3P Learning
Annual Report 2016

Plain-text annual report

Annual Report For the year ended 30 June 2016 Lodged with the ASX under the Listing Rule 4.3A 3P Learning Limited ABN 50 103 827 836 Dear Shareholders, The past year has been one of significant challenge and change for 3P Learning Limited. On 1 June we welcomed Rebekah O’Flaherty to our Board and as Managing Director and Chief Executive Officer of the company. Rebekah brings to 3P Learning deep experience in global technology companies with particular expertise in consumer engagement and product and market development. We expect Rebekah to lead and foster the development of a customer focused and high performance culture in our key markets around the world. During the year, revenue increased in all regions and products and we increased our market share in key markets. Whilst it was re-assuring to achieve positive growth during the year, our earnings did not live up to our expectations and the company has a substantial amount of work to do to build a globally competitive online education business. Our investment in Learnosity delivered results ahead of expectations. We expect substantial global demand for online assessments which will strengthen Learnosity’s position as a global leader in this specialist niche of the Education Technology market. The strategic priorities put in place by the CEO, her Executive Leadership Team and your Board are to: strengthen the product portfolio   develop a scalable digital sales platform  implement a global operating model With Rebekah’s leadership, and a reinvigorated 3P team, we feel confident that 3P will build upon its strengths and firmly establish its place on a global stage. I would like to extend a personal thank you to my fellow Directors for their significant contribution during the year and in particular during the leadership transition. Having a strong and committed Board enabled these changes to take place and at the same time ensure business continuity. Finally, I would like to thank every member of the 3P team for their hard work and dedication as well as our customers and shareholders for their continued support. Yours sincerely, Samuel Weiss Chairman, 3P Learning Limited Dear Shareholders, I am delighted to share with you my first report as CEO and Managing Director of 3P Learning Limited and the results for the year ended 30 June 2016. Year in review Key Financial Information A$M (unless stated) Revenue Underlying Core EBITDA Underlying Net Profit after Tax Total Licences (Million) ARPU (A$) Learnosity – Revenue (€’000) FY16 49.3 13.3 5.3 5.65 8.48 8.2 FY15 Pro Forma 44.8 16.9 10.8 5.31 8.33 5.4 Variation % 10% -21% -51% 6% 2% 52% EMEA delivered 14% constant currency revenue growth with a 10% increase in licences. The Americas, achieved 19% constant currency revenue growth and 14% licence growth, and the region is now cash flow break even. We signed new district agreements including Chicago, the 4th largest US school district, as well as Houston. In our key Australia and New Zealand market, we increased both our market share and customer retention in the primary segment year over year. The year ahead 3P has key strengths to succeed in the increasingly competitive education technology sector. We have a highly talented team who have strong insight into innovating products that are both engaging and academically rigorous. This is evidenced by our industry awards and the 5.6 million students in over 17,000 schools across the world who use our products every day. Building on these strengths our focus this year, one of transition, will be in 3 key areas: 1. strengthen our product portfolio, with a focus on our flagship Mathletics product and expanding our literacy offering 2. develop a more scalable sales model, including laying the foundations to digitize all aspects of our business 3. move to a global operating model to deliver efficiency and effectiveness While executing in these areas, we expect to deliver revenue growth ahead of cost growth in all markets and products in financial year 2017. We have the right team in place to execute our plans and in turn put 3P in a stronger position to accelerate sustainable global growth. It is a real privilege to be leading such an extraordinary team of people and I feel entirely accountable to them, as well as our shareholders and customers who have placed their confidence in 3P Learning. Rebekah O’Flaherty CEO and Managing Director, 3P Learning Limited 3P Learning Limited Directors' report 30 June 2016 The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'Group') consisting of 3P Learning Limited (referred to hereafter as the 'Company' or 'parent entity') and the entities it controlled at the end of, or during, the year ended 30 June 2016. Directors The following persons were directors of 3P Learning Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Samuel Weiss Roger Amos Claire Hatton Rebekah O’Flaherty (appointed on 1 June 2016) Timothy Power (resigned on 11 January 2016) Principal activities During the financial year the principal continuing activities of the Group consisted of developing, sales and marketing of online educational programs to schools and parents of school-aged students. There was no significant change in the nature of these activities during the year. Dividends Dividends paid during the financial year were as follows: Consolidated 2016 $'000 2015 $'000 Final dividend declared for the year ended 30 June 2015 of 1.8 cents per ordinary share (2014: $82.73 per pre-IPO ordinary share) 2,428 12,500 There were no dividends recommended or declared for the year ended 30 June 2016. Previous year As part of the capital restructure and listing of the Company, pre-IPO shareholders were entitled to a dividend of $12,500,000 which was declared on 2 June 2014 and paid on 9 July 2014. Operating and financial review The profit for the Group after providing for income tax and non-controlling interest amounted to $3,632,000 (30 June 2015: $4,085,000). A reconciliation of earnings before interest, tax, depreciation and amortisation ('EBITDA') to statutory profit before tax for the year is as follows: 1 3P Learning Limited Directors' report 30 June 2016 Underlying core EBITDA* Depreciation and amortisation expense Interest income Finance costs Underlying profit before income tax expense** Income tax expense Underlying profit after income tax expense*** Professional fees for initial public offering Tax benefit Restructuring costs Tax benefit Net profit after income tax expense for the year Non-controlling interest Profit attributable to owners of 3P Learning Limited Consolidated 2016 $'000 2015 $'000 13,326 (5,064) 148 (649) 7,761 (2,476) 5,285 - - (2,231) 596 3,650 (18) 3,632 16,814 (3,062) 566 (20) 14,298 (3,588) 10,710 (9,368) 2,810 - - 4,152 (67) 4,085 * ** Underlying Core EBITDA represents earnings before interest, tax, depreciation and amortisation plus share of profits of associates accounted for using the equity method, excluding professional fees for initial public offering and restructuring costs. Underlying profit before income tax expense represents reported profit before income tax expense of the Group, excluding professional fees for initial public offering and restructuring costs. *** Underlying profit after income tax expense represents reported profit after income tax expense of the Group, excluding professional fees for initial public offering and restructuring costs. Underlying Information, including this reconciliation to net profit after income tax expense, has been provided in order to meet the demands from users of the financial reports for information to better understand aspects of the Group’s performance. The directors believe that underlying profit after income tax expense is the most appropriate measure of the maintainable earnings of the Group and thereby best reflects the core drivers of, and ongoing influences upon, those earnings. For this reason, the impact of professional fees for initial public offering and restructuring costs is excluded from the measurement of underlying profit after income tax expense. Revenue Total revenue for the year ended 30 June 2016 was $49,264,000 (30 June 2015: $44,247,000). All segments and all licence products showed modest growth. Licence numbers for the Group grew 6.2% from 5.3 million to 5.7 million. Performance The profit for the Group after providing for income tax and non-controlling interest amounted to $3,632,000 (30 June 2015: $4,085,000). Australia and New Zealand (‘ANZ’) and Europe, Middle East and Africa (‘EMEA’) showed improved underlying core EBITDA performance which contributed to the profit for the Group after providing for income tax and non-controlling interest. This was offset by increased investment into Americas and corporate functions. Depreciation and Amortisation expenses in the current year increased by $2,002,000 to $5,064,000 which was the result of the accumulation of capitalised product development and software assets. 2 3P Learning Limited Directors' report 30 June 2016 Net interest expense in the current year was $501,000 compared to a net interest income of $546,000 for the previous year. This was driven by the long term borrowings taken out during the year and the reduction in cash and cash equivalents. One-off restructuring costs of $2,231,000 relating to the leadership transition and transactions costs associated with the investment in Learnosity Holdings Limited impacted the current year. These transaction costs on investment were offset by the share of profit recognised during the year from Learnosity. In the previous year performance was impacted by one-off professional fees for initial public offering of $9,368,000. Segment review Segment review for the year is as follows: ANZ Americas EMEA Total Revenue Segment underlying core EBITDA is as follows: ANZ Americas EMEA Total EBITDA 2016 $'000 2015 $'000 Change $'000 Change % 30,791 5,846 12,627 49,264 29,543 4,443 10,261 44,247 1,248 1,403 2,366 5,017 4% 32% 23% 11% 2016 $'000 2015 $'000 Change $'000 Change % 15,231 (4,039) 2,134 13,326 17,915 (1,999) 898 16,814 (2,684) (2,040) 1,236 (3,488) (15%) 102% 138% (21%) ANZ Performance saw modest revenue growth of 4% to $30,791,000 driven by licence growth and price increases. Underlying core EBITDA declined by 15% to $15,231,000. Corporate costs make up a significant part of ANZ’s costs and during the year further investment was made into development of product, corporate systems, including the implementation of a new CRM system, and into the transition from on-premises server based product delivery to cloud based product delivery. Americas Revenue in Americas grew 32% to $5,846,000 driven by licence growth of 14% during the year. EBITDA declined $2,040,000 as the segment was impacted by the strategic investment in the sales force and increased inter-segment royalty payments on revenue growth. EMEA Operational performance grew in EMEA with revenue up 23% to $12,627,000 driven by 10% licence growth. EBITDA was up 138% to $2,134,000 due to revenue contribution less growth in inter-segment royalties. The Group has net assets of $43,549,000 (30 June 2015: $33,142,000) which was a result of new equity issued in relation to Learnosity acquisition as detailed in the 'Significant changes in the state of affairs below', and profits for the financial year, off-set by additional borrowings of $11,500,000. The online K-12 education industry is a fast moving industry and the rate of technological change and competition is increasing. The risk associated with the market requires management to continually focus on innovation and change to keep pace with competitors and new entrants to the market. The Group invested $10,076,000 (30 June 2015: $8,160,000) in product development and this level of investment is expected to continue to remain competitive. The current carrying value of product development assets is $17,941,000 (30 June 2015: $11,848,000). 3 3P Learning Limited Directors' report 30 June 2016 The material business risks faced by the Group that are likely to have an effect on the financial prospects of the Group are outlined below: Competition risks: The Group operates in a highly competitive industry and there are a large number of participants targeting the K-12 segment, many with significant resources and capital. Distribution rights to Reading Eggs Product risks: The Group does not own the intellectual property rights to Reading Eggs and Reading Eggspress. Technology and intellectual property risks: The Group’s technology platforms and systems may be disrupted which could affect the Group’s reputation, ability to generate income and financial performance. Economic risks: In particular, the Group is exposed to a number of macro risks potentially impacting its economic sustainability. Exchange rate risk: Volatility in exchange rates can impact the Group’s ability to maintain or grow margins, However, to a significant extent the Group’s business currently enjoys natural hedges: the revenue that the Group obtains in a particular foreign currency closely matches the expenses it incurs in that currency (such as the British Pound). The Board believes that natural hedges presently mitigate any exchange rate volatility risk for the Group to an economically acceptable level. Significant changes in the state of affairs Investment in associates On 9 September 2015, the Group acquired an initial 23.07% interest in Learnosity Holdings Limited (www.learnosity.com) a provider of SaaS Assessment tools, based in Dublin, Ireland for a total cost of $27,875,000. On this date the Group also entered into an option to purchase an additional 16.93%. The Group exercised this option on 19 January 2016 for a consideration of $20,529,000. Cash consideration of $33,748,000 was paid up to 30 June 2016 and a further $6,092,000 is accrued and will be paid subsequent to the end of the financial year. Consideration paid was settled by the issuance of 4,108,527 shares in the Company. This included 2,292,649 shares issued on 7 December 2015 and 1,816,878 shares issued on 31 March 2016, which are both held in escrow for a period of 12 months from their respective issue dates. Long term borrowings During the financial year, the Group entered into a new banking facilities agreement with HSBC bank including a working capital facility for $20,000,000 and a bank guarantee and other ancillary facility for $2,000,000. As at 30 June 2016, the Group had used $11,500,000 of the working capital facility and $1,839,000 of the bank guarantee and other ancillary facility. There were no other significant changes in the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year On 24 August 2016, the Group increased the HSBC banking facilities agreement including the working capital facility from $20,000,000 to $30,000,000 and maintained the bank guarantee and other ancilliary facility for $2,000,000. No other matter or circumstance has arisen since 30 June 2016 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. Likely developments and expected results of operations Group’s growth is expected to be supported by the continuing shift of consumers seeking more engaging and interactive online learning resources and resources with proven academic rigour. The