IncentiaPay
Annual Report 2020

Plain-text annual report

2 0 2 0 A N N U A L R E P O R T For the year ended 30 June 2020 IncentiaPay Ltd ABN 43 167 603 992 ASX-listed IncentiaPay is the owner of The Entertainment Group – and the producer of Australia and New Zealand’s Entertainment Membership App and corporate Frequent Values product. Entertainment builds communities where everyone wins, through experiences, savings, philanthropy and the building of businesses. Helping others is at the heart of what we do. Entertainment is an iconic brand with a 26-year history providing one of the largest Merchant partners: Entertainment drives new business and revenue growth through word of portfolios of lifestyle offers and content in mouth and exclusive marketing programs for the market. Members: A choice of memberships provide access to thousands of 2-for-1 and up to 50% off offers from almost 9,000 business partners contemporary and casual dining merchants, retail outlets, and travel and leisure partners. Enterprise clients: Entertainment’s bespoke dining and leisure benefits product provides in dining, travel, activities, and retail across organisations and major brands with trusted almost 20,000 partner locations in Australia, and well-known loyalty programs, featuring New Zealand, and Bali. Our offers are available always-on special offers across dining, take across 21 major cities, regional areas, and away, travel, and wellbeing to help retain country towns. Entertainment is about existing customers, reduce lapsed customers, discovering new experiences and creating and acquire new ones. Over 35 corporate memories with family and friends all while clients including household names such as helping a good cause. Zurich, Red Energy, HSBC and Budget Direct Fundraiser groups: An Entertainment Membership allows savvy consumers to provide this offering to their clients. There are over 100 Entertainment employees do more of what they value and love every working in 13 offices across Australia and New day, while at the same time saving money Zealand with headquarters in Sydney. and helping a good cause. 20 per cent of Membership sales go directly to fundraisers, and since its establishment in 1994, Entertainment has helped more than 15,000 charities large and small, local primary and high schools, sports clubs and community groups reach their fundraising community goals. C O N T E N T S Chairman’s Introduction ..................................................................1 CEO’s Operating Review ................................................................5 Financial Review ............................................................................... 13 Leadership Team .............................................................................. 17 Business Risks .................................................................................... 21 Directors’ Report ............................................................................. 25 Remuneration Report .................................................................... 31 Auditor’s Independence Declaration ..................................... 41 Financial Statements .....................................................................43 Directors’ Declaration ....................................................................111 Independent Auditor’s Report .................................................113 ASX Additional Information ..................................................... 120 Corporate Directory .....................................................................123 IncentiaPay Ltd ABN 43 167 603 992 Chairman’s Introduction 1 Dear Shareholders, On behalf of the Board of Directors of IncentiaPay, and as your Chairman, I am pleased to present you with the 2020 Annual Report. The past financial year has been one of significant business change with the organisation evolving and moving forward in many areas, while at the same time, being forced to manage widespread and unexpected macroeconomic and social disruption. During FY2019, the Company announced a strategic has seen the average revenue per transaction in the 2020 sales season increase by 13 per cent. Thirdly, expansion of distribution beyond the ‘not-for-profit’ channels. While small merchant pilots did commence, this pillar is being deferred due to the onset of Covid-19. review of operations and organisational structure, and In March 2020, the business experienced major and effected a major Company turnaround strategy. Over obviously unexpected disruption due to the Covid-19 the past year, we have made significant progress in pandemic. While the Company’s pre-sales season was our efforts to refocus the business; in our successful successfully launched in February, this came to a halt with search for a new Chief Executive Officer and the substantially lower revenues in March, April, and most subsequent development of our Executive Team; in our of May than the organisation had become accustomed implementation of a cost reduction program including to. As the relaxing of restrictions took place across a restructure; in our repair and rebuild of the business Australia and New Zealand, the Company began to see foundations; and, in managing the repercussions some increase in its cash inflows from Entertainment and impact on the business from Covid-19. All of this Memberships in June, and the first half of July. However, has been underpinned by support from our major the second half of July and August saw a subsequent shareholders, specifically, Suzerain Investments Holdings down turn due to Covid-19 restrictions being reinforced. Ltd (Suzerain). People were key to the implementation and delivery of the turnaround. In August 2019, Dean Palmer was appointed to the Board of Directors, to join myself, Jeremy Thorpe, and Charles Romito. In October 2019, the Board’s search resulted in the appointment of Henry Jones as CEO, replacing Interim CEO Darius Coveney who departed at the end of August 2019, and allowed me to step down as Executive Chairman. Henry has subsequently formed an Executive Team whose deep experience and background are outlined in the Leadership Team section of this Annual Report. At the end of 2019, IncentiaPay completed its restructure as announced at the Annual General Meeting in December, removing $14 million in annualised operating expenditure and closing six regional offices. The strategic focus for moving forward in 2020 continued to centre on three key pillars. Firstly, the transition of the Entertainment Membership to a 100 per cent digital model. This was achieved as at 1 June 2020 with the iconic Entertainment book ceasing to be sold after 26 years. Secondly, a focus on core membership products. The Company enhanced its core digital product to allow a 12-month membership to commence any time - and introduced three different product options including multi-city and multi-year, which The ongoing results of the pandemic had widespread impact on the organisation and its employees. While health, wellbeing, and safety of the team were the first priority, with work-from-home arrangements put in place, preserving as many jobs as possible was key. In order to achieve this, and in consultation with employees, the Company utilised a combination of salary reductions for executives, senior management, and the Board. A reduction in the number of days worked for other team members, coupled with the government’s JobKeeper payments were also utilised. Strategic focus during this time was on supporting take- away options from Entertainment Merchants, helping Fundraiser groups to prepare for fundraising in a different environment, and the significant technology transformation that is being undertaken in the coming years. We have remained vigilant in managing austerity measures across the business. The Company has now refocused its attention on the delivery of its technology transformation, the stengthening of consumer sentiment, and ensuring the business is well placed in a post Covid-19 environment. The Company will continue with its planned focus to support Fundraiser groups and their fundraising inititatives, as well as our Merchant partners. CHAIRMAN’S INTRODUCTION 2 IncentiaPay would like to acknowledge the continued We are most grateful for support from our largest support of its largest shareholder and creditor, shareholder, who has reinforced its ongoing Suzerain, during this difficult time. In February commitment and belief in the business, the value 2020, Suzerain converted $19,300,257 of its debt of its underlying assets, the Company’s turnaround into 410,643,766 ordinary shares (4.7c per share), strategy and our technology transformation focus. leaving approximately $500,000 of secured debt, and between February and May provided a further $9.825 million loan facility for the Company to pursue additional growth over the medium to long term. The Board would also like to acknowledge and thank its employees who have remained dedicated and committed to the organisation throughout a challenging period. In recognition, the Board approved an Employee Gift Plan at the end of June, In addition, a further $1.2 million facility has been which will be finalised over the coming months, approved, to be drawn down for transformational following which shares will be issued. On behalf of the Board, I would like to thank our shareholders, our clients and our employees for their support and contribution. capital expenditure to be agreed between the Company and the lender, Skybound Fidelis Investment Limited as trustee for the Skybound Fidelis Credit Fund (Skybound) - a related entity of Suzerain. This funding is important for the business’ focus and its use of technology to transform and advance the Company in the fintech industry. The first application of this funding was announced to the market on 3 August 2020 and is a multi- year licensing agreement to partner with Paywith Worldwide Inc. (Paywith) - to combine it’s Processing STEPHEN HARRISON Engine Offers Marketplace and Syndication Platform CHAIRMAN with our strong content and deep relationships - to deliver new products and further enhance our customer value proposition. 3 CHAIRMAN’S INTRODUCTION 4 CEO’s Operating Review 55 CEO’S OPERATING REVIEW Looking back over the past financial year, there is much for the team at IncentiaPay to be proud of. The transformation that we commenced executing on at the start of FY2020 is clearly moving us in the right LEVERAGING UNIQUE STAKEHOLDER RELATIONSHIPS We have a unique relationship between our Fundraiser groups, Merchant partners and Member base. Coupled with our Enterprise clients, it presents us with a competitive advantage that is not easy to replicate. All of our underlying strategic foundations are built with these stakeholders in mind – they underpin the workings of our core business. direction, despite complexities and delays introduced by MEMBER BASE Covid-19. • We have a premium and affluent member base While there is certainly still a long road ahead of us, we • We have a known renewal rate of 50.2 per cent with also need to acknowledge the significant progress that Members that redeem 12 or more offers a year has been made in the turnaround of the organisation, the building of our business foundations and the alignment on our longer-term strategy. While our restructure was significant, so was the unwavering commitment of our team to our customers - Members, Fundraiser groups, Merchant partners, and Enterprise clients. I would like to acknowledge the hard work and dedication of our employees whose parallel work efforts on customer service and transformation were simultaneously achieved amidst a pandemic that has significantly impacted our team, sales revenue, and entire network of stakeholders. MERCHANT PARTNERS • We have one of the largest databases of quality Merchant partners in Australia and New Zealand • Unique coverage across multiple category types including dining, travel, activities, and retail • Best in class savings that are valid year-round without multiple restrictions, unlike other market players • Members have access to some of the most exclusive restaurants, wine dinners, and experiences, all at reduced prices As I present my first formal letter as your CEO, there FUNDRAISER GROUPS is still much work to be done, but I am pleased with the outcomes of our hard work, and confident that IncentiaPay is far better positioned to capitalise on the opportunities before us. A SOLID FOUNDATION TO BUILD ON We have the support and backing of our major shareholders, cash funding and enviable assets. We have a brand with more than 26 years of history, a • We are strongly anchored in local communities with deep connections across our Fundraiser groups • We provide a unique yet simple fundraising opportunity for our Fundraisers and their supporters, who in turn, are our Members • Fundraisers have always been and will continue to be core to our value proposition ENTERPRISE CLIENTS channel of more than 15,000 Fundraiser groups across • 35+ corporate clients Australia and New Zealand selling Entertainment Memberships, a Merchant partner base of almost • Clients across multiple industries including banking, insurance, superannuation, utilities, industry bodies 9,000 organisations offering goods and services across and associations 20,000 merchant locations, and a Member base of • Widespread geographic footprint with broad depth more than 590,000 people (including Entertainment and breadth of offers built up over many years, and subscriptions, Frequent Values subscriptions and applicability of interest to a wide end-user member Enterprise clients). base that is difficult and costly to replicate CEO’S OPERATING REVIEW 66 FOUR-PHASED APPROACH FOR THE ROAD AHEAD In December last year at the Annual General Meeting, I defined IncentiaPay’s four-phased approach for the transformation. It consisted of the following: 1. TURNAROUND • Cost reduction • Book to digital transition • Focus on core business • New channels 3. STRATEGY • Medium to long-term corporate strategy • Organic growth • Inorganic growth 2. FOUNDATIONS • Platforms • Product • Team • Operating model 4. BRAND • Awareness & profile • Media relations • Investor relations TURNAROUND 100 per cent digital A key decision was also made over the past financial year to transition the Company to a digital-only world. The organisation, which has sold the iconic Entertainment book to its Members for 26 years made a strategic decision that from 1 June 2020, the book would no longer be sold. In addition to cost savings from a logistics and printing perspective, additional benefits also included: • App members redeeming at higher levels than book members and gaining greater value; • a full 12-months of validity from the date purchased; • a more environmentally sustainable delivery mechanism; • a more user-friendly experience; • the ability to add new offers at any time and allow members to take advantage of them instantly; • the ability to share a Membership across multiple devices; • greater ability to increase member retention; • better access and connection to our members via IncentiaPay was a Company in need of significant electronic communications; and, restructure, as evidenced by our FY2019 financial results. • an important step towards our fintech future. Substantial progress has been made over the past eight months with our turnaround on track, our commitment to a digital future without the iconic Entertainment book completed, and a 54 per cent reduction in our underlying operating loss from $7.4 million in FY2019 to $3.4 million in FY2020. Underlying operating loss in FY2020 was impacted by the application of AASB 16, an accounting standard that removes operating lease payments off the Profit and Loss Statement and onto the Balance Sheet, and is instead replaced by depreciation and interest which appears outside of EBITDA reporting. The net effect is the removal of $1.9 million to underlying operating loss. Overall, the cost base going forward was reduced, in particular: • we reviewed and rationalised branch-based expenditure including early termination of leases where appropriate; • baseline IT expenditure was reduced as part of an IT infrastructure review; A digital transition campaign was put in place at the end of 2019 to manage the shift of book Members to the App, including free trials to encourage take up. The outcome has been in line with Company expectations, based on general attrition rates, this being the first time a book is not available, and the effects of Covid-19 on the 2020 sales season. Paramount to the turnaround was returning our attention to the core of the Entertainment business and a focus on our Member base, Merchant partners, Fundraiser groups and Enterprise clients. By better understanding the needs of our audiences and building value propositions to serve them, we will gain far more from these mutually reinforcing relationships. Over the past financial year, there have been a number of high-level initiatives undertaken. Member base The Member joining process was revised, with an improved look and feel and a refreshed interface to • we consolidated our payroll systems and moved onto a lessen barriers and move a buyer from consideration to single payment cycle allowing better cash control; and, purchase more quickly and easily. • we implemented tighter controls over expenditure processes including the implementation of a purchase order system. We also launched 12 and 24 month memberships with three new product options and new standard pricing, giving the opportunity to subscribe at any time for a full year of membership from any start date. This change in 7 product pricing has increased the average sale by Enterprise clients 13 per cent so far, over an eight-month period. Focus over the past financial year has been on Also new to the product mix was the opportunity to servicing and protecting the existing Enterprise gift an Entertainment Membership online and instantly clients. The team have built up long-term relationships deliver it. This was launched in 2019 for Christmas. with Enterprise clients and work closely to implement Merchant partners As part of the organisational restructure in October, the travel and leisure department were amalgamated with the Merchant business development team to create a reduced Partnerships team. The team took responsibility for all acquisition, retention, and servicing of content clients across Entertainment memberships, Frequent Values and Enterprise clients, with accounts reallocated due to the decrease in team members. To facilitate better Merchant servicing with a smaller team and support previous areas that were handled by an in-house production team, the process to automate Merchant onboarding, and manage content changes and additions commenced. This has resulted in the health checks and monitor results. Campaigns for Enterprise clients focused on driving activations for the Frequent Values loyalty membership among their customer base, with redemption-based marketing that showcased the value of offers through a scheduled program of client communications and highlighted available and new offers. This was effective in assisting with activations and renewals as evidenced by a large corporate client reporting a reduction in its lapsed customer rate of over 1.5 per cent, representing a seven-figure cost saving. While new sales were a secondary focus in FY2020, we continued to field interest, signing a large corporate in-house build of a product that can be integrated into bank, as well as one of Australia’s largest insurance other technology systems in the future as needed. companies. As at the end of June 2020, the seasonal recommit of Website and App enhancements merchants across Australia and New Zealand saw a Several improvements have been made to the 81 per cent retention rate. Entertainment website and App functionality. Among Fundraiser groups We have worked closely with our Fundraiser groups over the past financial year to deliver more value. We launched a new Fundraiser support program, to include education and better training, as well as a digital asset management solution to help store, organise, manage, create, and distribute Fundraiser marketing assets. The software solution allows the organisation to track and analyse the use of digital assets by the Fundraiser groups to better communicate and market to them. The servicing of Fundraiser groups was also restructured during the past financial year, with smaller Fundraising groups moving to an internal inside sales team, and an external call centre. In response to the need to decrease expenditure due to Covid-19, all accounts were temporarily brought back in-house and reallocated to existing account managers. We continue to use a flexible model that enables us to scale up and down our need for external resourcing. the most significant for Members included a new website homepage and new online member journey that changed the purchase, activation, and renewal flow, enabled the bulk purchase of online subscriptions, and introduced a membership gifting service. Tagging for revenue source tracking and optimisation purposes along with Google Ad-Words support was also introduced, as was the enablement of promotional codes and back-end redemption tracking for member campaign execution, and a postcode search page to find offers ‘near me’. A number of administration improvements were made to the Fundraiser and Merchant portals of the Entertainment website, including improved functionality to reset forgotten account keys, account numbers and account passwords, and view Fundraiser balances for commission raised. From an internal perspective, improvements were made to back-end administration portals to improve process efficiency, and benefit from better reporting functionality. CEO’S OPERATING REVIEW 8 FOUNDATIONS We worked on defining and implementing the foundations required for an efficient, long-term business to maximise customer focus and take advantage of market opportunities. This included (CXO), Toby Ellis, our existing GM of Sales was appointed as our Chief Revenue Officer (CRO), and Stacey Hampton remained as our existing General Manager of People (GM People). Organisational restructure reviewing and redefining our team, structure, During the past financial year, IncentiaPay underwent platforms, and culture. Building a high performing team During the past financial year, we have significantly enhanced our Leadership Team with the following appointments; Ben Newling, our existing GM of Commercial was appointed to the position of Chief Operating Officer (COO), Linda McDonald was appointed as our Chief Customer Experience Officer a significant organisational restructure, which saw a decrease in employee numbers. The largest area of restructure was in the Sales Team, as part of the Company’s drive for better efficiency and effectiveness. This resulted in the formation of an Inside Sales Team focused on the acquisition and account management of our smaller Fundraiser groups, and in-bound enquiries. 9 Building platform capability Impact of Covid-19 The two areas in our business where platforms play a At the timing of preparing this Annual Report, the significant role in our future are Customer Experience Covid-19 pandemic continues to evolve and change, (including Marketing), and Technology. Historically, we and the situation differs in Australia by state. As such, have underinvested in building platform capability in the Board and Management continue to monitor both of these areas. Over the past financial year, we have engaged with our the situation and adapt. The virus has impacted the business in its entirety, as well as all its key existing and various external providers to implement stakeholders. a transformation plan that going forward, will Merchant partners have been severely affected with accelerate and better support the needs of our various the shutdown of restaurant dine-in, travel restrictions stakeholders and help us to access untapped market in place and the temporary closure of many leisure potential. activities. As a direct response to the effect of Covid-19, Transforming our core with culture During the past financial year, we commenced the transformation of our corporate culture, with a focus on understanding the Company’s mission, and the values and behaviours that we wish to uphold. The Company cemented and socialised its mission to create connection, a sense of belonging and a clear purpose across all our stakeholders. As a loyalty platform, our purpose is to create communities where everyone benefits, through experiences, savings, philanthropy, and the building of businesses. We also committed to defining a Company direction that gave purpose to the roles of our employees and forming, “The Entertainment Way”, and in so doing, we defined an agreed set of values to work to – Community, Challenge, Courage, and Together. We will come together, challenge ourselves and grow in support of the Entertainment community. This new “Way” is centred on a “One Team” approach in service to our stakeholders. We have successfully spent the past six months living our new culture, improving communications and information sharing, identifying the best platforms to do so, and providing as much transparency as possible with regards to the decisions that are made. This has been particularly important from the onset of Covid-19, where we were forced into a work environment that saw us collaborating from afar and unexpectedly changing our short-term strategic focus. Despite challenging times, we have upheld the corporate values and behaviours that were defined, and I am immensely proud of the team. the Company pivoted from a dine-in, to a takeaway focus, launching the #EatAloneTogether campaign in conjunction with the Restaurant & Catering Association of Australia (R&CA) - its purpose to drive immediate offer redemptions and support customer traffic to Merchant partners. We will continue to work with affiliated associations such as R&CA to evolve how we assist our Merchant partners through these challenging times, and evolve campaigns such as these to maintain relevance like the shift from supporting #EatAloneTogether to #TakeAwayTuesdays. The virus is expected to impact Fundraisers for the remainder of the year who are now unable to raise money as they have traditionally done. With physical events significantly impacted in the foreseeable future, there is a need to find new approaches to engaging with and gaining financial support. Entertainment’s new 100 per cent digital platform is a simple, low cost mechanism to aid our Fundraiser Groups in raising those funds. Commencement of the fundraising season which usually starts in March was delayed by more than three months, as were Entertainment’s Fundraiser group launches which pivoted to focus on helping local communities. With unemployment rates growing, Members are facing economic hardship due to job losses or decreased income. As at the date of this report, renewal rates are lower than in previous years, with the possibility that redemption of offers will also be lower in the coming financial year than in previous periods. The outcome of this has been financially detrimental to the organisation, delaying the launch of sales season and increasing the Company’s requirements for liquidity, and funding. Due to far lower than expected member sales, there was a material impact on revenue between March and August 2020. CEO’S OPERATING REVIEW 10 STRATEGY At the end of 2019, IncentiaPay