ELMO Soft ware Limited ACN 102 455 087 ANNUAL REPORT 2017 1 2017 Highlights $19.1m SaaS revenue run rate $17.0m FY17 pro forma revenue 92.3% Customer retenti on rate5 Refl ecti ng 89% of forecast FY18 pro forma SaaS revenue2 Up 4% on prospectus forecast1 $1.2m FY17 pro forma EBITDA Up 42% on prospectus forecast1 524 Customer base3 Up 11% since 31 December 2016 2.29 Modules per customer Up from 2.22 since June 30 20164 Over 37,000 Hours <2.9% of FY17 revenue (SaaS) <16% of FY17 revenue (SaaS) Focused on Research & Development Contributed by largest customer Contributed by top 10 customers AGM Details ELMO Soft ware Limited (ELMO) advises that it will hold its 2017 Annual General Meeti ng on Tuesday, 28 November 2017 at 2.30pm (Australian Eastern Daylight Time) at the offi ces of Norton Rose Fulbright, Level 18, Grosvenor Place, 225 George Street, Sydney. Contents IFC 2017 Highlights 02 Financial snapshot 04 Chairman’s lett er 06 CEO’s message 08 Company history 10 Product and soluti on 11 Soluti on off ering details 13 Industry partnerships 14 ELMO growth strategy 17 Business model 20 Operati ng and fi nancial review 22 Risk management 24 Environment, social and governance 26 Board of Directors 28 Key Management Team 30 Directors’ report 41 Auditor’s independence declarati on 42 Financial report 46 Notes to the fi nancial statements 69 Independent auditor’s report 78 Glossary IBC Corporate directory June 2017 SaaS revenue annualised 1. Vs. pro forma FY17 forecast as per IPO Prospectus on a like-for-like basis 2. 3. As at 30 June 2017 4. Excludes Techni Works 5. Customer retenti on is calculated by dividing the number of customers in the reference period who were customers at the end of the prior period by the number of customers at the end of the prior period E LMO Software Limi ted | Annual Report 2017 E LMO Software Limi ted | Annual Report 2017 ELMO operates in the Human Capital Management (HCM) soft ware market. HCM soft ware soluti ons are used to support and automate HR related processes at various stages of an employee’s lifecycle, including recruitment, onboarding, performance management, learning and development, succession planning and employee administrati on. 1 Financial snapshot ELMO has achieved a successful FY17 with 31% SaaS revenue growth (excluding Techni Works) from the previous year culminati ng in the capital raising through the IPO in June 2017. There is strong revenue visibility with long term contracts paid annually in advance, a signifi cant cash positi on from the IPO, high operati ng cash fl ow and a strong ongoing positi ve working capital positi on. Strong revenue visibility with 93% recurring revenue and typical contract length of 3 years Positi ve working capital Customers pay annual license fees in advance – contributi ng to positi ve working capital positi on throughout the year Strong balance sheet and no debt $26.6m Strong cash positi on as at 30 June 2017 PRO FORMA HISTORICAL AND FORECAST REVENUE ($M) PRO FORMA EBITDA VS. OPERATING CASH FLOW ($M) SaaS revenue Other revenue 9.9 1.0 9.0 7.3 0.2 7.1 FY14 FY15 Recurring revenue 97% SaaS revenue growth 90% 37% 13.5 0.9 12.6 FY16 93% 50% 22.4 0.9 21.5 17.0 1.2 15.7 EBITDA Operating Cash Flow 6.1 2.4 2.3 0.9 1.1 3.1 2.7 1.6 2.0 1.2 FY17 FY18F FY14 FY15 FY16 FY17 FY18F 93% 31% 96% 40% 253% 218% 195% 165% 227% Operating cash flow conversion2 2 ELMO Software Limited | Annual Report 2017 2017 Scorecard New product off erings Technology enhancements Acquisiti on HR Core & Succession modules 128 product enhancements Techni Works New Zealand Workforce Established New Zealand offi ce to support operati ons 106 employeess Listed on the ASX on 27 June 2017 Raised $25m in new equiti y 3 Chairman’s lett er “FY17 was a strong and producti ve year for ELMO. We delivered on our prospectus forecasts and executed on our growth strategies.“ Dear Shareholder, On behalf of the Directors, it is my pleasure to present to shareholders ELMO’s maiden FY17 full year results and Annual Report as a public listed company. ELMO is a leading provider of Soft ware- as-a-Service (SaaS), cloud-based talent management soft ware soluti ons in Australia and New Zealand. The Company develops, sells and implements talent management soft ware soluti ons that enable organisati ons to automate many of the Human Management Capital (HCM) processes and functi ons to effi ciently manage the various stages of an employee’s lifecycle from “hire to reti re”. ELMO currently off ers seven diff erent modules covering recruitment, onboarding, performance management, learning and development, pre-built courses, succession planning and employee administrati on. FY17 was a transformati ve year for ELMO. In June 2017 we listed on the ASX and stepped into public company life. Our fi rst result delivered on our prospectus forecasts and in the ti me leading up to the fl oat, and in the period since we have put in place strong foundati ons for future growth. The highlights include: – – Successful listi ng on ASX, raising $25m of new equity to fund our growth plans Reported pro forma EBITDA of $1.2m, 42% ahead of prospectus forecast – Grew pro forma SaaS based subscripti on revenues by 26% year on year, 4% ahead of prospectus forecasts – – – Increased our customer base to 524 organisati ons, up 46% since 30 June 2016 Launched new product off erings including HR Core and Succession Improved the average module purchased per customer to 2.29, up from 2.22 since 30 June 2016 During the fi nancial year ELMO acquired and integrated Techni Works Pty Limited into its business, acquiring 82 new customers, taking ELMO‘s total customer base to 524 organisati ons. In additi on, ELMO eff ecti vely delivered the identi fi ed acquisiti on synergies through operati onal effi ciencies and cross selling into the acquired customer base. New Zealand conti nued to make a positi ve contributi on to the Group with the Company’s New Zealand customer base increasing 41% since 31 Dec 2016 while revenues increased by 264% compared to the full year 2016. Outlook The mid-market conti nues its trend towards HR automati on with the majority of mid- market businesses not yet taking advantage of a single integrated platf orm soluti on which gives rise to new customer opportuniti es for ELMO. The HCM market is fragmented with many single soluti on vendors with inherent competi ti ve disadvantages as customers trend towards a single integrated platf orm such as ELMO. This provides the opportunity for your Company to gain further market share through both organic and inorganic growth. In parti cular, the Company has a multi -pillar growth strategy based on: – – – – – the upsell of further modules to existi ng customers ongoing growth in new customers new product development to expand the existi ng platf orm additi onal bolt-on acquisiti ons geographic expansion Each of these pillars has its own executi on strategy and the board and management are monitoring closely the value of the opportunity that arises in each area. We are pleased to reaffi rm our FY18 prospectus forecasts. Based on the run rate of recurring SaaS revenue in June 2017 we have already achieved 89% of forecast revenue for FY18. Thanks ELMO is led by a highly regarded and experienced management team that has a track record of achieving signifi cant revenue growth and delivering on targets. I would like to thank Danny Lessem, Co-Founder and CEO for his talented and dedicated leadership, Trever Lonstein, CFO and executi ve director; and my fellow Non-Executi ve board member David Hancock for his experti se, skill and support. I would also like to thank all of the people at ELMO for their dedicated eff orts in delivering these results. I know you are extremely capable and deeply committ ed to delivering the best outcomes for customers. On behalf of the Board, I thank you for your support as a shareholder and look forward to sharing the future Company success with you. Yours sincerely, Jim McKerlie Chairman 4 ELMO Software Limited | Annual Report 2017 FY17 was a transformative year for ELMO. In June 2017 we listed on the ASX and stepped into public company life. Our first result delivered on our prospectus forecasts and in the time leading up to the float, and in the period since we have put in place strong foundations for future growth. 5 CEO’s message Dear Shareholder, In FY17 ELMO conti nued to make good progress in executi ng on its growth strategies, listed on the ASX and delivered on market expectati ons. We are building a larger, stronger and more diversifi ed ELMO and we look forward to another year of signifi cant revenue and profi t growth in FY18 as we deliver on prospectus forecasts. In FY17, ELMO delivered – – – – – – $17.0 million of pro forma revenues with SaaS revenue growth of 31%, excluding Techni Works 93% recurring revenue and a 92% customer retenti on rate $1.2m pro forma EBITDA while increasing investment by 32% to drive further growth Successful integrati on and achievement of the full synergies of the Techni Works acquisiti on Pro forma cash receipts of over 112% of pro forma revenues Listed on ASX on 27 June 2017, with an issue price at $2.00 per share ELMO was founded in 2002 as an eLearning platf orm focused on providing employee development content and compliance. Since then, driven by client demand, ELMO has expanded its platf orm to address the evolving requirements of the Human Capital Management (HCM) industry by off ering a broader suite of modular applicati ons to cover a wider range of talent management needs. Research and development is at ELMO’s core with conti nual investment in the development of new HCM modules and the enhancement of its existi ng platf orm. Leading integrated talent management platf orm ELMO is a leading provider of integrated talent management soft ware. We now employ 106 people in 4 offi ces across Australia and New Zealand. ELMO’s SaaS cloud based platf orm provides organisati ons with a centralised approach to managing an employee’s life cycle. We have invested in and developed a scalable SaaS cloud based platf orm with multi - tenant architecture and single source code. Our platf orm technology, soft ware soluti ons and learning content are developed and maintained in-house by ELMO’s Australian based team. Developed over fi ft een years, we have over 400 eLearning courses in our content library covering a broad range of topics. Our primary customer targets are mid-market organisati ons with between 100 – 1000 employees where we see signifi cant opportuniti es for increased market share growth. Outlook Given our positi ve momentum we have a confi dent outlook for FY18. We affi rm our FY18 prospectus forecasts including: – – – – – – Pro forma SaaS revenue of $21.5m (+39% SaaS revenue growth ex Techni Works) Pro forma EBITDA of $2.68m (12% margin versus 5.26% in FY17) Profi t before Tax of $319,000 compared to a loss before tax of $1,725,000 in FY17 $25.8m of cash receipts demonstrati ng our strong cash conversion 96% recurring revenue refl ecti ng the quality of our income streams 650 customers (compared to 524 at end of FY17) and 2.55 modules per customer (2.29 at end FY17) The June 2017 revenue run rate represents $19.1 million of SaaS revenue, refl ecti ng 89% of forecast FY18 pro forma SaaS revenue. Acknowledgements In delivering on these growth strategies I must thank all the ELMO staff who have worked so diligently in building this special business. We are proud of ELMO’s culture of innovati on and delivering excepti onal service to our customers. We look forward to making further progress in the year ahead and thank you once again for your support as a shareholder. Yours sincerely, Danny Lessem Co-Founder and CEO Large market with clear growth strategies We have a large addressable market with clear growth strategies to deliver ongoing value for shareholders. The global talent management total available market is esti mated at around US$6.1bn pa with the Australian and New Zealand market at around US$258m pa. We see the accelerati ng penetrati on of cloud based talent management soluti ons and their increasing adopti on in the mid-market. ELMO has a broad and diverse customer base with scope for ongoing organic growth. We have 524 acti ve customers across multi ple industries and sectors. Our customer base has grown by 47% CAGR since FY14. Our largest customer accounts for less than 2.9% of total revenue. Our top 10 customers account for less than 16% of total revenue. Customer contracts are typically for three years with subscripti ons paid annually in advance. ELMO has clear strategies to deliver ongoing growth and value for shareholders ELMO has multi ple growth drivers 1. Greater usage from existi ng customers – growing penetrati on amongst the existi ng customer base with average modules per customer of 2.29, up from 2.22 as at June 30th 2016 2. New customers in existi ng markets – 166 new customers were added in FY17 including Techni Works. There is a signifi cant opportunity to further penetrate existi ng markets and increase overall market share from the current level of 4% 3. Expand product line – Succession and HR Core modules were launched in FY17. Conti nuous development and deployment of new features with 128 enhancements launched in FY17. Four modules are slated to be released in the next two to three years 4. Growth through acquisiti ons – Having fully integrated Techni Works we are acti vely seeking bolt on acquisiti ons or complimentary technology to augment ELMO’s value propositi on 5. Geographic expansion – NZ customer base of 31, up 41% since 31 December 2016, 264% increase in revenue from FY16. 6 ELMO Software Limited | Annual Report 2017 We are building a larger, stronger and more diversifi ed ELMO and we look forward to another year of signifi cant revenue and profi t growth in FY18 as we deliver on prospectus forecasts. $17.0m of pro forma revenues 31% SaaS revenue growth ex Techni Works 524 Customers 7 Company history ELMO was founded in 2002 by Danny Lessem, the Company’s CEO, and Manuel Garber, a conti nued Shareholder, for the purpose of providing an eLearning platf orm with customised content for compliance and training. Since incepti on, ELMO’s soluti ons have been built and developed using a SaaS, cloud-based infrastructure. During the initi al phase following launch, ELMO began to build an eLearning course library that the Company conti nues to grow, develop and invest in today with additi onal eLearning content as part of its Pre-Built Courses module. This module currently provides customers with over 400 diff erent eLearning courses, including compliance and policy, organisati onal process, systems, professional development and soft skills. In 2007, ELMO’s talent management soft ware soluti ons received its fi rst Australian Government supplier panel arrangement with the Queensland Government. In 2011, aft er receiving feedback from customers, ELMO began to expand its platf orm with the objecti ve of off ering a full suite of talent management soft ware soluti ons to service the changing requirements of the HR functi on. This transiti on began with the launch of the Course Builder and Learning Management System (LMS) modules. In 2013, ELMO’s customer base reached over 130 organisati ons. During that year, ELMO also began shift ing the Company’s focus towards addressing the HCM requirements of mid- market organisati ons, which ELMO viewed as an underserviced market that presented att racti ve market opportuniti es. In 2013, ELMO conti nued to expand its soluti ons off ering with the introducti on of its Performance module. In additi on, the Company received several government accreditati ons and introduced the Australian Human Resources Insti tute (AHRI), the nati onal associati on representi ng human resource and people management professionals, as a customer. In 2015, ELMO expanded into New Zealand and Singapore, and its customer base grew to over 250 organisati ons, including the Human Resources Insti tute of New Zealand (HRINZ). Additi onally, following ELMO’s ongoing commitment to investi ng in research and development to expand its product suite, the Company launched its Onboarding and Recruitment modules. In 2016, the Company conti nued to expand its soluti ons off ering with the launch of its Succession module and had grown its customer base to over 350 organisati ons. In October 2016, ELMO completed its fi rst acquisiti on, being Techni Works, an Australian eLearning company specialising in the provision of Australian focused eLearning courses. The acquisiti on of Techni Works expanded ELMO’s course library and added 82 new organisati ons to the Company’s existi ng customer base, which included terti ary educati on insti tuti ons and government organisati ons at the Commonwealth, State and Local levels. In 2017, ELMO formally launched its fi rst HR Administrati on product with the release of its HR Core module. Today, ELMO conti nues to focus on platf orm expansion with conti nuous product development and enhancement, and is currently in the process of developing additi onal HCM modules. As at 30 June 2017, the Company’s soluti ons were being used by 524 organisati ons. A summary of ELMO’s history is provided below. LEARNING MANAGEMENT SYSTEM PRE-BUILT COURSES 1 2 3 PERFORMANCE RECRUITMENT SUCCESSION HR CORE COURSE BUILDER HEALTH Commenced Commenced Commenced devvvelopment of full suite of full sui of full sui of talent manamanamanagement eLearning customised content ONBOARDING T Techni Techni wwworks 2002 2011 2012 2013 2014 2015 2016 2017 Focus on cu ocus on customer ocus on cu orientated ted ted training ounded ELMO founded ounded in 2002 by Danny Lessem y Lessem y Lessem and Manuel Garber and Manuel Garber and Manuel Garber Focused on ocused on mid-markettt Began expansion xpansion xpansion ealand ealand into New Zealand Australian Human Resources Approved supplier ed supplier ed supplier on Governmennt Panel arrangemeemeements ces NNew Zealand 164 Customers 55% 254 Customers 41% 358 Customers 46% 524 Customers As at 30 june 2017 t c u d o r P i s p h s r e n t r a p / s r e m o t s u C 8 ELMO Software Limited | Annual Report 2017 Today, ELMO continues to focus on platform expansion with continuous product development and enhancement. 