Group expects to focus on its core products by increasing their functionality, adding additional content and enhancing the user experience. The Group also expects to establish a scalable sales and operational model to support its growth in student licences and home licences in both existing and potential new territories. Environmental regulation The Group is not subject to any significant environmental regulation under Australian Commonwealth or State law. 4 3P Learning Limited Directors' report 30 June 2016 Information on directors Name: Title: Qualifications: Experience and expertise: Samuel Weiss Independent Non-Executive Chairperson AB, MS, FAICD Significant experience as a senior executive and as a non-executive director in education, technology and consumer products companies in Australia, North America, Europe and Asia. Chairman of Altium Limited (ASX: ALU) and Surfstitch Group Limited (ASX: SRF). Other current directorships: Former directorships (last 3 years): Non-Executive Director of iProperty Group Limited (ASX: IPP), Oroton Group Limited (ASX: ORL) and Breville Group Limited (ASX: BRG) and Chairman of Ensogo Limited (ASX: E88) Member of the Nomination and Remuneration Committee and the Audit and Risk Committee 306,508 ordinary shares Special responsibilities: Interests in shares: Name: Title: Qualifications: Experience and expertise: Rebekah O’Flaherty Chief Executive Officer (appointed on 1 June 2016) B.Ec., MBA, GAICD Extensive experience in technology, digital, product development, sales, marketing and distribution across Asia Pacific, Europe and United States gained over 12 years with Hewlett Packard, Telstra and most recently Origin Energy. None Other current directorships: Former directorships (last 3 years): None None Interests in shares: None Interests in options: 500,000 performance rights Interests in rights: Name: Title: Qualifications: Experience and expertise: Other current directorships: Roger Amos Independent Non-Executive Director FCA, FAICD Over 35 years of experience in finance, business and accounting. Previously a partner at the international accounting firm KPMG for 25 years. Non-Executive Director of REA Group Limited (ASX: REA), Chairman of Tyrian Diagnostics Limited (ASX: TDX) and Deputy Chairman of Enero Group Limited (ASX: EGG) Former directorships (last 3 years): Non-Executive Director of Austar United Communication Limited (ASX: AUN) Special responsibilities: Member of the Nomination and Remuneration Committee and Chairman of the Audit and Risk Committee 31,992 ordinary shares Interests in shares: Name: Title: Qualifications: Experience and expertise: Claire Hatton Independent Non-Executive Director BSc, MBA, MAICD Over 20 years of global experience in strategy, sales, marketing and operations. Significant experience in the digital and technology market. Previously held senior roles at Google, Travelport and Zuji.com. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Chair of the Nominations and Remuneration Committee and Member of the Audit and Risk Committee 31,000 ordinary shares Interests in shares: 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 'Former directorships (last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 5 3P Learning Limited Directors' report 30 June 2016 Company secretary Ms. Stephanie Belton (LLB, MBA) was appointed General Counsel of the Group in March 2016 and as company secretary on 22 April 2016. She has over 20 years' corporate and commercial experience in Australia and the UK. Mr. Jonathan Kenny resigned as company secretary on 22 April 2016. Meetings of directors The number of meetings of the Company's Board of Directors ('the Board') and of each Board committee held during the year ended 30 June 2016, and the number of meetings attended by each director were: Full Board Attended Held Nomination and Remuneration Committee Attended Held Audit and Risk Committee Attended Held Samuel Weiss Roger Amos Claire Hatton Timothy Power* 10 10 10 5 10 10 10 7 5 5 5 1 5 5 5 4 5 5 5 1 5 5 5 3 Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. * Timothy Power attended the Nomination and Remuneration Committee and Audit and Risk Committee meetings as an observer. Rebekah O'Flaherty was appointed to the Full Board on 1 June 2016. No Board meetings were held during the period from 1 June to 30 June 2016. 6 3P Learning Limited Directors' report 30 June 2016 Letter from the Chair of the Nominations and Remunerations Committee Dear Shareholder, Last year, at the Company’s Annual General Meeting, we received a “first strike” against the 2015 remuneration report in that more than 25% of votes cast by those entitled to vote voted against the report. As part of our response to this vote, we have consulted with a number of institutional investors and with proxy advisors, in order to better understand the reasons for the strike vote. The purpose of my letter to you is to set out the changes that we have made to our remuneration policies and practices and to explain how they have been applied in determining our compensation plans. The principal concerns identified in regard to the 2015 remuneration report included:    Compensation of the Chief Executive Officer; Terms and conditions of the Company’s long term incentive plan; and Board composition. Compensation of the Chief Executive Officer In January 2016, our long time Chief Executive Officer, Timothy Power resigned. The Company entered into a commercial negotiation with Tim about the final payment to him that recognised the length and impact of his tenure and did not exceed the limit to be paid under the Corporations Act 2001 without shareholder approval. The following table sets out the compensation paid to Tim in respect of the years ended 30 June 2016 and 30 June 2015. Short-term benefits Salary $ STI plan $ IPO bonus * $ Termination benefits $ Post- employment benefits** $ Long term employee benefits $ LTI plan $ Total $ Performance related % LTIP % T Power (Former Chief Executive Officer resigned 11 January 2016) 2016 2015 254,433 225,000 - 438,524 30,000 98,288 - 1,046,245 411,525 100,000 6,828,750 - 29,577 98,539 100,000 7,568,391 N/A - 94% 1% * The one off cash bonus paid in 2015 was detailed in the Initial Public Offering (‘IPO’) prospectus, issued by the Company on 19 June 2014. The bonus was awarded for work done prior to the IPO and was pre-committed by the prior owners of the Company. The bonus was paid in July 2014, and so was required to be included in the Company’s remuneration report for 2015. ** Amounts comprised of superannuation only. In April 2016, the Company announced the appointment of Rebekah O’Flaherty as Chief Executive Officer. Rebekah joined the Company on 1 June 2016 and the remuneration report includes full details of Rebekah’s salary and benefits package, including share-based benefits all of which are subject to shareholder approval. Rebekah is a seasoned global technology industry executive with significant experience leading change, the transformation of customer experience and the creation of digital platforms. In instructing the international executive search for the new Chief Executive Officer, the Board offered a salary package which reflected the evolution and the increased complexity of the Company since its IPO in 2014, and which recognised the skill set required to transform the Company and restore shareholder value. 7 3P Learning Limited Directors' report 30 June 2016 The content and structure of Rebekah’s remuneration package was benchmarked against the market and is of the level required to secure an executive of Rebekah’s experience and ability. In addition, the key remuneration elements set out below are designed to address the increased risk in joining the Company at a time of transition and transformation and to partially compensate for any element of guaranteed remuneration forgone by Rebekah. Rebekah O'Flaherty fixed remuneration (including compulsory superannuation contributions) Rebekah O'Flaherty at risk remuneration 1. Short term incentive: 2. Long term incentive: 3. Special long term incentive: $610,000 per annum. 50% of annual fixed remuneration, subject to the Board's assessment of Rebekah’s achievement of applicable performance targets in accordance with the Company's short term incentive plan (‘STIP’). If an Event (as defined in the long term incentive (‘LTI’) plan) occurs in any financial year, Rebekah will be entitled to receive payment of the target STI amount for the relevant year.* 50% of annual fixed remuneration, subject to shareholder approval. Subject to shareholder approval, 400,000 performance rights under the LTI plan subject to the following conditions: a) Where the volume weighted average price (‘VWAP’) of the Company's ordinary shares for the period of 60 consecutive days after the date of release of the Company's annual results for the period ended 30 June 2019 is: i) Less than $3.95, none of the performance rights will vest; ii) Greater than $3.95 per share, 50% of the performance rights will vest; iii) Greater than $4.45 per share, 75% of the performance rights will vest; and iv) Greater than $5.70 per share, 100% of the performance rights will vest. b) any shares issued on vesting of any performance right shall be placed in escrow for a period of 12 months from the date of vesting. 4. Further long term incentive: Provided Rebekah remains in the role of Chief Executive Officer until 1 September 2019, she shall, subject to shareholder approval, receive an additional award of 100,000 performance rights under the terms of the LTI plan. * This provision recognises the increased likelihood of an Event during the current period of transformation and change and facilitates the full engagement of the CEO in completing the Event process. The terms of the special long term incentive award (paragraph 3 above), were based on the Company’s share price at the time of Rebekah’s appointment and are specifically designed to drive substantial revenue and earnings growth and enhance shareholder value. This award continues to operate as a strong incentive, notwithstanding recent movements in share price, and is complimentary to the other elements of Rebekah’s remuneration package. Upon joining the Company, Rebekah was required to forfeit an element of share-based remuneration that would have been paid had she not left her former employer. The further long term incentive (paragraph 4 above) is designed to compensate Rebekah for the loss of this equity award and is subject to a time based hurdle only. We are very grateful to Jonathan Kenny, our Chief Financial Officer, who served as interim Chief Executive Officer from 11 January 2016 to 31 May 2016. Jonathan did an excellent job in a very challenging time for the Company and not only steadied the business but also stepped up to make key strategic decisions. Jonathan’s salary increased over this period only from $388,000 to $450,000 (inclusive of superannuation). In recognition of his exemplary performance, and to retain him as a key leader of our Company, Jonathan was granted 300,000 shares on 19 February 2016, subject to time based vesting dates as follows: a) b) c) as to an initial 100,000 shares, 15 September 2016; as to the next 100,000 shares, 15 September 2017; and as to the final 100,000 shares, 15 September 2018. 8 3P Le Direct 30 Ju earning Limi tors' report ne 2016 ited Long T We ha Term Incenti ave made so ive Plan ome importan nt changes to o our LTI pla an this year. I plan are se et out in the e body of th is report. 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We r mpliment and r the year en regularly rev d add to the s nded 30 June iew the com skills and ca e 2016 includ position and pabilities of t des a matrix size of our the Board. x of the key s Board and w skills and we plan to We be place becom elieve that th the right fou me a market he substantia undations to a leader, not o al changes ou accelerate g only in Austra utlined above rowth, to res alia but in ke e, to both ou store the und ey countries a r leadership derlying value around the w team and ou e in 3P Learn world. ur remunerat ning and pos tion framewo sition the Co ork, put in mpany to Yours s sincerely ___________ ____ _____ Claire Chair 25 Au __________ e Hatton of the Nomin gust 2016 nations and Remuneratio on Committe ee Sydne ey 9 3P Learning Limited Directors' report 30 June 2016 Remuneration report (audited) This remuneration report for the year ended 30 June 2016 outlines the director and executive remuneration arrangements for the Group in accordance with the Corporations Act 2001 and its Regulations. For the purposes of this report, key management personnel (‘KMP’) are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including all directors, whether executive or non-executive. The disclosures in the remuneration report have been audited. The Company has not engaged any remuneration consultants to advise on remuneration policy or the structure or level of executive remuneration. The remuneration report is presented under the following headings:       Overview of 3P Learning remuneration policy; Details of senior executive remuneration structure; Non-executive directors’ remuneration; Service agreements; Share-based compensation Additional disclosure relating to key management personnel Overview of 3P Learning remuneration policy The Nomination and Remuneration Committee (‘NRC’) is responsible for the remuneration arrangements for its directors and senior executives and for reviewing and approving key employment policies and practices. The performance of the Group depends on the quality of its directors and executives. The Company’s remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The Group's executive reward framework is founded on the objectives of:    driving growth and profitability; aligning executive rewards with achievement of strategic objectives and the delivery of shareholder value; and providing competitive remuneration packages that recognise both individual and organisational performance The NRC has structured an executive remuneration framework that is market competitive, is designed to retain and motivate the Company’s leadership team and sets a standard for transparency and good corporate governance. The determination of non-executive director and executive remuneration is separate. Details of senior executive remuneration structure The senior executive remuneration structure has three key components stated below, including what the Board has agreed is the optimal mix between fixed and “at risk” components for the Chief Executive Officer and senior executives. Details for each of the individual components are as follows: Fixed annual remuneration Short term incentive Long term incentive Fixed salary set by reference to appropriate benchmark information and experience of individuals Includes superannuation and salary- sacrifice non-monetary benefits 25 - 50% of fixed remuneration 25 - 50% of fixed remuneration Annual cash incentive Grant of premium options 12 month period Targets linked to group performance 3 year performance period Performance hurdles linked to revenue and EPS growth Executive remuneration Fixed remuneration The objective for fixed remuneration is to provide a base level of compensation appropriate to the senior executive’s role, responsibilities and experience. Fixed remuneration is determined with reference to available market data including benchmarks, the scope of the role and the qualifications and experience of the individual. The NRC have re-aligned fixed remuneration to ensure consistency of application and market parity. Fixed remuneration includes base salary, non-monetary benefits, superannuation and other statutory components such as long service leave. 