Elopak Annual Report 2019

Plain-text annual report

Annual Report 2019 ELMO Software Limited ACN 102 455 087 Contents Large and growing addressable market CEO message The ELMO numbers and track record ELMO at a glance 2 4 6 8 10 Business model 12 Company history 16 22 23 24 Recent acquisitions 26 Our people 28 Environment, social and governance 30 Board of Directors The ELMO solution Industry partnerships Strong organic growth strategy Financial statements 32 Key Management team 34 Director’s report 43 Remuneration report 56 Auditor’s independence declaration 58 62 Notes to the financial statements 95 Director’s declaration 96 101 Shareholder information 104 Risk management 106 Glossary IBC Corporate directory Independent auditor’s report AGM Details ELMO Software Limited (ELMO) advises that it will hold its 2019 Annual General Meeting on Tuesday, 26 November at 2pm (Sydney time) at the ELMO office, Level 27, 580 George Street, Sydney. ELMO ANNUAL REPORT 2019ELMO IS ONE OF AUSTRALIA AND NEW ZEALAND’S ONLY INTEGRATED CLOUD HR, PAYROLL AND ROSTERING / TIME & ATTENDANCE SOLUTIONS 1 ELMO ANNUAL REPORT 2019Large and growing addressable market ELMO’s market opportunity has grown to 23,813 organisations and a ~$2.4bn opportunity in ANZ ANZ Total Addressable Market (TAM) 50+ employee organisations1,2,3 ANZ market potential ~23,813 organisations2 Total addressable market ~$2.4b Larger market opportunity: • New lower-mid market opportunity (50 to 200 employee organisations) provides an additional 13,210 organisations to ELMO’s addressable market • Product suite has grown from 7 modules focusing on talent management at IPO in June 2017 to 13 modules which now also includes HR Admin, Payroll, Rostering / Time & Attendance Extended product suite by adding Payroll and Rostering / Time & Attendance: • Enhanced competitive advantage from a broader suite • Increased potential of sales to new customers • Additional cross-sell opportunity from existing customers Market penetration ~5.6% organisations with average of 2.4 out of 13 modules Large opportunity for growing customer base and increasing module saturation of existing customer base 1. Frost & Sullivan independent market report 2019 2. TAM includes organisations from 50 to 200 employees (lower mid-market) across Talent Management, HR Core, Payroll and Rostering / Time & Attendance 3. Assumes full penetration of ELMO modules across all organisations 2 ELMO ANNUAL REPORT 2019Expansion of our product suite We have built a leading integrated cloud HR, Payroll, Rostering / Time and Attendance solution Pay Engage Hire Retain Develop Payroll Core HR Recruitment Performance Management Learning Management Self-Service HR Survey Onboarding Rewards & Recognition Course Builder Rostering / Time & Attendance Pivot Remuneration Course Library Modules added during: FY17 FY18 FY19 Succession Management Grown from 7 to 13 modules since June 2017 Rostering / Time & Attendance added in January 2019 Proven ability to cross-sell modules to existing customers Developing additional functionality based on customer needs 3 ELMO ANNUAL REPORT 2019 CEO message Dear Shareholder, We are pleased to report that FY19 was a record year for ELMO Software Limited (ELMO). We continued to deliver on our growth strategy and we are strengthening our position as the leading cloud, software- as-a-service (SaaS), human resource (HR), payroll and rostering / time & attendance provider in Australia and New Zealand. ELMO develops, sells and implements software solutions that enable organisations to efficiently manage and automate the stages of human capital management (HCM) processes and functions in an employee’s life cycle from “hire to retire”, including pay. Our market leading convergent platform solution now consists of 13 modules spanning across people, process and pay. We provide a unified, intuitive, user- friendly, single dashboard solution for recruitment, onboarding, performance management, learning and development, pre-built courses, succession planning, remuneration, HR surveys, employee administration (HR core) and payroll. Rostering / time & attendance was added in January 2019 with the acquisition of Get BoxSuite Pty Ltd (“BoxSuite”), unlocking a new and complementary ~$426 million market1. In FY19 we delivered strong financial results, achieving record annualised recurring revenue2 (ARR) of $46.0 million, up 47.8% on FY18. Our organic SaaS ARR grew 38.1% during the year. Sustained sales momentum has grown our customer base by 30% to 1,3413 with an estimated lifetime value of $621 million, adding $156 million of incremental value in 12 months. Customer retention4 remains consistently high at 92% and the module penetration per customer has steadily grown to 2.45. Over 95% of our revenue is subscription- based, which is recurring in nature. Our customer retention5 in dollar terms was 110.8% in FY19, highlighting the successful cross-selling of our enlarged suite of solutions into our sticky customer base. We have supplemented this growth with two selective and strategic acquisitions to broaden our offering with complementary technology and / or a high quality customer base, all of which enhance our cross-sell potential. Other FY19 highlights include: • Achieved updated pro forma revenue guidance • Statutory revenue of $40.1 million • Record annual cash receipts of $45.1 million • High gross profit margin of 86.6% • 265 organic, new customers added • 165 product enhancements In line with ELMO’s growth strategy, we invested significantly in FY19 across sales & marketing resources, technology capability and client implementation to take full advantage of the large market opportunity at hand. In addition, we’ve grown our company from 193 ELMOnians in FY18 to 277 in FY19. We continue to lay the foundations for long term, sustainable growth. Our total addressable market opportunity is large and has grown substantially from ~$1.7 billion to ~$2.4 billion through increased visibility on the opportunities in the lower mid-market6 and increasing the product suite of our convergent solution. We are organising and allocating our resources purposefully to optimise our results in these markets. With roughly 5.6% market share based on customer numbers and scope to increase the number of modules per customer (currently 2.4 out of a potential 13), there is substantial cross-sell potential and considerable scope for growth for some time to come. We see increasing traction from both new customers and throughout our loyal customer base with our recent acquisitions. The outlook for 2020 is exciting and builds on our 2019 investments and success. We will continue to target further investment in 2020 to deliver long-term, sustainable growth. We expect to increase headcount, capabilities, technology development, sales and marketing resources and actively seek strategic investment opportunities for complementary, adjacent technology or customer lists that provide cross-sell opportunities. We are confident these investments will generate strong, long-term returns for shareholders as we take full advantage of the wider view we now have of the market. To support our growth strategy, in September following the close of FY19, we successfully completed a $55 million institutional placement and Share Purchase Plan (SPP) to raise new capital. We are pleased to report the offer was well supported and we welcome our new investors to ELMO. Our guidance for FY20 assumes strong ARR growth to $61-63 million, revenue growth to $53-55 million and EBITDA expected to be ($1-3) million. ELMO is fortunate to have a deeply experienced management team that continues to successfully execute our accelerated growth strategy and deliver on expectations. We would also like to thank our customers for their much appreciated and continuing support, and all our shareholders for their loyalty. We look forward to sharing our successes and exciting future with you. Yours sincerely, Danny Lessem, Co-founder and CEO 1. Frost & Sullivan independent market report 2018 2. June 2019 subscription revenue annualised. Subscription revenue was formerly referred to as “SaaS revenue” 3. As at 30 June 2019 4. Customer retention is calculated by dividing the number of customers in the current period who were active customers at the end of the prior period by the number of customers at the end of the prior period 5. Customer dollar retention is calculated by dividing the incremental ARR in FY19 by the ARR spend in FY18 of the same customer cohort 6. Lower mid-market represents companies with <200 employees 4 ELMO ANNUAL REPORT 2019“WE CONTINUE TO LAY THE FOUNDATIONS FOR LONG-TERM, SUSTAINABLE GROWTH. Annual Recurring Revenue (ARR) $46.0m FY18 $31.1m Total statutory revenue $40.1m FY18 $26.5m “47.8% growth in ARR from FY18” 5 ELMO ANNUAL REPORT 2019The numbers ... Strong growth in annualised recurring revenue1 up 47.8% from FY18 $46.0m Annualised recurring revenue (ARR)1 Up 47.8% growth in ARR from FY18 $42.6m FY19 pro forma revenue2 $40.1m FY19 statutory revenue up 51.2% on FY18 86.6% Gross profit margin High gross profit margin 1,341 Customers as at 30 June 2019 Customers increased 30.1% since 30 June 2018 92.1% Customer retention3 110.8% customer dollar retention4, net of churn $621m Lifetime value (LTV) of customer base at 30 June 20195 Up $156m from $465m at 30 June 2018 on an ARR basis NEW PRODUCT OFFERINGS6 TECHNOLOGY ENHANCEMENTS ACQUISITIONS6 WORKFORCE AWARDS Rostering / Time & Attendance 165 product enhancements6 HROnboard BoxSuite 277 employees7 Deloitte Tech Fast 50 Aus Smart50 – Top Innovator Stevie – Computer software company of the year 1. June 2019 subscription revenue annualised. Subscription revenue was formerly referred to as “SaaS revenue” 2. Pro forma revenue includes the full year impact of FY19 acquisitions 3. Customer retention is calculated by dividing the number of customers in the current period who were active customers at the end of the prior period by the number of customers at the end of the prior period 4. Customer dollar retention is calculated by dividing the incremental ARR in FY19 by the ARR spend in FY18 of the same customer cohort 5. LTV is calculated by multiplying the average ARR per customer over the past 12 months by gross profit margin (%) divided by revenue churn 6. Up to 30 June 2019 7. As at 30 June 2019, includes HROnboard and BoxSuite (BoxSuite) 6 ELMO ANNUAL REPORT 2019 Building on our track record Statutory revenue and ARR ($m) Annual customer receipts ($m) Statutory revenue1 ARR 46.0 40.1 ARR CAGR 55.2% 31.1 26.5 19.1 16.6 CAGR 57.1% 58% $45.1 54% $28.6 $18.3 FY17 FY18 FY19 FY17 FY18 FY19 Subscription revenue2,3 % 93.3% 93.6% 95.4% Customer numbers Employees 1,341 1,031 277 193 254 106 FY17 FY18 FY19 FY17 FY18 FY19 1. Statutory revenue includes professional services and other income 2. Subscription revenue was formerly referred to as “SaaS revenue” 3. Subscription revenue % is the proportion of subscription revenue of total statutory revenue 7 ELMO ANNUAL REPORT 2019 ELMO at a glance ... “A LEADING PROVIDER OF CLOUD HR, PAYROLL, ROSTERING / TIME & ATTENDANCE SOFTWARE IN AUSTRALIA & NEW ZEALAND (ANZ) ONE vendor ONE dashboard ONE user-experience Australia ELMO is one of Australia and New Zealand’s leading providers of integrated cloud human resources “HR”, payroll and rostering / time & attendance software solutions ELMO’s SaaS, cloud-based platform provides organisations with a centralised approach to managing an employee’s lifecycle from ‘hire to retire’ including payroll and rostering / time & attendance 1. As at 30 June 2019 2. Frost & Sullivan independent market report 8 ELMO ANNUAL REPORT 2019ELMO employs 2771 people across 6 offices in Australia and New Zealand New Zealand Snapshot1 277 employees 6 Offices throughout the ANZ region Customer base of 1,341 organisations Scalable SaaS cloud-based platform ANZ = regional focus ANZ Total Addressable Market $2.4bn2 ELMO at a glance ELMO’s industry agnostic customer base – consisting of more than 1,300 organisations spread over multiple, varied different industries – all benefit from of our convergent solution that is developed and maintained in-house by the Australian and New Zealand ELMO team. Local knowledge and support has been a key part of ELMO’s ongoing success and today over 270 employees in 6 offices across Australia and New Zealand work tirelessly to ensure customer expectations are met and exceeded. ELMO primarily targets lower-mid market (50-200 employees) and mid-market organisations, who stand to benefit by automating their HR, payroll and rostering / time & attendance operations with ELMO’s constantly evolving suite of 13 integrated modules. Customers can also gain access to a library of over 400 eLearning courses covering a broad range of compliance, soft skills and technical skills – all of which are updated and curated by the local team. 9 ELMO ANNUAL REPORT 2019Business model Wider view of the market opportunity ELMO’s cloud HR, payroll and rostering / time & attendance software solutions and business model have been primarily built to address the HCM requirements of organisations ranging from 50 - 2,000 employees. During FY19, ELMO’s modular product offering increased to 13 with the acquisition of BoxSuite, a rostering / time & attendance solution. This acquisition and our increased focus on the lower-mid market increased the market opportunity available from ~$1.7 billion to $2.4 billion1. During FY19, ELMO invested in fully commercialising this new opportunity by adopting a relevant sales and marketing strategy and adapting the solution to be user- friendly and intuitive for this lower mid-market group. In addition, the HROnboard acquisition in January 2019, provided ELMO with an expanded customer base in the HCM space and provides a significant scope to cross-sell ELMO’s extensive SaaS offering. Currently, most SaaS HR & payroll providers that offer a unified solution target large enterprise and government organisations. The HR & payroll 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 and lower mid-market organisations. Consequently, mid-market and lower mid-market organisations have limited HR solution options and many existing solution providers only address a single vertical of the various HR functions. In addition, the payroll landscape in this market is primarily dominated by legacy providers. As a result, ELMO believes a large underserviced market has emerged, which is growing as organisations increasingly recognise the strategic importance of HR & payroll and the need to adopt an efficient and scalable cloud solution. ELMO believes these organisations require more flexible and cost-effective HR, payroll and rostering / time & attendance solutions that can be delivered on shorter sales cycles, with simpler implementation processes than those currently provided by HR & payroll solution providers who are typically focused on larger enterprises. ELMO is well placed to take advantage of the market opportunity by having the widest convergent platform in the region. Multi-jurisdictional and industry agnostic Thanks to a multi-jurisdictional and industry-agnostic platform, ELMO’s cloud HR, payroll and rostering / time & attendance solutions have been designed to be scalable on an international basis. ELMO currently provides solutions to customers based principally in Australia and New Zealand; however, the platform can be translated into nearly any language and is multi-jurisdiction compatible. ELMO is industry agnostic in the deployment of its HR, payroll and rostering / time & attendance solutions. ELMO HR & PAYROLL SOFTWARE SOLUTIONS IS INDUSTRY AGNOSTIC 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 over 95% of its FY19 statutory revenue from subscription revenue for its HR & payroll 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 12 months of the contract. The amount of the annual fee is dependent on the number of modules subscribed to by the customer and the number of users on the platform. In addition to subscription revenue, 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. Frost & Sullivan independent market report 2019 10 ELMO ANNUAL REPORT 2019% of FY19 statutory revenue ~95% Customer Subscription revenue Revenue model Revenue recognition policy Description SaaS subscription fee ELMO’s subscription revenue is recognised evenly on a monthly basis. The balance of the revenue received in advance is categorised as a liability (referred to as deferred income). Professional services fees ~5% Consultation or integration fees 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 any ad- ditional 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 subscription 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 subscription revenues ELMO has a high proportion of revenue that is classified as recurring in nature (subscription revenue), as shown below, which is a result of the subscription-based revenue model. ELMO’S SUBSCRIPTION REVENUE AS A PERCENTAGE OF TOTAL STATUTORY REVENUE 93.3% 93.6% 95.4% FY17 FY18 FY19 From FY17 to FY19, ELMO has consistently achieved more than 90% in subscription revenue. In FY19, 95.4% of ELMO’s statutory revenue was recurring in nature, reflecting the SaaS business model and the Company’s focus on subscription revenue. 11 ELMO ANNUAL REPORT 2019 Company history Learning Management System Pre-Built Courses Performance t c u d o r P Course Builder eLearning platform and customised content Commenced development of full suite of talent management solutions 2002 2013 Focus on customer orientated training solutions ELMO founded in 2002 by Danny Lessem and Manuel Garber i s p h s r e n t r a p / s r e m o t s u C 12 2011 2012 2014 Focused on mid-market organisations Australian Human Resources Institute Approved supplier on Government Panel arrangements 164 Customers As at 30 June 2014 ELMO ANNUAL REPORT 2019Recruitment Succession HR Core Rewards and Recognition Rostering / Time & Attendance Onboarding Remuneration Listed June 29 2017 2015 Began expansion into New Zealand 2016 2017 2018 2019 Acquisition of Techniworks Acquisition of HROnboard UTS/ELMO Partnesrship Acquisition of SkyPayroll Acquisition of PeoplePulse and LiveSalary Acquisition of Pivot Software Acquisition of BoxSuite 254 Customers As at 30 June 2015 358 Customers As at 30 June 2016 524 Customers 1,031 Customers As at 30 June 2017 As at 30 June 2018 1,341 Customers As at 30 June 2019 13 ELMO ANNUAL REPORT 2019 UNLOCK THE POTENTIAL OF YOUR ORGANISATION Leading integrated cloud HR, payroll and rostering / time & attendance platform 14 ELMO ANNUAL REPORT 2019Pay Engage Hire Offer self-service functionality to managers and employees and provide real-time access to payroll and personal data from anywhere, anytime, on any device Carry out core HR functions, including the ability to process and approve leave, timesheets and retrieve pay slips, and ensure HR initiatives are optimised with employee surveys Set your new hires up for success from the start by streamlining talent identification, recruitment and onboarding processes Retain Develop Improve retention by capturing performance feedback to identify star performers, manage career development plans and align compensation accordingly Keep skills compliant and up-to-date with personalised learner plans, access to pre-built courses and the ability to customise learning content 15 ELMO ANNUAL REPORT 2019The ELMO solution ELMO provides a suite of cloud HR, payroll and rostering / time & attendance software solutions that aim to address and automate key HCM activities and pay processes. ELMO’s software modules cover all stages of an employee’s lifecycle, from ‘hire to retire’. Our modules can be used together or stand alone and are configurable to an organisation’s unique processes and workflows. Leading integrated cloud HR and payroll solutions Pay Engage Hire Retain Develop Payroll Core HR Recruitment Performance Management Learning Management Self-Service HR Survey Onboarding Rewards & Recognition Course Builder Rostering / Time & Attendance Remuneration Course Library Succession Management 16 ELMO ANNUAL REPORT 2019Pay Easily manage essential people-management functions relating to pay, leave and rostering / time & attendance, while empowering employees to update personal records in their own time. Ensure accurate and compliant workforce management Effective workforce management, which ensures employees are in the right place at the right time and then paid accordingly, remains a key challenge for employers. ELMO’s Pay suite helps employers optimise shift coverage, control costs and minimise risks associated with overwork/fatigue and incorrect Award/EA interpretation. They can also maintain and keep track of payroll data for all employees, ensuring they are paid accurately while meeting single touch payroll (STP; AU), payday filing (NZ), and other legislative obligations. ELMO’s Pay suite also offers self-service functionality. Managers gain access to historical data, ensuring more informed decision- making, while employees can swap shifts, make leave requests, check leave balance, and review payslips. The end result is more efficient workforce management and less administrative burden on HR teams. Payroll Enhanced compliance – Ensure all