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Annual Report 2019

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Corporate Directory Directors Thomas Stianos (Non-Executive Chairman) John Bardwell (Non-Executive Director) Richard Bevan (Non-Executive Director) Cristiano Nicolli (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 Company Number A.C.N: 090 503 843 Country of Incorporation Australia Company Domicile and Legal Form Empired Limited is the parent entity and an Australian Company limited by shares Legal Advisers Jackson McDonald Lawyers Level 17, 225 St Georges Terrace Perth WA 6000 Auditors Grant Thornton Audit Pty Ltd Level 43, 152 -158 St Georges Terrace Perth WA 6000 Share Register Computershare Investor Services Pty Ltd Level 11, 172 St Georges Terrace Perth WA 6000 Website www.empired.com ASX Code EPD Principal Places of Business Perth Level 7, The Quadrant 1 William Street Perth WA 6000 Adelaide Level 2 8 Leigh Street Adelaide SA 5000 Melbourne Level 5 Brisbane Level 11 257 Collins Street Melbourne VIC 3000 79 Adelaide Street Brisbane QLD 4000 Seattle 2010 156th Ave NE Suite 210 Bellevue, WA, 98007 USA Sydney Level 12 9 Hunter Street Sydney NSW 2000 Wellington Level 4, 89 Willis Street Wellington 6011 Contents Corporate Directory Inside front cover Chairman & CEO Review Directors’ Report Remuneration Report Corporate Governance Statement 2 4 11 19 Consolidated Statement of Profit or Loss and Other Comprehensive Income 20 Consolidated Statement of Financial Position 21 Consolidated Statement of Cash Flows 22 Consolidated Statement of Changes in Equity Notes to the Financial Statements Directors’ Declaration Auditor’s Independence Declaration Independent Audit Report Shareholding Analysis Other Information for Shareholders 23 24 59 60 61 65 68 EMPIRED LIMITED | ANNUAL REPORT | 2019 1 Chairman & CEO Review Thomas Stianos NON-EXECUTIVE CHAIRMAN Russell Baskerville MANAGING DIRECTOR & CEO To our fellow Shareholders, On behalf of your board of directors, we present the Empired Limited 2019 annual report, in what has been a challenging year for our business. We are however confident in the company’s outlook and management and the Board are focused on executing a plan to improve operating debt through improved cash flows and profit. A significant reduction in Capital Expenditure will also lead to lower depreciation and amortisation expense which is turn will improve Net Profit After Tax. This combined with an active share buy-back will provide a sound framework for increased earnings per share. performance and deliver value to our shareholders. Management are focused on the execution of this plan, Empired Limited’s financial results for the year ended 30 June 2019 are in line with our guidance provided on having already commenced and actioned a number of activities which will continue over the coming year. 2 July 2019 with revenue of $176m and Underlying Earnings Empired is well placed to benefit from the continued growth Before Interest Tax Depreciation and Amortisation (EBITDA) in the Information Technology sector especially with the of $15.3m (1). Reported Net Profit After Tax (NPAT) was a growing trends that are today dominated by the adoption of loss of $15.3m, including a non-cash impairment charge technology to support business growth and transformation. of $25.4m. Net Debt at 30 June 2019 was $14.3m and is Our aspiration is to be the digital solutions partner of choice expected to decline materially throughout the course of FY20 across Australia & New Zealand consistently delivering (prior to the adoption of AASB 16 Leases). innovation and business value to our clients underpinned by The non-cash impairment charge predominately relates to strong financial performance. software assets that are now being superseded through new Empired is confident of the success of our SaaS based technologies and changes in market trends. Cohesion platform. Cohesion is Empired’s proprietary A comprehensive review has been undertaken with clear priorities and targets set for the FY20 financial year to deliver much improved operational performance. This has included a review of the balance sheet, capital management, operating costs, and investment in sales growth. We are committed to deliver revenue growth whilst reducing overhead expenses and achieving a significant reduction in capital expenditure. These improvements will reduce net cloud-based system for the provision of Enterprise Content and Collaboration Management (ECCM) and is the leading platform for delivery of these services to the New Zealand Government. During the year Empired grew Cohesion SaaS users from 7,000 to 11,500 on the back of a major contract win with Oranga Tamariki (OT) – Ministry for Children. We are now providing a range of additional services to OT and expect the relationship to continue to grow in FY20. 2 EMPIRED LIMITED | ANNUAL REPORT | 2019CHAIRMAN & CEO REVIEWWe have invested in the development of Cohesion on Our pipeline of large multi-year contracts is very healthy, the Microsoft Azure platform and Office365 platform in and we will be competing on approximately $200m in readiness for its launch in Australia. We have established a strategic opportunities throughout FY20. We have invested dedicated software sales function in Australia and developed in the right assets and have positioned Empired to compete a solid pipeline of Cohesion opportunities that we will and win in this market. Accordingly, we expect that we contest in the near term. will capture our share of the market and deliver long term We have a strong relationship with Microsoft, where we growth. are highly respected and considered the leading consulting Our recent actions and renewed focus on operational partner across Australia and New Zealand. During the year improvement are an important reset in the company Empired’s Microsoft Dynamics business performed strongly, direction and establishes a strong platform from which to up 20% in Australia and up 10% in NZ (up 30% half on half execute much improved operational performance. in NZ) and is Empired’s highest margin business. We believe that growth combined with overhead cost We have had a period of solid growth across the Australian reductions and improved cash generation will deliver East Coast, where we have delivered around 10% growth shareholders an attractive investment proposition and create year on year for the 3 years up to the end of FY18. FY19 sustainable value in both the short and long term. growth was modest, up only 2% however we are confident that a range of growth initiatives being implemented now will re-ignite our expansion in the Australian East Coast. We along with our board and leadership team would like to thank all of our staff, clients and shareholders for their support in our pursuit of building a highly respected and A highlight of the New Zealand performance was a new, successful company. Yours faithfully Thomas Stianos NON-EXECUTIVE CHAIRMAN Russell Baskerville MANAGING DIRECTOR & CEO $10m+ contract with the Department of Internal Affairs (DIA) in New Zealand. The contract involves Empired working with DIA to re-imagine how New Zealand citizens access government services in a secure online system, to build the system and then to run and enhance it for up to seven years. DIA today is one of Empired’s largest clients. During the year 63% of revenue was either recurring in nature or was generated from multi-year contracts. This provides a stable, predictable base of revenue at the start of each financial year improving our predictability and significantly enhancing our year on year growth prospects. These revenues improve the defensive nature of our business because our clients continue to rely on Empired to run and maintain their business-critical technology assets during periods of low investment. Throughout the year we have invested in our managed services offerings to capitalise on the rapid adoption of cloud technologies. We have seen dramatic changes in the nature of our client’s technology environments and the way in which they consume software and services. We are confident that these investments ensure that we have a modern solution that meets today’s needs of our clients. (1) FY19 EBITDA Underlying of $15.3m is a non AIFRS number that is reconciled to the reported result in note 3. 3 EMPIRED LIMITED | ANNUAL REPORT | 2019CHAIRMAN & 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 2019. 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 Thomas Stianos Non-Executive Chairman - Age 65 Richard Bevan Non-Executive Director - Age 53 Mr Stianos joined the board as a Non-Executive on Mr Bevan joined the board as a Non-Executive director on 29 November 2016 and was appointed Chairman on 31 January 2008 with corporate and senior management 1 July 2018. Mr Stianos is widely recognised as one of the experience including various directorship’s and CEO/MD most successful and experienced leaders in the IT industry. roles in ASX listed and private companies, and was appointed He is also a member of the Remuneration and Nomination Chairman on 29 November 2016 to 30 June 2018. Mr Bevan Committee. Mr Stianos was previously the Managing Director is also a member of the Audit and Risk Committee and the of SMS Management & Technology Limited. Remuneration and Nomination Committee. Mr Bevan brings He has also previously held senior positions with the Department of Premier and Cabinet, Department of experience in the execution and integration of mergers, acquisitions and other major corporate transactions. Justice, and Department of Treasury & Finance. Mr Stianos Mr Bevan has been involved in a number of businesses in holds a Bachelor of Applied Science from the University areas as diverse as healthcare, construction and engineering, of Melbourne and is a Fellow of the Australian Institute of resources and information services. Mr Bevan’s roles within Company Directors. Other current directorships of listed entities these businesses have included strategic operational management, implementing organic growth strategies, business integration and raising capital in both public and • Gale Pacific Limited private markets. Previous directorships (last 3 years) Other current directorships of listed entities • Inabox Group Limited • Cassini Resources Limited Russell Baskerville Managing Director & CEO - Age 41 John Bardwell Non-Executive Director - Age 59 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 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 is Chairman of the Audit and Risk Committee. for ten years and has successfully listed the company on ASX Mr Bardwell holds a Bachelor of Business and a Graduate and made a number of successful acquisitions. Mr Baskerville Diploma in Applied Finance and Investment. He is a was previously a Non Executive Director of BigRedSky Limited, successfully developed and commercialised a SaaS Graduate Member of the Australian Institute of Company Directors and a Fellow of the Financial Services Institute of delivered eRecruitment tool prior to the company being Australasia. acquired by Thomson Reuters. Previous directorships of listed entities (last 3 years) • None 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 of listed entities (last 3 years) • None 5 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORT Cristiano Nicolli Non-Executive Director - Age 65 COMPANY SECRETARY David Hinton CFO & Company Secretary - Age 56 Mr Nicolli joined the Board on 22 October 2018. Mr Hinton joined Empired in May 2016. He has had over 10 Mr Nicolli has had extensive career as an influential leader years experience in the technology sector having previously and successful businessman in the technology sector, he has held the position of CFO and Company Secretary of ASX extensive corporate and ASX listed company experience, listed Amcom Telecommunications. Prior to Amcom he held and is a sought after non-executive director. Mr Nicolli is the a senior executive role in a large diversified listed company Chairman of the Remuneration and Nomination Committee and also worked at Ernst & Young. and a member of the Audit and Risk Committee. He was the Group Managing Director and CEO of UXC Limited from 2003 to 2016 when UXC Limited was sold to global IT firm CSC. Mr Hinton holds a Bachelor of Business degree, is a Fellow of the Institute of Chartered Accountants, is a graduate of the Australian Institute of Company Directors and is a member During that time Mr Nicolli was instrumental in leading the of the Governance Institute of Australia. He is also Finance growth and development of UXC to delivering revenue of Director of not for profit Auspire - Australia Day Council WA. $750m, employing 3,000 staff and being widely recognised Mr Hinton is a non-executive director of ASX listed Heramed as the largest and one of the most respected ASX listed IT Limited and a Flag Officer of Royal Perth Yacht Club Inc. company’s in Australia. Mr Nicolli is also a non-executive director of ASX/ NZX listed Vista Group International Limited (VGL) a global market leader that provides software solutions across the global film industry and ASX listed Otherlevels Holdings Limited (OLV). Mr Nicolli is also Treasurer of NFP Charity Kadasig Aid and Development. Mr Nicolli is a Fellow of the Australian Institute of Company Directors (FAICD), a past member of the New Zealand Society of Accountants and holds a Bachelor of Management & Business Studies. Other current directorships of listed entities • Vista Group International Limited • Otherlevels Holdings Limited Previous directorships of listed entities (last 3 years) • UXC Limited 6 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORTDIRECTORS’ MEETINGS The number of Directors meetings and the number of meetings attended by each Director during the year are: No. of Meetings Directors attended as a Director during the year ended 30 June 2019 No. of Audit Committee Meetings held while a Director No. of Audit Committee meetings attended during the year ended 30 June 2019 No. of Directors Meetings held while a Director 12 12 12 12 7 5 12 12 12 12 7 4 2 2 2 2 1 1 2 2 2 2 1 1 No. of Remunertion and Nomination committee meetings held during the year ended 30 June 2019 No. of Remuneration and Nomination Committee meetings attended during the year ended 30 June 2019 No. of Audit and Risk Committee meetings held during the year ended 30 June 2019 No. of Audit and Risk Committee meetings attended during the year ended 30 June 2019 - 2 2 - 2 - - 2 2 - 2 - - - 1 1 1 - - - 1 1 1 - Name of Director Russell Baskerville Thomas Stianos Richard Bevan John Bardwell Cristiano Nicolli Chris Ryan Name of Director Russell Baskerville Thomas Stianos Richard Bevan John Bardwell Cristiano Nicolli Chris Ryan On 14 February 2019 the Audit and Risk Committee was established, that superceded the Audit Committee. Also on this date, a Remuneration and Nomination Committee was formed. 