10 3P Learning Limited Directors' report 30 June 2016 Fixed remuneration is reviewed annually by the NRC, based on individual and business unit performance, the overall performance of the Group, and comparable market remuneration. Superannuation in excess of the concessional contribution cap is provided as cash salary. Senior executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs for the Group and provides additional value to the executive. The fixed remuneration for the Chief Executive Officer is reviewed annually by the NRC, for approval by the Board, following consideration of her performance against her annual KPIs. Performance based remuneration The performance based remuneration components for senior executives align reward with the achievement of annual and longer term objectives of the Group, and the optimisation of shareholder value over the short and long term. The performance based components comprise a STI plan and a LTI plan, each of which is designed to link to key elements of the Group business plan and budget. Executive remuneration Details of remuneration paid to the current and former executives, for the years ended 30 June 2016 and 30 June 2015, are set out below: Short-term benefits Salary $ STI plan $ Current executives IPO bonus $ Termin- ation benefits $ Post- employment benefits $ R O'Flaherty (Chief Executive Officer appointed 1 June 2016) Long term employee benefits $ LTI plan* $ Total $ Perform- ance related % LTIP % 2016 48,333 - - - 2,500 - 3,457 54,290 - - J Kenny (Chief Financial Officer and Interim Chief Executive Officer from 11 January 2016 to 31 May 2016) 2016 377,802 - - 2015 357,530 75,000 300,000 - - 30,000 30,000 - 138,142 545,944 - - - 75,000 837,530 55% 9% Former executive T Power (Former Chief Executive Officer resigned 11 January 2016) 2016 254,433 225,000 - 438,524 30,000 98,288 - 1,046,245 N/A - 2015 411,525 100,000 6,828,750 - 29,577 98,539 100,000 7,568,391 94% 1% * The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. 11 3P Learning Limited Directors' report 30 June 2016 Short term incentives What is the STI and who participates? The remuneration of the Group’s senior executives is linked to the Company’s short term annual performance through a cash based STI. The Group STI program is designed to deliver sustainable performance and continued growth by retaining talent and rewarding performance. The key objectives of the STI program are to:  drive and reward outstanding performance against annual strategic financial and operational performance objectives; promote effective management of capital, in the short, medium and long term; position the Company to over achieve in future years; emphasise and reward team and Company performance outcomes; provide competitive and motivating reward opportunities; create a clear and transparent link between performance and rewards with minimum subjectivity; and be simple to administer and easily understood.       What are the performance measures? Financial performance measures are set for each senior executive based on profit and revenue targets. These targets are in turn derived from the Company’s business plan and budget as the NRC considers this to be the best way to ensure the aims of the business plan and budget are met. Currently, the Company’s STI Plan does not include non-financial performance objectives. As part of the ongoing development of the Company’s remuneration framework, the NRC will consider non-financial measures that are within the sphere of influence of the individual and are aligned with the Company’s overall business goals. The performance measures are as follows: Performance measure Revenue EBITDA Executive allocation 50% 50% Why were these performance measures chosen? The Board considers the financial measures to be appropriate as they are aligned with the Group’s objective of delivering profitable growth and, improved shareholder returns. The Group operates in the fast moving and rapidly changing global environment of education technology in which a large number of companies, individuals, startups and even global technology giants like Amazon and Google are trying to establish themselves as credible suppliers to schools for education services. Today, no one company has significant market share, or a perceived advantage to any other. The Board believes that the Group is capable of achieving a market leading position in the countries in which it operates if management is incentivised to deliver both rapid growth in revenue and consistent growth in earnings. What is the amount the executives can earn? Financial measure – level of performance Below Threshold (i.e. <90% of Target) Target Above Target (i.e. > 100% of Target) * Pro-rata payment made between these points % of Target incentive award* 0% 100% Up to 160% When are the performance conditions tested? Performance conditions are tested and incentive payments under the STI plan are determined by the NRC after the approval and release of the Company’s annual results in August. 12 3P Learning Limited Directors' report 30 June 2016 STI for the 2016 financial year The target STI opportunity for the financial year ended 30 June 2016 was up to an amount equal to 25% of the senior executive’s fixed remuneration (up to 50% in the case of the Chief Executive Officer and Chief Financial Officer). There were 12 participants in the STI incentive payments for FY16 and 3 achieved their targets for the year. For FY16 a total of $105,347 was paid for STI awards. The former Chief Executive Officer, Tim Power, received an STI payment of $225,000 as part of his final payment negotiated on commercial terms with the Company. Long term incentives The LTI plan has been modified this year in light of feedback both from the Company’s shareholders and from the review of the Company’s remuneration framework. The objective is to link the long term reward for senior executives with the creation of shareholder value through the allocation of equity awards which are subject to specific performance conditions. The key changes to the plan for 2016 are as follows:   a revenue based hurdle is included in the plan, in addition to an EPS hurdle; participants in the plan have been restricted to the new senior executive team comprising the Chief Executive Officer and her direct reports; and the equity vehicle under the plan has changed from performance rights to options to be issued at a premium to the VWAP at the time of issue (premium options)  The revenue hurdle has been chosen to reward participants for increasing the rate of growth for the Company especially in international markets. This hurdle is complemented by the EPS hurdle, which ensures that there is also focus on shareholder value. The senior executive team, which includes a number of new leaders, has been tasked with driving significant growth for shareholders. The choice of premium options as the equity vehicle under the plan is in recognition of the high growth nature of online education and its fragmented early stage state in global markets. This should maximise the opportunity for the senior executive team to benefit from that growth in a way that is consistent with providing value for shareholders. What are the objectives of the LTI? The key objectives of the LTI program are to:   align executive performance with shareholder return; drive and reward outstanding performance against three year strategic financial and operational performance objectives; emphasise and reward senior executives for long term Company performance outcomes; provide competitive reward opportunities that motivate participants; and create a clear and transparent link between long term performance and rewards with minimum subjectivity.    Who are the participants of the LTI? The Chief Executive Officer and her five direct reports are eligible to participate in the LTI plan. What is the amount that executives can earn? Beneficiaries under the LTI plan can earn an amount equal to a percentage of their annual fixed remuneration in the range of 25%-50%. How is the LTI grant determined? Grants will be made in September 2016 after the 30 June 2016 financial statements have been finalised. The vesting date will be three years after the grant date, following the approval of the financial results for FY19. Any premium options which do not meet the performance conditions at the end of the performance period will lapse. Awards will take the form of premium options. Each option represents a conditional right to acquire one share in the Company on exercise by payment of an exercise price determined by the Board during a limited exercise period. For the purpose of the FY17 grant under the LTI plan, the exercise price will be set at a premium of 43% to the Company’s share price on the date of grant. The life of the grant is four years. 13 3P Learning Limited Directors' report 30 June 2016 The number of options to be granted will be determined by dividing the dollar award value by the value of an option at the time of grant (based on a two week VWAP of the Company’s shares at that time). What are the performance conditions? The performance conditions for the year ending 30 June 2017 grant are based on the following:   50% of award to be tested based on compound annual growth in revenue; and 50% of award to be tested based on compound annual growth in EPS. Each performance condition is tested following finalisation of the annual financial results for the year ending 30 June 2019 (performance period). The financial hurdles are independent of each other. One can be achieved without the other hitting threshold. What vesting schedules apply? During the financial year, the Board reviewed the award schedule in light of the Company’s historical financial performance and the three year revenue and EBIT growth forecasts. The Board approved challenging threshold, target and stretch growth rates (using FY16 as the base) in respect of both the revenue and EPS hurdles, which are based on the Company’s strategic plan and are reflective of the Company’s growth objectives. Both hurdles require double digit growth at the threshold level for any award to occur. The following award schedule applies to both performance hurdles: Performance level Below threshold Threshold Target Stretch The Board has chosen to offer significant incentive opportunity if the Senior Executive team can substantially increase the rate of growth in revenue and EPS as the Board believes this is in the interest of the Senior Executive team and shareholders alike. The target hurdle has been set to be stretching but achievable and the stretch target to be particularly ambitious. % of options awarded 0% 80% 100% 150% Performance conditions and disclosure of targets The Board considers the combination of revenue and EPS hurdles an appropriate balance to ensure that ‘top line’ growth is pursued over the long term, whilst growth in earnings is maintained. In particular, the revenue hurdle has been adopted in light of the Group’s desire to accelerate growth to achieve national and international expansion. The Board has selected EPS as a performance measure because it provides a relevant indicator of shareholder value and provides a clear target to drive and motivate senior executive performance. The publication of prospective revenue and EPS targets for future performance periods would require the disclosure of price sensitive information. Accordingly, the Company will not disclose prospective targets but will disclose historic targets and the Company’s performance against those targets. Premium options may lapse in the event that the relevant performance conditions are not met. In addition, premium options may be forfeited if a ”claw back” event occurs during the performance period. A claw back event includes circumstances where a senior executive has engaged in fraud, dishonesty or gross misconduct, where the financial results that led to the equity award are subsequently shown to be materially misstated, or where the behaviour of a senior executive brings the Company into disrepute or impacts the Company’s long term financial strength. LTI for the 2016 financial year The relevant EPS target threshold for awards under the LTI plan in the financial year ended 30 June 2016 was 8.19 cents against an actual underlying EPS figure of 3.87 cents*. No awards were made under the LTI plan for the financial year ended 30 June 2016, other than the awards made to Rebekah O’Flaherty on her appointment to the role of Chief Executive Officer, which are subject to shareholder approval at the 2016 AGM and the award to Jonathan Kenny in relation to his role as Interim Chief Executive Officer. *Underlying EPS is calculated as Underlying profit after income tax expense of $5,285,000 (as defined in the Operating Financial Review of the Directors’ Report) divided by 136,650,228 being the weighted average number of shares as disclosed in Note 37. 