Elopak Annual Report 2021

Plain-text annual report

ANNUAL REPORT 2021 ELMO Software Limited ACN 102 455 087 The ELMO group is a leading provider of cloud HR, payroll and expense management solutions in Australia, New Zealand and the United Kingdom. Contents 2 4 5 6 10 12 14 16 24 25 26 Chairman’s and CEO’s message ELMO group total addressable market (TAM) Expansion of our product suite The Numbers ELMO at a glance Business model Company history The ELMO solution The Breathe solution Growth Strategy Recent Acquisitions 28 31 32 33 50 52 56 92 93 97 99 Environment, social and governance Board of Directors FY2021 financial report Directors’ report Auditor’s independence declaration Financial statements Notes to the financial statements Directors’ declaration Independent auditor’s report Shareholder information Glossary 100 Corporate directory AGM Details ELMO Software Limited (ELMO) advises that it will hold its 2021 Annual General Meeting on Tuesday, 23 November 2021 at 2.00pm (Sydney time). Further details about the AGM will be provided to shareholders in October 2021. 1 ELMO ANNUAL REPORT 2021CHAIRMAN’S AND CEO’S MESSAGE “ We continued to deliver on our growth strategy and achieved strong results”. Dear Shareholder, We are pleased to report that FY21 was another successful year for ELMO Software Limited. We continued to deliver on our growth strategy and achieved strong results. Key highlights include high levels of organic growth in both the mid-market and our small-business platform Breathe. We also experienced signs of operating leverage coming through with cost ratios improving. As a leading developer of cloud software-as-a-service (SaaS) solutions for Human Capital Management (HCM), payroll and expense management, ELMO is in a prime position to benefit from the tailwinds in the broad adoption of cloud- based technology. Throughout FY21, organisations continued to adapt and manage a geographically dispersed workforce making a cloud-based solution a priority for many businesses. The breadth of our integrated mid-market and small business solutions provides us with a competitive advantage in attracting new customers. It also enables us to cross-sell our wide module set to our existing customer base as we execute our ‘land and expand’ model. Throughout FY21 growth was delivered across ELMO’s three- pillar strategy which focuses on segment expansion, module expansion and geographic expansion. Segment expansion was enabled by our acquisition of Breathe in October 2020. Breathe is a Human Resource (HR) solution that caters for small businesses with fewer than 50 employees. This is a $2.2 billion market opportunity. Breathe expands ELMO’s reach beyond the mid-market where it has historically focused. Currently, Breathe has more than 9,000 small business customers with plenty of headroom to grow as this segment is still early in its adoption of cloud-based HR technology. Module expansion continues to be an instrumental element of ELMO’s growth. We recently released four new modules to market including Predictive People Analytics, Experiences, COVIDsecure and Expense Management. The first three were developed in-house and Expense Management came via the acquisition of Webexpenses. The Predictive People Analytics module represents a significant milestone in ELMO’s technological evolution as we apply Artificial Intelligence (AI) solutions to Human Capital Management. With the advent of remote-based working our Experiences module keeps employees engaged. The COVIDsecure module automates secure record keeping of employees’ COVID-19 vaccination and test status so businesses can operate safely in the current environment. COVIDsecure and Experiences respond to the challenges that countless organisations are facing as they navigate a new way of working. In addition, the acquisition of UK based mid-market expense management solution Webexpenses in December 2020 further expanded ELMO’s module suite. We have since integrated the new module into the ELMO platform and it is being sold to new and existing customers. These additions have increased our available module count to 19, which further differentiates our market leading all-in- one solution and provides additional revenue opportunities. The acquisitions of Breathe and Webexpenses have underpinned ELMO’s geographic expansion as we have commenced our entry into the UK market. The existing Webexpenses operations in the UK, with more than 1,000 customers, has provided a platform to launch the ELMO mid-market business there. Execution of our three-pillar growth strategy has assisted ELMO to deliver strong financial results in FY21. The ELMO consolidated group achieved record annualised recurring revenue (ARR) of $83.8 million, up 52.1% from FY20. We were also able to deliver EBITDA of $0.4 million, up $3.3 million from FY20 with key cost ratios improving as operating leverage begins to emerge. The ELMO mid-market business performed well with ARR growing to $74.7 million, up 35.7% from FY20. The increased scale of the mid-market operations contributed to a significant uplift in EBITDA to $1.6 million, an increase of $4.5 million from FY20 as operating leverage appears. Breathe experienced rapid growth to $9.0 million in ARR, which is up 51.8% on an annualised basis since acquisition. Breathe reported an EBITDA loss of $(1.2) million as we invest in the rapid scale up of the small business opportunity in both the UK and ANZ region. 2 ELMO ANNUAL REPORT 2021 Annualised Recurring Revenue (ARR) Revenue $83.8m 52.1% growth from FY20 $69.1m 38.1% growth from FY20 Other FY21 highlights include: • Record consolidated revenue of $69.1 million, up 38.1% from FY20 • Record annual cash receipts of $79.8 million, up 38.8% from FY20 • High gross profit margins of 86.4% in ELMO mid-market and 89.5% in the Breathe small-business segment • $81.9 million cash balance The ELMO group has grown from 384 employees in FY20 to 535 employees in FY21. In line with our growth strategy, we have continued to invest in the substantial opportunities in our markets. As a result of our expansion into new market segments, module adjacencies and geographies, our total addressable market has expanded considerably to $12.8 billion (mid-market: $10.6 billion, small business: $2.2 billion). With less than 3% penetration in the small business segment and less than 5% penetration in the mid-market, there is tremendous headroom for growth. We are approaching exciting financial milestones including breaking through $100 million in ARR during the financial year. Our guidance for FY22 includes ARR growth to $105.0-111.0 million (25.3% to 32.5%), revenue growth to $90.5-$95.5 million (31.0% to 38.2%) and EBITDA expected to be $1.0-6.0 million. We would like to thank ELMO’s board, the management team and all our employees for continuing to execute our growth strategy successfully and for their tremendous contributions and support, often under challenging working restrictions, as we continue to scale the business. We would also like to thank our customers for your continued support, and our shareholders for your belief in the ELMO group. We look forward to sharing our successes and exciting future with you. Yours sincerely, FY22 promises to be an exciting year for ELMO as we build on our prior investments and gain greater momentum. Barry Lewin Chairman Danny Lessem Co-founder and CEO “ Key highlights include high levels of organic growth in both the mid-market and our small-business platform Breathe. We also experienced signs of operating leverage coming through with cost ratios improving. “ 3 ELMO ANNUAL REPORT 2021 ELMO GROUP TOTAL ADDRESSABLE MARKET (TAM) Large market opportunity and headroom for growth Small business TAM1,2 (<50 employees) Mid-market TAM1,3 (50+ employees) ANZ ANZ ~3.7m organisations TAM ~$2.2bn ~75K organisations TAM ~$10.6bn UK UK Market penetration <3% organisations Market penetration <5% organisations Plus 5.4 million UK public employees ELMO’s Total Addressable Market (TAM) has expanded to $12.8bn with the inclusion of small business and expense management 1. Frost & Sullivan independent market report 2019/2020 2. Assumes full penetration of Breathe platform 3. Assumes full penetration of ELMO platform 4 ELMO ANNUAL REPORT 2021 ELMO ANNUAL REPORT 2020 EXPANSION OF OUR PRODUCT SUITE EXPANSION OF OUR PRODUCT SUITE... Two ﬁt-for-purpose platforms for two market segments PAY ENGAGE HIRE RETAIN DEVELOP PREDICT Payroll HR Core Recruitment Performance Management Learning Management Predictive People Analytics Self-Service Survey Onboarding Rewareds & Recognition Course Builder Rostering / Time and Attendance Expenses Connect Experiences COVIDsecure Remunereation Course Library Succession Management Video Library Modules added since IPO (FY17)... FY17 FY18 FY19 FY20 FY21 FY22 HR ROSTER LEARN PAYROLL Enhanced competitive advantage from a broader suite Increased portential of sales to new customers Additional cross-sell opportunity from enlarged customer base FY21 5 ELMO ANNUAL REPORT 2021THE NUMBERS The ELMO group consolidated numbers ARR growth of 52.1% from FY20 $83.8m Annualised recurring revenue (ARR) $69.1m Revenue $0.4m EBITDA 52.1% growth from FY20 38.1% growth from FY20 Up $3.3m from FY20 FY21 mid-market dashboard Returning to high growth and generating positive EBITDA FINANCIAL OPERATIONAL CUSTOMER $74.7m Annualised recurring revenue (ARR) 86.4% Gross profit margin 3,114 Customer base 35.7% growth from FY20 Up 1.0% from FY20 85.1% growth from 30 June 2020 $63.6m FY21 revenue 95.7% Net customer dollar retention 3.3 Modules per new customer at 30 June 202113 27.1% growth from FY20 Customer retention rate 84.2% Total modules per customer of 2.3 $1.6m EBITDA $555m Lifetime value (LTV) of customer base at 30 June 2021 $24.0k Average ARR per customer at 30 June 2021 Up $4.5m from FY20 Down $47m from 30 June 2020 Down $8.7k from 30 June 2020 1. Includes Webexpenses customers who had 1.0 module per customer on average 6 ELMO ANNUAL REPORT 2021 The ELMO group consolidated numbers High levels of organic ARR growth and positive EBITDA 26.0% FY21 organic ARR growth $79.8m Cash receipts $81.9m Cash on hand FY21 small business dashboard High growth at 51.8% on an annualised ARR basis REVENUE OPERATIONAL CUSTOMER $9.0m Annualised recurring revenue (ARR) 89.5% Gross profit margin 9,069 Customer base $5.5m FY21 revenue ~86.6% Annualised customer retention rate 1.2 Modules per new customer at 30 June 2021 $(1.2)m EBITDA $60m Lifetime value (LTV) of customer base at 30 June 2021 $995 Average ARR per customer at 30 June 2021 7 ELMO ANNUAL REPORT 2021THE NUMBERS CONTINUED ARR CAGR 44.7% per annum from IPO in FY17 ARR and revenue FY17 to FY21 ($m) Cash receipts ($m) Statutory revenue ARR 83.8 69.1 ARR CAGR 44.7% 46.0 40.1 55.1 50.1 79.8 57.5 CAGR 44.6% 45.1 31.1 26.5 19.1 16.6 28.6 18.3 FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21 Customer numbers Employee numbers 12,183 Breathe 9,069 535 384 277 193 1,031 1,341 524 1,682 ELMO 3,114 106 30 JUN 17 30 JUN 18 30 JUN 19 30 JUN 20 30 JUN 21 FY17 FY18 FY19 FY20 FY21 8 ELMO ANNUAL REPORT 2021 9 ELMO ANNUAL REPORT 2021 ELMO AT A GLANCE Australia United Kingdom Fit-for-purpose platforms for small business and mid-market organisations New Zealand 10 ELMO ANNUAL REPORT 2021 Snapshot1 535 employees Offices in Australia, New Zealand and the UK Two fit-for-purpose human capital management (HCM) platforms – 3,000+ mid-market customers – 9,000+ small businesses Scalable cloud-based platforms Total Addressable Market $12.8bn 1 The ELMO Group provides human capital management (HCM) solutions to small business and mid-market organisations across Australia, New Zealand and the United Kingdom. The ELMO mid-market business has more than 3,000 customers and targets organisations with 50 to 2,000 employees. The Breathe small business platform has more than 9,000 customers and focuses on organisations with fewer than 50 employees. Customers benefit by automating fragmented HR, payroll, rostering / time & attendance and expense management operations with an all-in-one platform to manage the employee lifecycle from hire-to-retire. With a wide variety of modules available, customers can rely on one provider to automate their people, process and pay functions. These solutions assist businesses to operate efficiently by automating manual processes while providing robust information to help businesses make more informed decisions. The ELMO Group has a customer centric focus, and continually invests in enhancing and growing the solution to meet businesses’ evolving HR needs. The ELMO Group employs 535 employees in offices across Australia, New Zealand and the UK who share a joint vision to create best-in-class technology to assist small and mid-market businesses better manage their people, pay and processes and shape the workplace of tomorrow. 1. Frost & Sullivan independent market report 2019/2020 11 ELMO ANNUAL REPORT 2021BUSINESS MODEL ELMO’s cloud HR, payroll and expense management software solutions are targeted to the HCM needs of small business (<50 employees) and mid-market organisations (50 – 2,000 employees). The ELMO Group operates on a Software-as-a-Service (SaaS) business model predicated on subscription license fees. ELMO identified a gap in the market for a flexible and cost-effective HR, payroll and expense management solution with simple implementation processes for small and mid-sized organisations. ELMO believes a large underserviced market has emerged, which is growing as organisations are increasingly compelled to adopt a cloud-based HCM solution to manage a remote-based workforce. ELMO is well placed to take advantage of the opportunity by having the widest convergent platform in the regions that it operates in. ELMO’s mid-market modular product offering has recently increased to 19 modules with the launch of 3 new modules. In FY21 ELMO launched Predictive People Analytics to leverage the capabilities of artificial intelligence (AI) to predict employee behaviour and provide powerful data visualisation tools. The module assists employers to identify and predict employee flight risk. In the opening quarter of FY22 ELMO released two new modules to broaden its convergent solution. The first module, Experiences, improves employee engagement while the COVIDsecure module enables employers to automate record keeping of employees’ vaccination and test status assisting businesses to reopen safely. ELMO completed two significant UK based acquisitions in the second quarter of FY21. The first was Breathe, a HR solution for small business with over 9,000 small business customers. The second was Webexpenses, an expense management solution with over 1,000 mid-market customers. ELMO’s expansion into new segments, new module adjacencies and new geographies, has expanded its Total Addressable Market to $12.8 billion. With <5% penetration in the mid-market and <3% penetration in small business, ELMO has plenty of headroom for long term sustainable growth. Multi-jurisdictional and industry agnostic ELMO’s cloud HR, payroll and expense management solutions are designed to be scalable and industry-agnostic. ELMO currently provides solutions to customers based primarily in Australia, New Zealand and the United Kingdom. ELMO HR & PAYROLL SOFTWARE SOLUTIONS ARE INDUSTRY AGNOSTIC Construction and mining Hospitality Professional services Education Industrials Finance Information technology telecommunications and media Retail Government Logistics Healthcare and Pharmaceuticals Not for profit 12 ELMO ANNUAL REPORT 2021 Revenue generation ELMO generates revenue through both licence fees and professional services relating to its HR and payroll solutions. Revenue is categorised as recurring and non-recurring. Through FY21 over 96 per cent of revenue related to recurring revenue streams, with the balance being non-recurring. Mid-market ELMO customers Typically, a new ELMO customer will enter into a three-year licence agreement for access to its solutions. It is customary for ELMO to be paid licence fees annually in advance by the customer. The amount of the annual licence is dependent on the number of modules subscribed to by the customer and the number of users on the platform. Following the initial contract period customers typically move to an annual recurring contract. In addition to licence fees, ELMO also generates revenue from charging professional service fees for providing non-standard implementation, configuration, consultancy, training and integration services. Small business Breathe customers Typically, a Breathe customer will enter into a monthly licence agreement for access to its solutions. It is customary for Breathe to be paid licence fees monthly in advance by the customer. The amount of the licence fee is dependent on the number of modules subscribed to by the customer and the number of users on the platform. ELMO’s subscription revenue as a percentage of total revenue 93.3% 93.6% 95.4% 97.6% 96.7% FY17 FY18 FY19 FY20 FY21 13 ELMO ANNUAL REPORT 2021COMPANY HISTORY A LEADING UNIFIED CLOUD HR, PAYROLL, EXPENSE MANAGEMENT SOLUTION LEARNING MANAGEMENT SYSTEM COURSE BUILDER PERFORMANCE PRE-BUILT COURSES ONBOARDING RECRUITMENT 2002 • • • 2013 2014 2015 ELMO founded in 2002 by Danny Lessem and Manuel Garber eLearning platform and customised content Commenced development of full suite of talent management solutions Australian Human Resources Institute Focused on mid-market organisations Approved supplier on Government Panel arrangements Began expansion into New Zealand 14 ELMO ANNUAL REPORT 2021 A LEADING UNIFIED CLOUD HR, PAYROLL, EXPENSE MANAGEMENT SOLUTION Listed June 29 2017 REWARDS AND RECOGNITION CONNECT COVIDsecure SUCCESSION SURVEY REMUNERATION VIDEO LIBRARY EXPERIENCES HR CORE PAYROLL ROSTERING / TIME & ATTENDANCE EXPENSES PREDICTIVE PEOPLE ANALYTICS 2016 2017 2018 2019 2020 2021 Acquisition of Techniworks Acquisition of Pivot Software UTS/ELMO Partnership Acquisition of Vocam Acquisition of PeoplePulse and LiveSalary Acquisition of SkyPayroll Acquisition of HROnboard Acquisition of BoxSuite Acquisition of Breathe Acquisition of webexpenses Began expansion into the UK 524 1,031 1,341 1,682 10,038 12,038 Customers Customers Customers Customers Customers Customers As at 30 June 2017 As at 30 June 2018 As at 30 June 2019 As at 30 June 2020 As at 31 Dec 2020 (includes Breathe) As at 30 June 2021 (includes Breathe) 15 ELMO ANNUAL REPORT 2021THE ELMO SOLUTION UNLOCK THE POTENTIAL OF YOUR ORGANISATION Leading integrated cloud-based solution helping organisations manage their people, process and pay 16 ELMO ANNUAL REPORT 2021 PAY Offer self-service functionality to managers and employees and provide real-time access to payroll and personal data from anywhere, anytime, on any device. ENGAGE 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. HIRE Set your new hires up for success from the start by streamlining talent identification, recruitment and onboarding processes. RETAIN Improve retention by capturing performance feedback to identify star performers, manage career development plans and align compensation accordingly. DEVELOP Keep skills compliant and up to date with personalised learner plans, access to pre-built courses and the ability to customise learning content. New PREDICT Through artificial intelligence and machine learning, unlock the potential of people data to improve decision-making across the entire employee lifecycle from hire-to-retire. 