legislative obligations are met with ELMO Payroll. A single touch payroll (STP) & SuperStream solution, compliant in AU, and payday filing & KiwiSaver compliant in NZ. Flexible pay cycles – Manage employees across one or multiple payroll cycles, with flexibility to run standard or ad-hoc payroll at any time. Reporting and analysis – Extract, analyse and accurately reconcile payroll, easily compare variance reports to identify anomalies and ensure accuracy from one pay cycle to the next. Self-Service Leave management – Create leave requisition and authorisation workflows. Organisation charts – Provide an overview of an organisation’s structure and reporting relationships. Employee self-service – Empower employees to access and update personal information, request leave and access pay slips and pay summaries from any device, anywhere and at any time. Manager self-service – Empower managers to access employee information, approve leave requests and view team analytics from any device, anywhere and at any time. Rostering / Time & Attendance Roster staff – Utilise the intuitive calendar to schedule weekly, fortnightly or monthly staff rosters. Account for staff availability, leave requests or special events to ensure optimal staff coverage. Time tracking – Benefit from an automatic and stress-free time tracking solution with real-time reporting. Gather data to help control staffing costs and ensure employees are paid correctly. Compliance risk management – Use ELMO’s powerful Business Rules Engine and Award Library to ensure all compliance obligations relating to Modern Awards or Enterprise Bargaining Agreements are met. 17 ELMO ANNUAL REPORT 2019Engage Save time, money and resources by automating HR administrative tasks, and gain greater insights into HR effectiveness and the employee experience with ELMO’s Engage suite. Transform the management and engagement of your workforce From chasing up leave forms, to managing staff absences and extracting information from disparate software systems, organisations can lose valuable time and productivity when burdened with heavy administrative tasks to support the HR function. HR Core provides a central location for all employee data, while employee self-service and manager self-service functionality empowers staff to find, update and use information anywhere, anytime. Just as critically, employees who are motivated and feel their voices are heard can result in higher engagement levels. ELMO Survey allows leaders to create, manage and analyse workforce surveys, with access to benchmark data for more context. By embedding surveys across the employee lifecycle, HR can assess employee sentiment, identify strengths, weaknesses, risks and opportunities, and address them early. HR Core Leave management – Create leave requisition and authorisation workflows. Organisation charts – View an organisation’s structure including roles, reporting relationships and profile details with tiered access. Employee self-service – Empower employees to access and update personal information, request leave and access pay slips and pay summaries from any device, anywhere and at any time. HR Survey Integrated or stand-alone solution – Collect feedback across all ELMO modules directly or from external sources. Benchmark survey templates – Access a library of best practice templates including onboarding, engagement, pulse, NPS, etc. Benchmark results against other organisations. Powerful insights – Obtain powerful and meaningful insights from collected data by using ELMO Survey reporting. Manager self-service – Empower managers to access employee information, approve leave requests and view team analytics from any device, anywhere and at any time. 18 ELMO ANNUAL REPORT 2019Hire From attracting top talent, to getting them up to productive speed quicker, creating a personalised candidate experience has never been easier thanks to ELMO’s Hire suite. Win the war for top talent Reducing the time to hire and increasing the time to productivity are key metrics used to assess the effectiveness of talent acquisition strategies – yet these are difficult to achieve without the right tools. ELMO’s Hire suite transforms end-to-end recruitment and onboarding processes by streamlining workflows, automating tasks and empowering managers and employees. ELMO Recruitment ensures the right first impression is made by creating a memorable candidate experience – an experience that is seamless, quick and intuitive. Employers benefit from one centralised system that integrates with job boards and allows users to create talent pools. The positive experience continues with ELMO Onboarding. Personalise the onboarding experience for each candidate, digitise and submit documents, and link new hires to training opportunities. Recruitment Job requisition – Select the required job position, add specific requirements, alert recruitment managers, track and monitor progress, and customise approval workflows. Onboarding Personalised onboarding webpage – Present company information and videos, create guidelines for the onboarding process, provide an onboarding task list, and give team member introductions. Talent pool – Search existing employees, search the candidate database, match job criteria, and rank candidates. Job posting – Integrate with job boards, social media, preset posting rules, and track costs. Branded careers webpage – Embed a careers page within a corporate website, customise branding, incorporate company media, and post jobs automatically. Workflows and approvals – Configure onboarding processes and select stakeholders, prerequisites, time delays, and conditions. Electronic forms – Create configurable forms, utilise the document upload facility, and benefit from integrations with the Australian Taxation Office and other third parties. 19 ELMO ANNUAL REPORT 2019Retain Holding onto top talent has never been more critical. Create a memorable employee experience and reduce staff turnover rates with ELMO’s Retain suite of solutions. Become a talent magnet Any list of employee “must-haves” will include fundamentals like a clear career trajectory, regular performance feedback, the right level of remuneration, and appropriate rewards & recognition. Thanks to technology, it’s now possible to ensure employees are presented with best practice approaches to all these areas, and a whole lot more. ELMO’s Retain suite enables managers to check in regularly with employees about their performance, build personalised development plans, and to reward and recognise employees for key achievements and milestones. Employers can also identify successors for mission-critical roles and provide career paths for high potential employees. Just as critically, HR and managers are given greater oversight and control of remuneration processes and budgets – all while accessing centralised data to coordinate retention efforts. Rewards & Recognition Employee recognition – Recognise peers and high performers with recommendations, configurable badges and points. Integrates with ELMO Performance. Configurable trophies – Acknowledge employee milestones, significant achievements or celebrations with automated assignment of trophies. Awards – Set-up workflows to allow employee nominations and voting for internal awards. Remuneration Streamline remuneration processes – Easily manage the end-to-end remuneration allocation and approvals process. Succession Management Ensure business continuity – Determine role criticality, identify high performers and mitigate flight risk. Managers empowered – Make more informed decisions about the allocation of salary increases, bonuses & equity awards. Link salary planning with ELMO suite – Combine performance data with remuneration strategies to align employee performance and remuneration. Employee career progression – View succession pathways, identify skills gaps and create development plans. Foster strategic succession – Match high potential employees to critical roles and compare candidate suitability by skills, performance, potential and aspirations. Performance Management Tailored performance appraisals – Configurable to any organisation’s requirements, including goal setting capabilities, competency models, development plans, and 360 reviews. Manager team view – Access direct and indirect reports to view the status of appraisals, utilise the search facility or collaborate using the export and print functions. Configurable reports – Generate reports at the click of a button, enabling users to choose appraisals for comparison, use graphs for visual display, access appraisal status updates, export to Excel and/or PDF, and automate report emails. 20 ELMO ANNUAL REPORT 2019Develop Keeping employee skills relevant and compliant has never been more critical. ELMO’s Develop product suite can help create a culture that embraces continuous learning. Create the workforce of the future Tracking and managing the end-to-end training needs of an organisation is only possible with technology. ELMO Learning Management smooths the process with one easy-to-use system. This helps HR stay on top of course completion rates, ensures compliance, accelerates employee performance, and supports organisational goals by facilitating blended learning – helping employers coordinate both eLearning and instructor-led training Today’s workforce also expects engaging learning content. eLearning has become the primary way of delivering workplace education, due to the ability to learn from anywhere at any time. ELMO Course Library provides access to over 400 eLearning regularly updated courses covering everything from soft skills to compliance-related issues. ELMO Course Builder simplifies the creation of bespoke online learning, from course development to publication – all without the need for coding experience. Course Builder Create courses – Insert images/movies, edit text, record voice-over, and use interactive features (buttons, rollovers, hotspots, etc.). Create assessments – Select question type (multi-choice, true/false, drag and drop), insert images/voice-over, randomise questions, and set pass mark. Preview, review and publish – Build courses with real-time editing, send courses to reviewers for feedback, and publish to ELMO Learning or a SCORM compliant LMS. Course Library An ever-expanding library – Provide access to ELMO’s Course Library, which offers over 400 courses with a wide range of content, including compliance, soft skills and productivity training. Customised course content – Copy and tailor content to a specific organisation’s needs with easy authoring tools built with “what you see is what you get” editing. Deep integration with ELMO Learning – Quickly and easily publish courses with detailed response tracking for in-depth reporting. Learning Management Learner’s view – Generate personalised learning plans, including eLearning courses and instructor-led training (ILT), and create policy acknowledgements and assessments. Integrates with ELMO Survey for learning feedback. Course catalogue – Course self-selection, search facility, configurable enrolment rules, access to over 400 pre-built eLearning courses. Manager team view – Access direct and indirect reports, view current status of learning, use the search facility, and export and print reports. Configurable reports – Generate reports at the click of a button, enabling users to choose courses for comparison, view graphs for visual display of course completion rates, export to Excel and/or PDF, and automate report emails. 21 ELMO ANNUAL REPORT 2019Industry partnerships ELMO continues to build on its deep relationships with peak industry bodies across Australia and New Zealand. This heightens ELMO’s ability to access a broader prospective customer base, increases industry recognition as a thought leader, and enables ELMO to work closely with industry stakeholders to not only enhance current solutions, but to develop new solutions to meet the evolving needs of the market. Here are just two examples of ELMO’s involvement with peak industry bodies: AHRI also provide members with access to ELMO’s pre-built content library via their online portal and a HR Certification Program designed to advance the HR profession within Australia, held quarterly at ELMO’s headquarters. “We don’t just do that with anybody. That’s a totally different, unique engagement opportunity,” Hegarty says. Winning the war on talent: the RCSA-ELMO Partnership ELMO has been in partnership with the Recruitment, Consulting and Staffing Association (RCSA) – the peak association for the Australian and New Zealand recruitment industry – since 2015. RCSA has over 3000 corporate and individual members who can access education, research and business advisory support. ELMO’s sponsorship of key events and the provision of ELMO technology and content via the RCSA online portal offers exposure and brand awareness to potential clients working in the recruitment industry. “ELMO plays an essential role in the RCSA member experience. For three years we have utilised ELMO for education and compliance matters within our membership base, particularly with our Code of Conduct. The RCSA Code for Professional Conduct, authorised by the Australian Competition and Consumer Commission, is the benchmark of professionalism in the recruitment and staffing sector. By hosting the RCSA Code of Professional Conduct, ELMO assists in ensuring that our members uphold the highest standards of ethics and honourability in their business practice. In addition to our Code, ELMO is an essential part of our Learning & Development offering. Our suite of courses, hosted on ELMO, are embraced and heavily utilised by our membership”. John Towey, Head of Marketing and Business Solutions, RCSA. Built on trust: the AHRI-ELMO Partnership ELMO has worked in partnership with AHRI, Australia’s peak HR industry association, since 2013. This partnership ultimately helps both entities improve the productivity, innovation and vitality of Australian workplaces. ELMO also gains unprecedented exposure to AHRI’s 20,000+ HR industry members through a series of national networking forums and conferences, including the industry’s largest annual events: the AHRI Awards, recognising excellence in HR; and the flagship AHRI National Convention & Exhibition. “Our members know the ELMO brand, they know what ELMO brings, and they see that consistently, year after year. That adds value.” Dean Hegarty, General Manager, Commercial, Member Services & Marketing. Australian HR Institute. Stronger together RELATIONSHIPS WITH THE INDUSTRY PEAK BODIES IN AUSTRALIA AND NEW ZEALAND “ELMO HAS FORGED DEEP 22 ELMO ANNUAL REPORT 2019Strong organic growth strategy Accelerated with selective acquisitions for complementary technology and /or customer lists + New customers in existing markets and new market segments • 265 organic new customers added during FY19 Greater usage from existing customers Expand and enhance product line Growth through acquisitions • Consistently high • Acquired and customer retention, 92.1% in FY19 • Total customer • Strong customer base of 1,341 as at 30 June 2019 dollar retention1, net of churn of 110.8% • Incremental ARR of $5.3 million from existing customers • Increased multi- module new business sales with the average modules per new customer of 3.7 for FY19 • Increase penetration and adoption in lower mid-market • Investment in sales and marketing to drive new customer wins across ANZ integrated rostering / time & attendance modules • Spent 28.8% of FY19 statutory revenue on R&D2 • Increased R&D investment in order to develop new modules and enhance functionality and interoperability of the 13 existing modules • Completed acquisitions of HROnboard and BoxSuite • Actively seeking strategic investments, primarily for complementary technology, to augment ELMO’s value proposition, or for customer lists that provide module cross- sell opportunity • Disciplined approach, with strong track record and significant resource and management expertise to complete integrations successfully and deliver synergy benefits 1. Customer dollar retention is calculated by dividing the incremental ARR in FY19 by the ARR spend in FY18 of the same customer cohort 2. Includes both expensed and capitalised research and development costs 23 ELMO ANNUAL REPORT 2019Recent acquisitions Broadening ELMO suite and increasing market share Onboarding Rostering / Time & Attendance HROnboard is one of Australia’s leading specialist providers of cloud-based employee onboarding software. HROnboard has successfully built a high quality and loyal customer base of 131 organisations, which is continuing to grow. HROnboard and ELMO’s customer base have minimal cross over and therefore provides an attractive cross-sell opportunity for ELMO’s extended product suite. • Rapid growth of recurring SaaS revenue, averaging over 40% annually over the last three years • High quality revenue stream with SaaS revenues accounting for ~97% of total revenues • Strong and loyal customer base of 131 organisations operating across a wide range of industries, who have demonstrated retention rates of ~93% BoxSuite is a SaaS, cloud-based specialist in workplace rostering and time & attendance (including award interpretation for calculation of pay rates) for casual and shift-based employees. Large new market opportunity with over 5.92 million casual and shift-based employees across Australia and New Zealand, which represents a ~$426 million market. It is estimated that approximately 60% of the casual and shift-based employee market is managed through the use of manual processes1. BoxSuite brings cost advantages compared to organic in-house development, as well as earlier realisation of the commercial benefits that an enlarged product suite offers. BoxSuite’s modules are a natural adjacency to ELMO’s existing HR & Payroll platform and provides a suitable solution for ELMO’s existing customers who employ casual and shift-based employees. This uniquely positions ELMO as the only Australian company who can provide a one-stop-shop for cloud HR, payroll and rostering / time & attendance software solutions. Completed 31 January 2019 Completed 31 January 2019 Targeted acquisitions to supplement strong organic growth Acquisitions performing as per expectations and integration on track 1. Frost & Sullivan independent market report 24 ELMO ANNUAL REPORT 2019“THIS UNIQUELY POSITIONS ELMO AS THE ONLY AUSTRALIAN COMPANY WHO CAN PROVIDE A ONE-STOP-SHOP FOR CLOUD HR, PAYROLL AND ROSTERING / TIME & ATTENDANCE SOFTWARE SOLUTIONS. 