Craneware plc (CRW) - Final Results RNS Number : 4053L Craneware plc 04 September 2012 Craneware plc ("Craneware", "the Group" or the "Company") Final Results 04 September 2012 - Craneware plc (AIM: CRW.L), the market leader in automated revenue integrity solutions for the US healthcare market, announces its results for the year ended 30 June 2012. Financial Highlights (US dollars) § Continued revenue and profit growth: o Revenue increased 8% to $41.1m (2011: $38.1m) o Adjusted EBITDA^1 increased 18% to $11.9m (2011: $10.1m) o Adjusted profit before taxation increased 16% to $10.8m (2011: $9.3m) o Profit before tax increased 29% to $11.2m (2011: $8.7m) o Basic adjusted EPS increased 23% to 31.6 cents (2011: 25.6 cents) o Basic EPS increased 43% to 33.0 cents (2011: 23.1 cents) § Positive operational cash flow of $10.6m (2011: $10.1m) § Cash at year end $28.8m (2011: $24.2m) after returning $4.1m to shareholders by way of dividends § Proposed final dividend of 5.7p (8.9 cents) per share giving total dividend for the year of 10.5p (16.4 cents) per share (2011: 8.8p (14.2 cents) per share) ^1. Adjusted EBITDA refers to earnings before interest, tax, depreciation, amortisation, share based payments, released deferred consideration and transaction related costs Operational Highlights · Extension of market reach through two significant customer deals signed in the year, one providing entry into the Federal and State Healthcare market and the other taking Craneware's software into a non-competitive parallel market · Increased sales activity in the second half of the year in core market · Increasing pressure being placed on hospitals by Medicare Recovery Auditors (formerly known as RAC programme) · Craneware InSight fully integrated as at 1^st July 2012, first cross-sales delivered · Renewal levels strong at over 100% of dollar value · Entered 2013 with revenue visibility back at historically high levels Keith Neilson, CEO of Craneware commented: "In a mixed trading environment Craneware delivered a solid level of growth across key financial and operational metrics, confirming the health of the business and giving a high degree of confidence for the future. "Added pressures on US hospitals have led to an increased sales and opportunity pipeline for our products as we move into the current financial year. Craneware's solutions help US healthcare providers drive business improvements that will result in better financial health. In this turbulent, demanding environment, hospitals need financial accuracy, visibility and shared accountability to survive. Fiscal and regulatory drivers are expected to increase in the year ahead as they push for greater transparency and accuracy, and although this creates a challenging ever-evolving marketplace, it ultimately increases the opportunities for Craneware's solutions. "Craneware is a trusted and established part of the fabric of the US healthcare industry, with a client base consisting of around a quarter of all US hospitals. We are confident that the business is ideally placed with its in-house expertise, industry-leading product suite and balance sheet strength to help US healthcare organisations deal with their increasing fiscal and regulatory pressures. Furthermore with revenue visibility having returned to the historic high levels, we view the future with confidence." For further information, please contact: Craneware plc Peel Hunt Newgate Threadneedle +44 (0)131 550 3100 +44 (0)20 7418 8900 +44 (0)20 7653 9850 Keith Neilson, CEO Dan Webster Caroline Evans-Jones Craig Preston, CFO Richard Kauffer Fiona Conroy About Craneware Founded in 1999, Craneware has headquarters in Edinburgh, Scotland with offices in Atlanta, Arizona, Massachusetts and Tennessee employing over 200 staff. Craneware is the leader in automated revenue integrity solutions that improve financial performance for healthcare organisations. Craneware's market-driven, SaaS solutions help hospitals and other healthcare providers more effectively price, charge, code and retain earned revenue for patient care services and supplies. This optimises reimbursement, increases operational efficiency and minimises compliance risk. By partnering with Craneware, customers achieve the visibility required to identify, address and prevent revenue leakage. To learn more, visit craneware.com and stoptheleakage.com Chairman's Statement Despite a mixed trading environment in the first half of the year, Craneware has delivered a solid set of results showing an 8% increase in revenues to $41.1 million, an 18% increase in adjusted EBITDA to $11.9 million, and a 23% increase in basic adjusted EPS to 31.6 cents. The Company continues to benefit from strong operational cash flow, closing the year with a cash balance of $28.8m. Renewal rates have remained high, at 109% by dollar value and Craneware has entered the current financial year with revenue visibility of $108.7m for the next three years, back at historic high levels. The level of new sales secured in the year was impacted by short-term competing IT priorities within our customer base, driven primarily by Electronic Health Records (EHR) incentive payment deadlines. By June 2012, a total of 3,779 hospitals had registered for the EHR Incentive Program and a total of 2,596 unique hospitals had been paid out $3.96 billion by that date (source: Centers for Medicare & Medicaid Services' (CMS)). During the first half of the year, this resulted in lengthier sales cycles for all of the Group's products. However, the second half saw an increase in sales activity which supports our view that sales cycles will return to normal lengths in the near-term, as healthcare organisations once again refocus on revenue integrity. 2012 has been a year of unprecedented change within US hospitals as the unintended consequences of some of the recently introduced healthcare proposals work through the system. However, it is unavoidable that US healthcare facilities will be required to provide a higher level of patient care, to a greater number of people, at a lower cost per patient in a climate of greater transparency. Compounding these issues, and adding to pressures placed on US healthcare organisations, is the Medicare Recovery Auditors (MRAs, formerly known as RAC) programme. MRAs and their other third party equivalents, continue to recover overpayments from hospitals. Indeed, the latest reported quarter (April-June 2012) showed another consecutive rise in the amount of overpayments collected. Audit readiness is getting real traction in the marketplace and we believe the combination of these factors is resulting in hospitals refocusing on revenue integrity solutions. These pressures create a compelling need for Craneware's software in order to efficiently protect the revenue to which these healthcare facilities are entitled. Craneware has a client base consisting of approximately 25% of US hospitals and it is now an established part of the fabric of the US healthcare industry making it a trusted partner. We are confident that Craneware is ideally placed with its in-house expertise, industry-leading product suite and balance sheet strength to help US healthcare organisations deal with their increasing fiscal and regulatory pressures. Consequently we continue to be confident in the future growth of the Group. We have entered the new financial year in a strong position, with a return to the historic high levels of revenue visibility for the coming years, a market leading product set, a focused sales force and a large and growing market opportunity. I would like to take this opportunity to thank our staff for their unrelenting high levels of energy and commitment and our shareholders for their continued support. George Elliott Chairman 3 September 2012 Operational Review Introduction Craneware's mission is to stop the loss of legitimate revenue owed to healthcare organisations by establishing a culture of revenue integrity within these organisations; our vision is to be the partner that can be relied on to improve and sustain our customers' strong financial performance. Over the history of the Company we have come a long way towards achieving this. Today, Craneware has a total of nine core products, spanning four product families; Audit & Revenue Recovery, Revenue Cycle, Supply Management and Access Management & Strategic Pricing. Craneware has installed its software into an extensive customer base which represents around quarter of all registered US hospitals - from the smallest critical access facilities to the largest healthcare networks. To support this growing client base and the Company's future growth prospects, Craneware now employs more than 200 professionals across the US and UK. We have achieved and are proud of our valuable and trusted position at the centre of this expanding market. Through aiding our customers in their implementation of a holistic revenue integrity model we have helped them achieve substantial revenue improvements and impressive returns on the investments made in our software, which can be reinvested by hospitals to deliver improved patient care. Over the year, the value of Craneware and its solutions to customers has increased, our product set has been enhanced, the addressable market has been extended and the sales team has been augmented for future growth. In the year Craneware was affected by the cessation of a third party contract and lengthening sales cycles due to the unforeseen consequences of the US government applying incentive payments to Electronic Health Record (EHR) implementations - in a year preceding a Presidential election, which is being fought on healthcare and economic battle grounds. This created a competing healthcare priority of meeting the initial EHR deadlines for these incentive payments. This was mitigated to some extent through a significant partner agreement signed in February 2012, opening market opportunities for the Group. In addition, we are now seeing indications of sales cycles returning to normal levels with the majority of qualifying hospitals having received their initial payments for EHR. Once again, Craneware received recognition and awards for several of its products, including a number one ranking by KLAS for Chargemaster toolkit® for a sixth consecutive year, matched by its Bill Analyzer product in