Apiam Animal Health Limited
Annual Report 2016

Plain-text annual report

Annual Report 2016CORPORATE DIRECTORY DIRECTORS Professor Andrew Vizard Dr Christopher Richards Mr Michael van Blommestein Mr Richard Dennis Mr Charles Sitch Chairman Managing Director Non-Executive Director Non-Executive Director Non-Executive Director COMPANY SECRETARY Ms Ella McDougall REGISTERED OFFICE 27-33 Piper Lane East Bendigo VIC 3550 T 03 5445 5999 F 03 5445 5914 E enquiries@apiam.com.au AUDITORS Grant Thornton Australia The Rialto, Level 30 525 Collins Street Melbourne VIC 3000 BANKERS National Australian Bank Level 1, 55 Mitchell Street Bendigo VIC 3550 SHARE REGISTRY Boardroom Registry Pty Ltd Level 12, 225 George Street Sydney NSW 2000 T 1300 737 760 F 02 9279 0664 E enquiries@boardroomlimited.com.au STOCK EXCHANGE LISTING Australian Securities Exchange Level 4, North Tower, Rialto 525 Collins Street Melbourne VIC 3000 ASX CODE AHX WEBSITE apiam.com.au TABLE OF CONTENTS Chairman’s Letter Managing Director’s Operations Review Operational Highlights Board of Directors Finance Report Corporate Governance Statement 5 7 8 17 22 92 ASX Shareholder Information 102 3 Annual Report 20164 Apiam Animal Health LimitedCHAIRMAN’S LETTER Dear Shareholder, It is with pleasure that I present the first Annual Report for Apiam Animal Health Limited (Apiam). In the short period since listing on the ASX on December 15, 2015, Apiam has set about establishing the solid foundations that will see us grow strongly into the future. We also have a clear plan that will further strengthen the company and deliver value for shareholders in the years to come. Apiam is a vertically integrated animal health business providing products and veterinary services that support the health and wellbeing of production and companion animals. With veterinary clinics in 26 locations, we are the leading production animal veterinary company in Australia, providing complete animal health solutions for the agricultural sector. Australia’s animal production industries have significant opportunities for growth, driven by a range of factors including: • underlying growth in domestic consumption of protein; • the influence of a rising middle class among key regional trading partners; • changing consumer preferences for safe and socially responsible food production; • Australia’s competitive advantage in food production; and the potential positive impact of free trade deals. • As well as our vet services, Apiam has a wholly owned procurement, wholesaling and logistics operation to service our regions, including a fleet of specialised delivery vehicles to support our veterinary practices and clients. We also have a broad product portfolio targeted at production animals, including exclusive distribution of third party products and a growing range of private label products. From these foundations, our strategy over the next three years will see us expand by focusing on four themes – customer service, high performance team, operational excellence/clinical leadership and innovation. All are elements of our business where we see real opportunities. Efficiencies across technology systems and processes across the business will also deliver savings for Apiam and services for clients. We will then leverage those efficiencies to improve services and customer relationships and reduce expenses. Apiam is committed to developing and maintaining a culture that respects, values and actively seeks to deliver on its commitments. In our recent prospectus, we forecasted revenue of $48.6 million and an EBITDA of $1.8 million for the period during which we traded as a company in the 2015/2016 fiscal year. Our actual revenue during this period was $54.1 million, $5.5 million greater than forecast, reflecting our focus on delivering what our customers want. Similarly, our EBITDA of $2.1 million also exceeded the statutory forecast. These are very solid results for the company and testament to the hard work of our employees, led by our management team. I thank you for your support and look forward to sharing with you our future success. Yours sincerely, Professor Andrew Vizard 5 Annual Report 20166 Apiam Animal Health LimitedMANAGING DIRECTOR’S OPERATIONS REVIEW Dear Shareholder, The past year has been one dedicated to building the foundations upon which Apiam will develop and grow. It’s been a carefully thought out process that is delivering on the expectations set out in the prospectus for our IPO in late 2015. Our customer focus will see us meeting their needs by providing evidence-based veterinary, well-being, production and genetics services and products that improve profitability for our clients and establish Apiam as a trusted service provider. Apiam’s focus on developing a high performance team will be welcomed by the industry. Through collaboration, the retention and recruitment of highly skilled people, and further development of our people through training and internships, we will continue to develop the high performance team that will enhance our relationships with customers and improve our value proposition. Operational excellence and clinical leadership will see the implementation of integrated systems across the business that will optimise processes while our support for innovation will see new services and programs developed to improve efficiencies, turnover and margins as well as research to develop new solutions for future challenges faced by our customers. We have a clear timeline for delivering on these themes. Year one has seen us commence building the foundation of our company through workplace policies, culture and services. Year two will see us consolidate our capacity for growth and continue building efficiencies across the business by improving processes, customer contact and business balance. Year three will see us leverage on our efficiencies to deliver on what we have created. I am proud of what we have built so far and am confident we have the plan and the people to continue growing and delivering on our potential. Yours sincerely, Dr Christopher Richards Like the honey bee (Genus Apis) which is the inspiration for the company’s name, our team have been working hard together to build a vertically integrated business that delivers a range of animal health services efficiently and cost effectively. Our financial results show that we are delivering to plan. Revenue from ordinary activities was $54.1 million, exceeding our prospectus statutory forecast of $48.6 million, and our EBITDA of $2.1 million also exceeded statutory expectations in the prospectus of $1.8 million. While gross margins were slightly down, this was because of growth in wholesale sales and some initial delays in procurement synergies. Our investment in human resources and information technology to support the integration of the veterinary clinics we acquired as part of the IPO saw operating expenses higher than expected. The acquisitions were settled earlier than expected, which also had an impact on operating costs. Apiam has brought together some of the largest rural veterinary practices from around the country. This has involved a period of integration which we have committed significant resources to bed down. Through it all, we have maintained our focus and our results show we have delivered on our promises. Since being formed and listed on the ASX, Apiam has executed on its growth plans. Subsequent to the end of the reporting period we secured the acquisition of Quirindi Veterinary Group, one of Australia’s largest rural veterinary groups, which we expect will be earnings accretive for us. We have also established our Veterinary Services Advisory Committees, which bring together our best veterinary minds to create programs that help our customers improve the value and productivity of their production animal operations. Our team has also focused on the integration of our businesses by bringing payroll, financial, workplace health and safety, intranet and human resources systems into alignment. Apiam’s growth plan revolves around our strategic themes of customer focus, high performance team, operational excellence/clinical leadership and innovation. These themes are the pillars that support our mission and vision to provide the best in production and companion animal health care in the regional and rural communities that we service. 7 Annual Report 201601 Operational Highlights 8 Apiam Animal Health LimitedApiam Animal Health has made significant progress in its plans for growth since listing on the Australian Securities Exchange in December 2015. A foundation has been established that Apiam will continue to strengthen to support expansion into the future. Apiam is committed to providing the best health outcomes for production and companion animals, the latest innovations in productivity for their owners, and delivering returns for shareholders. Apiam is Australia’s leading provider of health services for production animals in the dairy, pigs and feedlot beef cattle industries, with plans to continue growing its footprint in Australia. INTEGRATION Segment Businesses Activities and Geographic Locations Veterinary Consulting Q u i r i n d i Feedlot servic es Q u i r i n d i Veterinary Clinic Products Ancillary and Support • 13 leading production animals and regional mixed animal practices • 29 clinics strategically located across Victoria, Tasmania, Queensland, Western Australia and New South Wales • Over 110 veterinarians, including many leading specialists in their fields of expertise • Centralised procurement and wholesaling of animal pharmaceuticals, nutritional supplements and equipment • In-house warehousing and logistics services to deliver products to veterinary clinics and end-point customers • Warehouses in Bendigo, Toowoomba, Welshpool and Smithton • 21 vehicle fleet with an estimated 65% of goods delivered via in-house capabilities • Genetics sourcing, sales and related services • Services to producers of industry quality assurance programs, including major national supermarket standards as third party (food chain) auditors Q u i p o l l y E q u i n e C e n t r e Apiam’s integration of veterinary practices and the services that support them is well underway. Centralised functions around finance and business support are in progress, as is the implementation of human resource and practice management systems. These are streamlining Apiam’s processes and will significantly contribute to efficiencies across the business. Apiam is making significant investments in these areas to accommodate the growth it expects to deliver in the years to come. 9 Annual Report 2016 KEY ACCOUNT MANAGERS A key part of Apiam’s vertically integrated business model is its team of Key Account Managers, which commenced phasing into the company during the initial trading period. These managers are dedicated to working alongside vets to assist in the sales of service based programs and the technology solutions associated with these innovations. They develop one-on-one relationships with clients and advise on the application of solutions recommended by the veterinarian which will improve animal health and/or farm productivity. The relationships forged between veterinarians, Key Account Managers and their clients will enable Apiam to deliver more services and products to a stable and secure client base. VETERINARY SERVICES ADVISORY COMMITTEES As part of its plan to offer value-added services to clients, Apiam has created a number of Veterinary Services Advisory Committees to address the needs of various clients and the species of animal they are raising or have as companions. These committees, currently in place for dairy, feedlot, pigs and poultry, genetics, companion animals and equine, bring together Apiam’s leading vets from around the country to develop new ideas and programs that will benefit clients, as well as increasing the level of service provided by all employees. The knowledge and information exchanged in the committees and the programs developed by the committees will assist Apiam to advise farmers on how they can better structure their farms to improve productivity in their animals prevent disease, improve animal health and increase financial returns. New services for companion animals will provide improvements in diagnostics and treatments to ensure that the pets and other animals that Apiam sees as patients receive the highest levels of care available. These committees will drive innovation in the animal health sector that will improve health outcomes for herds, increase productivity gains and enrich the lives of clients and the animals in Apiam’s care. 10 Apiam Animal Health Limited11 Annual Report 2016ACQUISITIONS Quirindi Veterinary Group Q u i r i n d i Veterinary Clinic Q u i p o l l y E q u i n e C e n t r e Q u i r i n d i Feedlot serv ices Apiam successfully completed the roll up of 12 veterinary practices around Australia as part of the IPO process. The acquisitions have given Apiam a presence in key animal production areas in Queensland, New South Wales, Victoria, South Australia, Western Australia and Tasmania. Targeted acquisitions of veterinary practices are part of Apiam’s strategy for growth. Since the IPO, Apiam has delivered on its growth strategy with the acquisition of the Quirindi Veterinary Group in New South Wales for $11.57 million. Quirindi provides veterinary services to large beef production systems throughout Australia, equine reproduction services and has a livestock and companion animal veterinary practice at Quirindi. The business is a strong strategic fit for Apiam, with the purchase expected to be earnings accretive. Apiam remains vigilant for further acquisitions that will deliver growth and synergies for the company. 12 Apiam Animal Health Limited13 Annual Report 20163 YEAR STRATEGY Leveraging performance • Increase the high margin services & products offered • Enhance our clinics' image & • customer relationships Improve end-user profitability/ perceived value for money Improve business balance • • Reduce operating expenses/COG's S E L B A R E V L E D I Gaining efficiencies • • • • • Improve the process of identifying, selecting & developing new business opportunities Improve the process of delivering new products & services to customers Improve customer contact (KAM) impact Improve procurement, service cost allocation, debt management Improve business balance Building the foundation • Develop strategic technology & services, operating & financial systems • Enhance company policies & work place safety • Develop a high performance, collaborative culture Improve procurement, service cost allocation, debt management Improve business balance • • 2016 - 17 2017 - 18 2018 - 19 14 Apiam Animal Health LimitedApiam has developed a clear three-year plan for growth. The company has created a solid foundation upon which it will continue to grow. Year one is about building the foundation of the business, which is well underway. Year two will see Apiam focus on efficiencies and in year three the company will leverage its performance. The plan revolves around the strategic themes of customer focus, creating a high performance team, clinical leadership and operational excellence, and innovation. These themes are the pillars that support Apiam’s mission to provide the best in production and companion animal health care in the regional and rural communities it serves. Customer focus – Apiam will meet the needs of its customers by providing evidence-based veterinary, well-being, production and genetics services and products that improve profitability for clients and establish Apiam as a trusted service provider. High performance team – Through the collaboration, retention and recruitment of skilled people and further training and internships, Apiam will create a high performance team that will enhance client relationships and the company’s value proposition. Operational excellence/clinical leadership – New integrated systems across the company will optimise processes and improve delivery of new products and services to clients. Innovation – Apiam’s support for innovation will see new services and programs developed that improve efficiencies, turnover and margins for the company and results for clients and any new business challenges they face. 15 Annual Report 2016INDUSTRY OUTLOOK Australia’s production animal sectors have a positive outlook for the years ahead and Apiam is well positioned to leverage emerging trends. Beef consumption is expected to continue growing, with cattle prices expected to remain strong on the back of significant winter rainfall. While we anticipate fewer cattle numbers through feedlots in FY17, Apiam is building capacity for the expected future growth in the Australian feedlot industry. Pig meat production has grown steadily since 2015, with pork prices at a six year high and grain feed prices at a two year low. The dairy sector has experienced some challenges recently but changes in industry dynamics present long-term opportunities for Apiam. Apiam is investing further in its companion animal services, both in equipment, standards of care and people. Apiam is expanding its services to the equine industry with increases in demand for dedicated skills in the areas that it services. DAIRY PIGS BEEF 16 Apiam Animal Health Limited 02 Board of Directors 17 Annual Report 2016BOARD OF DIRECTORS PROFESSOR ANDREW LANCELOT VIZARD BVSC(HONS), MVPM, FAICD DR CHRISTOPHER IRWIN RICHARDS BSC, BVSC Independent Chairman Independent Non-Executive Director Member of Audit and Risk Management Committee Member of Remuneration Committee Appointed 5 November 2015 Andrew is a Principal Fellow at the Faculty of Veterinary and Agricultural Sciences, University of Melbourne and previously Associate Professor of Veterinary Epidemiology and Director of The Mackinnon Project, a recognised leader in sheep and beef veterinary consultancy. An experienced company director, previous board experience includes directorships of Animal Health Australia, the body responsible for coordinating Australia’s animal health system, Primesafe, the statutory authority responsible for regulating the production of safe meat in Victoria and the Australian Wool Corporation, the body responsible for managing research and marketing of Australian Wool. For ten years Andrew also managed Roxby Park, his family’s 3,300 acre farm. Managing Director Member of Audit and Risk Management Committee Appointed 25 March 2015 Chris founded Chris Richards & Associates in 1998 as a pig specific veterinary clinic based in Bendigo, servicing clients throughout Australia. Chris has been responsible for the strategic direction of the former Chris Richards Group, which has seen the development, acquisition and integration of other production animal veterinary clinics, veterinary wholesale, logistics and genetic services businesses over the last 18 years resulting in the formation of Apiam. Chris is currently a member of APL’s Biosecurity Strategic Review Panel and is a member of the Pork CRC Research and Development Committee. 18 Apiam Animal Health LimitedMR MICHAEL VAN BLOMMESTEIN GAICD Independent Non-Executive Director Chair and Member of Remuneration Committee Appointed 5 November 2015 Michael was a Vice President and Country Manager of Australia and New Zealand for Zoetis and managed the spin-off of Zoetis from Pfizer Australia. An experienced director in the animal health sector, Michael presided over Animal Medicines Australia, the peak industry body for five years and was a member of the board for nearly a decade. Michael played an integral role in leading and overseeing the transition of Animal Health Alliance into Animal Medicines Australia and has also served on the board of Animal Health Association Japan. MR RICHARD JOHN DENNIS BCOMM, LLB, CA, MAICD Independent Non-Executive Director Chair and Member of Audit and Risk Management Committee Appointed 5 November 2015 Rick had 35 years with Ernst & Young and was the Managing Partner of EY’s Queensland practice on two occasions from 2001-2007 and from 2014-2015. Rick also held a number of executive management roles at EY, including the roles of Deputy COO and CFO for the Asia- Pacific practice where he was responsible for overseeing the financial and operational integration of EY’s Australian and Asian member firms. Rick is also a member of Australian Super’s Queensland Advisory Board and a member of the advisory board to EWM Group. He is also a non-executive director of Springfield Land Corporation Pty Ltd, Vesta Living Communities Ltd and Gold Coast Private Health Network. 19 Annual Report 2016MR CHARLES TREVOR SITCH BCOMM, LLB, MBA, GAICD Independent Non-Executive Director Member of Audit and Risk Management Committee Member of Remuneration Committee Appointed 5 November 2015 Charles is currently a director of ASX listed Spark New Zealand Ltd and a member of their audit risk and finance committee. He is also a director of Bellamy’s Australia Ltd. Previously Charles spent 24 years at McKinsey and Company New York, London and Melbourne. He was a senior director, primarily working with CEOs and Boards on strategy and operations turnarounds before retiring in 2010. In 2002, Charles was awarded the President’s Medal for services to the Royal Agricultural Society of Victoria. MR MATTHEW BRIAN WHITE DIRECTOR Appointed 28 August 2015, Resigned 5 November 2015. Executive Director Chief Financial Officer An experienced finance director with over 15 years of experience in the animal health industry, having held finance roles both in Australia and internationally with MSD, one of the largest pharmaceutical companies in the world including as Finance Director for Australia. MS ELLA CATHERINE MCDOUGALL DIRECTOR Appointed 28 August 2015, Resigned 5 November 2015. Executive Director General Counsel Ella has a background in corporate and commercial law and has previously held in-house legal roles at Hills Limited and ASC Pty Ltd. Ella joined the Chris Richards Group in 2012 and has an extensive knowledge of the regulatory environment in which veterinarians and pharmaceutical wholesalers operate. COMPANY SECRETARY Ms Ella McDougall, BHSc, BA, BLLP, GIA(Cert) is General Counsel and Company Secretary. Ella has been Company Secretary of Apiam since incorporation on 25 March 2015. 