25 ELMO ANNUAL REPORT 2019Our people One team united 26 ELMO ANNUAL REPORT 2019277 ELMOnians across 6 offices in Australia and New Zealand 27 ELMO ANNUAL REPORT 2019Environment, social and governance ELMO is focused on building a culture and environment that sustains our ELMOnians as people, engages them as part of a team and encourages them to innovate and thrive. Growing our ELMOnians The ELMO team is growing both organically and through acquisitions across Australia and New Zealand. ELMO has expanded geographically to support our people and clients to have offices in Sydney, Melbourne, Perth, and Brisbane, in addition to Auckland and Christchurch. On 1 July 2018, we had 97 ELMOnians move into our new ELMO HQ in the heart of Sydney’s CBD, and in July 2019 we have 212 ELMOnians thriving in productive space and community activities. We have a focus on maximising our employee value proposition through engagement, wellbeing and helping them to become the best version of themselves. We believe ELMO is an awesome place to be, because our ELMOnians are just that…AWESOME! The diversity of skills, experience, cultures and attributes that each ELMOnian brings and shares each day creates a rich cultural health. We embrace their uniqueness and personal contributions to help make ELMO a great place to work. The ELMOnian employee value proposition (EVP) ELMO’s leaders are working with each division to ensure we introduce activities and initiatives that focus on supporting and growing our ELMOnians and help to attract the right people to join the team. As a part of our EVP we are focusing on activities that engage, inspire and ignite our ELMOnians to sustain them as human beings. That means, in addition to compensation and benefits, we also provide: • Challenging and meaningful work • Opportunity for personal achievement • Amazing and engaging organisational culture • Career development. Corporate Social Responsibility (CSR) ELMO is committed to being actively involved in worthy causes within every community in which we are located. Our CSR activities target what matters most to our ELMOnians; the goal is to deliver initiatives they care about, while also supporting the wider Australian community and contributing to Australian economic development. This year ELMO supported: • Youth Off The Streets • RSPCA Million Paws Walk • Movember • Dry July • MS Swimathon • MS Rideathon • Steptember • United Against Domestic Violence • Cancer Council’s Biggest Morning Tea • RUOK Day morning tea. ELMOnian Wellbeing and Engagement ELMO prides itself on caring for the health and wellbeing of our ELMOnians. It is a gift that we offer to our teams to ensure health and wellbeing programs not only have a positive impact on the wellbeing of ELMOnians, they also lead to significant increase in ELMOnian engagement, cohesiveness and overall productivity. Our employee engagement and welfare survey provided fresh insight to the needs, feelings and “mood” of our ELMOnians. We are constantly listening to develop a multitude of engagement, community and wellbeing programs being explored and implemented. Some of these include: • Yoga • Mindful Meditation • Toastmasters • City2Surf • Hackathons • End of month and quarterly milestones • Morning teas and shared lunches • Flexible working arrangements • Job sharing 28 ELMO ANNUAL REPORT 2019• Healthy food initiatives • Gratitude practice including badges, employee and CEO awards. Our diverse programs are delivered throughout the year with the goal of improving the mind and body – and ultimately enhancing the work satisfaction and performance – of all ELMOnians. In addition, our Employee Assistance Program (EAP) offers free short-term counselling designed to help ELMOnians prevent or resolve personal, family and workplace problems affecting their wellbeing and job performance. and management teams, and we also believe in building the strength of all our teams. This year HR has established a dedicated learning and development function to identify and develop our emergent leaders, build individual and team skills and knowledge, and plan for succession activities. In support of this we are working to build our management team to coach, counsel, mentor and model design thinking, continuous improvement, accountability, responsibility and clear communication. This ensures our ELMOnians are supported and empowered to grow in their roles and prepare for future roles. Toastmasters ELMO Melbourne and Sydney Toastmasters Club continues to evolve, with new Toastmasters Pathway program. We have new ELMOnians joining the team fortnightly and open the meetings to guests. We have seen enormous success with the Toastmasters program helping to build relationships, communication and leadership skills across the business. Through Toastmasters our ELMOnians are encouraged to listen and answer, to plan and lead, to give feedback and to accept it, thereby becoming more effective communicators and leaders. Professional Development ELMO recognises that organisation- wide learning and development starts at the top. We are dedicated to the sustained growth of the business through development of our senior leadership To support individual and team development, ELMO invests in various development opportunities, some of which are listed below: • AHRI National Convention and State Conferences • National and State HR Summits • HR & L&D Tech Fest • HR Leaders’ Summit • ReimagineHR • Third Sector Live • Women in Leadership • Toastmasters • Sydney University Centre for Continuing Education short courses • AHRI short courses Environment With ELMO’s continued growth, we are looking for opportunities to improve our operations and build a long-term, sustainable business. Over time, ELMO will move its operations to work environments that have a NABERS rating. We have supported office environmental sustainability and established the ELMO Green Team, an ELMOnian led committee to education and monitor ELMO commitment to a sustainable environment. Policy and Security As a part of ELMO’s commitment to information security for the business and clients, ELMO undertook ISO 27001:2013 accreditation for the ELMO and Pivot businesses this year. It was an ambitious 9-month timeline with 27001:2013 certification achieved in July 2019, with no non-conformances. ELMO has invested in our Quality Management System and streamlining policies and processes designed to support business activity and enable the ELMO to operate in a productive, safe and agile manner. Corporate Governance ELMO takes a deliberate and focused approach to corporate governance. 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: https://investors.elmosoftware.com.au/ Investors/?page=Corporate-Governance 29 ELMO ANNUAL REPORT 2019Board of Directors Danny Lessem CO-FOUNDER AND CHIEF EXECUTIVE OFFICER Barry Lewin INDEPENDENT NON-EXECUTIVE CHAIRMAN Founded ELMO in 2002 Joined ELMO in 2018 Mr Danny Lessem is the CEO, Executive Director and co-founder of ELMO. Member of the Audit and Risk Management Committee. 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. Mr Barry Lewin is non-executive Chairman of ELMO, having been appointed to the position on 10 October 2018. Barry is the founder and Managing Director of Melbourne- based corporate advisory firm SLM Corporate Pty Ltd where he advises public and private companies on mergers, acquisitions, transaction structuring, debt and equity issues, business sales and on all aspects of corporate governance. Prior to establishing SLM Corporate in 1999, Barry spent 12 years as an in-house counsel to a number of ASX- listed companies. Barry is non-executive Chairman of ASX-listed Praemium Limited (ASX:PPS), Quick Fee Limited (ASX:QFE), and has held previous directorships at ASX-listed Senetas Corporation Limited (ASX:SEN) and Clean TeQ Holdings Limited (ASX:CLQ), where he also served as Chairman of the Audit Committee. He has degrees in Commerce and Law and holds an MBA from Swinburne University. 30 ELMO ANNUAL REPORT 2019Kate Hill INDEPENDENT NON-EXECUTIVE DIRECTOR Leah Graeve INDEPENDENT NON-EXECUTIVE DIRECTOR Joined ELMO in 2018 Joined ELMO in 2019 Ms Kate Hill is an independent Non-executive Director of ELMO, Chair of the Audit and Risk Committee and member of Nomination and Remuneration Committee. She has over 20 years’ experience as an audit partner with Deloitte Touche Tohmatsu, working with ASX listed and privately owned clients. She has worked extensively in regulated environments including assisting with Initial Public Offerings, capital raising and general compliance, as well as operating in an audit environment. Kate is also Chair of Seeing Machines Limited (AIM:SEE), an independent Non-executive Director of CountPlus Limited (ASX:CUP) where she serves as Chair of the Audit and Risk Committee and is a member of the Acquisitions Committee. She is the Company Secretary of Kazia Therapeutics Limited (ASX:KZA, Nasdaq: KZIA). She held a variety of leadership and executive roles in Deloitte and served for a period on the Board of Partners of the Australian firm. Kate holds a Bachelor of Science (Hons) from Bristol University, is a member of the Institute of Chartered Accountants in Australia and New Zealand, and a graduate of the Australian Institute of Company Directors. Ms Leah Graeve is a Non-Executive Director of ELMO and Chair of the Remuneration and Nomination Committee. Leah has enjoyed a career as a successful commercial and contracts negotiator in a range of organisations and industries over the past 16 years. Leah is currently a senior executive at Qantas Ltd, where she is Senior Manager, Contracts, IT & Digital. She is also a Board member of the not-for-profit Rare Cancers Australia. Leah previously held roles as Qantas Group Head of Procurement – IT & Digital, Senior Manager at Jetstar Airways, Legal Counsel at Engonet, and IT Commercial Manager at BHP Group Limited. She holds a Bachelor of Arts & Law from Monash University and is a graduate of the Australian Institute of Company Directors. 31 ELMO ANNUAL REPORT 2019Key Management team Samuel Sun CHIEF TECHNOLOGY OFFICER Darryl Garber CHIEF COMMERCIAL OFFICER Joined ELMO in 2010 Joined ELMO in 2011 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. Mr Darryl Garber is ELMO’s Chief Commercial Officer (CCO). Darryl joined ELMO in 2011 and has over 8 years of experience in roles encompassing business development, marketing, corporate finance, management and strategy. As CCO, Darryl’s core objective is to develop, evaluate and execute ELMO’s growth strategy. This includes pursuing and driving merger & acquisition activities, securing financing, launching go-to-market products and investigating new markets. Darryl is also responsible for ELMO’s investor relations activities. Darryl played a critical role during ELMO’s 2017/18 period of expansion by acting as project lead for the IPO and subsequent capital raising. His past experience working across a number of ELMO departments has been invaluable during this transformative period. Darryl is adept at managing rapid change, scaling operations and driving strategy. Darryl holds a Graduate Diploma in Applied Finance from Kaplan University and an MBA (Dean’s List) from Bond University. Monica Watt CHIEF HUMAN RESOURCES OFFICER Joined ELMO in 2015 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. 32 ELMO ANNUAL REPORT 2019James Haslam CHIEF FINANCIAL OFFICER Gordon Starkey CHIEF OPERATING OFFICER Joined ELMO in 2019 Joined ELMO in 2010 Mr James Haslam is the CFO of ELMO and joined the company in February 2019. James is a Chartered Accountant with over 18 years of experience in accounting and financial roles. As CFO, James 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. Before joining ELMO, James founded Financial Agility Consulting a consultancy practice providing senior executive management support through mergers, acquisitions, capital raisings and IPO’s. Prior to Financial Agility Consulting, James worked for both KPMG and Deloitte providing professional services advice, predominantly in respect of mergers, acquisitions and IPO’s. James holds a Bachelor of Science in Engineering and Business from the University of Warwick in the UK and is a Fellow of the Institute of Chartered Accountants in England and Wales. Mr Gordon Starkey is the 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. Danny Lessem CEO, EXECUTIVE DIRECTOR AND CO-FOUNDER Founded ELMO in 2002 Mr Danny Lessem is the CEO, Executive Director and co-founder of ELMO. Member of the Audit and Risk Management Committee. 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. 33 ELMO ANNUAL REPORT 2019Directors’ report 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 2019. 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: Barry Lewin (appointed 10 October 2018) James McKerlie (resigned 19 September 2018) Danny Lessem Trevor Lonstein (resigned 4 February 2019) Kate Hill Leah Graeve (appointed 12 June 2019) Dividends No dividend was paid during the financial year ended 30 June 2019 (2018: $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 human resources and payroll solutions. ELMO’s human resources (HR) and payroll 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 HR and payroll related processes including recruitment, onboarding, performance management, learning and development, rewards and recognition, remuneration, succession planning, payroll, onboarding, workplace rostering, time and attendance. ELMO also provides HR Core, a software module which organisations use for people management and employee self-service, and HR Survey for internal staff and external customer surveys. 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 During the year ended 30 June 2019 the following acquisitions were made by the Group: HROnboard On 31 January 2019 the Company completed the purchase of HROnboard Pty Limited (HROnboard), one of Australia’s leading providers of cloud-based employee onboarding software for an estimated total consideration of $10.0m with an initial amount of $7.0m paid on completion and a deferred cash payment of $3.0m (see note 21). The vendor is eligible for an additional conditional cash payment (estimated to be $5.5m) which will be subject to achieving a range of certain high growth performance targets. Total consideration payable is subject to adjustments relating to cash, debt and working capital. The onboarding process is an essential function of the employee’s lifecycle within an organisation and the acquisition of HROnboard strategically strengthens ELMO’s position as a leading provider of SaaS onboarding solutions in the Australian market. Goodwill arising on the acquisition reflects potential cost synergies, enhanced market coverage from a broader module suite and the increased opportunities for cross-selling to both new and existing customers. 34 ELMO ANNUAL REPORT 2019BoxSuite On 31 January 2019 the Company completed the purchase of Get BoxSuite Pty Limited (BoxSuite), a SaaS, cloud-based specialist in workplace rostering and time and attendance for casual and shift-based employees, for a total consideration of $1.4m with an initial amount of $1.0m paid on completion and $0.4m deferred based on agreed development milestones. BoxSuite’s rostering module enables organisations to schedule shifts and monitor staff costs while its time and attendance modules enable organisations to efficiently record and manage employee hours, calculate appropriate remuneration rates, and seamlessly integrate with external payroll platforms. The acquisition of BoxSuite is firmly in line with ELMO’s growth strategy to supplement the Company’s strong organic growth with complementary technology to offer customers an integrated product suite of HR and payroll solutions. 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 Annual Recurring Revenue (ARR), 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 2019, ELMO reported statutory revenue of $40.1m (FY2018: $26.5m). ELMO’s statutory loss before income tax, finance expenses, depreciation and amortisation was $2.5m (FY2018: earnings of $1.0m) and its statutory net loss after tax was $13.2m (FY2018: loss $3.0m). Annual recurring revenue, which reflects the revenue run rate at a point in time and is considered a key leading metric for prospective revenue, increased to $46.0m at 30 June 2019 (30 June 2018: $31.1m). Growth in ARR was driven by a combination of new contracts and the contribution from the FY19 acquisition of HROnboard and BoxSuite. Pro forma financial performance For the full year ended 30 June 2019, ELMO’s pro forma revenue was $42.6m (FY2018: $31.8m), which was consistent with market guidance of $42.4m. ELMO’s pro forma loss before income tax, finance expenses, depreciation and amortisation was $0.9m (FY18: earnings $3.5m), which was ahead of market guidance of negative $1.6m. The pro forma financial information reflects ELMO’s statutory financial statements adjusted for: • estimated full year revenue and EBITDA contribution from acquisitions, assuming the date of ownership was from 1 July in the respective years; and • adjustments relating to acquisition related transaction costs and other non-recurring items. The acquisition revenue and EBITDA adjustments relate to the following acquisitions: • Quintessential Marketing Consulting, Sky Payroll and Pivot Software during FY18; and • HROnboard and BoxSuite during FY19. Pro forma revenue The growth in pro forma revenue during the period was driven by: • Strong subscription revenues of 95.4% of total revenue and high customer retention rates of 92.1%; • Expansion of ELMO’s customer base to 1,341 organisations compared to 1,031 at 30 June 2018 (30.1% increase); • Increased investment into ELMO’s sales and marketing team; • Increased investment and traction in new and existing modules, resulting in increased cross-sell and upsell opportunities amongst ELMO’s customer base; and • Enhanced brand awareness and reputation of ELMO and its product offering. 35 ELMO ANNUAL REPORT 2019A reconciliation between revenue based on the statutory accounts and pro forma revenue is provided below. Reconciliation of revenue Revenue based on statutory accounts Add/(less) net effects of: Other income Full year estimated impact of acquisitions Pro forma revenue Year ended 30 June 2019 $m Year ended 30 June 2018 $m 40.1 26.5 – 2.5 42.6 0.1 5.2 31.8 Pro forma EBITDA For FY19, ELMO reported pro forma operating expenses, excluding depreciation and amortisation of $43.5m (FY18: $28.3m). The key driver for the increase in operating expenses was ELMO’s continued investment in resources to underpin future growth. There was increased investment into: • ELMO’s sales and marketing function which reported pro forma expenses of $18.8m (FY18: $9.2m, reflecting a 104.3% increase compared to pro forma FY18 due to increased headcount during the year; • • Increased investment and capacity in client services up to $5.5m (FY18: $2.7m). The increased investment was focussed on supporting the increase in activity covering implementation, integration and training; Increased investment in research and development, primarily the development of new modules and enhancement of existing modules. Pro forma research and development spend totalled $11.7m through FY19 (FY18: $5.0m). The total spend in FY19 was split between operating expenses of $3.4m and capitalised expenses of $8.3m (FY18: $0.8m, $4.2m); and • An increase in pro forma general and administrative expenses to $15.8m (FY18: $15.6m) driven by an increase in employment and operating costs due to the strengthening of ELMO’s infrastructure to scale operations. A reconciliation between EBITDA based on the statutory accounts and pro forma EBITDA is provided below Reconciliation of EBITDA EBITDA based on statutory accounts Add/(less) net effects of: Full year estimated impact of acquisitions Acquisition related costs Other non-recurring items Pro forma EBITDA1 Year ended 30 June 2019 $m Year ended 30 June 2018 $m (2.5) 0.4 0.6 0.6 (0.9) 1.0 0.9 1.2 0.4 3.5 1. Pro forma EBITDA in the year ended 30 June 2019 reflects the application of AASB16 Leases which results in certain leases being reclassified as finance leases. This accounting treatment requires the applicable lease to be capitalised on the balance sheet and the expenses reflected within depreciation and interest costs (below EBITDA). Pro forma EBITDA year ended 30 June 2018 reflects the leases as operating leases with the rent expense included within EBITDA. 36 ELMO ANNUAL REPORT 2019Directors’ report Financial position As at 30 June 2019, ELMO has no debt and a net cash balance of $27.7m (2018: $46.0m). The primary reason for the decline in the cash balance through FY19 was $13.2m of acquisition related payments. ELMO’s underlying strong cash position was driven by the payment of annual license fees in advance, which contributed to the positive operating positive cashflow of $5.5m through FY19. Due to growth through acquisitions, intangible assets have increased to $58.9m (2018: $35.8m (note 15)). 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 currently has a market penetration of circa 5.6%, reflecting the ratio of 1,341 active customers from a total market of 23,813 organisations2, across Australia and New Zealand. ELMO plans to accelerate its market penetration in the region by increasing investment into its sales and marketing capabilities and initiatives to drive new customer wins. • Expand product offering ELMO recently acquired and integrated rostering, onboarding and time and attendance modules to expand its solutions. There is continuous development and deployment planned for new and enhanced features across both the newly acquired and existing modules with additional modules aimed to be launched within the next few years. ELMO continues to commit to investment in research and development with the total spend in FY19 reflecting 28.8% (FY18: 18.9%) of statutory revenue. Key development plans include the continued enhancement of the user experience and user interface, continued integration of the FY19 acquisitions and further development of the interoperability of the module suite. • Acquisitions ELMO continues to believe there are opportunities to gain additional market share and/or acquire complementary technology through targeted acquisitions of other HR management software companies. Matters subsequent to the end of the financial year No other matter or circumstance has arisen since 30 June 2019 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. 2 Frost & Sullivan independent market report 2019. 37 ELMO ANNUAL REPORT 2019Information on directors Name: Title: Qualifications: Experience and expertise: Barry Lewin (appointed 10 October 2018) Chairman and Independent Non-executive Director Bachelor of Commerce (B.Com) and Bachelor of Laws (LLB) from University of Cape Town, MBA, Swinburne University of Technology. Barry is the founder and Managing Director of Melbourne-based corporate advisory firm SLM Corporate Pty Limited, where he advises public and private companies on mergers, acquisitions, transaction structuring, debt and equity issues, business sales and all aspects of corporate governance. Prior to establishing SLM Corporate in 1999, Barry spent 12 years as an in-house counsel to a number of ASX-listed companies. Other current directorships: Non-Executive Chairman of Praemium Limited (ASX:PPS), Non-Executive Chairman of Quickfee Ltd (ASX:QFE). Former directorships (last 3 years): None Special responsibilities: Member of the Nomination and Remuneration Committee Interests in shares: Interests in options: Contractual rights to shares: Name: Title: Qualifications: Experience and expertise: 10,000 fully paid ordinary shares None None James (Jim) McKerlie (resigned 19 September 2018) Former 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 directorships3: Chairman of Bambu Digital. Independent Non-Executive Director of Beach Energy. Former directorships (last 3 years): Chairman of Manalto Limited, Lithium Consolidated Minerals Exploration Limited and 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 Committee (until resignation on 19 September 2018). Interests in shares: Interests in options: Contractual rights to shares: None at 30 June 2019 None None 3. Directorships current at the time of resignation. 