the first year of appearance in the programme. Additionally, InSight Audit received platinum level status from Executive Health Resources. In response to increasing demand and organisational expansion, Craneware opened its extended premises in Scottsdale, Arizona during April 2012. The opening of this enlarged office demonstrates Craneware's commitment to the financial success of its clientele and dedication to exceptional client service across North America. Market Developments In 2012 total US healthcare expenditure is expected to exceed $3 trillion, and with an anticipated 4% growth per annum, it will rapidly approach a projected 20% of US GDP by 2017; US Healthcare is the largest Healthcare market in the world. It is a market which is striving for greater levels of transparency to understand and better quantify the areas of spend within healthcare providers, resulting in ever-increasing complexity as data becomes more granular. This complexity produces high levels of data which need to be analysed in an effort to understand and bring some control to this unsustainable growth. Even without changing legislation, the US healthcare industry's reimbursement model is unique and complex. Nearly 50% of healthcare costs are paid by the government, with the rest paid by private insurers and individuals; each of these payers has different criteria and rates of reimbursement. The US healthcare market faces new and increasing regulatory challenges as part of the US Government's healthcare reform which seeks to reduce the burden of healthcare on the State whilst making healthcare available to a larger percentage of the population. In addition to this, North America is experiencing the effects of an increasing aging population which brings its own care and cost challenges. This changing economic landscape necessitates that US healthcare organisations find ways to ensure operational efficiency, quality and financial success while managing compliance risks. The evolving regulations and healthcare reforms make it more important than ever for healthcare organisations to proactively ensure the accuracy and defensibility of their charges as they face tightening reimbursement and increasing scrutiny from auditors. These factors mean a growing number of hospitals are seeking technology-based solutions to help improve accuracy of billing and reduce regulatory burdens, thereby protecting their slim profit margins. Craneware's strategy to meet this growing need is to provide software solutions that help at the points in systems where clinical and operational data transform into financial transactions. Our solutions automate data normalisation, combining disparate data sets while maintaining the localised context. This produces valuable, actionable information and creates organisation-wide visibility and accountability. The need for continued innovation in this changing environment will drive Craneware's future growth. By providing the tools to normalise data across disparate areas of the hospital and remaining agnostic to data formats and other vendors, Craneware gives the power to take a step back and provide a holistic view indentifying areas of productivity improvement, inefficiencies and errors. The American Hospital Association estimates the total number of registered US hospitals at 5,754. Fewer than half of these manage their charge description masters, the central dataset from which all bills are generated, with software such as Craneware's Chargemaster toolkit. As healthcare reform requires hospitals to manage data and resources better, charging accurately will be nearly impossible without automation tools. Craneware's four product families enable the improvement of financial performance along multiple points in the hospital's operational areas, far beyond the charge description master. One point of increasing importance is in management of claims denials and audits by Medicare Recovery Auditors. Reducing risks associated with managing financial transactions in order to keep earned revenue is a pressing priority for US hospitals facing a myriad of audits from State and federal entities as well as private payers. Medicare Recovery Auditors (MRA) Medicare Recovery Auditors are tasked with detecting and correcting past improper payments to hospitals, whether these are overpayments which need to be recouped or underpayments. The medical record submission process is lengthy and has several strict deadlines. This, coupled with the increased number of audits expected, represents a significant burden for healthcare providers; a hospital can lose 7%-10% of its revenue to denied claims that could be corrected and resubmitted, and this can make the difference between financial success and failure. Since its nationwide roll-out on 1 January 2010, the Centers for Medicare & Medicaid Services' (CMS) Medicare Fee-for-Service Recovery Audit Program has consistently increased in scale. In the first quarter of FY2012 the recoupment total was $397.8m, in the second quarter it was $588.4m, and, in the third quarter it was $657.2m; therefore in nine months a total of $1,643.4m has been recouped, this represents an increase of 206% when compared to the previous full 12 month period (FY2011 $797.4m). This escalating rate of take-backs has driven a greater emphasis on compliance in healthcare and a demand for best practice tools to help healthcare providers support compliance and manage audits. As a result, several healthcare industry associations invited Craneware to share information at audit and compliance events and conferences. Craneware's InSight Audit product organises, manages and reports on all audit requests, responses and appeal activities for all audit types. It stores the relevant information and documents the steps taken to appeal denials, whilst also identifying trends and areas of exposure. InSight Audit manages (1) the patient record, (2) the RAC audit workflow, and (3) reports on areas of risk. Craneware's solutions have helped hospitals successfully manage the audit process to win more than twice as many appeals as their peers, defending millions of dollars in denials. In February 2012, Craneware announced its participation in the CMS electronic submission of medical documentation (edMD) Gateway Services pilot program. The program provides a mechanism for the digital exchange of medical record documentation in order to streamline and improve the efficiency of audit appeals; this therefore also reduces the potential cost burden. In August 2012, Craneware was pleased to achieve certification from CMS as a Healthcare Information Handler (HIH), enabling its InSight Audit solution to digitally submit medical record documentation and joining a list of less than 20 to have achieved this status. The Patient Protection and Affordable Care Act (PPACA) In June 2012, after years of legislative and legal battles the Supreme Court ruled that the Patient Protection and Affordable Care Act (PPACA) was constitutional. The most significant effect of this wide ranging package of legislation is to increase pressure on the entire US healthcare system to slow the growth in costs while bringing roughly 32 million previously uninsured Americans into the system. Accountable Care Organisations (ACOs) and bundled payments The Medicare shared savings program rewards Accountable Care Organisations (ACOs) that take responsibility for the costs and quality of care received by their patients. ACOs can include groups of healthcare providers, including physician groups, hospitals, nurse practitioners, physician assistants and others. As stated by the PPACA, the objective of ACOs is to attain a degree of financial responsibility on the providers in the hope of improving care management and limiting unnecessary expenditures, ultimately fostering clinical excellence while simultaneously controlling costs. ACOs that meet quality-of-care targets and reduce costs of their patients relative to a spending benchmark are rewarded with a share of the savings they achieve for the Medicare programme. There are two models based on a degree of risk. Model one is low risk and involves shared savings in year one, two and shared savings/risk in year three. Model two is high risk and involves shared savings/risk in all three years. Both models have caps on savings and losses, but there are potential savings of up to 60%. Bundled payments align incentives for providers - hospitals, post-acute care providers and doctors - to partner closely across all specialties to improve the patient's experience and reduce costs by replacing fragmented care with coordinated care. Many organisations view bundled payments as a measured foray into accountable care at an acceptable level of risk and adjustment. Much of the benefits from bundled payments can be reaped via data normalisation which would have to be a key area of an informed bundled payment movement. The increased transparency and accountability of this normalisation also has obvious benefits to the ACO models. Alternative payment models like Medicare Shared Savings and bundled/value based payments have the potential of shifting the focus away from the quantity of services to the clinical outcomes achieved. Currently there are 310 ACOs in the US, located in mostly urban areas across 45 states. However, with these alternative models only expected to yield savings of $1 billion over the next three years (less than 0.01% of total healthcare costs) and the highly unpredictable nature of small population insurance risk, it is being widely predicted by industry experts that they will have a limited impact on healthcare provision for the foreseeable future and will probably remain at the fringes of the healthcare model accounting for no more than 20% of hospital reimbursement over the long-term. Similar models (e.g. capitation) have been tried and failed in the past in different States to provide the cost savings and clinical improvements expected from these models. Electronic Healthcare Records (EHR) Healthcare Reform authorised CMS to provide incentives to providers to implement Electronic Health Records (EHR). There are two main programs under EHR that hospitals can register for; Medicare and Medicaid. Qualifying hospitals may register for both. As Medicare has set the initial higher standard, hospitals