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Annual Report 2017

Plain-text annual report

EMPIRED LIMITED & ITS CONTROLLED ENTITIES FOR THE YEAR ENDED 30 JUNE 2017 ABN 81 090 503 843 EMPIRED LTD | ANNUAL REPORT | 2017Corporate Directory Highlights & Results Chairman & CEO Review Directors’ Report Case Studies Corporate Governance Statement Consolidated Statement of Profit or Loss & Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Financial Statements 1. Corporate information 2. Summary of significant accounting policies 3. Segment reporting 4. Revenues 5. Administration Expenses 6. Finance Expenses 7. Income Tax 8. Earnings per share 9. Cash & cash equivalents 10. Trade & other receivables 11. Work in progress 12. Other current assets 13. Investment in associate 14. Property, plant & equipment 15. Intangible assets 16. Share based payments 17. Trade & other payables 18. Borrowings 19. Provisions 20. Deferred consideration 21. Issued Capital 22. Dividends 23. Financial risk management objectives & policies 24. Financial instruments 25. Commitments & contingencies 26. Investment in controlled entity 27. Auditors’ remuneration 28. Parent entity 29. Related party transactions 30. Events after the reporting date Directors’ Declaration Auditor's Independence Declaration Independent Audit Report Shareholding Analysis Other Information for Shareholders Contents 5 7 9 13 33 36 37 38 39 40 42 42 42 54 55 55 55 56 59 60 61 61 61 61 62 64 66 67 68 70 70 71 72 72 76 78 79 79 80 81 81 83 84 85 89 92 Page 3 EMPIRED LTD | ANNUAL REPORT | 2017“Our clients aren’t impatient; our market reality is. It’s exciting to be able to deliver them tomorrow’s advantage today, and that’s why we really make a difference.“ Russell Baskerville | Managing Director Page 4 EMPIRED LTD | ANNUAL REPORT | 2017CHAIRMAN & CEO REVIEWCorporate Directory Directors Principal Places of Business Richard Bevan (Non-Executive Chairman) John Bardwell (Non-Executive Director) Chris Ryan (Non-Executive Director) Thomas Stianos (Non-Executive Director) Russell Baskerville (Managing Director & CEO) Company Secretary David Hinton Registered Office Level 7 The Quadrant 1 William Street Perth WA 6000 Telephone No: +618 6333 2200 Fax No: +618 6333 2323 Legal Advisers Jackson McDonald Lawyers Level 17, 225 St Georges Terrace Perth WA 6000 Auditors Grant Thornton Audit Pty Ltd Level 1, 10 Kings Park Road West Perth WA 6005 Share Register Computershare Investor Services Pty Ltd Level 11, 172 St Georges Terrace Perth WA 6000 Country of Incorporation Australia Company Domicile & Legal Form Empired Limited is the parent entity and an Australian Company limited by shares Company Number A.C.N: 090 503 843 Perth Level 7, The Quadrant 1 William Street Perth WA 6000 Melbourne Level 5 257 Collins Street Melbourne VIC 3000 Sydney Level 12 9 Hunter Street Sydney NSW 2000 Adelaide Level 2 8 Leigh Street Adelaide SA 5000 Brisbane Level 11 79 Adelaide Street Brisbane QLD 4000 Wellington Level 4, Press Hall 80 Willis Street Wellington 6011 Seattle Suite 100 2035 158th Court NE Bellevue, WA, 98008 USA Website www.empired.com ASX Code EPD Page 5 EMPIRED LTD | ANNUAL REPORT | 20172013 2014 2015 2016 2017 REVENUE 180 160 140 120 100 80 60 40 20 0 S N O I L L I M $ EBITDA 18 16 14 12 10 8 6 4 2 0 S N O I L L I M $ 2013 2014 2015 2016* 2017 *FY16 EBITDA adjusted to exclude the write off of $0.7m for doubtful debtors relating to prior financial periods. Page 6 EMPIRED LTD | ANNUAL REPORT | 2017 Highlights & Results FY17 FINANCIAL RESULTS • Revenue $168m, up 5% • EBITDA $15.4m, up 105% • FY17 H2 EBITDA $9m, up 36% from $6.6m pcp • Operating cash flow $9.8m, with H2 Operating cash flow $8.9m • Net debt reduced to $13.8m (includes the repayment of all deferred consideration by year end) FY17 HIGHLIGHTS • Revenue from multi-year contracts grew to 66% of total revenue • Underlying services Revenue up c10% – WA up 14%, East Coast up 6%, NZ up 11% • Key growth regions ramping up with NSW sales growth of 32% and Auckland 67% • Contracted Cohesion users up 56% • Established an extended delivery centre in Bengaluru, India • Expanding EBITDA margin from 5% to 9% with further operational leverage expected FY18 OUTLOOK • Expect continued market consolidation • Positive growth thematic impacting broad array of industries and businesses • Well placed to capture market share in circa $30+ Billion market • Expect pleasing revenue growth in FY18 • Converting to accelerated earnings growth with strong cash conversion • Net debt to reduce across the year Page 7 EMPIRED LTD | ANNUAL REPORT | 2017“I’d like to thank to our dedicated team who have delivered a strong performance this year and positioned Empired to capitalise on a number of exciting opportunities going forward.“ Richard Bevan | Non-Executive Chairman Page 8 EMPIRED LTD | ANNUAL REPORT | 2017CHAIRMAN & CEO REVIEWChairman & CEO Review To our fellow Shareholders, On behalf of your Board of Directors, we are delighted to present the 2017 annual report. This time last year we communicated that our focus in 2017, following a period of rapid expansion and integration, focussed on rebuilding value for shareholders through improvements in our profitability, the strengthening of our balance sheet and leveraging off our foundations for future sustainable growth. We are pleased to report that we have delivered on this strategy, providing sound improvements to profitability and with shareholder support a materially enhanced financial position. This has led to improved shareholder value reflected through a material increase in our share price across the year. The headline results for the year included revenue of $168m up 5%, EBITDA $15.4m up 105%, NPAT $3.2m (including $1m in non-cash asset impairments) and operating cash flow of $9.8m. Net debt was reduced from $30.3m at the December half to $13.8m at June 30 representing a material reduction in the company’s borrowings and improvements to its working capital liquidity. During 2017, Empired also delivered outstanding sales growth, with overall sales up 10%. Importantly, the key growth markets for Empired delivered exceptional results with New South Wales up 32% and Auckland up 67%. In contrast, the company experienced contraction in hardware sales and overall performance of its US operations. Today, hardware sales represent a minor contribution to profit and we are pleased to report that following a number of changes to the US operation, we Richard Bevan NON-EXECUTIVE CHAIRMAN Russell Baskerville MANAGING DIRECTOR & CEO with a number of implementations for our clients as a standalone, or as part of a broader solution. We undertook a range of investments in our managed services business to enhance our service offering capability by establishing a delivery centre in Bengaluru, India, to support our domestic operations. We are seeing a strengthening Australian economic climate, however, we remain cautious with heightened levels of volatility globally which in recent years appears to be becoming somewhat the norm rather than an exception. Despite this, our view is that Empired is well positioned in the IT service market and continues to experience global growth with organisations turning to data and technology in order to transform their businesses and gain a competitive advantage in a modern digital world. are expecting improved results from this region in 2018. In recent years, we have seen a rapid consolidation of We continued to build upon the success of our investments in our intellectual property in managed services, mobile and cloud applications. In New Zealand, our Cohesion platform grew from approximately 4,500 to 7,000 contracted users across the year. We have continued to position Cohesion for launch into Australia, with an anticipated ‘go-live’ date in the second half of 2018. Our mobile field services solution has delivered on-going the Australian IT Services landscape, with a number of our direct local competition being acquired by large international companies. Empired has clearly demonstrated that we possess the capability, balance sheet strength and depth of resources required to compete and win against these larger players. Our combination of local management knowledge, resources and regional knowledge make Empired the IT provider of choice. project work throughout the year and also led to Empired We are confident in our market offerings, the investments securing a multi-year managed services agreement for we have made and our market position. We believe we application support. Early stage adoption of another have a clear competitive advantage in an exciting growth Empired software tool which provides a low cost, rapidly sector and are looking forward to delivering a solid deployable collaboration portal, has been encouraging performance in the year ahead. Page 9 EMPIRED LTD | ANNUAL REPORT | 2017CHAIRMAN & CEO REVIEWOne team, a clear focus A platform for operational leverage and growth Following a number of years of significant organic and Building upon the enhancements in our operating model, acquisitive growth, we have more recently focused on we have further refined our delivery frameworks, improved ensuring we optimise our assets. This has centred on our the rigour of our project management and contract culture and people that underpin our services portfolio and management processes, and engrained a high level of operating model. This year we matured our ‘thinking forward’ framework. operational discipline. These changes were key to the improvements in gross margins across the business this year. This framework connects our purpose, our values and our The investments made over a number of years in our core brand promise to our clients. In 2016, we implemented the business platform have ensured that we are well positioned framework in New Zealand and following positive results, we formally rolled-out the framework in Australia in 2017. Thinking forward engages and motivates all stakeholders involved in the delivery of services to produce outstanding outcomes collaboratively. We believe it will continue to take our staff engagement and client experience to a completely new level. This is already being evidenced through strengthening client satisfaction results. We also introduced the Business Leadership Group (BLG), which incorporates all our key operational management. This group of leaders are at the face of our organisation, dealing directly with our clients and people every day. The formalisation of this group has allowed a strong sense of collaboration across multiple business units, introduced consistent messaging on company priorities versus business unit priorities and fosters operational alignment. Members of the BLG undertake a range of training programs to enhance their leadership and commercial skills to underpin excellent operational performance and ensuring the leaders of Empired tomorrow are well trained and prepared for their transition to senior management and leadership roles. As part of the introduction of the BLG we also undertook a review of our management structures and operating model. We refined these structures and as part of this process recruited a number of key people into new roles. These roles ensure that we have adequate management coverage on for future growth. As our focus moves from consolidation of the business over the past two years to future growth, these investments will be key to the seamless and rapid integration of any future acquisitions and manage organic growth to deliver predictable growth in earnings. Our physical platform is geared for growth. Over the past two years we have invested heavily in our physical infrastructure with quality office environments in most of our operations. Whilst this has been capital intensive, we are now nearing completion of this cycle and expect that our facilities will support increased staff numbers and higher revenues in all our major locations. This will lead to improved margins and greatly reduced infrastructure based capital spend for years to come. Our sales capability is geared for growth to capitalise in the areas where we see the largest market opportunities. Sales costs per revenue dollar across the east coast and Auckland are far higher than that of our more mature regions such as Western Australia. As we grow in these regions, we expect sales costs per revenue dollar to reduce providing margin leverage over time. Our management structure has been built to support higher levels of revenue in our targeted growth markets. This investment ensures that our quality remains high in our growth markets and that we are well placed to identify and the ground in each of our locations. We are confident that secure opportunities in the market as they arise. these changes will support our ability to deliver outstanding Again, as these regions develop we expect our management quality as we continue to grow, building our business in all of costs per revenue dollar to reduce leading to margin the regions we operate. improvement over time. During the year we implemented a Net Promoter Score Our board and senior management believe that our based employee and client engagement framework. We are operational platform will underpin a very exciting period of confident that the initiatives above have been key to driving sustainable and profitable growth for Empired, where we the outstanding improvements that we have seen in these leverage off it to deliver predictable profit margin expansion measures during the year. and earnings growth. Page 10 EMPIRED LTD | ANNUAL REPORT | 2017CHAIRMAN & CEO REVIEWInvesting in the future In addition to our investments in operational platforms and During the year, we opened a delivery centre in Bengaluru, physical infrastructure, we have made careful and purposeful India. The pace at which we have been able to implement investment in evolving our service offerings and developing the facility and ramp up our productive staff numbers has IP. In the second half of the year we expanded our delivery delighted us. The facility is now operational and delivering centre in India to meet the demands of our Managed services to some of our largest clients at similar levels of Services clients. productivity to our onshore operations. Digital technologies are having a profound impact on This facility will ensure that we are highly competitive when commerce and the way in which we conduct our day-to-day bidding on new contracts and will provide opportunities for lives. We continue to shape our services portfolio around margin leverage in our managed services business as we Mobility, Digital, Cloud, Data & Analytics and Security trends scale the size of the facility in 2018. that we have broadly spoken to over the past two years. As these trends move toward wide scale adoption, we are seeing Looking to 2018! the evolution of Artificial Intelligence and Machine Learning We cannot recall a time we have been more excited about as the next frontier. our company and the prospects that lie ahead. Our services align well to these trends with standout The Australian and New Zealand economic climate is robust expertise in cloud infrastructure, business systems, modern and provides a solid foundation for a growth business. applications and data. We believe our skills are well versed The digital era is very much upon us, with technology in industry and technology trends and we are well placed to fundamentally changing the way in which business is continue to capture market share as these trends evolve. conducted, transforming some of the world’s oldest To improve our competitive differentiation, accelerate our solutions time to value and grow our recurring revenue industries and largest companies and having a profound impact on our day to day lives. we have invested in a range of software solutions and We are seeing a rapid consolidation of our sector in the local accelerators. The most prominent and successful of these market, disrupting the competitive environment and opening to date has been Cohesion. Cohesion is an Enterprise many new opportunities to Empired. Content Management System that has been widely adopted by New Zealand Public Sector agencies where we boast approximately 7,000 contracted users and growing. During the year we made a number of investments in extending the functionality of Cohesion and preparing it for launch in the Australian market. We have also invested in a collaboration portal called SNAP and a mobile field services solution where we have had pleasing early stage commercial success. As these solutions move into production we expect a declining capital investment profile associated with solution development combined with growing recurring revenue. Our investments in our cloud platform FlexScale reduced this year with the platform supporting several customers and internal systems. Our clients and the market generally continue the trend to low cost public cloud offerings as confidence in public cloud infrastructure grows. We are confident that the investments Empired has made across a broad range of areas and our strategic market position will ensure that Empired is uniquely positioned to secure its place in this exciting transformation. Together with our Board of Directors, we would like to thank all of our loyal staff for their exceptional effort throughout the year and extend our appreciation to the support of our clients and partners. To our fellow shareholders, we thank you for your support through what has been a transformational period for Empired and we look forward to delivering on an exciting year ahead. Yours faithfully, Richard Bevan NON-EXECUTIVE CHAIRMAN Russell Baskerville MANAGING DIRECTOR & CEO Page 11 EMPIRED LTD | ANNUAL REPORT | 2017CHAIRMAN & CEO REVIEW“Our values reflect what we believe in and are at the heart of who we are and why we do what we do, and we love to work with clients who share them.