20 Apiam Animal Health Limited21 Annual Report 201603 Finance Report 22 Apiam Animal Health LimitedTABLE OF CONTENTS Directors Report Remuneration Report (Audited) Auditor’s Independence Declaration 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 Consolidated Financial Statements Directors’ Declaration Independent Auditors’ Report 24 32 37 39 40 41 42 44 88 90 23 Annual Report 2016DIRECTORS REPORT The Directors of Apiam Animal Health Limited (‘Apiam’) present their Report together with the financial statements of the consolidated entity, being Apiam (‘the Company’) and its controlled entities (‘the Group’) for the year ended 30 June 2016. DIRECTOR DETAILS The following persons were Directors of Apiam during or since the end of the financial year: PROFESSOR ANDREW LANCELOT VIZARD BVSC(HONS), MVPM, FAICD MR MICHAEL VAN BLOMMESTEIN GAICD Independent Chairman Independent Non-Executive Director Member of Audit and Risk Management Committee Member of Remuneration Committee Appointed 5 November 2015 Other current listed public company directorships: Nil Previous listed public company directorships (last 3 years): Ridley Corporation Ltd (resigned 31 March 2016) Interests in shares: 30,000 shares Interest in options: None DR CHRISTOPHER IRWIN RICHARDS BSC, BVSC Managing Director Member of Audit and Risk Management Committee Appointed 25 March 2015 Other current listed public company directorships: Nil Previous listed public company directorships (last 3 years): Nil Interests in shares: 26,852,304 shares Interest in options: None Independent Non-Executive Director Chair and Member of Remuneration Committee Appointed 5 November 2015 Other current listed public company directorships: Nil Previous listed public company directorships (last 3 years): Nil Interests in shares: 100,000 Interest in options: None MR RICHARD JOHN DENNIS BCOMM, LLB, CA, MAICD Independent Non-Executive Director Chair and Member of Audit and Risk Management Committee Appointed 5 November 2015 Other current listed public company directorships: Omni Market Tide Ltd Previous public company directorships (last 3 years): Nil Interests in shares: 50,000 shares Interest in options: None 24 Apiam Animal Health LimitedMR CHARLES TREVOR SITCH BCOMM, LLB, MBA, GAICD Independent Non-Executive Director Member of Audit and Risk Management Committee Member of Remuneration Committee Appointed 5 November 2015 Other current listed public company directorships: Bellamy’s Australia Limited Spark New Zealand Limited Previous listed public company directorships (last 3 years): Pacific Edge Limited (NZX Listed) (resigned 30 June 2016) Interests in shares: 150,000 Interest in options: None MR MATTHEW BRIAN WHITE DIRECTOR Appointed 28 August 2015, Resigned 5 November 2015. Executive Director Chief Financial Officer MS ELLA CATHERINE MCDOUGALL DIRECTOR Appointed 28 August 2015, Resigned 5 November 2015. Executive Director General Counsel MS ELLA CATHERINE MCDOUGALL COMPANY SECRETARY Appointed 25 March 2015. 25 Annual Report 2016PRINCIPAL ACTIVITIES The Group operates in the segment of provision of veterinary products and services to production and companion animals. Apiam’s strategy is to service production animals throughout their life cycle, including the provision of: Financial Results Highlights of FY16 Statutory Results • Revenue of $54.1 million representing growth of 11.4% over reported forecast • EBITDA of $2.1 million exceeding reported forecast by • systems to assist in herd health programs; $0.3 million • production advice; • Net Profit before tax (NPBT) of $1.1m exceeded forecast • consulting services and products to assist in the by 94.5% Apiam recorded revenue of $54.1 million representing solid growth of 11.4% over the FY16 prospectus statutory forecast of $48.6 million. The strong revenue result delivered gross profit of $1.4 million in excess of the prospectus forecast. Wholesale revenue growth and a phasing in of procurement savings have contributed to the lower gross margin. Operating expenses were higher than budgeted as a result of the acquired clinics commencing trading in December 2015 as well as further investment in human resources and information technology personnel to support integration of the acquired clinics. EBITDA exceeded the prospectus forecast by $0.3 million as a result of strong revenue growth and lower IPO expense than expected. The Net Profit before tax (NPBT) of $1.1m exceeded forecast by 94.5%. The profit before tax excluding one-off expenses was $4.5m. One-off expenses of $3.4m were budgeted for and related to the initial public offering and the acquisitions. Income tax in FY16 has been impacted by one off permanent non-deductible expenses relating to stamp duty and employee share based payments related to the IPO. Since the statutory accounts contain significant one-off expenses and the group only traded for part of the FY16 year, the following table is presented to assist in the interpretation of the underlying performance of the Company during the period. This information is additional and provided using non-IFRS information and terminology. prevention of animal diseases; • technologies to manage compliance with legislative requirements on pharmaceutical use; • advice and services in respect of animal welfare compliance; • retail animal health product sales; • on-farm delivery of products via its own logistics capability; • third party auditing services of industry quality assurance programs; • technology development for animal health management; • ancillary services such as sales and/or delivery of genetics and associated products; and • on-farm and on-line training programs for clients. There have been no significant changes in the nature of these activities during the year. REVIEW OF OPERATIONS AND FINANCIAL RESULTS Apiam Business Apiam Animal Health is positioned in the Australian market as a vertically integrated animal health business providing a range of products and services to production and companion animals. Apiam Animal Health’s strategy is to service production animals throughout their life cycle, including the provision of genetics, veterinary services, wholesale and retail of related products, together with technical services related to food-chain security. The FY16 statutory results include: • • from 1 November 2015, the trading of Chris Richards Group businesses and 3 clinics in which Chris Richards Group had a majority equity interest; and from 10 December 2015, the trading of the nine (9) other clinics acquired. The FY16 prospectus statutory forecast includes: • • from 1 November 2015, the trading of Chris Richards Group businesses and 3 clinics in which Chris Richards Group had a majority equity interest; and from 1 January 2016, the trading of the nine (9) other clinics acquired. 26 Apiam Animal Health LimitedFY16 Financial Results Summary $’000 Revenue Gross Profit GM Expenses Employment costs General expenses Utilities Operating Expenses EBITDA (before one-off expenses) Integration expenses IPO costs Total expenses EBITDA Depreciation and amortisation expense EBIT Net interest paid Net Profit Before Tax Income tax Net Profit After Tax • Non-controlling interest • Apiam shareholders Actual 54,097 25,330 46.8% 14,155 4,257 1,410 19,822 5,508 451 2,934 23,207 2,123 621 1,502 434 1,068 975 93 43 50 Prospectus Statutory Forecast Favourable / (Unfavourable) Variance 48,569 23,948 49.3% 12,967 4,479 1,041 18,487 5,461 500 3,143 22,130 1,818 735 1,083 534 549 165 384 49 335 5,528 1,382 (1,188) 222 (369) (1,335) 47 49 209 (1,077) 305 114 419 100 519 (810) (291) (6) (285) % 11.4% 5.8% (9.2%) 5.0% (35.4%) (7.2%) 0.9% 9.8% 6.6% (4.9%) 16.8% 15.5% 38.7% 18.8% 94.5% (491.1%) (75.7%) (11.5%) (85.0%) EBITDA: Earnings before interest, tax depreciation and amortisation EBIT: Earnings before interest and tax Note the reported prospectus statutory forecast contains the following reclassifications to present it in accordance with Australian Accounting Standards: 1. Customer rebates of $0.95 million reclassified from general expenses to revenue; 2. Freight, pathology and packaging costs of $0.59 million reclassified from cost of goods sold to general expenses; and 3. Other income of $0.58 million reclassified as $0.5 million integration expense and $1.08 million reduction to cost of goods sold (relating to supplier rebates). Operations Since being formed and listed on the ASX, Apiam has executed on its plans for growth. The Company worked towards the acquisition of Quirindi Veterinary Group, one of Australia’s largest rural veterinary groups. The acquisition was finalised and announced subsequent to the reporting period and is discussed further below. Apiam also established its Veterinary Services Advisory Committees, which bring together the Company’s best veterinary minds to create programs that help customers improve the value and productivity of their production animal operations. The Company has also focused on the integration of its businesses by bringing payroll, financial, workplace health and safety, intranet and human resources systems into alignment. Apiam’s operations across the business will continue to be driven by a focus on its four key strategy pillars of customer service delivery, developing a high performance team, operational excellence/clinical leadership and innovation. The Company has a three-year plan through which it will implement its operational ambitions. Year one will see Apiam build the foundation of the Company through workplace policies, culture and services. Year two will see consolidation of capacity for growth and continued efficiencies across the business by improving processes, customer contact and business balance. Year three will see the Company leverage those efficiencies to deliver on its performance. 27 Annual Report 2016SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS LIKELY DEVELOPMENTS, BUSINESS STRATEGIES AND PROSPECTS Apiam has successfully completed the roll in of the Chris Richards Group businesses and the acquisition of 12 large rural vet businesses in FY16 as outlined in the prospectus. Integration of the acquired clinics is progressing according to plan and management is focused on implementation of the business strategies outlined in the prospectus. DIVIDENDS During or since the end of the financial year, no dividends have been paid or declared. EVENTS ARISING SINCE THE END OF THE REPORTING PERIOD On 19 August 2016, the Company signed an agreement to acquire 100% of the shares in Quirindi Veterinary Group (QVG) for $11.57 million. QVG provides veterinary services to large beef production systems throughout Australia through its business unit Quirindi Feedlot Services, provides equine reproduction services at its custom built centre in Quipolly, near Scone in NSW, and runs a livestock and companion animal veterinary practice located in Quirindi. The acquisition will be funded using Apiam’s existing bank facilities. The consideration for the acquisition is a combination of 70% cash and 30% scrip. In line with Apiam’s previous acquisitions, the principals of the business will enter into an employment contract with restraint conditions. Shares issued under the agreement will be subject to escrow. The Group is currently obtaining the information necessary to appropriately consider the identification and fair value of identifiable intangible assets. There are no other matters or circumstances that have arisen since the end of the year that have significantly affected or may significantly affect either: • • • the entity’s operations in future financial years the results of those operations in future financial years; or the entity’s state of affairs in future financial years. Apiam’s strategy is to build on the solid foundation it has established as an integrated animal health business servicing the rural production and companion animal sectors, ensuring it can meet the needs of a market which is rapidly growing as a result of the expanding global demand for animal protein. Apiam expects to continue to invest through acquisition, collaborative partnerships and further recruitment of leading expertise to ensure it has the capability required to prosper in the expanding global animal health industry. DIRECTORS’ MEETINGS The number of Directors’ Meetings (including meetings of Committees of Directors) held during the year, and the number of meetings attended by each Director is as follows: Directors’ Board Audit and Risk Committee Remuneration Committee A B A B Andrew Vizard Chris Richards Michael van Blommestein Richard Dennis Charles Sitch Ella McDougall Matthew White Where: 7 9 7 7 7 2 2 7 9 6 7 6 2 2 3 - - 3 3 - - 3 - - 3 2 - - A 1 - 1 - 1 - - B 1 - 1 - - - - • column A is the number of meetings the Director was eligible to attend; and • column B is the number of meetings the Director attended. UNISSUED SHARES UNDER OPTION There were no unissued ordinary shares of Apiam under option at the date of this report. SHARES ISSUED DURING OR SINCE THE END OF THE YEAR AS A RESULT OF EXERCISE OF OPTIONS During or since the end of the financial year, the Company has not issued any ordinary shares as a result of the exercise of options. 28 Apiam Animal Health Limited ENVIRONMENTAL LEGISLATION Apiam operations are not subject to any particular or significant environmental regulation under a law of the Commonwealth or of a State or Territory in Australia. INDEMNITIES GIVEN TO, AND INSURANCE PREMIUMS PAID FOR, AUDITORS AND OFFICERS INSURANCE OF OFFICERS During the year, Apiam paid a premium to insure officers of the Group. The officers of the Group covered by the insurance policy include all Directors. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else to cause detriment to the Group. Details of the amount of the premium paid in respect of insurance policies are not disclosed as such disclosure is prohibited under the terms of the contract. The Group has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify any current or former officer of the Group against a liability incurred as such by an officer. INDEMNITY OF AUDITORS The Group has not, during or since the end of the financial year, indemnified or agreed to indemnify its auditors, Grant Thornton Audit Pty Ltd, or any related entity against a liability incurred by the auditor. During the financial year, the Group has not paid a premium in respect of a contract to insure the auditor of the Group or any related entity. NON-AUDIT SERVICES During the year, the Company’s auditors performed certain other services in addition to their statutory audit duties. The Board has considered the non-audit services provided during the year by the auditor and, in accordance with written advice provided by resolution of the Audit and Risk Management Committee, is satisfied that the provision of those non-audit services during the year is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit and Risk Management Committee to ensure they do not impact upon the impartiality and objectivity of the auditor; and • the non-audit services do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. Details of the amounts paid to the auditors of the Company and its related practices for audit and non-audit services provided during the year are set out in Note 27 to the financial statements. A copy of the Auditor’s Independence Declaration as required under s307C of the Corporations Act 2001 is included on page 19 of this financial report and forms part of this Directors’ Report. 29 Annual Report 2016PROCEEDINGS OF 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. ROUNDING OF AMOUNTS Apiam is a type of Company referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and therefore the amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable), or in certain cases, to the nearest dollar under the option permitted in the Instrument. Signed in accordance with a resolution of the Directors: Dr Christopher Irwin Richards Managing Director Melbourne 25 August 2016 30 Apiam Animal Health Limited31 Annual Report 2016REMUNERATION REPORT (AUDITED) The Directors of Apiam Animal Health Limited (‘the Group’) present the Remuneration Report for Non-Executive Directors, Executive Directors and other key management personnel, prepared in accordance with the Corporations Act 2001 and the Corporations Regulations 2001. The Remuneration Report is set out under the following main headings: a. Principles used to determine the nature and amount of remuneration; b. Details of remuneration; c. Service agreements; d. Share-based remuneration; e. Bonuses included in remuneration; f. Non-executive director remuneration; and g. Other information. a. Principles used to determine the nature and amount of remuneration The principles of the Group’s executive strategy and supporting incentive programs and frameworks are: • • • to align rewards to business outcomes that deliver value to shareholders; to drive a high performance culture by setting challenging objectives and rewarding high performing individuals; and to ensure remuneration is competitive in the relevant employment market place to support the attraction, motivation and retention of executive talent. The Group has structured a remuneration framework that is market competitive and complementary to the reward strategy of the Group. The Board has established a Remuneration Committee which operates in accordance with its charter as approved by the Board and is responsible for reviewing and recommending compensation arrangements for the Directors and the Executive Team. The Remuneration Committee has met once in the FY16 reporting period. The Remuneration Committee has approved the engagement of Korn Ferry Hay Group to undertake bench-marking for the executive team. The Remuneration Committee has also approved the engagement of Grant Thornton Australia Limited and HRAscent to formulate an equity management plan for principal and senior vets which is expected to be completed in the financial year ending 30 June 2017. The remuneration structure that has been adopted by the Group consists of the following components: • fixed remuneration being annual salary; and • short term incentives, being bonuses. However, the Remuneration Committee is considering long term incentives (LTI) to be implemented in the future. The Remuneration Committee assesses the appropriateness of the nature and amount of remuneration on a periodic basis by reference to recent employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and Executive Team. The payment of bonuses and other incentive payments are reviewed by the Remuneration Committee annually as part of the review of executive remuneration and a recommendation is put to the Board for approval. All bonuses and incentives must be linked to pre-determined performance criteria. Short Term Incentive (STI) Apiam performance measures involve the use of annual performance objectives, metrics, performance appraisals and continuing emphasis on living the Company values. The performance measures are set annually after consultation with the Directors and Executives and are specifically tailored to the areas where each executive has a level of control. The measures target areas the Board believes hold the greatest potential for expansion and profit and cover financial and non-financial measures. The Key Performance Indicators (KPI’s) for the Executive Team are summarised as follows: Performance area: • financial – operating profit and earnings per share; and • non-financial – goals set by each individual business unit based on job descriptions. The STI Program incorporates cash for the Executive Team and other employees. The Board may, at its discretion, award bonuses for exceptional performance in relation to each person’s pre- agreed KPIs. Voting and comments made at the Company’s last Annual General Meeting The Company became a listed public company during the financial year ended 30 June 2016 and this is the first remuneration report of Apiam Animal Health Limited and the first to be presented at an Annual General Meeting. Consequences of performance on shareholder wealth In considering the Group’s performance and benefits for shareholder wealth, the Board have regard to the following indices in respect of the current financial year. Item EPS (cents) Dividends (cents per share) Net profit before tax ($’000) Share price ($) 2016 0.08c - $1,068 $1.49 32 Apiam Animal Health Limitedb. Details of remuneration Details of the nature and amount of each element of the remuneration of each Key Management Personnel (KMP) of Apiam are shown in the table below: Short term employee benefits Post- employment benefits Year Salary & fees (v) Cash bonus Non- monetary benefits Superannuation Long- term benefits Long service leave (vi) Share- based payments Shares (viii) Total Performance based percentage of remuneration Directors $ $ $ $ $ $ $ 80,000 - 46,667 - - - - - 40,000 - 40,000 - - - 256,101 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3,470 - 3,470 - - - - - - - - - - - - - - - - - 19,941 10,868 4,241 - - - - 12,848 - - 74 - Andrew Vizard Chairman 2016 80,000 Independent (ii) Richard Dennis Independent (ii) Ella McDougall Director (iv) Chris Richards Managing Director (i) Charles Sitch Independent (ii) 2015 - 2016 46,667 2015 2016 2015 2016 2015 - - - - - 2016 36,530 2015 - Michael van Blommestein 2016 36,530 Independent (ii) Matthew White Director (iv) Employees Chris Richards Managing Director (i) Corne Loots Vet. Services Manager (vii) Julie Tippett Chief Operating Officer (iii) Matthew White Chief Financial Officer (iv) Ella McDougall General Counsel/Cpy Sec (iv) 2016 Total 2015 Total 2015 2016 2015 - - - 2016 221,051 2015 - 2016 139,772 50,000 2015 - 2016 145,161 2015 - - - - 2016 136,449 95,000 2015 - 2016 101,389 2015 - - - - 50,000 252,694 - - 3,117 13,790 (17,793) 200,000 344,275 - - - - - - 12,929 - - 75 - - - 30,000 274,453 - - 9,204 1,458 100,000 212,051 - - - - % 0% - 0% - - - - - 0% - 0% - - - 0% - 20% - 0% - 35% - 0% - 9% - 2016 943,549 145,000 23,058 66,579 (11,945) 380,000 1,546,241 2015 - - - - - - - i. Appointed director 25 March 2015 and received no remuneration for acting as a director or employee of the company for the period 25 March 2015 to 31 October 2015. On 1 November 2015 Chris became Managing Director of the company and his remuneration received relates to the period 1 November 2015 to 30 June 2016. ii. Appointed director 5 November 2015. Remuneration received relates to the period 5 November 2015 to 30 June 2016. iii. Remuneration received relates to the period 1 November 2015 to 30 June 2016. iv. Appointed director 28 August 2015, resigned 5 November 2015. No remuneration was received for acting as a director. Remuneration received relates to KMP role for the period 1 November 2015 to 30 June 2016. v. Salary and fees includes fixed cash and annual leave accruals. vi. Long term benefits includes long service leave accruals vii. Cash bonus is a sign on bonus. viii. As part of the listing on the Australian Securities Exchange, shares were issued to certain eligible employees in Australia for nil consideration as part of their reward for service to the Company. 