9 Product and soluti on ELMO provides a talent management soft ware soluti ons platf orm that aims to address and automate key HCM acti viti es and processes. The platf orm currently off ers seven talent management soft ware modules that address various stages of an employee’s lifecycle from hire to reti re. Customers can purchase modules based on their immediate needs with scope to add additi onal modules at any point. The fi gure below provides a summary of the key functi onaliti es of the individual modules. Customers who are subscribed to the Learning module are also provided with the Course Builder module as part of the off ering. Leading integrated talent management platf orm RECRUITMENT Job requisition Talent pool Job posting Branded careers webpage SUCCESSION Ensure business continuity Employee career progression Foster strategic succession END TO END ‘HIRE TO RETIRE’ SOLUTION ONBOARDING Personalised onboarding webpage Workflows and approvals Electronic forms PERFORMANCE Performance appraisals Management team view Configurable reports HR CORE Leave management Organisation charts Employee self-service Manager self-service PRE-BUILT COURSES Best practice eLearning content Course editor Course features Assessment features 1 2 3 LEARNING Learner’s view Course catalogue Manager team view Configurable reports HEALTH COURSE BUILDER Create courses Create assessments Create surveys Preview and Publish 10 ELMO Software Limited | Annual Report 2017 Soluti on off ering details HR CORE RECRUITMENT ONBOARDING PERFORMANCE – Leave management – Leave requisiti on and authorisati on workfl ows – Organisati on charts – Overview of organisati on’s structure and reporti ng relati onships – Employee self-service – Enablesemployees to access and update personal informati on, request leave and access payroll slips from any device, anywhere and at any ti me – Manager self-service – Enables managers to access employee informati on, approve leave requests and view team analyti cs from any device, anywhere and at any ti me – Job requisiti on – Select the – Personalised onboarding required job positi on, add specifi c requirements, alert recruitment manager, track and monitor progress, and customise approval workfl ows webpage – Present company informati on and video, guidelines for onboarding process, onboarding task list, and team member introducti ons – Performance appraisals –Confi gure to customer’s requirements, features goal setti ng, competency models, development plans and 360 reviews – Talent pool – Search existi ng employees, search the candidate database, match job criteria, and rank candidates – Workfl ows and approvals – Confi gure process and select stakeholders, prerequisites, ti me delays, and conditi ons – Manager team view – Access direct and indirect reports, view current status of appraisals, search facility, export and print – Job posti ng – Integrate with job boards and social media, preset posti ng rules, and track costs – Branded careers webpage – Embed customer organisati on’s website, customise branding, incorporate company media, and post jobs automati cally – Electronic forms – Confi gurable forms, document upload facility, and integrati on with ATO and other 3rd parti es – Succession planning – Identi fy high performers, miti gate fl ight risk, recruit from within, foster strategic succession – Confi gurable reports – Generate at the click of a butt on, choose fi elds for comparison, coloured graphs for visual display, export to Excel and/or PDF, and email reports SUCCESSION LEARNING COURSE BUILDER PRE-BUILT COURSIIES HEALTH 1 2 3 – Ensure business conti nuity – – Learner’s view – Personalised Determine role criti cality, identi fy high performers and miti gate fl ight risk – Employee career progression – View succession pathways, identi fy skills gaps and create development plans – Foster strategic succession –Match high potenti al employees to criti cal roles and compare candidate suitability by skills, performance, potenti al and aspirati ons learning plan, eLearning courses, instructor-led training (ILT), policy acknowledgements, assessments and surveys – Course catalogue – Course self-selecti on, search facility, confi gurable enrolment rules, access to over 400 pre-built eLearning courses – Manager team view – Access direct and indirect reports, view current status of learning, search facility, export and print – Confi gurable reports – Generate at the click of a butt on, choose fi les for comparison, use coloured graphs for visual display, export to Excel and/or PDF, automate report emails – Create courses – Insert images/ movies, edit text, record voice- over, and use interacti ve features (butt ons, rollovers, hotspots, etc.) – Best practi ce eLearning content – Compliance sources updates, quality assurance, expert instructi onal design – Create assessments – Select questi on type (multi -choice, T/F, drag and drop), insert images/ voice-over, randomise questi ons, and set pass mark – Course editor – Accessible via the Internet, no programming skills required, access to ELMO royalty free image library, upload your own multi media – Create surveys – Select – Course features – Customer questi on type (multi ple choice or free text), compulsory and anonymous opti onality – Preview and publish – Customer branding, update customer in real-ti me, publish ELMO or SCORM compliant LMS branding, multi media enabled, touch screen opti mised, modify content with the ELMO course editor – Assessment features –Automati c marking, multi media enabled, touch screen opti mised, modify Q&As with ELMO course editor 11 ELMO has forged deep and exclusive relati onship with the industry peak bodies in Australia and New Zealand. This enhances the ability to ELMO to access potenti al customers , increases industry recogniti on and enables ELMO to work closely with industry stakeholders to enhance current soluti ons and develop new soluti ons to meet their evolving needs. 12 ELMO Software Limited | Annual Report 2017 Industry partnerships ELMO has forged deep and exclusive relati onship with the industry peak bodies in Australia and New Zealand. This enhances the ability of ELMO to access potenti al customers, increases industry recogniti on and enables ELMO to work closely with industry stakeholders to enhance current soluti ons and develop new soluti ons to meet their evolving needs. ELMO has worked in partnership with AHRI, Australia’s peak HR industry associati on, since 2013. This relati onship provides ELMO with unprecedented exposure to AHRI’s 20,000+ HR industry members through a series of nati onal networking forums, conferences, the annual HR Awards and the fl agship AHRI Nati onal Conventi on and Exhibiti on. AHRI also provide members with access to ELMO’s pre- built content library via their online portal and recently, has launched a HR Certi fi cati on program designed to advance the HR profession within Australia. ELMO has worked in partnership with HRINZ, New Zealand’s peak HR industry associati on since 2015. 45% of the New Zealand HR Industry (just over 3000 individuals) are current HRINZ members and through this membership, can access educati on and informati on services, conferences and seminars and parti cipate in the annual NZ HR Awards. ELMO’s sponsorship of key events, and the provision of the ELMO soluti on via the HRINZ online portal off ers exposure and brand awareness for our growing list of New Zealand clients. RCSA is the peak associati on for the Australian and New Zealand recruitment industry with over 3000 corporate and individual members. Members can access educati on, research and business advisory support. ELMO has been in partnership with the RCSA since 2015, ELMO’s sponsorship of key events and the provision of ELMO technology and content via the RCSA online portal off ers exposure and brand awareness to potenti al clients working in the recruitment industry. 13 ELMO growth strategy ELMO’s growth strategy is based on fi ve key levers: + Greater usage from existi ng customers New customers in existi ng markets Expand product line ELMO has a strong customer retenti on rate of 92.3% and aims to increase usage of its soluti ons amongst the Company’s existi ng customer base and undertake cross-selling and upselling of additi onal modules to customers who are not yet subscribed to the full suite of ELMO’s modules. Currently, ELMO off ers customers seven talent management modules of which, on average, customers are subscribed to 2.29 modules (up from 2.22 as at June 2016). ELMO plans to support this growth strategy by undertaking further investment in its sales and marketi ng team and broadening its talent management soft ware soluti ons off ering in order to improve the inherent value of the platf orm to the existi ng customer base. There is a signifi cant opportunity to further penetrate existi ng markets with conti nuati on of strong sales momentum. Additi onal potenti al may be capitalised upon through an increasing number of mid market fi rms adopti ng cloud-based talent management soft ware. The result of this increased penetrati on into existi ng market is that: – – There are 166 new customers, including Techni Works customers, acquired during FY17 A total customer base, including Techni Works, of 524 as at 30 June 2017. IMAGE TO BE UPDATED IMAGE TO BE UPDATED ELMO adopts a conti nuous improvement approach to its SaaS, cloud-based off ering by conti nuously investi ng in research and development with an expenditure of 15% of FY17 revenue to expand its product off ering with new additi onal modules as well as to enhance the functi onality of its existi ng platf orm. The signifi cant investment in research and development is a key pillar of ELMO’s strategy with 24% of staff focused in this area. For FY17 this resulted in over 37,000 man hours spent on R&D and $2.5m total cash fl ow costs. As ELMO releases new products and platf orm enhancements, the Company expands its opportuniti es to further entrench the existi ng customer base through cross-sell and upsell initi ati ves and support new customer acquisiti on. The SaaS, cloud- based infrastructure of ELMO’s platf orm is highly conducive to these opportuniti es and allows for new product modules to be easily sold and implemented with both new and existi ng customers. The product development process is driven by collati ng feedback and product enhancement suggesti ons from a wide range of sources including ELMO’s broad customer base and employees. There is conti nuous development and deployment of new features on existi ng modules with 128 enhancements in FY17. ELMO has recently launched a module for HR administrati on functi ons (HR Core) to expand its market opportunity and address both categories of the HCM industry. Additi onal modules in ELMO’s development pipeline includes Rewards and Recogniti on, Time and Att endance, Remunerati on and Workforce Planning. ELMO aims to launch four new modules in the next two to three years. 14 ELMO Software Limited | Annual Report 2017 Growth through acquisiti ons Geographic expansion The HCM industry is a highly fragmented market with many small vendors of HCM soluti ons. As a result of being in operati on since 2002, ELMO has increasingly become familiar with the various providers of HCM soluti ons across the ANZ market and believes that there is an opportunity to gain additi onal market share through targeted acquisiti ons of smaller HR technology companies who provide single HCM point soluti ons within the industry. Similar to ELMO’s recent acquisiti on of Techni Works, incorporati ng complementary HR technology businesses into ELMO’s business provides opportunity to leverage operati onal effi ciencies through ELMO’s existi ng infrastructure and explore potenti al upsell and cross- sell opportuniti es. Case study: Acquisiti on of Techni Works Acquisiti on summary In October 2016, ELMO completed the acquisiti on of Techni Works for a total maximum considerati on of $2.6 million, inclusive of conditi onal earnout payments. Techni Works Techni Works is an Australian-based online learning soluti ons company specialising in the provision of off -the-shelf and custom- built eLearning courses developed specifi cally for the Australian work environment. Since being established in 1999, Techni Works had developed an eLearning course content library and grown to a customer base of 83 organisati ons which operate across all levels of government (Commonwealth, State and Local) and terti ary educati onal insti tuti ons. Rati onale The strategic rati onale underpinning the acquisiti on of Techni Works included: – – – EBITDA margin expansion from synergy cost savings as a result of reducti on in operati onal costs; low integrati on risk and ability to extract signifi cant operati onal effi ciencies from leveraging ELMO’s existi ng infrastructure; increasing market share with an enlarged customer base of 82 additi onal customers. This allows ELMO account managers to leverage existi ng customer relati onships to establish new contracts from upselling and cross-selling of ELMO’s full suite of talent management soft ware soluti ons; and – expanding ELMO’s learning module platf orm with the additi on of Techni Works’ 46 eLearning courses. ELMO’s platf orm has been built and designed on a globally scalable infrastructure and has a multi -lingual and multi -jurisdicti onal compati ble eLearning course library. Although there is signifi cant opportunity to grow within Australia, ELMO also believes there is currently an att racti ve market opportunity for HCM soluti ons in New Zealand. ELMO also aims to eventually build its presence outside of the Australian and New Zealand markets to leverage the Company’s technology capability and capital light expansion model. Case study: New Zealand Expansion ELMO began operati ons in New Zealand during November 2014 with an initi al customer base of fi ve organisati ons and revenues of approximately $35,000 in FY15. Since then, ELMO’s New Zealand operati ons have expanded to a customer base of 31 organisati ons across the government, fi nance, retail, agricultural, uti liti es and professional services industries which contributed revenue of approximately $878,000 during FY17. NEW ZEALAND CUSTOMER BASE GROWTH 31 18 5 30 June 15 30 June 16 30 June 2017 NEW ZEALAND REVENUE GROWTH ($000’s) 878 333 35 FY15 FY16 FY17 15 Integrated Human Capital Management (HCM) software providing ‘hire to retire’ software solutions across 7 modules. 16 ELMO Software Limited | Annual Report 2017 Business model ELMO is one of Australia and New Zealand’s leading providers of integrated talent management software solutions ELMO’s SaaS, cloud-based platform provides organisations with a centralised approach to managing an employee’s lifecycle from ‘hire to retire’ ELMO employs 106 people in 4 offices across Australia and New Zealand Integrated Human Capital Management (HCM) software providing ‘hire to retire’ software solutions across 7 modules Primarily targets mid-market organisations (100 – 1,000 employees) Scalable SaaS, cloud-based platform, multi tenant infrastructure, single source code Customer base of 524 organisations and deployed across 13 different industries1 Platform, technology, software solutions and learning content is developed and maintained in-house by ELMO’s Australian based team Over 400 eLearning course content library covering a broad range of topics which has been developed for over 15 years 1. As at 30 June 2017 includes construction and mining, education, finance, government, healthcare and pharmaceuticals, hospitality, industrials, IT, telecommunications and media, not-for-profit organisations, professional services, property, retail and transport. 17 Business model Target mid-market organisations ELMO’s talent management software solutions and business model have been primarily built to address the HCM requirements of mid-market organisations. Currently, many SaaS HCM providers that offer a unified talent management solution target large enterprise and government organisations (over 1,000 employees). The talent management solutions offered by these providers are typically costly to implement, require significant time investment and involve complex integration processes making such solutions unsuited in addressing the HCM requirements of mid-market organisations. As a result, mid-market organisations have limited HCM solution options and many existing solution providers only address a single vertical of the various HR functions. As a result, ELMO believes this has created a large underserviced market, which is growing as HR managers in mid-market organisations are increasingly recognising the strategic importance of talent management. ELMO believes mid-market organisations require more flexible and cost effective talent management software solutions that can be delivered on shorter sales cycles, with simpler implementation processes than those currently provided by HCM solution providers who are typically focused on larger enterprises. Multi-jurisdictional and industry agnostic ELMO’s talent management software solutions have been designed to be scalable on an international basis with its multi-jurisdictional and industry agnostic platform. ELMO currently provides talent management software solutions to customers based principally in Australia, New Zealand and Singapore, however, the platform can be translated into nearly any language and is multi-jurisdiction compatible. ELMO currently deploys its talent management software solutions across 13 different industries1: INDUSTRIES ELMO’S TALENT MANAGEMENT SOFTWARE SOLUTIONS ARE DEPLOYED IN Construction and mining Hospitality Professional services Education Finance Industrials Information Technology telecommunications and media Property Retail Government Logistics Healthcare and pharmaceuticals Not for profit Revenue generation ELMO generated 93% of its FY17 pro forma revenue from subscription-based fees for its talent management software solutions. Typically, customers enter into three year contracts with ELMO for access to its solutions. It is customary for ELMO to be paid annually in advance by the customer, with revenue recognised evenly over the twelve months of the contract. The amount of the annual fee is dependent on the number of modules subscribed for by the customer and the number of users on the platform. In addition to subscription-based fees, ELMO also generates revenue from charging professional service fees for providing non-standard implementation, configuration, training and integration services as well as other revenue including government grants. 1. As at 30 June 2017 includes construction and mining, education, finance, government, healthcare and pharmaceuticals, hospitality, industrials, IT, telecommunications and media, not-for-profit organisations, professional services, property, retail and transport. 