“ Simon Bright | Chief Operating Officer Page 12 EMPIRED LTD | ANNUAL REPORT | 2017CHAIRMAN & CEO REVIEWDirectors’ Report The directors present their report on the consolidated entity comprising Empired Limited (“the Company“) and its controlled entities (“the Group“) for the year ended 30 June 2017. The names of the Company’s directors in office during the year and until the date of this report are detailed below. Directors were in office for this entire period unless stated otherwise. DIRECTORS NAME AGE EXPERIENCE & SPECIAL RESPONSIBILITIES Richard Bevan Non-Executive Chairman 51 Russell Baskerville Managing Director & CEO 39 Mr Bevan joined the board as a Non-Executive Director on 31 January 2008 with corporate and senior management experience including various directorship’s and CEO/MD roles in ASX listed and private companies, and was appointed Chairman on 29 November 2016. Mr Bevan brings experience in the execution and integration of mergers, acquisitions and other major corporate transactions. Mr Bevan has been involved in a number of businesses in areas as diverse as healthcare, construction and engineering, resources and information services. Mr Bevan’s roles within these businesses have included strategic operational management, implementing organic growth strategies, business integration and raising capital in both public and private markets. Other current directorships » Cassini Resources Limited Mr Baskerville is an experienced business professional and has worked in the IT industry for in excess of 15 years. He has extensive knowledge in both the strategic growth and development of technology businesses balanced by strong commercial and corporate skills including strategy development and execution, IPOs, capital raisings, divestments, mergers and acquisitions. Mr Baskerville has been the Managing Director of Empired for ten years and has successfully listed the company on ASX and made a number of successful acquisitions. Mr Baskerville was previously a Non Executive Director of BigRedSky Limited, successfully developed and commercialised a SaaS delivered eRecruitment tool prior to the company being acquired by Thomson Reuters. Previous directorships (last 3 years): » None Page 13 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT DIRECTORS NAME AGE EXPERIENCE & SPECIAL RESPONSIBILITIES 63 57 54 Mr Stianos joined the board as a Non-Executive Director on 29 November 2016. He is widely recognised as one of the most successful and experienced leaders in the IT industry. Mr Stianos was previously the Managing Director of SMS Management & Technology Limited. He has also previously held senior positions with the Department of Premier and Cabinet, Department of Justice, and Department of Treasury & Finance. Mr Stianos holds a Bachelor of Applied Science from the University of Melbourne. Other current directorships: » Inabox Group Limited » Escient Limited Previous directorships (last three years): » SMS Management & Technology Limited Mr Bardwell has had a long career in the financial services and IT sectors through a variety of senior leadership positions. Mr Bardwell's previous executive experience includes Head of IT Services at Bankwest, Managed Services Director at Unisys West and as the General Manager of Delivery Services at Empired Ltd prior to his appointment to the Board as a Non-Executive Director on 26 November 2011. Mr Bardwell holds a Bachelor of Business and a Graduate Diploma in Applied Finance and Investment. He is a Graduate Member of the Australian Institute of Company Directors and a Fellow of the Financial Services Institute of Australasia. Mr Bardwell is a Board Member of Swancare Group, a specialist provider of retirement living and aged-care services, where he is also Chair of the Business Development Committee. Previous directorships (last three years): » None Mr Ryan joined the Board on 1 May 2015. He has had extensive executive and corporate advisory experience in Human Resources across a broad range of industries. This includes 10 years leading the Group HR function for diversified industrial business Wesfarmers, where he led the people aspects of major acquisitions and integrations, including the Coles Group transaction. Through his advisory practice Mr Ryan advises Boards and CEOs on HR strategy, executive remuneration and executive talent management. Previously he has been an independent director of ASX listed Resource Development Group. Mr Ryan holds a Bachelor of Business, is a graduate member of the Australian Institute of Company Directors, a Fellow of the Australian Institute of Management and a Fellow of the Australian Human Resources Institute. He holds the honorary title of Adjunct Professor with Curtin University Business School where he pursues the connection of industry with education, and is a member of the Advisory Board of the University’s School of Management. Previous directorships (last three years): » Resource Development Group Limited Thomas Stianos Non-Executive Director John Bardwell Non-Executive Director Chris Ryan Non-Executive Director Page 14 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT NAME AGE EXPERIENCE & SPECIAL RESPONSIBILITIES Mel Ashton Former Non-Executive Chairman 59 Mr Ashton retired on 29 November 2016 after 11 years as Chairman of the Company. Mr Ashton is a Fellow of the Australian Institute of Company Directors and a Fellow of the Institute of Chartered Accountants in Australia and has over 30 years corporate experience in a wide range of industries. Other current directorships: » Venture Minerals Limited Previous directorships (last three years): » Gryphon Minerals Limited » Renaissance Minerals Limited » Resource Development Group Limited » Barra Resources Limited COMPANY SECRETARY NAME AGE EXPERIENCE & SPECIAL RESPONSIBILITIES David Hinton CFO & Company Secretary 54 Mr Hinton joined Empired in May 2016. He has had over 10 years experience in the technology sector having previously held the position of CFO and Company Secretary of ASX listed Amcom Telecommunications. Prior to Amcom he held a senior executive role in a large diversified listed company and also worked at Ernst & Young. Mr Hinton holds a Bachelor of Business degree, is a Fellow of the Institute of Chartered Accountants and is a graduate of the Australian Institute of Company Directors and is a member of the Governance Institute of Australia. DIRECTORS’ MEETINGS The number of Directors meetings and Audit Committee meetings attended by each Director during the year are: NAME OF DIRECTOR No. of Directors Meetings held while a Director No. of Meetings Directors attended as a Director during the year ended 30 June 2017 No. of Audit Committee Meetings held while a Director No. of Audit Committee meetings attended during the year ended 30 June 2017 Russell Baskerville Richard Bevan John Bardwell Chris Ryan Thomas Stianos Mel Ashton 10 10 10 10 6 3 10 10 10 10 6 2 2 2 2 2 1 1 2 2 2 2 1 1 Page 15 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT OPERATING & FINANCIAL REVIEW Review of operations Empired Limited is an international IT Services Provider with a broad range of capabilities and a reputation for delivering enterprise class IT services and solutions. Established in 1999, Empired is a publicly listed company (ASX: EPD) formed in Western Australia. With a team of over 900 people located across Australia, New Zealand and USA, Empired has built a reputation for service excellence and is a leading provider of business technology solutions to both government and private sectors. We work with clients to deliver high quality solutions to meet their business requirements. Our flexible service delivery approach has enabled Empired to secure clients that range from medium size entities through to large enterprise and Government agencies. The business operates as two segments: Australia – which includes Singapore New Zealand – which includes North America Review of financial results Revenue overall increased by 5% to $167m. Earnings before interest, tax depreciation and amortisation (EBITDA) for the financial year increased by 106% to $15.4m. The profit after tax for the year was $3.2m compared to a loss after tax in the previous year of $1.7m. Included in the current year result is a non-cash loss on disposal of assets of $1.0m resulting from a re-location of the Wellington operations and the write-off of legacy assets. 180 160 140 120 100 80 60 40 20 0 ) S N O I L L I M $ ( E U N E V E R Page 16 New Clients/ Individual Contracts Additional Projects from Multi Year Contracts Multi Year Contracts FY13 FY14 FY15 FY16 FY17 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT Review of financial results (continued) The financial results are summarised in the following table: $M Revenue Other income EBITDA Depreciation & amortisation Loss on disposal of assets EBIT Interest (net) Net profit / (loss) before tax Income tax Net profit / (loss) after tax EBITDA / Revenue % Basic EPS (cents) Operating results by Segment $M Revenue Australia Revenue New Zealand Inter-segment Segment Revenue EBITDA Australia EBITDA New Zealand Segment EBITDA 1H 17 2H 17 83.6 0.1 6.4 (3.9) - 2.5 (1.2) 1.3 (0.2) 1.1 8% 83.8 0.6 8.9 (4.3) (1.0) 3.6 (1.1) 2.5 (0.5) 2.0 11% 1H 17 2H 17 51.6 32.8 (0.8) 83.6 3.9 2.6 6.4 52.8 32.0 (1.0) 83.8 6.8 2.2 8.9 2017 167.4 0.7 15.4 (8.2) (1.0) 6.2 (2.3) 3.9 (0.7) 3.2 9% 2.4 2017 104.4 64.9 (1.9) 167.4 10.6 4.7 15.4 2016 160.0 0.4 7.5 (7.0) (2.3) (1.8) (1.6) (3.4) 1.0 (2.4) 5% (1.5) 2016 101.0 62.1 (3.1) 160.0 3.0 4.5 7.5 For the financial year ended 30 June 2017 the Australian segment increased its revenue by 3% to $104m and recorded a Segment EBITDA of $10.6m. The New Zealand segment increased revenue by 4% to $65m and reported a Segment EBITDA of $4.7m. The New Zealand segment results were impacted during the year by adverse trading conditions on US based contracts estimated to have impacted revenue and EBITDA by approximately $1m. Page 17 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT Cash flow The following table summarises the cash flow for the financial year ended 30 June 2017: $M EBITDA Non cash items Tax paid Dividends – associate Working capital Lease incentive Operating cash flow Interest paid (net) Purchases of P&E and intangibles Acquisitions (inc deferred consideration) Equity raising Repayment of borrowings Proceeds from borrowings Change in cash 1H 17 2H 17 6.4 - (0.7) 0.1 (4.9) - 0.9 (1.2) (4.3) (1.0) - (3.5) 3.2 (5.9) 8.9 0.2 - - (0.3) - 8.8 (0.9) (6.6) (7.7) 15.1 (7.7) 0.8 1.8 2017 15.4 0.2 (0.7) 0.1 (5.2) - 9.8 (2.0) (10.9) (8.7) 15.1 (11.3) 4.0 (4.0) 2016 7.5 0.2 (0.3) 0.2 1.9 3.8 13.3 (1.6) (14.6) (1.2) 0.2 (7.1) 4.4 (6.6) Operating cash flow for the financial year ended 30 June 2017 was $9.8m compared to $13.3m the previous financial year. The previous financial year included a cash lease incentive of $3.8m and after allowing for this the Operating cash flow increased by 4% year on year. Page 18 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT Financial position and capital structure The balance sheet as at 30 June 2017 is summarised below: $M Cash Receivables & WIP Other Current Assets Plant & Equipment Intangibles and other Non Current Assets Trade & other payables Borrowings* Provisions & other Current Liabilities Borrowings* Provisions & other Non Current Liabilities Net Assets/Equity Net debt (Nd) Gearing (Nd/Nd+Equity) June 2017 Dec 2016 Pro Forma June 2016 2.0 32.5 2.4 36.8 21.0 61.3 82.2 22.1 6.7 5.9 34.7 9.1 4.0 13.1 71.3 13.8 16% 3.1 29.5 2.6 35.2 20.6 60.6 81.2 19.6 21.8 5.2 46.6 11.6 4.5 16.0 53.7 30.3 36% 3.0 32.6 2.6 38.2 21.1 58.7 79.8 26.1 8.9 6.0 41.1 19.6 4.8 24.5 52.4 25.6 33% *Proforma in FY2016 reflects the re-classification of $6.8m of borrowings from current to non-current liabilities for bank borrowings renegotiated after 30 June 2016. Net debt reduced during the financial year from $25.6m to $13.8m with gearing reducing from 33% to 16%. The reduction in net debt and improvement in gearing is attributable to the equity raising of $15.1m (net of costs) when 36.4m shares were issued at 44 cents per share. Borrowings* in previous periods included deferred consideration payable on acquisitions completed in previous years. These amounts due have been paid by 30 June 2017. Risk As part of the planning process the Company has identified the risks that could potentially have an adverse impact on the performance of the Company. The Company has in place policies and procedures to monitor and manage these risks which can be broadly categorised as: • General macro economic risks • Business risks • Operational risks • Financial risks Commentary on strategy and prospects is included in the Chairman and CEO Review. Page 19 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT Dividends The directors do not recommend payment of a dividend (2016: nil). Likely Developments Any likely developments are disclosed in the Chairman and CEO Review. Performance Rights Granted to Directors and Officers Executive Officers were granted 3,411,975 Performance Rights under the Long Term Incentive Plan. Information relating to the grants is detailed in the notes to the financial statements. Significant changes in the state of affairs During the financial year the Company raised $15,137,239, net of costs, with the placement of 36,363,636 ordinary shares at 44 cents per share. A total of 38,558,080 ordinary shares were issued during the financial year. Auditor The lead auditor’s Independence Declaration for the year ended 30 June 2017 has been received and can be found on page 84 of the financial report. Non-Audit Services The directors, as per the advice from the audit committee, are satisfied that non-audit services provided during the year did not compromise the external auditors' independence in accordance with the general standard of independence for auditors imposed by the Corporations Act 2001. Indemnification and insurance of directors and officers During the year, Empired Limited paid a premium to insure directors and officers of the Group. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else to cause detriment to the Group. Details of the amount of the premium paid in respect of the insurance policies is not disclosed as such disclosure is prohibited under the terms of the contract. The Company has agreed, to the extent permitted by law, to indemnify each Director and Company Secretary of the Company against any and all reasonable liabilities incurred in respect of or arising out of any act in the course of their role as an officer of the Company. The Company has not agreed to indemnify the auditor of the Company, however a controlled entity has provided an indemnity to the auditor of that controlled entity for losses arising from false or misleading information provided or third party claims except to the extent such amounts are determined to have been caused by the auditor's fraud. Significant events after the reporting date There have been no events to report subsequent to reporting date. Page 20 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT Page 21 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT REMUNERATION REPORT (AUDITED) The Directors of Empired Limited present the Remuneration Report (“the Report“) for the Company and its controlled entities for the year ended 30 June 2017 (“FY17“). This Report forms part of the Directors’ Report and has been audited in accordance with section 300A of the Corporations Act 2001. Remuneration Philosophy The performance of the Company depends upon the quality of its directors and executives. To prosper, the Company must attract, motivate and retain highly skilled directors and executives. To this end, the Company embodies the following principles in its remuneration framework: • Provide competitive rewards to attract high calibre executives; • Link executive rewards to shareholder value; • Have a portion of certain executive’s remuneration ‘at risk’, dependent upon meeting pre-determined performance benchmarks; and • Establish appropriate, demanding performance hurdles for variable executive remuneration. Linking remuneration ‘at risk’ to Company performance The Group recorded a profit after tax of $3.2m for the year ended 30 June 2017 compared to a net loss after tax of $1.7m in the previous financial year. As a result, no Short Term Incentive will be paid to Key Management Personnel in respect to the 2017 financial year as the key performance indicators were not achieved. Remuneration Structure In accordance with the best practice corporate governance, the structure of non-executive director and executive remuneration is separate and distinct. A. Non-Executive director remuneration Objective The board seeks to set aggregate remuneration at a level that provides the company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. Structure The constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was at the Annual General Meeting held on 27 November 2014 when shareholders approved an aggregate remuneration of $500,000 per year. The amount of aggregated remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst directors is reviewed from time to time. The Board considers advice from external consultants as well as the fees paid to non-executive directors of comparable companies when undertaking the annual review process. The remuneration of Non-Executive Directors, the Executive Director and other Key Management Personnel for the period ended 30 June 2017 is detailed in the table in Section E. Page 22 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT B. Executive remuneration Objective The company aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the company and so as to: • Reward executives for company, business unit and individual performances against targets set by reference to appropriate benchmarks; • Align the interests of executives with those of shareholders; • Link rewards with the strategic goals and performance of the Company; and • Ensure total remuneration is competitive by market standards. Structure In determining the level of remuneration paid to senior executives of the company, the Board took into account available benchmarks and prior performance. Remuneration consists of the following key elements: • Fixed Remuneration • Variable Remuneration • Short Term Incentive (STI); and • Long Term Incentive (LTI) The proportion of fixed remuneration and variable remuneration (potential short term and long term incentives) is established for each senior executive by the Board. The table in Section E below details the fixed and variable components of the executives of the company. Fixed Remuneration Objective Fixed remuneration is reviewed annually by the board. The process consists of a review of companywide, business unit and individual performance, relevant comparative remuneration in the market and internally, and where appropriate, external advice on policies and practices. As noted above, the Board has access to external advice independent of management. Structure Senior executives are given the opportunity to receive their fixed remuneration in a variety of forms including cash and fringe benefits such as motor vehicles. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the group. The fixed remuneration component of the company executives is detailed in the table in Section E. Page 23 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT Variable Remuneration – Short Term Incentive (STI) Objective The objective of the STI program is to link the achievement of the Group’s performance and operational targets with the remuneration received by the executives charged with meeting those targets. Structure Actual STI payments granted to the company executives depend on the extent to which specific operating targets set at the beginning of the financial year are met. The targets consist of a number of Key Performance Indicators (KPIs) covering both financial and non-financial measures of performance. Typically included are measures such as revenue, profitability, customer service, risk management, and leadership/team contribution. Any STI payments are subject to the approval of the Board. Payments made are delivered as a cash bonus in the following financial year. For the 2017 financial year no STI will be paid to Key Management Personnel (2016: nil). Variable Pay – Long Term Incentive (LTI) Objective The objective of the LTI plan is to reward senior executives in a manner that aligns this element of remuneration with the creation of shareholder wealth. As such, LTI grants are only made to executives who are able to influence the generation of shareholder wealth and thus have a direct impact on the Group’s performance against the relevant long term performance hurdle. Structure LTI grants to executives are delivered in the form of performance rights. The table in Sections F and G provide details of performance rights and options granted and the value of equity instruments granted, exercised and lapsed during the year. The performance rights were issued for nil consideration. Each performance right entitles the holder to subscribe for one fully paid ordinary share in the entity based on achieving vesting conditions at a nil exercise price. During the financial year 3,411,975 Performance Rights were issued under the Long Term Incentive Plan on terms and conditions determined and approved by the Board of Directors. The number of Performance Rights offered is based upon the share price of the company at the time of Board approval. The vesting conditions selected are designed to align remuneration with the creation of shareholder value over the long- term. The performance measures that have been chosen are: • Basic Earnings per Share (EPS) (adjusted for any abnormal items) with a target set as a growth percentage of current year budget. Due to their sensitive nature, EPS targets are disclosed retrospectively should the Performance Rights vest. • Relative Total Shareholder Return this compares the Total Shareholder Return (TSR) of the company measured from 1 July 2016 to 30 June 2019 and ranks it on a percentile basis with the constituents of the S&P/ASX 200 Industrial Index. • Sustainability measure to be determined and assessed by the Board. Page 24 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT NUMBER Performance Measures % Vesting Vesting Dates FY 2018 EPS Below minimum target At minimum target Within target range At maximum of target range and above FY 2019 EPS Below minimum target At minimum target Within target range At maximum of target range and above Relative TSR Below 60th percentile At 60th percentile 0% 50% 50%-100% pro-rata 100% 0% 50% 50%-100% pro-rata 100% 0% 50% Between 60th & 75th percentile 50%-100% pro-rata At or above 75th percentile Sustainability FY 2017 EPS Below minimum target At minimum target Within target range At maximum of target range and above FY 2018 EPS Below minimum target At minimum target Within target range At maximum of target range and above Relative TSR (1) Below 50th percentile 100% 100% 0% 50% 50%-100% pro-rata 100% 0% 50% 50%-100% pro-rata 100% 0% Between 50th and 75th percentile 50%-100% pro-rata At or above 75th percentile Relative TSR (2) Below 50th percentile 100% 0% Between 50th and 75th percentile 50%-100% pro-rata At or above 75th percentile Sustainability Sustainability 100% 100% 100% 30 August 2019 30 August 2019 30 August 2019 30 August 2019 1 July 2017 1 July 2018 1 July 2017 1 July 2018 1 July 2017 1 July 2018 617,576 617,576 1,235,150 617,576 90,452 39,183 90,452 39,183 45,210 19,617 (1) Empired TSR measured over period 1 July 2015 to 30 June 2017 as compared to TSR of the constituents of the ASX Industrials Index. (2) Empired TSR measured over period 1 July 2015 to 30 June 2018 as compared to TSR of the constituents of the ASX Industrials Index. Page 25 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT Should an employee leave Empired then Performance Rights are retained on a pro-rata basis for the duration of employment completed during the term of the Performance Right, except where continuing employment is a vesting condition or where employment is summarily terminated. Consequence of performance on shareholder wealth In considering the Group’s performance and benefits for shareholder wealth, the Board have regard to the following indices in respect of the current financial year and the previous three financial years: ITEM EPS (cents) Dividends (cents per share) Total Comprehensive Income ($000) Share price ($) C. Key management personnel (i) Directors 2017 2.42 - 3,122 0.54 2016 (1.47) - (1,545) 0.34 2015 4.82 - 5,233 0.77 2014 4.33 1.00 3,793 0.60 The following persons were directors of Empired Limited during the financial year: R Bevan – Non-Executive Director (Chairman from 29 November 2016) M Ashton – Non-Executive Chairman to 29 November 2016 J Bardwell – Non-Executive Director C Ryan – Non-Executive Director T Stianos – Non-Executive Director from 29 November 2016 R Baskerville – Managing Director and CEO (ii) Other key management personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group during the financial year: S Bright – Chief Operating Officer D Hinton – Chief Financial Officer and Company Secretary (iii) Remuneration of Key Management Personnel Information regarding key management personnel compensation for the year ended 30 June 2017 is provided in table in Section E of this remuneration report. Page 26 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT D. Service Agreements Russell Baskerville – Managing Director • Terms of Agreement – commenced 1 July 2005, until terminated by either party. • Salary – fixed remuneration $525,000 per annum with an STI cash bonus of 50% of base fees and LTI bonus of 75% of base fees. • Termination – three months' notice. Richard Bevan – Chairman • Terms of Agreement – appointed 29 November 2016. • Fee – fixed $90,000 per annum. Thomas Stianos – Non Executive Director • Terms of Agreement – appointed 29 November 2016. • Fee – fixed $60,000 per annum. John Bardwell – Non-Executive Director • Terms of Agreement – appointed 26 September 2011. • Fee – fixed $60,000 per annum. Chris Ryan – Non-Executive Director • Terms of Agreement – appointed 1 May 2015. • Fee – fixed $60,000 per annum. David Hinton – Chief Financial Officer & Company Secretary • Terms of Agreement – commenced 12 April 2016, until terminated by either party. • Salary – fixed remuneration $400,000 per annum with an additional STI cash bonus target of 25% of base fees and LTI bonus target of 40% of base fees. • Termination – three months' notice. Simon Bright – Chief Operating Officer • Terms of Agreement – commenced 1 July 2016, until terminated by either party. • Salary – fixed remuneration NZ$435,000 per annum with an STI cash bonus target of 30% of base fees and LTI bonus target of 40% of base fees, plus an additional once off stretch STI of 25%. • Termination – three months' notice. Page 27 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT E. Details of Remuneration Details of the nature and amount of each element of the remuneration of each Key Management Personnel (`KMP’) of Empired Limited are shown in the table below: SHORT TERM BENEFITS POST EMPLOYMENT $ Year Salary & Fees Non-cash benefits Cash STI Superannuation Share-based Payments Total % Perfomance Related % of STI achieved NON-EXECUTIVE DIRECTORS M. Ashton (to 29 November 2016) R. Bevan T. Stianos (from 29 November 2016) C. Ryan J. Bardwell 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 37,500 90,000 70,984 54,795 32,379 - 60,000 60,000 54,795 54,795 - - - - - - - - - - EXECUTIVE DIRECTORS R. Baskerville 2017 2016 525,000 15,076 525,000 - KEY MANAGEMENT D. Hinton (from 1 May 2016) S. Bright (from 1 July 2016) 2017 2016 2017 2016 365,297 15,076 81,176 - 408,073 3,716 - - - - - - - - - - - - - - - - - - - - 6,743 5,205 3,076 - - - 5,205 5,205 - - - - - - - - - - 37,500 90,000 77,727 60,000 35,455 - 60,000 60,000 60,000 60,000 - - - - - - - - - - - - 139,016 679,092 260,094 785,094 20.5% 33.1% 34,703 23,335 438,411 5.3% 7,712 - 88,888 - 30,318 48,335 490,442 9.9% - - - - - - - - - - - - - - - - - - - - Share-based payments for S. Bright include a once-off share issue to the value of $25,000 for nil consideration. Page 28 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT F. Directors’ and Key Management Personnel Equity Holdings Shares held in Empired Limited All equity transactions with directors and executives, other than those arising from the vesting of performance rights and as part of remuneration, have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length. Balance 01 Jul 16 Vesting of Performance Rights Remuneration Net Change Other Balance 30 June 17 DIRECTORS R. Baskerville 7,836,300 850,000 M. Ashton R. Bevan - - C. Ryan 17,000 T. Stianos - J. Bardwell 4,099,904 - - - - - Total 11,953,204 850,000 KEY MANAGEMENT D. Hinton S. Bright 25,000 80,074 Total 105,074 - - - - - - - - - - - 69,444 69,444 - - 79,800 - 143,200 8,686,300 - 79,800 17,000 143,200 - 4,099,904 223,000 13,026,204 27,093 - 27,093 52,093 149,518 201,611 Performance Rights held in Empired Limited Performance rights are issued for nil consideration and do not have an exercise price. The movements and balances of performance rights for the financial year are summarised in the below table. Balance 01 Jul 16 Granted Forfeited Vested Balance 30 June 17 DIRECTORS R. Baskerville 2,294,915 Total 2,294,915 KEY MANAGEMENT D. Hinton S. Bright Total - 100,000 100,000 1,193,182 1,193,182 484,848 484,848 969,696 (650,000) (650,000) - (25,000) (25,000) (850,000) (850,000) - - - 1,988,097 1,988,097 484,848 559,848 1,044,696 Page 29 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT Directors’ and Key Management Personnel Equity Holdings (continued) Performance Rights granted to the Executive Team are under the Company’s Long Term Incentive Plan. Refer to the notes to the financial statements for more detail regarding the plan. Performance Rights granted as part of remuneration: Grant date Number granted Average Value per right at grant date Value of rights granted during the year - - - - - - - - - - - - - - - - - - - - 9/12/2016 1,193,182 $0.48 $275,482 1/11/2016 1/11/2016 484,848 484,848 $0.42 $0.42 $106,026 $106,026 Grant date Number granted Average Value per right at grant date Value of rights granted during the year - - - - - - - - - - - - - - - - - - - - 16/11/2015 444,915 $0.86 $260,094 - - - - - - - - 2017 NON-EXECUTIVE DIRECTORS M. Ashton R. Bevan T. Stianos C. Ryan J. Bardwell EXECUTIVE DIRECTORS R. Baskerville KEY MANAGEMENT D. Hinton S. Bright 2016 NON-EXECUTIVE DIRECTORS M. Ashton R. Bevan T. Stianos C. Ryan J. Bardwell EXECUTIVE DIRECTORS R. Baskerville KEY MANAGEMENT D. Hinton S. Bright Page 30 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT G. Performance Hurdles for Performance Rights vested during the financial year The Company from time to time grants Performance Rights to executives under the Empired Executive Long Term Incentive Plan. In the case of grants to the Managing Director, shareholder approval is sought at the Annual General Meeting prior to Performance Rights being granted. As stated in the applicable Notice of Meeting, to convene the members meeting to approve the grant of Performance Rights, the details of the performance hurdles are not disclosed unless the performance hurdle is satisfied and then the Company will disclose the details in the subsequent Remuneration Report. During the financial year 2,125,000 Performance Rights vested and a corresponding number of ordinary shares were issued as a result of achieving the relevant performance hurdle as follows: PERFORMANCE HURDLE Applicable to Russell Baskerville - FY15 Basic EPS 4.2 cents - FY15 Basic EPS 2.0 cents - FY15 Basic EPS 2.1 cents Applicable to other Executives Total ACHIEVED NO. OF PERFORMANCE RIGHTS 4.82 cents 4.82 cents 4.82 cents 200,000 300,000 350,000 1,275,000 2,125,000 H. Employee Share Schemes During the financial year, 451,323 ordinary shares were purchased on behalf of employees under the Exempt Employee Share Plan at a cost of $215,560, and 233,554 ordinary shares were purchased on behalf of employees under the Employee Share Ownership Loan Plan at a cost of $89,771. I. Voting and comments made at the company’s 2016 Annual General Meeting The company did not receive any specific feedback at the AGM on its remuneration report. Signed in accordance with a resolution of directors. 23rd August 2017 Russell Baskerville MANAGING DIRECTOR & CEO Page 31 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT “By delivering holistic managed business services, we’re allowing our clients to focus on the high value strategic activities that will allow them to make a real difference.“ Brett Gresele | Executive General Manager, Lifecycle Services Page 32 CASE STUDYEMPIRED LTD | ANNUAL REPORT | 2017Case Study AIRWAYS Transport Airways provides air traffic control and infrastructure to keep New Zealand’s skies safe. Responsible for controlling all air movements across 30 We saw a need to introduce that to improve security million square kilometres of airspace in New Zealand and further delineate between personal and work data and over the Pacific, the company handles over one on personal devices.“ million air traffic movements a year. The most obvious benefit of the shift into the cloud is Airways had tried and trusted business systems in place. simply that Airways now has an optimised environment, But changes in the way necessary IT services can be where licensing costs are accurately matched to delivered were increasingly coming to the company’s business requirements. Another important benefit is attention and they looked to modernise. Sean Kennedy, Manager Enterprise Business Systems at Airways, says that pre-cloud, keeping track of licensing that the successful move of common, but mission- critical, business services is reinforcing the value and benefit of a ‘cloud first’ approach. agreements and costs across employees was proving “With the cloud, the reliability is up there. Availability onerous. Additionally, the Christchurch, Seddon and, from anywhere is another key factor which our people more recently, Kaikoura earthquakes “highlighted appreciate. As a company with people all around the the potential disadvantages of our Christchurch and world, being able to connect straight into the data Wellington data centres.“ centre in Australia is great,“ says Kennedy. Kennedy says the key implementation aspects were the Expenditure on IT services has improved not only establishment of secure cloud identity management on the bottom line, but in terms of visibility of costs and the implementation of Microsoft Office 365 itself. against licensing. “That means we can budget better, “The big one was moving Exchange to the cloud and know what the costs are and what we’re getting for the introducing Mobile Device Management. money,“ Kennedy says. “The more we put in the cloud, the better it will be.“ Sean Kennedy MANAGER ENTERPRISE BUSINESS SYSTEMS, AIRWAYS Page 33 CASE STUDYEMPIRED LTD | ANNUAL REPORT | 2017Case Study PEREGRINE Retail Peregrine owns and operates approximately 140 On the Run convenience outlets across South Australia. These outlets are multi-purpose, with many containing a monitoring and reporting of temperature data, along combination of petrol stations and fast food franchises, with predictive analytics to determine the risk of an asset such as Subway and Oporto. Each of these stores has a varying number of fridges and warmers to keep food at a safe and appropriate breakdown. The monitoring and reporting is designed to put real-time data in the hands of the maintenance team for immediate follow-up. temperature. On the Run staff were required to regularly The contrast between the before and after scenario is check and record the temperature of these fridges and substantial. With a state-wide rollout of the automation warmers, and complete a site manual which was then solution, the financial losses from spoilage and later sent back to the site support office. This process equipment breakdowns could largely be a thing of resulted in a delay in the data being presented and the past, as would the frustrations and inefficiencies analysed by the maintenance division; sometimes up experienced by employees undertaking the essentially to weeks or months. By the time the data reached the futile task of manual data logging. maintenance team, the asset may have already suffered a breakdown, diminishing the value of the effort involved in recording the temperature. This manual process not only consumed significant staff time and effort, but also presented the opportunity for human error to occur, causing potentially disastrous breaches to the Food Standard Code. Peregrine wanted to reduce manual activities by implementing automation tools. Based on the Azure IoT Suite, Empired’s solution facilitates the automated The new solution also allows for a systematic and simple approach to adherence to compliance regulations, which facilitates a more accurate and simple process and removes capacity for potentially catastrophic breaches of the Food Standard Code. With more time to spend on the higher value tasks on the job, this enables staff to deliver better levels of service to customers, translating to increased customer satisfaction and loyalty, sales and ultimately profits. “The South Australian convenience sector is extremely competitive, so we are making a commitment to investment in technology to increase efficiency in our site operations and ultimately, improve the customer experience.