7 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORTOPERATING AND 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 approximately 1,000 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 • New Zealand - which includes USA Review of financial results Revenue overall increased by 1% to $176m. Earnings before interest, tax depreciation and amortisation (EBITDA Underlying) for the financial year decreased to $15.3m from $17.0m. The net loss after tax of ($15.3m) included a non-cash impairment charge of $25.4m. The non-cash impairment charge was as a result of a review of the carrying value of assets. The financial results are summarised in the following table: $m Revenue EBITDA Underlying Depreciation & amortisation EBIT Interest (net) Net profit before tax Impairment losses Once off costs Result before tax Income tax Net profit/ (loss) after tax EBITDA Underlying/ Revenue % Basic EPS (cents) 1H 19 2H 19 88.6 8.2 (4.4) 3.8 (0.6) 3.2 - - 3.2 (1.0) 2.2 9.3% 87.4 7.1 (4.1) 3.0 (0.8) 2.2 (25.4) (1.5) (24.6) 7.0 (17.5) 8.1% 2019 176.0 15.3 (8.5) 6.8 (1.4) 5.4 (25.4) (1.5) (24.6) 6.0 (15.3) 8.7% (9.56) 2018 174.3 17.0 (8.2) 8.8 (1.3) 7.5 - (0.6) 6.9 (2.0) 4.9 9.8% 3.06 8 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORTOperating results by Segment $m Revenue Australia New Zealand Inter-segment Segment Revenue EBITDA Underlying Australia New Zealand Segment EBITDA Underlying 1H 19 2H 19 2019 2018 60.4 28.8 (0.6) 88.6 5.0 3.2 8.2 56.1 32.1 (0.8 87.4 3.5 3.6 7.1 116.5 60.9 (1.4) 176.0 8.4 6.8 15.3 116.7 59.2 (1.6) 174.3 11.1 5.4 16.5 For the financial year ended 30 June 2019 the Australian segment decreased revenue by 0.15% to $116.5m and recorded a Segment EBITDA Underlying of $8.4m. The revenue for the New Zealand segment increased by 3% to $60.9m and reported a Segment EBITDA Underlying of $6.8m. Cash flow The following table summarises the cash flow for the financial year ended 30 June 2019: $m EBITDA Underlying Non cash items Tax paid Working capital and once off items Operating cash flow Interest paid (net) Purchases of P&E and intangibles Repayment of borrowings Proceeds from borrowings Change in cash 1H 19 2H 19 8.2 0.5 (0.4) (7.6) 0.7 (0.7) (5.6) (2.1) 1.0 (6.7) 7.1 0.1 (0.5) 1.1 7.8 (0.6) (5.2) (7.4) 4.3 (1.1) 2019 15.3 0.6 (0.9) (6.5) 8.5 (1.3) (10.8) (9.5) 5.3 (7.8) 2018 17.0 (0.2) (0.8) (0.5) 15.5 (1.4) (8.9) (4.4) 13.4 14.2 Operating cash flow for the financial year ended 30 June 2019 was $8.5m compared to $15.5m the previous financial year. The adverse variance is attributable to lower profitability and adverse capital movements. Payments for the purchases of plant & equipment and intangibles increased from $8.9m to $10.8m. 9 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORT Financial position and capital structure The balance sheet as at 30 June 2019 is summarised below: $m Cash Receivables and WIP Other Current Assets Plant & Equipment Intangibles and other Non Current Assets Trade and other payables Borrowings Provisions and other Current Liabilities Borrowings Other Non Current Liabilities Net Assets / Equity Net debt (Nd) Gearing (Nd/(Nd+Equity)) JUNE 2019 DEC 2018 JUNE 2018 5.6 35.1 2.3 42.9 6.2 59.7 65.9 16.7 2.4 8.1 27.2 17.4 2.3 19.7 61.9 14.3 19% 6.7 35.5 2.1 44.3 15.4 67.7 83.0 15.9 2.2 7.6 25.7 19.9 2.6 22.6 79.1 15.4 16% 13.4 36.0 2.4 51.7 16.9 64.7 81.6 22.7 2.4 8.6 33.7 20.3 3.0 23.3 76.4 9.3 11% Net debt increased during the financial year from $9.3m to $14.3m with gearing increasing from 11% to 19%. 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. 10 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORT Dividends The directors do not recommend payment of a dividend (2018: nil). Likely Developments 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 Any likely developments are disclosed in the Chairman and prohibited under the terms of the contract. CEO Review. Performance Rights Granted to Directors and Officers Executive Officers were granted 1,586,000 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 An impairment change of $25,352,785 was made during the financial year leading the company to record a net loss after tax of $15,311,847, a reduction in total equity from $76,375,298 to $61,921,491 as at 30 June 2019. Auditor The lead auditor’s Independence Declaration for the year ended 30 June 2019 has been received and can be found on page 60 of the financial report. Non-Audit Services The directors are satisfied that the provision of non- audit services is compatibale with the general standard of independence for auditors imposed by the by the Corporations Act 2001 . The nature and scope of the type of non-audit service provided means that auditor independence was not compromised. Grant Thornton received or are due to receive $22,768 for the provision of tax compliance services. 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 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 significant events to report subsequent to reporting date. 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 2019 (“FY19”). 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 and retain high calibre executives; • Link executive rewards to shareholder value; • Have a material 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. 11 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORTLinking remuneration ‘at risk’ to Company performance The Group recorded a net loss after tax of $15.3m for the year ended 30 June 2019 compared to a net profit after tax of $4.9m in the previous financial year. Earnings per share decreased 24% to (9.56) cents per share. 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. 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 Remuneration and Nomination Committee and the Board. The table in Section E below details the fixed and variable components of the executives of the company. Fixed Remuneration The remuneration of Non-Executive Directors, the Executive Director and other Key Management Personnel for the Objective period ended 30 June 2019 is detailed in the table in Fixed remuneration is reviewed annually by the board. Section E. 12 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. EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORTStructure Structure Senior executives are given the opportunity to receive their LTI grants to executives are delivered in the form of fixed remuneration in a variety of forms including cash and performance rights. 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 table in Sections F and G provide details of performance rights granted and the value of equity instruments granted and lapsed during the year. The performance rights were The fixed remuneration component of the company issued for nil consideration. Each performance right entitles executives is detailed in the table in Section E. the holder to subscribe for one fully paid ordinary share Variable Remuneration - Short Term Incentive (STI) Objective in the entity based on achieving vesting conditions at a nil exercise price, and up to 1.5 ordinary shares should Stretch Performance Measures be achieved. During the financial year, 2,321,000 Performance Rights were issued under the Long Term Incentive Plan on terms The objective of the STI program is to link the achievement and conditions determined and approved by the Board of the Group’s performance and operational targets with of Directors. The number of Performance Rights offered is the remuneration received by the executives charged with based upon the share price of the company at the end of the meeting those targets. Structure Actual STI paid 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 financial year. The vesting conditions selected are designed to align remuneration with the objective of creating shareholder value over the long-term. The performance measures that have been chosen are: of a number of Key Performance Indicators (KPIs) covering • Basic Earnings per Share (EPS) adjusted for any abnormal both financial and non-financial measures of performance. costs or transaction costs due to its sensitive nature, Typically included are measures such as revenue, profitability, EPS targets are disclosed retrospectively should the customer service, risk management, and leadership/team Performance Rights vest. contribution. • Return on Equity (ROE), a measure of the net profit after Any STI payments are subject to the approval of the Board. tax for the financial year ended 30 June 2021 divided by Payments made are delivered as a cash bonus in the total equity as at 30 June 2021. Due to its sensitive nature, following financial year. In respect to the 2019 financial year ROE targets are disclosed retrospectively should the no STI will be paid to Key Managemnt Personnel. Performance Rights vest. • Absolute Total Shareholder Return is measured over the period 1 July 2018 to 30 June 2021. 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 objective of creating 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. 13 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORTNumber 928,400 Performance Measures FY 2021 Basic Below Threshold Threshold achieved Target achieved Stretch achieved 464,200 FY 2021 Return on Equity Below Threshold Threshold achieved Target achieved Stretch achieved Absolute TSR Below Threshold Threshold achieved Target achieved Stretch achieved 928,400 (1) Vesting to occur on a pro-rata basis Structure % Vesting(1) Vesting Dates 1 September 2021 0% 50% 100% 150% 0% 50% 100% 150% 0% 50% 100% 150% 1 September 2021 1 September 2021 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 unless raised at the Boards discretion. Where Performance Rights vest the holder of the Performance Right has until 30 September 2023 to exercise the Performance Right. Should the Directors consider that a Change of Control in the company has occurred or is likely to occur then Performance Rights will automatically vest on the basis one fully paid ordinary share for each Performance Right held with Board discretion to provide up to 1.5 fully paid ordinary shares for each Performance Right held. Consequence of performance on shareholder wealth In considering the Group’s performance and benefits for shareholder wealth, the Board have regard to the following metrics in respect of the current financial year and the previous three financial years: Item EPS (cents) Dividends (cents per share) Net profit (loss)($000) Share price ($) 2019 2018 2017 2016 2015 (9.56) - (14,826) 0.27 3.06 - 4,685 0.51 2.42 - 3,122 0.54 (1.47) - (1,545) 0.34 4.82 - 5,233 0.77 As a consequence of the FY19 performance, of the Company has not paid any STI to key management personnel or related Performance Rights in respect to the FY19 financial year as performance conditions were not achieved. 14 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORTC. Key Management Personnel D. Service Agreements (i) Directors Russell Baskerville - Managing Director The following persons were directors of Empired Limited • Terms of Agreement – commenced 1 July 2019, until during the financial year to date of report: terminated by either party, with six months notice. T Stianos Non-executive Chairman • Fees – fixed remuneration $600,000 per annum with an STI R Bevan Non-executive Director J Bardwell Non-executive Director C Nicolli Non-executive Director from 22 October 2018 C Ryan Non-executive Director to 27 November 2018 R Baskerville Managing Director and LTI bonus allocation to be determined by the Board. Thomas Stianos - Non-Executive Chairman • Terms of Agreement – appointed 29 November 2016. • Fee – fixed $120,000 per annum. Richard Bevan - Non-Executive Director • Terms of Agreement - appointed 31 January 2008. • Fee – fixed $90,000 per annum. (ii) Other key management personnel John Bardwell - Non-Executive Director The following persons also had authority and responsibility • Terms of Agreement – appointed 26 September 2011. 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 • Fee – fixed $75,000 per annum. Cristiano Nicolli - Non-Executive Director • Terms of Agreement – appointed 22 October 2018. Company Secretary • Fee – fixed $75,000 per annum. (iii) Remuneration of Key Management Personnel Secretary David Hinton - Chief Financial Officer and Company Information regarding key management personnel compensation for the year ended 30 June 2019 is provided in the table in Section E of this remuneration report. • Terms of Agreement – commenced 12 April 2016, until terminated by either party, with three months notice. • Salary – fixed remuneration $433,500 per annum with an additional STI cash bonus target of 25% of base fees and LTI bonus target of 40%# of base fees. Simon Bright – Chief Operating Officer • Terms of Agreement – commenced 1 July 2016, until terminated by either party, with three months notice. • Salary – fixed remuneration NZ$469,200 per annum with an STI cash bonus target of 30% of base fees and LTI bonus target of 40%# of base fees # As provided by the Empired Long Term Incentive Plan Rules, should stretch targets be achieved then the LTI benefit could be 50% higher. 