Annual Report 2020 EMPIRED LIMITED | ABN 81 090 503 843 Corporate Directory Directors Share Register Thomas Stianos (Non-Executive Chairman) Computershare Investor Services Pty Ltd 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 Auditors Grant Thornton Audit Pty Ltd Level 43, 152 -158 St Georges Terrace Perth WA 6000 Website www.empired.com Level 11, 172 St Georges Terrace Perth WA 6000 ASX Code EPD Principal Places of Business Perth Level 7, The Quadrant 1 William Street Perth WA 6000 Melbourne Level 14 360 Elizabeth Street Melbourne VIC 3000 Auckland Level 1 152 Fanshawe St Auckland 1010 Wellington Level 4 80 Willis Street Wellington 6011 Dunedin 64 Willowbank Dunedin 9016 Adelaide Level 2 8 Leigh Street Adelaide SA 5000 Brisbane Level 11 79 Adelaide Street Brisbane QLD 4000 Sydney Level 12 9 Hunter Street Sydney NSW 2000 Christchurch Level 2 165 Gloucester Street Christchurch 8011 Seattle 2018 156th Ave NE Suite 108 Bellevue, WA, 98007 USA Contents Corporate Directory Chairman & CEO Review Directors’ Report Remuneration Report Corporate Governance Statement Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Financial Statements Directors’ Declaration Auditor’s Independence Declaration Independent Auditor’s Report Shareholding Analysis Other Information for Shareholders Inside front cover 2 4 12 21 22 23 24 25 26 65 66 67 71 73 EMPIRED LIMITED | ANNUAL REPORT | 2020 1 1 Chairman & CEO Review Russell Baskerville MANAGING DIRECTOR & CEO Thomas Stianos NON-EXECUTIVE CHAIRMAN Dear Fellow Shareholders On behalf of your Board of Directors, we present the Empired Limited 2020 annual report. The year was heavily disrupted by the COVID-19 pandemic which has resulted in a global health crisis and challenging economic conditions. Against this backdrop we are pleased to report that we have delivered on our FY20 priorities and advanced our strategic objectives that position the company for growth. For the 2020 financial year Empired Limited delivered revenue of $166m and Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) of $19.0m. Net Profit After Tax (NPAT) was $6.1m resulting in earnings per share of 3.84 cents. Operating cash flow of $23.8m was excellent and reduced Net debt* by $10m to close at $4.4m at 30 June 2020. We have delivered on our commitment to improved earnings and cash flow and demonstrated that the business has navigated the economic and operational impacts of the COVID-19 pandemic well. Responding to these conditions was underpinned by a clear plan and methodical approach to execution. A COVID-19 Response Group was established ensuring a dedicated and clear focus was placed on the rapidly evolving environment, data and government directives in our many different regions of operation. This Group oversaw the policy development and execution of all plans in response to the COVID-19 pandemic. Of the highest priority was the safety of Empired’s staff and clients’ staff whilst ensuring immediate actions were taken to protect the company’s operations and financial performance. Plans were developed to undertake defensive actions which focused on internal changes to ensure a heightened risk posture and a conservative approach to the management of operations. In parallel, a set of growth initiatives were also undertaken which sought to adapt our business to optimise productivity and capture new market opportunities. Defensive actions included remuneration reductions from our board though to our “Business Leadership Group”, cancellation of the Short Term Incentive Plan for all participating staff, general overhead cost reductions, tight management of credit risk and a strong focus on cash flow and debt. Growth initiatives included the rapid mobilisation of our 1,000 staff working remotely and safely, a targeted marketing campaign focused on assisting clients in a new digital model and cross/upskilling staff in areas of heightened demand to ensure we productively maintained headcount. The Company also availed itself of government incentives including JobKeeper allowing it to retain all of its staff through a period of significant disruption. This has allowed the company to retain all of its capability and capacity as we enter FY21 with a positive outlook. As a result of these actions we have delivered sound financial performance, maintained high levels of confidence with our clients and retained almost all of our pre-pandemic workforce ensuring our business retains it’s capability and capacity as we emerge to a new post-pandemic way of working. *Net debt and the reference to the reduction in debt excludes the lease liability introduced by AAB16 Leases. 2 EMPIRED LIMITED | ANNUAL REPORT | 2020 Whilst not immune to the impacts of COVID-19 our In April 2020, the Company announced that it had secured New Zealand operations have performed exceptionally well the largest contract in its history with Western Power. throughout the year with sector leading revenue growth of The contract will run for up to seven years and will see 11%. This was underpinned by continued strong performance Empired manage all core IT infrastructure operations for and growth with the Department of Internal Affairs where we Western Power. Over an initial five year period services are delivering a large multi-year program of work, a major revenue from managed services plus the infrastructure asset application modernisation to our RIOD (Realtime Information refresh program is estimated at $60m with an extensive for Operational Deployment) solution with NZ Police and key opportunity to secure additional project services revenue. new contract wins with NZ telco 2degrees and Sky TV. We are excited about working with Western Power and the We continued our expansion in the Australian East Coast where we invested in key leaders and capability in the pursuit credibility this contract brings to Empired as we contest new material contracts of this nature. of new clients and larger contracts. Since then we have As we enter FY21 the above strategic wins have underpinned secured a number of multi-year, multi-million dollar contracts an increase of 55% in recurring revenue providing a solid including managed services contracts with Cancer Council platform that we will continue to build upon in the coming NSW, e-Health NSW and two potential multi-million dollar year as we pursue a number of significant opportunities Microsoft Dynamics contracts. All of these contracts will similar to the Western Power contract. contribute to revenue growth in FY21 and have commenced. We have also seen our East Coast sales pipeline grow greater than 30% giving confidence in sales growth for the coming year. We worked closely with Microsoft where our relationship continues to expand into new services and strengthened in key client accounts. Microsoft awarded Empired the privilege of inclusion in it’s most prestigious global Dynamics partner group the ‘Business Applications Inner Circle’ in both Australia and New Zealand. This demonstrates the ongoing strength of our relationship and provides a strong reference point for our clients. Disrupted client operations and the overall impact of the COVID-19 pandemic remains uncertain, the company is confident in earnings growth and a strong FY21 financial performance. Our confidence in FY21 performance is formed through the key points outlined in this letter; the overall company sales pipeline has strengthened, our New Zealand operations have delivered solid growth in FY20 up 11% and move into FY21 producing stable consistent results, our investments in the Australian east coast have led to a number of new client wins and over 30% increase in our Australian east coast sales pipeline. These key measures combined with an increase in Microsoft Dynamics services, provided by our Business recurring revenue of 55%, a strong Microsoft relationship Applications practice continued to see strong client demand and a number of large strategic deals to contest following the and remains a central pillar to our strategy. Our New Zealand win with Western Power provide for an exciting year ahead Business Applications services revenue grew by 6% in FY20 for the company. and whilst revenue in our Australian Business Applications practice was impacted by COVID-19 the sales pipeline is up strongly as we enter FY21. We would like to acknowledge and sincerely thank all of our staff who have worked tireless and in many cases made personal financial sacrifices to ensure Empired’s ability to Since Empired’s inception a core part of our business protect the company and all of its employees and clients model and strategy has been to secure large, multi-year through a challenging and unsettling time. enterprise managed services contracts. This provides a stable and growing base of recurring revenue with an opportunity to continue to expand and grow within these contracts each year. In November 2019, we announced that we had secured a new 3 year master IT supply contract with Rio Tinto, at the time our largest client. Shortly following this we announced new managed services contracts expected to generate recurring revenue of $5m per annum with the opportunity to generate additional revenue through project services. We have made significant progress toward building a highly respected company that delivers value to all of its stakeholders and thank our partners, clients and shareholders for your support. Yours faithfully Russell Baskerville MANAGING DIRECTOR & CEO Thomas Stianos NON-EXECUTIVE CHAIRMAN 3 EMPIRED LIMITED | ANNUAL REPORT | 2020CHAIRMAN & 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 2020. 4 EMPIRED LIMITED | ANNUAL REPORT | 2020 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 66 Richard Bevan Non-Executive Director - Age 54 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: • Gale Pacific Limited these businesses have included strategic operational management, implementing organic growth strategies, business integration and raising capital in both public and private markets. Previous directorships (last 3 years): • Inabox Group Limited Other current directorships of listed entities: • Cassini Resources Limited Previous directorships (last 3 years): • None Russell Baskerville Managing Director & CEO - Age 42 Mr Baskerville is an experienced business professional and has worked in the IT industry for in excess of 15 years. He has extensive knowledge in both the strategic growth and development of technology businesses balanced by strong commercial and corporate skills including strategy development and execution, IPOs, capital raisings, divestments, mergers and acquisitions. Mr Baskerville has been the Managing Director of Empired for fifteen years and has successfully listed the company on ASX and made a number of successful acquisitions. Mr Baskerville was previously a Non Executive Director of BigRedSky Limited, successfully developed and commercialised a SaaS delivered eRecruitment tool prior to the company being acquired by Thomson Reuters. Other current directorships of listed entities: • None Previous directorships (last 3 years): • None 5 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT John Bardwell Non-Executive Director - Age 60 Mr Nicolli is also Treasurer of NFP Charity Kadasig Aid and Development. Mr Bardwell has had a long career in the financial services Mr Nicolli is a Fellow of the Australian Institute of Company 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 Directors (FAICD), a past member of the New Zealand Society of Accountants and holds a Bachelor of Management & Business Studies. Delivery Services at Empired Ltd prior to his appointment to the Board as a non-executive Director on 26 November 2011. Other current directorships of listed entities: • Vista Group International Limited Previous directorships (last 3 years): • Otherlevels Holdings Limited COMPANY SECRETARY David Hinton CFO & Company Secretary - Age 57 Mr Hinton joined Empired in May 2016. He has had over 10 years experience in the technology sector having previously held the position of CFO and Company Secretary of ASX listed Amcom Telecommunications. Prior to Amcom he held a senior executive role in a large diversified listed company and was also a Manager at Ernst & Young. Mr Hinton holds a Bachelor of Business degree, is a Fellow of the Institute of Chartered Accountants and is a graduate of the Australian Institute of Company Directors and is a member of the Governance Institute of Australia. He is also Finance Director of not for profit Auspire - Australia Day Council WA. Mr Hinton is a non-executive director of ASX listed HeraMEd Limited and a Flag Officer of Royal Perth Yacht Club Inc. Mr Bardwell is Chairman of the Audit and Risk Committee. Mr Bardwell holds a Bachelor of Business and a Graduate Diploma in Applied Finance and Investment. He is a Graduate Member of the Australian Institute of Company Directors and a Fellow of the Financial Services Institute of Australasia. Mr Bardwell is a Board Member of Swancare Group, a specialist provider of retirement living and aged-care services, where he is also Chair of the Business Development Committee. Other current directorships of listed entities: • None Previous directorships (last 3 years): • None Cristiano Nicolli Non-Executive Director - Age 66 Mr Nicolli joined the Board on on 22 October 2018. He is highly regarded as an influential leader and successful businessman across the technology sector, he has corporate and ASX listed company experience and is sought after non-executive director. Mr Nicolli is the Chairman of the Remuneration and Nomination Committee 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. During that time Mr Nicolli was instrumental in leading the growth and development of UXC to delivering revenue of $750m, employing 3,000 staff and is widely recognised as the largest and one of the most respected ASX listed IT companies 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. 