33 Annual Report 2016The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: Name Executive Directors Chris Richards Other Key Management Personnel Corne Loots Julie Tippett Matthew White Ella McDougall c. Service agreements Fixed remuneration At risk – STI 100% 80% 100% 65% 100% - 20% - 35% - Remuneration and other terms of employment for the Executive Directors and other key management personnel are formalised in a Service Agreement. The major provisions of the agreements relating to remuneration are set out below: Name Chris Richards Corne Loots Julie Tippett Matthew White Ella McDougall Base salary* Term of agreement Notice period $369,380 $212,500 $200,000 $190,000 $150,000 5 years from listing Twelve (12 months) No fixed term No fixed term No fixed term No fixed term Six (6) months Six (6) months Six (6) months Four (4) months * Base salary for Chris Richards is inclusive of superannuation guarantee payments. For all other key management personnel, base salary does not include superannuation guarantee payments. Bonus provisions Chris Richards: Nil Corne Loots: Sign on bonus of $50,000 payable after twelve months service completed on 1 December 2016. Eligible for an annual bonus of up to 20% of base salary from 1 December 2016. Julie Tippett Eligible for an annual bonus of up to 20% of base salary from 1 July 2016. Matthew White Eligible for a bonus of up to 50% of base salary for the period ended 30 June 2016. Eligible for an annual bonus of up to 20% of base salary from 1 July 2016. Ella McDougall Eligible for an annual bonus of up to 20% of base salary from 1 July 2016. d. Share-based remuneration As part of the listing on the Australian Securities Exchange, shares were issued to certain eligible employees in Australia for nil consideration as part of listing success milestones and as reward for service to the Company. The $1.00 fair value per share to the Company is included as an expense in the profit and loss statement. The total remuneration in shares for each key management person is included as part of their remuneration in Part b of this Remuneration Report under Share-based payments. e. Bonuses included in remuneration Details of the short-term incentive cash bonuses awarded as remuneration to each key management personnel, the percentage of the available bonus that was paid and payable in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. The bonus to Corne Loots is payable upon completion of twelve months service on 1 December 2016. 34 Apiam Animal Health Limited Executive Directors Included in remuneration ($) Percentage vested during the year Percentage forfeited during the year Chris Richards Other Corne Loots Julie Tippett Matthew White Ella McDougall - $50,000 - $95,000 - - 100% - 100% - - - - - - f. Non-Executive Director remuneration Clause 13.1(a) of the Company’s Constitution (Constitution) provides the limit for the aggregated remuneration of non-executive directors which is currently set at $750,000. The Directors of the Company are entitled to apportion and distribute this aggregate Non-Executive Directors’ remuneration as they determine. The Non-Executive Directors of the Company received the following fees (which total $300,000): • Chairman (One): $120,000 per annum; • Directors (Three): $60,000 per annum, each; and • Chair of the Audit and Risk Management Committee $10,000 (in addition to the directors fees), such amounts being inclusive of any superannuation payments. The ASX Listing Rules and Constitution allows the Company to increase the aggregate amount of remuneration payable to Non- Executive Directors of the Company pursuant to Shareholder approval at a general meeting, noting that the Company has not yet held its first annual general meeting. g. Other information Options held by key management personnel There were no options to acquire shares in the Company held during the 2016 reporting period by key management personnel of the Group, including their related parties. Shares held by key management personnel The number of ordinary shares held in the Company at 30 June 2016 held by each of the Group’s key management personnel, including their related parties, is set out below: Personnel Chris Richards Andrew Vizard Charles Sitch Richard Dennis Michael van Blommestein Corne Loots Julie Tippett Matthew White Ella McDougall Balance at 1/07/2015 Granted as remuneration Received on exercise 1 - - - - - - - - 1 - - - - - 50,000 200,000 30,000 100,000 380,000 - - - - - - - - - Other changes 26,852,303 Held as at 30/06/2016 26,852,304 30,000 150,000 50,000 100,000 36,689 - 50,000 - 30,000 150,000 50,000 100,000 86,689 200,000 80,000 100,000 27,268,992 27,648,993 None of the shares included in the table above are held nominally by key management personnel. 35 Annual Report 2016Loans to key management personnel The Group entered into a loan facility agreement with Chris Richards, under which the Group agreed to lend up to $1.5 million. The loan is at an interest rate equal to the Term Debt Facility interest payable by the Group plus 2% per annum. The table below provides aggregate information relating to Group’s loans to key management personnel during the year: Balance at the start of the year Loans advanced Interest paid and payable for the year Repayments made Balance at the end of the year 2016 $ 133 1,229 15 (1,377) - The number of key management personnel included in the Group aggregate at year end is Nil. The Group does not have an allowance account for receivables relating to outstanding loans and has not recognised any expense for impaired receivables during reporting period. Other transactions with key management personnel The Group rents premises at Piper Lane, Bendigo East, Victoria. The premises are owned by an entity associated with Chris Richards. Rent payments made amounted to $160,000 (2015: Nil). The Group rents premises at Rubicon Street, Smithton, Tasmania. The premises are owned by an entity associated with Chris Richards. Rent payments made amounted to $73,515 (2015: Nil). The Group leases it artificial insemination facility in Victoria from entities associated with Chris Richards. Lease payments made amounted to $43,147 (2015: Nil). All related party rentals are based on commercial rates and the terms of the lease are standard commercial terms. The Group has entered into an intellectual property licence with iVet Pty Ltd, a company controlled by Chris Richards, to use the iVet intellectual property. The Group will pay iVet Pty Ltd a royalty of 10% of net sales revenue received by the Group for the use of the intellectual property licence. The agreement is for an initial term of 10 years. The group has the option to purchase the iVet technology by giving notice to iVet Pty Ltd at any time during the initial 5 years of the term. No payments were made during the financial year (2015: Nil). The Group obtains air travel services for business purposes from an entity associated with Chris Richards. The fares paid are based on commercial fares. Payments made amounted to $121,257 (2015: Nil). 36 Apiam Animal Health Limited AUDITOR’S INDEPENDENCE DECLARATION 19 78 The Rialto, Level 30 525 Collins St Melbourne Victoria 3000 Correspondence to: GPO Box 4736 Melbourne Victoria 3001 The Rialto, Level 30 525 Collins St T +61 3 8320 2222 Melbourne Victoria 3000 F +61 3 8320 2200 E info.vic@au.gt.com Correspondence to: W www.grantthornton.com.au GPO Box 4736 Melbourne Victoria 3001 T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au Auditor’s Independence Declaration To the Directors of Apiam Animal Health Limited Independent Auditor’s Report In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Apiam Animal Health Limited for the year ended 30 June 2016, I declare that, to the best of my knowledge and belief, there have been: To the Members of Apiam Animal Health Limited Report on the financial report a b no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and We have audited the accompanying financial report of Apiam Animal Health Limited (the “Company”), which comprises the consolidated statement of financial position as at 30 June 2016, the consolidated statement of profit or loss and other comprehensive income, no contraventions of any applicable code of professional conduct in relation to the consolidated statement of changes in equity and consolidated statement of cash flows for audit. 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 year end or from time to time during the financial year. Directors’ responsibility for the financial report GRANT THORNTON AUDIT PTY LTD Chartered Accountants 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. The Directors’ responsibility also includes such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. The Directors also state, in the notes to the financial report, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, the financial statements comply with International Financial Reporting Standards. Adam Pitts Partner - Audit & Assurance Auditor’s responsibility Melbourne, 25 August 2016 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 us to comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 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 judgement, including the assessment of the risks of material misstatement of the financial ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm report, whether due to fraud or error. is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies. ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies. 37 Annual Report 2016 38 Apiam Animal Health LimitedSTATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016 Notes 2016 $’000 2015 $’000 Revenue Expenses Changes in inventories Costs of materials Costs of consumables and services Employee benefits expense Listing & acquisition expenses Property expenses Freight vehicle & transport expenses Depreciation of property, plant and equipment Other operating expenses Finance costs Other financial items Profit / (Loss) before income tax Income tax (expense) / benefit Profit / (Loss) for the year Other comprehensive income Other comprehensive income for the period, net of tax Total comprehensive income / (loss) for the period Profit / (Loss) for the year attributable to: • non-controlling interest • owners of the parent Total comprehensive income attributable to: • non-controlling interest • owners of the parent 6 54,097 1,703 (30,470) (472) (15,377) (2,026) (1,410) (1,456) (614) (2,466) (434) (7) 1,068 (975) 93 - 93 43 50 43 50 26 13 7 7 8 23 23 Earnings per share Basic earnings per share: Diluted earnings per share: Notes 24 2016 0.08 cents 0.08 cents Note: This statement should be read in conjunction with the notes to the financial statements. - - - - - - - - - (218) - - (218) 31 (187) - (187) - (187) - (187) 2015 ($187,000) ($187,000) 39 Annual Report 2016STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Current tax liabilities Borrowings Provisions Other current liabilities Current liabilities Non-current liabilities Borrowings Provisions Total non-current liabilities Total liabilities Net assets/(liabilities) Equity Equity attributable to owners of the parent: • share capital • convertible notes • corporate re-organisation reserve • non-controlling interest acquisition reserve • accumulated losses Non-controlling interest Total equity/(deficiency) Notes 9 10 11 12 13 14 15 16 17 18 19 20 18 19 21.1 21.2 22 22 23 2016 $’000 2,117 13,254 10,181 376 25,928 4,496 44,702 2,960 52,158 78,086 9,491 1,366 4,148 3,453 1,250 19,708 11,864 243 12,107 31,815 46,271 79,070 - (26,666) (6,615) (137) 45,652 619 46,271 2015 $’000 20 15 - - 35 - - 31 31 66 113 - - - - 113 - - - 113 (47) - 140 - - (187) (47) - (47) Note: This statement should be read in conjunction with the notes to the financial statements. 40 Apiam Animal Health LimitedSTATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2016 Note Share capital Convertible notes Corporate re-organisation reserve Non- controlling interest acquisition reserve Retained earnings Total attributable to owners of parent Non- controlling interest Total equity $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 - - - - - - - - 285 21 21 21,26 1,360 Balance at 25 March 2015 Transactions with owners Issue of convertible notes Total transactions with owners Comprehensive income Loss for the period Total comprehensive income/(loss) Balance at 30 June 2015 Balance at 1 July 2015 Transactions with owners Issue of convertible notes Conversion of convertible notes Employee share based payments Restructure and transfer of Chris Richards entities into Apiam Issue of shares to vendors of businesses acquired 21,31 30,633 21,32 25,904 Issue of new share capital 21 23,000 21 (3,017) 21 905 Transaction costs relating to issue of share capital Income tax benefit relating to transaction costs Total transactions with owners Comprehensive income - 140 140 - - 140 140 145 (285) - - - - - - - - - - - - - - - - (26,666) - - - - - - - - - - - - - - - (6,615) - - - - - - - 140 140 (187) (187) (187) (187) (187) (47) (187) (47) 145 - 1,360 - - - - - - - - - - - 140 140 (187) (187) (47) (47) 145 - 1,360 3,967 - 3,967 19,289 576 19,865 23,000 (3,017) 905 - 23,000 - - (3,017) 905 45,649 576 46,225 - - - - - - - - - 79,070 (140) (26,666) (6,615) Profit for the year 23 Total comprehensive income - - Balance at 30 June 2016 79,070 - - - - - - - 50 50 50 50 43 43 93 93 (26,666) (6,615) (137) 45,652 619 46,271 Note: This statement should be read in conjunction with the notes to the financial statements. 41 Annual Report 2016STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2016 Operating activities Receipts from customers Payments to suppliers and employees Interest paid Transaction costs in relation to restructures Transaction costs in relation to acquisitions Income taxes paid Net cash used in operating activities Investing activities Purchases of property, plant and equipment Purchases of intangible assets Restructure of group entities, net of cash Acquisition of subsidiaries, net of cash Net cash used in investing activities Financing activities Proceeds from borrowings Repayments of borrowings Borrowing transaction costs Repayments of lease liabilities Loans made to director related entity Repayments from director related entity Proceeds from issue of share capital Share issue transaction costs Proceeds from issue of convertible notes Net cash inflow from financing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Notes 7 31 32 25 31 32 9 2016 $’000 59,010 (56,992) (434) (640) (934) (1,247) (1,237) (295) (80) (615) (24,068) (25,058) 21,797 (13,281) (68) (317) (1,229) 1,362 23,000 (3,017) 145 28,392 2,097 20 2,117 2015 $’000 - (163) - - - - (163) - - - - - - - - - - 43 - - 140 183 20 - 20 Note: This statement should be read in conjunction with the notes to the financial statements. 42 Apiam Animal Health Limited 43 Annual Report 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Apiam Animal Health Limited and subsidiaries’ (‘the Group’) principal activities include the provision of veterinary products and services to production and companion animals. Apiam’s strategy is to service production animals throughout their life cycle, including the provision of: • systems to assist in herd health programs; • production advice; • consulting services and products to assist in the prevention of animal diseases; • technologies to manage compliance with legislative requirements on pharmaceutical use; • advice and services in respect of animal welfare compliance; • retail animal health product sales; • on-farm delivery of products via its own logistics capability; • • third party auditing services of industry quality assurance programs; technology development for animal health management; • ancillary services such as sales and/or delivery of genetics and associated products; and • on-farm and on-line training programs for clients. There have been no significant changes in the nature of these activities during the year. 2. GENERAL INFORMATION AND STATEMENT OF COMPLIANCE The consolidated general purpose financial statements of the Group have been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (AASB). Compliance with Australian Accounting Standards results in full compliance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Apiam Animal Health Limited is a for-profit entity for the purpose of preparing the financial statements. Apiam Animal Health Limited is the Group’s Ultimate Parent Company. Apiam Animal Health Limited is a Public Company incorporated and domiciled in Australia. The address of its registered office is 61 Bull Street, Bendigo, Victoria 3550. The address of its principal place of business is 27-33 Pipers Lane, East Bendigo, Victoria 3550. The consolidated financial statements for the year ended 30 June 2016 were approved and authorised for issue by the Board of Directors on 25 August 2016. Comparative information The Company was incorporated on 25 March 2015. The comparative information relates to the period 25 March 2015 to 30 June 2015. 44 Apiam Animal Health Limited3. CHANGES IN ACCOUNTING POLICIES 3.1 NEW AND REVISED STANDARDS THAT ARE EFFECTIVE FOR THESE FINANCIAL STATEMENTS A number of new and revised standards became effective for the first time to annual periods beginning on or after 1 January 2015. Information on the more significant standard(s) is presented below. The adoption of these new and revised standards has not had a material impact on the Group as they are largely of the nature of clarification of existing requirements. 3.2 ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE AND NOT BEEN ADOPTED EARLY BY THE GROUP 3.2.1 Revised pronouncement: AASB 9 Financial Instruments (December 2014) Superseded pronouncement - AASB 139 Financial Instruments: Recognition and Measurement, Effective date - 1 January 2018. Nature of change AASB 9 introduces new requirements for the classification and measurement of financial assets and liabilities and includes a forward-looking ‘expected loss’ impairment model and a substantially-changed approach to hedge accounting. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes are: a. Financial assets that are debt instruments will be classified based on: (i) the objective of the entity’s business model for managing the financial assets; and (ii) the characteristics of the contractual cash flows. b. Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income (instead of in profit or loss). Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. c. Introduces a ‘fair value through other comprehensive income’ measurement category for particular simple debt instruments. d. Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. e. Where the fair value option is used for financial liabilities the change in fair value is to be accounted for as follows: * * the change attributable to changes in credit risk are presented in Other Comprehensive Income (OCI) the remaining change is presented in profit or loss If this approach creates or enlarges an accounting mismatch in the profit or loss, the effect of the changes in credit risk are also presented in profit or loss. Otherwise, the following requirements have generally been carried forward unchanged from AASB 139 into AASB 9: • classification and measurement of financial liabilities; and • derecognition requirements for financial assets and liabilities AASB 9 requirements regarding hedge accounting represent a substantial overhaul of hedge accounting that enable entities to better reflect their risk management activities in the financial statements. Furthermore, AASB 9 introduces a new impairment model based on expected credit losses. This model makes use of more forward-looking information and applies to all financial instruments that are subject to impairment accounting. Likely impact on initial application The entity is yet to undertake a detailed assessment of the impact of AASB 15. However, based on the entity’s preliminary assessment, the Standard is not expected to have a material impact on the transactions and balances recognised in the financial statements when it is first adopted for the year ending 30 June 2019. 45 Annual Report 2016 3.2.3 Revised pronouncement: AASB 15 Revenue from Contracts with Customers Superseded pronouncement - AASB 118 Revenue Nature of change • replaces AASB 118 Revenue, AASB 111 Construction Contracts and some revenue-related Interpretations: • establishes a new revenue recognition model • changes the basis for deciding whether revenue is to be recognised over time or at a point in time • provides new and more detailed guidance on specific topics (e.g. multiple element arrangements, variable pricing, rights of return, warranties and licensing) • expands and improves disclosures about revenue Likely impact on initial application The entity is yet to undertake a detailed assessment of the impact of AASB 15. However, based on the entity’s preliminary assessment, the Standard is not expected to have a material impact on the transactions and balances recognised in the financial statements when it is first adopted for the year ending 30 June 2019. 3.2.3 Revised pronouncement: AASB 16 Leases Superseded pronouncement - AASB 117 Leases, Effective date - 1 January 2019 Nature of change • • replaces AASB 117 Leases and some lease-related Interpretations requires all leases to be accounted for ‘on-balance sheet’ by lessees, other than short-term and low value asset leases • provides new guidance on the application of the definition of lease and on sale and lease back accounting • • largely retains the existing lessor accounting requirements in AASB 117 requires new and different disclosures about leases Likely impact on initial application The entity is yet to undertake a detailed assessment of the impact of AASB 16. However, based upon the entity’s preliminary assessment, the likely impact on the first time adoption of the Standard for the year ending 30 June 2020 includes: • • there will be a significant increase in lease assets and financial liabilities recognised on the balance sheet, the reported equity will reduce as the carrying amount of lease assets will reduce more quickly than the carrying amount of lease liabilities, • EBIT in the statement of profit or loss and other comprehensive income will be higher as the implicit interest in lease payments for former off balance sheet leases will be presented as part of finance costs rather than being included in operating expenses, • Operating cash outflows will be lower and financing cash flows will be higher in the statement of cash flows as principal repayments on all lease liabilities will now be included in financing activities rather than operating activities. Interest can also be included within financing activities. 