Orion Engineered Carbons
Annual Report 2021

Plain-text annual report

27 August 2021 APPENDIX 4E Preliminary Final Report for the year ended 30 June 2021 Reporting Period The reporting period is for the year ended 30 June 2021 with the corresponding reporting period being for the year ended 30 June 2020. Results for announcement to the market 30 June 2021 A$'000 Revenue from continuing operations Profit/(Loss) for the year Down Down Profit/(Loss) after tax attributable to members Down 8% 716% 716% To To To 31,202 (11,445) (11,445) Net tangible assets per share (cents) 0.56 12.53 30 June 2021 30 June 2020 Dividends There is no proposal to pay dividends for the year ended 30 June 2021. Audit This report is based on accounts which have been audited. Commentary on results for the period The commentary on the results for the period is contained within the Annual Report and ASX announcement accompanying the report. Annual Meeting The annual meeting is expected to be held as follows: Place: City of Perth Library 573 Hay Street Perth, Western Australia Date: 16 November 2021 -ENDS- CONTACTS Announcement authorised by: Todd Alder CEO & Managing Director Tel: +61 8 9441 2311 Email: contact@orbitalcorp.com.au For further information, contact: Ian Donabie Communications Manager Tel: +61 8 9441 2165 Email: idonabie@orbitalcorp.com.au About Orbital UAV Orbital UAV provides integrated propulsion systems and flight critical components for tactical unmanned aerial vehicles (UAVs). Our design thinking and patented technology enable us to meet the long endurance and high reliability requirements of the UAV market. We have offices in Australia and the United States to serve our prestigious client base. Forward-looking statements This release includes forward-looking statements that involve risks and uncertainties. These forward-looking statements are based upon management's expectations and beliefs concerning future events. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company that could cause actual results to differ materially from such statements. Actual results and events may differ significantly from those projected in the forward-looking statements as a result of a number of factors including, but not limited to, those detailed from time to time in the Company’s Annual Reports. The Company makes no undertaking to subsequently update or revise the forward-looking statements made in this release to reflect events or circumstances after the date of this release. Follow us: 2 O 2 1 A N N U A L R E P O R T O r b i t a l C o r p o r a t i o n L i m i t e d | 2 0 2 1 A n n u a l R e p o r t CONTENTS Directors’ Report Auditor’s Independence Declaration Financial Statements Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the financial statements Directors’ declaration Independent auditor’s report Shareholding details Corporate information 1 18 19 20 21 22 23 24 50 51 58 59 CORPORATE PROFILE Orbital UAV provides integrated propulsion systems and flight critical components for tactical unmanned aerial vehicles (UAVs). Our design thinking and patented technology enable us to meet the long endurance and high reliability requirements of the UAV market. We have offices in Australia and the United States to serve our prestigious client base. DIRECTORS’ REPORT for the year ended 30 June 2021 The Directors present their report together with the financial report of Orbital Corporation Limited (the Company or Orbital) and of the Group, being the Company and its subsidiaries for the year ended 30 June 2021 and the auditor's report thereon. Reference Contents of Directors’ Report Page 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Operating and Financial Review Directors Company Secretary Directors’ Meetings Principal Activities Dividends Events Subsequent to Balance Sheet Date Proceedings on Behalf of Company Likely Developments and Expected Results Environmental Regulation and Performance Directors’ Interests Share Options Auditor Independence and Non-Audit Services Indemnification Corporate Governance Statement Rounding Off Remuneration Report Lead Auditor’s Independence Declaration 2 4 5 5 5 5 5 6 6 6 6 6 6 6 7 7 8 18 1 1 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 1. OPERATING AND FINANCIAL REVIEW John Welborn Chairman Non-Executive Director Todd Alder Managing Director and Chief Executive Officer Dear Shareholders, On behalf of the Board of Directors (“the Board”), we are pleased to present the annual report of Orbital Corporation (“Orbital” or “the Company”) and its subsidiaries (“the Group”) for the year ended 30 June 2021. Overview FY21 highlights • • • • • • • • Delivery