that meet the meaningful use criteria (MU) and are Medicaid eligible can automatically claim for a Medicaid incentive. A hospital may, through choice or eligibility only apply for a Medicaid incentive payment following the criteria set at the local State level. At 30 June 2012, with six States still to start their Medicaid Incentive scheme, 2,596 unique hospitals have received their share of the $4 billion that has been paid to hospitals under the incentive schemes (~60% of eligible hospitals). It is likely that the disruption in hospitals seen to December 2011, caused by EHR systems, will continue for many years to come as new levels of EHR integration and standards are introduced. However hospitals need to return their focus to revenue integrity very quickly after making their initial EHR purchasing decisions as it is widely recognised that there are limited additional returns in the short and medium term. Since technologies like Cranewares' with its unique normalisation of data approach, when combined with EHR's are critical to achieving the improvements necessary to provide the increased care levels and the required cost efficiencies expected of this programme the Company is well placed to address this expanding market opportunity. Sales and Marketing During the year the geographical alignment of our sales team across the US, which began in the prior year, was completed. Experienced Regional Vice Presidents now oversee each of our three geographical regions, and each has a team comprised of mixed experience and skill sets. In addition, the separate Sales Support and Marketing Teams in our Atlanta office have been strengthened allowing the field Sales Team to concentrate on their customers and sales opportunities. We anticipate further investment into these teams, in line with our revenue growth, as we work to address the market opportunity. We have completed thorough internal and external training as a result of our enlarged product set and increasing market opportunities presented by various US healthcare reforms, including internally developed industry leading 'boot camps' for every member of the sales team and a sales partner 'boot camp'. In addition to our direct field sales opportunities, there are a number of major contract opportunities which all have the ability to yield significant potential revenues. Previously we have referred to these deals as 'channel partners'; however it is more accurate to instead refer to these as different 'routes to market', as we shall do going forward. These potential contracts follow the same revenue recognition methodology as an individual hospital and group hospital contracts; although the sales approach for these deals is quite different. These different routes to market can be broken down into six categories (as listed below), and range in potential total contract value from $5 million to $100 million in any instance. IDN's & Large Hospital Systems An Integrated Delivery Network (IDN) is a network of facilities and providers working together to offer a continuum of care to a specific market or geographic area. These always involve a significant number of multi-site licences, and, like the large hospital systems involve multiple people from within Craneware working as a team to sign the contract. Craneware continues to have very good traction in this area, being the only software company with the ability to provide proven "corporate" solutions. Consolidation within the US healthcare industry increases the reach and number of these organisations. Typically a team of Craneware staff representing various areas of the Company will be responsible for the success of these deals from prospecting through implementation. Business Process Outsourcers/Consultants (BPO) Typically BPO's/consultants work with hospitals, on a gain-share model ("at risk") with the improvements found generating the revenue for them (a model we do not utilise). The BPO's will often employ erstwhile hospital staff and outsource large functions of the hospital's back office. This provides Craneware with the opportunity to provide best-of-breed software to BPO's for a true win-win-win, for them, their hospital client and Craneware. In many instances we will explore white-labelling in this area so that we provide the functionality of our software in a software wrapper that they can brand, but for which we charge a premium. BPO's can range from large national players (including the largest accountancy firms) to small, regional "mom & pop" players. In some cases, IDN's or Large Hospital Systems will spin-out experts in a particular field and create BPO's that may also want to resell our software into external hospitals. BPO deals are typically led by Business Development and utilise the experts within Craneware as required. Hardware Vendors Hardware vendors primarily want to use advanced functionality to push a greater requirement for further computer hardware and to embed their brand in a facility. This is commonly under the auspices of a division of the hardware manufacturer or distributor that provides BPO or consultancy services. These deals are typically led by Business Development and utilise the experts within Craneware as required. There are white-label opportunities within this category. Software Vendors Third party software vendors often wish to integrate areas of our functionality with their software so that they can leverage more sales, for which we are paid a fee. Sometimes the opportunity is on a pure Value Added Reseller basis; where they are looking for more to sell to their customers and it is seen by Craneware as a quicker route to market. This can work in both directions where Craneware has additional functionality to sell to our customers. These deals are typically led by Business Development and utilise the experts within Craneware as required. There are white-label opportunities within this category. Group Purchasing Organisations (GPO's) A Group Purchasing Organisation (GPO) is an entity that is created to leverage the purchasing power of a group of hospitals to obtain discounts from vendors based on their collective buying power. GPO's also provide a route to market and may include a division that has a BPO or consultancy offering in specialist areas. The GPO involvement can be from simple referral or list generation through to senior executive level sponsorship and cross hospital references. These deals are typically led by Business Development and utilise the experts within Craneware as required. There are white-label opportunities within this category. Content Acquirers Due to the ever-increasing amount of data powering the Craneware software - and the added functionality we can offer our customers through blinded data - there is a growing desire from some organisations to purchase the data that we use to power our software solutions, to incorporate into different non-competing offerings. These would typically be led by Product Management who utilise Business Development for the commercial terms. There are white-label opportunities within this category. Routes to Market Summary Craneware has experience in working with organisations in all these categories and in FY2012 new revenues from these sources accounted for less than 20% of total revenue. Although there has been much debate around our increased exposure to these opportunities in FY12, it is merely their absence that has further highlighted their always present existence. They are not contributing a larger proportion of the revenue in this year than they have previously nor are they increasing the risk profile of Craneware. In addition to our direct sales efforts, these different routes to market are a valuable extra opportunity for Craneware to generate further revenues from its technology. A larger number of these organisations successfully promoting products in the US Healthcare market, regardless if by their nature they are white-label, further educates and evangelises the importance of Revenue Integrity and leads to further Craneware success. Brand building, Conferences & Events During the year important progress was made in brand building and brand awareness. This has been achieved through a variety of activities including sponsorship in support of our different market segments including the Community Hospital 100, the American Association of Medical Audit Specialists (AAMAS) and the Modern Healthcare Women Leaders in Healthcare. Brand building continued through awards, conferences and white papers. Several healthcare industry associations invited Craneware to present information at audit and compliance events and conferences during the year. Craneware was selected to lead an educational session at ANI: Healthcare Financial Management Association's (HFMA) National Institute 2012, held in June 2012. During the presentation, Craneware's client University Medical Center (UMC) Health System explained that moving to a revenue integrity approach increased their gross revenues across all clinical departments by 100%, enhanced electronic charge capture and improved UMC's Medicare case mix by 7%. Craneware and its client, The Bellevue Hospital, presented at October 2011's Revenue Integrity HFMA MAP event. The Bellevue Hospital shared insights gained from their revenue integrity initiatives, including the successful implementation of revenue integrity solutions that helped them to improve the accuracy and efficiency of charge processes, find missed revenue and strengthen compliance. The Bellevue Hospital reduced its denial write-offs from $1.8 million in 2009 to $155,000 in 2010, decreased days in accounts receivable by approximately 30%, nearly doubled bad debt collections and achieved a net revenue potential impact of more than $1 million. In its first year of implementation of Craneware's Chargemaster Toolkit, Online Reference Toolkit and Bill Analyzer products, Amerinet member Adams County Regional Medical Center (ACRMC), a 25-bed Critical Access Hospital in the Southern Ohio region, significantly improved its financial performance, operational efficiency and compliance. The CFO of ACRMC noted that there has been a dramatic financial turnaround having significantly reduced errors, and identified millions in financial performance improvement opportunities. AMRMC is projecting a profit