6 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT DIRECTORS’ MEETINGS The number of Directors meetings and the number of meetings attended by each Director during the year are: Name of Director Russell Baskerville Thomas Stianos Richard Bevan John Bardwell Cristiano Nicolli Name of Director Russell Baskerville Thomas Stianos Richard Bevan John Bardwell Cristiano Nicolli No. of meetings Directors attended as a Director during the year ended 30 June 2020 No. of Audit and Risk Committee meetings held during the year ended 30 June 2020 No. of Audit and Risk Committee meetings attended during the year ended 30 June 2020 No. of Directors Meetings held while a Director 13 13 13 13 13 13 13 13 13 13 - - 4 4 4 - - 4 4 4 No. of Remuneration and Nomination committee meetings held during the year ended 30 June 2020 No. of Remuneration and Nomination Committee meetings attended during the year ended 30 June 2020 - 3 3 - 3 - 3 3 - 3 7 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ 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 quality. Our flexible service delivery approach has enabled Empired to secure clients that range from medium size entities through to large enterprise and public sector agencies. The business operates as two segments: • Australia • New Zealand - which includes USA Underlying drivers of performance Empired generates its revenue from the provision of IT services. The IT consulting services which are billed on a fixed price or time and materials basis. These IT consulting services are deployed to deliver IT projects and for the provision of support services. Empired also generates revenue from the selling of third-party software licenses and Software as a Service revenue from its own proprietary ECM platform, Cohesion. In May 2019, Empired announced that it was not successful in securing a new contract with Main Roads Western Australia which was estimated to have a revenue impact on FY20 of approximately $10m. This is the main reason why the Australian segment recorded a reduction in revenue in FY20 over FY19. $m AUD Revenue Australia New Zealand Inter segment 1H 20 2H 20 50.2 34.2 - 84.4 47.8 33.3 - 81.1 2020 98.0 67.5 - 165.5 2019 116.5 60.9 (1.4) 176.0 % -16% 11% -6% On 28 April 2020, Empired announced the securing of a material multi-year contract with Western Power which will commence in FY21. COVID-19 impacts In H2, revenue and profitability was effected by the impacts of the COVID-19 pandemic. In response the company took immediate steps to protect the health and safety of its people and customers. Steps were taken to reduce operating costs which included cancellation of the FY20 short term incentive plan, reduction in Board and Executive remuneration, enforced annual leave and standing down of employees. The Company has availed itself of JobKeeper Payments and has included as income $4.1m in FY20 and expects further income in FY21. To assist with funding and liquidity, bank facilities have been re-negotiated to temporarily increase the limit under the borrowing base facility from $15m to $16m and to relax some of the debtor eligibility criteria under this facility in order to provide additional liquidity. Minor rent relief was obtained from landlords in FY20 and arrangements are in place to have some rent deferred in FY21. 8 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT Results The profit after tax for the financial year ended was $6.1m compared to a reported loss of $15.3m in the previous year which was impacted by a $25.4m impairment charge. The results reported for the 2020 financial year are in accordance with AASB 16 Leases. AASB16 was adopted for the first time this year, in order to provide the current year results on a comparable basis to the previous year the results for FY19 have been adjusted as shown in the below table. The key change is to remove the rent expense from EBITDA and include amortisation on the Right of Use Asset and interest on the lease liability. The impact on cash flow and balance sheet is shown further below. $m AUD Revenue Other income Earnings before interest, tax, depreciation and amortisation (EBITDA) Depreciation & amortisation Right of use asset amortisation Earnings before interest and tax (EBIT) Interest Interest on leased liabilities Profit before tax and impairment Impairment Tax Profit after tax EPS (cents) FY20 165.5 4.2 19.0 (2.8) (5.7) 10.5 (0.7) (0.8) 9.0 - (2.9) 6.1 3.84 c Pro forma* FY19 Reported FY19 176.0 - 19.0 (8.5) (5.2) 5.3 (1.3) (0.8) 3.2 (25.4) 6.2 (15.9) (9.95) c 176.0 - 13.8 (8.5) - 5.3 (1.3) - 4.0 (25.4) 6.0 (15.3) (9.56) c %# Change -6% 0% 97% 181% 139% * Adjusted for AASB 16 Leases so as to be comparative with FY20 reporting # % change from pro forma Other income in FY20 includes $4.1m of JobKeeper Payments from the Federal Government’s COVID-19 stimulus assistance. Cash flow The following table summarises the cash flow for the financial year ended 30 June 2020: $m AUD EBITDA Tax refunded/(paid) Non cash items Working capital Operating cash flow Purchases of P&E and intangibles Finance costs (net) Interest leases Repayment of leases Repayment of bank debt Share buy-back Net movement in cash H1 FY20 7.8 0.2 - 3.0 11.0 (2.7) (0.5) (0.4) (3.1) (7.0) (0.1) (2.8) H2 FY20 11.2 0.2 - 1.4 12.8 (3.8) (0.2) (0.4) (3.2) (2.0) - 3.3 FY20 19.0 0.4 - 4.4 23.8 (6.5) (0.7) (0.8) (6.3) (9.0) (0.1) 0.5 Pro Forma* FY19 Reported FY19 19.0 (0.9) 0.6 (4.3) 14.5 (10.7) (1.3) (0.8) (5.9) (3.5) - (7.8) 13.8 (0.9) 0.6 (5.1) 8.5 (10.7) (1.3) - - (3.5) - (7.1) *Adjusted for AASB 16 Leases so as to be comparative with FY20 reporting Operating cash flow increased to $23.8m from $14.5m compared to the operating cash flow on a pro forma basis. The increase in Operating cash flow is due to positive movements in working capital and a refund of income tax in the 2020 financial year. 9 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT Financial position The financial position or balance sheet is shown below in summary form. $m AUD Cash Receivables and contract assets Other Current assets Trade and other payables Borrowings Lease liabilities (including hire purchase) Provisions and other Current liabilities Current asset surplus Plant & equipment Intangibles Intangible - Right of use assets Deferred tax assets Non-current assets Borrowings Lease liabilities Other Non-current liabilities Net assets/equity Net tangible assets (NTA)* Net debt (Nd) Net debt ex. lease liabilities Gearing (Nd/(Nd+Equity)) Gearing (Nd/(Nd+Equity)) ex. lease liabilities *Treating all right of use assets as intangible Jun-20 Dec-19 Jun-19 6.3 30.1 2.5 38.9 15.2 1.9 5.4 9.0 31.4 7.5 5.2 56.1 17.9 5.7 84.8 8.6 14.6 0.8 24.0 68.3 (5.6) 24.1 4.4 26% 6% 2.7 27.7 2.0 32.5 13.4 1.9 6.2 6.5 28.0 4.5 5.6 53.8 16.7 7.8 83.9 10.7 12.7 0.9 24.3 64.1 (6.4) 28.8 10.1 31% 14% 5.6 35.1 2.3 42.9 16.7 2.0 0.4 8.1 27.2 15.7 6.2 51.5 0.0 8.2 65.9 17.4 0.0 2.3 19.7 61.9 10.4 14.3 14.3 19% 19% The major changes in the balance sheet has been due to the introduction of AASB16 Leases. As of 1 July 2019, an intangible asset called Right of Use Assets and a corresponding lease liability representing the net present value of future lease rental payments split between current and non-current was introduced. The introduction of the lease liability for office lease rentals has increased the Net debt to $24.1m and Gearing to 26%. However, if this liability is not included then Net debt has reduced to $4.4m and Gearing to 6%. The introduction of AASB16 has negatively impacted Net Tangible Assets as the Right of Use Asset is treated as intangible. Receivables and contract assets have decreased by $5.0m during the financial year. Bank borrowings comprise a term loan of $6.5m that is repayable by March 2022 and a Borrowing Base drawn down to $4m on a facility of $16m (reducing to $15m on 31 December 2020) due March 2022. 10 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT Business strategies and prospects for future financial years Unissued shares under option There are no unissued shares under option at the date of Please refer to the Chairman and CEO report. this report. Material Business Risks Empired has identified and continues to assess its material business risks. The material business risks faced by the company that are likely to have a material effect on the financial prospects of the company, and how the company manages these risks include: Reduction in demand – the ability to sustain and grow revenue is dependent upon continuing demand for the Shares issued during or since the end of the year as a result of exercise During or since the end of the financial year, the Company issued ordinary shares as a result of the vesting and subsequent exercising of Performance Rights as follows (there were no amounts unpaid on the shares issued): Date options granted 28 July 2020 Issue price of shares ($) Number of shares issued - 286,517 IT professional services that the company provides, we do Auditor not foresee any material decline in demand. However, this is dependent upon stable macro-economic conditions, the actions of competitors and any extended negative impacts of COVID-19 all of which are outside the control of the company. Ability to deliver services profitably – there are many inputs to the delivery of profitable services to customers. This risk is addressed through the critical assessment, pricing and monitoring of projects. Ability to attract and retain people with the requisite skills - the ability to grow revenue longer term and deliver repeatable profitable projects is dependent upon attracting and retaining appropriately skilled people. The working from home requirements of COVID-19 has not had a material impact on the productivity of our people. There is the risk that inability of people to travel due to COVID-19 restrictions The lead auditor’s Independence Declaration as required under s307c of the Corporations Act 2001 for the year ended 30 June 2020 has been received and can be found on page 66 of the financial report. Non-audit services During the year, Grant Thornton, the Company’s auditors, performed certain other services in addition to their statutory audit duties. The Board has considered the non-audit services provided during the year by the auditor and, in accordance with written advice provided by resolution of the Audit and Risk Committee, is satisfied that the provision of those non-audit services during the year is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: may impact on productivity and the ability to attract and • all non-audit services were subject to the corporate retain people with the requisite skills. Dividends governance procedures adopted by the Company and have been reviewed by the Audit and Risk Committee to ensure they do not impact upon the impartiality and The Directors do not recommend payment of a dividend objectivity of the auditor (2019: nil). Likely developments The Company is not aware of any likely developments as at the date of this report. Performance Rights granted to Directors and Officers Executive Officers were granted 2,786,667 Performance Rights under the Long Term Incentive Plan. Information relating to the grants is detailed in the notes to the financial statements. • the non-audit services do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. Details of the amounts paid to the auditors of the Company, Grant Thornton, and its related practices for audit and non-audit services provided during the year are set out in Note 30 to the financial statements. 11 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT 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 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 2020 (“FY20”). This Report forms part of the Directors’ Report and has been audited in accordance with section 300A of the Corporations Act 2001 . Remuneration philosophy by the officers in connection with such proceedings, other The performance of the Company depends upon the quality than where such liabilities arise out of conduct involving of its directors and executives. To prosper, the Company a wilful breach of duty by the officers or the improper must attract, motivate and retain highly skilled directors use by the officers of their position or of information to and executives. gain advantage for themselves or someone else to cause detriment to the Group. Details of the amount of the premium paid in respect of the insurance policies is not disclosed as such disclosure is prohibited under the terms of the contract. The Company has agreed, to the extent permitted by law, to indemnify each Director and Company Secretary of the Company against any and all reasonable liabilities incurred in respect of or arising out of any act in the course of their role as an officer of the Company. The Company has not agreed to indemnify the auditor of the Company, however a controlled entity has provided an indemnity to the auditor of that controlled entity for losses 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. Linking remuneration ‘at risk’ to Company performance arising from false or misleading information provided or The Group recorded a net profit after tax of $6.1m for third party claims except to the extent such amounts are the year ended 30 June 2020 compared to a net loss determined to have been caused by the auditor’s fraud. after tax of $15.3m in the previous financial year. Proceedings on behalf of the Company Earnings per share increased to 3.8 cents per share. No person has applied to the Court under section 237 of Remuneration Structure the Corporations Act 2001 for leave to bring proceedings on In accordance with the best practice corporate governance, behalf of the Company, or to intervene in any proceedings the structure of non-executive director and executive to which the Company is a party, for the purpose of taking remuneration is separate and distinct. responsibility on behalf of the Company for all or part of those proceedings. Significant events after the reporting date There have been no significant events to report subsequent to reporting date. 12 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT A. Non-executive director Structure 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 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. aggregate remuneration of $500,000 per year. Fixed remuneration The amount of aggregated remuneration sought to be Objective approved by shareholders and the manner in which it is apportioned amongst Directors is reviewed from time to time. The Board considers advice from external consultants as well as the fees paid to Non-Executive Directors of comparable companies when undertaking the annual review process. The remuneration of Non-Executive Directors, the Executive Director and other Key Management Personnel for the period ended 30 June 2020 is detailed in the table in Section E. 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 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. Fixed remuneration is reviewed annually by the Board. The process consists of a review of companywide, business unit and individual performance, relevant comparative remuneration in the market and internally, and where appropriate, external advice on policies and practices. As noted above, the Board has access to external advice independent of management. Structure Senior executives are given the opportunity to receive their fixed remuneration in a variety of forms including cash and fringe benefits such as motor vehicles. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the group. The fixed remuneration component of the company executives is detailed in the table in Section E. Variable remuneration - Short Term Incentive (STI) Objective The objective of the STI program is to link the achievement of the Group’s performance and operational targets with the remuneration received by the executives charged with meeting those targets. 13 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT 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 of a number of Key Performance Indicators (KPIs) covering both financial and non-financial measures of performance. Typically included are measures such as revenue, profitability, customer service, risk management, and leadership/team contribution. 