of $31.2M revenue Operational EBITDA of $1.2M and Net Loss of $1.3M adjusted for one off items; Renegotiated WA Government Loan to support near-term engine production line expansion; New engine development program and supply agreement signed with Textron subsidiary Lycoming Engines; Engine prototypes delivered to Textron-Lycoming and Orbital’s Singapore Defence customer; Facility review by Minister for Defence Industry, Hon Melissa Price MP; Named SME of the Year at the 2020 Australian Defence Industry Awards; and Restructured for profitability in FY22. Orbital achieved operating revenue of $31.2M in FY21, the lower end of the Company’s revised guidance of between $30M and $40M for the period. Revenue was underpinned by two engine model production lines for key customer Insitu Inc., a wholly owned subsidiary of the Boeing Company. The Company’s strong first half performance (HY revenue: $19M, HY operational profit: $0.6M) was impacted in the second half by a reduction in order volumes from Boeing-Insitu for one engine model production line. In addition, production of the third engine model under Orbital’s Long Term Agreement (‘LTA’) with Boeing-Insitu was delayed due to additional customer requested design revisions. In March 2021, Orbital further progressed its customer diversification strategy, signing an engine development and supply agreement with Lycoming Engines, an unincorporated operating division of Avco Corporation, a subsidiary of Textron Inc. The new agreement includes a 12- month engine development program, which will enable the integration of an Orbital-designed core engine, including proprietary fuel and engine control systems, into Textron Systems’ Aerosonde program. Textron Systems Corporation is a subsidiary of Textron and a world leader in unmanned aircraft systems (UAS). Upon satisfactory completion of the engine development program, the Agreement transitions to an engine supply contract. The contract represents a major expansion of Orbital’s business partnerships and future revenue opportunities. WA Government Loan Deed of Variation In early 2021 Orbital commenced renegotiations of its $10M WA Government Loan and received formal confirmation of a Deed of Variation on 12 August 2021. The restructured loan agreement includes an extended repayment schedule over the next four years and repayment offset options that are contingent on the Company achieving operational milestones aligned with its increasing engine business in Western Australia over that period. The repayment offset options provide the potential to forgive the entire value of the loan. As loan negotiations were concluded after the 2021 financial year end, compliance with accounting standards required the full value of the WA Government Loan to be recorded as a current liability. This revised agreement restores balance sheet strength and supports the Company’s growth aspirations, specifically the near-term expansion of engine production lines in Balcatta, Western Australia. 2 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 In FY22, $4M of the $9.9M loan is expected to be offset due to achievement of operational milestones. Financial results The Company reported financial results for the year ended 30 June 2021, with revenue from continuing operations of $31,202,000 (2020: $33,823,000) and a net loss after tax of $11,445,000 (2020: profit of $1,857,000). Operational Net Loss of $1.3M has been adjusted for the following one off items: US Asset Impairment of $2.5M. US facility remains operational and a critical part of Orbital’s long term growth objectives; One off engine reworks of $2.4M and FY22 rework provision of $1.7M; Restructure cost of $0.6M; FX loss (net) of $1M on the conversion of USD intercompany loan to AUD; • • • • • Write off US Deferred Tax Asset of $1.2M; and • WA Government Loan additional interest expense of $0.6M. The Company reports a balance sheet with cash and receivables of $7,705,000 (2020: $14,681,000) and net current assets of -$474,000 (2020: $11,851,000). The decrease in net current assets is the result of the full amount payable on the WA Government loan ($10M) being triggered whilst the loan terms were under renegotiation. Despite the Deed of Variation being signed shortly after 30 June 2021, compliance with the accounting standards requires the Company to recognise the full value of the WA Government loan as current liability at the close of the financial year. Net cash outflow from operating activities during the period was $1,559,000 (2020: net cash inflow $3,726,000). Shareholder returns Closing share price ($)1 2021 0.83 Market capitalisation ($m) 64.46 