Hormel Foods
Annual Report 2017

Plain-text annual report

HRL Holdings Limited Appendix 4E 2017 Final Report Results for Announcement to the Market 21 August 2017 1. Company Details and Reporting Period Name of Entity: HRL Holdings Limited ABN: 99 120 896 371 Reporting Period: 30 June 2017 Previous Corresponding Period: 30 June 2016 2. Results for Announcement to the Market $ Revenue from ordinary activities up 63% to: 13,648,858 Net profit for the period attributable to members up 11% to: 130,420 No dividends were paid or payable during the period. Refer to pages 8 to 11 of the Financial Statements for the operational and financial review of the Entity. 3. Statement of Comprehensive income with Notes to the Statement Refer to Page 26 of the 2016 Financial Statements and accompanying Notes. 4. Balance Sheet with Notes to the Statement Refer to Page 27 of the 2017 Financial Statements and accompanying Notes. 5. Statement of Cash Flows with Notes to the Statement Refer to Page 29 of the 2017 Financial Statements and accompanying Notes. 6. Dividends No dividends were paid or payable during the period. 7. Statement of Changes in Equity Refer to Page 28 of the 2017 Financial Statements and accompanying Notes. 8. Net Tangible Assets per Security 2017 $0.029 2016 $0.006 www.hrlholdings.com | ABN 99 120 896 370 | ASX Code: HRL 9. Entities over which Control has been Gained or Lost during the Period. Refer to Page 59 of the 2017 Financial Statements. 10. Associates and Joint Venture Entities Not applicable. 11. Other Significant Information Not applicable. 12. Accounting Standards used for Foreign Entities Not applicable. 13. Commentary on the Results for the Period Refer to pages 8 to 11 of the Financial Statements for the operational and financial review of the Entity. 14. Status of Audit The attached 2017 Financial Statements have been audited. 15. Dispute or Qualifications if not yet audited Not applicable. 16. Dispute or Qualifications if audited Not applicable. Paul Marshall Company Secretary 21 August 2017 www.hrlholdings.com | ABN 99 120 896 370 | ASX Code: HRL HRL HOLDINGS LIMITED ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2017 Index CEO’s Letter Directors’ Report Remuneration Report Auditor’s Independence Declaration Additional ASX Information Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Corporate Information 3 5 14 23 24 26 27 28 29 30 69 70 75 2 CEO’S LETTER Dear Shareholders, Your Directors and I have much pleasure in presenting the 2017 Annual Financial Statements for the HRL Group. Introduction and the past year in review 2016-17 was the second full financial year for HRL as an environmental services business. It was an exciting and transformational year for HRL as we expanded across geographical locations and service lines. The group now operates from 12 branch locations and offers integrated services including field sampling, laboratory analysis and cloud hosted data management. Throughout the year Precise Consulting and OCTIEF have focussed on developing a high performing culture sustainably expanding their business. There has been substantial investment in organic expansion leveraging the expanded geographic coverage of the business. Whilst these organic expansion activities come at a cost to both short term cashflows and profits, the business is now more robust and we expect financial benefits will flow in coming periods from both increased volumes and margin protection. All OCTIEF and Precise Consulting & Laboratory branches now offer methamphetamine investigation services. Precise Consulting achieved the highly regarded IANZ accreditation for field sampling work and the newest laboratory in Auckland obtained its asbestos analysis accreditation. OCTIEF recently achieved a NATA accreditation for gravimetric dust sampling and has begun expanding the Brisbane laboratory for additional chemistry services for soil analysis. The key milestones achieved throughout the year include:  March 2017 – $8.5m capital raise to fund acquisitions. The raise was supported by existing shareholders, new institutional investors and all Board and Key Management.  March 2017 – Acquisition of Morrison Geotechnic expanding HRL service offerings into engineering and construction material laboratory testing services  April 2017 – Precise Consulting & Laboratory Auckland branch achieves IANZ laboratory accreditation  April 2017 – Acquisition of the OCTFOLIO business - a SaaS platform for managing client compliance registers  June 2017 – OCTIEF achieves NATA accreditation for gravimetric dust laboratory services The core business of environmental services has grown substantially in the past year and is now characterised by:   12 branch locations across Australian and New Zealand, including 10 accredited laboratories The new Geotech service line will contribute upwards of 40% of the group turnover with the balance coming from HAZMAT and software  Business scale has improved with corporate costs as a percentage of revenue decreasing from 15% in FY2016, to 11% in FY2017. This trend is expected to continue into FY2018 with full year contribution from the Morrison and OCTFOLIO businesses  Expanded service capabilities, including: o Hazardous material consulting and laboratory services (such as asbestos, lead, synthetic mineral fibres, gravimetric dust, chemical contamination and illegal clandestine laboratory investigations); o Geotechnical engineering and the associated laboratory construction material testing; o o Environmental management (such as contaminated land investigations, water quality, dust and noise monitoring); and Training and technology solutions. Outlook for FY2018 We expect the Australian HAZMAT businesses to continue their improvement into the next financial year. OCTIEF has secured some large panel contracts within all states and territories across our existing and new branches. The New Zealand market for HAZMAT services is still in its infancy and through the Precise brand we expect to continue to see exciting growth in this region. 3 CEO’S LETTER The Australian outlook for infrastructure and civil projects is positive and Morrison Geotechnic is well positioned to capitalise on this. HRL will focus on investing in higher throughput laboratory equipment and streamlining field processes to ensure Morrison remain a market leader in both quality and value for money. OCTFOLIO are focussing on growing the subscription revenue for the coming year and are targeting a strong pipeline of both government and corporate leads. All additional revenue generated from SaaS fees will contribute strongly to the bottom line. HRL is focused on executing the following strategic objectives for FY2018: 1. Leverage the current branch network to expand new service lines and increase market share; 2. Expand laboratory services into higher end chemistry and environmental services through commissioning new services or strategic acquisitions; 3. Invest in high throughput technics for our laboratories to protect or increase margins; and 4. Continue to seek attractive new business opportunities to add to the group. In closing, I would like to take this opportunity to thank our Chairman and Board for their guidance over the past year and also to thank all of the HRL Group’s employees for their dedication and hard work. My thanks also to you, our shareholders for your ongoing support in FY17. I look forward to keeping you updated on our progress in FY18 and the transformation of HRL to one of Australia’s and New Zealand’s leading environmental services groups. Steven Dabelstein CEO 4 DIRECTORS’ REPORT DIRECTORS' REPORT Your Directors present their report on the Consolidated Entity consisting of HRL Holdings Limited (“HRL” or “Company”) and the entities it controlled at the end of, or during, the year ended 30 June 2017. DIRECTORS The following persons were directors of HRL Holdings Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Name Kevin Maloney Darren Anderson Mark Elliott John Taylor Position Period of Directorship Non-Executive Chairman Appointed 15 September 2014 Executive Director Appointed 15 September 2014 Non-Executive Director Appointed 11 August 2006 Non-Executive Director Appointed 25 November 2014 Frederick Kempson Alternate Non-Executive Director Appointed 15 September 2014 Kevin Maloney Non-Executive Chairman Mr Kevin Maloney is the founder and Chairman of the Australian investment entity Tulla Group and has built an extensive career in retail banking, finance and resources. One of Kevin's many career highlights was as founder and Executive Chairman of The MAC Services Group (The MAC), which was sold to Oil States International in 2010 for $651 million. Kevin was heavily involved in all stages of The MAC’s growth, including its move into mining services accommodation in 1996. Kevin has been involved with numerous public companies as both an executive and director. After spending 20 years with ANZ Bank, Kevin joined Elders Resources Finance Limited in 1981, progressing to Chief Executive Officer before moving on to his own business enterprises. Mr Maloney is currently a director of the following other ASX listed company:  Altona Mining Limited (appointed July 2009) Darren Anderson Executive Director Mr Darren Anderson was formerly the Executive Director and Chief Operating Officer of Diversified Mining Services Ltd, an unlisted public company that at its peak in mid-2012 had consolidated revenue in excess of $200 million and 850 personnel. Previous career highlights include 15 years spent as founder and Executive Director of the Anderson Group of Companies, which grew from a single person operation in Mackay to a company with in excess of 300 employees and 12 operating divisions across both Queensland and New South Wales that serviced the Australian and international coal industries. He has not been a Director of any other Australian listed company in the last three years. 5 DIRECTORS’ REPORT Mark Elliott Non-Executive Director Dip App Geol., PhD, FAICD, FAusIMM(CP), FAIG Dr Elliott is a Chartered Professional (CP) geologist with over 40 years’ experience in economic geology, exploration, mining, project development and corporate management. He has extensive experience in managing companies and exploration/mining operations in a wide range of commodities including energy. He has a diploma in Applied Geology from the Ballarat School of Mines and a Doctor of Philosophy degree from the University of New South Wales. He is a Fellow of the Australian Institute of Company Directors, Australasian Institute of Mining and Metallurgy and the Australian Institute of Geoscientists. Dr Elliott is currently a director of the following other ASX listed companies:  Nexus Minerals Ltd (Oct 2006 – present)  Aruma Resources Ltd (July 2017 – present) John Taylor Non-Executive Director LLB, Grad Dip ACG Mr Taylor is the founding partner of Taylors Solicitors, Mackay, a Senior Counsellor of the Queensland Law Society and has over 30 years’ experience in commercial and property transactions and litigation. John Taylor was, from 2006 and 2010, a director of ASX listed The MAC Services Group Limited, where he was Chair of the Remuneration and Nomination Committee and a member of the Audit and Risk Management Committee. He is also a former Chair of the Mackay Port Authority and a Board member of Tourism Mackay and Mackay Regional Economic Bureau. He has not been a Director of any other Australian listed company in the last three years. Frederick Kempson Alternate Non-Executive Director BComm Fred Kempson brings a wealth of experience to the Board of Directors from the highly-specialised spectrum of international investment banking and corporate governance. Fred has held a range of senior executive positions within the international investment banking arena including a significant period as Managing Director of ANZ’s investment bank AIFC Limited, and Vice President of Security Pacific Limited. During his time as Vice President of Security Pacific Bank, in 1992 the bank merged with San Francisco-based Bank America (now called Bank of America), in a deal that was at the time one of the largest bank mergers in history. Fred is currently also Managing Director of Kempson Capital, Director of AHA Retail Partners Ltd a UK public company and holds a Bachelor of Commerce from the University of New South Wales. Mr Kempson was a director of the following other ASX listed company:  Victor Group Holdings (Jan 2014 – July 2015) 6 DIRECTORS’ REPORT DIRECTOR INTERESTS IN THE SHARES AND OPTIONS OF THE CONSOLIDATED ENTITY As at the date of this report, the interests of the Directors in the shares and options of HRL Holdings Limited are shown in the table below: Director Kevin Maloney Darren Anderson Mark Elliott John Taylor Frederick Kempson Fully Paid Ordinary Shares 61,209,491 21,172,397 3,123,634 1,673,077 - MEETINGS OF DIRECTORS The following table sets out the number of meetings of the Company’s Directors held during the year ended 30 June 2017 and the number of meetings attended by each Director. Kevin Maloney Darren Anderson Mark Elliott John Taylor Frederick Kempson Meetings attended Eligible to attend 6 6 6 6 5 6 6 6 6 6 There are no committees of directors. All relevant matters are considered by the Board. SENIOR MANAGEMENT Paul Marshall Company Secretary LLB, ACA Mr Marshall holds a Bachelor of Law degree, a post Graduate Diploma in Accounting and is a Chartered Accountant. He has more than thirty years’ experience initially with Ernst & Young and subsequently twenty years spent in commercial roles as Company Secretary and CFO for a number of listed and unlisted companies mainly in the resources sector. He has extensive experience in all aspects of company financial reporting, corporate regulatory and governance areas, business acquisition and disposal due diligence, capital raising and company listings and company secretarial responsibilities. Steven Dabelstein Chief Executive Officer BComm, CPA Mr Dabelstein has a strong financial and operational background in various roles, including most recently as General Manager Commercial and QLD Mining/Maintenance Services with Diversified Mining Services Limited. Mr Dabelstein’s experience includes public practice accounting, manufacturing, service and the construction industries. Previous roles have provided exposure to large-scale international businesses reporting through and working with companies in the US, Asia and Europe. 7 DIRECTORS’ REPORT Michael Harvey Chief Finance Officer BBus, B AppSci, Grad Dip ICAA, Grad Dip CSA, CA, GAIA Mr Harvey is a Chartered Accountant and Chartered Secretary. Mr Harvey holds Bachelor degrees in Business and Property Economics and post Graduate Diplomas in Accounting and Corporate Governance. He has more than 15 years in the accountancy profession in Australia, having worked for PKF for eight years in audit, and subsequently over five years in commercial roles as financial controller for a number of listed companies mainly in the property and resources sector. Mr Harvey has experience in all aspects of company financial reporting, internal control, corporate regulatory and governance areas, business acquisition and disposal, due diligence, and company secretarial responsibilities. PRINCIPAL ACTIVITIES The HRL Group is a diversified environmental and geotechnical service provider with offices and laboratory facilities across Australia and New Zealand. The Group offers services including;       industrial hygiene, with a focus on asbestos and hazardous materials management; geotechnical testing and engineering services; property contamination testing and work place drug testing; environmental services (air, water and soil including contaminated land); environmental and property management software solutions; and specialised NATA/IANZ - accredited laboratory analysis and on-site testing and monitoring. ENVIRONMENTAL REGULATION AND PERFORMANCE The Company’s operations are subject to environmental regulations in relation to its consulting and laboratory activities. The Directors are not aware of any breaches during the period covered by this report. REVIEW OF OPERATIONS Over the last year HRL Holdings Limited has continued to focus on expanding its service capabilities. The Company has achieved a number of key milestones:    Acquisition of Morrison Geotechnic in March 2017; Acquisition OCTFOLIO in April 2017; Service line expansion with a new laboratory opened in Auckland; Below are the key highlights: Acquisition of Morrison Geotechnic On 31 March 2017, HRL completed the acquisition of Morrison Geotechnic Holdings Pty Ltd (Morrison Geotechnic). The Morrison Geotechnic acquisition represents a strategic expansion into a new market for HRL. Established for over 17 years, Morrison Geotechnic services the civil, engineering and construction industries primarily across South East Queensland. The Company has 3 branches covering Brisbane, Gold Coast and the Sunshine Coast. With a portfolio of over 12,000 completed projects, Morrison Geotechnic provides a breadth of engineering and laboratory expertise across its target sectors and geography. Morrison Geotechnic provide a range of services and analysis including:  Geotechnical investigations and studies;  Temporary works designs and inspections;  Construction phase verification;  Earthworks supervision;  Soil, concrete and aggregate testing in its NATA accredited laboratories; and  Onsite mobile laboratory testing. 