18 ELMO Software Limited | Annual Report 2017 A summary of ELMO’s revenue model is provided below. ELMO’S REVENUE MODEL % of FY17 statutory revenue Revenue model Revenue recognition policy Description Customer Recurring revenue ~93% SaaS subscription fee – Professional services fees ~7% Consultation or integration fees – ELMO’s recurring revenue is recognised evenly on a monthly basis. The balance of the revenue received in advance is categorised as a liability (known as deferred income). ELMO’s professional service fees are recognised as revenue once delivery of the required services is completed – – – – – – ELMO typically receives an annual fee, payable in advance over the term of the contract Amount of fee varies depending on the number of modules subscribed for and the number of users on the platform Customers are invoiced on an annual basis throughout the term of the contract ELMO receives a professional service fee associated with providing implementation, configuration and integration services as well as other services Fees are typically invoiced during the first year of the contract Amount of fee varies depending on the level of service provided and complexity of the process Attractive cash flow profile ELMO’s attractive financial and cash flow profile is supported by the high recurring revenue, strong customer retention rates and favourable payment terms as a result of the Company’s SaaS-based revenue model with long term contracts paid annually in advance, as explained below: – high recurring revenues: ELMO has a high proportion of revenue that is classified as recurring in nature (recurring revenue) as shown below, which is a result of the subscription based revenue model. From FY15 to FY17, ELMO has consistently achieved more than 90% in recurring subscription revenue. In FY17, 93.0% of ELMO’s pro forma revenue was recurring in nature reflecting the SaaS business model and the Company’s focus on subscription revenue. ELMO’S RECURRING REVENUE AS A PERCENTAGE OF TOTAL PRO FORMA REVENUE 90.3% 93.3% 93.0% FY15 FY16 FY17 19 Operating and financial review Financial Performance A$ (’000) June year end SaaS revenue Other Income Total Revenue Cost of Sales Gross Profit Sales and Marketing Research and Development General and Administration Total Operating Expenses EBITDA EBITDA Margin Financial metrics Pro forma Cash Receipts Pro Forma Cash Receipts as a % of proforma revenue SaaS revenue Growth SaaS revenue Growth (excl Techniworks) Recurring Revenue Revenue Run Rate Pro forma Gross Margin S&M as % of revenue R&D as % of revenue (Total R&D Spend) G&A as % of revenue 1. June 2017 SaaS revenue annualised. Proforma FY17 vs Pro Forma FY16 vs Forecast FY17 25.00% 37.66% 25.84% 35.98% 24.82% 44.23% -22.66% 26.17% 31.68% -21.94% 0.18% 90.23% 3.77% 6.01% 3.53% -1.01% -22.31% 4.58% 1.14% 42.07% Pro Forma Historical Pro forma forecast FY16 12,588 901 13,489 (1,242) 12,247 (4,435) (437) (5,808) FY17 15,735 1,240 16,975 (1,689) 15,286 (6,397) (338) (7,328) FY17F 15,706 652 16,358 (1,593) 14,765 (6,462) (435) (7,007) (10,680) (14,063) (13,904) 1,567 11.62% 1,223 7.21% 861 5.26% Pro Forma Historical Pro forma forecast FY16 15,704 116.4% 40.4% 50% 93.0% 91.0% 33.0% 16.0% 43.0% FY17 19,039 112.2% 25.0% 31% 92.7% 90.1% 37.7% 15.1% 43.2% FY17F 19,035 116.4% 24.8% 31% 96.0% 90.0% 40.0% 15.0% 43.0% 20 ELMO Software Limited | Annual Report 2017 Review of operations during the year For the full year ended 30 June 2017, ELMO reported statutory revenue of $16.6 million (FY2016: $12.2 million). ELMO’s statutory earnings before income tax, finance expenses, depreciation and amortisation (excluding discontinued operations) was $0.7 million (FY2016: $1.7 million) and its statutory net loss after tax (including discontinued operations) was $0.9 million (FY2016: profit $0.1 million). These statutory results include significant expenses relating to the ASX IPO listing. In the ASX listing prospectus, ELMO reported financial results and forecasts on a pro forma basis. Pro forma adjustments reflect the impact of the acquisition of Techni Works, the RTO discontinued operations, IPO offer costs, standalone public company costs and other non-recurring items. For the full year ended 30 June 2017, ELMO’s pro forma revenue was $17.0 million (FY2016: $13.5 million), which is 3.77% ahead of Prospectus forecast of $16.4 million. ELMO’s pro forma earnings before income tax, finance expenses, depreciation and amortisation was $1.2 million (FY2016: $1.6 million), which is 42% ahead of Prospectus forecast of $0.9 million. ELMO’s pro forma net loss after tax was $0.1 million (FY2016: net profit after tax of $0.2 million). The growth in revenue during the period was being driven by: – – – – – – Expansion of ELMO’s customer base to 524 organisations (including Techni Works customers); Increased investment into ELMO’s sales and marketing team; Enhanced brand awareness and reputation of ELMO and its product offering; Increased traction in new modules, resulting in more cross-sell and upsell opportunities amongst ELMO’s customer base; Continued expansion of ELMO’s operations in New Zealand; and Strong recurring revenues of 93% and high revenue dollar retention rates of 113%. For the full year ended 30 June 2017, ELMO reported statutory operating expenses (excluding discontinued operations) of $16.8 million (2016: $10.8 million) and adjusting for the impact of the acquisition of Techni Works, one-off IPO costs, standalone public company costs and non-recurring items the total pro forma operating expenses were $14.1 million (FY2016: $10.7 million). The key driver for the increase in operating expenses was ELMOs continued investment in future growth. There was increased investment into: – – – ELMO’s sales and marketing, which reported expenses of $6.4 million (statutory and pro forma), reflecting a 44% increase compared to pro forma FY2016; ELMO actively seeks new business through a sophisticated marketing strategy with new lead generation from various marketing activities both digital and non-digital resulting in the following during FY17: – – – 17 email marketing campaigns 26 ELMO sponsored events 15 ELMO hosted events; and An increase in general and administrative expenses for the period driven by an increase in employment costs to $1.9 million (FY2016: $1.1 million) due to ELMO’s decision to strengthen its infrastructure to scale operations by recruiting middle and senior management. ELMO’s revenue growth was driven by new customer acquisition, increasing revenue per existing customer, enhanced brand awareness, traction of new modules and momentum in New Zealand. 21 Risk management The Group’s operations and financial results are subject to a number of risks. Some of these risks are not directly under ELMO’s control. The key risks affecting ELMO, and the steps taken to mitigate these risks are described below. Failure to retain existing customers and attract new customers The success of ELMO’s business relies on its ability to attract new customers and to retain and increase revenue from existing customers. ELMO’s customers have no obligation to renew their service offering when their contract term ends and ELMO cannot guarantee that all or any of its customers will renew their current service offering after the completion of their contract term. ELMO also cannot guarantee that it will successfully increase revenue from its existing customers through the ability to cross-sell other modules to the same customers. If customers do not continue to use ELMO’s platform and do not increase their usage over time, and if new customers do not choose to use ELMO’s platform, the growth in ELMO’s revenue may slow, or decline, which will have an adverse impact on ELMO’s operating and financial performance. Ability to attract and retain key personnel A perceived critical component of the success of the Company is the ongoing retention of key personnel, specifically, founder and CEO, Danny Lessem, and members of the senior management and product research and development teams. There is a risk ELMO may not be able to attract and retain key personnel or be able to find effective replacements for those key personnel in a timely manner. The loss of such personnel, or any delay in their replacement, could have a significant negative impact on management’s ability to operate the business and achieve financial performance targets and strategic growth objectives. Reliance on ELMO’s talent management software solutions and failure to adequately maintain and develop it ELMO’s business model depends on ELMO’s ability to continue to ensure that ELMO’s customers are satisfied with the functionality of ELMO’s talent management software solutions. The market for talent management software solutions is subject to evolving industry standards, changing regulations as well as ever changing customer needs, requirements and preferences. ELMO’s success will depend on its ability to adapt and respond effectively to these changes on a timely basis. There is a risk that ELMO may fail to maintain its software platform adequately or that future updates may introduce errors and performance issues causing customer satisfaction to fall. Any of these factors may result in reduced sales and usage of ELMO’s solutions, loss of customers, damage to ELMO’s reputation and an inability to attract new customers. Reliance on up-take of SaaS-based talent management software solutions ELMO’s future revenue and growth depends on the increasing adoption of SaaS-based talent management software solutions. It may be difficult for ELMO to persuade potential customers to change their existing legacy on premise, manual paper-based or point solution and adopt SaaS-based talent management solutions like ELMO’s. If ELMO’s solutions are not accepted and used by more mid-market organisations or if the market for talent management solutions fails to grow as expected, ELMO’s platform could be adversely affected and revenue growth may slow, which could negatively impact ELMO’s operating and financial performance. Failure to effectively manage growth ELMO has experienced a period of considerable growth in both revenue, employee numbers and customer base. Based on ELMO’s projections, ELMO expects further growth in the future which could place significant strain on the current management, operational and finance resources as well as the infrastructure supporting ELMO’s platform. Failure to appropriately manage growth could result in failure to retain existing customers and a failure to attract new customers which could adversely affect ELMO’s operating and financial performance. 22 ELMO Software Limited | Annual Report 2017 Failure to realise benefits from product research and development Developing software and technology is expensive and often involves an extended period of time to achieve a return on investment. ELMO believes that it must continue to dedicate resources to ELMO’s innovation efforts to develop ELMO’s software and technology product offering and maintain the Company’s competitive position. ELMO may not however, receive benefits from these investments for several years or may not receive benefits from these investments at all. There is a risk that ELMO may fail to realise benefits from its innovation and product development related costs Disruption or failure of technology and software systems ELMO and its customers are dependent on the performance, reliability and availability of ELMO’s platform, data centres and communications systems (including servers, the internet, hosting services and the cloud environment in which ELMO provides its solutions). Loss or theft of data and failure of data security systems Any disruption or failure of ELMO’s technology and software systems could potentially lead to a loss of customers, legal claims by customers, and an inability to attract new customers, any of which could adversely impact ELMO’s operating and financial performance. ELMO’s products involve the storage of customers’ confidential and proprietary information including information regarding their employees. ELMO’s business could be materially impacted by security breaches of customer data either by unauthorised access, theft, destruction, loss of information or misappropriation or release of confidential customer data. There is a risk that any measures taken may not be sufficient to prevent or detect unauthorised access to, or disclosure of, such confidential or proprietary information, and any of these events may cause significant disruption to ELMO’s business and operations. This may also expose ELMO to reputational damage, regulatory scrutiny and fines, any of which could materially impact ELMO’s operating and financial performance. Success of sales and marketing strategy ELMO’s future success is partly dependent on the realisation of benefits from investment spent on sales and marketing campaigns and initiatives. Failure to realise intended benefits from sales and marketing investment could negatively impact ELMO’s ability to attract new customers and adversely impact ELMO’s operating and financial performance. Revenue recognised throughout term of customer contracts ELMO invoices customers annually in advance and recognises revenue monthly on a pro-rated basis throughout the term of the contract. As a result, most of the revenue realised in any given period relates to agreements entered into during previous periods. Consequently, a shortfall in demand for ELMO’s solutions or losses in the existing customer base may not be reflected in the revenue results of that period but are likely to negatively impact revenue in subsequent periods. Accordingly, the effect of a shortfall in revenue from ELMO’s platform may not be fully reflected in the financial performance until future periods. Other key risks The above risks are a summary of some of the key risks, but not an exhaustive list of all of the risks associated with the Company or an investment in the Shares. Investors are recommended to carefully review all risks included in Section 5 of the Prospectus before making an investment decision. 23 Environment, social and governance Our Employee Assistance Program (EAP) offers free short-term counselling designed to help ELMOnians prevent or resolve personal, family and workplace problems affecting their well-being and job performance. Toastmasters ELMO Sydney Toastmasters Club commenced in May 2017. Toastmasters helps to build communication and leadership amongst employees in a collaborative and supportive environment. We encourage ELMOnians to listen and answer, to plan and lead, to give feedback and to accept it. Toastmasters empowers ELMOnians to become more effective communicators and leaders. We plan to expand the ELMO Toastmasters to other states in the future. ELMO competed against six other clubs in our first Area contest, and won both heats. What a great start to our Toastmaster journey. This year ELMO Talent supported: – Randwick Children’s Hospital – – Vinnies CEO Sleepout Cancer Councils Biggest Morning Tea – – RSPCA Million Paws Walk RUOK Day morning tea. ELMOnian Wellbeing ELMO cares aims to promote the safety and wellbeing of our ELMOnians. We encourage our ELMOnians to practice safe work practices and communicate suggestions and improvements to the business. We provide support and opportunities that encourage ELMOnians to look after their health and fosters relationship inside and outside of the work environment. We conduct an annual employee engagement and welfare survey, with routine pulse surveys to identify needs, feelings and “mood” of our ELMOnians and our workplace. Results of the survey are explored, and small ELMOnian work groups are established to guide the business in what initiatives would be welcome and to then champion initiatives launched to the business. ELMO is focussed in building an organisation that supports its people, fosters innovation, and aims for sustainable growth. ELMOnians As a growing organisation across Australia and New Zealand, ELMO has offices in Sydney, Melbourne, Perth and Auckland. ELMO values our ELMOnians diversity and believes that a range of cultures, beliefs and ethnicities brings a variety of ideas, thoughts, perspectives and experiences that create an innovative and productive work environment. Corporate Social Responsibility ELMO is committed to being actively involved in worthy causes within the community where it is located. At ELMO we have established our corporate social responsibility (CSR) policy to support this activity and communicates our commitment, financial assistance, community support and corporate sponsorship in the community. Our CSR aims to support our people in an initiative that they care about, the Australian community, all while contributing to Australian economic development. ELMOnians by function (% as at 30 June 2017) 26% 20% 13% 23% 10% 8% General and administration Business development Account management Marketing and support Client Services Research and development 24 ELMO Software Limited | Annual Report 2017 Professional Development ELMO is dedicated to the sustained growth of the business through leadership and management. We work with our management team and determine areas of interest and enhancement to conduct in house training twice a year. To guide, build, motivate and cohere our teams we run conferences unique to each team needs, direction, and objectives. The individual ELMOnian desire to grow and learn is fostered through professional development that supports their own growth and that of the business. We explore training and professional development opportunities each year to assist the business and our ELMOnians grow, some of these that we have participated in this year: – AHRI National Convention and State Conferences – National and State HR Summits – HR Tech Summit and HR Tech Fest – HR Leaders’ Summit – – Reimagine HR Local Government HR Conference – Not-for-profit People Conference TEDX – Women in Leadership – – Google Cloud Summit – – Toastmasters Sales and product training Environment ELMO as it is growing is looking at opportunities to improve our operations and environmental footprint. ELMO when considering the long term sustainable growth of the business looks to move its operations to work environments that has an up to date Building Energy Efficiency Certificate, and NABERS rating. ELMO relocated its Melbourne office this year to a office environment of 3.5 NABERS rating. The intention in the coming year is to consolidate the Sydney Head Office into a central location with a minimum of 3.5 NABERS rating. ELMO is focussed on building an organisation that supports its people, fosters innovation, and aims for sustainable growth. Policy Update ELMO in this past year has taken considerable effort in establishing a Quality Management System, and developed policies that support business activity and enable the business to operate in a safe yet agile manner. Corporate Governance ELMO takes a deliberate and focussed approach to corporate governance and our compliance with the Corporate Governance Principles and Recommendations of the ASX Corporate Governance Council is described in our Corporate Governance Statement, which is available from our website http://investors.elmotalent.com. au/Investors/?page=Corporate- Governance 25 Board of Directors James (Jim) McKerlie Chairman and Independent Non-executive Director Danny Lessem CEO, Executive Director and Co-founder Mr Jim McKerlie is the Chairman and an independent Non-executive Director of ELMO. He has over 30 years of experience across digital, media, technology, energy and professional services industries. Jim is currently the Chairman of Manalto Limited, Lithium Consolidated Minerals Exploration Limited and Bambu Digital. Jim previously served as the Chairman of Drillsearch Energy prior to it being acquired by Beach Energy (BPT.ASX), where he currently serves as an independent Non-executive Director. In addition, Jim has held senior roles as Partner in Charge at Deloitte Touche Tohmatsu, Managing Partner at KPMG, Chairman of onthehouse.com.au, Executive Chairman of Bullseye and Chairman of Acer Energy and Ambassador Energy. Jim holds a Bachelor of Economics and a Diploma in Financial Management from the University of New England. He is a fellow of the Institute of Chartered Accountants, Australian Institute of Company Directors and Institute of Management Consultants. Mr Danny Lessem is the CEO, Executive Director and co-founder of ELMO. Danny is responsible for leading the development and execution of the Company’s long term strategy and delivering on growth objectives for the business. Danny also plays a key part in the day-to-day management of the Company’s operations and has been critical to the success of ELMO, including the strategy underpinning the development of the Company’s full suite of talent management software solutions. Danny has extensive experience in the technology industry having led SaaS companies for over 15 years in senior roles, including Compu Technologies where he was the CEO and was responsible for overseeing the transition of the Company’s primary business from a digital agency to an eLearning content provider. Danny holds a Bachelor of Laws (LL.B.) and Bachelors of Arts and Law from the University of Witwatersrand, South Africa. 