38 ELMO ANNUAL REPORT 2019Directors’ report Name: Title: Qualifications: Experience and expertise: Danny Lessem Chief Executive Officer, Executive Director and Co-Founder of ELMO Bachelor of Laws (LL.B) and Bachelor of Arts and Law from the University of Witwatersrand, South Africa 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: Former directorships (last 3 years): None None Special responsibilities: Member of the Audit and Risk Committee Interests in shares: Interests in options: Contractual rights to shares: Name: Title: Qualifications: Experience and expertise: 11,989,816 fully paid ordinary shares None None Trevor Lonstein (resigned 4 February 2019) Former Chief Financial Officer and Executive Director Bachelor of Commerce (B.Com) in Accounting and Finance from University of Cape Town, South Africa and a Fellow of the Institute of Chartered Accountants in England and Wales. Trevor was 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: Former directorships (last 3 years): None None Special responsibilities: Member of the Nomination and Remuneration Committee (until resignation on 4 February 2019). Interests in shares: Interests in options: 420,695 fully paid ordinary shares 31,373 options Contractual rights to shares: None 39 ELMO ANNUAL REPORT 2019Name: Title: Qualifications: Experience and expertise: Other current directorships: Catherine (Kate) Hill Independent Non-Executive Director, Chair of the Audit and Risk Committee Bachelor of Science – Honours, Mathematics and Statistics from the University of Bristol, England, a member of the Institute of Chartered Accountants in Australia and New Zealand, and a graduate of the Australian Institute of Company Directors. Kate has over 20 years’ experience as a former audit partner with Deloitte Touche Tohmatsu, advising privately owned and small cap ASX listed clients. She has worked extensively in regulated environments including assisting with Initial Public Offerings, capital raising and general compliance, as well as operating in an audit environment. She also held several leadership positions within Deloitte Australia and built an audit practice serving private clients in the Western Sydney office. She served on the Deloitte Australia board of partners for 2 years. Non-Executive Director of Countplus Limited (CUP.ASX), Chair of their Audit and Risk Committee and a member of the Acquisitions Committee. Non-Executive Chair of Seeing Machines Limited (AIM: SEE). Former directorships (last 3 years): None Special responsibilities: Interim Chair of the Board from 19 September 2018 until 10 October 2018. Chair of the Audit and Risk Committee and Member of the Nomination and Remuneration Committee Interests in shares: Interests in options: Contractual rights to shares: None None None Name: Title: Qualifications: Experience and expertise: Leah Graeve (appointed 12 June 2019) Independent Non-Executive Director, Chair of the Nomination and Remuneration Committee Bachelor of Arts and Law from Monash University and a graduate of the Australian Institute of Company Directors Leah is a senior executive at Qantas Airways Limited, where she is Head of Procurement – IT and Digital and is also a Board Member of Rare Cancers Australia (not-for-profit). Leah has over 16 years as a successful commercial and contracts negotiator in a range of organisations and industries. She has held roles as a senior manager at Jetstar Airways, Legal Counsel at Engonet, IT Commercial Manager at BHP Limited and was a former Policy Advisor to the Animal Law Institute, a not-for-profit community legal centre. Other current directorships: Former directorships (last 3 years): None None Special responsibilities: Chair of the Nomination and Remuneration Committee effective from her appointment on 12 June 2019 and member of the Audit and Risk Committee Interests in shares: Interests in options: Contractual rights to shares: None None None 40 ELMO ANNUAL REPORT 2019Directors’ report Chief Financial Officer On 4 February 2019 James Haslam was appointed as Chief Financial Officer. James is a Chartered Accountant and fellow of the Institute of Chartered Accountants in England and Wales (ICAEW). James has over 18 years in accounting and finance including 15 years professional services for KPMG and Deloitte, following which he founded and operated Financial Agility Consulting, specialising in financial analysis, due diligence, accounting, mergers and acquisitions, and capital markets advice, primarily, in recent years, based in the technology sector. 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. On 4 February 2019 James Haslam, Chief Financial Officer, was appointed as Joint Company Secretary. Meetings of directors The number of directors’ meetings (including meetings of the committees of directors) and number of meetings attended by each of the Directors of the company during the year ended 30 June 2019 were: Barry Lewin Jim McKerlie Danny Lessem Trevor Lonstein Kate Hill Leah Graeve Board meetings Audit and Risk Committee Nomination and Remuneration Committee A 9 2 14 9 14 1 B 9 2 14 8 14 1 A 2 1 3 – 3 – B 2 1 3 – 3 – A 2 2 – 2 4 1 B 2 2 – 2 4 1 A – Number of meetings held when director was eligible to attend during the year B – Number of meetings attended during the time the director held office during the year Directors’ interests The relevant interest of each director in the shares and options over such instruments issued by the Group, as notified by the directors to the ASX in accordance with S205G(1) of the Corporations Act 2001 at the date of this report is as follows: Directors Danny Lessem Barry Lewin Kate Hill Leah Graeve Fully paid ordinary shares Share options Number Number 11,989,816 10,000 – – – – – – 41 ELMO ANNUAL REPORT 2019Options granted to the key management personnel of the company, being senior management or directors Director or ‘senior management’ Number of options granted Issuing entity Danny Lessem Gordon Starkey Xin Sun Darryl Garber Monica Watt James Haslam – 198,612 180,557 130,627 112,163 24,614 ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited Shares under option Issuing entity Share option plan Number of shares under option ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited SEEP SEEP SEEP SEEP HPEP HPEP HPEP HPEP HPEP HPEP 398,712 31,373 223,247 24,614 202,902 8,735 22,260 8,820 Class of shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares 455,354 Ordinary shares 7,885 Ordinary shares Exercise price of options Expiry date of options $2.51 $2.51 $5.50 $5.50 $2.51 $2.51 $5.08 $5.08 $5.50 $5.50 17 October 2027 7 December 2027 29 October 2028 27 March 2029 17 October 2027 11 December 2027 9 March 2028 12 June 2028 5 November 2028 25 February 2029 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. 42 ELMO ANNUAL REPORT 2019Directors’ report 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 31 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 31 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 No officer of the company was an audit partner of Deloitte Touche Tohmatsu, being the auditors during the financial year, at a time when the audit firm undertook an audit of the company. Rounding of amounts The Group 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 on page 56. Auditor Deloitte Touche Tohmatsu continues in office in accordance with section 327 of the Corporations Act 2001. 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. The remuneration report is set out under the following main headings: • Remuneration governance • Key management personnel • Human resource strategy and remuneration policy • Remuneration payments and link between performance and reward • Remuneration of key management personnel • Share option plan • Key terms of employment contracts • Key management personnel equity holdings 43 ELMO ANNUAL REPORT 2019Remuneration governance The Nomination and Remuneration Committee is responsible for reviewing the remuneration arrangements for its Directors and Executives and making recommendations to the Board. The Nomination and Remuneration Committee has two key functions: • The purpose of the nomination function is to review and make recommendations to the Board with respect to identifying nominees for directorships and key executive appointments; considering the composition of the Board, ensuring that effective induction and education procedures exist for new Board appointees, key executives and senior management; ensuring that appropriate procedures exist to assess and review the performance of the Chairman, Non-executive Directors and senior executives. The responsibility for the Company’s remuneration policy rests with the full Board notwithstanding the establishment of the Committee. • The purpose of the remuneration function is to provide advice, recommendations and assistance to the Board in relation to the Company’s remuneration policies and remuneration packages of senior executives, Executive Directors and Non-executive Directors. Further information regarding the Committee’s responsibilities is set out in the Nomination and Remuneration Committee Charter available at http://investors.elmosoftware.com.au/Investors/?page=Corporate-Governance. Key management personnel Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the consolidated entity, directly or indirectly, including all directors (non-executive and executive) of the consolidated entity. The directors and other key management personnel (KMP) of the consolidated entity during or since the end of the financial year were: Position Non-Executive Directors Barry Lewin James (Jim) McKerlie Catherine (Kate) Hill Effective date KMP from appointment on 10 October 2018 KMP until resignation on 19 September 2018 KMP for the entire financial year Leah Graeve (appointed 12 June 2019) KMP from appointment on 12 June 2019 Executive Directors Danny Lessem Position KMP for the entire financial year Trevor Lonstein (resigned 4 February 2019) KMP until resignation on 4 February 2019 Other Key Management Personnel Position James Haslam (appointed 4 February 2019) Chief Financial Officer and joint Company Secretary Gordon Starkey Xin Sun Darryl Garber Monica Watt Chief Operating Officer Chief Technology Officer Chief Commercial Officer Chief Human Resources Officer 44 ELMO ANNUAL REPORT 2019Directors’ report Human resource strategy and remuneration policy The framework encourages executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to be based on 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 Remuneration payments and link between performance and reward ELMO’s remuneration strategy is designed to assist ELMO to achieve its corporate objectives through appropriate fixed and performance-based remuneration as detailed below: 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 • superannuation • short-term incentive • long-term incentive (share options) The combination of these comprises the executive’s total remuneration as detailed under ‘Key terms of employment contracts’ below. Fixed remuneration, consisting of base salary, fees and superannuation is 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. 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 is 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 as relevant to the specific executive role. Subject to the discretion of the Board, the STI Plan has been structured based on the overall remuneration structure adopted by ELMO such that 60% of an employee’s total package consists of fixed pay and 40% as performance pay, with the performance pay component divided such that 60% is based on short term performance and 40% of long term performance (excluding the CEO where only the STI element will apply for the performance pay). The quantum of any reward is 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. 45 ELMO ANNUAL REPORT 2019Long-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 for the year ended 30 June 2019. During the year key management personnel received awards granted in accordance with the SEEP only. The Senior Executive Equity Plan (SEEP) Equity incentives under the SEEP 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 this plan 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 the SEEP if considered appropriate by the Board. The SEEP is intended to align the interests of the senior executives with Shareholders. Awards under the SEEP have been structured as an option to receive shares at a future date subject to the recipient paying the exercise price (SEEP Option). Grants under the SEEP are made annually and are made to the senior executive team and such other executives as the Board may determine from time to time. Any grants are made subject to the ASX Listing Rules, to the extent applicable. The following table details the fixed, variable, short and long term incentives in relation to executive remuneration and the link to the Group’s performance. Component Performance measures Strategic objective/Performance link Fixed remuneration The position description of each Executive includes a set of individual performance measures which are reviewed and evaluated each financial year. Each Executive’s individual performance measures are specifically designed to ensure alignment with the Group’s strategic plans for the year. Remuneration is set competitively in order to: Fixed remuneration is based on: • Recruit: Attract the best talent to ELMO to • Role and responsibility ensure sustainable growth • Retain: Ensure talent is not lured away by well financed technology organisations or direct competitors. • Capability and competencies • Comparable market remunerations Performance-based remuneration (STIs and LTIs) ELMO’s performance pay consists of short and long-term incentives which are designed to: • Motivate: to achieve financial and non-financial corporate objectives • Reward: create performance culture that recognises and rewards outstanding performance • Retain: through the Senior Executive Equity Plan (SEEP) and the subsequent tenure required for options to vest Short-term incentive plan (STI) being cash award The personal Key Performance metrics of each Executive relate to conditions that are within the control of the employee which include but are not limited to divisional revenue and expense targets, strategic initiatives and such other conditions as the Group requires. STIs are cash-based payments • Quantum of STI = % of performance relative to an individual’s key performance metrics Ensures each Executive is held accountable for the outcomes that are under their control. These outcomes are designed to support the overall Group objectives. STIs motivate individuals, create a high- performance culture and increase employee engagement. 46 ELMO ANNUAL REPORT 2019Directors’ report Component (continued) Performance measures Strategic objective/Performance link Ensures a direct link between the performance of the KMP and their departments with the creation of shareholder value. Long-term incentive plan (LTI) under the (SEEP) being share options Participants must be employed on vesting date for the options to vest. Performance will be tested at the end of each vesting period (years 1, 2, and 3) to determine the extent to which the Company has satisfied the Total Shareholder Return (TSR) performance condition. Vesting against this target will apply if the following is met: • 100% of the Options will vest if the company ranks at or above the 75th percentile; • Straight line vesting will occur if the Company ranks between the 50th percentile and the 75th percentile; • 65% of the Options will vest if the Company ranks at the 50th percentile; • 0% of the Options will vest if the Company ranks below the 50th percentile. Performance will be tested relative to a peer group comprising the constituent companies of the S&P/ASX 300 excluding mining and energy companies. The TSR of each company will be measured from the start of the performance period to the end of the performance period. For FY19 performance measures for the STI’s were based on revenue and cost targets for each Executive with individual performance reviews conducted at the end of the year. ELMO is committed to continually evolving the key performance indicators for Executives ensuring meaningful shareholder value aligned targets on which to be assessed. 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 of the Non-executive Directors 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. 47 ELMO ANNUAL REPORT 2019Chair and independent Non-Executive Director, Barry Lewin’s annual directors’ fee was $150,000 (inclusive of superannuation), effective from his appointment to the position on 10 October 2018. Former Chair and independent Non-Executive Director, Jim McKerlie’s annual director fee was $150,000 (inclusive of superannuation) per annum plus an amount of $75,000 for additional services provided to the company, prior to his resignation on 19 September 2018. Kate Hill receives an annual fee of $100,000 per annum (inclusive of superannuation) for her role as a Non-Executive director, Chair of the Audit and Risk Committee and a member of the Nomination and Remuneration Committee. Leah Graeve receives an annual fee of $100,000 per annum (inclusive of superannuation) for her role as a Non-Executive director, Chair of the Nomination and Remuneration Committee and a member of the Audit and Risk Committee. 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 Board 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. The Non-executive Directors do not receive performance-related compensation, and there are no contractual redundancy or retirement benefit schemes for Non-executive Directors, other than statutory superannuation contributions. 48 ELMO ANNUAL REPORT 2019Directors’ report Remuneration of key management personnel The tables below detail remuneration of key management personnel based on the policies previously discussed for the years ended 30 June 2019 and 30 June 2018. Year ended 30 June 2019 Non-executive Directors: James McKerlie (Chairman)(i) Barry Lewin (Chairman)(i) Kate Hill Leah Graeve(i) Executive Directors: Danny Lessem Trevor Lonstein(i) Other Key Management Personnel: James Haslam(i) Gordon Starkey Xin Sun Monica Watt Darryl Garber Cash salary and fees $ STI(ii) $ Annual leave $ Long service leave $ Super- annuation $ Share Options(iii) $ Total $ 190,558 109,231 100,000 5,000 – – – – – – – – 609,148 202,269 411,667 – 56,056 26,857 130,141 367,808 328,500 217,967 267,637 2,528,259 60,000 158,400 144,000 100,000 120,000 994,067 10,606 38,720 16,999 6,565 20,931 – – – – – – – 20,023 15,137 – – – – – – 24,695 15,577 9,705 21,086 25,038 27,266 21,594 – – – – – 190,558 109,231 100,000 5,000 1,101,566 3,120 247,823 28,266 73,700 67,000 43,210 50,856 238,718 679,737 596,674 395,007 481,017 176,734 35,160 144,961 266,152 4,145,333 Notes in relation to Directors’ and Executive officers’ remuneration table (i) The following changes to key management personnel occurred during the financial year: • On 10 October 2018, Barry Lewin was appointed as Non-Executive Director; • On 19 September 2018 Jim McKerlie resigned as Non-Executive Director; • On 12 June 2019 Leah Graeve was appointed as Non-Executive Director; • On 4 February 2019 James Haslam was appointed; and • On 4 February 2019 Trevor Lonstein resigned as Executive Director. From and since those dates the individuals ceased and commenced as key management personnel. The remuneration for each has thereby been disclosed as appropriate until/from these dates. (ii) The STI bonus is for performance during the retrospective financial year using the performance criteria set out on page 43 after performance reviews were completed and approved by the Nomination and Remuneration Committee. Short-term incentives were approved by the Board post year-end but accrued in the financial statements for the year ended 30 June 2019 and were therefore disclosed. (iii) The value of the share options granted to key management personnel as part of their remuneration under the long-term incentive plan (LTI) is calculated at the grant date using a Monte Carlo simulation approach subject to the relative total shareholder returns performance conditions, and is allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options recognised as an expense in each reporting period. 