8 DIRECTORS’ REPORT Acquisition of OCTFOLIO On 13 April 2017, HRL completed the acquisition of Integrated Holdings Group Pty Ltd (IHG) to acquire 100% of the issued capital in IHG. IHG is the holding entity of OCTFOLIO Pty Ltd (OCTFOLIO) and has no other operations or assets. OCTFOLIO is an Australian-based specialised software vendor focused on the development and implementation of:  Information management software solutions for asbestos and hazardous materials;  Innovative field management software solutions; and  Customised compliance solutions and applications relating to workplace health and safety. OCTFOLIO provides the following services:  Hosting of HAZMAT compliance data and registers;  Quality management systems;  Laboratory management systems;  Field surveying tools;  On demand programming services;  Data migrations; and  Training. OCTFOLIO is a versatile and adaptive application that provides asset owners the control and insight to their portfolio which is currently lacking from traditional paper based systems. The OCTFOLIO suite enables HRL businesses to position themselves as offering industry best practice solutions to our clients with larger asset portfolios – the key target market segment for the Group. Auckland laboratory expansion During the year HRL commissioned and accredited laboratory facilities in its recently opened Auckland branch. The Auckland market is the largest market in New Zealand for Precise’s major service offerings of asbestos and property contamination testing. It is also home to New Zealand’s largest corporate, educational and government organisations – the key target customer segments for Precise. The accredited laboratory is a key factor in growing Precise’s operations in Auckland. Precise now offers an all in one audit, testing and compliance management service for the Auckland market. The branch will also be targeting the external laboratory market aggressively which is the largest by size in New Zealand. Trading Review New Zealand New Zealand operations were strong in FY2017. OCTIEF Limited (NZ) successfully completed its second large scale survey works project for Chorus New Zealand Limited (Chorus) across the North and South Islands of New Zealand. Precise Consulting continued its strong performance with the Wellington, Dunedin and Palmerston North branches all performing above expectations. With laboratory accreditation granted in late April, the Auckland branch can now focus on capturing work across the largest external laboratory market in New Zealand. Earthquake rebuild activities in Christchurch have now tapered off. Anticipating this Precise has spent the last 6 months transitioning resources and focusing business development on its other branches. Australia Australian activity saw significant improvement during the year. The Queensland market was especially strong in the second half of the year. Asbestos audits for state based assets operate on a 3-year cycle. Q3 FY2017 represented the start of this cycle and this trend should continue across the remainder of this calendar year. The environmental engineering/sciences service line continued its recent growth securing a number of large contaminated land projects during the year. 9 DIRECTORS’ REPORT Activity in the ACT branch remained strong with work continuing on NSW loose-fill asbestos insulation program. This work is expected to continue through calendar 2017 and will compliment normal ongoing work from ACT based projects. OCTIEF was recently awarded a significant contract by the Northern Territory Department of Housing and Community Development to carry out asbestos surveys across a range of public housing assets throughout the Darwin, Casuarina and Palmerston regions of the Northern Territory. The contract is expected to be completed over a 6 month period and will be serviced out of the Darwin branch. The project commenced in early August 2017. In the 3 months since acquisition, Morrison Geotechnic has performed very well contributing $2.3M to group revenues. Morrison Geotechnic has a strong pipeline of works already secured focusing on civil works (roads and bridges), large property developments and industrial projects. OCTFOLIO joined the group in mid-April. Since then it has won a new contract with South32. South32 will utilise the OCTFOLIO software platform for its asbestos registers on their Cannington and Groote Eylandt assets in Queensland and the Northern Territory respectively. FINANCIAL REVIEW Key financial headlines of the HRL Group’s 30 June 2017 results are:  Statutory profit after tax of $130,420  Underlying profit after tax of $789,784 1  Revenues of $13,646,447  Net assets of $15,111,992 1 Underlying profit reflects statutory profit as adjusted to reflect the Directors’ assessment of the result for the ongoing business activities of the Group, in accordance with AICD/Finsia principles of recording underlying profit. Underlying profit has not been audited. The following table summarises key reconciling items between the Group’s statutory profit and underlying profit after tax: Underlying EBITDA Operating depreciation and amortisation Interest Operating tax Underlying profit after tax Non-operating adjustments Acquisition related expenses Amortisation of intangible assets arising from acquisitions Morrison Geotechnic earn out Precise earn out Management performance shares & broker options Geothermal costs Non-operating tax June 2017 June 2016 $ $ 1,509,017 (337,216) (99,278) (282,739) 789,784 (86,633) (528,975) (62,500) 1,074,645 (179,386) (81,719) (225,686) 587,854 (91,378) (307,598) - - (239,552) (203,636) (16,884) 239,265 - - 168,662 Statutory profit after income tax 130,420 117,988 In the opinion of the Directors, the Group’s underlying profit reflects the results generated from ongoing operating activities and is calculated in accordance with AICD/Finsia principles. The non-operating adjustments outlined above are considered to be non-cash or non-recurring in nature. These items are included in the Group’s consolidated statutory 10 DIRECTORS’ REPORT result but excluded from the underlying result. Comparison with the Prior Period Underlying profit after tax for the year increased by $201,930 compared with the prior period. The key reasons for the movement were:   The additional revenue and profit resulting from the acquisition of Morrison Geotechnic from 31 March 2017; The additional revenue and profit resulting from the acquisition of OCTFOLIO from 13 April 2017;  Decline in activity in Christchurch;  Additional employee, administration and corporate costs reflecting the increase in the size of the Group. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS The following significant changes occurred during the year:  Acquisition of Morrison Geotechnic Holdings Pty Ltd (March 2017);  Acquisition of Integrated Holdings Group Pty Ltd (April 2017); and  Issue of 85,283,375 ordinary shares at $0.10 per share via a rights issue and share placement. LIKELY DEVELOPMENTS AND FUTURE OPERATIONS During FY2018, the Group will continue to focus on growing its HAZMAT, geotechnical and software businesses: Focussed business development plans to target new customers and protect the existing customer base;   Utilising new equipment and software platforms to improve efficiencies and margins;  Continued focus on cross selling opportunities across the HAZMAT and geotechnical businesses;  Development of new service lines in the Australian market;  Geographical expansion into new markets when justified; and  Development of new functionality for the OCTFOLIO software platform and aggressive targeting of new customers. In addition, the Group will continue to evaluate acquisition opportunities of high quality businesses both within the environmental services sector and across other complimentary industries. INDEMNIFICATION OF OFFICERS OR AUDITOR Each of the Directors and the Secretary of the Company has entered into a Deed with the Company whereby the Company has provided certain contractual rights of access to books and records of the Company and certain indemnification to those Directors and Secretary. The Company has insured all of the Directors of HRL Holdings Limited. The contract of insurance prohibits the disclosure of the nature of the liabilities covered and amount of the premium paid. The Corporations Act 2001 does not require disclosure of the information in these circumstances. The Company has not indemnified its auditor. PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purposes of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. 11 DIRECTORS’ REPORT SHARE OPTIONS AND PERFORMANCE SHARES Details of options issued, exercised, and expired during the financial year are set out below: Expiry Date 31 December 2019 31 December 2019 31 December 2019 Exercise Price $0.18 $0.20 $0.23 1 July 2016 Movements Issued Exercised Expired - - - - 1,600,000 1,600,000 1,600,000 4,800,000 - - - - 30 June 2017 1,600,000 1,600,000 1,600,000 4,800,000 - - - - Details of performance shares issued, exercised and expired during the financial year are set out below: Expiry Date 30 June 2019 30 June 2019 30 June 2019 Exercise Price $Nil $Nil $Nil Vesting Price 1 $0.156 $0.194 $0.234 1 July 2016 Movements Issued Exercised Expired - - - - 1,029,556 1,029,556 1,029,555 3,088,667 - - - - 30 June 2017 1,029,556 1,029,556 1,029,555 3,088,667 - - - - 1 Vesting Conditions Primary Vesting Condition From the 30 day VWAP of HRL’s share price at 1 July 2016, any of the following increases occur:    HRL share price increases 33% within 1 year; or HRL share price increases 66% within 2 years; or HRL share price increases 100% within 3 years. The HRL share price must remain above the nominated target for the relevant period for 14 consecutive trading days. Secondary Vesting Condition The Performance Shares will vest in proportion to the number of years’ service after the plan is implemented:    First 33% of the performance shares vest after 1 year of service from plan commencement; Next 33% performance shares vest after 2 years of service from plan commencement; Final 34% performance shares vest after 3 years of service from plan commencement. The Performance Shares will lapse if none of the pricing conditions are met or the participant does not meet the service conditions. AFTER BALANCE DATE EVENTS There have been no other events since 30 June 2017 that impact upon the financial report. REMUNERATION REPORT The Remuneration Report set out on pages 14 to 22 provides details of the remuneration and equity holdings of the Directors and Key Management Personnel, including details of equity instruments issued or exercised during the financial year, or outstanding at the date of this report, and forms part of the Directors’ Report. DIVIDENDS No dividends were paid or declared during the financial year. 12 DIRECTORS’ REPORT NON-AUDIT SERVICES The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor's expertise and experience with the Company and/or the Group are important. Details of the amounts paid or payable to the auditor (BDO Audit Pty Ltd and its associated entities) for non-audit services provided during the year are set out below. The Board of Directors has considered the position and, in accordance with advice received from the Audit Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:   all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor none of the services undermines the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. During the year, the following fees were paid or payable for non-audit services provided by the auditor of the parent entity, its related practices and non-related audit firms: Taxation services $26,927 AUDITOR’S INDEPENDENCE DECLARATION The Auditor’s Independence Declaration on page 23 forms part of the Directors’ Report. Signed in accordance with a resolution of the board of directors of HRL Holdings. Darren Anderson Director Brisbane, 21 August 2017 13 REMUNERATION REPORT - AUDITED This report details the nature and amount of remuneration for Directors and Key Management Personnel of the Company. Remuneration Policy The performance of the Company depends upon the quality of its Directors and Executives. To prosper, the Company must attract, motivate and retain highly skilled Directors and Executives. Remuneration Committee The Board does not have Remuneration or Nomination Committees. The full Board is responsible for determining and reviewing compensation arrangements for the Directors and the Executive team. The Board assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and Executive team. Officers are given the opportunity to receive their base emoluments in a variety of forms including cash and fringe benefits. It is intended that the manner of payments chosen will be optimal for the recipient without creating undue cost for the company. Remuneration structure It is the Company’s objective to provide maximum stakeholder benefit from the retention of a high quality Board and Executive team by remunerating Directors and other Key Management Personnel fairly and appropriately with reference to relevant employment market conditions. To assist in achieving this objective, the Board considers the nature and amount of Executive Directors’ and Officers’ emoluments alongside the company’s financial and operational performance. The expected outcomes of the remuneration structure are the retention and motivation of key Executives, the attraction of quality management to the Company and performance incentives which allow Executives to share the rewards of the success of the company. In accordance with best practice corporate governance, the structure of Executive and Non-Executive Director remuneration is separate and distinct. Non-Executive Director Remuneration The Board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain Directors of the highest caliber, whilst incurring a cost which is acceptable to shareholders. The Constitution of HRL Holdings Limited and the ASX Listing Rules specify that the Non-Executive Directors are entitled to remuneration as determined by the Company in a General Meeting to be apportioned among them in such manner as the Directors agree and, in default of agreement, equally. The maximum aggregate remuneration currently approved by shareholders for Directors’ fees is for a total of $250,000 per annum. If a Non-Executive Director performs extra services, which in the opinion of the Directors are outside the scope of the ordinary duties of the Director, the company may remunerate that Director by payment of a fixed sum determined by the Directors in addition to or instead of the remuneration referred to above. Non-Executive Directors are entitled to be paid travel and other expenses properly incurred by them in attending Directors or General Meetings of the Company or otherwise in connection with the business of the Company. The remuneration of Non-Executive Directors for the year ended 30 June 2017 is detailed in this Remuneration Report. Executive Director and Senior Management Remuneration The Company aims to reward Executive Director and Senior Management with a level and mix of remuneration commensurate with their position and responsibilities within the company and so as to:  reward Executives for Company and individual performance against targets set by reference to appropriate benchmarks;  align the interests of Executives with those of shareholders;  link reward with the strategic goals and performance of the Company; and  ensure total remuneration is competitive by market standards. The remuneration of the Executive Director and Senior Management may from time to time be fixed by the Board. As noted above, the Board’s policy is to align Executive objectives with shareholder and business objectives by providing a fixed remuneration component and offering short-term and long-term incentives. The level of fixed remuneration is set 14 REMUNERATION REPORT - AUDITED so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market. Fixed remuneration is reviewed annually by the Board, and the process consists of a review of company wide and individual performance, relevant comparative remuneration in the market and internal, and where appropriate, external advice on policies and practices. In relation to the payment of bonuses, options and other incentive payments, discretion is exercised by the Board, having regard to the overall performance of the Company and the performance of the individual during the year. The remuneration of the Executive Directors and Senior Management for the period ended 30 June 2017 is detailed in this Remuneration Report. Employment contracts It is the Board’s policy that employment agreements are entered into with all Directors, Executives and employees. The current employment agreement with the Executive Director and CEO has a three month notice period. All other employment agreements have one month (or less) notice periods. No current employment contracts contain early termination clauses. All Non-Executive Directors have contracts of employment. None of these contracts have termination benefits. Non-Executive Chairman Arrangements The Company entered into a service arrangement with Mr Kevin Maloney as Non-Executive Chairman of the Company commencing from 15 September 2014. The key terms of the arrangement are:  Ongoing contract – no fixed term;  Fee of $75,000 per annum;  No notice period. Non-Executive Director Arrangements The Company entered into a service arrangement with Dr Mark Elliott and Mr John Taylor as Non-Executive Directors of the Company commencing from 15 September 2014 and 25 November 2014 respectively. The key terms of the arrangement are:  Ongoing contract – no fixed term;  Fee of $40,000 per annum;  No notice period. Executive Director Arrangements The Company entered into an employment contract with Mr Darren Anderson as Executive Director of the Company commencing from 15 September 2014. The key terms of the contract are:  Ongoing contract – no fixed term;  Salary of $250,000 per annum, inclusive of statutory superannuation contributions;  6 weeks annual leave;  motor vehicle allowance;  Annual bonus at the Board’s discretion;  3 month notice period. 