commenced a strategic engagement to review and document the medium to long- term corporate business strategy. As we move through the current turnaround phase and focus on building the business foundations, of equal importance is how we both execute in the short term, and position ourselves well to take advantage of the longer-term opportunities to 2023 We will partner with our Merchants to continue to drive value and new customers to their businesses, and enhanced insights to assist them in delivering a stronger business outcome. We will use our existing marketing and automation platform more strategically to target current and future Members with more relevant product offers, communications, and campaigns that deliver even and beyond. We have engaged a corporate consulting greater performance. agency to work with the business to define our approach, We will utilise our relationships with Enterprise clients in and we look forward to working through and sharing these healthcare, telecommunications, and superannuation to plans with the market in due course. target their customer bases fuelling both our acquisition Corporate governance and risk management IncentiaPay’s Board remain strongly committed to sound corporate governance practices and to managing risk to protect shareholders, employees, partners, customers, the environment, Company assets, and its reputation. The Board sets the risk appetite of the business to ensure that operational direction is consistent with the goals of the Company. For more information on our corporate governance, please refer to the corporate governance statement on the IncentiaPay website at www.incentiapay.com. For an outline of business risks, please refer the Business Risks section of this Annual Report. Looking ahead growth strategy and our Enterprise client engagement. Technology and platforms are key to our current and future success. On 3 August 2020, we announced a strategic partnership with Paywith, an innovative fintech company with a proven track record in building game changing offer syndication, payments, and rewards solutions. This is a key step forward in our transformation strategy, with an impending product suite that is going to transform the rewards and payment industry, and positively impact thousands of not-for-profits, schools and associations. We look to our technology focused future in the fintech industry. We will leverage data and insights, improve participant experience, build member scale, focus on the breadth and depth of Merchant partner content, Our turnaround is on track. Despite Covid-19 delays, it and better support Fundraiser groups. is still expected to complete towards the end of next financial year. We have made substantial progress on business foundations and will continue to define and refine our overall strategy for FY2023 and beyond. We are sufficiently capitalised, with Suzerain, our largest shareholder continuing to demonstrate its ongoing confidence and commitment to the business so we can address the significant and untapped market potential we know exists. We are working on enhanced value propositions for Members, Fundraisers, and Merchants. We intend to improve the current Fundraiser portal, as well as the process by which Fundraiser groups join Entertainment. We will create a more user friendly, automated, quicker, and easier process, that is facilitated by software, and allows these groups to access Fundraiser material needed in a manner we can analyse. A future that works for everyone We have strong foundations, a significant opportunity to deliver better value to customers and shareholders and plans to execute. I would like to thank our Members, Fundraisers, Merchant partners and Enterprise clients for their loyalty, use of the platform and for being our most vocal champions. I would like to thank the team at IncentiaPay, including the Board, for their hard work, dedication, sacrifice, and customer focus, in a period that has been extremely challenging. Finally, thank you to our shareholders for your faith in the longer-term potential of this Company. HENRY JONES CHIEF EXECUTIVE OFFICER 11 CEO’S OPPERATING REVIEW 12 Financial Review 131313 F I N A N C IA L R E V I EW Gross revenue for FY2020 was $42.2 million, underlying EBITDA for FY2020 was a loss of $3.4 million, and negative operating cash flow was $13.8 million. Net Membership revenue during FY2020 was lower than expected due to a delay in the formal commencement of the 2020 sales season, originally scheduled for February. The launch was rescheduled to June 2020 as a series of virtual events, due to restrictions placed loss after tax (NLAT) from ordinary activities was on large gatherings. In prior years, the sales launch was $24.7 million. Australian revenue accounted for a series of face to face events that spearheaded the $37.6 million, or 89.0 per cent (FY2019: $59.2 million, seasons Fundraiser group activities. 91.8 per cent), while New Zealand revenue accounted This disruption led to lower than anticipated activity for $4.6 million, or 11.0 per cent (FY2019: $5.3 million, from the fundraiser channel, and accordingly subdued 8.2 per cent). G R O S S R E V E N U E sales to members. In addition to launch disruption, access to membership benefits has temporarily reduced the appeal of an Entertainment subscription, Overall gross revenue for FY2020 was $42.2 million and uncertainty associated with job security has also compared to $64.6 million in FY2019. This included driven down demand. $2.5 million, or 0.6 per cent from fee income and paid Paid advertising revenue is down on the prior year due advertising (2019: $5.4 million), $24.8 million, or to the move away from printed books to digital-only 59 per cent from membership sales (2019: $28.6 memberships. This reduction was expected given the million), $4.1 million, or 1.0 per cent from Enterprise nature of the change and the popularity of the printed client sales (2019: $3.3 million) and $10.7 million, or 25.4 per cent from gift card sales (2019: $27.3 million). Government assistance provided during the calendar year was $1.05 million (compared to no government assistance in the previous corresponding period) and consisted of a cash boost of $0.15 million and JobKeeper payments of $0.9 million. book with both Entertainment Members and Merchants. The Company is repositioning the advertising product offering to capitalise on the digital platform moving forward. N E T LOSS AF TE R TA X AN D I M PAI R M E NTS Reported net loss after tax (NLAT) from ordinary activities in FY2020 was $24.7 million compared to a net The decrease in revenue was predominantly attributed loss after tax from ordinary activities in FY2019 of to a $16.6 million or a 61.0 per cent decline in gift card $37.9 million. The net loss was predominantly attributed to: sales from $27.3 million down to $10.7 million; a • a 35.0 per cent or $22.4 million reduction in $1.2 million or 36 per cent decline in paid advertising underlying revenue; and travel from $3.3 million down to $2.1 million; a • transformation and restructure costs incurred to pivot $3.8 million or 13.0 per cent decline in membership the business from print to digital-only memberships; sales from $28.6 million to $24.8 million; and, a • impairment of the deferred consideration from the $0.8 million increase in Enterprise client revenue from Bartercard divestment; $3.3 million to $4.0 million or a 24.0 per cent increase. • impairment of leasehold improvement assets due to A review of gift card offerings was undertaken midway through FY2019, with a view to only offer gift cards that provided a positive margin and contributed to overall business objectives. The prior year’s gift card revenue included those gift cards that were subsequently removed from Entertainment’s offering. Furthermore, gift card revenue was severely impacted towards the second half of the year due to Covid-19. branch closures; • impairment of Entertainment Digital intangible assets prior to disposal in early July 2020; • impairment of goodwill given the assessment of the net present value of discounted cash flows associated with the Entertainment cash generating unit; and, • acceleration of amortisation for technology related intangible assets due to the technology transformation initiative. FINANCIAL REVIEW 1414 14 Despite a reduction in gross revenue and higher than expected NLAT, the NLAT has reduced from the prior year due to the transition from a printed book to a digital-only Entertainment membership, resulting in reduced production and logistics costs. Furthermore, a restructure of operations and the reduction of employee headcount has successfully removed fixed employee related costs from the business, while the closure of branches reduced property related fixed costs. Additionally, the prior year’s NLAT was impacted to a greater extent by impairment adjustments to goodwill. The Company has also taken active steps in the management of costs due to challenging conditions brought on by reduced revenue and the delayed sales season launch. These included negotiating with property managers for rent relief, employees’ salaries reduced by between 10 per cent and 40 per cent, negotiating delayed payments to suppliers and accessing all available support provided by both Federal and State governments, including accessing cash grants D E B T M A N AG E M E N T A N D B A N K I N G COV E N A N T S During FY2020, IncentiaPay continued to review, assess, and manage its funding and capital requirements. This has been a particular focus for both the Board and Management, given the effects of Covid-19, as well as the focus on rebuilding the core business over the short to medium term. As announced on 28 February 2020, the Company obtained additional unsecured funding from its major shareholder, Suzerain Investments Holdings Ltd (Suzerain) of $5.8 million to support the business in expediting revenue generating initiatives. The Company also announced on 4 June 2020, that Suzerain agreed to increase the facility by $4.0 million for working capital and operational requirements. Furthermore, an additional $1.2 million facility was secured for transformational capital expenditure, from Skybound Fidelis Investment Limited as trustee for Skybound Fidelis Credit Fund. and deferment of tax obligations. This will continue into D I V I D E N D S No dividend has been declared in relation to the FY2020 results. The Board of Directors of IncentiaPay do not expect to declare any dividends. FY2021, thereby accessing all available cost reductions and government support. T R A N SAC TI O N , I N T E G R ATI O N A N D R E S T R U C T U R I N G CO S T S The Company continued with the restructure program which commenced in the second half of FY2019, with the focus to remove ongoing fixed costs from the business. In line with that, the Company incurred restructure costs associated with employee termination and redundancies. Furthermore, the Company continued to review leased office space and terminated two leases early during FY2020. D I S CO N TI N U E D O P E R ATI O N S As part of the ongoing review of operations of the Company, the Board commenced the disposal of the assets associated with MobileDEN, which was then finalised on 1 July 2020. This transaction did not result in the divestment of any entities, as it was structured around the disposal of associated assets of the MobileDEN platform. 15 16 SECTION 0 | TITLE TO BE CONFIRMEDLeadership Team 1717 B OA R D O F D I R E C TO R S Meet IncentiaPay’s Board of Directors – a group of knowledgeable business executives with a track record of growing and building businesses. STEPHEN HARRISON CHAIRMAN Stephen has over 30 years of experience in the financial services, funds management, M&A, private equity, and accounting fields - primarily focused on the energy, technology, IT services, infrastructure, financial services, health, entertainment, and natural resource sectors. He has held Director positions with international fund manager subsidiaries, Investec Funds Management, and the Australian subsidiary of US based fund manager Sanford C. Bernstein. He has been a founder and held Directorships in a number of unlisted and listed companies both in Australia and internationally. He is currently the Chairman of two other public companies in Australia; NobleOak Life Limited and Conscious Capital Limited. JEREMY THORPE NON-EXECUTIVE DIRECTOR Jeremy Thorpe holds BA and LLB degrees, is a qualified attorney in South Africa, and the Managing Director and Chief Executive Officer of Skybound Capital Australia. He serves on the boards of all subsidiary and associate companies within Skybound Australia’s diverse range of investments and is directly responsible for their performance and investment returns. He has over 30 years of experience in corporate finance, private equity, consumer and business credit, and structured finance. In the recent past, he has served on the Board of the National Credit Providers Association in Australia. CHARLES ROMITO NON-EXECUTIVE DIRECTOR Charles Romito is an experienced management consultant with an extensive background across Venture Capital/Private Equity, Lead Syndicate Investing, and Management Academia. His expertise lies at the intersection of innovation management, growth strategy and business transformation; and he has applied this to the benefit of blue-chips, family offices and start-ups alike. He was previously in the London office of the global strategy consultancy McKinsey & Company and built on this with an Operating Partner/COO role in a VC fund. He has since spent most of this decade as a sought-after advisor to both private investors and corporates. Charles hold an M.Sci (Physics) and a PhD (Innovation Management) from the University of Cambridge. D E A N PA L M E R N O N - E X E C U TI V E D I R E C TO R Dean Palmer is an experienced business professional with more than 20 years of experience across a variety of industries including finance, property, and funds management. He is the founder and CEO of Skybound Fidelis Investment Limited - a specialist structured finance, commercial credit, and property fund manager. He also serves on the boards of all subsidiary and associate companies within Skybound Australia’s diverse range of investments in Australia. Dean holds a Bachelor of Commerce, Bachelor of Laws and is a member of Chartered Accountants Australia and New Zealand. LEADERSHIP TEAM 1818 E XC E CUTIV E TE A M IncentiaPay has an outstanding leadership team with a deep history in business management, technology, and marketing. H E N RY J O N E S C H I E F E X E C U TI V E O F F I C E R Henry Jones has more than 25 years of executive experience, predominantly in the technology sector, having started, stabilised and grown businesses, both regionally and globally. Prior to IncentiaPay, Henry was with IBM where he held senior positions across Australia, New Zealand, and North America. Henry is also active with a number of smaller entrepreneurial ventures, as a mentor and investor. His role as CEO is key to leading and accelerating the Company’s turnaround and building on its existing foundation to set the strategy for future growth. Henry has an MBA from Harvard Business School, an LLB (Law) and a BA (Economics and Politics) from the University of Melbourne. B E N N E W L I N G C H I E F O P E R ATI N G O F F I C E R Ben Newling has more than 15 years of experience across general management and corporate advisory within investment banking, retail banking, and technology. His executive experience covers equities, capital markets, M&A’s, and people management. His role as COO spans commercial and legal compliance, finance, operations and human resources. Ben has a Master of Business Administration (MBA) focused in Finance and Financial Management Services from the Macquarie Graduate School of Management. L I N DA M C D O N A L D C H I E F C U S TO M E R E X P E R I E N C E O F F I C E R Linda McDonald has more than 20 years of experience in delivering exceptional results in the retail, FMCG and consumer healthcare industries, having held several senior executive leadership roles in Marketing, Customer experience, eCommerce and Sales. Her role as CXO is key to driving significant revenue, the creation of a transformation digital program and a clear focus on customer acquisition, retention, and value growth. Linda has a Bachelor of Commerce (Marketing) from the University of Wollongong and is currently completing her MBA at the Macquarie Graduate School of Management. 1919 TO BY E L L I S C H I E F R E V E N U E O F F I C E R Toby Ellis has more than 20 years of experience in sales and distribution, customer experience, start-up commercialisation, emerging technologies, telecommunications and enabling infrastructure, financial services, and transformation, across Australia and Asia. His role as CRO is key to driving revenue and growth across all the Company’s channels. He is also responsible for Merchant and Partner engagement. Toby has numerous finance and project management qualifications, including an MBA from the Macquarie Graduate School of Management. S TAC E Y H A M P TO N G M O F P E O P L E Stacey Hampton has over 18 years of experience managing people and culture across finance and technology companies, with previous roles focused on building a culture of engagement, diversity, and inclusion. Her role as GM of People is key to leading the Company through transformational change, focusing on employee lifecycle and workforce planning, attraction, selection, performance management, talent identification, leadership, learning and development, and reward and recognition. Stacey has a Bachelor of Business (Human Resources) and a Graduate Diploma Human Resources and Industrial Relations. LEADERSHIP TEAM 2020 Business Risks 21 B U S I N E S S R I S K S IncentiaPay faces a number of business risks that may impact the Company’s ability to achieve its strategic objectives and create shareholder value. The Board considers the following to be the key risks currently facing the business. RISK NATURE OF RISK There is no certainty that IncentiaPay will remain sufficiently funded. IncentiaPay recently secured additional funding from its largest shareholder Suzerain Investments Holdings Ltd (Suzerain) to provide it with sufficient working capital FUNDING for the short term. IncentiaPay continually manages its cash position and regularly monitors its investments to balance the risk, outlay, and timings. The Company has seen operating cash inflows decline due to the delay of the sales season, and restrictions affecting dining out and general travel expenditure. This has directly resulted in the Company making the difficult decision to stand down employees and reduce hours, as well as reduce salaries for senior management, executives and the Board. This has had a short-term impact on operational capacity. It has further impacted our working environment, with work from home arrangements MACRO-ECONOMIC put in place to protect the health, safety, and well-being of our employees. UNCERTAINTY DUE TO COVID-19 As the Covid-19 pandemic continues to evolve, the Board and Management continue to monitor the situation and adapt, and expenditure continues to be closely monitored and managed based on revenue. The team remains vigilant in managing austerity measures across the business whilst commencing the implementation of transformational initiatives to ensure the business is well placed in a post Covid environment. IncentiaPay’s success depends, in part, upon the continued performance, efforts, abilities and expertise of its key management personnel, as well as other management and technical personnel. The loss of the services of these personnel without replacement could have an adverse impact on the successful operation, management, and marketing of IncentiaPay’s product/service offerings and platforms. Further, a substantial increase in labour costs for employees or contractors may have an adverse impact on the financial performance and/or PERSONNEL financial position of IncentiaPay. The Board reviews the incentive structures of key personnel and senior management to ensure their remuneration is in line with the market, with a proportion deferred as a long-term/retention incentive. Management regularly undertakes succession planning analysis of key lead roles with the view to understand suitable internal talent and their readiness to assume these roles. BUSINESS RISKS 22 RISK NATURE OF RISK IncentiaPay is increasingly reliant on its technology to deliver services to its customers. In the event of a technology outage or planned upgrade not fit for purpose, this could create an adverse reputational or financial impact to IncentiaPay. TECHNOLOGY IncentiaPay has signed a multi-year Master Services Agreement with Paywith Worldwide to deliver core components of its future technology capability. The Apps and websites will remain the intellectual property of IncentiaPay and continuity of service to Paywith’s backend has been protected though a call option, and market standard escrow provisions. In addition, IncentiaPay have a technology team on staff, to ensure the ongoing performance of our systems. REGULATORY REPUTATION IncentiaPay is subject to substantial regulatory and legal oversight. The agencies with regulatory oversight of IncentiaPay and its subsidiaries include, among others, the ASX and ASIC. Failure to comply with legal and regulatory requirements may have a material adverse effect on IncentiaPay and its reputation among customers and regulators, and in the market. IncentiaPay has compliance frameworks, policies, and procedures in place to manage the risk of non-compliance and is prepared to play an active role in consulting with regulators on changes that could impact the business. Reputation risk may arise through the actions of IncentiaPay or its employees and adversely affect perceptions of IncentiaPay held by the public, customers, shareholders, or regulators. These issues include appropriately dealing with product outages or issues, potential conflicts of interests, legal and regulatory requirements, ethical issues, privacy laws, information security policies and sales and trading practices. Damage to IncentiaPay’s reputation may have an adverse impact on IncentiaPay’s financial performance, capacity to source funding, cost of sourcing funding, and liquidity. IncentiaPay actively manages the above risks by regularly monitoring its market reputation amongst customers and shareholders, as well as keeping an open dialogue with regulators and financiers. 23 RISK NATURE OF RISK New competitors are emerging in the loyalty and incentives markets, within which IncentiaPay operates. The loyalty space is particularly competitive, with many well-funded international competitors. An inability to adapt to technological advancement, including further digitisation and flexibility of products, could negatively impact the ability to attract customers and have a material adverse effect on the business of IncentiaPay. To mitigate this, IncentiaPay continues to invest in its Merchant content, including the signing of exclusive content where applicable. The Company’s ongoing investment in its digital technology and customer experience platform will also assist to lessen this risk. IncentiaPay is reliant on several third-party contractors. These third parties provide essential services, on an outsourced basis, including software and/or product development activities. Accordingly, IncentiaPay is reliant on contractors properly performing their contractual obligations and performance failures may have an adverse effect on IncentiaPay. IncentiaPay is also an extensive user of third party provided IT hardware and software platforms, systems, and infrastructure. IncentiaPay is reliant on these suppliers properly performing their contractual obligations, and performance failures or unreasonable price increases may have a material adverse impact on the Company. A failure by any of these suppliers to provide those services or a failure of their systems may adversely affect IncentiaPay’s ability to provide services to its customers. To minimise these risks, IncentiaPay actively engages with its key third party providers on a regular basis, and remains abreast of potential risks within these providers through regular interaction at the senior management level. Whilst every effort has been made to secure the technology supporting IncentiaPay’s various platforms, IncentiaPay does not intend to apply to register patents for all the intellectual property associated with the Entertainment and Frequent Values platforms. Other parties may claim infringement of patents, or alternatively other parties may develop and patent other very similar, potentially substitutable products, processes or technologies. IncentiaPay see the unique value of its intellectual property, in the content of its Entertainment and Frequent Values platforms, as a mitigant to this risk. COMPETITION THIRD PARTY FAILURE INTELLECTUAL PROPERTY RISK BUSINESS RISKS 24 Directors’ Report 25 DIRECTORS’ REPORT The Directors present their report on the consolidated entity IncentiaPay Ltd and its controlled entities (IncentiaPay) for the financial year ended 30 June 2020. The information in the CEO’s Operating Review and Financial Review forms part of this Directors’ report and should be read in conjunction with this PROCEEDINGS ON BEHALF OF COMPANY No person has applied to the court under Section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. section of the Annual Report. NON-AUDIT SERVICES GENERAL INFORMATION DIRECTORS The Board of Directors, pursuant to advice from the Audit and Risk Committee, is satisfied that the provision of non-audit services during the year is The following persons were Directors of IncentiaPay compatible with the general standard of independence Ltd during or since the end of the financial year up to for auditors imposed by the Corporations Act 2001. the date of this report: The Directors are satisfied that the services disclosed • Stephen Harrison (appointed 15 February 2019) below did not compromise the external auditor’s • Jeremy Thorpe (appointed 16 May 2019) • Charles Romito (appointed 28 June 2019) • Dean Palmer (appointed 15 August 2019) Particulars of each Director’s experience and independence for the following reasons: • all non-audit services are reviewed and approved by the Audit and Risk Committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; qualifications are set out on pages 28 to 29 of this and, report. DIVIDENDS PAID OR DECLARED No dividends were paid or declared for payment during the financial year. Investors should note that the Board of Directors of IncentiaPay Ltd do not expect to declare dividends from the Company during the next financial year. • the nature of the services provided does not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. The following fees were paid or payable to KPMG for non-audit services provided during the year ended INDEMNIFYING DIRECTORS AND OFFICERS 30 June 2020: The Company has entered into a deed of indemnity in favour of each Director and Officer of the Company. The indemnity operates so that officers are indemnified on a full indemnity basis and to the full extent permitted by law against liabilities and losses incurred as an officer of the Company. During or since the end of the financial year, the Company has paid premiums to insure the Directors $ Taxation services 79,874 Other services 725 Total 80,599 AUDITOR’S INDEPENDENCE DECLARATION and Officers against liabilities for costs and expenses The lead auditor’s independence declaration for the incurred by them in defending legal proceedings year ended 30 June 2020 has been received and can arising from their conduct while acting in the capacity be found on page 41 of the Annual Report. of Directors or Officers of the Company, other than conduct involving a wilful breach of duty in relation to the Company. The insurance is in accordance with section 199B of the Corporations Act 2001 (Cth). In accordance with the terms of the policy, the policy prohibits disclosure of its terms, including the amount of the premium. DIRECTORS’ REPORT 26 ASIC INSTRUMENT 2016/191 ROUNDING IN FINANCIAL STATEMENTS / DIRECTORS’ REPORT The Company is an entity to which ASIC Instrument 2016/191 applies. Accordingly, amounts in the financial statements and Directors’ report have been rounded to the nearest thousand dollars, or in certain cases, to the nearest dollar. MATTERS ARISING AFTER THE END OF THE FINANCIAL YEAR The impact of the Covid-19 pandemic is ongoing and it is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is rapidly developing and is dependent on measures imposed by the Australian Government and other countries. There were no other matters arising after the end of the financial year which may significantly affect IncentiaPay’s operations, their results in future financial years or the state of affairs in future financial years. ENVIRONMENTAL REGULATION The Group is not subject to any significant environmental regulation under a law of the Commonwealth or of a State or Territory. OPTIONS There were no options over ordinary shares granted to or vested by directors or other key management personnel as part of compensation during the year ended 30 June 2020. There were no ordinary shares of the Group issued on the exercise of options during the year ended 30 June 2020 and up to the date of this report. 