Annual Report 2018 Annual Report for the year ended 30 June 2018 InvestSMART Group Limited ABN 62 111 772 359 www.InvestSMART.com.au 1300 880 160 SECTION HEADING??For personal use only OUR VISION To help all Australians grow and protect their wealth. WHY? Because we believe people should be able to take control of their financial future. And it shouldn’t be hard or expensive to do so. HOW? By providing innovative tools, research and advice that people can trust, empowering them to make better investing decisions. Research & Advice Investment Advice Investment Portfolios Investment Tools SECTION HEADING??For personal use only 2018 FINANCIAL YEAR Highlights Total no. of portfolios managed through our proprietary Portfolio Manager (PM) 23% to 109,472 members Value of shares managed in PM 35% to $11.87b Value of funds managed in PM Value of cash managed in PM Value of property managed in PM 28.9% to $2.5b 29.2% to $2.43b 28.5% to $9.63b Active prospective database Website activity Marketing costs 8.65% to 637,024 members 21% to 3.03m visits 5% to 6.75m pageviews 128% to $1.9m Retail funds under management (FUM) Retail FUM revenue 214% to $104.4m 370% to $347,667 CONTENTS 3 ANNUAL REPORT 2018For personal use only Contents Chairman and Managing Director’s report .................................................................. 5 Corporate Governance Statement ................................................................................7 Directors’ Report ........................................................................................................ 14 Auditor’s Independence Declaration ..........................................................................24 Consolidated Statement of Comprehensive Income ...................................................25 Consolidated Statement of Financial Position ............................................................26 Consolidated Statement of Changes in Equity ........................................................... 27 Consolidated Statement of Cash Flows ......................................................................28 Notes to the Consolidated Financial Statements ........................................................29 Directors’ Declaration ............................................................................................... 50 Independent Audit Report to the Members Additional Information Directory ............ 51 Additional Information ............................................................................................... 57 Directory ................................................................................................................... 59 4 ANNUAL REPORT 2018SECTION HEADING??For personal use only CHAIRMAN A ND M ANAGING DIR ECTOR’S REPORT Chairman and Managing Director’s report Dear Shareholders, On behalf of the Directors we are pleased to announce the results for InvestSMART Group for the financial year ended 30 June 2018. Commissions income - Fund Managers Commissions Income - Insurance Funds management income Subscription income Other Income Total Income Commission rebates Paid Employee Costs Marketing costs Other Expenses Total Operating Expenses Operating Profit FY18 4,935,931 1,933,307 347,667 5,005,675 247,975 FY17 5,158,174 2,116,041 73,844 6,584,654 147,192 12,470,555 14,079,905 1,920,662 5,537,570 1,897,204 2,396,101 1,983,032 5,747,665 832,202 2,510,497 11,751,537 11,073,396 719,018 3,006,509 We have continued to invest heavily in our digital wealth platform, launching several new products and services in 2018, including our first ASX-listed fund, the InvestSMART Australian Equity Income Fund (ASX Code: INIF). Investment in our brand and broader market awareness resulted in record traffic and engagement across our platform. Increased marketing spend contributed to lower operating profit for FY2018 than 2017. We expect this marketing spend to result in growing FUM in FY2019. Reduced subscriber numbers also contributed to reduced operating profit. Retention rates for Eureka Report subscribers have to improved, though more slowly than expected. Over the last 6 months the retention rate has increased to 76%. When we bought the business from News Corp in May 2016 it was below 50%. Funds under management (FUM) grew from $33.0m to $104.4m, slightly slower than expected. Building awareness of our funds is one thing; building trust to invest takes longer. During the year we purchased an option for $250,000 to acquire The Term Deposit Shop (TTDS) for $3.75m, exercisable between the third and fourth anniversary date of the option grant date. At the same time, we entered an agreement to share 50% of revenue received on clients introduced by InvestSMART to TTDS. InvestSMART members have cash holdings of over $2.5bn recorded in our portfolio manager. The software TTDS has developed will help members find the best term deposits to further optimise their portfolios. 5 ANNUAL REPORT 2018For personal use only CHAIRMA N AND MA NA GIN G DIRECTOR’ S REPORT In December 2017, the Board welcomed Kevin Moore as a Non-Executive Director. Kevin brings with him a wealth of marketing experience at a time when we are investing in our brand and expanding our services. Marketing expenditure from December 2017 has been significantly increased, focussing on an integrated digital and physical marketing campaign in Qantas Club lounges and wider digital advertising and engagement through radio. This has led to a large increase in downloads of our free portfolio manager and wealth advice for the mobile App, leading to a significant increase in assets held on the platform (see below). Assets Held on InvestSMART’s portfolio manager Total Active Free Database Total Member Portfolios Value of Shares Value of Funds Value of Property Value of Cash Jun 16 546,980 63,014 Jun 17 586,309 88,892 $5,132,400,000 $8,774,429,101 $11,875,519,858 $1,492,739,000 $1,964,275,045 $2,532,313,865 $4,742,250,000 $7,494,427,822 $9,631,816,856 $1,251,770,000 $1,876,695,681 $2,426,226,903 29.28% Jun 18 Change 637,024 109,472 8.65% 23.15% 35.34% 28.92% 28.52% During FY2019, we will increase marketing and sales expenditure to raise awareness of the new InvestSmart branding, reposition our service to better articulate the benefits of our low cost products and offer our high quality financial technology model to a new audience. Our focus is to provide digital wealth advice through low cost online investment services to help all Australians to grow and protect their wealth. Paul Clitheroe Chairman Ron Hodge Managing Director 6 ANNUAL REPORT 2018For personal use only CORPORA TE GOVER NANCE STATEM E NT Corporate Governance Statement Corporate governance includes the policies and practices fulfilling the functions of their office and exercising by which InvestSMART Group Limited (Company) and its the powers attached to that office; controlled entities (Group Entities) (collectively, Group) are effectively managed. Those policies and practices prescribe: our ethics; • • • always use the powers of their office for a proper purpose; • recognise that their primary responsibility is to the the accountability of the Board for financial Company’s security holders as a whole but should, performance and growth; and where appropriate, have regard to all stakeholders of • the management of the risks which are encountered the Company; in running a company reliant upon the performance of • not make improper use of information acquired as a financial assets and investments. Director, senior executive or employee; In developing corporate governance policies and practices • not allow personal interests, or the interests of any for the Group, the Company takes into account the associated person, to conflict with the interests of the Constitution of the Company (Constitution) and applicable Company; legislation and standards, including: • • Corporations Act 2001 (Corporations Act); all reasonable steps to be satisfied as to all decisions Australian Securities Exchange Listing Rules taken by or on behalf of the Company; (Listing Rules); • not engage in conduct likely to bring discredit on the • be independent in judgment and actions and to take • Corporate Governance Principles and Company; Recommendations with 2014 Amendments, 3rd Edition • comply with the spirit, as well as the letter of the law published by the ASX Corporate Governance Council and with the principles of the Code of Conduct; (ASXCGC); and • ensure compliance with the policies and procedures • legislation governing Australian Financial Services of the Company, including the Board Charter, Licences and other licences held by members of the Delegations, Securities Trading and Prevention Group. The information in this Statement is current as at 8 October 2018 and has been approved by the Board. 1. Code of Conduct The Code prescribes that Directors, senior executives and employees must: • act honestly, in good faith and in the best interests of the Company as a whole at all times; • discharge their duty to use due care and diligence in of Insider Trading Policy, Staff Trading and Investment Policy, Continuous Disclosure Policy, Human Resources Policies and Procedures and Risk Management and Compliance Policies. The Code of Conduct can be downloaded from the Company’s website at: www.investsmart.com.au/ shareholder-centre/governance. Directors, senior executives and employees are required to make all disclosures, keep all records and take all steps necessary to enable the Company to comply with all relevant legislation, common law obligations and Company policies, including the Code of Conduct. 7 ANNUAL REPORT 2018For personal use only CORPORA TE GOVER NANCE STATEM E NT 2. Responsibilities and functions of the board and management The Board functions in accordance with a Charter. Under that Charter, the role of the Board is to: • act as an interface between the Company and its shareholders; • oversight of the Company’s continuous disclosure obligations; • • reporting to shareholders and other stakeholders; capital management. The Board Charter was reviewed in August 2018. It can be downloaded from the Company’s website at: • set the goals of the Company including short, medium www.investsmart.com.au/shareholder-centre/governance. and longer term objectives; • provide the overall strategic direction of the and functions, certain powers have been delegated To assist the Board to carry out its responsibilities Company; • • assess the optimal use of the Company’s capital; and oversee the efficient management of the Company. The Board is responsible for: • consideration and approval of corporate strategy proposed by management and monitoring its implementation; • • overseeing/monitoring financial performance; approving financial and other reporting to shareholders, employees and other stakeholders of the Company; • ensuring that the Company has appropriate human, financial and physical resources to execute Company strategies; to management, including the authority to undertake transactions and incur expenditure on behalf of the Group, up to specified thresholds. Processes have been established to ensure that management provides relevant information to the Board to enable the Board to make informed decisions and effectively discharge its duties. The Board may also request additional information where necessary and may seek independent advice should it wish to do so. 3. Board structure The Constitution provides for a minimum of three Directors and a maximum of twelve Directors. The Company undertakes appropriate checks before appointing a person as a Director or putting forward a person as a candidate for election as a Director. All material information in the possession of the Company, which is • reviewing the Board and management succession relevant to whether or not a person should be elected or re- planning; elected as a Director, is provided to shareholders prior to an • appointing, removing and monitoring the performance election taking place. of the Managing Director and Key Management At the date of this Statement, the Board comprises the Personnel; appointing and removing the Company Secretary; Chairman, two independent non-executive Directors and the Managing Director. The Chairman held the role of Executive Chairman from 31 March 2015 to 24 February 2016 and for considering and monitoring risks; this reason, is not considered independent. reviewing the effectiveness of Company policies and The Directors’ Report included in the 2018 Annual Report • • • procedures regarding risk management; • reviewing the effectiveness of the Company’s internal control and accounting systems; • ensuring appropriate corporate governance structures are in place including standards of ethical behaviour and a culture of corporate and social responsibility; provides the details of the Directors in office during the year ended 30 June 2018, together with their experience, expertise and qualifications and the number of Board meetings each attended during the year. 8 ANNUAL REPORT 2018For personal use only CORPORA TE GOVER NANCE STATEM E NT As at the date of this Statement, the Directors are: • compliance with Company policies, including the Chairman: Mr Paul Clitheroe AM Managing Director: Mr Ron Hodge Lead Independent Non-Executive Director: Mr Michael Shepherd AO Independent Non-Executive Director: Mr Kevin Moore The Company does not comply with the ASXCGC Board Charter, Code of Conduct and Securities Trading Policy; induction and training; access to independent advice; indemnification and insurance; and confidentiality and the right of access to Company information. • • • • Corporate Governance Principles and Recommendations Directors appointed by the Board to fill a casual vacancy or in relation to a majority of the Board and the Chairman, as an addition to existing Directors (other than a Managing being independent. The Board believes that at this time in Director) are appointed only to the conclusion of the general the development of the Company, the current allocation meeting following their appointment and must stand for of responsibilities among the Directors is most practical election at that general meeting. Otherwise, Directors and effective for the Company and in the best interests of (other than any Managing Director) retire at every AGM if shareholders. The Board has assessed the mix of skills which best suit the business conducted by the Company. The Board considers the current mix of skills among Directors as appropriate for the Company, with the presence of core skills in financial services, governance, marketing, digital distribution and