15 REMUNERATION REPORT - AUDITED Chief Executive Officer Arrangements The Company entered into an employment contract with Mr Steven Dabelstein as Chief Executive Officer of the Company commencing from 1 January 2015. The key terms of the contract are:  Ongoing contract – no fixed term;  Salary of $250,000 per annum, inclusive of statutory superannuation contributions;  4 weeks annual leave;  Use of a company motor vehicle;  Annual bonus at the Board’s discretion.  3 month notice period. Chief Finance Officer Arrangements The Company entered into an employment contract with Mr Michael Harvey as Chief Finance Officer of the Company commencing from 1 September 2016. The key terms of the arrangement are:  Ongoing contract – no fixed term;  Fee of $160,000 per annum, inclusive of statutory superannuation contributions;  4 weeks annual leave;  3 month notice period. Company Secretary Arrangements The Company entered into a service arrangement with Mr Paul Marshall as Company Secretary of the Company commencing from 15 September 2014. The key terms of the arrangement are:  Ongoing contract – no fixed term;  Fee of $52,000 per annum;  One month notice period. 16 REMUNERATION REPORT - AUDITED Details of Directors and other Key Management – HRL Holdings Limited Name Directors Kevin Maloney Darren Anderson Mark Elliott John Taylor Position Period of Service Non-Executive Chairman Appointed 15 September 2014 Executive Director Appointed 15 September 2014 Non-Executive Director Appointed 11 August 2006 Non-Executive Director Appointed 25 November 2014 Frederick Kempson Alternate Non-Executive Director Appointed 15 September 2014 Key Management Steven Dabelstein Michael Harvey Paul Marshall Chief Executive Officer Appointed 1 January 2015 Chief Finance Officer Company Secretary Appointed 15 September 2014 Appointed 2 July 2007 17 REMUNERATION REPORT Remuneration of Directors and other Key Management Personnel – 2017 Short Term Benefits Long Term Benefits Post Employment Benefits Equity based Benefits Salary/ Director fees Consulting fees Non- monetary benefits Leave benefits Superannuation Performance Shares Total Performance Related % % of bonus forfeited Directors Kevin Maloney Darren Anderson Mark Elliott John Taylor Alternate Director Frederick Kempson Key Management Steven Dabelstein Michael Harvey Paul Marshall 47,780 228,310 40,000 40,000 - - 10,000 - - 13,205 - - 17,606 (2,885) 27,220 21,690 - - - - - - - - - 962 5,538 - 3,615 - - - - - - - - 19,615 12,724 - 40,874 26,159 - 81,249 67,033 230,384 133,942 52,000 772,416 - - - 23,205 17,606 There were no termination benefits paid or accrued for the year ended 30 June 2017. 75,000 264,721 50,000 40,000 13,205 291,835 178,363 52,000 965,124 - - - - - - 100% - - - 14% 15% - 100% - - 18 REMUNERATION REPORT Remuneration of Directors and other Key Management Personnel – 2016 Short Term Benefits Long Term Benefits Post Employment Benefits Equity based Benefits Salary/ Director fees Consulting fees Non- monetary benefits Leave benefits Superannuation Options Total Performance Related % % of bonus forfeited Directors Kevin Maloney Darren Anderson Mark Elliott John Taylor Alternate Director Frederick Kempson Key Management Steven Dabelstein Michael Harvey Paul Marshall 43,668 228,417 40,000 40,000 - - 5,850 - - 17,150 230,692 71,833 52,000 706,610 - - - - - 28,895 (5,769) 31,332 21,583 - - - - - - - - - (8,017) 2,665 - - - - 19,308 5,784 - 78,007 There were no termination benefits paid or accrued for the year ended 30 June 2016. 23,000 28,895 (11,121) - - - - - - - - - 75,000 273,126 45,850 40,000 17,150 241,983 80,282 52,000 825,391 - - - - - - - - - 100% - - - 100% - - 19 REMUNERATION REPORT - AUDITED Key management personnel equity holdings Shareholdings Directors Kevin Maloney Darren Anderson Mark Elliott John Taylor Alternate Director Frederick Kempson Key Management Steven Dabelstein Michael Harvey Paul Marshall Performance Shares Directors Kevin Maloney Darren Anderson Mark Elliott John Taylor Alternate Director Frederick Kempson Key Management Steven Dabelstein Michael Harvey Paul Marshall Balance 1 July 2016 Acquired through capital raising Acquired on market Other additions /disposals/transfers Balance 30 June 2017 47,459,491 16,589,064 2,848,634 923,077 13,750,000 4,583,333 275,000 750,000 - - 680,500 286,259 2,014,536 597,043 291,958 500,000 70,801,561 20,747,334 - - - - - - - - - - - - - - - - - - 61,209,491 21,172,397 3,123,634 1,673,077 - 1,277,543 578,217 2,514,536 91,548,895 Balance 1 July 2016 Granted Exercised Lapsed Balance 30 June 2017 - - - - - - - - - - - - - - 1,068,376 683,761 - 1,752,137 - - - - - - - - - - - - - - - - - - - - - - - 1,068,376 683,761 - 1,752,137 20 REMUNERATION REPORT - AUDITED Performance Shares Details The performance shares granted under the long term incentive plan focuses on long term shareholder wealth creation and retention of key personnel. Participants receive Performance shares with the following terms and conditions: From the 30 day VWAP of HRL’s share price at 1 July 2016, any of the following increases occur: 1. HRL share price increases 33% within 1 year; or Primary Vesting Conditions 2. HRL share price increases 66% within 2 years; or 3. HRL share price increases 100% within 3 years. The HRL share price must remain above the nominated target for the relevant period for 14 consecutive trading days The Performance Shares will vest in proportion to the number of years’ service after the plan is implemented: 1. First 33% of the performance shares vest after 1 year of service from plan commencement; 2. Next 33% performance shares vest after 2 years of service from plan commencement; 3. Final 34% performance shares vest after 3 years of service from plan commencement. Secondary Vesting Conditions Exercise Price $Nil The Performance Shares will lapse if: Forfeiture - None of the pricing conditions are met; or - the participant does not meet the service conditions. Change of Control Event In the event a bona fide Takeover Bid is declared unconditional and the bidder has acquired a relevant interest of at least 50.1%, the Performance Share vest immediately, irrespective of any unmet vesting conditions. Fair value of performance shares granted The assessed fair value at the date of grant of performance shares issued is determined using a option pricing models that takes into account the exercise price, the underlying share price at the time of issue, the term of the performance share, the underlying share’s expected volatility, expected dividends and the risk free interest rate for the expected life of the instrument. Transactions with related parties Transactions with Key Management Personnel related parties Transaction Entity Rental of office space Paget Developers Software and hosting services 1 Octfolio Sublet of office space to Octfolio 1 Octfolio 1 Services provided from 1 July 2016 to 13 April 2017. Association Darren Anderson Kevin Maloney Darren Anderson Kevin Maloney Darren Anderson Kevin Maloney 2017 $ 2016 $ 107,369 101,979 322,725 249,253 33,773 30,858 All of the above transactions were based on normal commercial terms and conditions. 21 REMUNERATION REPORT - AUDITED Trade payable balances with related parties Nature Entity Software and hosting services Octfolio Association Darren Anderson Kevin Maloney 2017 $ NA 2016 $ 31,573 Loans to related parties There were no loans given to related parties. Relationship between remuneration and Company performance The factors that are considered to affect shareholder return in the past 5 years are summarised below: Measures Share price at end of financial year Market capitalisation at end of financial year ($M) 2017 $ 0.08 19.53 2016 $ 0.11 17.48 2015 $ 0.068 10.51 2014 $ 0.005 1.73 2013 $ 0.008 2.76 Net Profit/(loss) for the financial year 130,420 117,988 (1,583,755) 2,147,825 (7,696,487) Director and Key Management Personnel remuneration 965,124 825,391 638,557 526,968 897,944 Fixed remuneration is not linked to Group performance. It is set with reference to the individual’s role, responsibilities, and performance and remuneration levels for similar positions in the market. Profit targets are deemed an appropriate performance measure for the granting of short and long term incentives to senior executives given that it is the key target hurdle referenced by the Board in preparing its annual budgets and measuring Group performance. Profit targets reflects the Directors’ assessment of the result for the ongoing business activities of the Group by excluding non-cash, one-off market related items that are usually out of management’s control. The annual target is determined by the Board having regard to the Group’s annual budget. The target could be higher or lower than budget, and is adjusted for the effect of material equity issues. Prior to the restructure in FY2015, the link between remuneration, Company financial performance and shareholder wealth generation was tenuous, particularly in the exploration and development stage of a geothermal company. Share prices are subject to the influence of international energy prices and market sentiment towards the sector and increases or decreases may occur independently of executive performance or remuneration. Both the CEO and Executive Director had the opportunity to earn up to 50% of their base salary each upon the Group meeting certain profit targets. No bonuses were paid or are due to be paid as the profit targets were not met. No dividends were paid by HRL Holdings Limited nor was there any return of capital over the past 5 years. No shares were issued on exercise of options issued as part of remuneration in 2017. No options expired during the period. 1,752,137 performance share equity instruments were issued to key management as remuneration in 2017. The Company did not engage any remuneration consultants during the financial year. ------------------------------ END OF REMUNERATION REPORT ------------------------------ 22 AUDITOR’S INDEPENDENCE DECLARATION Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au Level 10, 12 Creek St Brisbane QLD 4000 GPO Box 457 Brisbane QLD 4001 Australia DECLARATION OF INDEPENDENCE BY T R MANN TO THE DIRECTORS OF HRL HOLDINGS LIMITED As lead auditor of HRL Holdings Limited for the year ended 30 June 2017, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of HRL Holdings Limited and the entities it controlled during the period. T R Mann Director BDO Audit Pty Ltd Brisbane, 21 August 2017 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. 23 ADDITIONAL ASX INFORMATION Additional information required by the Australian Stock Exchange Ltd and not shown elsewhere in this report is as follows. The information is current as at 14 August 2017. Distribution of equity securities HRL – Ordinary Fully Paid Shares Number of Securities Held 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total No’s of holders 300 318 105 316 160 1,199 Number of unmarketable parcels of shares 633 Twenty largest holders HRL – Ordinary Fully Paid Shares No. Name of Shareholder 1 TULLA PROPERTY PARTNERS PTY LTD 2 J P MORGAN NOMINEES AUSTRALIA LIMITED 3 DARREN ANDERSON & JULIE ANDERSON 4 CRAIG ANDERSON & AMANDA ANDERSON 5 GREG ANDERSON & NANCY ANDERSON 6 DIXSON TRUST PTY LIMITED 7 ANDERSON PROPERTY HOLDINGS PTY LTD 8 HGT INVESTMENTS PTY LTD 9 BNP PARIBAS NOMS PTY LTD 10 DARREN G ANDERSON & GREGORY J ANDERSON & JULIE E ANDERSON 11 H K PRICE PTY LTD 12 CITICORP NOMINEES PTY LIMITED 13 G4 INVESTORS PTY LTD 14 ELLIOTT NOMINEES P/L 15 MATARANKA PTY LTD 16 MR JONATHAN PAUL KERSHAW MARSHALL 17 ESTANZA PTY LTD 18 NOVUS CAPITAL NOMINEES PTY LIMITED 19 DENBASS PTY LTD 20 MERRIWEE PTY LTD Holding 61,209,491 33,646,457 13,480,089 11,160,858 10,937,711 5,075,585 4,322,898 3,979,269 3,791,556 3,369,410 3,330,624 3,292,947 2,924,419 2,921,710 2,633,077 2,511,456 2,308,000 2,000,000 2,000,000 % Held 25.07% 13.78% 5.52% 4.57% 4.48% 2.08% 1.77% 1.63% 1.55% 1.38% 1.36% 1.35% 1.20% 1.20% 1.08% 1.03% 0.95% 0.82% 0.82% 1,819,842 176,715,399 0.75% 72.37% Voting Rights All fully paid ordinary shares carry one vote per share without restriction. Substantial Shareholders The company has received the following substantial shareholder notices as at 14 August 2017:    Mr Kevin Maloney holds an interest in 61,209,491 shares (25.07%) Mr Darren Anderson holds an interest in 21,172,397 shares (8.67%) Viburnum Funds Pty Ltd holds an interest in 29,928,178 shares (12.26%) 24 ADDITIONAL ASX INFORMATION Interests in Exploration Tenements Type Location Status Grant Expiry Date HRL Interest GEP 6 GEP 8 Portland Warrnambool Granted Granted 14/05/2007 14/05/2007 13/09/2019 13/09/2019 100% 100% 25 STATEMENT OF COMPREHENSIVE INCOME Consolidated Statement of Comprehensive Income For the year ended 30 June 2017 Note 3 4 15 & 4 2017 $ 2016 $ 13,646,447 8,385,178 2,411 4,888 (2,186,035) (7,228,818) (866,191) (101,690) (688,715) (471,639) (1,553,495) (25,613) (983,578) (4,425,802) (486,984) (81,719) (451,177) (372,568) (1,076,713) (5,583) - (79,119) (62,500) (118,166) (85,470) (86,633) (160,433) - - (91,378) 173,893 175,012 5 (43,473) (57,024) 130,420 117,988 Services revenue Interest revenue Costs and consumables relating to the provision of services Employee benefits expense Depreciation and amortisation expenses Finance costs Rent and property expenses Travel and business development expenses Other expenses Impairment of receivables Settlement expense Employee benefits expense on earn-out payments Employee benefits expense – share based payments Consulting expense – share based payments Acquisition expenses Profit before income tax Income tax expense Profit after income tax Other comprehensive income Items that may be reclassified to profit or loss Foreign currency translation differences for foreign operations (36,064) 343,138 Income tax Other comprehensive income for the period, net of tax - - (36,064) 343,138 Total comprehensive income 94,356 461,126 Earnings per share Basic earnings per share Diluted earnings per share Cents Cents 7 7 0.07 0.07 0.07 0.07 The Statement of Comprehensive Income should be read in conjunction with the Notes to the Financial Statements. 26 BALANCE SHEET Consolidated Balance Sheet As at 30 June 2017 Note 2017 $ 2016 $ CURRENT ASSETS Cash and cash equivalents Trade and other receivables Other current assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Trade and other receivables Plant and equipment Intangible assets Goodwill Deferred tax assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Current tax liabilities Short-term provisions Borrowings TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Long-term provisions Borrowings Deferred tax liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed capital Reserves Retained earnings/(Accumulated losses) TOTAL EQUITY 6 9 10 9 11 12 13 5 14 15 16 15 16 5 17 18 728,165 3,418,836 268,161 4,415,162 122,619 1,458,961 3,477,212 8,186,266 1,170,288 14,415,346 392,863 1,354,351 4,771 1,751,985 122,861 672,956 646,418 5,054,138 875,167 7,371,540 18,830,508 9,123,525 1,308,692 286,605 969,172 615,576 3,180,045 240,044 220,773 77,654 538,471 671,034 199,354 120,962 491,856 1,483,206 - 878,189 77,796 955,985 3,718,516 2,439,191 15,111,992 6,684,334 16,349,948 1,244 8,220,282 (166,328) (1,239,200) (1,369,620) 15,111,992 6,684,334 The Balance Sheet should be read in conjunction with the Notes to the Financial Statements. 27 STATEMENT OF CHANGES IN EQUITY Consolidated Statement of Changes in Equity For the year ended 30 June 2017 Contributed Capital Accumulated Losses Share Based Payment Reserve Foreign Currency Reserve Balance at 1 July 2015 8,220,282 (1,487,608) $ $ Transactions with owners in their capacity as owners Contributions of capital Share issue costs (net of tax) Total Comprehensive income Profit after income tax Foreign currency translation differences for foreign operations Total comprehensive income Balance at 30 June 2016 Balance at 1 July 2016 Transactions with owners in their capacity as owners Contributions of capital Share issue costs (net of tax) Share based payments Total Comprehensive income Profit after income tax Foreign currency translation differences for foreign operations Total comprehensive income $ - - - - - - - - - $ Total $ (509,466) 6,223,208 - - - - - - - 343,138 343,138 117,988 343,138 461,126 (166,328) 6,684,334 (166,328) 6,684,334 - - - - - - - - - 117,988 - 117,988 8,220,282 (1,369,620) 8,220,282 (1,369,620) 8,528,338 (398,672) - 8,129,666 - - - - - - 203,636 203,636 - - - - 8,528,338 (398,672) 203,636 8,333,302 - - - 130,420 - 130,420 - - - - (36,064) (36,064) 130,420 (36,064) 94,356 Balance at 30 June 2017 16,349,948 (1,239,200) 203,636 (202,392) 15,111,992 The Statement of Changes in Equity should be read in conjunction with the Notes to the Financial Statements. 