17 ELMO ANNUAL REPORT 2021PAY PAY Easily manage essential people-management functions relating to pay, leave, rostering / time & attendance and expense management, while empowering employees to update personal records in their own time. Ensure accurate and compliant workforce and expense 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. Additionally, ELMO’s integrated Expenses solution can automate the management of business expenses. Submitting, approving, and reporting expenses is simplified through an intuitive digital platform. Multi-level workflows can be configured to unique organisational needs, providing automatic compliance and custom reporting for control and visibility. The end result is more efficient workforce and expense management, and less administrative burden on HR and finance teams. Payroll Self-Service 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. 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 and 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. New Expenses Mobile expense app – Manage expenses on-the-go. Users can snap a picture of their receipt and easily create a claim in seconds. Admins can review, approve, reject and track expense reports via desktop or mobile. Corporate card matching – Intelligent Receipt Matching automatically pairs receipts to their corresponding card transaction(s), reducing admin workflows for quick and accurate expense management. Integrated & secure – Integration via API or CSV can be easily achieved with many accounting systems for seamless control of company budget and expenditure. Sensitive information is encrypted and protected, keeping your data safe, yet accessible from almost anywhere. 18 ELMO ANNUAL REPORT 2021 ENGAGE ENGAGE 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 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 across the employee lifecycle, allowing HR to assess employee sentiment, identify strengths, weaknesses, risks and opportunities, and address them early. It’s crucial that teams can communicate and maintain team engagement and collaboration whether it’s in the workplace or while working remotely. ELMO Connect resolves these issues by offering instant messaging functionality and integration with Zoom video conferencing. ELMO Experiences creates memorable, personalised experiences for all the critical ‘moments that matter’ during the employee lifecycle. This allows organisations to save time and resources while creating seamless experiences for important career transition milestones. In today’s world of work, ELMO’s latest COVIDsecure module enables employers to automate record keeping of the COVID-19 testing and vaccination status of the entire or targeted areas of their workforce such as location, department or even role, in a single, secure platform with strict access control measures. It provides HR and leadership with a powerful dashboard to provide a real-time view of critical information to assist with COVID-19 risk management. HR Core HR Survey Connect Experiences COVIDsecure New New 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. Instantly communicate with colleagues – Utilise the chat functionality to strengthen collaboration between multiple users or one- on-one. Initiate and manage Zoom meetings – Easily initiate Zoom meetings from ELMO and effectively manage Zoom video conferencing. Benefit from rapid implementation – Leverage the ELMO database without the need to procure and integrate with third- party applications. Time-Based Notifications – Avoid information overload by breaking up experiences into smaller, easier-to- digest pieces, and spreading these out at designated times. Empower Managers – Provide managers with templates and workflows to help employees navigate key career transitions such as onboarding and internal moves. Mobile-First Access – Allow employees to progress with assigned tasks and receive information ‘on-the-go’ with a mobile-friendly employee portal. Track Vaccination and Test Status – Enable employees to easily submit vaccination certificates and COVID-19 test results. COVIDsecure Template Library – Access ready-to-use COVID-19 HR policy templates which can be easily deployed to your employees. Manage COVID-19 Risks – Use the dashboard with real- time visualisations of key metrics to encourage proactive risk mitigation. 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. Manager self-service – Empower managers to access employee information, approve leave requests and view team analytics from any device, anywhere and at any time. 19 ELMO ANNUAL REPORT 2021HIRE HIRE 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 Onboarding Job requisition – Select the required job position, add specific requirements, alert recruitment managers, track and monitor progress, and customise approval workflows. 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. Personalised onboarding webpage – Present company information and videos, create guidelines for the onboarding process, provide an onboarding task list, and give team member introductions. 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. 20 ELMO ANNUAL REPORT 2021 RETAIN RETAIN 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. Remuneration Streamline remuneration processes – Easily manage the end-to-end remuneration allocation and approvals process. 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. Succession Management Ensure business continuity – Determine role criticality, identify high performers and mitigate flight risk. 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 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. 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. 21 ELMO ANNUAL REPORT 2021DEVELOP DEVELOP 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. ELMO Video Library offers an extensive library of SCORM-compliant, customisable, video-rich pre-built eLearning courses, and gives users flexibility to tailor supporting content using the powerful functionality of the ELMO Course Builder. When used with ELMO Learning Management, employers can identify problem areas with trainee testing and stay on top of compliance requirements with a verifiable audit trail. Learning Management Course Builder Course Library Video Library 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. 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. Pre-built and customisable video courses – Choose from an extensive library of live- action video courses, or pick from hundreds of individual live-action video chapters and associated quizzes to suit your organisation. Comprehensive learner evaluation and analysis – Evaluate learners’ understanding of courses and assess and analyse results for individuals and/or groups. Get detailed learner reports showing training history and current progress. Thorough documentation and audit trail – Training can also be automatically assigned or regularly scheduled using ELMO Learning Management. Keep track of training completion rates with a verifiable audit trail. 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. 22 ELMO ANNUAL REPORT 2021 PREDICT PREDICT Unlock the potential of your people data to improve decision-making. ELMO’s Predict product suite can help deliver predictions and recommendations based on your organisation’s unique business processes and employee data. Track trends, identify risks and forecast ahead Employees are an organisation’s most valuable but also potentially most costly asset. Employers spend thousands of dollars annually recruiting, developing, engaging and motivating top talent. Relying on gut instinct alone to make decisions and manage this valuable resource can be risky. Fortunately, business leaders now stand to benefit from the people-related dataat their fingertips. Using aggregated data collected from ELMO solutions such as Learning, Performance Management, HR Core and Recruitment, ELMO Predictive People Analytics helps HR track trends based on the behaviour patterns of their workforce. Data is presented in easily understandable charts and graphs. From there, process improvements can be implemented toincrease engagement and productivity. These insights can be used to enhance every stage of the employee lifecycle. HR also benefits from clear evidence of how their initiatives add value to the organisation. New Predictive People Analytics Make better decisions, faster – Supports HR leaders to gain a deeper understanding of their workforce to make more informed decisions at a faster pace, enabling them to strategically support the organisation and its people. Employee Flight Risk Predictions – Obtain employee flight risk insights and identify potential regrettable loss with ELMO’s artificial intelligence (AI) and machine learning technology. Data Aggregation and Visualisations – Extract and process data from various ELMO systems to create easily understandable graphs and charts. ‘Hire to Retire’ Insights – Use multiple configurable dashboards at a central location to view HR and predictive metrics from across the employee lifecycle. 23 ELMO ANNUAL REPORT 2021THE BREATHE SOLUTION Breathe is an intuitive, easy-to-use cloud-based software for small businesses. Breathe is well established in the UK market with more than 9,000 customers and presents a high growth opportunity in Australia and New Zealand following the recent launch in these geographies. The full suite of products is listed below. HR – People Management Allows businesses to manage HR admin with an easy-to-use online (HR) system, which includes the ability to manage holiday requests, employee leave, store documents safely in the cloud, plan appraisals, and recognise achievements and run insightful HR reports. The expense management module allows automated claims, uploading of receipts, and approvals. Recruitment supports the business in managing end to end staff hiring. Payroll – Pay Breathe’s Payroll solution allows businesses to consistently deliver secure, accurate and compliant payroll with features such as compliant employee pay calculations, a simple reporting dashboard with important payroll insights, annual and personal leave processing and termination payments, automatic compliance updates and comprehensive reporting functionality. 24 Roster – Schedule Breathe’s cloud-based Rostering software makes creating and accessing a schedule quick and easy. Businesses can manage their roster to budget, share it with employees instantly, record start and finish times and allow teams to manage shift swaps. Learn – Upskill the team The Learn module offers a number of courses designed to build on people’s soft skills. With courses covering topics such as business ethics, workplace mental health, information security and much more, Breathe’s Learn module helps to maintain compliance. Assigning courses and tracking completion is also easy. ELMO ANNUAL REPORT 2021 GROWTH STRATEGY Three pillar strategy driving expansion 1. Segment Expansion 2. Module Expansion 3. Geographic Expansion Multiple levers to continue high growth into FY22 Executing on the growth strategy ELMO has a three-pillar growth strategy comprised of segment expansion, module expansion and geographic expansion. ELMO’s segment expansion pillar broadens the organisation’s market segment focus from its mid-market roots into the small business segment. The acquisition of UK based HR solution Breathe supported the segment expansion through its software tailored for businesses with fewer than 50 employees. Since its acquisition by ELMO, Breathe now has more than 9,000 small businesses and is growing rapidly. The small business segment is a new $2.2bn opportunity for ELMO. Expanding the module offering has always been at the core of ELMO’s value proposition. Providing a one-stop-shop to manage people, pay and process has been a principle of ELMO that has set it apart from point-solution competitors. ELMO addresses pain points that its customer are facing through a single platform solution. The release of new modules provides cross-sell opportunities to existing customers and widens the gap between ELMO and its competitors. Recently, ELMO launched four new modules to market including Predictive People Analytics, Experiences, COVIDsecure and Expenses. Finally, geographic expansion has been underpinned by the acquisitions of UK based companies Breathe (Oct 2020) and Webexpenses (Dec 2020). These acquisitions spearhead ELMO’s presence in the UK and provide a foundation for long term sustainable growth there across both the mid-market and small business segments. 25 ELMO ANNUAL REPORT 2021RECENT ACQUISITIONS The acquisitions of Breathe and Webexpenses facilitate growth into a new market segment, expansion into a new module adjacency and growth into the United Kingdom Breathe – a HR solution for small business In October 2020 ELMO acquired UK based Breathe, a rapidly growing self-service HCM solution targeted to businesses with fewer than 50 employees. The Breathe acquisition enables ELMO to penetrate two distinct market segments with its ELMO mid-market solution and Breathe for small businesses. Breathe has more than 9,000 customers and is experiencing rapid growth of 51.8% on an annualised ARR basis. The highly manual small business segment is rapidly adopting cloud-based people management solutions and is a $2.2 billion opportunity 1. With less than 3% market share, Breathe has plenty of room to continue their growth into FY22. Since the acquisition a number of ELMO modules have been added to Breathe’s platform in the UK to broaden the solution’s capability and assist small businesses manage a remote-based workforce. There has been a pleasing amount of initial cross-sell success as seen by Breathe’s module per customer count increasing 20% over the period. The Breathe solution has been launched in the Australian and New Zealand market and activities in the region will continue to ramp up through FY22. Webexpenses – a market leading expense management solution ELMO acquired Webexpenses in December 2020 to broaden its all-in-one platform with the addition of expense management. Webexpenses is a UK based market leading cloud-based expense management solution. The acquisition provides ELMO with highly complementary technology and a large customer base of more than 1,000 businesses. With the new expense management module, ELMO customers will have the ability to manage employees’ expenses effectively and efficiently as part of ELMO’s convergent HR, payroll and expense management solution. Significant progress has been made to realise the benefits of this acquisition. Data integration of the Webexpenses solution has been completed, and the new module is being successfully cross-sold to ELMO customers in the Australian and New Zealand market. ELMO’s mid-market solution has also been launched in the UK leveraging Webexpenses operational footprint. 1. Frost & Sullivan independent market report 2019/2020 26 ELMO ANNUAL REPORT 2021 ENVIRONMENT, SOCIAL AND GOVERNANCE INTEGRITY Operating in an environment of openness, respect and accountability INNOVATION Approaching challenges with agility, flexibility and inspiration COLLABORATION Working in partnership to achieve shared goals RESULTS Achieving high quality outcomes 27 ELMO ANNUAL REPORT 2021ENVIRONMENT, SOCIAL AND GOVERNANCE ELMO’s Core Values ELMO’s core values of integrity, innovation, collaboration and results remain pillars of the organisation’s culture. ELMO’s values have played a critical role in aligning the organisation as it grows into new geographies. The values have been instrumental in aligning an increasingly dispersed workforce to the fundamental attributes of an ELMO employee. Each employee’s alignment with the core values contributes to ELMO producing high quality outcomes for customers, shareholders and the community. Employee Value Proposition (EVP) The Employee Value Proposition (EVP) has always been an integral element of ELMO’s relationship with its employees. The EVP has assisted in encouraging professional development among employees so they can actualise opportunities with ELMO. ELMO’s EVP has a distinct focus on activities that engage, inspire and ignite employees to do their best work. In addition to compensation and benefits, we also provide: • Challenging and meaningful work • Opportunities for personal achievement • An amazing and engaging organisational culture • Career development A significant portion of ELMO employees are shareholders of the business. In the 12 months to 30 June, we grew our workforce by 151, to 535 employees, supported by key offices across Australia, New Zealand and the United Kingdom. Diversity and Inclusion (D&I) ELMO recognises that creating an inclusive workplace will encourage diversity. It is the responsibility of the organisation through talent acquisition, career progression and flexible work practices to facilitate D&I activity and conversation. ELMO’s approach to D&I has been endorsed by the Board in its Diversity Policy to create a diverse workplace composed of individuals with a wide array of skills, backgrounds and experiences. The Board is responsible for establishing and monitoring ELMO’s overall diversity strategy and policy. ELMO understands that it’s important that people are able to balance their career, family and personal needs and obligations. Empowering employees to actively integrate important facets of their life is an essential part of ELMO’s approach to D&I. To the extent practicable, Group wide policies have been implemented to support employees in achieving greater work-life balance. ELMO is committed to gender diversity initiatives, including options for job share working arrangements and working from home arrangements. At 30 June, 34 percent of ELMO’s overall workforce was female. ELMO’s board consists of 50 per cent female directors. 