14 3P Learning Limited Directors' report 30 June 2016 Non-executive directors' remuneration Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of the directors. Non-executive directors' fees and payments are reviewed annually by the NRC. The Chairman's fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The Chairman is not present in any discussions relating to determination of his own remuneration. ASX listing rules require the aggregate non-executive directors’ remuneration be determined periodically by a general meeting. The most recent determination was at the 2014 Annual General Meeting where the shareholders approved the aggregate remuneration be fixed at $650,000 per annum. Board and committee fees, as well as statutory superannuation contributions made on behalf of the non-executive directors, are included in the aggregate fee pool. The table below shows the structure and level of non-executive director fees for the financial year ended 30 June 2016. These will remain the same for financial year ending 30 June 2017. Fee applicable Board Audit and Risk Committee Nominations and Remuneration Committee Chair $ 150,000 20,000 20,000 Member $ 75,000 10,000 10,000 Details of the remuneration for the Chairman and independent non-executive directors for the financial years ended 30 June 2016 and 30 June 2015 are set out in the table below. Name S Weiss (Chairman) R Amos C Hatton Total Fees and allowances $ 176,333 181,153 105,000 105,673 98,667 95,608 380,000 382,434 2016 2015 2016 2015 2016 2015 2016 2015 IPO bonus $ Post- employment benefits $ - 100,000 - 50,000 - 50,000 - 200,000 16,752 17,248 9,975 10,061 9,373 9,103 36,100 36,412 Total $ 193,085 298,401 114,975 165,734 108,040 154,711 416,100 618,846 Service agreements Non-executive directors do not have fixed term contracts with the Company. On appointment to the Board, all non- executive directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation. Non-executive directors retire by whichever is the longer period: the third annual general meeting following their appointment or the third anniversary date of appointment, but may then be eligible for re-election. Remuneration and other terms of employment for executives are formalised in employment agreements. The Chief Executive Officer and Chief Financial Officer do not have a fixed term contract with the Company. Details of the employment agreements are as follows: 15 3P Learning Limited Directors' report 30 June 2016 Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Rebekah O’Flaherty Chief Executive Officer 1 June 2016 Open ended Rebekah will receive a fixed annual remuneration of $610,000, inclusive of statutory superannuation. Rebekah will be eligible to receive an annual short term incentive with a target STI of 50% of her fixed annual remuneration, as determined by the Board for each financial year ending after 30 June 2016. Payment of the cash bonus will depend on the Group’s performance and Rebekah’s achievement of certain key performance indicators or at the discretion of the Board. As part of a long term incentive package and subject to shareholder approval, Rebekah may be entitled to receive an equity based award under the LTI plan with a value equivalent to 50% of her fixed annual remuneration, commencing 1 July 2016. Further, subject to shareholder approval, as part of her appointment package, Rebekah will receive an award of up to 400,000 performance rights under the LTI plan subject to specific long term performance indicators. In addition, provided that Rebekah remains in the role of Chief Executive Officer until 1 September 2019, subject to shareholder approval, she will receive an additional award of 100,000 performance rights under the terms of the LTI plan. Either party may terminate the employment contract by giving six months’ notice in writing. The Company may terminate Rebekah’s employment contract by making a payment in lieu of notice. In the event of serious misconduct or other specific circumstances warranting summary dismissal, the Company may terminate Rebekah’s employment contract immediately by notice in writing and without payment in lieu of notice. Upon the termination of Rebekah’s employment contract, she will be subject to a restraint of trade period of 12 months. The Company may elect to reduce the restraint of trade period, or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. Jonathan Kenny Interim Chief Executive Office and Chief Financial Officer 1 July 2014 Open ended Jonathan will receive annual fixed remuneration of $388,000 plus statutory superannuation. Jonathan will be eligible to receive an annual short term incentive with a target STI of 50% of his fixed annual remuneration, as determined by the Board. Payment of the cash bonus will depend on the Group’s performance and Jonathan’s achievement of certain key performance indicators or at the discretion of the Board. As part of a long term incentive package Jonathan may be entitled to receive an equity based award under the LTI plan with a value equivalent to 50% of his fixed annual remuneration. On 19 February 2016, it was determined that 300,000 ordinary shares were to be issued to Jonathan as a retention and reward bonus in acknowledgement of his increased responsibilities and ongoing contributions to the Group as Interim Chief Executive Office. The first issue date will be 15 September 2016, and subsequent to that 100,000 shares will be issued in 2017 and 2018, subject to continued employment at that time. The Board may, at its absolute discretion, elect to issue some or all of these shares, regardless of the vesting dates. Either party may terminate the employment contract by giving six months’ notice in writing. The Company may terminate Jonathan’s employment contract by making a payment in lieu of notice. In the event of serious misconduct or other specific circumstances warranting summary dismissal, terminate Jonathan’s employment contract immediately by written notice and without payment in lieu of notice. Jonathan’s employment contract also contains a post-employment restraint of trade period of up to 18 months. The Company may elect to reduce the restraint of trade period, or eliminate the period in its entirety. The enforceability of the restraint clause is subject to all usual legal requirements. the Company may 16 3P Learning Limited Directors' report 30 June 2016 Share-based compensation Issue of shares Details of shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2016 are set out below: Name Date Shares Issue price $ Jonathan Kenny Timothy Power 1 October 2015 1 October 2015 30,000 40,000 $2.50 $2.50 75,000 100,000 Options There were no options over ordinary shares issued to directors or other key management personnel as part of compensation that were outstanding as at 30 June 2016, aside from the performance rights disclosed above pertaining to Rebekah and Jonathan (the former being subject to shareholder approval at the Annual General Meeting). In accordance with the terms of their employment agreements, an award of premium options to each of Rebekah and Jonathan will be considered in respect of FY17. In the event such award is made to Rebekah, it will be submitted for shareholder approval at the Annual General Meeting. Additional disclosures relating to key management personnel Shareholding The number of shares in the Company held during the financial year by each director and other members of key management personnel of the Group, including their personally related parties, is set out below: Ordinary shares Samuel Weiss Roger Amos Claire Hatton Jonathan Kenny Timothy Power * Balance at the start of the year Received as part of remuneration Additions Disposals/ other Balance at the end of the year 130,400 17,500 25,000 118,100 3,036,472 3,327,472 - - - 30,000 40,000 70,000 176,108 14,492 6,000 - - 196,600 - - - - (3,076,472) 306,508 31,992 31,000 148,100 - (3,076,472) 517,600 * Disposals/other represent disposals of 465,500 shares during the period and 2,610,972 shares held at resignation date. This concludes the remuneration report, which has been audited. 17 3P Learning Limited Directors' report 30 June 2016 Shares under option There were no unissued ordinary shares of 3P Learning Limited under option outstanding at the date of this report. Shares under performance rights Unissued ordinary shares of 3P Learning Limited under performance rights at the date of this report are as follows: Grant date 19/02/2016 19/02/2016 19/02/2016 01/06/2016 01/06/2016 Expiry date 15/09/2017 15/09/2018 15/09/2019 01/09/2019 * Exercise price Number under rights $0.00 $0.00 $0.00 $0.00 $0.00 100,000 100,000 100,000 100,000 400,000 800,000 * 60 days after the date of release of the Company's annual results for the year ended 30 June 2019. No person entitled to exercise the performance rights had or has any right by virtue of the performance right to participate in any share issue of the Company or of any other body corporate. Shares issued on the exercise of options There were no ordinary shares of 3P Learning Limited issued on the exercise of options during the year ended 30 June 2016 and up to the date of this report. Shares issued on the exercise of performance rights There were no ordinary shares of 3P Learning Limited issued on the exercise of performance rights during the year ended 30 June 2016 and up to the date of this report. Indemnity and insurance of officers The Company has indemnified the directors and executives of the Company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the Company paid a premium in respect of a contract to insure the directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during the financial year and up to the date of this report. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 28 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. 18 3P Learning Limited Directors' report 30 June 2016 The directors are of the opinion that the services as disclosed in note 28 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ● all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. ● Officers of the Company who are former partners of Ernst & Young There are no officers of the Company who are former partners of Ernst & Young. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors' Report) Instrument 2016/191, dated 24 March 2016, and consequently the amounts in this report have been rounded off to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors' report. Auditor Ernst & Young continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Samuel Weiss Chairman 25 August 2016 Sydney 19 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of 3P Learning Limited As lead auditor for the audit of 3P Learning Limited for the financial year ended 30 June 2016, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of 3P Learning Limited and the entities it controlled during the financial year. Ernst & Young Lisa Nijssen-Smith Partner 25 August 2016 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 3P Learning Limited Contents 30 June 2016 Statement of profit or loss and other comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements Directors' declaration Independent auditor's report to the members of 3P Learning Limited Shareholder information Corporate directory 22 23 24 25 26 66 67 69 71 21 3P Learning Limited Statement of profit or loss and other comprehensive income For the year ended 30 June 2016 Revenue Share of profits of associates accounted for using the equity method Other income Expenses Employee benefits expense Depreciation and amortisation expense Professional fees Technology costs Marketing expenses Occupancy expenses Restructuring expenses Administrative expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Net change in the fair value of cash flow hedges taken to equity, net of tax Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit for the year is attributable to: Non-controlling interest Owners of 3P Learning Limited Total comprehensive income for the year is attributable to: Non-controlling interest Owners of 3P Learning Limited Consolidated Note 2016 $'000 2015 $'000 5 6 7 7 7 8 49,264 44,247 480 1,044 - 1,657 (23,738) (5,064) (2,356) (2,583) (3,060) (2,281) (2,231) (3,296) (649) (19,337) (3,062) (10,750) (1,207) (2,289) (1,914) - (2,395) (20) 5,530 4,930 (1,880) (778) 3,650 4,152 85 120 205 - (919) (919) 3,855 3,233 18 3,632 3,650 18 3,837 3,855 67 4,085 4,152 67 3,166 3,233 Basic earnings per share Diluted earnings per share Cents Cents 37 37 2.66 2.66 3.04 3.04 The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 22 3P Learning Limited Statement of financial position As at 30 June 2016 Assets Current assets Cash and cash equivalents Trade and other receivables Income tax Other Total current assets Non-current assets Royalty receivable Investments accounted for using the equity method Available-for-sale financial assets Plant and equipment Intangibles Deferred tax Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Derivative financial instruments Income tax Provisions Deferred revenue Finance lease payable Total current liabilities Non-current liabilities Borrowings Provisions Deferred revenue Finance lease payable Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Equity attributable to the owners of 3P Learning Limited Non-controlling interest Total equity Consolidated Note 2016 $'000 2015 $'000 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 4,281 7,980 48 24 12,333 80 48,884 6,607 1,216 23,917 5,881 86,585 30,886 8,677 - 630 40,193 145 - 6,607 965 17,242 7,600 32,559 98,918 72,752 10,745 313 - 2,036 28,423 9 41,526 11,500 549 1,754 40 13,843 7,392 - 1,997 2,324 23,924 38 35,675 - 875 3,060 - 3,935 55,369 39,610 43,549 33,142 33,951 7,382 2,160 43,493 56 25,113 7,035 956 33,104 38 43,549 33,142 The above statement of financial position should be read in conjunction with the accompanying notes 23 3P Learning Limited Statement of changes in equity For the year ended 30 June 2016 Consolidated Issued capital $'000 Reserves $'000 Retained earnings $'000 Non- controlling interest $'000 Total equity $'000 Balance at 1 July 2014 2,352 7,954 (3,129) - - - - 4,085 (919) (919) - 4,085 87 67 - 67 7,264 4,152 (919) 3,233 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 22) Dividends paid to non-controlling interest 22,761 - - - - - - (116) 22,761 (116) Balance at 30 June 2015 25,113 7,035 956 38 33,142 Consolidated Issued capital $'000 Reserves $'000 Retained earnings $'000 Non- controlling interest $'000 Total equity $'000 Balance at 1 July 2015 25,113 7,035 956 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 22) Share-based payments (note 38) Dividends paid (note 24) - - - 8,838 - - - 205 205 - 142 - 3,632 - 3,632 - - (2,428) 38 18 - 18 - - - 33,142 3,650 205 3,855 8,838 142 (2,428) Balance at 30 June 2016 33,951 7,382 2,160 56 43,549 The above statement of changes in equity should be read in conjunction with the accompanying notes 24 3P Learning Limited Statement of cash flows For the year ended 30 June 2016 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Interest and other finance costs paid Income taxes refunded/(paid) Consolidated Note 2016 $'000 2015 $'000 59,467 (45,397) 148 (359) (2,206) 54,940 (35,506) 599 (78) 1,301 Net cash from operating activities 35 11,653 21,256 Cash flows from investing activities Payment for purchase of business, net of cash acquired Payment for previous year's business combinations Payments for investments Payments for investments in associates Payments for plant and equipment Payments for intangibles Proceeds from disposal of plant and equipment Proceeds from release of holding deposits Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Share issue transaction costs Proceeds from borrowings Repayment of borrowing Dividends paid Dividends paid to non-controlling interest Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents - (495) (1,318) (33,748) (912) (11,382) 1 500 (1,062) - (5,308) - (327) (8,475) 5 1,702 (47,354) (13,465) - - 17,500 (6,000) (2,404) - 23,500 (11,741) - (260) (12,500) (116) 9,096 (1,117) (26,605) 30,886 - 6,674 24,442 (230) Cash and cash equivalents at the end of the financial year 9 4,281 30,886 The above statement of cash flows should be read in conjunction with the accompanying notes 25 3P Learning Limited Notes to the financial statements 30 June 2016 Note 1. General information The financial statements cover 3P Learning Limited as a Group consisting of 3P Learning Limited (the 'Company' or 'parent entity') and its subsidiaries (collectively referred to as the 'Group'). The financial statements are presented in Australian dollars, which is 3P Learning Limited's functional and presentation currency. 