“ Brendon Hore CIO, PEREGRINE Page 34 CASE STUDYEMPIRED LTD | ANNUAL REPORT | 2017Case Study WOODS BAGOT Architecture Woods Bagot place users at the center of every design. As a global design and consulting studio with a team IP and knowledge of how organisations collaborate of over 1100 experts across 17 studios in Australia, Asia, effectively. Snap brings together O365’s collaboration Europe, the Middle East and North America, effective tools creating an integrated, targeted and relevant communication and collaboration is a key business driver experience for the user. for Woods Bagot. With continual growth and a need to operate as one connected organisation, moving to a Modern Workplace became an even more integral part of their strategy. Woods Bagot now have an advanced engagement portal for employees. They have a visually improved front page with a focus on news, essential information and feeds from their design platform and trusted sector Whilst Woods Bagot’s legacy intranet had been a pages to consolidate key sector information such as successful platform to store and share information and exemplar bids and templates. knowledge, it was accepted that it was hosted on ageing technology which needed a refresh. With the advent of Microsoft Office 365 (O365), Woods Bagot saw a golden opportunity to remove some of the maintenance costs they were incurring and look at the threshold changes that can be achieved through the introduction of improved and more modern collaboration. Woods Bagot is utilising most of the O365 suite of features, predominantly Delve and Search, OneDrive for business and Skype, all of which complete one of their main goals of making employee communication easy. The Snap portal allows the creation of virtual communities to share ideas and information and connect with one another across the globe. The portal Empired architected a solution using their Snap 365 provides a complete, end-to-end user experience with offering which gives organisations the ability to deploy a the greatest gain being end to end collaboration, templated portal to O365 rapidly using Empired’s existing having one place for everything. “Overall we were after an intranet that could underpin our stance as a leading global design firm – showcasing our work, inspiring our designers while providing trusted and useful reference data.“ Tom Leydon CIO, WOODS BAGO Page 35 CASE STUDYEMPIRED LTD | ANNUAL REPORT | 2017CORPORATE GOVERNANCE STATEMENT Corporate Governance Statement The Board is committed to achieving and demonstrating the highest standards of corporate governance. As such, Empired Limited and its Controlled Entities ('‘the Group’') have adopted the third edition of the Corporate Governance Principles and Recommendations which was released by the ASX Corporate Governance Council on 27 March 2014 and became effective for financial years beginning on or after 1 July 2014. The Group’s Corporate Governance Statement for the financial year ending 30 June 2017 was approved by the Board on 23 August 2017. The Corporate Governance Statement is available on Empired's website at: www.empired.com/Investor- Centre/Corporate-Governance/. Page 36 Page 36 Empired Ltd | Annual Report | 2016 CONSOLIDATED FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017Consolidated Statement of Profit or Loss & Other Comprehensive Income For the year ended 30 June 2017 Notes 2017 $ 2016 $ Continuing operations Revenue Cost of Sales Gross profit Other Income Administration expenses Marketing expenses Occupancy expenses Finance expenses Loss on disposal of assets Other expenses Profit/(loss) before income tax from continuing operations Income tax expense Profit/(loss) from continuing operations for the year Other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations Total comprehensive income/(loss) for the year Earnings/(loss) per share (cents per share): Basic earnings/(loss) per share Diluted earnings/(loss) per share 4 4 5 6 7 8 8 167,391,710 159,982,870 (111,866,357) (108,943,410) 55,525,353 51,039,460 663,721 390,198 (41,327,154) (42,929,170) (452,917) (5,679,393) (2,269,575) (982,904) (1,583,551) 3,893,580 (732,450) 3,161,130 (722,924) (5,518,820) (1,660,336) (2,393,742) (1,632,472) (3,427,806) 1,703,428 (1,724,378) (38,674) 179,443 3,122,456 (1,544,935) 2.42 2.42 (1.47) (1.47) Page 37 EMPIRED LTD | ANNUAL REPORT | 2017CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position As at 30 June 2017 ASSETS Current assets Cash and cash equivalents Trade and other receivables Work in progress Other current assets Total Current Assets Non-current assets Investments in associate Plant and equipment Intangible assets Other receivables Deferred tax asset Total Non-Current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Borrowings Provisions Deferred consideration Total Current Liabilities Non-current liabilities Borrowings Provisions Deferred tax liability Deferred consideration Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained profits TOTAL EQUITY Page 38 Notes 2017 $ 2016 $ 9 10 11 12 13 14 15 10 7 17 18 19 20 18 19 7 20 21 2,004,385 23,027,144 9,452,907 2,352,211 2,970,688 22,212,724 10,399,024 2,614,113 36,836,647 38,196,549 - 20,965,878 58,052,451 33,424 3,191,630 192,085 21,139,187 55,104,355 68,161 3,246,657 82,243,383 79,750,445 119,080,030 117,946,994 22,138,984 6,720,722 5,854,399 - 26,153,318 13,451,719 6,027,245 2,200,993 34,714,105 47,833,275 9,057,872 4,028,337 - - 13,086,209 47,800,314 71,279,716 54,204,746 2,071,835 15,003,135 6,120,877 4,834,336 694 6,753,111 17,709,018 65,542,293 52,404,701 38,783,679 1,779,017 11,842,005 71,279,716 52,404,701 CONSOLIDATED FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017Consolidated Statement of Cash Flows For the year ended 30 June 2017 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Other receipts Income tax paid Dividends received from associate Net cash flows from operating activities Cash flows from investing activities Purchase of intangibles Purchase of plant and equipment Deferred payment in relation to business acquisition of prior years Proceeds from sale of associate Net cash flows used in investing activities Cash flows from financing activities Finance costs (net) Proceeds from issue of shares Payment of capital raising costs Repayment of bank borrowings Options exercised Repayment of finance lease liabilities Proceeds from finance leases Proceeds from borrowings Net cash flows (used in)/from financing activities Net (decrease)/increase in cash and cash equivalents Effect of exchange rate fluctuations on cash held Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 9 (i) Notes 2017 $ 2016 $ 13 9 (ii) 185,368,794 165,496,214 (174,888,578) (152,262,610) - (713,221) 75,943 9,842,938 (7,269,413) (3,681,756) (8,954,103) 231,024 88,621 (336,657) 214,887 13,200,455 (4,162,562) (10,446,871) (1,175,375) - (19,674,248) (15,784,808) (2,048,298) 16,000,000 (862,761) (3,344,633) - (7,910,326) 2,194,991 1,900,605 5,929,578 (3,901,732) 86,131 2,970,688 (844,913) (1,624,424) - (11,927) (4,144,627) 200,000 (2,753,809) 3,243,845 932,055 (4,158,887) (6,743,240) 109,506 9,604,422 2,970,688 Page 39 EMPIRED LTD | ANNUAL REPORT | 2017CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Changes in Equity For the year ended 30 June 2017 Issued Capital Retained Profits Foreign Currency Translation Reserve Employee Equity Benefits Reserve Total Equity $ $ $ $ $ Balance at 30 June 2015 37,779,130 13,566,383 (40,632) 1,410,259 52,715,140 Loss for the year Other comprehensive income Share-based payments Options exercised Issue of shares Capital raising costs - - - 200,000 816,475 (11,926) (1,724,378) - - - - - - 179,443 - - - - - - 229,947 - - - (1,724,378) 179,443 229,947 200,000 816,475 (11,926) Balance at 30 June 2016 38,783,679 11,842,005 138,811 1,640,206 52,404,701 Profit for the year Other comprehensive income/(loss) Share-based payments Issue of shares Capital raising costs - - - 16,025,000 (603,933) 3,161,130 - - - - - (38,674) - - - - - 331,492 - - 3,161,130 (38,674) 331,492 16,025,000 (603,933) Balance at 30 June 2017 54,204,746 15,003,135 100,137 1,971,698 71,279,716 Page 40 CONSOLIDATED FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017“We’re passionate about helping clients achieve their strategic objectives and encouraging our people become the absolute best they can be.“ Cheryl Adams | Practice Manager, Dynamics Solutions Page 41 EMPIRED LTD | ANNUAL REPORT | 2017CHAIRMAN & CEO REVIEWNotes to the Financial Statements For the year ended 30 June 2017 1. CORPORATE INFORMATION The financial report of Empired Ltd for the year ended 30 June 2017 was authorised for issue in accordance with a resolution of the directors on 23 August 2017. Empired Limited, whose shares are publicly traded on the Australian Securities Exchange, is a company incorporated in Australia. The financial report includes the consolidated financial statements and notes of Empired Limited and controlled entities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General information and statement of compliance The consolidated general purpose financial statements of the Group have been prepared in (b) New and revised standards that are effective for these financial statements A number of new and revised standards are effective for the current reporting period, however there was no need to change accounting polices or make retrospective adjustments as a result of adopting these standards. Information on these new standards is presented below. AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation The amendments to AASB 116 prohibit the use of a revenue-based depreciation method for property, plant and equipment. Additionally, the amendments provide guidance in the application of the diminishing balance method for property, plant and equipment. accordance with the requirements of the Corporations The amendments to AASB 138 present a rebuttable Act 2001, Australian Accounting Standards and other presumption that a revenue-based amortisation authoritative pronouncements of the Australian method for intangible assets is inappropriate. This Accounting Standards Board. Compliance with rebuttable presumption can be overcome (i.e. a Australian Accounting Standards results in compliance revenue-based amortisation method might be with the International Financial Reporting Standards appropriate) only in two (2) limited circumstances: (‘IFRS’) as issued by the International Accounting Standards Board (IASB). Empired Limited is a for-profit entity for the purpose of preparing the financial statements. The financial report has been prepared on an accruals basis, and is based on historical costs modified where applicable, by measurement at fair value of • the intangible asset is expressed as a measure of revenue, for example when the predominant limiting factor inherent in an intangible asset is the achievement of a revenue threshold (for instance, the right to operate a toll road could be based on a fixed total amount of revenue to be generated from cumulative tolls charged); or selected non-current assets, financial assets and • when it can be demonstrated that revenue and financial liabilities. The financial report is presented in the consumption of the economic benefits of the Australian dollars. intangible asset are highly correlated. AASB 2014-4 is applicable to annual reporting periods beginning on or after 1 January 2016. Page 42 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017AASB 2015-2 Amendments to Australian AASB 2016-2 is applicable to annual reporting Accounting Standards – Disclosure Initiative: periods beginning on or after 1 January 2017. Amendments to AASB 101 AASB 2016-1 Amendments to Australian The Standard makes amendments to AASB 101 Accounting Standards – Recognition of Deferred Tax Presentation of Financial Statements arising from the Assets for Unrealised Losses IASB’s Disclosure Initiative project. The amendments: • clarify the materiality requirements in AASB 101, including an emphasis on the potentially detrimental effect of obscuring useful information with immaterial information • clarify that AASB 101’s specified line items in the statement(s) of profit or loss and other comprehensive income and the statement of financial position can be disaggregated • add requirements for how an entity should present subtotals in the statement(s) of profit and loss and other comprehensive income and the statement of financial position • clarify that entities have flexibility as to the AASB 2016-1 amends AASB 112 Income Taxes to clarify how to account for deferred tax assets related to debt instruments measured at fair value, particularly where changes in the market interest rate decrease the fair value of a debt instrument below cost. AASB 2016-1 is applicable to annual reporting periods beginning on or after 1 January 2017. (c) Impact of standards issued but not yet applied New and revised accounting standards and amendments that are currently issued for future reporting periods that are relevant to the Company include: AASB 9 Financial Instruments (December 2014) order in which they present the notes, but AASB 9 introduces new requirements for the also emphasise that understandability and classification and measurement of financial assets and comparability should be considered by an entity liabilities and includes a forward-looking ‘expected when deciding that order loss’ impairment model and a substantially-changed • remove potentially unhelpful guidance in AASB 101 for identifying a significant accounting policy. AASB 2015-2 is applicable to annual reporting periods beginning on or after 1 January 2016. AASB 2016-2 Amendments to Australian approach to hedge accounting. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes are: Accounting Standards – Disclosure Initiative: • Financial assets that are debt instruments Amendments to AASB 107 AASB 2016-2 amends AASB 107 Statement of Cash Flows to require entities preparing financial statements in accordance with Tier 1 reporting requirements to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. will be classified based on: (i) the objective of the entity’s business model for managing the financial assets; and (ii) the characteristics of the contractual cash flows. • Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income (instead of in profit or loss). Dividends in respect of these investments that are a return on Page 43 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017investment can be recognised in profit or loss and Standard is not expected to have a material impact there is no impairment or recycling on disposal of on the transactions and balances recognised in the the instrument. financial statements when it is first adopted for the • Introduces a ‘fair value through other year ending 30 June 2019. comprehensive income’ measurement category for particular simple debt instruments. • Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly AASB 15 Revenue from Contracts with Customers AASB 15 replaces AASB 118: Revenue, AASB 111 Construction Contracts and some revenue-related Interpretations. In summary, AASB 15: reduces a measurement or recognition • establishes a new revenue recognition model; inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. • Where the fair value option is used for financial liabilities the change in fair value is to be accounted for as follows: » the change attributable to changes in credit risk are presented in Other Comprehensive Income (OCI) » the remaining change is presented in profit or loss. • changes the basis for deciding whether revenue is to be recognised over time at a point in time; • provides a new and more detailed guidance on specific topics (eg multiple element arrangements, variable pricing, rights of return and warranties); and • expands disclosures about revenue. The estimated potential impact of the impending change, based upon current Group business operations, would be to defer the recognition of revenue and costs on isolated revenue streams of the If this approach creates or enlarges an accounting Group and recognise that revenue as performance mismatch in the profit or loss, the effect of the obligations are satisfied taking into consideration the changes in credit risk are also presented in profit or core principles of AASB 15. loss. Otherwise, the following requirements have generally been carried forward unchanged from AASB 139 into AASB 9: » classification and measurement of financial liabilities; and The estimated potential financial impact on revenue and after tax profit for the year ended 30 June 2017, based upon current Group business operations, is a reduction of $1,347,000 and $302,000 respectively. The effective date is for annual reporting periods » derecognition requirements for financial assets beginning on or after 1 July 2018. and liabilities. AASB 16 Leases AASB 9 requirements regarding hedge accounting represent a substantial overhaul of hedge accounting that enable entities to better reflect their risk AASB 16 replaces AASB 117 Leases and some lease- related Interpretations. In summary, AASB 16: management activities in the financial statements. • requires all leases to be