28 STATEMENT OF CASH FLOWS Consolidated Statement of Cash Flows For the year ended 30 June 2017 Note 2017 $ 2016 $ CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest received Income tax paid Acquisition costs Precise earn-out payments Settlement payment Finance costs Net cash provided by/(used in) operating activities 6 CASH FLOWS FROM INVESTING ACTIVITIES Payments for plant & equipment Payments for intangible assets Payments for security deposits Net outflow of cash from the acquisition of Morrison Net outflow of cash from the acquisition of IHG Net outflow of cash from the acquisition of AAC Net outflow of cash from the acquisition of RJL Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Contributions of capital Capital raising costs Proceeds/(repayment) of borrowings Finance lease payments Net cash provided by financing activities 19 20 Net increase/(decrease) in cash and cash equivalents held Net foreign exchange differences Cash and cash equivalents at the beginning of the financial period Cash and cash equivalents at the end of the financial period 6 14,713,803 (14,038,708) 2,411 (523,004) (86,633) - - (101,690) (33,822) (327,133) (49,214) - (3,483,988) (2,730,081) - - (6,590,416) 8,528,338 (569,531) (928,208) (70,543) 6,960,056 335,818 (516) 392,863 728,165 9,254,475 (8,211,447) 11,461 (459,770) (91,378) (214,067) (50,000) (81,719) 157,555 (249,689) - (93,126) - - (992,203) (461,979) (1,796,997) - - 1,170,608 (17,669) 1,152,939 (468,503) 19,866 859,500 392,863 The Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements. 29 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS INDEX Note Page Number Summary of Significant Accounting Policies Financial Performance Notes Segment Reporting Revenue Expenses Income Tax Cash Flow Information Earnings Per Share Dividends Financial Position Notes Trade and Other Receivables Other Assets Plant and Equipment Intangible Assets Goodwill Trade and Other Payables Provisions Borrowings Contributed Capital Reserves Group Structure Notes Morrison Geotechnic Holdings Acquisition Integrated Holdings Group Acquisition Parent Entity Information Other Disclosure Notes Share Based Payments Related Party Transactions Financial Risk Management Commitments Contingent Liabilities Auditors Remuneration Events After Balance Sheet Date 31 34 37 37 38 42 43 43 44 45 45 46 48 49 49 51 53 53 54 56 58 60 62 63 67 67 68 68 30 NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Introduction This financial report covers the Consolidated Entity of HRL Holdings Limited (the “Company”) and its controlled entities (together referred to as the “Consolidated Entity”). HRL Holdings Limited is a listed public company, incorporated and domiciled in Australia. The accounting policies have been consistently applied, unless otherwise stated. Operations and principal activities The HRL Group is a diversified environmental and geotechnical service provider with offices and laboratory facilities across Australia and New Zealand. The Group offers services including;       industrial hygiene, with a focus on asbestos and hazardous materials management; geotechnical testing and engineering services; property contamination testing and work place drug testing; environmental services (air, water and soil including contaminated land); environmental and property management software solutions; and specialised NATA/IANZ - accredited laboratory analysis and on-site testing and monitoring. Currency The financial report is presented in Australian dollars, rounded to the nearest dollar, which is the functional currency of the Company. Authorisation of financial report The financial report was authorised for issue on 21 August 2017. Basis of preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. HRL Holdings Limited is a for-profit entity for the purpose of preparing the financial statements. The financial statements of the Consolidated Entity also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention The financial statements have been prepared under the historical convention, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. Critical accounting estimates and judgements The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Consolidated Entity’s accounting policies. The Directors evaluate estimates and judgments incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on historical experiences and the best available current information on current trends and economic data, obtained both externally and within the Consolidated Entity. The estimates and judgements made assume a reasonable expectation of future events but actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period and future periods if the revision affects both current and future periods. The following critical accounting estimates or judgements were made in the process of applying the Consolidated Entity’s accounting policies that in management’s assessment can significantly affect the amounts recognised in the financial statements: 31 NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 13. The recoverable amounts of cash generating units have been determined based on value in use calculations. These calculations require the use of assumptions. Refer to Note 13 for details of these assumptions and the potential impact of changes to the assumptions. Provisions The Group has estimated the likely payout under the earn out payment on acquisition of Morrison Geotechnic Holdings Limited and Integrated Holdings Pty Ltd (refer Note 15). This calculation requires the use of assumptions. Refer to Note 15 for details of these assumptions and the potential impact of changes to the assumptions. Accounting policies (a) Financial Instruments Recognition and initial measurement Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the Consolidated Entity commits itself to either the purchase or sale of the asset. Financial instruments are initially measured at fair value plus transaction costs, except where the instrument is classified “at fair value through profit or loss”, in which case transaction costs are expensed to profit or loss immediately. Classification and subsequent measurement Financial instruments are subsequently measured at fair value, amortised cost using the effective interest rate method, or cost. Amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition less principal repayments and any reduction for impairment, and adjusted for any cumulative amortisation of the difference between that initial amount and the maturity amount calculated using the effective interest method. (b) Impairment of Assets At the end of each reporting period, the Consolidated Entity assesses whether there is any indication that an asset may be impaired. If such an indication exists, an impairment test is carried out on the asset by comparing the recoverable amount of the asset, being the higher of the asset’s fair value less costs of disposal and value in use, to the asset’s carrying amount. Any excess of the asset’s carrying amount over its recoverable amount is recognised immediately in profit or loss, unless the asset is carried at a revalued amount in accordance with another Standard. Any impairment loss of a revalued asset is treated as a revaluation decrease in accordance with that other Standard. Where it is not possible to estimate the recoverable amount of an individual asset, the Consolidated Entity estimates the recoverable amount of the cash-generating unit to which the asset belongs. (c) Foreign Exchange Exchange differences arising on the translation of monetary items are recognised in the statement of comprehensive income, except where deferred in equity as a qualifying cash flow or net investment hedges. Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the statement of comprehensive income. Subsidiary companies The financial results and position of foreign operations whose functional currency is different from the Consolidated Entity’s presentation currency are translated as follows: - assets and liabilities are translated at year-end exchange rates prevailing at that reporting date; - - income and expenses are translated at average exchange rates for the period; and retained earnings are translated at the exchange rates prevailing at the date of the transaction. On consolidation, exchange differences arising from the translation of any net investment in foreign entities are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. 32 NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) New Accounting Standards The Consolidated Entity adopted all new Accounting Standards and Interpretations effective for the year ended 30 June 2017. There were no material impacts on the financial statements of the Consolidated Entity as a result of adopting these standards. New Standards and Interpretations Not Yet Adopted Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2017 reporting periods. The Consolidated Entity has decided against early adoption of these standards. The Consolidated Entity's assessment of the impact of these new standards and interpretations is set out below: AASB 9 Financial Instruments This standard and its consequential amendments are currently applicable to annual reporting periods beginning on or after 1 January 2018. This standard introduces new classification and measurement models for financial assets, using a single approach to determine whether a financial asset is measured at amortised cost or fair value. To be classified and measured at amortised cost, assets must satisfy the business model test for managing the financial assets and have certain contractual cash flow characteristics. All other financial instrument assets are to be classified and measured at fair value. This standard allows an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading) in other comprehensive income, with dividends as a return on these investments being recognised in profit or loss. In addition, those equity instruments measured at fair value through other comprehensive income would no longer have to apply any impairment requirements nor would there be any 'recycling' of gains or losses through profit or loss on disposal. The accounting for financial liabilities continues to be classified and measured in accordance with AASB 139, with one exception, being that the portion of a change of fair value relating to the entity's own credit risk is to be presented in other comprehensive income unless it would create an accounting mismatch. The Consolidated Entity has not yet evaluated the impact adoption of this standard will have. AASB 15 Revenue from Contracts with Customers This standard and its consequential amendments are currently applicable to annual reporting periods beginning on or after 1 January 2018. This standard requires recognised revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This means that revenue will be recognised when control of goods or services is transferred, rather than on transfer of risks and rewards as is currently the case under IAS 18 Revenue. The Consolidated Entity has not yet evaluated the impact adoption of this standard will have. AASB16 Leases This standard and its consequential amendments are currently applicable to annual reporting periods beginning on or after 1 January 2019. When effective, this standard will replace the current accounting requirements applicable to leases in AASB117 Leases and related interpretations. AASB16 introduces a single lessee accounting model that eliminates the requirement for leases to be classified as operating or finance leases. This means that for all leases, a right-to-use asset and a liability will be recognised, with the right-to-use asset being depreciated and the liability being unwound in principal and interest components over the life of the lease. The Consolidated Entity has not yet evaluated the impact adoption of this standard will have. There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. Comparative Figures When required by accounting standards comparative figures have been adjusted to conform to changes in presentation for the current financial year. 33 NOTES TO THE FINANCIAL STATEMENTS NOTE 2 SEGMENT REPORTING Reportable Segments For the period ended 30 June 2017 the Group has identified the operating segments based on internal reports that are reviewed and used by the executive team in assessing performance and determining the allocation of resources:  HAZMAT services including: o o o o o industrial hygiene, with a focus on asbestos and hazardous materials management; property contamination testing and work place drug testing; environmental services (air, water and soil including contaminated land); environmental and property management software solutions; and specialised NATA/IANZ - accredited laboratory analysis and on-site testing and monitoring.  Geotechnical services including: o Geotechnical investigations and studies; o o o o o Onsite mobile laboratory testing. Temporary works designs and inspections; Construction phase verification; Earthworks supervision; Soil, concrete and aggregate testing; and  Software services including: o o o Information management software solutions for asbestos and hazardous materials; Innovative field management software solutions; and Customised compliance solutions and applications relating to workplace health and safety. The Geotechnical services segment reflects the activities of Morrison Geotechnic for the 3 months since acquisition on 31 March 2017. The Software services segment reflects the activities of OCTFOLIO for the 2.5 months since acquisition on 13 April 2017. Unallocated amounts reflect corporate costs incurred by the HRL Holdings Limited parent entity as well as the financing activities of the Group. Reported segment results include any acquisition costs and amortisation of intangible assets that arose on acquisition that are applicable to that segment. Change to reportable segments For the year ended 30 June 2016 and the prior comparative period the Group identified the operating segments based on internal reports that were reviewed and used by the executive team in assessing performance and determining the allocation of resources. The internal reports and operating segments were based on branded locations (OCTIEF and Precise) for the year ended 30 June 2016. With the addition of the Morrison Geotechnic and OCTFOLIO to the Group in the current year, the operating segments have been changed to reflect the distinctive business units of the Group. OCTIEF and Precise, which provide a similar suite of services have now been merged into the HAZMAT service segment. The comparatives have been restated. No geotechnical or software services were provided for the year ended 30 June 2016. Geographical Information Segment revenue is based on the geographical location of customers and segment assets are based on the geographical location of the assets. The entity is domiciled in Australia The amount of its revenue from external customers in Australia is $6,345,317 (2016: $2,795,007) Total revenues from customers domiciled in New Zealand is $7,301,130 (2016: $5,553,524). The amount of non-current assets other than financial instruments and deferred tax assets located in Australia is $7,952,123 (2016: $1,125,213). Total non-current assets other than financial instruments and deferred tax assets located in New Zealand is $5,170,316 (2016: $5,248,299). 