for the first time in five years. Craneware is a partner in the Amerinet Strategic Alliance for Financial Efficiency (SAFE), a consortium of market-leading companies providing best-in-class revenue cycle and financial performance improvement solutions that support healthcare facilities of all sizes. Awards The Company's supplier award from Amerinet demonstrates the continued success with our partner network. Many awards were achieved during the year across the product portfolio. Craneware's Chargemaster toolkit received, for its sixth consecutive year, the number one ranking in the KLAS 'Revenue Cycle - Chargemaster Management market' category. Craneware was delighted that its Bill Analyzer product also achieved the number one ranking in 2011 for its KLAS ranking. KLAS is the leading source of healthcare information technology vendor performance metrics. In addition, the Chargemaster toolkit achieved Healthcare Financial Management Association (HFMA) Peer-Review status for its eighth consecutive year. Craneware's InSight Audit software, one of our newer products, achieved platinum-level status; this is the highest level of integration certification from Executive Health Resources, a leading provider of medical necessity compliance and appeals management solutions. Product Development In the year, product development has been focused on leveraging the best innovative combinations of the Craneware and Craneware InSight enlarged product set, whilst ensuring that the direction of the product set moves consistently with the long-term strategic positioning of Craneware as the revenue integrity partner of choice. Organisational Changes As of 1 July 2012 Craneware InSight (formerly ClaimTrust, acquired in February 2011) has been fully integrated into the management structure of the Group. With this integration, Glen Johnson formerly CIO of ClaimTrust has joined the Operational Board of the Company to lead our Product Management division. Sharon Cuming has joined the Operational Board as Senior VP of Human Resources. We would also like to take this opportunity to thank Joe Ferro (former CEO of ClaimTrust and EVP Craneware InSight) who left the Group in February 2012, for his service to both organisations and his continued positive advocacy of Craneware Solutions in his new role heading-up one of the partners we have recently entered into a relationship with. Financial Review The financial results for the current year, for the first time, include a full year contribution from our February 2011 acquisition ClaimTrust Inc, in comparison to the 4 months contribution in the prior year. These results reflect the mixed trading environment we experienced, especially in the first half of the financial year. However, despite this environment we have continued to invest in the future growth of the Group whilst delivering an 18% increase in our Adjusted EBITDA to $11.9m from $10.1m in the prior year. There have been no changes during the year to the business model underlying the Group's revenue recognition policies. The Group continues to recognise revenue primarily under its Annuity Software-as-a-Service (SaaS) revenue recognition policies with these revenues accounting for between 75% to 80% of all revenue in any one year. Under this model we recognise software licence revenue and any minimum payments due from our 'partner' contracts evenly over the life of the underlying signed contracts. With any new contract we sign, we normally expect to deliver a professional services engagement, relating to the implementation of the software, the training of the hospital staff and further assisting the hospital in developing its processes to ensure the software is utilised to its maximum potential. Within any individual contract we would expect these services to account for 12% to 20% of the total contract value (dependent on the product and needs of the individual hospital). However of total Group revenue in any one year we would expect services revenues to account for between 10% to 20% of revenue. This revenue is typically recognised as the service is delivered, usually on a percentage of completion basis. As a result of the ClaimTrust Inc acquisition in 2011 we now have a third revenue model. For revenue recognition purposes it is effectively the same recognition as the normal Annuity SaaS model described above. It is recurring in its nature, however, it is not signed under long term non-breakable contracts and is invoiced monthly in arrears rather than annual in advance, therefore it does not include the inherent advantages of the Craneware Annuity SaaS revenue model. This revenue currently accounts for less than 10% of total revenues in any one year and as new contracts for the InSight product range are being signed under the Annuity SaaS model, we would expect the proportion of revenue derived from this model to reduce over time. As a result of these revenue recognition models, based on our historical normal average contract life of 5 years, the maximum value of an average contract that can be recognised as revenue in any one year is 20% plus the value of associated services that have been delivered. In all cases, if the contract contains any material contingencies or any increased risk of collection is identified, revenue is deferred until the contingency is satisfied, at which point the revenue that has been deferred is released and the revenue recognition is 'caught up' to the level that would have been recognised had there been no contingency. Revenue Revenue for the year has increased by 8% to $41.1m (2011: $38.1m). Growth of 8%, whilst meaningful, is below both the challenging targets we set for the Group and the historical high levels of growth we have reported in prior years. The primary reasons for this relate to: · The cessation of a contract 'acquired' as part of the ClaimTrust acquisition at the end of the first quarter of the financial year. This contract was administered through a third party and was unexpectedly terminated as a result of the third party losing its contract with its end hospital network. As with most ClaimTrust contracts, this contract was subject to a 'break clause' which allowed for early termination in the event the end customer contract was lost. The loss of this contract negatively impacted revenues by c$2m in the current year. · The lengthening sales cycles due to the unforeseen consequences of the US government applying incentive payments to Electronic Health Record (EHR) implementations. Further details of these unintended consequences have been provided earlier, however the lengthening of these sales cycles and the resultant reduction in new contract signed in the year has impacted current year revenues. The most significant impact relates to professional services revenues. As stated above, with any new sale we would expect to deliver and recognise 12 to 20% of the total contract value within the first 3 to 6 months of signing. As a result of the lower level of sales, professional services revenues, on like for like services, have decreased in the current year by c$1.8m. Whilst we have managed to mitigate some of this loss in other areas, total professional services revenue is $1.2m below the prior year. However we would expect to see this revenue quickly return to prior year levels as new sales levels return to historical norms. During the second half of the financial year, we saw month on month sales activity increases which based on our historical norms for sales cycles we would expect to positively impact revenue growth in the second quarter of FY2013 and thereafter. In any single year large hospital deals and/or deals signed through other routes to market are an important part of our growth and we would normally expect to sign at least one significant contract in each half year. Whilst the quantum of revenue we derive from any one deal has increased, the actual percentage of our total revenues derived from these deals in any one year has fallen considerably, with now less than 20% of our revenue expected from new large deals in a single year. Despite signing two large deals in the year, the revenue recognised from these deals only served to mitigate the revenue shortfalls discussed above rather than significantly add to our annual revenue growth as we would normally expect. One of these large deals signed in the year introduced, for the first time since we entered the public markets, a "White-Labelling fee". This is in effect paid for development services (which carry a significant premium), where we provide the functionality of our software in a software wrapper that the partner can brand. We have recognised this revenue as we would any other services revenue, i.e. as we deliver the underlying service on a percentage of completion basis. As a result $3.5m of revenue has been recognised in the current year, bringing the total services revenue recognised in the year to $7m or 17% of our current year's revenue, this compares to 12% in the prior year. This increase is primarily a result of total revenue growth being below expectations rather than a significant long term increase in total services revenues. Earnings In the prior year, the Company introduced an 'Adjusted' earnings metrics to adjust for one-off acquisition costs. In keeping with this methodology a one-off benefit of $0.95m relating to the release of the provision for contingent consideration has been removed. We believe the disclosure of these adjusted earnings metrics is consistent with other acquisitive companies and that it allows for a more accurate understanding of the underlying profit generated from operations and for a direct comparison year on year. Adjusted earnings before interest, taxation, share based payments, depreciation and amortisation ("EBITDA") has grown in the year to $11.9m (2011: 10.1m) an increase of 18%. Accordingly Adjusted EBITDA margins have increased from 26.5% in the prior year to 29%. Revenue Visibility and other KPI's The Company continues to believe the "Three Year Visible Revenue" metric is key to assessing the medium term growth prospects. This metric includes: · Future revenue under contract; · Revenue generated from renewals (calculated at 100% dollar value renewal). · InSight revenue identified as recurring in nature (subject to an estimated churn rate