product development. the number of Directors (excluding the Managing Director and Directors appointed after the prior year general meeting and standing for election) is five or less, then two of the remaining must retire and stand for election. If the number is more than five, one third of those directors (to the nearest whole number) must retire and stand for election. Details of Directors, their experience, expertise and qualifications are set out in the Directors’ Report included in the 2018 The Company Secretary is accountable directly to the Annual Report. Board, through the Chairman, on all matters to do with the proper functioning of the Board. The appointment and removal of any Managing Director is a matter for the Board as a whole. • • • • • • 4. Terms of appointment of director The Company issues letters of appointment to Directors, which include: term of appointment; expectations regarding the Director’s involvement and time commitment envisaged; powers and duties of Directors; 5. Director’s interests and independence The Board has in place processes to ensure that conflicts of interest are managed appropriately throughout the Group. Directors are required to immediately notify the Company of interests or changes to interests as they arise. The Company Secretary maintains a register of Directors’ interests. That register is updated as interests or changes in interests are notified and it is reviewed at the commencement of each circumstances in which the office of Director will regular Board meeting. become vacant; remuneration and expenses; requirements regarding interests (including the disclosure of interests in securities) and independence; The Board undertakes the assessment of the independence of Directors and makes a determination in respect of each Director taking into account matters such as: • • specific disclosures made by the Director; any association with a substantial shareholder of the Company; 9 ANNUAL REPORT 2018For personal use only CORPORA TE GOVER NANCE STATEM E NT employment in any other capacity by the Group; The Committee consists of not less than two members • • any related party dealings which are material under accounting standards; • association with a supplier, adviser, consultant to or customer of the Group for the purposes of the ASXCGC Corporate Governance Principles and Recommendations; and appointed by the Board. Where possible, a majority of members will be independent non-executive Directors. The Board appoints the Chairman of the Committee, who must be an independent non-executive Director. Preferably, the Chairman of the Board is not also the Chairman of the Committee. In determining membership of the Committee, the Board • whether the Director has been in their position for seeks to identify and appoint: such a period that their independence may have been compromised. • members who can all read and understand financial statements and are otherwise financially literate; 6. Committees of the Board Under the Constitution the Directors may delegate any of their powers to a committee or committees. Any committees established by the Board: • are entitled to obtain independent professional or other advice at the cost of the Company, unless the • at least one member with financial expertise either as a qualified accountant or other financial professional with experience in financial and accounting matters; and • at least one member who has an understanding of the financial services industry. Board determines otherwise; The current Chairman of the Committee is Mr Michael • are entitled to obtain such resources and information from the Company including direct access to employees of and advisers to the Company as they might require; and • operate in accordance with a charter or terms of reference established by the Board. 6.1 Audit, Risk and Compliance Committee The Charter of the Audit, Risk and Compliance Committee can be downloaded from the Company’s website at: www.investsmart.com.au/shareholder-centre/governance. This Committee assists the Board to fulfil its corporate governance and oversight responsibilities in relation to: 1. Audit – the Committee reviews the integrity of the Group’s financial reporting and oversees the independence of the external auditor; 2. Compliance – the Committee reviews the integrity of the Group’s compliance framework; Shepherd AO and the other Committee member is Mr Paul Clitheroe AM. Due to the size and complexity of the business three members is not considered necessary. The current Committee members are not executives. Details of the number of meetings of the Committee held during the year ended 30 June 2018 are set out in the Directors’ Report included in the 2018 Annual Report. 6.2 Nomination and Remuneration Committee The Charter of the Nomination and Remuneration Committee can be downloaded from the Company’s website at: www.investsmart.com.au/shareholder-centre/ governance. The Committee: 1. reviews and reports/make recommendations to the Board in relation to nomination matters; 2. develops and recommends to the Board strategies on gender diversity for the Board, committees of the Board and all other levels of the Company and Group 3. Risk – the Committee assists the Board in fulfilling Entities. its risk management responsibilities as defined by applicable law and regulations, the Constitution and other applicable standards. 3. reviews and reports/make recommendations to the Board in relation to remuneration matters; 4. reviews and brings to the attention of the Board matters relating to: 1 0 ANNUAL REPORT 2018For personal use only • remuneration structure including long term incentive arrangements and participation; senior executive and key staff succession plans; recruitment, retention and termination strategies; the Remuneration Report of the Company; and • • • • CORPORA TE GOVER NANCE STATEM E NT 7. Securities Trading and Prevention of Insider Trading Policy and Staff Trading and Investment Policy The Company has adopted a policy regarding trading in its securities and the prevention of insider trading which applies to all Directors, employees and contractors and their associates. This policy can be downloaded from the Company’s website at: www.investsmart.com.au/ other matters identified from time to time by the shareholder-centre/governance. Board. Those covered by the policy must not trade, arrange for The Committee consists of not less than two members someone else to trade, or communicate information to appointed by the Board. Where possible, a majority of someone they know, or ought reasonably to know, may use members will be independent non-executive Directors. The the information to trade (or procure another person to trade) Board appoints the Chairman of the Committee. Preferably, Company securities when they are in possession of price the Chairman of the Board is not also the Chairman of the sensitive information relating to the Group which is not Committee. generally available to the market. The current Chairman of the Committee is Mr Michael Directors and employees are generally only permitted to Shepherd AO and the other Committee member is Mr trade in Company securities in defined open periods and Paul Clitheroe AM. Due to the size and complexity of the then, only if they are not in possession of price sensitive business three members is not considered necessary. The information relating to the Group which is not generally current Committee members are not executives. available to the market and if they have prior written Details of the number of meetings of the Committee held approval to trade. during the year ended 30 June 2018 are set out in the The Company has also adopted a separate policy dealing Directors’ Report included in the 2018 Annual Report. with staff trading and investment. That policy deals with the Details about the Company’s remuneration policies and practices are set out in the 2018 Remuneration Report included in the 2018 Annual Report. The 2018 Remuneration Report distinguishes the structure of Directors’ remuneration from that of senior executives. The Company has equity-based remuneration schemes. Hedging of unvested shares is prohibited under the Securities Trading and Prevention of Insider Trading Policy. management of actual and perceived conflicts of interest arising where in the ordinary course of business Group Entities promote, analyse or report on securities. 8. Continuous Disclosure The Board is very conscious of its disclosure obligations and has a Continuous Disclosure Policy. It can be downloaded from the Company’s website at: www.investsmart.com.au/ shareholder-centre/governance. 6.3 Investment Committee All Directors and the Company Secretary are responsible The Company has established an Investment Committee to to ensure that the Continuous Disclosure Policy is adhered review and, if thought fit, approve investment portfolios for to. The Chairman or the Managing Director deal with media use in the suite of investment products offered by Group contact and any external communications. Entities. The Committee is also responsible for the ongoing monitoring and review of investment portfolios. 9. Independent professional advice Members of the Committee are drawn from the Board, Directors may obtain independent professional advice at the management and external advisers based on their relevant Company’s expense on matters arising in the course of their skills and experience. The current members are Mr Paul Board and Committee duties, after obtaining the Chairman’s Clitheroe (Chairman of the Committee), Mr Alastair approval (or in the case of the Chairman, with the prior Davidson and Mr Ron Hodge. approval of the Chairman of the Audit, Risk and Compliance 1 1 ANNUAL REPORT 2018For personal use only CORPORA TE GOVER NANCE STATEM E NT Committee). The Board requires that all Directors be 11. Diversity provided with a copy of such advice and be notified if the Chairman’s approval is withheld. 10. Performance assessment The performance assessment of individual Directors, Committees and the Board is included in the Board Charter. The process is aimed at ensuring individual Directors, Committees and the Board as a whole work efficiently and effectively. As part of that process: In April 2016 the Company established a Diversity Policy. It can be downloaded from the Company’s website at: www.investsmart.com.au/shareholder-centre/governance. The Company has policies and procedures in place in relation to employment opportunities for women. The Board has not set measurable objectives for achieving diversity. The Board believes these policies and procedures best suit the Company given its size and stage of development. The company employs less than 100 staff and is not a “relevant • the Board as a whole discusses and analyses its own employer” under the Workplace Gender Equality Act. performance during the year including suggestions for change or improvement; The Company does not currently have any women on the Board or within the senior executives (Key Management • the Chairman meets with each non-executive Director Personnel identified in the 2018 Annual Report). However, separately to discuss individually performance, 39% of the employees in the Group are women. The including development areas; • a nominated Director leads the review of the Chairman. Company will seek to maintain or increase this level of women employees in the future and to reflect gender diversity within the Board and Key Management Personnel. Due to the size of the Board a formal performance evaluation of Directors was not undertaken in the reporting period. 12. Directors’ induction and continuing education Each senior executive in the Group is engaged under a written contract which includes: All Directors receive an induction after joining the Board and have access to continuing education to update and enhance their skills and knowledge to enable them to continue to • • • • • the term of appointment; carry out their duties. a description of the position and associated duties and responsibilities; reporting; 13. Management of risk and internal control framework The Board is the ultimate sponsor of risk oversight within remuneration, including superannuation; the Group but does so in a manner which reflects the the requirement to comply with corporate policies, including Delegations, Securities Trading and Prevention of Insider Trading Policy, Staff Trading transparent nature of the Group’s systems. The Company pays significant attention to risk as a consequence of its activities, which involve dealing in financial assets. and Investment Policy, Continuous Disclosure Policy, The Audit, Risk and Compliance Committee fulfils Human Resources Policies and Procedures and Risk an essential role in the management of risk and the Management and Compliance Policies; and establishment, review and monitoring of internal controls. • circumstances of termination and entitlements on termination. Those contracts also set out the manner in which the performance of the respective senior executive is evaluated. Performance evaluation of senior executives was undertaken in the reporting period. In addition, through the reporting of the Managing Director, the Board also monitors various measurements of absolute and relative risk. Reviews of the Company’s risk management framework were undertaken throughout the reporting period. Due to the relative small size of the Group and limited nature of its business operations, the Company does not have an Internal Audit function. This matter is reviewed 1 2 ANNUAL REPORT 2018For personal use only CORPORA TE GOVER NANCE STATEM E NT periodically by the Audit, Risk and Compliance Committee The Chairman and the Managing Director are primarily and that Committee makes relevant recommendations to responsible for promoting effective communication with the Board to improve the effectiveness of the Company’s shareholders and encouraging their participation at risk management and internal control processes. general meetings. The Board reviews the activities aimed The Company has access to a series of internal and external controls through the Managing Director, which govern the Company’s material business risks. These controls include, but are not restricted to: • external providers of accounting and related services to the Company and Group Entities; and • regular reporting by the Managing Director to the Board. The Company’s exposure to economic, environmental and social sustainability risks and management of those risks is disclosed in the 2018 Annual Report. The Board received a statement in writing from the Managing Director and the Chief Finance Officer that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and the system is at achieving these outcomes. The Company Secretary and the share registry are also available to assist shareholders. Shareholders have the option to receive communications from, and send communications to, the Company and the share registry electronically. Current and archived announcements by the Company are available on the Company’s website at: www.investsmart. com.au/shareholder-centre/announcements; or at: www.asx.com.au. The Company provides a review of operations and financial performance in the 2018 Annual Report, which includes the Company’s financial report. Results announcements to the Australian Securities Exchange, Business Updates (lodged quarterly in the ordinary course of business) and the full text of the Chairman’s address at the Company’s Annual General Meeting are lodged with Australian Securities Exchange and available at the Company’s website at: www.investsmart. com.au/shareholder-centre/announcements; or at: www. operating effectively in all material respects in relation to asx.com.au. financial reporting risks. The External Auditor attends the Annual General Meeting of the Company and is available to answer questions from shareholders relevant to the audit of the Company. 