4. SUMMARY OF ACCOUNTING POLICIES 4.0 OVERALL CONSIDERATIONS The consolidated financial statements have been prepared using the significant accounting policies and measurement bases summarised below. 4.1 BASIS OF CONSOLIDATION The Group financial statements consolidate those of the Parent Company and all of its subsidiaries as of 30 June 2016. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All subsidiaries have a reporting date of 30 June. All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective. Amounts reported in the financial statements of 46 Apiam Animal Health Limitedsubsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. 4.2 BUSINESS COMBINATION The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of: (a) fair value of consideration transferred, (b) the recognised amount of any non-controlling interest in the acquire, and (c) acquisition- date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (ie gain on a bargain purchase) is recognised in profit or loss immediately. 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 acquisition date. The measurement period ends on either the earlier of (i) 12 months from the date of acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Business combinations under common control are accounted for in the accounts prospectively from the date the group obtains the ownership interest. Assets and liabilities are recognised upon consolidation at their existing carrying amount in the financial statements of the Acquiree. Any difference between the fair value of the consideration paid and the acquisition date fair values at which the assets and liabilities are recorded is recognised directly in the Corporate re-organisation reserve in equity. 4.3 FOREIGN CURRENCY TRANSLATION Functional and presentation currency The consolidated financial statements are presented in Australian Dollars ($AUD), which is also the functional currency of the Parent Company. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from the re-measurement of monetary items at year end exchange rates are recognised in profit or loss. Non-monetary items are not retranslated at year-end and are measured at historical cost (translated using the exchange rates at the date of the transaction), except for non-monetary items measured at fair value which are translated using the exchange rates at the date when fair value was determined. 4.4 SEGMENT REPORTING Apiam operates on a consolidated basis being the provision of veterinary services and sale of veterinary products across Australia. There are currently no segments being reported on and the chief operating decision makers review the consolidated results of the business. 47 Annual Report 201648 Apiam Animal Health Limited4.5 REVENUE Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Revenue from veterinary services is recognised in accounting period in which the services are provided. Revenue from the sale of goods is recognised when the risk and rewards have transferred to the customer which is generally upon receipt of the goods. Interest and dividend income Interest income and expenses are reported on an accrual basis using the effective interest method. Dividends, other than those from investments in associates, are recognised at the time the right to receive payment is established. 4.6 OPERATING EXPENSES Operating expenses are recognised in profit or loss upon utilisation of the service or at the date of their origin. Expenditure for warranties is recognised and charged against the associated provision when the related revenue is recognised. 4.7 BORROWING COSTS Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised during the period of time that is necessary to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed in the period in which they are incurred and reported in finance costs (see Note 7). 4.8 INTANGIBLE ASSETS Goodwill Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognised. See Note 4.2 for information on how goodwill is initially determined. Goodwill is carried at cost less accumulated impairment losses. Refer to Note 4.11 for a description of impairment testing procedures. Capitalised development costs Capitalised development costs are measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over its useful life of 10 years from the date of use. 4.9 PROPERTY, PLANT AND EQUIPMENT Leasehold improvements, plant and equipment and motor vehicles Leasehold improvements, plant and equipment and motor vehicles are initially recognised at acquisition cost or manufacturing cost, including any costs directly attributable to bringing the assets to the location and condition necessary for it to be capable of operating in the manner intended by the Group’s management. Plant and equipment and motor vehicles also include property held under finance lease (see Note 4.10). Leasehold improvements, plant and equipment and motor vehicles are subsequently measured using the cost model, cost less subsequent depreciation and impairment losses. Depreciation is recognised on a straight-line basis to write down the cost less estimated residual value of buildings, IT equipment and other equipment. The following useful lives are applied: • Leasehold improvements: 10 - 33% • Plant & equipment: 10 – 33% • Motor vehicles: 25% In the case of leasehold property, expected useful lives are determined by reference to comparable owned assets or over the term of the lease, if shorter. Material residual value estimates and estimates of useful life are updated as required, but at least annually. Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets and are recognised in profit or loss within other income or other expenses. 49 Annual Report 20164.10 LEASED ASSETS Finance leases The economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards of ownership of the leased asset. Where the Group is a lessee in this type of arrangement, the related asset is recognised at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any. A corresponding amount is recognised as a finance lease liability. Leases of land and buildings are classified separately and are split into a land and a building element, in accordance with the relative fair values of the leasehold interests at the date the asset is recognised initially. See Note 4.9 for the depreciation methods and useful lives for assets held under finance lease. The corresponding finance lease liability is reduced by lease payments net of finance charges. The interest element of lease payments represents a constant proportion of the outstanding capital balance and is charged to profit or loss, as finance costs over the period of the lease. Operating leases All other leases are treated as operating leases. Where the Group is a lessee, payments on operating lease agreements are recognised as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. 4.11 IMPAIRMENT TESTING OF GOODWILL, OTHER INTANGIBLE ASSETS AND PROPERTY, PLANT AND EQUIPMENT For impairment assessment purposes, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors goodwill. Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash-generating units are tested 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 or cash-generating unit’s carrying amount exceeds its recoverable amount, which is the higher of fair value less costs to sell and value-in-use. To determine the value-in-use, management estimates expected future cash flows from each cash-generating unit and determines a suitable interest rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Group’s latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements. Discount factors are determined individually for each cash-generating unit and reflect management’s assessment of respective risk profiles, such as market and asset-specific risks factors. Impairment losses for cash-generating units reduce first the carrying amount of any goodwill allocated to that cash- generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment charge is reversed if the cash-generating unit’s recoverable amount exceeds its carrying amount. 4.12 FINANCIAL INSTRUMENTS Recognition, initial measurement and derecognition Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument, and are measured initially at fair value adjusted by transactions costs, except for those carried at fair value through profit or loss, which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities are described below. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Classification and subsequent measurement of financial assets For the purpose of subsequent measurement, financial assets other than those designated and effective as hedging instruments are classified into the following categories upon initial recognition: • Loans and receivables • Financial assets at Fair Value Through Profit or Loss (FVTPL) • Available-For-Sale (AFS) financial assets All financial assets except for those at FVTPL are subject to review for impairment at least at each reporting date to identify whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described below. All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within other expenses. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, these are measured at amortised cost using the effective interest 50 Apiam Animal Health Limitedmethod, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Group’s trade and most other receivables fall into this category of financial instruments. Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default. Receivables that are not considered to be individually impaired are reviewed for impairment in groups, which are determined by reference to the industry and region of a counterparty and other shared credit risk characteristics. The impairment loss estimate is then based on recent historical counterparty default rates for each identified group. Financial assets at FVTPL Financial assets at FVTPL include financial assets that are either classified as held for trading or that meet certain conditions and are designated at FVTPL upon initial recognition. All derivative financial instruments fall into this category, except for those designated and effective as hedging instruments, for which the hedge accounting requirements apply (see below). Assets in this category are measured at fair value with gains or losses recognised in profit or loss. The fair values of financial assets in this category are determined by reference to active market transactions or using a valuation technique where no active market exists. AFS financial assets AFS financial assets are non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. All other AFS financial assets are measured at fair value. Gains and losses are recognised in other comprehensive income and reported within the AFS reserve within equity, except for impairment losses and foreign exchange differences on monetary assets, which are recognised in profit or loss. When the asset is disposed of or is determined to be impaired the cumulative gain or loss recognised in other comprehensive income is reclassified from the equity reserve to profit or loss and presented as a reclassification adjustment within other comprehensive income. Interest calculated using the effective interest method and dividends are recognised in profit or loss within ‘finance income’ (see Note 4.5). Reversals of impairment losses for AFS debt securities are recognised in profit or loss if the reversal can be objectively related to an event occurring after the impairment loss was recognised. For AFS equity investments impairment reversals are not recognised in profit loss and any subsequent increase in fair value is recognised in other comprehensive income. Classification and subsequent measurement of financial liabilities The Group’s financial liabilities include borrowings, trade and other payables and derivative financial instruments. Financial liabilities are measured subsequently at amortised cost using the effective interest method, except for financial liabilities held for trading or designated at FVTPL, that are carried subsequently at fair value with gains or losses recognised in profit or loss. All derivative financial instruments that are not designated and effective as hedging instruments are accounted for at FVTPL. All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included within finance costs or finance income. 4.13 INVENTORIES Inventories are stated at the lower of cost and net realisable value. Costs are assigned on the basis of weighted average cost. Net realisable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. 51 Annual Report 20164.14 INCOME TAXES Tax expense recognised in profit or loss comprises the sum of deferred tax and current tax not recognised in other comprehensive income or directly in equity. Current income tax assets and/or liabilities comprise those obligations to, or claims from, the Australian Taxation Office (ATO) and other fiscal authorities relating to the current or prior reporting periods that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred income taxes are calculated using the liability method on temporary differences between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with investments in subsidiaries and joint ventures is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted by the end of the reporting period. Deferred tax assets are recognised to the extent that it is probable that they will be able to be utilised against future taxable income, based on the Group’s forecast of future operating results which is adjusted for significant non-taxable income and expenses and specific limits to the use of any unused tax loss or credit. Deferred tax liabilities are always provided for in full. Deferred tax assets and liabilities are offset only when the Group has a right and intention to set off current tax assets and liabilities from the same taxation authority. Changes in deferred tax assets or liabilities are recognised as a component of tax income or expense in profit or loss, except where they relate to items that are recognised in other comprehensive income (such as the revaluation of land) or directly in equity, in which case the related deferred tax is also recognised in other comprehensive income or equity, respectively. 4.15 CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. 4.16 EQUITY, RESERVES AND DIVIDEND PAYMENTS Share capital Share capital represents the fair value of shares that have been issued. Any transaction costs associated with the issuing of shares are deducted from share capital, net of any related income tax benefits. Corporate re-organisation reserve The Corporate re-organisation reserve represents the difference between the fair value of the consideration paid and the fair value of assets and liabilities acquired in a business combination whereby the business acquired was under common control at the date of acquisition. Non-controlling interest acquisition reserve The group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners. Non-controlling interest Represents the portion of the net assets of subsidiary’s that are not 100% owned by the Company. Retained earnings Retained earnings include all current and prior period retained profits. Dividend distributions payable to equity shareholders are included in other liabilities when the dividends have been approved in a general meeting prior to the reporting date. All transactions with owners of the parent are recorded separately within equity. 52 Apiam Animal Health Limited4.17 EMPLOYEE BENEFITS Short-term employee benefits Short-term employee benefits are benefits, other than termination benefits, that are expected to be settled wholly within twelve (12) months after the end of the period in which the employees render the related service. Examples of such benefits include wages and salaries, non-monetary benefits and accumulating sick leave. Short-term employee benefits are measured at the undiscounted amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The Group’s liabilities for annual leave and long service leave are included in other long term benefits as they are not expected to be settled wholly within twelve (12) months after the end of the period in which the employees render the related service. They are measured at the present value of the expected future payments to be made to employees. The expected future payments incorporate anticipated future wage and salary levels, experience of employee departures and periods of service, and are discounted at rates determined by reference to market yields at the end of the reporting period on high quality corporate bonds that have maturity dates that approximate the timing of the estimated future cash outflows. Any re-measurements arising from experience adjustments and changes in assumptions are recognised in profit or loss in the periods in which the changes occur. The Group presents employee benefit obligations as current liabilities in the statement of financial position if the Group does not have an unconditional right to defer settlement for at least twelve (12) months after the reporting period, irrespective of when the actual settlement is expected to take place. Post-employment benefit plans The Group provides post-employment benefits through various defined contribution and defined benefit plans. 4.18 SHARE-BASED EMPLOYEE REMUNERATION The Group operates equity-settled share-based remuneration plans for its employees. None of the Group’s plans feature any options for a cash settlement. All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the equity instruments granted. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example profitability and sales growth targets and performance conditions). 4.19 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS Provisions for product warranties, legal disputes, onerous contracts or other claims are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required from the Group and amounts can be estimated reliably. Timing or amount of the outflow may still be uncertain. Restructuring provisions are recognised only if a detailed formal plan for the restructuring has been developed and implemented, or management has at least announced the plan’s main features to those affected by it. Provisions are not recognised for future operating losses. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the reporting date, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Provisions are discounted to their present values, where the time value of money is material. Any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognised as a separate asset. However, this asset may not exceed the amount of the related provision. No liability is recognised if an outflow of economic resources as a result of present obligation is not probable. Such situations are disclosed as contingent liabilities, unless the outflow of resources is remote in which case no liability is recognised. 4.20 GOODS AND SERVICES TAX (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST components of investing and financing activities, which are disclosed as operating cash flows. 53 Annual Report 20164.21 ROUNDING OF AMOUNTS The Parent Entity has applied the relief available to it under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instruments 2016/191 and accordingly, amounts in the financial statements and directors’ report have been rounded off to the nearest $1,000, or in certain cases, the nearest dollar. 4.22 SIGNIFICANT MANAGEMENT JUDGEMENT IN APPLYING ACCOUNTING POLICIES When preparing the financial statements, management undertakes a number of judgements, estimates and assumptions about the recognition and measurement of assets, liabilities, income and expenses. Significant management judgement The following are significant management judgements in applying the accounting policies of the Group that have the most significant effect on the financial statements. Recognition of deferred tax assets The extent to which deferred tax assets can be recognised is based on an assessment of the probability of the Group’s future taxable income against which the deferred tax assets can be utilised. In addition, significant judgement is required in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions (see Note 4.14). Estimation uncertainty Information about estimates and assumptions that have the most significant effect on recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different. Impairment In assessing impairment, management estimates the recoverable amount of each asset or cash-generating unit based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate (see Note 4.11). Useful lives of depreciable assets Management reviews its estimate of the useful lives of depreciable assets at each reporting date, based on the expected utility of the assets. Uncertainties in these estimates relate to technical obsolescence that may change the utility of certain software and IT equipment. Trade receivables Management estimates the recoverable amount of any outstanding trade receivable balances at reporting date and recognises an allowance for impairment if required. Inventories Management estimates the net realisable values of inventories, taking into account the most reliable evidence available at each reporting date. The future realisation of these inventories may be affected by future technology or other market-driven changes that may reduce future selling prices. Business combinations Management uses valuation techniques in determining the fair values of the various elements of a business combination (see Note 4.2). Particularly, the fair value of contingent consideration is dependent on the outcome of many variables that affect future profitability (see Note 20). 5. SEGMENT REPORTING Apiam operates on a consolidated basis being the provision of veterinary services and sale of veterinary products across Australia. There are currently no segments being reported on and the chief operating decision makers review the consolidated results of the business. 