49 ELMO ANNUAL REPORT 2019Year ended 30 June 2018 Non-executive Directors: James McKerlie (Chairman) David Hancock(i) Kate Hill(i) Executive Directors: Danny Lessem Trevor Lonstein Other Key Management Personnel: Gordon Starkey(ii) Xin Sun(iii) Monica Watt Darryl Garber Cash salary and fees $ Sales commission $ STI(iv) $ Bonus $ Other benefits(v) $ Super- annuation $ Share Options(vi) $ Total $ 225,000 83,710 6,300 475,000 274,960 309,952 274,960 159,817 182,648 – – – – – – – – – 120,000 – – – – – – – – – 7,953 – 78,557 11,669 25,000 25,000 – – – – 225,000 91,663 6,300 578,557 31,638 463,267 33,878 132,000 15,000 – – – 120,000 70,000 80,000 – – – 28,525 29,116 8,605 8,429 20,048 25,000 15,183 17,352 34,802 31,638 18,456 21,092 574,205 480,714 272,061 309,521 1,992,347 33,878 522,000 15,000 164,901 135,536 137,626 3,001,288 Notes in relation to Directors’ and Executive officers’ remuneration table (i) On 8 June 2018, David Hancock resigned as Non-Executive Director and Kate Hill was appointed as Non-Executive Director on the same day. The remuneration for each has thereby been disclosed as appropriate until/from this date. (ii) Gordon Starkey, Chief Operating Officer who has an agreed benefits package including a sales commission of 2% received on new business and an additional $15,000 for a target-related bonus in relation to FY17. (iii) Xin (Samuel) Sun received $90,444 holiday payout included within other benefits due to an accumulation of accrued annual leave. (iv) Short-term incentives were approved by the Board post year-end but accrued in the financial statements for the year ended 30 June 2018 and were therefore disclosed. (v) Other benefits include annual leave, long service leave and holiday payout. (vi) The value of the share options granted to key management personnel as part of their remuneration is calculated at the grant date using a Monte Carlo simulation approach subject to the relative total shareholder returns performance conditions. 50 ELMO ANNUAL REPORT 2019Directors’ report Share option plan Details on the options over ordinary shares in the Company that were granted as compensation to each key management personnel during the reporting period are as follows: Option tranches Tranche 1 Tranche 2 Tranche 3 Vesting date 31 August 2019 31 August 2020 31 August 2021 Fair value at grant date Exercise price $1.18 $1.50 $1.76 $5.50 $5.50 $5.50 The weighted average fair value for the three tranches is $1.56. Grant and expiry for all three tranches of options are as follows in relation to key management personnel: Key management personnel Gordon Starkey Xin Sun Monica Watt Darryl Garber James Haslam Grant date 29 October 2018 29 October 2018 29 October 2018 29 October 2018 27 March 2019 Expiry date 29 October 2028 29 October 2028 29 October 2028 29 October 2028 27 March 2029 51 ELMO ANNUAL REPORT 2019Balance as at 1 July 2018 Number Granted as compensation Cancelled Number Tranche 1 Tranche 2 Tranche 3 Balance as at 30 June 2019 Vested Number Number Executive Directors: Trevor Lonstein(i) 119,019 12,308 18,462 30,768 (149,184) 31,373 31,373 Other Key Management Personnel: James Haslam Gordon Starkey Xin Sun Monica Watt Darryl Garber – 130,920 119,019 69,428 79,345 4,923 13,538 12,308 8,547 10,256 7,384 20,308 18,462 12,821 15,385 12,307 33,846 30,768 21,367 25,641 – – – – – 24,614 198,612 180,557 112,163 130,627 – 34,510 31,373 18,301 20,915 (i) Trevor Lonstein ceased employment on 4 February 2019 and as a result all unvested options were cancelled. Balance as at 1 July 2017 Number Granted as compensation Number Tranche 1 Tranche 2 Tranche 3 Balance as at 30 June 2018 Number Nil Nil Nil Nil Nil 31,373 36,364 51,282 119,019 34,510 31,373 18,301 20,915 40,000 36,364 21,212 24,242 56,410 51,282 29,915 34,188 130,920 119,019 69,428 79,345 Executive Directors: Trevor Lonstein Other Key Management Personnel: Gordon Starkey Xin Sun Monica Watt Darryl Garber 52 ELMO ANNUAL REPORT 2019Directors’ report There were nil ordinary shares of ELMO Software Limited issued during the year ended 30 June 2019 to key management personnel and up to the date of this report resulting from the exercise of options. Key terms of employment contracts for the year ended 30 June 2019 Name: Title: Details: 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 2019 of $650,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. Trevor Lonstein Executive Director and Chief Financial Officer (resigned as director on 4 February 2019) Base salary for the year ending 30 June 2019 of $360,000 including superannuation, pro-rated to 4 February 2019. Trevor was eligible to participate in the short and long term incentive programs for the year ending 30 June 2019, effective until his resignation on 4 February 2019. James Haslam (appointed 4 February 2019) Chief Financial Officer Base salary for the year ending 30 June 2019 of $360,000 including superannuation, pro-rated from 4 February 2019, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. James was eligible for short term and long term incentive benefit effective from his appointment on 4 February 2019. Gordon Starkey Chief Operating Officer Base salary for the year ending 30 June 2019 of $396,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. Gordon was eligible for short term and long term incentive benefit. Xin Sun Chief Technology Officer Base salary for the year ending 30 June 2019 of $360,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. Xin was eligible for short term and long term incentive benefit. Monica Watt General Manager: Human Resources Base salary for the year ending 30 June 2019 of $250,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. Monica was eligible for short term and long term incentive benefit. Darryl Garber Chief Commercial Officer Base salary for the year ending 30 June 2019 of $300,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. Darryl was eligible for short term and long term incentive benefit. 53 ELMO ANNUAL REPORT 2019Key management personnel equity holdings Year ended 30 June 2019 Non-Executive Directors Barry Lewin(i) Jim McKerlie(ii) Kate Hill Leah Graeve Executive Directors Danny Lessem Trevor Lonstein(iii) Other Key Management Personnel James Haslam(iv) Gordon Starkey Xin Sun Monica Watt Darryl Garber Balance as at 1 July 2018 Purchased/other changes during the year Balance as at 30 June 2019 Number Number Number – 50,000 – – 11,989,816 420,695 – 510,945 425,695 1,250 460,945 10,000 (50,000) – – – – 5,000 (90,250) – – (40,250) 10,000 – – – 11,989,816 420,695 5,000 420,695 425,695 1,250 420,695 (i) Barry Lewin was appointed as a Non-Executive Director on 10 October 2018. (ii Jim McKerlie resigned as Non-Executive Director on 19 September 2018. At the date of resignation Jim McKerlie held 50,000 shares. (iii) Trevor Lonstein resigned as a director on 4 February 2019. (iv) James Haslam was appointed on 4 February 2019. Balance as at 1 July 2017 Purchased/other changes during the year Balance as at 30 June 2018 Number Number Number 50,000 – – 11,989,816 420,695 510,945 425,695 1,250 460,945 – – – – – – – – – 50,000 – – 11,989,816 420,695 510,945 425,695 1,250 460,945 Year ended 30 June 2018 Non-Executive Directors Jim McKerlie David Hancock(i) Kate Hill(ii) Executive Directors Danny Lessem Trevor Lonstein Other Key Management Personnel Gordon Starkey Xin Sun Monica Watt Darryl Garber (i) David Hancock resigned as a Director on 8 June 2018. (ii) Kate Hill was appointed as a Director on 8 June 2018. This concludes the remuneration report (audited). 54 ELMO ANNUAL REPORT 2019Directors’ report Directors’ declaration 30 June 2019 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 Barry Lewin Chairman 15 August 2019 Sydney Danny Lessem Director 55 ELMO ANNUAL REPORT 2019 Auditor’s independence declaration Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 Australia Tel: +61 (0) 2 9322 7000 www.deloitte.com.au 15 August 2019 The Board of Directors Elmo Software Limited Level 27, 580 George Street SYDNEY, NSW 2000 Dear Board Members Elmo Software Limited In accordance with section 307C of the Corporations Act 2001, 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 financial year ended 30 June 2019, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) (ii) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. Yours faithfully DELOITTE TOUCHE TOHMATSU Joshua Tanchel Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network. 56 ELMO ANNUAL REPORT 2019Contents Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows 58 59 60 61 62 Notes to the financial statements 95 Directors’ declaration 96 Independent auditor’s report to the members of ELMO Software Limited General information The financial statements cover ELMO Software Limited as a consolidated entity consisting of ELMO Software Limited and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars, which is ELMO Software Limited’s functional and presentation currency. ELMO Software Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business are: Registered office Level 12 680 George Street Sydney NSW 2000 Principal place of business Level 27 580 George Street Sydney NSW 2000 A description of the nature of the consolidated entity’s operations and its principal activities are included in the directors’ report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of directors, on 15 August 2019. The directors have the power to amend and reissue the financial statements. 57 ELMO ANNUAL REPORT 2019Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2019 Revenue from contracts with customers Cost of sales Gross profit Other income Sales and marketing expenses Research and development expenses General and administrative expenses Depreciation and amortisation expense Impairment loss on trade receivables Net gain on derecognition of financial assets measured at cost Finance income Finance costs Loss before income tax expense from continuing operations Income tax expense Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive loss for the year attributable to the owners of ELMO Software Limited Earnings per share From continuing operations Basic earnings Diluted earnings Note 4 5 16 7 8 9 Consolidated 2019 $’000 40,053 (5,388) 2018 $’000 26,520 (2,245) 34,665 24,275 35 (17,786) (3,247) 127 (8,699) (806) (15,332) (13,098) (9,437) (894) 98 857 (764) (4,250) (787) – 265 – (11,805) (2,973) (1,375) (15) (13,180) (2,988) – – (13,180) (2,988) Cents Cents 37 37 (20.85) (20.85) (5.29) (5.29) The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 58 ELMO ANNUAL REPORT 2019 Consolidated statement of financial position as at 30 June 2019 Consolidated 2019 $’000 2018 $’000 Note Assets Current assets Cash and cash equivalents Trade and other receivables Income tax refundable Other current assets Lease incentive receivable Finance lease receivable Total current assets Non-current assets Property, plant and equipment Intangible assets and capitalised costs Right-of-use assets Finance lease receivable Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Deferred and contingent consideration Lease liabilities Employee benefits Current tax liabilities Contract liabilities Lease payables and incentives Total current liabilities Non-current liabilities Deferred and contingent consideration Lease liabilities Employee benefits Deferred tax Contract liabilities Lease payables and incentives Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Accumulated losses 10 11 12 13 17 14 15 16 17 20 21 18 22 12 23 21 18 25 24 23 27 27 28 Equity attributable to the owners of ELMO Software Limited Total equity The above statement of financial position should be read in conjunction with the accompanying notes. 27,698 9,540 – 533 – 186 45,995 6,460 7 1,099 4,164 – 37,957 57,725 4,249 58,860 8,173 289 71,571 109,528 7,286 3,953 2,632 1,939 71 19,910 – 35,791 5,500 9,309 172 2,977 382 – 18,340 54,131 55,397 72,733 836 (18,172) 55,397 55,397 5,789 35,815 – – 41,604 99,329 4,636 5,735 – 1,010 – 13,782 925 26,088 400 – 128 801 – 3,700 5,029 31,117 68,212 72,340 158 (4,286) 68,212 68,212 59 ELMO ANNUAL REPORT 2019Consolidated statement of changes in equity for the year ended 30 June 2019 Consolidated Balance at 1 July 2017 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 via Institutional Placement and Share Purchase Plan (net of issue costs and tax) Issue of shares under business combinations Reserves: Translation movement during the year Equity settled share-based payment Foreign currency translation reserves $’000 (47) – – – – – – – Issued capital $’000 25,110 – – – 45,080 2,150 – – Balance at 30 June 2018 72,340 (47) Share option reserves $’000 Accumulated losses $’000 Total equity $’000 – – – – – – – 205 205 (1,298) 23,765 (2,988) (2,988) – – (2,988) (2,988) – – – – 45,080 2,150 – 205 (4,286) 68,212 Consolidated Balance at 1 July 2018 AASB 15 adjustment (net of tax): note 2 AASB 16 adjustment (net of tax): note 2 Issued capital $’000 72,340 – – Restated total at the beginning of the financial year 72,340 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 under business combinations – deferred consideration from prior year acquisitions (net of costs) Reserves: Translation movement during the year Equity settled share-based payment – – – 393 – – Balance at 30 June 2019 72,733 Foreign currency translation reserves $’000 Share option reserves $’000 Accumulated losses $’000 Total equity $’000 (47) – – (47) – – – – 52 – 5 205 (4,286) 68,212 – – (736) 30 (736) 30 205 (4,992) 67,506 – – – – – 626 831 (13,180) (13,180) – – (13,180) (13,180) – – – 393 52 626 (18,172) 55,397 The above statement of changes in equity should be read in conjunction with the accompanying notes. 60 ELMO ANNUAL REPORT 2019Consolidated statement of cash flows for the year ended 30 June 2019 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Income taxes (paid)/refunded Net cash from operating activities Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Payments for transaction costs of acquisitions Payment for acquisitions of businesses and subsidiaries, net of cash acquired Receipt for lease incentives Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Share issue transaction costs (net of tax) Repayment of lease liabilities Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Consolidated 2019 $’000 2018 $’000 Note 36 45,060 28,623 (40,226) (24,655) 4,834 833 (196) 5,471 (1,001) (9,433) (494) 3,968 265 150 4,383 (5,628) (4,845) – (13,222) (17,564) 2,874 – (21,276) (28,037) – (51) (2,441) 46,023 (2,975) – (2,492) 43,048 (18,297) 45,995 Cash and cash equivalents at the end of the financial year 10 27,698 The above statement of cash flows should be read in conjunction with the accompanying notes. 19,394 26,601 45,995 61 ELMO ANNUAL REPORT 2019 Notes to the financial statements 30 June 2019 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. This is the first set of the Group’s annual financial statements in which AASB 15 Revenue, AASB 9 Financial Instruments, have been applied and the Group has chosen to early adopt AASB 16 Leases. Application of new Australian accounting standards are described in note 2. 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 3. 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 33. 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 2019 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 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. Transactions eliminated upon consolidation 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. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired when the control is transferred to the group. 62 ELMO ANNUAL REPORT 2019 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, except if related to the issue of equity securities. 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. Any goodwill that arises is tested annually for impairment. 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. 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 currency differences are generally recognised in profit or loss and presented within finance costs. 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. Revenue recognition Revenue from contracts with customers From 1 July 2018 the Group has applied AASB 15, Revenue from contracts with customers. Information regarding the Group’s accounting policies in relation to contracts with customers and the effect of initially applying AASB 15 is provided in note 2(ii). Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. 63 ELMO ANNUAL REPORT 2019Note 1. Significant accounting policies (continued) Other income 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; 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. Finance income and finance costs The Group’s finance income and finance costs include: • Interest income; • Interest expense; • Foreign currency gain or loss on financial assets or financial liabilities; • Gain on the remeasurement to fair value of any pre-existing interest in an acquired entity as part of a business combination; and • Fair value loss on contingent consideration classified as a financial liability through a business combination. 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. Interest revenue includes interest for the lease receivable in relation to the sub-lease held. Interest expense includes interest in relation to lease liabilities and is calculated based on the default interest rate implicit in the lease contract. 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 Income tax comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to a business combination or items recognised directly in equity or other comprehensive income. Current tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable for the previous years. The amount of current tax payable or receivable is the best estimate of the tax expected to be paid or received. It is measured using tax rates enacted or substantively enacted at the reporting date. Deferred tax 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. 64 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Deferred tax assets are recognised for deductible temporary differences, unused tax credits and unused tax losses to the extent 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. 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 and term deposits over 90 days. 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. Upon the initial application of AASB 9 Financial Instruments, (note 2(i)), the Group recognises a loss allowance at an amount equal to lifetime expected credit losses (ECL) (see note 26 for further discussion). Other receivables are recognised at amortised cost, less any provision for impairment. Property, plant and equipment (i) Recognition and measurement Property, 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. If significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for as separate items of property, plant and equipment. 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. (ii) Subsequent expenditure Subsequent expenditure is capitalised only if it probable that the future economic benefits associated with the expenditure will flow to the Group. 65 ELMO ANNUAL REPORT 2019Note 1. Significant accounting policies (continued) (iii) Depreciation 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 and is recognised in profit or loss. 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. The estimated useful lives of property, plant and equipment for current and comparative periods are as follows: Leasehold improvements 3-8 years Plant and equipment Computer equipment 3-7 years 2-4 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Intangible assets (i) Recognition and measurement 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. 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. Capitalised sales commission costs Commission costs are those amounts paid to business development employees as remuneration for securing new contracts based on a discretionary fixed percentage of revenue. Customer lists Upon acquisition of a new business, customer lists which are acquired including active revenue contracts are amortised over management’s best estimate of their useful life. Trademark The trademark is treated as having an indefinite useful life because it is expected to contribute to net cash flows indefinitely and thus the trademark is not amortised until its useful life is determined to be finite. It will be tested for impairment annually and whenever there is an indication that it may be impaired. (ii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits of the specific asset to which it relates. All other expenditure including any expenditure for internally generated goodwill or brands is recognised in the profit or loss as incurred. 66 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019(iii) Amortisation Amortisation is calculated to write off the cost of the intangible assets less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. Goodwill and trademarks are not amortised. The estimated useful lives for current and comparative periods are as follows: Software development costs 3 years Capitalised sales commission costs 1-3 years Customer lists 7-10 years Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently, if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash of other assets or cash generating units (CGUs). Goodwill arising from a business combination is allocated to CGUs or a group of CGUs that are expected to benefits from the synergies of the consolidation. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount of the asset of CGU is the higher of the assets fair value less costs to sell and value in use. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amount of other assets in the CGU or on a pro-rata basis. An impairment in respect of goodwill is not reversed. For other assets, an impairment loss is only reversed to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 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. Employee benefits Short-term employee benefits Short-term benefits are expensed as the relative service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share-based payment arrangements The grant-date fair value of equity-settled share-based payment arrangements granted to employees is generally recognised as an expense, with a corresponding increase in equity, to the share option reserve, over the vesting period of the awards. The fair value of the share options has been determined as detailed in note 38. Other long-term employee benefits The Group’s obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using the rates attached to the high quality corporate bonds at the statement of financial position date, the maturity of which approximates to the terms of the Group’s obligations. 67 ELMO ANNUAL REPORT 2019Note 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. Share 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. 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. In the case that the Group is in a loss position for the period no effect will be applied in relation to dilutive factors. 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. Standards issued but not yet effective A number of new standards are effective for annual periods beginning on or after 1 July 2018. The Group has decided to early adopt AASB 16, Leases. The accounting policy and impact on transition is provided in note 2(iii). From the remaining standards and interpretations issued but not yet effective, the Group has assessed that there will be no significant impact on the financial statements. 68 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Note 2. Application of new Australian accounting standards (i) AASB 9 Financial Instruments AASB 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial assets. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. As a result of the adoption of AASB 9, where relevant the Group has adopted amendments to AASB 101 Presentation of Financial Statements, which require impairment of financial assets to be presented in a separate line item in the statement of the profit or loss or other comprehensive income. Impairment: 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. Impairment of trade receivables which would previously have been included in other expenses is now stated as ‘impairment loss on trade receivables’. Any impairment losses on other financial assets are presented under ‘finance costs’ and not presented separately in the statement of profit or loss and other comprehensive income. The Group has assessed the effect of this requirement upon the trade receivables being the only relevant asset grouping. It has been the policy of the Group to continually assess the collectability of all trade receivables including the assessment of credit risk at the outset of a sale and relevant past experience. There were no significant amendments required upon the adoption of AASB 9 for the Group or amendments to be disclosed. (ii) AASB 15 Revenue from Contracts with Customers The Group has adopted AASB 15 Revenue from Contracts with Customers, from 1 July 2018. The Group has applied AASB 15 using the modified approach, with any cumulative effect being recognised in opening retained earnings. AASB 15 establishes a framework for determining whether, how much and when revenue is recognised. It replaced AASB 118 Revenue and related interpretations. Under AASB 15, revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control – at a point in time or over time – requires judgement. AASB introduces a 5-step approach to revenue recognition. Under AASB 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying a particular performance obligation is transferred to the customer. Accounting treatment under AASB 15 The group has two primary revenue streams: • Software solution services; and • Professional services (i) Identification of distinct elements and separate performance obligations Software solution services In the case where the customer contract includes a license and additional integration services provided including implementation and training (“software solution services”) the assessment has been performed as to whether a separate performance obligation exists for each element. These additional services provided with the licence are not distinct or separately identifiable and therefore the contract includes only one performance obligation under AASB 15. Under the Group’s previous revenue recognition policy, revenue from the sale of software licences when sold in conjunction with integration services (which includes but is not limited to installation, implementation and initial training) were generally treated as separate performance obligations with the associated revenue recognised on satisfaction of each separate performance obligation. Professional services These services can be provided at any point during the life of the licence contract and are therefore classified as a separate performance obligation. No impact of the transition to AASB 15 Revenue has been identified to the accounting policy for standalone professional services. 69 ELMO ANNUAL REPORT 2019Note 2. Application of new Australian accounting standards (continued) (ii) Revenue recognition under AASB 15 The Group now recognises revenue from the following major sources under AASB 15 as below: Revenue Stream Performance Obligation Timing of Recognition “Software solution services” – software licences, implementation and integration services Professional services Access to software Over the life of the contract as the customer simultaneously receives and consumes the benefits of accessing the software As defined in the contract but typically at completion of the service Recognised over time, but because time delivered is minimal, point in time recognition has been applied. (iii) Impact of transition to AASB 15 An assessment has been performed and determined that during the three annual financial years to 30 June 2018, revenue of $1,052,000 was recognised (under AASB 118) for the additional services provided to customers as part of a software solution services contract. Under AASB 15, these services are not considered to be a separately identifiable performance obligation. Accordingly, this revenue cannot be recognised separately but instead should be recognised over the period for which services are being delivered. Consistent with the transition arrangements no adjustment has been made to the year ended 30 June 2018 comparative revenue balance but an adjustment has been made to the opening balances to the balance sheet to reduce retained earnings by $736,400 (net of tax), with a corresponding increase to contract liabilities (deferred income). The amounts that have been deferred will be recognised over the remaining life of the contracts, typically over the next two to three years. There are no other significant adjustments required in relation to the adoption of AASB 15 for the current financial year. (iii) AASB 16 Leases General impact of application of AASB 16 Leases In the current year, the Group, for the first time, has applied AASB 16 Leases in advance of its effective date with the date of initial application of AASB 16 for the Group being 1 July 2018. AASB 16 introduces new requirements with respect to lease accounting by removing the distinction between operating and finance leases, requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases except for short-term leases, being those less than 12 months, and leases of low-value assets. The Group has applied AASB 16 using the modified retrospective approach, with no restatement to the comparative information. Impact of the definition of a new lease The change in definition of a lease mainly relates to the concept of control. AASB 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time in exchange for consideration. The Group has applied this definition to all lease contracts currently held. Impact on lessee accounting Previously, under AASB 117 for the comparative period, all leases were classified as operating leases and were not recognised in the Group’s statement of financial position. Payments under operating leases were recognised in the profit or loss on a straight-line basis over the term of the lease. Lease incentives received were recognised as an integral part of the total lease expense, over the term of the lease. AASB 16 changes how the Group accounts for leases previously classified as operating leases under AASB 117 including: • Recognising right-of-use assets and lease liabilities in the consolidated statement of financial position, initially measured at the present value of future lease payments; • Recognising depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of profit or loss; and 70 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019• Separating the total amount of cash paid separated into a principal portion (presented within financing activities) and interest (presented within operating activities) in the Consolidated Cash flow statement. Lease incentives under AASB 16 are recognised as part of the measurement of the right-of-use assets and lease liabilities. Under AASB 16, right-of-use assets are tested for impairment in accordance with AASB 136 Impairment of assets. This replaces the previous requirement to recognise a provision for onerous lease contracts. For short-term leases (lease term of 12 months or less) and leases of low-value assets, the Group has opted to recognise a lease expense on a straight-line basis as permitted by AASB 16. This expense is presented within other expenses in the consolidated statement of profit or loss. Impact on lessor accounting Under AASB 16 the Group is required to assess the classification of the sub-lease commenced during the financial year with reference to the right-of-use asset, not the underlying asset. The Group concluded that the sub-lease is a finance lease under AASB 16. Upon commencement of the sub-lease the right-of-use asset held by the Group as the intermediate lessor is derecognised, recognising a lease receivable being the present value of sub-lease payments to be received with any gain or loss being recognised in the profit or loss. Financial impact of initial application of AASB 16 On transition to AASB 16, at 1 July 2018, the Group recognised an additional $10.3m of right-of-use assets and $10.3m of lease liabilities. When measuring lease liabilities, the Group discounted lease payments using the interest rate implicit in the lease contract, being 6%. Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Revenue recognition Judgement is required as to whether revenue is recognised over time or at a point in time. 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. There is significant judgement involved including determining the fair value of consideration and critically valuing the intangible assets for each business combination. Several factors are taken into consideration in valuing intangibles including replacement cost for software and revenue growth assumptions and discount rates underlying the valuation of customer lists and software. 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. 71 ELMO ANNUAL REPORT 2019Note 3. Critical accounting judgements, estimates and assumptions (continued) Impairment of goodwill The consolidated entity assesses impairment of goodwill and other indefinite life intangible assets annually by performing a fair value less costs of disposal calculation, which incorporate a number of key estimates and assumptions. In determining the Elmo CGU’s fair value significant judgement is used in considering the appropriate comparable companies, and consequently the appropriate revenue multiple to determine Elmo’s fair value. 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. Leases For the purpose of measuring the right-of-use asset lease term, duration is estimated. This requires judgement and is based on an assessment as to whether an option to extend or terminate a lease will be exercised. The Group must also consider each contract held to assess whether a contract includes a lease under AASB 16. Recovery of deferred tax assets Deferred tax assets for tax losses and R&D tax credits are only recognised if the Group considers it is probable that future taxable amounts will be available to utilise those tax losses and R&D tax credits against. Note 4. Revenue from contracts with customers The effect of initially applying AASB 15 Revenue from contracts with customers, is described in note 2(ii). Due to the transition method adopted, comparative information has not been restated to reflect the new requirements. 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 2019 $’000 37,124 2,929 – 2018 $’000 25,423 892 205 2019 $’000 58,313 13,258 – 2018 $’000 35,593 6,011 – 40,053 26,520 71,571 41,604 The majority of the Group’s revenue is generated from sales contracts with Australia, Singapore and New Zealand companies. The geographic split of this revenue across all companies is: a) Australia (87.70%, 2018: 89.70%); b) New Zealand (10.20%, 2018: 8.40%); c) Singapore (0.60%, 2018: 0.90%) and d) Other (1.50%, 2018: 1.0%) 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. 72 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Timing of revenue recognition Products and services transferred at a point in time Products and services transferred over time Total revenue Note 5. Other income Government grants Other income Note 6. Expenses Employment expenses Sales and marketing Research and development General and administrative Included in general and administrative expenses Consultancy and subcontractor expenses Rental expenses Note 7. Finance income Interest on lease receivable Other interest income Consolidated 2019 $’000 1,839 38,214 40,053 2018 $’000 93 34 127 Consolidated 2019 $’000 – 35 35 Consolidated 2019 $’000 2018 $’000 13,076 3,132 7,187 5,369 792 6,560 23,395 12,721 1,189 1,056 1,651 1,514 Consolidated 2019 $’000 2018 $’000 24 833 857 – 265 265 73 ELMO ANNUAL REPORT 2019Note 8. Finance costs Interest on lease liability Foreign exchange loss Note 9. Income tax expense Income tax expense Current tax expense Deferred tax – origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense Income tax expense is attributable to: Loss from continuing operations Aggregate income tax expense Deferred tax included in income tax expense comprises: Increase in deferred tax assets (note 24) Deferred tax – origination and reversal of temporary differences Numerical reconciliation of income tax benefit and tax at the statutory rate Loss before income tax expense from continuing operations Loss before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible in calculating taxable income: Effect of expenses that are not deductible in determining taxable profit Effect of tax concession (Research and Development Tax Incentives) Non-deductible R&D costs (R&D tax offset not booked) Tax losses not recognised Benefit of tax losses not previously recognised Other Adjustment to opening deferred tax asset Adjustment recognised for prior periods Income tax expense Amounts credited directly to equity Deferred tax liabilities (note 24) 74 Consolidated 2019 $’000 751 13 764 2018 $’000 – – – Consolidated 2019 $’000 2018 $’000 (358) (1,017) – (1,375) (1,375) (1,375) (1,017) (1,017) (11,805) (11,805) 3,541 (209) – (3,623) (451) 9 56 (677) (698) – (1,375) 6 107 (128) (15) (15) (15) 107 107 (2,988) (2,988) 896 (381) (628) – – – – (113) – 98 (15) – 1,040 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Note 10. Cash and cash equivalents Cash at bank Term deposits Cash and cash equivalents Note 11. Trade and other receivables Trade receivables Loss allowance Other receivables Consolidated 2019 $’000 25,640 2,058 27,698 Consolidated 2019 $’000 11,015 (1,475) 9,540 – 9,540 2018 $’000 45,861 134 45,995 2018 $’000 7,326 (902) 6,424 36 6,460 The consolidated entity has recognised a loss of $894,268 (2018: $786,971) in profit or loss in respect of impairment of receivables for the year ended 30 June 2019. Information about the Group’s exposure to credit and market risks, and impairment losses for trade receivables is included in note 26. Note 12. Current tax (i) Current tax asset: income tax refundable Income tax refundable The income tax refundable for the prior year comprises of tax refunds owing to the subsidiaries in the Group. (ii) Current tax liabilities: income tax payable Income tax payable Consolidated 2019 $’000 – 2018 $’000 7 Consolidated 2019 $’000 71 2018 $’000 – For the year ended 30 June 2019 as the Group revenue exceeded the $20m threshold relating to research and development tax credits, there will be a non-refundable tax offset carried forward of $3,622,740 available to the parent entity (2018: $841,312). The Group has decided not to book the non-refundable Research and Development tax offset carried forward as a deferred tax asset in this financial year until there is a reasonable certainty that sufficient future taxable income will be available (see note 24). 75 ELMO ANNUAL REPORT 2019 Note 13. Other current assets Prepayments Other debtors Note 14. Property, plant and equipment Plant and equipment – at cost Accumulated depreciation Computer equipment – at cost Accumulated depreciation Leasehold improvements – at cost Accumulated depreciation Consolidated 2019 $’000 473 60 533 Consolidated 2019 $’000 608 (342) 266 1,288 (830) 458 4,311 (786) 3,525 4,249 2018 $’000 1,096 3 1,099 2018 $’000 518 (296) 222 855 (541) 314 5,253 – 5,253 5,789 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 2017 Additions Additions through business combinations Disposals Depreciation expense Balance at 30 June 2018 Additions Additions through business combinations Disposals Transfers Depreciation expense Effects of movements in exchange rates Balance at 30 June 2019 76 Plant and equipment $’000 Computer equipment $’000 Leasehold improvements $’000 153 97 25 (1) (52) 222 165 – – (48) (73) – 266 170 197 52 – (105) 314 421 1 (76) 48 (254) 4 458 Total $’000 506 5,551 77 (158) (187) 5,789 1,001 1 183 5,257 – (157) (30) 5,253 415 – (1,355) (1,431) – (786) (2) 3,525 – (1,113) 2 4,249 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Note 15. Intangibles assets and capitalised costs Consolidated Software development costs Accumulated amortisation Capitalised sales commission costs Accumulated amortisation Customer lists (acquired through business combinations) Accumulated amortisation Goodwill (acquired through business combinations) Trademarks (acquired through business combinations) 2019 $’000 24,712 (11,099) 13,613 3,490 (2,089) 1,401 8,816 (1,600) 7,216 36,051 579 58,860 2018 $’000 13,606 (6,633) 6,973 2,338 (1,588) 750 6,995 (525) 6,470 21,380 242 35,815 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 2017 Additions Additions through business combinations (note 21) Amortisation expense Balance at 30 June 2018 Software development costs $’000 Capitalised Commission costs $’000 2,772 4,200 3,113 (3,112) 6,973 762 645 – (657) 750 Additions 8,283 1,148 Additions through business combinations (note 21) Amortisation expense Effects of movements in exchange rates Balance at 30 June 2019 2,759 (4,466) 64 13,613 – (501) 4 1,401 Customer list $’000 Goodwill $’000 Trademarks $’000 366 – 6,585 (481) 6,470 – 1,821 (1,075) – 7,216 2,071 – 19,309 – 21,380 2 14,669 – – – – 242 – 242 – 337 – – Total $’000 5,971 4,845 29,249 (4,250) 35,815 9,433 19,586 (6,042) 68 36,051 579 58,860 Goodwill arose during the current financial year through the acquisition of HROnboard and BoxSuite (2018: Quinntessential Marketing Consulting, Sky Payroll and Pivot Software); refer to Note 21 for further details. An impairment loss, if any, is recognised for the amount by which the carrying amount exceeds its recoverable amount of the cash generating unit (classified as a single CGU by the Group under the current business model). The recoverable amount is determined on a Fair Value Less Cost of Disposal Basis and as at 30 June 2019 following impairment testing there are no indicators to suggest that an impairment would occur. 