3P Learning Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 18, 124 Walker Street North Sydney NSW 2060 A description of the nature of the Group's operations and its principal activities are included in the directors' report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of directors, on 25 August 2016. The directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New, revised or amending Accounting Standards and Interpretations adopted The Group has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. Net current asset deficiency As at 30 June 2016, the Group was in a net current liability position of $29,193,000 (2015: net current asset of $4,518,000) of which $6,092,000 relates to future payments in relation to Learnosity and $28,423,000 (2015: $23,924,000) is deferred revenue which will be recognised as income in the next financial year with no further cash outflows to the Group. Further there is $8,500,000 available of the working capital debt facility. Accordingly, the financial statements continue to be prepared on a going concern basis. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). Historical cost convention The financial statements have been prepared under the historical cost convention except for certain financial instruments that are measured at revalued amounts or fair values, as detailed in the accounting policies in this note. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 32. 26 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of 3P Learning Limited as at 30 June 2016 and the results of all subsidiaries for the year then ended. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity of the Group. Losses incurred by the Group are attributed to the non-controlling interest in full, even if that results in a deficit balance. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non- controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in Australian dollars, which is 3P Learning Limited's functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Revenue recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. A number of recognition criteria must also be met before revenue is recognised. 27 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) Mathletics, Spellodrome and IntoScience licence revenues The Group recognises revenue pursuant to software licence agreements upon the provision of access to its customers of the Group’s intellectual property as it exists at any given time during the period of the license. Revenue is therefore recognised over the duration of the agreement or for as long as the customer has been provided access, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Reading Eggs products licence revenue The Group recognises commission revenue pursuant to a distribution agreement when it sells a third party’s online products to customers which provides these customers with access to the third party’s intellectual property as it exists at any given time. Revenue from the sale of Reading Eggs products is recorded on a net basis when the online product is sold, consistent with an agency relationship. Sponsorship income Revenue is recognised in relation to sponsorship amounts provided by various external parties when the Company becomes entitled to the benefit and all of its obligations have been fulfilled. Translation fee Revenue is recognised in relation to translation of educational programs to the local language of the customer base upon completion of the translation. Sale of workbooks Revenue is recognised in relation to workbook materials sold to schools and students, on sale of the items. Copyright licence fee Revenue is recognised in relation to copyright agency fees upon becoming entitled to compensation being at a time when the Group’s materials and resources are reproduced by third parties. Interest Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Deferred revenue Deferred revenue is recognised on all customer contracts where appropriate as revenue is recorded over the contract duration. Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: ● When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. ● Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. 28 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. 3P Learning Limited (the 'head entity') and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the 'separate taxpayer within group' approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Research and development rebate Research and development rebate are credited against tax payable and are not treated as revenue. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30-60 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Other receivables are initially recognised at fair value and subsequently measured at amortised cost, less any provision for impairment. 29 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on the expected period of realisation. Cash flow hedges Cash flow hedges are used to cover the Group's exposure to variability in cash flows that is attributable to particular risks associated with a recognised asset or liability or a firm commitment which could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income through the cash flow hedges reserve in equity, whilst the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction when the forecast transaction occurs. Cash flow hedges are tested for effectiveness on a regular basis both retrospectively and prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected to occur, the amounts recognised in equity are transferred to profit or loss. If the hedging instrument is sold, terminated, expires, exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast transaction occurs. Associates Associates are entities over which the Group has significant influence but not control or joint control. Investments in associates are accounted for using the equity method. Under the equity method, the share of the profits or losses of the associate is recognised in profit or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in associates are carried in the statement of financial position at cost plus post-acquisition changes in the Group's share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Dividends received or receivable from associates reduce the carrying amount of the investment. When the Group's share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The Group discontinues the use of the equity method upon the loss of significant influence over the associate and recognises any retained investment at its fair value. Any difference between the associate's carrying amount, fair value of the retained investment and proceeds from disposal is recognised in profit or loss. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets, principally equity securities, that are either designated as available-for-sale or not classified as any other category. After initial recognition, fair value movements are recognised in other comprehensive income through the available-for-sale reserve in equity. Cumulative gain or loss previously reported in the available-for-sale reserve is recognised in profit or loss when the asset is derecognised or impaired. 30 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) Impairment of financial assets The Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor; a breach of contract such as default or delinquency in payments; the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset; or observable data indicating that there is a measurable decrease in estimated future cash flows. Available-for-sale financial assets are considered impaired when there has been a significant or prolonged decline in value below initial cost. Subsequent increments in value are recognised in other comprehensive income through the available- for-sale reserve. Plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of plant and equipment over their expected useful lives as follows: Furniture & fittings Computer equipment Office equipment three to seven years three to five years three to five years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement at inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset's useful life or over the shorter of the asset's useful life and the lease term if there is no reasonable certainty that the Group will obtain ownership at the end of the lease term. Group as a lessee Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. 31 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and an expense is recognised in the statement of comprehensive income in the year in which the expenditure is incurred. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Product development Research costs are expensed in the period in which they are incurred. Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility; the Group is able to use or sell the asset; the Group has sufficient resources; and intent to complete the internal development and their costs can be measured reliably. Capitalised development costs are amortised on a straight-line basis over the period of their expected benefit, being their finite useful lives of five years. Patents and trademarks Significant costs associated with patents and trademarks are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite useful life of three years. Customer contracts Customer contracts acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being their finite useful life of between one to three years. Software Significant costs associated with software are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite useful life of three years. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. 32 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) Finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred. Provisions Provisions are recognised when the Group has a present (legal or constructive) obligation as a result of a past event, it is probable the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Employee benefits Short-term employee benefits Employee benefits expected to be settled within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits Employee benefits not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore, any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. 33 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree's identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group's operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the Group remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer's previously held equity interest in the acquirer. 34 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of 3P Learning Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors' Report) Instrument 2016/191, dated 24 March 2016, and consequently the amounts in this report have been rounded off to the nearest thousand dollars, or in certain cases, the nearest dollar. Comparatives Comparatives in the statement of profit or loss and other comprehensive income have been realigned to current year presentation. There has been no effect on the profit for the year. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 30 June 2016. The Group's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, are set out below. 35 3P Learning Limited Notes to the financial statements 30 June 2016 Note 2. Significant accounting policies (continued) AASB 9 Financial Instruments This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of AASB 9 and completes the project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. AASB 9 introduces new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost, if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, which arise on specified dates and solely principal and interest. All other financial instrument assets are to be classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading) in other comprehensive income ('OCI'). For financial liabilities, the standard requires the portion of the change in fair value that relates to the entity's own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements will use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment will be measured under a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. The standard introduces additional new disclosures. The Group expects to adopt this standard from 1 July 2018 but the impact of its adoption is yet to be assessed. AASB 15 Revenue from Contracts with Customers This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard provides a single standard for revenue recognition. The core principle of the standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will require: contracts (either written, verbal or implied) to be identified, together with the separate performance obligations within the contract; determine the transaction price, adjusted for the time value of money excluding credit risk; allocation of the transaction price to the separate performance obligations on a basis of relative stand-alone selling price of each distinct good or service, or estimation approach if no distinct observable prices exist; and recognition of revenue when each performance obligation is satisfied. Credit risk will be presented separately as an expense rather than adjusted to revenue. For goods, the performance obligation would be satisfied when the customer obtains control of the goods. For services, the performance obligation is satisfied when the service has been provided, typically for promises to transfer services to customers. For performance obligations satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. Contracts with customers will be presented in an entity's statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity's performance and the customer's payment. Sufficient quantitative and qualitative disclosure is required to enable users to understand the contracts with customers; the significant judgments made in applying the guidance to those contracts; and any assets recognised from the costs to obtain or fulfil a contract with a customer. The Group will adopt this standard from 1 July 2018 and the adoption of this standard is not expected to have a material impact for the Group. AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. The standard replaces AASB 117 'Leases' and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a 'right-of-use' asset will be capitalised in the statement of financial position, measured as the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a 'right-of-use' asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) component. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The Group will adopt this standard from 1 July 2019 and the impact of its adoption will be that operating leases, such as those detailed in note 30, will be brought onto the statement of financial position with a corresponding liability. 36 3P Learning Limited Notes to the financial statements 30 June 2016 Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Fair value measurement hierarchy The Group is required to classify all assets and liabilities, measured at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs for the asset or liability. Considerable judgement is required to determine what is significant to fair value and therefore which category the asset or liability is placed in can be subjective. The fair value of assets and liabilities classified as level 3 is determined by the use of valuation models. These include discounted cash flow analysis or the use of observable inputs that require significant adjustments based on unobservable inputs. Goodwill and other indefinite life intangible assets The Group tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 2. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The Group assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Income tax The Group is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on the Group's current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Product development costs The Group capitalises development costs for a project in accordance with the accounting policy. Initial capitalisation of costs is based on management’s judgement that technological and economic feasibility is confirmed. In determining the amounts to be capitalised, as with the nature of Software-as-a-Service delivery model, key judgement is required in determining whether incremental product enhancements will provide additional future economic benefit. 37 3P Learning Limited Notes to the financial statements 30 June 2016 Note 4. Operating segments Identification of reportable operating segments The Group is organised into geographic operating segments: Australia & New Zealand ('ANZ'), America, Canada and South America ('Americas') and Europe, Middle-East and Africa ('EMEA'). These operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers ('CODM') in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. The CODM reviews EBITDA (earnings before interest, tax, depreciation and amortisation). The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. The information reported to the CODM is on a quarterly basis. The CODM does not regularly review segment assets and segment liabilities. Refer to statement of financial position for assets and liabilities. Intersegment transactions Intersegment transactions were made at market rates. Intersegment transactions are eliminated on consolidation. Major customers There are no major customers that contributed more than 10% of revenue to the Group. Operating segment information Consolidated - 2016 Revenue Sales to external customers Other revenue Total revenue EBITDA* Depreciation and amortisation Interest revenue Finance costs Share of profits of associates Restructuring expenses Profit before income tax expense Income tax expense Profit after income tax expense ANZ $'000 Americas $'000 EMEA $'000 Total $'000 30,615 176 30,791 5,835 11 5,846 12,608 19 12,627 14,751 (4,039) 2,134 49,058 206 49,264 12,846 (5,064) 148 (649) 480 (2,231) 5,530 (1,880) 3,650 * EBITDA is after inter-segment royalty expense incurred by Americas segment of $2,324,000 and EMEA segment of $4,582,000. 38 3P Learning Limited Notes to the financial statements 30 June 2016 Note 4. Operating segments (continued) Consolidated - 2015 Revenue Sales to external customers Other revenue Total revenue EBITDA* Depreciation and amortisation Interest revenue Finance costs Profit before income tax expense Income tax expense Profit after income tax expense ANZ $'000 Americas $'000 EMEA $'000 Total $'000 29,511 32 29,543 4,443 - 4,443 10,261 - 10,261 8,547 (1,999) 898 44,215 32 44,247 7,446 (3,062) 566 (20) 4,930 (778) 4,152 * EBITDA for ANZ segment includes IPO costs of $9,368,000. EBITDA is after inter-segment royalty expense incurred by Americas segment of $1,772,000 and EMEA segment of $3,612,000. Note 5. Revenue Licence fees Sponsorship income Sale of workbooks Copyright licence fees Other Net commission revenue Revenue Note 6. Other income Net foreign exchange gain Interest Other Other income Consolidated 2016 $'000 2015 $'000 39,799 683 - 1,724 233 6,825 35,123 1,079 128 1,563 198 6,156 49,264 44,247 Consolidated 2016 $'000 2015 $'000 615 148 281 537 586 534 1,044 1,657 39 3P Learning Limited Notes to the financial statements 30 June 2016 Note 7. Expenses Profit before income tax includes the following specific expenses: Depreciation Fixtures and fittings Computer equipment Office equipment Total depreciation Amortisation Product development Patents and trademarks Customer contracts Software Total amortisation Total depreciation and amortisation Professional fees includes the following: Professional fees for initial public offering Other professional fees Total professional fees Finance costs Interest and finance charges paid/payable Rental expense relating to operating leases Minimum lease payments Superannuation expense Defined contribution superannuation expense Consolidated 2016 $'000 2015 $'000 164 421 32 617 3,983 103 138 223 4,447 5,064 - 2,356 142 475 20 637 2,087 149 168 21 2,425 3,062 9,368 1,382 2,356 10,750 649 20 1,395 1,201 2,655 2,021 40 3P Learning Limited Notes to the financial statements 30 June 2016 Note 8. Income tax expense Income tax expense Current tax Deferred tax - origination and reversal of temporary differences Research and developments rebates recognised Aggregate income tax expense Deferred tax included in income tax expense comprises: Decrease in deferred tax assets (note 16) Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Non-deductible expenses Impact of foreign tax rate Other tax offsets Current year tax benefit not recognised Research and developments rebates recognised Prior year tax losses derecognised Adjustments recognised for prior year deferred tax Other Income tax expense Amounts credited directly to equity Deferred tax assets (note 16) Note 9. Current assets - cash and cash equivalents Cash at bank and in hand Short-term deposits 41 Consolidated 2016 $'000 2015 $'000 749 1,719 (588) 1,880 3,355 132 (2,709) 778 1,719 132 5,530 1,659 71 (385) 314 869 2,528 (588) - - (60) 1,880 4,930 1,479 196 (147) - - 1,528 (2,709) 447 1,398 114 778 Consolidated 2016 $'000 2015 $'000 - (317) Consolidated 2016 $'000 2015 $'000 4,219 62 10,215 20,671 4,281 30,886 3P Learning Limited Notes to the financial statements 30 June 2016 Note 10. Current assets - trade and other receivables Trade receivables Less: Provision for impairment of receivables Other receivables Prepayments Consolidated 2016 $'000 2015 $'000 7,098 (20) 7,078 230 672 902 7,980 7,522 (18) 7,504 238 935 1,173 8,677 Impairment of receivables The Group has recognised a loss of $52,000 (2015: $18,000) in profit or loss in respect of impairment of receivables for the year ended 30 June 2016. The ageing of the impaired receivables provided for above are as follows: 0ne to three months overdue Three to six months overdue Over six months overdue Movements in the provision for impairment of receivables are as follows: Opening balance Additional provisions recognised Receivables written off during the year as uncollectable Closing balance Consolidated 2016 $'000 2015 $'000 3 10 7 20 Consolidated 2016 $'000 2015 $'000 18 52 (50) 20 - 3 15 18 - 18 - 18 Past due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $1,791,000 as at 30 June 2016 ($1,722,000 as at 30 June 2015). The ageing of the past due but not impaired receivables are as follows: 1 to 12 months overdue Consolidated 2016 $'000 2015 $'000 1,791 1,722 42 3P Learning Limited Notes to the financial statements 30 June 2016 Note 11. Current assets - other Term deposits Other deposits Other current assets Note 12. Non-current assets - investments accounted for using the equity method Investment in Learnosity Holdings Limited Refer to note 34 for further information on interests in associates. Consolidated 2016 $'000 2015 $'000 16 8 - 24 516 8 106 630 Consolidated 2016 $'000 2015 $'000 48,884 - On 9 September 2015, the Group acquired an initial 23.07% interest in Learnosity Holdings Limited (www.learnosity.com) a provider of SaaS Assessment tools, based in Dublin, Ireland for a total cost of $27,875,000. On this date the Group also entered into an option to purchase an additional 16.93%. The Group exercised this option on 19 January 2016 for a consideration of $20,529,000. Cash consideration of $33,748,000 was paid up to 30 June 2016 and a further $6,092,000 is accrued and will be paid subsequent to the reporting date. Consideration paid was settled by the issuance of 4,108,527 shares in the Company. This included 2,292,649 shares issued on 7 December 2015 and 1,816,878 shares issued on 31 March 2016, which are both held in escrow for a period of 12 months from their respective issue dates. Note 13. Non-current assets - available-for-sale financial assets Unlisted ordinary shares - 17.2% interest in Desmos Inc. 6,607 6,607 Refer to note 26 for further information on fair value measurement. Consolidated 2016 $'000 2015 $'000 43 3P Learning Limited Notes to the financial statements 30 June 2016 Note 14. Non-current assets - plant and equipment Furniture & fittings - at cost Less: Accumulated depreciation Computer equipment - at cost Less: Accumulated depreciation Office equipment - at cost Less: Accumulated depreciation Consolidated 2016 $'000 2015 $'000 1,510 (753) 757 3,499 (3,161) 338 268 (147) 121 1,216 1,033 (596) 437 3,211 (2,752) 459 186 (117) 69 965 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2014 Additions Disposals Additions through business combinations Exchange differences Write off of assets Transfers in/(out) Depreciation expense Balance at 30 June 2015 Additions Disposals Exchange differences Depreciation expense Balance at 30 June 2016 Furniture and fittings $'000 Computer equipment $'000 Office equipment $'000 Total $'000 491 55 - - 37 (4) - (142) 437 448 (2) 38 (164) 757 784 223 - - 4 (17) (60) (475) 459 302 (6) 4 (421) 338 47 49 (5) 2 - (4) - (20) 69 162 (67) (11) (32) 121 1,322 327 (5) 2 41 (25) (60) (637) 965 912 (75) 31 (617) 1,216 Property, plant and equipment secured under finance leases Refer to note 30 for further information on property, plant and equipment secured under finance leases. 44 3P Learning Limited Notes to the financial statements 30 June 2016 Note 15. Non-current assets - intangibles Goodwill - at cost Product development - at cost Less: Accumulated amortisation Patents and trademarks - at cost Less: Accumulated amortisation Customer contracts - at cost Less: Accumulated amortisation Software - at cost Less: Accumulated amortisation Consolidated 2016 $'000 2015 $'000 4,414 4,654 24,683 (6,742) 17,941 3,074 (2,982) 92 316 (276) 40 1,861 (431) 1,430 14,605 (2,757) 11,848 3,074 (2,879) 195 370 (172) 198 561 (214) 347 23,917 17,242 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2014 Additions Additions through business combinations Exchange differences Transfers in/(out) Amortisation expense Balance at 30 June 2015 Additions Exchange differences Amortisation expense Goodwill $'000 Product development $'000 Patents and trademarks $'000 Customer contracts $'000 Software $'000 Total $'000 3,012 - 1,578 64 - - 4,654 - (240) - 5,775 8,160 - - - (2,087) 11,848 10,076 - (3,983) 337 7 - - - (149) 195 - - (103) 92 - - 354 12 - (168) 198 - (20) (138) - 308 - - 60 (21) 347 1,306 - (223) 9,124 8,475 1,932 76 60 (2,425) 17,242 11,382 (260) (4,447) 40 1,430 23,917 Balance at 30 June 2016 4,414 17,941 45 3P Learning Limited Notes to the financial statements 30 June 2016 Note 15. Non-current assets - intangibles (continued) Impairment testing for goodwill Goodwill acquired through business combinations have been allocated to the following cash-generating units ('CGUs'): CGU1: ANZ CGU2: EMEA Consolidated 2016 $'000 2015 $'000 3,012 1,402 4,414 3,012 1,642 4,654 The recoverable amount of each CGU is determined based on value-in-use calculations which require the use of assumptions. The calculations use cash flow projections based on business plan, prior to any future restructuring to which the Group is not yet committed, approved by management covering a five year period. Cash flows beyond the five year period are extrapolated using the estimated growth rates stated below. The following key assumptions were used in the discounted cash flow model for the different CGUs: a. Pre-tax discount rate: CGU1: ANZ 10.98% and CGU2: EMEA 11.48%. b. Projected growth rate of 3% beyond five year period for all CGUs. c. Increase in operating costs and overheads based on current levels adjusted for inflationary increases. For the financial year ended 30 June 2016, the recoverable amount of net assets for all CGUs are greater than the carrying value of the assets and therefore, the goodwill is not considered to be impaired. Sensitivity As disclosed in note 3, management have made judgements and estimates in respect of impairment testing of goodwill. Should these judgements and estimates not occur the resulting carrying amounts of assets may decrease. For all CGUs, any reasonable change in the key assumptions on which the recoverable amount is based would not cause the CGU’s carrying amount to exceed its recoverable amount. 46 3P Learning Limited Notes to the financial statements 30 June 2016 Note 16. Non-current assets - deferred tax Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Tax losses Accrued expenses Deferred Revenue IPO costs Royalty asset Intangibles Unrealised foreign exchange fluctuation Plant and equipment Deferred tax asset Movements: Opening balance Charged to profit or loss (note 8) Credited to equity (note 8) Closing balance Consolidated 2016 $'000 2015 $'000 707 1,075 6,200 2,094 882 (5,153) 15 61 597 871 5,146 2,824 1,004 (2,793) 36 (85) 5,881 7,600 7,600 (1,719) - 5,881 7,415 (132) 317 7,600 Unused tax losses of $869,000 have not been recognised as a deferred tax asset as at 30 June 2016. There is no expiry date on these tax losses. Note 17. Current liabilities - trade and other payables Trade payables Accrued expenses Deferred consideration on investments Goods and service tax Other payables Refer to note 25 for further information on financial instruments. Note 18. Current liabilities - derivative financial instruments Consolidated 2016 $'000 2015 $'000 1,281 2,640 5,779 735 310 10,745 1,209 3,559 1,299 1,022 303 7,392 Consolidated 2016 $'000 2015 $'000 Forward foreign exchange contracts - cash flow hedges 313 - Refer to note 25 for further information on financial instruments. Refer to note 26 for further information on fair value measurement. 47 3P Learning Limited Notes to the financial statements 30 June 2016 Note 19. Current liabilities - provisions Employee benefits Lease make good Contingent consideration Consolidated 2016 $'000 2015 $'000 1,232 510 294 2,036 1,377 452 495 2,324 Employee benefits Employee benefits comprise of provisions for annual leave and current long service leave. Where an obligation is presented as current, the Group does not have an unconditional right to defer settlement. Lease make good The provision represents the present value of the estimated costs to make good the premises leased by the Group at the end of the respective lease terms. Contingent consideration The provision represents contingent consideration payable on acquisition of business. It is measured at the present value of the estimated liability. Movements in provisions Movements in each class of provision during the current financial year, other than employee benefits, are set out below: Consolidated - 2016 Carrying amount at the start of the year Additional provisions recognised Amounts transferred from non-current Amounts used Unused amounts reversed Carrying amount at the end of the year Note 20. Non-current liabilities - borrowings Bank loans Refer to note 25 for further information on financial instruments. During the year, the Group entered into the following banking facilities with HSBC Bank: • Working capital facility of $20,000,000 • Bank guarantee and other ancillary facility for $2,000,000 Lease make good $'000 Contingent consideration $'000 452 105 - - (47) 510 495 - 294 (495) - 294 Consolidated 2016 $'000 2015 $'000 11,500 - The facilities are subject to variable interest rate, which is based on bank bill swap rate ('BBSY'), plus a margin. The banking facilities mature on 4 September 2018. The banking facilities are secured by fixed and floating charge over the Group's assets. The Group increased its working capital facility after the reporting date, as detailed in note 39. 