26 ELMO Software Limited | Annual Report 2017 David Hancock Independent Non-executive Director Trevor Lonstein CFO and Executive Director Mr David Hancock is an independent Non-executive Director of ELMO. He has over 25 years experience in financial services and a variety of governance roles. Mr Trevor Lonstein is the CFO and Executive Director of ELMO and joined the Company in 2014. Trevor has over 15 years of experience in accounting and finance. David is currently Chairman of Freedom Insurance Group Limited (FIG. ASX), Chairman of Finclear Pty Limited, an ASX general and clearing participant, Non-executive Director at Tower Insurance (TWR.ASX) and Non-executive Director and Chairman of the Audit and Risk Committee at Afterpay (AFY.ASX). David was the Chief Executive Officer at Tower Insurance (TWR.ASX/NZX). Prior to this, David has been an Executive General Manager at the Commonwealth Bank (CBA.ASX) and was Managing Director and Head of Asia/Australia/Japan Equities for JP Morgan. David is a member of the Australian Institute of Company Directors (GAICD) and holds a Bachelor of Business from the Queensland University of Technology (QUT). David lives in Sydney and is married and has two teenage sons. Trevor is responsible for all aspects of the accounting and finance function, from ensuring efficient, controlled and timely recording and reporting systems, to budgeting, forecasting, and cash flow analysis. Prior to joining ELMO, Trevor owned and operated Adrite Digital Colour Printing and held senior roles as Senior IT Project Manager at Allens Arthur Robinson, Ships Financial Controller at Orient Cruise Lines – MV Marco Polo and a career of over eight years in auditing with Deloitte Touche Tohmatsu’s member firms in England and Australia. Trevor holds a Bachelor of Commerce (BCom) in Accounting and Finance from the University of Cape Town in South Africa and is a Fellow of the Institute of Chartered Accountants in England and Wales. 27 Key Management Team Danny Lessem CEO, Executive Director and Co-founder(See previous page) Trevor Lonstein CFO and Executive Director (See previous page) Gordon Starkey Chief Operating Officer Mr Gordon Starkey is the Chief Operating Officer (COO) of ELMO and joined the Company in 2007. Gordon has extensive experience across enterprise SaaS solutions, including roles with responsibilities across general management, business development, product design, financial management and strategy. Gordon is responsible for overseeing ELMO’s business development, sales and marketing, product and client services. Gordon is essential to driving the strategic direction of the Company and managing partnership alignment with ELMO’s customers. Prior to joining ELMO as an eLearning/LMS Consultant, Gordon served in various teaching, consulting and research roles at Macquarie University. Gordon holds a Bachelor of Business Administration (Hons) and a Bachelor of Psychology from Macquarie University. Samuel Sun Chief Technology Officer Mr Samuel Sun is the Chief Technology Officer (CTO) of ELMO and joined the Company in 2010. Samuel has over 10 years of experience in software development roles. As CTO at ELMO, Samuel is responsible for setting the overall direction for the organisation’s software and technology, and manages the strategy, architecture, engineering, design, governance and information security functions of ELMO’s solutions and platform. Prior to joining ELMO as a Research and Technical Development Manager, Samuel was a Lead Developer at Scholani Education College and a Software Developer at IBM. Samuel holds a Masters in Information Technology from the University of NSW and a Bachelor of Telecommunication Engineering from Tongji University, China. Gordon Starkey, Samuel Sun, Trevor Lonstein, Danny Lessem, Monica Watt, Darryl Garber Monica Watt General Manager Human Resources Mrs Monica Watt is General Manager Human Resources at ELMO. Monica has over 10 years of experience working across compliance and human resource roles. Monica is responsible for optimising the business performance through innovation and people engagement and elevating team performance through innovative leadership. Monica has a broad range of experience in leading organisational transformations, driving large scale growth, talent acquisition, leadership development, and succession planning. Prior to joining ELMO, Monica was previously Senior Compliance Manager at Open Colleges and Instructional Designer for SkillsDMC, Transpacific Industries and TAFE NSW. She is also currently appointed as Officer Commanding of 204 Army Cadet Unit, Timor Barracks, Dundas, and holds the rank of Captain (AAC) in the Australian Army Cadets. Monica holds a Bachelor of Commerce, Human Resources from Deakin University, a Graduate Diploma in Management from Australian Institute of Business, Graduate Certificate in Management from Charles Sturt University and is currently working towards an MBA in Human Resources from Charles Sturt University. In addition, Monica also has several TAFE NSW Qualifications, Diplomas and Certificates. Darryl Garber Head of Corporate Development and Strategy Mr Darryl Garber is Head of Corporate Development and Strategy at ELMO and joined the Company in 2011. Darryl has over seven years of experience in sales, marketing, corporate finance and management. Darryl is responsible for sourcing, evaluating and executing ELMO’s growth strategy and initiatives, which involves financing activities, expansion opportunities, mergers and acquisition and go-to-market products. Darryl holds a Graduate Diploma in Applied Finance from Kaplan University and an MBA (Dean’s List) from Bond University. 28 ELMO Software Limited | Annual Report 2017 ELMO Soft ware Limited Financial report for the year ended 30 June 2017 29 The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘consolidated entity’) consisting of Elmo Software Limited (referred to hereafter as the ‘company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2017. Directors The following persons were directors of Elmo Software Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: James David McKerlie (appointed on 5 June 2017) Danny Isaac Lessem David Charles Hancock (appointed on 5 June 2017) Trevor Rael Lonstein (appointed on 6 March 2017) Manuel Garber (resigned on 5 June 2017) Dividends No dividend was paid during the financial year ended 30 June 2017 (2016: $nil). Operating and financial review Principal activities ELMO is one of Australia and New Zealand’s leading providers of Software-as-a-Service (SaaS), cloud-based talent management software solutions. ELMO’s talent management software solutions enable organisations to manage the lifecycle of an employee from hire to retire on a single integrated platform. The Company develops, sells and implements a range of modular software applications to efficiently manage human resource (HR) related processes including recruitment, onboarding, performance management, learning and development and succession planning. ELMO also provides HR Core, a software module which organisations use for people management and employee self-service. ELMO’s solutions assist organisations to better address and adapt to the complexities of the Human Capital Management (HCM) industry while increasing their productivity and reducing costs. Significant changes to the business On 7 October 2016, the company acquired 100% of the ordinary shares of Techni Works Pty Ltd for a total consideration of $2.1 million (see note 15). Techni Works is an Australian-based online learning solutions company specialising in the provision of off-the-shelf and custom-built eLearning courses developed specifically for the Australian work environment. The strategic rationale underpinning the acquisition of Techni Works included: – – – – EBITDA margin expansion from synergy cost savings; Low integration risk; Increased market share and enlarged customer base; and Expansion of ELMO’s eLearning course library. On 29 June 2017, ELMO commenced trading on the ASX after successfully completing an Initial Public Offer (IPO) of 12.5 million new shares to raise $25.0 million. Proceeds raised from the IPO will provide funding to support ELMO’s growth strategies through increased investment towards new product development and sales and marketing as well as exploring future acquisition opportunities. In addition, ELMO anticipates that the IPO will increase brand value and raise the profile of the company. During the 2016 financial year, ELMO’s management made the decision to discontinue its Registered Training Organisation (RTO) operations following a strategic decision to apply greater focus towards growing the Company’s core offering, being the delivery of cloud-based talent management software solutions. ELMO’s RTO operations ceased during the second half of the 2017 financial year. Review of operations during the year Certain financial information in the review of operations section below referencing Statutory Earnings Before Interest, Tax, Depreciation and Amortisation (“EBITDA”) has been derived from the audited financial statements. The pro forma EBITDA, pro forma revenue and pro forma operating expenses are non-IFRS financial information and as such have not been audited in accordance with Australian Accounting Standards. For the full year ended 30 June 2017, ELMO reported statutory revenue of $16.6 million (FY2016: $12.2 million). ELMO’s statutory earnings before income tax, finance expenses, depreciation and amortisation (excluding discontinued operations) was $0.7 million (FY2016: $1.7 million) and its statutory net loss after tax (including discontinued operations) was $0.9 million (FY2016: profit $0.1 million). These statutory results include significant expenses relating to the ASX IPO listing. In the ASX listing prospectus, ELMO reported financial results and forecasts on a pro forma basis. Pro forma adjustments reflect the impact of the acquisition of Techni Works, the RTO discontinued operations, IPO offer costs, standalone public company costs and other non-recurring items. For the full year ended 30 June 2017, ELMO’s pro forma revenue was $17.0 million (FY2016: $13.5 million), which is 3.7% ahead of Prospectus forecast of $16.4 million. ELMO’s pro forma earnings before income tax, finance expenses, depreciation and amortisation was $1.2 million (FY2016: $1.6 million), which is 42% ahead of Prospectus forecast of $0.9 million. ELMO’s pro forma net loss after tax was $0.1 million (FY2016: net profit after tax of $0.2 million). 30 ELMO Software Limited | Annual Report 2017Directors’ report The growth in revenue during the period was being driven by: – – – – – – Expansion of ELMO’s customer base to 524 organisations (including Techni Works customers); Increased investment into ELMO’s sales and marketing team; Enhanced brand awareness and reputation of ELMO and its product offering; Increased traction in new modules, resulting in more cross-sell and upsell opportunities amongst ELMO’s customer base; Continued expansion of ELMO’s operations in New Zealand; and Strong recurring revenues of 93% and high revenue dollar retention rates of 113%. For the full year ended 30 June 2017, ELMO reported statutory operating expenses (excluding discontinued operations) of $16.8 million (2016: $10.8 million) and adjusting for the impact of the acquisition of Techni Works, one-off IPO costs, standalone public company costs and non-recurring items the total pro forma operating expenses were $14.1 million (FY2016: $10.7 million). The key driver for the increase in operating expenses was ELMOs continued investment in future growth. There was increased investment into: – – ELMO’s sales and marketing, which reported expenses of $6.4 million (statutory and pro forma), reflecting a 45% increase compared to pro forma FY2016; and An increase in general and administrative expenses for the period driven by an increase in employment costs to $1.9 million (FY2016: $1.1 million) due to ELMO’s decision to strengthen its infrastructure to scale operations by recruiting middle and senior management. A reconciliation between statutory EBITDA and pro forma EBITDA is provided below. Reconciliation of EBITDA Statutory EBITDA (excluding discontinued operations) Add/(less) net effects of: Acquisition of Techni Works One-off IPO costs Additional listed company cost Other non-recurring items Pro forma EBITDA Year Ended 30 June 2017 $’000 Year Ended 30 June 2016 $’000 656 1,696 275 1,635 (1,115) (229) 1,222 1,234 – (1,135) (229) 1,566 Financial position As at 30 June 2017, ELMO has no debt and a net cash balance of $26.6 million. ELMO’s pro forma cash receipts for the full year ended 30 June 2017 was $19 million, representing 112.2% of pro forma revenue for the period. The consolidated entity’s strong cash position is due to the following factors: IPO: The listing of ELMO in June 2017 resulted in an injection of $25 million cash (less IPO costs). – – Favourable payment terms resulting in positive cashflow: ELMO operates its business under a SaaS-based revenue model whereby customers typically enter into three year contracts and pay annual license fees in advance. The consolidated entity’s working capital, being current assets less current liabilities was a positive position of $17.3 million (2016: net current liabilities of $2.8 million). As a result of the above, the Directors believe the consolidated entity is in a strong and stable position to expand and grow its current operations. Business growth strategy and likely developments – Greater usage from existing customers ELMO aims to increase usage of its solutions amongst the existing customer base by encouraging customers to subscribe to additional modules. ELMO plans to support this via further investment into sales and marketing and broadening its talent management software offering. – – Increasing market penetration in Australia and New Zealand ELMO plans to accelerate its market penetration across Australia and New Zealand by increasing investment into its sales and marketing capabilities and initiatives to drive new customer wins. Expand product offering ELMO recently launched its succession and HR administration module (HR Core) to expand its solutions offering and aims to launch two new modules within the next two years. – Acquisitions ELMO believes that there is an opportunity to gain additional market share and/or acquire complementary technology through targeted acquisitions of other HR management software companies. – Geographic expansion ELMO’s platform has been designed and built on a globally scalable infrastructure which offers a multi-lingual and multi-jurisdictional compatible eLearning course library. This provides ELMO with opportunities to potentially expand into other overseas geographic regions. 31 Matters subsequent to the end of the financial year No other matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on directors Name: Title: Qualifications: Experience and expertise: James (Jim) McKerlie Chairman and Independent Non-Executive Director Bachelor of Economics (B.Ec) and a Diploma in Financial Management from the University of New England. He is a fellow of the Institute of Chartered Accountants, Australian Institute of Company Directors and Institute of Management Consultants. Jim has over 30 years of experience across digital, media, technology, energy and professional services industries. Jim has held senior roles as Partner in Charge at Deloitte Touche Tohmatsu, Managing Partner at KPMG, Chairman of onthehouse.com.au, Executive Chairman of Bullseye and Chairman of Acer Energy and Ambassador Energy. Other current directorships: Chairman of Manalto Limited, Lithium Consolidated Minerals Exploration Limited and Bambu Digital. Independent Non-Executive Director of Beach Energy Former directorships (last 3 years): Chairman of Drillsearch Energy prior to it being acquired by Beach Energy (BPT.ASX) Special responsibilities: Chairman of the Nomination and Remuneration Committee and Member of the Audit and Risk Management Committee Interests in shares: 50,000 fully paid ordinary Shares Interests in options: Contractual rights to shares: None None Name: Title: Danny Lessem Executive Director and Chief Executive Officer Qualifications: Bachelor of Laws (LL.B) and Bachelor of Arts and Law from the University of Witwatersrand, South Africa Experience and expertise: Danny is responsible for leading the development and execution of the Company’s long term strategy and delivering on growth objectives for the business. Danny also plays a key part in the day-to-day management of the Company’s operations and has been critical to the success of ELMO, including the strategy underpinning the development of the Company’s full suite of talent management software solutions. Danny has extensive experience in the technology industry having led SaaS companies for over 15 years in senior roles, including Compu Technologies where he was the CEO and was responsible for overseeing the transition of the Company’s primary business from a digital agency to an eLearning content provider. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of the Audit and Risk Management Committee Interests in shares: 11,989,816 ordinary shares Interests in options: Contractual rights to shares: None None 32 ELMO Software Limited | Annual Report 2017Directors’ report Name: Title: Qualifications: David Hancock Independent Non-Executive Director Bachelor of Business from the Queensland University of Technology (QUT) and a member of the Australian Institute of Company Directors (GAICD) Experience and expertise: David has over 25 years’ experience in financial services and a variety of governance roles. David has been an Executive General Manager at the Commonwealth Bank (CBA:ASX) and was Managing Director and Head of Asia/Australia/Japan Equities for JP Morgan. Other current directorships: Chairman of Freedom Insurance Group Limited (FIG.ASX), Chairman of Finclear Pty Limited, an ASX general and clearing participant, Non-executive Director at Tower Insurance (TWR.ASX) and Non-Executive Director and Chairman of the Audit and Risk Committee at Afterpay (AFY.ASX). Former directorships (last 3 years): Chief Executive Officer at Tower Insurance (TWR.ASX/NZX) Special responsibilities: Member of the Nomination and Remuneration Committee and the Chairman of Audit and Risk Management Committee Interests in shares: Interests in options: Contractual rights to shares: None None None Name: Title: Qualifications: Trevor Lonstein Executive Director and Chief Financial Officer Bachelor of Commerce (B.Com) in Accounting and Finance from University of Cape Town, South Africa and is a Fellow of the Institute of Chartered Accountants in England and Wales. Experience and expertise: Trevor is responsible for all aspects of the accounting and finance function, from ensuring efficient, controlled and timely recording and reporting systems, to budgeting, forecasting, and cash flow analysis. Prior to joining ELMO, Trevor owned and operated Adrite Digital Colour Printing and held senior roles as Senior IT Project Manager at Allens Arthur Robinson, Ships Financial Controller at Orient Cruise Lines – MV Marco Polo and a career of over eight years in auditing with Deloitte Touche Tohmatsu’s member firms in England and Australia. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Member of the Nomination and Remuneration Committee Interests in shares: 420,695 ordinary shares Interests in options: Contractual rights to shares: None None ‘Other current directorships’ quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. ‘Former directorships (last 3 years)’ quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Company Secretary Anna Sandham has held the role of Company Secretary since 1 May 2017. Anna is an experienced company secretary and governance professional with over 20 years’ experience in various large and small, public and private, listed and unlisted companies. Anna has previously worked for companies including AMP Financial Services, Westpac Banking Corporation, BT Financial Group and NRMA Limited. Anna holds a Bachelor of Economics (University of Sydney) and a Graduate Diploma of Applied Corporate Governance (Governance Institute of Australia) and is a Chartered Secretary and a Fellow of the Governance Institute of Australia. 33 Meetings of directors The number of meetings of the company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 30 June 2017, and the number of meetings attended by each director were: James McKerlie Danny Lessem David Hancock Trevor Lonstein Manuel Garber Attended Held 1 2 1 1 1 1 2 1 1 1 Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. The Nomination and Remuneration Committee and the Audit Committee were formed upon listing and no meetings held prior to the year ended 30 June 2017. Remuneration report (audited) The remuneration report details the key management personnel remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: Principles used to determine the nature and amount of remuneration Employee incentive arrangements – – – Details of remuneration – Service agreements – – – Additional information Share-based compensation Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration The objective of the consolidated entity’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to the market best practice for the delivery of reward. The Board of Directors (‘the Board’) ensures that executive reward satisfies the following key criteria for good reward governance practices: – – – – competitiveness and reasonableness acceptability to shareholders performance linkage/alignment of executive compensation transparency The Nomination and Remuneration Committee is responsible for determining and reviewing remuneration arrangements for its directors and executives. The performance of the consolidated entity depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The reward framework is designed to align executive reward to shareholders’ interests. The Board have considered that it should seek to enhance shareholders’ interests by: – – – achieving entity forecasts as a core component of plan design focusing on sustained growth in shareholder wealth, consisting of growth in share price, delivering constant or increasing return on assets, dividends, when deemed appropriate, and as well as focusing the executive on key non-financial drivers of value attracting and retaining high calibre executives Additionally, the reward framework should seek to enhance executives’ interests by: – – – rewarding capability and experience reflecting competitive reward for contribution to growth in shareholder wealth providing a clear structure for earning rewards In accordance with best practice corporate governance, the structure of non-executive director and executive director remuneration is separate. 34 ELMO Software Limited | Annual Report 2017Directors’ report Non-executive Directors remuneration Each of the Non-executive Directors has entered into appointment letters with ELMO, confirming the terms of their appointment and their roles and responsibilities. Under the Constitution, the Board decides the total amount paid to each Non-executive Director as remuneration for their services as a Director. However, under the ASX Listing Rules, the total amount of fees paid to all Directors for their services (excluding, for these purposes, the salary of any Executive Director) must not exceed in aggregate in any financial year the amount fixed by the Company in general meeting. This amount has been fixed by the Company at $750,000 per annum (inclusive of superannuation). Any change to that aggregated annual sum needs to be approved by the Shareholders. The aggregate sum does not include any special and additional remuneration for special exertions and additional services performed by a Director as determined appropriate by the Board. Annual aggregate Non-executive Directors’ fees currently agreed to be paid by the Company are $250,000 per annum. Chairman and independent Non-executive Director, Jim McKerlie, will receive $150,000 (inclusive of superannuation) per annum and independent Non-executive Director, David Hancock, will receive $100,000 (inclusive of superannuation) per annum. Directors may also be reimbursed for expenses properly incurred by the Directors in connection with the affairs of the Company including travel and other expenses in attending to the Company’s affairs. The Directors’ fees do not include a commission on, or a percentage of, profits or income. If a Director renders or is called on to perform extra services or to make any special exertions in connection with the affairs of the Company, the Directors may arrange for special remuneration to be paid to that Director, either in addition to or in substitution for that Director’s remuneration set out above. There are no contractual redundancy or retirement benefit schemes for Non-executive Directors, other than statutory superannuation contributions. Executive remuneration The consolidated entity aims to reward executives based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. The executive remuneration and reward framework for the current year included: – – – cash salary and fees sales commission and bonus where relevant to specified individuals superannuation The combination of these comprises the executive’s total remuneration. Fixed remuneration, consisting of base salary, fees and superannuation will be reviewed annually by the Nomination and Remuneration Committee based on individual and business performance, the overall performance of the consolidated entity and comparable market remunerations. Details of remuneration Amounts of remuneration Details of the remuneration of key management personnel of the consolidated entity during the financial year are set out in the following tables. The key management personnel of the consolidated entity consisted of the following directors of Elmo Software Limited: James McKerlie – Chairman and Independent Non-Executive Director – – Danny Lessem – Executive Director and Chief Executive Officer – David Hancock – Independent Non-Executive Director – – Manuel Garber – Executive Director (resigned 5 June 2017) Trevor Lonstein – Executive Director and Chief Financial Officer And the following persons: – Gordon Starkey – Chief Operating Officer Xin Sun – Chief Technology Officer – – Monica Watt – General Manager – Human Resources – Darryl Garber – Head of Corporate Development and Strategy 35 The table below provides remuneration for key management personnel for the 12 months ended 30 June 2017. Due to the company listing in June 2017 with no remuneration report required for the year ended 30 June 2016 no comparatives for the year ended 30 June 2016 have been disclosed. 2017 Non-Executive Directors: James McKerlie (Chairman) David Hancock Executive Directors: Danny Lessem Manuel Garber Trevor Lonstein Other Key Management Personnel: Trevor Lonstein Gordon Starkey Xin Sun Monica Watt Darryl Garber Short-term benefits Cash salary and fees $ Sales commission $ Cash bonus $ Post- employment benefits Super- annuation $ 12,500 8,333 500,000 272,500 76,923 139,401 220,899 256,833 150,685 74,063 – – – – – – – – 30,000 7,308 – – – – – – – 158,208 45,662 – – – – – – 13,243 38,151 24,399 14,315 6,997 Total $ 12,500 8,333 500,000 272,500 114,231 152,644 462,920 281,232 165,000 81,060 1,712,137 158,208 75,662 104,413 2,050,420 It should be noted that on 5 June 2017 the Non-Executive Directors, James McKerlie and David Hancock were only appointed as Directors of the Company and Manuel Garber resigned as an Executive Director, and the remuneration has thereby been disclosed as appropriate from/until this date. Sales commission and bonus for the year ended 30 June 2017 were only recognized in the following cases: – Gordon Starkey, Chief Operating Officer who has an agreed benefits package including a sales commission of 2% received on new business and a cash bonus based on revenue targets as agreed by the Board. – Trevor Lonstein, Chief Financial Officer who received the bonus of $30,000 upon the successful listing of the company. Trevor was appointed as Director on 6 March 2017, before which time he was a member of other key management personnel. 36 ELMO Software Limited | Annual Report 2017Directors’ report Additional disclosures relating to key management personnel Shareholding The number of shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Non-executive Directors Jim McKerlie David Hancock Executive Directors Danny Lessem Trevor Lonstein Manuel Garber Other Key Management Personnel Gordon Starkey Xin Sun Monica Watt Darryl Garber As at 1 July 2016 Share subdivision1 Issued during the year Post share split2 Purchased during IPO As at 30 June 2017 – – 12 – 12 – – – – – – 285 – 285 – – – – – – – 10 – 10 10 – 10 – – 11,989,816 420,695 –3 50,000 50,000 – – – – – 11,989,816 420,695 – 420,695 420,695 – 90,250 5,000 1,250 510,945 425,695 1,250 420,695 40,250 460,945 1. The Company undertook a share subdivision with a ratio of 23.75 for each of its ordinary shares. 2. The Company undertook a share split with a ratio of 42,069.53 for each of its ordinary shares. 3. No further disclosures have been made with regard to Manuel Garber as he resigned as director on 5 June 2017 prior to the IPO taking place. Option holding Nil options are held by directors or other members of key management personnel of the consolidated entity, including their personally related parties. Voting and comments to be made at the company’s Annual General Meeting (‘AGM’) As the Company only converted to a public company in March and only listed on the ASX on 27 June 2017, no public AGM was held in the previous financial year. The 2017 AGM is expected to be held in November 2017 at which time shareholders will have the opportunity to vote on this remuneration report and provide feedback regarding its remuneration practices. Issue of shares and options No shares or options have been issued in the last financial year as a part of share-based compensation. For the financial years ended 30 June 2017 and 30 June 2016 there was no link between Company performance and KMP remuneration with the exception of those individuals disclosed separately above. However, two of the executive members of the KMP (Danny Lessem the CEO and Trevor Lonstein the CFO) continue to hold a substantial shareholding thereby providing a significant alignment of interests with company performance. Each of these executive KMP have had their executive service agreements, particularly their base pay, amended to reflect their roles in the Group. For the year ended 30 June 2017, the earnings per share were -2.20 cents (2016: 0.21 cents). Shares in the company closed on 30 June 2017 at $2.50. Other transactions with key management personnel and their related parties During the financial year, there were no other transactions with key management personnel and their related parties. This concludes the section of the remuneration report which has been audited. 37 Expected changes to remuneration for key management personnel for the year ending 30 June 2018 (unaudited) Service agreements Following the listing of ELMO in June 2017 the remuneration and other terms of employment for the following directors are detailed as follows: Name: Title: Details: Name: Title: Details: Name: Title: Details: Name: Title: Details: Name: Title: Details: Name: Title: Details: Danny Lessem Executive Director and Chief Executive Officer Base salary for the year ending 30 June 2018 of $500,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. It has been agreed with the Board that for FY18 Danny has elected with Board approval not to participate in any short term incentive plan or long term incentive program. Following this time the Nomination and Remuneration Committee will approve appropriate incentive arrangements under the new incentive schemes. Trevor Lonstein Executive Director and Chief Financial Officer Base salary for the year ending 30 June 2018 of $300,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee. 6 month termination notice by either party. Trevor will be eligible for a cash bonus to be determined by the Nomination and Remuneration Committee dependent on financial performance of the company and KPI achievement as agreed by the Board. Trevor is also eligible to participate in the long term incentive programs for the year ending 30 June 2018. Gordon Starkey Chief Operating Officer Base salary for the year ending 30 June 2018 of $330,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee. 1 month termination notice by either party. Gordon will be eligible for short term and long term incentive benefits under the schemes listed below as per Nomination and Remuneration Committee approval and KPI achievement, non-solicitation and non-compete clauses. Xin Sun Chief Technology Officer Base salary for the year ending 30 June 2018 of $300,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee. 30 day termination notice by either party. Xin will be eligible for short term and long term incentive benefits under the schemes listed below as per Nomination andRemuneration Committee approval and KPI achievement, non-solicitation and non-compete clauses. Monica Watt General Manager – Human Resources Base salary for the year ending 30 June 2018 of $175,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee. 30 day termination notice by either party. Monica will be eligible for short term and long term incentive benefits under the schemes listed below as per Nomination and Remuneration Committee approval and KPI achievement, non-solicitation and non-compete clauses. Darryl Garber Head of Corporate Development and Strategy Base salary for the year ending 30 June 2018 of $200,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee. 6 month termination notice by either party. Darryl will be eligible for short term and long term incentive benefits under the schemes listed below as per Nomination and Remuneration Committee approval and KPI achievement, non-solicitation and non-compete clauses. ELMO has established a short term incentive plan and long term incentive program for the year ending 30 June 2018. 