77 ELMO ANNUAL REPORT 2019Note 16. Right of use assets The Group holds leases for several properties with lease terms ranging from 3 to 5 years. AASB 16 Leases has been adopted with a modified retrospective transition approach so there are no right of use assets recognised for the comparative year ended 30 June 2018. Right-of-use assets: property As at 1 July 2018: cost recognised upon transition to AASB 16 Less: accumulated depreciation recognised upon transition to AASB 16 Net carrying amount as at 1 July 2018 Additions Derecognition of right-of-use asset(i) Depreciation Net carrying amount as at 30 June 2019 Amounts recognised in profit or loss in relation to leases Interest expense Expense relating to low value assets Expense relating to variable lease payments not included in the measurement of the lease liability Cash flow from leases Total cash outflow as a lessee Income from sub-leasing of right-of-use asset Consolidated 2019 $’000 11,492 (1,156) 10,336 627 (505) (2,285) 8,173 751 19 449 3,917 152 (i) During the financial year, a sub-lease was entered into derecognising the right-of-use asset in relation to the head lease and recognising a financial lease receivable (note 17) with a resulting gain to the profit or loss of $98,332. Note 17. Finance lease receivable The Group holds a sub-lease which commenced during the current financial year in relation to a property recognised as a finance lease under AASB 16 Leases. Current finance lease receivable (recoverable within 12 months) Non-current finance lease receivable (recoverable after 12 months) Consolidated 2019 $’000 186 289 78 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Note 18. Lease liabilities AASB 16 Leases has been adopted with a modified retrospective transition approach so there are no right of use liability disclosures for the comparative year ended 30 June 2018. Amounts due for settlement within less than 12 months (current liabilities) Amounts due for settlement in more than 12 months (non-current liabilities) Maturity analysis Not later than 1 year Later than 1 year but not later than 5 years Later than 5 years Consolidated 2019 $’000 2,632 9,309 Consolidated 2019 $’000 2,632 9,309 – 11,941 The lease liabilities are interest bearing at a rate of 6% based on the interest rates implicit in the lease contract. There are options to extend included in several of the lease contracts held. However, these options are not expected to be exercised based on current business operations. There are no other future cash flows anticipated in relation to leases held which have not been disclosed in the financial statements. As at 30 June 2019, there are no other leases which have not commenced but a commitment has been made. The Group does not face a significant liquidity risk in relation to its lease liabilities. Note 19. Lease commitments Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years Consolidated 2019 $’000 2018 $’000 – – – 3,035 11,027 14,062 Operating lease commitments includes contracted amounts for offices 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. Following the early adoption of AASB 16 Leases, (see note 2), significant property leases previously reported as operating leases are now recognised as finance leases. The maturity analysis for lease liabilities as at 30 June 2019 is detailed in note 18. 79 ELMO ANNUAL REPORT 2019Note 20. Trade and other payables Trade payables and accruals Other payables Loans from a related party Consolidated 2019 $’000 4,506 2,780 – 7,286 2018 $’000 3,773 838 25 4,636 Note 21. Business combinations and acquisitions of business assets During the year the Company acquired interests in HROnboard and BoxSuite (2018: Quinntessential Marketing Consulting (QMC), Sky Payroll and Pivot Software). Key information on the acquisitions is summarised in the table below: Net fixed assets Cash Customer list intangible asset Software intangible asset Trademark intangible asset Other assets Deferred revenue Deferred tax liability Loans repaid to previous shareholders Other liabilities Net identifiable (liabilities)/assets acquired Goodwill on acquisition Acquisition-date fair value of the total consideration transferred Acquired in the year ended 30 June 2018 Acquired in the year ended 30 June 2019 QMC $’000 Sky Payroll $’000 Pivot Software $’000 HROnboard $’000 BoxSuite $’000 14 10 3,020 1,053 134 599 (1,501) (946) – (50) 2,333 9,718 – – – 324 – – – – – – 324 1,476 63 481 3,565 1,736 108 697 (1,779) (1,102) (3,551) (463) (245) 8,115 1 332 1,806 1,580 337 498 (1,303) (1,117) (948) (426) 760 14,123 – 13 15 1,179 – 9 – (358) – (4) 854 546 12,051 1,800 7,870 14,883 1,400 During the financial year ended 30 June 2019 the following payments were made in relation to deferred consideration for business combinations in the prior year: Acquired entity QMC Sky Payroll Pivot Software Consideration settled in shares $’000 Consideration settled in cash $’000 – – 393 4,000 400 931 As at 30 June 2019, consideration has been settled in final in relation to the prior year acquisitions in QMC and Pivot Software, with consideration for Sky Payroll to be finalised during the year ending 30 June 2020. 80 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019HROnboard On 31 January 2019 the Company completed the purchase of HROnboard Pty Limited (‘HROnboard’), one of Australia’s leading providers of cloud-based employee onboarding software for an estimated total consideration of $10.0m with an initial amount of $7.0m paid on completion and a deferred cash payment of $3.0m. The vendor is eligible for an additional conditional cash payment (estimated to be $5.5m) which will be subject to achieving a range of certain high growth performance targets. Total consideration payable is subject to adjustments relating to cash, debt and working capital. The onboarding process is an essential function of the employee’s lifecycle within an organisation and the acquisition of HROnboard strategically strengthens ELMO’s position as a leading provider of SaaS onboarding solutions in the Australian market. Goodwill has arisen through this acquisition from synergies, the opportunities for cross-selling and ability to provide a broader product suite to offer to the market. BoxSuite On 31 January 2019 the Company completed the purchase of Get BoxSuite Pty Limited (‘BoxSuite’), a SaaS, cloud-based specialist in workplace rostering and time and attendance for casual and shift-based employees, for a total consideration of $1.4m with an initial amount of $1.0m paid on completion and $0.4m deferred based on agreed milestones. BoxSuite’s rostering module enables organisations to schedule shifts and monitor staff costs while its time and attendance modules enable organisations to efficiently record and manage employee hours, calculate appropriate remuneration rates, and seamlessly integrate with external payroll platforms. The acquisition of BoxSuite is firmly in line with ELMO’s growth strategy to supplement the Company’s strong organic growth with complementary technology to offer customers an integrated product suite of HR and payroll solutions. Results for each acquisition included in the consolidated statement of comprehensive income for the current and prior reporting period since the appropriate acquisition date for each transaction as stated above are as follows: Year ended 30 June 2019 HROnboard BoxSuite Year ended 30 June 2018 QMC Sky Payroll Pivot Software Revenue $’000 Loss after tax $’000 1,004 5 2,161 61 1,235 (476) (565) (206) (315) (263) If the acquisition date for all acquisitions that occurred during the year had been as of the beginning of the annual reporting period, the results for ELMO Software Limited, being the combined entity including a full year of results for HROnboard and BoxSuite (2018: QMC, Sky Payroll and Pivot Software) would have been: Revenue Loss before tax 2019 $’000 42,600 (11,400) 2018 $’000 31,800 (1,900) The Group incurred costs of $0.55m (2018: $1.16m) in relation to all acquisitions made during the year. These costs have been included in business acquisition expenses. 81 ELMO ANNUAL REPORT 2019Note 22. Employee benefits: current liabilities Employee benefits Consolidated 2019 $’000 1,939 2018 $’000 1,010 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 23. Contract liabilities Contract liabilities Current Non-current Note 24. Deferred tax: non-current liabilities Consolidated 2019 $’000 2018 $’000 19,910 382 13,782 – As at 1 July 2018 $’000 Prior year adjustments (Note 2) $’000 Recognised in profit or loss (Note 9) $’000 Acquired in business combinations (Note 21) $’000 As at 30 June 2019 $’000 172 (2) (1) (1,514) – 13 554 476 (1,941) 59 (73) 84 189 342 – – 841 (801) – – – – (3,101) – – – – – – – – – 316 3,101 – 316 44 1 9 (888) (363) (6) (185) (119) 216 76 – 100 415 206 (164) 482 (841) – – – – – – – – (546) (828) (101) – – – – – – 216 (1) 8 (2,402) (3,464) 7 369 357 (2,271) (693) (174) 184 604 548 152 3,583 – (1,017) (1,475) (2,977) Year ended 30 June 2019 Provision for doubtful debts Prepayments Property, plant and equipment Intangibles Right-of-use assets Blackhole expenses IPO costs Transaction costs on share issue Acquired on business combination: Customer list Capitalised software development costs Trademarks Superannuation payables Accruals Provision for employee benefits Contract liabilities Lease liabilities R&D tax incentive Deferred tax assets/(deferred tax liabilities) 82 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019The Group has decided not to book the 2019 refundable Research and Development tax offset carried forward of $3,622,740 as a deferred tax asset, until there is a reasonable certainty that sufficient future taxable income will be available. The Group has also reversed the 2018 non-refundable Research and Development tax offset carried forward of $841,312 in the 2019 year. The Group has decided not to book the deferred tax asset impact arising from the total tax losses carried forward of $451,339, until there is a reasonable certainty that sufficient future taxable income will be available. ELMO is considering tax consolidation in FY20 and no tax losses for acquired subsidiaries have been recognised as the available fraction of tax losses has not been calculated. Year ended 30 June 2018 Provision for doubtful debts Prepayments Property, plant and equipment Intangibles Blackhole expenses IPO costs Transaction costs on share issue Acquired on business combination: Customer list Capitalised software development costs Trademarks Superannuation payables Accruals Employee benefits Carried forward non-refundable R&D tax incentive Deferred tax assets/(deferred tax liabilities) As at 1 July 2017 $’000 Recognised in profit or loss (Note 9) $’000 Recognised in equity (Note 9) $’000 Acquired in business combinations $’000 As at 30 June 2018 $’000 135 – 34 (1,060) 758 – – (110) – – 71 40 231 – 99 37 (2) (35) (454) (745) 108 (119) 144 59 – 13 149 111 841 107 – – – – – 446 595 – – – – – – – – – – – – – – 172 (2) (1) (1,514) 13 554 476 (1,975) (1,941) – (73) – – – – 59 (73) 84 189 342 841 (801) 1,040 (2,048) Note 25. Employee benefits: non-current liabilities Employee benefits Note 26. Financial risk management The Group has exposure to the following risks arising from financial assets and liabilities: • Credit risk • Liquidity risk • Market risk Consolidated 2019 $’000 172 2018 $’000 128 Risk management framework The Company’s board of directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The board of directors has established the Audit and Risk committee, which includes responsibility for developing and monitoring the Group’s risk management policies. The committee reports regularly to the board of directors on its activities. 83 ELMO ANNUAL REPORT 2019Note 26. Financial risk management (continued) The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations. The role of the Audit and Risk Committee for the Group is to: • Provide oversight of the integrity of internal financial reporting and the external financial statements; • Review the effectiveness of the internal financial controls; • Review the independence, objectivity and performance of the external auditors; and • Provide guidance on risk management. The Group maintains a comprehensive risk exposure matrix which is regularly reviewed, monitored and updated. As part of the risk management strategy the Group constantly evaluates risk and risk acceptance. 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; related to trade receivables and lease receivables for the Group. The average credit period on sales of products and services is 30 days. No interest is charged on outstanding trade receivables. The Group always measures the loss allowance for trade receivables at an amount equal to lifetime expected credit losses. The expected credit losses on trade receivables are estimated by reference to past default experience of the debtor and an analysis of the debtors current financial position, adjusted for factors that are specific to the debtor, general economic conditions of the industry and an assessment of both current and forecast conditions. New customers are typically invoiced in advance of their contract commencing with annual renewals also being due for payment in advance of the renewal anniversary. Receivables held are monitored on an ongoing basis to minimise the Group’s exposure. The maximum exposure to credit risk at the reporting date is the carrying value of trade receivables (see note 11) and lease receivables (note 17). Expected credit loss rates and allowances for expected credit losses are as follows: Expected credit loss rate Carrying amount Allowance for expected credit losses 2019 % – 14% 52% 2018 % – 6% 48% 2019 $’000 4,192 5,392 1,431 11,015 2018 $’000 3,395 2,366 1,565 7,326 2019 $’000 – 731 744 1,475 2018 $’000 – 144 758 902 Neither past due nor impaired 0 to 3 months overdue 3 to 6 months overdue Total 84 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Movements in the provision for impairment of receivables are as follows: Opening balance Additional/(reduction in) provisions recognised Closing balance Consolidated 2019 $’000 902 573 1,475 2018 $’000 914 (12) 902 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. This risk is managed through constant monitoring of cash resources and future obligations. The Group currently does not hold debt and has a cash balance of $27.7m at 30 June 2019. In the event that further resources are required the Group has the potential to raise additional funds through a capital raising and/or acquire debt. Interest rate risk As the Group does not currently hold debt, the only significant liabilities which are subject to interest rate risk are lease liabilities held. The interest charged on these liabilities is implicit in the lease and is fixed for all leases currently held and committed. Market risk: Currency risk The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when revenue or expense is denominated in a different currency from the Group’s presentation currency) and the Group’s net investment in foreign subsidiaries. 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 and these transactions are conducted at spot rates as necessary in normal operations. The Group’s assets and liabilities at balance date denominated in foreign currencies is: Assets Current Non-current Liabilities Current Non-current New Zealand Dollar $’000 Singapore Dollar $’000 2,434 4,442 (2,270) (3,432) 127 – – (620) Movements in foreign exchange rates are unlikely to have a significant impact on the Group’s financial performance. 85 ELMO ANNUAL REPORT 2019Note 27. Equity – share capital and reserves Ordinary shares issued and fully paid At 1 July 2017 Shares issued under business combinations Shares issued under Institutional Placement Shares issued under Share Purchase Plan Less: Capitalised share placement costs (net of tax) At 30 June 2018 At 1 July 2018 Shares issued under business combinations – deferred consideration from acquisition in the prior period At 30 June 2019 Shares $’000 54,171,584 465,827 8,333,334 189,341 25,110 2,150 45,000 1,022 – (942) 63,160,086 72,340 63,160,086 72,340 72,373 63,232,459 393 72,733 Ordinary shares Issue of ordinary shares No shares were issued in relation to business’ acquired in the current year. However ordinary shares were issued as deferred consideration for prior year acquisitions as follows: Year ended 30 June 2019 30 July 2018 31 January 2019 Pivot Software (3) Pivot Software (4) Year ended 30 June 2018 1 February 2018 13 March 2018 30 April 2018 Sky Payroll Pivot Software (1) Pivot Software (2) Number Issue price $’000 41,101 31,272 72,373 141,643 290,429 33,755 465,827 $5.53 $5.31 $3.53 $5.05 $5.43 227 166 393 500 1,467 183 2,150 See note 21 for further detail regarding acquisitions during the year. Shares issued in the year ended 30 June 2018 On 28 March 2018, the Company issued 8,333,334 ordinary shares under an institutional placement at a price of $5.40 per share. Additionally, 189,341 shares were issued under the share purchase plan for eligible existing shareholders at a price of $5.40. On 5 April 2018, the company offered existing ELMO shareholders the opportunity to acquire additional shares in ELMO at a fixed price of $5.40 per share. Existing shareholders with registered addresses in Australia or New Zealand on 26 March 2018 being the record date will be entitled to subscribe for up to $15,000 in new ELMO shares through the share purchase plan. 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. 86 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Share 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. For the current and prior periods, no dividends have been paid or proposed. 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 capital risk management policy remains unchanged from the 30 June 2018 Annual Report. Nature and purpose of reserves Reserves Foreign exchange translation reserve Share options reserve Consolidated 2019 $’000 5 831 836 2018 $’000 (47) 205 158 (i) Foreign exchange translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. (ii) Share options reserve The share options reserve comprises the value of the share-based payment arrangements recognised in equity. Note 28. Equity – accumulated losses Accumulated losses at the beginning of the financial year AASB 15 Revenue from contracts with customers, adjustment, net of tax (note 2) AASB 16 Leases, adjustment, net of tax (note 2) Loss after income tax benefit for the year Accumulated losses at the end of the financial year Note 29. Equity – dividends There were no dividends paid or proposed for the year ended 30 June 2019 (2018: $nil). Consolidated 2019 $’000 2018 $’000 (4,286) (1,298) (736) 30 (13,180) (18,172) – – (2,988) (4,286) 87 ELMO ANNUAL REPORT 2019Note 30. 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 Share-based payment Consolidated 2019 $’000 3,734 145 266 4,145 2018 $’000 2,727 136 138 3,001 Further details of the compensation made to directors and other key management personnel are included in the remuneration report within the Directors’ report. Note 31. 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 due diligence services – Deloitte Touche Tohmatsu Consolidated 2019 $ 2018 $ 239,000 103,000 110,000 349,000 330,000 433,000 During the financial year the following fees are payable for services provided by Mann & Associates PAC as auditors and Hawksford as accountants for ELMO Talent Management Software Pte Limited: Audit services – unrelated firms Audit of the financial statements for ELMO Talent Management Software Pte Limited 5,435 4,800 Other services – unrelated firms Accountancy fees for ELMO Talent Management Software Pte Limited 7,191 12,626 7,400 12,200 Note 32. Related party transactions Parent entity ELMO Software Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 34. Key management personnel Disclosures relating to key management personnel are set out in note 30 and the remuneration report included in the directors’ report. 88 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Loans to/from related parties In the year ended 30 June 2019, a loan payable of $24,564 with one of its shareholders was written off to the profit or loss and $948,000 of loans were repaid to the former shareholders of HROnboard. In the prior year, the Company repaid $3.551m loans to the former shareholders of Pivot. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Note 33. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Loss after income tax benefit Total comprehensive loss Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Reserves Accumulated losses Total equity Parent 2019 $’000 (11,946) (11,946) Parent 2019 $’000 33,634 103,676 27,208 44,887 72,733 822 (14,766) 58,789 2018 $’000 (1,361) (1,361) 2018 $’000 61,417 97,426 24,181 26,968 72,340 205 (2,087) 70,458 Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2019 and 30 June 2018. Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2019 and 30 June 2018. 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. 89 ELMO ANNUAL REPORT 2019 Note 34. 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: Ownership interest Name Principal place of business/ Country of incorporation ELMO Accredited 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 Quinntessential Marketing Consulting Pty Limited Australia ELMO Talent Management Software Pte Limited Singapore ELMO Software Limited ELMO New Zealand Holdings Limited Pivot Remesys Group Holdings Limited Pivot Remesys IP Limited Pivot Remesys Limited Pivot Remesys Pty Limited HROnboard Pty Limited Get BoxSuite Pty Limited New Zealand New Zealand New Zealand New Zealand New Zealand Australia Australia Australia 2019 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2018 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – – Note 35. Events after the reporting period There is no other matter or circumstance has arisen since 30 June 2019 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. 