15 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ 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 Non-cash Benefits Salary & Fees Cash STI Post- employment Super- annuation Share-based payments (1) Total % Performance related % of STI achieved Year Non-Executive Directors T. Stianos 2019 109,589 R. Bevan C. Nicolli (from 22 Oct 2018) C. Ryan (to 27 Nov 2018) J. Bardwell Executive Directors 2018 2019 2018 2019 2018 2019 2018 2019 2018 54,795 82,193 82,192 53,260 - 31,250 60,000 68,493 54,795 - - - - - - - - - - R. Baskerville 2019 644,453 9,168 - - - - - - - - - - - Key Management 2018 600,000 11,579 149,679 10,411 5,205 7,808 7,808 5,060 - - - 6,507 5,205 - - - - - - - - - - 120,000 60,000 90,001 90,000 58,320 - 31,250 60,000 75,000 60,000 - - 209,554 863,174 131,212 892,470 D. Hinton 2019 413,675 10,200 - 2018 388,128 12,633 52,388 S. Bright 2019 438,747 17,342 - 2018 418,804 12,179 63,564 28,207 36,872 13,222 8,420 112,614 564,696 59,645 549,666 113,956 583,268 60,997 563,964 (1) Comprises the share payment expense recognised in the reporting period for performance rights on issue. F. Directors’ and Key Management Personnel Equity Holdings Shares held in Empired Limited - - - - - - - - - - 24.3% 31.5% 19.9% 20.4% 19.5% 22.1% - - - - - - - - - - - 50.0% - 50.0% - 50.0% 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-18 Vesting of Performance Rights Net Change Other Balance 30-Jun-19 Directors R. Baskerville T. Stianos R. Bevan C. Nicolli C. Ryan J. Bardwell Total Key Management D. Hinton S. Bright Total 9,095,622 143,200 79,800 190,000* 60,000 4,099,904 13,668,526 52,093 150,877 202,970 29,661 - - - - - 29,661 - - - - - - 100,000 - 150,000 250,000 - (135,000) (135,000) 9,125,283 143,200 79,800 290,000 60,000 4,249,904 13,948,187 52,093 15,877 67,970 * Mr Nicolli held a relevant interest in 190,000 Ordinary shares at the date of his appointment. 16 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORT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. Directors R. Baskerville Key Management D. Hinton S. Bright Total Balance 01-Jul-18 Granted as remuneration Lapsed Vested Balance 30-June-19 2,193,487 880,000 (357,280) (29,661) 2,686,546 802,848 789,848 3,786,183 353,000 353,000 1,586,000 (96,970) (96,970) (551,220) - - (29,661) 1,058,878 1,045,878 4,791,302 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: 2019 Non- Executive Executive Directors Key Management 2018 Non- Executive Executive Directors Key Management Grant Date Number granted as remuneration Average Value per right at grant date Value of rights granted during the year - - - - 11/12/2018 16/07/2018 16/07/2018 - - - - 880,00 353,000 353,000 - - - - $0.30 $0.39 $0.39 - - - - $ 268,243 $ 138,370 $ 138,370 Grant Date Number granted as remuneration Average Value per right at grant date Value of rights granted during the year - - - - 6/12/2017 14/09/2017 14/09/2017 - - - - 852,00 318,000 330,000 - - - - $0.49 $0.63 $0.63 - - - - $ 291,299 $ 138,847 $ 143,972 T. Stianos R. Bevan C. Nicolli J. Bardwell R. Baskerville D. Hinton S. Bright T. Stianos R. Bevan C. Nicolli J. Bardwell R. Baskerville D. Hinton S. Bright 17 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ 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 subject to members' approval. Should the performance hurdle be satisfied then the Company will disclose the details in the subsequent Remuneration Report. During the financial year 49,278 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 Sustainability - as determined by the Board in respect of FY18 performance Achieved No. of Performance Rights 49,278 The Performance Rights vested represent 7% of the issuance of the Performance Rights in FY16, the balance of 93% was forfeited. H. Voting and comments made at the company’s 2018 Annual General Meeting The company did not receive any specific feedback at the AGM on its remuneration report. End of Remuneration Report Signed in accordance with a resolution of directors. Russell Baskerville Managing Director 12 August 2019 18 EMPIRED LIMITED | ANNUAL REPORT | 2019DIRECTORS’ REPORT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 The Group’s Corporate Governance Statement for the Group’’) have adopted the third edition of the Corporate financial year ended 30 June 2019 was approved by the Governance Principles and Recommendations which was Board on 8 August 2019. The Corporate Governance released by the ASX Corporate Governance Council on Statement is available on Empired’s website at 27 March 2014 and became effective for financial years www.empired.com/Investor- Centre/Corporate-Governance/. beginning on or after 1 July 2014. Consolidated Statement of Profit or Loss & Other Comprehensive Income For the year ended 30 June 2019 Revenue from contracts with customers Cost of services Gross Profit Other income Adminstration expenses Marketing expenses Occupancy expenses Impairment expenses Loss on disposal of assets Other expenses Operating (loss)/profit Finance expenses (Loss)/profit before income tax Income tax benefit/(expense) (Loss)/profit for the year Other comprehensive income/ (loss), net of income tax Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations Total comprehensive (loss)/ income for the year Earnings per share (cents per share): Basic loss per share Basic loss per share Notes 4 5 4 2019 $ 2018 $ 176,014,365 174,310,863 (110,364,007) (110,808,860) 65,650,358 63,502,003 60,239 37,909 6(a) (53,233,038) (48,063,572) (553,557) (796,427) (5,821,152) (5,556,385) 6(b) (25,352,785) - (706,077) - (14,361) (831,763) (19,956,012) 8,277,404 8 9 (1,394,816) (21,350,828) 6,038,981 (15,311,847) (1,348,691) 6,928,713 (2,046,403) 4,882,310 486,157 (14,825,690) (196,813) 4,685,497 10 10 (9.56) (9.56) 3.06 2.96 20 EMPIRED LIMITED | ANNUAL REPORT | 2019CONSOLIDATED STATEMENT Consolidated Statement of Financial Position As at 30 June 2019 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Work in progress Contract assets Other current assets Total Current Assets Non-Current Assets Plant and equipment Intangible assets Deferred tax asset Total Non-Current Assets TOTAL ASSETS LIABILITIES Current Liabilities Trade and other payables Income tax payable Borrowings Provisions Deferred revenue Contract liabilities Total Current Liabilities Non-Current Liabilities Borrowings Provisions Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained profits TOTAL EQUITY Notes 2019 $ 2018 $ 11 12 13 14 15 9 17 18 19 18 19 21 20 5,551,971 22,985,739 - 12,136,933 2,273,771 13,364,679 25,092,381 10,894,165 - 2,352,168 42,948,414 51,703,393 6,236,263 51,539,561 8,160,143 16,949,293 62,712,777 2,004,609 65,935,967 81,666,679 108,884,381 133,370,072 16,685,941 22,247,580 35,705 2,409,260 5,925,436 - 2,158,205 502,472 2,381,231 6,254,407 2,293,310 - 27,214,547 33,679,000 17,413,416 2,334,927 20,327,773 2,988,001 19,748,343 23,315,774 46,962,890 56,994,774 61,921,491 76,375,298 54,204,746 3,425,657 4,291,088 54,204,746 2,285,107 19,885,445 61,921,491 76,375,298 21 EMPIRED LIMITED | ANNUAL REPORT | 2019CONSOLIDATED STATEMENTConsolidated Statement of Cash Flow For the year ended 30 June 2019 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Income tax paid Notes 2019 $ 2018 $ 197,638,807 188,570,926 (188,288,868) (172,221,895) (854,150) (812,491) Net cash flows from operating activities 11(b) 8,495,789 15,536,540 Cash flows from investing activities Purchase of intangibles Purchase of plant and equipment Net cash flows used in investing activities Cash flows from financing activities Finance costs Repayment of borrowings Repayment of finance lease liabilities 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 (9,948,374) (8,153,440) (794,540) (735,158) (10,742,914) (8,888,598) (1,336,888) (8,779,869) (718,425) 5,260,794 (5,574,388) (1,349,361) (3,396,923) (998,186) 13,285,957 7,541,487 (7,821,513) 14,189,429 8,805 13,364,679 20,163 (844,913) 11(a) 5,551,971 13,364,679 22 EMPIRED LIMITED | ANNUAL REPORT | 2019CONSOLIDATED STATEMENTConsolidated Statement of Changes in Equity For the year ended 30 June 2019 Balance at 1 July 2017 Profit for the year Other comprehensive (loss) Share-based payments Balance at 30 June 2018 Adjustment for adoption of AASB 9 Loss for the year Other comprehensive gain Share-based payments Balance at 30 June 2019 - - - Issued Capital $ Retained Profits $ Foreign Currency Translation Reserve $ Employee Equity Benefits Reserve $ Total Equity $ 54,204,746 15,003,135 100,137 1,971,698 71,279,716 - - - 4,882,310 - - - (196,813) 54,204,746 19,885,445 (96,676) - - 410,085 4,882,310 (196,813) 410,085 2,381,783 76,375,298 - - - - (282,510) (15,311,847) - - 486,157 - 654,393 - - - (282,510) (15,311,847) 486,157 654,393 54,204,746 4,291,088 389,481 3,036,176 61,921,491 23 EMPIRED LIMITED | ANNUAL REPORT | 2019CONSOLIDATED STATEMENT Notes to the Financial Statements For the year ended 30 June 2019 1. CORPORATE INFORMATION The financial report of Empired Limited for the year ended 30 June 2019 was authorised for issue in accordance with a resolution of the directors on 12 August 2019. 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 The adoption of AASB 9 has not had a significant effect on the Group’s accounting policies related to financial liabilities. Trade receivables is the only financial asset that has been impacted by the adoption of the standard, specifically the measurement basis for the impairment of trade receivables. AASB 9 replaces the ‘incurred loss’ model in AASB 139 with an ‘expected credit loss’ (ECL) model. The new impairment model applies to financial assets measured at amortised cost. This includes trade receivables and cash and cash equivalents controlled entities. in Empired’s case. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Under AASB 9, loss allowances are measured on either 12-month ECLs or Lifetime ECLs. 12-month ECLs result from possible default events within the 12 months after reporting date and Lifetime ECLs result from all possible default events over the expected life of a financial instrument. The Group (a) General information and statement of compliance has elected to measure loss allowances on a 12-month ECL The consolidated general purpose financial statements basis. of the Group have been prepared in accordance When determining the credit risk for trade receivables the with the requirements of the Corporations Act 2001, Group uses quantitative and qualitative information and Australian Accounting Standards and other authoritative analysis, based on the Group’s historical experience and pronouncements of the Australian Accounting Standards informed credit assessment, as well as forward-looking Board. Compliance with Australian Accounting Standards information. The adoption of AASB 9 has resulted in an results in compliance with the International Financial increase to the provision for doubtful debts of $403,599, an Reporting Standards (‘IFRS’) as issued by the International increase to deferred tax assets of $121,080 and a decrease to Accounting Standards Board (IASB). Empired Limited is a opening retained earnings of $282,510. for-profit entity for the purpose of preparing the financial statements. The financial report has been prepared on an accruals basis, AASB 15 Revenue from Contracts with Customers and is based on historical costs modified where applicable, AASB 15 introduces a 5-step process for revenue recognition by measurement at fair value of selected non-current assets, from contracts with customers. The standard requires that financial assets and financial liabilities. The financial report is revenue be recognised when the performance obligation presented in Australian dollars. (b) New and revised standards that are effective for these financial statements is met, namely when the promised good or service is transferred to the customer. AASB 15 replaces all previous revenue related accounting standards. AASB 15 has been retrospectively applied with no impact to comparative figures, with the cumulative effect of initial recognition as an A number of new and revised standards are effective for adjustment to the opening balance of retained earnings at 1 the current reporting period, accounting polices have been July 2018. The application of AASB 15 has only been applied updated, no retrospective adjustments have taken place as a to contracts that are incomplete as at 1 July 2018. result of adopting these standards. Information on these new standards is presented below. AASB 9 Financial Statements AASB 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. The standard replaces AASB 139 Financial Instruments: Recognition and Measurement. AASB 15 does not include any guidance on how to account for loss contracts. Accordingly, such contracts are accounted for using the guidance in AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets’. 