38 ELMO Software Limited | Annual Report 2017Directors’ report Short term incentive plan (STI Plan) ELMO has established a short term incentive plan under which employees may be provided with a cash bonus for achievement against key performance metrics. Participation in the STI Plan will be determined at the discretion of the Board. Key performance metrics will generally relate to conditions that are within the control of the employee, for example divisional profit targets, strategic measures or other such conditions as ELMO may decide. Subject to the discretion of the Board, the STI Plan has been structured based on the overall remuneration structure to be adopted by ELMO such that 60% of an employee’s total package will consist of fixed pay and 40% as performance pay, with the performance pay component divided such that 60% will be based on short term performance and 40% of long term performance. The quantum of any reward will be determined by the Board. Amounts to be paid to employees under the STI Plan will typically be paid after the release of full financial year audited results, and in accordance with the annual review process. Long-term incentive program (LTI Program) ELMO has established both a Senior Executive Equity Plan (SEEP) and a High Performer Equity Plan (HPEP) as part of its LTI Program. Equity incentives under the SEEP or the HPEP may be granted to employees (or such other person that the Board determines is eligible to participate) in respect of FY18 and beyond. Offers will be made at the discretion of the Board. The terms of the incentives granted under these plans will be determined by the Board at grant and may therefore vary over time. ELMO will regularly assess the appropriateness of its incentive plans and may amend or replace, suspend or cease using either or both of the SEEP or HPEP if considered appropriate by the Board. The Senior Executive Equity Plan (SEEP) The SEEP is intended to align the interests of the senior executives with Shareholders. Awards under the SEEP will be structured as an option to receive Shares at a future date subject to the recipient paying the exercise price (SEEP Option). The rules of the SEEP will provide the Board with the flexibility to award restricted shares, performance rights and options, and to cash settle any award, at the discretion of the Board. Grants under the SEEP are expected to be made annually and will be made to the senior executive team and such other executives as the Board may determine from time to time. Any grants will be made subject to the ASX Listing Rules, to the extent applicable. Shares under option There are nil unissued ordinary shares of Elmo Software Limited under option at the date of this report. Shares issued on the exercise of options There were nil ordinary shares of Elmo Software Limited issued during the year ended 30 June 2017 and up to the date of this report on the exercise of options. Indemnity and insurance of officers The company has indemnified the directors and executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the company paid a premium in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. 39 Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 26 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 26 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: – – all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. Officers of the company who are former partners of Deloitte Touche Tohmatsu James McKerlie, Chairman and Non-Executive Director, is a former partner of Deloitte Touche Tohmatsu but not at a time when the audit firm undertook an audit of the company. Rounding of amounts The company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors’ report. Auditor Deloitte Touche Tohmatsu continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors Danny Lessem Director 30 August 2017 Sydney Trevor Lonstein Director 40 ELMO Software Limited | Annual Report 2017Directors’ report Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au 30 August 2017 The Board of Directors Elmo Software Limited Westfield Tower One Level 25, Suite 2502 520 Oxford Street Bondi Junction NSW 2022 Dear Board Members Elmo Software Limited I am pleased to provide the following declaration of independence to the directors of Elmo Software Limited. As lead audit partner for the audit of the financial statements of Elmo Software Limited for the year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) (ii) the auditor independence requirements in relation to the audit; and any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Joshua Tanchel Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 15 41 Auditor’s independence declaration Revenue from rendering of services Cost of sales Gross profit Interest income Other income Sales and marketing expenses Research and development expenses General and administrative expenses (Loss)/profit before income tax benefit from continuing operations1 Income tax benefit (Loss)/profit after income tax benefit from continuing operations Loss after income tax benefit from discontinued operations (Loss)/profit after income tax benefit Other comprehensive income for the year, net of tax Total (comprehensive loss)/comprehensive income for the year attributable to the owners of Elmo Software Limited Earnings per share From continuing operations Basic earnings Diluted earnings Earnings per share From discontinued operations Basic earnings Diluted earnings Consolidated 2017 $’000 16,564 (1,679) 14,885 31 125 (6,397) (338) (10,031) (1,725) 978 (747) (173) (920) – (920) 2016 $’000 12,179 (1,190) 10,989 49 22 (4,434) (437) (5,927) 262 275 537 (450) 87 – 87 Cents Cents (1.79) (1.79) (0.41) (0.41) 1.34 1.34 (1.13) (1.13) Note 3 4 5 5 6 7 33 33 33 33 The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 1 Includes $1.635m of IPO related costs as per Note 5 to the Financial Statements. 42 ELMO Software Limited | Annual Report 2017Statement of profit or loss and other comprehensive income For the year ended 30 June 2017 Assets Current assets Cash and cash equivalents Trade and other receivables Income tax and R&D refundable Other current assets Total current assets Non-current assets Deferred tax Property, plant and equipment Intangible assets and capitalised costs Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Business combination liability Employee benefits Revenue received in advance Total current liabilities Non-current liabilities Deferred tax Employee benefits Total non-current liabilities Total liabilities Net assets/(liabilities) Equity Issued capital Accumulated losses Reserves Equity attributable to the owners of Elmo Software Limited Total equity/(Total deficit) The above statement of financial position should be read in conjunction with the accompanying notes Consolidated 2017 $’000 2016 $’000 Note 8 9 10 11 18 12 13 14 15 16 17 18 19 21 22 24 26,601 3,568 503 372 31,044 99 506 5,971 6,576 37,620 3,014 1,000 654 9,072 13,740 – 115 115 13,855 23,765 25,110 (1,298) (47) 23,765 23,765 3,017 2,227 536 244 6,024 – 385 2,951 3,336 9,360 1,446 – 454 6,966 8,866 408 114 522 9,388 (28) 350 (378) – (28) (28) 43 Statement of financial positionAs at 30 June 2017 Consolidated Balance at 1 July 2015 Profit after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Balance at 30 June 2016 Consolidated Balance at 1 July 2016 Loss after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive loss for the year Transactions with owners in their capacity as owners: Issue of shares to the public on IPO (net of issue costs) Issue of employees gift shares Issue of F Class share capital Reserves Balance at 30 June 2017 Foreign currency translation reserves $’000 Issued capital $’000 350 – – – 350 – – – – – Accumulated losses $’000 Total deficit $’000 (465) (115) 87 – 87 (378) 87 – 87 (28) Foreign currency translation reserves $’000 Issued capital $’000 Retained profits $’000 Total (deficit)/ equity $’000 350 – – – 23,515 45 1,200 – 25,110 – – – – – – – (47) (47) (378) (920) – (1,298) – – – – (28) (920) – (948) 23,515 45 1,200 (47) (1,298) 23,765 The above statement of changes in equity should be read in conjunction with the accompanying notes 44 ELMO Software Limited | Annual Report 2017Statement of changes in equityFor the year ended 30 June 2017 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest and other finance costs paid Income taxes refunded Net cash from operating activities Cash flows from investing activities Interest received Payments for property, plant and equipment Payments for intangibles Advances to related party Payment for purchase of Techni Works Group, net of cash acquired Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Share issue transaction costs Dividends paid Repayment of related party advances Net cash from/(used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year The above statement of cash flows should be read in conjunction with the accompanying notes Consolidated 2017 $’000 2016 $’000 Note 18,527 (15,529) 2,998 (21) 578 3,555 31 (308) (2,764) – (1,046) (4,087) 26,200 (2,084) – – 24,116 23,584 3,017 26,601 14,693 (12,086) 2,607 (23) 705 3,289 49 (251) (2,259) (7) – (2,468) – – – (500) (500) 321 2,696 3,017 32 23 8 45 Statement of cash flowsFor the year ended 30 June 2017 Note 1. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The financial statements have been prepared under the historical cost convention. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in note 29. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Elmo Software Limited (‘company’ or ‘parent entity’) as at 30 June 2017 and the results of all subsidiaries for the year then ended. Elmo Software Limited and its subsidiaries together are referred to in these financial statements as the ‘consolidated entity’. Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in Australian dollars, which is Elmo Software Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. 46 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Revenue recognition 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. Rendering of services Services revenue is predominantly from recurring revenues associated with the cloud-based Talent Management Software Solutions. The agreements with customers do not include general rights of return and do not provide customers with the right to take possession of the software supporting the services being provided. As such, revenue is recognized in equal monthly amounts over the life of the agreement, usually a 3 year term, when all of the following criteria are achieved: – – – – There is persuasive evidence of an agreement; The service has been provided to the customer; Collection of the fees is reasonably assured; and The amount of fees to be paid by the customer is fixed or determinable. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Government grants Government grants, including non-monetary grants at fair value, are only recognised when there is reasonable assurance that: a. all conditions attaching to the Government grant will be complied with; b. the value of the grant can be determined with reasonable certainty; and c. the grant will be received. Government grants are recognised as revenue during the period, or periods in which the expenses for which the grants are intended to compensate are recognised. If the Government grant cannot be determined with reasonable certainty, then the grant is recognised as revenue when it is received. Cost of sales Cost of sales includes wages, salaries and other expenses of employees who carry out implementation, training and support of software for customers. Cost of sales also includes third party hosting costs. Income tax The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. The major impact on the income tax expense is the benefit obtained from the Research & Development Tax Incentive that is being received as a tax refund. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: – When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or – When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. 47 Note 1. Significant accounting policies (continued) Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash at bank. Trade and other receivables Trade receivables are initially recognised at cost being their carrying value which is a reasonable approximation of their fair value. Trade receivables are generally due for settlement within 30 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Leasehold improvements Plant and equipment Computer equipment 3 – 10 years 3 – 7 years 2 – 4 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Any revaluation surplus reserve relating to the item disposed of is transferred directly to retained profits. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. 48 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Software development costs – Research and development Research costs are expensed in the period in which they are incurred. Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility; the consolidated entity is able to use or sell the asset; the consolidated entity has sufficient resources; and intent to complete the development and its costs can be measured reliably. Software development costs have a finite life and are amortised on a systematic basis matched to the future economic benefits over the 3 year useful life of the software. Capitalised sales commission costs Commission costs paid to employees as a remuneration for securing a new contract are amortised on a straight-line basis over the period of the contract (1 – 3 years). Customer list The acquired customer list is amortised over management’s best estimate of its useful life over 7 years on a straight-line basis. Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Finance costs Finance costs are expensed in the period in which they are incurred. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 49 Note 1. Significant accounting policies (continued) Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the company. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity’s operating or accounting policies and other pertinent conditions in existence at the acquisition date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit or loss attributable to the owners of Elmo Software Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. 50 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Rounding of amounts The company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2017. The consolidated entity’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, are set out below. AASB 9 Financial Instruments This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of AASB 9 and completes the project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. AASB 9 introduces new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost, if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, which arise on specified dates and solely principal and interest. All other financial instrument assets are to be classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading) in other comprehensive income (‘OCI’). For financial liabilities, the standard requires the portion of the change in fair value that relates to the entity’s own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements will use an ‘expected credit loss’ (‘ECL’) model to recognise an allowance. Impairment will be measured under a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. The standard introduces additional new disclosures. The consolidated entity will adopt this standard from 1 July 2018 but the impact of its adoption is yet to be assessed by the consolidated entity. AASB 15 Revenue from Contracts with Customers This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard provides a single standard for revenue recognition. The core principle of the standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will require: contracts (either written, verbal or implied) to be identified, together with the separate performance obligations within the contract; determine the transaction price, adjusted for the time value of money excluding credit risk; allocation of the transaction price to the separate performance obligations on a basis of relative stand-alone selling price of each distinct good or service, or estimation approach if no distinct observable prices exist; and recognition of revenue when each performance obligation is satisfied. Credit risk will be presented separately as an expense rather than adjusted to revenue. For goods, the performance obligation would be satisfied when the customer obtains control of the goods. For services, the performance obligation is satisfied when the service has been provided, typically for promises to transfer services to customers. For performance obligations satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. Contracts with customers will be presented in an entity’s statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance and the customer’s payment. Sufficient quantitative and qualitative disclosure is required to enable users to understand the contracts with customers; the significant judgments made in applying the guidance to those contracts; and any assets recognised from the costs to obtain or fulfil a contract with a customer. The consolidated entity will adopt this standard from 1 July 2018 but the impact of its adoption is yet to be assessed by the consolidated entity. 51 Note 1. Significant accounting policies (continued) New Accounting Standards and Interpretations not yet mandatory or early adopted (continued) AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. The standard replaces AASB 117 ‘Leases’ and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a ‘right-of-use’ asset will be capitalised in the statement of financial position, measured at the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a ‘right-of-use’ asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) component. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The consolidated entity will adopt this standard from 1 July 2019 but the impact of its adoption is yet to be assessed by the consolidated entity. Note 2. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Estimation of useful lives of assets The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Goodwill and other indefinite life intangible assets The consolidated entity tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 1. The recoverable amounts of cash-generating units have been determined based on the fair value less costs to sell calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The consolidated entity assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Capitalisation of Software Development costs As discussed in Note 1 internally generated Software development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility; the consolidated entity is able to use or sell the asset; the consolidated entity has sufficient resources; and intent to complete the development and its costs can be measured reliably. Business combinations As discussed in note 1, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the consolidated entity taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. 