14. Engaging shareholders The Board is committed to ensuring that the shareholders are at all times provided with information sufficient to allow effective monitoring of the Company’s performance, including: • the Annual Report which is distributed to shareholders (at their election); the Half Yearly Report; periodic reports and special reports when matters of material interest arise; • • • the Annual General Meeting and other meetings called to obtain shareholder approval of any action as required; and • continuous and periodic disclosure. 1 3 ANNUAL REPORT 2018For personal use only Director’s Report The Directors present their report on InvestSMART Group Limited (the Company) and its subsidiaries (collectively the Group) for the financial year ended 30 June 2018. Directors The names and details of the Directors of the Company who held office during the year and at the date of this report (unless otherwise specified) are: Paul Clitheroe AM Chairman (Appointed Non-Executive Chairman 26 November 2014, appointed Executive Chairman 31 March 2015, reappointed Non- Executive Chairman 24 February 2016) Bachelor of Arts (UNSW), SNF Fin, CFP Age 63 Paul Clitheroe was a founding director of leading financial planning firm ipac and has been involved in the investment industry since he graduated from the University of New South Wales in the late 1970s. From 1993 to 2002 Mr Clitheroe hosted the popular Channel 9 program Money. Since 1999 he has been the chairman and chief commentator of Money magazine. He writes personal finance columns for metropolitan, suburban and regional newspapers across Australia. Mr Clitheroe has been a media commentator and conference speaker for more than 30 years and is regarded as one of Australia’s leading experts in the field of personal investment strategies and advice. Mr Clitheroe is Chairman of Monash Absolute Investment Company Ltd and a Director of Wealth Defender Equities Ltd, both ASX-listed investment companies. He is also Chairman of the Australian Government Financial Literacy Board, Chairman of Financial Literacy Australia, Chairman of the youth anti-drink driving body, RADD, and a member of the Sydney University Medical School Advisory Board. In 2012, Macquarie University appointed Mr Clitheroe as Chair of Financial Literacy. He is a Professor with the School of Business and Economics. Michael Shepherd AO Lead Independent Non-Executive Director Chairman of the Audit Risk and Compliance Committee Chairman of the Nomination and Remuneration Committee (Appointed 1 March 2014) Age 68 Michael Shepherd has had a successful career in financial services over more than 40 years. He was a director of ASX Limited and group between 1988 and 2007, including a term as Vice-Chairman between 1993 and 2007. Mr Shepherd was also Chairman of the ASX Derivatives Board and Chairman of the ASX Market Rules Committee. Mr Shepherd is currently Chairman of Navigator Global Investments Limited (a listed investment management company) and a member of the Responsible Entity Compliance Committee of UBS Global Asset Management (Australia) Limited. He is also a Senior Fellow and Life Member, Financial Services Institute of Australasia, after being a director of that body between 2001 and 2009, including 2 years as National President. 1 4 ANNUAL REPORT 2018DIRECTOR’S REPORTFor personal use only Peter Ronald Hodge Managing Director (Appointed 1 September 2015, appointed Managing Director 24 February 2016) FFin Age 48 Ron Hodge was the founder of InvestSMART in 1999. Mr Hodge later sold this business to Fairfax Media in October 2007 where he continued as General Manager. He has worked in financial services for over 25 years, including at UBS in Singapore and Bell Commodities in Sydney. Mr Hodge holds a Masters degree in Computer Science, Bachelor Degrees in Commerce and Economics, a Graduate Diploma in Applied Finance and Investments and is a Graduate of the Australian Institute of Company Directors. Kevin A Moore Independent Non-executive Director (Appointed 1 December 2017) FAICD, MCIM, JP Age 54 Kevin Moore has multinational board and governance experience, specialising in digital marketing, and is a Growth Director with a focus on $10 to $100 million businesses. Mr Moore is a fellow of the Australian Institute of Company Directors and a Member of the Chartered Institute of Marketing. He holds a Diploma in International and Export Marketing from Henley, The Management College, at The University of Reading. Mr Moore was appointed to the Chair of Crossmark Asia Pacific in 2014. Company Secretary Peter Friend is a qualified solicitor and was appointed Company Secretary on 10 February 2014 and held office to 19 July 2017. Grant Winberg was appointed Company Secretary on 19 July 2017 and held office throughout the year. Mr Winberg is a Certified Practising Accountant and is a Fellow of the Chartered Institute of Secretaries, a Fellow of the Governance Institute of Australia and a Fellow of Australian Institute of Company Directors. Interests in the Securities of the Company The relevant interests of each Director in the securities of the Company shown in the Register of Directors’ Shareholdings as at the date of this report are: Director Paul Clitheroe Michael Shepherd Peter Ronald Hodge Kevin Moore Ordinary Shares 5,000,000 400,000 4,885,000 211,809 Directors are not required under the Company’s constitution to hold any Shares, Options or any other Securities in the Company. A portion of the shares held by Mr Paul Clitheroe (2,666,667), and Mr Ron Hodge (1,655,556), are subject to vesting conditions. Interests in Contracts or Proposed Contracts with the Company None of the Directors have an interest in, or proposed interests in, contracts with the Company, other than the loans to Mr Paul Clitheroe and Mr Ron Hodge as part of the Long-Term Incentive Plan (LTIP) and Employee Share Ownership Plan (ESOP) as detailed below. 1 5 DIRECTOR’S REPORTANNUAL REPORT 2018For personal use only Principal Activities The principal activities of the Group during the year was the provision of financial services and products under general advice to retail investors in particular in the area of wealth management, personal insurance and funds management. Dividends No dividend has been declared for the financial year ended 30 June 2018 (2017: nil). Review of operations The table below shows the consolidated performance of the Group for the years ended 30 June 2018 and 30 June 2017. This information is presented to show the relative changes in operating income over the period. Continuing operations Commission income Subscription income Funds management fees Other income Change in fair value of financial assets at fair value through profit and loss Total Income Total operating expenses Profit before income tax, amortisation, impairment and employee benefit expense Amortisation of intangibles Employee benefit expense Goodwill impairment Loss before income tax Income tax benefit/(expense) Profit/(Loss) for the year 2018 $ 6,869,238 5,005,675 347,667 76,904 1,154,339 13,453,823 11,756,240 1,697,583 1,366,660 353,809 2017 $ 7,274,215 6,584,654 73,844 43,895 241,297 14,217,905 11,073,396 3,144,509 1,366,660 424,528 – 23,610,664 (22,886) 253,170 230,284 (22,257,343) (291,017) (22,548,360) The net tangible asset backing of the Company as at 30 June 2018 was $4,257,796 (2017: $2,524,917). The net tangible asset backing per share at 30 June 2018 was $0.0384 per share (2017: $0.0228 per share). The fall in commissions income was within management’s expectations as clients moved to products that do not pay commissions. Subscription revenue decreased due to a reduction in subscriber numbers over the year. The Group has made investments in technology, content and brand to improve subscriber numbers and position itself at the forefront of digital financial advice. Funds management fees increased over the year as funds under management increased from $33m (at 30 June 2017) to $104.4m at year end. The Group was granted authorisation under one if its AFSLs (“Australian Financial Services License”) to issue its own managed investment schemes and launched two retail funds during the year, including an ASX listed Active Exchange Traded Fund. Change in fair value of financial assets increased over the year, however $989,098 of the gain is an unrealised gain on the valuation of venture capital investments. Determining fair value for these assets requires the use of judgement by the Directors. Operating expenses are higher than 2017, due to an increase in marketing expenditure as the Group promotes its funds management products and digital financial advice subscriptions. A large portion of the loss in 2017 was attributable to a write down in the valuation of the goodwill assets of the Group of $23,610,664 at 30 June 2017. The Group has substantial realised and unrealised capital tax losses that have not been recognised in the financial statements as the Directors believe there are negligible opportunities to utilise those losses in the medium term. 1 6 ANNUAL REPORT 2018DIRECTOR’S REPORTFor personal use only Business strategies and prospects The Group will increase its focus on increasing the number of users of its free portfolio management service, website and mobile phone application (“App”). These users are expected to convert to new subscribers and investors in its fund management products. This is expected to result in a continued increase in operating costs, particularly marketing expenditure. Retention of existing subscription members stabilised over the second half of the year. Commissions income is expected to continue to fall, albeit at a slower rate than in 2018. There is a risk of a material decline in Commissions income if there is a significant and sustained equity market fall or changes in financial services regulation that may diminish its ability to collect commissions in the future. The Group has contingency plans to reduce as many variable costs as possible in that event. Employee Share Ownership Plan The Company lent $178,500 to employees of the Group to acquire 700,000 ordinary shares on 6 September 2017 (Grant Date) as part of the Employee Share Ownership Plan (ESOP), which was approved by shareholders at the Annual General Meeting on 29 November 2016. The shares were issued on the Grant Date. These shares have not vested and therefore have not been included in share capital. The shares will vest in three equal tranches on the first, second and third anniversaries of the Grant Date. The Company estimates the fair value of this employee share benefit is $47,808 at the Grant Date. Significant Changes in State of Affairs There were no significant changes in the Group affairs during the period. Meetings of Directors The number of Directors’ Meetings (including Meetings of Committees of Directors) and number of Meetings attended by each of the Directors of the Company during the 2018 financial year were: Directors’ Meetings Meetings of Audit, Risk and Compliance Committee Meetings of Nomination and Remuneration Committee Meetings of Investment Committee Meetings eligible to attend Meetings attended Meetings eligible to attend Meetings attended Meetings eligible to attend Meetings attended Meetings eligible to attend Meetings attended Paul Clitheroe Ron Hodge Michael Shepherd Kevin Moore 8 8 8 5 8 8 7 5 6 – 6 – 6 – 6 – 1 – 1 – 1 – 1 – 4 4 – – 4 4 – – Events Subsequent to Balance Date Since 30 June 2018, there have been no significant events up to the date of this report. Earnings (loss) per share Basic earnings per share was 0.21 cents per share, and diluted earnings per share was 0.17 cents per share, (2017: loss of 20.33 cents per share for basic and diluted earnings). 1 7 DIRECTOR’S REPORTANNUAL REPORT 2018For personal use only Remuneration Report (Audited) The Group’s policy is to offer a sufficient level of remuneration to attract employees and Directors who are financially literate and knowledgeable of financial services and investment management best practice. As the Company has a Long-Term Incentive Plan (LTIP) and Employee Share Ownership Plan (ESOP) in place which is an equity- settled share-based payment to employees and Directors, the Company has linked performance with compensation in relation to the performance of the Company’s share price. The value of any benefits given to Directors or senior management is detailed below. All Directors must have a commitment to good corporate governance. The primary role of the Non- Executive Directors is the protection and enhancement of sustainable shareholder value through: (a) ensuring the control and accountability framework is in place so that all significant issues relating to the operation and performance of the Company and its subsidiary entities are brought to the attention of the Board; (b) monitoring governance policies, practices and systems to ensure they are effective and appropriate; (c) monitoring risk policies, practices and systems to ensure they are effective and appropriate. Subject to the sum determined by the Company in general meeting, the Directors agree the remuneration each Director (other than any Managing Director or Director who is a salaried officer) receives. No option or bonus plans are in place for Directors (other than the Managing Director). Under ASX Listing Rules, the maximum fees payable to Directors may not be increased without prior approval from the Company at a general meeting. Directors will seek approval from time to time as deemed appropriate. The Directors will be entitled to receive the following benefits: (a) the maximum total remuneration of the Directors of the Company (excluding the Managing Director) has been set at $400,000 per annum to be divided amongst them in such proportions as they agree. Directors are not required to allocate the entire amount. (b) Mr Paul Clitheroe is eligible to participate in the LTIP and received 4,000,000 shares at 25 cents per share and a corresponding limited recourse loan on 26 November 2014, as approved by shareholders. 