25 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 Under AASB 137, the assessment of whether a provision The estimated impact of this impending change as at needs to be recognised takes place at the contract level and 30 June 2019 can be summarised as follows: introduction of there are no segmentation criteria to apply. As a result, there a right-of-use asset of $16.7m, an increase in borrowings of are some instances where loss provisions recognised in the $19.2m and a reduction in provisions of $2.5m. past have not been recognised under AASB 15 because the contract as a whole is profitable. In addition, when two or more contracts entered into at or near the same time are required to be combined for accounting purposes, AASB 15 requires the Group to perform the assessment of whether the contract is onerous at the level of the combined contracts. The Group also notes that the amount of loss accrued in respect of a loss contract under AASB 111 takes into account The Group is planning to adopt AASB 16 on 1 July 2019 using the Standard’s modified retrospective approach. Under this approach the cumulative effect of initially applying AASB 16 is recognised as an adjustment to equity at the date of initial application. Comparative information is not re-stated. AASB Interpretation 23 Uncertainty over Income Tax an appropriate allocation of overheads. This contrasts with Treatment AASB 137 where loss accruals may be lower as they are based on the identification of ‘unavoidable costs’. A contract asset is defined as right to consideration in exchange for goods or services that has transferred to a customer, when that right is conditioned on something other than the passage of time, for example our future performance. A contract liability is an obligation to transfer goods or services to a customer for which consideration has been received from the customer (or payment is due) but the transfer has not yet been completed. The application of AASB 15 is not materially different from the previous standard in terms of revenue recognition. The application did not impact the way in which the Group accounts for revenues. (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 Group AASB 16 Leases AASB 16 replaces AASB 117 Leases and some lease-related Interpretations. In summary, AASB 16: • requires all leases to be accounted for ‘on-balance sheet’ by lessees, other than short-term and low value asset leases; • provides new guidance on the application of the definition of lease and on sale and lease back accounting; • largely retains the existing lessor accounting requirements in AASB 117; and • requires new and different disclosures about leases. The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of AASB 112 and does not apply to taxes or levies outside the scope of AASB 112, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately • The assumptions an entity makes about the examination of tax treatments by taxation authorities • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances. An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods beginning on or after 1 January 2019, but certain transition reliefs are available. The Group will apply the interpretation from its effective date. Since the Group operates in several tax jurisdictions applying the Interpretation may affect its consolidated financial statements. In addition, the Group may need to establish processes and procedures to obtain information that is necessary to apply the interpretation on a timely basis. At the date of authorisation of these financial statements, several new, but not effective, Standards and amendments to existing Standards, and interpretations have been published by the AASB. None of these Standards or amendments to existing Standards have been adopted early by the Group. 26 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 Management anticipates that all relevant pronouncements Impairment will be adopted for the first period beginning on or after the effective date of the pronouncement. New Standards, amendments and Interpretations not adopted in the current year have not been disclosed as they are not yet expected to have a material impact on the Group’s financial statements. (d) Basis of consolidation The Group financial statements consolidate those of the Parent Company and all of its subsidiaries as of 30 June 2019. The carrying values of plant and equipment are 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 Parent controls a subsidiary if it is exposed, or has rights, The recoverable amount of plant and equipment is the to variable returns from its involvement with the subsidiary greater of fair value less costs to sell and value in use. In and has the ability to affect those returns through its power assessing value in use, the estimated future cash flows are over the subsidiary. All subsidiaries have a reporting date of discounted to their present value using a pre-tax discount 30 June 2019. 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. Profit or loss and other comprehensive income of subsidiaries rate that reflects current market assessments of the time value of money and the risks specific to the asset. An item of 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 profit or loss in the period the item is derecognised. (f) Borrowing costs acquired or disposed of during the year are recognised from Borrowing costs are recognised as an expense when incurred the effective date of acquisition, or up to the effective date except where incurred in relation to qualifying assets where of disposal, as applicable. borrowing costs are capitalised. Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net (g) Goodwill 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. (e) 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: Leasehold Improvements 5 – 20 yrs Furniture & Fittings 1 – 15 yrs Computer Hardware 1 – 8 yrs 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 indicate that the carrying value may be impaired. Goodwill is not amortised. 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 27 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 unit to which the goodwill relates. Where the recoverable Following the initial recognition of the development amount of the cash-generating unit is less than the carrying expenditure, the cost model is applied requiring the asset amount, an impairment loss is recognised. to be carried at cost less any accumulated amortisation and Where goodwill forms part of a cash-generating unit and accumulated impairment losses. part of the operation within that unit is disposed of, the Software 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. Costs incurred in developing software are capitalised where future financial benefits can be reasonably assured. It is probable that the expected future economic benefits that Goodwill disposed of in this circumstance is measured on the are attributable to the asset will flow to the entitiy, and basis of the relative values of the operation disposed of and the cost of the asset can be measured reliably. These costs the portion of the cash-generating unit retained. include employee costs incurred on development along with appropriate portion of relevant overheads. (h) Intangible Assets Other Than Goodwill Amortisation is calculated on a straight-line basis depending Amortisation is calculated on a straight-line basis over the on the useful life of the asset. estimated useful life of the asset as follows: Software assets are treated for impairment where an Software Other 1 - 7 yrs 3 - 7 yrs indicator of impairment exists. The carrying amount of software is considered either individually or collectively in regard to estimated future cash flows. An impairment charge is raised where the value in the use exceeds the carrying Acquired both separately and from a business combination amount. Intangible assets acquired separately are capitalised 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 of indefinite lived intangibles annually, either individually or at the cash generating unit level. Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. Research and development costs Research and development costs are expensed as incurred. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised. (i) 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 recoverable amount the asset is considered impaired 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 Development expenditure incurred on an individual project from other assets or groups of assets, in which case, the is carried forward when its future recoverability can be recoverable amount is determined for the cash-generating reasonably assured. unit to which the asset belongs. 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. 28 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 (j) Operating segments Financial assets at amortised cost The Group has more than one reportable operating segment Financial assets are measured at amortised cost if the assets identified by and used by the Chief Executive Officer (chief meet the following conditions (and are not designated as operating decision maker). FVTPL): (k) Financial instruments Recognition, and derecognition Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument. 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 initial measurement of financial assets Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with AASB 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable). Financial assets, other than those designated and effective as hedging instruments, are classified into the following categories: • amortised cost • fair value through profit or loss (FVTPL) • fair value through other comprehensive income (FVOCI). In the periods presented the corporation does not have any financial assets categorised as FVOCI. The classification is determined by both: • the entity’s business model for managing the financial asset • the contractual cash flow characteristics of the financial asset. 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. • they are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows • the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Group’s cash and cash equivalents, trade and most other receivables fall into this category of financial instruments under AASB 9. Impairment AASB 9’s impairment requirements use more forward- looking information to recognise expected credit losses – the ‘expected credit loss (ECL) model’. This replaced AASB 139’s ‘incurred loss model’. Instruments within the scope of the new requirements included loans and other debt- type financial assets measured at amortised cost and FVOCI, trade receivables, contract assets recognised and measured under AASB 15 and loan commitments and some financial guarantee contracts (for the issuer) that are not measured at fair value through profit or loss. Recognition of credit losses is no longer dependant on the Group first identifying a credit loss event. Instead the Group considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument. In applying this forward-looking approach, a distinction is made between: • financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk (‘Stage 1’) and • financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low (‘Stage 2’) 29 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 ‘Stage 3’ would cover financial assets that have been Where discounting is used, the increase in the provision due objective evidence of impairment at the reporting date. to the passage of time is recognised as a finance cost. ’12-month expected credit losses’ are recognised for the No liability is recognised if an outflow of economic resources first category while ‘lifetime expected credit losses’ are as a result of present obligations is not probable. Such recognised for the second category. situation are disclosed as contingent liabilities unless the Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the outflow of resources is remote. expected life of the financial instrument. (o) Employee benefits (l) Trade and other receivables (i) Short-term employee benefits Liabilities for wages and salaries, including non-monetary The Group makes use of a simplified approach in accounting benefits, and accumulating sick leave expected to be settled for trade and other receivables as well as contract assets and within 12 months of the reporting date are recognised in records the loss allowance as lifetime expected credit losses. respect of employees’ services up to the reporting date. These are expected shortfalls in contractual cash flows, They are measured at the amounts expected to be paid when considering the potential for default at any point during the liabilities are settled. Expenses for non-accumulating the lifetime of the financial instrument. In calculating, the sick leave are recognised when the leave is taken and are Group uses its historical experience, external indicators and measured at the rates paid or payable. forward-looking information to calculate expected credit losses using a provision matrix. (m) Cash and cash equivalents (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 Cash and short-term deposits in the statement of financial after the end of the period in which the employees render position comprise cash at bank, in hand and short-term the related service. They are measured at the present value deposits with an original maturity of three months or less net of the expected future payments to be made to employees. of bank overdrafts. (n) Provisions, Contingent Assets and Liabilities 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 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 current liabilities in the statement of financial position if the Group does not have an unconditional right to defer settlement for at least twelve (12) months after the reporting period, irrespective of when the actual settlement is expected to of any reimbursement. take place. 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. (p) Share-based payment transactions The Group provides remuneration to certain employees, including directors, of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’). 30 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 The cost of these equity-settled transactions with employees Capitalised leased assets are depreciated over the shorter of is measured by reference to the fair value at the date at the estimated useful life of the asset or the lease term. which they are granted. The fair value 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. Further, the cost of equity-settled transactions is recognised, together with a corresponding increase in the Employee Equity Benefits Reserve, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘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. This opinion is formed based on the best available information at reporting date. No adjustment is made for the likelihood of market performance 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 to the carrying amount of the leased asset and recognised over the lease term on the same bases as the lease income. Operating lease payments are recognised as an expense in the consolidated profit or loss on a straight-line basis over the lease term. (r) Revenue from Contracts with Customers Revenue arises mainly from IT consulting services and product and license revenue. To determine whether to recognise revenue, the Group follows a 5-step process: conditions being met as the effect of these conditions is 1. Identifying the contract with a customer included in the determination of fair value at grant date. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised 2. Identifying the performance obligations 3. Determining the transaction price 4. Allocating the transaction price to the performance for any increase in the value of the transaction as a result of obligations 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 any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. (q) Leases Finance leases, which transfer to the Group substantially all 5. Recognising revenue when/as performance obligation(s) are satisfied. The Group often enters into transactions involving a range of the Group’s products and services. Revenue which represent income arising in the course of the Groups ordinary activities is recognised by reference to each distinct performance obligation promised in the contract with customers when or as the Group transfers the control of the goods or services promised in a contract and the customer obtains control of the goods or services. Depending on the substance of the respective contract with customers, the control of the promised goods or services may transfer over time or at a the risks and benefits incidental to ownership of the leased point in time. 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. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. A contract with customer exists when the contract has commercial substance, the Group and its customer has approved the contract and intend to perform their respective obligations, the Groups and the customers rights regarding the goods or services to be transferred and the payment terms can be identified, and it is probable that the Group will collect the consideration to which it will be entitled to in exchange of those goods or services. 31 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 Recognition and Measurement Control over the goods or services are transferred over time At the inception of each contract with customer, the Group and revenue is recognised over time if: assesses the contract to identify distinct performance (i) The customer simultaneously receives and consumes the obligations, being the units of account that determine benefits provided by the Groups performance as the Group when and how revenue from the contract with customer performs; is recognised. A performance obligation is a promise to transfer a distinct good or service (or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer) to the customer that is explicitly stated in the contract and/ or implied in the Groups customary business practises. A good or service is distinct if: (i) The customer can either benefit from the good or service on its own or together with other readily available resources; and (ii)The Groups performance creates or enhances a customer- controlled asset; or (iii) The Groups performance does not create an asset with alternative use and the Group has a right to payment for performance completed to date. Revenue for a performance obligation that is not satisfied over time is recognised at the point in time at which the customer obtains control of the promised goods or services. (ii) The good or service is separately identifiable from other SaaS promises in the contract (e.g. the good or service is not integrated with, or significantly modify, or highly interrelate with, other goods or services promised in the contract). If a good or service is not distinct, the Group combines it with other promised goods or services until the Group identifies a distinct performance obligation consisting a distinct bundle of goods or services. Revenue is measured at the amount of consideration to which the Group expects to be entitled in exchange for transferring the promised goods or services to the customers, excluding amounts collected on behalf of third parties such as sales and service taxes or goods and services taxes. If the amount of consideration varies due to discounts, rebates, credits, incentives, performance bonuses, penalties or other similar items, the Group estimates the amount of consideration that it expects to be entitled based on the expected value or the most likely outcome but the estimation is constrained up to the amount that is highly probable of no significant reversal in the future. If the contract with customer contains more than one distinct performance obligation based on the relative stand-alone selling prices of the goods or services promised in the contract. If a standalone selling price is not directly Revenue is derived from providing customers access to group platforms and is recognised in accordance with the terms of contracts provided in the subscription agreement. The SaaS and related support revenue (if any) is recognised over time, being the subscription period, as the customer simultaneously receives and consumes the benefit of accessing the platform. Access to the platforms is not considered distinct from other performance obligations, such as set-up and support, as access to any platform alone does not allow the customer to obtain substantially all the benefits of the access, and is therefore accounted for as a single performance obligation. Consideration received can be variable in nature, based upon customer usage in excess of contractually agreed units. The variable consideration is included in the transaction price at the company’s best estimate, using either an expected value or most likely outcome, whichever provides the best estimate and is included in revenue to the extent that it is highly probable that there will be no significant reversal of the cumulative amount of revenue when any price uncertainty is resolved. Product and License Revenue observable, the Group will need to estimate it using adjusted Revenue from the sale of product and software licenses market assessment approach, expected cost plus a margin is recognised when or as the Group transfers control of approach and residual approach. The consideration allocated to each performance obligation the assets to the customer. Invoices for goods or services transferred are due upon receipt by the customer. is recognised as revenue when or as the customer obtains Professional Services control of the goods or services. At the inception of each contract with customer, the Group determines whether control of the goods or services for each performance obligation is transferred over time or at a point. Revenue from professional services for a fixed fee or time and material is recognised when or as the Group transfers control of the assets to the customer. Invoices for goods or 32 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019services transferred are due upon receipt by the customer. Deferred income tax liabilities are recognised for all taxable Revenue is recognised over time as the work is performed. As temporary differences: costs are generally incurred uniformly as the work progresses and are considered to be proportionate to the entity’s performance. (s) Foreign currency transactions The consolidated financial statements are presented in • 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 Australian Dollars (‘$AUD’), which is also the functional • in respect of taxable temporary differences associated with 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 settlement of such transactions investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. and from the re-measurement of monetary items at year • Deferred income tax assets are recognised for all end exchange rates are recognised in profit or loss. Non- deductible temporary differences, carry-forward of unused monetary items are not retranslated at year-end and are tax assets and unused tax losses, to the extent that it is measured at historical cost (translated using the exchange probable that taxable profit will be available against which rates at the date of the transaction), except for non- the deductible temporary differences, and the carry- monetary items measured at fair value which are translated forward of unused tax assets and unused tax losses can be using the exchange rates at the date when fair value was utilised: determined. In the Group’s financial statements, all assets, liabilities and transactions of Group entities with a functional currency other than the $AUD are translated into $AUD upon consolidation. The functional currency of the entities in the Group has remained unchanged during the reporting period. 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 been treated as assets and liabilities of the foreign entity and translated into $AUD at the closing rate. Income and expenses have been translated into $AUD at the average rate over the reporting period. 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. (t) Income tax 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. » except where the deferred income tax asset relating to the deductible temporary differences 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 » in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred 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 differences can be utilised. 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 taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. The tax expense recognised in profit or loss compromises the sum of deferred tax and current tax not recognised in other comprehensive income. The calculation of current tax is based on tax rates and tax laws that have been enacted or substantially enacted by the end of the reporting period. Deferred taxes are calculated using the balance sheet liability method. 33 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 (u) Other taxes Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the Revenues, expenses and assets are recognised net of the future. The estimates and assumptions that have a significant amount of GST except: • 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. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The Group tests annually whether goodwill has suffered any impairment, in accordance with the 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. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation (ii) Share based payments authority. (v) Equity and reserves 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 Share capital represents the nominal (par) value of shares option pricing model that takes into account the terms that have been issued. Other components of equity include the following: • translation reserve - compromises foreign currency translation differences arising from the translation of financial statements of the Group’s foreign entities into 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 AUD. and equity. Retained earnings includes all current and prior period (iii) Long service leave provision retained profits and share-based employee remuneration. The liability for long service leave is recognised and measured at the present value of the estimated future (w) Significant accounting judgements, estimates and assumptions cash flows to be made in respect of all employees at the reporting date. In determining the present value of the Estimates and judgements are continually evaluated and are based on historical experience and other factors, including liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. expectations of future events that may have a financial The Group uses the high quality corporate bond rate as impact on the entity and that are believed to be reasonable the discount rate when measuring its Australian dollar under the circumstances. dominated long term employee benefits. 34 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 (iv) Estimation of useful lives of assets (v) Recognition of deferred tax assets The Group determines the estimated useful lives and related The extent to which deferred tax assets can be recognised depreciation and amortisation charges for its property, is based on an assessment of the probability that future plant and equipment and finite life intangible assets. The taxable income will be available against which the deductible useful lives could change significantly as a result of technical temporary differences and tax loss carry-forwards can be innovations or some other event. The depreciation and utilised. In addition, significant judgement is required in amortisation charge will increase where the useful lives are assessing the impact of any legal or economic limits or less than previously estimated lives, or technically obsolete or uncertainties in various tax jurisdictions. non-strategic. 3 SEGMENT REPORTING Management identifies its operating segments based on the Group's geographical presence, which represent the main products and services: • Australia • New Zealand The revenues and profit generated by each of the Group’s operating segments and segment assets are summarised as follows: 2019 Revenue From external customers From other segment Total Segment profit (EBITDA) prior to underlying adjustments Segment profit (Underlying EBITDA) Impairment Segment assets Segment non-current assets 2018 Revenue From external customers From other segment Total Segment profit (EBITDA) prior to underlying adjustments Segment profit (underlying EBITDA) Segment assets Segment non-current assets Australia $ New Zealand $ Elimination $ Total $ 115,504,559 60,509,806 - 176,014,365 1,019,631 427,972 (1,447,603) - 116,524,190 60,937,778 (1,447,603) 176,014,365 7,325,359 8,442,350 17,343,902 74,353,328 56,564,601 6,475,178 6,849,935 8,008,883 34,531,053 9,371,367 116,056,995 58,253,868 13,800,537 15,292,285 25,352,785 108,884,381 65,935,968 174,310,863 - - - - - 618,968 960,252 (1,579,220) - 116,675,963 59,214,120 (1,579,220) 174,310,863 11,062,236 11,598,267 96,367,754 56,716,370 5,351,882 5,374,109 37,002,318 24,950,309 16,414,118 16,972,376 133,370,072 81,666,679 - - - 35 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 The Group’s segment operating EBITDA reconciles to the Group’s profit before tax as presented in the financial statements as follows: Total reporting segment operating underlying EBITDA Less: Finance costs (net) Depreciation and amortisation expenses One off costs Impairment Group profit/ (loss) before tax 4. REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue Services revenue Product and license revenue Total revenue from contracts with customers Other Income Interest Total revenue and other income Geographical markets Australia Services revenue Product and license revenue New Zealand Services revenue Product and license revenue Total revenue from contracts with customers Timing of revenue recognition Services Revenue Transferred at a point in time Transferred over time Product and license revenue Transferred at a point in time Transferred over time 2019 $ 2018 $ 15,292,285 16,972,376 (1,334,577) (8,464,003) (1,491,748) (25,352,785) (21,350,828) (1,310,782) (8,160,262) (558,258) (14,361) 6,928,713 2019 $ 2018 $ 159,398,897 16,615,468 157,092,408 17,218,455 176,014,365 174,310,863 60,239 37,909 176,074,604 174,348,772 103,879,098 11,625,460 103,559,810 12,497,182 55,519,798 4,990,008 53,532,598 4,721,273 176,014,365 174,310,863 88,785,722 70,613,175 14,033,939 2,581,530 89,194,947 67,897,461 15,484,565 1,733,890 Total revenue from contracts with customers 176,014,365 174,310,863 Customers generally pay for amounts billed on a 30 day basis. Contract assets and contract liabilities remained relatively constant. 