28 Wellbeing and Engagement As the COVID-19 pandemic continued to unfold the impact on people’s wellbeing became more profound. At ELMO, we took proactive measures to ensure we assisted our people to manage their wellbeing and remain engaged with the business. The health and wellbeing of our employees is critical to our success as an organisation. Over the last 12 months ELMO conducted employee engagement surveys to gain a greater understanding of what support they needed and what initiatives resonated with them. Towards the end of the financial year ELMO commenced an employee engagement initiative to provide employees with greater input into how the organisation can actualise opportunities for its people, customers and the company. As per previous years, ELMO has run a broad range of initiatives for its employees including: • Yoga and meditation • Toastmasters • End of month and quarterly milestones • Flexible working arrangements • Healthy food initiatives • Run club, cycle club, movie club • 10,000 steps club • Hackathons • Morning teas and shared lunches • Job sharing • Return to work • Professional development • Care packages • Gratitude practice including badges, employee awards and CEO awards • Financial Wellness Initiatives • Bring your child to work days ELMO ANNUAL REPORT 2021 Environment ELMO has progressed in its activity to reduce its carbon emissions. ELMO has prioritised office locations with high NABERS ratings and undertakes monthly analysis of its energy consumption. The energy analysis is instrumental in identifying any anomalies that can be quickly remedied. ELMO’s commitment to seek more green energy has been furthered through discussions with the company’s existing energy supplier and a new vendor. ELMO is currently discussing the appropriate approach for its larger offices in Sydney and Melbourne. ELMO’s Green Team, an employee-led committee, ensures environmental education, awareness and leads various environmental initiatives. In response to growing use of take away coffee cups, the team researched alternatives to traditional paper cups and moved to purchase recyclable cups. After use the cups are deposited into recycle tubes and collected by a third party to recycle to pulp, avoiding landfill. Corporate Governance ELMO values high levels of 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 or at https://bit.ly/ELO-governance. Professional Development Organisation-wide learning and development starts at the top. ELMO is committed to the sustained growth of our business through the development of senior leadership and management teams, and to all teams in our organisation. ELMO’s objective is to upskill, cross skill and reskill employees to protect and sustain the business globally. ELMO’s Human Resources function identifies opportunities for growth and solve problems using Agile methodology to test, hypothesise and iterate. Developing a strong capability framework which leverages talent in the emerging leader program builds individual and team skills to assist in succession planning activities. To support individual and team development, ELMO invests in various development opportunities, including: • AHRI National Convention and State Conferences • HR & L&D Tech Fest • HR Leaders’ Summit • Reimagine HR • Third Sector Live • Brainmates Product Management Conference • HR Congress • PeopleMatters APAC • Toastmasters ELMO in the Community ELMO is committed to an active role in our communities. We recognise the benefits for our employees and the community when we work together on shared initiatives. This year, ELMO supported: • Youth Off The Streets • Movember • Dry July • Steptember • Cancer Council • RUOK Day morning tea Data Privacy and Security Security controls are in place to protect the confidentiality, integrity and availability of ELMO’s platform/system, people and customer information. ELMO complies with ISO 27001:2013. This standard covers the requirements for privacy information management and ELMO’s Data Privacy Protection Policy is maintained on the following website https://bit.ly/ELO-data-privacy. ELMO has a fully published and implemented Information Security Management System (ISMS). In addition, ELMO has a Security Awareness Training Program that covers all aspects of data security and privacy. 29 ELMO ANNUAL REPORT 2021“ ELMO’s core values of integrity, innovation, collaboration and results remain pillars of the organisation’s culture. ELMO’s values have played a critical role in aligning the organisation as it grows into new geographies. “ 30 ELMO ANNUAL REPORT 2021 BOARD OF DIRECTORS Danny Lessem Co-founder and Chief Executive Officer 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 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. Barry Lewin Independent Non- Executive Chairman Joined ELMO in 2018 Mr Barry Lewin is the Independent 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) and ASX-listed QuickFee 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 a MBA from Swinburne University. Kate 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 and held a variety of leadership and executive roles in Deloitte, including serving on the Board of Partners of the Australian firm. Kate is an Independent Non- Executive Director of CountPlus Limited (ASX:CUP), and Chair of the Audit and Risk Committee. She is also the independent Non-Executive Chair of Seeing Machines Limited (LON:SEE). 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 an Independent 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. Leah is currently Head of Strategic Sourcing and Procurement at Afterpay and is also a Board member of the not-for-profit Rare Cancers Australia. Leah previously held roles as Portfolio Senior Manager and Head of Procurement at Qantas Group, Senior Manager at Jetstar Airways, Legal Counsel at Engonet and IT Commercial Manager at BHP Group. 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 2021FY2021 FINANCIAL REPORT Contents Directors’ Report Auditor’s Independence Declaration Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Glossary Corporate Directory 33 50 56 92 93 97 99 100 32 ELMO ANNUAL REPORT 2021 DIRECTORS’ 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 ‘Group’, ‘Company’ or ‘Parent Entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2021. 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 Danny Lessem Kate Hill Leah Graeve Dividends No dividend was paid during the financial year ended 30 June 2021 (2020: $nil). Operating and financial review Principal activities ELMO is a leading provider of Software-as-a-Service (SaaS), cloud-based Human Resources (HR), payroll and expense management solutions in Australia, New Zealand and more recently the United Kingdom (UK). With over 500 employees the ELMO Group primarily operates in two segments, mid-market through the ELMO platform, and small business through the Breathe platform. In the mid-market, ELMO’s HR, payroll and expense management software solutions enable organisations to manage the lifecycle of an employee from hire to retire on a single integrated platform. The Group develops, sells and implements a range of modular software applications to efficiently manage HR, payroll and expense management related processes. 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 during the year ELMO has enhanced its mid-market offering with the acquisition of UK based Webexpenses in December 2020. Webexpenses is an expense management point solution which adds to ELMO’s revenue, customer base and market opportunity. The acquisition opens up a significant two-way cross-sell opportunity by offering expense management to ELMO customers and HR modules to Webexpenses customers. The addition of Webexpenses has increased the estimated size of the total addressable market to $10.6 billion. ELMO has completed the integration of Webexpenses and commenced the cross-sell of expense management to existing ELMO customers as well as including the solution in sales to new customers. Commencing in FY22, ELMO will leverage Webexpenses’ operational footprint in the UK to launch ELMO’s mid-market HR solution there. ELMO also entered the small business segment during FY21 through the acquisition of UK based Breathe in October 2020. Breathe is a market leading self-service HR solution for small business, with over 9,000 customers and growing rapidly. Breathe presents significant new revenue opportunities for the Group in Australia, New Zealand and the UK. ELMO has added additional modules to the Breathe platform in the UK which provides new revenue streams and cross-sell opportunities. Breathe was introduced into the Australian market during 2H21 and the company will be ramping up activities in the region through FY22. The total addressable market of the small business segment is estimated to be $2.2 billion. 33 ELMO ANNUAL REPORT 2021directors’ report Financial and operational performance for the year Highlights Annualised Recurring Revenue Revenue Underlying EBITDA 83.8 69.1 55.1 46.0 50.1 40.1 0.4 (1.4) (2.9) FY19 FY20 FY21 FY19 FY20 FY21 FY19 FY20 FY21 The ELMO Group has seen significant growth across the key metrics of Annualised Recurring Revenue (ARR), revenue and underlying EBITDA through FY21 when compared to FY20. The statutory loss after tax for the year was $37.6 million and is reconciled to the underlying EBITDA on page 35. ARR and Revenue The Group achieved ARR of $83.8 million, an increase of 52.1% compared to the prior year (FY20: $55.1 million). The growth in ARR was driven by the return of business confidence and the increase in remote based working as a result of COVID-19 which is resulting in businesses increasingly adopting cloud-based HR technology to help with the management of the workforce. This has resulted in: • organic growth of 26.0% across both the mid-market and small business operations, primarily through the increase in the number of customers and cross-sell to existing customers; and • the contribution from the acquisitions of both Webexpenses and Breathe. Within the organic ARR growth the mid-market solution is returning towards pre-COVID growth rates, recording organic growth of 21.4% through the year and the small business segment saw accelerated growth of 51.8% on an annualised basis. Organic growth in the mid-market reflected a temporary decrease in customer retention as some customers in more affected sectors suffered hardship as a result of COVID-19, particularly in 1H21. The growth in ARR translated to revenue increasing to $69.1 million, an increase of 38.1% compared to the prior year (FY20: $50.1 million). The gross profit margin has remained high at 86.6%, a 130-basis point increase compared to FY20. Underlying EBITDA ELMO achieved an underlying EBITDA of $0.4 million, an improvement of $3.3 million compared to the prior period (FY20: loss of $2.9 million). The growth in underlying EBITDA was due to revenue growth coupled with increased operating cost leverage across sales & marketing, research & development (R&D) and general & administrative expenses. Underlying EBITDA reflects the receipt of government stimulus payments of $1.8 million, which were invested into employee retention and hiring. In addition, underlying EBITDA reflects a temporary increase in the impairment of trade receivables reflecting the hardship on some customers more acutely affected by the pandemic. The net loss before significant items was $26.7 million, compared with a loss of $17.2 million in the prior year. The increase in the loss was driven by the factors outlined above coupled with the additional amortisation expense relating to the investment in R&D through this year and prior years. 34 ELMO ANNUAL REPORT 2021 Consolidated income statement summary A$m Revenue Gross profit1 Gross profit % Underlying EBITDA2 Underlying EBITDA % Depreciation and amortisation Net finance cost Taxation Net loss before significant items Net loss before significant items % Significant items3 Net loss after tax attributable to equity owners Cents per share Loss per share pre significant items Loss per share FY21 69.1 59.9 86.6% 0.4 0.6% (27.4) (0.3) 0.6 (26.7) (38.6%) (10.9) (37.6) (30.56) (42.89) FY20 50.1 42.8 85.3% (2.9) (5.7%) (15.7) (0.2) 1.6 (17.2) (34.3%) (1.4) (18.6) (23.51) (25.42) 1. Gross profit stated above excludes non-cash share-based payments of $0.2 million and sales commission amortisation of $2.3 million which are included within cost of sales in the statutory cost of sales on page 51. 2. Underlying EBITDA is a key measure of the underlying performance of the Group. 3. Significant items relate to changes in the fair value of contingent consideration of $3.9 million (FY20: nil), non-recurring transaction costs of $1.9 million (FY20: $0.3 million) and non-cash share-based payments of $5.2 million (FY20: $1.1 million). Basis of preparation This report includes Annualised Recurring Revenue and underlying EBITDA, measures used by the Directors and management in assessing the on-going performance of the ELMO Group. Annualised Recurring Revenue and underlying EBITDA are non-IFRS measures and have not been audited or reviewed in accordance with Australian Accounting Standards. Annualised Recurring Revenue is calculated at a point in time and, in this report, reflects the annualisation of revenue at 30 June 2021 and 30 June 2020. Underlying EBITDA is calculated as profit/(loss) before interest, taxes, depreciation of plant and equipment, amortisation of intangibles, changes in the fair value of contingent consideration, share based payments and significant non-recurring transactions. Underlying EBITDA, which is reconciled in the above table is a measure used by management and the Directors in assessing the performance of the Group. It provides information on the Group’s performance excluding significant transactions and non-cash items which are not representative of the Group’s on-going operations. Capital management ELMO is well capitalised to fund future growth initiatives and as at 30 June 2021 held a cash balance of $81.9 million, which includes a term deposit of $15 million with a maturity date of 15 March 2022. The total cash receipts through FY21 totalled $79.8 million reflecting a 38.8% increase compared to FY20 (FY20: $57.5 million). On 15 March 2021 ELMO secured a three-year debt facility with the Commonwealth Bank of Australia for $34.5 million to provide additional balance sheet flexibility and to support future growth initiatives. As at 30 June 2021 the majority of this facility was drawn. Matters subsequent to the end of the financial year On 1 July 2021, ELMO entered into a forward contract to buy £4.4m with a maturity date of 30 September 2021 to economically hedge the FX exposure on contingent consideration payments as noted in the financial statements. 35 ELMO ANNUAL REPORT 2021directors’ report COVID-19 has not substantially impacted the operations of the Group and its core operations and is not likely to compromise the ability of the Group to continue operating for the foreseeable future. However, the extent of the future impact of COVID-19 on the Group’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak locally and globally, the impact of protracted lockdowns and other regulations imposed by governments with respect to further outbreaks and the resulting impact on customers, employees and vendors all of which are uncertain and cannot be predicted at this time. Other than disclosed above, no other matter or circumstance has arisen since 30 June 2021 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on directors Name: Title: Qualifications: Experience and expertise: Other current directorships: Barry Lewin 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, Melbourne. 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. Non-Executive Chairman of Praemium Limited (ASX:PPS), Non-Executive Chairman of Quickfee Ltd (ASX: QFE). Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options: Contractual rights to shares: Name: Title: Qualifications: Experience and expertise: Member of the Nomination and Remuneration Committee and Member of the Audit and Risk Committee 15,000 fully paid ordinary shares None None 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 Group’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 Group’s operations and has been critical to the success of ELMO, including the strategy underpinning the development of the Group’s full suite of software solutions. Other current directorships: Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Contractual rights to shares: None None None 10,823,149 fully paid ordinary shares None None 36 ELMO ANNUAL REPORT 2021 Name: Title: Qualifications: Experience and expertise: Other current directorships: 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. Non-Executive Director of Countplus Limited (ASX: CUP), Chair of their Audit and Risk Committee and a member of the Acquisitions Committee. Non-Executive Chair of Seeing Machines Limited (AIM: SEE), a member of the Audit, Finance and Risk Committee and a member of the People and Culture Committee. Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options: Chair of the Audit and Risk Committee and Member of the Nomination and Remuneration Committee 24,132 (includes 9,262 restricted shares acquired under the NED equity plan) None Contractual rights to shares: 3,666 share rights under the NED equity plan Name: Title: Qualifications: Experience and expertise: Leah Graeve 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 currently Global Lead Strategic Sourcing & Procurement at Afterpay Ltd and is also a Board Member of Rare Cancers Australia (not-for-profit). Leah has over 16 years experience as a successful commercial and contracts negotiator in a range of organisations and industries. She has held roles as Head of Procurement, IT & Digital at Qantas Airways, 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: Interests in shares: Interests in options: Contractual rights to shares: Chair of the Nomination and Remuneration Committee and member of the Audit and Risk Committee 1,531 None None 37 ELMO ANNUAL REPORT 2021directors’ report Chief Financial Officer James Haslam has held the roles of Chief Financial Officer and Joint Company Secretary since 4 February 2019. James is a Chartered Accountant and fellow of the Institute of Chartered Accountants in England and Wales (ICAEW). James has over 20 years in accounting and finance including 15 years professional services for KPMG and Deloitte. In 2017 James founded and operated Financial Agility Consulting, which specialised in financial analysis, due diligence, accounting, mergers and acquisitions, and capital markets advice, primarily, focussing on 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. 