48 3P Learning Limited Notes to the financial statements 30 June 2016 Note 20. Non-current liabilities - borrowings (continued) Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank loans - working capital facility Bank guarantee and ancillary facility Used at the reporting date Bank loans - working capital facility Bank guarantee and ancillary facility Unused at the reporting date Bank loans - working capital facility Bank guarantee and ancillary facility Note 21. Non-current liabilities - provisions Employee benefits Contingent consideration Employee benefits Employee benefits represents provision for long service leave. Consolidated - 2016 Carrying amount at the start of the year Amounts transferred to current Carrying amount at the end of the year 49 Consolidated 2016 $'000 2015 $'000 11,500 - Consolidated 2016 $'000 2015 $'000 20,000 2,000 22,000 11,500 1,839 13,339 8,500 161 8,661 - - - - - - - - - Consolidated 2016 $'000 2015 $'000 549 - 549 581 294 875 Contingent consideration $'000 294 (294) - 3P Learning Limited Notes to the financial statements 30 June 2016 Note 22. Equity - issued capital Ordinary shares - fully paid 139,034,170 134,814,660 33,951 25,113 Consolidated 2016 Shares 2015 Shares 2016 $'000 2015 $'000 Movements in ordinary share capital Details Date Shares $'000 Balance Transfer class B shares into ordinary shares Share split Issuance of shares on Initial Public Offering ('IPO') Share issue transaction costs, net of tax 1 July 2014 10 July 2014 10 July 2014 14 July 2014 Balance Issue of shares Issue of shares under Dividend Reinvestment Plan Issue of shares Issue of shares 30 June 2015 1 October 2015 22 October 2015 7 December 2015 31 March 2016 83,785 67,317 125,263,558 9,400,000 - 134,814,660 100,000 10,983 2,292,649 1,815,878 2,352 - - 23,500 (739) 25,113 250 24 4,940 3,624 Balance 30 June 2016 139,034,170 33,951 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The Group's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding. The Group is subject to certain financing arrangements covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. As the Company is by its nature a growth company, the Board has not adopted any dividend policy in respect of future periods and may look to retain capital generated by the Group’s business to reinvest in its growth. The capital risk management policy remains unchanged from the 30 June 2015 Annual Report. 50 3P Learning Limited Notes to the financial statements 30 June 2016 Note 23. Equity - reserves Foreign currency reserve Acquisition reserve Hedging reserve - cash flow hedges Share-based payment reserve Consolidated 2016 $'000 2015 $'000 30 (798) 85 8,065 7,382 (90) (798) - 7,923 7,035 Foreign currency reserve The reserve is used to recognise exchange differences arising from translation of the financial statements of foreign operations to Australian dollars. Acquisition reserve The reserve resulted from the acquisition of non-controlling interests in a subsidiary. The acquisition of non-controlling interest is not a business combination but is an equity transaction between owners. Accordingly, the difference between consideration paid and identifiable net assets of the non-controlling interest has been accounted for in the acquisition reserve. Hedging reserve - cash flow hedges The reserve is used to recognise the effective portion of the gain or loss of cash flow hedge instruments that is determined to be an effective hedge. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and directors as part of their remuneration, and other parties as part of their compensation for services. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 July 2014 Foreign currency translation Balance at 30 June 2015 Foreign currency translation Net change in fair value of cash flow hedges Share based payments Balance at 30 June 2016 Foreign currency reserve $'000 Acquisition reserve $'000 Hedging reserve $'000 Share based payment reserve $'000 Total $'000 (798) - (798) - - - (798) - - - - 85 - 85 7,923 - 7,923 - - 142 8,065 7,954 (919) 7,035 120 85 142 7,382 829 (919) (90) 120 - - 30 51 3P Learning Limited Notes to the financial statements 30 June 2016 Note 24. Equity - dividends Dividends Dividends paid during the financial year were as follows: Consolidated 2016 $'000 2015 $'000 Final dividend declared for the year ended 30 June 2015 of 1.8 cents per ordinary share (2014: $82.73 per pre-IPO ordinary share) 2,428 12,500 There were no dividends recommended or declared for the year ended 30 June 2016. Previous year As part of the capital restructure and listing of the Company, pre-IPO shareholders were entitled to a dividend of $12,500,000 which was declared on 2 June 2014 and paid on 9 July 2014. Franking credits Consolidated 2016 $'000 2015 $'000 Franking credits available for subsequent financial years based on a tax rate of 30% 877 2,126 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: ● ● ● franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date franking debits that will arise from the payment of dividends recognised as a liability at the reporting date franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date Note 25. Financial instruments Financial risk management objectives The Group's activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, ageing analysis for credit risk. The Board of directors have overall responsibility for the establishment and oversight of the risk management framework. The Board has established an Audit and Risk Committee, which is responsible for managing risk. The committee reports to the Board of Directors on its activities. Risk management processes are established to identify and analyse the risks faced by the Group, to analyse the risk exposure of the Group and appropriate procedures, controls and risk limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Audit and Risk Committee, oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Market risk Foreign currency risk The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. 52 3P Learning Limited Notes to the financial statements 30 June 2016 Note 25. Financial instruments (continued) Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity's functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. In order to protect against exchange rate movements, the Group entered into forward foreign exchange contracts. These contracts hedge highly probable forecast cash flows for the ensuing financial year. The maturity, settlement amounts and the average contractual exchange rates of the Group's outstanding forward foreign exchange contracts at the reporting date were as follows: Buy US dollars Maturity: 0 - 3 months 3 - 6 months Sell Australian dollars 2016 $'000 Average exchange rates 2016 1,929 4,198 0.7037 0.7008 The carrying amount of the Group's foreign currency denominated financial assets and financial liabilities (unhedged) at the reporting date were as follows: Consolidated US dollars Euros Pound Sterling Canadian dollars Other currencies Assets Liabilities 2016 $'000 2015 $'000 2016 $'000 2015 $'000 1,207 195 77 89 453 2,021 1,157 478 506 325 377 2,843 64 5 - - 262 331 1,388 5 12 - 804 2,209 The Group had net assets denominated in foreign currencies of $1,690,000 (assets $2,021,000 less liabilities $331,000) as at 30 June 2016 (2015: $634,000 (assets $2,843,000 less liabilities $2,209,000). Based on this exposure, had the Australian dollar weakened by 10%/strengthened by 10% (2015: weakened by 10%/strengthened by 10%) against these foreign currencies with all other variables held constant, the Group's profit before tax for the year would have been $169,000/$169,000 lower (2015: $63,000 higher/$ 63,000 lower). The percentage change is the expected overall volatility of the significant currencies, which is based on management's assessment of reasonable possible fluctuations. Price risk The Group is not exposed to any significant price risk. Interest rate risk The Group's main interest rate risk arises from its borrowings and term deposits. Borrowings and term deposits issued at variable rates expose the Group to interest rate risk. 53 3P Learning Limited Notes to the financial statements 30 June 2016 Note 25. Financial instruments (continued) As at the reporting date, the Group had the following variable rate borrowings and cash balances: Consolidated Bank loans Short term deposits Net exposure to cash flow interest rate risk 2016 2015 Weighted average interest rate % Weighted average interest rate % Balance $'000 3.75% 7.98% - 2.68% 11,500 (78) 11,422 Balance $'000 - (21,187) (21,187) An analysis by remaining contractual maturities is shown in 'liquidity and interest rate risk management' below. An official increase/decrease in interest rates of 50 (2015:50) basis points would have an adverse/favourable effect on profit before tax of $57,000 (2015: $107,000 favourable/adverse) per annum. The percentage change is based on the expected volatility of interest rates using market data and analysts forecasts. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The Group does not hold any collateral. The majority of schools pay upfront and the nature of the customer base has a low impact on the Group's credit risk exposure. Liquidity risk Vigilant liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements Unused borrowing facilities at the reporting date: Bank loans - working capital facility Bank guarantee and ancillary facility Consolidated 2016 $'000 2015 $'000 8,500 161 8,661 - - - 54 3P Learning Limited Notes to the financial statements 30 June 2016 Note 25. Financial instruments (continued) Remaining contractual maturities The following tables detail the Group's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Consolidated - 2016 Non-derivatives Non-interest bearing Trade and other payables Other payables Deferred consideration Contingent consideration Interest-bearing - variable Bank loans Interest-bearing - fixed rate Lease liability Total non-derivatives Derivatives Forward foreign exchange contracts net settled Total derivatives Consolidated - 2015 Non-derivatives Non-interest bearing Trade and other payables Other payables Deferred consideration Contingent consideration Interest-bearing - fixed rate Lease liability Total non-derivatives Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Over 5 years $'000 Remaining contractual maturities $'000 - - - - 1,281 310 5,779 294 - - - - - - - - 3.75% 431 1,885 10,068 7.40% 16 8,111 52 1,937 - 10,068 - 313 313 - - - - - - - - - - - - - 1,281 310 5,779 294 12,384 68 20,116 313 313 Weighted average interest rate % 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Over 5 years $'000 Remaining contractual maturities $'000 - - - - 5.41% 1,209 303 1,299 495 44 3,350 - - - 294 - 294 - - - - - - - - - - - - 1,209 303 1,299 789 44 3,644 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. The Group may repay debt when cash is sufficiently available. 55 3P Learning Limited Notes to the financial statements 30 June 2016 Note 26. Fair value measurement Fair value hierarchy The following tables detail the Group's assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Consolidated - 2016 Assets Ordinary shares available-for-sale Total assets Liabilities Contingent consideration Forward foreign exchange contracts Total liabilities Consolidated - 2015 Assets Ordinary shares available-for-sale Total assets Liabilities Contingent consideration Total liabilities Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 Level 1 $'000 - - - - - - - - - - - 6,607 6,607 6,607 6,607 - 313 313 294 - 294 294 313 607 Level 2 $'000 Level 3 $'000 Total $'000 - - - - 6,607 6,607 6,607 6,607 789 789 789 789 There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The carrying value of borrowings approximate their fair value. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 Ordinary shares - available-for-sale The fair values of the unquoted ordinary shares have been estimated using a discounted cash flow method. The valuations requires management to make certain assumptions about the inputs, including forecast cash flows, growth rate and discount rate. The probabilities of the various estimates within the range can be reasonably assessed and are used in management’s estimate of fair value for these unquoted equity instruments. Contingent consideration arising on business combinations The fair value is determined using the discounted cash flow method. Significant unobservable valuation inputs in relation to contingent consideration includes assumed cash billing earnings before interest, tax, depreciation and amortisation and discount rate. Derivatives - forward foreign exchange contracts Derivative financial instruments have been valued using quoted market rates. This valuation technique maximises the use of observable market data where it is available and relies as little as possible on entity specific estimates. 56 3P Learning Limited Notes to the financial statements 30 June 2016 Note 26. Fair value measurement (continued) Level 3 assets and liabilities Movements in level 3 assets and liabilities during the current and previous financial year are set out below: Consolidated Balance at 1 July 2014 Additions Exchange differences Balance at 30 June 2015 Payments Balance at 30 June 2016 Available- for-sale $'000 Contingent consideration $'000 Total $'000 - 6,607 - 6,607 - 6,607 - (759) (30) (789) 495 (294) - 5,848 (30) 5,818 495 6,313 The level 3 assets and liabilities unobservable inputs and sensitivity are as follows: Description Unobservable inputs Range (weighted average) Sensitivity Available-for-sale Growth rate 3% Weighted average cost of capital 20.8% 0.25% change would increase/decrease fair value by $85,000. 0.5% change would increase/decrease fair value by $264,000 Note 27. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel of the Group is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments Consolidated 2016 $ 2015 $ 1,285,568 98,600 98,288 438,524 141,599 8,655,239 95,989 273,539 - - 2,062,579 9,024,767 57 3P Learning Limited Notes to the financial statements 30 June 2016 Note 28. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by Ernst & Young, the auditor of the Company: Audit services - Ernst & Young Audit or review of the financial statements Other services - Ernst & Young Tax services Other services Consolidated 2016 $ 2015 $ 303,500 227,800 56,924 123,182 103,500 - 180,106 103,500 483,606 331,300 Note 29. Contingencies The Group has given bank guarantees as at 30 June 2016 of $1,839,000 (2015: $1,315,000) for merchant facility and operating leases. Note 30. Commitments Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years Lease commitments - finance Committed at the reporting date and recognised as liabilities, payable: Within one year One to five years Total commitment Less: Future finance charges Net commitment recognised as liabilities Consolidated 2016 $'000 2015 $'000 1,725 3,973 5,698 807 1,276 2,083 16 52 68 (19) 49 44 - 44 (6) 38 Operating lease commitments includes contracted amounts for commercial leases under non-cancellable operating leases expiring within one to seven years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Finance lease commitments includes contracted amounts for various plant and equipment under finance leases expiring within one to five years. Under the terms of the leases, the Group has the option to acquire the leased assets for predetermined residual values on the expiry of the leases. 58 3P Learning Limited Notes to the financial statements 30 June 2016 Note 31. Related party transactions Parent entity 3P Learning Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 33. Associates Interests in associates are set out in note 34. Key management personnel Disclosures relating to key management personnel are set out in note 27 and the remuneration report included in the directors' report. Transactions with related parties The following transactions occurred with related parties: Consolidated 2016 $ 2015 $ Payment for other expenses: Annual strategy meeting and membership fees paid to Coraggio Pty Ltd, whilst a director related entity* - 43,417 ClickView technology was provided by ClickView Pty Limited, a director related entity for no consideration. This ceased to be a related entity on 11 January 2016. Initial public offering costs Professional fees included IPO costs and lead manager fees paid to Macquarie Capital (Australia) Limited amounting to $Nil (2015: $9,983,000). Macquarie Group Limited and its related bodies corporate had a significant influence in the Group until the sale of their shares following the IPO. Agreement with Learnosity On 1 January 2016 the Group entered into an agreement with Learnosity Limited Holdings ('Learnosity') to licence the Learnosity Assessment Software for the period 1 January 2016 to 31 December 2020. Under the agreement no licence fee is payable until 1 July 2017. Receivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Consolidated 2016 $ 2015 $ - 11,539 Current payables: Trade payables to Coraggio Pty Ltd, a director related entity* *The entity ceased to be a related party with effect from 25 March 2015. Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. 59 3P Learning Limited Notes to the financial statements 30 June 2016 Note 32. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Reserves Retained earnings Total equity Parent 2016 $'000 2015 $'000 6,749 (1,753) 6,749 (1,753) Parent 2016 $'000 2015 $'000 2,188 7,003 78,390 35,897 6,006 32,894 33,951 8,150 3,395 3,387 3,787 25,113 7,923 (926) 45,496 32,110 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to its subsidiaries as at 30 June 2016 and 30 June 2015. Contingent liabilities The parent entity has given bank guarantees as at 30 June 2016 of $1,839,000 (2015: $nil) for merchant facility and operating leases. Capital commitments - Plant and equipment The parent entity had no capital commitments for plant and equipment as at 30 June 2016 and 30 June 2015. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 2, except for the following: ● ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. 60 3P Learning Limited Notes to the financial statements 30 June 2016 Note 33. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: Name 3P Learning Australia Pty Limited Into Science Pty Ltd 3P International Holdings Pty Ltd 3P Learning Pty Limited 3P Learning Limited 3P Learning Inc. 3P Learning Canada Mathletics LLP Note 34. Interests in associates Principal place of business / Country of incorporation Ownership interest 2015 2016 % % Australia Australia Australia New Zealand United Kingdom United States Canada India 100% 100% 100% 100% 100% 100% 100% 60% 100% 100% 100% 100% 100% 100% 100% 60% Interests in associates are accounted for using the equity method of accounting. Information relating to associates that are material to the Group are set out below: Name Principal place of business / Country of incorporation Ownership interest 2015 2016 % % Investment in Learnosity Holdings Limited* Ireland 40.00% - * Strategic investment by the Group, entity involved in providing SaaS Assessment tools. 61 3P Learning Limited Notes to the financial statements 30 June 2016 Note 34. Interests in associates (continued) Summarised financial information Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Total liabilities Net assets Summarised statement of profit or loss and other comprehensive income Revenue Expenses Profit before income tax Income tax expense Profit after income tax Other comprehensive income Total comprehensive income Reconciliation of the Group's carrying amount Opening carrying amount Additions in Associates Share of profit after income tax Closing carrying amount (refer note 12) Contingent liabilities Share of contingent liabilities not recognised as liability as at 30 June 2016 $Nil. Commitments Share of commitments not recognised as liability as at 30 June 2016 $Nil. 62 Investment in Learnosity Holdings Limited 2016 $'000 5,916 624 6,540 6,492 6,492 48 10,623 (8,727) 1,896 (136) 1,760 - 1,760 - 48,404 480 48,884 3P Learning Limited Notes to the financial statements 30 June 2016 Note 35. Reconciliation of profit after income tax to net cash from operating activities Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Share of profit - associates Share-based payments Foreign exchange differences Interest received - non cash Net loss on disposal of plant and equipment Other revenue -non cash Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Increase in income tax refund due Decrease/(increase) in deferred tax assets Decrease/(increase) in other operating assets Increase/(decrease) in trade and other payables Increase in derivative liabilities Increase/(decrease) in provision for income tax Increase/(decrease) in employee benefits Increase/(decrease) in other provisions Increase in other operating liabilities Consolidated 2016 $'000 2015 $'000 3,650 4,152 5,064 (480) 142 349 (108) 74 (615) 762 (48) 1,719 106 (1,964) 398 (1,997) (177) (437) 5,215 3,062 - - (614) (45) 25 (457) (1,452) - (296) (322) 8,289 - 1,910 8 1,241 5,755 Net cash from operating activities 11,653 21,256 Note 36. Non-cash investing and financing activities Consolidated 2016 $'000 2015 $'000 250 24 8,564 8,838 - - - - Consolidated 2016 $'000 2015 $'000 3,650 (18) 3,632 4,152 (67) 4,085 Shares issued under employee share plan Shares issued under dividend reinvestment plan Shares issued in relation to investment in associates Note 37. Earnings per share Profit after income tax Non-controlling interest Profit after income tax attributable to the owners of 3P Learning Limited 63 3P Learning Limited Notes to the financial statements 30 June 2016 Note 37. Earnings per share (continued) Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: 136,650,228 134,479,886 Options over ordinary shares 117,213 - Weighted average number of ordinary shares used in calculating diluted earnings per share 136,767,441 134,479,886 Number Number Basic earnings per share Diluted earnings per share Note 38. Share-based payments Cents Cents 2.66 2.66 3.04 3.04 Retention and reward bonus On 19 February 2016, it was determined that 300,000 ordinary shares are to be issued to Mr. Jonathan Kenny as a Retention and Reward bonus in acknowledgement of his increased responsibilities and ongoing contributions to the Group as interim chief executive officer over a period of three years. The first issue of 100,000 shares will be on 15 September 2016, and subsequent to that 100,000 shares will be issued in 2017 and 2018, subject to continued employment at that time. Special long term incentives On 1 June 2016, as stipulated in the ASX announcement released on 11 April 2016, the Group granted to Ms. Rebekah O’Flaherty, subject to shareholder approval, a specific award of up to 400,000 performance rights under the long term incentive plan, subject to the following conditions: a) where the volume weighted average price of the Company's ordinary shares for the period of 60 consecutive days after the date of release of the Company's annual results for the year ended 30 June 2019 is: i) less than $3.95 per share, none of the performance rights will vest; ii) greater than $3.95 per share, 50% of the performance rights will vest; iii) greater than $4.45 per share, 75% of the performance rights will vest; or iv) greater than $5.70 per share, 100% of the performance rights will vest. b) any shares issued on vesting of any performance rights shall be placed in escrow for a period of 12 months from the date of vesting. Further long term incentives On 1 June 2016, as stipulated in the ASX announcement released on 11 April 2016, the Group granted to Ms. Rebekah O’Flaherty, subject to shareholder approval, an additional award of up to 100,000 performance rights which is subject to Ms O’Flaherty remaining in the role of Chief Executive Officer until 1 September 2019. The share-based payment expense for the year was $142,000 (2015: $nil). For the options granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date 19/02/2016 19/02/2016 19/02/2016 01/06/2016 01/06/2016 15/09/2017 15/09/2018 15/09/2019 * 01/09/2019 Share price Exercise at grant date price Expected volatility Dividend yield Risk-free interest rate Fair value at grant date $1.41 $1.41 $1.41 $0.71 $0.71 $0.00 $0.00 $0.00 $0.00 $0.00 40.00% 40.00% 40.00% 40.00% 40.00% - - - - - 2.25% 2.25% 2.25% 2.25% 2.25% $1.410 $1.410 $1.410 $0.003 $0.710 * 60 days after the date of release of the Company's annual results for the year ended 30 June 2019. 64 3P Learning Limited Notes to the financial statements 30 June 2016 Note 39. Events after the reporting period On 24 August 2016, the Group increased the HSBC banking facilities agreement including the working capital facility from $20,000,000 to $30,000,000 and maintained the bank guarantee and other ancilliary facility for $2,000,000. No other matter or circumstance has arisen since 30 June 2016 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. 65 3P Learning Limited Directors' declaration 30 June 2016 In the directors' opinion: ● ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; the attached financial statements and notes give a true and fair view of the Group's financial position as at 30 June 2016 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Samuel Weiss Chairman 25 August 2016 Sydney 66 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent auditor's report to the members of 3P Learning Limited Report on the financial report We have audited the accompanying financial report of 3P Learning Limited, which comprises the statement of financial position as at 30 June 2016, the statement of profit or loss and other comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year. Directors' responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor's responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 2 Opinion In our opinion: a. the financial report of 3P Learning Limited is in accordance with the Corporations Act 2001, including: i ii giving a true and fair view of the consolidated entity's financial position as at 30 June 2016 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 2. Report on the remuneration report We have audited the Remuneration Report included in pages 10 to 17 of the directors' report for the year ended 30 June 2016. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of 3P Learning Limited for the year ended 30 June 2016, complies with section 300A of the Corporations Act 2001. Ernst & Young Lisa Nijssen-Smith Partner Sydney 25 August 2016 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 3P Learning Limited Shareholder information 30 June 2016 The shareholder information set out below was applicable as at 5 August 2016. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES LIMITED PASCAL EDUCATIONAL SERVICES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMS PTY LTD ABN AMRO CLEARING SYDNEY NOMINEES PTY LTD VIBURNUM FUNDS PTY LTD VF STRATEGIC EQUITIES FUND AC CITICORP NOMINEES PTY LIMITED BNP PARIBAS NOMINEES PTY LTD KATHERINE PIKE RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED RYANNABEL PTY LTD GAVIN FRANCIS COONEY TIMOTHY POWER NETWEALTH INVESTMENTS LIMITED BOND STREET CUSTODIANS LIMITED WENDY BECKETT ALBURY'S OWN PTY LTD MR KEI YAN CHENG MUTUAL APPRECIATION SOCIETY PTY LIMITED 69 Number of holders of ordinary shares Number of holders of options over ordinary shares 556 930 420 404 50 2,360 - - - - - 2 2 - Ordinary shares Number held 27,036,232 19,804,146 13,695,000 12,840,833 9,118,161 6,312,642 5,684,662 5,439,150 4,614,906 2,381,376 2,347,163 2,048,390 1,815,878 1,390,972 1,100,980 550,000 519,248 332,000 284,280 260,903 117,576,922 % of total shares issued 19.45 14.24 9.85 9.24 6.56 4.54 4.09 3.91 3.32 1.71 1.69 1.47 1.31 1.00 0.79 0.40 0.37 0.24 0.20 0.19 84.57 3P Learning Limited Shareholder information 30 June 2016 Unquoted equity securities Share options over ordinary shares Performance rights over ordinary shares Substantial holders Substantial holders in the Company are set out below: J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES LIMITED PASCAL EDUCATIONAL SERVICES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMS PTY LTD Voting rights The voting rights attached to ordinary shares are set out below: Number on issue Number of holders 300,000 500,000 1 1 Ordinary shares Number held 27,036,232 19,804,146 13,695,000 12,840,833 9,118,161 % of total shares issued 19.45 14.24 9.85 9.24 6.56 Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. Securities subject to voluntary escrow Class Ordinary shares Ordinary shares Expiry date 07/12/2016 31/03/2017 Number of shares 2,292,649 1,815,878 4,108,527 70 3P Learning Limited Corporate directory 30 June 2016 Directors Samuel Weiss - Independent Non-Executive Chairman Rebekah O’Flaherty - Chief Executive Officer Roger Amos - Independent Non-Executive Director Claire Hatton - Independent Non-Executive Director Company secretary Stephanie Belton Registered office Principal place of business Share register Auditor Solicitors 3P Learning Limited Level 18, 124 Walker Street North Sydney NSW 2060 Head office telephone: 1300 850 331 3P Learning Limited Level 18, 124 Walker Street North Sydney NSW 2060 Head office telephone: 1300 850 331 The Registrar Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Share registry telephone: 1300 554 474 Ernst & Young 200 George Street Sydney NSW 2000 King & Wood Mallesons Level 61 Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Stock exchange listing 3P Learning Limited shares are listed on the Australian Securities Exchange (ASX code: 3PL) Website http://www.3plearning.com/ Corporate Governance Statement Corporate governance statement which was approved at the same time as the Annual Report can be found at http://www.3plearning.com/CGS/ 71 3P Learning Ltd Level 18, 124 Walker Street North Sydney, NSW 2060 T: 1300 850 331 F: 1300 762 165 customerservice@3plearning.com.au 

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