of 8% per year); The different categories of revenue reflect any inherent future risk in recognising these revenues. Future revenue under contract, is as the title suggests subject to contract without break clauses and therefore only has to be invoiced to be recognised in the respective years (only subject to future collection risk that exists with all revenue). Renewal revenues are contracts coming to the end of their original contract term (e.g. 5 years) and will require the contracts to be renewed for the revenue to be recognised, however as we are renewing contracts at over 100% dollar value it is reasonable to conclude minimal additional risk is associated to this revenue. The final category "Insight revenue identified as recurring in nature" is revenue that we would expect to recur in the future but as the underlying contracts do contain break clauses there is potential for this revenue not to be recognised in future years, however we apply an estimated 8% churn rate to make allowance for this risk. To better aid understanding, the three year visible revenue as at 30 June 2012 (i.e. visible revenue for FY2013, FY2014 and FY2015) is being presented against the visible revenue for the same three year period as at 30 June 2011. As such, visible revenue for the three years to 30 June 2015 has increased to $108.7m from $100.9m at 30 June 2011, as follows: · InSight revenue of $10.8m. · Revenue generated from renewal activities contributing $38m; being $5.0m in FY13, $12.5m in FY14 and $20.5m in FY15. · Future revenue under contract contributing $59.9m of which $28.5m is expected to be recognised in FY13, $20.6m in FY14 and $10.8m in FY15. Average contract length during the period has dipped to c4 years, below our historical normal average contract length of 5 years, this is due to the smaller number of contracts signed in the year and the sales mix of size of hospital being skewed as a result. The Company does not anticipate this to be a long term trend as overall sales levels and mix return to historical levels. The product attachment rate, being the average number of our nine products that are in place across our entire customer base, has increased from 1.5 in the prior year to 1.6 products. The remaining 7.4 reflects the significant cross sell opportunity that still exists for the Group. Operating Expenses The current year cost base includes the full year cost of the Craneware InSight cost base as well as the planned for investment 'released and executed on' in the year. As a result net operating expenses (before acquisition benefits/costs, share based payments, depreciation and amortisation) have increased to $27.6m an 18% increase over the prior year (FY11: $23.4m). The most significant increases relate to Client Servicing and Product Development where ClaimTrust had made significant investment prior to the acquisition and we will now look to leverage this cost base investment in future years as we increase sales levels and hospital customer numbers. Client Servicing has increased 24% to $7.2m (FY11: $5.8m) and Product Development has increased 36% to $6.8m (FY11: $5.0m). Product Development spend has increased to 16.5% of our total revenue (2011: 13%) reflecting the increased number of core products we are now supporting. We continue to capitalise very low levels of Development spend with $0.3m capitalised in the year (FY11: 0.2m). Acquisition of ClaimTrust Inc. In the prior year, Craneware completed the acquisition of ClaimTrust Inc. via a newly formed subsidiary Craneware InSight Inc. During the course of the year we made substantial progress on the integration of this business, ultimately completing the integration by 1st July 2012. At an early stage of the integration plan the InSight and the original Craneware sales forces were brought together such that the Group had one common sales force selling nine core products. All nine products are sold into 'one market segment' being revenue integrity solutions to healthcare organisations within the United States of America. As a result of the level of integration achieved throughout the year combined with the Group serving a single market it is not appropriate to show the results of Craneware InSight separate from the rest of the Group. As required by International Accounting Standards (IAS), in the prior year we were required, on consolidation, to both separately identify intangible assets and their fair value and estimate the fair value of contingent consideration that would ultimately be paid. In respect of intangible assets and the fair value of assets acquired, the finalisation of the original fair values are detailed in Note 16 to the accounts and relate primarily to the recognition of a deferred tax asset of $1.34m relating to pre-acquisition losses and an adjustment for a unrecorded liability of $0.26m that existed at the opening balance sheet date. As a result finalised Goodwill is $11.2m (2011: $12.3m). In respect of the estimate of contingent consideration, this estimate was produced prior to both the cessation of the third party contract reported in the interim results statement and the effect of lengthening sales cycles due to the unforeseen consequences of the US government applying incentive payments to Electronic Health Record (EHR) implementations which impacted the InSight products as well as the other Craneware products. As a result, no contingent consideration is payable in respect of the ClaimTrust Inc. acquisition and as required by IAS the original provision of $0.95m has been released to the current year's results. Again as required by IAS a detailed review for impairment of Goodwill has been carried out at the balance sheet date and no impairment has been identified. Full details of the impairment review are disclosed in Note 14 to the accounts. Cash We continue to measure the quality of our earnings through our ability to convert them into operating cash. As in prior years, we have continued to have very high levels of cash conversion which has enabled us to grow our cash reserves to $28.8m (FY11: $24.2m). These cash levels are now approaching the levels prior to the $9m paid for the acquisition despite having paid out a further $4.1m to our shareholders by way of dividends. Our ability to return our cash balances to pre-acquisition levels gives us confidence in our ability to fund further 'bolt-on' acquisitions from the Company's own reserves, and as such acquisitions continue to be part of our future growth strategy. Balance Sheet The Group maintains a strong balance sheet position, not only through our significant cash balance but with rigorous controls over working capital and no debt. Currency The reporting currency for the Group (and cash reserves) is US Dollars. Whilst the majority of our cost base is US located and therefore US Dollar denominated we do have approximately one quarter of the cost base based in the UK relating primarily to our UK employees (and therefore denominated in Sterling). As a result, we continue to closely monitor the Sterling to US Dollar exchange rate, and where appropriate consider hedging strategies. During the year, we have not seen a significant impact through exchange rate movements, with the average exchange rate throughout the year being $1.5840 as compared to $1.5906 in the prior year. Taxation The Group's effective tax rate remains dependent on the proportion of profits generated in the UK and overseas and the applicable tax rates in the respective jurisdictions. As detailed above, the current year has seen a significant decrease in the levels of professional services revenues generated. As all professional services are delivered in the US, this reduction combined with the lower level of sales generated in the year in this revenue has significantly reduced the levels of income subject to taxation in the US. This combined with the reducing tax rate in the UK and our continued ability to agree enhanced Research and Development tax relief has resulted in an effective tax rate of 20.6% (FY11: 30.5%). We would expect effective tax rates to increase in future years as sales levels return to normal and the levels of professional services increase accordingly. EPS As with EBITDA, the Group is reporting an Adjusted EPS figure, adjusting for the $0.95m of contingent consideration provision release. In the year adjusted EPS has increased by 23% to $0.316 (FY11: $0.256) and adjusted diluted EPS has increased by 25% to $0.315 (FY11: $0.253). This is despite the increase in weighted number of average shares as a result of the full year effect of the shares issued in FY11 as a result of the acquisition of ClaimTrust. The increase in EPS is driven by the increase in EBITDA further enhanced by the lower effective tax rate resulting in the year. Dividend The Board recommends a final dividend of 5.7p (8.9 cents) per share giving a total dividend for the year of 10.5p (16.4 cents) per share (2011: 8.8p (14.12 cents) per share). Subject to confirmation at the Annual General Meeting, the final dividend will be paid on 7th December 2012 to shareholders on the register as at 9th November 2012, with a corresponding ex-Dividend date of 7th November 2012. The final dividend of 5.7p per share is capable of being paid in US dollars subject to a shareholder having registered to receive their dividend in US dollars under the Company's Dividend Currency Election, or who registerto do soby the close of business on9th November 2012. The exact amount to be paid will be calculated by reference to the exchange rate to be announced on 9th November 2012. The final dividend referred to above in US dollars of 8.9 cents is given as an example only using the Balance Sheet date exchange rate of $1.5685/£1 and may differ from that finally announced. Outlook In a mixed trading environment Craneware delivered a solid level of growth across key financial and operational metrics, confirming the health of the business and giving a high degree of confidence for the future. Added pressures on US hospitals have led to an increased sales and opportunity pipeline for our products as we move into the current financial year. Craneware's solutions help US healthcare providers drive business improvements that will result in better financial health. In this turbulent, demanding environment, hospitals need financial