1,333,333 of these shares vested on 30 May 2016, when the share price reached $0.33 per share. The second tranche vests when the share price reaches $0.42 per share after 26 November 2016. The final tranche vests when the share price reaches $0.50 per share after 26 November 2017. There is no time limit for the share price to reach the vesting price. (c) Mr Ronald Hodge, as Managing Director, is eligible to participate in the LTIP and received 4,166,666 shares at 25 cents per share and a corresponding limited recourse loan on 8 September 2015, as approved by shareholders. Mr Hodge’s shares have no performance conditions and the first tranche of 1,388,888 vested on 8 September 2016. The second tranche vested on 8 September 2017. The remaining shares will vest on 8 September 2018. As Managing Director Mr Hodge is eligible to participate in the ESOP and received 400,000 shares at 31 cents per share and a corresponding limited recourse loan on 28 December 2016, as approved by shareholders. The first tranche of 133,333 shares vested on 28 December 2017. The remaining shares will vest in two equal tranches on the second and third anniversaries of the Grant Date. Additional information on the remuneration of executive directors and key management personnel is given in Note 14 of the Financial Statements. 1 8 ANNUAL REPORT 2018DIRECTOR’S REPORTFor personal use only The Directors’ remuneration for the year ended 30 June 2018 is detailed in the following table. There was no accrued long service leave for the Managing Director at 30 June 2018. Name of Director Paul Clitheroe Michael Shepherd Ron Hodge Kevin Moore TOTAL Base fee $ Superannuation $ Accrued Annual Leave $ LTIP & ESOP Expense $ Total $ 82,192 68,493 264,450 35,000 450,135 7,808 21,507 25,123 – 54,438 – – 8,324 – 8,324 87,560 177,560 – 90,000 60,620 358,517 – 35,000 148,180 661,077 The Directors’ remuneration for the year ended 30 June 2017 is detailed in the following table. Name of Director Paul Clitheroe Michael Shepherd Ron Hodge TOTAL Base fee $ Superannuation $ Accrued Annual Leave $ LTIP & ESOP Expense $ Total $ 88,048 34,246 264,252 386,546 1,952 57,369 30,518 89,839 - - (6,237) (6,237) 1,576 - 91,576 91,615 122,874 411,407 124,450 594,598 No Director of the Company has received or become entitled to receive a benefit, other than a remuneration benefit as disclosed in the notes to the financial statements, by reason of a contract made by the Company or a related entity with the Director or with a firm of which they are a member, or with a Company in which they have a substantial interest. Key Management Personnel Nigel Poole (Chief Technology Officer) and Alastair Davidson (Head of Funds Management) were considered to be Key Management Personnel for the year ended 30 June 2018. The remuneration of the key management personnel who were not Directors for the year to 30 June 2018 is shown below. Name of Key Management Personnel Base Remuneration $ Superannuation $ Accrued Annual Leave $ LTIP & ESOP Expense $ Total $ Nigel Poole Alastair Davidson 211,150 196,532 20,059 27,303 (3,245) (5,182) 58,361 286,325 58,361 277,013 Key management personnel are on standard Group employment contracts, with the exception of termination which requires 3 months’ notice, if without cause. The remuneration of the key management personnel who were not Directors for the year to 30 June 2017 is shown below. Name of Key Management Personnel Base Remuneration $ Superannuation $ Accrued Annual Leave $ LTIP Expense $ Total $ Nigel Poole Alastair Davidson 214,940 192,518 20,419 30,608 3,159 374 121,715 360,233 121,715 345,215 1 9 DIRECTOR’S REPORTANNUAL REPORT 2018For personal use only Shares held by Key Management Personnel and Directors for the year ended 30 June 2018 Ordinary Shares Paul Clitheroe Michael Shepherd Ron Hodge Kevin Moore Nigel Poole Alastair Davidson Balance at 30 June 2017 Shares acquired / (disposed) Shares vested Balance at 30 June 2018 2,333,333 400,000 1,588,888 – 1,388,888 1,716,562 – – 118,334 211,809 – – – – 1,522,222 – 1,488,889 1,488,889 2,333,333 400,000 3,229,444 211,809 2,877,777 3,205,451 Shareholdings relating to LTIP Tranches Shares acquired per Tranche Approval or Issue date Value at issue date Balance at 30 June 2017 Estimated or actual vesting date Balance at 30 June 2018 Paul Clitheroe Tranche 1 1,333,333 26/11/2014 Tranche 2 1,333,333 26/11/2014 Tranche 3 1,333,334 26/11/2014 Ron Hodge Tranche 1 1,388,888 17/06/2015 Tranche 2 1,388,888 17/06/2015 Tranche 3 1,388,889 17/06/2015 Nigel Poole Tranche 1 1,388,888 17/06/2015 Tranche 2 1,388,888 17/06/2015 Tranche 3 1,388,889 17/06/2015 Alastair Davidson Tranche 1 1,388,888 17/06/2015 Tranche 2 1,388,888 17/06/2015 Tranche 3 1,388,889 17/06/2015 0.054 0.066 0.073 0.077 0.083 0.088 0.077 0.083 0.088 0.077 0.083 0.088 – 30/05/2016 – 1,333,333 27/05/2020 1,333,333 1,333,333 26/08/2021 1,333,334 – 8/09/2016 1,388,888 8/09/2017 – – 1,388,889 8/09/2018 1,388,889 – 8/09/2016 1,388,888 8/09/2017 – – 1,388,889 8/09/2018 1,388,889 – 8/09/2016 1,388,888 8/09/2017 – – 1,388,889 8/09/2018 1,388,889 The remaining LTIP shares issued to Paul Clitheroe will vest in two equal tranches on the later of the second and third anniversary of the grant date, or the date the share price is at or above $0.42 or $0.50 respectively for each tranche. The performance of the share price was selected as the performance criteria as this closely aligns the rewards for performance to shareholder returns. The remaining LTIP shares issued to Ron Hodge, Nigel Poole and Alastair Davidson vest at $0.25 per share on the dates noted above and have no performance conditions in order to vest. These LTIP shares were issued in relation to the termination of a management contract with one of the Group subsidiaries, and the Directors believed this compensation best aligned the executives to the interests of shareholders. 2 0 ANNUAL REPORT 2018DIRECTOR’S REPORTFor personal use only Shareholdings relating to ESOP Tranches Shares acquired per Tranche Approval or Issue date Value at issue date Balance at 30 June 2017 Actual vesting date Balance at 30 June 2018 Ron Hodge Tranche 1 Tranche 2 Tranche 3 133,333 28/12/2016 133,333 28/12/2016 133,334 28/12/2016 Nigel Poole Tranche 1 100,000 28/12/2016 Tranche 2 100,000 28/12/2016 Tranche 3 100,000 28/12/2016 Alastair Davidson Tranche 1 100,000 28/12/2016 Tranche 2 100,000 28/12/2016 Tranche 3 100,000 28/12/2016 0.050 0.057 0.063 0.050 0.057 0.063 0.050 0.057 0.063 133,333 28/12/2017 133,333 28/12/2018 133,334 28/12/2019 100,000 28/12/2017 100,000 28/12/2018 100,000 28/12/2019 100,000 28/12/2017 100,000 28/12/2018 100,000 28/12/2019 - 133,333 133,334 - 100,000 100,000 - 100,000 100,000 The shares issued to the Managing Director and key management personnel as part of the ESOP on 28 December 2016 are dependent on the relevant employee not resigning, or being dismissed for cause, before each tranche vests. Shares held by Key Management Personnel and Directors for the year ended 30 June 2017 Ordinary Shares Paul Clitheroe Michael Shepherd Ron Hodge Nigel Poole Alastair Davidson Shareholdings relating to LTIP Balance at 30 June 2016 Shares acquired / (disposed) Shares vested Balance at 30 June 2017 2,333,333 400,000 – – 327,674 – – – – 200,000 1,388,888 – – 1,388,888 1,388,888 2,333,333 400,000 1,588,888 1,388,888 1,716,562 Tranches Shares acquired per Tranche Approval or Issue date Value at issue date Balance at 30 June 2016 Estimated or actual vesting date Balance at 30 June 2017 Paul Clitheroe Tranche 1 1,333,333 26/11/2014 Tranche 2 1,333,333 26/11/2014 Tranche 3 1,333,334 26/11/2014 Ron Hodge Tranche 1 1,388,888 17/06/2015 Tranche 2 1,388,888 17/06/2015 Tranche 3 1,388,889 17/06/2015 Nigel Poole Tranche 1 1,388,888 17/06/2015 Tranche 2 1,388,888 17/06/2015 Tranche 3 1,388,889 17/06/2015 Alastair Davidson Tranche 1 1,388,888 17/06/2015 Tranche 2 1,388,888 17/06/2015 Tranche 3 1,388,889 17/06/2015 0.054 0.066 0.073 0.077 0.083 0.088 0.077 0.083 0.088 0.077 0.083 0.088 1,333,333 30/05/2016 – 1,333,333 25/11/2018 1,333,333 1,333,334 26/08/2020 1,333,334 1,388,888 8/09/2016 – 1,388,888 8/09/2017 1,388,888 1,388,889 8/09/2018 1,388,889 1,388,888 8/09/2016 – 1,388,888 8/09/2017 1,388,888 1,388,889 8/09/2018 1,388,889 1,388,888 8/09/2016 – 1,388,888 8/09/2017 1,388,888 1,388,889 8/09/2018 1,388,889 2 1 DIRECTOR’S REPORTANNUAL REPORT 2018For personal use only Shareholdings relating to ESOP Tranches Shares Approval or acquired per Tranche Value at Issue date Balance at issue date Estimated 30 June 2016 Ron Hodge Nigel Poole Alastair Davidson Unitholdings in Funds Tranche 1 Tranche 2 Tranche 3 Tranche 1 Tranche 2 Tranche 3 Tranche 1 Tranche 2 Tranche 3 133,333 28/12/2016 133,333 28/12/2016 133,334 28/12/2016 100,000 28/12/2016 100,000 28/12/2016 100,000 28/12/2016 100,000 28/12/2016 100,000 28/12/2016 100,000 28/12/2016 0.050 0.057 0.063 0.050 0.057 0.063 0.050 0.057 0.063 – – – – – – – – – Balance at or actual vesting date 28/12/2017 28/12/2018 28/12/2019 28/12/2017 28/12/2018 28/12/2019 28/12/2017 28/12/2018 28/12/2019 30 June 2017 133,333 133,333 133,334 100,000 100,000 100,000 100,000 100,000 100,000 The number of units held during the year by each Director and KMP in funds for which InvestSMART Funds Management Ltd acts as Responsible Entity: Balance at 30 June 2017 Units acquired Balance at 30 June 2018 InvestSMART Australian Small Companies Fund Directors: Paul Clitheroe Michael Shepherd Ron Hodge InvestSMART Australian Equity Income Fund Directors: Ron Hodge Kevin Moore Other KMP: Alastair Davidson - - - - - - 83,794 21,329 43,497 40,000 10,000 32,000 83,794 21,329 43,497 40,000 10,000 32,000 Key management personnel transactions concerning dividends and ordinary shares are on the same terms and conditions applicable to ordinary shareholders. This concludes the Remuneration Report which has been audited. 2 2 ANNUAL REPORT 2018DIRECTOR’S REPORTFor personal use only Insurance of Directors During the financial year, the Company has given indemnity and paid insurance premiums to insure Directors and officers of subsidiaries against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of Directors or officers of the Company or subsidiaries, other than conduct involving a wilful breach of duty in relation to the Company or subsidiaries. During the year, premiums were paid in respect of the key management personnel liability and legal expenses insurance contract. Details of the nature of the liabilities covered and the amount of premiums paid have not been disclosed as disclosure is prohibited under the terms of the contract. Indemnification of auditors To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the end of the financial year. Proceedings on behalf of the Group There are no legal or other proceedings being made on behalf of the Group or against the Group as at the date of this report. Non-Audit Services No non-audit services have been provided by the Auditor or by another person on the Auditor’s behalf during the year. This statement has been made in accordance with advice provided by the Company’s audit committee and has been endorsed by a resolution of that committee. Auditor’s Independence Declaration The auditor’s independence declaration for the year ended 30 June 2018 has been received and can be found on page 24. Signed in accordance with a resolution of the Directors. Paul Clitheroe Chairman Dated this 29th day of August 2018 at Sydney 2 3 DIRECTOR’S REPORTANNUAL REPORT 2018For personal use only Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of InvestSMART Group Limited As lead auditor for the audit of InvestSMART Group Limited for the financial year ended 30 June 2018, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. Ernst & Young Mark Jones Partner 29 August 2018 10 2 4 ANNUAL REPORT 2018For personal use only CONSOLIDATED ST ATEMEN T OF COM PRE H ENS IVE INCOM E Consolidated Statement of Comprehensive Income Commission income Subscription income Funds management fees Interest Other income Notes 2018 $ 6,869,238 5,005,675 347,667 36,669 40,235 Net gain on financial instruments at fair value through profit and loss 3 1,154,339 2017 $ 7,274,215 6,584,654 73,844 34,997 8,898 241,297 Total Income 13,453,823 14,217,905 Share of net loss of associate Accounting and administrative costs Audit fees Business insurance Commission rebates Directors’ fees Employee costs Legal and statutory expenses Market data costs Marketing and advertising Other expenses Rent Travel and accommodation Depreciation and amortisation Employee benefit expense Goodwill impairment Total expenses Loss before income tax 4,703 216,116 166,169 162,037 1,920,662 215,000 5,537,570 88,508 722,080 1,897,204 367,860 320,881 36,631 1,467,479 353,809 19 5 - 187,305 133,560 143,217 1,983,032 181,616 5,747,665 92,180 702,732 832,202 497,647 367,968 89,909 1,481,023 424,528 - 23,610,664 13,476,709 36,475,248 (22,886) (22,257,343) Income tax benefit/(expense) 6 253,170 (291,017) Profit/(loss) for the year Other comprehensive income, net of income tax Total comprehensive profit/(loss) for the year Basic earnings/(loss) per share (cents per share) Diluted earnings/(loss) per share (cents per share) 230,284 (22,548,360) - - 230,284 (22,548,360) 16 16 0.21 0.17 (20.33) (20.33) The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes 2 5 ANNUAL REPORT 2018For personal use only CONSOLIDATED ST ATEMEN T OF FINA NCIAL POSITIO N Consolidated Statement of Financial Position ASSETS Cash and cash equivalents Trade and other receivables Prepayments and deposits Investment in associate Financial assets at fair value through profit and loss Fixed assets, including software less accumulated depreciation Deferred tax asset Intangibles Total assets LIABILITIES Trade and other payables Subscriptions received in advance Trail commissions to rebate Deferred tax liability Total liabilities Net assets EQUITY Issued capital Employee Benefit reserve Retained losses Total equity Notes 2018 $ 2017 $ 4,565,772 4,935,046 7 8 4 9 6 10 11 6 666,230 155,574 384,475 2,251,177 237,368 274,101 6,255,450 14,790,147 1,251,543 1,601,560 1,149,697 1,720,249 5,723,049 602,697 271,888 – 2,053,481 294,478 455,311 7,622,110 16,235,011 2,000,923 2,422,358 1,209,391 2,119,333 7,752,006 9,067,098 8,483,005 13 5 58,522,440 58,522,440 1,443,339 1,089,530 (50,898,681) (51,128,965) 9,067,098 8,483,005 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 2 6 ANNUAL REPORT 2018For personal use only CONSOLIDATED ST ATEMEN T OF CH ANGES IN EQUITY Consolidated Statement of Changes in Equity Notes Issued Capital $ Retained losses $ Employee Benefit Reserve $ Total Equity $ Balance at 30 June 2016 58,522,440 (28,580,605) 665,002 30,606,837 Comprehensive loss for the year Employee benefit share reserve Balance at 30 June 2017 Comprehensive income for the year Employee benefit share reserve 5 5 – – (22,548,360) – (22,548,360) – 424,528 424,528 58,522,440 (51,128,965) 1,089,530 8,483,005 – – 230,284 – – 353,809 230,284 353,809 Balance at 30 June 2018 58,522,440 (50,898,681) 1,443,339 9,067,098 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 2 7 ANNUAL REPORT 2018For personal use only CONSOLIDA TED STAT EM ENT O F CASH F LOWS Consolidated Statement of Cash Flows Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Income tax paid Net cash from/(used in) operating activities 15(a) Cash flows from investing activities Proceeds from sale of investments Purchase of investments and subsidiary Effect of loss of control of subsidiary Purchase of fixed assets Dividends received Rental deposit Notes 2018 $ 2017 $ 12,226,972 13,958,126 (12,398,118) (13,488,084) 36,669 (758,553) (893,030) 908,286 (250,000) (90,821) (43,709) – – 34,997 (276,643) 228,396 210,180 (383,913) – (144,501) 3,166 34,891 Net cash from/(used in) investing activities 523,756 (280,177) Cash flows from financing activities Net cash inflow from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at the end of the year 15(b) – – (369,274) 4,935,046 4,565,772 – – (51,781) 4,986,827 4,935,046 The above Consolidated Statement of Cash flows should be read in conjunction with the accompanying notes. 