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: • Basic Earnings per Share (EPS) adjusted for any abnormal costs or transaction costs due to its sensitive nature, EPS targets are disclosed retrospectively should the Performance Rights vest. • 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 2022 divided by Payments made are delivered as a cash bonus in the total equity as at 30 June 2022. Due to its sensitive nature, following financial year. Variable pay - Long Term Incentive (LTI) Objective ROE targets are disclosed retrospectively should the Performance Rights vest. • Absolute Total Shareholder Return is measured over the period 1 July 2019 to 30 June 2022. 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. Structure LTI grants to executives are delivered in the form of performance rights. The table in Sections F and G provide details of performance rights granted and the value of equity instruments granted and lapsed during the year. The performance rights were issued for nil consideration. Each performance right entitles the holder to subscribe for one fully paid ordinary share in the entity based on achieving vesting conditions at a nil exercise price, and up to 1.5 ordinary shares should Stretch Performance Measures be achieved. During the financial year, 2,786,667 Performance Rights were issued under the Long Term Incentive Plan on terms and conditions determined and approved by the Board of Directors. This is summarised in the table below. The number of Performance Rights offered is based upon the agreed LTI value divided by the share price of the Company at the end of the financial year. 14 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT Number 1,114,667 Performance Measures FY 2022 Basic EPS Below Threshold Threshold achieved Target achieved Stretch achieved 557,333 FY 2022 Return on Equity BelowThreshold Threshold achieved Target achieved Stretch achieved 1,114,667 Absolute TSR (1 July 2019 - 1 September 2022) Below - Threshold Threshold achieved Target achieved Stretch achieved (1) Vesting to occur on a pro-rata basis % Vesting (1) Vesting Dates 1/09/2022 0% 50% 100% 150% 0% 50% 100% 150% 0% 50% 100% 150% 1/09/2022 1/09/2022 Should an employee leave Empired then Performance Rights are forfeited unless decided otherwise by the Board. Where Performance Rights vest the holder of the Performance Right has until 1 September 2024 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) ($000) Share price ($) 2020 3.84 - 6,146 0.33 2019 (9.56) - (15,312) 0.27 2018 3.06 - 4,882 0.51 2017 2.42 - 3,161 0.54 2016 (1.47) - (1,724) 0.34 As a consequence of the FY20 performance and the economic climate, of the Company has not paid any STI to key management personnel. 15 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ 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 R Bevan Non-executive Director J Bardwell Non-executive Director C Nicolli Non-executive Director R Baskerville Managing Director Fees – fixed remuneration $600,000 per annum with an STI 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 (ii) Other key management personnel Terms of Agreement - appointed 31 January 2008. The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group during the financial year: S Bright Chief Operating Officer D Hinton Chief Financial Officer and Company Secretary Fee – fixed $90,000 per annum. John Bardwell – Non-Executive Director Terms of Agreement – appointed 26 September 2011. Fee – fixed $85,000 per annum. Cristiano Nicolli - Non-Executive Director Terms of Agreement – appointed 22 October 2018. (iii) Remuneration of Key Management Personnel Fee – fixed $85,000 per annum. Information regarding key management personnel compensation for the year ended 30 June 2020 is provided in table in Section E of this remuneration report. David Hinton – Chief Financial Officer and Company Secretary 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. 16 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT E. Details of remuneration Details of the nature and amount of each element of the remuneration of each Key Management Personnel (`KMP’) of Empired Limited are shown in the table below: Short term benefits Post Employment Year Salary & Fees Non-cash Benefits Cash STI Super- annuation Share-based payments (1) Total % Performance related % of STI achieved Non-Executive Directors T. Stianos R. Bevan C. Nicolli C. Ryan J. Bardwell Executive Directors R. Baskerville Key Management D. Hinton S. Bright 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 107,763 109,589 80,822 82,193 71,766 53,260 - 31,250 71,766 68,493 - - - - - - - - - - 570,238 11,976 644,453 9,168 389,292 413,675 424,507 438,747 12,771 10,200 17,165 17,342 - - - - - - - - - - - - - - - - 10,237 10,411 3,904 7,808 6,818 5,060 - - 6,818 6,507 - - - - - - - - - - 118,000 120,000 84,726 90,001 78,584 58,320 - 31,250 78,584 75,000 - - - - - - - - - - 21,003 144,566 747,783 - 209,554 863,174 36,983 28,207 12,735 13,222 67,836 506,882 112,614 564,696 67,483 521,890 113,956 583,268 19.3% 24.3% 13.4% 19.9% 12.9% 19.5% - - - - - - - - - - - - - - - - (1) Comprises the share payment expense recognised in the reporting period for performance rights on issue. 17 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT F. Directors’ and Key Management Personnel Equity Holdings Shares held in Empired Limited All equity transactions with directors and executives, other than those arising from the vesting of performance rights and as part of remuneration, have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length. Directors R. Baskerville T. Stianos R. Bevan C. Nicolli J. Bardwell Total Key Management D. Hinton S. Bright Total Balance 01-Jul-19 9,125,283 143,200 79,800 290,000 4,249,904 13,888,187 52,093 15,877 67,970 Vesting of Performance Rights Net Change Other Balance 30-June-20 - - - - - - - - - - 100,000 - 83,500 50,096 233,596 - (14,518) (14,518) 9,125,283 243,200 79,800 373,500 4,300,000 14,121,783 52,093 1,359 53,452 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-19 Granted as remuneration Lapsed Vested Balance 30-June-20 2,686,546 1,000,000 (1,124,946) 1,058,878 1,070,878 4,816,302 377,778 388,889 1,766,667 (449,878) (453,878) (2,028,702) - - - - 2,561,600 986,778 1,005,889 4,554,267 18 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ REPORT 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: 2020 Non-Executive Directors T. Stianos R. Bevan C. Nicolli J. Bardwell Executive Directors R. Baskerville Key Management D. Hinton S. Bright 2019 Non-Executive Directors T. Stianos R. Bevan C. Nicolli J. Bardwell Executive Directors R. Baskerville Key Management D. Hinton S. Bright Grant date Number granted as remuneration Average Value per right at grant date Value of rights granted during the year - - - - - - - - 6/12/2019 1,000,000 3/10/2019 3/10/2019 377,778 388,889 - - - - $0.15 $0.13 $0.13 - - - - $153,200 $50,169 $51,644 Grant date Number granted as remuneration Average Value per right at grant date Value of rights granted during the year - - - - - - - - - - - - - - - - 11/12/2018 880,000 $0.30 $268,243 16/07/2018 16/07/2018 353,000 353,000 $0.39 $0.39 $138,370 $138,370 19 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ 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 no Performance Rights vested as performance hurdles were not achieved. H. Voting and comments made at the company’s 2019 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 17 August 2020 20 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ 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 Group’’) have adopted the third edition of the Corporate Governance Principles and Recommendations which was released by the ASX Corporate Governance Council on 27 March 2014 and became effective for financial years beginning on or after 1 July 2014. The Group’s Corporate Governance Statement for the financial year ended 30 June 2020 was approved by the Board on 17 August 2020. The Corporate Governance Statement is available on Empired’s website at www.empired.com/Investor-Centre/Corporate-Governance/. EMPIRED LIMITED | ANNUAL REPORT | 2020 21 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Revenue from contracts with customers Other income Cost of licenses Employee benefits Depreciation and amortisation expense Occupancy expenses Impairment expenses Other expenses Operating profit/(loss) Finance costs Finance income Profit/(loss) before income tax Income tax (expense)/benefit Profit/(loss) for the year Other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations Total comprehensive income/(loss) for the year Earnings per share (cents per share): Basic earnings/(loss) per share Diluted earnings/(loss) per share Notes 2020 $ 2019 $ 4 5 6A 6B 7 8 9 9 165,549,359 176,014,365 4,184,500 - (14,290,247) (14,678,231) (125,121,578) (128,380,387) (8,502,600) (541,000) (8,464,003) (5,821,152) - (25,352,785) (10,769,724) (13,334,058) 10,508,710 (20,016,251) (1,524,197) (1,394,816) 13,997 60,239 8,998,510 (21,350,828) (2,852,524) 6,038,981 6,145,986 (15,311,847) (135,999) 486,157 6,009,987 (14,825,690) 3.84 3.69 (9.56) (9.56) This Statement of Profit or Loss should be read in conjunction with the accompanying notes 22 EMPIRED LIMITED | ANNUAL REPORT | 2020CONSOLIDATED STATEMENT Consolidated Statement of Financial Position As at 30 June 2020 ASSETS Current assets Cash and cash equivalents Trade and other receivables Contract assets Other current assets Total current assets Non-current Assets Plant and equipment Intangible assets Deferred tax asset Right of use assets Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Income tax payable Borrowings Lease liabilities Provisions Contract liabilities Total current liabilities Non-current Liabilities Borrowings Lease liabilities Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained profits TOTAL EQUITY Notes 2020 $ 2019 $ 10 11 4 12 13 14 8 15 17 8 18 19 20 4, 21 18 19 20 23 22 6,316,968 21,599,744 8,525,275 2,496,622 5,551,971 22,985,739 12,136,933 2,273,771 38,938,609 42,948,414 5,177,190 56,100,583 5,651,301 17,871,839 6,236,263 51,539,561 8,160,143 - 84,800,913 65,935,967 123,739,522 108,884,381 14,883,604 16,685,941 309,555 1,854,671 5,371,495 7,315,073 1,689,674 35,705 2,032,726 376,534 5,925,436 2,158,205 31,424,072 27,214,547 8,636,677 14,568,739 17,413,416 - 829,947 2,334,927 24,035,363 19,748,343 55,459,435 46,962,890 68,280,087 61,921,491 54,146,878 3,696,135 10,437,074 54,204,746 3,425,657 4,291,088 68,280,087 61,921,491 This Statement of Financial Position should be read in conjunction with the accompanying notes 23 EMPIRED LIMITED | ANNUAL REPORT | 2020CONSOLIDATED STATEMENT Consolidated Statement of Cash Flows For the year ended 30 June 2020 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Government subsidy received Income tax received/(paid) Net cash flows from operating activities 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 Buyback of shares Interest on bank borrowings Interest on leases Interest received Repayment of borrowings Repayment of lease liabilities Proceeds from borrowings Net cash flows used in financing activities Notes 2020 $ 2019 $ 190,569,019 197,638,807 (169,859,814) (188,288,868) 2,731,500 370,568 10 23,811,273 - (854,150) 8,495,789 (5,906,608) (9,948,374) (569,723) (794,540) (6,476,331) (10,742,914) (57,868) (768,511) (755,686) 13,997 - (1,397,127) - 60,239 (24,541,607) (8,779,869) (6,273,740) 15,560,843 (718,425) 5,260,794 (16,822,572) (5,574,388) Net increase/(decrease) 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 512,370 252,627 5,551,971 6,316,968 (7,821,513) 8,805 13,364,679 5,551,971 10 This Statement of Cash Flows should be read in conjunction with the accompanying notes 24 EMPIRED LIMITED | ANNUAL REPORT | 2020CONSOLIDATED STATEMENT Consolidated Statement of Changes in Equity For the year ended 30 June 2020 Issued Capital $ Retained Profits $ Foreign Currency Translation Reserve $ Employee Equity Benefits Reserve $ Total Equity $ Balance at 1 July 2018 54,204,746 19,602,935 (96,676) 2,381,783 76,092,788 Loss for the year Other comprehensive gain Share-based payments Balance at 30 June 2019 Profit for the year Other comprehensive gain Share buy back Share-based payments Balance at 30 June 2020 - - - (15,311,847) - - - 486,157 - - - 654,393 (15,311,847) 486,157 654,393 54,204,746 4,291,088 389,481 3,036,176 61,921,491 - - (57,868) - 6,145,986 - - - - (135,999) - - - - - 406,477 6,145,986 (135,999) (57,868) 406,477 54,146,878 10,437,074 253,482 3,442,653 68,280,087 This Statement of Changes in Equity should be read in conjunction with the accompanying notes 25 EMPIRED LIMITED | ANNUAL REPORT | 2020CONSOLIDATED STATEMENT Notes to the Financial Statements For the year ended 30 June 2020 26 EMPIRED LIMITED | ANNUAL REPORT | 2020 1. CORPORATE INFORMATION The consolidated financial report of Empired Limited and its subsidiaries (collectively, the Group) for the year ended 30 June 2020 was authorised for issue in accordance with a resolution of the directors on 17 August 2020. Empired Limited, is a for profit entity, whose shares are publicly traded on the Australian Securities Exchange, is a company incorporated in Australia. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of operations The principal activities of the Group include the provision of IT solutions and product and licensing. (b) General information and statement of compliance The consolidated general purpose financial statements of the Group have been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. Compliance with Australian Accounting Standards results in compliance with the International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (IASB). Empired Limited is a for-profit entity for the purpose of preparing the financial statements. The financial report has been prepared on an accruals basis, and is based on historical costs modified where applicable, by measurement at fair value of selected non-current assets, financial assets and financial liabilities. The financial report is presented in Australian dollars. (c) New and revised standards that are effective for these financial statements The Group has adopted the new accounting pronouncements which have become effective this year, and are as follows: i) AASB 16 Leases AASB 16 Leases has been applied using the modified retrospective approach. Prior periods have not been restated. For contracts in place at the date of initial application, the Group has elected to apply the definition of a lease from AASB 117 and AASB Interpretation 4 and has not applied AASB 16 to arrangements that were previously not identified as lease under AASB 117 and AASB Interpretation 4. The Group has elected not to include initial direct costs in the measurement of the right of use asset for operating leases in existence at the date of initial application of AASB 16, being 1 July 2019. At this date, the Group has also elected to measure the right of use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments and lease incentives. The provision for lease incentives previously booked has accordingly been netted of the right of use asset as at 1 July 2019 as the modified retrospective approach was used. Instead of performing an impairment review on the right of use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of AASB 16. As at the date of adoption there were no leases considered onerous or right of use assets impaired. On transition to AASB 16 the weighted average incremental borrowing rate applied to lease liabilities recognised was 4.1% per annum. On transition, leases previously accounted as operating leases with a remaining lease term of less than 12 months and for leases of low-value assets the accounting policy is to expense on a straight-line basis over the remaining lease term and not recognising a right of use assets continues. As described above, the Group has applied AASB 16 using the modified retrospective approach and therefore comparative information has not been restated. This means comparative information is still reported under AASB 117. 