accuracy, visibility and shared accountability to survive. Fiscal and regulatory drivers are expected to increase in the year ahead as they push for greater transparency and accuracy, and although this creates a challenging ever-evolving marketplace, it ultimately increases the opportunities for Craneware's solutions. Craneware is a trusted and established part of the fabric of the US healthcare industry, with a client base consisting of around a quarter of all US hospitals. We are confident that the business is ideally placed with its in-house expertise, industry-leading product suite and balance sheet strength to help US healthcare organisations deal with their increasing fiscal and regulatory pressures. Furthermore with revenue visibility having returned to the historic high levels, we view the future with confidence. Keith Neilson Craig Preston Chief Executive Officer Chief Financial Officer 3 September 2012 3 September 2012 Consolidated Statement of Comprehensive Income For the year ended 30 June 2012 Total Total 2012 2011 Notes $'000 $'000 Revenue 3 41,067 38,124 Cost of sales (1,556) (4,696) Gross profit 39,511 33,428 Net operating expenses 4 (28,416) (24,874) Operating profit 11,095 8,554 Analysed as: Adjusted EBITDA* 11,932 10,077 Acquisition costs on business combination - (517) Released deferred consideration on business combination 954 - Share based payments (152) (139) Depreciation of plant and equipment (579) (312) Amortisation of intangible assets (1,060) (555) Finance income 107 99 Profit before taxation 11,202 8,653 Tax on profit on ordinary activities 5 (2,309) (2,638) Profit for the year attributable to owners of the parent 8,893 6,015 Total comprehensive income attributable to owners of the parent 8,893 6,015 *Adjusted EBITDA is defined as operating profit before acquisition costs, released deferred consideration, share based payments, depreciation and amortisation. Earnings per share for the period attributable to equity holders Notes 2012 2011 Basic ($ per share) 7a 0.330 0.231 *Adjusted Basic ($ per share) 7a 0.316 0.256 Diluted ($ per share) 7b 0.329 0.228 *Adjusted Diluted ($ per share) 7b 0.315 0.253 *Adjusted Earnings per share calculations allow for the release of deferred consideration on the business combination and acquisition costs (in the prior year) together with amortisation on acquired intangible assets to form a better comparison with previous years. Statements of Changes in Equity for the year ended 30 June 2012 Share Share Premium Other Retained Total Capital Account Reserves Earnings Equity Group $'000 $'000 $'000 $'000 $'000 At 1 July 2010 512 9,250 3,237 9,053 22,052 Total comprehensive income - profit for the year - - - 6,015 6,015 Transactions with owners: Share-based payments - - 139 1,249 1,388 Impact of share options exercised 13 - (3,074) 3,074 13 Issue of ordinary shares related to business combination 11 5,989 - - 6,000 Dividends (Note 6) - - - (3,063) (3,063) At 30 June 2011 536 15,239 302 16,328 32,405 Total comprehensive income - profit for the year - - - 8,893 8,893 Transactions with owners: Share-based payments - - 152 (538) (386) Impact of share options exercised 2 169 (245) 692 618 Dividends (Note 6) - - - (4,093) (4,093) At 30 June 2012 538 15,408 209 21,282 37,437 Consolidated Balance Sheet as at 30 June 2012 Notes 2012 2011 $'000 $'000 ASSETS Non-Current Assets Plant and equipment 2,027 2,167 Intangible assets 8 16,010 16,652 Deferred tax 1,470 1,287 19,507 20,106 Current Assets Trade and other receivables 12,560 13,121 Cash and cash equivalents 28,790 24,176 41,350 37,297 Total Assets 60,857 57,403 EQUITY AND LIABILITIES Non-Current Liabilities Contingent consideration 9 - 954 Deferred income 183 250 183 1,204 Current Liabilities Deferred income 15,766 15,638 Current tax liabilties 1,527 288 Trade and other payables 5,944 7,868 23,237 23,794 Total Liabilities 23,420 24,998 Equity Called up share capital 10 538 536 Share premium account 15,408 15,239 Other reserves 209 302 Retained earnings 21,282 16,328 Total Equity 37,437 32,405 Total Equity and Liabilities 60,857 57,403 Statements of Consolidated Cash Flows for the year ended 30 June 2012 Notes 2012 2011 $'000 $'000 Cash flows from operating activities Cash generated/(used) from operations 11 10,602 10,089 Interest received 107 99 Tax paid (1,316) (1,595) Net cash from operating activities 9,393 8,593 Cash flows from investing activities Purchase of plant and equipment (439) (1,790) Acquisition of subsidiary, net of cash acquired 9 - (8,772) Capitalised intangible assets 8 (418) (247) Net cash used in investing activities (857) (10,809) Cash flows from financing activities Dividends paid to company shareholders 6 (4,093) (3,063) Proceeds from issuance of shares 171 13 Net cash used in financing activities (3,922) (3,050) Net increase/(decrease) in cash and cash equivalents 4,614 (5,266) Cash and cash equivalents at the start of the year 24,176 29,442 Cash and cash equivalents at the end of the year 28,790 24,176 Notes to the Financial Statements General Information Craneware plc (the Company) is a public limited company incorporated and domiciled in Scotland. The Company has a primary listing on the AIM stock exchange. The principal activity of the Group continues to be the development, licensing and ongoing support of computer software for the US healthcare industry. Basis of preparation The financial statements are prepared in accordance with International Financial Reporting Standards, as adopted by the European Union (IFRS), IFRIC interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historic cost convention and prepared on a going concern basis. The applicable accounting policies are set out below, together with an explanation of where changes have been made to previous policies on the adoption of new accounting standards in the year, if relevant. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The Company and its subsidiary undertakings are referred to in this report as the Group. 1 Selected Principal accounting policies The principal accounting policies adopted in the preparation of these accounts are set out below. These policies have been consistently applied, unless otherwise stated. Reporting currency The Directors consider that as the Group's revenues are primarily denominated in US dollars the Company's principal functional currency is the US dollar. The Group's financial statements are therefore prepared in US dollars. Currency translation Transactions denominated in foreign currencies are translated into US dollars at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities expressed in foreign currencies are translated into US dollars at rates of exchange ruling at the balance sheet date $1.5685/£1 (2011 : $1.6055/£1). Exchange gains or losses arising upon subsequent settlement of the transactions and from translation at the balance sheet date, are included within the related category of expense where separately identifiable, or in general and administrative expenses. Revenue recognition The Group follows the principles of IAS 18, "Revenue Recognition", in determining appropriate revenue recognition policies. In principle revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow into the Group. Revenue is derived from sales of, and distribution agreements relating to, software licenses and professional services (including installation). Revenue is recognised when (i) persuasive evidence of an arrangement exists; (ii) the customer has access and right to use our software; (iii) the sales price can be reasonably measured; and (iv) collectability is reasonably assured. Revenue from standard licensed products which are not modified to meet the specific requirements of each customer is recognised from the point at which the customer has access and right to use our software. This right to use software will be for the period covered under contract and, as a result, our annuity based revenue model recognises the licensed software revenue over the life of this contract. This policy is consistent with the Company's products providing customers with a service through the delivery of, and access to, software solutions (Software-as-a-Service ("SaaS")), and results in revenue being recognised over the period that these services are delivered to customers. 'White-labelling' or other 'Paid for development work' is generally provided on a fixed price basis and as such revenue is recognised based on the percentage completion or delivery of the relevant project. Where percentage completion is used it is estimated based on the total number of hours performed on the project compared to the total number of hours expected to complete the project. Where contracts underlying these projects contain material obligations, revenue is deferred and only recognised when all the obligations under the engagement have been fulfilled. Revenue from all professional services is recognised as the applicable services are provided. Where professional services engagements contain material obligation, revenue is recognised when all the obligations under the engagement have been fulfilled. Where professional services engagements are provided on a fixed price basis, revenue is recognised based on the percentage completion of the relevant engagement. Percentage completion is estimated based on the total number of hours performed on the project compared to the total number of hours expected to complete the project. Software and professional services sold via a distribution agreement will normally follow the above recognition policies. Should any contracts contain non-standard clauses, revenue recognition will be in accordance with the underlying contractual terms which will normally result in recognition of revenue being deferred until all material obligations are satisfied. The excess of amounts invoiced over revenue recognised are included in deferred income. If the amount of revenue recognised exceeds the amount invoiced the excess is included within accrued income. Intangible Assets (a) Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is capitalised and recognised as a non-current asset in accordance with IFRS 3 and is tested for impairment annually, or on such occasions that events or changes in circumstances indicate that the value might be impaired. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose. (b) Proprietary software Proprietary software acquired in a business combination is recognised at fair value at the acquisition date. Proprietary software has a finite life and is carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the associated costs over their estimated useful lives of 5 years. (c) Contractual customer relationships Contractual customer relationships acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer relations have a finite useful economic life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the customer relationship which has been assessed as 10 years. (d) Research and Development expenditure Expenditure associated with developing and maintaining the Group's software products is recognised as incurred. Where, however, new product development projects are technically feasible, production and sale is intended, a market exists, expenditure can be measured reliably, and sufficient resources are available to complete such projects, development expenditure is capitalised until initial commercialisation of the product, and thereafter amortised on a straight-line basis over its estimated useful life, which has been assessed as 5 years. Staff costs and specific third party costs involved with the development of the software are included within amounts capitalised. (e) Computer software Costs associated with acquiring computer software and licensed to-use technology are capitalised as incurred. They are amortised on a straight-line basis over their useful economic life which is typically 3 to 5 years. Impairment of non-financial assets At each reporting date the Group considers the carrying amount of its tangible and intangible assets including goodwill to determine whether there is any indication that those assets have suffered an impairment loss. If there is such an indication, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any) through determining the value in use of the cash generating unit that the asset relates to. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset is estimated to be less than its carrying amount, the impairment loss is recognised as an expense. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset. A reversal of an impairment loss is recognised as income immediately. Impairment losses relating to goodwill are not reversed. Taxation The charge for taxation is based on the profit for the period and takes into account deferred taxation. Taxation is computed using the liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted rates and laws that will be in effect when the differences are expected to reverse. The deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will arise against which the temporary differences will be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities arising in the same tax jurisdiction are offset. In the UK and the US, the Group is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options under each jurisdiction's tax rules. As explained under "Share-based payments", a compensation expense is recorded in the Group's statement of comprehensive income over the period from the grant date to the vesting date of the relevant options. As there is a temporary difference between the accounting and tax bases a deferred tax asset is recorded. The deferred tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future (based on the Company's share price at the balance sheet date) with the cumulative amount of the compensation expense recorded in the statement of comprehensive income. If the amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory rate, the excess is recorded directly in equity against retained earnings. Share-based payments The Group grants share options to certain employees. In accordance with IFRS 2, "Share-Based Payments" equity-settled share-based payments are measured at fair value at the date of grant. Fair value is measured by use of the Black-Scholes pricing model as appropriately amended. The fair value determined at the date of grant of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the number of shares that will eventually vest. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At the end of each reporting period, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the statement of comprehensive income, with a corresponding adjustment to equity. When the options are exercised the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium. The share-based payments charge is included in net operating expenses and is also included in 'Other reserves'. 2 Critical accounting estimates and judgements The preparation of financial statements in accordance with IFRS requires the directors to make critical accounting estimates and judgements that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying value of assets and liabilities within the next financial year are discussed below:- · Impairment assessment:- the Group tests annually whether Goodwill has suffered any impairment and for other assets including acquired intangibles at any point where there are indications of impairment. This requires an estimation of the value in use of the applicable cash generating unit to which the Goodwill and other assets relate too. Estimating the value in use requires the Group to make an estimate of the expected future cashflows from the specific cash generating unit using certain key assumptions including growth rates and a discount rate. Reasonable changes to these assumptions such as increasing the discount rate by 5% (18% to 23%) and decreasing the long term growth rate applied to revenues by 1% (2% to 1%) would still result in no impairment. · Provision for impairment of trade receivables:- the Group assesses trade receivables for impairment which requires the directors to estimate the likelihood of payment forfeiture by customers. · Revenue recognition:- the Group assesses the economic benefit that will flow from future milestone payments in relation to sub-licensing partnership arrangements. This requires the directors to estimate the likelihood of the Group, its partners, and sub-licensees meeting their respective commercial milestones and commitments. · Capitalisation of development expenditure:- the Group capitalises development costs provided the conditions laid out previously have been met. Consequently the directors require to continually assess the commercial potential of each product in development and its useful life following launch. · Provisions for income taxes:-the Group is subject to tax in the UK and US and this requires the directors to regularly assess the applicability of its transfer pricing policy. · Share-based payments:- the Group requires to make a charge to reflect the value of share-based equity-settled payments in the period. At each grant of options and Balance Sheet date, the directors are required to consider whether there has been a change in the fair value of share options due to factors including number of expected participants. 3 Revenue The chief operating decision maker has been identified as the Board of directors. The Group revenue is derived entirely from the sale of software licences, white labelling and professional services (including installation) to hospitals within the United States of America. Consequently the Board has determined that Group supplies only one geographical market place and as such revenue is presented in line with management information without the need for additional segmental analysis. All of the Group assets are located in the United States of America with the exception of the Parent Company's, the net assets of which are disclosed separately on the Company Balance Sheet and are located in the UK. Revenue is analysed as follows:- 2012 2011 $'000 $'000 Software licencing 34,002 33,381 White labelling 3,500 - Professional services 3,565 4,743 Total revenue 41,067 38,124 4 Net operating expenses Net operating expenses are comprised of the following:- 2012 2011 $'000 $'000 Sales and marketing expenses 8,804 8,368 Client servicing 7,189 5,775 Research and development 6,844 5,024 Administrative expenses 4,763 4,143 Acquisition costs on business combination - 517 Release of contingent consideration on business combination (Note 9) (954) - Share-based payments 152 139 Depreciation of plant and equipment 579 312 Amortisation of intangible assets 1,060 555 Exchange loss/(gain) (21) 41 Net operating expenses 28,416 24,874 5 Tax on profit on ordinary activities 2012 2011 $'000 $'000 Profit on ordinary activities before tax 11,202 8,653 Current tax Corporation tax on profits of the year 3,790 3,257 Foreign exchange on taxation in the year 2 42 Adjustments for prior years (762) 68 Total current tax charge 3,030 3,367 Deferred tax Origination & reversal of timing differences (1,371) (749) Adjustments for prior years 645 - Change in tax rate 5 20 Total deferred tax (credit) (721) (729) Tax on profit on ordinary activities 2,309 2,638 The difference between the current tax charge on ordinary activities for the year, reported in the consolidated statement of comprehensive income, and the current tax charge that would result from applying a relevant standard rate of tax to the profit on ordinary activities before tax, is explained as follows: Profit on ordinary activities at the UK tax rate 25.5% (2011: 27.5%) 2,857 2,380 Effects of: Adjustment in respect of prior years (117) 68 Change in tax rate 5 20 Additional US taxes on losses/profits 39% (2011: 39%) (256) 136 Foreign Exchange 2 34 Non taxable income (243) - Expenses not deductible for tax purposes 82 13 Tax deduction on share plan charges (21) (13) Total tax charge 2,309 2,638 6 Dividends The dividends paid during the year were as follows:- 2012 2011 $'000 $'000 Final dividend, re 30 June 2011 - 7.68 cents (4.8 pence)/share 2,036 1,333 Interim dividend, re 30 June 2012 - 7.54 cents (4.8 pence)/share 2,057 1,730 Total dividends paid to company shareholders in the year 4,093 3,063 The proposed final dividend for 30 June 2012 is subject to approval by the shareholders at the Annual General Meeting and has not been included as a liability in these accounts. 