2 8 ANNUAL REPORT 2018For personal use only NOTES TO TH E CONSOLIDAT ED FIN A NCIAL STATEM ENTS Notes to the Consolidated Financial Statements 1. Reporting Entity InvestSMART Group Limited (the “Company”) is domiciled in Australia and is the parent entity of the group which includes the entities listed in Note 8 (the “Group”) and is a for profit company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange. The consolidated financial statements of the Group are presented for the year ended 30 June 2018. The Group is primarily involved in operating businesses delivering financial services to retail investors in Australia, primarily in wealth and funds management. 2. Summary of significant accounting policies Basis of Preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, including Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions to which they apply. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The financial report has been prepared on an accruals basis, and is based on historical cost, with the exception of the valuation of financial assets as described below. The financial statements were authorised for issue by the Directors on 29 August 2018. The directors and shareholders have the power to amend these financial statements after issue. The following significant accounting policies have been adopted in the preparation and presentation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. Adoption of New and Revised Accounting Standards The Group has adopted all of the new and revised standards and interpretations issued by the Australian Accounting Standards Board that are relevant to its operations and effective for the current reporting period. The adoption of these new and revised standards and interpretations did not have a material impact on the financial statements of the Group. New standards and interpretations not yet adopted Australian Accounting Standards and Interpretations have recently been issued or amended, but are not yet effective, which have not been adopted by the Group in the presentation of this financial report. AASB 15 - Revenue from Contracts with Customers AASB 15 is applicable to annual reporting periods beginning on or after 1 January 2018. 2 9 ANNUAL REPORT 2018For personal use only Under the standard an entity recognises revenue by applying the following steps: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation The Group has a performance obligation to service customers who have purchased subscriptions in advance and recognises revenue when that subscription service has been delivered. Commission income is derived from trailing commissions on funds management and insurance products under a contract to distribute products to the InvestSMART client base. Funds management fees are recognised based on net assets under management at the end of each day. Revenue is recognised as the performance obligation is satisfied. Management has assessed the impact of applying the new standard on the Group’s financial statements will not be material from the adoption date of 1 July 2018. AASB 16 – Leases AASB 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments. Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non- cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. This Standard is applicable to annual reporting periods beginning on or after 1 January 2019. The Group is not considering early adopting AASB 16. An initial assessment has been performed based on leases that exist in the current reporting period. Based on this assessment it is anticipated that there will be a material impact to the statement of financial position as the Group is expected to recognise a “right-of-use” asset and corresponding liability for operating leases. A schedule of current operating lease commitments is disclosed in Note 17. The Group will recognise the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. Current versus non-current classification The Group presents assets and liabilities in the Statement of Financial Position based on liquidity and not on a current versus non- current classification. Investments at Fair Value The Group’s investments are all measured at fair value through profit or loss in accordance with AASB 13: Fair Value Measurement. The fair values of the Group’s listed investments are determined from the amount quoted on the primary exchange of the country of domicile. If a listed investment is measured at fair value and has a bid price and an ask price, fair value is based on a price within the bid-ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. The fair value of the Group’s unlisted ventures investments is determined primarily using the price at which any recent transaction in the security may have been effected, adjusted for the Directors’ view as to the likely success of the business model and discounted for the likelihood of a liquidity event occurring in the next 3 years. A derivative is a financial contract whose value depends on, or is derived from, underlying assets, liabilities or indices. Derivative transactions include a wide assortment of instruments, such as forwards, futures, options and swaps. The fair value of derivatives that are not exchange traded is estimated based on most recent transactions. Where no recent transactions are available fair value is determined by applying a binomial option pricing model, which takes into account current market conditions (volatility and interest rates). Changes in the fair value of investments are recognised in the Statement of Comprehensive Income. Transaction costs directly attributable to the acquisition of the investments are expensed in the Statement of Comprehensive Income as incurred. 3 0 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only Principles of Consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Group as at 30 June 2018 and the results of all subsidiaries for the period from 1 July 2017 to 30 June 2018, with the exception of InvestSMART Australian Small Companies Fund (previously Intelligent Investor Small Caps Fund), whose results are included to the date that control ceased, 7 September 2017. Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights and excludes those subsidiaries determined by the Directors to be investments held for resale. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, or when they are established. Associates An associate is an entity over which the Group exercises significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. Investments in associates are accounted for using the equity method of accounting. The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income. Dividends or distributions received or receivable from an associate reduce the carrying value of the investment. Where an associate was previously a controlled entity of the Group, the deemed cost for applying the equity method is the fair value on the date that the Group ceased to have a controlling interest. Intercompany transactions and balances Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Where there is a change in ownership interest, there will be an adjustment between the carrying amounts of the controlling and “non-controlling” interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to the owners of the Company. When a Company acquires control through a change in investment policy, the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. Any amounts above net tangible assets are held as goodwill or intangibles at that point. If the ownership interest in a jointly-controlled entity or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. 3 1 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only Business combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the fair value consideration transferred, measured at acquisition date and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in the consolidated statement of comprehensive income in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates and adjusted on a prospective basis. The amortisation expense on intangible assets with finite lives is recognised in the statement of profit or loss as the expense category that is consistent with the function of the intangible assets. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of profit or loss when the asset is derecognised. Impairment of financial assets The Group assesses at each reporting date an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. Under the general approach for credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL). For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group considers a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. Share-based Payments to Employees and Directors Employees (including executive directors) of the Group may receive remuneration in the form of share-based payments, where employees render services as consideration for equity instruments (equity-settled transactions). 3 2 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model. The cost is recognised, together with a corresponding increase in other capital reserves in equity, over the period in which the performance and/or service conditions are fulfilled in the employee benefits reserve. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. This cost is reversed in the event that an employee forfeits any share-based payment, when leaving the Group or other circumstances. The expense in the consolidated statement of comprehensive income for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in employee benefits expense. Income Tax The Group has formed a tax consolidated group and has executed tax-sharing agreements with each controlled entity. The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the Group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the Group also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The income tax expense (revenue) for the year comprises current income tax expense and deferred tax expense or benefit. 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 as well as unused tax losses. Current and deferred income tax expense is charged or credited outside profit or loss when the tax relates to items that are recognised outside profit and loss. No deferred income tax is recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised only to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (a) a legally enforceable right of set-off exists; (b) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective assets and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Revenue Recognition Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is received. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty, and is generally recognised on an accruals basis. 3 3 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only Subscription revenue Subscription revenue is generally received in advance and is recognised to the extent that the service has been delivered. Commission revenue Commission revenue from managed funds and life insurance products are recognised and measured as the fair value of the consideration received or receivable to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Funds management fees Management fees are recognised over the period the service is provided based on a percentage of net assets under management of the fund. Performance fees are recognised when the right to receive payment has been established. There were no performance fees paid or payable for the year ended 30 June 2018 (2017: $3,151). Net changes in fair value of investments Realised and unrealised gains and losses on investments measured at fair value through profit or loss are recognised in the Statement of Comprehensive Income. Realised gains and losses are calculated as the difference between the consideration received and the fair value at the previous year end. Dividend income Dividends and distributions are recognised on the applicable ex-dividend date. Interest income Interest Income is recognised as it accrues. Other income Other income is recognised to the extent that it is probable that the economic benefits will flow to the Group and when the revenue can be reliably measured. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with bank, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. For the purposes of the Statement of Cash Flows, cash includes deposits held at call with financial institutions net of bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities on the Statement of Financial Position. Long service and Annual leave provisions The Group does not expect its long service leave or annual leave benefits to be settled wholly within 12 months of each reporting date. The Group recognises a liability for long service leave and annual leave measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Expenses The Group records all expenses on an accruals basis. This includes: accounting, audit, legal and administrative fees, management fees, employee costs, marketing and advertising costs, director’s fees, travel and accommodation expense, rent expenses, commission rebates, other expenses, market data costs, software and website costs. 3 4 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only Property, Plant and Equipment All property, plant and equipment is carried at historical cost less accumulated depreciation and accumulated impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, when it is probable that the future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Depreciation on assets is calculated using the straight-line method to allocate their cost, net of residual value, over the estimated useful lives as follows: Computer and office equipment Network and production equipment 2-4 years 3-4 years Leasehold improvements shorter of the expected fitout life or lease term (approximately 4 years) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the Statement of Financial Position are shown inclusive of GST. Earnings/loss per share Basic earnings/loss per share is calculated by dividing profit/(loss) attributable to members of the Company by the weighted average number of ordinary shares outstanding during the year, adjusted for any bonus element, and are shown to one decimal place. Diluted earnings/(loss) per share is calculated by dividing profit attributable to members of the Company by the total number of ordinary shares that would be outstanding if all the LTIP and ESOP shares had vested. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Functional and presentation currency The functional and presentation currency of the Group is Australian dollars. Comparatives Where necessary, comparative information has been reclassified to be consistent with the current reporting period. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectation of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. Estimates of future cash flows were used to estimate fair value of the assets acquired and liabilities assumed in the business combination. In particular, the fair value of intangible assets was calculated using management’s estimates of future cash flows from each entity’s identified intangible assets for the period of their expected useful life. Level 3 investments in financial assets are based on Director’s estimates of the fair value of those investments, where reliable third-party sources of valuation are not available. The Group has not recognised deferred tax assets relating to carried forward realised capital losses on the basis that it does not expect to derive sufficient future capital gains to utilise the current losses within a 3 to 5-year time period. 3 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only 3. Change in fair value of financial assets at fair value through profit and loss Net realised gain on investments Net unrealised gain on investments 4. Financial assets held at fair value AWI Ventures investee companies Investments in Separately Managed Accounts Derivatives Investments in Equity Securities Financial assets at fair value through profit and loss 2018 $ 165,242 989,098 1,154,339 2018 $ 1,808,520 192,657 250,000 – 2,251,177 2017 $ 69,218 172,079 241,297 2017 $ 1,573,000 182,124 – 298,357 2,053,481 The Separately Managed Accounts are issued by Praemium Australia Limited as the responsible entity and managed by InvestSMART Financial Services Pty Ltd. Derivatives consists of a purchased call option to acquire 100% of an unlisted company for $3,750,000 exercisable between the third and fourth anniversary date of entering the share option deed. The transaction price paid for the call option ($250,000) is considered to be fair value at 30 June 2018. Further information on the fair value determination and the risk exposures of financial assets held at fair value is provided in Note 12. 5. Employee benefit reserve Long Term Incentive Plan (LTIP) Employee Share Ownership Scheme (ESOP) Opening balance Expense Closing balance 2018 $ 1,264,334 179,005 2017 $ 1,022,025 67,505 1,443,339 1,089,530 1,089,530 353,809 1,443,339 665,002 424,528 1,089,530 The cost of the LTIP shares, ESOP shares and Company issued options have been estimated using the Monte-Carlo simulation or Black-Scholes methodology and amortised over the applicable vesting period. A summary of the terms of the issues are included in the Directors’ Report and Note 14. 6. Income Tax (a) Income tax benefit/(expense) recognised in the Statement of Comprehensive Income The components of income tax expense: Current income tax expense Other adjustments for prior years Deferred tax income relating to the origination and reversal of temporary differences Change in tax rate Total income tax benefit/(expense) 2018 $ (46,495) 81,791 217,874 – 2017 $ (787,655) 73,968 271,145 151,525 253,170 (291,017) 3 6 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only (b) Income tax expense A reconciliation of income tax expense applicable to accounting profit before income tax at the statutory income tax rate to income tax expense at the entity’s effective income tax rate for the years ended 30 June 2018 and 2017 is as follows: Prima facie income tax benefit calculated at 27.5% (2017: 30%) on operating loss Add/(Less) tax effect of: Expenditure not deductible in current year Recognition of previously unused tax losses Impairment of goodwill Change in tax rate Adjustments for prior years Income tax benefit/(expense) (c) Deferred tax assets and liabilities Deferred tax assets The deferred tax asset balance comprises temporary differences recognised as follows: Accruals and provisions not deductible in this period Deductible capital expenditure Tax losses carried forward Closing balance Movements in deferred tax assets Opening balance Benefit (expense) in the income statement Deferred tax liabilities 2018 $ 6,294 (106,543) 274,301 – – 79,118 253,170 175,858 69,422 28,821 274,101 455,311 (181,210) 274,101 2017 $ 6,673,891 (134,231) – (7,083,199) 151,525 100,997 (291,017) 236,875 181,866 36,570 455,311 613,248 (157,937) 455,311 The deferred tax liability balance comprises temporary differences recognised as follows: Future tax expense for intangibles acquired 1,720,249 2,096,080 Unrealised gain on investments Closing balance Movements in deferred tax liabilities Opening balance Benefit in the income statement – 1,720,249 2,119,333 (399,084) 1,720,249 23,253 2,119,333 2,697,185 (577,852) 2,119,333 A tax rate of 27.5% was applied for the year ending 30 June 2018 (2017: 30%) as the Group is classified as a small business for tax purposes. The Group expects to continue to be classified as a small business for tax purposes. The Group has not recognised deferred tax assets relating to carried forward realised capital losses on the basis that it does not expect to derive sufficient future capital gains to utilise the current losses within a 3 to 5-year time period. The potential deferred tax asset that could be realised is $5,120,945 at 30 June 2018. 3 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only 7. Trade and other receivables Trade receivables Income tax receivable 2018 $ 638,540 27,690 666,230 2017 $ 602,697 – 602,697 Receivables are non-interest bearing and unsecured and will be received within 3 months. The credit risk exposure of the Group in relation to receivables is the carrying amount. 8. Controlled entities and investment in associate (a) Controlled entities The company exercised control over the below entities during the period: Intelligent Investor Holdings Pty Ltd InvestSMART Financial Services Pty Ltd InvestSMART Funds Management Ltd InvestSMART Advice Pty Ltd (previously Ziel Two Pty Ltd) Yourshare Financial Services Pty Ltd InvestSMART Insurance Pty Ltd AWI Ventures Pty Ltd Eureka Report Pty Ltd InvestSMART Australian Small Companies Fund % owned at 30/06/2018 30/06/2017 100% 100% 100% 100% 100% 100% 100% 100% 3% 100% 100% 100% 100% 100% 100% 100% 100% 100% On 1 February 2017 the InvestSMART Australian Small Companies Fund, a unit trust, was established by payment of $350,000. InvestSMART Funds Management Limited held greater than 40% of all outstanding units in the fund from establishment date to 7 September 2017 and consolidated the operations of the fund. From 7 September 2017 to year end the holding is accounted for as an investment in associate. The Group recognised a loss of $2,249 attributable to measuring the investment retained and accounted for as an investment in associate. (b) Investment in associate On 7 September 2017 management considered that the Group’s ownership in The InvestSMART Australian Small Companies Fund no longer constituted control. The Fund was classified as an investment in associate and accounted for using the equity method from 7 September 2017 onwards. InvestSMART Funds Management Ltd is the Responsible Entity for the Fund and is deemed to have significant influence over the financial and operating policy decisions of the Fund. The Fund is domiciled and has its principal place of business in Australia. Below is a summary of the financial information relating to the investment in associate: 3 8 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only Cash and cash equivalents Receivables Financial assets held at fair value through profit or loss Total assets Total liabilities Net assets attributable to unitholders Group carrying amount of investment in associate Interest income Dividend income Net loss on financial instruments held at fair value through profit and loss Total investment income Total expenses Operating profit/(loss) 9. Fixed assets including software Cost at 30 June 2016 Additions Disposals Cost at 30 June 2017 Additions Cost at 30 June 2018 Accumulated depreciation at 30 June 2016 Depreciation charge for the period Accumulated depreciation at 30 June 2017 Depreciation charge for the period Accumulated depreciation at 30 June 2018 Net book value at 30 June 2017 Net book value at 30 June 2018 10. Intangibles Balance at 30 June 2016 Amortisation Balance at 30 June 2017 Amortisation Balance at 30 June 2018 Plant and equipment Software $ 185,490 145,897 (394) 330,993 43,709 374,702 10,172 79,509 89,681 47,819 137,500 241,312 237,202 $ 211,790 – – 211,790 – 211,790 122,768 35,856 158,624 53,000 211,624 53,166 166 Fund distribution contracts Subscriber lists $ 7,457,900 877,400 6,580,500 877,400 5,703,100 $ 1,530,870 489,260 1,041,610 489,260 552,350 2018 $ 2,980,826 20,051 10,215,628 13,216,504 88,702 13,127,802 384,475 34,028 147,851 (1,081,253) (899,374) 148,530 (1,047,904) Total $ 397,280 145,897 (394) 542,783 43,709 586,492 132,940 115,365 248,305 100,819 349,124 294,478 237,368 Total $ 8,988,770 1,366,660 7,622,110 1,366,660 6,255,450 3 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only Fund distribution contracts were acquired as intangible assets under a business combination as at 1 January 2015. Whilst they have no expiry date, it is expected that customers on which the distribution fees are earned will leave over 10 years. Subscriber lists in Intelligent Investor are assumed to have a 5-year life, based on the Group’s historical experience, and therefore the intangible asset arising from those lists are amortised on a straight-line basis. Subscriber lists in Eureka Report are assumed to have a 3-year life and are amortised on a straight line over that period. 11. Trade and other payables Trade payables Annual leave provision Long service leave provision PAYG and superannuation payables GST payable Accruals Other payables Tax payable 2018 $ 151,757 234,760 125,003 148,121 130,520 308,355 153,027 – 2017 $ 29,189 208,396 65,623 136,255 252,686 319,780 222,835 766,159 1,251,543 2,000,923 Trade payables are non-interest bearing and unsecured. Payment duration is disclosed in Note 12. 12. Financial risk management The Group’s financial instruments consist mainly of deposits with banks, accounts receivable, accounts payable, investments in unlisted equities and derivatives classified as financial assets at fair value through profit and loss. AASB 7 Financial Instruments: Disclosures identify three types of risk associated with financial instruments (i.e. the Group’s investments, receivables and payables) (i) Credit risk The standard (AASB 7) defines this as the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets, is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. There are no other material amounts of collateral held as security at 30 June 2018. Credit risk is managed as shown in Note 7 with respect to receivables. The credit risk exposure of the Group in relation to cash is the carrying amount and any accrued unpaid interest. Cash investments are held with a number of banks all of which are rated AA- by Standard and Poor’s. None of these assets are over-due or considered to be impaired. (ii) Liquidity risk The standard (AASB 7) defines this as the risk that an entity will encounter difficulty in meeting obligations associated with liabilities. Senior management monitors the Group’s cash-flow requirements daily taking into account upcoming dividends, tax payments and investment activity. The Group’s inward cash-flows depend upon the level of trail commission and subscription revenue received. If these decrease by a material amount, the Group will amend its outward cash-flows accordingly. As the Group’s major cash outflows are the cost of employees and rebates of trail commissions, the level of both of these is managed by the Board and senior management. The tangible assets of the Group are largely in the form of unlisted securities which may be difficult to liquidate in a timely fashion, and short-term receivables. 