36 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 5. COST OF SERVICES The comparative for cost of services shown in the Statement of Profit or Loss and Other Comprehensive Income has been reduced by $3,246,604 with employment benefits expenses increased by $1,447,084 and other administration expenses increased by $1,799,520 as shown in note 6. The amendment to the comparative has been made for consistency purposes as a result of minor changes in the operation of the business. The table below discloses what was previously reported in the Financial Report for the period ending 30 June 2019 to what is now reported. Cost of services Employment benefit expenses Other administration expenses 6. EXPENSES (a) Administration expenses Employee benefits (not included in cost of sales) Depreciation expenses Amortisation expenses Other administration expenses (b) Impairment expenses Plant and equipment (refer Note 14) Intangible assets (refer Note 15) Trade and other receivables 7. EMPLOYEE BENEFITS EXPENSE Employee benefits included in cost of sales Employee benefits included in administration expenses 12 months to 30 June 2018 Change 110,808,860 (3,246,604) 29,664,510 10,238,800 1,447,084 1,799,520 Previously reported 12 months to 30 June 2018 114,055,464 28,217,426 8,439,280 2019 $ 32,723,546 4,043,395 4,420,608 12,045,489 2018 $ 29,664,510 4,571,722 3,588,540 10,238,800 53,233,038 48,063,572 7,614,851 17,029,201 708,734 25,352,785 - - - - 2019 $ 94,107,823 32,723,546 2018 $ 95,751,863 29,664,510 126,831,369 125,416,373 37 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 8. FINANCE EXPENSE Interest expenses - bank borrowings Interest expenses - finance leases and hire purchase Interest expenses - other 9. INCOME TAX (a) Income tax expense 2019 $ 1,330,432 46,011 18,373 2018 $ 1,308,425 40,266 - 1,394,816 1,348,691 The major components of tax expense and the reconciliation of the expected tax expense based on the domestic effective tax rate of Empired Ltd at 30% (2018: 30%) and the reported tax expense in profit or loss are as follows: Current income tax payable Deferred income tax relating to origination and reversal of temporary differences Origination and reversal of temporary differences Under provision in respect of prior years Income tax reported in profit or loss 2019 $ 451 - (6,086,495) 47,063 (6,038,981) 2018 $ 857,149 1,365,204 (175,950) - 2,046,403 (b) Numerical reconciliation between aggregate tax expense calculated per the statutory income tax rate recognised in the comprehensive income statement and tax expense 2019 $ 2018 $ (21,350,828) 6,928,713 (6,405,248) 58,663 196,318 5,736 174,591 (116,104) - 47,063 - (6,038,981) 2,079,518 (102,038) - - 215,743 (36,949) - (183,780) 73,909 2,046,403 Accounting profit before income tax Income Tax Expense to Accounting Profit Domestic tax rate for Empired Ltd (30%) Tax rate differential Employee option expense Amortisation of intangibles Other expenditure not allowed for income tax purposes Foreign exchange differences R&D offset income tax variance Under provision in respect of prior years Other income for income tax purposes Income tax expense 38 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 (c) Recognised deferred tax assets and liabilities Deferred income tax balances at 30 June 2019 relate to the following: (i) Deferred tax liabilities Contract assets Fixed assets Trade & other receivables Other Gross deferred tax liabilities (ii) Deferred tax assets Provisions Equity raising costs Borrowing costs R&D offset carried forward Fixed assets Trade & other receivables Employee obligations Other Tax losses Gross deferred tax assets Deferred income tax balances relate to the following: 2019 $ 2018 $ 3,140,945 - - 36,416 3,177,361 1,038,256 106,227 1,595 3,745,620 2,778,803 63,882 2,159,093 29,545 1,414,485 2,874,258 3,030,446 24,495 24,848 5,954,048 1,064,224 193,460 3,269 4,100,040 - 2,482 2,102,834 12,514 479,833 11,337,506 7,958,656 Opening Balance $ Recognised in Profit and Loss $ Recognised in Other Comprehensive Income $ Exchange Differences $ 30 June 2019 Deferred tax liabilities Contract assets Fixed assets Trade & other receivables Other 2,874,258 3,030,446 24,495 24,849 266,686 (3,030,447) (24,495) 9,235 Gross deferred tax liabilities 5,954,048 (2,779,021) Deferred tax assets Provisions Equity raising costs Borrowing costs R&D offset carried forward Fixed assets Trade & other receivables Employee obligations Other Tax losses Gross deferred tax assets 1,064,225 193,460 3,269 4,100,040 - 2,482 2,102,835 12,514 479,833 7,958,657 2,004,609 (25,968) (87,233) (1,674) (354,420) 2,769,360 61,423 30,369 13,930 854,625 3,260,411 6,039,432 - - - - - - - - - - - - - - - - - - 2,333 2,333 - - - - 9,443 (23) 25,889 3,100 80,027 118,436 116,103 Closing Balance $ 3,140,944 - - 36,417 3,177,361 1,038,257 106,227 1,595 3,745,620 2,778,803 63,881 2,159,093 29,544 1,414,485 11,337,504 8,160,143 39 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 (c) Recognised deferred tax assets and liabilities (continued) Opening Balance $ Recognised in Profit and Loss $ Recognised in Other Income $ Exchange Differences $ 30 June 2019 Deferred tax liabilities Contract assets Fixed assets Trade & other receivables Other 2,606,793 3,369,352 - 49,470 Gross deferred tax liabilities 6,025,615 Deferred tax assets Provisions Equity raising costs Borrowing costs R&D offset carried forward Trade & other receivables Other Tax losses 3,269,110 331,361 7,397 4,840,625 18,845 2,602 747,305 267,465 (338,302) 24,495 (24,621) (70,963) (101,508) (137,901) (4,128) (740,585) (16,345) 9,431 (269,182) Gross deferred tax assets 9,217,245 (1,260,218) Closing Balance $ 2,874,258 3,030,446 24,495 24,849 - (604) - - (604) 5,954,048 (543) - - - (18) 481 1,710 1,630 3,167,059 193,460 3,269 4,100,040 2,482 12,514 479,833 7,958,657 - - - - - - - - - - - - - (d) Tax consolidation 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. 40 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 201910. EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing net (loss)/ profit for the year attributable to ordinary equity holders of the parent. The following represents the income and share data used in the basic and diluted earnings per share computations: Net (loss)/ profit attributable to ordinary equity holders of the parent Weighted average number of ordinary shares for basic earnings per share Effect of Dilution: Performance rights Weighted average number of ordinary shares adjusted for the effect of dilution 2019 $ (15,311,847) 160,127 6,481,636 6,641,763 2018 $ 4,882,310 159,751 5,184 164,935 As the group incurred a loss for the period, the options on issue have an anti-dilutive effect, therefore the diluted EPS is equal to the basic EPS. A total of 2,730,369 (2018: 5,184,000) performance rights which could potentially dilute EPS in the future have been excluded from the diluted EPS calculation because they are anti-dilutive for the current year presented. 11. CASH AND CASH EQUIVALENTS (a) Reconciliation of cash For the purpose 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 2019 $ 5,551,971 5,551,971 2018 $ 13,364,679 13,364,679 (b) Reconciliation of net cash flows from operating activities to profit after income tax (Loss)/ profit after income tax Finance expenses (net) Depreciation and amortisation Impairment losses Share payment expense Changes in assets and liabilities net of effects of purchases and disposals of: (Increase) / decrease in receivables (Increase) / decrease in contract assets Increase / (decrease) in trade creditors and other payables Increase / (decrease) in contract liabilities (Increase) / decrease in deferred tax asset Increase / (decrease) in provisions Net cash from operating activities 2019 $ (15,311,847) 1,334,578 8,464,003 25,352,785 654,393 2,545,732 (1,242,767) (6,028,406) (135,104) (6,155,534) (982,044) 8,495,789 2018 $ 4,882,310 1,310,782 8,160,262 14,361 410,096 (1,186,739) (1,441,258) 3,824,789 (984,753) 1,187,021 (640,331) 15,536,540 41 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 12. TRADE AND OTHER RECEIVABLES Current Gross trade receivables Allowance for credit losses (refer Note 23) Other receivables 2019 $ 23,542,062 (997,876) 441,553 2018 $ 25,104,980 (165,920) 153,321 22,985,739 25,092,381 Trade receivables are non-interest bearing and are generally on 30-day terms. A provision for impairment is recognised when there is objective evidence that an amount is considered not collectible. 13. OTHER CURRENT ASSETS Prepayments 2019 $ 2018 $ 2,273,771 2,352,168 14. PLANT AND EQUIPTMENT 2019 Gross carrying amount Balance 1 July 2018 Additions Disposals Exchange differences Balance 30 June 2019 Depreciation and impairment Balance 1 July 2018 Disposals Impairment losses Depreciation Balance 30 June 2019 Carrying amount 30 June 2019 Leased equipment $ Leasehold improvements $ Computer hardware $ Furniture, Equipment & Fittings $ Total $ 39,506 - (39,506) - - (35,031) 39,506 - (4,475) - - 6,015,328 520,255 (113,982) 26,408 21,073,555 253,138 2,603,290 21,147 29,731,679 794,540 (13,357,042) (1,170,777) (14,681,307) 63,778 60,491 150,677 6,448,009 8,033,429 1,514,151 15,995,590 (2,059,565) 106,605 (75) (579,037) (9,599,274) 9,245,225 (3,238,656) (3,167,683) (2,532,072) (6,760,388) (1,088,516) (12,782,386) 933,327 (19,476) (292,202) (466,867) 10,324,663 (3,258,207) (4,043,397) (9,759,327) 3,915,937 1,273,041 1,047,284 6,236,263 During the financial year an impairment charge of $7,614,851 (inclusive of disposed assets) was raised following a review of the year end carrying values and the value in use of the assets. The assessment of value in use considered a number of factors impacting future cash flows including general technological change and obsolescence and strategic direction of the Group. There were no impairment charges reversed during the current or previous financial year in relation to property, plant and equipment. 42 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 2018 Gross carrying amount Balance 1 July 2017 Additions Disposals Exchange differences Balance 30 June 2018 Depreciation and impairment Balance 1 July 2017 Disposals Impairment losses Depreciation Leased equipment $ Leasehold improvements $ Computer hardware $ Furniture, Equipment & Fittings $ Total $ 39,506 6,062,054 20,505,974 2,638,019 29,245,553 - - - 3,815 (29,917) (20,624) 673,190 (1,607) (104,002) 58,153 (2,487) (90,395) 735,158 (34,011) (215,021) 39,506 6,015,328 21,073,555 2,603,290 29,731,679 (32,787) (1,518,972) (5,877,590) - (2,244) - 15,564 (556,586) 429 1,257 (3,736,521) 13,580 (850,326) 1,559 (276,371) 36,622 (8,279,675) 18,380 (4,571,722) 50,631 Balance 30 June 2018 (35,031) (2,059,565) (9,599,274) (1,088,516) (12,782,386) Carrying amount 30 June 2018 4,475 3,955,763 11,474,281 1,514,774 16,949,293 15. INTANGIBLE ASSETS 2019 Gross carrying amount Balance 1 July 2018 Additions Disposals Exchange differences Balance 30 June 2019 Depreciation and impairment Balance 1 July 2018 Disposals Amortisation Impairment losses Exchange differences Balance 30 June 2019 Goodwill $ Software $ Other $ Total $ 46,446,049 - - - 24,486,954 9,948,374 (7,687,527) 135,253 46,446,049 26,883,054 - - - - - - (8,291,525) 7,136,002 (4,420,608) (16,477,675) 261,173 (21,792,633) 355,462 - (249,303) 56,391 162,550 (284,163) 249,302 - - (124,598) (159,459) 71,288,465 9,948,374 (7,936,830) 191,644 73,491,653 (8,575,688) 7,385,304 (4,420,608) (16,477,675) 136,576 (21,952,092) Carrying amount 30 June 2019 46,446,049 5,090,421 3,091 51,539,561 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. During the financial year an impairment charge of $17,029,201 was raised following a review of the year end carrying values and the value in use of the assets. The assessment considered a number of factors impacting the carrying values including general technological change and obsolescence and strategic direction of the Company. There were no impairment charges reversed during the current or previous financial year in relation to intangible assets. 43 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 2018 Gross carrying amount Balance 1 July 2017 Additions Exchange differences Balance 30 June 2018 Depreciation and impairment Balance 1 July 2017 Amortisation Exchange differences Balance 30 June 2018 Goodwill $ Software $ 46,446,049 - - 16,153,436 8,332,703 815 Other $ 355,462 - - Total $ 62,954,947 8,332,703 815 46,446,049 24,486,954 355,462 71,288,465 - - - - (4,625,726) (3,511,144) (154,655) (276,772) (77,396) 70,005 (4,902,498) (3,588,540) (84,650) (8,291,525) (284,163) (8,575,688) Carrying amount 30 June 2018 46,446,049 16,195,429 71,299 62,712,777 Goodwill Goodwill acquired through business combinations with indefinite lives are allocated to the Australian and New Zealand cash generating units. Australia New Zealand Total carrying amount of goodwill 2019 $ 27,105,898 19,340,151 46,446,049 2018 $ 27,105,898 19,340,151 46,446,049 The Group performed the annual impairment test in June 2019. 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 Managements key assumption is that stable economic conditions prevail for the foreseeable future. Cash flow projections reflect stable profit margins previously achieved and that no material deterioration in the cash margin are anticipated. The sensitivity analysis undertaken considers each key assumption in isolation and does not take into account any remedial action that may be taken if, for example, margins were to deteriorate. The calculation of value in use for each CGU is most sensitive to the following assumptions: Gross profit margins - are based upon FY20 budgets and margins achieved in the current year. Gross profit margins are the most sensitive variable to the value in use calculation. However, a reasonable possible change is not likely to cause a material impairment. If gross profit margins were to reduce by more than 200 basis points in Australia or by more than 500 basis points in New Zealand without any compensating adjustment to cash flows then it is likely that a goodwill impairment charge would occur. 