34 NOTES TO THE FINANCIAL STATEMENTS NOTE 2 SEGMENT REPORTING (CONT’D) Segment Revenues and Results 30 June 2017 HAZMAT Geotechnical Software Unallocated Consolidated Revenue: Services revenue Interest income Expenses: Interest expense $ $ $ 11,247,858 2,289,196 109,393 - - - - - - $ - $ 13,646,447 2,411 2,411 (101,690) (101,690) Other expenses Segment result before acquisition related expenses (9,308,982) (1,894,332) (54,002) (1,437,852) (12,695,168) 1,938,876 394,864 55,391 (1,537,131) 852,000 Acquisition related expenses Acquisition costs Earn-out expenses Amortisation of acquisition intangibles Segment result before tax Income tax Net Profit Non-cash and other significant items: Depreciation and amortisation Impairment of receivables Share based payments Acquisition expenses Earnout expenses Assets: Segment assets Liabilities: Segment liabilities - - (359,069) 1,579,807 - (23,322) (62,500) (63,311) - (103,933) (65,972) - - - 205,109 (73,891) (1,537,131) - - - 637,234 25,613 - - - 152,887 66,900 - - 23,322 62,500 - - 63,311 - 9,170 - 203,636 - - (86,633) (62,500) (528,974) 173,893 (43,473) 130,420 866,191 25,613 203,636 86,633 62,500 8,534,953 5,594,611 3,072,558 1,628,386 18,830,508 1,524,076 1,705,331 399,795 89,314 3,718,516 Segment acquisitions: Acquisition of property, plant and equipment Acquisition of intangibles Acquisition of goodwill 327,859 49,214 - - 1,768,000 1,550,000 - 1,770,810 1,365,920 - - - - - - 327,859 3,367,214 3,136,730 122,619 1,458,961 3,477,212 8,186,266 1,170,288 108,916 693,664 329,117 13,703 728,738 - 9,525 27,034 1,664,067 1,484,028 5,049,536 1,770,810 1,365,920 - - - 1,170,288 6,181,233 4,177,318 2,859,473 1,197,322 14,415,346 35 Details on non-current assets: Trade and other receivables Plant and equipment Intangibles Goodwill Deferred tax assets NOTES TO THE FINANCIAL STATEMENTS NOTE 2 SEGMENT REPORTING (CONT’D) Segment Revenues and Results 30 June 2016 Revenue: Services revenue Interest income Expenses: Interest expense Other expenses HAZMAT Unallocated Consolidated $ 8,385,178 $ - 4,888 $ 8,385,178 4,888 - (81,179) (81,179) (6,136,667) (1,178,680) (7,495,347) Segment result before acquisition related expenses 2,068,511 (1,254,971) 813,540 Acquisition related expenses Acquisition costs Settlement expenses Earn-out expenses Amortisation of acquisition intangibles Segment result before tax Income tax Net Profit Non-cash and other significant items: Depreciation and amortisation Impairment of receivables Settlement expenses Acquisition expenses Earnout expenses Assets: Segment assets Liabilities: Segment liabilities Segment acquisitions: Acquisition of property, plant and equipment Acquisition of intangibles Acquisition of goodwill Details on non-current assets: Trade and other receivables Plant and equipment Intangibles Goodwill Deferred tax assets (91,378) (79,119) (160,433) (307,598) - - - - 1,429,983 (1,254,971) - - 474,620 12,364 5,583 79,119 91,378 160,433 - - - - (91,378) (79,119) (160,433) (307,598) 175,012 (57,024) 117,988 486,984 5,583 79,119 91,378 160,433 8,077,054 1,046,471 9,123,525 1,294,739 1,144,452 2,439,191 249,689 693,143 661,357 122,861 637,326 646,418 5,054,138 7,544 6,468,287 - - - - 35,630 - - 867,623 903,253 249,689 693,143 661,357 122,861 672,956 646,418 5,054,138 875,167 7,371,540 36 NOTES TO THE FINANCIAL STATEMENTS NOTE 3 REVENUE Services Revenue HAZMAT service revenue Geotechnical service revenue Software service revenue Total service revenue 2017 $ 2016 $ 11,247,858 8,385,178 2,289,196 109,393 - - 13,646,447 8,385,178 Revenue is measured at the fair value of the consideration received or receivable after taking into account any trade discounts and volume rebates allowed. When the inflow of consideration is deferred, it is treated as the provision of financing and is discounted at a rate of interest that is generally accepted in the market for similar arrangements. The difference between the amount initially recognised and the amount ultimately received is interest revenue. Revenue from the provision of services is recognised on an accruals basis in the period in which the service is provided. Revenue from the provision of these services is calculated with reference to the professional staff hours incurred on each client assignment adjusted for any time that may not be recoverable. Interest revenue is recognised using the effective interest rate method. NOTE 4 EXPENSES Employee benefits expenses Note Defined contribution superannuation expense Other employee benefits expenses Total employee benefits expenses Employee benefits expense – share based payments Remuneration expense on Morrison Geotechnic earn-out 21 15 262,985 6,965,833 7,228,818 118,166 62,500 144,520 4,281,282 4,425,802 - - Remuneration expense on Precise Consulting earn-out - 160,433 Contributions to defined contribution plans are expensed when incurred. Rental expense relating to operating leases Minimum lease payments 791,320 360,695 Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are recognised as expenses on a straight-line basis over the lease term. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the lease term. Net loss on disposal of plant and equipment - 29,119 Gains and losses on plant and equipment disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the statement of comprehensive income. 37 NOTES TO THE FINANCIAL STATEMENTS NOTE 5 INCOME TAX Income tax expense: Current tax Current tax on profit/loss for the year Adjustments for current tax of prior periods Total current tax expense Deferred tax Movement in deferred tax assets Movement in deferred tax liabilities Total deferred tax expense/(benefit) 2017 $ 2016 $ 395,122 (11,277) 383,845 (204,996) (135,376) (340,372) 412,305 10,572 422,877 (309,268) (56,585) (365,853) Total income tax expense/(benefit) 43,473 57,024 Reconciliation of income tax expense to prima facie tax payable: Profit before tax Prima facie tax at 30% Tax effect of not deductible (taxable) amounts in calculating taxable income: Entertainment expenses Amortisation of intangible assets Share based payments Other items Difference in overseas tax rate Adjustments for tax of prior periods Total income tax expense 173,893 175,012 52,168 52,504 2,409 - 25,641 (2,158) 78,060 (23,310) (11,277) 43,473 2,887 17,381 - - 72,772 (26,321) 10,573 57,024 The income tax expense (benefit) for the year comprises current income tax expense (income) and deferred tax expense (income). Current income tax expense charged to profit or loss is the tax payable on taxable income. Current tax liabilities (assets) are measured at the amounts expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well unused tax losses. Current and deferred income tax expense (income) is charged or credited outside profit or loss when the tax relates to items that are recognised outside profit or loss. The charge for current income tax expense is based on the profit/(loss) for the year adjusted for any non-assessable or disallowed items. It is calculated using the tax rates that have been enacted or are substantially enacted by the balance date. 38 NOTES TO THE FINANCIAL STATEMENTS NOTE 5 INCOME TAX (CONT’D) Amounts recognised directly in equity: Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity: 2017 2016 Current tax: share issue costs Deferred tax: share issue costs Deferred tax assets: Balance comprises temporary differences attributable to: Employee benefits payable Employee leave provisions Accrued expenses Provision for doubtful debts Vendor earn-outs Lease liabilities Carried forward tax losses Set-off of deferred tax liabilities Net deferred tax assets $ - 170,859 170,859 24,587 230,200 - 2,503 18,750 125,897 1,450,512 1,852,449 (682,221) 1,170,288 $ - - - 10,975 35,248 9,472 3,604 60,432 14,265 885,760 1,019,756 (144,589) 875,167 A deferred tax asset has been recognised as the consolidated entity is forecasting to generate taxable profits over the next five years. Movements during the period: Year ended June 2017 1 July 2016 Charged/credited to Profit or Loss Other Comp. Income Directly to equity Employee benefits payable Employee leave provisions Accrued expenses Provision for doubtful debts Vendor earn-out provision Lease liabilities 10,975 35,248 9,472 3,604 60,432 14,265 13,612 19,898 (9,472) (1,101) (41,682) (7,282) Carried forward tax losses 885,760 231,023 1,019,756 204,996 - - - - - - - - - - - - - - 170,859 170,859 Acquisition of subsidiary - 175,054 - - - 30 June 2017 24,587 230,200 - 2,503 18,750 118,914 162,870 125,897 1,450,512 456,838 1,852,449 39 NOTES TO THE FINANCIAL STATEMENTS NOTE 5 INCOME TAX (CONT’D) Year ended June 2016 1 July 2015 Charged/credited to Profit or Loss Other Comp. Income Directly to equity Employee benefits payable Employee leave provisions Accrued expenses Provision for doubtful debts Precise earn-out provision Lease liabilities 8,909 30,540 13,818 4,587 14,462 16,966 2,066 4,708 (4,346) (983) 45,970 (2,701) Carried forward tax losses 620,551 265,209 Other amounts 654 (655) 710,488 309,268 - - - - - - - - - Deferred tax liabilities: Balance comprises temporary differences attributable to: Intangibles assets Plant and equipment Other amounts Set-off of deferred tax assets Net deferred tax liabilities Movements during the period: Acquisition of subsidiary - - - - - - - - - - - - - - - - - - 2017 $ 594,013 140,188 25,674 759,875 (682,221) 77,654 30 June 2016 10,975 35,248 9,472 3,604 60,432 14,265 885,760 - 1,019,756 2016 $ 181,440 10,426 30,519 222,385 (144,589) 77,796 Year ended June 2017 1 July 2016 Intangible assets Plant and equipment Other amounts 181,440 10,426 30,519 Profit or Loss (132,827) 2,296 (4,845) 222,385 (135,376) Year ended June 2016 1 July 2015 Intangible assets Plant and equipment Other amounts 60,874 13,901 2,204 Profit or Loss (81,425) (3,475) 28,315 76,979 (56,585) Charged/credited to Other Comp. Income Directly to equity - - - - Charged/credited to Other Comp. Income Directly to equity - - - - Acquisition of subsidiary 545,400 127,466 - 672,866 Acquisition of subsidiary 201,991 - - 30 June 2017 594,013 140,188 25,674 759,875 30 June 2016 181,440 10,426 30,519 201,991 222,385 - - - - - - - - 40 NOTES TO THE FINANCIAL STATEMENTS NOTE 5 INCOME TAX (CONT’D) Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (a) a legally enforceable right of set-off exists; and (b) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Deferred tax is accounted for using the balance sheet method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Tax consolidation HRL Holdings Limited and its wholly-owned Australian controlled entities have formed a tax-consolidated group. HRL Holdings NZ Limited (a wholly-owned subsidiary of HRL Holdings Limited) and its wholly-owned New Zealand controlled entities have formed a tax-consolidated group. The entities in the tax group have entered into a tax sharing agreement to limit the joint and several liability of the wholly-owned entities in the case of a default by the relevant Head Entity. A tax funding agreement where the wholly-owned entities fully compensate the Head Entity for any current tax receivable and deferred tax assets related to unused tax losses or unused tax credits that are transferred to the Head Entity under the tax consolidation legislation has also been entered into. The transfer of such amounts to the Head Entity is recognised as inter-company receivables or payables. Each entity in the tax-consolidated group continues to account for its own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right. In addition to its own current and deferred tax amounts, each relevant Parent entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the relevant tax authority. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the relevant tax authority is included with other receivables or payables in the balance sheet. 41 NOTES TO THE FINANCIAL STATEMENTS NOTE 6 CASH FLOW INFORMATION Reconciliation of cash flows from operations with profit after tax Profit after income tax 130,420 117,988 2017 $ 2016 $ Non-cash items in profit/(loss) after income tax Depreciation and amortisation Loss on sale of plant and equipment Impairment of receivables Share based payments Movements in operating assets and liabilities Trade and other receivables Other assets Trade and other payables Provisions Tax balances 866,191 - 25,613 203,636 (459,857) (128,163) (321,873) 129,742 (479,531) 486,984 29,119 5,583 - (108,907) 101,491 (30,339) (41,618) (402,746) Net cash provided by/ (used in) operating activities (33,822) 157,555 Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the relevant tax authority are presented as operating cash flows included in receipts from customers or payments to suppliers. Non-cash Investing and Financing Activities There were no non-cash investing and financing activities during the year (2016: $Nil). Cash and Cash Equivalents Cash at bank and on hand Cash on deposit 608,029 120,136 728,165 317,413 75,450 392,863 For statement of cash flow presentation purposes cash and cash equivalents include cash on hand, deposits available on demand with banks, other short-term highly liquid investments with original maturities of 3 months or less, and bank overdrafts. Bank overdrafts are reported within short-term borrowings in current liabilities in the balance sheet. 42 NOTES TO THE FINANCIAL STATEMENTS NOTE 7 EARNINGS PER SHARE Earnings 2017 $ 2016 $ Earnings used to calculate basic and diluted EPS 130,420 117,988 Weighted average number of shares and options Weighted average number of ordinary shares outstanding during the period, used in calculating basic earnings per share Weighted average number of dilutive options outstanding during the period Weighted average number of ordinary shares and potential ordinary shares outstanding during the period, used in calculating diluted earnings per share Number of shares Number of shares 179,593,908 158,903,031 - - 179,593,908 158,903,031 The Consolidated Entity presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. Options and performance shares could potentially dilute basic earnings per share in the future but were not included in the calculation of diluted earnings per share for 2017 as they were anti-dilutive. NOTE 8 DIVIDENDS No dividends were paid during the financial year ended 30 June 2017 (2016: nil) and no dividend is recommended for the current year. 43 NOTES TO THE FINANCIAL STATEMENTS NOTE 9 TRADE AND OTHER RECEIVABLES CURRENT Trade receivables Provision for impairment Accrued income Other receivables NON-CURRENT Bonds and other deposits 2017 $ 2016 $ 3,035,283 (8,609) 3,026,674 330,142 62,020 1,173,562 (5,583) 1,167,979 146,536 39,836 3,418,836 1,354,351 122,619 122,861 Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. Trade receivables are generally due for settlement within 30 days and therefore are all classified as current. Other receivables generally arise from transactions outside the usual operating activities of the group. The non-current bonds and other deposits receivables are due and payable within three years from the end of the reporting period. Impairment of receivables The Group recognised a loss of $25,163 during the year (2016: $5,583) in relation to impaired receivables. Movement in the provision for impairment of receivables was: Opening balance Impaired receivables provided for during the period Receivables written off during the year as uncollectible Closing balance Past due but not impaired 2017 $ 5,583 25,613 (22,587) 8,609 2016 $ - 5,583 - 5,583 Customers with balances past due but with no provision for impairment at 30 June 2017 were $81,586 (2016: $85,744). Based on payments received after 30 June 2017 from these customers, recent collection history and other relevant factors, no impairment was necessary for these customer balances. The ageing of receivables past due but not provided for is: Past due 0-30 days Past due 30-60 days Past due > 60 days 31,422 37,513 12,651 81,586 63,888 11,801 10,055 85,744 At the end of each reporting period, the Group assesses whether there is objective evidence that a receivable has been impaired. Impairment losses are recognised in profit or loss. 44 NOTES TO THE FINANCIAL STATEMENTS NOTE 10 OTHER ASSETS CURRENT Prepaid expenses NOTE 11 PLANT AND EQUIPMENT Leasehold improvements at cost Accumulated depreciation Motor vehicles at cost Accumulated depreciation Office furniture and equipment at cost Accumulated depreciation Lab and field equipment at cost Accumulated depreciation Total plant and equipment at cost Total accumulated depreciation Total plant and equipment Movements during the year Year ended 30 June 2017 Balance at 1 July 2016 Additions Business combinations Foreign exchange movements Depreciation Balance at 30 June 2017 Year ended 30 June 2016 Balance at 1 July 2015 Additions Additions – leases Business combinations Disposals Foreign exchange movements Depreciation Balance at 30 June 2016 Leasehold Improvements 51,546 9,038 - (4) (15,251) 45,329 Leasehold Improvements 24,613 37,815 - - - 687 (11,569) 51,546 2017 $ 2016 $ 268,161 4,771 72,368 (27,039) 45,329 953,170 (158,561) 794,609 342,960 (158,338) 184,623 644,181 (209,780) 434,401 2,012,679 (553,718) 1,458,961 Motor Vehicles Office Furniture and Equipment Lab and field Equipment 63,279 (11,733) 51,546 353,370 (62,435) 290,935 164,402 (71,104) 93,298 329,994 (92,817) 237,177 911,045 (238,089) 672,956 Total 672,956 327,859 787,163 1,692 290,935 11,154 601,779 (8,904) (100,355) 794,609 93,298 143,659 23,492 7,742 (83,568) 184,623 237,177 164,008 161,892 2,858 (131,534) (330,708) 434,401 1,458,962 Motor Vehicles Office Furniture and Equipment Lab and field Equipment 141,549 34,546 49,934 151,760 (29,119) 3,767 (61,502) 290,935 Total 372,933 249,689 49,934 60,423 42,799 - 146,348 134,529 - 20,237 27,076 199,073 - 5,932 (36,093) 93,298 - (29,119) (554) 9,832 (70,222) (179,386) 237,177 672,956 45 NOTES TO THE FINANCIAL STATEMENTS NOTE 11 PLANT AND EQUIPMENT (CONT’D) Each class of property, plant and equipment is carried at cost less, where applicable, any accumulated depreciation and impairment losses. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised in profit or loss. A formal assessment of recoverable amount is made when impairment indicators are present. The cost of fixed assets constructed within the Consolidated Entity includes the cost of materials, direct labour, borrowing costs and an appropriate proportion of fixed and variable overheads. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future benefits associated with the item will flow to the Consolidated Entity and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial period in which they are incurred. The depreciable amount of all fixed assets is depreciated on a diminishing value basis over the asset’s useful life to the Consolidated Entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The depreciation rates used for each class of asset is: Class of Fixed Asset Leasehold improvements Motor vehicles Office equipment Laboratory equipment Depreciation Rate 20% 25% 40% - 67% 20% - 40% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance date. NOTE 12 INTANGIBLE ASSETS Customer contracts at cost Accumulated amortisation Licences and accreditations at cost Accumulated amortisation Software at cost Accumulated amortisation Other intangibles at cost Accumulated amortisation 2017 $ 1,740,619 (238,082) 1,502,537 937,356 (485,189) 452,167 1,549,214 (69,062) 1,480,152 64,038 (21,682) 42,356 2016 $ 389,377 (43,264) 346,113 471,356 (228,085) 243,271 - - - 64,164 (7,129) 57,034 Total intangible assets 3,477,212 646,418 46 NOTES TO THE FINANCIAL STATEMENTS NOTE 12 INTANGIBLE ASSETS (CONT’D) Movements during the year Year ended 30 June 2017 Balance at 1 July 2016 Additions Customer Contracts 346,113 - Licences and Accreditations 243,271 Software Other Intangibles - 57,034 - 49,214 Total 646,418 49,214 3,318,000 - - Business combinations 1,352,000 466,000 1,500,000 Foreign exchange movements Amortisation Balance at 30 June 2017 Year ended 30 June 2016 Balance at 1 July 2015 Additions Business combinations Disposals Foreign exchange movements Amortisation Balance at 30 June 2016 Customer contracts (758) (194,818) 1,502,537 Customer Contracts 57,937 - 380,450 - 7,693 (99,967) 346,113 - (54) (125) (937) (257,104) (69,008) (14,553) (535,483) 452,167 1,480,152 42,356 3,477,212 Licences and Accreditations 193,976 - 250,000 - - (200,705) 243,271 Other Intangibles Total - - 251,913 - 62,693 693,143 - 1,267 (6,926) 57,034 - 8,960 (307,598) 646,418 Customer contracts acquired as part of a business combination are recognised separately from goodwill. The customer contracts are carried at their fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on the timing of projected cash flows of the contracts over their estimated useful lives, which currently vary from 2 to 5 years. Licenses and accreditations Licenses and accreditations acquired as part of a business combination are recognised separately from goodwill. The licenses and accreditations are carried at their fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on the timing of projected cash flows of the contracts over their estimated useful lives, which is estimated at 2 to 3 years. Software Costs associated with maintaining software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the group are recognised as intangible assets when the following criteria are met:  it is technically feasible to complete the software so that it will be available for use  management intends to complete the software and use or sell it  there is an ability to use or sell the software  it can be demonstrated how the software will generate probable future economic benefits  adequate technical, financial and other resources to complete the development and to use or sell the software are available, and  the expenditure attributable to the software during its development can be reliably measured. Directly attributable costs that are capitalised as part of the software include employee costs and an appropriate portion of relevant overheads. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use. 47 NOTES TO THE FINANCIAL STATEMENTS NOTE 13 GOODWILL Opening balance Goodwill arising on acquisition of Morrison Geotechnic Goodwill arising on acquisition of OCTFOLIO Goodwill arising on acquisition of AAC Foreign exchange movements Impairment tests for goodwill 2017 $ 5,054,138 1,770,810 1,365,920 - (4,602) 2016 $ 4,079,678 - - 661,357 313,103 8,186,266 5,054,138 Goodwill is monitored by management at the Company level for Precise Consulting, Morrison Geotechnic and OCTFOLIO and at the geographic branch level for AAC. Goodwill is not amortised but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. The group tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of a cash generating unit (CGU) is determined based on value-in-use calculations which require the use of assumptions. The calculations use cash flow projections based on financial budgets covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. These growth rates are consistent with forecasts included in industry reports specific to the industry in which each CGU operates. Refer to Note 3 for the segment level of goodwill. The following table sets out the key assumptions for the value in use: Assumption Precise AAC Morrison OCTFOLIO Approach Sales volume annual growth 2.5% 1% 1% 18% Average annual growth rate over the five-year forecast period based on management’s expectations of market development. Sales price annual growth 2.5% 1% 1% 2% Average annual growth rate over the five-year forecast period based on current industry trends Fixed costs per annum $2.1M $0.3M $2.4M $0.4M Annual capital expenditure $100,000 $25,000 $200,000 $10,000 Long term growth rate 2% 2% 2% 1% Pre-tax discount rate 18% 18% 18% 18% Fixed costs of the Company, which do not vary significantly with sales volumes or prices. Management forecasts these costs based on the current structure of the business, adjusting for inflationary increases but not reflecting any future restructurings or cost saving measures. The amounts disclosed are the average operating costs for the five-year forecast period. Expected capital cash costs based on the historical experience of management, and the planned refurbishment expenditure. No incremental revenue or cost savings are assumed in the value-in-use model as a result of this expenditure. This is the weighted average growth rate used to extrapolate cash flows beyond the budget period. The rates are consistent with forecasts included in industry reports. Reflects specific risks relating to the relevant segments and the countries in which they operate. In performing the value-in-use calculations for each CGU, the group has applied post-tax discount rates to discount the forecast future attributable post-tax cash flows. The equivalent pre-tax rates are disclosed in the table. There is sufficient headroom in the value in use calculation such that in management’s opinion a reasonably possible change in a key assumption on which management has based its determination of the cash generating unit’s recoverable amount would not cause the cash generating unit’s carrying amount to exceed its recoverable amount. 48 NOTES TO THE FINANCIAL STATEMENTS NOTE 14 TRADE AND OTHER PAYABLES CURRENT Trade payables Other payables and accrued expenses Payables to Directors – outstanding wages and fees 2017 $ 509,375 789,317 10,000 1,308,692 2016 $ 293,262 357,772 20,000 671,034 Trade payables are amounts due to suppliers for goods purchased or services provided in the ordinary course of business. Trade payables are generally due for settlement within 30 days and therefore are all classified as current. Other payables and accrued expenses generally arise from normal transactions within the usual operating activities of the group and comprise items such as employee taxes, employee on costs, GST and other recurring items. NOTE 15 PROVISIONS CURRENT Employee benefits Morrison earn-out OCTFOLIO contingent consideration at fair value NON-CURRENT Employee benefits OCTFOLIO contingent consideration at fair value 719,172 62,500 187,500 969,172 52,544 187,500 240,044 120,962 - - 120,962 - - - Employee Benefit Provisions Short-term obligations Liabilities for wages and salaries, including non-monetary benefits that are expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liabilities are presented as current employee benefit obligations in the balance sheet. Other long-term employee benefit obligations The liabilities for long service leave and annual leave are not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service. They are therefore measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. Morrison Geotechnic Earn-out Provision On 31 March 2017, HRL acquired 100% of the issued capital of Morrison Geotechnic Holdings Limited. The agreed purchase consideration was:  initial payment of $3,750,000 cash; and  earn-out consideration of up to $750,000. 49 NOTES TO THE FINANCIAL STATEMENTS NOTE 15 PROVISIONS (CONT’D) The amount of earn out consideration is based on Morrison Geotechnic’s earnings before interest and taxes (EBIT) for the year 1 April 2017 to 31 March 2018: EBIT Earn Out Consideration Less than $1.1 million Nil $1.1 – 1.3 million $1.3 – 1.5 million $250,000 $500,000 More than $1.5 million $750,000 If applicable, one half of the earn-out consideration will be paid 12 months after settlement. Payment of the remaining half of the earn-out consideration will be paid in 12 equal monthly instalments thereafter. Payment of the earn-out consideration is contingent on the four vendor’s ongoing service with Morrison Geotechnic. The vendors will remain employed with Morrison Geotechnic for a minimum period of two years after acquisition. In the situation where employment is terminated prior to completing one year of service, no earn-out is payable. If employment is terminated after one but before the minimum two-year period, the earn-out consideration will be reduced proportionately to the length of time not employed. As the earn-out consideration is contingent on the vendors’ ongoing service, the principles and guidance as set out in AASB 3 Business Combinations require that any earn-out consideration be expensed as an employment cost in the relevant period the service was provided. HRL estimates that Morrison Geotechnic will exceed an EBIT of $1,300,000 for the 12 months ended 31 March 2017, resulting in an estimated earn-out of $500,000. As at 30 June 2017, the vendors had performed 3 months of the 24 month service period (12.5%). Accordingly, an amount of $62,500 (being 12.5% of $500,000) has been recognised in profit or loss. OCTFOLIO contingent consideration at fair value On 13 April 2017, HRL acquired 100% of the issued capital of Integrated Holdings Group Limited. The agreed purchase consideration was:  initial payment on completion of the IHG acquisition of $2,750,000 in cash; and  earn-out consideration of up to $750,000 in cash. The amount of earn out consideration is based on OCTFOLIO’s earnings before interest and taxes (EBIT) for the 24 months after settlement: Tranche 1 12 Months Post-Acquisition EBIT Earn Out Consideration Less than $300,000 Nil More than $300,000 $375,000 Tranche 2 13 Months to 24 Months Post-Acquisition EBIT Earn Out Consideration Less than $450,000 Nil More than $450,000 $375,000 Payment of the earn-out consideration is not contingent on any individual providing ongoing service. As per the principles and guidance as set out in AASB 3, the value of the estimated earn-out is reflected as an increase in the total consideration paid for the entity. Any subsequent changes in the estimate earn-out will be reflected in profit or loss. HRL estimates that there is 50% probability of OCTFOLIO’s meeting the EBIT targets for both tranches. Accordingly, a total liability of $375,000 has been recognised as a provision. 50 NOTES TO THE FINANCIAL STATEMENTS NOTE 15 PROVISIONS (CONT’D) Movements during the year Opening balance Morrison Geotechnic earn-out expense recognised OCTFOLIO earn-out provision recognised Precise Consulting earn-out expense recognised Foreign exchange movements Payment of Precise Consulting earn-out NOTE 16 BORROWINGS CURRENT Finance leases Bank loans Insurance financing NON-CURRENT Finance leases Bank loans 2017 $ - 62,500 375,000 - - - 437,500 198,884 287,334 129,358 615,576 220,773 - 220,773 2016 $ 51,650 - - 160,433 1,984 (214,067) - 25,856 466,000 - 491,856 67,959 810,230 878,189 Bank loans and insurance financing Bank loans and insurance financing (excluding financial guarantees) are measured at amortised cost. Amortised cost is the amount at which the financial liability is measured at initial recognition less principal repayments and adjusted for any cumulative amortisation of the difference between that initial amount and the maturity amount calculated using the effective interest method. The effective interest method is used to allocate interest expense over the relevant period and is equivalent to the rate that discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) through the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial liability. The bank loan is secured against all current and non-current assets of the Group by floating charge. The facility has a variable interest rate of 4.535% per annum on the drawn balance and a facility line fee of 1% on the total available balance. The bank loan expires in September 2019. Insurance financing is unsecured. The facilities have an average interest rate of 5.51% per annum and expire between July 2017 and March 2018. Finance leases Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership is transferred to entities in the Consolidated Entity, are classified as finance leases. Finance leases are capitalised by recognising an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. The finance leases are secured over the individual motor vehicles that the lease relates to. The leases have interest rates of 4.35% - 7.37% per annum and expire between July 2017 and June 2021. 51 NOTES TO THE FINANCIAL STATEMENTS NOTE 16 BORROWINGS (CONT’D) Financing Facilities The Group has access to the following lines of credit: Total facilities available Finance leases and equipment financing Insurance financing Bank loans Facilities used at balance date Finance leases and equipment financing Insurance financing Bank loans Unused facilities at balance date Finance leases and equipment financing Insurance financing Bank loans 2017 $ 2016 $ 852,220 129,358 1,332,953 2,315,531 419,657 129,358 287,334 836,349 547,553 - 2,307,856 2,855,409 93,815 - 1,276,230 1,370,045 433,563 453,738 - 1,045,619 1,479,182 - 1,031,626 1,485,364 Restrictions as to use or withdrawal The bank loan facility is subject to the Group complying with covenants listed below. Covenants The bank loan facility is subject to the below covenants: Debt Service Cover Ratio greater than 1 Debt Service Cover Ratio means: Operating EBITDA divided by the total minimum principal and interest payments for that period. This ratio will be assessed every 12 months. Gearing Ratio of less 60% Gearing ratio means: Total liabilities divided by total tangible assets (including goodwill and other acquisition based intangibles). This ratio will be assessed every 12 months. Provision of bi-annual compliance certificates HRL must provide within 60 days of 30 June a compliance certificate (and relevant supporting information as set out in the agreement) that states both the above covenants have been met. There were no breaches of covenants during the period. 52 NOTES TO THE FINANCIAL STATEMENTS NOTE 16 BORROWINGS (CONT’D) Assets pledged as security In accordance with the security arrangements of the bank loans, all current and non-current assets of the Group are secured by floating charge. Finance leases are also secured by mortgage over the relevant motor vehicle which at 30 June 2017 had a carrying value of $467,293 (2016: $79,536). Defaults and breaches During the current and prior year, there were no defaults or breaches on any of the loans. Terms and conditions Bank loan facilities may be drawn at any time and have a remaining maturity of 2.25 years. The bank loan facilities are principal and interest and amortise equally over the loan period. 2017 $ 2016 $ NOTE 17 CONTRIBUTED CAPITAL 244,186,406 fully paid ordinary shares (June 2016: 158,903,031) 16,349,948 8,220,282 June 2017 Number June 2016 Number Movements during the period Balance at beginning of period 158,903,031 154,550,025 Rights issue – issued at $0.10 per share Placement – issued at $0.10 per share 57,783,375 27,500,000 Share issue costs (net of tax) Shares issued to OCTIEF vendors on achieving Milestones - - - - - 4,353,006 June 2017 $ 8,220,282 5,783,338 2,750,000 (398,672) - June 2016 $ 8,220,282 - - - - Balance at end of period 244,186,406 158,903,031 16,349,948 8,220,282 Ordinary shares participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held. At shareholders meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. Ordinary shares do not have a par value. Issued and paid up capital is recognised at the fair value of the consideration received by the Consolidated Entity. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received. NOTE 18 RESERVES Foreign currency translation reserve Share based payment reserve 2017 $ 2016 $ (202,392) 203,636 (166,328) - 1,244 (166,328) The foreign currency translation reserve records exchange rate differences arising from the translation of the financial statements of foreign subsidiaries. The share based payments reserve is used to record the value of share based payments provided to employees as part of their remuneration and to consultants for services provided. 53 NOTES TO THE FINANCIAL STATEMENTS NOTE 18 RESERVES (CONT’D) Movements during the year Opening balance Foreign exchange differences Share based payments Closing balance 2017 $ (166,328) (36,064) 203,636 1,244 2016 $ (509,466) 343,138 - (166,328) NOTE 19 MORRISON GEOTECHNIC HOLDINGS PTY LTD ACQUISITION ACCOUNTING On 31 March 2017, HRL acquired 100% of the issued capital of Morrison Geotechnic Holdings Pty Ltd (Morrison Geotechnic). Established for over 17 years, Morrison Geotechnic services the civil, engineering and construction industries primarily across South East Queensland. The Company has 3 branches covering Brisbane, Gold Coast and the Sunshine Coast. The agreed purchase consideration was:  initial payment of $3,750,000 cash; and  earn-out consideration of up to $750,000. The amount of earn out consideration is based on Morrison’s earnings before interest and taxes (EBIT) for the year 1 April 2017 to 31 March 2018: EBIT Earn Out Consideration Less than $1.1 million Nil $1.1 – $1.3 million $1.3m to $1.5 million More than $1.5 million $250,000 $500,000 $750,000 If applicable, half of the earn-out consideration will be paid 12 months after settlement. Payment of the remaining half of the earn-out consideration will be paid in 12 equal monthly instalments thereafter. Payment of the earn-out consideration is contingent on the four vendor’s ongoing service with Morrison Geotechnic. The vendors will remain employed with Morrison Geotechnic for a minimum period of two years after acquisition. In the situation where employment is terminated prior to completing one year of service, no earn-out is payable. If employment is terminated after one but before the minimum two-year period, the earn-out consideration will be reduced proportionately to the length of time not employed. 