4 0 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only The table below analyses the Group’s non-derivative liabilities in relevant maturity groupings based on the remaining period to the earliest possible contractual maturity date at the year-end date. The amounts in the table below are contractual undiscounted cash flows. At 30 June 2018: Trade and other payables Subscriptions received in advance Trail commissions due to customers Total At 30 June 2017: Trade and other payables Subscriptions received in advance Trail commissions due to customers Total (iii) Market risk On-demand $ – – – – – – – – Less than 3 months $ 692,395 749,517 561,417 3 to 12 months $ 395,271 820,967 588,280 1 to 5 years $ 163,877 31,076 Total $ 1,251,543 1,601,560 – 1,149,697 2,003,329 1,804,518 194,953 4,002,800 1,641,423 293,877 147,396 371,347 2,160,166 1,983,794 838,044 3,115,715 65,623 291,168 2,000,923 2,422,358 – 1,209,391 356,791 5,632,672 The standard (AASB 7) defines this as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. A general fall in market prices of 5 per cent and 10 per cent, if spread equally over all investments would lead to a reduction in the Group’s equity and increase the reported loss by $124,959 and $253,318 respectively (2017: $102,674 and $205,348 respectively). The Group is not directly exposed to currency risk as all its operations are conducted in Australian dollars. The Group is engaged in activities conducted solely in Australia. Interest rate risk The Group’s cash balances and term deposits expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Sensitivity analysis - interest rate risk An increase of 75 basis points in interest rates at year end would have increased the Group’s profit by $34,243 (2017: $37,013). A decrease of 75 basis points would have an equal but opposite effect. 4 1 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only At 30 June 2018, the Group’s exposure to interest rate risk and the effective weighted average interest rate for each class of asset and liability is set out in the table below: Weighted average interest rate Floating interest rate Non-interest bearing Assets Cash assets Trade and other receivables Prepayments and deposits Financial assets at fair value through profit and loss (% pa) 0.7 Liabilities Trade and other payables Trail commissions due to customers Subscriptions received in advance Net assets/(liabilities) Total $ $ $ 3,292,712 1,273,060 4,565,772 – – – 666,230 155,574 2,251,177 666,230 155,574 2,251,177 3,292,712 4,346,041 7,638,753 – – – – 3,292,712 1,251,543 1,149,697 1,601,560 4,002,800 343,241 1,251,543 1,149,697 1,601,560 4,002,800 3,635,953 At 30 June 2017, the Group’s exposure to interest rate risk and the effective weighted average interest rate for each class of asset and liability is set out in the table below: Weighted average interest rate Floating interest rate Non-interest bearing Assets Cash assets Trade and other receivables Prepayments & deposits Financial assets at fair value through profit and loss Liabilities Trade and other payables Trail commissions due to customers Subscriptions received in advance (% pa) 0.8 $ 4,465,970 - - - 4,465,970 - - - - $ 469,076 602,697 271,888 2,053,481 3,397,142 2,000,923 1,209,391 2,422,358 5,632,672 Net assets/(liabilities) 4,465,970 (2,235,530) Total $ 4,935,046 602,697 271,888 2,053,481 7,863,112 2,000,923 1,209,391 2,422,358 5,632,672 2,230,440 Fair value hierarchy AASB 13 requires the Group to classify fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in making the measurements. The fair value hierarchy has the following levels: • • Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). • Level 3 - Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the 4 2 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ requires significant judgement by the Directors. The Directors consider observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. There has been no change in the Level 2 and Level 3 valuation techniques used for this report from previous reports. The table below sets out the Group’s financial assets and liabilities (by class) measured at fair value according to the fair value hierarchy at 30 June 2018: At 30 June 2018 Financial assets Investments in Separately Managed Accounts AWI Ventures investee companies Derivatives Financial assets held at fair value through profit or loss At 30 June 2017 Financial assets Investments in Equity Securities Investments in Separately Managed Accounts AWI Ventures investee companies Level 1 Level 2 Level 3 $ 192,657 $ – Total $ 192,657 – – 1,808,520 1,808,520 250,000 250,000 192,657 2,058,520 2,251,177 $ – – – – 298,357 – – – 182,124 – – 298,357 182,124 – 1,573,000 1,573,000 Financial assets held at fair value through profit or loss 298,357 182,124 1,573,000 2,053,481 During the reporting period ending 30 June 2018 there were no transfers between Level 1 and Level 2 fair value measurements. Financial instruments whose values are based on quoted market prices in active markets, and therefore classified within level 1, include active listed equities, certain unlisted unit trusts and exchange traded derivatives. Investments classified within level 2 have inputs based on quoted and unquoted prices. The level 2 investments held by the Group relate to investments in Separately Managed Accounts issued by Praemium Australia Limited. The accounts hold primarily listed securities which are valued at the last closing price on the Australian Securities Exchange. Description of significant unobservable inputs to valuation of Level 3 assets Through AWI Ventures Pty Ltd, the Group has investments in 7 start-up companies in the financial technology sector. These companies have little or no revenue and therefore cannot be valued using Discounted Cash Flow. The fair value of the investee companies has been assessed as the price at which each investee company raised a material amount of new capital, or historic cost if they have not raised a material amount of new capital, adjusted for the Director’s view of the likely success of the business. The Group purchased a call option (derivative) over an unlisted business on 14 June 2018. At year end the transaction price for the call option is considered to be an appropriate proxy for fair value. Investments classified within level 3 have significant unobservable inputs, as they are infrequently traded. Unlisted equities and options are classified within level 3. 4 3 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only The table below shows the assumptions used by management in assessing fair value of its investments in unlisted investments: Valuation technique Significant unobservable inputs Range (weighted average) Sensitivity to fair value AWI Ventures investee companies Director’s valuation Last issue price & date of new N/A equity, last traded price of equity, Capital structure, Directors’ qualitative assessment of investee business model success Call option Director’s valuation Last traded price of derivative N/A An issue of new equity, or trade in existing equity, at a higher or lower price may have significant effect on fair value An issue of new equity, trade in existing equity, changes in interest rates, volatility, dividends at a higher or lower amount may have significant effect on fair value under option pricing models The following table shows a reconciliation of the movement in the fair value of financial instruments categorised within level 3 between the beginning and the end of the reporting period: Fair Value at 30 June 2017 Disposal of unlisted equities (fair value at 30 June 2017) Unrealised gain through profit and loss Purchase of call option (derivative) Balance at 30 June 2018 13. Issued capital 1,573,000 (743,045) 978,565 250,000 2,058,520 Fully paid ordinary share capital 110,885,360 58,522,440 110,885,360 58,522,440 2018 2017 Shares $ Shares $ An additional 16,499,998 shares were issued, as part of the LTIP detailed in Note 5 and Note 14. A portion of the Long-Term Incentive Plan shares issued to Ron Hodge, Nigel Poole and Alastair Davidson on 8 September 2015, vested on 8 September 2016 and 8 September 2017. A portion of the Long-Term Incentive Plan shares issued to Paul Clitheroe on 26 November 2014, vested on 26 November 2017. 6,833,334 shares remain unvested at 30 June 2018. The vested shares have a non-recourse loan outstanding. Under the LTIP, the director or employee can repay the loan by forfeiting the shares issued under the plan. The shares vest when the Company’s share price reaches certain hurdles or after certain time periods and may be forfeited prior to the loan repayment date and have therefore not been included in the issued share capital total. On 28 December 2016 the Company issued 5,820,000 shares under the ESOP to the Managing Director and other employees of the Group, which will vest over the next 3 years. 1,585,000 ESOP shares were forfeited and cancelled at 30 June 2018. 1,411,658 of these shares vested on 28 December 2017. On 6 September 2017 the Company issued 700,000 shares under the ESOP to employees of the Group, which will vest over the next 3 years. Under the ESOP, the director or employee can repay the loan by forfeiting the shares issued under the plan. The shares vest over certain time periods and may be forfeited prior to the loan repayment date and have therefore not been included in the issued share capital total. 4 4 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only (a) Terms and conditions The Company has ordinary shares on issue. Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholder meetings. (b) Capital Management The Group’s policy is to maintain a strong capital base so as to maintain investor and market confidence. To achieve this the Directors monitor the monthly performance of the operating entities, the Group’s management expenses, and share price movements. The Group is not subject to any externally imposed capital requirements. Capital relates to equity attributable to investors. The primary objective of the Group’s capital management is to ensure that it maintains healthy capital ratios to support its business and maximise shareholder value. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust any dividend payment to investors, capital returns or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the years ended 30 June 2018 and 30 June 2017. 14. Related party information (a) Key management personnel Ron Hodge, Nigel Poole and Alastair Davidson were key management personnel of the Group during the financial year. (b) Key management personnel remuneration Remuneration paid to key management personnel by the Group in connection with the management of affairs of the Group were: 2018 2017 Short-term Employee Benefit Cash Salary & Fees Employment Benefit Superannuation 672,132 671,710 72,485 81,545 Accrued Annual Leave (103) (2,704) Employee Share Benefit 177,342 366,304 Total 921,856 1,116,855 The Directors’ remuneration excludes insurance premiums paid and payable by the Group in respect of Directors’ liability insurance. Apart from the details disclosed in this note, no key management personnel have entered into a material contract with the Group during the financial year. The Directors of the InvestSMART Group Limited are responsible for determining and reviewing compensation arrangements for the Managing Director and key management personnel. The Directors also assess the appropriateness of the nature and amount of emoluments of each Director on a periodic basis by reference to workload and market conditions. The overall objective is to ensure maximum stakeholder benefit from the retention of a high-quality board whilst constraining costs. The Directors’ remuneration has been included in the remuneration report section of the Directors Report. On 26 November 2014 (the grant date), the Company lent $1,000,000 to the Executive Chairman, Mr Paul Clitheroe, to acquire 4,000,000 shares, as part of the Long-Term Incentive Plan, subject to vesting terms, as approved by shareholders at the Annual General Meeting in November 2014. The first tranche of these shares has vested, though the associated non-recourse loan has not been repaid, and therefore has not been included in fully paid ordinary share capital. The remaining tranches have not vested and therefore have not been included in fully paid ordinary share capital. The Company estimated the fair value of this director/ employee share benefit was $258,400 at the grant date. 4 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only On 17 June 2015 the Company agreed to lend $3,125,000 in total to three key management personnel to acquire 12,499,998 shares, as part of the Long-Term Incentive Plan as approved by shareholders at the Extraordinary General Meeting in June 2015. These shares were issued on 8 September 2015 and vest in three equal tranches over three years. The first tranche of these shares vested on 8 September 2016 and the second tranche vested on 8 September 2017. The associated non-recourse loan has not been repaid, and therefore has not been included in fully paid ordinary share capital. The remaining tranche has not vested and therefore has not been included in fully paid ordinary share capital. The Company estimated the fair value of this director/ employee share benefit was $1,029,293 at the grant date. On 28 December 2016 as part of the Employee Share Ownership Plan (ESOP) the Company lent $1,804,200 to the Managing Director and employees of the Group to acquire 5,820,000 ordinary shares as approved by shareholders at the Annual General Meeting on 29 November 2016. The shares were issued on the Grant Date and vest in three equal tranches over three years. The first tranche of these shares vested on 28 December 2017 (1,411,658 shares). The associated non-recourse loan has not been repaid, and therefore has not been included in fully paid ordinary share capital. The remaining tranches have not vested and therefore have not been included in fully paid ordinary share capital. 