44 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019Cost price inflation – has been based upon publicly available inflationary data. Growth rate estimates – 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 costs have been assumed post year 5 at 3%. If terminal growth was to reduce to zero, in real terms, then it is estimated that a goodwill impairment charge is unlikely. 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 14.6% which is applied to the pre-tax cash flows after replacement capital expenditure of each CGU. 16. EMPLOYEE BENEFITS The total expense relating to equity-settled share-based payment transactions in 2019 was $654,393 (2018: $410,085). During 2019 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 performance 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 2019 No. 5,184,166 2,321,000 (974,252) (49,278) 6,481,636 2018 No. 5,023,659 2,075,000 (443,192) (1,471,301) 5,184,166 A summary of the performance criteria and vesting dates is as follows: Number of Performance Rights Number of Ordinary Vesting Date Hurdle description 587,576 587,576 1,175,150 380,067 * 380,067 * 768,133 * 380,067 889,200 * 444,600 * 889,200 * 587,576 587,576 1,175,150 570,101 570,101 1,152,200 380,067 1,333,800 666,900 1,333,800 31 August 2019 31 August 2019 31 August 2019 30 August 2020 30 August 2020 30 August 2020 30 August 2020 1 September 2021 1 September 2021 1 September 2021 FY18 Basic EPS FY19 Basic EPS Relative Total Shareholder Return FY19 Basic EPS FY20 Basic EPS Relative Total Shareholder Return Sustainability measure FY21 Basic EPS FY21 Return on Equity Absolute TSR 6,481,636 8,357,271 * For these Tranches should a change of control of the Company occur in accordance with the Long Term Incentive Plan Rules the Directors have the discretion to issue up to 1.5 ordinary shares per Performance Right. 45 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 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: Grant date Vesting period ends Share price at date of grant Term Fair value at grant date Performance rights granted 16 July 2018 11 December 2018 1 September 2021 1 September 2021 $0.39 3 yrs $276,740 1,441,000 $0.30 3 yrs $268,243 880,000 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 AND OTHER PAYABLES Trade payables Other payables 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. 18. BORROWINGS Current Designated at amortised cost: Obligations under bank loan Obligations under NZ-Dollar bank loan Obligations under finance leases and hire purchase contracts Obligations under premium funding contracts Non-current Designated at amortised cost: Obligations under bank loan Obligations under NZ-Dollar bank loan 46 2019 $ 5,358,019 11,327,922 16,685,941 2018 $ 10,744,831 11,502,749 22,247,580 2019 $ - 2018 $ 55,000 2019 No. 2018 No. 1,200,000 1,200,000 669,612 376,534 163,114 640,559 245,935 294,737 2,409,260 2,381,231 15,069,770 2,343,646 17,413,416 17,445,255 2,882,518 20,327,773 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019Summary of facilities At reporting date, the following financing facilities were available: Bank 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 Summary of covenants The bank debt facilities comprise: 2019 No. 2018 No. 23,413,259 22,989,396 (19,283,028) (22,168,332) 4,130,231 821,064 3,500,000 (2,626,630) 873,370 3,500,000 (2,573,283) 926,717 4,000,000 4,000,000 - - 4,000,000 4,000,000 • non-revolving term debt of $8,413,259 maturing in February 2021 with quarterly principal repayments; • borrowing base facility of $15,000,000, drawn to $10,869,770 at 30 June 2019. This facility matures in February 2021; • bank guarantee facility of $3,500,000 maturing in February 2021; and • lease facility of $4,000,000 maturing in February 2021 The term debt, borrowing base and bank guarantee facilities 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 borrowing base utilisation as a percentage of certain trade debtors. Security arrangements Security for the above bank facilities has been provided as follows: • Registered General Security Interest provided by Empired Limited and Intergern Limited; • Specific Security deed over the shares in the subsidiaries of Empired Limited; and • Cross guarantee and indemnity provided by each group entity. 47 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 19. PROVISIONS Year end 30 June 2019 Balance at the beginning of the year Discounting adjustment Additional provisions Amounts used Closing value at 30 June 2019 Analysis of total provisions: Current Provision for Annual Leave Provision for Long Service Leave Provision for Lease Incentives Non-current Provision for Long Service Leave Provision for Lease Incentives 20. RESERVES Lease Incentives $ 3,400,275 - - (935,731) 2,464,544 Annual Leave $ Long Service Leave $ 4,353,145 (8,453) 7,895,467 (8,098,137) 4,142,022 1,488,988 - 453,426 (288,617) 1,653,797 2019 $ 4,142,022 919,191 864,223 5,925,436 734,606 1,600,321 2,334,927 Total $ 9,242,408 (8,453) 8,348,893 (9,322,485) 8,260,363 2018 $ 4,353,145 945,979 955,283 6,254,407 543,009 2,444,992 2,988,001 Foreign Currency Translation Reserve $ Employee Equity Benefits Reserve $ Total Reserves $ Opening balance as at 1 July 2017 Exchange differences arising on translation of foreign operations Share-based payments Closing balance as at 30 June 2018 Exchange differences arising on translation of foreign operations Share-based payments Closing balance as at 30 June 2019 100,137 (196,813) - (96,676) 486,157 - 389,481 1,971,698 - 7,895,467 2,381,783 - 654,393 3,036,176 2,071,835 (196,813) 410,085 2,285,107 486,157 654,393 3,425,657 48 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 21. ISSUED CAPITAL Ordinary Shares fully paid Movement in ordinary shares on issue At 1 July 2017 Issue of ordinary shares (net of issue costs) At 30 June 2018 Issue of ordinary shares (net of issue costs) At 30 June 2019 2019 $ 2018 $ 54,204,746 54,204,746 No. 158,606,618 1,471,301 160,077,919 49,278 Value ($) 54,204,746 54,204,746 - 160,127,197 54,204,746 Ordinary shares entitle the holder to participate in dividends, and carry one vote per share. These shares have no par value. On 3 July 2018, the company issued 49,278 ordinary shares for the vesting of Performance Rights. 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. 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 2019 and 30 June 2018 are as follows: Note 18 11(a) Consolidated Group 2019 $ Consolidated Group 2018 $ 19,822,676 (5,551,971) 14,270,705 54,204,746 68,475,451 19% 22,709,004 (13,364,679) 9,344,325 54,204,746 63,549,071 11% Total Borrowings Less cash and cash equivalents Net Debt Issued Capital Total Capital Gearing ratio 22. DIVIDENDS Balance of franking account at year end at 30% available to the shareholders of Empired Limited for subsequent financial years 24,841 24,841 2019 $ 2018 $ 49 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 23. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s principal financial instruments consist of bank loans, cash, trade receivables and trade payables. The main purpose of the financial liabilities is to raise finance for the Group’s operations. Financial instruments such as trade debtors and trade creditors, which arise directly from its operations. The Group has a 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. 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 11. Refer to note 23 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% (2018: +/- 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. Year end 30 June 2019 30 June 2019 30 June 2018 Foreign currency risk Profit for the year Equity $ +1% 99,895 (65,410) $ -1% (99,895) 65,410 $ +1% 99,895 (65,410) $ -1% (99,895) 65,410 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 currency. 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 2019 $ 2018 $ 12,177,993 9,629,754 (5,029,652) (5,143,590) 7,148,341 4,486,164 2019 $ 566,866 (48,005) 518,861 2018 $ 570,376 - 570,376 2019 $ 3,826 (1,799) 2,027 2018 $ 49,312 (23,261) 26,051 50 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 201923. FINANCIAL RISK MANAGEMENT OBJECTIVES AND 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 (2018: 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% (2018: 10%) then this would have had the following impact: Year end 30 June 2019 30 June 2019 30 June 2018 NZD $ 714,834 448,616 USD $ 51,886 57,038 SGD $ 203 2,605 If the $AUD had weakened against the respective currencies by 10% (2018: 10%) then this would have had the following impact: Year end 30 June 2019 30 June 2019 30 June 2018 NZD $ (714,834) (448,616) USD $ (51,886) (57,038) SGD $ (203) (2,605) 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 commodity price risk is minimal. Credit risk The Group trades only with recognised, creditworthy third parties. It is the Group policy that 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. 51 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 Exposure to credit risk The Group’s maximum exposure to credit risk at the report date was: Cash and cash equivalents (note 11 ) Trade and other receivables (note 12 ) The aging of the Group’s non-impaired trade receivables at reporting date was: 2019 $ 5,551,971 22,985,739 28,537,710 2018 $ 13,364,679 25,092,381 38,457,060 30 June 2019 Expected credit loss rate Gross carrying amount Lifetime expected credit loss 30 June 2018 Expected credit loss rate Gross carrying amount Lifetime expected credit loss Trade receivables past due More than 30 days More than 60 days More than 90 days Total 1.0% 2,932,281 29,323 6.0% 466,013 27,961 35.0% 309,129 108,195 22,544,186 174,897 Trade receivables past due More than 30 days More than 60 days More than 90 days Total 1.0% 2,297,151 22,972 6.0% 764,590 45,875 35.0% 519,827 181,939 24,939,060 261,465 Current 0.1% 18,836,762 9,418 Current 0.1% 21,357,492 10,679 The closing balance of the trade receivables less allowances at 30 June 2019 reconciles with trade receivables: Opening balance of provision for doubtful debts Amounts recognised through opening retained earnings Opening estimated credit losses 1 July 2018 Receivables written off during the year (note 23) Estimated credit losses provided in year Expected credit loss at 30 June 2019 $ 165,920 367,263 533,183 (154,300) 618,993 997,876 52 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019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 2019, the Group’s financial liabilities have contractual maturities (including interest payments where applicable) as summarised: Year end 30 June 2019 Insurance premium funding loan Bank borrowings Finance leases and hire purchase obligations Trade and other payables Total 0-12 Months $ 168,921 1,944,396 390,698 16,685,941 1 - 5 years $ - 19,805,854 - - 19,189,956 19,805,854 This compares to the maturity of the Group’s financial liabilities in the previous reporting periods as follows: Year end 30 June 2018 Insurance premium funding loan Bank borrowings Finance leases and hire purchase obligations Trade and other payables Total 0-12 Months $ 306,847 2,848,672 254,551 22,247,580 1 - 5 years $ - 21,223,430 - - 25,657,650 21,223,430 5+ years $ - - - - - 5+ years $ - - - - - 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 ASSETS AND LIABILITIES Note 2 (k) provides a description of each category of financial assets and financial liabilities and the related accounting policies. The carrying amount of financial assets and financial liabilities in each category are as follows: Financial assets Non-current assets Work in progress Contract assets Cash and cash equivalents Trade and other receivables Total assets 2019 $ 57,775,824 - 12,136,933 5,551,971 22,985,739 2018 $ 79,662,070 10,894,165 - 13,364,679 25,092,381 98,450,467 129,013,295 53 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 Financial liabilities Current borrowings Non-current borrowings Current provisions Non-current provisions Deferred revenue Contract liabilities Trade and other payables Total liabilities 2019 $ 2,409,260 17,413,416 5,925,436 2,334,927 - 2,158,205 16,685,941 46,927,185 2018 $ 2,381,231 20,327,773 6,254,407 2,988,001 2,293,310 - 22,247,580 56,492,302 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 profit or loss when the liabilities are derecognised and as well as through the amortisation process. 25. 