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 Group during the year ended 30 June 2021 were: Board meetings Audit and Risk Committee Nomination and Remuneration Committee Barry Lewin Danny Lessem Kate Hill Leah Graeve A 12 12 12 12 B 12 12 12 12 A – 4 4 4 B – 4 4 4 A 3 – 3 3 B 3 – 3 3 A – Number of meetings attended during the time the Director held the office during the year B – Number of meetings held when the Director was eligible to attend during the year Directors’ interests The relevant interest of each director and officer as KMP in the shares, options and rights over such instruments issued by the Group, at the date of this report is as follows: Directors Danny Lessem Barry Lewin Kate Hill Leah Graeve Officer James Haslam Fully paid ordinary shares Share options Performance rights Share rights Number Number Number Number 10,823,149 15,000 24,132(i) 1,531 – – – – – – – – 13,590 24,407 36,705 – – 3,666 – – (i) Includes 9,262 restricted shares issued as part of the Non-Executive Director equity plan. 38 ELMO ANNUAL REPORT 2021 Shares under option/rights (see note 39 for further detail) Issuing entity Share options Executive ELMO Software Limited ELMO Software Limited ELMO Software Limited ELMO Software Limited Employee ELMO Software Limited ELMO Software Limited ELMO Software Limited Performance rights Executive ELMO Software Limited ELMO Software Limited Employee ELMO Software Limited ELMO Software Limited Number of shares/rights under option Class of shares Exercise price of rights/options Expiry date of options 17 October 2027 7 December 2027 29 October 2028 27 March 2029 17 October 2027 5 November 2028 25 February 2029 279,877 31,373 207,831 24,407 72,465 250,468 7,885 Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares 58,001 105,556 Ordinary shares Ordinary shares 225,609 268,868 Ordinary shares Ordinary shares $2.51 $2.51 $5.50 $5.50 $2.51 $5.50 $5.50 $6.74 $5.29 $5.29 $6.55 Upon vesting, the rights immediately convert to shares so no expiry date applies. Indemnity and insurance of officers The Group has indemnified the directors and executives of the Group 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 Group paid a premium in respect of a contract to insure the directors and executives of the Group 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 Group has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Group or any related entity against a liability incurred by the auditor. During the financial year, the Group has not paid a premium in respect of a contract to insure the auditor of the Group or any related entity. Proceedings on behalf of the Group No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Group, or to intervene in any proceedings to which the Group is a party for the purpose of taking responsibility on behalf of the Group for all or part of those proceedings. 39 ELMO ANNUAL REPORT 2021 directors’ 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 32 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 32 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 Group, acting as advocate for the Group or jointly sharing economic risks and rewards. Officers of the Group who are former partners of Deloitte Touche Tohmatsu No officer of the Group 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 Group. 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 50. Auditor Deloitte Touche Tohmatsu continues in office in accordance with section 327 of the Corporations Act 2001. 40 ELMO ANNUAL REPORT 2021 Remuneration report (audited) The remuneration report details the key management personnel (KMP) 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 • Key terms of employment contracts • Long term incentive plan • Key management personnel equity holdings Remuneration 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 Group’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 Group’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. For the year ended 30 June 2021 and since the end of the financial year KMP are as follows: Executive KMP Danny Lessem James Haslam Chief Executive Officer Chief Financial Officer and Joint Company Secretary 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 41 ELMO ANNUAL REPORT 2021directors’ report 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 KMP remuneration The consolidated entity aims to reward Executive KMPs based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. The Executive KMP remuneration and reward framework for the current year included: • cash salary • superannuation • short-term incentive • long-term incentive including share options and performance rights (LTI) although the CEO does not participate in the LTI due to his status as a founder and significant shareholder. The combination of these comprises the Executive KMP’s total remuneration as detailed under ‘Key terms of employment contracts’. 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. The Group did not engage any remuneration consultants during the years ended 30 June 2021 and 30 June 2020. Short-term incentive plan (STI Plan) ELMO has established a Short-term incentive plan under which employees may be provided with a cash or equity bonus for achievement against objectives and key results (OKRs). Participation in the STI Plan is determined at the discretion of the Board. OKR’s to Executive KMP will generally relate to conditions that are within the control of the employee, for example group revenue and profit targets, strategic measures or other such conditions, including both quantitative and qualitative 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. Employee Salary Sacrifice Scheme (ESS) During FY21 ELMO introduced an employee share scheme whereby individuals eligible for a Short-term incentive could elect to opt in to the scheme (required by 30 June 2021) and convert the STI into ELO ordinary shares, which was undertaken by the Executive KMP. Long-term incentive program (LTI Plan) ELMO has both a Senior Executive Equity Plan (SEEP) and a High Performer Equity Plan (HPEP) as part of its LTI Plan for the year ended 30 June 2021. During the year Executive KMP (except the CEO) received awards granted in accordance with the SEEP only. 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 Senior Executive Equity Plan (SEEP) Equity incentives under the SEEP were granted to executive employees (or such other person that the Board determines is eligible to participate) in respect of FY20 and FY21; with offers made at the discretion of the Board. Grants under the SEEP are made annually and are made to the Executive KMP (except the CEO) as the Board may determine from time to time. Any grants are made subject to the ASX Listing Rules, to the extent applicable. The terms of the incentives granted under this plan were determined by the Board at grant. 42 ELMO ANNUAL REPORT 2021 Share options The SEEP is intended to align the interests of the senior executives with Shareholders. Awards under the SEEP prior to FY20 were structured as an option to receive shares at a future date subject to the recipient paying the exercise price (SEEP Option) with the performance period commencing on 1 July of the year of grant and concluding on 30 June three years later. Performance rights From FY20 onward, to ensure alignment and retention of key executives as the Group matures, awards under the SEEP are issued as performance rights rather than share options. If the performance rights vest they will be automatically converted to shares; one share will be received for each performance right vested and no cash alternative. 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 Fixed remuneration The position description of each Executive KMP includes a set of individual performance measures which are reviewed and evaluated each financial year. Remuneration is set competitively in order to: • Recruit: Attract the best talent to ELMO to ensure sustainable growth • Retain: Ensure talent is not poached by larger technology organisations or direct competitors. Strategic objective/ Performance link Each Executive KMP’s individual performance measures is specifically designed to ensure alignment with the Group’s strategic plans for the year. Fixed remuneration is based on: • Role and responsibility • 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 and rights to vest Short-term incentive plan (STI) being cash or equity award The personal OKRs of each Executive KMP relate to conditions that are within the control of the employee including quantitative and qualitative targets, strategic initiatives and such other conditions as the Group requires. Quantitative targets include material achievement of Group guidance*. STIs are cash or equity-based payments • Quantum of STI = % of performance relative to an individual’s OKRs. Ensures each Executive KMP is held accountable for the outcomes that are under his control. These outcomes are designed to support the overall Group objectives. STIs motivate individuals, create a high-performance culture and increase employee engagement. 43 ELMO ANNUAL REPORT 2021Strategic objective/ Performance link Ensures a direct link between the performance of the Executive KMP and their departments with the creation of shareholder value. directors’ report Component Performance measures Long-term incentive plan (LTI) under the (SEEP) Share options Share options are tested in three tranches over a three year period in the following proportions: • Year 1 – 20% • Year 2 – 30% • Year 3 – 50% 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 Group 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 Group ranks at or above the 75th percentile; • Straight line vesting will occur if the Group ranks between the 50th percentile and the 75th percentile; • 65% of the Options will vest if the Group ranks at the 50th percentile; • 0% of the Options will vest if the Group 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. Long-term incentive plan (LTI) under the (SEEP) Performance Rights The performance rights will vest in three tranches over a three-year period from the grant date in the following proportions: • Year 1 – 20% • Year 2 – 30% • Year 3 – 50% Performance will be tested as to 50% against relative TSR (RTSR Hurdle), 50% material achievement of Group guidance* and continued employment. The TSR of each Group will be measured from the start of the performance period to the end of the performance period with the following vesting proportions applying: Group’s RTSR percentile rank against comparator group Vesting percentage Less than 50th At 50th Nil 65% Between 50th to 75th 66-99% on a straight-line basis At or above 75th 100% * Group guidance for FY21 was: Annual recurring revenue (ARR) $83m - $85m Revenue EBITDA $68m - $70m ($2.5m) – ($3.5m) 44 ELMO ANNUAL REPORT 2021 For FY21 the STI’s were based on quantitative and qualitative performance measures for each Executive KMP with individual performance reviews conducted at the end of the year. ELMO is committed to continually evolving the OKR’s for Executives KMP’s ensuring meaningful shareholder value aligned targets on which to be assessed. In considering the Group’s performance and benefits for shareholder wealth, the Nomination and Remuneration Committee have regard to the following indices in respect of the current financial year and the previous four financial years. ARR ($’m) Revenue ($’m) Revenue growth (%) Closing share price ($) FY21 83.8 69.1 38.1 4.26 Change in the share price from beginning of year (%) (40.5%) No dividends have been paid in the financial years disclosed above. FY20 55.1 50.1 25.0 7.16 (2%) FY19 46.0 40.1 51.3 7.29 33% FY18 31.1 26.5 60.0 5.50 120% FY17 19.1 16.6 36.0 2.50 N/A 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, guided by remuneration benchmarking. 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 Group in the general meeting. This amount has been fixed by the Group 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 remuneration for special exertions and additional services performed by a Non-Executive Director in addition to their agreed roles. Any additional fees will be approved by the Board when determined to be appropriate. Non-Executive Directors may also be reimbursed for expenses properly incurred by the Non-Executive Directors in connection with the affairs of the Group including travel and other expenses in attending to the Group’s affairs. The Non-Executive Directors’ fees do not include a commission on, or a percentage of, profits or income. 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. There is however a Non-Executive Director (NED) equity plan in place under which a Non-Executive Director may choose to sacrifice some or all of their salary in share rights (non-performance). The share rights vest on the first business day of the financial quarter beginning after each grant date. Upon vesting, restricted shares will be allocated subject to the restriction period being the earlier of 15 years or upon cessation as a Non-Executive Director. Chair and independent Non-Executive Director, Barry Lewin’s annual directors’ fee was $200,000. Kate Hill’s annual fee was $110,000 per annum for her role as a Non-Executive director, Chair of the Audit and Risk Committee and a member of the Nomination and Remuneration Committee. In accordance with the rules of the NED equity plan Kate salary sacrifices 32% of her salary to be transferred into the equity plan from which the share rights are purchased and valued at the grant date. Leah Graeve’s annual fee was $110,000 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. 45 ELMO ANNUAL REPORT 2021directors’ report Remuneration of key management personnel The following tables below detail remuneration of key management personnel based on the policies previously discussed for the years ended 30 June 2021 and 30 June 2020. Year ended 30 June 2021 Fees sacrificed under NED equity plan $ Cash salary and fees $ STI (equity- settled)(ii) $ Equity- settled share- based payment (LTI)(iii) $ Super- annuation $ Annual leave $ Long service leave $ Total $ Non-executive Directors: Barry Lewin (Chairman) Kate Hill(i) Leah Graeve Executive KMP: Danny Lessem James Haslam 200,000 75,000 100,457 833,000 454,160 – 35,000 – – – 1,662,617 35,000 – – – 679,250 239,580 918,830 – – – – 59,153 59,153 – – 9,543 25,000 25,000 59,543 – – – – – – 200,000 110,000 110,000 22,671 17,603 40,274 41,987 1,601,908 4,198 799,694 46,185 2,821,602 Notes in relation to Non-Executive Directors’ and Executive KMP remuneration table (i) During the current year Kate Hill salary sacrificed 32% of her annual salary under the rules of the NED equity plan detailed previously (2020: 25%) and received during the financial year as $30,000 in restricted shares and $17,500 in share rights, of which $35,000 related to salary sacrifice in FY21 and $12,500 related to FY20. (ii) The STI bonus is for performance during the 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 2021 and were therefore disclosed. Following the introduction of the ESS scheme (page 42) 100% of STI will be awarded and equity-settled. (iii) The respective values of awards granted under the long-term incentive plan (LTI) are calculated as follows: • For share options issued prior to FY20, using a Monte Carlo simulation approach subject to the relative total shareholder returns performance conditions, and allocated to each reporting period evenly over the period from grant date to vesting date. • For performance rights issued in FY20 and FY21, using a Monte Carlo simulation approach. Key terms of employment contracts for the year ended 30 June 2021 Danny Lessem Executive Director and Chief Executive Officer Base salary for the year ending 30 June 2021 of $858,000 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. Danny was eligible for a Short-term incentive benefit. He does not participate in the LTI. James Haslam Chief Financial Officer Base salary for the year ending 30 June 2021 of $479,160 including superannuation, to be reviewed annually by the Nomination and Remuneration Committee with a 6 month termination notice by either party. James was eligible for both Short-term and long term incentive benefit. Name: Title: Details: Name: Title: Details: 46 ELMO ANNUAL REPORT 2021 Year ended 30 June 2020 Fees sacrificed under NED equity plan $ Cash salary and fees $ 150,000 73,303 90,500 690,000 371,000 – 26,697 – – – 1,374,803 26,697 Equity- settled share- based payment (iii) $ – – – – 60,860 60,860 STI(ii) $ – – – 465,000 158,400 623,400 Super- annuation $ Annual leave $ Long service leave $ Total $ – – 9,500 25,000 25,000 59,500 – – – – – – 150,000 100,000 100,000 22,369 24,189 46,558 14,384 1,216,753 – 639,449 14,384 2,206,202 Non-executive Directors: Barry Lewin (Chairman) Kate Hill(i) Leah Graeve Executive KMP: Danny Lessem James Haslam Notes in relation to Non-Executive Directors’ and Executive KMP remuneration table (i) Kate Hill salary sacrificed 25% of her annual salary under the rules of the NED equity plan detailed previously and received during the financial year as $25,218 in restricted shares and $7,350 in share rights, of which $12,121 related to salary sacrifice in FY19 and $20,447 related to FY20. (ii) The STI bonus is for performance during the 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 2020 and were therefore disclosed. (iii) The respective values of awards granted under the long-term incentive plan (LTI) are calculated as follows: • For share options issued prior to FY20, using a Monte Carlo simulation approach subject to the relative total shareholder returns performance conditions, and allocated to each reporting period evenly over the period from grant date to vesting date. • For performance rights issued in FY20, using the Monte Carlo simulation approach. Long term incentive plan Rights and options over equity instruments granted as compensation Details on performance rights and options over ordinary shares in the Group that were granted as compensation to KMP during the reporting period and details on options that vested during the reporting period are as follows: Performance rights James Haslam No of performance rights granted during FY21 24,172 Vesting condition Grant date TSR & Material achievement of group guidance (p44) 14 Sep 2020 NED share rights No of share rights granted during FY21 Grant date Kate Hill 1,663 30 Sep 2020 1,342 31 Dec 2021 1,743 31 Mar 2021 1,923 30 Jun 2021 Weighted Average Fair value at grant date $3.81 Fair value at grant date $5.26 $6.52 $5.02 $4.55 47 ELMO ANNUAL REPORT 2021directors’ report Options and rights over equity instruments Options James Haslam Performance rights James Haslam Share rights(iii) Kate Hill Held at 1 July 2020 Granted as compensation Vested & converted to shares(i) Cancelled Held at 30 June 2021 Vested 24,614 – (207)(i) 24,407 12,100 15,667 24,172 (3,090) (44)(ii) 36,705 2,302 6,671 (5,307) – 3,666 (i) Following testing of vesting conditions 97.2% year 2 options vested; (ii) Following testing of vesting conditions 98.6% year 1 rights vested; (iii) The NED share rights vest on the first business day of the next financial quarter which will be the first available date post the trading black-out window. Details of equity incentives affecting current and future remuneration In addition to a continuing employment service condition, vesting is conditional on the Group achieving certain performance hurdles. Details of the performance criteria are including in the long-term incentives discussion on page 44. For performance rights granted in the current year, the earliest vesting and exercisable date are: • Year 1 – 20% • Year 2 – 30% • Year 3 – 50% The fair value of the performance rights is calculated using a Monte-Carlo simulation approach. Key management personnel equity holdings Year ended 30 June 2021 Balance as at 1 July 2020 Purchases during the year(i) Shares acquired under the SEEP equity plan Shares acquired under NED equity plan Balance as at 30 June 2021 Ordinary Shares Restricted shares Number Number Number Number Number 15,000 8,955 – 10,823,149 8,500 – 9,870 1,531 – 2,000 – – – – 3,090 – 5,307 – – – 15,000 14,870 1,531 10,823,149 13,590 – 9,262 – – – Non-Executive Directors Barry Lewin Kate Hill Leah Graeve Executive KMP Danny Lessem James Haslam (i) The following purchases of ordinary shares were made during the year: • On 17 February 2021 Leah Graeve purchased 1,531 shares at a price of $6.48 per share; • On 1 April 2021 Kate Hill purchased 9,870 shares at a price of $5.06 per share; • On 8 March 2021 James Haslam purchased 2,000 shares at a price of $5.00 per share. 