27 I N FO R M ATI O N R E L ATI N G TO D I R E C TO R S A N D CO M PA N Y S E C R E TA RY S TE P H E N H A R R I S O N C H A I R M A N Board appointment 28 June 2019 as Chairman 15 February 2019 as Non-Executive Director 13 August to 14 October 2019 as Interim Executive Chairman Interest in shares and options Nil Special responsibilities Member of the Audit and Risk Committee Member of the Nominations and Remuneration Committee Directorships held in other listed entities Sinetech Ltd during the three years prior to the current year MEC Resources Limited Qualifications Bachelor of Economics, CPA Experienced Chairman and Director with a demonstrated history of working in the investment management industry. Skilled in negotiation, asset management, management, mergers & acquisitions, and start-ups. Experience J E R E M Y TH O R P E N O N - E X E C U TI V E D I R E C TO R Board appointment 16 May 2019 Interest in shares and options Jeremy Thorpe has an indirect interest in 422,386,092 shares. Jeremy Thorpe’s family trust is a unit holder in Australia Fintech Pty Ltd ACN 619 156 099 as trustee of the Australian Fintech Trust, and Jeremy Thorpe is an employee of a related entity of Suzerain. Special responsibilities Member of the Audit and Risk Committee Member of the Nominations and Remuneration Committee Directorships held in other listed entities during the three years prior to the current year Nil Qualifications Experience Bachelor of Laws (LLB) Bachelor of Arts Experienced in private equity, corporate finance, and consumer and business credit. DIRECTORS’ REPORT 28 C H A R LE S R O M ITO N O N - E X E C U TI V E D I R E C TO R Board appointment 28 June 2019 Interest in shares and options Nil Special responsibilities Member of the Audit and Risk Committee Chairman of the Nominations and Remuneration Committee Directorships held in other listed entities during the three years prior to the current year Nil Qualifications Doctor of Philosophy (Ph.D) MSci, Physics Experience Experienced management consultant with an extensive background in VC/PE and management academia. Expertise lies in the intersection of innovation management, growth strategy, and business transformation. Passion for business model innovation, growth, transformation, venturing and new businesses. Worked in VC/PE and been a Lead Syndicate Investor for several private deals. Published academic that has presented at world-leading conferences on innovation management and designed, developed, and delivered postgraduate and executive education to several thousand high-performers from all five continents. D E A N PA LM E R N O N - E X E C U TI V E D I R E C TO R Board appointment 15 August 2019 Interest in shares and options Special responsibilities Dean Palmer has an indirect interest in 422,386,092 shares. Dean Palmer’s family trust is a unit holder in Australia Fintech Pty Ltd ACN 619 156 099 as trustee of the Australian Fintech Trust, and Dean Palmer is an employee of a related entity of Suzerain. Chairman of the Audit and Risk Committee Member of the Nominations and Remuneration Committee Directorships held in other listed entities during the three years prior to the current year Nil Qualifications Experience 29 Bachelor of Laws (LLB), Bachelor of Commerce Member of Chartered Accountants Australia & New Zealand Chartered Accountant with more than 20 years of experience. Founder and CEO of Skybound Fidelis Investment Limited - a specialist structured finance, commercial credit, and property fund manager. Has held numerous senior executive roles both in Australia and the UK. B E N N E W LI N G CO M PA N Y S E C R E TA RY Ben was appointed as the Company Secretary on 11 February 2019. Ben is employed at IncentiaPay as the Chief Operating Officer. He holds an MBA. M E E TI N G S O F D I R E C TO R S During the financial year, the following meetings of Directors (including committees of Directors) were held. Attendances by each Director during the year was as follows: DIRECTORS’ MEETINGS AUDIT AND RISK COMMITTEE REMUNERATION AND NOMINATIONS COMMITTEE NUMBER ELIGIBLE TO ATTEND NUMBER ATTENDED NUMBER ELIGIBLE TO ATTEND NUMBER ATTENDED NUMBER ELIGIBLE TO ATTEND NUMBER ATTENDED Stephen Harrison Jeremy Thorpe Charles Romito Dean Palmer 15 15 15 11 15 14 15 10 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 This Directors’ report, incorporating the CEO’s Operating Review, Financial Review and the Remuneration report is signed in accordance with a resolution of the Board of Directors. STEPHEN HARRISON CHAIRMAN 18 September 2020 DIRECTORS’ REPORT 3030 Remuneration Report 31 R E M U N E R ATI O N R E P O R T F R A M EWO R K 1 . K E Y M A N AG E M E NT P E R S O N N E L KMP are those people who have authority and responsibility for planning, directing and controlling the strategic activities of the Group, directly or indirectly, including any Group (the Board) or any individual acting under delegated authority. K E Y M A N AG E M E N T P E R S O N N E L FO R T H E Y E A R CO M P R I S E D : N O N - E X E C U TI V E D I R E C TO R S A S AT 3 0 J U N E 2 02 0 NAME POSITION DATES Stephen Harrison Non-Executive Chairman Full Financial Year Jeremy Thorpe Charles Romito Dean Palmer Non-Executive Director Full Financial Year Non-Executive Director Full Financial Year Non-Executive Director Appointed 15 August 2019 E X E C U TI V E S A S AT 3 0 J U N E 2 02 0 NAME Henry Jones Ben Newling1 Darius Coveney Heidi Halson POSITION CEO COO Acting CEO EGM Retail DATES Appointed 14 October 2019 Full Financial Year Until 30 August 2019 Until 20 August 2019 1. For the purposes of this report, Ben Newling is a KMP from 30 August 2019. 2 . R E M U N E R ATI O N P O LI CY The remuneration policy of IncentiaPay has been designed to attract the most qualified and experienced KMP and align objectives with those of the business and shareholders. All executives receive a base salary which is based upon factors such as the length of service, experience, and skills, as well as superannuation as required by law. Executives may sacrifice part of their salary to increase payments towards superannuation. During the period, the Company had a Performance Rights Equity Plan (PREP) in place. The terms and conditions of the employee incentive plan were originally approved by shareholders on 5 April 2018. The PREP was wound up on 22 July 2019 as most eligible employees had left the business and the Board’s intention was to provide a more inclusive incentive plan for management and staff. The Board has approved an Employee Gift Plan, which will see the Company issue $1,000 of shares to eligible staff under section 83A-35 of the Income Tax Assessment Act 1997. The Board intends to issue theses shares from its placement capacity. Due to the impacts of Covid-19, the Board of Directors and KMPs temporarily reduced their remuneration by between 30 per cent and 40 per cent. Further, although not in the period, the Board approved a Loan Funded Share Scheme (LFS) for Henry Jones and Ben Newling on 23 July 2020, and an Employee Share Scheme for other senior executives. The Board approved Loan Funded Share Scheme is a three year long-term incentive plan for the CEO and COO, which will vest over a three year period. Vesting conditions related to achieving FY2021 Board approved budget, and for the FY2022 and FY2023 financial years, will vest where the share price is greater than $0.10 and $0.15 respectively. REMUNERATION REPORT 32 The Board approved Employee Share Scheme for senior management, will result in shares being issued into a trust controlled by the Company. These shares will be subject to the same vesting hurdles as the LFS. The Board’s policy is to review remuneration for KMP annually, based on market practice, duties and accountability. All remuneration paid to Directors and Executives is valued at the cost to the Company and expensed in accordance with Australian Accounting Standards. Independent advice is proactively sought when required, particularly around the employment arrangements of new KMP including long-term incentive plans. The maximum aggregate amount of fees that can be paid to Non-Executive Directors is subject to approval at the AGM. The maximum amount currently approved by shareholders is $500,000 per annum. 3 . R E M U N E R ATI O N CO M M IT TE E A N D E X E C U TI V E CO M P E N SATI O N The Remuneration Committee has the responsibility for providing advice in relation to the remuneration packages of senior executives, non-executive and executive directors. The Committee is also responsible for the design and oversight of any share option schemes, performance incentive packages, superannuation entitlements, and retirement and termination entitlements. The Remuneration Committee reviews the compensation package for senior executives on an annual basis and makes recommendations to the Board for approval. Compensation packages are reviewed and determined based on current market rates and benchmarked against comparable roles and companies of a similar size. The role, responsibility and charter of the Remuneration Committee was performed by the Board until 5 March 2020 when the Committee was re-constituted with Charles Romito appointed as Chairman of the Committee. 4 . R E M U N E R ATI O N O B J E C TI V E S A N D P R I N C I P L E S Remuneration packages are set at levels that are intended to attract and retain executives capable of managing the Company’s operations. The Company’s remuneration strategy is structured to: • ensure employee remuneration is fair and reasonable; • attract and retain high calibre executives; • align performance with shareholder value; and, • be easily understood by all stakeholders. 5 . R E M U N E R ATI O N F R A M E WO R K The Executive Remuneration Framework is characterised by Fixed Remuneration (base salary, superannuation plus other fixed benefits) and Variable/Performance Related Remuneration (including short-term incentive (STI) and long-term incentive (LTI) linked to performance). E M P LOY E E G I F T P L A N On 18 June 2020, the Board resolved to implement an Employee Gift Plan for all eligible employees under section 83A-35 of the Income Tax Assessment Act 1997. The Board accepts, since the onset of Covid-19, many staff have been working reduced hours or are on reduced salaries. Commensurate with this, the Board approved the scheme and all eligible employees will receive $1,000 of shares which will be issued from the Company’s placement capacity. Additional information is included in note 31 to the Financial Statements. F IX E D CO M P E N SATI O N This component is not performance linked and generally consists of salary, superannuation entitlements and a motor vehicle allowance. The base amount is reviewed annually by the Remuneration Committee for the Chief Executive Officer and other senior executives. Any adjustments made during the year will either be as a result of market rate changes in order for the Company to remain competitive, or to reflect any changes in the level of responsibility in the event the role has expanded. 33 P E R FO R M A N C E R E L AT E D CO M P E N SATI O N Performance related compensation includes both short-term and long-term incentives and is designed to reward key management personnel for meeting or exceeding their financial and personal objectives. The STI is an ’At Risk’ bonus provided in the form of cash and its calculation is based on the achievement of agreed KPIs. The LTI is provided predominantly as exposure to the price performance of ordinary shares of the consolidated entity, and to align management incentives with long-term shareholder value. SHORT-TERM INCENTIVES (STI) The STI performance target is a Board approved scheme in which executives are incentivised to increase revenue and decrease cost to maximise IncentiaPay earnings. Hurdles are set in order to incentivise improved business performance. Individuals have STI targets, as set out in their contracts, with final payment amounts subject to individual, divisional and group KPIs, as well as Board review and approval. LONG-TERM INCENTIVES (LTI) LTI’s are linked to share price performance and are provided to certain key management personnel as part of their remuneration package, at the discretion of the Board. There were no LTI arrangements in place during the period, however, LTI arrangements approved by the Board on 23 July 2020 include vesting arrangements on the achievement of Board approved budget and share price hurdles. The exercise prices are set at or above the share price on the date of issuance, and thereby assist in the alignment of management and shareholders. 6 . G R O U P P E R FO R M A N C E A N D C H A N G E S I N S H A R E H O LD E R W E A LTH The table below sets out summary information about the Company’s performance and its impact on shareholder wealth for the five years to 30 June 2020: FY2020 FY2019 FY2018 FY2017 FY2016 Revenue ($’000) 42,205 64,5721 75,8091 110,464 50,172 Profit/(loss) for the period before tax ($’000) (20,945) (27,367)1 (23,197)1 11,349 8,134 Dividends paid ($’000) - - 2,666 3,877 3,071 Share price as at 30 June $0.026 $0.045 $0.245 $0.740 $0.952 Change in share price ($0.019) ($0.200) ($0.495) ($0.212) $0.145 1. Amounts exclude discontinued operations. REMUNERATION REPORT 34 7. F U LLY PA I D O R D I N A RY S H A R E S H E LD BY K E Y M A N AG E M E NT P E R S O N N E L HELD AT 1 JULY 2019 RECEIVED AS PART OF REMUNERATION OTHER CHANGES HELD AT 30 JUNE 2020 DIRECTORS Jeremy Thorpe1 Dean Palmer1 EXECUTIVES Henry Jones - - - - - - 36,732,674 36,732,674 36,732,674 36,732,674 2,528,631 2,528,631 1. On 28 May 2020, Australia Fintech Pty Ltd as trustee for the Australia Fintech Trust, purchased 36,732,674 shares from Suzerain Investments Holdings Ltd. Jeremy Thorpe and Dean Palmer are Directors of Australia Fintech Pty Ltd and beneficiaries of the Australia Fintech Trust. 8 . LOA N F U N D E D S H A R E S H E L D BY K E Y M A N AG E M E NT P E R S O N N E L HELD AT 1 JULY 2019 CHANGE IN KMP STATUS CLOSING BALANCE DIRECTORS Iain Dunstan1 Darius Coveney1 3,035,714 2,678,571 (3,035,714) (2,678,571) - - 1. Iain Dunstan left the Company during the year ended 30 June 2019 and Darius Coveney left the Company during the year ended 30 June 2020. The shares will be returned to the consolidated entity and will be held in an Employee Trust. As at 30 June 2020, the shares had not been transferred to the employee trust, however, both individuals no longer qualify as KMP. 35     9 . D E TA I L S O F R E M U N E R ATI O N (K M P) Details of the remuneration of KMP of the consolidated entity are set out in the following tables. SHORT-TERM BENEFITS POST EMPLOYMENT BENEFITS LONG-TERM BENEFITS SHARE BASED PAYMENTS NON- MONETARY BENEFITS BONUS OTHER SUPER- ANNU- ATION OTHER LONG SERVICE LEAVE TERMINA- TION BENEFITS LONG-TERM INCENTIVE PLAN EQUITY SETTLED CASH SETTLED OTHER (E.G. HYBRIDS) TOTAL CASH SALARY AND FEES $ 2020 DIRECTORS9 Stephen Harrison1 145,156 Jeremy Thorpe6 74,542 Charles Romito7 83,220 Dean Palmer2,6 65,270 EXECUTIVES Henry Jones3 189,750 Ben Newling8 201,831 $ - - - - - - Darius Coveney4 94,717 3,590 Heidi Halson5 46,835 - $ $ $ - - - - - - - - - - - - - - - - 292 - - - 15,752 15,498 (68) 10,105 $ - - - - - - - - $ - - - - - - - $ - - - - - - 22,256 126,426 189,319 $ - - - - - - - - $ - - - - - - - - $ $ $ - - - - - - - - - - - - - - - - 145,448 74,542 83,220 65,270 205,502 217,329 120,495 372,685 1. Stephen Harrison was appointed as Interim Executive Chairman from 30 August 2019 to 14 October 2019. This amount includes remuneration related to that temporary appointment. Remuneration was paid partly in salary and partly to an associated entity. 2. Appointed as Director on 15/08/2019. 3. Appointed as CEO on 14/10/2019. Henry Jones is employed by IncentiaPay as a permanent full-time employee. For details relating to his notice period required to terminate his contract, and termination payments provided for under the contract, refer to page 39. 4. Terminated on 30/08/2019. Termination benefits include unused annual leave paid on termination. 5. Terminated on 23/08/2019. Termination benefits include unused annual leave, redundancy, and notice period. 6. Directors fees were paid to an associated entity of Jeremy Thorpe and Dean Palmer and a related party of IncentiaPay Ltd. 7. Directors fees were paid to an associated entity of Charles Romito. 8. Remuneration disclosed is for period as KMP. Ben Newling is employed by IncentiaPay as a permanent full-time employee. For details relating to his notice period required to terminate his contract, and termination payments provided for under the contract, refer to page 39. 9. All Directors are Non-Executive Directors other than where noted for an interim period. Directors do not receive performance related compensation and are not provided with retirement benefits, apart from statutory superannuation where applicable. REMUNERATION REPORT 36     SHORT-TERM BENEFITS POST EMPLOYMENT BENEFITS LONG-TERM BENEFITS SHARE BASED PAYMENTS CASH NON- BONUS OTHER SUPER- OTHER LONG TERMINA- LONG-TERM EQUITY CASH OTHER TOTAL SALARY MONETARY AND FEES BENEFITS ANNU- ATION SERVICE TION INCENTIVE SETTLED SETTLED (E.G LEAVE BENEFITS PLAN HYBRIDS) $ $ $ $ $ $ $ $ $ $ $ $ $ 2019 DIRECTORS6 Stephen Harrison1,5 26,820 Jeremy Thorpe3 10,007 Charles Romito - PREVIOUS DIRECTORS Murray d’Almeida1 42,975 Garth Barrett1 12,624 Chris Berkefeld1 138,186 Naseema Sparks1 128,073 EXECUTIVES - - - - - - - - - - - - - - Iain Dunstan2,5 245,343 375 70,832 Darius Coveney4 427,582 5,202 148,332 Heidi Halson 325,200 Toby Ellis 236,346 - - 17,500 - - - - - - - - - - - - 965 - - - 1,199 7,947 8,828 21,740 77,440 27,645 18,413 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 28,237 271,875 - - - - - - - - - - - - - - - - - - - - (27,933) (24,647) 72,706 - - - - - - - - - - - - - - - - - - - - - - - 27,785 10,007 - 42,975 13,823 146,133 136,901 338,594 905,784 443,051 254,759 1. Remuneration was paid partly in salary and partly to an associated entity. 2. Termination benefits include unused annual leave paid on termination. Negative share based payment is due to a reversal of share based payment previously recognised. 3. Directors fees were paid to an associated entity of Jeremy Thorpe and a related party of IncentiaPay Ltd. 4. Termination benefits include unused annual leave paid on termination, and contract termination costs agreed on 28 July 2019 but not paid until FY2020. Negative share based payment is due to a reversal of share based payment previously recognised. 5. Remuneration disclosed is for period as KMP. 6. All Directors are Non-Executive Directors other than where noted. Directors do not receive performance related compensation and are not provided with retirement benefits apart from statutory superannuation where applicable. 37     The proportion of remuneration linked to performance and the fixed proportion are as follows: FIXED REMUNERATION AT RISK - STI AT RISK - LTI FY2020 FY2019 FY2020 FY2019 FY2020 FY2019 DIRECTORS Stephen Harrison Jeremy Thorpe Charles Romito Dean Palmer PREVIOUS DIRECTORS Chris Berkefeld Murray d’Almeida Garth Barrett Naseema Sparks EXECUTIVES Henry Jones Iain Dunstan Toby Ellis Ben Newling Darius Coveney Heidi Halson 100% 100% 100% 100% N/A N/A N/A N/A 100% N/A N/A 100% 100% 100% 100% 100% 100% N/A 100% 100% 100% 100% N/A 87% 100% N/A 86% 80% - - - - - - - - - N/A - - - - - - - - - - - - N/A 21% - N/A 17% 4% - - - - - - - - - N/A - - - - - - - - - - - - N/A (8%) - N/A (3%) 16% The proportion of the cash bonus paid/payable or forfeited is as follows: CASH BONUS PAID/PAYABLE CASH BONUS FORFEITED FY2020 FY2019 FY2020 FY2019 DIRECTORS Stephen Harrison Jeremy Thorpe Charles Romito Dean Palmer PREVIOUS DIRECTORS Chris Berkefeld Murray d’Almeida Garth Barrett Naseema Sparks EXECUTIVES Iain Dunstan Darius Coveney Heidi Halson Toby Ellis Ben Newling Henry Jones - - - - - - - - N/A - - N/A - - - - - - - - - - 50% 75% 100% - N/A N/A - - - - - - - - - - - - 100% 100% - - - - - - - - 50% 25% - - N/A N/A REMUNERATION REPORT 38         1 0 . S E RV I C E AG R E E M E NT S Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: NAME Title Henry Jones Chief Executive Officer Agreement commenced 14 October 2019 Term of engagement Ongoing Details Termination of employment: • By either party on giving twenty-six (26) weeks’ notice; or • Immediately on payment in lieu of notice or if any of the conditions for summary terminations are met including serious misconduct, gross negligence, breach of contract, bankruptcy, crime, or repeated absence without explanation. Excluding payment in lieu of notice and statutory entitlements to accrued leave, the contract does not specify any termination payment. Equity compensation • Nil NAME Title Ben Newling Chief Operating Officer Agreement commenced 30 August 2019 Term of engagement Ongoing Details Termination of employment: • By either party on giving thirteen (13) weeks’ notice; or • Immediately on payment in lieu of notice or if any of the conditions for summary terminations are met including serious misconduct, gross negligence, breach of contract, bankruptcy, crime, or repeated absence without explanation. Excluding payment in lieu of notice and statutory entitlements to accrued leave, the contract does not specify any termination payment. Equity compensation • Nil 39 1 1 . R E M U N E R ATI O N CO N S U LTA NT IncentiaPay engaged a remuneration consultant in the financial year ended 30 June 2020. Details of the recommendations made by the remuneration consultant are as follows: • AON Rewards Solutions • The consultant provided a benchmarking report in relation to the CEO’s remuneration on comparable companies • The total consideration for this engagement was $6,500 (excl. GST) • The engagement was undertaken by the Chairman of the Nominations and Remuneration Committee in consultation with the Chairman of the Board • The Board is satisfied the recommendation was free from influence of KMP, given the selection of firm and the engagement was managed directly through the Nominations and Remuneration Committee REMUNERATION REPORT 40 Auditor’s Independence Declaration 41 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of IncentiaPay Limited I declare that, to the best of my knowledge and belief, in relation to the audit of IncentiaPay Limited for the year ended 30 June 2020 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG John Wigglesworth Partner Sydney 18 September 2020 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. AUDITOR’S INDEPENDENCE DECLARATION 42 Financial Statements 43 Financial I N C E NTI A PAY LTD A N D CO N TR O L LE D E NTITI E S CO N S O LI DATE D S TATE M E NT O F P R O F IT O R LO S S A N D OTH E R CO M P R E H E N S I V E I N CO M E FO R TH E Y E A R E N D E D 3 0 J U N E 2 02 0 CONSOLIDATED GROUP Direct expenses of providing services Revenue Impairments Employee expenses Depreciation and amortisation expense Building occupancy expense Finance costs Legal and professional costs Website and communication NOTE 2 3 3 3 3 3 3 Bad debts 3 Other expenses FY2020 $’000 42,205 (23,937) (4,990) (16,980) (5,466) (279) (1,295) (674) (2,017) (2,810) (4,702) FY2019 $’000 64,572 (41,919) (14,553) (19,141) (2,015) (2,943) (346) (2,622) (2,419) (447) (6,134) Operating loss before income tax (20,945) (27,967) Gain on disposal of equity accounted investment Loss before income tax Tax benefit/(expense) 4(a) Loss for the period Loss for the period from discontinued operations 24 Net profit attributable to: - (20,945) (3,717) (24,662) - 600 (27,367) (786) (28,153) (9,751) Members of the parent entity (24,662) (37,904) Other comprehensive income (Loss)/gain arising from translating foreign controlled entities from continuing operations Transfer of foreign currency translation reserve to loss of discontinued operations 20 24 (29) - 399 (208) Total comprehensive loss for the period (24,691) (37,713) Loss per share Basic loss per share (cents) 5(a) Loss from continuing operations Loss from discontinued operations Total Diluted loss per share (cents) 5(a) Loss from continuing operations Loss from discontinued operations Total (8.2) - (8.2) (8.2) - (8.2) (12.1) (4.2) (16.3) (12.1) (4.2) (16.3) The accompanying notes form part of these financial statements. FINANCIAL STATEMENTS 44 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S CO N S O LI DATE D S TATE M E N T O F F I N A N C I A L P O S ITI O N A S AT 3 0 J U N E 2 02 0 CONSOLIDATED GROUP NOTE FY2020 $’000 FY2019 $’000 Current assets Cash and cash equivalents Deferred consideration Trade and other receivables Inventories 6 24 8 9 Other assets 10 Total current assets Non-current assets Deferred consideration Right-of-use asset Property, plant and equipment 24 11 12 Deferred tax assets 4(c) Intangible assets 13 Total non-current assets Total assets Current liabilities Trade and other payables Lease liabilities Borrowings 14 15 16 Current tax liabilities 4(d) Deferred revenue Provisions Total current liabilities Non-current liabilities Lease liabilities Borrowings Deferred revenue Provisions 17 18 15 16 17 18 Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves 19 20 Accumulated losses Total equity 5,307 - 992 134 2,351 8,784 - 2,781 1,327 - 14,387 18,495 27,279 6,235 1,731 517 186 6,219 764 15,652 2,158 2,691 350 182 5,381 21,033 6,246 116,026 377 (110,157) 6,246 3,460 695 2,728 96 7,853 14,832 2,414 - 2,383 3,717 22,507 31,021 45,853 5,941 - 4,169 186 21,394 1,833 33,523 - 466 - 217 683 34,206 11,647 96,006 1,136 (85,495) 11,647 The accompanying notes form part of these financial statements. 