90 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Note 36. Reconciliation of loss after income tax to net cash from operating activities Loss after income tax benefit for the year Adjustments for: Amortisation and depreciation Bad debt expense Transaction costs Loss on disposal of assets Rental expenses Share based payment Adjustments to revenue arising from adoption of AASB 15 Other expenses Change in operating assets and liabilities: Increase in trade and other receivables Increase in other assets Decrease in lease incentive Decrease in income tax refundable Increase in deferred tax liabilities Increase in trade and other payables Increase in employee benefits Increase in contract liabilities Increase in lease payables Net cash from operating activities Note 37. Earnings per share Earnings per share for profit from continuing operations Loss after income tax Basic earnings per share Diluted earnings per share Consolidated 2019 $’000 2018 $’000 (13,180) (2,988) 9,437 894 545 – – 626 (546) 3 (4,029) 620 1,290 (196) 853 3,324 685 4,779 366 5,471 4,438 787 – 158 460 205 – (354) (3,415) (727) – 396 (231) 2,236 369 3,049 – 4,383 Consolidated 2019 $’000 2018 $’000 (13,180) (2,988) Cents (20.85) (20.85) Cents (5.29) (5.29) The calculation of EPS has been based on the following loss attributable to ordinary shareholders and weighted average number of ordinary shares outstanding. There are no adjustments in relation to the effects of all dilutive potential ordinary shares due to the current loss-making position of the Group for the current financial year. 91 ELMO ANNUAL REPORT 2019Note 37. Earnings per share (continued) Weighted average number of ordinary shares used in calculating basic earnings per share 63,210,660 56,517,696 Adjustments for calculation of diluted earnings per share: Options over ordinary shares – – Weighted average number of ordinary shares used in calculating diluted earnings per share 63,210,660 56,517,696 Number Number Note 38. Share-based payment arrangement Description of share-based payment arrangement As at 30 June 2019 the Group had the following share-based payment arrangements in place. Share options (equity-settled) ELMO has established both a Senior Executive Plan (SEEP) and a High Performer Equity Plan (HPEP) as part of its long term incentive (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. The High Performer Equity Plan (HPEP) The Plan is designed to link to performance, encourage retention, reward tenure and provide High Performers with participation in the Company. Awards under the Plan will be structured as an option to receive shares on a certain date in the future subject to the participant paying the exercise price. The Plan rules will provide the Board the flexibility to award restricted shares, performance rights and options, and to cash settle any Award. Grants will be made to the High Performers and such other executives as the Board may determine. 92 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Grant date/employees entitled No of options granted and outstanding as at 30 June 2018 Granted Cancelled No of options outstanding as at 30 June 2019 Vested Options granted to key management personnel under SEEP 17 October 2017 7 December 2017 29 October 2018 23 November 2018 27 March 2019 Total SEEP options Options granted to personnel under HPEP 17 October 2017 11 December 2017 9 March 2018 12 June 2018 5 November 2018 25 February 2019 Total HPEP options Total options 398,712 119,019 – – – – – 223,247 61,538 24,614 – 398,712 105,099 (87,646) 31,373 31,373 – 223,247 (61,538) – – 24,614 – – – 517,731 309,399 (149,184) 677,946 136,472 202,902 8,735 22,260 8,820 – – – – – – 455,354 7,885 242,717 463,239 – – – – – – – 202,902 8,735 22,260 8,820 455,354 7,885 705,956 – – – – – – – 760,448 772,638 (149,184) 1,383,902 136,472 There is a vesting condition relevant to all share options under the SEEP and HPEP that the participant must be employed at the vesting date. The conceptual life of the options/maximum term is 10 years. As at 30 June 2019 none of the options have been exercised (2018: none vested or exercised). An expense of $626,000 (2018: $205,000) in relation to the share options granted has been recognised in the statement of profit or loss with a corresponding increase to the share payment reserve in the year ended 30 June 2019. Measurement of fair values Share options (equity-settled) The fair value of the employee share options under the SEEP has been measured using the Monte Carlo simulation approach subject to the total shareholder returns (TSR) performance criteria. The fair value of the employee share options under the HPEP has been measured using the Binomial option pricing model. Non-market performance conditions attached to the arrangements were not taken into account in measuring fair value in accordance with accounting standards. 93 ELMO ANNUAL REPORT 2019Note 38. Share-based payment arrangement (continued) Measurement of fair values (continued) The inputs used in the measurement of the fair values at grant date of the equity-settled share-based payment plans were as follows: Share options plans SEEP HPEP For the year ended 30 June 2019 Tranche 1 Tranche 2 Tranche 3 Fair value at grant date Share price at grant date Exercise price Expected volatility (weighted-average) Expected life Expected dividends Risk-free interest rate $1.18 $5.50 $5.50 37% $1.50 $5.50 $5.50 37% $1.76 $5.50 $5.50 37% 5 Nov 2018 $1.64 $5.50 $5.50 37% 25 Feb 2019 $1.64 $5.50 $5.50 37% 2.7 years 3.7 years 4.7 years 3.5 years 3.5 years 0% 2.05% 0% 2.14% 0% 2.25% 0% 2.11% 0% 2.11% Share options plans SEEP HPEP Grant Date For the year ended 30 June 2018 Tranche 1 Tranche 2 Tranche 3 Fair value at grant date Share price at grant date Exercise price Expected volatility (weighted-average) $0.51 $2.50 $2.51 40% $0.66 $2.50 $2.51 40% $0.78 $2.50 $2.51 40% 17 Oct 2017 11 Dec 2017 $0.79 $2.50 $2.51 40% $0.79 $3.60 $2.51 40% 9 Mar 2018 $1.44 $5.80 $5.08 40% 12 Jun 2018 $1.44 $5.50 $5.08 40% Expected life Expected dividends Risk-free interest rate 2.7 years 3.7 years 4.7 years 2.7 years 2.7 years 2.7 years 2.7 years 0% 1.88% 0% 2.02% 0% 0% 0% 0% 0% 2.14% 1.88% 1.88% 1.88% 1.88% Volatility is a measure of price variation of a financial instrument over the life of the award. Since ELMO is newly listed on the ASX, there is no sufficient market data to measure the historical volatility and there are no publicly traded options over the company’s ordinary shares. Therefore this valuation has based the expected volatility on average annualised historical volatility of constituents in S&P/ASX 300 Software & Services Industry Index over the three year period to the valuation date. ELMO’s current policy is not to distribute dividends but rather reinvest in the growth of the company hence zero dividend yield is used in this valuation report. 94 ELMO ANNUAL REPORT 2019Notes to the financial statements30 June 2019Directors’ declaration 30 June 2019 1. In the opinion of the directors of ELMO Software Limited (the ‘Company’): a. The consolidated financial statements and notes that are set on pages 62 to 94 and the Remuneration report on pages 43 to 54 in the Directors’ report, are in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the Group’s financial position as at 30 June 2019 and its performance for the financial year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001: and b. There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 30 June 2019. 3. The directors draw attention to Note 1 to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the directors: Barry Lewin Chairman 15 August 2019 Sydney Danny Lessem Director 95 ELMO ANNUAL REPORT 2019 Independent auditor’s report to the members of ELMO Software Limited 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 2019, 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 2019 and of its financial performance for the year then ended; and complying with Australian Accounting 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. 96 Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network. 65 ELMO ANNUAL REPORT 2019Key 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 Matters Revenue Recognition – rendering of services ($40.1m) Refer to the description of accounting principles and Note 4. For the year ended 30 June 2019, $40.1 million was recognised by the Group from rendering of services. As the Group continues to expand, and its software offering evolves, there is a considerable risk associated with recognizing its services revenue. A significant level of judgment is required in ensuring the relevant revenue recognition criteria is met as per the relevant accounting standard. This judgment and manual nature could affect the timing and quantum of revenue recognized in each period. 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 all 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 relevant accounting standards; • • • • • Assessing the key controls in relation to the recognition and measurement of revenue; process for recording accounts receivable and assessing the provision for doubtful debts to identify and test relevant internal controls; 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 invoice at 30 amortisation any exceptions. June 2019 using the noting schedule, Business combinations Refer to Note 21. During the financial year ended 30 June 2019, the Group acquired the following: • • On 31 January 2019, 100% of the voting rights of HROnboard, for a total consideration of $15.5 million. On 31 January 2019, 100% of the voting rights of Get BoxSuite, for a total consideration of $1.4 million. We also assessed the appropriateness of the disclosures in Note 4 to the financial statements. 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 intangible value of separately assets; identified 66 97 ELMO ANNUAL REPORT 2019Key Audit Matters The accounting for a business combination can be complex and involves several significant judgments and estimates including: • • The determination of the fair value of the contingent consideration; The determination of separately intangible assets; and identifiable • • • Measurement of identifiable intangible assets including customer relationships, trademarks and Software. separately the How the scope of our audit responded to the Key Audit Matter • Assessing whether there have been any the underlying significant performance of the business acquired; changes to Assessing the useful economic life of software and customer list intangibles acquired; and Confirming the estimation of the contingent consideration was in accordance with the sale terms and and purchase agreement conditions, key assumptions such as revenue growth rates used in the forecasts. challenging and the We also assessed the appropriateness of the disclosures financial statements. in Note 21 the to Goodwill impairment Our procedures included, but were not limited to: Refer Note 15 The Group has $36.1 million of Goodwill as at 30 June 2019. The Group performed an impairment assessment which requires significant judgements over the goodwill balance by: • Determining the cash generating unit (CGU) and the amount of goodwill attributed from business combinations. • • • • Obtaining an understanding of the budgeting process and approvals of the budget by the board; Assessing impairment model process; the key controls over the Evaluating the Group’s categorization of CGUs and the allocation of goodwill to the carrying value of a CGU based on our understanding of the Group’s business. This evaluation included performing an analysis of the Group’s internal reporting; and Engaging with our valuation specialists to assist with challenging the key assumptions adopted by management in their fair value less cost of disposal valuation approach including: • • assessing the comparable companies identified; and the appropriate revenue multiple determined as a consequence. We also assessed the appropriateness of the disclosures financial statements. in Note 15 the to 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. 98 67 ELMO ANNUAL REPORT 2019Independent auditor’s reportto the members of ELMO Software LimitedIn 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. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal 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 68 99 ELMO ANNUAL REPORT 2019auditor'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. 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 43 to 54 of the Directors' Report for the year ended 30 June 2019. In our opinion, the Remuneration Report of Elmo Software Limited, for the year ended 30 June 2019, 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 Sydney, 15 August 2019 100 69 ELMO ANNUAL REPORT 2019Independent auditor’s reportto the members of ELMO Software LimitedShareholder information as at 1 October 2019, post capital raise 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 2019 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 2019 financial year. 2. Substantial shareholders. The number of securities held by substantial shareholders and their associates (as disclosed to the ASX) are set out below: Name JLAB Investments (No. 2) Pty Limited Lessem Trading Pty Ltd Number %* Date lodged 13,655,865 10,823,149 18.86 24/09/2019 14.95 24/09/2019 Bessie Garber and Manuel Garber as trustees of the Garber Family Trust 9,656,482 13.34 24/09/2019 Immersion Capital Master Fund Ltd 12,108,910 16.72 26/09/2019 * % of issued capital as at the date the notice was lodged. 3. Number of security holders and securities on issue ELMO Software Limited has issued the following securities: 72,415,619 fully paid ordinary shares held by 4,192 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 and unquoted 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 (quoted and unquoted) Holders Shares 2,737 1,236 130 69 20 1,225,590 2,841,836 937,680 1,397,637 66,012,876 4,192 72,415,619 % 1.69 3.92 1.29 1.93 91.16 100% 101 ELMO ANNUAL REPORT 2019Shareholder information as at 1 October 2019, post capital raise b. 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 (quoted) Holders Shares 2,737 1,236 130 69 19 1,225,590 2,841,836 937,680 1,397,637 65,871,233 4,191 72,273,976 % 1.70 3.93 1.30 1.93 91.14 100% 6. Unmarketable parcel of shares The number of shareholders holding less than a marketable parcel of ordinary shares is 139 based on ELMO Software Limited’s closing share price of $6.40, on 1 October 2019. 7. Twenty largest shareholders of quoted and unquoted equity securities Fully paid ordinary shares Details of the 20 largest shareholders by registered shareholding are: Rank Name JLAB Investments (No. 2) Pty Ltd J P Morgan Nominees Australia Pty Limited Lessem Trading Pty Ltd Mr Manuel Garber & Mrs Bessie Garber HSBC Custody Nominees (Australia) Limited – A/C 2 Citicorp Nominees Pty Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited CS Fourth Nominees Pty Limited Brispot Nominees Pty Ltd Xin Sun Gordon Starkey Mr Trevor Lonstein Mr Darryl Justin Garber UBS Nominees Pty Ltd BNP Paribas Nominees Pty Ltd Christopher James Youngman & Paul Roger Hartland & Phillipa Joanne Youngman Truebell Capital Pty Ltd Neweconomy Com AU Nominees Pty Limited The Aussie Mall Pty Ltd Laumark Pty Ltd Mr Timothy Andrew Graham & Mrs Kathy Margaret Graham 01 Oct 2019 13,655,865 11,809,604 10,823,149 9,656,482 8,959,720 3,106,536 2,684,502 858,096 712,715 643,367 425,695 420,695 420,695 420,695 355,920 292,269 242,197 215,000 168,031 141,643 91,602 90,000 % IC 18.86 16.31 14.95 13.33 12.37 4.29 3.71 1.18 0.98 0.89 0.59 0.58 0.58 0.58 0.49 0.40 0.33 0.30 0.23 0.20 0.13 0.12 Total 66,194,478 Balance of register 6,221,141 91.41 8.59 Grand total 72,415,619 100.00 1 2 3 4 5 6 7 8 9 10 11 12 12 12 13 14 15 16 17 18 19 20 102 ELMO ANNUAL REPORT 2019 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: Level 27, 580 George Street, Sydney NSW 2000 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. 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 Fully paid ordinary shares No. of shares Escrow period 141,643 1 February 2020 13. Unquoted securities Details of the unquoted securities on issue are as follows: a. ASX restricted securities Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Options (unquoted) Holders Shares – 21 41 53 – – 60,008 294,406 1,178,672 – % – 3.91% 19.20% 76.88% – 115 1,533,086 100.00% 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. Details of investments N/A – ELMO Software Limited is not an investment company. 17. 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 18. No securities were purchased on-market during the reporting period ended 30 June 2019. 103 ELMO ANNUAL REPORT 2019Risk statement 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, in no particular order. These risks are a summary only of some of the risks that ELMO considers to be key to its business, and the summary is not, and it does not purport to be, an exhaustive list of all of the risks associated with the Group or an investment in ELMO shares. There is no guarantee or assurance that the risks will not change or that other risks or matters that may adversely impact ELMO’s business, the industry in which it operates or an investment in ELMO shares, will not emerge. Should this arise, ELMO is under no obligation to update its summary of key risks and investors are urged to exercise caution before investing in ELMO shares. 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, sales and product research and development teams. Reliance on ELMO’s software solutions and failure to adequately maintain and develop it Reliance on up- take of SaaS-based talent management software solutions Failure to effectively manage growth 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. 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. 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. 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. Future expansion by acquisition may be affected by factors beyond ELMO’s control (including without limitation, commercial or regulatory changes). There is a risk that the integration requires significantly more financial and management resources, or time to complete, than originally planned. Acquisitions may fail to meet ELMO’s strategic and financial objectives, generate the synergies and benefits that ELMO expected, or provide an adequate return on the purchase price and resources invested in them. There is a risk that in any acquisition appropriate warranties or indemnities cannot be obtained or that ELMO’s due diligence and analysis may be incomplete or inaccurate. Any of these factors, either individually or in combination, may have an adverse impact on ELMO’s operating and financial performance. 104 ELMO ANNUAL REPORT 2019Failure 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. Competition Funding The HR & Payroll software industry is rapidly evolving and becoming increasingly competitive. Some of ELMO’s existing and potential competitors have significantly more resources than ELMO does. Due to competitive factors, ELMO may compete less effectively which may reduce the Company’s market share and ability to develop or secure new business. This would have an adverse impact on ELMO’s operating and financial performance. ELMO may in the future require further funding with respect to its business, for either ongoing operations or to fund acquisitions. This funding may take the form of debt financing or raising more capital from existing shareholders or new investors. There is no guarantee that any such funding will be available, or available on terms that are acceptable to ELMO. Any capital raising may dilute existing shareholders equity. 105 ELMO ANNUAL REPORT 2019Glossary Term ARR AASB ASX Meaning Annual recurring revenue 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 The board of directors of the Company Chief Executive Officer Chief Financial Officer Company ELMO Software Limited Corporations Act Corporations Act 2001 Customer retention in dollar terms Customer retention in dollar terms measures the ratio of like for like revenue growth of customers who transacted in the current and the preceding year Customer retention rate 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 Directors EBITDA ELMO The directors of the Company from time to time Earnings before interest, income tax, depreciation and amortisation ELMO Software Limited Free cash flows 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 FY IPO KMP Financial year ending Initial Public Offering Directors and key management personnel Prospectus The prospectus dated 6 June 2017 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 SaaS Share Software-as-a-Service A fully paid ordinary share in the Company 106 ELMO ANNUAL REPORT 2019Corporate Directory Directors Barry Lewin Danny Lessem Leah Graeve Catherine Hill Company secretary Anna Sandham Registered office Level 12 680 George Street Sydney NSW 2000 Phone: 02 8280 7100 Principal place of business Level 27 580 George Street Sydney NSW 2000 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 Mills Oakley Level 12 400 George Street Sydney NSW 2000 Financial adviser Blackpeak Capital Pty Ltd Level 5 55 Harrington Street The Rocks NSW 2000 Stock exchange listing ELMO Software Limited shares are listed on the Australian Securities Exchange (ASX code: ELO) Website www.elmosoftware.com.au Corporate governance statement https://investors.elmosoftware.com.au/ Investors/?page=Corporate-Governance ELMO ANNUAL REPORT 2019ELMO Software Limited ACN 102 455 087

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