6. REVENUE Sales revenue Sale of goods Rendering of services Total revenue 2016 $’000 41,822 12,275 54,097 2015 $’000 - - - 54 Apiam Animal Health Limited 7. EXPENSES Profit before income tax includes the following specific expenses: Depreciation Leasehold improvements Plant and equipment Motor vehicles Total depreciation Finance costs Interest expenses for borrowings at amortised cost • other borrowings at amortised cost Interest expenses for finance lease arrangements Total interest expenses for financial liabilities not at FVTPL Other financial items – amortisation of borrowing costs Share-based payments expense Rental 8. INCOME TAX EXPENSE 2016 $’000 6 321 287 614 413 21 434 7 1,360 876 2015 $’000 - - - - - - - - - - - The major components of tax expense and the reconciliation of the expected tax expense based on the domestic effective tax rate of Apiam at 30% (2015: 30%) and the reported tax expense in profit or loss are as follows: Profit /(loss) before tax Domestic tax rate for Apiam Animal Health Limited - 30% Expected tax expense / (benefit) Adjustment for non-deductible expenses: • Share based payments expense • Stamp duty on acquisitions • Other non-deductible expenses Actual tax expense / (benefit) Tax expense/(benefit) comprises: • current tax expense/(benefit) • deferred tax expense/(benefit) Tax expense/(benefit) Note 15 provides information on deferred tax assets and liabilities. 9. CASH AND CASH EQUIVALENTS Cash at bank and in hand Cash and cash equivalents 2016 $’000 1,068 320 408 243 4 975 823 (1,798) 975 2016 $’000 2,117 2,117 2015 $’000 (218) (65) - - 34 (31) (31) - (31) 2015 $’000 20 20 55 Annual Report 2016 10. TRADE AND OTHER RECEIVABLES Trade receivables, gross Less: provision for impairment of receivables Trade receivables Other receivables Rebates receivable 2016 $’000 12,462 (137) 12,325 168 761 13,254 2015 $’000 - - - 15 - 15 All amounts are short-term. The net carrying value of trade receivables is considered a reasonable approximation of fair value. All of the Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were found to be impaired and an allowance for credit losses of $137,000 (2015: $Nil) has been recorded accordingly within other expenses. The movement in the allowance for credit losses can be reconciled as follows: Balance at 1 July Amounts written off (uncollectable) Impairment loss Impairment loss reversed Balance 30 June An analysis of unimpaired trade receivables that are past due is given in Note 35.3. 11. INVENTORIES Stock on hand, at cost Less provision for obsolescence Stock in transit, at cost 12. OTHER CURRENT ASSETS Prepayments Security deposits 2016 $’000 - - 137 - 137 2016 $’000 9,828 (100) 453 10,181 2016 $’000 311 65 376 2015 $’000 - - - - - 2015 $’000 - - - - 2015 $’000 - - - 56 Apiam Animal Health Limited 13. PROPERTY, PLANT AND EQUIPMENT Details of the Group’s property, plant and equipment and their carrying amount are as follows: Leasehold improvements Plant & equipment Motor vehicles Gross carrying amount Balance 1 July 2015 Additions Acquisition through business combination Balance 30 June 2016 Depreciation and impairment Balance 1 July 2015 Depreciation Balance 30 June 2016 Carrying amount 30 June 2016 Gross carrying amount Balance 25 March 2015 Additions Balance 30 June 2015 Depreciation and impairment Balance 25 March 2015 Depreciation Balance 30 June 2015 Carrying amount 30 June 2015 $’000 - 54 98 152 - (6) (6) 146 - - - - - - - $’000 - 248 2,651 2,899 - (321) (321) 2,578 - - - - - - - $’000 - 150 1,909 2,059 - (287) (287) 1,772 - - - - - - - Refer to Note 30 for capital commitments relating to vehicle leases. Total $’000 - 452 4,658 5,110 - (614) (614) 4,496 - - - - - - - 57 Annual Report 2016 2016 $’000 44,622 80 44,702 2016 $’000 - 44,622 44,622 - - - 44,622 2016 $’000 - 80 80 - - - - 80 2015 $’000 - - - 2015 $’000 - - - - - - - 2015 $’000 - - - - - - - - 14. INTANGIBLE ASSETS Goodwill Capitalised development costs The movements in the net carrying amount of intangible assets are as follows: Goodwill Gross carrying amount Balance 1 July Acquired through business combination Balance 30 June Accumulated impairment Balance 1 July Impairment loss recognised Balance 30 June Carrying amount at 30 June Capitalised development costs Gross carrying amount Balance 1 July Additions Balance 30 June Accumulated impairment Balance 1 July Amortisation expense Impairment loss recognised Balance 30 June Carrying amount at 30 June 58 Apiam Animal Health Limited 14.1 IMPAIRMENT TESTING Apiam will monitor the performance of its business in FY17 at species level but has tested goodwill for impairment in FY16 at the clinic level as this represents the cash generating units as at 30 June 2016. Goodwill is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units that are expected to benefit from the business combination in which the goodwill arose. The units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the nine (9) individual veterinary clinic entities. The recoverable amounts of the cash-generating units were determined based on value-in-use calculations, covering a detailed five (5) year forecast, followed by an extrapolation of expected cash flows for the units’ remaining useful lives using the growth rates determined by management. The present value of the expected cash flows of each segment is determined by applying the following key assumptions: 2016 Annual sales growth % Annual operating expenses growth rate % Long-term growth rate % Post-tax discount rate % Goodwill allocation at 30 June across nine (9) individual veterinary clinic entities 2015 5.00% 2.00% 2.50% 11.88% 2016 $’000 44,622 - - - - 2015 $’000 - The Directors and management have considered and assessed reasonably possible changes for key assumptions and have not identified any instances that could cause the carrying amount for any of the nine (9) individual veterinary clinic entities to exceed its recoverable amount. 14.2 GROWTH RATES The growth rates reflect the long-term average growth rates for the industry. 14.3 DISCOUNT RATES The discount rates reflect appropriate adjustments relating to market risk and specific risk factors of each unit. 14.4 CASH FLOW ASSUMPTIONS Management’s key assumptions include stable profit margins, based on past experience in this market. The Group’s management believes that this is the best available input for forecasting this mature market. Cash flow projections reflect stable profit margins achieved immediately before the budget period. No expected efficiency improvements have been taken into account and prices and wages reflect publicly available forecasts of inflation for the industry. Apart from the considerations described in determining the value-in-use of the cash-generating units described above, management is not currently aware of any other probable changes that would necessitate changes in its key estimates. 59 Annual Report 2016 15. DEFERRED TAX ASSETS AND LIABILITIES Deferred taxes arising from temporary differences and unused tax losses can be summarised as follows: Deferred tax liabilities / (assets) Current assets Trade and other receivables Inventories Current liabilities Provisions Borrowing costs Other Unused tax losses Equity raising costs Listing and acquisition costs Deferred tax liabilities / (assets) Other Unused tax losses 1-Jul-15 $’000 Recognised in business combination $’000 Recognised in profit and loss 30-Jun-16 $’000 $’000 - - - - 31 - - 31 25-Mar-15 $’000 - - - - 1,131 - - - - 1,131 Recognised in business combination $’000 41 30 160 (18) 690 724 171 1,798 41 30 1,291 (18) 721 724 171 2,960 Recognised in profit and loss 30-Jun-15 $’000 $’000 - - 31 31 31 31 All deferred tax assets (including tax losses and other tax credits) have been recognised in the statement of financial position. 16. TRADE AND OTHER PAYABLES Current: Trade payables Sundry payables and accrued expenses Other payables Total trade and other payables 2016 $’000 6,185 3,218 88 9,491 2015 $’000 5 65 43 113 All amounts are short-term. The carrying values of trade payables and other payables are considered to be a reasonable approximation of fair value. 17. CURRENT TAX LIABILITIES Current tax payable 2016 $’000 1,366 2015 $’000 - 60 Apiam Animal Health Limited 18. BORROWINGS Current: Bank loans (a) Less capitalised borrowing costs Lease liability (b) Less deferred interest charges Total current borrowings Non-current: Bank loans (a) Less capitalised borrowing costs Lease liability (b) Less deferred interest charges Total non-current borrowings Refer to Note 40 for information on financial instruments. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans Less capitalised borrowing costs Lease liability Less deferred interest charges 2016 $’000 3,919 (13) 257 (15) 4,148 11,650 (48) 271 (9) 11,864 2016 $’000 15,569 (61) 528 (24) 16,012 Assets pledged as security (a) Bank loans are secured by first ranking general security agreements in relation to the current and future assets of Apiam and each wholly-owned subsidiary. (b) The lease liabilities are effectively secured as the rights to the leased assets, recognised in the statements of financial position, revert to the lessor in the event of default. 2015 $’000 - - - - - - - - - - 2015 $’000 - - - - - 61 Annual Report 2016 Financing arrangements Unrestricted assess was available at the reporting date to the following lines of credit: Total facilities Bank - term loan facilities Bank – master asset finance agreement for equipment finance Bank – overdraft facility Bank – credit card facility Used at reporting date Bank - term loan facilities Bank – master asset finance agreement for equipment finance Bank – overdraft facility Bank – credit card facility Unused at reporting date Bank - term loan facilities Bank – master asset finance agreement for equipment finance Bank – overdraft facility Bank – credit card facility Banking covenants The key financial covenants applicable to bank facilities are: • Maximum gearing ratio of 35% (ratio of debt to equity): • Maximum operating leverage ratio of 2.5 times (ratio of gross debt to EBITDA): and • Minimum interest cover ratio of 5.0 times (ratio of EBIT to gross interest expense). The Group complied with all bank covenants during the period. 2016 $’000 33,000 1,000 1,000 300 35,300 15,569 146 - - 15,715 2016 $’000 17,431 854 1,000 300 19,585 19. PROVISIONS Current: Employee benefits Non-current: Employee benefits 62 2016 $’000 3,453 243 2015 $’000 - - - - - - - - - - - 2015 $’000 - - - - - 2015 $’000 - - Apiam Animal Health Limited Employee benefits The provision for employee benefits relates to the group’s liability for long service leave and annual leave. Amounts not expected to be settled within the next 12 months The current portion of this liability includes all of the accrued annual leave, the unconditional entitlements to long service leave where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount of the provision of $3,453,000 (2015: $Nil) is presented as current, since the group does not have an unconditional right to defer settlement for any of these obligations. However, based upon past experience, the group does not expect all employees to take the full amount of accrued leave or require payment within the next twelve months. The group does not expect $2,071,800 (2015: $Nil) of this liability to be taken or paid within the next 12 months. 20. OTHER CURRENT LIABILITIES Contingent consideration Total other current liabilities 2016 $’000 1,250 1,250 2015 $’000 - - This relates to contingent consideration on businesses acquired during the year. Refer to Note 31.3 and 32.4 for further details. 63 Annual Report 201621. EQUITY 21.1 SHARE CAPITAL The share capital of Apiam consists only of fully paid ordinary shares; the shares do not have a par value. All shares are equally eligible to receive dividends and the repayment of capital and represent one vote at the shareholders’ meeting of Apiam. 2016 Shares 2015 Shares Shares issued and fully paid: • beginning of the year On 25 March 2015 initial share issue • On 8 December 2015 • shares issued on restructure of Chris Richards Group of Companies • shares purchased from Chris Richards in accordance with prospectus dated 17 Nov 2015 • shares issued in accordance with prospectus dated 17 Nov 2015 • shares issued upon conversion of convertible notes • employee shares issued (a) • shares issued as consideration for business acquisitions • equity raising costs, net of income tax benefit 1 - 43,827,303 (17,000,000) 40,000,000 2,690,000 1,360,000 27,598,270 - Total share capital at 30 June 98,475,574 - 1 - - - - - - - 1 2016 $’000 - - 28,939 (17,000) 40,000 285 1,360 27,598 (2,112) 79,070 2015 $’000 - - - - - - - - - - (a) Shares were issued during 2016 relating to share-based payments (see Note 26.2 for details on the Group’s share-based employee remuneration). Each share has the same right to receive dividend and the repayment of capital and represents one vote at the shareholders’ meeting of Apiam. 21.2 CONVERTIBLE NOTES The Group entered into convertible note agreements, principally with the vendors of business combinations acquired to raise $285,000 towards the costs of the IPO. These notes converted into 2,690,000 ordinary shares on completion of the IPO. Convertible notes issued and fully paid: • beginning of the year 1,400,000 - 140,000 2016 No. 2015 No. 2016 $’000 2015 $’000 - • • • issue of convertible notes issue of convertible notes issue of convertible notes • conversion to ordinary shares - 1,400,000 - 140,000 1,250,000 40,000 (2,690,000) - - - 125,000 20,000 (285,000) - - - Total convertible notes at 30 June - 1,400,000 - 140,000 64 Apiam Animal Health Limited 22. RESERVES Details of reserves are as follows: Balance at 25 March 2015 No movements in reserves during the period Balance at 30 June 2015 Balance at 1 July 2015 Restructure and transfer of Chris Richards entities into the Group Premium on issue of shares to non-controlling interests of Chris Richards entities transferred into the Group Balance at 30 June 2016 Corporate reorganisation reserve $’000 - Non-controlling Interest acquisition reserve $’000 - - - - (26,666) - (26,666) - - - - (6,615) (6,615) 23. NON-CONTROLLING INTERESTS Issued capital Retained profits Total non-controlling interests 2016 $’000 576 43 619 Total $’000 - - - - (26,666) (6,615) (33,281) 2015 $’000 - - - 24. EARNINGS PER SHARE AND DIVIDENDS 24.1 EARNINGS PER SHARE Both the basic and diluted earnings per share have been calculated using the profit attributable to shareholders of the Parent Company as the numerator (i.e. no adjustments to profit were necessary in 2016 or 2015). The reconciliation of the weighted average number of shares for the purposes of diluted earnings per share to the weighted average number of ordinary shares used in the calculation of basic earnings per share is as follows: Amounts in thousand shares: • weighted average number of shares used in basic earnings per share • weighted average number of shares used in diluted earnings per share Shares deemed to be issued for no consideration in respect of share based payments 59,447,120 59,447,120 1,360,000 1 1 - 2016 201 65 Annual Report 2016 24.2 DIVIDENDS There were no dividends paid or declared to equity holders during or since the year ended 30 June 2016. There were no dividends paid during the comparative period. 24.3 FRANKING CREDITS The amount of the franking credits available for subsequent reporting periods are: balance at the end of the reporting period franking credits that will arise from the payment of the amount of provision for income tax 2016 $’000 4,304 1,366 5,670 25. RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES (a) Reconciliation of cash flows from operating activities Cash flows from operating activities Profit / (Loss) for the period Adjustments for: • depreciation expense • doubtful debt expense • obsolete stock provision • amortisation of borrowing expenses • share benefits expense Net changes in working capital: • change in inventories • change in trade and other receivables • change in other assets • change in trade and other payables • change in deferred tax • change in provisions Net cash used in operating activities (b) Non cash financing transactions 2016 $’000 93 614 137 100 7 1,360 (2,016) (1,381) 69 586 (878) 72 (1,237) 2015 $’000 - - - 2015 $’000 (187) - - - - - - (15) - 70 (31) - (163) During the financial year, the Group acquired vehicles to the value $157,266 (2015: $Nil) via finance leases. These transactions are not reflected in the Statement of Cash Flows. 66 Apiam Animal Health Limited26. EMPLOYEE REMUNERATION 26.1 EMPLOYEE BENEFITS EXPENSE Expenses recognised for employee benefits are analysed below: Employee benefits – expense Wages and salaries Bonuses Share-based payments Superannuation Employee benefits expense 2016 $’000 12,639 330 1,360 1,048 15,377 2015 $’000 - - - - - 26.2 SHARE-BASED EMPLOYEE REMUNERATION As part of Apiam’s initial public float 1,360,000 shares were issued to eligible employees in Australia nominated by the Company. These employee shares were issued for nil consideration. The fair value of the shares issued was $1.00. In total, $1,360,000 (2015: $Nil) of employee remuneration expense (all of which related to equity-settled share-based payment transactions) have been included in profit or loss and credited to share capital. 27. AUDITOR REMUNERATION Audit services – Grant Thornton Remuneration for audit or review of financial statements Other services – Grant Thornton • • investigating accountant taxation services • other Total other services remuneration Total auditor’s remuneration 2016 $’000 186 300 18 25 343 529 2015 $’000 7 - - 1 1 8 28. RELATED PARTY TRANSACTIONS The Group’s related parties include key management, post-employment benefit plans for the Group’s employees and others as described below. Unless otherwise stated, none of the transactions incorporate special terms and conditions and no guarantees were given or received. Outstanding balances are usually settled in cash. 67 Annual Report 2016 28.1 TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL Key management of the Group are the executive members of Apiam’s Board of Directors and members of the Executive Team. Key management personnel remuneration includes the following expenses: Short-term employee benefits: • salaries including bonuses and non-monetary benefits • bonuses • non-monetary benefits Total short-term employee benefits Long- term employee benefits: • long service leave Total long-term employee benefits Post-employment benefits: • superannuation Total post-employment benefits Share-based payments Total remuneration 2016 $’000 943 145 23 1,111 (12) (12) 67 67 380 1,546 2015 $’000 - - - - - - - - - - Loans to key management personnel The Group entered into a loan facility agreement with Chris Richards, under which the Group agreed to lend up to $1.5million. The loan is at an interest rate equal to the Term Debt Facility interest payable by the Group plus 2% per annum. The table below provides aggregate information relating to Group’s loans to key management personnel during the year: Balance at the start of the year Loans advanced Interest paid and payable for the year Repayments made Balance at the end of the year 2016 $ 133 1,229 15 (1,377) - The number of key management personnel included in the Group aggregate at year end is Nil. The Group does not have an allowance account for receivables relating to outstanding loans and has not recognised any expense for impaired receivables during reporting period. Other transactions with key management personnel The Group rents premises at Piper Lane, Bendigo East, Victoria. The premises are owned by an entity associated with Chris Richards. Rent payments made amounted to $160,000 (2015: Nil). The Group rents premises at Rubicon Street, Smithton, Tasmania. The premises are owned by an entity associated with Chris Richards. Rent payments made amounted to $73,515 (2015: Nil). The Group leases it artificial insemination facility in Victoria from entities associated with Chris Richards. Lease payments made amounted to $43,147 (2015: Nil). All related party rentals are based on commercial rates and the terms of the lease are standard commercial terms. The Group has entered into an intellectual property licence with iVet Pty Ltd, a company controlled by Chris Richards, to use the iVet intellectual property. The Group will pay iVet Pty Ltd a royalty of 10% of net sales revenue received by the Group for the use of the intellectual property licence. The agreement is for an initial term of 10 years. The group has the option to purchase the iVet technology by giving notice to iVet Pty Ltd at any time during the initial 5 years of the term. No payments were made during the financial year (2015: Nil). The Group obtains business air travel services from an entity associated with Chris Richards. The fares paid are based on commercial fares. Payments made amounted to $121,257 (2015: Nil). 68 Apiam Animal Health Limited29. CONTINGENT LIABILITIES In the Directors’ view, there are no contingent assets or liabilities that will have a material effect on the Group. 30. CAPITAL COMMITMENTS Property, plant and equipment 201 $’000 218 218 201 $’000 - - Capital commitments relate to vehicle leases where finance facilities have been committed but the assets not yet received. Annual Report 2016 69 70 Apiam Animal Health Limited31. BUSINESS RESTRUCTURE On 1 November 2015 and 9 December 2015, as part of the Group’s reorganisation and restructure of entities under common control, ownership of the following companies was transferred to Apiam Animal Health Limited in exchange for cash and shares: • Chris Richards & Associates Pty Ltd • Farm Gate Logistics (Qld) Pty Ltd • Southern Cross Feedlot Services Pty Ltd • Portec Veterinary Services Pty ltd % gained 100 100 100 49 • Country Vet Wholesaling Pty ltd • Apiam Management Pty Ltd • Westvet Wholesale Pty Ltd • Pork Storks Australia Pty Ltd % gained 100 100 100 100 Details of the business restructure are as follows: Fair value of consideration transferred Settled as follows: Amount settled in cash Amount settled by issue of shares at fair value Amount owing at balance date Contingent consideration subject to performance criteria Recognised amounts of identifiable net assets Property, plant and equipment Deferred tax assets Total non-current assets Inventories Trade and other receivables Cash and cash equivalents Other current assets Total current assets Borrowings Provisions Total non-current liabilities Borrowings Provisions Current tax liabilities Trade and other payables Total current liabilities Identifiable net assets Reserves arising upon reconstruction Represented by: Corporate re-organisation reserve Non-controlling interest acquisition reserve Non-controlling interest Consideration transferred settled in cash Cash and cash equivalents acquired Net cash outflow on acquisition Acquisition costs charged to expenses Net cash inflow relating to the acquisition $’000 34,386 2,915 30,633 88 750 1,916 451 2,367 5,381 11,417 2,299 323 19,420 (563) (61) (624) (5,944) (1,082) (378) (12,078) (19,482) 1,681 32,705 26,666 6,615 (576) (2,914) 2,299 615 (640) (25) 71 Annual Report 201631.1 CONSIDERATION TRANSFERRED Acquisition-related costs amounting to $640,000 are not included as part of consideration transferred and have been recognised as an expense in the consolidated statement of profit or loss and other comprehensive income, as part of listing and acquisition costs expenses. 