48 ELMO ANNUAL REPORT 2021 Year ended 30 June 2020 Non-Executive Directors Barry Lewin Kate Hill Leah Graeve Executive KMP Danny Lessem James Haslam Balance as at 1 July 2019 Purchase/ sold during the year(i) Shares acquired under NED equity plan Balance as at 30 June 2020 Ordinary Shares Restricted shares Number Number Number Number Number 10,000 – – 5,000 5,000 – 11,989,816 (1,166,667) 5,000 3,500 – 3,955 – – – 15,000 5,000 – 10,823,149 8,500 – 3,955 – – – (i) On 18 September 2019 Danny Lessem sold 1,166,667 ordinary shares at a share price of $6.00 per share. This concludes the remuneration report (audited). 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 Danny Lessem Director 31 August 2021 Sydney 49 ELMO ANNUAL REPORT 2021 AUDITOR’S INDEPENDENCE DECLARATION 50 Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Organisation. 22 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 31 August 2021 The Board of Directors Elmo Software Limited Level 27, 580 George Street SYDNEY, NSW 2000 Dear Board Members EEllmmoo SSooffttwwaarree LLiimmiitteedd 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 report of Elmo Software Limited for the financial year ended 30 June 2021, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours faithfully DELOITTE TOUCHE TOHMATSU Carlo Pasqualini Partner Chartered Accountants ELMO ANNUAL REPORT 2021 CONTENTS 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 Notes to the financial statements Directors’ declaration Independent auditor’s report to the members of ELMO Software Limited Shareholder information Glossary Corporate directory 52 53 54 55 56 92 93 97 99 101 General information The financial statements cover ELMO Software Limited as a consolidated entity consisting of the parent company ELMO Software Limited (‘Company’) and the entities it controlled at the end of, or during, the year ended 30 June 2021 (‘Group’). The financial statements are presented in Australian dollars, which is ELMO Software Limited’s functional and presentation currency. The ELMO Group is a for-profit entity and its principal business is providing Software-as-a-Service (SaaS), cloud-based human resources and payroll solutions. 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 The financial statements were authorised for issue, in accordance with a resolution of directors, on 31 August 2021. The directors have the power to amend and reissue the financial statements. 51 ELMO ANNUAL REPORT 2021coNsoLidAted stAteMeNt oF proF it or Loss AND OTHER COMPREHENSIVE INCOME for the year ended 30 June 2021 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 right-of-use asset measured at cost Changes to fair value of contingent consideration Finance income Finance costs Share of loss from joint venture Loss before income tax expense from continuing operations Income tax benefit Loss after income tax expense for the year Other comprehensive income Items that may be reclassified to profit or loss: Exchange differences on translation of foreign operations Total comprehensive loss for the year attributable to the owners of ELMO Software Limited Loss per share From continuing operations Basic loss Diluted loss Note 4 5 27 7 8 16 9 Consolidated 2021 $’000 69,106 (11,693) 57,413 1,826 (30,921) (12,271) (22,674) (25,140) (2,010) 134 (3,866) 452 (744) (461) 2020 $’000 50,051 (7,980) 42,071 2,006 (22,589) (6,102) (18,100) (15,041) (2,109) 17 – 770 (1,006) (182) (38,262) (20,265) 636 1,649 (37,626) (18,616) 767 94 (36,859) (18,522) Cents Cents 38 38 (42.89) (42.89) (25.42) (25.42) The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 52 ELMO ANNUAL REPORT 2021 coNsoLidAted stAteMeNt oF F iNANciAL positioN as at 30 June 2021 Assets Current assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Other current assets Income tax refundable Finance lease receivable Total current assets Non-current assets Investment in jointly controlled entity 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 Total current liabilities Non-current liabilities Loans and borrowings Deferred and contingent consideration Lease liabilities Employee benefits Deferred tax Contract liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Accumulated losses 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 Consolidated 2021 $’000 2020 $’000 Note 10 11 27 13 12 18 16 14 15 17 18 20 27 19 23 12 24 21 27 19 26 25 24 28 28 29 81,944 13,724 400 3,567 – 82 139,887 10,386 – 1,636 81 206 99,717 152,196 1,037 8,422 188,595 18,774 – 216,828 316,545 14,644 35,234 4,041 4,494 441 32,545 91,399 30,000 313 20,155 799 5,002 2,031 1,498 4,589 72,961 14,991 83 94,122 246,318 10,842 6,208 2,741 3,273 – 26,098 49,162 – 500 16,006 436 450 516 58,300 149,699 166,846 17,908 67,070 179,248 235,695 214,156 5,565 1,880 (74,414) (36,788) 166,846 166,846 179,248 179,248 53 ELMO ANNUAL REPORT 2021CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2021 Consolidated Balance at 1 July 2019 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: Shares issued under institutional placement Shares issued under share purchase plan Exercise of unlisted options Less: share placement costs (net of tax) Issue of shares under business combinations (net of cost) Reserves: Equity-settled share-based payment Exercise of unlisted options Balance at 30 June 2020 Consolidated Balance at 1 July 2020 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 (see note 22) Vesting of performance rights and exercise of options Reserves: Shares purchased by Trust Equity-settled share-based payment Issued capital $’000 72,733 – – – 125,000 17,801 669 (3,047) 1,000 – – Foreign currency reserves $’000 5 – 94 94 – – – – – – – 214,156 99 Issued capital $’000 214,156 – – – 21,223 316 – – Foreign currency reserves $’000 99 – 767 767 – – – – Balance at 30 June 2021 235,695 866 The above statement of changes in equity should be read in conjunction with the accompanying notes Share option reserves $’000 831 – – – – – – – – 1,086 (136) 1,781 Share option reserves $’000 1,781 – – – – (254) (2,000) 5,172 4,699 Accumulated losses $’000 (18,172) (18,616) – Total equity $’000 55,397 (18,616) 94 (18,616) (18,522) – – – – – – – 125,000 17,801 669 (3,047) 1,000 1,086 (136) (36,788) 179,248 Accumulated losses $’000 (36,788) (37,626) – Total equity $’000 179,248 (37,626) 767 (37,626) (36,859) – – – – 21,223 62 (2,000) 5,172 (74,414) 166,846 54 ELMO ANNUAL REPORT 2021 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 June 2021 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Other income received Income taxes refunded Net cash generated from operating activities Cash flows from investing activities Interest received Payment for investment in jointly controlled entity Payment of deferred consideration from acquisitions in the prior period Payments for property, plant and equipment Payments for intangibles Payment for acquisitions of businesses and subsidiaries, net of cash acquired Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Shares purchased by trust (ESS) Proceeds from exercise of share options Share issue transaction costs (net of tax) Proceeds from borrowings Repayment of lease liabilities Receipt for lease incentives Net cash generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effect of exchange differences on cash balances Consolidated 2021 $’000 2020 $’000 Note 79,819 (77,673) 57,498 (53,200) 37 2,146 3,898 59 6,103 467 – (5,839) (5,875) (30,554) (46,216) 4,298 1,736 35 6,069 746 (1,180) (3,770) (1,785) (21,423) (2,255) (88,017) (29,667) – 142,801 (2,000) 60 (328) 30,000 (5,116) 1,338 23,954 (57,960) 139,887 17 – 511 (4,356) – (3,259) – 135,697 112,099 27,698 90 Cash and cash equivalents at the end of the financial year 10 81,944 139,887 The above statement of cash flows should be read in conjunction with the accompanying notes 55 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 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 Group 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 includes amendments to AASB 3 Definition of a business, AASB 101 and AASB 108 Definition of material. There was no significant impact from the application of these amendments. The impact of the IFRIC Agenda decision regarding Cloud Computing Arrangements has been deemed to have a insignificant effect on current or previous financial years. 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. The consolidated financial statements also comply with International Financial Reporting Standards (‘IFRS’) and interpretations (‘IFRICs’) adopted by the International Accounting Standards Board (‘IASB’). The consolidated financial statements have been prepared on the historical cost basis except for derivative financial assets, contingent consideration payables and share-based payment transactions which are stated at their fair value. 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. Going concern The Consolidated financial statements have been prepared on a going concern basis, which assumes that the Group will be able to meet its obligations as and when they fall due. As at 30 June 2021 the Group has a cash balance of $81.9 million with net current assets of $8.3 million but this includes non-cash elements of contract liabilities for deferred subscription revenue of $32.5 million and contingent consideration to be settled in shares of $7.3 million. 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 34. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. Changes in these judgements, estimates and assumptions could result in outcomes that require a material adjustment in future periods. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of ELMO Software Limited (‘Group’, ‘Company’ or ‘parent entity’) as at 30 June 2021 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 parent entity has control. The parent entity controls an entity when the parent entity is exposed to, or has rights to, variable returns from its involvement with the entity and can affect those returns through its power to direct the relevant activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the parent entity. They are de-consolidated from the date that control ceases. 56 ELMO ANNUAL REPORT 2021 Note 1. Significant accounting policies (continued) 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. 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. 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. Interests in equity-accounted investees The Group’s interest in equity-accounted investees comprises an interest in a jointly controlled investment. A jointly controlled investment is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than the rights to its assets and obligations for its liabilities. The interest in the jointly controlled investment is accounted for using the equity accounting method. The interest is initially recognised at cost; subsequent to initial recognition, the consolidated financial statements include the Group’s share of profit or loss and other comprehensive income (‘OCI’) of the equity-accounted investment until the date on which joint control ceases. 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 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. 57 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 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. Exchange differences arising on translation of foreign operations with functional currencies other than Australian dollars are recognised in other comprehensive income and included in the foreign currency translation reserve in the Consolidated statement of financial position. The cumulative amount of these differences is reclassified into profit or loss in the period in which the operation is disposed of. Revenue recognition from contracts with customers The Group applies the following five steps in recognising revenue from contracts with customers: 1. 2. Identify the contract with the customer; Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to performance obligations based on their relative standalone selling price; and 5. Recognise revenue when, or as, performance obligations are satisfied. 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 integration (‘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. 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. (ii) Revenue recognition The Group recognises revenue from the following major sources as below: Revenue Stream Performance Obligation Timing of Recognition ‘Software solution services’ – software licences, implementation and integration services Access to software Professional services – one-off services including but not limited to training workshops and onsite consultations. As defined in the contract but typically at completion of the service Over the life of the contract as the customer simultaneously receives and consumes the benefits of accessing the software Recognised over time, but because time delivered is minimal, point in time recognition has been applied. 58 ELMO ANNUAL REPORT 2021 Note 1. Significant accounting policies (continued) (iii) Contract balances The timing of revenue recognition, customer invoicing and cash collections results in trade receivables and deferred revenue (contract liabilities) recognised on the Group’s Consolidated statement of financial position. Other income Other income Other income is recognised when it is received or when the right to receive payment is established. Government grants Government grants, including non-monetary grants at fair value, are only recognised when there is reasonable assurance that: (a) all conditions attaching to the Government grant will be complied with; (b) the value of the grant can be determined with reasonable certainty; (c) the grant will be received. Government grants are recognised in the profit or loss over the periods in which the Group recognises related expenses. Where government grants relate to costs which have been capitalised as non-current assets these are recognised as a reduction to the related non-current asset in the consolidated statement of financial position and transferred to profit or loss over the useful lives of the related assets. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable. 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. Interest income 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 income includes interest for the lease receivable in relation to the sub-lease held. Interest expense includes interest based on cash products and interest in relation to lease liabilities calculated based on the default interest rate implicit in the lease contract. Cost of sales Cost of sales includes wages, salaries, capitalised commission amortisation 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. Tax consolidation Elmo Software Limited (the ‘head entity’) and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group where it is probable that taxable income will be generated. 59 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. 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. Deferred 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 Short-term deposits. 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. Other receivables are recognised at amortised cost, less any provision for impairment. 60 ELMO ANNUAL REPORT 2021 Note 1. Significant accounting policies (continued) 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 is probable that the future economic benefits associated with the expenditure will flow to the Group. (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. 61 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 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. (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 and are tested for impairment. The estimated useful lives for current and comparative periods are as follows: Software development costs 3-5 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. With respect to trade receivables an ‘expected credit loss’ (‘ECL’) model will be used 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. 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. Loans and borrowings Bank loans are initially recorded at fair value less directly attributable transaction cost. Subsequent accounting is amortised cost. 62 ELMO ANNUAL REPORT 2021 Note 1. Significant accounting policies (continued) 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-based payment reserve, over the vesting period of the awards. The fair value of the share options and performance rights has been determined as detailed in note 39. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight line basis over the vesting period, based on the Group’s estimate of the number of equity instruments that will eventually vest. At each reporting date, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market- based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to reserves. 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. Leases Definition of a lease The determination of whether a contract contains a lease is 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 and holds substantially all of the output of the asset. The Group has applied this definition to all lease contracts currently held. Lessee accounting For all contracts determined to constitute a lease, right-of-use assets and lease liabilities are recognised in the consolidated statement of financial position, initially measured at the present value of the minimum future lease payments. When measuring these lease liabilities, the Group discounted lease payments using the interest rate implicit in the lease contract. Right-of-use assets are tested for impairment in accordance with AASB 136 Impairment of assets. Lease incentives are recognised as part of the measurement of the right-of-use assets and lease liabilities. Depreciation is expensed on right-of-use assets and interest expense on lease liabilities, both recognised in the consolidated statement of profit or loss. For presentation purposes, the total amount of cash paid in relation to leases is separated into a principal portion (presented within financial activities) and interest on lease liabilities, both recognised in the consolidated statement of profit or loss. 