27 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if For any new contracts entered into on or after 1 July 2019, there are changes in in-substance fixed payments. When the the Group considers whether a contract is, or contains a lease liability is remeasured, the corresponding adjustment lease. A lease is defined as ‘a contract, or part of a contract, is reflected in the right of use asset, or profit and loss if the that conveys the right to use an asset (the underlying asset) right of use asset is already reduced to zero. for a period of time in exchange for consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether: The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right of use asset and lease liability, • the contract contains an identified asset, which is either the payments in relation to these are recognised as an explicitly identified in the contract or implicitly specified by expense in the Statement of Profit or Loss on a straight- being identified at the time the asset is made available to line basis over the lease term. Right of use assets and lease the Group • the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract liabilities are shown on the Statement of Financial Position. The adoption of AASB 16 has also effected the Statement of Cash Flows since 1 July 2019. Previously lease payments, included as a period cost in the Statement of Profit or Loss, where included in Cash flows from Operating activities • the Group has the right to direct the use of the identified now these outflows are included in Finance activities split asset throughout the period of use. The Group assess whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use. Measurement and recognition of leases as a lessee At lease commencement date, the Group recognises a right between repayment of lease liabilities and finance costs. The following is a reconciliation of total leases commitments at 30 June 2019 to the lease liabilities recognised at 1 July 2019: of use asset and a lease liability on the Statement of Financial Lease commitments as at 30 June 2019 Position. The right of use asset is measured at cost, which is Provision recognised made up of the initial measurement of the lease liability, any Lease liabilities as at 30 June 2019 initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the Future finance charges lease, and any lease payments made in advance of the lease Lease liabilities as at 1 July 2019 $ 22,968,964 (723,910) 390,698 22,635,752 (1,810,098) 20,825,654 commencement date (net of any incentives received). The Group depreciates the right of use assets on a straight- line basis from the lease commencement date to the earlier of the end of the useful life of the right of use asset or the end of the lease term. The Group also assesses the right of use asset for impairment when such indicators exist. The Group has leases for its office premises and software. The key impact has been to bring to account a right to use asset and lease liability in respect in the obligations under the lease of the office premises of the Group together with the introduction of an amortisation charge on the right of use asset and the splitting of lease payments between At the commencement date, the Group measures the lease interest and principle reduction of the lease liability. liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing rate. Lease payments included in The change in accounting policy affected the following items in the balance sheet on 1 July 2019: • Lease liabilities increased by $20,825,654 the measurement of the lease liability are made up of fixed • Right of use assets increased by $18,361,110 payments (including in substance fixed), variable payments • Current provisions decreased by $864,223 based on an index or rate, amounts expected to be payable • Non-current provisions decreased by $1,600,321 under a residual value guarantee and payments arising from • Retained earnings no change as retrospective modified options reasonably certain to be exercised. approach was used. 28 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ii) AASB Interpretation 23 Uncertainty over Income Tax Treatment An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2019, with early application permitted. These amendments had no impact on the consolidated The Interpretation addresses the accounting for income financial statements of the Group as there is no transaction taxes when tax treatments involve uncertainty that affects where joint control is obtained. the application of AASB 112 Income Taxes. It 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), (d) Impact of standards issued but not yet applied Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2020 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and these standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. (e) Basis of consolidation tax bases, unused tax losses, unused tax credits The Group financial statements consolidate those of the and tax rates • How an entity considers changes in facts and circumstances. The Group determines whether to consider each uncertain Parent Company and all of its subsidiaries as of 30 June 2020. The Parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All subsidiaries have a reporting date of tax treatment separately or together with one or more other 30 June 2020. uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty. The Group determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty. The Group applies significant judgement in identifying uncertainties over income tax treatments. Since the Group operates in a complex multinational environment, it assessed whether the Interpretation had an impact on its consolidated financial statements. Upon adoption of the Interpretation, the Group applied a risk weighted measurement to the tax treatments used in the Group and has determined that there is no change required under AASB Interpretation 23 Uncertainty over Income Tax Treatments . iii) AASB 3 Business Combinations The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business. 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 acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. 29 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Intangible assets other than goodwill Initial recognition of other intangible assets (f) Property, plant and equipment Plant and equipment is stated at cost less accumulated depreciation and impairment losses 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 (g) Borrowing costs Borrowing costs are expensed in the period in which they are incurred and reported in finance costs. (h) Goodwill Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable Acquired both separately and from a business combination. Intangible assets acquired separately are capitalised at cost. 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 are expensed as incurred. Development expenditure incurred on an individual project is carried forward when its future recoverability can be reasonably assured. assets, liabilities and contingent liabilities. Internally developed software 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 unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the 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 are attributable to the asset will flow to the entity, and the cost of the asset can be measured reliably. These costs include employee costs incurred on development along with appropriate portion of relevant overheads. Subsequent measurement All finite-lived intangible assets, including internally developed software, are accounted for using the cost model whereby capitalised costs are amortised on a straight-line basis over their estimated useful lives. Residual values and useful lives are reviewed at each reporting date. In addition, they are subject to impairment testing as described in 2(i). The following useful lives are applied: Software 1 - 7 years Customer relationships 3 - 7 years Any capitalised internally developed software that is not yet complete is not amortised but is subject to basis of the relative values of the operation disposed of and impairment testing. the portion of the cash-generating unit retained. 30 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (j) Impairment of non-financial assets The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the statement of profit or loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. asset is required, the Group estimates the asset’s recoverable Goodwill is tested for impairment annually at reporting date amount. An asset’s recoverable amount is the higher of an and when circumstances indicate that the carrying value may asset’s or Cash Generating Unit’s (CGU) fair value less costs be impaired. of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. 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. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods. Intangible assets with indefinite useful lives are tested for impairment annually at reporting date at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. In determining fair value less costs of disposal, recent market (k) Operating segments transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. The Group has two operating segments: Australia and New Zealand. In identifying these operating segments, These calculations are corroborated by valuation multiples, management follows the geographical presence representing quoted share prices for publicly traded companies or other the main products and services. available fair value indicators. Each of these operating segments is managed separately as The Group bases its impairment calculation on most recent each requires different technologies, marketing approaches budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the and other resources. All inter-segment transfers are carried out at arm’s length prices based on prices charged to individual assets are allocated. These budgets and forecast unrelated customers in stand-alone sales of identical goods calculations generally cover a period of five years. or services. A long-term growth rate is calculated and applied to project future cash flows after the fifth year. For management, purposes the Group uses the same measurement policies as those used in its financial Impairment losses of continuing operations are recognised statements. in the statement of profit or loss in expense categories consistent with the function of the impaired asset. For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited 31 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (l) Financial instruments Recognition and derecognition • 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. Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of Impairment 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 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 Except for those trade receivables that do not contain a financial guarantee contracts (for the issuer) that are not significant financing component and are measured at the measured at fair value through profit or loss. 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 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 • fair value through profit or loss (FVTPL) cash flows of the instrument. • fair value through other comprehensive income (FVOCI). In applying this forward-looking approach, a distinction is In the periods presented the corporation does not have any made between: financial assets categorised as FVOCI. • financial instruments that have not deteriorated The classification is determined by both: • the entity’s business model for managing the financial asset 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 • the contractual cash flow characteristics of the is not low (‘Stage 2’) 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. Subsequent measurement of financial assets (i) Financial assets at amortised cost Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVTPL): • financial instruments that have objective evidence of impairment at the reporting date (‘Stage 3’). ’12-month expected credit losses’ are recognised for the first category while ‘lifetime expected credit losses’ are recognised for the second category. Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument. 32 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (o) Cash and cash equivalents Cash and short-term deposits in the statement of financial position comprise cash at bank, in hand and short-term (m) Trade and other receivables deposits with an original maturity of three months or less net The Group makes use of a simplified approach in accounting of bank overdrafts. (p) 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 of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. No liability is recognised if an outflow of economic resources as a result of present obligations is not probable. Such situation are disclosed as contingent liabilities unless the outflow of resources is remote. for trade and other receivables and records the loss allowance as lifetime expected credit losses. These are expected shortfalls in contractual cash flows, considering the potential for default at any point during the lifetime of the financial instrument. In calculating, the Group uses its historical experience, external indicators and forward-looking information to calculate expected credit losses using a provision matrix. The Group asses impairment of trade receivables on a collective basis as they possess shared credit risk characteristics they have been grouped based on the days past due. The Group assess impairment of trade receivables on a collective basis as they possess shared credit risk characteristics they have been grouped based on the days past due. Refer to Note 2(l) for a detailed analysis of how the impairment requirements of AASB 9 are applied. (n) Classification and measurement of financial liabilities The Group’s financial liabilities include borrowings, trade payables and other payables. Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Group designated a financial liability at fair value through profit or loss. Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for financial liabilities designated at FVTPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss. All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included within finance costs or finance income. 