54 NOTES TO THE FINANCIAL STATEMENTS NOTE 19 MORRISON GEOTECHNIC HOLDINGS PTY LTD ACQUISITION ACCOUNTING (CONT’D) The assets and liabilities recognised as a result of the acquisition are as follows: Purchase consideration: Cash payment Fair value of assets and liabilities acquired: Cash and cash equivalents Trade and other receivables Other assets Property, plant and equipment Deferred tax assets Intangibles – customer contracts and relationships Intangibles – licences and accreditations Trade and other payables Employee provisions Finance leases Borrowings – insurance financing Income tax payable Deferred tax liabilities Net identifiable assets acquired Goodwill on acquisition Net assets acquired Revenue and profit contribution 31 March 2017 $ 3,750,000 266,012 1,539,457 120,607 776,510 293,413 1,302,000 466,000 (833,810) (581,663) (396,381) (68,670) (246,419) (657,866) 1,979,190 1,770,810 3,750,000 Morrison Geotechnic contributed revenues of $2,289,457 and net profit of $276,587 to the group for the period from 1 April 2017 to 30 June 2017. If the acquisition had occurred on 1 July 2016 and the operations of Morrison Geotechnic been included from that date then the consolidated pro-forma revenue and profit for the year ended 30 June 2017 would have been $9,434,982 and $804,637 respectively. Outflow of cash to acquire Morrison Geotechnic, net of cash acquired Cash consideration Less: cash and cash equivalents acquired Net outflow of cash – investing activities Acquisition related costs 31 March 2017 $ 3,750,000 (266,012) 3,483,988 Acquisition-related costs of $23,322 that were not directly attributable to the issue of shares are included in ‘Acquisition expenses’ profit or loss and in operating cash flows in the statement of cash flows. 55 NOTES TO THE FINANCIAL STATEMENTS NOTE 20 INTEGRATED HOLDINGS GROUP ACQUISITION ACCOUNTING On 13 April 2017, HRL acquired 100% of the issued capital of Integrated Holdings Group Pty Ltd (IHG). IHG is the holding entity of OCTFOLIO Pty Ltd (OCTFOLIO) and has no other operations or assets. OCTFOLIO is an Australian-based specialised software vendor focused on the development and implementation of:  Information management software solutions for asbestos and hazardous materials;  Innovative field management software solutions; and  Customised compliance solutions and applications relating to workplace health and safety. The agreed purchase consideration was:  initial payment on completion of the IHG acquisition of $2,750,000 in cash; and  earn-out consideration of up to $750,000 in cash. The amount of earn out consideration is based on OCTFOLIO’s earnings before interest and taxes (EBIT) for the 24 months after settlement: Tranche 1 12 Months Post-Acquisition EBIT Less than $300,000 More than $300,000 Tranche 2 13 Months to 24 Months Post-Acquisition EBIT Less than $450,000 More than $450,000 Earn Out Consideration Nil $375,000 Earn Out Consideration Nil $375,000 Payment of the earn-out consideration is not contingent on any individual providing ongoing service. As per the principles and guidance as set out in AASB 3, the value of the estimated earn-out is reflected as an increase in the total consideration paid for the entity. Any subsequent changes in the estimate earn-out will be reflected in profit or loss. HRL estimates that there is 50% probability of OCTFOLIO’s meeting the EBIT targets for both tranches. Accordingly, a total liability of $375,000 has been recognised as a provision. 56 NOTES TO THE FINANCIAL STATEMENTS NOTE 20 INTEGRATED HOLDINGS GROUP ACQUISITION ACCOUNTING (CONT’D) The assets and liabilities recognised as a result of the acquisition are as follows: Purchase consideration: Cash payment Contingent consideration recognised Fair value of assets and liabilities acquired: Cash and cash equivalents Trade and other receivables Other assets Property, plant and equipment Intangibles – customer contracts and relationships Intangibles – software Deferred tax assets Trade and other payables Deferred tax liabilities Employee provisions Net identifiable assets acquired Goodwill on acquisition Net assets acquired Revenue and profit contribution 13 April 2017 $ 2,750,000 375,000 3,125,000 19,919 107,094 8,409 10,653 50,000 1,500,000 163,425 (83,571) (15,000) (1,849) 1,759,080 1,365,920 3,125,000 OCTFOLIO contributed revenues of $109,394 and net profit of $38,775 to the group for the period from 14 April 2017 to 30 June 2017. If the acquisition had occurred on 1 July 2016 and the operations of OCTFOLIO been included from that date then the consolidated pro-forma revenue and profit for the year ended 30 June 2017 would have been $556,965 and $198,950 respectively. Outflow of cash to acquire IHG, net of cash acquired Cash consideration Less: cash and cash equivalents acquired Net outflow of cash – investing activities Acquisition related costs 13 April 2017 $ 2,750,000 (19,919) 2,730,081 Acquisition-related costs of $63,311 that were not directly attributable to the issue of shares are included in ‘Acquisition expenses’ profit or loss and in operating cash flows in the statement of cash flows. 57 NOTES TO THE FINANCIAL STATEMENTS NOTE 21 PARENT ENTITY INFORMATION The legal Parent Entity of the Consolidated Entity is HRL Holdings Limited. Parent Entity Financial Information Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Issued capital Reserves Accumulated losses Total equity Loss after income tax Other comprehensive income Total comprehensive income 2017 $ 2016 $ 106,931 13,262,940 13,369,871 520,720 28,113 548,833 88,635 6,938,519 7,027,154 564,067 848,310 1,412,377 12,821,038 5,614,777 27,388,480 203,636 (14,771,078) 12,821,038 19,258,814 - (13,644,037) 5,614,777 (1,127,041) (957,762) - - (1,127,041) (957,762) Commitments, Contingencies and Guarantees of the Parent Entity The Parent Entity has no material commitments for the acquisition of property, plant and equipment. The Parent Entity’s exposure to contingent liabilities is detailed in Note 25. The Parent Entity has no contingent assets or guarantees at balance date. 58 NOTES TO THE FINANCIAL STATEMENTS NOTE 21 PARENT ENTITY INFORMATION (CONT’D) Controlled Entities of the Parent Entity Percentage Owned Country of Incorporation OCTIEF Pty Ltd OCTIEF ACT Pty Ltd Hot Rock Geothermal Pty Ltd HRL Holdings NZ Limited Octief Limited Precise Consulting and Laboratory Limited Morrison Geotechnic Holdings Pty Ltd Morrison Geotechnic Pty Ltd Integrated Holdings Pty Ltd OCTFOLIO Pty Ltd Principles of Consolidation 2017 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2016 % 100% - 100% 100% 100% 100% - - - - Australia Australia Australia New Zealand New Zealand New Zealand Australia Australia Australia Australia Subsidiaries are all entities (including structured entities) over which the Consolidated Entity has control. The Consolidated Entity controls an entity when the Consolidated Entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Consolidated Entity. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Consolidated Entity. Intercompany transactions, balances and unrealised gains on transactions between Consolidated Entity companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Consolidated Entity. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, statement of changes in equity and balance sheet respectively. Business combinations Business combinations occur where an acquirer obtains control over one or more businesses. A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The business combination will be accounted for from the date that control is attained, whereby the fair value of the identifiable assets acquired and liabilities (including contingent liabilities) assumed is recognised (subject to certain limited exemptions). When measuring the consideration transferred in the business combination, any asset or liability resulting from a contingent consideration arrangement is also included. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability is remeasured each reporting period to fair value, recognising any change to fair value in profit or loss, unless the change in value can be identified as existing at acquisition date. All transaction costs incurred in relation to the business combination are expensed to the statement of comprehensive income. The acquisition of a business may result in the recognition of goodwill or a gain from a bargain purchase. 59 NOTES TO THE FINANCIAL STATEMENTS NOTE 22 SHARE BASED PAYMENTS Performance Shares The Company has granted performance shares to incentivise senior management. The performance shares were granted for nil consideration and are not quoted on the ASX. Performance shares granted carry no dividend or voting rights. When vested, each performance share is convertible into one ordinary share. Details of performance shares issued, exercised and expired during the financial year are set out below: Expiry Date 30 June 2019 30 June 2019 30 June 2019 1 July 2016 Vesting Price $0.156 $0.194 $0.234 Movements Issued Exercised Expired - - - - 1,029,556 1,029,556 1,029,555 3,088,667 - - - - 30 June 2017 1,029,556 1,029,556 1,029,555 3,088,667 - - - - The remaining contractual life of performance shares outstanding at the end of the prior period was 2 years. The performance shares have the following key terms and conditions: From the 30 day VWAP of HRL’s share price at 1 July 2016, any of the following increases occur: 1. HRL share price increases 33% within 1 year; or Primary Vesting Conditions 2. HRL share price increases 66% within 2 years; or 3. HRL share price increases 100% within 3 years. Secondary Vesting Conditions The HRL share price must remain above the nominated target for the relevant period for 14 consecutive trading days The Performance Shares will vest in proportion to the number of years’ service after the plan is implemented: 1. First 33% of the performance shares vest after 1 year of service from plan commencement; 2. Next 33% performance shares vest after 2 years of service from plan commencement; 3. Final 34% performance shares vest after 3 years of service from plan commencement. Exercise Price $Nil Forfeiture The Performance Shares will lapse if: - None of the pricing conditions are met; or - the participant does not meet the service conditions. Change of Control Event In the event a bona fide Takeover Bid is declared unconditional and the bidder has acquired a relevant interest of at least 50.1%, the Performance Share vest immediately, irrespective of any unmet vesting conditions. 60 NOTES TO THE FINANCIAL STATEMENTS NOTE 22 SHARE BASED PAYMENTS (CONT’D) Fair value of performance shares granted The assessed fair value at the date of grant of performance shares issued is determined using a option pricing models that takes into account the exercise price, the underlying share price at the time of issue, the term of the performance share, the underlying share’s expected volatility, expected dividends and the risk free interest rate for the expected life of the instrument. The value of the performance shares was calculated using the inputs shown below: Inputs into pricing model Grant date Exercise price Vesting conditions Share price at grant date Life of the instruments Underlying share price volatility Expected dividends Risk free interest rate Pricing model Fair value per instrument Tranche 1 31 August 2016 $Nil See above table $0.12 3 years 52% Nil 1.52% Binomial $0.0746 The expected price volatility is based on the historic volatility (based on the remaining life of the performance shares), adjusted for any expected changes to future volatility due to publicly available information. Options During the period the Company granted performance options to its capital advisors, Canaccord Genuity (Australia) Limited in connection with the ongoing capital markets strategy requirements of the Company. The performance shares were granted for nil consideration and are not quoted on the ASX. Options granted carry no dividend or voting rights. When exercised, each option converts into one ordinary share. Details of options issued, exercised and expired during the financial year are set out below: Expiry Date 31 December 2019 31 December 2019 31 December 2019 Exercise Price $0.18 $0.20 $0.23 1 July 2016 Movements Issued Exercised Expired - - - - 1,600,000 1,600,000 1,600,000 4,800,000 - - - - 30 June 2017 1,600,000 1,600,000 1,600,000 4,800,000 - - - - The remaining contractual life of options outstanding at the end of the prior period was 2.5 years. The weighted average exercise price of the options is $0.203. Fair value of options granted The assessed fair value at the date of grant of options issued is determined using a option pricing models that takes into account the exercise price, the underlying share price at the time of issue, the term of the option, the underlying share’s expected volatility, expected dividends and the risk free interest rate for the expected life of the instrument. The value of the options was calculated using the inputs shown below: 61 NOTES TO THE FINANCIAL STATEMENTS NOTE 22 SHARE BASED PAYMENTS (CONT’D) Inputs into pricing model Tranche A - $0.18 Tranche B - $0.20 Tranche C - $0.23 Grant date Exercise price Vesting conditions Share price at grant date Life of the instruments Underlying share price volatility Expected dividends Risk free interest rate Pricing model Fair value per instrument 2 June 2017 2 June 2017 2 June 2017 $0.18 Nil $0.10 $0.18 Nil $0.10 $0.18 Nil $0.10 2.5 years 2.5 years 2.5 years 59% Nil 1.55% Binomial $0.02054 59% Nil 1.55% Binomial $0.01800 59% Nil 1.55% Binomial $0.01488 The expected price volatility is based on the historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. Expenses arising from share-based payment transactions Performance shares issued to senior management Options issued to capital advisors NOTE 23 RELATED PARTY TRANSACTIONS Key Management Personnel Compensation Short-term benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments 2017 $ 118,166 85,470 203,636 813,227 81,249 3,615 - 67,033 965,124 2016 $ - - - 758,505 78,007 (11,121) - - 825,391 Detailed remuneration disclosures are provided in the remuneration report on pages 14 to 22. Transactions with related parties Transaction Entity Rental of office space Paget Developers Software and hosting services 1 Octfolio Sublet of office space to Octfolio 1 Octfolio 1 Services provided from 1 July 2016 to 13 April 2017. Association Darren Anderson Kevin Maloney Darren Anderson Kevin Maloney Darren Anderson Kevin Maloney 2017 $ 2016 $ 107,369 101,979 322,725 249,253 33,773 30,858 All of the above transactions were based on normal commercial terms and conditions. 62 NOTES TO THE FINANCIAL STATEMENTS NOTE 23 RELATED PARTY TRANSACTIONS (CONT’D) Trade payable balances with related parties Nature Entity Software and hosting services Octfolio Association Darren Anderson Kevin Maloney 2017 $ NA 2016 $ 31,573 NOTE 24 FINANCIAL RISK MANAGEMENT The Consolidated Entity's financial instruments consist mainly of deposits with banks and accounts receivable and payable. The main risk arising from the financial instruments is credit risk and foreign exchange risk. The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for day to day management of these risks to the Chief Finance Officer. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below: Credit Risk Credit risk is the risk that the other party to a financial instrument will fail to discharge their obligation resulting in the Consolidated Entity incurring a financial loss. This usually occurs when debtors fail to settle their obligations owing to the Consolidated Entity. It arises from exposure to customers as well as through deposits with financial institutions. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets, is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the balance sheet and notes to the financial statements. There is no collateral held as security at 30 June 2017. Credit risk is reviewed regularly by the Board. The Group does not have any material credit risk exposure to any single counterparty, except for its holdings of cash which is held with the Westpac Bank. Maximum exposure to credit risk Summary exposure Cash and cash equivalents Trade receivables Other receivables Liquidity risk 2017 $ 2016 $ 728,165 3,026,674 392,162 4,147,001 392,863 1,167,979 186,372 1,747,214 Liquidity risk is the risk that the Group may encounter difficulties raising funds to meet financial obligations as they fall due. Liquidity risk is reviewed regularly by the Board. The Group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate cash resources are maintained. Refer to Note 16 for the Group’s financing facilities available at balance date. Remaining contractual maturities The tables below reflects the contractual maturity of fixed and floating rate financial liabilities. Cash flows for financial liabilities without fixed amount or timing are based on the conditions existing at period end. The amounts disclosed represent undiscounted cash flows. The tables include both interest and principal cash flows and therefore the totals may differ from their carrying amount in the balance sheet. 