31.2 IDENTIFIABLE NET ASSETS The fair values of the identifiable intangible assets have been determined provisionally at 30 June 2016. The Group is currently obtaining the information necessary to appropriately consider the identification and fair value of identifiable intangible assets. 31.3 CONTINGENT CONSIDERATION SUBJECT TO PERFORMANCE CRITERIA The contingent consideration amounting to $750,000 (Note 20) relating to the acquisition of a subsidiary has been recorded at fair value. The consideration is contingent on achieving certain pre-determined earnings which is expected to be met and paid in December 2016. 32. BUSINESS COMBINATION On 9 December 2015, the Group acquired 100% of the issued share capital and voting rights of the following companies: • McAuliffe Moore & Perry Pty Ltd (Kyabram Clinic) • Warrnambool Veterinary Clinic Pty Ltd • Scottsdale Veterinary Services Pty Ltd • Smithton Veterinary Service Pty Ltd In addition, on 9 December 2015, the following businesses were acquired: • Dubbo Veterinary Clinic • Bell Veterinary Clinic • Gippsland Veterinary Clinic • Southern Riverina Clinic • Border Veterinary Clinic The following detailed table highlights the fair value of the identifiable assets acquired and liabilities assumed as at the date of acquisition for each of the business combinations undertaken in the period. 72 Apiam Animal Health Limited Details of the business combination are as follows: Fair value of consideration transferred Amounts settled in cash Amount settled by issue of shares at fair value Contingent consideration Total fair value of consideration transferred Recognised amounts of identifiable net assets Property plant and equipment Deferred tax assets Total non-current assets Cash and equivalents Inventories Trade and other receivables Other current assets Total current assets Borrowings Provisions Total non-current liabilities Provisions Borrowings Current tax liabilities Trade and other payables Total current liabilities Identifiable net assets Goodwill on acquisition Net cash outflow on acquisition Practice 1 $’000 Practice 2 Practice 3 Practice 4 $’000 $’000 $’000 Others $’000 Total $’000 3,752 3,775 3,494 3,963 - 2,151 7,757 - 4,977 3,834 - 9,694 6,574 500 24,068 25,903 500 7,527 7,457 9,908 8,811 16,768 50,471 376 77 453 2 354 347 - 703 - 26 26 236 132 84 84 536 594 6,933 3,752 620 122 742 - 463 907 43 1,413 - 31 31 487 - - 285 772 1,352 6,105 3,494 494 90 584 - 385 554 - 939 - 26 26 275 - - 59 334 392 15 407 - 348 560 - 908 - - - 49 - - - 49 860 391 1,251 - 1,334 2,973 76 4,383 101 36 137 1,315 976 99 1,633 4,023 2,742 695 3,437 2 2,884 5,341 123 8,347 101 119 220 2,362 1,108 183 2,061 5,714 1,163 8,745 2,151 1,266 7,545 4,977 1,474 15,294 5,849 44,622 9,694 24,068 73 Annual Report 201632.1 CONSIDERATION TRANSFERRED Acquisition-related costs amounting to $934,000 are not included as part of consideration transferred and have been recognised as an expense in the consolidated statement of profit or loss and other comprehensive income, as part of listing and acquisition costs expenses. 32.2 IDENTIFIABLE NET ASSETS The fair values of the identifiable intangible assets have been determined provisionally at 30 June 2016. The Group is currently obtaining the information necessary to appropriately consider the identification and fair value of identifiable intangible assets. 32.3 GOODWILL The goodwill that arose on the combination can be attributed to the value of the businesses to the Group in addition to the net tangible assets acquired, synergies expected to be derived from the combination and the value of each of the veterinary businesses which cannot be recognised as an intangible asset. The goodwill that arose from this business combination is not expected to be deductible for tax purposes. 32.4 CONTINGENT CONSIDERATION SUBJECT TO PERFORMANCE CRITERIA The contingent consideration amounting to $500,000 (Note 20) relating to the acquisition of a subsidiary has been recorded at fair value. The consideration is contingent on achieving certain pre-determined earnings which is expected to be met and paid in December 2016. 33. INTERESTS IN SUBSIDIARIES 33.1 COMPOSITION OF THE GROUP Set out below details of the subsidiaries held directly by the Group: Name of the Subsidiary Chris Richards & Associates Pty Ltd Country Vet Wholesaling Pty Ltd Farm Gate Logistics (Qld) Pty Ltd Apiam Management Pty Ltd Southern Cross Feedlot Services Pty Ltd Westvet Wholesale Pty Ltd Portec Veterinary Services Pty Ltd Pork Storks Australia Pty Ltd McAuliffe Moore & Perry Pty Ltd Warrnambool Veterinary Clinic Pty Ltd Scottsdale Veterinary Services Pty Ltd Smithton Veterinary Service Pty Ltd AAH - Dubbo Vet Hospital Pty Ltd AAH - Bell Vet Services Pty Ltd CVH Gippsland Pty Ltd CVH Southern Riverina Pty Ltd CVH Border Pty Ltd CVH iVet Pty Ltd Tasvet Wholesale Pty Ltd Country of incorporation and principal place of business Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Principal activity Veterinary services Wholesale supply Transport Payroll Veterinary services Wholesale supply Veterinary services Genetics Veterinary services Veterinary services Veterinary services Veterinary services Veterinary services Veterinary services Veterinary services Veterinary services Veterinary services Dormant Dormant Group proportion of ownership interests 30-Jun-16 100% 30-Jun-15 -% 100% 100% 100% 100% 100% 49% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% 74 Apiam Animal Health LimitedSignificant judgements and assumptions The Group holds 49% of the ordinary shares and voting rights in Portec Veterinary Services Pty Ltd (‘Portec’). One (1) other investor holds 51% in order to ensure compliance with statutory laws applicable in Western Australia where Portec Veterinary Services Pty Ltd (Portec) conducts its operations. Management has assessed its involvement in Portec in accordance with AASB 10’s revised control definition and guidance. It has concluded that it has outright control. In making its judgement, management considered the Group’s voting rights, the relative size and dispersion of the voting rights held by the other shareholder and the extent of recent participation by those shareholder in general meetings. Recent experience demonstrates that the other shareholder participates such that they do not prevent the Group from having the practical ability to direct the relevant activities of Portec unilaterally. 33.2 LOSING CONTROL OVER A SUBSIDIARY DURING THE REPORTING PERIOD There was no loss of control over a subsidiary during the reporting period. 33.3 INTERESTS IN UNCONSOLIDATED STRUCTURED ENTITIES The Group has no interests in unconsolidated structured entities. 34. LEASES 34.1 FINANCE LEASES AS LESSEE The Group’s main motor vehicles and certain items of plant and equipment are held under finance lease arrangements. As of 30 June 2016, the net carrying amount of the motor vehicles held under finance lease arrangements (included as part of motor vehicles) is $564,585 (2015: $Nil); and the net carrying amount of the plant and equipment held under finance lease arrangements (included as part of plant and equipment) is $73,076 (2015: $Nil) (see Note 13). The Group’s finance lease liabilities, which are secured by the related assets held under finance leases, are classified as follows: Current: • finance lease liabilities Non-current: • finance lease liabilities 2016 $’000 242 262 Future minimum finance lease payments at the end of each reporting period under review were as follows: 30-Jun-16 Lease payments Finance charges Net present values 30-Jun-15 Lease payments Finance charges Net present values Minimum lease payments due Within 1 year $’000 1-5 years $’000 After 5 years $’000 257 (15) 242 - - - 271 (9) 262 - - - - - - - - - 2015 $’000 - - Total $’000 528 (24) 504 - - - 75 Annual Report 2016 34.2 OPERATING LEASES AS LESSEE The Group leases an office and veterinary premises at various locations under operating leases. The future minimum lease payments are as follows: 30 June 2016 30 June 2015 Within 1 year $’000 1,438 - Minimum lease payments due 1-5 years $’000 4,409 - After 5 years $’000 2,062 - Total $’000 7,909 - Lease expense during the period amounted to $875,752 (2015: $Nil) representing the minimum lease payments. 35. FINANCIAL INSTRUMENT RISK 35.1 RISK MANAGEMENT OBJECTIVES AND POLICIES The Group is exposed to various risks in relation to financial instruments. The Group’s financial assets and liabilities by category are summarised in Note 40.1. The main types of risks are market risk, credit risk and liquidity risk. The Group’s risk management is coordinated at its headquarters, in close cooperation with the Board of Directors, and focuses on actively securing the Group’s short to medium-term cash flows by minimising the exposure to financial markets. Long-term financial investments are managed to generate lasting returns. The Group does not actively engage in the trading of financial assets for speculative purposes nor does it write options. The most significant financial risks to which the Group is exposed are described below. 35.2 MARKET RISK ANALYSIS The Group is exposed to market risk through its use of financial instruments and specifically to interest rate risk, which result from both its operating and investing activities. Interest rate sensitivity The Group’s policy is to minimise interest rate cash flow risk exposures on long-term financing. At 30 June 2016, the Group is exposed to changes in market interest rates through bank borrowings at variable interest rates. The following table illustrates the sensitivity of profit and equity to a reasonably possible change in interest rates of +/- 1% (2015: +/- 1%). These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on a change in the average market interest rate for each period, and the financial instruments held at each reporting date that are sensitive to changes in interest rates. All other variables are held constant. 30 June 2016 30 June 2015 Profit for the year $’000 +1% 80 - $’000 -1% (80) - Equity $’000 +1% 80 - $’000 -1% (80) - 76 Apiam Animal Health Limited 35.3 CREDIT RISK ANALYSIS Credit risk is the risk that a counterparty fails to discharge an obligation to the Group. The Group is exposed to this risk for various financial instruments, for example by trade receivables. The Group’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognised at the reporting date, as summarised below: Classes of financial assets Carrying amounts: • cash and cash equivalents • trade and other receivables 2016 $’000 2,117 13,254 15,371 2015 $’000 20 15 35 The Group continuously monitors defaults of customers and other counterparties, identified either individually or by group and incorporates this information into its credit risk controls. Where available at reasonable cost, external credit ratings and/ or reports on customers and other counterparties are obtained and used. The Group’s policy is to deal only with creditworthy counterparties. The Group’s management considers that all of the above financial assets that are not impaired or past due for each of the 30 June reporting dates under review are of good credit quality. At 30 June, the Group has certain trade receivables that have not been settled by the contractual due date but are not considered to be impaired. The amounts at 30 June analysed by the length of time past due, are: Past due under 30 days Past due 30 days to under 60 days Past due 60 days and over Total 2016 $’000 1,594 633 831 3,058 2015 $’000 15 - - 15 In respect of trade and other receivables, the Group is not exposed to any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. Trade receivables consist of a large number of customers in various industries and geographical areas. Based on historical information about customer default rates management consider the credit quality of trade receivables that are not past due or impaired to be good. The credit risk for cash and cash equivalents is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. 35.4 LIQUIDITY RISK ANALYSIS Liquidity risk is the risk that the Group might be unable to meet its obligations. The Group manages its liquidity needs by monitoring scheduled debt servicing payments for long-term financial liabilities as well as forecast cash inflows and outflows due in day-to-day business. The data used for analysing these cash flows is consistent with that used in the contractual maturity analysis below. Liquidity needs are monitored in various time bands, on a day-to-day and week-to-week basis, as well as on the basis of a rolling 30-day projection. Long-term liquidity needs for a 180-day and a 360-day lookout period are identified monthly. Net cash requirements are compared to available borrowing facilities in order to determine headroom or any shortfalls. This analysis shows that available borrowing facilities are expected to be sufficient over the lookout period. The Group’s objective is to maintain cash and marketable securities to meet its liquidity requirements for 30-day periods at a minimum. This objective was met for the reporting periods. Funding for long-term liquidity needs is additionally secured by an adequate amount of committed credit facilities and the ability to sell long-term financial assets. 77 Annual Report 2016 The Group considers expected cash flows from financial assets in assessing and managing liquidity risk, in particular its cash resources and trade receivables. The Group’s existing cash resources and trade receivables significantly exceed the current cash outflow requirements. Cash flows from trade and other receivables are all contractually due within one (1) month. As at 30 June 2016, the Group’s non-derivative financial liabilities have contractual maturities (including interest payments where applicable) as summarised below: Current Non-current Within 6 months $’000 6 - 12 months $’000 1 - 5 years $’000 5+ years $’000 3,919 121 9,491 13,531 - 121 - 121 11,650 262 - 11,912 - - - - 30 June 2016 Other bank borrowings Finance lease obligations Trade and other payables Total This compares to the maturity of the Group’s non-derivative financial liabilities in the previous reporting periods as follows: Current Non-current Within 6 months $’000 6 - 12 months $’000 1 - 5 years $’000 5+ years $’000 113 113 - - - - - - 30 June 2015 Trade and other payables Total The above amounts reflect the contractual undiscounted cash flows, which may differ to the carrying values of the liabilities at the reporting date. 36. FAIR VALUE MEASUREMENT 36.1 FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three (3) levels of a fair value hierarchy. The three (3) levels are defined based on the observability of significant inputs to the measurement, as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities • 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 78 Apiam Animal Health Limited 79 Annual Report 2016The following table shows the levels within the hierarchy of financial assets and liabilities measured at fair value on a recurring basis at 30 June 2016 and 30 June 2015: 30 June 2016 Financial liabilities Contingent consideration Total liabilities Net fair value 30 June 2015 Financial liabilities Total liabilities Net fair value Level 1 $’000 Level 2 $’000 - - - Level 1 $’000 - - - - - Level 2 $’000 - - Level 3 $’000 1,250 1,250 1,250 Level 3 $’000 - - Total $’000 1,250 1,250 1,250 Total $’000 - - Measurement of fair value of financial instruments The Group’s finance team performs valuations of financial items for financial reporting purposes, including Level 3 fair values, in consultation with third party valuation specialists for complex valuations. Valuation techniques are selected based on the characteristics of each instrument, with the overall objective of maximising the use of market-based information. The finance team reports directly to the Chief Financial Officer (CFO) and to the Audit Committee. Valuation processes and fair value changes are discussed among the Audit Committee and the valuation team at least every year, in line with the Group’s reporting dates. The valuation techniques used for instruments categorised in Level 3 are described below: Contingent consideration (Level 3) The fair value of contingent consideration related to the acquisition of business combinations (see Note 31.3 and 32.4) is considered to be face value as the payments become due within the next six (6) months. The following table provides information about the sensitivity of the fair value measurement to changes in the most significant inputs: Significant unobservable input Estimate of the input Sensitivity of the fair value measurement to input Probability of meeting target 100% - 80 Apiam Animal Health Limited Level 3 Fair value measurements The reconciliation of the carrying amounts of financial instruments classified within Level 3 is as follows: Balance at 1 July 2015 Payable business combination Balance at 30 June 2016 Contingent consideration 2016 $’000 - 1,250 1,250 2015 $’000 - - - 37. CAPITAL MANAGEMENT POLICIES AND PROCEDURES The Group’s capital management objectives are: • • to ensure the Group’s ability to continue as a going concern, and to provide an adequate return to shareholders; by pricing products and services commensurately with the level of risk. The Group monitors capital on the basis of the carrying amount of equity less cash and cash equivalents as presented on the face of the statement of financial position. The Group’s goal in capital management is to maintain a maximum gearing ratio of 35% (ratio of debt to equity). This is in line with the Group’s covenants resulting from the banking facilities it has taken out from in December 2015. Management assesses the Group’s capital requirements in order to maintain an efficient overall financing structure while avoiding excessive leverage. This takes into account the subordination levels of the Group’s various classes of debt. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. 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 amounts managed as capital by the Group for the reporting periods under review are summarised as follows: Total equity Cash and cash equivalents Capital Total equity Borrowings Overall financing Capital-to-overall financing ratio 2016 $’000 46,271 2,117 48,388 46,271 16,012 62,283 0.78 2015 $’000 (47) 20 (27) (47) - (47) - The Group has honoured its covenant obligations, including maintaining capital ratios, since the banking loans were taken out in December 2015. 81 Annual Report 2016 38. PARENT ENTITY INFORMATION Information relating to Apiam Animal Health Limited (‘the Parent Entity’): Statement of financial position Current assets Total assets Current liabilities Total liabilities Net assets Issued capital Retained earnings / (Accumulated losses) Total equity Statement of profit or loss and other comprehensive income Profit for the year Other comprehensive income Total comprehensive income 2016 $’000 786 94,116 7,375 18,951 75,165 79,070 (3,905) 75,165 (3,718) - (3,718) 2015 $’000 35 66 113 113 (47) 140 (187) (47) (187) - (187) The Parent Entity has capital commitments of $218,000 to purchase motor vehicles (2015: $Nil). Refer Note 30 for further details of the commitment. The Parent Entity has entered into a deed of cross guarantee. Refer Note 41 for details. The Parent Entity had no contingent liabilities at 30 June 2016 (2015: $Nil). 39. POST-REPORTING DATE EVENTS On 19 August 2016, the Company signed an agreement to acquire 100% of the shares in Quirindi Veterinary Group of companies, comprising Quirindi Veterinary Clinic Pty Ltd, Quirindi Feedlot Services Pty Ltd and Quirindi Equine Centre Pty Ltd (QVG) for $11.57 million. QVG provides veterinary services to large beef production systems throughout Australia through its business unit Quirindi Feedlot Services, provides equine reproduction services at its custom built centre in Quipolly, near Scone in NSW, and runs a livestock and companion animal veterinary practice located in Quirindi. The acquisition will be funded using Apiam’s existing bank facilities. The consideration for the acquisition is a combination of 70% cash and 30% scrip. In line with Apiam’s previous acquisitions, the principals of the business will enter into an employment contract with restraint conditions. Shares issued under the agreement will be subject to escrow. The Group is currently obtaining the information necessary to appropriately consider the identification and fair value of identifiable intangible assets. There are no other matters or circumstances that have arisen since the end of the year that have significantly affected or may significantly affect either: • • • the entity’s operations in future financial years the results of those operations in future financial years; or the entity’s state of affairs in future financial years 82 Apiam Animal Health Limited40. FINANCIAL ASSETS AND LIABILITIES 40.1 CATEGORIES OF FINANCIAL ASSETS AND LIABILITIES Note 4.12 provides a description of each category of financial assets and financial liabilities and the related accounting policies. A description of the Group’s financial instrument risks, including risk management objectives and policies is given in Note 35. The methods used to measure financial assets and liabilities reported at fair value are described in Note 36.1. The carrying amounts of financial assets and financial liabilities in each category are as follows: 30 June 2016 Financial assets Cash and cash equivalents Trade and other receivables * 30 June 2016 Financial liabilities Non-current borrowings Current borrowings Trade and other payables Current tax liabilities Contingent consideration Notes 9 10 Notes 18 18 16 17 20 Financial assets at amortised cost $’000 2,117 13,254 15,371 Other liabilities $’000 (Carried at amortised cost) Total $’000 2,117 13,254 15,371 Total $’000 11,864 11,864 4,148 9,491 1,366 1,250 4,148 9,491 1,366 1,250 28,119 28,119 Notes Financial assets at amortised cost 30 June 2015 Financial assets Cash and cash equivalents Trade and other receivables * 9 10 $’000 20 15 35 * These amounts only represent trade receivables that are financial assets. See Note 10. 