7 Earnings per share a) Basic Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year. 2012 2011 Profit attributable to equity holders of the Company ($'000) 8,893 6,015 Weighted average number of ordinary shares in issue (thousands) 26,946 26,079 Basic earnings per share ($ per share) 0.330 0.231 Profit attributable to equity holders of Company ($'000) 8,893 6,015 Release of deferred consideration on business combination (Note 9) (954) - Acquisition costs ($'000) - 517 Amortisation of acquired intangibles ($'000) 574 147 Adjusted Profit attributable to equity holders ($'000) 8,513 6,679 Weighted average number of ordinary shares in issue (thousands) 26,946 26,079 Adjusted Basic earnings per share ($ per share) 0.316 0.256 b) Diluted For diluted earnings per share, the weighted average number of ordinary shares calculated above is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has one category of dilutive potential ordinary shares, being those granted to directors and employees under the share option scheme. 2012 2011 Profit attributable to equity holders of the Company ($'000) 8,893 6,015 Weighted average number of ordinary shares in issue (thousands) 26,946 26,079 Adjustments for:- Share options (thousands) 84 324 Weighted average number of ordinary shares for diluted earnings per share (thousands) 27,030 26,403 Basic earnings per share ($ per share) 0.329 0.228 Profit attributable to equity holders of Company ($'000) 8,893 6,015 Release of deferred consideration on business combination (Note 9) (954) - Acquistion costs ($'000) - 517 Amortisation of acquired intangibles ($'000) 574 147 Adjusted Profit attributable to equity holders ($'000) 8,513 6,679 Weighted average number of ordinary shares in issue (thousands) 26,946 26,079 Adjustments for:- Share options (thousands) 84 324 Weighted average number of ordinary shares for diluted earnings per share (thousands) 27,030 26,403 Adjusted Basic earnings per share ($ per share) 0.315 0.253 8 Intangible assets Goodwill and Other Intangible assets Group Goodwill Customer Proprietary Development Computer Relationships Software Costs Software Total $'000 $'000 $'000 $'000 $'000 $'000 Cost At 1 July 2011 11,188 2,964 1,222 2,584 453 18,411 Additions - - - 328 90 418 At 30 June 2012 11,188 2,964 1,222 2,912 543 18,829 Amortisation At 1 July 2011 - 66 82 1,308 303 1,759 Charge for the year - 329 244 410 77 1,060 At 30 June 2012 - 395 326 1,718 380 2,819 Net Book Value at 30 June 2012 11,188 2,569 896 1,194 163 16,010 Cost At 1 July 2010 - - - 2,385 293 2,678 Additions - - - 199 48 247 Additions acquired at Fair Value 11,188 2,964 1,222 - 112 15,486 At 30 June 2011 11,188 2,964 1,222 2,584 453 18,411 Amortisation At 1 July 2010 - - - 944 260 1,204 Charge for the year - 66 82 364 43 555 At 30 June 2011 - 66 82 1,308 303 1,759 Net Book Value at 30 June 2011 11,188 2,898 1,140 1,276 150 16,652 In accordance with the Group's accounting policy, the carrying values of goodwill and other intangible assets are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill arose on the acquisition of Craneware InSight Inc. (Note 9). The carrying values are assessed for impairment purposes by calculating the value in use (net present value (NPV) of future cashflows) of the Craneware InSight cash generating unit. The goodwill impairment review assesses whether the carrying value of goodwill is supported by the NPV of the future cashflows based on management forecasts for 5 years and then using an assumed sliding scale annual growth rate which is trending down to give a long-term growth rate of 2% in the residual years of the assessed period. Management have made the judgement that this long-term growth rate does not exceed the long-term average growth rate for the industry and also estimated a pre-tax discount rate of 18% based on the Groups estimated weighted average cost of capital. Sensitivity analysis was performed using a combination of different annual growth rates and a range of different weighted average cost of capital rates. Management concluded that the tempered growth rates resulting in 2% during the residual period and the pre-tax discount rate of 18% were appropriate in view of all relevant factors and reasonable scenarios and that there is currently sufficient headroom over the carrying value of the assets in the acquired business that any reasonable change to key assumptions is not believed to result in impairment. 9 Acquisition of subsidiary: Craneware InSight Inc On 17 February 2011, the Company acquired 100% of the issued share capital of ClaimTrust Inc. On the date of acquisition the assets and liabilities of ClaimTrust Inc. were merged into the newly created entity, Craneware InSight Inc. The total consideration for the acquisition along with the fair value of the identified assets and assumed liabilities is shown below: Fair Value Final Final Adjustments Fair Value Fair Value Recognised amounts of identifiable Book Value 30-Jun-11 Adjustments assets acquired and liabilities assumed $'000 $'000 $'000 $'000 Tangible fixed assets Plant and equipment 408 - - 408 Intangible assets Computer software 112 - - 112 Customer relationships - 2,964 - 2,964 Proprietary software - 1,222 - 1,222 Other assets and liabilities Trade and other receivables 1,171 - - 1,171 Bank and cash balances 228 - - 228 Trade and other payables (741) - (263) (1,004) Deferred tax - (1,674) 1,339 (335) 1,178 2,512 1,076 4,766 Goodwill 11,188 Fair Value 15,954 Satisfied by: $'000 Cash 9,000 Ordinary shares issued - 641,917 shares at $9.347 (£5.83) 6,000 Fair value of contingent deferred consideration 954 15,954 Bank balances and cash acquired 228 Cash consideration (9,000) Net cash on acquisition (8,772) Provisional accounting for the business combination as disclosed in the Financial Statements for the year ended 30 June 2011 The contingent consideration is subject to performance criteria, including revenue and profit targets, set for the next financial year and consequently the actual consideration is payable following the respective year end. The maximum potential deferred consideration payable is an additional $4.5m subject to meeting all the performance criteria. The acquisition costs, including all due diligence costs that related to the transaction amounted to $516,796 and these have been expensed as operating costs in compliance with IFRS 3 (revised). Goodwill of $12,263,819 has been recognised on acquisition and is attributable to future customers, future software and the assembled workforce. In the period following the acquisition, Craneware InSight Inc. contributed $2,612,624 to Group revenue and $3,016 to adjusted EBITDA* which has been included with the consolidated statement of comprehensive income for the year. Had Craneware InSight Inc. been consolidated from 1 July 2010, the consolidated statement of comprehensive income would show revenue of $42,958,489 and adjusted EBITDA* of $10,235,219. *Adjusted EBITDA is defined as operating profit before acquisition costs, share based payments, depreciation and amortisation. Completed accounting in respect of the business combination reported in the prior year The accounting for the business combination was completed during the year and resulted in two further separate fair value adjustments, as reflected in amended table above, both of which had a resulting impact on the final Goodwill recognised on acquisition, which remains attributable to future customers, future software and the assembled workforce. The first fair value adjustment to the acquired balance sheet was in respect of obligations to third parties which were not recorded in the opening balance sheet. Following the completion of a rigorous internal review of inherited systems and all potential obligations to a total of $262,776 and as such this liability was recognised as at the date of acquisition, the subsequent expenditure satisfies the liability that existed on the 17 February 2011. With regard to the second fair value adjustment the directors have now determined that the cumulative historical net operating losses of ClaimTrust Inc. have survived the merger agreement. As such they are therefore available to offset against future profits, in so much as they are derived in the same trade and tax jurisdiction as before. Consequently, Craneware InSight Inc. has recognised a deferred tax asset that existed at the date of acquisition equal to the net operating losses at the Federal rate of US tax against which they may be utilised. The directors have also considered any potential lapses and restrictions that apply to the utilisation of these losses in conjunction with the timing of forecasted future taxable profits made by Craneware InSight in order to arrive in their conclusion. The resulting fair value adjustment was to recognise a deferred tax asset of $1,338,800. These fair value adjustments concluded the accounting for the business combination and as such the initial recognised Goodwill of $12,263,819 was amended to a finalised Goodwill of $11,187,795. Comparative balances have been restated throughout to reflect the fair value adjustments note above. 10 Called up share capital Authorised 2012 2011 Number $'000 Number $'000 Equity share capital Ordinary shares of 1p each 50,000,000 1,014 50,000,000 1,014 Allotted called-up and fully paid 2012 2011 Number $'000 Number $'000 Equity share capital Ordinary shares of 1p each 26,991,891 538 26,792,681 536 The movement in share capital during the year is represented as follows: · 175,024 Ordinary Share options were exercised in the year. · 24,186 Ordinary Shares were issued in the year which represented the remaining outstanding equity in respect of the final consideration for the Craneware InSight Inc acquisition at price of $9.35 (£5.83). 11 Cash flow generated from operating activities Reconciliation of profit before tax to net cash inflow from operating activities 2012 2011 $'000 $'000 Profit before tax 11,202 8,653 Finance income (107) (99) Depreciation on plant and equipment 579 312 Amortisation on intangible assets 1,060 555 Share-based payments 152 139 Movements in working capital: Increase / (decrease) in trade and other receivables 611 (3,353) (Decrease) / increase in trade and other payables (2,895) 3,882 Cash generated from operations 10,602 10,089 This information is provided by RNS The company news service from the London Stock Exchange END FR BRGDCSDGBGDX -0- Sep/04/2012 06:00 GMT
Craneware plc CRW Final Results
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