33 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (q) Employee benefits (i) Short-term employee benefits 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 Liabilities for wages and salaries, including non-monetary become fully entitled to the award (‘vesting date’). benefits, and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. (ii) Other long-term employee benefits The Group’s liabilities for annual leave and long service leave are included in other long term benefits as they are not expected to be settled wholly within twelve (12) months after the end of the period in which the employees render Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Group’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions. the related service. They are measured at the present value No expense is recognised for awards that do not ultimately of the expected future payments to be made to employees. vest because non-market performance and/or service The expected future payments incorporate anticipated future wage and salary levels, experience of employee conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated departures and periods of service, and are discounted at as vested irrespective of whether the market or non- vesting rates determined by reference to the market yields on high condition is satisfied, provided that all other performance quality corporate bonds with terms and currencies that and/or service conditions are satisfied. match as closely as possible. 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 take place. (r) 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’). 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 for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and 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. (s) Leases As described in Note 2(c), the Group has applied AASB 16 The cost of these equity-settled transactions with employees using the modified retrospective approach and therefore is measured by reference to the fair value at the date at comparative information has not been restated. This means which they are granted. The fair value is measured using a comparative information is still reported under AASB 117 variation of the binomial option pricing model that takes into and IFRIC 4. account the terms and conditions on which the instruments 34 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Accounting policy applicable from 1 July 2019 Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments. For any new contracts entered into on or after 1 July 2019, When the lease liability is remeasured, the corresponding the Group considers whether a contract is, or contains a adjustment is reflected in the right of use asset, or profit and lease. A lease is defined as ‘a contract, or part of a contract, loss if the right of use asset is already reduced to zero. that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether: The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right of use asset and lease liability, the payments in relation to these are recognised as an • the contract contains an identified asset, which is either expense in profit or loss on a straight-line basis over the explicitly identified in the contract or implicitly specified by lease term. being identified at the time the asset is made available to the Group; • the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract; On the statement of financial position, right of use assets have been included in property, plant and equipment and lease liabilities have been included in trade and other payables. Short-term leases and leases of low value • the Group has the right to direct the use of the identified Short-term leases (lease term of 12 months or less) and asset throughout the period of use. The Group assess leases of low value assets (under 5,000 USD) are recognised whether it has the right to direct ‘how and for what as incurred as an expense in the consolidated income purpose’ the asset is used throughout the period of use. statement. Low value assets comprise office equipment hire. At lease commencement date, the Group recognises a right Accounting policy applicable before 1 July 2019 of use asset and a lease liability on the balance sheet. Finance leases, which transfer to the Group substantially all The right of use asset is measured at cost, which is made up the risks and benefits incidental to ownership of the leased of the initial measurement of the lease liability, any initial item, are capitalised at the inception of the lease at the fair direct costs incurred by the Group, an estimate of any costs value of the leased property or, if lower, at the present value to dismantle and remove the asset at the end of the lease, of the minimum lease payments. and any lease payments made in advance of the lease commencement date (net of any incentives received). The Group depreciates the right of use assets on a straight- 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 line basis from the lease commencement date to the earlier liability. Finance charges are charged directly against income. of the end of the useful life of the right of use asset or the end of the lease term. The Group also assesses the right of use asset for impairment when such indicators exist. At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. 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. 35 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (t) 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: 1. Identifying the contract with a customer 2. Identifying the performance obligations 3. Determining the transaction price Recognition and measurement At the inception of each contract with customer, the Group assesses the contract to identify distinct performance obligations, being the units of account that determine when and how revenue from the contract with customer 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 Group’s customary business practises. A good or service is distinct if: (i) The customer can either benefit from the good or service 4. Allocating the transaction price to the on its own or together with other readily available performance obligations resources; and 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 (ii) The good or service is separately identifiable from other 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). is recognised by reference to each distinct performance If a good or service is not distinct, the Group combines obligation promised in the contract with customer when or it with other promised goods or services until the Group as the Group transfers the control of the goods or services identifies a distinct performance obligation consisting a promised in a contract and the customer obtains control distinct bundle of goods or services. of the goods or services. Depending on the substance of the respective contract with customer, the control of the promised goods or services may transfer over time or at a point in time. 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 A contract with customer exists when the contract has commercial substance, the Group and its customer has third parties such as sales and service taxes or goods and services taxes. If the amount of consideration varies due to approved the contract and intend to perform their respective discounts, rebates, credits, incentives, performance bonuses, obligations, the Groups and the customers rights regarding penalties or other similar items, the Group estimates the the goods or services to be transferred and the payment amount of consideration that it expects to be entitled terms can be identified, and it is probable that the Group based on the expected value or the most likely outcome will collect the consideration to which it will be entitled to in but the estimation is constrained up to the amount that exchange of those goods or services. 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 observable, the Group will need to estimate it using adjusted market assessment approach, expected cost plus a margin approach and residual approach. 36 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 Professional Services 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 services transferred are due upon receipt by the customer. Revenue is recognised over time as the work is performed. As costs are generally incurred uniformly as the work progresses and are considered to be proportionate to the entity’s performance. (u) Government grants and subsidies Government grants and subsidies are recognised where there is reasonable assurance that the they will be received and all attached conditions will be complied with. When the grant or subsidy relates to an expense item, it is recognised as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the grant or subsidy relates to an asset, it is recognised as income in equal amounts over the expected useful life of the related asset. When the Group receives grants or subsidies of non- monetary assets, the asset and the grant/subsidy are recorded at nominal amounts and released to profit or loss over the expected useful life of the asset, based on the pattern of consumption of the benefits of the underlying asset by equal annual instalments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The consideration allocated to each performance obligation is recognised as revenue when or as the customer obtains 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. Control over the goods or services are transferred over time and revenue is recognised over time if: (i) The customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs; (ii) The Group’s performance creates or enhances a customer-controlled asset; or (iii) The Group’s 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. Software as a Service (SaaS) 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. Product and License Revenue Revenue from the sale of product and software licenses is recognised when or as the Group transfers control of the assets to the customer. 37 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (v) Foreign currency transactions The consolidated financial statements are presented in Australian Dollars (‘AUD’), which is also the functional currency of the Parent Company. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the re-measurement of monetary items at year end exchange rates are recognised in profit or loss. Non-monetary items are not retranslated at year-end and are measured at historical cost (translated using the exchange rates at the date of the transaction), except for non- monetary items measured at fair value which are translated using the exchange rates at the date when fair value was determined. 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 taxable temporary differences associated with 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. • Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: • Except where the deferred income tax asset 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 In the Group’s financial statements, all assets, liabilities the transaction, affects neither the accounting profit nor and transactions of Group entities with a functional taxable profit or loss; and currency other than the AUD are translated into AUD upon • In respect of deductible temporary differences associated consolidation. The functional currency of the entities in the with investments in subsidiaries, associates and interests Group has remained unchanged during the reporting period. in joint ventures, deferred tax assets are only recognised 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. (w) Income tax 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 Deferred income tax is provided on all temporary differences substantially enacted by the end of the reporting period. at the reporting date between the tax bases of assets and liabilities and their carrying amounts for the financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: Deferred taxes are calculated using the balance sheet liability method. Management has applied a risk weighted measurement to the tax treatments used in the Group and has determined that there is no change required under IFRIC 23 Uncertainty • Except where the deferred income tax liability arises from over Income Tax Treatments. the initial recognition of an asset or liability in a transaction 38 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (x) Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: • Where the GST incurred on a purchase of goods and (z) Significant accounting judgements, estimates and assumptions Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. services is not recoverable from the taxation authority, Critical accounting estimates and assumptions 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 The Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying • Receivables and payables are stated with the amount of amounts of assets and liabilities within the next financial 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. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (y) Equity and reserves 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 2(z). Issued capital represents the amounts contributed for shares less issuance costs and consideration paid for share (ii) Share based payments buy-backs. Other components of equity include the following: 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. • Foreign currency translation reserve - compromises The fair value is measured by using a variation of the foreign currency translation differences arising from the binomial option pricing model that takes into account the translation of financial statements of the Group’s foreign terms and conditions on which the instruments were granted entities into AUD. and the current likelihood of achieving the specified target. • Employee equity benefits reserve - compromises The accounting estimates and assumptions relating to share-based employee remuneration. Retained profits includes all current and prior period retained profits. equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. 39 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (vi) Leases - Estimating the incremental borrowing rate (iii) Long service leave provision The liability for long service leave is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at the reporting date. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. The Group uses the high quality corporate bond rate as the discount rate when measuring its Australian dollar dominated long term employee benefits. (iv) Estimation of useful lives of assets The Group determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non- strategic assets that have been abandoned or sold will be written off or written down. (v) Recognition of deferred tax assets The extent to which deferred tax assets can be recognised is based on an assessment of the probability that future taxable income will be available against which the deductible temporary differences and tax loss carry-forwards can be utilised. In addition, significant judgement is required in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions. The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right of use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating). (vii) Recognition of service contract revenues As revenue from after-sales maintenance agreements and construction contracts is recognised over time, the amount of revenue recognised in a reporting period depends on the extent to which the performance obligation has been satisfied. For after-sales maintenance agreements this requires an estimate of the quantity of the services to be provided, based on historical experience with similar contracts. In a similar way, recognising revenue for construction contracts also requires significant judgment in determining the estimated number of hours required to complete the promised work when applying the hours-to-hours method described in Note 2(t). (viii) Capitalisation of internally developed software Distinguishing the research and development phases of a new customised software project and determining whether the recognition requirements for the capitalisation of development costs are met requires judgement. After capitalisation, management monitors whether the recognition requirements continue to be met and whether there are any indicators that capitalised costs may be impaired (see Note 2(i)). 40 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 3. SEGMENT REPORTING Management identifies its operating segments based on the Group’s geographical presence, which represent the main products and services provided by the Group. The Group’s two operating segments are: • Australia • New Zealand No operating segments have been aggregated to form the above reportable operating segments. There is no single customer on which the Group’s revenue depended during the financial year. The Chief Executive Officer is the Chief Operating Decision Maker (CODM) and monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on profit or loss and is measured consistently with profit or loss in the consolidated financial statements. The Group’s financing (including finance costs, finance income and other income) and income taxes are managed on a Group basis and are not allocated to operating segments. Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties. Inter-segment revenues are eliminated upon consolidation and reflected in the elimination column. All other adjustments and eliminations are part of detailed reconciliations presented further below. The revenues and profit generated by each of the Group’s operating segments and segment assets are summarised as follows: 2020 Revenue From external customers From other segment Total Segment profit (EBITDA) Segment assets Segment non-current assets 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 Australia $ New Zealand $ Elimination $ Total $ 98,020,883 67,528,476 - - 98,020,883 67,528,476 10,664,034 73,896,301 48,563,549 8,347,276 49,843,220 36,237,364 115,504,559 60,509,806 - - - - - - 165,549,359 - 165,549,359 19,011,310 123,739,521 84,800,913 176,014,365 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 13,800,537 15,292,285 25,352,785 108,884,381 65,935,967 - - - Finance costs and finance income are not allocated to individual segments as the underlying instruments are managed on a group basis. Current taxes, deferred taxes are not allocated to those segments as they are also managed on a group basis. 41 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 3. SEGMENT REPORTING (continued) 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 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 Total revenue from contracts with customers Market type Government Non-government Total revenue from contracts with customers Customers generally pay for amounts billed on a 30 day basis. Contract balances Contract assets Contract liabilities (Note 21) 42 2020 $ 2019 $ 19,011,310 15,292,285 (1,510,200) (8,502,600) - - (1,334,577) (8,464,003) (1,491,748) (25,352,785) 8,998,510 (21,350,828) 2020 $ 2019 $ 150,401,382 159,398,897 15,147,977 16,615,468 165,549,359 176,014,365 89,001,043 103,879,098 9,019,840 11,625,460 61,400,339 6,128,137 55,519,798 4,990,008 165,549,359 176,014,365 93,789,726 56,611,656 88,785,721 70,613,175 15,147,977 - 14,033,939 2,581,530 165,549,359 176,014,365 50,418,729 47,309,151 115,130,630 128,705,214 165,549,359 176,014,365 2020 $ 8,525,275 1,689,674 2019 $ 12,136,933 2,158,205 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 4. REVENUE FROM CONTRACTS WITH CUSTOMERS (continued) During the financial year contract assets reduced by $3,611,658 largely as a result of a major managed service contract coming to an end during the financial year together with a number of projects with on-going multi-year customers naturally concluding in the financial year. All of the prior year’s closing balance contract liabilities are now in revenue and we estimate that all of the current year closing balance will be brought to account as revenue in the financial year ended 30 June 2021. 5. OTHER INCOME Government subsidy Other income 6. EXPENSES 6A Depreciation and amortisation Depreciation of plant and equipment Amortisation of intangible assets Amortisation of right of use assets 6B Impairment expenses Plant and equipment (refer Note 13) Intangible assets (refer Note 14) Trade and other receivables 7. FINANCE EXPENSES Interest expenses - bank borrowings Interest expenses - leases 2020 $ 2019 $ 4,084,500 100,000 4,184,500 - - - 2020 $ 2019 $ 1,581,337 1,257,961 5,663,302 8,502,600 - - - - 4,043,395 4,420,608 - 8,464,003 7,614,851 17,029,201 708,734 25,352,785 2020 $ 699,166 825,031 1,524,197 2019 $ 1,348,805 46,011 1,394,816 43 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 8. INCOME TAX (a) Income tax expense 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% (2019: 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 expense/(benefit) 2020 $ 343,625 2019 $ 451 2,507,569 (6,086,495) 1,330 47,063 2,852,524 (6,038,981) (b) Numerical reconciliation between aggregate tax expense recognised in the comprehensive income statement and tax expense calculated per the statutory income tax rate Accounting profit/(loss) before income tax Income tax expense to accounting profit 2020 $ 2019 $ 8,998,510 (21,350,828) Domestic tax rate for Empired Ltd (30%) 2,699,553 (6,405,248) Tax rate differential Employee option expense Amortisation of intangibles Other expenditure not allowed for income tax purposes Foreign exchange differences Under provision in respect of prior years Income tax expense/(benefit) (75,506) 121,943 927 104,332 (55) 1,330 58,663 196,318 5,736 174,591 (116,104) 47,063 2,852,524 (6,038,981) 44 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 8. INCOME TAX (continued) (c) Recognised deferred tax assets and liabilities Deferred income tax balances relate to the following: Opening Balance $ Recognised in Profit and Loss $ Exchange Differences $ Closing Balance $ 30 June 2020 Deferred tax liabilities Contract assets Right of use assets Trade and other receivables Other 3,140,944 - - 36,417 (753,844) 2,520,018 367,908 (31,994) Gross deferred tax liabilities 3,177,361 2,102,088 Deferred tax assets Provisions Equity raising costs Borrowing costs R&D Tax Offsets carried forward Fixed assets Trade and other receivables Employee obligations Lease liabilities Other Tax losses Gross deferred tax assets 30 June 2019 Deferred tax liabilities Contract assets Fixed assets Trade and other receivables Other Gross deferred tax liabilities 5,954,048 (2,779,021) Deferred tax assets Provisions Equity raising costs Borrowing costs R&D Tax Offsets carried forward Fixed assets Trade and 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 12,513 479,833 7,958,657 2,004,609 (25,968) (87,233) (1,674) (354,420) 2,769,359 61,423 30,369 13,930 854,625 3,260,411 6,039,432 1,038,257 106,227 1,595 3,745,620 2,778,802 63,882 2,159,093 29,543 1,414,485 11,337,504 (872,270) (54,221) (1,365) (779,764) (1,337,760) (63,881) 353,442 3,310,980 (2,525) (959,444) (406,808) 2,874,258 3,030,446 24,495 24,849 266,686 (3,030,447) (24,495) 9,235 8,160,143 (2,508,896) 55 5,651,301 - - (6,063) 1,275 (4,788) - - - - (5,221) - 18,996 - 627 (19,135) (4,733) 2,387,100 2,520,018 361,845 5,698 5,274,661 165,987 52,006 230 2,965,856 1,435,821 - 2,531,531 3,310,980 27,645 435,906 10,925,962 - - - 2,333 2,333 - - - - 9,443 (23) 25,889 3,100 80,027 118,436 116,103 3,140,944 - - 36,417 3,177,361 1,038,257 106,227 1,595 3,745,620 2,778,802 63,882 2,159,093 29,543 1,414,485 11,337,504 8,160,143 45 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 8. INCOME TAX (continued) (d) Tax payable Income tax payable (e) Tax consolidation 2020 $ 309,555 2019 $ 35,705 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. 9. EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing net profit/(loss) 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 profit/(loss) 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 2020 $ 2019 $ 6,145,986 (15,311,847) 2020 ‘000s 159,950 6,427 166,377 2019 ‘000s 160,127 6,507 166,634 As the Group incurred a loss for the 2019 financial year, 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 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 prior year presented. 46 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 10. CASH AND CASH EQUIVALENTS (a) Reconciliation of cash Cash at bank and in hand: -AUD -NZD -USD -SGD 2020 $ 2019 $ 3,005,416 2,476,453 835,099 - 1,774,768 3,265,039 508,338 3,826 6,316,968 5,551,971 (b) Reconciliation of net cash flows from operating activities to profit after income tax Profit/(loss) 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 Decrease in receivables Decrease/(increase) in contract assets Increase in prepayments Increase/(decrease) in trade creditors and other payables Decrease in contract liabilities Increase in deferred tax asset Increase/(decrease) in provisions Net cash from operating activities 11. TRADE AND OTHER RECEIVABLES Current Gross trade receivables Allowance for credit losses (refer Note 26) Other receivables Trade receivables are non-interest bearing and are generally on 30-day terms. 12. OTHER CURRENT ASSETS Prepayments 2020 $ 6,145,986 1,510,200 8,502,600 - 406,477 1,385,995 3,611,658 39,779 1,119,965 (468,531) 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) 1,557,144 23,811,273 (982,044) 8,495,789 2020 $ 2019 $ 20,690,281 23,542,062 (492,856) 1,402,319 (997,876) 441,553 21,599,744 22,985,739 2020 $ 2019 $ 2,496,622 2,273,771 47 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 13. PLANT AND EQUIPMENT Leased equipment $ Leasehold improvements $ Computer hardware $ Furniture, equipment & fittings $ Total $ 2020 Gross carrying amount Balance 1 July 2019 Additions Exchange differences Balance 30 June 2020 Depreciation and impairment Balance 1 July 2019 Depreciation Balance 30 June 2020 Carrying amount 30 June 2020 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 - - - - - - - - 6,448,009 8,033,429 1,514,152 15,995,591 16,562 (17,066) 542,973 92,129 10,188 9,111 569,723 84,174 6,447,505 8,668,531 1,533,451 16,649,488 (2,532,072) (6,760,388) (607,866) (949,808) (466,867) (155,297) (9,759,327) (1,712,971) (3,139,938) (7,710,196) (622,164) (11,472,298) 3,307,567 958,335 911,287 5,177,190 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 21,073,555 2,603,290 29,731,679 253,138 21,147 794,540 (113,982) (13,357,042) (1,170,777) (14,681,307) 26,408 63,778 60,492 150,678 6,448,009 8,033,429 1,514,152 15,995,590 (2,059,565) (9,599,274) (1,088,516) (12,782,386) 106,605 (75) (579,037) 9,245,225 (3,238,656) (3,167,683) 933,327 (19,476) (292,202) 10,324,663 (3,258,207) (4,043,397) (2,532,072) (6,760,388) (466,867) (9,759,327) 3,915,937 1,273,041 1,047,285 6,236,263 During 2019 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 plant and equipment. 48 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 14. INTANGIBLE ASSETS 2020 Gross carrying amount Balance 1 July 2019 Additions Exchange differences Balance 30 June 2020 Depreciation and impairment Balance 1 July 2019 Amortisation Balance 30 June 2020 Goodwill $ Software $ Other $ Total $ 46,446,049 26,883,054 162,550 73,491,653 - - 5,924,122 (111,760) - - 5,924,122 (111,760) 46,446,049 32,695,416 162,550 79,304,015 - - - (21,792,633) (1,248,249) (159,459) (21,952,092) (3,091) (1,251,340) (23,040,882) (162,550) (23,203,432) Carrying amount 30 June 2020 46,446,049 9,654,534 - 56,100,583 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. Goodwill $ Software $ Other $ Total $ 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 46,446,049 - - - 24,486,954 9,948,374 (7,687,527) 135,253 46,446,049 26,883,054 355,462 - (249,303) 56,391 162,550 (284,163) 249,302 - - 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) (8,291,525) 7,136,002 (4,420,608) (16,477,675) - - - - - - 261,173 (124,598) 136,575 (21,792,633) (159,459) (21,952,092) Carrying amount 30 June 2019 46,446,049 5,090,421 3,091 51,539,561 During 2019 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. 49 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 14. INTANGIBLE ASSETS (continued) Goodwill Goodwill acquired through business combinations with indefinite lives are allocated to the Australian and New Zealand cash generating units (CGUs), which are also the operating and reportable segments for impairment testing. The carrying amount of goodwill allocated to each CGU is as follows: Australia New Zealand Total carrying amount of goodwill 2020 $ 27,105,898 19,340,151 46,446,049 2019 $ 27,105,898 19,340,151 46,446,049 The Group performed the annual impairment test in June 2020. 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 is anticipated. In making this assessment the possible impacts of COVID-19 have been taken into account. 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 FY21 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 400 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. 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 2%. 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% which is applied to the forecast pre-tax cash flows after capital expenditure of each CGU. 50 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 15. RIGHT OF USE ASSETS On adoption of AASB 16 Additions Amortisation Total right of use assets 2020 $ 18,361,110 5,174,031 23,535,141 (5,663,302) 17,871,839 2019 $ - - - - - The following describes the nature of the Group’s leasing activities by type of right of use asset recognised on the balance sheet: Right of use asset Number of right of use assets leased Range of remaining term Average remaining lease term Number of leases with extension options Number of leases with options to purchase Number of leases with variable payments linked to an index Number of leases with termination options Office building 10 0.5 - 7.7 years 3.1 years 8 - 2 - 16. EMPLOYEE BENEFITS The total expense relating to equity-settled share-based payment transactions in 2020 was $406,477 (2019: $654,393). During 2020 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. Each performance right is issued for nil consideration, with each performance right converting to one fully paid ordinary share upon vesting except when performance above the target is achieved and then up to 1.5 ordinary shares per performance right is provided. 