45 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S CO N S O LI DATE D S TATE M E N T O F C H A N G E S I N E Q U IT Y FO R TH E Y E A R E N D E D 3 0 J U N E 2 02 0 ORDINARY SHARE CAPITAL ACCUMULATED LOSSES FOREIGN CURRENCY TRANSLATION RESERVE SHARE BASED PAYMENTS RESERVE TOTAL Balance at 1 July 2018 94,892 (47,591) 215 660 48,176 NOTE $’000 $’000 $’000 $’000 $’000 Comprehensive income Loss for the period Other comprehensive income Exchange differences on translation of foreign operations Transfer of foreign currency translation reserve to loss of discontinued operations 24 Total comprehensive loss for period Transactions with owners, in their capacity as owners and other transfers Shares issued during the period 19 Transaction costs 19 Movement during the period 20 Total transactions with owners and other transfers - - - - 1,155 (41) - 1,114 (37,904) - - - 399 (208) - - (37,904) 399 (208) (37,904) 191 - (37,713) - - - - - - - - - - 70 70 1,155 (41) 70 1,184 Balance at 30 June 2019 96,006 (85,495) 406 730 11,647 FINANCIAL STATEMENTS 46 INCE NTIAPAY LTD AN D CONTROLLE D E NTITIE S CO N S O LI DATE D S TATE M E N T O F C H A N G E S I N E Q U IT Y FO R TH E Y E A R E N D E D 3 0 J U N E 2 02 0 The accompanying notes form part of these financial statements. ORDINARY SHARE CAPITAL ACCUMULATED LOSSES NOTE $’000 $’000 FOREIGN CURRENCY TRANSLATION RESERVE $’000 SHARE BASED PAYMENTS RESERVE TOTAL $’000 $’000 Balance at 1 July 2019 96,006 (85,495) 406 730 11,647 Comprehensive income Loss for the period Other comprehensive income Exchange differences on translation of foreign operations Transfer of foreign currency translation reserve to loss of discontinued operations 24 Total comprehensive loss for period Transactions with owners, in their capacity as owners and other transfers - - - - (24,662) - - - (29) - (24,662) (29) Shares issued during the period 19 20,050 Transaction costs 19 Movement during the period 20 Total transactions with owners and other transfers (30) - 20,020 - - - - - - - - - - - - - - (730) (24,662) (29) - (24,691) 20,050 (30) (730) (730) 19,290 Balance at 30 June 2020 116,026 (110,157) 377 - 6,246 47 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2020 The accompanying notes form part of these financial statements. CONSOLIDATED GROUP NOTE FY2020 $’000 FY2019 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Government assistance received Interest received 33,126 (47,616) 677 25 86,175 (99,591) - 78 Net cash used in continuing operations 7 (13,788) (13,338) Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangibles Proceeds from sales of businesses 24 Proceeds from sale of unlisted equity investment Net cash used in investing activities Cash flows from financing activities Net proceeds from issue of shares 19 Proceeds of loan repaid from external parties Repayment of borrowings Proceeds from borrowings Payment of lease liabilities Interest paid Net cash from financing activities Net increase/(decrease) in cash held Cash and cash equivalents at beginning of financial period Effects of movements in exchange rates on cash and cash equivalents held (40) (169) 155 - (54) - - - 17,585 (1,610) (249) 15,726 1,884 3,460 (37) (1,597) (1,878) 2,058 600 (817) 1,114 800 (4,000) 8,635 - (221) 6,328 (7,827) 11,508 (221) Cash and cash equivalents at the end of the financial period in continuing operations 6 5,307 3,460 The accompanying notes form part of these financial statements. FINANCIAL STATEMENTS 48 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Note 1 Summary of significant accounting policies ........................................................................................................................50 Note 2 Revenue .................................................................................................................................................................................................. 57 Note 3 Expenses ................................................................................................................................................................................................ 59 Note 4 Income tax .............................................................................................................................................................................................. 61 Note 5 Dividends, earnings per share and franking credit ..........................................................................................................64 Note 6 Cash and cash equivalents ........................................................................................................................................................... 65 Note 7 Cash flow information ..................................................................................................................................................................... 66 Note 8 Trade and other receivables ......................................................................................................................................................... 68 Note 9 Inventories .............................................................................................................................................................................................. 71 Note 10 Other assets ........................................................................................................................................................................................... 71 Note 11 Right-of-use assets ............................................................................................................................................................................72 Note 12 Property, plant and equipment ...................................................................................................................................................74 Note 13 Intangible assets ................................................................................................................................................................................. 76 Note 14 Trade and other payables .............................................................................................................................................................. 79 Note 15 Leases ......................................................................................................................................................................................................80 Note 16 Borrowings ............................................................................................................................................................................................ 82 Note 17 Deferred revenue ...............................................................................................................................................................................84 Note 18 Provisions ............................................................................................................................................................................................... 85 Note 19 Issued capital ....................................................................................................................................................................................... 88 Note 20 Reserves .................................................................................................................................................................................................90 Note 21 Key management personnel compensation ......................................................................................................................... 91 Note 22 Auditor’s remuneration .................................................................................................................................................................... 91 Note 23 Interests in subsidiaries and business combinations ....................................................................................................... 92 Note 24 Disposal groups classified as held for sale and discontinued operations ............................................................ 92 Note 25 Parent company information .......................................................................................................................................................99 Note 26 Segment information .......................................................................................................................................................................101 Note 27 Capital and leasing commitments........................................................................................................................................... 102 Note 28 Contingent liabilities and contingent assets ...................................................................................................................... 103 Note 29 Financial risk management ......................................................................................................................................................... 103 Note 30 Related party transactions ......................................................................................................................................................... 109 Note 31 Events after the reporting period ............................................................................................................................................ 110 49 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 1 | S U M M A RY O F S I G N I F I C A NT timing of expected revenue over the next 12 months by ACCO U NTI N G P O LI C I E S delaying renewals, which has been taken into account in preparing the cash flow projections to assess the B A S I S O F P R E PA R ATI O N outcome of the going concern viability. These general-purpose financial statements for the year ended 30 June 2020 have been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards and Interpretations of the Australian Accounting Standards Board and International Financial Reporting Standards as issued by the International Accounting Standards Board At 30 June 2020 the Group had cash on hand of $5.3 million, net assets of $6.2 million and a net current asset deficiency of $6.9 million. During the year ended 30 June 2020, the Group incurred a net loss before tax from continuing operations of $20.9 million, including impairment of $5.0 million, and incurred net cash outflows from operating activities of $13.8 million. (IFRS). Consequently, this financial report is compliant The Directors have prepared cash flow projections with IFRS. IncentiaPay Ltd is a listed public company for the period from 1 July 2020 to 30 September 2021 incorporated and domiciled in Australia. The Company that support the ability of the Group to continue as a is a for-profit entity for financial reporting purposes going concern. Most notable aspects of the cash flow under Australian Accounting Standards. Material projections include: accounting policies adopted in the preparation of these • Business transformation centred around technology, financial statements are presented below and have been consistently applied unless stated otherwise. Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified where applicable by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. These audited consolidated financial statements were authorised for issue on 18 September 2020. G O I N G CO N C E R N The consolidated financial report has been prepared on a going concern basis, which contemplates the continuation of normal business operations and the realisation of assets and settlement of liabilities in the normal course of business. During the year the Group focused its efforts on transforming the business from a fixed membership period to a 100 per cent rolling digital membership. The digital membership was launched in November 2019 to capitalise on the Christmas season. The formal launch was scheduled for February 2020, however, due to Covid-19 restrictions, was delayed as a virtual launch to June 2020. Membership periods were extended beyond 12 months to acknowledge the impact of limited access to membership benefits and address concerns raised by members. These changes have impacted the to support revenue growth; • Improved trading conditions on a progressive basis to support merchant accessibility for members in the short to medium term; • Continued cost cutting through streamlining of activities and processes; • Continued receipt of government assistance; and, • Continued support from the Group’s major shareholder, Suzerain, through the availability of financing facilities and accommodative repayment terms. This includes an expectation that the Group will defer the repayment of an amount of $500,000 in respect of the interest bearing loan, which is a facility provided by Suzerain and its related entities (all facilities in note 16 collectively referred to as the Suzerain facilities) due to be settled on 30 September 2020, or to capitalise the repayment amount into the existing facilities. The funding of ongoing operations of the Group is dependent upon the Group continuing to access the Suzerain facilities and/or the Group reducing expenditure in-line with current cash and financing resources. As of 30 June 2020, the Group had undrawn financing facilities from Suzerain totalling $8.3 million. See note 16 for further information. This undrawn amount has reduced to $7.6 million at the date of the approval of this annual financial report. FINANCIAL STATEMENTS 50 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 The Directors have reasonable grounds to believe that PROCESSES APPLIED the ongoing financial support of Suzerain and its related entities is likely to continue and therefore, the going concern basis on which the financial report has been As a consequence of Covid-19 and in preparing these financial statements, management: prepared is appropriate. However, should the Group • Re-evaluated whether there were any additional areas not meet its cash flow projections, the achievement of judgement or estimation uncertainty beyond what of which is inherently uncertain and highly sensitive to has been disclosed above; assumptions made in respect of revenue performance, including not obtaining further financing from Suzerain and its related entities as required, there is a material uncertainty as to whether the Group will be able to continue as a going concern. • Updated its economic outlook – principally for the purposes of inputs into its Expected Credit Losses (”ECL”) through the application of forward-looking information, but also for the input into the impairment analysis of financial and non-financial asset classes In the event the Group is unable to continue as a going and disclosures such as fair values; concern, the Group may be required to realise assets at an amount different to that recorded in the Statement of Financial Position, settle liabilities other than in the ordinary course of business and make provision for other costs which may arise. A ) IMPACT KEY STATEMENTS OF FINANCIAL POSITION ITEMS AND RELATED DISCLOSURES THAT HAVE BEEN IMPACTED BY COVID-19 WERE AS FOLLOWS: Covid-19 was declared a world-wide pandemic by the • Reviewed external market communications to identify other Covid-19 related impacts; • Reviewed public forecasts and experience from previous downturns; • Conducted several internal processes to ensure consistency in the application of the expected impact of Covid-19 across all asset classes; and, • Considered the impact of Covid-19 on the Group’s financial statement disclosures. World Health Organisation in March 2020. Covid-19, as Key Statements of Financial Position items and related well as measures to slow the spread of the virus, have disclosures that have been impacted by Covid-19 were as since had a significant impact on global economies and follows: equity, debt, and commodity markets. The Group has considered the impact of Covid-19 and other market TRADE AND OTHER RECEIVABLES volatility in preparing its financial statements. The Group has reassessed expected credit losses in light Given the dynamic and evolving nature of Covid-19, of the current Covid-19 pandemic impacts on customers limited recent experience of the economic and financial as at 30 June 2020 and the adjusted loss rate was impacts of such a pandemic, and the short duration updated accordingly. See note 8. between the declaration of the pandemic and the preparation of these financial statements, changes to estimates and outcomes that have been applied in PROPERTY, PLANT AND EQUIPMENT AND RIGHT-OF-USE ASSETS the measurement of the Group’s assets and liabilities Given the impact of Covid-19, the Property, plant and may arise in the future. Other than adjusting events equipment and Right-of-use assets were subject to that provide evidence of conditions that existed at the impairment testing which concluded that no material end of the reporting period, the impact of events that impairment was required. arise after the reporting period will be accounted for in future reporting periods. INTANGIBLE ASSETS Consistent with the Group’s accounting policies, the Group has tested goodwill and indefinite life intangible assets for impairment and has reviewed the carrying value of its finite life intangible assets at the reporting date for indicators of impairment and, where applicable, 51 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 reviewed the measurement of the carrying value of monetary items are translated at the year-end exchange such intangible assets. Such assessment incorporated a rate. Non-monetary items measured at historical cost consideration of Covid-19. See note 13. continue to be carried at the exchange rate at the date DEFERRED TAX ASSETS of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when The Group has reassessed the recognition of deferred fair values were determined. tax assets based on a forecast taxable income in light of the current Covid-19 pandemic impacts. See note 4. Exchange differences arising on the translation of monetary items are recognised in profit or loss, except B ) PRINCIPLES OF CONSOLIDATION where deferred in equity as a qualifying cash flow or net The consolidated financial statements incorporate all of investment hedge. the assets, liabilities and results of the parent IncentiaPay Exchange differences arising on the translation of Ltd and all of its subsidiaries (also referred to as “the non-monetary items are recognised directly in other Group”). Subsidiaries are entities the parent controls. The comprehensive income to the extent that the underlying parent controls an entity when it is exposed to, or has gain or loss is recognised in other comprehensive rights to, variable returns from its involvement with the income. Otherwise the exchange difference is entity and has the ability to affect those returns through recognised in profit or loss. its power over the entity. GROUP COMPANIES The assets, liabilities and results of all subsidiaries are fully consolidated into the financial statements of the Group from the date on which control is obtained by the Group. The consolidation of a subsidiary is discontinued from the date that control ceases. Inter-company transactions, balances and unrealised gains or losses on The financial results and position of foreign operations, whose functional currency is different from the Group’s presentation currency, are translated as follows: • Assets and liabilities are translated at exchange rates prevailing at the end of the reporting period; transactions between Group entities are fully eliminated • Income and expenses are translated at average on consolidation. exchange rates for the period; and, Accounting policies of subsidiaries have been adjusted where necessary to ensure uniformity of the accounting policies adopted by the Group. • Retained earnings are translated at the exchange rates prevailing at the date of the transaction. Exchange differences arising on translation of foreign operations with functional currencies other than Australian C) FOREIGN CURRENCY TRANSACTIONS AND dollars are recognised in other comprehensive income and BALANCES FUNCTIONAL AND PRESENTATION CURRENCY included in the foreign currency translation reserve in the Statement of Financial Position. The cumulative amount of these differences is reclassified into profit or loss in the The functional currency of each of the Group’s period in which the Group disposes of the operation. entities is measured using the currency of the primary economic environment in which that entity operates. D) GOODS AND SERVICES TAX (GST) The consolidated financial statements are presented in Revenues, expenses and assets are recognised net of the Australian dollars, which is the parent entity’s functional amount of GST, except where the amount of GST incurred currency. TRANSACTIONS AND BALANCES is not recoverable from the relevant taxation authority. Receivables and payables are stated exclusive of the amount of GST receivable or payable. The net amount Foreign currency transactions are translated into of GST recoverable from, or payable to, the relevant functional currency using the exchange rates prevailing taxation authority is included with other receivables or at the date of the transaction. Foreign currency payables in the Statement of Financial Position. FINANCIAL STATEMENTS 52 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Cash flows are presented on a gross basis. The GST KEY JUDGEMENTS components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the relevant taxation authority are presented as operating cash flows included in receipts from customers or payments to suppliers. E) COMPARATIVE FIGURES Where the Group retrospectively applies an accounting policy, makes a retrospective restatement or reclassifies items in its financial statements, an additional (third) Revenue recognition The Group recognises revenue over time, using a method that reflects the manner in which its obligations are fulfilled. See note 2. Lease term The Group assesses whether it is reasonably certain that an extension option will be exercised. KEY ESTIMATES Statement of Financial Position as at the beginning Measurement of ECL allowance for trade receivables of the preceding period in addition to the minimum and contract assets comparative financial statements is presented. ECLs are measured at an unbiased, probability- F) ROUNDING OF AMOUNTS The parent entity has applied the relief available to it under ASIC Instrument 2016 / 191. Accordingly, amounts in the consolidated financial statements and Directors’ report have been rounded off to the nearest $1,000. weighted amount, using reasonable and supportable information that is available without undue cost or effort at the reporting date. See note 8. Deferred tax assets “DTA” Availability of future taxable profit against which deductible temporary differences and tax losses G) NEW AUSTRALIAN ACCOUNTING STANDARDS AND AMENDMENTS TO AUSTRALIAN ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET carried forward can be utilised. Goodwill and other intangibles ADOPTED Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2020 reporting period and have not been adopted early by the Group. These amended standards and interpretations are not expected to have a material impact on the Group’s consolidated financial statements in the current or future reporting periods: • Amendments to references to conceptual framework in AASB standards; • Definition of a business (Amendments to AASB 3); and, • Definition of material (Amendments to AASB 101 and AASB 108). The Group assesses impairment at the end of each reporting period by evaluating conditions and events specific to the Group that may be indicative of impairment triggers. Recoverable amounts of relevant assets are reassessed using the higher of fair value less costs of disposal or value-in-use calculations which incorporate various key assumptions. Further details on the key estimates used in the impairment evaluation and the impairment recognised in respect of goodwill or other intangibles for the year ended 30 June 2020 can be found in note 13. The Group has re-assessed the useful life of the software intangible asset, largely comprising costs associated with capitalised web development. As a H) CRITICAL ACCOUNTING ESTIMATES AND result, amortisation has been accelerated to reflect this, resulting in the asset being fully written down by 31 December 2020. See note 13. JUDGEMENTS The Directors’ estimates and judgments are incorporated into the financial statements and are based on historical knowledge and the best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and from within the Group. 53 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 I) CHANGES IN SIGNIFICANT ACCOUNTING From 1 July 2019, leases are recognised as a right- POLICIES The Group applied AASB 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 July 2019. Accordingly, the comparative information presented for 2019 is not restated and it is presented as previously reported, under AASB 117 and related interpretations. The details of the changes in accounting policies are disclosed below. Additionally, the disclosure requirements in AASB 16 have not been applied to comparative information. DEFINITION OF A LEASE Previously the Group determined at contract inception whether an arrangement was or contained a lease under AASB Interpretation 4, determining whether an arrangement contains a lease. The Group now assesses whether a contract is or contains a lease, based on the criteria outlined in note 11. A contract is, or contains a lease if it conveys the right to control the use of an identified asset for a of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s life and the lease term on a straight-line basis. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • Fixed payment, less any lease incentives receivable; • Amounts expected to be payable by the lessee under residual value guarantees; • The exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and, • Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. period of time in exchange for consideration. To assess The lease payments are discounted using the lessee’s whether a contract conveys the right to control the use incremental borrowing rate, being the rate that lessee of an identified asset, the Group uses the definition of a would have to pay to borrow the funds necessary to lease in AASB 16. This policy is applied to contracts entered into on or after 1 July 2019. THE GROUP AS A LESSEE As a lessee, the Group leases various properties and equipment. Rental contracts are made for fixed periods of 2 to 4 years. The Group’s leases may have extension options as described below. Lease terms obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are initially measured at cost comprising the following: • The amount of the initial measurement of lease liability; • Lease payments made at or before the commencement date less any lease incentive received; • Initial costs; and, are negotiated on an individual basis and contain a • Restoration costs. wide range of different terms and conditions. The Right-of-use assets are subsequently measured at cost lease agreements do not impose any covenants, but less any accumulated depreciation and adjustments for lease assets may not be used as security for borrowing remeasurement of the lease liability. purposes. Until 30 June 2019, leases of properties and equipment were classified as operating leases under AASB 117. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease. PRACTICAL EXPEDIENTS APPLIED The Group used a number of practical expedients when applying AASB 16 to leases previously classified as operating leases under AASB 117. FINANCIAL STATEMENTS 54 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 In particular, the Group: • Used a single discount rate to a portfolio of leases with reasonably similar characteristics; • Relied on previous assessments on whether leases are onerous; order to allocate resources to the segment and assess its performance. Since the divestment of the Bartercard business, IncentiaPay Ltd manages the Group as one segment, being the Entertainment business. There is no allocation impact to segment earnings. • Adjusted the right-of-use asset by the amount of any provision for onerous leases recognised in the ADJUSTMENTS RECOGNISED ON ADOPTION OF AASB 16 Statement of Financial Position immediately before the On transition to AASB 16, the Group recognised lease date of initial application; liabilities in relation to leases which had previously • Excluded initial direct costs from the measurement of been classified as operating leases under the principles the right-of-use assets at the date of initial application; of AASB 117. These liabilities were measured at present and, • Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease. SHORT-TERM LEASES AND LEASES OF LOW-VALUE ASSETS The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. IMPACT ON TRANSITION On transition to AASB 16, the Group recognised right-of-use assets and lease liabilities. The change in accounting policy impacted the following balance sheet accounts on 1 July 2019: • Right-of-use assets – increase by $4.3 million • Lease liabilities – increase by $5.7 million • Lease incentive loan – decrease by $0.6 million • Onerous lease provision – decease by $0.6 million The net impact on retained earnings on 1 July 2019 was nil as the Group applied the simplified transition approach and has not restated comparative amounts. IMPACT ON EARNINGS operating lease payments were included in EBITDA, but the amortisation of the right-of-use assets and interest on the lease liability are excluded from this measure. Reportable segments are identified on the basis of internal reports on the business units of the Group that are regularly reviewed by the Board of Directors in 55 value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 July 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 5.54 per cent. Lease liabilities recognised in the Statement of Financial Position at the date of initial application: Operating lease commitments disclosed as at 30 June 2019 Discounted using the lessee’s incremental borrowing rate at the date of initial application Add/(less): recognition exemption for leases with less than 12 months of lease term at transition Add/(less): recognition exemption for leases of low-value assets Add/(less): adjustments as a result of a different treatment of extension and termination options1 Lease liabilities recognised as at 1 July 2019 1 JULY 2019 $’000 6,352 5,711 - - - 5,711 1,723 3,988 Non-current liabilities 1. The Group has not included option extensions in the calculation as it is considered probable that option extensions will not be exercised. EBITDA increased by approximately $1.9 million, as the Current lease liabilities I N C E NTI A PAY LTD A N D CO N TR O L LE D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 All right-of-use assets were measured at the amount AMOUNTS RECOGNISED IN STATEMENT equal to the lease liability, adjusted by the amount OF CASH FLOWS of any prepaid or accrual lease payments relating to that lease recognised in that balance sheet as at 30 June 2019. The Group has adjusted the right-of-use asset at the date of initial application by $1.2 million, the amount of provision for onerous lease and lease incentive loan recognised in the Statement of Financial Position immediately at the date of initial application. EXTENSION OPTIONS Interest on lease liabilities Principal element of lease payments Total cash flow for leases FY2020 $’000 249 1,610 1,859 In determining the lease term, management considers all facts and circumstances that create an economic RENT CONCESSION incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The Group is still reviewing its options to renew, as such, extension options are not included in the calculation. This is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the Group. AMOUNTS RECOGNISED IN PROFIT AND LOSS The Group has applied the practical expedient to all rent concessions that meet the conditions. Rent concession amounts recognised in profit and loss: Rent concession as a negative variable lease payment FY2020 $’000 99 Rent concession amounts recognised in statement of cash flows: FY2020 $’000 FY2020 $’000 2020 leases under AASB 16 Reduced cash outflows 99 Interest on lease liabilities 249 Expenses relating to short-term leases Expenses relating to leases of low-value assets, excluding short-term leases of low-value assets 2019 operating leases under AASB 117 - - Lease expense 2,943 FINANCIAL STATEMENTS 56 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 2 | R E V E N U E ACCO U N TI N G P O L I C Y REVENUE FROM CONTRACTS WITH CUSTOMERS Other than for a limited number of exceptions, including leases, the revenue model in AASB 15 applies to all contracts with customers as well as non-monetary exchanges between entities in the same line of business to facilitate sales to customers and potential customers. The core principle of the Standard is that an entity recognises revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. To achieve this objective AASB 15 provides the following five-step process: • Identify the contract(s) with a customer; • Identify the performance obligations in the contract(s); • Determine the transaction price; • Allocate the transaction price to the performance obligations in the contract(s); and, • Recognise revenue when (or as) the performance obligations are satisfied. In November 2019, Entertainment launched a wholly digital version of the Entertainment membership that incorporates a rolling 12-month subscription period. The subscription period commences when the membership is activated and expires after a period of between 12 to 24 months, depending on the subscription purchased, or longer if extensions have been applied under circumstances. The membership year for the 19/20 edition of the Entertainment book ran from 1 June 2019 to 31 May 2020. The Group satisfies its obligations as services are rendered to members during the period of membership. Benefits must be provided constantly throughout the period and Entertainment Publications has concluded that a straight- line basis is the most appropriate method. The Group has consistently applied this revenue recognition model to both the 19/20 physical book, which expired on 31 May 2020 and the relaunched rolling digital memberships. A summary of the revenue recognition by income stream of the Group is as follows: • Fee income – Paid advertising: Revenue from Entertainment Publications marketing and merchant support fees through the placement of advertisements and the distribution of offers and promotions on behalf of businesses to members is recognised when the advertisement or offer is placed, distributed and invoiced. Revenue from the successful promotion of merchant offers is recognised when the transaction occurs which evidences the take up of the promotion. • Fee income – Travel booking: Revenue from commission’s receivable for bookings are recognised when the bookings are made, and it is paid for. Members have access to a range of discounts and deals from hotels, airlines and car rental companies through the Group’s platform, from which the Group acts as an agent on behalf of the hotels, airlines and car rental companies. • Fee income - Consulting and media: Revenue relates to rendering of information technology consulting services and it is recognised by reference to the stage of completion of the contract. • Membership subscriptions: On commencement of memberships, Entertainment Publications enters into a performance obligation to deliver benefits in the form of special offers, discounts, promotions and booking facilities to members during the period of membership. A contract liability is recognised for unearned revenue for performance obligations to members that have not yet been satisfied. Payment for membership is made prior to the commencement of membership. A gift with purchase promotion is treated as a reduction in revenue over the life of the subscription. 57 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 • Corporate sales: Entertainment Publications enters into contracts with corporate customers to develop a program of special offers, discounts, promotions and booking facilities for their customers or employees during the period applicable in the contract. Entertainment Publications has taken the view that the performance obligations defined in the contract should be bundled into one performance obligation centred around access to the program of benefits. • Gift card sales: Revenue from the sale of gift cards on behalf of businesses to members is recognised when the gift card is provided to the customer and it is paid for. Payment terms are highly varied for the different sources of revenue, different customers and contract terms are individually negotiated. REVENUE FROM GOVERNMENT GRANTS Revenue from government grants are recognised when there is reasonable assurance that the Group will comply with the conditions attaching to them and the grants will be received. The Group has made an election to present JobKeeper on a net basis, being set off against the related salary expense. Cash flow boost assistance received during the period has been presented as revenue. CONSOLIDATED GROUP FY2020 $’000 FY20219 $’000 Fee income - Paid advertising and travel booking Fee income - Consulting and media 2,108 347 Membership subscriptions 24,767 Corporate sales 4,121 3,274 2,097 28,611 3,283 Gift card sales 10,692 27,307 Government assistance 150 - Revenue from ordinary activities 42,185 64,572 Interest received 20 - Total 42,205 64,572 Contract receivables (included in ‘Trade and other receivables’) Contract liabilities NOTE 8 17 FY2020 $’000 FY2019 $’000 870 6,569 2,495 21,394 The contract liabilities primarily relate to the advance consideration received from members for subscriptions, for which revenue is recognised over time. FINANCIAL STATEMENTS 58 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 3 | E X P E N S E S Loss before income tax from continuing operations includes the following significant expenses: CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Direct expenses of providing services Variable expenses relating to book printing and production Amortisation of printing and production Corporate book printing 2,503 9,359 584 Gift cards 10,508 Other Total 983 23,937 Bad debts written off Deferred consideration Other debtors Movement in expected credit losses Total Employee expenses Employee related expenses JobKeeper payments earned 2,966 59 (215) 2,810 17,889 (909) Total 16,980 Building occupancy expense Rent Variable lease expense Total Finance costs Finance costs on borrowings Interest expense on lease liabilities Total Depreciation and amortisation expense Plant and equipment Intangibles Right-of-use assets Total Impairments Goodwill Intangible assets Total - 279 279 1,046 249 1,295 521 3,299 1,646 5,466 3,605 1,385 4,990 3,522 9,036 1,943 26,706 712 41,919 - 447 - 447 19,141 - 19,141 2,943 - 2,943 346 - 346 325 1,690 - 2,015 14,553 - 14,553 59 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 DIRECT EXPENSES OF PROVIDING SERVICES Membership book printing and production expenses includes the amortisation of fundraiser sales commission and prepaid production costs. Sales commission paid to fundraiser partners for the sale of Entertainment memberships is an incremental cost of obtaining contracts with customers, and is initially recognised as a prepayment on the balance sheet, and subsequently amortised as an expense through the income statement in line with the recognition of revenue from associated membership sales. BAD DEBTS WRITTEN OFF Bad debts written off relates to $2.9 million deferred consideration for the sale of a group of previous subsidiaries known as the Bartercard business, (see ASX release 24 December 2019 Settlement of Claim with TCM), and $0.06 million owing from Blackglass Pty Ltd also a previous subsidiary, for deferred consideration held for working capital adjustments. The Board has determined that these balances will not be recoverable. EMPLOYEE EXPENSES Employee related expenses include all costs associated with human resources and is offset by JobKeeper payments earned as part of the Covid-19 government assistance package. The Group has elected to present JobKeeper payments on a net basis, with the income being set off against the related salary expense. IMPAIRMENT OF INTANGIBLE ASSETS See note 13. DEPRECIATION AND AMORTISATION EXPENSE The Group has re-assessed the useful life of the software intangible asset, largely comprising costs associated with capitalised web development. As a result of the strategic transformation within the business during the financial year, the Group has determined that the period over which the written down value will be consumed will be shorter than previously estimated. Amortisation has been accelerated to reflect this, resulting in the asset being fully written down by 31 December 2020. The Group has adopted AASB 16, thereby recognising a right-of-use asset on the balance sheet using the modified retrospective approach from 1 July 2019 and has not restated comparatives for the prior reporting period. See note 1(i). BUILDING OCCUPANCY EXPENSE Due to the adoption of AASB 16, rent payments are included in the measurement of the lease liabilities and variable lease payments not included in the measurement of the lease liabilities. See note 1(i). FINANCE COSTS ON BORROWINGS The increase in finance costs on borrowings is predominately due to the accrual of interest on the additional borrowings from Suzerain. See note 16. The adoption of AASB 16 also resulted in the recognition of interest expense on lease liabilities. See note 1(i). FINANCIAL STATEMENTS 60 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 4 | I N CO M E TA X ACCO U N TI N G P O L I C Y The income tax expense for the year comprises current income tax expense and deferred tax expense. Current income tax expense charged to profit or loss is the tax payable on taxable income. Current tax liabilities are measured at the amounts expected to be paid to the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year. Current and deferred income tax expense is charged outside profit or loss when the tax relates to items that are recognised outside profit or loss. 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. With respect to non-depreciable items of property, plant and equipment measured at fair value and items of investment property measured at fair value, the related deferred tax liability or deferred tax asset is measured on the basis that the carrying amount of the asset will be recovered entirely through sale. 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. In the current circumstances, the Group’s projections of future taxable profits may be affected by: • Changes in forecasted cash flows – e.g. decrease in memberships, the costs of incentives to stimulate membership sales and decreases in costs due to savings initiatives. Cash flows may also be negatively affected by the dynamic and evolving nature of Covid-19 and the impact it has on the macro economic climate; • Changes as a result of the Group’s operational strategies; and, • Government support measures in response to Covid-19. TAX CONSOLIDATION GROUP IncentiaPay (the head entity) and its wholly owned Australian subsidiaries implemented the tax consolidation legislation. On adoption of the tax consolidation legislation, the entities in the tax consolidated Group entered into a tax sharing and funding agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly-owned subsidiaries in the case of a default by the head entity. This agreement provides that the wholly-owned subsidiaries will continue to fully compensate IncentiaPay for any current tax payable assumed and be compensated by IncentiaPay for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to IncentiaPay under the tax consolidation legislation. 61 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 a) The components of income tax expense comprise Current tax Deferred tax Income tax expense - 3,717 3,717 - 786 786 b) Numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense (20,945) (27,367) Loss from discontinuing operation before income tax expense - (9,881) The prima facie tax payable on profit from ordinary activities before income tax is reconciled to income tax as follows Prima facie tax payable (benefit) on profit from ordinary activities before income tax at domestic statutory rate of 30% (2019: 30%) (6,284) (11,174) Add/(less) tax effect of Permanent differences Temporary differences 641 (410) Unrecognised tax losses 6,053 Derecognised deferred tax assets Income tax expense 3,717 3,717 9,288 - 2,672 - 786 No income tax benefit was recognised. This income tax benefit arising from tax losses will only be realised if: • the Group derives future assessable income of a nature and of an amount sufficient to enable the Group to benefit from the deductions for the losses to be realised; • the Group continues to comply with the conditions for deductibility imposed by tax legislation; and, • no changes in tax legislation adversely affect the Group in realising the benefit from the deductions for the losses. FINANCIAL STATEMENTS 62 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 CONSOLIDATED GROUP c) Deferred tax OPENING BALANCE CHARGED TO INCOME DIVESTMENT $’000 $’000 $’000 DERECOGNISED DEFERRED TAX ASSETS $’000 TOTAL $’000 Deferred tax assets Provisions 6,164 (5,103) (319) Transaction costs on equity issues 888 (888) - Employee benefits 1,388 (174) (548) Property, plant and equipment (18) 19 Intangibles (1,708) (388) Other (1,941) 5,748 (1) 250 348 Balance as at 30 June 2019 4,773 (786) (270) Provisions Employee benefits 742 666 Intangibles (1,846) Other 4,155 Balance as at 30 June 2020 3,717 - - - - - - - - - - - - - - - - - (742) (666) 1,846 (4,155) (3,717) 742 - 666 - (1,846) 4,155 3,717 - - - - - The Group has estimated unutilised tax losses of $40.3 million. These losses, along with other deductible temporary differences, have resulted in potential deferred tax assets for the Group of approximately $2.3 million, calculated using the prevailing rate of Australian corporation tax of 30 per cent for the Group. After considering the above, the Group has determined that these deferred tax assets will no longer be recognised as it is uncertain whether future taxable profits in the short term will be sufficient to utilise the losses. The Group is part way through its transformation plan which will provide a platform to deliver growth and stability when restrictions are lifted post Covid-19. Current projections indicate a gradual return to profitability, however, given the levels of uncertainty it may not be sufficient for the purposes of reporting. 63 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 d) Current tax INCOME TAX PAYABLE Income tax payable 186 186 The income tax payable relates to provisional income tax payable in New Zealand. N OTE 5 | D I V I D E N D S , E A R N I N G S P E R S H A R E A N D F R A N K I N G C R E D IT CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Franking account Balance of franking account at year end adjusted for franking credits arising from: 6,493 6,493 Payments of income tax - - Franking credits available for subsequent financial year 6,493 6,493 The Directors have advised that they do not intend to declare dividends for the 2020 financial year. The ability to utilise the franking credits is dependent upon the ability to declare dividends. In accordance with the tax consolidation legislation, IncentiaPay Ltd as the head entity in the tax consolidated Group has also assumed the benefit of $6.4 million (2019: $6.4 million) franking credits. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 a) Reconciliation of earnings to profit or loss Loss for the period from continuing operations (24,662) (28,153) Loss for the period from discontinued operations - (9,751) Earnings used to calculate basic EPS (24,662) (37,904) Weighted average number of ordinary shares outstanding during the year used in calculating basic EPS 302,134,914 233,011,438 Weighted average of dilutive convertible notes and equity instruments outstanding - - Weighted average number of ordinary shares outstanding during the year used in calculating diluted EPS 302,134,914 233,011,438 FINANCIAL STATEMENTS 64 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 6 | C A S H A N D C A S H E Q U I VA L E NT S ACCO U N TI N G P O L I C Y Cash and cash equivalents include cash on hand, deposits available on demand with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts, if any, are reported within short-term borrowings in current liabilities in the Statement of Financial Position. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Cash at bank and on hand 5,304 3,457 Short-term bank deposits 3 3 Total cash and cash equivalents 5,307 3,460 Reconciliation of cash Cash at the end of the financial year as shown in the statement of cash flows is reconciled to items in the Statement of Financial Position as follows Cash and cash equivalents 5,307 Total cash and cash equivalents 5,307 3,460 3,460 65 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 7 | C A S H F LOW I N FO R M ATI O N CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Reconciliation of loss after income tax to net cash flow from operations Loss after income tax (24,662) (37,904) Non-cash flows in loss Amortisation 3,299 Loss on disposal of discontinued operations Loss on disposal of leasehold improvements Depreciation - property, plant and equipment - 690 521 Depreciation - right-of-use 1,646 Impairment of intangibles in continuing operations 4,990 Sale of unlisted equity investment - Share based payment unwound (730) 1,690 7,326 - 325 - 14,553 (600) (70) Net interest paid including investing 1,295 (346) Changes in assets and liabilities, net of effects of purchase and disposal of subsidiaries Decrease in trade receivables Decrease in prepayments (Increase)/decrease in inventories Decrease in deferred taxes receivable 4,867 5,502 (38) 3,717 8,081 4,329 254 1,059 Increase/(decrease) in trade payables and accruals 1,044 (6,860) Decrease in deferred income (14,825) Increase in income taxes payable - (606) 18 Decrease in provisions (1,104) (4,725) Cash flow used in operating activities (13,788) (13,338) FINANCIAL STATEMENTS 66 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 RECONCILIATION OF LIABILITIES ARISING FROM CASH FLOWS FROM FINANCING ACTIVITIES INTEREST BEARING LOAN ADDITIONAL GROWTH OPERATIONAL FACILITY LEASE LIABILITIES LEASE INCENTIVE LOAN $’000 $’000 $’000 $’000 Balance as at 1 July 2019 4,029 Initial recognition of lease liabilities1 - - - Drawn down 15,000 2,585 Rent concessions or deferred rents Repayment or amortised Interest paid Interest expenses Line fees - - - 788 - Loan converted to equity (19,300) AASB 16 adjustment2 Balance as at 30 June 2020 - 517 - 5,711 - (212) (1,610) (249) 249 - - - - - - 71 35 - - 2,691 3,889 606 - - - - - - - - (606) - 1. The draw down of lease liabilities relate to the initial application of AASB 16, it is a non-cash entry and there is no cash flow impact. See note 1(i). 2. As part of the initial application of AASB 16, the lease incentive loan was offset against the right-of-use assets at the date of initial application. These transactions are non-cash. See note 1(i). 67 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 8 | TR A D E A N D OT H E R R E C E I VA B L E S ACCO U N TI N G P O L I C Y Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinary course of business. Receivables expected to be collected within 12 months of the end of the reporting period are classified as current assets. All other receivables are classified as non-current assets. Trade and other receivables are initially recognised at fair value, less any provision for loss allowance. Current Trade receivables Provision for loss allowance Net trade receivables Other receivables Total current trade and other receivables CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 870 (241) 629 363 992 2,495 (580) 1,915 813 2,728 FINANCIAL STATEMENTS 68 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Movement in the provision for loss allowance of receivables is as follows: OPENING BALANCE 1 JULY 19 RECLASSIFIED AS HELD FOR SALE FOR YEAR $’000 $’000 LOSS ALLOWANCE ADJUSTMENT FOR YEAR $’000 Current trade receivables (580) Total (580) - - 215 215 AMOUNTS WRITTEN OFF CLOSING BALANCE 30 JUNE 20 $’000 124 124 $’000 (241) (241) OPENING BALANCE 1 JULY 18 RECLASSIFIED AS HELD FOR SALE FOR YEAR $’000 Current trade receivables (2,287) Total (2,287) $’000 1,954 1,954 LOSS ALLOWANCE ADJUSTMENT FOR YEAR $’000 (522) (522) AMOUNTS WRITTEN OFF CLOSING BALANCE 30 JUNE 19 $’000 275 275 $’000 (580) (580) The Group impairs the value of individual trade debtors based on an assessment of the credit quality of the customer, the previous trading pattern of the customer and management’s assessment of the likely recovery. All trade debtors which are not likely to be recovered are either written off or an impairment for expected credit losses is recognised. No credit risk is expected in respect of amounts that are recoverable, which are not written off or provided against. The remainder of receivables, after credit losses, are of high credit quality. The Group uses a “roll rate” method to calculate expected credit losses for trade receivables from individual customers that is made up of a variable mix of number and size of balances. Loss rates are calculated based on the probability of receivables progressing through successive stages of delinquency to write off. Roll rates are calculated using an analysis of how balances change from one month to next until they reach 90 days. Data over the last 12 months was reviewed to determine the level of recovery of those receivables older than 90 days. Combining these two measurements provided the Group with the ability to determine the loss allowance as of 30 June. Due to the severe economic impacts of the Covid-19 outbreak, the Group reviewed the expected credit loss allowance and determined that the adjusted loss rate for trade debtors past due over 60 days should be 100 per cent. On that basis, the expected credit loss allowance as at 30 June 2020 was determined as follows for trade receivables: REPORT CATEGORY DAYS ADJUSTED LOSS RATE Current Past due 1-30 Past due 31-60 Past due 61-90 Past due over 90 Greater than over 90 days overdue 0-30 31-60 61-90 91-120 121-150 Greater than 150 % 16 31 14 100 100 100 Total RECEIVABLES BALANCE AS AT 30 JUNE 2020 $’000 LOSS ALLOWANCE AS AT 30 JUNE 2020 $’000 641 101 22 9 7 90 870 101 31 3 9 7 90 241 69 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 The expected credit loss allowance as at 30 June 2019 was determined as follows for trade receivables: REPORT CATEGORY DAYS ADJUSTED LOSS RATE Current Past due 1-30 Past due 31-60 Past due 61-90 Past due over 90 Greater than over 90 days overdue 0-30 31-60 61-90 91-120 121-150 Greater than 150 % 8 24 16 12 49 53 RECEIVABLES BALANCE AS AT 30 JUNE 2019 $’000 LOSS ALLOWANCE AS AT 30 JUNE 2019 $’000 1,342 333 264 23 103 430 111 79 43 3 51 293 580 Total 2,495 C R E D IT R I S K The Group has no significant concentration of credit risk with respect to any single counterparty or group of counterparties other than those receivables specifically impaired. The class of assets described as “trade and other receivables” are the main source of credit risk related to the Group. No collateral is held in respect of these exposures and there are no other credit enhancement arrangements. All trade receivables have been investigated and, other than those which have been written off, or for which credit losses have been recognised, there are no indicators of poor credit quality for trade receivables. Securities in the form of personal guarantees from Directors, or registered mortgages are regularly taken to support customer trading activities. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Gross amount Impaired (past due) Total Within initial trade terms Past due not impaired - 30 days 60 days 90 days 90 days + 870 (241) 629 540 70 19 - - 2,495 (580) 1,915 1,231 254 221 20 189 Total 629 1,915 FINANCIAL STATEMENTS 70 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 G E O G R A P H I C A L C R E D IT R I S K The Group has significant operations in Australia and New Zealand. The Group’s exposure to credit risk for trade and other receivables at the end of the reporting period in these regions is as follows: CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Australia New Zealand Total 565 64 629 1,856 59 1,915 N OTE 9 | I N V E NTO R I E S ACCO U N TI N G P O L I C Y Inventories represent gift cards. These assets are valued at the lower of cost and net realisable value. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Gift cards held for sale Total inventories 134 134 96 96 N OTE 1 0 | OT H E R A S S E T S ACCO U N TI N G P O L I C Y Other assets relate to prepaid fundraiser commission incurred as a result of the sale of memberships and costs incurred for the development of the following year’s membership package (see note 3), and short-term investments that relate to security deposits for leased premises. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Current Short-term investments 1,018 Prepayments 337 Production prepayments 996 Total other assets 2,351 391 198 7,264 7,853 71 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Year ended 30 June 2019 Balance as at 1 July 2018 Prepayments PRODUCTION PREPAYMENT $’000 8,558 7,742 Amortisation (9,036) Balance as at 30 June 2019 7,264 Year ended 30 June 2020 Balance as at 1 July 2019 Prepayments 7,264 3,091 Amortisation (9,359) Balance as at 30 June 2020 996 N OTE 1 1 | R I G HT- O F - U S E A S S E T S ACCO U N TI N G P O L I C Y Right-of-use assets relate to leased property that do not meet the definition of investment property and are presented as property, plant and equipment. Right-of-use assets are initially measured at cost comprising the following: • The amount of the initial measurement of lease liability (see note 1(i) and note 15); • Any lease payments made at or before the commencement date less any lease incentive received; • Any initial costs; and, • Restoration costs. Right-of-use assets are subsequently measured at cost less any accumulated depreciation and adjustments for remeasurement of the lease liability. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The Group has determined that it will not be exercising the options to renew, as such, extension options are not included in the calculation. FINANCIAL STATEMENTS 72 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 D E P R E C I ATI O N O F R I G H T- O F - U S E A S S E T S The right-of-use asset is depreciated over the shorter of the asset’s life and the lease term on a straight-line basis. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Land and buildings At cost 4,068 Accumulated depreciation (1,510) Total 2,558 Equipment At cost Accumulated depreciation Total Total right-of-use assets 359 (136) 223 2,781 - - - - - - - M OV E M E N T S I N C A R RY I N G A M O U N T S Movements in the carrying amounts for each class of right-of-use assets between the beginning and the end of the current financial year are set out below. CONSOLIDATED GROUP LAND AND BUILDINGS $’000 EQUIPMENT TOTAL $’000 $’000 Balance as at 1 July 2019 Initial recognition of right-of-use assets Additions to right-of-use assets Depreciation charge for the year Balance as at 30 June 2020 - 4,068 - (1,510) 2,558 - 259 100 (136) 223 - 4,327 100 (1,646) 2,781 73 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 1 2 | P R O P E R T Y, P L A N T A N D E Q U I P M E N T ACCO U N TI N G P O L I C Y Each class of property, plant and equipment is carried at cost or fair value (as indicated) less, where applicable, any accumulated depreciation and impairment losses. PLANT AND EQUIPMENT Plant and equipment are measured on the cost basis and therefore carried at cost less accumulated depreciation and any accumulated impairment. 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 either in profit or loss, or as a revaluation decrease if the impairment losses relate to a revalued asset. A formal assessment of the recoverable amount is made when impairment indicators are present. The carrying amount of plant and equipment is reviewed annually by Directors to ensure it is not more than the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. Where material, the expected net cash flows are discounted to their present values in determining recoverable amounts. The cost of fixed assets constructed within the consolidated Group 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 economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised as expenses in profit or loss during the financial period in which they are incurred. DEPRECIATION OF PLANT AND EQUIPMENT The depreciable amount of all fixed assets including buildings and capitalised lease assets, but excluding freehold land, is depreciated on a straight-line basis over the asset’s useful life to the consolidated Group. Useful life is taken to commence 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. Estimated useful life for each class of depreciable assets are: CLASS OF FIXED ASSET ESTIMATED USEFUL LIFE Leasehold improvements 2-4 years Plant and equipment Leased plant and equipment 3-5 years 3-5 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are recognised in profit or loss in the period in which they arise. When revalued assets are sold, amounts included in the revaluation surplus relating to that asset are transferred to retained earnings. FINANCIAL STATEMENTS 74 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Plant and equipment At cost Accumulated depreciation Total Leasehold improvements At cost Accumulated depreciation Total Total property, plant and equipment 821 (579) 242 2,090 (1,005) 1,085 1,327 806 (490) 316 2,970 (903) 2,067 2,383 MOVEMENTS IN CARRYING AMOUNTS Movements in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year are set out below. CONSOLIDATED GROUP PLANT AND EQUIPMENT LEASEHOLD IMPROVEMENTS LEASED PLANT AND EQUIPMENT TOTAL $’000 $’000 $’000 $’000 Balance as at 1 July 2018 Additions Disposals Transfers Reclassified as held for sale Depreciation expense Balance as at 30 June 2019 Balance as at 1 July 2019 Additions Disposals Depreciation expense Balance as at 30 June 2020 1,133 23 (125) - (592) (123) 316 316 16 - (90) 242 1,065 1,050 (25) 584 (405) (202) 2,067 2,067 135 (686) (431) 1,085 168 - (40) - (128) - - - - - - - 2,366 1,073 (190) 584 (1,125) (325) 2,383 2,383 151 (686) (521) 1,327 CONTRACTUAL COMMITMENTS The parent entity did not enter into any contractual commitments for the acquisition of property, plant or equipment during FY2020 or FY2019. 75 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 1 3 | I NTA N G I B LE A S S E T S ACCO U N TI N G P O L I C Y GOODWILL Goodwill is carried at cost less any accumulated impairment losses. Goodwill is calculated as the excess of the sum of the following items, over the acquisition date fair value of net identifiable assets acquired: • the consideration transferred; • any non-controlling interest (determined under either the full goodwill or proportionate interest method); and, • the acquisition date fair value of any previously held equity interest. The acquisition date fair value of the consideration transferred for a business combination plus the acquisition date fair value of any previously held equity interest shall form the cost of the investment in the financial statements. Fair value re-measurements in any pre-existing equity holdings are recognised in the profit or loss in the period in which they arise. Where changes in the value of such equity holdings had previously been recognised in other comprehensive income, such amounts are recycled to profit or loss. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested for impairment at least annually and/or when other indicators of impairment exist and is allocated to the Group’s cash-generating units or groups of cash-generating units, (“CGUs”). These CGUs represent the lowest level at which goodwill is monitored but are not larger than an operating segment. Gains and losses on the disposal of an entity include the carrying amount of goodwill of the entity that has been sold. Changes in the ownership interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions and do not affect the carrying amounts of goodwill. TECHNOLOGY, SOFTWARE AND DATABASE ASSETS Technology and software assets acquired separately are capitalised at cost. Where the technology and software asset has been acquired as part of a business acquisition, these assets are recognised at fair value as at the date of acquisition. The useful lives of these assets are then assessed to be either finite or indefinite. Assets with a finite life are amortised over that life with the expense being recognised in the profit and loss. Expenditure on the development of technology and software assets are capitalised until the software is ready for use and then amortised over their expected useful life of 2 to 3 years (FY2019: 4-5 years). During the period, the Group re-assessed the expected economic useful life of its software intangible assets and revised their expected useful lives to between 2-3 years (previously between 4-5 years). The reassessment was a result of the strategic transformation within the business, detailed further in notation 3 in the table on page 78. These changes have been applied with effect from 1 July 2019 and have resulted in an increase in amortisation expense for the year ended 30 June 2020 of $1.4 million. These assets are tested for impairment at least annually as part of the value in use analysis associated with the cash-generating unit. BRAND NAMES AND INTERNATIONAL RIGHTS The brand names and international rights were acquired in a separate transaction. These assets are recognised using the cost model, which requires an intangible asset to be recorded at cost less any accumulated amortisation and any accumulated impairment losses. These intangible assets have been assessed as having an indefinite useful life as neither brand names nor international rights are subject to contractual or statutory time limits. There is no foreseeable limit to the period FINANCIAL STATEMENTS 76 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 over which the asset is expected to generate net cash inflows. As a result, no amortisation will be charged. These assets are tested for impairment at least annually, either individually or within a cash-generating unit. IMPAIRMENT OF ASSETS At the end of each reporting period, the Group assesses whether there is any indication that an asset may be impaired. The assessment will include the consideration of external and internal sources of information including dividends received from subsidiaries, associates or jointly controlled entities deemed to be out of pre- acquisition profits. 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 to sell 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 (e.g. in accordance with the revaluation model in AASB 116: Property, plant and equipment). 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 Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Impairment testing is performed at least annually for goodwill, intangible assets with indefinite lives and intangible assets not yet available for use. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Goodwill Cost 31,199 Accumulated impairment losses (21,108) Total 10,091 Technology and software 31,199 (17,503) 13,696 Accumulated amortisation and impairment losses (8,000) (4,068) Cost 9,296 9,127 Total 1,296 5,059 Purchased brand names and international rights Accumulated impairment losses - Cost 3,000 Total 3,000 Other intangibles Cost Accumulated amortisation Total 752 (752) - 3,000 - 3,000 752 - 752 Total intangibles 14,387 22,507 77 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 CONSOLIDATED GROUP GOODWILL RESTATED TECHNOLOGY & SOFTWARE RESTATED BRAND NAME & INTERNATIONAL RIGHTS OTHER INTANGIBLES RESTATED TOTAL $’000 $’000 $’000 $’000 $’000 Balance as at 1 July 2018 Measurement period adjustment1 Balance as at 1 July 2018 29,341 1,858 31,199 Additions - Disposals2 (2,950) Amortisation charge - Impairment (14,553) Balance as at 30 June 2019 Balance as at 1 July 2019 13,696 13,696 Additions Disposals Amortisation charge3 - - - Impairment4,5 (3,605) Balance as at 30 June 2020 10,091 14,588 (2,317) 12,271 1,877 (7,399) (1,690) - 5,059 5,059 169 - (3,299) (633) 1,296 3,659 - 3,659 - 1,692 459 2,151 49,280 - 49,280 - 1,877 (659) (1,399) (12,407) - - 3,000 3,000 - - - - - - 752 752 - - - (1,690) (14,553) 22,507 22,507 169 - (3,299) (752) (4,990) 3,000 - 14,387 1. Adjustments to purchase price allocation in FY2019. Refer to Annual Report 2019 note 22(c) for details. 2. See note 24. 3. The Group have re-assessed the useful life of the software intangible asset, largely comprising costs associated with capitalised web development. As a result of the strategic transformation within the business, the Group has entered into an agreement to move to a new platform that will result in new products and higher value propositions for customers. The Group has determined that the period over which the written down value of the existing platform will be shorter than previously estimated. Amortisation has been accelerated to reflect this, resulting in the asset being fully written down by 31 December 2020. 4. As a result of the Group’s decision to seek expressions of interest with respect to Entertainment Digital business assets, it has been assessed that the assets will not produce any future economic benefits to the Group, as such, the assets have been impaired to reflect an estimate of their fair value less costs of disposal. This has resulted in impairment of $633,000 during the financial year. 5. As at 30 June 2020 the estimated recoverable amounts determined using the method outlined below were found to be less than the carrying value of the net assets of the cash-generating unit and accordingly, an impairment adjustment on goodwill was required. Current market conditions brought on by Covid-19, in addition to uncertainty associated with the change in the Group’s business model, has triggered an assessment whether the carrying value of the Groups’ goodwill and other non-current assets may be impaired. The recoverable amount of the cash-generating unit is determined based on a value-in-use calculation, covering a detailed five-year forecast, followed by an expected cash flow for the unit’s remaining useful life using the growth rates determined by management. Where appropriate the value of any proposed sale of cash-generating units has been considered and the model includes a sensitivity analysis allowing for a range of growth rates. The following assumptions were used in the value-in-use calculations: Year ended 30 June 2020 2021 - 2025 Entertainment Publications GROWTH RATES 2021 - 2025 GROWTH RATES 2025 ONWARD DISCOUNT RATE/WEIGHTED AVERAGE COST OF CAPITAL 2.5% - 5% 2% 11% FINANCIAL STATEMENTS 78 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Year ended 30 June 2019 2020- 2024 Entertainment Publications GROWTH RATES 2020-2024 GROWTH RATES 2024 ONWARD DISCOUNT RATE/WEIGHTED AVERAGE COST OF CAPITAL 2% 2% 11% Cash flows used in the value-in-use calculations are based on forecasts produced by management. The growth rates are based on a proposed strategic repositioning of the core operations of the business focusing on long- term sustainability. Forecasts for 2021 consider the increased level of market volatility and uncertainty caused by Covid-19 and the business transformation currently in progress. The Directors consider these forecasts to reflect the best estimates of revenue based on facts and circumstances available as at 30 June 2020. Given the nature of the uncertainty associated with the underlying assumptions, any changes over the coming months not factored in the cash flow forecasts may result in material changes to the assumptions. The key assumptions to which the model is most sensitive include: • Forecast revenue and expenditure taking into account the impacts of Covid-19 for the first half of the forecast year, and based on the continued progress of the technology transformation which is anticipated to be completed in the first half of the financial year; and, • The discount rate of 11 per cent (post tax). As at 30 June 2020 the estimated recoverable amounts determined using the method outlined above were found to be less than the carrying value of the net assets of the cash-generating unit and accordingly, an impairment adjustment was required. Following the impairment loss recognised in the Group’s cash-generating unit, the recoverable amount was equal to the carrying amount. Therefore, any adverse movement in a key assumption would lead to further impairment. N OTE 1 4 | TR A D E A N D OTH E R PAYA B LE S ACCO U N TI N G P O L I C Y Trade and other payables represent the liabilities for goods and services received by the entity that remain unpaid at the end of the reporting period. The balance is recognised as a current liability with the amounts normally paid within 60 days of recognition of the liability. The non-current payables are amounts not expected to be settled within the next 12 months. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Current Unsecured liabilities Trade payables Other payables and accruals Litigation claim payables1 2,359 3,553 323 Total current unsecured liabilities 6,235 2,172 3,769 - 5,941 1. Litigation claim payables relate to various settlement fees incurred during the business restructure process. 79 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 1 5 | LE A S E S ACCO U N TI N G P O L I C Y Lease liabilities are measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • Fixed payment, less any lease incentives receivable; • Amounts expected to be payable by the lessee under residual value guarantees; • The exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and, • Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The lease payments are discounted using the lessee’s incremental borrowing rate of 5.54 per cent, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are initially measured at cost comprising the following: • The amount of the initial measurement of lease liability; • Any lease payments made at or before the commencement date less any lease incentive received; • Any initial costs; and, • Restoration costs. The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Current Lease liabilities Total current lease liabilities Non-current Lease liabilities Total non-current lease liabilities 1,731 1,731 2,158 2,158 Total lease liabilities 3,889 - - - - - FINANCIAL STATEMENTS 80 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 The Group has adopted AASB 16 using the modified retrospective approach from 1 July 2019 and has not restated comparatives for the prior reporting period. See note 1(i). Balance as at 1 July 2019 Initial recognition of lease liabilities Interest charges Repayments (including interest) Rent concessions or deferred rents Balance as at 30 June 2020 CONSOLIDATED GROUP LEASE LIABILITIES $’000 - 5,711 249 (1,859) (212) 3,889 81 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 1 6 | B O R R OW I N G S ACCO U N TI N G P O L I C Y NON-DERIVATIVE Non-derivative loans and borrowings are financial liabilities with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost using the effective interest rate method. Gains or losses are recognised in profit or loss through the amortisation process and when the financial liability is derecognised. Amortised cost is calculated as 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 income or interest expense over the relevant period and is equivalent to the rate that exactly 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 asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying amount with a consequential recognition of an income or expense item in profit or loss. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Current Lease incentive loan Interest bearing loan Total current borrowings Non-current Lease incentive loan Additional growth capital facility Total non-current borrowings - 517 517 - 2,691 2,691 140 4,029 4,169 466 - 466 Total borrowings 3,208 4,635 FINANCIAL STATEMENTS 82 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Facility limit Unused facility INTEREST BEARING LOAN ADDITIONAL GROWTH OPERATIONAL FACILITY TRANSFORMATIONAL CAPITAL FACILITY $’000 500 - $’000 9,825 7,134 $’000 1,200 1,200 Interest rate (fixed) 10% per annum 10% per annum 12.5% per annum Line fees N/A $9,708 per month $2,000 per month Maturity date 30/09/2020 31/12/2021 18 months from the date of the first draw down Security over all the Group’s present and future property Subject to shareholders’ approval Subject to shareholders’ approval Security Drawn down as at 1 July 2019 Drawn down Interest expenses Line fees 4,029 15,000 788 - Loan converted to equity (19,300) Drawn down as at 30 June 2020 517 2,691 - 2,585 71 35 - - - - - - - INTEREST BEARING LOAN On 9 August 2019 the Group entered into a loan deed with Suzerain for total funding of $19.0 million to support working capital requirements and to restructure the business. The loan was to be repaid on 30 September 2020 with interest capitalised at 10 per cent per annum. During the AGM, resolutions were passed to enter into a General Security Deed over the assets of the Group in the form attached to the Convertible Loan Deed and for the loan to be convertible to ordinary shares at the higher of $0.047 per share or 30 days volume weighted average price prior to conversion. Accordingly, $19.3 million including accrued interest of the convertible loan was converted to equity with the issuance of 410,643,766 ordinary shares (4.7 cents per share) in the Company. This will leave $500,000 of the convertible loan in which Suzerain had the option to convert up until 30 June 2020. The option lapsed as the loan was not converted at 30 June 2020 and will remain as a secured interest-bearing loan repayable by 30 September 2020. 83 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 ADDITIONAL GROWTH OPERATIONAL FACILITY The Group entered into a new Loan Deed with Suzerain on 27 February 2020 for the provision of a $5.83 million facility (including associated borrowing costs). Subsequently, Suzerain has agreed to increase the facility limit of the original loan by $4.0 million to $9.825 million. This facility is unsecured with the view to obtaining shareholder approval for security over the assets of the Group at the Company’s next Annual General Meeting, anticipated to be held in November 2020. TRANSFORMATIONAL CAPITAL FACILITY Skybound Fidelis Investment Limited as trustee for the Skybound Fidelis Credit Fund (Skybound) (a related entity of Suzerain) agreed to provide the Group with a $1.2 million facility for the transformational capital expenditures to be agreed between the Group and Skybound. As at 30 June 2020 this loan facility had not been drawn down. LEASE INCENTIVE LOAN As part of the initial application of AASB 16, the lease incentive loan was offset against the right-of-use assets at the date of initial application. See note 1(i). N OTE 1 7 | D E F E R R E D R E V E N U E ACCO U N TI N G P O L I C Y Deferred revenue constitutes contract liabilities under AASB 15, as it relates to performance obligations to the members of Entertainment Publications not yet satisfied. See note 2. CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Deferred revenue Total current deferred revenue Deferred revenue Total non-current deferred revenue 6,219 6,219 350 350 21,394 21,394 - - Total deferred revenue 6,569 21,394 FINANCIAL STATEMENTS 84 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Year ended 30 June 2019 Balance as at 1 July 2018 Revenue deferred Revenue recognised Balance as at 30 June 2019 Year ended 30 June 2020 Balance as at 1 July 2019 Revenue deferred DEFERRED REVENUE $’000 22,001 36,758 (37,365) 21,394 21,394 14,768 Revenue recognised (29,593) Balance as at 30 June 2020 6,569 The contract liabilities primarily relate to cash receipts from membership sales, for which revenue is recognised over time. The reduction in contract liabilities is predominantly due to the impact of the Covid-19 pandemic, which resulted in the planned launch events for the new digital product to be postponed from numerous physical events in February 2020 to virtual events in June 2020. The launch events were earmarked as a key strategic tool to engage fundraisers and use as a launchpad for the new digital membership. The change in membership also changed the timing of when cash was collected as books could be sold ahead of when the membership period commenced, whereas rolling digital memberships were only purchased when books expired, being 31 May 2020. N OTE 1 8 | P R OV I S I O N S ACCO U N TI N G P O L I C Y Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result, and that outflow can be reliably measured. Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period. EMPLOYEE BENEFITS Short-term employee benefits Provision is made for the Group’s obligation for short-term employee benefits. Short-term employee benefits are benefits (other than termination benefits) that are expected to be settled within 12 months after the end of the annual reporting period in which the employees render the related service. These benefits include wages, salaries and sick leave. Short-term employee benefits are measured at the (undiscounted) amounts expected to be paid when the obligation is settled. 