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. This expense is presented within other expenses in the consolidated statement of profit or loss. Lessor accounting The Group assesses the classification of the sub-lease commenced during the financial year with reference to the right-of-use asset, not the underlying asset. 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. 63 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 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. Standards issued but not yet effective From the new standards effective for annual periods beginning on or after 1 July 2020 and the standards and interpretations issued but not yet effective, the Group has assessed that there will be no significant impact on the financial statements. Note 2. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. 64 ELMO ANNUAL REPORT 2021 Note 2. Critical accounting judgements, estimates and assumptions (continued) Revenue recognition Judgement is required as to whether revenue is recognised over time or at a point in time (see note 4). 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 (see note 22). Contingent consideration There is uncertainty around the actual payments that will be made in relation to contingent consideration for acquisitions that will be subject to the performance of the acquired entity subsequent to the reporting date for which a fair value assessment is made at the reporting date based on information available (see note 27). 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. Impairment of goodwill The consolidated entity assesses impairment of goodwill and other indefinite life intangible assets annually by performing a value in use 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 (see note 15). Credit risk During the current challenging economic environment, credit risk is assessed to be a critical accounting judgement regarding estimations and assumptions over the expected credit loss allowance (see note 27). Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses (see note 25). Note 3. Operating segments Operating segments, are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (CODM). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive management team. A change has been made to ELMO’s operating segments since FY20 following consideration of the acquisitions made during the year. The acquisition of Breathe introduced a new solution aimed at small business creating a new target market which has been identified as a separate operating segment – Small business solution. The acquisition of Webexpenses provides an additional module to the current range of ELMO software applications serving the mid-market and has therefore been included within the Mid-market solution. For FY21 the Group operated in two distinct segments being: • Small business solution providing a self-service HR platform; • Mid-market solution providing a range of modular software applications to efficiently manage HR and pay. 65 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 These segments are managed and reported separately because the operating markets in which the product is sold are fundamentally different. Segment underlying EBITDA is the measure used by the CODM to measure the segment results. Segment underlying EBITDA is defined as earnings before interest, tax, depreciation and amortisation and excludes share-based payments and long-term incentives, fair value adjustments to contingent consideration and other significant items identified to be one-off in nature. 2021 Segment Revenue Share of loss from joint venture Segment Underlying EBITDA Net finance costs Depreciation and amortisation Share-based payments Fair value adjustment to contingent consideration Significant one-off items Loss before tax Small business solution $’000 Mid-market solution $’000 Total $’000 5,498 – (1,194) 63,608 69,106 (461) 1,599 (461) 405 (292) (27,409) (5,172) (3,866) (1,928) (38,262) In the previous financial statements for the year ended 30 June 2020 there was only one operating segment and the prior year segment disclosure corresponded to the primary statements and notes. Major customers During the years ended 30 June 2021 and 30 June 2020 no single customer contributed 10% or more to the Group’s external revenue. Geographical information Australia New Zealand United Kingdom Rest of the world Revenue from external customers Geographical non-current assets 2021 $’000 52,963 5,465 10,526 152 69,106 2020 $’000 45,512 4,333 206 – 2021 $’000 96,771 13,403 105,287 330 2020 $’000 78,599 13,853 89 – 50,051 215,791 92,541 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; specifically for the current year excludes the investment in jointly controlled entity of $1,037,000 (2020: investment in jointly controlled entity and finance lease receivable of $1,581,000). Segment assets and liabilities are not regularly reported to the CODM. 66 ELMO ANNUAL REPORT 2021 Small business solution Mid-market solution Total 2021 $’000 – 5,498 5,498 2020 $’000 2021 $’000 2020 $’000 2021 $’000 2020 $’000 – – – 2,280 1,181 2,280 1,181 61,328 63,608 48,870 50,051 66,826 69,106 48,870 50,051 Note 4. Revenue from contracts with customers Timing of revenue recognition Revenue recognised at a point in time: professional fees Revenue recognised over time: software solution services Total revenue Note 5. Other income COVID-related government stimulus Other income Note 6. Expenses Included in the consolidated statement of profit or loss Employment expenses Sales and marketing Research and development General and administrative Note 7. Finance income Interest on lease receivable Other interest income Consolidated 2021 $’000 1,716 110 1,826 2020 $’000 2,005 1 2,006 Consolidated 2021 $’000 2020 $’000 19,711 10,241 10,563 40,515 17,646 5,263 9,866 32,775 Consolidated 2021 $’000 12 440 452 2020 $’000 23 747 770 67 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Note 8. Finance costs Interest on bank loan Interest on lease liability Net foreign exchange (gain)/loss Note 9. Income tax benefit Income tax expense Current tax expense Deferred tax – origination and reversal of temporary differences Adjustment recognised for prior periods – current tax Adjustment recognised for prior periods – deferred tax Aggregate income tax benefit Numerical reconciliation of income tax benefit and tax at the statutory rate Loss before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible in calculating taxable income: Tax rate difference in overseas tax jurisdictions Effect of expenses that are not deductible in determining taxable profit Non-deductible R&D costs (R&D tax offset not booked) Tax losses not recognised Adjustment for prior income year Benefit of tax losses not previously recognised Other Adjustment to opening deferred tax asset Income tax benefit Note 10. Cash and cash equivalents Cash at bank Term deposit Cash and cash equivalents Consolidated 2021 $’000 165 1,177 (598) 744 Consolidated 2021 $’000 (342) 978 – – 636 2020 $’000 – 950 56 1,006 2020 $’000 50 1,909 (201) (109) 1,649 (38,262) 11,479 (20,265) 6,080 (1,930) (873) (328) (8,034) – 332 (10) 636 – 636 – (657) (578) (2,886) (201) – – 1,758 (109) 1,649 Consolidated 2021 $’000 66,944 15,000 81,944 2020 $’000 139,887 – 139,887 The term deposit is a security deposit of $15 million with a maturity date of 15 March 2022, relating to the loan facility. 68 ELMO ANNUAL REPORT 2021 Note 11. Trade and other receivables Trade receivables Loss allowance Consolidated 2021 $’000 16,466 (2,742) 13,724 2020 $’000 12,888 (2,502) 10,386 The consolidated entity has recognised an expense of $2.0 million in profit or loss in respect of impairment of receivables for the year ended 30 June 2021, (2020: $2.1 million). Information about the Group’s exposure to credit and market risks, including expected credit losses for trade receivables is included in note 27. Note 12. Current tax Income tax (payable)/refundable 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 2021 $’000 (441) 2020 $’000 81 Consolidated 2021 $’000 3,504 63 3,567 Consolidated 2021 $’000 1,023 (565) 458 4,028 (2,525) 1,503 9,557 (3,096) 6,461 8,422 2020 $’000 531 1,105 1,636 2020 $’000 859 (455) 404 2,776 (1,841) 935 4,993 (1,743) 3,250 4,589 69 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 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 2019 Additions Additions through business combinations Disposals Depreciation expense Effects of movements in exchange rates Balance at 30 June 2020 Additions Additions through business combinations Disposals Depreciation expense Effects of movements in exchange rates Balance at 30 June 2021 Note 15. Intangible assets and capitalised costs Software development costs Accumulated amortisation Capitalised sales commission costs Accumulated amortisation Customer lists (acquired through business combinations) Accumulated amortisation Goodwill Trademarks (acquired through business combinations) Plant and equipment $’000 Computer equipment $’000 Leasehold improve- ments $’000 266 265 – (8) (119) – 404 127 38 – (110) (1) 458 458 858 13 – (396) 2 935 935 327 (9) (684) (1) 1,503 3,525 662 – – (942) 5 3,250 4,885 325 (644) (1,353) (2) 6,461 Total $’000 4,249 1,785 13 (8) (1,457) 7 4,589 5,947 690 (653) (2,147) (4) 8,422 Consolidated 2021 $’000 81,888 (39,142) 42,746 11,952 (5,398) 6,554 19,084 (4,717) 14,367 117,650 7,278 188,595 2020 $’000 42,724 (20,513) 22,211 6,673 (3,131) 3,542 9,829 (2,825) 7,004 39,625 579 72,961 70 ELMO ANNUAL REPORT 2021 Note 15. Intangible assets and capitalised costs (continued) 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 2019 Additions Additions through business combinations (note 22) Amortisation expense Effects of movements in exchange rates Balance at 30 June 2020 Additions Additions through business combinations (note 22) Amortisation expense (i) Revalue/Effects of movements in exchange rates Balance at 30 June 2021 Software develop- ment costs $’000 13,613 17,459 525 (9,428) 42 22,211 26,079 12,916 (18,688) 228 42,746 Capitalised Commission costs $’000 Customer list $’000 Goodwill $’000 Trademarks $’000 1,401 3,182 – (1,043) 2 3,542 5,279 – (2,267) – 6,554 7,216 – 1,013 (1,225) – 7,004 – 9,100 (1,892) 36,051 – 3,541 – 33 39,625 – 76,738 – 155 1,287 14,367 117,650 579 – – – – 579 – 6,582 – 117 7,278 Total $’000 58,860 20,641 5,079 (11,696) 77 72,961 31,358 105,336 (22,847) 1,787 188,595 (i) Amortisation for capitalised commission costs is recognised under cost of sales within the consolidated statement profit or loss. Goodwill arose during the current financial year through the acquisition of Breathe and Webexpenses (2020: Vocam); refer to Note 22 for further details. Goodwill and intangible assets with indefinite useful lives are allocated to a CGU and tested annually for impairment. During FY21 a change has been made to ELMO’s operating segments following consideration of the acquisitions made during the year. The acquisition of Breathe introduced a new solution aimed at small business creating a new target market which has been identified as a separate operating segment – Small business solution. This new segment has also been identified as a separate CGU this year. Goodwill in relation to the Breathe acquisition has been allocated to the Small business solution CGU. The acquisition of Webexpenses provides an additional module to the current range of ELMO software applications serving the mid-market and therefore including within the existing CGU. Goodwill in relation to the Webexpenses acquisition has been allocated to the Mid-market solution CGU. 71 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Following the determination of the two CGUs being small business and mid-market solutions the goodwill and trademarks as indefinite useful live assets have been allocated as follows: Small business solution Mid-market business solution Consolidated 2021 2020 Trademarks $’000 Goodwill $’000 Trademarks $’000 Goodwill $’000 2,678 4,600 7,278 31,475 86,175 117,650 – 579 579 – 39,625 39,625 The recoverable amounts of the CGUs to which the assets have been allocated have been determined based on value-in-use calculations using a five-year cash flow forecast from internal budgets and long-term management forecasts. A terminal growth factor that estimates the long-term growth for the CGU is applied to the year 5 cash flows into perpetuity. The terminal growth rates do not exceed the long term expected industry growth rates. These calculations are performed based on cash flow projections and require the adoption of assumptions and estimates. The key assumptions used in the estimation of the recoverable amounts are set out below. Each of these assumptions and estimates is based on a best estimate at the time of performing the valuation. The values assigned to the key assumptions represent management’s assessment of future trends and based on historical data from both external and internal sources. Pre-tax discount rate Terminal value growth rate 2021 Small business solution Mid-market business solution 14.56% 3.0% 11.12% 3.0% Based on the impairment assessment conducted, no impairment losses have been identified or recognised for the year ended 30 June 2021. The Group has conducted an analysis of the sensitivity of the impairment test to changes in the key assumptions used to determine the recoverable amount of goodwill and has determined that any reasonably possible change in any of the key assumptions on which the recoverable amount is based will not cause the carrying amount of the CGUs to be impaired. Note 16. Investment in jointly controlled entity Opening balance Group’s share of losses for the year Carrying amount as at 30 June Consolidated 2021 $’000 1,498 (461) 1,037 2020 $’000 1,680 (182) 1,498 On 13 December 2019, ELMO acquired joint control in Hero Brands Pty Ltd with a 50% ownership interest. Hero Brands expands ELMO’s research and development capacity and capability. ELMO’s initial investment consists of a $1.18 million capital injection plus deferred consideration of $0.3 million. 72 ELMO ANNUAL REPORT 2021 Note 16. Investment in jointly controlled entity (continued) The following table summarises the financial information of Hero Brands Pty Ltd as included in its own financial statements: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Revenue (Loss)/Profit (100%) (Loss)/Profit (50%) Elimination of unrealised profits Group share of losses Reconciliation of net assets Opening net assets as at acquisition (Loss)/Profit for the period Closing net assets 50% ownership interest Elimination of unrealised profit Goodwill Carrying amount of jointly controlled entity Note 17. Right of use assets The Group holds leases for several properties with lease terms ranging from 3 to 5 years. Right-of-use assets: property Net carrying amount as at 1 July 2019 Additions Derecognition of right-of-use asset Depreciation Net carrying amount as at 30 June 2020 Additions Depreciation Net carrying amount as at 30 June 2021 2021 $’000 1,390 – (420) – 970 4,282 (122) (61) (400) (461) 1,092 (122) 970 485 (588) 1,140 1,037 2020 $’000 1,416 – (323) – 1,092 1,951 12 6 (188) (182) 1,080 12 1,092 546 (188) 1,140 1,498 Consolidated $’000 8,173 9,538 (151) (2,569) 14,991 7,775 (3,992) 18,774 73 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 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 Note 18. Finance lease receivable Current finance lease receivable (recoverable within 12 months) Non-current finance lease receivable (recoverable after 12 months) Note 19. Lease liabilities Amounts due for settlement in less than 12 months (current) Amounts due for settlement in more than 12 months (non-current) Maturity analysis Not later than 1 year Later than 1 year but not later than 5 years Later than 5 years 2021 $’000 1,177 184 547 4,654 226 Consolidated 2021 $’000 82 – 2020 $’000 950 57 561 3,469 210 2020 $’000 206 83 Consolidated 2021 $’000 4,041 2020 $’000 2,741 20,155 16,006 Consolidated 2021 $’000 2020 $’000 4,041 18,771 1,384 24,196 2,741 11,879 4,127 18,747 The lease liabilities are interest bearing at an average 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. As at 30 June 2021 any options to extend leases which have not been or expected to be exercised based on current business operations and needs of the individual locations have not been included in the lease calculations. There would be no significant impact on the financial statements in relation to these options. There are no other future cash flows anticipated in relation to leases held which have not been disclosed in the financial statements. 