Basic EPS (cents) from operations (14.74) 1 as at 30 June Management transition 2020 0.75 58.2 2.40 2019 0.30 23.2 (7.63) 2018 0.36 27.9 2.87 2017 0.50 38.6 (15.55) On 01 July 2020, Mr Martin Johnston BEng (Hons) was appointed Chief Operating Officer. Mr Johnston is a Chartered Engineer and has more than 20 years’ experience in engineering, design, prototyping, testing and manufacturing. He is a Member of the Institute of Mechanical Engineers. Change in operations The Company took action in the second half of FY22 to ensure it is structured appropriately and best positioned strategically to continue to deliver on its long-term market opportunity. Orbital maintains operations in Australia and the United States and remains confident the Company’s customer diversification strategy will generate additional engineering development programs. COVID-19 Like many businesses in Australia, the USA and around the world, Orbital has closely monitored – and continues to monitor – the business risks presented by the Coronavirus (COVID-19) pandemic. The physical wellbeing and mental health of all our people is a priority and the Company implemented a COVID-19 Response Plan to minimise the risk of contracting and spreading the virus at its operations in Australia and the USA. Our ability to continue manufacturing at our operations and our product demand was not impacted directly by the COVID-19 pandemic. We continued to deliver on our production commitments and strengthened our global supply chain where necessary. Delivery of our products continued through our established logistics providers, and contingency plans were put in place should existing channels of delivery be impacted. The Company will continue to support the public health effort to minimise the spread of COVID-19. Outlook As geopolitical tensions rise, the intelligence, surveillance and reconnaissance capability that unmanned aircraft systems (‘UAS’) provide will continue to be an integral and increasing part of modern defence forces. Defence spending globally remains high and market research continues to predict significant growth in the UAS market over the coming decade. The growing tactical UAS market remains Orbital UAV’s core focus. The Company continues to build long-term, strategic partnerships with established global defence contractors in this sector, as well as making progress with newer players entering the market. The Company’s most recent contract with Textron subsidiary Lycoming Engines represents a significant new revenue stream in the mid-term and the Company continues to work to secure additional defence prime customers. 3 3 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021 DIRECTORS’ REPORT for the year ended 30 June 2021 Orbital’s engines and associated technologies have accumulated hundreds of thousands of flight hours and with that comes a growing reputation for capability, quality and reliability. The Company continues to leverage this reputation to build its pipeline of opportunities and expand Orbital UAV’s customer base and market share. Revenue in FY22 is expected to be in line with FY21 results and will continue to be underpinned by production revenue from the engine models included in the Boeing-Insitu LTA. During FY22, the Company plans to have three engine production lines in operation under the Agreement. Orbital’s LTA with Boeing-Insitu remains foundational to the Company’s near-term revenue growth. Since the start of 2020, Orbital UAV’s customer diversification strategy has resulted in the Company’s customer portfolio expanding from Boeing-Insitu to now include, Lycoming Engines, Northrop Grumman and one of Singapore’s largest defence companies. Orbital UAV is working with all these leading tactical drone manufacturers on development programs for new engine products. With a growing portfolio of global defence customers, Orbital UAV’s engine development programs represent significant long-term revenue opportunities. The Company is targeting profitability on stable revenue in FY22 and expects revenue growth and profitability to accelerate in FY23 with additional engine models entering production. The Chairman and Managing Director would like to thank the ongoing commitment of the Company’s shareholders and staff. 