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 2020 No. 6,481,636 2,786,667 (2,841,402) - 2019 No. 5,184,166 2,321,000 (974,252) (49,278) 6,426,901 6,481,636 51 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 16. EMPLOYEE BENEFITS (CONTINUED) A summary of the performance criteria and vesting dates is as follows: Number of Performance Rights Number of ordinary shares(i) 377,517* 763,033* 377,517 872,867* 436,433* 872,867* 1,090,667* 545,333* 1,090,667* 6,426,901 566,276 1,144,550 377,517 1,309,301 654,650 1,309,301 1,636,001 818,000 1,636,001 9,451,593 Vesting date 30 August 2020 30 August 2020 30 August 2020 1 September 2021 1 September 2021 1 September 2021 1 September 2022 1 September 2022 1 September 2022 Hurdle description FY20 Basic EPS Relative Total Shareholder Return Sustainability measure FY21 Basic EPS FY21 Return on Equity Absolute TSR FY22 Basic EPS FY22 Return on Equity Absolute TSR (i) Maximum number of ordinary shares to be provided should stretch performance measures be achieved * 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. 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 3 October 2019 1 September 2021 5 November 2019 1 September 2021 6 December 2019 1 September 2021 $0.29 3 yrs $197,430 1,486,667 $0.32 3 yrs $42,240 300,000 $0.34 3 yrs $153,200 1,000,000 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 grant were incorporated into measurement of fair value. 17. TRADE AND OTHER PAYABLES Trade payables Other payables Trade payables are non-interest bearing and are normally settled on 30-day terms. 2020 $ 5,923,794 8,959,810 14,883,604 2019 $ 5,358,019 11,327,922 16,685,941 52 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 18. BORROWINGS Current Obligations under bank loan Obligations under NZ-Dollar bank loan Obligations under premium funding contracts Non-current Obligations under bank loan Obligations under NZ-Dollar bank loan 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: 2020 $ 2019 $ 1,200,000 654,671 - 1,200,000 669,612 163,114 1,854,671 2,032,726 7,000,000 1,636,677 8,636,677 15,069,770 2,343,646 17,413,416 2020 $ 2019 $ 22,491,348 23,413,259 (10,491,348) (19,283,028) 12,000,000 4,130,231 4,200,000 3,500,000 (3,338,357) (2,626,630) 861,643 873,370 - - - 4,000,000 - 4,000,000 • non-revolving term debt of $6,491,348 maturing in March 2022 with quarterly principal repayments; • borrowing base facility of $16,000,000 (reducing to $15,000,000 on 31 December 2020), drawn to $4,000,000 at 30 June 2020. This facility matures in March 2022; and • bank guarantee facility of $4,200,000 maturing in March 2022. The 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 Intergen Limited; • Specific Security deed over the shares in the subsidiaries of Empired Limited; and • Cross guarantee and indemnity provided by each group entity. 53 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 19. LEASE LIABILITIES Lease liabilities are presented in the statement of the financial position as follows: Current Lease liabilities Hire purchase leases Non-current Lease liabilities 2020 $ 5,136,514 234,981 5,371,495 2019 $ - 376,534 376,534 14,568,739 19,940,234 - 376,534 The Group has leases for its office and some IT equipment. With the exception of short-term leases and leases of low-value underlying assets, each lease is reflected on the balance sheet as a right of use asset and a lease liability. Variable lease payments which do not depend on an index or a rate (such as lease payments based on a percentage of Group sales) are excluded from the initial measurement of the lease liability and asset. The Group classifies its right of use assets in a consistent manner to its property, plant and equipment. Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right of use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee. Some leases contain an option to extend the lease for a further term. The Group is prohibited from selling or pledging the underlying leased assets as security. For leases over office buildings and factory premises the Group must keep those properties in a good state of repair and return the properties in their original condition at the end of the lease. Further, the Group must insure items of property, plant and equipment and incur maintenance fees on such items in accordance with the lease contracts. Future minimum lease payments at 30 June 2020 were as follows: Lease payments Finance charges Net present values Within one year 1 - 5 years After 5 years Minimum lease payments due 6,064,821 (693,326) 5,371,495 15,232,584 (1,144,665) 14,087,919 496,705 (15,885) 480,820 Total 21,794,110 (1,853,876) 19,940,234 Lease payments not recognised as a liability The Group has elected not to recognise a lease liability for short term leases (leases with an expected term of 12 months or less) or for leases of low value assets. Payments made under such leases are expensed on a straight-line basis. In addition, certain variable lease payments are not permitted to be recognised as lease liabilities and are expensed as incurred. The expense relating to payments not included in the measurement of the short-term lease assets is $50,191. 54 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 20. PROVISIONS Balance at the beginning of the year Discounting adjustment Additional provisions Amounts used Restoration $ Lease incentives* $ Annual leave $ Long service leave $ Total $ 2,464,544 4,142,022 1,653,797 8,260,363 - - 874,609 - - - (2,464,544) Closing value at 30 June 2020 874,609 - *The lease incentive was derecognised on adoption of AASB 16. Analysis of total provisions: Current Provision for annual leave Provision for long service leave Provision for restoration Provision for lease incentives Non-current Provision for long service leave Provision for restoration Provision for lease incentives 21. CONTRACT LIABILITIES Current Deposits for future work Total contract liabilities (Note 4) - 4,318,413 (3,722,127) 4,738,308 - 1,306,583 (428,277) 2,532,103 - 6,499,605 (6,614,948) 8,145,020 2020 $ 2019 $ 4,738,308 2,316,765 260,000 - 7,315,073 215,338 614,609 - 829,947 4,142,022 919,191 - 864,223 5,925,436 734,606 - 1,600,321 2,334,927 2020 $ 2019 $ 1,689,674 1,689,674 2,158,205 2,158,205 55 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 22. RESERVES Opening balance as at 1 July 2018 Exchange differences arising on translation of foreign operations Share-based payments Closing balance as at 30 June 2019 Exchange differences arising on translation of foreign operations Share-based payments Closing balance as at 30 June 2020 Foreign Currency Translation Reserve (96,676) 486,157 389,481 (135,999) - 253,482 Employee Equity Benefits Reserve $ 2,381,783 654,393 3,036,176 - 406,477 3,442,653 Total Reserves $ 2,285,107 486,157 654,393 3,425,657 (135,999) 406,477 3,696,135 23. ISSUED CAPITAL Ordinary shares fully paid Movement in ordinary shares on issue At 1 July 2018 Issue of ordinary shares (net of issue costs) At 30 June 2019 Issue of ordinary shares (net of issue costs) Share buy back (net of costs) At 30 June 2020 2020 $ 2019 $ 54,146,878 54,204,746 No. 160,077,919 49,278 Value ($) 54,204,746 160,127,197 54,204,746 (203,119) (57,868) 159,924,078 54,146,878 Ordinary shares entitle the holder to participate in dividends, and carry one vote per share. These shares have no par value. During August 2019 the Company purchased on market and cancelled 203,119 ordinary shares in order to return capital to shareholders. 24. CAPITAL MANAGEMENT For the purpose of the Group’s capital management, capital includes ordinary share capital and convertible performance rights, supported by financial assets. The primary objective of the Group’s capital management is so that the Group can fund its operations, continue as a going concern and enhance shareholder value. The Group manages its capital structure and makes adjustments in light of changes in economic conditions and the requirements of the financial covenants. The Group monitors capital using a gearing ratio, which is ‘net debt’ divided by total capital plus net debt. The Group’s policy is to maintain a sustainable gearing ratio. The Group includes within net debt, interest bearing loans and borrowings, trade and other payables, less cash and short-term deposits. In order to achieve this overall objective, the Group’s capital management, among other things, aims to ensure that it meets financial covenants attached to the interest-bearing loans and borrowings that define capital structure requirements. Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. There have been no breaches of the financial covenants of any interest- bearing loans and borrowing in the current period. 56 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 24. CAPITAL MANAGEMENT (continued) There have been no material 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 2020 and 30 June 2019 are as follows: Total borrowings Less cash and cash equivalents Net debt including leases Issued capital Total capital Gearing ratio 25. DIVIDENDS Note 18, 19 10 2020 $ 30,431,582 (6,316,968) 24,114,614 54,146,878 78,261,492 26% 2019 $ 19,822,676 (5,551,971) 14,270,705 54,204,746 68,475,451 19% Balance of franking account at year end at 30% available to the shareholders of Empired Limited 2020 $ 24,841 2019 $ 24,841 26. 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 10. Refer to Note 27 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% (2019: +/- 1%). These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on a change in the average market interest rate for each period, and the financial instruments held at each reporting date that are sensitive to changes in interest rates. All other variables are held constant. 30 June 2020 30 June 2019 Profit for the year Equity $ +1% 30,866 99,895 $ -1% (30,866) (99,895) $ +1% 30,866 99,895 $ -1% (30,866) (99,895) 57 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 26. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) Foreign currency risk 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: NZD USD SGD 2020 $ Financial assets 11,718,221 Financial liabilities (14,161,508) Net exposure (2,443,287) 2019 $ 12,177,993 (5,029,652) 7,148,341 2020 $ 769,615 (187,010) 582,605 2019 $ 566,866 (48,005) 518,861 2020 $ - - - 2019 $ 3,826 (1,799) 2,027 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% (2019: 10%) then this would have had the following impact: 30 June 2020 30 June 2019 NZD $ (244,329) 714,834 USD $ 58,261 51,886 SGD $ - 203 If the AUD had weakened against the respective currencies by 10% (2019: 10%) then this would have had the following impact: 30 June 2020 30 June 2019 NZD $ 244,329 (714,834) USD $ (58,261) (51,886) SGD $ - (203) 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. 58 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 26. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) 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. Exposure to credit risk The Group’s maximum exposure to credit risk at the report date was: Cash and cash equivalents (Note 10) Trade and other receivables (Note 11) 2020 $ 6,316,968 21,599,744 27,916,712 2019 $ 5,551,971 22,985,739 28,537,710 The Group applies the AASB 9 simplified model of recognising lifetime expected credit losses for all trade receivables as these items do not have a significant financing component. In measuring the expected credit losses, the trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics. They have been grouped based on the days past due and also according to the geographical location of customers. The expected loss rates are based on the payment profile for sales over the past 48 months before 31 December 2020 and 31 December 2019 respectively as well as the corresponding historical credit losses during that period. The historical rates are adjusted to reflect current and forwarding looking macroeconomic factors affecting the customer’s ability to settle the amount outstanding. The Group has identified gross domestic product (GDP) and unemployment rates of the countries in which the customers are domiciled to be the most relevant factors and according adjusts historical loss rates for expected changes in these factors. However given the short period exposed to credit risk, the impact of these macroeconomic factors has not been considered significant within the reporting period. Trade receivables are written off (i.e. derecognised) when there is no reasonable expectation of recovery. Failure to make payments within 180 days from the invoice date and failure to engage with the Group on alternative payment arrangement amongst other is considered indicators of no reasonable expectation of recovery. 59 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 26. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) The aging of the Group’s non-impaired trade receivables at reporting date was: 30 June 2020 Expected credit loss rate Gross carrying amount Lifetime expected credit loss 30 June 219 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 2.0% 1,780,622 36,264 11.0% 639,679 71,257 65.0% 593,160 378,884 Trade receivables past due More than 30 days More than 60 days More than 90 days 1.0% 2,401,939 26,895 50.0% 1,139,548 568,186 100.0% 395,088 395,088 Current 0.05% 17,676,820 6,451 Current 0.05% 19,605,487 7,707 The closing balance of the trade receivables less allowances at 30 June 2020 reconciles with trade receivables: Opening balance of provision for doubtful debts as at 1 July 2018 Receivables written off during the year Estimated credit losses provided in year Opening estimated credit losses 1 July 2019 Provision written off during the year Estimated credit losses provided in year Expected credit loss at 30 June 2020 Liquidity risk Total - 20,690,281 492,856 Total - 23,542,062 997,876 $ 533,183 (154,300) 618,993 997,876 (745,098) 240,078 492,856 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 2020, the Group’s financial liabilities have contractual maturities (including interest payments where applicable) 0-12 Months $ 2,056,115 6,064,821 14,883,604 309,555 1 - 5 years $ 8,884,483 15,232,584 - - 5+ years $ - 496,705 - - 23,004,540 24,117,067 496,705 as summarised 30 June 2020 Bank borrowings Leases and hire purchase Trade and other payables Income tax payable Total 60 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 26. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued) This compares to the maturity of the Group’s financial liabilities in the previous reporting periods as follows: 30 June 2019 Insurance premium funding loan Bank borrowings Leases and hire purchase Trade and other payables Total 0-12 Months $ 1 - 5 years $ 5+ years $ 168,921 1,944,396 390,698 16,685,941 19,189,956 - 19,805,854 - - 19,805,854 - - - - - The above amounts reflect the contractual undiscounted cash flows, which may differ to the carrying values of the liabilities at the reporting date. 27. 