52 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Note 3. Revenue from rendering of services Identification of reportable operating segments The Group operates in one segment, based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers (CODM)) in assessing performance and in determining the allocation of resources. As a result, the operating segment information is disclosed in the statements and notes to the financial statements. Geographical information Australia New Zealand Singapore Revenue from external customers Geographical non-current assets 2017 $’000 16,396 – 168 2016 $’000 12,097 – 82 2017 $’000 6,439 32 6 2016 $’000 3,330 – 6 16,564 12,179 6,477 3,336 The majority of the Group’s revenue is generated from sales contracts with Australian, Singapore and New Zealand companies. The geographic split of this revenue across all companies is: a) Australia (93.3%, 2016: 96.3%); b) New Zealand (5.3%, 2016: 2.7%); c) Singapore (1.0%, 2016: 0.7%); and d) Other (0.4%, 2016: 0.3%). The geographical non-current assets above are exclusive of, where applicable, financial instruments, deferred tax assets, post-employment benefits assets and rights under insurance contracts. Note 4. Other income Government grants Rent received from temporary sub-leasing of office Other income Consolidated 2017 $’000 72 – 53 125 2016 $’000 – 3 19 22 53 Note 5. Expenses (Loss)/profit before income tax benefit includes the following specific expenses: Sales and marketing expenses Advertising Sales and marketing related – Wages, commissions and on-cost Seminars and sponsorships General and administrative expenses Accounting and secretarial expenses Amortisation expenses Audit fees Bad debt expenses Bank charges Bookkeeping expenses Depreciation expenses Directors’ fees Employment expenses IPO-related costs Rental expenses Subcontractors Subscriptions Telephone and Internet expenses Travelling expenses Other expenses Consolidated 2017 $’000 2016 $’000 1,142 4,354 901 6,397 98 2,225 142 101 28 19 187 835 1,927 1,635 553 108 235 205 734 999 1,453 2,138 843 4,434 49 1,392 36 178 22 84 91 772 1,117 – 428 35 130 105 694 794 10,031 5,927 54 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Note 6. Income tax benefit Income tax benefit Current tax Deferred tax – origination and reversal of temporary differences Aggregate income tax benefit Income tax benefit is attributable to: Loss from continuing operations Loss from discontinued operations Aggregate income tax benefit Deferred tax included in income tax expense comprises: Increase in deferred tax assets/(increase in deferred tax liabilities) (note 18) Deferred tax – origination and reversal of temporary differences Numerical reconciliation of income tax benefit and tax at the statutory rate (Loss)/profit before income tax benefit from continuing operations Loss before income tax benefit from discontinued operations Loss before income tax benefit Tax at the statutory tax rate of 30% Consolidated 2017 $’000 2016 $’000 422 630 1,052 978 74 1,052 630 630 (1,725) (247) (1,972) 592 505 (37) 468 275 193 468 (37) (37) 262 (643) (381) 114 Tax effect amounts which are (not deductible)/taxable in calculating taxable income: Effect of expenses that are not deductible in determining taxable profit (1,070) (643) Effect of tax concession (Research and Development Tax Incentives) Adjustment recognised for prior periods Income tax benefit 900 422 – 1,052 996 467 38 468 Note 7. Discontinued operations The Company completed the wind down of its Registered Training Organisation (RTO) division on 13 January 2017. The division has been disclosed as a discontinued operation. Results of discontinued operations Consolidated Revenue from rendering of services (2017: refund to customers) Cost of sales (Gross loss)/gross profit Sales and marketing expenses General and administrative expenses Operating loss from discontinued operation Income tax benefit Loss after income tax benefit from discontinued operations 2017 $’000 (10) (101) (111) (35) (101) (247) 74 (173) The loss after income tax benefit from the discontinued operation of $173,193 (2016: loss of $450,024) is attributable entirely to the owners of the Company. 2016 $’000 423 (354) 69 (489) (223) (643) 193 (450) 55 Note 8. Current assets – cash and cash equivalents Cash at bank Note 9. Current assets – trade and other receivables Trade receivables Allowance for doubtful debts Other receivables Consolidated 2017 $’000 26,601 2016 $’000 3,017 Consolidated 2017 $’000 4,402 (914) 3,488 80 3,568 2016 $’000 3,013 (851) 2,162 65 2,227 Impairment of receivables The consolidated entity has recognised a loss of $101,816 (2016: $177,797) in profit or loss in respect of impairment of receivables for the year ended 30 June 2017. The ageing of the impaired receivables provided for above are as follows: 0 to 3 months overdue 3 to 6 months overdue Movements in the provision for impairment of receivables are as follows: Opening balance Additional net provisions recognised Closing balance Note 10. Current assets – income tax and R&D refundable Income tax and R&D tax incentive refundable Consolidated 2017 $’000 515 399 914 2016 $’000 684 167 851 Consolidated 2017 $’000 851 63 914 2016 $’000 14 837 851 Consolidated 2017 $’000 503 2016 $’000 536 The company expects the R&D tax incentive related to the financial year 2017 will be available to the company. Further, the company intends to submit the 2017 R&D tax incentive application and has recorded those amounts in the financial statements for the year ended 30 June 2017 although the company will lodge the R&D tax incentive application to the AusIndustry after 30 June 2017. An estimate of the 2017 R&D credits have been included as it is expected that the company will receive these in line with previous claims made with AusIndustry. 56 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Note 11. Current assets – other Prepayments Other debtors Note 12. Non-current assets – property, plant and equipment Plant and equipment – at cost Less: Accumulated depreciation Computer equipment – at cost Less: Accumulated depreciation Leasehold improvements – at cost Less: Accumulated depreciation Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2015 Additions Depreciation expense Balance at 30 June 2016 Additions Depreciation expense Balance at 30 June 2017 Plant and equipment $’000 Computer equipment $’000 Leasehold improvements $’000 62 10 (21) 51 143 (41) 153 118 159 (62) 215 70 (115) 170 45 82 (8) 119 95 (31) 183 Consolidated 2017 $’000 259 113 372 2016 $’000 179 65 244 Consolidated 2017 $’000 396 (243) 153 606 (436) 170 233 (50) 183 506 2016 $’000 253 (202) 51 536 (321) 215 138 (19) 119 385 Total $’000 225 251 (91) 385 308 (187) 506 57 Note 13. Non-current assets – intangibles Software development costs Less: Accumulated amortisation Capitalised sales commission costs Less: Accumulated amortisation Customer list (acquired through business combinations) Less: Accumulated amortisation Goodwill (acquired through business combinations) Consolidated 2017 $’000 6,293 (3,521) 2,772 1,692 (930) 762 410 (44) 366 2,071 5,971 2016 $’000 4,069 (1,828) 2,241 1,153 (443) 710 – – – – 2,951 Total $’000 2,084 2,259 (1,392) 2,951 2,764 2,481 (2,225) 5,971 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2015 Additions Amortisation expense Balance at 30 June 2016 Additions Additions through business combinations (note 15) Amortisation expense Balance at 30 June 2017 Software development costs $’000 Capitalised commission costs $’000 Customer list $’000 Goodwill $’000 1,677 1,663 (1,099) 2,241 2,225 – (1,694) 2,772 407 596 (293) 710 539 – (487) 762 – – – – – 410 (44) 366 – – – – – 2,071 – 2,071 Goodwill is acquired through the acquisition of Techni Works Pty Limited, please refer to Note 15 for further details. An impairment loss, if any, is recognised for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is determined on a Fair Value Less Cost to Sell and as at 30 June 2017 there are no indicators to suggest that an impairment would occur. Note 14. Current liabilities – trade and other payables Consolidated 2017 $’000 2,390 599 25 3,014 2016 $’000 614 807 25 1,446 Trade payables and accruals Other payables Loans from a related party 58 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Note 15. Business combinations On 7 October 2016, Elmo Software Ltd acquired 100% of the ordinary shares of Techni Works Pty Ltd and its controlled subsidiary, Techni Works Action Learning Pty Ltd for the total consideration transferred of $2,062,360. Techni Works is an Australian eLearning company specialising in the provision of Australian focused cloud based eLearning courses. The strategic rationale underpinning the acquisition of Techni Works and resulting in goodwill on acquisition included: – Margin expansion from synergy cost savings as a result of a significant reduction in operational costs; – – Low integration risk and ability to extract significant operational efficiencies from leveraging ELMO’s existing infrastructure; Increasing market share with an enlarged customer base of 82 additional customer. This allows ELMO account managers to leverage existing Techni Works customer relationships to establish new contracts from upselling and cross-selling of ELMO’s full suite of talent management software solutions; and – Expanding ELMO’s learning module platform with the addition of new eLearning courses. Details of the acquisition are as follows: Plant and equipment Customer list intangible Other assets Deferred tax liability Deferred revenue Net identifiable liabilities acquired Goodwill on acquisition Acquisition-date fair value of the total consideration transferred Fair value $’000 22 410 147 (123) (465) (9) 2,071 2,062 Of the total consideration, $1,062,360 was paid in cash and $1,000,000 is shown as a Business Combination liability within current liabilities. The business combination liability is based on the directors’ best estimate of Techni Works revenues during the contractual earn out period of one year from the acquisition date. Note 16. Current liabilities – employee benefits Employee benefits Consolidated 2017 $’000 654 2016 $’000 454 Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements 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 is presented as current, since the consolidated entity does not have an unconditional right to defer settlement. Note 17. Current liabilities – revenue received in advance Revenue received in advance Consolidated 2017 $’000 9,072 2016 $’000 6,966 59 Note 18. Non-current assets/liabilities – deferred tax Share issue expenses Provision for doubtful debts Prepayments Property, plant and equipment Intangibles Black hole expenses – IPO costs Customer list Less: Accumulated depreciation – Customer list Superannuation payables Accruals Provision for employee benefits Deferred tax asset/(deferred tax liability) Note 19. Non-current liabilities – employee benefits Employee benefits Note 20. Financial risk management As at 1 July 2016 Recognised in profit or loss (Note 6) Acquired in business combinations (Note 15) As at 30 June 2017 27 58 9 37 (885) – – – 54 122 170 (408) (7) 77 (9) (3) (175) 738 – 13 17 (82) 61 630 – – – – – – (123) – – – – (123) 20 135 – 34 (1,060) 738 (123) 13 71 40 231 99 Consolidated 2017 $’000 115 2016 $’000 114 Credit risk Credit risk is the risk of financial loss to the consolidated entity if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The maximum exposure to credit risk at balance date to recognised financial assets is the carrying amount of the customer outstanding balances less any provision for impairment of those assets, as disclosed in the Consolidated statement of financial position. These predominantly relate to trade receivables (see note 9). Liquidity risk Liquidity risk is the risk that the consolidated entity will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by cash or other financial asset. The consolidated entity’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the consolidated entity’s reputation. Market risk: Currency risk ELMO’s financial statements are presented in Australian Dollars with only a small proportion of sales denominated in overseas currencies as denoted under note 3 Revenue from rendering of services. At the current time therefore the risk due to foreign exchange movements is determined to be immaterial; however this risk will continue to be assessed in future years. 60 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Note 21. Equity – issued capital Ordinary shares – fully paid Movements in ordinary share capital Details Opening balance Shares subdivision F class issued F class converted to ordinary shares Balance pre share split and IPO Consolidated Consolidated 2017 Shares 54,171,584 2016 Shares 40 2017 $’000 25,110 Note Date Shares F class shares Issue price 1 July 2016 1 20 September 2016 40 910 40 990 – – 40 (40) – – – – – – – $30,000 – – $2.00 – $2.00 2016 $’000 350 $’000 350 – 1,200 – 1,550 – 25,000 (1,485) 45 25,110 Share split under IPO 2 5 June 2017 41,648,834 Issue of shares to the public on IPO Less: Capitalised IPO costs Issue of employees gift shares Balance 22 June 2017 12,500,000 22 June 2017 22 June 2017 – 22,750 30 June 2017 54,171,584 Note 1. The Company undertook a 23.75 for 1 share split of its ordinary shares. Note 2. The existing 990 shares at this time were split on a ratio of 42,069.53. Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The consolidated entity’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The consolidated entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current company’s share price at the time of the investment. The consolidated entity is subject to certain financing arrangements covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. The capital risk management policy remains unchanged from the 30 June 2016 Annual Report. 61 Note 22. Equity – accumulated losses Accumulated losses at the beginning of the financial year (Loss)/profit after income tax benefit for the year Accumulated losses at the end of the financial year Note 23. Equity – dividends There were no dividends paid or proposed for the year ended 30 June 2017 (2016 $nil). Note 24. Equity – reserves Foreign exchange translation reserve Note 25. Key management personnel disclosures Compensation The aggregate compensation made to directors and key management personnel of the consolidated entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Consolidated 2017 $’000 (378) (920) (1,298) 2016 $’000 (465) 87 (378) Consolidated 2017 $’000 (47) (47) 2016 $’000 – – Consolidated 2017 $’000 1,946 104 – 2,050 2016 $’000 1,634 – 50 1,684 62 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Note 26. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by Deloitte Touche Tohmatsu, the auditor of the company, its network firms and unrelated firms: Audit services – Deloitte Touche Tohmatsu Audit of the financial statements Other services – Deloitte Touche Tohmatsu Audit services – UHY Haines Norton Audit of the financial statements Other services – UHY Haines Norton Assistance in preparation of financial statements, tax return and other consultancy services Consolidated 2017 $ 2016 $ 148,000 325,000 473,000 – – – 75,000 30,000 96,000 171,000 35,000 65,000 During the financials year the following fees are payable for services provided by Mann & Associates PAC, the accountants and auditors of the Elmo Talent Management Software Pte Limited: Audit services – unrelated firms Audit of the financial statements for Elmo Talent Management Software Pte Limited 3,000 6,000 Other services Accountancy fees for Elmo Talent Management Software Pte Limited Note 27. Commitments Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years 9,000 12,000 14,000 20,000 Consolidated 2017 $’000 2016 $’000 530 571 1,101 220 31 251 Operating lease commitments includes contracted amounts for various retail outlets, warehouses, offices and plant and equipment under non- cancellable operating leases expiring within one to ten years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. 63 Note 28. Related party transactions Parent entity Elmo Software Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 30. Key management personnel Disclosures relating to key management personnel are set out in note 25 and the remuneration report included in the directors’ report. Loans to/from related parties There were no loans to or from related parties at the current reporting date. The Company had a loan payable of $24,564 with one of its shareholders in the 2017 and 2016 financial year. Other related party transactions Elmo Talent Management Software Pte Limited Techniworks Action Learning Pty Limited Elmo Software Limited Transactions during the year ended 30 June Balance as at 30 June 2017 $’000 45 479 198 2016 $’000 74 – – 2017 $’000 623 479 198 2016 $’000 578 – – During the year an amount of $134,642 was written off from the receivable due from the Singapore subsidiary, Elmo Talent Management Software Pte Limited. All transactions and outstanding balances are on an arm’s length basis and unsecured basis. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. 64 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Note 29. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income (Loss)/profit after income tax benefit Total comprehensive (loss)/income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital (Accumulated losses)/retained profits Total equity Parent Parent 2017 $’000 (927) (927) 2017 $’000 30,317 37,911 13,412 13,527 25,110 (726) 24,384 2016 $’000 143 143 2016 $’000 5,983 9,938 8,865 9,387 350 201 551 Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2017 and 30 June 2016. Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2017 and 30 June 2016. Significant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in note 1, except for the following: Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. – – Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. Note 30. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following wholly-owned subsidiaries in accordance with the accounting policy described in Note 1: Name Principal place of business/Country of incorporation Elmo Talent Management Software Pte Limited Singapore Elmoaccredited Pty Limited Elmo Talent Management Software Pty Limited International Colleges Pty Limited Studywell College Pty Limited Techni Works Pty Limited Techniworks Action Learning Pty Limited Australia Australia Australia Australia Australia Australia Elmo Software Limited New Zealand Ownership interest 2017 % 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 2016 % 100.00% 100.00% 100.00% 100.00% 100.00% – – – 65 Note 31. Events after the reporting period There is no other matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Note 32. Reconciliation of profit after income tax to net cash from operating activities Consolidated 2017 $’000 (920) 101 2,412 (47) 1,635 (11) (31) (1,442) (128) (424) 33 (507) 577 201 2,106 3,555 2016 $’000 87 178 1,483 30 – – (49) (67) 102 – 200 37 252 154 882 3,289 (Loss)/profit after income tax benefit for the year Adjustments for: Bad debt expense Depreciation and amortisation (Foreign exchange gain)/foreign exchange loss IPO costs Other costs Interest received Change in operating assets and liabilities: Increase in trade and other receivables (Increase)/decrease in other assets Increase in intangibles Decrease in income tax refundable (Decrease)/increase in deferred tax liabilities Increase in trade and other payables Increase in employee benefits Increase in revenue received in advance Net cash from operating activities 66 ELMO Software Limited | Annual Report 2017Notes to the financial statements30 June 2017 Note 33. Earnings per share Earnings per share for profit from continuing operations (Loss)/profit after income tax Basic earnings per share Diluted earnings per share Earnings per share for profit from discontinued operations Loss after income tax Basic earnings per share Diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Options over ordinary shares Consolidated 2017 $’000 2016 $’000 (747) 537 Cents (1.79) (1.79) Cents 1.34 1.34 Consolidated 2017 $’000 2016 $’000 (173) (450) Cents (0.41) (0.41) Cents (1.13) (1.13) Number Number 41,699,592 39,966,054 – – Weighted average number of ordinary shares used in calculating diluted earnings per share 41,699,592 39,966,054 The weighted average number of ordinary shares used in calculating the earnings per share for 2016 has been amended to reflect the share split as detailed in note 21. 