2. DIRECTORS The Directors of the Company at any time during or since the end of the financial year are: Mr John Paul Welborn, BCom, FCA, FAIM, MAICD, MAusIMM, JP Chairman Joined the Board in June 2014 and appointed as Chairman in March 2015. Mr Welborn is the Managing Director and Chief Executive Officer of Equatorial Resources Limited, an ASX listed (ASX: EQX) iron ore exploration and development company. Mr Welborn is a Chartered Accountant with a Bachelor of Commerce degree from the University of Western Australia and holds memberships of the Institute of Chartered Accountants in Australia (ICAA), the Financial Services Institute of Australasia (FINSIA) and the Australian Institute of Company Directors (AICD). Mr Welborn is a former international rugby union player with extensive experience in the resources sector as a senior executive and in corporate management, finance and investment banking. He has served on the Boards of a number of charitable organisations and is a former Commissioner of Tourism Western Australia. Mr Welborn also serves as a director of Equatorial Resources Limited (appointed August 2010) and a Non-Executive Director of Apollo Minerals Ltd (appointed February 2021). Mr Todd Alder, BEc (Acc), CPA, ACIS Managing Director and Chief Executive Officer Joined Orbital as Chief Financial Officer and Company Secretary in December 2016 and appointed as Managing Director and Chief Executive Officer in August 2017. Mr Alder’s experience includes successful start-ups, acquisitions and the implementation of lean concept business transformations. Mr Alder is an accomplished leader focused on financial discipline, strategy alignment and operational efficiency. His previous role was Chief Financial Officer and Company Secretary at Toro Energy Limited, where he was responsible for financial and management accounting, company secretarial functions, investor relations and information technology. Mr Alder has also worked with Capgemini Consulting (previously Ernst & Young) and Origin Energy Limited. Mr Steve Gallagher, B.E (Hons), B.Com, MAICD Non-Executive Director Joined the Board in April 2017. Mr Gallagher is Principal of Agere Pty Ltd, an advisory and investment company drawing on his capability and professional networks established over 30 years as a CEO and director of global businesses. Mr Gallagher has operated in various business sectors including industrial automation, building technology and power systems, having spent 15 years living and working in Asia (China, Hong Kong and Singapore) and Europe (Switzerland). Mr Gallagher is currently a Non-Executive Director with Optal Ltd (an innovative global payment solutions company), Vix Technology Ltd (an industry leader in transport ticketing, fare collection/payments), Transact1 Pty Ltd (a financial services provider for cash management optimisation and Littlepay Pty Ltd (transit payment processing service provider). Mr Gallagher is also the chairman of the Company’s Audit and Risk Committee. 4 4 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 Mr Kyle Abbott, B.Com (Hons 1st), CA Non-Executive Director Joined the Board in May 2018. Mr Abbott is an experienced aerospace and defense industry executive. Mr Abbott was Managing Director of Western Australian Specialty Alloys (WASA) from 1996 to 2015. During this period WASA grew from a Western Australian specialised alloy manufacturer to become a major supplier to the global aerospace industry, with key customers in the United States, the United Kingdom and Japan. In 2000, Mr Abbott managed the successful sale of WASA to United States-based Precision Castparts Corporation (PCC), an S&P 500 company. PCC was subsequently acquired by Berkshire Hathaway in 2015. Mr Abbott is also a member of the Company’s Audit and Risk Committee. 3. COMPANY SECRETARY Mr David Bonomini, B.Com, CPA Mr David Bonomini was appointed as Chief Financial Officer and Company Secretary in February 2020. Mr Bonomini is a respected finance executive with global experience leading governance, regulatory and commercial initiatives in high growth companies. He is a qualified CPA and holds a Bachelor of Commerce degree. In his previous CFO roles with Compass Group Australia and KB Food Company, Mr Bonomini was responsible for commercial, financial, tax and mergers and acquisitions during periods of significant expansion. 4. DIRECTORS’ MEETINGS The number of Directors’ meetings and the number of meetings attended by each of the Directors of the Company during the financial year are shown below. Director J P Welborn T M Alder S Gallagher K Abbott Directors Meetings Audit and Risk Committee Meetings No. of meetings attended No. of meetings held1 No. of meetings attended No. of meetings held2 7 7 7 7 7 7 7 7 - - 6 6 - - 6 6 1 Number of meetings held during the time the Director held office during the year. 2 The Audit and Risk Committee was established in March 2019. 