74 ELMO ANNUAL REPORT 2021 Note 20. Trade and other payables Trade payables and accruals Other payables Note 21. Loans and borrowings Non-current liabilities Secured bank loans Consolidated 2021 $’000 10,259 4,385 14,644 2020 $’000 7,579 3,263 10,842 Consolidated 2021 $’000 2020 $’000 30,000 – On 15 March 2021 the Group secured a three-year $34.5 million multi-purpose debt facility from the Commonwealth Bank of Australia comprising of a $30.0 million acquisition facility with an interest rate of BBSY + 2.6% and a $4.5 million bank guarantee facility with an effective interest rate of 2%. As of 30 June 2021 the acquisition facility was fully drawn and $3.4 million of the bank guarantee facility was drawn. During the year ended 30 June 2021 borrowing costs of $271,000 were expensed to the profit or loss. Note 22. Business combinations and acquisitions of business assets During the year the Group acquired interests in Breathe and Webexpenses entities, (2020: Vocam). Key information on the acquisitions is summarised in the table below: Net tangible assets Cash Customer list Software Trademark Other assets Contract liability Deferred tax liability Other liabilities Net identifiable assets acquired Goodwill on acquisition Fair value of the total consideration at acquisition comprising: Cash Shares Contingent consideration Acquired in the year ended 30 June 2021 Breathe $’000 Web- expenses $’000 95 – 4,089 4,925 2,678 658 (724) (2,237) (956) 8,528 31,475 40,003 29,058 3,669 7,276 609 954 5,011 7,991 3,904 2,597 (1,136) (3,293) (3,051) 13,586 45,263 58,849 18,112 17,554 23,183 Acquired in the year ended 30 June 2020 Vocam $’000 13 – 1,013 525 – – (966) (304) (79) 202 3,248 3,500 2,500 1,000 – 75 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 The purchase price allocation for the acquisitions of Breathe and Webexpenses during the year ended 30 June 2021 have now been finalised. As at 30 June 2021 there was a net fair value adjustment to the contingent consideration for Breathe and Webexpenses of $4.1 million (see note 27) to reflect the expected performance of the entities compared to expectations at the acquisition date, which has been recognised in the profit or loss statement. Deferred consideration paid Settled in FY21 BoxSuite HROnboard Vocam Settled in FY20 Sky Payroll BoxSuite HROnboard Acquired entity Consideration settled in shares $’000 Consideration settled in cash $’000 – – – – – – 105 5,234 500 400 435 2,935 As at 30 June 2021, consideration has been settled in final in relation to BoxSuite, HROnboard and Vocam with a resulting gain to the profit or loss of $368,518. FY21 Acquisitions Breathe On 7 October 2020, ELMO completed the purchase of 100% of the shares and voting rights in Centurion Management Systems Limited (trading as Breathe) for a purchase consideration of GBP £18.0 million ($16 million cash and $2 million scrip) and an estimated earnout consideration payable in October 2021 based on an ARR multiple fixed in August 2021 of £10.8 million ($20 million) including an adjustment in fair value from the estimated contingent consideration at the acquisition date. The acquisition of Breathe has provided entry into a new market segment being the small business market. Goodwill is generated through the transaction in presenting significant new revenue opportunities for the Group. ELMO has added additional modules to the Breathe platform in the UK which provides new revenue streams and cross-sell opportunities. Breathe was introduced into the Australian market during 2H21 and the company will be ramping up activities in the region through FY22. Webexpenses On 16 December 2020, ELMO completed the purchase of 100% of the shares and voting rights in Webexpenses entities (including Signifo Ltd (UK), Webexpenses Inc. (US) and Webexpenses Pty Ltd (AU) for a purchase consideration of £20.0 million ($10.2 million cash and $9.8 million scrip) and an estimated earnout consideration based on an ARR multiple fixed in March 2022 of £8.1 million ($15 million) including an adjustment in fair value from the estimated contingent consideration at the acquisition date. Goodwill is generated through the transaction by adding to ELMO’s revenue, customer base and market opportunity. The acquisition of Webexpenses opens up a significant two-way cross-sell opportunity for ELMO by offering expense management to ELMO customers and HR modules to Webexpenses customers. FY20 Acquisitions Vocam (Vocam Pty Ltd (AU) and Safety Learning Ltd (UK)) On 27 February 2020 the Group completed the purchase of 100% of the shares in Vocam group entities (Vocam) for a total consideration of $3.5 million to be funded by $2.5 million cash and $1 million shares of the parent company, which is subject to a 12 month voluntary escrow plus a cash balance repaid of $0.3 million. 76 ELMO ANNUAL REPORT 2021 Note 22. Business combinations and acquisitions of business assets (continued) Vocam is a leader in HR and safety video e-learning content with offices in Australia and the United Kingdom. The acquisition also gives ELMO access to cutting edge video production and post-production facilities in Melbourne and the Philippines. This will enable ELMO to expand and update video content according to changing customer and industry requirements. BoxSuite On 31 January 2019 the Group 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 $1.4 million with an initial amount of $1.0 million paid on completion and $0.4 million 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 Group’s strong organic growth with complementary technology to offer customers an integrated product suite of HR and payroll solutions. Results for the entities acquired 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 2021 Breathe Webexpenses Year ended 30 June 2020 Vocam Revenue $’000 Loss before tax $’000 5,497 5,452 (1,717) (2,326) 687 137 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 Breathe and Webexpenses (2020: Vocam) would have been: Revenue Loss before tax 2021 $’000 74,500 (38,000) 2020 $’000 51,500 (20,200) The Group incurred costs of $1.9 million (2020: $0.3 million) in relation to all acquisitions made during the year. These costs have been included in business acquisition expenses. 77 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Note 23. Employee benefits: current liabilities Employee benefits Consolidated 2021 $’000 4,494 2020 $’000 3,273 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 24. Contract liabilities Current Non-current Note 25. Deferred tax: non-current liabilities Year ended 30 June 2021 Consolidated 2021 $’000 32,545 2,031 2020 $’000 26,098 516 Provision for doubtful debts Property, plant and equipment Intangibles Right-of-use assets Government grant Blackhole expenses Acquired on business combination: Customer list Capitalised software development costs Trademarks Superannuation payables Accruals Provision for employee benefits Contract liabilities Lease liabilities FX derivatives Deferred tax timing differences not booked Deferred tax liabilities As at 1 July 2020 $’000 Recognised in profit or loss $’000 Recognised in equity $’000 Acquired in business combinations $’000 As at 30 June 2021 $’000 590 326 (1,053) (4,482) (299) 1,522 (2,100) 1,636 (174) 258 774 1,112 20 5,606 – (4,186) (450) 71 127 (2,351) 5,770 223 (578) 500 1,898 1 97 (278) 444 – (5,278) (116) 448 978 – – – – – – – – – – – – – – – – – – – – – – – (1,758) (2,499) (1,273) – – – – – – – (5,530) 661 453 (3,404) 1,288 (76) 944 (3,358) 1,035 (1,446) 355 496 1,556 20 328 (116) (3,738) (5,002) 78 ELMO ANNUAL REPORT 2021 Note 25. Deferred tax: non-current liabilities (continued) Year ended 30 June 2020 Provision for doubtful debts Prepayments Property, plant and equipment Intangibles Right-of-use assets Government grant Blackhole expenses Acquired on business combination: Customer list Capitalised software development costs Trademarks Superannuation payables Accruals Provision for employee benefits Contract liabilities Lease liabilities Deferred tax timing differences not booked Deferred tax liabilities As at 1 July 2019 $’000 Recognised in profit or loss $’000 Recognised in equity $’000 Acquired in business combina- tions $’000 As at 30 June 2020 $’000 216 (1) 8 (2,402) (3,464) – 733 (2,271) (693) (174) 184 604 548 152 3,583 – (2,977) 374 1 318 1,349 (1,018) (299) (518) (133) 2,329 – 74 170 564 (132) 2,023 (4,186) 916 – – – – – – 1,307 – – – – – – – – – – – – – – – – 304 – – – – – – – – 1,307 304 590 – 326 (1,053) (4,482) (299) 1,522 (2,100) 1,636 (174) 258 774 1,112 20 5,606 (4,186) (450) The Group has decided not to book $3.7 million of deferred tax temporary differences in excess of deferred tax liabilities in this financial year until there is reasonable certainty that sufficient future taxable income will be available. The Group will continue to monitor this assessment in FY22 as the Group continues to scale and grow. The Group has also decided not to book the deferred tax impact from tax losses and carry forward R&D tax concessions of $13.0 million (2020: $5.3 million), until there is reasonable certainty that sufficient taxable income will be generated. The Group will continue to monitor this assessment in FY22 as the Group continues to scale and grow. Note 26. Employee benefits: non-current liabilities Employee benefits Note 27. Financial risk management The Group has exposure to the following risks arising from financial assets and liabilities: • Credit risk • Liquidity risk • Market risk Consolidated 2021 $’000 799 2020 $’000 436 79 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Risk management framework The Group’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. 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. Accounting classifications and fair values The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. Contingent consideration Forward exchange contracts Net FX gain FX gains/(losses) during the year Carrying amount: Fair value through P&L Fair value hierarchy 2021 $’000 (386) 400 14 2021 $’000 43,881 400 2020 $’000 6,102 – 3 2 Reconciliation of Level 3 fair values: Contingent consideration Opening balance as at 1 July Investment in Hero Brands joint venture Settlement of HROnboard Acquisition of Breathe Acquisition of Webexpenses Changes to fair value in contingent consideration (i) Changes to foreign exchange rate Closing balance as at 30 June (ii) Due in less than 1 year Due in more than 1 year Consolidated 2021 $’000 2020 $’000 6,102 5,602 – (5,603) 7,276 23,183 3,866 723 35,547 35,234 313 500 – – – – – 6,102 5,602 500 (i) Changes to the fair value include adjustments of $12.4m for Breathe, ($8.3 million) for Webexpenses and ($0.2m) adjustment to Hero Brands. (ii) Includes $7.3 million to be settled in shares for Webexpenses contingent consideration. 80 ELMO ANNUAL REPORT 2021 Note 27. Financial risk management (continued) Type Valuation technique Contingent consideration The fair value is based on a multiple of ARR for each acquisition at a future point in time. Forward exchange contracts The fair value is based on fluctuation in exchange rates since the inception of the forward contract. Significant unobservable inputs Expected ARR Inter-relationship between significant unobservable inputs and fair value measurement The estimated fair value would increase/ (decrease) if the ARR were higher/(lower). Not applicable. Not applicable. 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 12 month 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 18). In the light of the COVID-19 pandemic and the potential risk for increased credit losses, the allowance for expected credit losses was reviewed analysing the trade debtors balance by industry. The Group holds receivables from a broad range of industries including those that have been significantly affected by COVID-19. Expected credit loss rates and allowances for expected credit losses are as follows: Neither past due nor impaired 0 to 3 months overdue Over 3 months overdue Total Expected credit loss rate Carrying amount 2021 % 1% 7% 81% 2020 % – 5% 80% 2021 $’000 10,870 2,545 3,051 16,466 2020 $’000 6,361 3,655 2,872 12,888 Allowance for expected credit losses 2021 $’000 109 186 2,447 2,742 2020 $’000 – 198 2,304 2,502 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 the current conditions impacted by COVID-19, 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. 81 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 The following are the remaining contractual maturities of financial liabilities at the reporting date: Maturity profile Within 1 year 1-2 years 2-5 years Over 5 years Loans and borrowings $’000 – – 30,000 – Trade and other payables $’000 Deferred and contingent consideration $’000 14,644 27,958 – – – – 313 – Lease liabilities $’000 4,041 4,255 14,516 1,384 The Group has a cash balance of $81.9m at 30 June 2021, which includes a security deposit of $15 million in the form of a term deposit, relating to the loan facility. This strengthens the Group’s financial liquidity in the current market and will allow the Group to not only weather the current crisis but continue to invest in the business. In the event that further resources are required the Group has the potential to raise additional funds through a capital raising and/or acquire further debt. Interest rate risk The Group entered into a bank loan during the year which is subject to interest rate risk as well as lease liabilities held. The interest rate will be the average bid rate in addition to a margin applied. The interest charged on the lease 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. During the current financial year the following forward contracts have been taken out to economically manage the currency exposure on contingent consideration included as part of the Breathe and Webexpenses acquisitions: Inception date of forward Amount (£’000) Currency 30 March 2021 30 March 2021 4,000 6,500 GBP GBP Maturity date 30 September 2021 30 March 2022 Hedge accounting is not required due to both the derivative on the forward contract and contingent consideration being recorded at fair value through the profit or loss. ELMO’s financial statements are presented in Australian Dollars with only a small proportion of sales denominated in overseas currencies as denoted under note 4 Revenue from contracts with customers and these transactions are conducted at spot rates as necessary in normal operations. The Group’s assets and liabilities held at the balance date denominated in foreign currencies: New Zealand Dollar $’000 Singapore Dollar $’000 British Pound Sterling £’000 United States Dollar $’000 6,380 5,736 (3,901) (6,107) 524 – (1) (1,061) 3,008 57,408 2,875 55,750 130 252 (30) (333) Assets Current Non-current Liabilities Current Non-current 82 ELMO ANNUAL REPORT 2021 Note 27. Financial risk management (continued) Sensitivity analysis If the exchange rates of the above foreign currencies strengthened or weakened with a fluctuation of 5% the effect on the consolidated results of the Group due to changing net asset values with a corresponding effect on the foreign exchange translation reserve would be as follows: Currency NZD SGD GBP USD Note 28. Equity – share capital and reserves Ordinary shares issued and fully paid At 1 July 2019 Issue of shares – Institutional Placement Issue of Shares – Share Purchase Plan Issue of shares – Business Combination Exercise of unlisted options Less transaction costs At 30 June 2020 Issue of shares – Breathe Business Combination (note 22) Issue of shares – Webexpenses Business Combination (note 22) Vesting of Performance Rights and exercise of options At 30 June 2021 Sensitivity in Group results $’000 +/-98 +/-26 +/-164 +/-1 $’000 72,733 125,000 17,801 1,000 669 (3,047) Shares 63,232,459 19,166,667 2,931,012 141,443 187,533 – 85,659,114 214,156 699,765 2,805,650 58,786 3,669 17,554 316 89,223,315 235,695 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The consolidated entity’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. For the current and prior periods, no dividends have been paid or proposed. 83 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 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 2020 Annual Report. Nature and purpose of reserves Reserves Foreign exchange translation reserve Share-based payment reserve Consolidated 2021 $’000 866 4,699 5,565 2020 $’000 99 1,781 1,880 (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-based payment reserve The share options reserve comprises the value of the share-based payment arrangements recognised in equity. Note 29. Equity – accumulated losses Accumulated losses at the beginning of the financial year Loss after income tax benefit for the year Accumulated losses at the end of the financial year Note 30. Equity – dividends There were no dividends paid or proposed for the year ended 30 June 2021 (2020: $nil). Note 31. Key management personnel disclosures Consolidated 2021 $’000 (36,788) (37,626) (74,414) 2020 $’000 (18,172) (18,616) (36,788) 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 (including NED equity plan and equity-settled STI) Consolidated 2021 $’000 1,749 60 1,013 2,822 2020 $’000 2,059 60 87 2,206 Further details of the compensation made to directors and other key management personnel are included in the remuneration report within the Directors’ report. 84 ELMO ANNUAL REPORT 2021 Note 32. 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 Group, its network firms and unrelated firms: Audit services – Deloitte Touche Tohmatsu Audit of the financial statements Other services – Deloitte Touche Tohmatsu Tax compliance Advisory and consulting Consolidated 2021 $ 2020 $ 280,000 255,000 87,000 118,000 485,000 80,000 – 335,000 During the financial year the following fees are payable for services provided by Mann & Associates PAC as auditors and accountants for ELMO Talent Management Software Pte Limited: Audit services – unrelated firms Audit of the financial statements for ELMO Talent Management Software Pte Limited 6,824 7,083 Other services – unrelated firms Accountancy fees for ELMO Talent Management Software Pte Limited 10,292 17,116 5,300 12,383 Note 33. Related party transactions Parent entity ELMO Software Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 35. Key management personnel Disclosures relating to key management personnel are set out in note 31 and the remuneration report included in the directors’ report. Other related party transactions In the current year amounts of $4,266,089 were paid to the Group’s jointly controlled entity, Hero Brands Pty Ltd in relation to development costs (2020: $1,358,634). Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. 85 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Note 34. 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 2021 $’000 (29,415) (29,415) 2020 $’000 (18,442) (18,422) Parent 2021 $’000 82,598 249,202 (37,571) (93,766) 2020 $’000 143,731 239,459 (37,177) (57,230) 214,472 214,156 4,042 (63,078) 155,436 1,736 (33,663) 182,229 Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2021 and 30 June 2020. Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2021 and 30 June 2020. 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. 86 ELMO ANNUAL REPORT 2021 Note 35. 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 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 Quinntessential Marketing Consulting Pty Limited ELMO Talent Management Software Pte Limited 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 Vocam Pty Limited Rose Class Unit Trust Safety Business Learning Limited Informed Business Outsourcing Clark, Inc ELMO Software UK Holdings Limited Centurion Management Systems Limited ELMO Software Limited Breathe Software Pty Limited Signifo Limited ELMO Software US Holdings Inc. Webexpenses Inc. Webexpenses Pty Limited Principal place of business/Country of incorporation Australia Australia Australia Australia Australia Australia Australia Singapore New Zealand New Zealand New Zealand New Zealand New Zealand Australia Australia Australia Australia Australia United Kingdom Philippines United Kingdom United Kingdom United Kingdom Australia United Kingdom United States United States Australia 2021 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2020 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – – – – – – – – – Note 36. Events after the reporting period On 1 July 2021, ELMO entered into a forward contract to buy £4.4 million with a maturity date of 30 September 2021 to economically hedge the FX exposure on contingent consideration payments as noted in the financial statements. COVID-19 has not substantially impacted the operations of the Group and its core operations and is not likely to compromise the ability of the Group to continue operating for the foreseeable future. However, the extent of the future impact of COVID-19 on the Group’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak locally and globally, the impact of protracted lockdowns and other regulations imposed by governments with respect to further outbreak and the resulting impact on customers, employees and vendors all of which are uncertain and cannot be predicted at this time. Other than stated above, no other matter or circumstance has arisen since 30 June 2021 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. 