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: Weighted average effective interest rate 1.25% 2019 i) Financial Assets Floating interest rate Fixed interest rate Non-interest bearing Carrying amount as per balance sheet Cash and cash equivalents 5,551,971 Trade and other receivables - Total financial assets 5,551,971 ii) Financial liabilities – at amortised cost Trade and other payables Finance leases and hire purchase obligations Insurance premium funding loan - - - Bank Loans 21,750,250 - - - - 376,534 163,114 - - 22,985,739 22,985,739 5,551,971 22,985,739 28,537,710 16,685,941 16,685,941 - - - 376,534 163,114 21,750,250 38,975,839 4.84% 3.56% 4.27% Total financial liabilities 21,750,250 539,648 16,685,941 54 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 Weighted average effective interest rate 1.25% 2018 i) Financial Assets Floating interest rate Fixed interest rate Non-interest bearing Carrying amount as per balance sheet Cash and cash equivalents 13,364,679 Trade and other receivables - Total financial assets 13,364,679 ii) Financial liabilities – at amortised cost Trade and other payables Finance leases and hire purchase obligations Insurance premium funding loan - - - Bank Loans 24,072,102 - - - - 245,935 294,737 - - 25,092,381 25,092,381 13,364,679 25,092,381 38,457,060 22,247,580 22,247,580 - - - 245,935 294,737 24,072,102 46,860,354 4.84% 4.75% 4.00% Total financial liabilities 24,072,102 540,672 22,247,580 26. COMMITMENTS AND CONTINGENCIES Contingent Asset The Group has brought a claim against a software vendor relating to a third party warranty claim. Management are unable to estimate the expected value of the claim and the probability of re-coupment is remote. Contingent Liability From time to time, Empired Ltd is subject to claims and/ or complaints from third parties and a contingent liability arose during the financial year arising from the ordinary course of its business. As per AASB 137 Provisions, Contingent Liabilities and Contingent Assets, this has not been recognised in the financial statements. Commitments for Expenditure Operating leases 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 Bank guarantees Bank guarantees outstanding at year end Total 2019 $ 2018 $ 5,991,355 14,094,360 2,883,249 22,968,964 5,194,852 14,563,884 3,010,675 22,769,411 2019 $ 2018 $ - - 2,626,630 2,573,283 55 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 27. INVESTMENT IN CONTROLLED ENTITY Tusk Technologies Pty Ltd Conducive Pty Ltd OBS Pty Ltd eSavvy Pty Ltd i5 Software Pty Ltd (a) Intergen Business Solutions Pty Ltd Intergen Limited Intergen X4 Holdings Limited Intergen USA Limited Intergen ESS Limited (b) Empired Singapore Pte Ltd Intergen North America Limited (a) Entity deregistered during the year. (b) Acts as trustee for the Intergen Limited Employee Share Scheme Trust 28. 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 % Equity Interest Country of Incorporation 2019 % 2018 % 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 2019 $ 147,331 47,740 195,071 2018 $ 167,221 88,182 255,403 Grant Thornton Australia: Taxation compliance 15,763 14,950 Overseas Grant Thornton network firms: Taxation compliance Total other services remuneration Total auditor’s remuneration 7,005 22,768 217,839 6,510 21,460 276,863 56 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 201929. PARENT ENTITY INFORMATION As at, and throughout, the financial year ended 30 June 2019 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) Total equity Statement of profit or loss and other comprehensive income (Loss)/ profit after tax Total comprehensive (loss)/ income 2019 $ 27,036,947 64,713,909 18,783,667 2018 $ 38,968,038 86,948,970 26,123,081 37,253,803 47,494,549 54,204,744 3,036,176 (29,780,814) 27,460,106 54,204,744 2,381,783 (17,132,106) 39,454,421 (12,366,189) (12,366,189) 2,683,777 2,683,777 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. During the financial year i5 Software Pte Ltd was released from the cross guarantee and indemnity. 57 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 30. RELATED PARTY TRANSACTIONS The Group's related parties includes its 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 key management personnel Key management of the Group are the executive members of Empired’s Board of Directors and members of the Executive Team. Key management personnel remuneration includes the following expenses: Short-term employee benefits Post-employment benefits Share-based payment Total compensation paid to key management personnel 2019 $ 1,878,371 71,215 436,124 2,385,710 2018 $ 1,960,736 63,510 251,854 2,276,100 31. EVENTS AFTER THE REPORTING DATE No significant non-adjusting events have occurred between the reporting date and the date of authorisation. 58 EMPIRED LIMITED | ANNUAL REPORT | 2019NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED JUNE 2019 DIRECTOR’S DECALARATION 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 2019 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 2019 and of its performance (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 2019. On behalf of the Board Russell Baskerville Managing Director 12 August 2019 59 EMPIRED LIMITED | ANNUAL REPORT | 2019AUDITOR’S INDEPENDENCE DECLARATION Auditor’s Independence Declaration Central Park, Level 43 152-158 St Georges Terrace Perth WA 6000 Correspondence to: PO Box 7757 Cloisters Square Perth WA 6000 T +61 8 9480 2000 F +61 8 9322 7787 E info.wa@au.gt.com W www.grantthornton.com.au Auditor’s Independence Declaration To the Directors of Empired Limited In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Empired Limited for the year ended 30 June 2019, I declare that, to the best of my knowledge and belief, there have been: a b no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. Grant Thornton Audit Pty Ltd Chartered Accountants L A Stella Partner – Audit & Assurance Perth, 12 August 2019 Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 61 60 EMPIRED LIMITED | ANNUAL REPORT | 2019 Independent Audit Report INDEPENDENT AUDIT REPORT Central Park, Level 43 152-158 St Georges Terrace Perth WA 6000 Correspondence to: PO Box 7757 Cloisters Square Perth WA 6000 T +61 8 9480 2000 F +61 8 9480 2050 E info.wa@au.gt.com W www.grantthornton.com.au Independent Auditor’s Report To the Members of Empired Limited Report on the audit of the financial report Opinion We have audited the financial report of Empired Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2019, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies, and the Directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a giving a true and fair view of the Group’s financial position as at 30 June 2019 and of its performance for the year ended on that date; and b complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. 62 61 EMPIRED LIMITED | ANNUAL REPORT | 2019 INDEPENDENT AUDIT REPORT Independent Audit Report (continued) Key audit matter How our audit addressed the key audit matter Revenue recognition – Note 2(r) and Note 4 For the year ended 30 June 2019, the group recorded $176,014,365 (2018: $174,310,863) in revenue from a combination of fixed price and variable contracts including product sales. Revenue is recognised in accordance with AASB 15 “Revenue from Contracts with Customers”. Revenue derived from the delivery of services may be complex and involves significant management judgement due to revenue to being recognised when performance obligations are satisfied. The audit team is required to obtain sufficient audit evidence as to whether the assumptions used by management to recognise revenue are reasonable and accurate in accordance with ASA 540 Auditing for Accounting Estimates. This area is a key audit matter due to the complexity associated with service revenue as well as the presumed risk of fraud in revenue. Our procedures for significant revenue streams included, amongst others:  Understanding and documenting the design of internal controls and performing test of key controls for their operational effectiveness on revenue recognition for material fixed and variable revenue streams;  Testing on a sample basis fixed price and variable contracts to supporting documentation to ensure revenue recognition was accurate, recorded in the correct period and compliant with AASB 15;  Reviewing the progress of fixed price contracts to supporting documentation and agreeing revenue recognition was appropriately applied over a period of time consistent to the requirements of AASB 15; and  Assessing the adequacy of Group’s presentation and disclosures in the financial statements. Carrying value of goodwill – Note 2(h) and Note 15 The Group has recorded goodwill totalling $46,446,049 (2018: $46,446,049) at 30 June 2019 across two Cash Generating Units (CGU). Goodwill is required to be assessed for impairment annually by management as prescribed in AASB 136 “Impairment of Assets”. Our procedures included, amongst others:  Understanding and documenting management’s process and controls related to the assessment of impairment, including management’s identification of CGUs and the calculation of the recoverable amount for each CGU; Management test each CGU for impairment by comparing their carrying amounts against their recoverable amounts determined by either, the greater of its fair value less costs to sell and its value in use.  Evaluating the value-in-use models against the requirements of AASB 136 “Impairment of Assets”, including consultation with our valuation auditor’s expert; This area is a key audit matter due to the significant balance carried by the Company that management have assess using estimates and judgement. The Company use the discounting cash flow model (value in use) to determine their recoverable value, in doing so, consider the following key inputs;  forecasted budgeted financial performance;  estimated growth rates;  working capital adjustments;  estimated capital expenditure;  discount rate; and  terminal value. - -  Reviewing management’s value-in-use calculations to: Test the mathematical accuracy of the calculations; Evaluate management’s ability to perform accurate estimates; Test forecast cash inflows and outflows to be derived by the CGUs assets; and Agree discount rates applied to forecast future cash flows. - -  Performing sensitivity analysis on the significant inputs and assumptions made by management in preparing its calculation; and These estimates and judgements requires specific valuation expertise and analysis. 62 Assessing the adequacy of financial statements disclosures.  63 EMPIRED LIMITED | ANNUAL REPORT | 2019 Independent Audit Report (continued) INDEPENDENT AUDIT REPORT Information other than the financial report and auditor’s report thereon The Directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the financial report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Auditor’s responsibilities for the audit of the financial report Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance Auditor’s responsibilities for the audit of the financial report is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are of users taken on the basis of this financial report. considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance auditor’s report. Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Report on the remuneration report Report on the remuneration report Opinion on the remuneration report Opinion on the remuneration report We have audited the Remuneration Report included in pages 15 to 23 of the Directors’ report for the year ended 30 June We have audited the Remuneration Report included in pages 11 to 18 of the Directors’ report for the year ended 30 June 2019. 2019. In our opinion, the Remuneration Report of Empired Limited, for the year ended 30 June 2019 complies with section In our opinion, the Remuneration Report of Empired Limited, for the year ended 30 June 2019 complies with section 300A of the Corporations Act 2001. 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. 64 63 GRANT THORNTON AUDIT PTY LTD Chartered Accountants L A Stella Partner – Audit & Assurance Perth, 12 August 2019 EMPIRED LIMITED | ANNUAL REPORT | 2019 INDEPENDENT AUDIT REPORT Independent Audit Report (continued) Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Grant Thornton Audit Pty Ltd Chartered Accountants L A Stella Partner – Audit & Assurance Perth, 12 August 2019 64 65 EMPIRED LIMITED | ANNUAL REPORT | 2019 SHAREHOLDING ANALYSIS Shareholding Analysis In accordance with Listing Rule 4.10 of ASX Limited, the Directors provide the following shareholding information which was applicable as at 29th July 2019. a. Distribution of Shareholding Size of Shareholding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10001 - 100,000 100,001 - max Total b. Substantial Shareholders Number of shareholders 136 487 287 471 133 % 0.04 0.86 1.37 10.25 87.48 1,514 100.00 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 Microequities Asset Management Pty Ltd Baskerville Investments Pty Ltd Number of shares held 24,381,400 23,106,794 13,308,937 7,450,059 % 15.23 14.43 8.31 6.21 65 EMPIRED LIMITED | ANNUAL REPORT | 2019 SHAREHOLDING ANALYSIS c. Twenty Largest Shareholders Name NATIONAL NOMINEES LIMITED UBS NOMINEES PTY LTD J P MORGAN NOMINEES AUSTRALIA PTY LIMITED ZERO NOMINEES PTY LTD BASKERVILLE INVESTMENTS PTY LTD BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP MR JOHN ALEXANDER BARDWELL BNP PARIBAS NOMS (NZ) LTD ICE COLD INVESTMENTS PTY LTD GABRIELLA NOMINEES PTY LTD BRANDONS TRUSTEE COMPANY LIMITED MR GREGORY DAVID LEACH NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> BASKERVILLE INVESTMENTS PTY LTD MICROEQUITIES ASSET MANAGEMENT PTY LTD MR MARK EDWARD WALLER MR TONY JOHN ALAN STEWART BARDWELL SUPERANNUATION FUND PTY LTD UNIPLEX CONSTRUCTIONS PTY LTD MCCUSKER HOLDINGS PTY LTD Total Number of shares held 30,756,035 23,106,794 12,770,384 8,728,605 7,780,000 3,644,809 3,150,000 2,325,000 1,962,275 1,600,000 1,570,517 1,370,000 1,315,510 1,288,983 1,211,726 1,206,229 1,134,921 1,099,904 1,065,500 1,000,000 % 19.21 14.43 7.98 5.45 4.86 2.28 1.97 1.45 1.23 1.00 0.98 0.86 0.82 0.80 0.76 0.75 0.71 0.69 0.67 0.62 108,087,192 67.50 The twenty members holding the largest number of shares together held a total of 67.5% of issued capital. d. Issued Capital (i) Ordinary Shares The fully paid issued capital of the company consisted of 160,127,197 shares held by 1,514 shareholders. Each share entitles the holder to one vote. The number of shareholdings held in less than marketable parcels is 103. (ii) Unquoted Equity No options were issued in the year under the company share options plan 2,321,000 performance rights were issued under the company’s LTI plan Options do not have any voting rights. 66 EMPIRED LIMITED | ANNUAL REPORT | 2019 e. On-Market Buy-Back There is currently an on-market buy-back in place. 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 SHAREHOLDING ANALYSIS 67 EMPIRED LIMITED | ANNUAL REPORT | 2019 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. 68 EMPIRED LIMITED | ANNUAL REPORT | 2019 OTHER INFORMATION FOR SHAREHOLDERS 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 The 2019 Annual General Meeting of Empired Limited will be held at: Canning Room, Adina Apartment Hotel 33 Mounts Bay Road in Perth at 11am on Thursday, 28 November 2019 Formal notice of the meeting will be circulated to shareholders separate to this report. 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 69 EMPIRED LIMITED | ANNUAL REPORT | 2019This page has been intentionally left blank. u a . m o c . n g s e d n r o c a i 1 9 5 9 7 

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