5. PRINCIPAL ACTIVITIES Orbital’s focus is on the revolutionary design, proven manufacturing processes and rigorous testing to deliver superiority in UAV propulsion systems and flight critical components. The Company drives its UAV-focused strategy from its dedicated production facilities in WA, Australia and Oregon, USA. Our intellectual property, know-how and industry experience, enable us to meet the long endurance and high reliability requirements of the rapidly evolving UAV market. Working with our international customers and supply chain, we continue to design, develop and manufacture world-leading propulsion system solutions and associated technologies to meet the changing demands and increasing mission parameters of tactical UAVs. 6. DIVIDENDS No dividend has been paid or proposed in respect of the current financial year. 7. EVENTS SUBSEQUENT TO BALANCE SHEET DATE Other than the matter sets out below, in the interval between the end of the year and the date of this report there has not arisen any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Group, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future years: • On 12 August 2021, a deed of variation was confirmed to the interest-free loan contract (as per Note D.1) to reschedule the loan repayments over the next 4 years. The deed of variation provides the Company the option to offset repayment amounts if agreed operational milestones are achieved. 5 5 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021 DIRECTORS’ REPORT for the year ended 30 June 2021 8. PROCEEDINGS ON BEHALF OF THE COMPANY No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 01. 9. LIKELY DEVELOPMENTS AND EXPECTED RESULTS Information as to the likely developments in the operations of the Group is set out in the operating and financial review above. 10. ENVIRONMENTAL REGULATION AND PERFORMANCE The Directors do not believe that the Group has significant environmental obligations. The Group’s policy is to comply with any applicable environmental regulations that are in force during the reporting period. 11. DIRECTORS’ INTERESTS The relevant interest of each Director in the share capital of the Company shown in the Register of Directors’ Shareholdings as at 30 June 2021 is as follows: Director J P Welborn T M Alder S Gallagher K Abbott Total Ordinary Shares 850,000 372,333 100,000 30,000 Performance Rights - 1,361,650 - - 1,352,333 1,361,650 12. SHARE OPTIONS The Company has no unissued shares under option at the date of this report. 13. AUDITOR INDEPENDENCE AND NON-AUDIT SERVICES The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. For the year ended June 2021, the Group engaged with PricewaterhouseCoopers in non-audit services that included Tax & other Corporate advisory services. Refer to Note F.6 in the Financial Statements for summary of fees paid. The Board of Directors has considered the position and, in accordance with advice received from the Audit Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. 14. INDEMNIFICATION Indemnification and insurance of officers To the extent permitted by law, the Company indemnifies every officer of the Company against any liability incurred by that person: (a) (b) in his or her capacity as an officer of the Company; and to a person other than the Company or a related body corporate of the Company unless the liability arises out of conduct on the part of the officer which involves a lack of good faith. During the year, the Company paid a premium in respect of a contract insuring all Directors, Officers and employees of the Company (and/or any subsidiary companies of which it holds greater than 50% of the voting shares) against liabilities that may arise from their positions within the Company and its controlled entities, except where the liabilities arise out of conduct involving a lack of good faith. The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the insurance contract 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, PricewaterhouseCoopers, 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 PricewaterhouseCoopers during or since the financial year. 6 6 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 15. CORPORATE GOVERNANCE STATEMENT The Board of Orbital Corporation Limited is responsible for corporate governance. The Board has prepared the Corporate Governance Statement in accordance with the third edition of the ASX Corporate Governance Council’s Principles and Recommendations, which is available on the Company’s website at www.orbitaluav.com under the About Us/Corporate Governance section. 16. ROUNDING OFF The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Instrument, amounts in the financial report and Directors’ Report have been rounded off to the nearest thousand dollars unless otherwise indicated. 