87 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Note 37. 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 Interest received Share based payment Net finance cost Other Change in operating assets and liabilities: Increase in trade and other receivables Increase in other assets Decrease in income tax refundable Decrease in deferred tax liabilities Increase in trade and other payables Increase in employee benefits Increase in contract liabilities Net cash from operating activities Note 38. Earnings per share Loss per share for profit from continuing operations Loss after income tax Basic loss per share Diluted loss per share Consolidated 2021 $’000 2020 $’000 (37,626) (18,616) 28,987 2,010 (440) 3,172 1,166 490 (2,492) (3,211) 522 (317) 4,055 1,584 8,203 6,103 15,671 2,109 (746) 1,109 931 (4) (3,290) (13) 40 (1,682) 4,085 1,545 4,930 6,069 Consolidated 2021 $’000 2020 $’000 (37,626) (18,616) Cents (42.89) (42.89) Cents (25.42) (25.42) 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. Weighted average number of ordinary shares used in calculating earnings per share 87,730,404 73,225,709 Consolidated 2021 Number 2020 Number 88 ELMO ANNUAL REPORT 2021 Note 39. Share-based payment arrangements Description of share-based payment arrangements As at 30 June 2021 the Group had the following share-based payment arrangements in place. Long term incentive plan (LTI) ELMO has established both a Senior Executive Plan (SEEP) and a High Performer Equity Plan (HPEP) as part of its long term incentive (LTI) Plan. 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. Share options (equity-settled) For the financial years up to and including FY19 equity incentives under the SEEP or the HPEP were granted to employees (or such other person that the Board determines is eligible to participate) in the form of share options. The options are structured to receive shares at a future date subject to the recipient paying the exercise price. Performance rights (equity settled) From FY20 onward, to ensure alignment and retention of key executives as the Group matures, awards under the SEEP or the HPEP are issued as performance rights rather than share options. If the performance rights vest they will be automatically converted to shares and one share will be received for each performance right vested and no cash alternative. 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 Group. 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. 89 ELMO ANNUAL REPORT 2021NOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Grant date Granted to executives Share options 17 October 2017 7 December 2017 29 October 2018 27 March 2019 Performance Rights 17 December 2019 14 September 2020 Granted to employees Share options 17 October 2017 11 December 2017 9 March 2018 5 November 2018 25 February 2019 Performance rights 19 September 2019 14 September 2020 22 January 2021 Outstanding as at 30 June 2020 Granted Exercise of options/ Conversion of rights No of options/rights outstanding as at 30 June 2021 Cancelled – – – – – – 105,556 105,556 284,689 31,373 209,709 24,614 550,385 72,504 – 72,504 72,465 8,735 22,260 326,834 7,885 438,179 – – – – – (14,298) – 14,298 – (8,735) – – – (4,812) – (1,878) (207) (6,897) (205) – (205) – – (22,260) (76,366) – (8,735) (98,626) 43,401 – (43,401) – – 43,401 243,115 268,868 511,983 – (17,506) – – – (43,401) (17,506) 279,877 31,373 207,831 24,407 543,488 58,001 105,556 163,557 72,465 – – 250,468 7,885 330,818 – 225,609 268,868 494,477 There were no share options granted under the SEEP and HPEP during the current financial year. 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 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. Based on performance criteria and pro-rated for number of days employed during the year performance rights awarded during FY21 will be granted in September 2021 and valued at this date based on the 10-day VWAP. As at 30 June 2021 with a fair value based on the year-end share price of $4.26 (2020: $7.16), achievement of performance criteria and probability of continued employment the number of performance rights is estimated to be 396,197 (2020: 174,691). 90 ELMO ANNUAL REPORT 2021 Note 39. Share-based payment arrangements (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 FY19 Valuation assumptions Tranche 1 Tranche 2 Tranche 3 5 Nov 2018 25 Feb 2019 Share options plans SEEP HPEP Fair value at grant date Share price at grant date Exercise price Expected volatility (weighted-average) Expected life Expected dividends Risk-free interest rate Performance rights (SEEP) $1.18 $5.50 $5.50 37% $1.50 $5.50 $5.50 37% $1.76 $5.50 $5.50 37% $1.64 $5.50 $5.50 37% $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% FY20 FY21 Valuation assumptions Tranche 1 Tranche 2 Tranche 3 Tranche 1 Tranche 2 Tranche 3 Fair value at grant date Share price at grant date Exercise price Expected volatility (weighted-average) $1.73 $6.19 N/A 41% $3.65 $6.19 N/A 41% $3.65 $6.19 N/A 41% $1.03 $4.98 N/A 46% $3.03 $4.98 N/A 46% $3.03 $4.98 N/A 46% Expected life Expected dividends Risk-free interest rate 0.75 years 1.75 years 2.75 years 1.0 years 2.0 years 3.0 years 0% 0.79% 0% 0.75% 0% 0.72% 0% 0.19% 0% 0.22% 0% 0.24% 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 Group’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 Group hence zero dividend yield is used in this valuation report. Upon exercise of performance rights each participant is entitled to one ordinary share for each performance right vested with no cash alternative, therefore the performance rights are deemed to be equity-settled. An expense of $5.2 million (2020: $1.1 million) in relation to share-based payments has been recognised in the statement of profit or loss with a corresponding increase to the share-based payment reserve. 91 ELMO ANNUAL REPORT 2021DIRECTORS’ DECLARATION 1. In the opinion of the directors of ELMO Software Limited (the ‘Company’): a) The consolidated financial statements and notes that are set out on pages 52 to 91 and the Remuneration Report on pages 41 to 49 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 2021 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 Group 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 2020. 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 31 August 2021 Sydney Danny Lessem Director 92 ELMO ANNUAL REPORT 2021 INDEPENDENT AUDITOR’S REPORT Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au IInnddeeppeennddeenntt AAuuddiittoorr’’ss RReeppoorrtt ttoo tthhee MMeemmbbeerrss ooff EEllmmoo SSooffttwwaarree LLiimmiitteedd RReeppoorrtt oonn tthhee AAuuddiitt ooff tthhee FFiinnaanncciiaall RReeppoorrtt 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 2021, 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 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:  Giving a true and fair view of the Group’s financial position as at 30 June 2021 and of its financial performance for the year then ended; and  Complying with Australian Accounting Standards and the Corporations Regulations 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 auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (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. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. 66 93 ELMO ANNUAL REPORT 2021 INDEPENDENT AUDITOR’S REPORT for the year ended 30 June 2021 HHooww tthhee ssccooppee ooff oouurr aauuddiitt rreessppoonnddeedd ttoo tthhee KKeeyy AAuuddiitt MMaatttteerr Our audit procedures included, but were not limited to:  Obtained an understanding of the significant revenue streams and the appropriateness of the Group’s principles applied in determining that revenue recognised is in accordance with the criteria outlined in the relevant accounting standards;  Assessed the design and implementation of key controls in relation to the recognition of and measurement of revenue;   Reconciled the deferred revenue schedule to the trial balance as at 30 June 2021 and testing journal entries to identify unusual items; Tested on a sample basis, revenue transactions by agreeing the revenue recognised during the year to the signed customer contract and the related invoice;  Obtained a listing of all invoices raised during the year and verified the completeness of the deferred revenue listing;   Recalculated revenue expected to be recognised in the current year for a sample of contracts and compared this to the amounts included in the deferred revenue schedule; and Tested on a sample basis, the completeness of credit notes issued post year end. We also assessed the appropriateness of the disclosures in Note 4 to the financial statements. Our procedures included, but were not limited to:  Evaluated management’s assessment of the transactions in accordance with AASB 3: Business Combinations;  Obtained a detailed understanding of the terms and conditions of the relevant purchase agreements;  Assessed, in conjunction with our valuation specialists, management’s purchase price allocation in relation to the acquisitions that management obtained from valuation experts in relation to the methodology and assumptions applied to identify and determine the fair value of separately identified intangible assets; information including relevant  In conjunction with our valuation specialists challenged the work performed by management’s expert by: ‒ Assessing the competence and capability of management’s expert; ‒ Assessing the appropriateness of the models utilised in the valuation of identifiable assets acquired by management’s expert; and ‒ Performing sensitivity analysis on key assumptions.  Evaluated the assumptions utilised to determine the value of the contingent consideration. We also assessed the appropriateness of the disclosures in Note 22 to the financial statements. 67 KKeeyy AAuuddiitt MMaatttteerr RReevveennuuee RReeccooggnniittiioonn For the year ended 30 June 2021, $69.1 million was recognised by the Group from rendering of software solution services as disclosed in Note 4. A significant level of judgment is required in ensuring the revenue recognition criteria is met as per the relevant accounting standard. In the current financial year revenue has been recognised automatically for new contracts and manually legacy contracts. This judgment and the manual nature of the legacy contracts could affect the timing and quantum of revenue recognised in each period. for AAccqquuiissiittiioonn ooff ssuubbssiiddiiaarriieess During the financial year, the Group acquired Breathe and Webexpenses as disclosed in Note 22. Accounting for these transactions is complex and judgmental, requiring management to determine:  appropriate purchase price The allocation, fair value including the assessment of the identifiable tangible and specifically software, customer relationships and trademarks/brand names; intangible assets,   The appropriateness of the fair value assessment of the contingent considerations; and the value of The completeness and appropriateness of disclosures pertaining the transactions and associated accounting. to 94 ELMO ANNUAL REPORT 2021 Other Information The directors are responsible for the other information. The other information comprises the Directors’ Report, which we obtained prior to the date of this auditor’s report, and also includes the following information which will be included in the Group’s 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 and ASX Additional 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 and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above 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, other Company information and ASX Additional Information which is expected to be made available to us after that date, 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 scepticism 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. 68 95 ELMO ANNUAL REPORT 2021 INDEPENDENT AUDITOR’S REPORT for the year ended 30 June 2021  Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit 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’s 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, actions taken to eliminate threats or safeguards applied. 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. RReeppoorrtt oonn tthhee RReemmuunneerraattiioonn RReeppoorrtt Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 41 to 49 of the Directors’ Report for the year ended 30 June 2021.. In our opinion, the Remuneration Report of Elmo Software Limited, for the year ended 30 June 2021, 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 Carlo Pasqualini Partner Chartered Accountants Sydney, 31 August 2021 69 96 ELMO ANNUAL REPORT 2021 SHAREHOLDER INFORMATION as at 7 October 2021 Shareholder Information required by the Australian Securities Exchange Limited (ASX) Listing Rules and not disclosed elsewhere in the Report is set out below. Substantial shareholders The number of securities held by substantial shareholders and their associates (as disclosed to the ASX) are set out below: Name Lessem Trading Pty Ltd Immersion Capital Master Fund Ltd JLAB Investments (No. 2) Pty Limited Bessie Garber and Manuel Garber as trustees of the Garber Family Trust * % of issued capital as at the date the notice was lodged Number 10,972,477 13,366,176 13,655,865 9,656,482 %* Date lodged 12.19 20/09/2021 14.98 17/02/2021 16.02 19/05/2020 11.33 19/05/2020 Number of security holders and securities on issue ELMO Software Limited has issued the following securities: 89,984,116 fully paid ordinary shares held by 10,482 shareholders. Voting rights Ordinary shares In accordance with the ELMO 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. Distribution of security holders – quoted securities Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Securities 74,285,941 3,869,760 2,736,588 6,112,256 2,979,571 % 82.55 4.30 3.04 6.79 3.31 No. of holders 24 176 374 2,672 7,236 % 0.23 1.68 3.57 25.49 69.03 89,984,116 100.00 10,525 100.00 Unmarketable parcel of shares The number of shareholders holding less than a marketable parcel of ordinary shares is 1,193 based on ELMO Software Limited’s closing share price of $4.45, on 7 October 2021. 97 ELMO ANNUAL REPORT 2021SHAREHOLDER INFORMATION as at 7 October 2021 Twenty largest shareholders of quoted equity securities Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 CITICORP NOMINEES PTY LIMITED JLAB INVESTMENTS (NO. 2) PTY LTD LESSEM TRADING PTY LTD MR MANUEL GARBER & MRS BESSIE GARBER NATIONAL NOMINEES LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED MICHAEL RICHARDS PACIFIC CUSTODIANS PTY LIMITED MR XIN SUN CS THIRD NOMINEES PTY LIMITED GORDON STARKEY BNP PARIBAS NOMINEES PTY LTD MR DARRYL JUSTIN GARBER GREENHILL ROAD INVESTMENTS PTY LTD BNP PARIBAS NOMS(NZ) LTD JONATHAN PAUL RICHARDS NICOLA MARY RICHARDS MR TREVOR RAEL LONSTEIN DAVID GARETH BURROWS 7 Oct 2021 18,121,810 13,655,865 10,823,149 9,656,482 7,699,887 3,616,269 3,386,528 2,657,584 816,703 469,706 429,937 420,695 415,473 407,495 237,772 223,434 204,620 187,385 178,045 155,120 %IC 20.14 15.18 12.03 10.73 8.56 4.02 3.76 2.95 0.91 0.52 0.48 0.47 0.46 0.45 0.26 0.25 0.23 0.21 0.20 0.17 The following number of securities are subject to voluntary escrow: • 2,805,650 Fully Paid Ordinary Shares which are scheduled to be released from escrow on 17 December 2022. Total 73,763,959 Balance of register 16,220,157 Grand total 89,984,116 81.97 18.03 100.00 Unquoted securities Details of the unquoted securities on issue are as follows: a) Restricted securities There are currently 569,705 restricted securities on issue. b) Performance Rights There are currently 902,446 unquoted Performance Rights on issue. c) Options There are currently 683,677 unquoted Options on issue. On-market purchases During the reporting period, securities were purchased on-market for the purpose of the employee incentive scheme or to satisfy the entitlements of the holders of options or Performance Rights to acquire securities granted under an employee incentive scheme. The following information is provided: • A total number of 307,622 securities were purchased during the reporting period; and • The average price per security at which the securities were purchased during the reporting period was $6.53. 98 ELMO ANNUAL REPORT 2021 GLOSSARY Term ARR AASB ASX Meaning Annualised recurring revenue – June subscription revenue annualised 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 CAGR CEO CFO The board of directors of the Company Compound annual growth rate 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 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 Directors EBITDA ELMO FY IPO KMP The directors of the Company from time to time Earnings before interest, income tax, depreciation and amortisation ELMO Software Limited Financial year ending Initial Public Offering Directors and key management personnel Lifetime value (LTV) LTV is calculated by multiplying the average ARR per customer over the past 12 months by gross profit margin (%) divided by ARR churn Net customer dollar retention Customer dollar retention is calculated by dividing the incremental ARR in FY20 by the existing ARR spend in FY19 of the same customer cohort net of any churn over the corresponding period. Recurring revenue Recurring revenue is the portion of a company’s revenue that is highly likely to continue in the future SaaS Share TAM Software-as-a-Service A fully paid ordinary share in the Company Total Addressable Market 99 ELMO ANNUAL REPORT 2021CORPORATE DIRECTORY Directors Barry Lewin Danny Lessem Kate Hill Leah Graeve Company secretaries Anna Sandham James Haslam 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 7 151 Clarence Street Sydney 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 http://investors.ELMOsoftware.com.au/ Investors/?page=Corporate-Governance Key dates Closing date for the receipt of Director nominations: 5 October 2021 2021 Annual General Meeting: 23 November 2021 100 ELMO ANNUAL REPORT 2021 This page has been left blank intentionally. 101 ELMO ANNUAL REPORT 2021

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