30 June 2015 Financial liabilities Trade and other payables Notes Other liabilities $’000 (Carried at amortised cost) 16 113 113 Total $’000 20 15 35 Total $’000 113 113 83 Annual Report 2016 84 Apiam Animal Health Limited40.2 BORROWINGS Borrowings include the following financial liabilities: Financial liabilities Current Non-current Carrying amount at amortised cost: • other bank borrowings (Note 18) • finance lease liabilities (Note 34) All borrowings are denominated in $AUD. 2016 $’000 3,906 242 4,148 2015 $’000 - - - 2016 $’000 11,602 262 11,864 2015 $’000 - - - Borrowings at amortised cost Other bank borrowings are secured by first ranking general security agreements in relation to the current and future assets of Apiam Animal Health Limited and each wholly owned subsidiary. Current interest rates are variable and average 5.4% (2015: Nil%). The carrying amount of the other bank borrowings is considered to be a reasonable approximation of the fair value. 40.3 OTHER FINANCIAL INSTRUMENTS The carrying amount of the following financial assets and liabilities is considered a reasonable approximation of fair value: trade and other receivables • • cash and cash equivalents; and • trade and other payables 41. DEED OF CROSS GUARANTEE The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others: Chris Richards & Associates Pty Ltd Country Vet Wholesaling Pty Ltd Farm Gate Logistics (Qld) Pty Ltd Apiam Management Pty Ltd Southern Cross Feedlot Services Pty Ltd Westvet Wholesale Pty Ltd Pork Storks Australia Pty Ltd McAuliffe Moore & Perry Pty Ltd Warrnambool Veterinary Clinic Pty Ltd Scottsdale Veterinary Services Pty Ltd Smithton Veterinary Service Pty Ltd AAH - Dubbo Vet Hospital Pty Ltd AAH - Bell Vet Services Pty Ltd CVH Gippsland Pty Ltd CVH Southern Riverina Pty Ltd CVH Border Pty Ltd Tasvet Wholesale Pty Ltd By entering into the deed, the wholly-owned entities have been relieved of the requirement to prepare financial statements and a directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. 85 Annual Report 2016 Set out below is a consolidated statement of profit or loss and other comprehensive income of the parties to the Deed. Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2016 Revenue Expenses Changes in inventories Costs of materials Costs of consumables and services Employee benefits expense Listing and acquisition expense Property expenses Freight vehicle and transport expenses Depreciation of property, plant and equipment Other expenses Finance costs Other financial items Profit / (Loss) before income tax Income tax expense Profit / (Loss) for the year Other comprehensive income Other comprehensive income for the period, net of tax Total comprehensive income / (loss) for the period 2016 $’000 51,724 1,725 (28,713) (456) (15,110) (2,026) (1,410) (1,407) (593) (2,345) (434) (7) 948 968 (20) - (20) 2015 $’000 - - - - - - - - - (218) - - (218) 31 (187) - (187) 86 Apiam Animal Health Limited Set out below is a consolidated statement of financial position of the parties to the Deed. Statement of Financial Position as at 30 June 2016 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Property, plant and equipment Financial assets Intangible assets Deferred tax assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Current tax liabilities Provisions Other current liabilities Current liabilities Non-current liabilities Borrowings Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets/(liabilities) Equity Equity attributable to owners of the parent: • share capital • convertible notes • corporate re-organisation reserve • non-controlling interest acquisition reserve • retained earnings/(accumulated losses) Total equity/(deficiency) 2016 $’000 2,009 12,770 10,167 371 25,317 4,479 799 44,702 2,967 52,947 78,264 9,410 4,147 1,357 3,453 1,250 19,617 11,864 266 - 12,130 31,747 46,517 79,070 - (25,642) (6,615) (296) 46,517 2015 $’000 20 15 - - 35 - - - 31 31 66 113 - - - - 113 - - - - 113 (47) - 140 - - (187) (47) 87 Annual Report 2016 DIRECTORS’ DECLARATION 1. In the opinion of the Directors of Apiam Animal Health Limited: a. The consolidated financial statements and notes of Apiam Animal Health Limited are in accordance with the Corporations Act 2001, including i. Giving a true and fair view of its financial position as at 30 June 2016 and of its performance for the financial year ended on that date; and ii. Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and b. There are reasonable grounds to believe that Apiam Animal Health Limited will be able to pay its debts as and when they become due and payable. 2. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer for the financial year ended 30 June 2016. 3. Note 2 confirms that the consolidated financial statements also comply with International Financial Reporting Standards. Signed in accordance with a resolution of the Directors: Dr Christopher Irwin Richards Managing Director Melbourne 25 August 2016 88 Apiam Animal Health Limited 89 Annual Report 2016INDEPENDENT AUDITORS’ REPORT 78 78 The Rialto, Level 30 525 Collins St Melbourne Victoria 3000 Correspondence to: GPO Box 4736 Melbourne Victoria 3001 T +61 3 8320 2222 The Rialto, Level 30 F +61 3 8320 2200 525 Collins St E info.vic@au.gt.com Melbourne Victoria 3000 W www.grantthornton.com.au Correspondence to: GPO Box 4736 Melbourne Victoria 3001 Independent Auditor’s Report To the Members of Apiam Animal Health Limited Report on the financial report T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com We have audited the accompanying financial report of Apiam Animal Health Limited (the W www.grantthornton.com.au “Company”), which comprises the consolidated statement of financial position as at 30 June Independent Auditor’s Report 2016, the consolidated statement of profit or loss and other comprehensive income, To the Members of Apiam Animal Health Limited consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and Report on the financial report other explanatory information and the Directors’ declaration of the consolidated entity We have audited the accompanying financial report of Apiam Animal Health Limited (the comprising the Company and the entities it controlled at year end or from time to time “Company”), which comprises the consolidated statement of financial position as at 30 June during the financial year. 2016, the consolidated statement of profit or loss and other comprehensive income, Directors’ responsibility for the financial report consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and The Directors of the Company are responsible for the preparation of the financial report other explanatory information and the Directors’ declaration of the consolidated entity that gives a true and fair view in accordance with Australian Accounting Standards and the comprising the Company and the entities it controlled at year end or from time to time Corporations Act 2001. The Directors’ responsibility also includes such internal control as during the financial year. the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or Directors’ responsibility for the financial report error. The Directors also state, in the notes to the financial report, in accordance with The Directors of the Company are responsible for the preparation of the financial report Accounting Standard AASB 101 Presentation of Financial Statements, the financial that gives a true and fair view in accordance with Australian Accounting Standards and the statements comply with International Financial Reporting Standards. Corporations Act 2001. The Directors’ responsibility also includes such internal control as Auditor’s responsibility the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or Our responsibility is to express an opinion on the financial report based on our audit. We error. The Directors also state, in the notes to the financial report, in accordance with conducted our audit in accordance with Australian Auditing Standards. Those standards Accounting Standard AASB 101 Presentation of Financial Statements, the financial require us to comply with relevant ethical requirements relating to audit engagements and statements comply with International Financial Reporting Standards. plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. Auditor’s responsibility An audit involves performing procedures to obtain audit evidence about the amounts and Our responsibility is to express an opinion on the financial report based on our audit. We disclosures in the financial report. The procedures selected depend on the auditor’s conducted our audit in accordance with Australian Auditing Standards. Those standards judgement, including the assessment of the risks of material misstatement of the financial require us to comply with relevant ethical requirements relating to audit engagements and report, whether due to fraud or error. plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. Grant Thornton Audit Pty Ltd ACN 130 913 594 An audit involves performing procedures to obtain audit evidence about the amounts and a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 disclosures in the financial report. The procedures selected depend on the auditor’s ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm judgement, including the assessment of the risks of material misstatement of the financial is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its report, whether due to fraud or error. Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies. 90 Apiam Animal Health Limited 79 In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation of the financial report that gives a true and fair view 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 Company’s internal control. 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. Auditor’s opinion In our opinion: a the financial report of Apiam Animal Health 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 the notes to the financial statements. Report on the remuneration report We have audited the remuneration report included in pages 11 to 16 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. Auditor’s opinion on the remuneration report In our opinion, the remuneration report of Apiam Animal Health Limited for the year ended 30 June 2016, complies with section 300A of the Corporations Act 2001. GRANT THORNTON AUDIT PTY LTD Chartered Accountants Adam Pitts Partner - Audit & Assurance Melbourne, 25 August 2016 91 Annual Report 201604 Corporate Governance Statement 92 Apiam Animal Health LimitedCORPORATE GOVERNANCE STATEMENT FOR THE YEAR ENDED 30 JUNE 2016 The Board is committed to achieving and demonstrating the highest standards of corporate governance. As such, Apiam Animal Health Limited and its controlled entities (‘Apiam’ or the Group’) have considered the third edition of the ASX Corporate Governance Principles and Recommendations which was released by the ASX Corporate Governance Council on 27 March 2014 and became effective for financial years beginning on or after 1 July 2014. The Company has followed all recommendations where they are deemed to be an appropriate benchmark for the Company’s corporate governance practices. Where, after due consideration, the Company’s corporate governance practices depart from a recommendation, the Board has offered full disclosure and reason for adoption of its own practice, in compliance with the “if not, why not” regime. This Corporate Governance Statement explains the Apiam’s conformance with the ‘Corporate Governance Principles and Recommendations’ issued by the Australian Securities Exchange (ASX). PRINCIPLE 1 - LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT RECOMMENDATION 1.1: A listed entity should disclose: ‹ the respective roles and responsibilities of its board and management; and those matters expressly reserved to the board and those delegated to management. ‹ The Board acts on behalf of shareholders and is accountable to shareholders for the overall direction, management and corporate governance of the Company. The Apiam Board Charter formally defines the role and responsibilities of the Board. The Board is responsible for: • providing leadership and setting the strategic direction of the Company; • reviewing on an ongoing basis how the Company’s strategic environment is changing, what key risks and opportunities are appearing, how they are being managed and what, if any, modifications in strategic direction should be adopted; • Approval of the strategic plan and budget annually; • Monitoring and assessing management’s performance against approved strategies and budgets; • Appointment and removal of the Managing Director and determination of the Managing’s terms and conditions including remuneration subject to shareholder approval if required by the Corporations Act or the ASX Listing Rules; • Setting the criteria and evaluating each year the performance of the Managing Director; • Approval, on the recommendation of the Managing Director, of the appointment and remuneration of the direct reports to the Managing Director; • appointing and when necessary removing the: • • the chairperson of the Board (Chair); the company secretary (Company Secretary); • approving and monitoring the acquisition, establishment, disposal or cessation of any significant business or significant changes to organisational structures; • approving and monitoring progress of major capital expenditure; • determining the Company’s dividend policy (if any) and overseeing the financing of dividend payments (if any); • monitoring the integrity of the Company’s accounting and corporate reporting systems, including the external audit; • monitoring the Company’s process for making timely and balanced disclosure of all material information concerning the Company that a reasonable person would expect to have a material effect on the price or value of its securities; • ensuring that the Company has in place an appropriate risk management framework; • setting the risk appetite within which the Board expects Management to operate; • approving the Company’s remuneration framework; • monitoring the effectiveness of the Company’s governance practises; 93 Annual Report 2016• monitoring and managing the performance of Senior Executives; • ensuring that appropriate resources are available to Senior Executives; • approving and managing succession plans for Senior Executives and other key management positions that may be identified from time to time; • reviewing and monitoring any related party transactions; and • monitoring the Company’s operations in relation to, and in compliance with, relevant regulatory and legal requirements. Role and responsibility of senior management • Apiam has a Managing Director (MD). Responsibility for day to day management and administration of the Company is delegated by the Board to the MD and the Company’s other Senior Executives. • The MD manages the Company in accordance with the strategy, plans and policies approved by the Board. • The responsibilities of the MD include: i. developing and recommending to the Board strategies, business plans and annual budgets for the Company; ii. implementing the strategies, business plans and budgets adopted by the Board; iii. providing effective leadership, direction and supervision of the Senior Executive team to achieve the strategies, business plans and budgets adopted by the Board; iv. managing resources within budgets approved by the Board; v. ensuring compliance with applicable laws and regulations; and vi. ensuring the Board is given sufficient information to enable it to perform its functions, set strategies and monitor performance. • The Board has in place procedures to assess the performance of the MD and Senior Executives. RECOMMENDATION 1.2: A listed entity should: ‹ undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and ‹ provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director. The Board Charter requires the Directors to undertake appropriate checks before appointing a person or putting forward a person for nomination as a director. RECOMMENDATION 1.3: A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. Each Director and senior executive is appointed under a written agreement setting out the terms of their appointment. RECOMMENDATION 1.4: The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. The role of the Company Secretary includes: i. advising the Board and its committees (as established from time to time) on governance matters; ii. monitoring that Board and committee policy and procedures are followed; iii. coordinating the timely completion and despatch of board and committee papers; iv. ensuring that the business at Board and committee meetings is accurately captured in the minutes; and v. helping to organise and facilitate the induction and professional development of directors. Each director should be able to communicate directly with the Company Secretary and vice versa. The Company Secretary is accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board. The Company Secretary is accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board. 94 Apiam Animal Health LimitedRECOMMENDATION 1.5: A listed entity should: RECOMMENDATION 1.6: A listed entity should: ‹ have a diversity policy which includes requirements for the board or a relevant committee of the board to set measureable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them; ‹ disclose that policy or a summary of it; and ‹ have and disclose a process for periodically evaluating the performance of the board, its committees and individual directors; and ‹ disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. ‹ disclose as at the end of each reporting period At the end of each annual reporting period, the Board will: the measureable objectives for achieving gender diversity set by the board in accordance with the entity’s diversity policy and its progress towards achieving the respective proportions of men and women on the board, in senior executive positions and across the whole organisation. Apiam’s Diversity Policy supports the company’s commitment to ensuring an inclusive workplace that encourages and embraces diversity. Diversity includes, but is not limited to, gender, age, ethnicity and cultural background. The Company is an equal opportunity employer and respects and welcomes people from all backgrounds. The Company’s diversity and inclusion principles are to ensure: • all employees are treated fairly and with respect; • the ability to contribute and access career development opportunities is based solely on merit; individual differences are embraced in the workplace; the workplace is free from discriminatory behaviours and practices; • • • equitable frameworks and policies, practices and processes limit the potential for biases; there is awareness of the different needs and circumstances of employees; and there is provision for flexible work arrangements. • • The Company and its Board recognise that gender diversity: • broadens the pool of high-quality directors and • • • employees; is likely to support employee retention; is likely to encourage greater innovation by drawing on different perspectives; is a socially and economically responsible governance practice; and • will improve the Company’s corporate reputation. As at 30 June 2016 women employees represented approximately 63% of the total workforce of 327. There are currently 4 women filling 50% of the 8 senior executive positions. • conduct a self-evaluation of its performance against this Charter; • review this Charter and recommend any changes or improvements if necessary; and • disclose in the Company’s annual report: a. the details and results of any performance evaluations that were undertaken by the Board during the period, including: b. c. d. • any insights gained from those evaluations; and • any resulting governance changes that will be implemented; the length of service of each director; the names of the directors considered by the Board to be independent directors; and if a director has an interest, position, association or relationship of a type which might be perceived as impacting upon their independence, but the Board is of the opinion that it does not compromise the independence of the director: • the nature of the interest position association or relationship in question; and • an explanation of why the Board is of that opinion. RECOMMENDATION 1.7: A listed entity should: ‹ have and disclose a process for periodically evaluating the performance of its senior executives; and ‹ disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. Refer to the Remuneration Report in the Report of the Directors. An evaluation of the performance of senior executives was undertaken during the year in accordance with the process determined by the Board. 