accounted for ‘on-balance The effective date is for annual reporting periods beginning on or after 1 January 2018. The Company is yet to undertake a detailed assessment of the impact of AASB 9. However, based on the Company’s preliminary assessment, the sheet’ by lessees, other than short-term and low value asset leases; • provides new guidance on the application of the definition of lease and on sale and lease back accounting; Page 44 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017• largely retains the existing lessor accounting Profit or loss and other comprehensive income of requirements in AASB 117; and subsidiaries acquired or disposed of during the year • requires new and different disclosures about leases. The estimated impact of the impending change as at 30 June 2017 can be summarised as follows: introduction of a right-of-use asset of $21.7m, an increase in other financial liabilities of $24.6m, a reduction in provisions of $4.1m and a derecognition of deferred tax assets of $1.2m. The financial impact on overall profit and cash flow is not considered material. This preliminary assessment is indicative and has not taken fully into consideration the transitional arrangements or practical expedients available under AASB 16. The assessment is also based upon current information that may by its nature change between this reporting date and the application date of AASB 16. The effective date is for annual reporting periods beginning on or after 1 July 2019. (d) Basis of consolidation The Group financial statements consolidate those of the Parent Company and all of its subsidiaries as of 30 June 2016. The Parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All subsidiaries have a reporting date of 30 June. All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra- group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. Business Combinations The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition- date fair values. (f) Property, plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight line basis over the estimated useful life of the asset as follows: Leased Equipment 3 yrs Leasehold Improvements 5–20 yrs Furniture & Fittings 1–15 yrs Computer Hardware 1–8 yrs Page 45 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017Impairment indicate that the carrying value may be impaired. The carrying values of plant and equipment are Goodwill is not amortised. reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued used of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of profit or loss in the period the item is derecognised. (g) Borrowing costs Borrowing costs are recognised as an expense when incurred except where incurred in relation As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. (i) Intangible Assets Other Than Goodwill Amortisation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Software Other 1–7 yrs 3–7 yrs Acquired both separately and from a business combination to qualifying assets where borrowing costs are Intangible assets acquired separately are capitalised capitalised. (h) Goodwill Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances at cost. Following initial recognition, the cost model is applied to the class of intangible assets. Where amortisation is charged on assets with finite lives, this expense is taken to the statement of profit or loss through the ‘amortisation expenses’ line item. Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against profits in the period in which the expenditure is incurred. Intangible assets are tested for impairment where an indicator of impairment exists and in the case Page 46 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017of indefinite lived intangibles annually, either or groups of assets, in which case, the recoverable individually or at the cash generating unit level. amount is determined for the cash-generating unit to Useful lives are also examined on an annual basis which the asset belongs. and adjustments, where applicable, are made on a prospective basis. In assessing value in use, the estimated future cash flows are discounted to their present value using Research and development costs a pre tax discount rate that reflects current market Research costs are expensed as incurred. assessments of the time value of money and the risks Development expenditure incurred on an individual project is carried forward when its future recoverability can be reasonably assured. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Software Costs incurred in developing software are capitalised where future financial benefits can be reasonably be assured. These costs include employee costs incurred on development along with appropriate portion of relevant overheads. Amortisation is calculated on a straight-line basis depending on the useful life of the asset. specific to the asset. (k) Operating segments The Group has more than one reportable operating segment identified by and used by the Chief Executive Officer (chief operating decision maker) in assessing the performance and determining the allocation of resources. The Group however has aggregated the segments in accordance with the aggregation criteria of AASB 8. (l) Financial instruments Recognition, initial measurement and derecognition Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument, and are Gains or losses arising from derecognition of an measured initially at fair value adjusted by transactions intangible asset are measured as the difference costs, except for those carried at fair value through between the net disposal proceeds and the profit or loss, which are measured initially at fair value. carrying amount of the asset and are recognised Subsequent measurement of financial assets and on the statement of profit or loss when the asset is financial liabilities are described below. derecognised. (j) Impairment of non-financial assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Classification and subsequent measurement of recoverable amount the asset is considered impaired financial assets and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets For the purpose of subsequent measurement, financial assets other than those designated and effective as hedging instruments are classified into the following categories upon initial recognition: • • loans and receivables financial assets at Fair Value Through Profit or Loss (‘FVTPL’) Page 47 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017 Held-To-Maturity (‘HTM’) investments; or or determinable payments, and it is the Group’s • • Available-For-Sale (‘AFS’) financial assets All financial assets except for those at FVTPL are subject to review for impairment at least at each reporting date to identify whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets, which are described below. All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within other expenses. (i) Financial assets at fair value through profit or loss Financial assets at FVTPL include financial assets that are either classified as held for trading or that meet certain conditions and are designated at FVTPL upon initial recognition. All derivative financial instruments fall into this category, except for those designated and effective as hedging instruments, for which the hedge accounting requirements apply. Assets in this category are measured at fair value with gains or losses recognised in profit or loss. The fair values of financial assets in this category are determined by reference to active market transactions or using a valuation technique where no active market exists. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, these are measured at amortised cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Group’s trade and most other receivables fall into this category of financial instruments. (iii) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets that have fixed maturities and fixed Page 48 intention to hold these investments to maturity. They are subsequently measured at amortised cost. Held-to-maturity investments are included in non- current assets, except for those which are expected to mature within 12 months after the end of the reporting period. (All other investments are classified as current assets). If during the period the Group sold or reclassified more than an insignificant amount of the held-to-maturity investments before maturity, the entire held-to-maturity investments category would be tainted and reclassified as available-for-sale. (iv) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either not suitable to be classified into other categories of financial assets due to their nature, or they are designated as such by management. They comprise investments in the equity of other entities where there is neither a fixed maturity nor fixed or determinable payments. Available-for-sale financial assets are included in non-current assets, except those which are expected to mature within 12 months after the end of the reporting period. (All other financial assets are classified as current assets). Classification and subsequent measurement of financial liabilities The Group’s financial liabilities include borrowings and trade and other payables. Financial liabilities are measured subsequently at amortised cost using the effective interest method, except for financial liabilities held for trading or designated at FVTPL, that are carried subsequently at fair value with gains or losses recognised in profit or loss. Impairment At the end of each reporting period, the Group assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available- for-sale financial instruments, a significant or prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in the statement of profit or loss and other comprehensive income. NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017(m) Trade and other receivables Trade receivables, which generally have 30-45 day terms, are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An impairment provision is recognised when there is objective evidence that the Group will not be able to collect the receivable. Bad debts are written off when identified. (n) Cash and cash equivalents Cash and short-term deposits in the statement of financial position comprise cash at bank, in hand and short-term deposits with an original maturity of three months or less. For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (o) Interest-bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in the statement of profit or loss and other comprehensive income when the liabilities are derecognised and as well as through the amortisation process. (p) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. (q) Employee benefits (i) Short-term employee benefits Liabilities for wages and salaries, including non- monetary benefits, and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in respect of employees' services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non- accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. (ii) Other long-term employee benefits The Group’s liabilities for annual leave and long service leave are included in other long term benefits as they are not expected to be settled wholly within twelve (12) months after the end of the period in which the employees render the related service. They are measured at the present value of the expected future payments to be made to employees. The expected future payments incorporate anticipated future wage and salary levels, experience of employee departures and periods of service, and are discounted at rates determined by reference to market yields at the end of the reporting period on high quality corporate bonds published by Milliman Australia/ G100 that have maturity dates that approximate the timing of the estimated future cash outflows. Any re- measurements arising from experience adjustments and changes in assumptions are recognised in profit or loss in the periods in which the changes occur. The Group presents employee benefit obligations as Page 49 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017current liabilities in the statement of financial position any expense not yet recognised for the award is if the Group does not have an unconditional right to recognised immediately. However, if a new award is defer settlement for at least twelve (12) months after substituted for the cancelled award, and designated the reporting period, irrespective of when the actual as a replacement award on the date that it is granted, settlement is expected to take place. the cancelled and new award are treated as if they (r) Share-based payment transactions The Group provides remuneration to certain were a modification of the original award. (s) Employee share schemes employees, including directors, of the Group in the In New Zealand, an Employee Share Ownership Plan form of share-based payment transactions, whereby operates. The scheme offers shares at a discount to employees render services in exchange for shares or the market price of Empired shares and provides rights over shares (‘equity-settled transactions’). the balance of the purchase as an interest free full The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value recourse loan. The shares are being held in Trust for three years by which time the loan will be repaid and the shares will vest to the employees. is measured using a variation of the binomial option In Australia, the Employee Share Plan is available pricing model that takes into account the terms and which involves a salary sacrifice on a monthly basis conditions on which the instruments were granted and a contribution from Empired to purchase shares and the current likelihood of achieving the specified in Empired up to a maximum of $1,000 per employee target. Further, the cost of equity-settled transactions per annum. The $1,000 maximum is based on a tax is recognised, together with a corresponding increase exemption allowable under the Australian taxation in the Employee Equity Benefits Reserve, over the legislation. Shares purchased are subject to a three year period in which the performance conditions are trading restriction whilst an employee of Empired. fulfilled, ending on the date on which the relevant employees become fully entitled to the award (t) Leases (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the directors of the Group, will ultimately vest. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. This opinion is formed based on the best available Lease payments are apportioned between the finance information at reporting date. No adjustment is made charges and reduction of the lease liability so as to for the likelihood of market performance conditions achieve a constant rate of interest on the remaining being met as the effect of these conditions is included balance of the liability. Finance charges are charged in the determination of fair value at grant date. directly against income. Where the terms of an equity-settled award are Capitalised leased assets are depreciated over the modified, as a minimum an expense is recognised as shorter of the estimated useful life of the asset or the if the terms had not been modified. In addition, an lease term. expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added Page 50 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017to the carrying amount of the leased asset and are measured at historical cost (translated using the recognised over the lease term on the same bases exchange rates at the date of the transaction), except as the lease income. Operating lease payments are recognised as an expense in the consolidated statement of profit or for non-monetary items measured at fair value which are translated using the exchange rates at the date when fair value was determined. loss and other comprehensive income on a straight- In the Group’s financial statements, all assets, liabilities line basis over the lease term. (u) Revenue and transactions of Group entities with a functional currency other than the $AUD are translated into $AUD upon consolidation. The functional currency Revenue is recognised to the extent that it is probable of the entities in the Group has remained unchanged that the economic benefits will flow to the Group and during the reporting period. the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Rendering of services On consolidation, assets and liabilities have been translated into $AUD at the closing rate at the reporting date. Goodwill and fair value adjustments arising on the acquisition of a foreign entity have Revenue from the provision of services is recognised been treated as assets and liabilities of the foreign when the service has been provided. Stage entity and translated into $AUD at the closing rate. completion or percentage completion method is used Income and expenses have been translated into to determine earned revenue for services that have $AUD at the average rate over the reporting period. fixed revenue. Maintenance, hosting and support fees Revenue from maintenance, hosting and support is recognised and bought to account over the time it is earned. Unexpired revenue is recorded as unearned income. Interest received Exchange differences are charged or credited to other comprehensive income and recognised in the currency translation reserve in equity. On disposal of a foreign operation the cumulative translation differences recognised in equity are reclassified to profit or loss and recognised as part of the gain or loss on disposal. Revenue is recognised as the interest accrues (using (w) Income tax the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset. (v) Foreign currency transactions The consolidated financial statements are presented in Australian Dollars (‘$AUD’), which is also the functional currency of the Parent Company. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for the financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: • except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and settlement of such transactions and from the • in respect of taxable temporary differences re- measurement of monetary items at year end associated with investments in subsidiaries, exchange rates are recognised in profit or loss. Non- associates and interests in joint ventures, except monetary items are not retranslated at year-end and where the timing of the reversal of the temporary Page 51 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017differences can be controlled and it is probable (x) Other taxes that the temporary differences will not reverse in Revenues, expenses and assets are recognised net of the foreseeable future. the amount of GST except: • Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: • except where the deferred income tax asset • where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • receivables and payables are stated with the amount of GST included. relating to the deductible temporary differences The net amount of GST recoverable from, or payable arises from the initial recognition of an asset or to, the taxation authority is included as part of liability in a transaction that is not a business receivables or payables in the statement of financial combination and, at the time of the transaction, position. Cash flows are included in the statement of affects neither the accounting profit nor taxable cash flows on a gross basis and the GST component profit or loss; and • in respect of deductible temporary differences associated with investments in subsidiaries, of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating associates and interests in joint ventures, deferred cash flows. tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. differences can be utilised. (y) Investments in associates The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient Associates are those entities over which the Group is able to exert significant influence but which are not subsidiaries. Investments in associates are accounted taxable profit will be available to allow all or part of for using the equity method. the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply Any goodwill or fair value adjustment attributable to the Group’s share in the associate is not recognised separately and is included in the amount recognised to the year when the asset is realised or the liability as investment. is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Income taxes relating to items recognised directly in The carrying amount of the investment in associates is increased or decreased to recognise the Group’s share of the profit or loss and other comprehensive income of the associate, adjusted where necessary to ensure equity are recognised in equity and not in profit or loss. consistency with the accounting policies of the Group. Unrealised gains and losses on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in those entities. Where unrealised losses are eliminated, the underlying asset is also tested for impairment. Page 52 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017(z) Significant accounting judgements, estimates and assumptions Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed (iii) Long service leave provision The liability for long service leave is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at the reporting date. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. The Group uses the high quality corporate bond rate as the discount rate when measuring its Australian dollar dominated long term employee benefits. (iv) Estimation of useful lives of assets below. The Group tests annually whether goodwill The Group determines the estimated useful lives has suffered any impairment, in accordance with the and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. accounting policies. (i) Impairment of goodwill and intangibles with indefinite useful lives The Group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash-generating unit to which the goodwill and intangibles with indefinite useful lives are allocated. The assumptions used in this estimation of recoverable amount and carrying amount of goodwill and intangibles with indefinite useful lives are discussed in note 15. (ii) Share based payments The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is measured by using a variation of the binomial option pricing model that takes into account the terms and conditions on which the instruments were granted and the current likelihood of achieving the specified target. The accounting estimates and assumptions relating to equity-settled share- based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Page 53 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 20173. SEGMENT REPORTING Management identifies its operating segments based on the Group's geographical presence, which represent the main products and services provided by the Group. The Group's two operating segments are: • Australia • New Zealand The revenues and profit generated by each of the Group’s operating segments and segment assets are summarised as follows: 2017 Revenue From external customers From other segment Total Segment profit (EBITDA) Segment assets 2016 Revenue From external customers From other segment Total Segment profit (EBITDA) Segment assets Australia New Zealand Elimination $ $ Total $ 104,020,398 63,371,312 - 167,391,710 379,730 1,499,691 (1,879,421) - 104,400,128 64,871,003 (1,879,421) 167,391,710 10,625,304 81,592,798 4,744,459 37,487,232 Australia New Zealand Elimination $ $ 100,319,331 59,663,539 - - - 15,369,763 119,080,030 Total $ 159,982,870 634,588 2,437,142 (3,071,730) - 100,953,919 62,100,681 (3,071,730) 159,982,870 2,953,986 4,515,340 81,154,966 36,792,028 - - 7,469,326 117,946,994 The Group’s segment operating EBITDA reconciles to the Group’s profit before tax as presented in the financial statements as follows: 2017 $ 2016 $ 15,369,763 7,469,326 (2,251,636) (1,624,425) (8,241,643) (6,878,965) (982,904) (2,393,742) 3,893,580 (3,427,806) Total reporting segment operating EBITDA Less: Finance costs (net) Depreciation and amortisation expenses Loss on disposal of assets Group profit/(loss) before tax Page 54 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 20174. REVENUE Sales Revenue Services revenue Product and license revenue Total sales revenue Other Income Gain from derecognition of consideration payable Payroll tax rebate Share of associate profit (see note 13) Profit on sale of associate Interest Vendor warranty claim Other Total other income 2017 $ 2016 $ 152,586,167 141,791,257 14,805,543 18,191,613 167,391,710 159,982,870 - - 92,259 21,476 17,939 532,047 - 663,721 125,611 136,000 66,304 - 35,912 - 26,371 390,198 Total revenue and other income 168,055,431 160,373,068 5. ADMINISTRATION EXPENSES Employee benefits (not included in cost of sales) Depreciation expenses Amortisation expenses Doubtful debts Other administration expenses Total 6. FINANCE EXPENSES Interest expenses – bank borrowings Interest expenses – finance leases and hire purchase Interest expenses – other Total 2017 2016 25,202,104 26,847,135 4,360,445 3,881,198 - 7,883,407 3,692,359 3,186,607 710,460 8,492,609 41,327,154 42,929,170 2017 2016 1,526,645 1,192,291 208,891 534,039 239,201 228,844 2,269,575 1,660,336 Page 55 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 20177. INCOME TAX (a) Income tax expense The major components of income tax expense are: Current income tax payable Current income tax payable – prior year adjustment Deferred income tax relating to origination and reversal of temporary differences Under provision in respect of prior years Income tax expense reported in profit or loss (b) Amounts charged (credited) directly to equity Capital raising costs Total (c) Reconciliation of tax expense to accounting profit Accounting profit / (loss) before income tax At Australia's statutory income tax rate of 30% Adjust for tax effect of: Tax rate differential Non-deductible expenses Other non-deductible expenses Change in fair value consideration Foreign exchange differences R&D offset income tax variance Under provision in respect of prior years Other income for income tax purposes Equity accounted earnings Income tax expense Page 56 2017 $ 541,217 (114,885) 469,981 (163,863) 2016 $ 1,385,997 (50,352) (2,893,274) (145,799) 732,450 (1,703,428) 2017 $ 258,828 258,828 2017 $ 3,893,580 1,178,240 (88,456) 133,344 102,475 - (6,716) (196,801) (278,747) (89,338) (21,551) 732,450 2016 $ - - 2016 $ (3,427,806) (1,021,205) (230,853) 248,595 53,444 (37,683) (28,026) (522,222) (196,151) 30,673 - (1,703,428) NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017(d) Recognised deferred tax assets and liabilities Deferred income tax balances relate to the following: Opening Balance Recognised in Profit and Loss Recognised in Other Comprehensive Income Exchange Differences Closing Balance 30 JUNE 2017 $ $ $ $ $ Deferred tax liabilities Work in Progress Fixed Assets Other 2,771,901 3,350,180 17,477 (165,108) 16,286 33,393 Gross deferred tax liabilities 6,139,558 (115,429) Deferred tax assets Provisions Equity raising costs Borrowing costs R&D Tax Offsets carried forward Trade and other receivables Other Tax losses Gross deferred tax assets Recognised in statement of financial position as: Deferred tax assets (net) Deferred tax liabilities (net) (258,070) (129,384) (1,069) 891,392 (22,262) (13,840) (888,315) (421,548) (306,119) 3,527,140 201,917 8,466 3,949,233 41,596 16,615 1,640,554 9,385,521 3,245,963 3,246,657 (694) 3,245,963 - - - - - 258,828 - - - - - 258,828 258,828 - 2,886 (1,400) 1,486 40 - - - (489) (173) (4,934) (5,556) (7,042) 2,606,793 3,369,352 49,470 6,025,615 3,269,110 331,361 7,397 4,840,625 18,845 2,602 747,305 9,217,245 3,191,630 3,191,630 - 3,191,630 Page 57 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017(d) Recognised deferred tax assets and liabilities (continued) Opening Balance Recognised in Profit and Loss Recognised in Other Comprehensive Income Exchange Differences Closing Balance 30 JUNE 2016 $ $ $ $ $ Deferred tax liabilities Work in Progress Fixed Assets Other 1,871,734 2,617,463 - 901,382 739,668 17,477 Gross deferred tax liabilities 4,489,197 1,658,527 Deferred tax assets Provisions Equity raising costs Borrowing costs R&D Tax Offsets carried forward Trade and other receivables Other Tax losses 2,028,104 1,489,250 301,182 13,196 (99,265) (4,730) 1,860,346 2,088,887 55,651 - 421,328 (15,752) 16,615 1,222,595 4,697,600 Gross deferred tax assets 4,679,807 (e) Tax consolidation - - - - - - - - - - - - (1,215) (6,951) - (8,166) 2,771,901 3,350,180 17,477 6,139,558 9,786 3,527,140 - - - 1,697 - (3,369) 8,114 201,917 8,466 3,949,233 41,596 16,615 1,640,554 9,385,521 Effective 1 July 2002, for the purposes of income taxation, Empired Limited and its 100% Australian owned subsidiaries formed a tax consolidated group. The head entity of the consolidated group is Empired Limited. The head entity is responsible for tax liabilities of the group. Intra group transactions are ignored for tax purposes and there is a single return lodged on behalf of the group. Empired Limited formally notified the Australian Taxation Office of its adoption of the tax consolidation regime upon lodgement of its 30 June 2003 consolidated tax return. Page 58 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 20178. EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent company by the weighted average number of ordinary shares on issue during the year. Diluted earnings per share amounts are calculated by dividing net profit attributable to ordinary equity holders of the parent company by the weighted average number of ordinary shares on issue during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. The following represents the income and share data used in the basic and diluted earnings per share computations: Net profit/(loss) attributable to ordinary equity holders of the parent 3,161,130 (1,724,378) 2017 $ 2016 $ Weighted average number of ordinary shares for basic earnings per share 130,498 117,655 Thousands Thousands Effect of Dilution: Share options Weighted average number of ordinary shares adjusted for the effect of dilution - 130,498 114 117,769 Page 59 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 20179. CASH & CASH EQUIVALENTS (a) Reconciliation of Cash For the purposes of the statement of cash flows, cash includes cash at bank and in hand net of bank overdraft. Cash at the end of the period as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash at bank and in hand Bank overdraft (note 18) 2017 $ 2016 $ 2,004,385 2,970,688 (2,849,298) - (844,913) 2,970,688 (b) Reconciliation of net cash flows from operating activities to profit after income tax Profit / (loss) after income tax Gain from derecognition of contingent consideration payable Finance expenses (net) Depreciation and amortisation Loss on disposal of assets Share payment expense Foreign currency unrealised (gain)/loss Equity accounted earnings from associate Dividend received from associate Profit on sale of associate Changes in assets and liabilities net of effects of purchases and disposals of controlled entities: (Increase) / decrease in receivables Decrease / (increase) in work in progress Increase in prepayments and other receivables (Decrease) / increase in trade creditors and other payables (Decrease) / increase in lease incentives (Decrease) / increase in unearned revenue Decrease / (increase) in deferred tax asset (Decrease) / increase in provision for employee entitlements Net cash from operating activities 2017 $ 2016 $ 3,161,130 (1,724,378) - 2,251,637 8,241,643 982,904 356,492 (40,711) (92,259) 75,943 (21,476) (814,420) 946,117 (217,747) (3,186,459) (808,505) (875,345) (125,611) 1,624,424 6,878,965 2,393,742 229,947 67,152 (66,304) 214,887 - 4,723,413 (3,637,860) (671,004) 324,058 4,043,362 1,247,963 54,333 (3,055,353) (170,339) 733,052 9,842,938 13,200,455 Page 60 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017(c) Non cash transactions During the period the Group acquired $1,025,045 of plant and equipment and intangibles under finance leases not involving cash. 10. TRADE & OTHER RECEIVABLES Current Gross trade receivables Provision for doubtful debts Other receivables Non-current Other receivables 2017 $ 2016 $ 22,911,739 22,238,728 (50,213) 165,618 (187,947) 161,943 23,027,144 22,212,724 33,424 68,161 Trade receivables are non-interest bearing and are generally on 30-day terms. (For further details on credit risk, refer to note 23). A provision for impairment is recognised when there is objective evidence that an amount is considered not collectible. 11. WORK IN PROGRESS Work in progress 12. OTHER CURRENT ASSETS Prepayments 2017 $ 2016 $ 9,452,907 10,399,024 2017 $ 2016 $ 2,352,211 2,614,113 13. INVESTMENT IN ASSOCIATE During the financial year the Group disposed of its 50% holding of X4 Consulting Limited. Share of profit Dividend received Carrying amount of the Group's interests in associate 2017 $ 92,259 75,943 - 2016 $ 66,304 214,887 192,085 Page 61 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017 14. PROPERTY, PLANT & EQUIPMENT Leasehold improvements At cost Accumulated depreciation Total lease improvements Computer hardware At cost Accumulated depreciation Total computer hardware Furniture, Equipment & Fittings At cost Accumulated depreciation Total Furniture, Equipment & Fittings Leased equipment At cost Accumulated depreciation Total leased equipment Total property, plant & equipment 2017 $ 2016 $ 6,062,054 6,350,867 (1,518,972) (1,565,323) 4,543,082 4,785,544 20,505,974 17,315,644 (5,877,590) (3,795,739) 14,628,384 13,519,905 2,627,798 (840,105) 1,926,526 (898,363) 1,787,693 1,028,163 39,506 (32,787) 6,719 3,022,624 (1,217,049) 1,805,575 20,965,878 21,139,187 Page 62 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201714. PROPERTY, PLANT & EQUIPMENT (CONTINUED) 2017 Gross carrying amount Balance 1 July 2016 Additions Transfers Disposals Exchange differences Balance 30 June 2017 Depreciation & impairment Leased equipment Leasehold improvements Computer hardware Furniture, Equipment & Fittings $ $ $ $ Total $ 3,022,624 6,350,867 17,315,643 1,926,525 28,615,659 - 578,994 (1,095,169) - (1,868,756) (861,395) (19,193) 39,506 (6,412) 2,990,574 1,095,169 (887,864) (7,548) 1,036,688 4,606,256 - - (325,118) (3,943,133) (76) (33,229) 6,062,054 20,505,974 2,638,019 29,245,553 Balance 1 July 2016 (1,217,049) (1,565,323) (3,795,738) (898,362) (7,476,472) Disposals Transfers Depreciation Exchange differences Balance 30 June 2017 1,768,190 (542,127) 543,694 - 999,412 542,127 233,537 3,544,833 - - (49,441) (501,286) (3,629,230) (180,488) (4,360,445) 7,640 3,943 5,839 (5,013) 12,409 (32,787) (1,518,972) (5,877,590) (850,326) (8,279,675) Carrying amount 30 June 2017 6,719 4,543,082 14,628,384 1,787,693 20,965,878 2016 Gross carrying amount Balance 1 July 2015 Additions Disposals Exchange differences Balance 30 June 2016 Depreciation & impairment Leased equipment Leasehold improvements Computer hardware Furniture, Equipment & Fittings $ 1,940,450 1,495,587 (438,746) 25,333 $ $ $ 3,711,524 17,013,890 1,947,783 24,613,647 3,593,547 4,951,306 423,289 10,463,729 (967,935) (4,657,904) (463,076) (6,527,661) 13,731 8,351 18,529 65,944 3,022,624 6,350,867 17,315,643 1,926,525 28,615,659 Total $ Balance 1 July 2015 (958,905) (1,392,556) (5,064,252) (995,994) (8,411,707) Disposals Depreciation Exchange differences Balance 30 June 2016 437,800 571,855 3,417,930 279,205 4,706,790 (683,745) (737,340) (2,098,590) (172,684) (3,692,359) (12,199) (7,282) (50,826) (8,889) (79,196) (1,217,049) (1,565,323) (3,795,738) (898,362) (7,476,472) Carrying amount 30 June 2016 1,805,575 4,785,544 13,519,905 1,028,163 21,139,187 Page 63 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201715. INTANGIBLE ASSETS Goodwill Cost Net carrying value Software Cost Amortisation Net carrying value Other Cost Amortisation Net carrying value Total intangibles Year end 30 June 2017 Balance at the beginning of the year Additions Disposals Amortisation charge Exchange differences Closing value at 30 June 2017 Year end 30 June 2016 2017 $ 2016 $ 46,446,049 46,446,049 46,446,049 46,446,049 16,280,368 14,249,913 (4,825,446) (5,830,065) 11,454,922 8,419,848 486,483 (335,003) 151,480 491,493 (253,035) 238,458 58,052,451 55,104,355 Other $ Total $ 238,458 55,104,355 - - 7,369,267 (531,793) Goodwill Software $ 8,419,848 7,369,267 (531,793) $ 46,446,049 - - - - (3,795,268) (85,930) (3,881,198) (7,132) (1,048) (8,180) 46,446,049 11,454,922 151,480 58,052,451 Balance at the beginning of the year 46,446,049 Additions Disposals Amortisation charge Exchange differences - - - - 7,935,235 4,162,562 (574,199) 323,592 54,704,876 - - 4,162,562 (574,199) (3,102,309) (84,298) (3,186,607) (1,441) (836) (2,277) Closing value at 30 June 2016 46,446,049 8,419,848 238,458 55,104,355 Intangible assets, other than goodwill, have finite lives and are required to be amortised over their expected lives. Goodwill has an infinite life. Goodwill assumptions have been detailed below. No impairment was recorded. Page 64 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201715. INTANGIBLE ASSETS (CONTINUED) Goodwill Goodwill acquired through business combinations with indefinite lives are allocated to the Australian and New Zealand cash generating units (CGUs), which are also the operating and reportable segments for impairment testing. The carrying amount of goodwill allocated to each CGU is as follows: Australia New Zealand 2017 $ 27,105,898 19,340,151 2016 $ 27,105,898 19,340,151 Total carrying amount of goodwill 46,446,049 46,446,049 The Group performed the annual impairment test in May 2017. The Group considers the relationship between its equity market capitalisation and the net assets as shown on the balance sheet, among other factors, when reviewing for indicators of impairment. No indicators of impairment are noted. In considering the carrying value of goodwill, the Directors have adopted a value in use methodology to determine the recoverable amounts of each CGU which confirms that no impairment charge is necessary. The recoverable amount of each CGU has been determined based on a value in use calculation that uses the cash flow budgets over a one year period, followed by an extrapolation of expected cash flows for the CGUs over a four year period using the growth rates determined by management and the assumptions outlined below. The present value of the expected cash flows and a terminal value for each segment is determined by applying a suitable discount rate. Key assumptions used in value in use calculations and sensitivity to changes in assumptions The calculation of value in use for each CGU is most sensitive to the following assumptions: • Gross profit margins – are based upon FY18 budgets and margins achieved in the current year. Gross profit • • margins are the most sensitive variable to the value in use calculation. Cost price inflation – has been based upon publicly available inflationary data. Growth rate estimates – consistent with published industry research have been adopted. It is acknowledged that technological change, macro-economic factors and action of competitors can have an impact on growth rate assumptions. Growth rates for revenue and cost of sales have been held consistent post year 3 at 4%. • Discount rates – represent the current market risks, taking into consideration the time value of money and specific risks not incorporated in the cash flow forecasts. The discount rate is based upon the weighted average cost of capital (WACC). WACC is assessed taking into account the expected return on investment by investors, the cost of debt servicing plus beta factors for industry risk. The Directors have adopted a WACC of 10.2% which is applied to the pre-tax cash flows after replacement capital expenditure. Management have considered the appropriateness of using the same discount rate for both CGUs noting that it would not materially impact the results. Page 65 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201716. SHARE BASED PAYMENTS The total expense relating to equity-settled share-based payment transactions in 2017 was $331,492 (2016: $229,947). During 2017 certain employees were eligible to participate in the Company’s Performance Rights Plan. Each performance right granted under this plan is subject to both a performance criteria and a vesting period. At termination of a perfomance rights holder's employment, unvested performance rights are retained on a pro-rata basis with the balance forfeited. Each performance right is issued for nil consideration, with each performance right converting to one fully paid ordinary share upon vesting. The performance rights are unquoted. There are no voting or dividend rights attaching to the performance rights. Performance rights vest upon a change of control in the Company. The following summarises the number and movement in performance rights for the reporting periods: Outstanding at the beginning of the year Granted during the year Forfeited during the year Vested during the year Outstanding at the end of the year A summary of the performance criteria and vesting dates is as follows: Number of Performance Rights Vesting Date Hurdle Description 2017 No. 2016 EP 5,584,076 6,770,000 3,411,975 444,915 (1,847,392) (405,839) (2,125,000) (1,225,000) 5,023,659 5,584,076 125,000 250,000 866,769 209,096 209,096 104,532 98,505 98,505 49,278 602,576 602,576 1,205,150 602,576 5,023,659 31 October 2017 31 October 2017 1 July 2018 1 July 2017 1 July 2017 1 July 2017 1 July 2018 1 July 2018 1 July 2018 31 August 2019 31 August 2019 31 August 2019 31 August 2019 FY16 EBITDA contribution of acquisition and retention Retention FY17 Basic EPS and retention FY17 Basic EPS Relative Total Shareholder Return Sustainability measure FY18 Basic EPS Relative Total Shareholder Return Sustainability measure FY18 Basic EPS FY19 Basic EPS Relative Total Shareholder Return Sustainability measure Page 66 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201716. SHARE BASED PAYMENTS (CONTINUED) The fair values of the performance rights is measured using a variation of the binomial option pricing model that takes into account the terms and conditions on which the instruments were granted and the current likelihood of achieving the specified target. The following principal assumptions were used in the valuation of performance rights issued in the financial year: TRANCHE Grant date Vesting period ends Share price at date of grant Volatility Term Dividend yield Risk free investment rate Fair value at grant date Performance rights granted 1 2 3 4 12/07/2016 1/07/2016 9/12/2016 1/11/2016 1/07/2018 1/07/2018 30/09/2019 30/09/2019 $0.36 40% 2-4 yrs - 1.56% $26,426 203,390 $0.33 40% 2-4 yrs - 1.55% $14,667 120,707 $0.50 40% 2-4 yrs - 1.88% $0.47 40% 2-4 yrs - 1.70% $275,482 $397,931 1,193,182 1,894,696 The underlying expected volatility was determined by reference to historical data of the Company’s shares over a period of time. No special features inherent to the options granted were incorporated into measurement of fair value. 17. TRADE & OTHER PAYABLES Trade payables Other payables Unearned revenue Total Included in the above are aggregate amounts payable to the following related parties: Owing to directors and director related entities Trade payables are non-interest bearing and are normally settled on 30-day terms. 2017 $ 2016 $ 8,671,125 9,728,185 10,189,796 12,271,727 3,278,063 4,153,406 22,138,984 26,153,318 2017 $ 2016 $ 60,740 56,375 Page 67 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201718. BORROWINGS Current – designated at amortised cost: Obligations under bank loan Obligations under NZ-Dollar bank loan Obligations under NZ-Dollar bank overdraft Obligations under finance leases and hire purchase contracts Obligations under premium funding contracts 2017 $ 1,941,201 1,110,329 2,849,298 622,999 196,895 2016 $ 8,763,638 1,593,184 - 2,949,293 145,604 Total 6,720,722 13,451,719 Non-current – Designated at amortised cost: Obligations under bank loan Obligations under NZ-Dollar bank loan Obligations under finance leases and hire purchase contracts 2017 $ 5,723,440 3,321,913 12,519 2016 $ 401,002 2,549,092 3,170,783 Total 9,057,872 6,120,877 Summary of facilities At reporting date, the following financing facilities were available: Bank overdraft Facility used at reporting date Facility unused at reporting date Term loans Facility used at reporting date Facility unused at reporting date Bank guarantees Facility used at reporting date Facility unused at reporting date Bank finance leases Facility used at reporting date Facility unused at reporting date Total bank facilities Facility used at reporting date Facility unused at reporting date Page 68 2017 $ 12,000,000 (2,849,298) 2016 $ 8,911,814 - 9,150,702 8,911,814 12,174,664 15,351,384 (12,096,883) (13,306,805) 77,781 2,044,579 3,500,000 4,073,122 (1,784,047) (3,512,002) 1,715,953 5,000,000 561,120 5,411,814 - (4,956,172) 5,000,000 455,642 32,674,664 33,748,134 (16,730,228) (21,774,979) 15,944,436 11,973,155 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201718. BORROWINGS (CONTINUED) Summary of covenants During the financial year the company re-financed it’s bank debt facilities. The bank debt facilities comprise: • non-revolving term debt of $12,174,664 maturing on 31 July 2020 with quarterly principle re-payments; • multi option facility of $15,500,000 for working capital and bank guarantee purposes. This facility is subject to annual review; and • lease facility of $5,000,000. The term debt and multi option facility can be drawn in Australian or New Zealand dollars. The bank facilities are subject to the customary borrowing terms and conditions of a bank facility of this kind. The financial covenants that apply include debt service coverage ratio, leverage ratio and maximum overdraft utilisation as a percentage of certain trade debtors and work in progress. Security arrangements Security for the above bank facilities has been provided as follows: • Registered General Security Interest provided by Empired Limited and Intergen Limited; • Specific Security deed over the shares in the subsidiaries of Empired Limited; and • Cross guarantee and indemnity provided by each group entity. Page 69 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201719. PROVISIONS Year end 30 June 2017 Lease Incentives $ Annual Leave $ Long Service Leave $ Total $ Balance at the beginning of the year 5,143,673 4,520,039 1,197,869 10,861,581 Decrease in discounting Additional provisions Amounts used - (14,835) - (14,835) 107,900 5,959,596 371,241 6,438,737 (916,405) (6,143,275) (343,067) (7,402,747) Closing value at 30 June 2017 4,335,168 4,321,525 1,226,043 9,882,736 Analysis of total provisions: Current Provision for Annual Leave Provision for Long Service Leave Provision for Lease Incentives Total Analysis of total provisions: Non-current Provision for Long Service Leave Provision for Lease Incentives Total 20. DEFERRED CONSIDERATION Amounts due to vendors for prior year acquisitions of controlled entities: Current Non-current Total 2017 $ 2016 $ 4,321,525 566,319 966,555 5,854,399 659,724 3,368,613 4,028,337 2017 $ 4,520,039 561,997 945,209 6,027,245 635,872 4,198,464 4,834,336 2016 $ 2,200,993 6,753,111 8,954,104 - - - Amounts above comprise consideration payable to the vendors of controlled entities acquired in prior financial years. Page 70 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201721. ISSUED CAPITAL Ordinary Shares fully paid Movement in ordinary shares on issue At 1 July 2015 Issue of shares Conversion of options At 30 June 2016 Issue of ordinary shares (net of issue costs) At 30 June 2017 2017 $ No. 2016 $ 54,204,746 38,783,679 Value ($) 37,779,130 804,549 200,000 38,783,679 15,421,067 54,204,746 115,183,253 4,365,285 500,000 120,048,538 38,558,080 158,606,618 Ordinary shares entitle the holder to participate in dividends, and carry one vote per share. These shares have no par value. On 1 July 2016, the company issued 2,100,000 ordinary shares for the vesting of Performance Rights. On 14 July 2016, the company issued 69,444 ordinary shares at $0.36 per share to an executive as part of a remuneration adjustment on promotion to Chief Operations Officer. On 14 March 2017, the company issued 25,000 ordinary shares for the vesting of Performance Rights. On 30 March 2017 and 19 May 2017, the company issued 30,450,000 and 5,913,636 ordinary shares respectively at $0.44 per share. The purpose of the issue was to reduce net debt, provide certainty of funding for deferred vendor payments and provide working capital for organic growth. Capital Management Management controls the capital of the Group in order to maintain a sustainable debt to equity ratio, generate long-term shareholder value and ensure that the Group can fund its operations and continue as a going concern. The Group’s debt and capital include ordinary share capital and convertible performance rights, supported by financial assets. There are no externally imposed capital requirements, except for the covenants on the bank facilities. Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues. Page 71 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201721. ISSUED CAPITAL (CONTINUED) There have been no changes in the strategy adopted by management to control the capital of the Group since the prior year. The gearing ratios for the years ended 30 June 2017 and 30 June 2016 are as follows: Note 18 20 9(i) Consolidated Group 2017 $ Consolidated Group 2016 $ 15,778,594 - (2,004,385) 13,774,209 54,204,746 67,978,955 16% 19,572,596 8,954,104 (2,970,688) 25,556,012 38,783,679 64,339,691 33% Total Borrowings Deferred consideration Less cash and cash equivalents Net Debt Issued Capital TOTAL CAPITAL Gearing ratio 22. DIVIDENDS (a) Distributions Paid Final franked dividend of nil cents (2016: 0 cents) Interim franked dividend of nil cents (2016: 0 cents) 2017 $ 2016 $ - - - - (b) Franking Credit Balance $ $ Balance of franking account at year end at 30% available to the shareholders of Empired Limited for subsequent financial years 24,841 24,841 23. FINANCIAL RISK MANAGEMENT OBJECTIVES & POLICIES The Group’s principal financial instruments consist of bank loans and hire purchase contracts, cash, short-term deposits, trade receivables, trade payables, loans and hire purchases. The main purpose of the financial liabilities is to raise finance for the Group’s operations. The Group has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. Page 72 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201723. FINANCIAL RISK MANAGEMENT OBJECTIVES & POLICIES (CONTINUED) It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and credit risk. The board reviews and agrees policies for managing each of these risks and they are summarised below. Market risk Interest rate risk Exposure to market interest rates is limited to the Group’s cash balances and bank borrowings at variable interest rates. Finance leases and hire purchase agreements entered into are purchased at fixed interest rates. Cash balances are disclosed at note 9. Refer to note 25 for detail of the Group's exposure to interest rate risks on financial assets and liabilities. The following table illustrates the sensitivity of profit and equity to a reasonably possible change in interest rates of +/- 1% (2016: +/- 1%). These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on a change in the average market interest rate for each period, and the financial instruments held at each reporting date that are sensitive to changes in interest rates. All other variables are held constant. 30 June 2017 30 June 2016 Foreign currency risk Profit for the year $ Equity $ +1% (96,419) (116,213) -1% 96,419 116,213 +1% +1% - - - - The Group has exposure to foreign currency risk as a result of its New Zealand, USA and Singapore based subsidiaries having trade debtors and trade creditors denominated in a currency other than the functional currencies. Trade creditor transactions for Australian subsidiaries may be entered into in foreign currency and fluctuations in these currencies may have a minor impact on the Company’s financial results. The exchange rates are closely monitored within the Group. Foreign currency denominated financial assets and liabilities which expose the Group to currency risk are disclosed below. The amounts shown are those reported to key management translated into $AUD at the closing rate: Financial Assets Financial Liabilities Net exposure NZD $ USD $ SGD $ 2017 2016 2017 2016 2017 2016 14,652,546 12,594,975 645,772 2,429,418 898,240 694,001 (9,497,896) (8,993,181) (23,111) (97,609) (14,305) (22,190) 5,154,650 3,601,794 622,661 2,331,809 883,935 671,811 Page 73 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201723. FINANCIAL RISK MANAGEMENT OBJECTIVES & POLICIES (CONTINUED) The following table illustrates the sensitivity of profit in regards to the Group’s financial assets and financial liabilities and the $NZD/$AUD exchange rate, $USD/$AUD exchange rate and $SGD/$AUD exchange rate ‘all other things being equal’. It assumes a +/- 10% change of the $AUD/$NZD exchange rate, a +/- 10% change of the $AUD/$USD exchange rate, and a +/- 10% change of the $AUD/$SGD exchange rate (2016: 10%). These percentages have been determined based on the average market volatility in exchange rates in the previous twelve (12) months. The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each reporting date. There is no effect on equity. If the $AUD had strengthened against the respective currencies by 10% (2016: 10%) then this would have had the following impact: 30 June 2017 30 June 2016 NZD $ 515,465 360,179 USD $ 62,266 233,181 SGD $ 88,394 67,181 If the $AUD had weakened against the respective currencies by 10% (2016: 10%) then this would have had the following impact: 30 June 2017 30 June 2016 NZD $ (515,465) (360,179) USD $ (62,266) (233,181) SGD $ (88,394) (67,181) Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group’s exposure to currency risk. Commodity price risk The Group’s exposure to price risk is minimal. Credit risk The Group trades only with recognised, creditworthy third parties. It is the Group policy that all customers who wish to trade on credit terms are subject to credit verification procedures. Customers that fail to meet the Group’s creditworthiness may transact with the group only on a prepayment basis. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. There are no material transactions that are not denominated in the measurement currency of the relevant operating unit. The Group does not offer credit terms without the specific approval of the Chief Financial Officer. With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents and available-for-sale financial assets, the Group’s exposure to credit risk arises from default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. Page 74 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201723. FINANCIAL RISK MANAGEMENT OBJECTIVES & POLICIES (CONTINUED) Exposure to credit risk The Group’s maximum exposure to credit risk at the report date was: Cash and cash equivalents (note 9) Trade and other receivables (note 10) Total The ageing of the Group’s non-impaired trade receivables at reporting date was: Not past due Past due 0-30 days Past due 31-60 days Past due 60 days Total 2017 $ 2016 $ 2,004,385 2,970,688 23,027,144 22,212,724 25,031,529 25,183,412 2017 $ 2016 $ 18,085,187 15,707,407 2,189,813 1,427,883 1,158,643 4,609,381 253,921 1,480,072 22,861,526 22,050,781 The group expects to be able to recover all outstanding debts that have not been provided for impairment. Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of short and long term debt. The Group manages liquidity risk by forecasting and monitoring cash flows on a continuing basis. As at 30 June 2017, the Group’s financial liabilities have contractual maturities (including interest payments where applicable) as summarised below: 30 June 2017 Insurance premium funding loan Bank borrowings and overdraft Finance leases and hire purchase obligations Trade and other payables Total 0–12 Months 1–5 years 5+ years $ 205,213 $ - 5,900,828 9,045,353 636,504 12,519 18,860,921 - 25,603,466 9,057,872 $ - - - - - Page 75 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201723. FINANCIAL RISK MANAGEMENT OBJECTIVES & POLICIES (CONTINUED) Liquidity risk (continued) This compares to the maturity of the Group’s financial liabilities in the previous reporting periods as follows: 30 June 2016 Insurance premium funding loan Bank borrowings and overdraft Finance leases and hire purchase obligations Deferred consideration Trade and other payables Total 0–12 Months 1–5 years 5+ years $ 151,813 $ - $ 10,356,822 2,950,094 3,130,419 3,265,127 2,200,993 6,753,111 21,999,912 - 37,839,959 12,968,332 - - - - - - The above amounts reflect the contractual undiscounted cash flows, which may differ to the carrying values of the liabilities at the reporting date. 24. FINANCIAL INSTRUMENTS The fair value of financial assets and liabilities is considered to approximate their carrying values. The tables below reflect the undiscounted contractual settlement terms for financial instruments of a fixed period of maturity, as well as management’s expectations of the settlement period for all other financial instruments. As such, the amounts may not reconcile to the statement of financial position. Interest Rate Risk Exposure to interest rate risks on financial assets and liabilities are summarised as follows: 2017 Floating interest rate Fixed interest rate Non-interest bearing Carrying amount as per balance sheet Weighted average effective interest rate i) Financial Assets Cash and cash equivalents Trade and other receivables Total financial assets ii) Financial liabilities – at amortised cost Trade and other payables Finance leases and hire purchase obligations Insurance premium funding loan $ 2,004,385 - 2,004,385 - - - Bank Loans 14,946,181 $ $ $ - - - - 635,518 205,213 - - 2,004,385 1.00% 23,027,144 23,027,144 23,027,144 25,031,529 18,860,921 18,860,921 - - - 635,518 205,213 14,946,181 5.35% 5.80% 5.36% Total financial liabilities 14,946,181 840,731 18,860,921 34,647,833 Page 76 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201723. FINANCIAL INSTRUMENTS (CONTINUED) 2016 i) Financial Assets Cash and cash equivalents Trade and other receivables Total financial assets ii) Financial liabilities – at amortised cost Trade and other payables Finance leases and hire purchase obligations Insurance premium funding loan Deferred consideration Bank Loans Floating interest rate Fixed interest rate Non-interest bearing Carrying amount as per balance sheet Weighted average effective interest rate $ 2,970,688 - 2,970,688 - - - - 13,306,916 $ $ $ - - - - 6,120,075 151,813 7,978,729 - - 2,970,688 0.20% 22,212,724 22,212,724 22,212,724 25,183,412 21,999,912 21,999,912 - - 6,120,075 151,813 975,375 8,954,104 - 13,306,916 4.61% 6.30% 6.63% 5.51% Total financial liabilities 13,306,916 14,250,617 22,975,287 50,532,820 Page 77 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201725. COMMITMENTS & CONTINGENCIES No contingent assets as at 30 June 2017. Commitments for expenditure A. Leases & Hire Purchase The consolidated entity has various computer equipment on hire purchase arrangements. Not later than one year Later than one year but not later than five years Less: unexpired charges Current Non Current Total hire purchase B. Operating leases 2017 $ 636,504 12,519 (13,505) 635,518 622,999 12,519 635,518 2016 $ 3,130,419 3,265,127 (275,471) 6,120,075 2,949,293 3,170,782 6,120,075 Office premises are leased under non-cancellable operating leases. Their commitment can be seen below: Minimum lease payments under non-cancellable operating leases according to the time expected to elapse to the date of payment: Not later than one year Later than one year but not later than five years Later than five years Total Contingent Liabilities 2017 $ 2016 $ 5,158,496 4,484,493 17,348,386 13,238,790 5,872,384 6,306,973 28,379,266 24,030,256 Office premises are leased under non-cancellable operating leases. Their commitment can be seen below: A. Bank guarantees Bank guarantees outstanding at year end B. Parent company guarantee 2017 $ 2016 $ 1,784,047 3,512,002 A parent company guarantee has been provided to a third party in respect of a lease obligation of a wholly owned subsidiary. Page 78 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201726. INVESTMENT IN CONTROLLED ENTITY Tusk Technologies Pty Ltd Conducive Pty Ltd OBS Pty Ltd eSavvy Pty Ltd i5 Software Pty Ltd Intergen Business Solutions Pty Ltd Intergen Limited Intergen X4 Holdings Limited Intergen USA Limited Intergen ESS Limited(a) Empired Singapore Pte Ltd Intergen North America Limited (a) acts as trustee for the Intergen Limited Employee Share Scheme Trust 27. AUDITORS’ REMUNERATION Amounts received or due and receivable by auditors of the parent entity: Audit and review of financial statements Grant Thornton Australia Overseas Grant Thornton network firms Remuneration for audit and review of financial statements Other Services Grant Thornton Australia: Taxation compliance Overseas Grant Thornton network firms: Taxation compliance Total other services remuneration Total auditor’s remuneration Country of Incorporation % Equity Interest 2017 2016 Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand New Zealand Singapore USA % 100 100 100 100 100 100 100 100 100 100 100 100 % 100 100 100 100 100 100 100 100 100 100 100 100 2017 $ 2016 $ 152,817 30,853 183,670 150,900 48,270 199,170 38,350 29,708 3,901 42,251 225,921 2,959 32,667 231,837 Page 79 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201728. PARENT ENTITY As at, and throughout, the financial year ended 30 June 2017 the parent entity of the Group was Empired Limited. Statement of financial position Current assets Total assets Current liabilities Total liabilities Issued capital Employee equity benefits reserve (Accumulated losses) / retained profits Total equity Statement of profit or loss and other comprehensive income Loss for year Other comprehensive income Total comprehensive loss 2017 $ 21,404,989 72,269,788 22,102,122 35,909,230 2016 $ 20,931,412 71,863,458 33,754,060 50,254,001 54,204,744 38,783,679 1,971,697 1,640,205 (19,815,883) (18,814,427) 36,360,558 21,609,457 (990,901) (18,818,841) - - (990,901) (18,818,841) The Parent Entity has issued the following guarantees in relation to the debts of its subsidiaries: 1. Pursuant to Class Order 98/1418, Empired Limited and OBS Pty Ltd have entered into a deed of cross guarantee on or about 14 November 2013. The effect of the deed is that Empired Limited has guaranteed to pay any deficiency in the event of winding up of OBS Pty Ltd. OBS Pty Ltd has also given a similar guarantee in the event that Empired Limited is wound up. The Closed Group financial information is not disclosed as it is not materially different to the above information for Empired Limited, the Parent Entity. 2. Empired Limited, eSavvy Pty Ltd, Conducive Pty Ltd, OBS Pty Ltd, i5 Software Pty Ltd, Tusk Technologies Pty Ltd, Intergen Business Solutions Pty Ltd and Intergen Limited have entered into a cross guarantee and indemnity in favour of the senior lender to the Group in respect to bank facilities provided to the Group by the senior lender. 3. Empired Limited has provided a third party lessor a guarantee to meet the obligations of a wholly owned subsidiary under the terms of a property rental agreement. Page 80 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 201729. RELATED PARTY TRANSACTIONS The Group's related parties includes its associate, subsidiaries and key management. Unless otherwise stated, none of the transactions incorporate special terms and conditions and no guarantees were given or received. Outstanding balances are usually settled in cash. Transactions with associates Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. During the financial year, the Group received $92,259 in revenue from its associate, X4 Consulting Limited. Transactions with key management personnel Key management of the Group are the executive members of Empired’s Board of Directors and members of the Executive Team. Refer to the Remuneration Report for compensation made to executive directors and other members of key management personnel. 30. EVENTS AFTER THE REPORTING DATE No significant non-adjusting events have occurred between the reporting date and the date of authorisation. Page 81 NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2016NOTES TO THE FINANCIAL STATEMENTS EMPIRED LTD | ANNUAL REPORT | 2017“This is the now economy and we’re well positioned as an organisation to leverage the best SaaS platforms, our IP, best practice and talented people to deliver early value to our clients.“ Russell Baskerville | Managing Director Page 82 EMPIRED LTD | ANNUAL REPORT | 2017DIRECTORS’ REPORT DIRECTORS’ DECLARATION Directors’ Declaration In accordance with a resolution of the directors of Empired Limited, I state that: 1. In the opinion of the directors, (a) the financial statements and notes of Empired Limited for the financial year ended 30 June 2017 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2017 and of its performance for the year ended on that date; and (ii) complying with Accounting Standards and the Corporations Regulations 2001; (b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 2(a); and (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the directors by the Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2017. On behalf of the Board Russell Baskerville MANAGING DIRECTOR 23rd of August 2017 Empired Ltd | Annual report | 2016 Page 83 AUDITOR’S INDEPENDENCE DECLARATION Page 84 INDEPENDENT AUDIT REPORT Page 85 INDEPENDENT AUDIT REPORT Page 86 INDEPENDENT AUDIT REPORT 22 to 31 Page 87 Page 88 EMPIRED LTD | ANNUAL REPORT | 2017CHAIRMAN & CEO REVIEWShareholding Analysis In accordance with Listing Rule 4.10 of ASX Limited, the Directors provide the following shareholding information which was applicable as at 30th June 2017. a. Distribution of Shareholding SIZE OF SHAREHOLDING 1 – 1,000 1001 – 5,000 5001 – 10,000 10001 – 100,000 100,001 – max Total Number of shareholders 134 513 350 616 136 1,749 % 0.05 1.01 1.67 13.21 84.06 100.00 b. Substantial Shareholders The following are registered by the Company as substantial shareholders, having declared a relevant interest in the number of voting shares shown adjacent as at the date of giving the notice. SHAREHOLDER National Nominees Ltd ACF Australian Ethical Investment Limited Tiga Trading Pty Ltd Wilson Asset Management Group Baskerville Investments Pty Ltd Number of shares held 25,258,447 15,809,144 11,606,170 7,450,059 % 16.54 10.35 7.32 6.21 Page 89 Page 89 SHAREHOLDING ANALYSISEMPIRED LTD | ANNUAL REPORT | 2016EMPIRED LTD | ANNUAL REPORT | 2017c. Twenty Largest Shareholders The names of the twenty largest shareholders as at 6 July 2017 are: NATIONAL NOMINEES LIMITED UBS NOMINEES PTY LTD RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LTD J P MORGAN NOMINEES AUSTRALIA LIMITED BASKERVILLE INVESTMENTS PTY LTD BNP PARIBAS NOMS PTY LTD ZERO NOMINEES PTY LTD MR TONY JOHN ALAN STEWART MR JOHN ALEXANDER BARDWELL CITICORP NOMINEES PTY LIMITED MR MARK EDWARD WALLER MR DENNIS RONALD PAYNE BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP PJTR PTY LTD GABRIELLA NOMINEES PTY LTD UNIPLEX CONSTRUCTIONS PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED – A/C 2 DEFENDER EQUITIES PTY LTD ICE COLD INVESTMENTS PTY LTD MS SARAH LOUISE MCCREADY Total Number of shares held 25,258,447 15,809,144 11,684,184 9,024,628 8,686,300 5,174,491 5,000,000 4,323,111 4,099,904 2,416,562 2,272,260 1,770,517 1,719,820 1,487,809 1,450,000 1,220,500 1,052,299 1,036,458 1,000,000 975,000 % 15.93 9.97 7.37 5.69 5.48 3.26 3.15 2.73 2.58 1.52 1.43 1.12 1.08 0.94 0.91 0.77 0.66 0.65 0.63 0.61 105,461,434 66.48 The twenty members holding the largest number of shares together held a total of 66.48% of issued capital. Page 90 Page 90 SHAREHOLDING ANALYSISEMPIRED LTD | ANNUAL REPORT | 2016EMPIRED LTD | ANNUAL REPORT | 2017d. Issued Capital (i) Ordinary Shares The fully paid issued capital of the company consisted of 158,606,618 shares held by 1,749 shareholders. Each share entitles the holder to one vote. The number of shareholdings held in less than marketable parcels is 194. (ii) Unquoted Equity No options were issued in the year under the company share options plan 3,411,975 performance rights were issued under the company’s LTI plan Options do not have any voting rights. e. On-Market Buy-Back There is no current on-market buy-back. f. Company Secretary The Company Secretary is Mr David Hinton g. Registered Office The registered office of Empired Ltd is: Level 7, The Quadrant 1 William Street Perth WA 6000 Telephone +61 8 6333 2200 Page 91 Page 91 SHAREHOLDING ANALYSISEMPIRED LTD | ANNUAL REPORT | 2016EMPIRED LTD | ANNUAL REPORT | 2017OTHER INFORMATION FOR SHAREHOLDERS Other Information for Shareholders In accordance with Listing Rule 4.10 of the ASX Limited, the Directors provide the following information not elsewhere disclosed in this report. SHAREHOLDER COMMUNICATIONS The Board of Directors aims to ensure that shareholders are informed of all major developments affecting the Company’s state of affairs. Information is communicated to shareholders as follows: • The annual report is distributed to shareholders who elect to receive the document. A copy of the full annual report is available free of charge, upon request, from the Company. The Board ensures that the annual report includes relevant information about the operation of the Company during the year, changes in the state of affairs of the Company and details of future developments, in addition to the other disclosures required by the Corporations Act; • The half-year report contains summarised financial information and a review of the operations of the Company during the period. The half-year financial report is prepared in accordance with the requirements of Accounting Standards and the Corporations Act, and is lodged with the Australian Securities and Investments Commission and the Australian Stock Exchange; and • The Company’s internet website at www.empired.com is regularly updated and provides details of recent material announcements by the Company to the stock exchange, annual reports and general information on the Company and its business. The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and identification with the Company’s strategy and goals. Important issues are presented to the shareholders as single resolutions. INTERNET ACCESS TO INFORMATION Empired maintains a comprehensive Investor Relations section on its website at www.empired.com/Investors/ You can also access comprehensive information about security holdings at the Computershare Investor Centre at www-au.computershare.com/investor/ By registering with Computershare’s free Investor Centre service you can enjoy direct access to a range of functions to manage your personal investment details. You can create and manage your own portfolio of investments, check your security holding details, display the current value of your holdings and amend your details online. Changes to your shareholder details, such as a change of name or address, or notification of your tax file number or direct credit of dividend advice can be made by printing out the forms you need, filling them in and sending the changes back to the Computershare Investor Centre. Page 92 Page 92 SHAREHOLDING ANALYSISEMPIRED LTD | ANNUAL REPORT | 2016EMPIRED LTD | ANNUAL REPORT | 2017SHARE REGISTRY ENQUIRIES Shareholders who wish to approach the Company on any matter related to their shareholding should contact the Computershare Investor Centre in Melbourne: The Registrar Computershare Investor Services Pty Ltd Level 11, 172 St Georges Terrace Perth WA 6000 Telephone +61 8 9323 2000 Facsimile +61 8 9323 2033 Website www-au.computershare.com/investor ANNUAL GENERAL MEETING To be confirmed. STOCK EXCHANGE LISTING Empired Limited shares are listed on the Australian Securities Exchange (ASX:EPD). The home exchange is Perth. All shares are recorded on the principal share register of Empired Limited, held by Computershare Investor Services Pty Limited at the following street address: Computershare Investor Services Pty Ltd Level 11, 172 St Georges Terrace Perth, WA 6000 OTHER INFORMATION FOR SHAREHOLDERS Page 93 EMPIRED LTD | ANNUAL REPORT | 2017Page 94 Empired Ltd | Annual report | 2016 EMPIRED LTD | ANNUAL REPORT | 2017EMPIRED LTD | ANNUAL REPORT | 2017

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