85 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 The Group’s obligations for short-term employee benefits are recognised as a part of current trade and other payables in the Statement of Financial Position. The Group’s obligations for employees’ annual leave and long service leave entitlements are recognised as provisions in the Statement of Financial Position. Other long-term employee benefits Provision is made for employees’ long service leave and annual leave entitlements not expected to be settled within 12 months after the end of the annual reporting period in which the employees render the related service. Other long-term employee benefits are measured at the present value of the expected future payments to be made to employees. Expected future payments incorporate anticipated future wage and salary levels, durations of service and employee departures and are discounted at rates determined by reference to market yields at the end of the reporting period on government bonds that have maturity dates that approximate the terms of the obligations. Any re-measurements for changes in assumptions of obligations for other long-term employee benefits are recognised in profit or loss in the periods in which the changes occur. The Group’s obligations for long-term employee benefits are presented as non-current provisions in its Statement of Financial Position, except where the Group does not have an unconditional right to defer settlement for at least 12 months after the end of the reporting period. In this case the obligations are presented as current provisions. Retirement benefits All employees of the Australian entities and the majority of employees of foreign subsidiaries in the Group receive defined contribution superannuation entitlements, for which the Group pays a fixed superannuation contribution based on a percentage of the employee’s ordinary salary. All contributions in respect of employees’ defined contribution entitlements are recognised as an expense when they become payable. The Group’s obligation with respect to employees’ defined contribution entitlements is limited to its obligation for any unpaid superannuation contributions at the end of the reporting period. All obligations for unpaid superannuation contributions are measured at the (undiscounted) amounts expected to be paid when the obligation is settled and are presented as current liabilities in the Group’s Statement of Financial Position. ONEROUS LEASE PROVISION The Group currently has leases for office space in various towns and cities across Australia and New Zealand. As a result of decisions made by the Board to streamline the operations of the business in 2019, certain leases became surplus to requirements. For those locations, the Group vacated the premises and attempted to sublease the space. Those leases were determined to be onerous at the time the Group vacated the premises, and the provision was calculated based on the present value of contracted obligations net of expected rental income. As part of the initial application of AASB 16, the onerous lease provision was offset against the right-of-use assets at the date of initial application. See note 1(i). RESTRUCTURING PROVISION In December 2017 IncentiaPay Ltd announced a restructure program in respect of geographical presence and the employee cost base. As at 31 December 2017, a provision was raised for $4.5 million, being for employee entitlements and occupancy costs. The Company spent $1.9 million of this provision during the six-month period ended 30 June 2018 and the remaining balance of $2.6 million was spent during the second half of financial year 2019. MAKE GOOD PROVISION The Group is required to restore the leased premises of its offices to their satisfactory condition at the end of the respective lease terms. A provision has been recognised for the present value of the estimated expenditure required for the restoration. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease and the useful life of the assets. FINANCIAL STATEMENTS 86 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 CONSOLIDATED GROUP EMPLOYEE BENEFITS RESTRUCTUR- ING PROVISION ONEROUS LEASES PROVISION MAKE GOOD PROVISION TOTAL $’000 $’000 $’000 $’000 $’000 Year ended 30 June 2019 Balance as at 1 July 2018 4,174 2,600 Released - (2,600) (Released)/additional provisions Reclassified as held for sale Balance as at 30 June 2019 Year ended 30 June 2020 Balance as at 1 July 2019 (Utilised)1/(transferred)2/ additional provisions3 Balance as at 30 June 2020 (1,506) (1,253) 1,415 1,415 (597) 818 - - - - - - - - 635 - 635 635 (635) - - - - - - - 128 128 6,774 (2,600) (871) (1,253) 2,050 2,050 (1,104) 946 1. The release of employee benefits on departure of employees leaving the Group and the net movement of accruing and utilising employee benefits. 2. The Group has applied the AASB 16 transition exemption to adjust the right-of-use asset by the amount previously recognised as an onerous lease provision. See note 1(i). 3. Make good provision for occupied premises was raised in the current period. The amount includes interest of $18,000. ANALYSIS OF TOTAL PROVISIONS CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Current Employee benefits Onerous leases provision Total current provisions Non-current Make good provision Employee benefits Total non-current provisions Total provisions 764 - 764 128 54 182 946 1,198 635 1,833 - 217 217 2,050 87 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 1 9 | I S S U E D C A P ITA L CONSOLIDATED GROUP FY2020 SHARES FY2019 SHARES FY2020 $’000 FY2019 $’000 655,940,612 242,618,274 116,026 96,006 DATE NUMBER OF SHARES ISSUE PRICE $ $’000 Ordinary shares - fully paid on issue INP has no limit to its authorised share capital Movements in ordinary share capital Ordinary shares at beginning of the year 228,193,274 Issues during the year 28 February 2019 14,425,000 Less, costs of issues - Balance as at 30 June 2019 Ordinary shares at beginning of the year 242,618,274 242,618,274 Issues during the year 1 November 20191 2,678,572 28 February 20202 410,643,766 Less, costs of issues - Balance as at 30 June 2020 655,940,612 0.08 - 0.28 0.05 - 94,892 1,155 (41) 96,006 96,006 750 19,300 (30) 116,026 1. Issued as final consideration for the acquisition of businesses of the Gruden group. 2. See note 16. Ordinary shares participate in dividends and the proceeds on winding-up of the parent entity in proportion to the number of shares held. Shares have no par value. 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. The entity manages its capital to ensure that it maximises the returns to shareholders as dividends and in capital value, whilst maintaining sufficient equity to ensure the Company can meet its business development objectives and continue as a going concern. The Group only has ordinary shares on issue and is not subject to any externally imposed capital requirements. Capital is also managed having regard to the Group’s long-term growth requirements. FINANCIAL STATEMENTS 88 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 PERFORMANCE RIGHTS NUMBER OF PERFORMANCE RIGHTS ISSUED PRICE $ $’000 Performance rights at beginning of the year 2,072,000 0.875 1,813,000 Balance as at 30 June 2019 2,072,000 Performance rights at beginning of the year 2,072,000 1,813,000 1,813,000 EP PREP wind up (2,072,000) 0.875 (1,813,000) Balance as at 30 June 2020 - - Performance rights were issued to management and employees of Entertainment Publications entities in May 2017. On 22 July 2019, the Board voted to wind up the original performance rights equity plan and replace it with a new broad-based employee share equity plan. The new plan’s roll out commenced in August 2020. 89 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 2 0 | R E S E RV E S ACCO U N TI N G P O L I C Y SHARE BASED PAYMENTS The fair value of unissued ordinary shares granted is recognised as a benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the recipients become unconditionally entitled to the equity-based incentive. Upon the issue of shares, the balance of the share based payments reserve relating to those rights are transferred to share capital. FOREIGN CURRENCY TRANSLATION Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as a foreign currency translation reserve. The cumulative amount is reclassified to profit or loss when the net investment is disposed. CONSOLIDATED GROUP SHARE BASED PAYMENTS RESERVE $’000 FOREIGN CURRENCY TRANSLATION RESERVE $’000 TOTAL $’000 Year ended 30 June 2019 Balance as at 1 July 2018 Amortised during the period 660 452 Unvested during the period1 (382) Movement during the period Balance as at 30 June 2019 Year ended 30 June 2020 Balance as at 1 July 2019 Unvested during the period2 Movement during the period Balance as at 30 June 2020 - 730 730 (730) - - 215 - - 191 406 406 - (29) 377 875 452 (382) 191 1,136 1,136 (730) (29) 377 1. The shares issued on 5 April 2018 related to Loan Funded Share arrangements with the CEO and COO/CFO. These shares are subject to various restrictions, as set out further in the Company’s Remuneration report. The departure of key personnel to which the Loan Funded Shares relate has and will result in these shares not vesting. 2. Performance rights were issued to management and employees of Entertainment Publications entities in May 2017. The Board, on 22 July 2019, voted to wind up the original performance rights equity plan and replace it with a new broad-based employee share equity plan. The new plan’s roll out commenced in August 2020. The share based payment reserve relating to these Performance rights has been reversed to reflect this. FINANCIAL STATEMENTS 90 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 2 1 | K E Y M A N AG E M E NT P E R S O N N E L CO M P E N SATI O N Refer to the Remuneration report for details of the remuneration paid or payable to each member of the Group’s Key Management Personnel (KMP) for the year ended 30 June 2020. The total remuneration paid to KMP of the Group during the year was as follows: CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Short-term employee benefits Post-employment benefits Long-term benefits Share based payments 904 42 338 - Total KMP compensation 1,284 1,835 164 300 20 2,319 N OTE 2 2 | AU D ITO R ’ S R E M U N E R ATI O N CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Auditing or reviewing the financial statements 294 Taxation services - compliance Other services 81 1 Total 376 306 57 17 380 91 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 2 3 | I NT E R E S T S I N S U B S I D I A R I E S A N D B U S I N E S S CO M B I N ATI O N S The subsidiaries listed below have share capital consisting solely of ordinary shares which are held directly by the Group. The proportion of ownership interests held equals the voting rights held by the Group. Each subsidiary’s principal place of business also reflects its country of incorporation. Name of entity Principal place of business FY2020 % FY2019 % OWNERSHIP INTEREST HELD BY THE GROUP a) Information about principal subsidiaries Entertainment Publications of Australia Pty Ltd Australia Entertainment Publications Ltd New Zealand Entertainment Digital Pty Ltd (previously MobileDEN Pty Ltd) Australia Entertainment Trus Co Pty Ltd1 Australia 100 100 100 100 100 100 100 - 1. The Employee Share Plan trust (“ESP”) was established on 24 April 2020 to provide benefits to current employees, Directors and contractors (“the Beneficiaries”). No shares are currently held by the ESP. Subsidiary financial statements used in the preparation of these consolidated financial statements have also been prepared as at the same reporting date as the Group’s financial statements, using the same accounting policies. There are no significant restrictions over the Group’s ability to access or use the assets and settle liabilities of the Group. N OTE 2 4 | D I S P O SA L G R O U P S C L A S S I F I E D A S H E L D FO R SA L E A N D D I S CO NTI N U E D O P E R ATI O N S 2 02 0 F I N A N C I A L Y E A R There were no discontinued operations during the 2020 financial year. During the financial year, the Group received $0.15 million from the sale of the performance marketing business still owing at 30 June 2019 and presented in de- ferred consideration. 2 01 9 F I N A N C I A L Y E A R BARTERCARD BUSINESS On 14 September 2018, the Group announced its intention to exit the Bartercard business. A binding share sale agreement to divest the Bartercard business was signed on 14 September 2018 and the sale transaction closed on 19 November 2018. As such, this business is reported in the previous period as a discontinued operation. Financial information relating to the discontinued operation for the period to the date of disposal is set out overleaf. The financial performance and cash flow information presented are for the period 1 July 2018 to 19 November 2018. FINANCIAL STATEMENTS 92 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 FINANCIAL PERFORMANCE AND CASH FLOW INFORMATION FY2020 $’000 FY2019 $’000 Revenue Expenses Profit before income tax Income tax Profit after income tax of discontinued operation Loss on sale of the subsidiary after income tax Loss from discontinued operation Exchange differences on translation of discontinued operations Other comprehensive income from discontinued operations Net cash inflow from operating activities Net cash outflow from investing activities Net cash inflow from financing activities Net increase in cash generated by the division DETAILS OF THE SALE OF THE SUBSIDIARY FY2020 $’000 Cash Deferred consideration Total disposal consideration Carrying amount of net assets sold Loss on sale before income tax and reclassification of foreign currency translation reserve Reclassification of foreign currency translation reserve Income tax expense on loss Loss on sale after income tax - - - - - - - - - - - - - - - - - - - - - 8,887 (8,271) 616 - 616 (6,196) (5,580) (208) (208) 953 (1,100) 273 126 FY2019 $’000 2,000 2,878 4,878 (11,282) (6,404) 208 - (6,196) 93 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 There is no ’earn out’ clause in the sale agreement, additional cash consideration of $3.0 million was receivable over three years to November 2021. At the time of the sale the present value of the consideration receivable was determined to be $2.9 million, bringing total disposal consideration to $4.9 million in return for the sale of the share capital of the following subsidiary entities: • Bartercard Group Pty Ltd • Trade Exchange Software Services Pty Ltd • BPS Financial Ltd • Bucqi Australia Pty Ltd • Bartercard Operations AUS Pty Ltd • Bartercard Operations NZ Ltd • Bartercard Services Pty Ltd • Bartercard Operations UK Ltd • Bartercard New Zealand GP Ltd • Bartercard New Zealand LP • Tindalls Dream Ltd • Valeo Corporation Ltd The carrying amounts of assets and liabilities as at the date of sale (19 November 2018) were: YEAR ENDED 30 JUNE 2018 19 NOV 2018 $’000 Cash and cash equivalents Trade and other receivables Inventories Other assets Property, plant and equipment Intangible assets Total assets Trade and other payables Vendor loans Deferred revenue Provisions Total liabilities Net assets 1,413 6,294 32 313 1,124 7,031 16,207 3,437 107 335 1,046 4,925 11,282 FINANCIAL STATEMENTS 94 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 G OV E R N M E N T D I V I S I O N (G R U D E N P T Y LT D) On 19 November 2018, the Group announced its intention to exit the Government division. The business was sold on 13 December 2018 and is reported in the previous period as a discontinued operation. Financial information relating to the discontinued operation for the period to the date of disposal is set out below. The financial performance and cash flow information presented is for the period 1 July 2018 to 13 December 2018. FINANCIAL PERFORMANCE AND CASH FLOW INFORMATION FY2020 $’000 FY2019 $’000 Revenue Expenses Loss before income tax Income tax Loss after income tax of discontinued operation Loss on sale of the subsidiary after income tax Loss from discontinued operation Net cash outflow from operating activities Net cash outflow from investing activities Net decrease in cash generated by the division DETAILS OF THE SALE OF THE SUBSIDIARY FY2020 $’000 Cash Deferred consideration Total disposal consideration Carrying amount of net assets sold Loss on sale before income tax Income tax expense on gain Loss on sale after income tax - - - - - - - - - - - - - - - - - 2,773 (3,550) (777) - (777) (1,270) (2,047) (489) (5) (494) FY2019 $’000 1,238 411 1,649 (2,919) (1,270) - (1,270) There is no ’earn out’ clause in the sale agreement, additional cash consideration of $0.4 million will be receivable. At the time of the sale the present value of the consideration receivable was determined to be $0.4 million. 95 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 The carrying amounts of assets and liabilities as at the date of sale (13 December 2018) were: YEAR ENDED 30 JUNE 2018 13 DEC 2018 $’000 Cash and cash equivalents Trade and other receivables Other assets Intangible assets Total assets Trade and other payables Deferred revenue Provisions Total liabilities Net assets 132 3,366 9 2,058 5,565 2,321 148 177 2,646 2,919 P E R FO R M A N C E M A R K E TI N G B U S I N E S S (B L AC KG L A S S P T Y LTD) On 12 April 2019, the Group announced it had entered into a binding agreement to divest the performance marketing business. The business was sold on 22 April 2019 and is reported in the previous period as a discontinued operation. Financial information relating to the discontinued operation for the period to the date of disposal is set out below. The financial performance and cash flow information presented are for the period 1 July 2018 to 22 April 2019. Revenue Expenses Loss before income tax Income tax Loss after income tax of discontinued operation Loss on sale of the subsidiary after income tax Loss from discontinued operation Net cash outflow from operating activities Net cash inflow from investing activities Net increase in cash generated by the division FY2020 $’000 FY2019 $’000 - - - - - - - - - - 2,732 (3,942) (1,210) 130 (1,080) (1,044) (2,124) (336) 371 35 FINANCIAL STATEMENTS 96 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 YEAR ENDED 30 JUNE 2018 Cash Deferred consideration Total disposal consideration 22 APR 2019 $’000 100 200 300 Carrying amount of net liabilities sold (1,344) Loss on sale before income tax (1,044) Income tax expense on gain - Loss on sale after income tax (1,044) There is no ’earn out’ clause in the sale agreement, additional cash consideration of $0.2 million will be receivable. No net present value calculation is required as the deferred consideration is payable within a year. The carrying amounts of assets and liabilities as at the date of sale (22 April 2019) were: YEAR ENDED 30 JUNE 2018 22 APR 2019 $’000 Cash and cash equivalents Trade and other receivables Other assets Intangible assets Total assets Trade and other payables Provisions Total liabilities Net assets 60 1,556 1 2,235 3,852 2,479 29 2,508 1,344 97 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 CO N S O LI DATE D D I S CO NTI N U E D O P E R ATI O N I N FO R M ATI O N The total presented for the tables above reconcile to the key financial figures as presented in its financial statements as follows: FY2020 $’000 FY2019 $’000 Deferred consideration Current Interest unlocked Paid during the year Total current deferred consideration Non-current Interest unlocked Total non-current deferred consideration Total deferred consideration Loss for the period from discontinued operations Bartercard business Government business Performance marketing business Total loss for the period from discontinued operations Year to date cash receipts from the sales of business Bartercard business Government business - - - - - - - - - - - - - - FY2020 $’000 FY2020 $’000 Performance marketing business Total cash receipts from the sales of business 155 155 19 NOV 2018 BARTERCARD BUSINESS 13 DEC 2018 GOVERNMENT BUSINESS 22 APR 2019 PERFORMANCE MARKETING $’000 $’000 $’000 Cash held in discontinued operations 1,413 132 60 1,101 5 (411) 695 2,388 26 2,414 3,109 FY2019 $’000 (5,580) (2,047) (2,124) (9,751) FY2019 $’000 2,000 1,563 100 3,663 TOTAL $’000 1,605 FINANCIAL STATEMENTS 98 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OT E 2 5 | PA R E NT CO M PA N Y I N FO R M ATI O N a) Information relating to IncentiaPay Ltd (the Parent Entity): Statement of profit or loss and other comprehensive income FY2020 $’000 FY2019 $’000 Total loss (15,508) (39,638) Total comprehensive income (15,508) (39,638) Statement of financial position Assets Current assets 1,724 Non-current assets 23,253 1,029 28,824 Total assets 24,977 29,853 Liabilities Current liabilities 2,648 Non-current liabilities 9,341 7,970 12,069 Total liabilities 11,989 20,039 Equity Issued capital 116,026 96,006 Reserves - 1,339 Accumulated losses (103,038) (87,531) Total equity 12,988 9,814 Details of the contingent assets and liabilities of the Group are contained in note 28. Details of the contractual commitments are contained in note 27. IncentiaPay Ltd, Entertainment Publications of Australia Pty Ltd and Entertainment Digital Pty Ltd are parties to a Deed of Cross Guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly owned entities have been relieved from the requirement to prepare a Financial report and Directors’ report under ASIC Corporations (Wholly owned Companies) Instrument 2016/785. 99 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Set out below is a consolidated balance sheet as of 30 June 2020 of the parties to the Deed of Cross Guarantee. FY2020 $’000 FY2019 $’000 Assets Current assets Cash and cash equivalents 4,394 Deferred consideration Trade and other receivables Inventories Other assets Total current assets Non-current assets - 924 100 1,961 7,379 Deferred consideration - Property, plant and equipment Right-of-use asset Deferred tax assets Intangible assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Lease liabilities Borrowings Deferred revenue Provisions 1,252 2,564 - 14,387 18,203 25,582 5,727 1,542 517 5,174 728 Total current liabilities 13,688 Non-current liabilities Trade and other payables Lease liabilities Borrowings Deferred revenue Provisions Total non-current liabilities Total liabilities Net assets Equity 1,725 2,124 2,691 350 52 6,942 20,630 4,952 Issued capital 116,026 Reserves 322 Retained earnings (111,396) Total equity 4,952 2,532 695 2,549 23 6,605 12,404 2,414 2,261 - 2,790 22,505 29,970 42,374 5,521 - 4,635 18,189 1,779 30,124 1,863 - - - 216 2,079 32,203 10,171 96,006 1,051 (86,886) 10,171 FINANCIAL STATEMENTS 100 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 See note 26 for the Consolidated Statement of Profit or Loss for the year ended 30 June 2020 of the parties to the Deed of Cross Guarantee. All entities incorporated in Australia are the parties of Deed of Cross Guarantee. N OT E 2 6 | S E G M E NT I N FO R M ATI O N ACCO U N TI N G P O L I C Y Reportable segments are identified on the basis of internal reports on the business units of the Group that are regularly reviewed by the Board of Directors in order to allocate resources to the segment and assess its performance. Since the divestment of the Bartercard entities, IncentiaPay Ltd manages the Group as one segment, being the Entertainment Publications business. The Group’s segment results include a corporate category reflecting head office operating costs. This does not qualify as an operating segment in its own right. The Group has not disclosed the results of the discontinued operation within the segment disclosures. This decision was based on the fact that the Group did not separately review the results of this division since the decision to dispose of it. The results of the discontinued operations are disclosed in note 24. There were no discontinued operations during the 2020 financial year. REVENUE BY GEOGRAPHICAL LOCATION Revenue, excluding revenue from discontinued operations, attributable to external customers is disclosed below based on the country in which the revenue is derived and billed. Year ended 30 June 2020 AUSTRALIA $’000 NEW ZEALAND $’000 TOTAL $’000 Revenue Revenue from contracts with customers 37,464 Government assistance 150 4,591 - 42,055 150 Total revenue 37,614 4,591 42,205 Expenses Direct expenses of providing services (21,765) Employee expenses (16,020) Depreciation and amortisation (5,155) Impairments (4,990) Interest (1,277) (2,172) (960) (311) - (18) (23,937) (16,980) (5,466) (4,990) (1,295) Other expenses (10,276) (206) (10,482) Total expenses (59,483) (3,667) (63,150) Segment loss before tax (21,869) 924 (20,945) Total assets Segment total assets 25,583 1,696 27,279 Total liabilities Segment total liabilities 19,037 1,996 21,033 101 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 Year ended 30 June 2019 AUSTRALIA $’000 NEW ZEALAND $’000 TOTAL $’000 Revenue from contracts with customers 59,247 Revenue Total revenue 59,247 Expenses Direct expenses of providing services (39,023) Employee expenses (17,669) Depreciation and amortisation (1,989) Impairments (14,553) Interest (346) 5,325 5,325 (2,896) (1,472) (26) - - 64,572 64,572 (41,919) (19,141) (2,015) (14,553) (346) Other expenses (13,404) (1,161) (14,565) Total expenses (86,984) (5,555) (92,539) Segment loss before tax (27,737) (230) (27,967) Total assets Segment total assets 42,374 3,479 45,853 Total liabilities Segment total liabilities 32,203 2,003 34,206 MAJOR CUSTOMERS The Group has no major customers with all customers contributing small balances to revenues. N OT E 27 | C A P ITA L A N D L E A S I N G CO M M ITM E NT S CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Operating lease commitments Non- cancellable operating leases contracted for but not recognised in the financial statements Not later than 1 year Between 2 and 5 years Later than 5 years Total - - - - 2,080 3,961 311 6,352 From 1 July 2019, the Group has recognised lease liabilities for these leases. See note 1(i). FINANCIAL STATEMENTS 102 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 CAPITAL COMMITMENTS On 31 July 2020, the Group entered into a master services agreement (MSA) with Paywith Australia Pty Ltd to develop the IncentiaPay products. This MSA follows on from a term sheet which was entered into in May 2020 which established the key commercial terms of the agreement. An amount of $615,000 was committed under the provisions of the term sheet for the development of the IncentiaPay products of which $50,000 was paid in June and a further $50,000 was accrued for under trade payables. The remaining $515,000 is anticipated to be paid in the first of half of the 2021 financial year. N OT E 2 8 | CO N TI N G E NT LI A B I LITI E S A N D CO NTI N G E NT A S S E T S S E C U R IT Y D E P O S IT The parent entity had given the following guarantees as at 30 June 2020: • Lease of the Sydney office space, $0.7 million. • Guarantee for credit cards facility, $0.1 million. • Lease of the Auckland office space, $0.082 million. • Letter of credit for payroll payment facility, $0.1 million. N OT E 2 9 | F I N A N C I A L R I S K M A N AG E M E NT ACCO U N TI N G P O L I C Y The Group’s financial instruments consist mainly of deposits with banks, accounts receivable and payable, loans to and from subsidiaries and leases. The totals for each category of financial instruments, measured in accordance with AASB 139: Financial Instruments: Recognition and Measurement as detailed in the accounting policies to these financial statements, are as follows: CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Financial assets Cash and cash equivalents 5,307 Deferred consideration Trade and other receivables - 992 Total financial assets 6,299 Financial liabilities Trade and other payables Lease liabilities Borrowings 6,235 3,889 3,208 Total financial liabilities 13,332 3,460 3,109 2,728 9,297 5,941 - 4,635 10,576 103 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 FINANCIAL RISK MANAGEMENT POLICIES Senior management meet on a regular basis to review currency and interest rate exposure and to evaluate treasury management strategies where relevant, in the context of the most