1,650,000 ESOP shares were forfeited and cancelled at 30 June 2018. The Company estimates the fair value of this director/employee share benefit is $329,716 at the Grant Date. On 6 September 2017 the Company lent $178,500 to employees of the Group to acquire 700,000 ordinary shares under the ESOP. The shares were issued on the Grant Date and vest in three equal tranches over three years. These shares have not vested and therefore have not been included in share capital. The Company estimates the fair value of this employee share benefit is $47,808 at the Grant Date. (c) Shareholdings of key management personnel and their related entities Ordinary Shares Ron Hodge Alastair Davidson Nigel Poole 15. Statement of Cash Flows Balance at 30 June 2016 Shares acquired Balance at 30 June 2017 Shares acquired Balance at 30 June 2018 4,166,666 4,494,340 4,166,666 600,000 300,000 300,000 4,766,666 118,334 4,885,000 4,794,340 4,466,666 - - 4,794,340 4,466,666 (a) Reconciliation of net profit from ordinary activities after income tax to net cash provided by operating activities Operating profit/(loss) Adjustments to reconcile profit after tax to net cash flows: Net gain/loss on financial instruments at fair value through profit and loss Employee benefit expense Depreciation and amortisation Share of net profit of associate Decrease in deferred tax asset Decrease in deferred tax liability Dividend income Change in goodwill through income statement Change in operating assets and liabilities: (Increase)/decrease in trade and other receivables Decrease/(Increase) in prepayments Decrease in trade and other payables Net cash from operating activities 2018 $ 2017 $ 230,284 (22,548,360) (1,154,339) 353,809 1,467,479 4,703 181,210 (399,084) – – (241,298) 424,528 1,481,023 – 157,937 (577,852) (3,166) 23,610,664 (63,533) 116,314 19,682 (80,757) (1,629,873) (2,014,005) (893,030) 228,396 4 6 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only (b) Reconciliation of cash Cash at the end of the financial year as shown in the Statement of Cash Flows is reconciled to the related items in the statement of financial position as follows: Cash at bank 2018 $ 2017 $ 4,565,772 4,935,046 The credit risk exposure of the group in relation to cash is the carrying amount and any accrued unpaid interest. Cash investments are held with a number of banks all of which are rated AA- by Standard and Poor’s. 16. Earnings/(loss) per share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 2018 cents 0.21 0.17 2017 cents (20.33) (20.33) Earnings gain/(loss) as per Statement of Consolidated Income 230,284 (22,548,360) Weighted average number of ordinary shares outstanding during the year used in calculating basic earnings per share Weighted average number of ordinary shares outstanding during the year used in calculating diluted earnings per share if all LTIP shares vest and non-recourse loans are repaid 110,885,360 110,885,360 132,320,358 132,820,362 As the Group was in a loss position in 2017, share based incentive plans did not affect the diluted earnings per share calculation as potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share from continuing operations. 17. Contingent liabilities and commitments At 30 June 2018, InvestSMART Group Limited had commitments for an office lease at Level 9, 37 York Street, Sydney, and Level 4, 356 Collins St, Melbourne for the following amounts: Within one year After one year but less than five years Total At 30 June 2018 InvestSMART Group Limited has the following contingent liabilities: Guarantees for office rentals Guarantee for merchant facility 2018 $ 369,362 401,512 770,874 187,778 351,000 538,778 2017 $ 313,374 650,415 963,789 187,778 351,000 538,778 4 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only 18. Franking account Opening balance of franking account 2018 $ 2,210,875 Adjustments for tax payment and tax payable/refundable in respect of the prior year’s profits 758,220 Adjusted franking account balance 2,969,095 2017 $ 1,887,279 323,596 2,210,875 19. Auditors remuneration Auditing and reviewing the financial reports of the Group and managed investment schemes: Ernst and Young - audit fees 20. Parent Entity Information Statement of Financial Position Assets Current assets Investments Total Assets Liabilities Current Liabilities Total Liabilities Net Assets Equity Contributed Equity Employee benefit reserve Retained earnings Total Equity Statement of Profit or Loss and other Comprehensive Income Net loss for the year after income tax expense Total Comprehensive loss for the year 2018 $ 2017 $ 166,169 133,560 2018 $ 128,260 4,745,948 4,874,208 2017 $ 128,260 5,474,546 5,602,806 – – 653,824 653,824 4,874,208 4,948,982 58,522,441 1,443,339 58,522,441 1,085,245 (55,091,572) (54,658,704) 4,874,208 4,948,982 432,868 432,868 21,526,639 21,526,639 The accounting policies of the parent entity, InvestSMART Group Limited, used in determining the financial information shown above, are the same as those applied in the Group’s consolidated financial statements, as detailed in Note 2. At 30 June 2018, InvestSMART Group Limited had commitments for an office lease at Level 9, 37 York Street, Sydney, and Level 4, 356 Collins St, Melbourne, for $770,874 (2017: $963,789). 4 8 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor personal use only 21. Segment information The Group has only one reportable segment. The Group is engaged solely in retail financial services conducted in Australia, deriving revenue from commissions, subscriptions and funds management fees. 22. Events occurring after reporting date Since 30 June 2018 there have been no significant events up to the date of these financial statements. 23. Company details The registered office and principal place of business of the Company and subsidiaries is: Level 9, 37 York Street Sydney NSW 2000 4 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2018For personal use only DIRECTOR’S DEC L ARATION Director’s declaration In accordance with a resolution of the Directors of InvestSMART Group Limited, I state that: 1. In the opinion of the Directors: (a) The financial statements, notes and the additional disclosures included in the Director’s Report designated as audited, of the Company are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Company as at 30 June 2018 and of its performance for the year ended on that date. (ii) complying with Australian Accounting Standards, International Financial Reporting Standards (IFRS) as disclosed in Note 2 and Corporations Regulations 2001. (b) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2018. On behalf of the Board Paul Clitheroe Chairman Dated this 29th day of August 2018 at Sydney 5 0 ANNUAL REPORT 2018For personal use only Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent Auditor's Report to the Members of InvestSMART Group Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of InvestSMART Group Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. 34 5 1 ANNUAL REPORT 2018For personal use only 2 Valuation of Intangible Assets Financial report reference: Note 10 Why significant How our audit addressed the key audit matter The Group holds intangible assets in respect of the following: Our audit procedures included the following: ► Fund distribution contracts and subscriber lists acquired as part of a business combination on 1 January 2015; and ► Subscriber lists acquired as part of the acquisition of Eureka on 4 April 2016. The fund distribution contracts are being amortised over a 10 year period. ► Assessed the methodology applied by the Group to consider whether indicators of impairment were present, with reference to the requirements of Australian Accounting Standards. ► Considered whether attrition rates of fund distribution contract arrangements and subscribers and considered whether they suggested an indicator of impairment was present or whether amortisation periods required adjustment. Subscriber lists are being amortised over either a three or five year period. The carrying value of the intangible assets as at 30 June 2018 was $6.2 million. ► Considered whether actual costs incurred in maintaining fund distribution contracts and subscribers would suggest an indicator of impairment was present. The Group performs an annual assessment considering whether any indicators of impairment are present in respect of these intangible assets. Given the judgments involved in this assessment and in the determination of amortisation periods applied to the intangible assets, this was considered to be a key audit matter. 35 5 2 ANNUAL REPORT 2018For personal use only 3 Valuation of Unlisted Investments Financial report reference: Note 4 Why significant How our audit addressed the key audit matter The Group holds investments in unlisted securities of $1.8 million as at 30 June 2018. They comprise minority holdings in start-up companies in the financial technology sector that are carried at fair value. We assessed the valuation analysis prepared by the Group and agreed inputs such as purchase price and last traded price to observable external support such as share certificates and transaction records. The investments are classified within Level 3 of the Fair Value Hierarchy set out in Australian Accounting Standards. The nature of these entities and the sector in which they operate means that they are inherently difficult to value and require significant judgment. Accordingly, this was considered to be a key audit matter. We assessed the application of the three valuation methodologies used by the Group in the determination of fair value: ► Reference to recent capital transactions and any discount applied thereon, representing the Group’s perspective of risk. ► Consideration of recent indicative offers received by the Group. ► Consideration of comparable market revenue multiples. Our valuation experts were involved in the assessment of the appropriateness of the valuation methodologies applied by the Group. We considered the adequacy of the disclosures relating to the investments within the financial report. 36 5 3 ANNUAL REPORT 2018For personal use only 4 Valuation of Derivatives Financial report reference: Note 4 Why significant How our audit addressed the key audit matter The Group purchased a call option during the year to acquire 100% of an unlisted company for $3.75 million exercisable between the third and fourth anniversary date of the purchase. The option was valued at $0.25 million on the statement of financial position at balance date. The option is classified within Level 3 of the Fair Value Hierarchy. The valuation option model includes material inputs which are subjective in nature. We assessed the determination of fair value prepared by the Group. We agreed inputs such as exercise price of shares on issue and recent share issuance price to observable external support such as share subscriptions and share sale agreements. We assessed valuation discounts applied and compared them to available market information for reasonableness. Our valuation specialists were involved in the performance of these procedures. We considered the adequacy of the disclosures relating to the option within the financial report. Information Other than the Financial Report and Auditor’s Report The directors are responsible for the other information. The other information comprises the information included in the Group’s 2018 Annual Report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express 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 and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. 37 5 4 ANNUAL REPORT 2018For personal use only 5 In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. 38 5 5 ANNUAL REPORT 2018For personal use only 6 We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 5 to 8 of the directors' report for the year ended 30 June 2018. In our opinion, the Remuneration Report of InvestSMART Limited for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Mark Jones Partner Sydney 29 August 2018 39 5 6 ANNUAL REPORT 2018For personal use only AD DITIONAL INFOR MATION Additional Information Additional information required by the Australian Securities Exchange Listing Rules is set out below. The security holder information set out below was current as at 25 September 2018. There were 132,160,358 ordinary shares held by 1,187 shareholders, all of which were quoted on the Australian Securities Exchange. There are no restricted shares on issue. There are no unquoted shares on issue. Distribution of shareholders Holdings Ranges 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Totals Holders Total Units 339 250 175 280 143 1,187 59,972 1,068,639 1,520,643 11,185,601 118,325,503 132,160,358 The number of shareholders holding less than a marketable parcel of fully paid ordinary shares is 383. Top 20 shareholders: Holder Name HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMINEES PTY LTDROBIN ANNE OWLES & RON PETER HODGE JAMES NOORT ONMELL PTY LTD MR PAUL HUGH CLITHEROE RONNSCAM PTY LTD CAMERON RICHARD PTY LTD MRS ANTONIA COLLOPY S M & R W BROWN PTY LTD PATCAIELI PTY LTD PENDEX PTY LTD VADINA PTY LIMITED STUART ANDREW PTY LTD JJC SF (2012) PTY LTD LEYLAND PRIVATE ASSET MANAGEMENT PTY LTD MYALL RESOURCES PTY LTD MR PETER RAYMOND DAVIES FROHSHIBER PTY LTD FARNWORTH HOUSE PTY LTD Total Top 20 Holdings Other Total Ordinary shares on issue Number of shares held 24,061,416 5,151,534 4,166,666 4,166,666 4,125,683 4,000,000 3,166,666 3,133,719 3,017,928 3,000,000 2,702,747 2,301,991 1,940,000 1,876,281 1,650,000 1,560,000 1,500,000 1,200,000 1,200,000 1,190,475 75,111,772 57,048,586 132,160,358 % 0.05 0.81 1.15 8.46 89.53 100.00 % 18.21% 3.90% 3.15% 3.15% 3.12% 3.03% 2.40% 2.37% 2.28% 2.27% 2.05% 1.74% 1.47% 1.42% 1.25% 1.18% 1.13% 0.91% 0.91% 0.90% 56.83% 43.17% 5 7 ANNUAL REPORT 2018For personal use only AD DITIONAL INFOR MATION Voting rights At a general meeting, shareholders are entitled to one vote for each share held. On a show of hands, every shareholder present in person or by proxy shall have one vote and upon a poll, every shareholder so present shall have one vote for every share held. Substantial shareholders The Company has been notified of three shareholders who hold relevant interests of in excess of 5% of the Company’s ordinary shares: Name Leyland Private Asset Management Pty Ltd Perpetual Limited Discovery Asset Management Pty Ltd Date of Interest No of shares held1 Percentage2 15 November 2017 25 August 2016 1 May 2014 25,138,492 18,539,432 7,521,739 18.94 14.55 6.19 1 As disclosed in the last notice lodged with the Australian Securities Exchange by the substantial shareholder. 2 The percentage set out in the notice lodged with the Australian Securities Exchange is based on the total issued capital of the Company at the date of the interest. Stock Exchange Listing Quotation has been granted for all the ordinary shares of the Company on all Member Exchanges of the Australian Securities Exchange Limited. On-market buyback There is no current on-market buyback 5 8 ANNUAL REPORT 2018For personal use only Directory Registered Office Level 9 37 York Street Sydney NSW 2000 Directors Paul Clitheroe AM (Chairman) Ron Hodge (Managing Director) Share Registry Boardroom Pty Limited Level 12 225 George Street Sydney NSW 2000 Shareholder Enquiries Telephone: +61 2 9290 9600 Email: enquiries@boardroomlimited.com.au Michael Shepherd AO (Lead Independent Non-Executive Auditors Director) Kevin A Moore (Independent Non-executive Director) Ernst & Young Company Secretary Grant Winberg 200 George Street Sydney NSW 2000 Telephone: +61 2 9248 5555 Facsimile: +61 2 9248 5959 For personal use only IN VE STSM A RT GR OUP 9/37 YOR K ST, SYDN EY N SW 2000 13 00 880 160 SECTION HEADING??For personal use only