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: Floating interest rate $ Fixed interest rate $ Non-interest bearing $ Carrying amount as per balance sheet $ Weighted average effective interest rate 2020 Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Financial liabilities Trade and other payables Leases and hire purchase obligations Bank loans Income tax payable Total financial liabilities 6,316,968 - 6,316,968 - - 10,940,598 - - - - - 19,940,234 - - - 21,599,744 21,599,744 6,316,968 21,599,744 27,916,712 14,883,604 - - 309,555 14,883,604 19,940,234 10,940,598 309,555 10,940,598 19,940,234 15,193,159 46,073,991 1.25% 4.10% 3.48% 61 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 27. FINANCIAL INSTRUMENTS (continued) Floating interest rate $ Fixed interest rate $ Non-interest bearing $ Carrying amount as per balance sheet $ Weighted average effective interest rate 2019 Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Financial liabilities Trade and other payables Finance leases and hire purchase obligations Insurance premium funding loan Bank loans Total financial liabilities 5,551,971 - 5,551,971 - - - 21,750,250 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 38,975,839 539,648 16,685,941 1.25% 4.84% 3.56% 4.27% 28. COMMITMENTS AND CONTINGENCIES Commitments for expenditure Capital commitments for office fit-out Operating leases Office equipment is leased under short term operating leases. Their commitment can be seen below: Minimum lease payments under 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 62 2020 $ 500,000 2019 $ - 2020 $ 47,127 - - 47,127 2019 $ 5,991,355 14,094,360 2,883,249 22,968,964 2020 $ 2019 $ 3,338,357 2,626,630 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 29. INVESTMENT IN CONTROLLED ENTITY Tusk Technologies Pty Ltd Conducive Pty Ltd OBS Pty Ltd eSavvy Pty Ltd Intergen Business Solutions Pty Ltd Intergen Limited Intergen X4 Holdings Limited Intergen USA Limited Intergen ESS Limited (a) Empired Singapore Pte Ltd Intergen North America Limited (a) Acts as trustee for the Intergen Limited Employee Share Scheme Trust 30. AUDITORS’ REMUNERATION Amounts received or due and receivable by auditors of the parent entity: Audit and review of financial statements Grant Thornton Australia Overseas Grant Thornton network firms Remuneration for audit and review of financial statements Other services Grant Thornton Australia: Taxation compliance Overseas Grant Thornton network firms: Taxation compliance Total other services remuneration Total auditor’s remuneration % Equity Interest Country of Incorporation 2020 % 2019 % 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 2020 $ 256,561 10,698 267,259 2019 $ 206,359 47,740 254,099 38,000 15,763 10,654 48,654 315,913 7,005 22,768 276,866 63 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 31. PARENT ENTITY INFORMATION As at, and throughout, the financial year ended 30 June 2020 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 Profit/(loss) after tax Total comprehensive income/(loss) 2020 $ 2019 $ 24,832,448 74,217,431 23,306,102 41,680,577 54,146,877 3,442,652 27,036,947 64,713,909 18,783,667 37,253,803 54,204,744 3,036,176 (25,052,675) (29,780,814) 32,536,854 27,460,106 4,735,451 4,735,451 (12,366,189) (12,366,189) 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, Tusk Technologies Pty Ltd, Intergen Business Solutions Pty Ltd and Intergen Limited have entered into a cross guarantee and indemnity in favour of the senior lender to the Group in respect to bank facilities provided to the Group by the senior lender. 3. Empired Limited has provided a guarantee to a customer of a wholly owned entity to support the operations of the subsidiary. 32. 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 2020 $ 2019 $ 1,758,066 1,878,371 98,498 279,885 71,215 436,124 2,136,449 2,385,710 33. EVENTS AFTER THE REPORTING DATE No significant non-adjusting events have occurred between the reporting date and the date of authorisation. 64 EMPIRED LIMITED | ANNUAL REPORT | 2020NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2020 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 2020 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 2020 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 2020. On behalf of the Board Russell Baskerville Managing Director 17 August 2020 65 EMPIRED LIMITED | ANNUAL REPORT | 2020DIRECTORS’ DECLARATION Auditor’s Independence Declaration Central Park, Level 43 Central Park, Level 43 152-158 St Georges Terrace 152-158 St Georges Terrace Perth WA 6000 Perth WA 6000 Correspondence to: Correspondence to: PO Box 7757 PO Box 7757 Cloisters Square Cloisters Square Perth WA 6000 Perth WA 6000 T +61 8 9480 2000 T +61 8 9480 2000 F +61 8 9322 7787 F +61 8 9322 7787 E info.wa@au.gt.com E info.wa@au.gt.com W www.grantthornton.com.au W www.grantthornton.com.au Auditor’s Independence Declaration Auditor’s Independence Declaration To the Directors of Empired Limited 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 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 2020, I declare that, to the best of my knowledge and belief, there have been: Limited for the year ended 30 June 2020, I declare that, to the best of my knowledge and belief, there have been: a a b b no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 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. no contraventions of any applicable code of professional conduct in relation to the audit. GRANT THORNTON AUDIT PTY LTD GRANT THORNTON AUDIT PTY LTD Chartered Accountants Chartered Accountants L A Stella L A Stella Partner – Audit & Assurance Partner – Audit & Assurance Perth, 17 August 2020 Perth, 17 August 2020 Grant Thornton Audit Pty Ltd ACN 130 913 594 Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 www.grantthornton.com.au 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 ‘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 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 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 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 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 ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. Liability limited by a scheme approved under Professional Standards Legislation. 66 EMPIRED LIMITED | ANNUAL REPORT | 2020AUDITOR’S INDEPENDENCE DECLARATION Independent Auditor’s Report Independent Auditor’s Report To the Members of Empired Limited Independent Auditor’s Report Report on the audit of the financial report To the Members of Empired Limited Opinion Central Park, Level 43 152-158 St Georges Terrace Perth WA 6000 Correspondence to: Central Park, Level 43 PO Box 7757 152-158 St Georges Terrace Cloisters Square Perth WA 6000 Perth WA 6000 Correspondence to: T +61 8 9480 2000 PO Box 7757 F +61 8 9322 7787 Cloisters Square E info.wa@au.gt.com Perth WA 6000 W www.grantthornton.com.au T +61 8 9480 2000 F +61 8 9322 7787 E info.wa@au.gt.com W www.grantthornton.com.au Report on the audit of the financial report 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 2020, the consolidated statement of profit or loss and other Opinion comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the We have audited the financial report of Empired Limited (the Company) and its subsidiaries (the Group), which comprises year then ended, and notes to the consolidated financial statements, including a summary of significant accounting the consolidated statement of financial position as at 30 June 2020, the consolidated statement of profit or loss and other policies, and the Directors’ declaration. comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies, and the Directors’ declaration. a giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its performance for the year ended on that date; and In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: b complying with Australian Accounting Standards and the Corporations Regulations 2001. a giving a true and fair view of the Group’s financial position as at 30 June 2020 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 Basis for opinion independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and our other ethical responsibilities in accordance with the Code. the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 Key audit matters forming our opinion thereon, and we do not provide a separate opinion on these 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 ‘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 Grant Thornton Audit Pty Ltd ACN 130 913 594 Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 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’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to 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 Grant Thornton Australia Limited. 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 Liability limited by a scheme approved under Professional Standards Legislation. 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. www.grantthornton.com.au www.grantthornton.com.au 67 EMPIRED LIMITED | ANNUAL REPORT | 2020INDEPENDENT AUDITOR’S REPORT Independent Auditor’s Report (continued) Key audit matter How our audit addressed the key audit matter Revenue recognition – Note 2(t) and Note 4 For the year ended 30 June 2020, the group recorded $165,549,359 (2019: $176,014,365) 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. Our procedures 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; 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 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. Testing on a sample basis both fixed and variable revenue 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 recalculating the stage of completion based on hours to date proportionate to forecasted hours or milestones. We tested a sample of progress billings comparing invoices and actual hours to ensure the allocation to contract assets and liabilities was appropriate and consistent to the requirements of AASB 15; Assessing the forecasted hours through discussions with project managers and challenged the key assumptions connected to the stage of completion method; and Assessing the adequacy of Group’s presentation and disclosures in the financial statements. Carrying value of goodwill – Note 2(h) and Note 14 The Group has recorded goodwill totalling $46,446,049 (2019: $46,446,049) at 30 June 2020 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 auditor’s valuation 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. These estimates and judgements requires specific valuation expertise and analysis. 68 Challenging the appropriateness of management’s revenue and cost forecasts by comparing the forecasted cash flows to actual growth rates achieve historically; Reviewing management’s value-in-use calculations to: – Test the mathematical accuracy of the calculations; – Test forecast cash inflows and outflows to be derived by the CGUs assets; – Comparing estimates and judgements for growth rates to available market and industry data; – Agree discount rates applied to forecast future cash flows including consultation with our valuation auditor’s expert. Performing sensitivity analysis on the significant inputs and assumptions made by management in preparing its calculation; and Assessing the adequacy of financial report disclosures. EMPIRED LIMITED | ANNUAL REPORT | 2020INDEPENDENT AUDITOR’S REPORT Independent Auditor’s Report (continued) 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 2020, 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 Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/auditors_responsibilities/ar1_2020.pdf. This description forms part of our auditor’s report. Report on the remuneration report Opinion on the remuneration report We have audited the Remuneration Report included in pages 12 to 20 of the Directors’ report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Empired Limited, for the year ended 30 June 2020 complies with section 300A of the Corporations Act 2001. 69 EMPIRED LIMITED | ANNUAL REPORT | 2020INDEPENDENT AUDITOR’S REPORT Independent Auditor’s 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, 17 August 2020 70 EMPIRED LIMITED | ANNUAL REPORT | 2020INDEPENDENT AUDITOR’S REPORT Shareholding Analysis In accordance with Listing Rule 4.10 of ASX Limited, the Directors provide the following shareholding information which was applicable as at 17 July 2020. 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 140 448 253 388 107 1,336 % 0.03 0.83 1.20 8.60 89.34 100.00 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 Tiga Trading Pty Ltd National Nominees Ltd ACF Australian Ethical Investment Limited Microequities Asset Management Pty Ltd Baskerville Investments Pty Ltd Number of shares held 24,803,548 24,440,404 17,047,292 7,450,059 % 15.51 15.28 10.66 6.21 71 EMPIRED LIMITED | ANNUAL REPORT | 2020SHAREHOLDING ANALYSIS c. Twenty Largest Shareholders Name Shareholder NATIONAL NOMINEES LIMITED UBS NOMINEES PTY LTD J P MORGAN NOMINEES AUSTRALIA PTY LIMITED ZERO NOMINEES PTY LTD BASKERVILLE INVESTMENTS PTY LTDBNP PARIBAS NOMINEES PTY LTD MICROEQUITIES ASSET MANAGEMENT PTY LTD MR JOHN ALEXANDER BARDWELL ICE COLD INVESTMENTS PTY LTD BNP PARIBAS NOMS (NZ) LTD GABRIELLA NOMINEES PTY LTD BRANDONS TRUSTEE COMPANY LIMITED NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> BASKERVILLE INVESTMENTS PTY LTD MR GREGORY DAVID LEACH BARDWELL SUPERANNUATION FUND PTY LTD MADSTASH TRADING PTY LTD MORGAN STANLEY AUSTRALIA SECURITIES (NOMINEE) PTY LIMITED MS SARAH LOUISE MCCREADY UNIPLEX CONSTRUCTIONS PTY LTD Number of shares held 33,013,112 24,803,548 13,518,594 8,550,000 7,780,000 5,095,474 3,598,522 3,150,000 2,499,730 2,223,000 1,720,000 1,403,347 1,397,257 1,288,983 1,200,000 1,150,000 1,134,921 1,053,276 970,390 965,500 % 20.64 15.51 8.45 5.35 4.86 3.19 2.25 1.97 1.56 1.39 1.08 0.88 0.87 0.81 0.75 0.72 0.71 0.66 0.61 0.60 Total 116,515,654 72.86 The twenty members holding the largest number of shares together held a total of 72.9% of issued capital. d. Issued Capital (i) Ordinary Shares The fully paid issued capital of the company consisted of 159,924,078 shares held by 1,336 shareholders. Each share entitles the holder to one vote. The number of shareholdings held in less than marketable parcels is 215. (ii) Unquoted Equity No options were issued in the year under the company share options plan. 2,786,667 performance rights were issued under the company’s LTI plan. Options and Performance Rights do not have any voting rights. e. On-Market Buy-Back Nil 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 72 EMPIRED LIMITED | ANNUAL REPORT | 2020SHAREHOLDING ANALYSIS 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 Securities 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. 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 73 EMPIRED LIMITED | ANNUAL REPORT | 2020OTHER INFORMATION FOR SHAREHOLDERS ANNUAL GENERAL MEETING The 2020 Annual General Meeting of Empired Limited will be held at 11AM AWST Friday, 27 November 2020, location to be advised. Formal notice of the meeting will be circulated to shareholders separate to this report. SECURITIES 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 74 EMPIRED LIMITED | ANNUAL REPORT | 2020OTHER INFORMATION FOR SHAREHOLDERS u a . m o c . n g s e d n r o c a i 4 1 1 0 8