recent economic conditions and forecasts. The overall risk management strategy seeks to assist the consolidated Group in meeting its financial targets, while minimising potential adverse effects on financial performance. Its functions include the review of the use credit risk policies and future cash flow requirements. The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include contractual liabilities interest payments and exclude the impact of netting agreements. CONTRACTUAL CASH FLOWS FY2020 CARRYING VALUE $’000 FY2019 CARRYING VALUE $’000 Maturity analysis Financial assets WITHIN 1 YEAR 1 - 5 YEARS > 5 YEARS TOTAL FY2020 FY2019 FY2020 FY2019 FY2020 FY2019 FY2020 FY2019 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cash 5,307 3,460 5,307 3,460 Deferred consideration - 3,109 - 695 Trade debtors 992 1,915 992 1,915 Other receivables - 813 - 813 - - - - Financial liabilities Trade and other payables 6,235 5,940 6,235 5,940 - Lease liabilities 3,889 - 1,888 - 2,317 - 2,414 - - - - Borrowings 3,208 4,635 517 4,169 2,691 466 - - - - - - - - 5,307 3,460 - - - - 3,109 992 1,915 - 813 - 6,235 5,940 - 4,205 - - 3,208 4,635 FINANCIAL STATEMENTS 104 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 ACCO U N TI N G C L A S S I F I C ATI O N S A N D FA I R VA LU E S The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. CARRYING VALUE RECEIVABLES $’000 CARRYING VALUE OTHER FINANCIAL LIABILITIES $’000 FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $’000 $’000 $’000 $’000 Year ended 30 June 2020 Financial assets not measured at fair value Cash 5,307 Deferred consideration Trade debtors Other receivables Financial liabilities not measured at fair value Trade and other payables Lease liabilities Borrowings - 629 363 - - - - - - - 6,235 3,889 3,208 - - - - - - - - - - - - - - - - - - - - - 5,307 - 629 363 6,235 3,889 3,208 CARRYING VALUE RECEIVABLES - $’000 CARRYING VALUE OTHER FINANCIAL LIABILITIES $’000 FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $’000 $’000 $’000 $’000 Year ended 30 June 2019 Financial assets not measured at fair value Cash 3,460 Deferred consideration 3,109 Trade debtors Other receivables 1,915 813 - - - - Financial assets not measured at fair value Trade and other payables Borrowings - - 5,941 4,635 - 3,109 - - - - - - - - - - - - - - - - 3,460 3,109 1,915 813 5,941 4,635 105 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 R E CO G N I S E D FA I R VA LU E M E A S U R E M E N T S The fair value of financial instruments that are not traded in an active market is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. VA LUATI O N T E C H N I Q U E S U S E D TO D E T E R M I N E FA I R VA LU E S Specific valuation techniques used to value financial instruments include: • Deferred consideration - based on the present value of the future cash flows, discounted using a 3-year government bond rate. • Lease liabilities - based on the present value of the future cash flows, discounted using an incremental borrowing rate. When measuring the fair value of an asset or a liability, the Group uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). S E N S ITI V IT Y A N A LYS I S Directors believe that the fair value of financial assets and liabilities are not sensitive to movements in either interest rates or exchange rates having taken into account the relatively stable interest rate market of our interest exposure and the low number of cross border transactions. Refer to the Market risk section below for further information. S P E C I F I C F I N A N C I A L R I S K E X P O S U R E S A N D M A N AG E M E N T The main risks the Group is exposed to through its financial instruments are credit risk, liquidity risk and market risk consisting of interest rate risk and foreign currency risk. M A R K E T R I S K A. CREDIT RISK Exposure to credit risk relating to financial assets arises from the potential non-performance by customers of contract obligations that could lead to a financial loss to the Group. I. RISK MANAGEMENT Credit risk is managed through the maintenance of systems for the approval, granting and renewal of credit limits, regular monitoring of exposures against such limits and monitoring of the financial stability of significant customers, ensuring to the extent possible that customers to transactions are of sound credit worthiness. Such monitoring is used in assessing receivables for impairment. Depending on the division within the Group, credit terms are generally 14 to 30 days from the invoice date. The maximum exposure to credit risk by class of recognised financial assets at the end of the reporting period excluding the value of any collateral or other security held, is equivalent to the carrying amount and classification of those financial assets (net of any provisions) as presented in the Statement of Financial Position. FINANCIAL STATEMENTS 106 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 The Group has no significant concentrations of credit risk with any single customer or group of customers. $35 million of the revenue in note 2 are memberships and gift cards sales, they are cash on delivery, therefore, the Group has no significant credit risk. Covid-19 impacts have increased the possibility of non-performance by customers, in particular, customers operating within the travel and leisure sector. The Group started engaging with its customers since the start of the pandemic, providing discounts to the existing debts or assisting customers with new sales proportions. As the revenue from travel and leisure was $1.7 million which was only 4.0 per cent of the total revenue for the financial year, there is no significant credit risk. II. IMPAIRMENT OF FINANCIAL ASSETS The Group has trade and other receivables that are subject to the expected credit loss model. Trade and other receivables that are neither past due nor impaired are considered to be of high credit quality. Aggregates of such amounts are detailed in note 8. While cash and cash equivalents are also subject to the impairment requirements of AASB 9, the identified impairment loss was immaterial. The major customers of trade and other receivables were not affected by Covid-19, as this group of customers are mainly in the energy, banking and insurance industry. Trade and other receivables The Group applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. See note 8. B. LIQUIDITY RISK Included in the $3.2 million disclosed in the 2020 borrowings time band is $0.5 million which is ‘within 1 year’, and the loan is required to be repaid by 30 September 2020. See note 16. Management monitors rolling forecasts of the Group’s liquidity reserve, and cash and cash equivalents on the basis of expected cash flows. Liquidity risk arises from the possibility that the Group might encounter difficulty in settling its debts or otherwise meeting its obligations related to financial liabilities. The Group manages this risk through the following mechanisms: • preparing forward-looking cash flow analyses in relation to its operating, investing and financing activities; • monitoring undrawn credit facilities; • obtaining funding from major financial institutions; • maintaining a reputable credit profile; • managing credit risk related to financial assets; • only investing surplus cash with major financial institutions; and, • comparing the maturity profile of financial liabilities with the realisation profile of financial assets. I. FINANCING ARRANGEMENTS The Group entered into a new Loan Deed with Suzerain on 27 February 2020 for the provision of a $5.83 million facility (including associated borrowing costs). Subsequently, Suzerain has agreed to increase the facility limit of the original loan by $4.0 million to $9.825 million. This facility will initially be unsecured with the view to obtaining shareholder approval for security at the Company’s next Annual General Meeting, anticipated to be held in November 2020. See note 16. 107 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 II. MATURITIES OF FINANCIAL LIABILITIES Interest bearing loan As at 30 June 2020, the interest bearing loan with Suzerain will mature on 30 September 2020. See note 16. Additional growth operational facility As at 30 June 2020, the additional growth operational facility with Suzerain will mature on 31 December 2021. See note 16. Transformational capital facility As at 30 June 2020, the transformational capital facility with Suzerain will mature 18 months from the date of the first draw down. There was no draw down as at 30 June 2020. See note 16. C. FOREIGN EXCHANGE RISK The Group is exposed to foreign currency risk on the sale of memberships and other fee income from foreign entities and on the translation of its foreign subsidiaries. Senior management has not hedged foreign currency transactions as at 30 June 2020 as $4.6 million of total revenue is in NZD and the foreign currency fluctuation between AUD and NZD is historically insignificant at 0.5 per cent during the year. Foreign exchange risk was therefore, considered insignificant. Senior management continue to evaluate this risk on an ongoing basis. The exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: FY2020 NZD $’000 73 (91) FY2019 NZD $’000 218 (69) Trade debtors Trade payables At the end of the financial year, the effect on profit and equity as a result of changes in the foreign exchange rate with all other variables remaining constant would be as follows: Year ended 30 June 2020 +/- 0.5% in foreign exchange rates Year ended 30 June 2019 +/- 0.5% in foreign exchange rates PROFIT $’000 EQUITY $’000 46 7 117 74 D. INTEREST RATE RISK See note 16 for details related to interest rates and repayment terms for borrowings. FINANCIAL STATEMENTS 108 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 3 0 | R E L ATE D PA R T Y TR A N SAC TI O N S KEY MANAGEMENT PERSONNEL Any persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any Director (whether Executive or otherwise) of that entity, are considered key management personnel. During the year certain remuneration entitlements of Executive and Non-Executive Directors were paid, upon request of the Directors, to related entities or associates of those Directors. See note 21 for the value of the related party transactions above. OTHER RELATED PARTIES Other related parties include entities controlled by the Company and entities over which key management personnel have joint control. Amounts disclosed in note 21 includes transactions with associated entities of key management personnel. Transactions between related parties are on normal commercial terms and conditions that are no more favourable than those available to other parties unless otherwise stated. The following transactions occurred with related parties controlled by key management personnel: CONSOLIDATED GROUP FY2020 $’000 FY2019 $’000 Purchases of services from entities controlled by key management personnel 339 - Transactions between the Company and controlled entities include loans, management fees and interest. These are eliminated on consolidation. Suzerain and Skybound, related parties to Jeremy Thorpe (Non-Executive Director) and Dean Palmer (Non-Executive Director), have provided a total of $11.5 million loan facilities to the Group. During the period, the Group drew down $3.2 million of the line of credit facility. See note 16 for additional detail. 109 I N C E NTI A PAY LT D A N D CO N TR O L L E D E NTITI E S NOTE S TO TH E FINANCIAL STATE M E NTS FOR TH E YEAR E N DE D 30 J U N E 2 02 0 N OTE 3 1 | E V E NT S A F T E R T H E R E P O R TI N G P E R I O D EMPLOYEE GIFT PLAN The Directors approved the establishment of an Employee Gift Plan effective on 28 July 2020, through an employee trust, being Entertainment Trus Co Pty Ltd, whereby each employee will be gifted $1,000 of shares for no payment. The number of shares will be determined based on the share price at the date they are issued and will be subject to the terms of the plan rules which include: • A recipient must be an employee of the Group on 28 August 2020. • The shares cannot be sold, assigned, transferred, or used as security before the earlier of: • The end of three years after the acquisition of the shares; • The employee is no longer employed by the Group; or, • There is a change of control event that occurs after the shares are issued to employees. SALE OF MOBILEDEN The Group entered into an agreement to dispose of the MobileDEN platform and associated assets on 1 July 2020 to Mobecom Limited. Consideration for the sale transaction will be determined using revenue over the period of 12 months after settlement. Settlement is dependent on Suzerain releasing its security interest over the assets, which occurred on 1 July 2020. Assets and liabilities associated with this sale have not been reclassified as available for sale in the financial report as they have either been fully recovered, or impaired, or have been fully settled as at 30 June 2020. COVID-19 Conditions affecting the macro economic environment and the uncertainty brought on by the Covid-19 pandemic continues after 30 June 2020, and given the nature of the pandemic, the term of this impact is unknown. The Group will continue to monitor the impacts associated with the pandemic, with a view to take appropriate and timely action. FINANCIAL STATEMENTS 110 Directors’ Declaration 111111 In accordance with a resolution of the Directors of IncentiaPay Ltd, the Directors of the Company declare that: The financial statements and notes, as set out on pages 43 to 110, are in accordance with the Corporations Act 2001 and: a) Comply with Australian Accounting Standards, which, as stated in the notes to the financial statements, constitutes compliance with International Financial Reporting Standards (IFRS); and, b) Give a true and fair view of the financial position as at 30 June 2020 and of the performance for the year ended on that date of the consolidated Group. In the Directors’ opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and the Directors have been given the declarations required by s295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Operating Officer. S T E P H E N H A R R I S O N C H A I R M A N 18 September 2020 IncentiaPay Limited ABN 43 167 603 992 Level 5, 68 Harrington Street, The Rocks 2000 NSW p | +61 2 8256 5300 | e | info@incentiapay.com www.incentiapay.com DIRECTORS’ DECLARATION 112 Independent Auditor’s Report 113 Independent Auditor’s Report To the shareholders of IncentiaPay Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of IncentiaPay Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • • giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises: • Consolidated statement of financial position as at 30 June 2020; • Consolidated statement of profit or loss and other comprehensive income, Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year then ended; • Notes including a summary of significant accounting policies; and • Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. 1 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. INDEPENDENT AUDITOR’S REPORT 114 Material uncertainty related to going concern We draw attention to Note 1, “Going Concern” in the Financial Report. The conditions disclosed in Note 1, indicate a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern and, therefore, whether it will realise its assets and discharge its liabilities in the normal course of business, and at the amounts stated in the financial report. Our opinion is not modified in respect of this matter. In concluding there is a material uncertainty related to going concern we evaluated the extent of uncertainty regarding events or conditions casting significant doubt in the Group’s assessment of going concern. This included: • Analysing the cash flow projections by: • • Evaluating the underlying data used to generate the projections for consistency with other information tested by us, and our understanding of the Group’s intentions, and past results and practices; Assessing the planned levels of operating and capital expenditures for consistency of relationships and trends to the Group’s historical results, particularly in light of recent loss making operations, results since year end, and our understanding of the business, industry and economic conditions of the Group with consideration to Covid-19; • • • Assessing significant non-routine forecast cash inflows and outflows for feasibility, quantum and timing. We used our knowledge of the client, its industry and financial position to assess the level of associated uncertainty; Reading correspondence with existing financiers to understand the financing options available to the Group, and assess the level of associated uncertainty resulting from financial loan draw-down conditions and negotiation of additional/revised funding arrangements; Evaluating the Group’s going concern disclosures in the financial report by comparing them to our understanding of the matter, the events or conditions incorporated into the cash flow projection assessment, the Group’s plans to address those events or conditions, and accounting standard requirements. We specifically focused on the principal matters giving rise to the material uncertainty. Key Audit Matters Key Audit Matters are those matters that, in our professional judgment, 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. In addition to the matter described in the Material uncertainty related to going concern section, we have determined the matter described below to be the Key Audit Matter. 115 Valuation of Goodwill and other intangible assets ($14.387m) Refer to Note 13 to the Financial Report The key audit matter How the matter was addressed in our audit A key audit matter for us was the Group’s annual testing of goodwill and other intangible assets for impairment, given the size of the balance (being 53% of total assets). We focussed on the significant forward-looking assumptions the Group applied in their value in use model, including: • forecast operating cash flows – the Group has incurred a loss during the year, as a result of impacts of reductions in membership subscriptions and gift card sales, as well as costs associated with the business transformation program this financial year. These conditions increase the possibility of goodwill and other intangible assets being impaired. Forecast operating cash flows take into account the Groups transformation program, including the strategic reposition of the core operations of the business focussing on long-term sustainability, as well as anticipated impacts from Covid-19 on the volatility of cash flows over the forecast period. This increases the risk of inaccurate forecasts or a wider range of possible outcomes for us to consider. forecast growth rate and terminal growth rate – In addition to the uncertainties described above, the Group’s model is highly sensitive to small changes in these assumptions, indicating likely impairment. This drives additional audit effort specific to their feasibility and consistency of application to the Group’s strategy. discount rate – this is complicated in nature and varies according to the conditions and environment the specific Cash Generating Unit (CGU) is subject to from time to time, and the model’s approach to incorporating risks into the cash flows or discount rate. The Group’s modelling is highly sensitive to small changes in the discount rate. • • Working with our valuation specialists, our procedures included: • We considered the appropriateness of the value in use method applied by the Group to perform the annual test of goodwill for impairment against the requirements of the accounting standards. • We, along with our valuation specialists, assessed the integrity of the value in use model used, including the accuracy of the underlying calculation formulas. • We considered the sensitivity of the model by varying key assumptions, such as forecast growth rate, terminal growth rate and discount rate, within a reasonably possible range. We did this to identify those assumptions at higher risk of bias or inconsistency in application and to focus our further procedures. • We assessed the accuracy of previous Group forecasts to inform our evaluation of forecasts incorporated in the model. • Working with our valuation specialists, we challenged the Group’s significant forecast cash flow and growth assumptions in light of the expected downturn in membership subscriptions in the short-term and as a result of Covid-19, as well as the change in anticipated cash flow cycles following completion of the Group’s transformation program. We compared key events to the Board approved plan and strategy. We applied increased scepticism to forecasts in the areas where previous forecasts were not achieved. We compared forecast growth rate and terminal growth rate to published studies of industry trends and expectations, and considered differences for the Group’s operations. We used our knowledge of the Group, their past performance, business and customers, and industry experience. • We checked the consistency of the growth rate to the Group’s stated plan and strategy, past performance of the Group, and our INDEPENDENT AUDITOR’S REPORT 116 experience regarding the feasibility of these in the industry/economic environment in which they operate. • Working with our valuation specialists, we analysed the Group’s discount rate against publicly available data of a group of comparable entities. • We assessed the difference between the Group’s year-end market capitalisation and the carrying amount of the net assets, by comparing the year-end market capitalisation to the Group’s enterprise value. • We recalculated the impairment charge against the recorded amount disclosed. • We assessed the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standards. The Group’s model used to perform their annual testing of goodwill and other intangible assets for impairment is largely manually developed, uses adjusted historical performance, and a range of internal and external sources as inputs to the assumptions. The Group have not met prior forecasts, raising our concern for reliability of current forecasts. Complex modelling, using forward-looking assumptions tend to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us, in particular to address the objectivity of sources used for assumptions, and their consistent application. The Group recorded an impairment charge of $3.6m against goodwill, resulting from the reduction in business due to Covid-19 along with changing cash flow cycles under the business transformation, increasing the sensitivity of the model to small changes. This further increased our audit effort in this key audit area. We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Other Information Other Information is financial and non-financial information in IncentiaPay Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we 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. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. 117 Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error assessing the Group and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • • 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 Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They 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 the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf This description forms part of our Auditor’s Report. INDEPENDENT AUDITOR’S REPORT 118 Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of IncentiaPay Limited for the year ended 30 June 2020, complies with Section 300A of the Corporations Act 2001. 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 responsibilities We have audited the Remuneration Report included in pages 31 to 40 of the Directors’ report for the year ended 30 June 2020. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG John Wigglesworth Partner Sydney 18 September 2020 119 ASX Additional Information ASX ADDITIONAL INFORMATION 120 A SX A D D ITI O N A L I N FO R M ATI O N As at 21 August 2020 D I S T R I B U TI O N O F E Q U ITA B L E S E C U R ITI E S ANALYSIS OF THE NUMBER OF EQUITABLE SECURITY HOLDERS BY SIZE OF HOLDING RANGE TOTAL HOLDERS SECURITIES % ISSUED CAPITAL 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 50,000 50,001 to 100,000 100,001 and over TOTAL 130 228 121 448 150 209 1,286 26,210 689,780 978,593 11,732,126 11,623,245 630,890,658 655,940,612 0.00 0.11 0.15 1.79 1.77 96.18 100.00 UNMARKETABLE PARCELS The number of security investors holding less than a marketable parcel of 15,152 securities ($0.033 on 21/08/2020) is 578 and they hold 2,981,788 securities. SUBSTANTIAL HOLDERS RANK NAME CURRENT BALANCE % ISSUED CAPITAL 1 2 Suzerain Investments Holdings Ltd 393,524,705 59.99% Australia Fintech Pty Ltd 36,732,674 5.60% TOP 20 HOLDERS OF FULLY PAID ORDINARY SHARES The names of the twenty largest security holders of quoted equity securities are listed below: RANK INVESTOR CURRENT BALANCE % ISSUED CAPITAL 1  Suzerain Investments Holdings Ltd 393,524,705 59.99% O R D I N A RY/ F U L LY PA I D O R D I N A RY S H A R E S 2  Citicorp Nominees Pty Limited 38,855,503 3  Australia Fintech Pty Ltd 4  Muirstone Capital Ltd 5  Sinetech Limited 6  HSBC Custody Nominees 121 36,732,674 28,861,387 16,178,574 12,693,730 5.92% 5.60% 4.40% 2.47% 1.94% 7  Everest MB Pty Ltd 7,518,000 8  Kootenay Investments Pty Ltd 6,500,000 9  BNP Paribas Nominees Pty Ltd 4,995,492 10  J.P. Morgan Nominees Australia Pty Limited 4,441,327 11  PC & Wendo Nominees Pty Ltd 3,496,008 12  Iain Dunstan 13  Mr Henry Michael Hoy Jones 14  Yarran Park Pty Ltd 15  Ben Johnson 3,035,714 2,528,631 2,170,034 2,139,574 16  Mr Lucas Rudolph and Jansen Van Vuuren 2,131,667 17  HSBC Custody Nominees (Australia) Limited 2,006,408 18  Virpaysol Pty Ltd 19  Darius Coveney 20  Ms Li Zhao 1,723,685 1,718,571 1,572,818 1.15% 0.99% 0.76% 0.68% 0.53% 0.46% 0.39% 0.33% 0.33% 0.32% 0.31% 0.26% 0.26% 0.24% TOTAL 572,824,502 87.33% VOTING RIGHTS The Company has 655,940,612 fully paid ordinary shares on issue. Each ordinary share is entitled to one vote when a poll is called, otherwise each member present at a meeting, or by proxy, has one vote by a show of hands. There are no other classes of equity securities. VOLUNTARY ESCROW No shares are under voluntary escrow. No fully paid ordinary shares are subject to voluntary escrow. ON-MARKET BUY-BACK There is no current on-market share buy-back. ASX ADDITIONAL INFORMATION 122  IncentiaPay Corporate Directory Directors Mr Stephen Harrison - Chairman Mr Jeremy Thorpe - Non-Executive Director Dr Charles Romito - Non-Executive Director Mr Dean Palmer - Non-Executive Director Company Secretary Mr Ben Newling Registered office Level 5, 68 Harrington Street The Rocks NSW 2000 Principal place of business Level 5, 68 Harrington Street The Rocks NSW 2000 Share registry Link Market Services ACN 083 214 537 Level 12, 680 George Street Sydney NSW 2000 +61 2 8280 7100 Auditor KPMG Level 38, Tower Three, International Towers Sydney 300 Barangaroo Avenue Sydney NSW 2000 Legal advisers Sundaraj & Ker Level 36, Australia Square 264 George Street Sydney NSW 2000 Bankers Commonwealth Bank of Australia Level 3, 240 Queen Street Brisbane QLD 4000 Stock exchange listing IncentiaPay Ltd shares are listed on the Australian Securities Exchange (ASX code: INP) Website www.incentiapay.com 123 LEVEL 5, 68 HARRINGTON STREET THE ROCKS NSW 2000 AUSTRALIA E M A I L I N F O @ I N C E N T I A P AY. C O M P H O N E ( 0 2 ) 8 2 5 6 5 3 0 0 WWW.INCENTIAPAY.COM 

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