67 In the directors’ opinion: – – – – the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in Note 1 to the financial statements; the attached financial statements and notes give a true and fair view of the consolidated entity’s financial position as at 30 June 2017 and of its performance for the financial year ended on that date; there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors Danny Lessem Director 30 August 2017 Sydney Trevor Lonstein Director 68 ELMO Software Limited | Annual Report 2017Directors’ declaration30 June 2017 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au Independent Auditor's Report to the Members of Elmo Software Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Elmo Software Limited (the “Company”) and its subsidiaries (the “Group”), which comprises the Consolidated Statement of Financial Position as at 30 June 2017, the Consolidated Statement of Profit or Loss and Other Comprehensive Income, the Consolidated Statement of Changes in Equity and the Consolidated Statement of Cash Flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) (ii) Giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year then ended; and Complying with Australian Standards and the Corporations Regulation 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board's APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor's report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 46 69 Independent auditor’s reportto the members of Elmo Software Limited Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter Revenue Recognition – rendering of services ($16.6m) Refer to the description of accounting principles and Note 3. For the year ended 30 June 2017, $16.6 million was recognised by the Group from rendering of services. How the scope of our audit responded to the Key Audit Matter Our audit procedures included, but were not limited to: • Obtaining an understanding of the revenue streams and the appropriateness of the Group’s principles in determining that the revenue recognized is in accordance with the criteria outlined in the applicable accounting standards; As the Group continues to expand, and its software offering evolves, there is a considerable risk associated with recognizing its services revenue. • Assessing the key controls in relation to the recognition and measurement of revenue; A significant level of judgment is required in complying with applicable accounting standards relevant to revenue recognition. This judgment along with the manual nature of the calculations, could affect the timing and quantum of revenue recognized in each period. • • • Testing on a sample basis, revenue transactions by assessing management’s calculations against the relevant criteria and tracing to agreements with clients; Testing journal entries posted to revenue accounts to identify any unusual items; Testing on a sample basis the completeness of credit notes issued post year end; and • Reconciling the deferred revenue balance as at 30 June 2017 using the invoice amortisation schedule, noting any exceptions. We also assessed the appropriateness of the disclosures in note 3 to the financial statements. 47 70 ELMO Software Limited | Annual Report 2017Independent auditor’s reportto the members of Elmo Software Limited Recoverability of Trade Receivables Refer to the description of accounting policies and Note 9. As at 30 June 2017 the Group’s trade receivables total $4.4 million. The Group has a customer base of 524 customers, deployed across a wide range of industries, most of which are small and medium sized businesses, which makes the assessment of impairment of trade receivables inherently difficult to track. Significant judgment is exercised by management in determining whether a provision should be recognized. Our audit procedures included, but were not limited to: • Assessing the design and effectiveness of the key controls in relation to trade receivables approval process and aging of overdue trade receivable balances; • • • Evaluating management’s billing process in relation to automatic renewal/rollover of client subscription contracts and assessing the recoverability of outstanding receivables and whether any of these were cancelled/reversed/credit noted or written off post year end; Testing on a sample basis trade receivables to subsequent cash collections and customer contracts; and Evaluating the adequacy of the provisions recorded against trade receivable balances after factoring subsequent cash received and assessing all outstanding debtor balances over 60 days for recoverability. We also assess the appropriateness of the disclosures in note 9 to the financial statements. Software development costs – Research & development Our audit procedures included, but were not limited to: Refer to the description of the accounting policies and Note 13. As at 30 June 2017 the Group recognised $2.8 million relating to software development costs. The Group capitalises internal software development costs if it can demonstrate the technical feasibility of completing the intangible asset, reliably measure the costs attributable to the intangible asset during its development and estimate future economic benefits. Judgment is involved in determining whether the costs are directly attributable to develop the Group’s product suite and new software and the appropriateness of the costs to be capitalised. • Assessing whether the technical and commercial feasibility of the product has been achieved; • Testing the amortisation charge for the year in accordance with the Group’s accounting policy and the applicable accounting standards; • Assessing the nature of the services performed by the employees and challenged/considered whether such services were appropriately capitalised as software development costs; • Reconciling capitalised hours to internal timesheets and assessed the distinction between the research and development stages; • Assessing the reasonableness of the percentage used by the Group for capitalisation of internal software development costs in relation to the Group’s accounting policy. We also assess the appropriateness of the disclosures in note 13 to the financial statements. 48 71 Business combinations Refer to Note 15. The Group on 7 October 2016 acquired 100% of the ordinary shares of Techni Works Pty Ltd and its controlled subsidiary, Techni Works Action Learning Pty Ltd for a total consideration of $2.1 million. The accounting for a business combination can be complex and involves a number of significant judgments and estimates including: The determination of the fair value of the contingent consideration; and The identification and measurement of the fair value of the identifiable assets and liabilities acquired including the valuation of customer relationships and goodwill. Our audit procedures included, but were not limited to: • Understanding the sales and purchase agreement terms and conditions of the acquisition and evaluating management’s application in accordance with the relevant accounting standard; • Evaluating the methodology and assumptions utilised to identify and determine the fair value of separately identified intangible assets. This primarily included consideration of the reasonableness of revenue growth assumptions and discount rates underlying the valuation of the separately identifiable customer list intangible; • Assessing the useful economic life of the customer list intangible acquired; and • Confirming the estimation of the contingent consideration was in accordance with the sale and purchase agreement terms and conditions and challenging the key assumptions such as revenue growth rates used in the forecasts; We also assess the appropriateness of the disclosures in note 15 to the financial statements. Other Information The directors are responsible for the other information. The other information comprises the information included in the Directors’ Report and ASX Additional Information, which we obtained prior to the date of this auditor’s report, and also includes the following information which will be included in the annual report (but does not include the financial report and our auditor’s report thereon): Company Description, Chairman’s message, CEO’s overview and other Company information, which is expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the Company Description, Chairman’s message, CEO’s overview and other Company information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action. 49 72 ELMO Software Limited | Annual Report 2017Independent auditor’s reportto the members of Elmo Software Limited Responsibilities of the Directors for the Financial Report The directors of the Entity are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal 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. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Group's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 50 73 We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 7 to 10 of the Directors' Report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Elmo Software Limited, for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities 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. DELOITTE TOUCHE TOHMATSU Joshua Tanchel Partner, Chartered Accountants Sydney, 30 August 2017 51 74 ELMO Software Limited | Annual Report 2017Independent auditor’s reportto the members of Elmo Software Limited Shareholder Information required by the Australian Securities Exchange Limited (ASX) Listing Rules and not disclosed elsewhere in the Report is set out below. 1. In accordance with the 3rd edition ASX Corporate Governance Council’s Principles and Recommendations, the 2017 Corporate Governance Statement, as approved by the Board, is available on the Company’s website at: http://investors.elmotalent.com.au/Investors/?page=Corporate-Governance. The Corporate Governance Statement sets out the extent to which ELMO Software Limited has followed the ASX Corporate Governance Council’s 29 Recommendations during the 2017 financial year. 2. Substantial shareholders The number of securities held by substantial shareholders and their associates are set out below: Fully paid Ordinary Shares Name JLAB Investments (No. 2) Pty Limited Lessem Trading Pty Ltd Bessie Garber and Manuel Garber as trustees of the Garber Family Trust Number 15,986,422 11,989,816 11,989,816 % 29.51 22.13 22.13 3. Number of security holders and securities on issue ELMO Software Limited has issued the following securities: 54,171,584 fully paid ordinary shares held by 536 shareholders. 4. Voting rights Ordinary shares In accordance with the EMLO Software Limited Constitution and subject to any rights or restrictions attached to any class of shares, at a meeting of members: – – on a show of hands, each shareholder has 1 vote; and on a poll, each fully paid share held by a shareholder has 1 vote. 5. Distribution of security holders (a) Quoted securities Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Fully paid Ordinary shares Holders 105 199 96 117 19 536 Shares 42,482 633,391 774,190 2,740,171 49,981,350 54,171,584 % 0.08 1.17 1.43 5.06 92.26 100.00 ELMO Software Limited does not have any unquoted securities. 6. Unmarketable parcel of shares The number of shareholders holding less than a marketable parcel of ordinary shares is Nil (0) based on ELMO Software Limited’s closing share price of $2.54, on 11 September 2017. 75 Shareholder informationAs at 11 September 2017 7. Twenty largest shareholders of quoted equity securities Fully paid ordinary shares Details of the 20 largest shareholders by registered shareholding are: Name 1 2 JLAB INVESTMENTS (NO.2) PTY LTD LESSEM TRADING PTY LTD 3. MANUEL GARBER & BESSIE GARBER 4 5 6 7 8 NATIONAL NOMINEES LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED BNP PARIBAS NOMS PTY LTD ONE MANAGED INVESTMENT FUNDS LIMITED GORDON STARKEY 9 MR DARRYL JUSTIN GARBER 10 XIN SUN 11 TREVOR LONSTEIN 12 WASHINGTON H SOUL PATTINSON AND COMPANY LIMITED 13 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 14 TRUEBELL CAPITAL PTY LTD 15 CITICORP NOMINEES PTY LIMITED 16 WILFERS DEVELOPMENTS PTY LTD 17 ROBERT LESSEM 18 PETCOL NOMINEES PTY LIMITED 19 H H RYAN (NOMINEES) PTY LIMITED 20 RAPAKI PTY LTD Total Total on Register 8. Name of the Company Secretary: Anna Sandham. 9. The details of the Company’s registered office are: Address: Level 12, 680 George Street, Sydney NSW 2000. Telephone: 02 8280 7355 The details of the Company’s principal administrative office are: Address: Westfield Tower One, Suite 2502, Level 25, 520 Oxford Street, Bondi Junction NSW 2022 10. The address and telephone number of the office at which a register of securities is kept: Link Market Services Limited Address: Level 12, 680 George Street, Sydney NSW 2000 Telephone: 02 8280 7288 11. ELMO Software Limited securities are not quoted on any other stock exchanges other than the ASX. No. of shares 15,986,422 11,989,816 11,989,816 2,670,191 1,800,000 1,250,000 900,000 510,945 460,945 425,695 420,695 350,000 350,000 195,000 181,984 160,306 125,000 109,240 105,295 86,654 % 29.51 22.13 22.13 4.93 3.32 2.31 1.66 0.94 0.85 0.79 0.78 0.65 0.65 0.36 0.34 0.30 0.23 0.20 0.19 0.16 50,068,004 54,171,584 92.42 100.00 76 ELMO Software Limited | Annual Report 2017Shareholder informationAs at 11 September 2017 12. The number and class of restricted securities or securities subject to voluntary escrow that are on issue and the date that the escrow period ends are set out below: Class of Securities No. of shares Escrow period Fully paid ordinary shares 774,995 24 months from the date of quotation (ie until 29 June 2019) Fully paid ordinary shares 812,088 To be held in escrow for 12 months from 18 November 2016. In accordance with section 7.7 of the Prospectus dated 6 June 2017, the shares will then be held in voluntary escrow for the duration of time until the end of 24 months from the date of quotation (i.e. until 29 June 2019). Employee Gift Shares 22,750 22 December 2017 13. Unquoted securities ELMO Software Limited does not have any unquoted securities. 14. Review of operations and activities A review of ELMO Software Limited’s operations during the period is provided within the Directors’ Report of the Annual Report. 15. On market buy-back There is no current on market buy-back. 16. Statement regarding use of cash and assets. During the period between 27 June 2017 and 30 June 2017, ELMO Software Limited has used its cash and assets readily convertible to cash that it had at the time of ASX admission in a way consistent with its business objectives set out in the prospectus dated 6 June 2017. 17. Details of investments N/A – ELMO Software Limited is not an investment company. 18. The following is a summary of any issues of securities approved for the purposes of Item 7 of section 611 of the Corporations Act which have not yet been completed. N/A 19. No securities were purchased on-market during the reporting period. 77 Term AASB ASX Meaning Australian Accounting Standards Board Australian Securities Exchange Australian Accounting Standards Australian Accounting Standards and other authoritative pronouncements issued by the Australian Accounting Standards Board and Urgent Issues Group interpretations Australian Accounting Standards Board The AASB is an Australian Government agency under the Australian Securities and Investments Commission Act 2001 Board CEO CFO Company Corporations Act Customer retention rate Directors EBITDA ELMO Free cash flows FY[XX] IPO Prospectus The board of directors of the Company Chief Executive Officer Chief Financial Officer ELMO Software Limited Corporations Act 2001 Customer retention is calculated by dividing the number of customers in the reference period who were customers at the end of the prior period by the number of customers at the end of the prior period The directors of the Company from time to time Earnings before interest, income tax, depreciation and amortisation ELMO Software Limited EBITDA after the removal of non-cash items in EBITDA such as bad debts and changes in working capital less capitalised software development and commission costs and other capital expenditure Financial year ending [xx] Initial Public Offering The prospectus dated x issued as part of the IPO Recurring revenue Recurring revenue is the portion of a company’s revenue that is highly likely to continue in the future Revenue dollar retention rate Percentage of revenue from a selected group of customers that has been retained over a financial year SaaS Share Software-as-a-Service A fully paid ordinary share in the Company 78 ELMO Software Limited | Annual Report 2017Glossary This page has been left intentionally blank 79 This page has been left intentionally blank 80 ELMO Software Limited | Annual Report 2017 Stock exchange listing Elmo Software Limited shares are listed on the Australian Securities Exchange (ASX code: ELO) Website www.elmotalent.com.au Corporate Governance Statement http://investors.elmotalent.com.au/Investors/?page=Corporate- Governance Directors James McKerlie Danny Lessem David Hancock Trevor Lonstein Company Secretary Anna Sandham Registered office Level 12 680 George Street Sydney NSW 2000 Phone: 02 8280 7100 Principal place of business Suite 2502 Level 25 Westfield Tower One 520 Oxford Street Bondi Junction NSW 2022 Phone: 02 8305 4600 Share register Link Market Services Pty Limited Level 12 680 George Street Sydney NSW 2000 Phone: 02 8280 7100 Auditor Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 Solicitors Norton Rose Fulbright Australia Level 18 Grosvenor Place 225 George Street Sydney NSW 2000 Financial Adviser Blackpeak Capital Pty Ltd Level 5 55 Harrington Street The Rocks NSW 2000 Lead Manager and Underwriter Wilsons Level 32 Governor Macquarie Tower 1 Farrer Place Sydney NSW 2000 Corporate directory