95 Annual Report 2016PRINCIPLE 2 – STRUCTURE THE BOARD TO ADD VALUE RECOMMENDATION 2.1: The board of a listed entity should: ‹ have a nomination committee. ‹ If it does not have a nomination committee, disclose this fact, and the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. Apiam does not have a separate nomination committee. The board considers that the nomination function is effectively managed by all directors. In relation to its nomination function, the Board Charter specifically requires the board to: • assess the competencies required to discharge competently the Board’s duties having regard to the Company’s performance, financial position and strategic direction; • develop and disclose to shareholders a Board skills matrix setting out the mix of competencies, experience and diversity that the Board currently has or is looking to achieve in its membership; • establish a process for identifying suitable candidates for appointment to the Board, including the MD, having regard to the competencies required and the competencies already represented on the Board; • undertake appropriate checks before a candidate is appointed or put forward to shareholders for election as a director; • ensure that all information necessary to make an informed decision is provided to shareholders in relation to a proposed candidate for election as a director; • develop and implement an induction program for all new directors and committee members which contains all such information and advice that may be considered necessary or desirable, including information regarding: the Company’s operations and the industry sectors i. in which it operates; the Company’s financial, strategic, operational and risk management position; ii. iii. governance matters, policies and procedures; and the director or committee member’s rights, duties iv. and responsibilities; • ensure that the Company provides each director and senior executive with a written agreement setting out the terms of his or her employment; • • regularly assess the independence of directors and report its findings to the Board; review the time commitments required from non- executive directors and whether the existing non- executive directors are meeting that requirement; • plan for Board succession generally; and • implement plans regarding the succession of the MD, executive directors and other senior management of the Company, including in regard to maintaining the required mix of competencies, experience and diversity. RECOMMENDATION 2.2: A listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership. The Apiam Board is well balanced, comprising directors who are proficient in all of Apiam’s activities with an appropriate range of skills, experience and expertise to complement the business, who have a proper understanding of and are competent to deal with current and emerging issues relevant to the veterinary and animal health industry and who can effectively review and challenge the performance of management and exercise independent judgement. Refer to the Report of the Directors for details of directors’ skills, experience and expertise. RECOMMENDATION 2.3 & 2.4: A listed entity should disclose: ‹ the names of the directors considered by the board to be independent directors and their length of service; ‹ a majority of the board of a listed entity should be independent directors. Apiam presently has four non-executive directors, all of whom are considered by the Board to be independent, and one executive director. Non-Executive Directors Professor Andrew Vizard (Chairman) – Independent Mr Richard Dennis – Independent Mr Charles Sitch – Independent Mr Michael van Blommestein – Independent Executive Directors Dr Christopher Richards (Managing Director) – Not independent Refer to the Report of Directors for information in relation to Director’s length of service. Directors are expected to comply with their legal, statutory and equitable duties when discharging their responsibilities as directors. Broadly, these are duties to: • Act in good faith and in the best interests of Apiam as a whole; • Act with care and diligence; • Act for proper purposes; • Avoid a conflict of interest or duty; and 96 Apiam Animal Health Limited • Refrain from making improper use of information gained through the position of director and taking improper advantage of the position of director. Directors may access information and seek independent advice that they consider necessary to fulfil their responsibilities and to exercise independent judgement in decision making. In respect of conflicts: • Directors are required to act in a manner which is consistent with the best interests of the Company as a whole, free of any actual or possible conflicts of interest. • Directors must: i. disclose to the Board any actual or potential conflict ii. of interest or duty, or matter that might reasonably be thought to exist as soon as the situation arises; take all necessary and reasonable action to resolve or avoid any actual or potential conflict of interest or duty; and iii. comply with all applicable law and the Constitution in relation to disclosing material personal interests and restrictions on voting. • If a conflict exists, it is expected that any director to whom the conflict relates will leave the room when the Board is discussing any matter to which the conflict relates. RECOMMENDATION 2.6: The company should have a program for inducting new directors and provide professional development opportunities for directors. New Board members are offered induction programs to allow them to fully and actively participate in decision making at the earliest opportunity. The induction programs are designed to ensure that any new director has a comprehensive knowledge of Apiam, the industry and the market in which it operates. Directors and key executives are encouraged to continually update and enhance their skills and knowledge. Directors and key executives are encouraged to become members of relevant industry groups and professional organisations and to update and enhance their skills and knowledge through appropriate education and training courses. PRINCIPLE 3 – PROMOTE ETHICAL AND RESPONSIBLE DECISION MAKING RECOMMENDATION 3.1: • Directors are expected to inform the Chair of any A listed entity should: proposed appointment to the board or executive of another company as soon as practicable. • No director will participate in the determination of their own remuneration. • No director will participate in the review of their own performance. • No director will be present for discussions at a Board meeting on, or vote on a matter , his or her election, re- election, or removal. RECOMMENDATION 2.5: The chair of the board should be an independent director and the roles of chairperson and chief executive officer should not be exercised by the same individual. Apiam’s Chairman, Professor Andrew Vizard, is considered by the board to be an independent director. The roles of chairperson and managing director are exercised by Professor Andrew Vizard and Dr Christopher Richards respectively. ‹ have a code of conduct for its directors, senior executives and employees; and ‹ disclose that code or a summary of it. Apiam recognises the need for directors and employees to observe the highest standards of behaviour and business ethics when engaging in corporate activity. Apiam intends to maintain a reputation for integrity. The Board has adopted a Code of Conduct which sets out the principles and standards with which all officers and employees are expected to comply in the performance of their respective functions in respect of responsibilities to shareholders, customers, clients, consumers and the community. The Code also sets guidelines in respect of employment practices, fair trading and dealing as well as conflicts of interest. A key element of that Code is the requirement that officers and employees act in accordance with the law and with the highest standards of propriety. The Code and its implementation are reviewed each year. The Apiam Code of Conduct is displayed on the company’s website. 97 Annual Report 2016PRINCIPLE 4 – SAFEGUARD INTEGRITY IN FINANCIAL REPORTING RECOMMENDATION 4.1: The board of a listed entity should: i. have an audit committee which: * has at least three members, all of whom are non-executive directors and a majority of whom are independent directors; and is chaired by an independent director who is not the chair of the board * ii. and disclose: * the charter of the committee; * the relevant qualifications and experience of the members of the committee; and * the number of times the committee met throughout the period and the individual attendances of the members at those meetings. At the date of this report the members of the Apiam Audit and Risk Management Committee are Messrs. Richard Dennis (Chairman), Andrew Vizard, and Charles Sitch. All members are independent non-executive directors. Details of attendances by directors are to be found in the Report of the Directors. The members of the Committee are well qualified to perform their duties as set out in the Charter with strong financial, legal and industry expertise. The external auditor met with the Audit and Risk Management Committee three times during the year without management being present. The charter of the Apiam Audit and Risk Management Committee clearly sets out the Committee’s role and responsibilities, composition, structure and membership requirements. The Audit and Risk Management Committee has the right to access management and seek independent professional advice in accordance with the Board Charter. The primary function of the Committee is to assist the Board in fulfilling its corporate governance and oversight responsibilities in relation to: a. the adequacy and integrity of financial reporting; b. the application of appropriate accounting policies; c. legal and regulatory compliance; d. internal control and risk management systems; and e. monitoring the effectiveness of audit functions. RECOMMENDATION 4.2: The board should, before it approves the entity’s financial statements for a financial period, receive from the chief executive officer and the chief financial officer a declaration that, in their opinion, the financial records of the entity for a financial year have been properly maintained in accordance with the Corporations Act and that the financial statements and notes for the financial year comply with the accounting standards and give a true and fair view of the financial position and performance of the entity. The declaration must be given before the directors approve the financial statements for the financial year. In accordance with the section 295 of the Corporations Act, the Managing Director and Chief Financial Officer of Apiam are required to declare in writing to the Board under section 295A(2) of the Act that in their opinion: • Apiam’s financial records have been properly maintained in accordance with section 286 of the Act; and • consolidated financial statements and associated notes required by the relevant accounting standards present a true and fair view of the Company’s financial condition and operational results and comply with relevant accounting standards. The declaration is also underpinned by representations from executive management and relevant accounting officers. The declaration by the Managing Director and Chief Financial Officer also confirms the existence of a sound system of risk management and internal compliance and control which implements the policies adopted by the Board and that Apiam’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects in relation to financial reporting risks. RECOMMENDATION 4.3: Ensure the external auditor attends the Annual General Meeting and is available to answer questions from security holders. The external auditor attends the Annual General Meeting and is available to answer questions from security holders. 98 Apiam Animal Health Limited PRINCIPLE 5 – PROVIDE TIMELY AND BALANCED DISCLOSURE OF ALL MATERIAL MATTERS CONCERNING THE COMPANY RECOMMENDATION 5.1: A listed entity should: ‹ have a written policy for complying with its continuous disclosure obligations under the Listing Rules; and ‹ disclose that policy or a summary of it. Apiam has adopted a Continuous Disclosure Policy. A copy of the Policy is available on the Company’s website. The Board bears the primary responsibility for ensuring the Company’s compliance with its disclosure obligations and is therefore responsible for overseeing and implementing this Policy. The ultimate decision on whether material information needs to be disclosed to the ASX or otherwise rests with the Board. The Company Secretary is responsible for day-to-day compliance with the Company’s continuous disclosure obligations, including: i. communicating with ASX in relation to Listing Rule matters including lodging disclosures with ASX; ii. overseeing and coordinating disclosure of information to ASX, analysts, brokers, shareholders, the media and the public; iii. making recommendations to the Board as to whether disclosure is required; iv. coordination, preparing and approving all media releases by the Company (not including paid advertising); and v. ensuring all announcements and investor presentations are made publically available on the Company’s website. Unless otherwise advised, the nominated Company spokespersons are: the Managing Director; the Company Secretary; and i. ii. iii. the Chairperson. The spokespersons are entitled to clarify information publicly released through ASX, but they should not add or reveal material price sensitive matters. The Managing Director should be kept advised of all discussions with the media and consulted in relation to any significant briefings or disclosures. PRINCIPLE 6 – RESPECT THE RIGHTS OF SHAREHOLDERS RECOMMENDATION 6.1: A listed entity should provide information about itself and its governance to investors via its website. The Apiam website provides to shareholders and other stakeholders the facility to read and download annual reports, ASX announcements and corporate governance policies and procedures. RECOMMENDATION 6.2: A listed entity should design and implement, an investor relations program to facilitate effective two-way communication with investors. The Company respects the rights of shareholders and seeks to facilitate the effective exercise of those rights. The Company does this by communicating effectively with shareholders, giving shareholders ready access to balanced and understandable information about the Company and corporate records and making it easy for shareholders to participate in general meetings. RECOMMENDATION 6.3: A listed entity should disclose the policies and procedures it has in place to facilitate and encourage participation at meetings of shareholders. Notices of meeting are drafted in plain English to be easy and clear to understand. They are honest, accurate and not misleading. Meetings are held during normal business hours and at a place convenient for the greatest possible number of shareholders to attend. 99 Annual Report 2016 RECOMMENDATION 6.4: RECOMMENDATION 7.2: A listed entity should give shareholders the option to receive communications from, and send communications to, the entity and its security registry electronically. The Company publishes all ASX announcements on the Apiam website, and also sends information to shareholders by mail or e-mail (where nominated). The Apiam website contains important information on the Company which is of use to shareholders in obtaining a greater understanding of the Company. PRINCIPLE 7 – RECOGNISE AND MANAGE RISK RECOMMENDATION 7.1: The board of a listed entity should: ‹ have a committee to oversee risk, which has at least three members and is chaired by an independent director; and disclose ‹ the charter of the committee, the members of the committee and as at the end of the period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings. The Board is responsible for reviewing and ratifying systems of risk management and internal compliance and control. The Board has delegated to the Audit and Risk Management Committee the responsibility for establishment of policies on risk oversight and management. Specifically, the Audit and Risk Management Committee has responsibility to: • • • • • to ensure that the Company has implemented a sound risk management framework and appropriate internal control systems; to review at least annually the effectiveness of the Company’s risk management and internal control systems and make relevant recommendations to the Board; to monitor compliance with regulatory requirements under the ASX Listing Rules, the Corporations Act 2001 (Cth) and any other relevant guidelines; to monitor the Company’s exposure to economic, environmental and social sustainability risks, and make recommendations to the Board as to how those risks should be managed; to make recommendations to the Board in relation to the Company’s insurance program, having regard to the Company’s business and the insurable risks associated with it; and • any other responsibilities as determined by the Committee or the Board from time to time. Further information is provided at Recommendation 4.1. The board or a committee of the board should: ‹ review the entity’s risk management framework at least annually to satisfy itself that continues to be sound; and ‹ disclose, in relation to each reporting period, whether such a review has taken place. Management has established and implemented the risk management system for assessing, monitoring and managing material business risks, including sustainability risk. Management reports to the Audit and Risk Management Committee outlining the material business risks to the Company and reports on the status of the risks and effectiveness of controls through integrated risk management programs aimed at ensuring risks are identified, assessed and properly managed. Each business operational unit is responsible and accountable for implementing and managing the standards required by the program. During the period, the Audit & Risk Management Committee commenced a review of the adequacy of the risk management framework and is to be completed in the following period. RECOMMENDATION 7.3: Disclose if the Company has an internal audit function, how it is structured and what role it performs: The Audit & Risk Management Committee recognises the benefit of an internal audit function to assist in identifying risks and monitor the effectiveness of internal controls. It intends to consider the engagement of external providers to assist in developing an internal audit program based on risks identified from the risk management system and to conduct internal audit activities in conjunction with company personnel. RECOMMENDATION 7.4: Disclose whether the Company has material exposure to economic, environmental and social sustainability risks and, if it does, how it intends to manage those risks. The Company does not believe its business operations have a material exposure to social sustainability risks. The Company believes its diversified product range and operations do not result in a material economic risk to the Company. 100 Apiam Animal Health LimitedPRINCIPLE 8 – REMUNERATE FAIRLY AND RESPONSIBLY RECOMMENDATION 8.1: The board should establish a remuneration committee which: ‹ consists of a majority of independent directors; ‹ is chaired by an independent chair; and ‹ has at least three members. The Apiam Remuneration consists of a majority of independent directors, is chaired by an independent chairperson and has at least three members. At the date of this report the members of the Apiam Remuneration Committee are Messrs. Michael van Blommestein (Chairman), Andrew Vizard and Charles Sitch Refer to the Report of the Directors for the number of meetings held during the period and member attendances. The purpose of the Committee is to assist the Board by reviewing and making recommendations to the Board in relation to: a. the Company’s remuneration policy, including as it applies to Directors and the process by which any pool of Directors’ fees approved by shareholders is allocated to Directors; b. remuneration packages of senior executives, non-executive Directors and executive Directors, equity-based incentive plans and other employee benefit programs; c. the Company’s superannuation arrangements; d. the process for the evaluation of the performance of the Board, its Board Committees and individual Directors; e. the review of the performance of senior executives and members of the Board, which should take place at least annually; and f. those aspects of the Company’s remuneration policies and packages, including equity-based incentives, which should be subject to shareholder approval. RECOMMENDATION 8.2: Disclose the policies regarding the remuneration of Directors and senior executives. Clearly distinguish the structure of non-executive directors’ remuneration from that of senior executives. Non-executive directors receive a fixed fee, no termination benefits, and no incentives. Fees paid to non-executive directors are benchmarked against similar sized companies operating in similar industries. Non-executive directors are not entitled to participate in any executive option or executive share scheme. The aggregate amount of directors’ fees payable to non-executive directors must not exceed the maximum amount permitted under the Apiam Constitution of $750,000. Executive directors have access to salary, termination benefits, superannuation benefits and a vehicle allowance. Executive directors have no access to short term and long term incentives. The letters of appointment for directors clearly set out all relevant entitlements as applicable to executive and non-executive directors. The level of remuneration paid to executive directors, non-executive directors and key management personnel is set out in the Remuneration Report. RECOMMENDATION 8.3: Disclose any policy regarding the ability of executives participating in equity-based remuneration to limit the economic risk of participating in the scheme. Refer to the Remuneration Report in the Report of the Directors in relation to equity based remuneration. 101 Annual Report 2016 ASX SHAREHOLDER INFORMATION Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. The information is effective as at 16 August 2016. SUBSTANTIAL SHAREHOLDERS The number of substantial shareholders and their associates are set out below: Shareholder Number Percentage Mr Christopher Irwin Richards HSBC Custody Nominees (Australia) Limited National Nominees Limited 26,852,304 6,674,728 6,070,576 27.27 6.78 6.16 VOTING RIGHTS 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. DISTRIBUTION OF EQUITY SECURITY HOLDERS Holding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,000 and over No. of holders 94 237 224 280 30 865 HOLDERS OF LESS THAN A MARKETABLE PARCEL OF ORDINARY SHARES There were no holders of less than a marketable parcel of ordinary shares. 102 Apiam Animal Health Limited TWENTY (20) LARGEST SHAREHOLDERS Shareholder Ordinary shares Number of shares held Percentage (%) of issued shares Mr Christopher Irwin Richards 26,852,304 27.27 HSBC Custody Nominees (Australia) Limited National Nominees Limited J P Morgan Nominees Limited Cobash Pty Ltd National Nominees Ltd BNP Paribas Noms Pty Ltd UBS Nominees Pty Ltd Ms KJ Malin BNP Paribas Nominees Pty Ltd Jupiter Forge Pty Limited Four Post Investments Pty Ltd Mr RC Carmody & Mrs MM Carmody Mr NL Leighton Sonjaswright Pty Limited Mr Craig James Dwyer Mr KF Sullivan & Mrs JM Sullivan Tocamac Pty Ltd Cindy Jane Pty Ltd RBC Investor Services Australia Nominees Pty Limited UNISSUED EQUITY SECURITIES There are no unissued equity securities. SECURITIES EXCHANGE The Company is listed on the Australian Securities Exchange. 6,674,728 6,070,576 4,829,313 3,834,158 2,849,211 2,668,332 2,098,275 1,724,700 1,710,055 1,419,505 1,386,700 1,333,650 1,244,131 1,200,000 1,104,321 1,010,000 986,700 933,753 923,887 6.78 6.16 4.90 3.89 2.89 2.71 2.13 1.75 1.74 1.44 1.41 1.35 1.26 1.22 1.12 1.03 1.00 0.95 0.94 70,854,299 71.95 103 Annual Report 2016 104 Apiam Animal Health Limited

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