63 NOTES TO THE FINANCIAL STATEMENTS NOTE 24 FINANCIAL RISK MANAGEMENT (CONT’D) The remaining contractual maturities of the financial liabilities are: 30 June 2017 Trade payables Other payables OCTFOLIO contingent consideration Bank loan Insurance financing Finance leases Fixed interest rate - 1 year or less $ 509,375 - - - 5.51% 4.90% 799,317 187,500 287,334 129,358 215,016 2,127,900 1 to 5 years $ - - 187,500 - - 233,718 233,718 Over 5 years $ - - - - - - - 30 June 2016 Trade payables Other payables Bank loan Finance leases Market Risk Fixed interest rate - 1 year or less $ 293,262 1 to 2 years $ - Over 2 years $ - - - 4.73% 377,772 774,000 31,239 1,476,273 - 502,230 31,239 533,469 - - 40,186 40,186 Total $ 509,375 799,317 375,000 287,334 129,358 488,734 2,589,118 Total $ 293,262 377,772 1,276,230 102,664 2,049,928 Market risk arises from the use of interest bearing, tradeable and foreign currency financial instruments. It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk), foreign exchange rates (currency risk) or other market factors (other price risk). Interest rate risk Interest rate risk is managed by constant monitoring of interest rates. Interest rates over the 12 month period were analysed and a sensitivity determined to show the effect on profit and equity after tax if the interest rates at reporting date had been 100 basis points higher or lower, with all other variables held constant. This level of sensitivity was considered reasonable given the current level of both short-term and long-term Australian and New Zealand interest rates. The following sensitivity analysis is based on the interest rate risk exposures in existence at the balance sheet date. All cash assets and the bank loan have floating interest rates. At 30 June, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post-tax profit and equity would have been affected as follows: Impact on profit and equity +1.00% (100 basis points) -1.00% (100 basis points) 2017 $ 3,155 (3,155) 2016 $ (9,588) 9,588 64 NOTES TO THE FINANCIAL STATEMENTS NOTE 24 FINANCIAL RISK MANAGEMENT (CONT’D) Foreign Currency Risk Foreign currency risk arises as a result of having assets/cash flows denominated in a currency other than the home currency in which they are reported. At 30 June, the Group had the following exposure to foreign currency, shown in Australian Dollars: Financial assets Cash and cash equivalents (NZD) Trade and other receivables (NZD) Financial liabilities Trade and other payables (NZD) 2017 $ 2016 $ 348,378 873,497 258,843 864,052 1,221,875 1,122,895 273,338 273,338 361,600 361,600 Exchange rates over the 12 month period were analysed and a sensitivity determined to show the effect on profit and equity after tax if the NZD:AUD exchange rates at reporting date had been 10% basis higher or lower, with all other variables held constant. The following sensitivity analysis is based on the foreign currency risk exposures in existence at the balance sheet date: Impact on equity +10.00% -10.00% Capital Risk Management 2017 $ 2016 $ (94,854) 94,854 (76,130) 76,130 The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Capital consists of ordinary shares and retained earnings of the Group. The Board of Directors monitors the return on capital as well as considers the potential of future dividends to ordinary shareholders. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. As part of complying with its borrowing covenants, the Group has an externally imposed requirement to maintain a Gearing Ratio of less than 60% at June 2017. Gearing ratio is defined as: Total liabilities divided by total tangible assets (including goodwill arising from the Precise Consulting acquisition). The actual gearing ratio at 30 June 2017 was 31%. Fair Values The fair values of financial assets and financial liabilities approximate their carrying values due to their short term nature. No financial assets or liabilities are readily traded on organised markets in standardised form. Fair value hierarchy AASB 13 Fair Value Measurement requires disclosure of fair value measurements by level in the fair value measurement hierarchy as follows:    Level 1 - the instrument has quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 - a valuation technique is used using inputs other than quoted prices within level 1 that are observable for the financial instrument, either directly (i.e. as prices), or indirectly (i.e. derived from prices) Level 3 - a valuation technique is used using inputs that are not observable based on observable market data (unobservable inputs). 65 NOTES TO THE FINANCIAL STATEMENTS NOTE 24 FINANCIAL RISK MANAGEMENT (CONT’D) Recurring fair value measurements The following financial instruments are subject to recurring fair value measurements: Contingent consideration – level 3 2017 $ 375,000 2016 $ - The fair value of the contingent consideration of $375,000 has been estimated by calculating the present value of the future expected cash outflows. Reconciliation of level 3 movements The following table sets out the movements in level 3 fair values for contingent consideration payable. Opening balance 1 July 2017 Recognised on business combination Payments of contingent consideration Closing balance 30 June 2017 Valuation processes for level 3 fair values - 375,000 - 375,000 - - - - The following table sets out the valuation techniques used to measure fair value within Level 3, including details of the significant unobservable inputs used and the relationship between unobservable inputs and fair value. Description Valuation approach Contingent consideration Expected EBIT is estimated based on the terms of the sale contract (see Note 20) and the entity’s knowledge of the business and how the current economic environment is likely to impact it. Unobservable inputs Expected EBIT of OCTFOLIO Risk adjusted discount rate Relationship between unobservable inputs and fair value The higher the expected EBIT the higher the fair value of the liability. The lower the risk adjusted discount rate the higher the fair value of the liability. 66 NOTES TO THE FINANCIAL STATEMENTS NOTE 25 COMMITMENTS Operating leases Minimum lease payments: Payable within one year Payable within one year and five years Total contracted at balance date 2017 $ 2016 $ 771,972 1,123,115 1,895,087 482,862 806,376 1,286,238 The Group leases various properties and motor vehicles under non-cancellable operating leases expiring within one to five years. The property leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Finance leases Future minimum lease payments: Payable within one year Payable between one year and five years Less future interest payments Present value of minimum lease payments: Current (Note 16) Non-Current (Note 16) Future exploration Exploration obligations to be undertaken: Payable within one year Payable between one year and five years 215,016 233,718 448,734 (29,077) 419,657 198,884 220,773 419,657 31,239 71,425 102,664 (9,149) 93,515 25,856 67,959 93,515 - - - 800,000 18,500,000 19,300,000 The Group has certain obligations to expend minimum amounts on exploration in tenement areas. On 29 June 2017 entered into an agreement to transfer its interest in Geothermal Exploration Permit 8 to a third party. HRL informed the Victorian Government that it would relinquish Geothermal Exploration Permit 6. As a result of these events HRL no longer has any ongoing exploration obligations. The Group has previously impaired the value of these tenement areas to $Nil in prior periods with all subsequent costs immediately expensed through the statement of comprehensive income. NOTE 26 CONTINGENT LIABILITIES The Consolidated Entity has arranged bank guarantees of $30,000 to the Victorian Government as security over the granted geothermal tenement. No liability has been recognised by the Group as bank deposits totalling $30,000 are in place to satisfy any obligation to the bank. Upon transfer or relinquishment of the tenements, the Victorian Government will release the security. The Consolidated Entity has arranged bank guarantees of $38,500 as security for rental premises. 67 NOTES TO THE FINANCIAL STATEMENTS NOTE 27 AUDITOR’S REMUNERATION Audit services – BDO Audit Pty Ltd Audit and review of financial reports Total audit services Non-audit services – BDO (QLD) Pty Ltd Taxation services Total non-audit services 2017 $ 69,026 69,026 26,927 26,927 2016 $ 59,500 59,500 2,500 2,500 NOTE 28 EVENTS AFTER BALANCE DATE There have been no other events since 30 June 2017 that impact upon the financial report. 68 DIRECTORS’ DECLARATION DIRECTORS' DECLARATION In the Directors opinion: (a) the attached consolidated financial statements and notes and the remuneration report in the Directors’ Report are in accordance with the Corporations Act 2001 and other mandatory professional reporting requirements, including: (i) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (ii) giving a true and fair view of the Consolidated Entity's financial position as at 30 June 2017 and of its performance for the financial year ended on that date; and (b) (b) the financial statements also comply with International Financial Reporting Standards as disclosed in Note 1 to the consolidated financial statements; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of directors. Darren Anderson Director Brisbane 21 August 2017 69 Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au Level 10, 12 Creek St Brisbane QLD 4000 GPO Box 457 Brisbane QLD 4001 Australia INDEPENDENT AUDITOR'S REPORT To the members of HRL Holdings Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of HRL Holdings Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated balance sheet as at 30 June 2017, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial report, including a summary of significant accounting policies and the directors’ declaration. In our opinion the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: (i) (ii) Giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year ended on that date; and Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. 70 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Acquisition of Morrison Geotechnic Holdings Pty Ltd (Morrison) Key audit matter How the matter was addressed in our audit The Group’s disclosures about the acquisition of Our procedures included, amongst others: Morrison Geotechnic Holdings Pty Ltd (Morrison) are included in Note 19, which details the key events that occurred in the transaction including the consideration transferred and assets and liabilities acquired. The acquisition of Morrison is considered a significant transaction for the group. The presentation, measurement and disclosures around this transaction are important in the users’ understanding of the financial statements. The transaction is material in the context of the audit and involved significant auditor effort, and was therefore key to our audit. Management have completed a process to determine the purchase consideration and the fair value of the identifiable net assets acquired, including customer contracts, customer relationships and licenses and accreditations and the allocation of the difference to goodwill. This process involved estimation and judgement to calculate both the consideration and the fair value of identified intangible assets. • • Assessing management’s determination of whether the acquisition was a business combination or an asset acquisition Evaluating management’s assessment of the fair value of the identifiable assets and liabilities acquired including: • • • • • Obtaining management's external valuation of the identifiable assets and liabilities acquired Assessing the professional competence and objectivity of the valuer Evaluating the appropriateness of the methods and assumptions used Challenging management in relation to the inputs and assumptions used by the valuer Providing the external valuation to the internal experts to assess the reasonableness of the structure and assumptions applied in the model including the discount rate. • Assessing the disclosures related to the acquisition to ensure they are in compliance with applicable accounting standards. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. 71 Acquisition of Integrated Holdings Group Pty Ltd (IHG) Key audit matter How the matter was addressed in our audit The Group’s disclosures about the acquisition of Our procedures included, amongst others: Integrated Holdings Group Pty Ltd (IHG), and its subsidiary OCTFOLIO Pty Ltd (OCTFOLIO), are included in Note 20, which details the key events that occurred in the transaction including the consideration transferred and assets and liabilities acquired. • • The acquisition of IHG is considered a significant transaction for the group. The presentation, measurement and disclosures around this transaction are important in the users’ understanding of the financial statements. The transaction is material in the context of the audit and involved significant auditor effort, and was therefore key to our audit. Management have completed a process to determine the purchase consideration and the fair value of the identifiable net assets acquired, including customer contracts, customer relationships and software and the allocation of the difference to goodwill. This process involved estimation and judgement to calculate both the consideration (including contingent consideration) and the fair value of identified intangible assets. Assessing management’s determination of whether the acquisition was a business combination or an asset acquisition Challenging management’s calculation of contingent consideration in accordance with requirements of AASB 3 Business Combinations. • Evaluating management’s assessment of the fair value of the identifiable assets and liabilities acquired including: • • • • Obtaining management's internal valuation of the identifiable assets and liabilities acquired Evaluating the appropriateness of the methods and assumptions used Challenging management in relation to the inputs and assumptions used in the valuation Providing the internal valuation to the internal experts to assess the reasonableness of the structure and assumptions applied in the model including the discount rate. • Critically assessing the disclosures related to the acquisition to ensure they are in compliance with applicable accounting standards. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. 72 Valuation of goodwill Key audit matter How the matter was addressed in our audit The Group’s disclosures about goodwill impairment are Our procedures included, amongst others: included in Note 13, which details the allocation of goodwill to the groups various CGU’s, sets out the key assumptions for value-in-use calculations and the impact of possible changes in these assumptions. This annual impairment test was significant to our audit because the balance of $8,186,266 as of 30 June 2017 is material to the financial statements. In addition, management’s assessment process is complex and highly judgmental and is based on assumptions, specifically forecast future cash flows, growth rate, and discount rate, which are affected by expected future market or economic conditions. • Assessing management’s allocation of goodwill and assets and liabilities, including corporate assets to Cash Generating Units ("CGU's") • Evaluating the inputs used in the value in use • • • calculation including the growth rates, discount rates and underlying cash flows applied by management Assessing the sensitivity of the assumptions used by management on the value in use calculation Involving our internal specialists to assess the discount rates and terminal growth rates against comparable market information Assessing the disclosures related to the goodwill and the impairment assessment by comparing these disclosures to our understanding of the matter and the applicable accounting standards. Other information The directors are responsible for the other information. The other information comprises the information in the Group’s annual report for the year ended 30 June 2017, but does not include the financial report and the 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 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. 73 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at: http://www.auasb.gov.au/auditors_responsibilities/ar1.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 14 to 22 of the directors’ report for the year ended 30 June 2017. In our opinion, the Remuneration Report of HRL Holdings Limited, for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. BDO Audit Pty Ltd T R Mann Director Brisbane, 21 August 2017 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. 74 HRL HOLDINGS LIMITED CORPORATE INFORMATION DIRECTORS Kevin Maloney (Chairman) Darren Anderson (Executive Director) Mark Elliott (Non-executive Director) John Taylor (Non-executive Director) Frederick Kempson (Alternate Non-executive Director) COMPANY SECRETARY Paul Marshall REGISTERED OFFICE HopgoodGanim Lawyers 1 Eagle Street Brisbane QLD 4000 Phone: + 61 7 3105 5960 SOLICITORS HopgoodGanim Lawyers 1 Eagle Street Brisbane QLD 4000 Phone: + 61 7 3024 0000 SHARE REGISTRY Link Market Services Limited Level 15 324 Queen Street Brisbane QLD 4000 Phone: 1300 554 474 AUDITORS BDO Audit Pty Ltd Level 10, 12 Creek Street Brisbane QLD 4000 Phone:+ 61 7 3237 5999 COUNTRY OF INCORPORATION Australia STOCK EXCHANGE LISTING Australian Securities Exchange Limited ASX Code: HRL INTERNET ADDRESS www.hrlholdings.com AUSTRALIAN BUSINESS NUMBER ABN 99 120 896 371 75 

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