7 7 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021 DIRECTORS’ REPORT for the year ended 30 June 2021 REMUNERATION REPORT - AUDITED KEY MANAGEMENT PERSONNEL AND SUMMARY OF ORBITAL’S FIVE-YEAR PERFORMANCE Key management personnel (“KMP”) This Remuneration Report outlines the remuneration in place and outcomes achieved for KMPs during the year ended 30 June 2021. KMPs are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any Director, whether executive or otherwise, of the parent company. The names and positions of the individuals who were KMP during 2021 are set out in Table 1. Table 1 – KMP Executive Executive Director Todd M Alder (Chief Executive Officer and Managing Director) Non-Executive Directors John P Welborn (Chairman) Steve Gallagher (Chairman of the Audit & Risk Committee) Kyle Abbott (Member of the Audit & Risk Committee) Senior Executives Geoff P Cathcart (Chief Technical Officer) David Bonomini (Chief Financial Officer & Company Secretary) Martin Johnston1 (Chief Operating Officer) 1 Mr. Johnston became a KMP on 1 July 2020 Table 2 – Five-year performance The table below outlines Orbital’s performance over the last five years against key metrics. Closing share price ($) Market capitalisation ($m) 2021 0.83 64.46 Basic EPS (cents) from operations (14.74) 2020 0.75 58.2 2.40 2019 0.30 23.2 (7.63) 2018 0.36 27.9 2.87 2017 0.50 38.6 (15.55) Short term incentives were paid in 2020 and 2018. No short term incentives were paid in 2021, 2019 and 2017. REMUNERATION OVERVIEW The Group’s remuneration strategy is designed to attract, motivate and retain employees in a globally competitive market. The Board structures remuneration so that it rewards those who perform, is valued by executives, and is strongly aligned to the Company’s strategic direction and the creation of returns to shareholders. Total Fixed Remuneration (“TFR”) is determined by the scope of the executive’s role and their level of knowledge, skills and experience. Executive members of the KMP may receive a short-term incentive (“STI”) approved by the Board as reward for exceptional performance in a specific matter of importance. No STI were accounted for during the year ended 30 June 2021 (2020: $194,508). Long-term incentives (“LTI”) consisting of performance rights that vest based on attainment of pre-determined performance goals are awarded to selected executives. During the 2018 financial year, the Group introduced new performance milestones under the Performance Rights Plan as part of its long-term incentive arrangements for the Managing Director and CEO, which were approved by shareholders on 27 October 2017 and 23 May 2018 (2018 LTI Plan). During the 2021 financial year, the first tranche of 475,675 performance rights vested in full under the 2018 LTI Plan and the remaining 342,213 performance rights expired on 10 August 2020. No rights have vested under the 2020 LTI Plan. The remuneration of Non-Executive Directors of the Company consists only of Directors’ fees. Director fees were not reviewed or adjusted during the 2021 financial year. Remuneration Report at 2020 AGM The 2020 Remuneration Report received positive shareholder support at the 2020 AGM with more than 75% of votes cast in favour. Remuneration strategy The Group’s remuneration strategy is designed to attract, motivate and retain employees and Non-Executive Directors by identifying and rewarding high performers and recognising the contribution of each employee to the continued growth and success of the Group. 8 8 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021 DIRECTORS’ REPORT for the year ended 30 June 2021 To this end, key objectives of the Company’s reward framework are to ensure that remuneration practices: • Are aligned to the Group’s business strategy; • Offer competitive remuneration, benchmarked against the external market; • Provide strong linkage between individual and Group performance and rewards; and • Align the interests of executives with shareholders through measuring the Company’s market capitalisation or share price. Key changes to remuneration structure in 2021 There were no changes to the remuneration structure of executives or Directors during the 2021 financial year. REMUNERATION GOVERNANCE Board of Directors The Board reviews and approves remuneration packages and policies applicable to Directors, the Company Secretary and the senior executives of the Group. Data is obtained from independent surveys to ensure that compensation throughout the Group is set at market rates having regard to experience and performance. In this regard, formal performance appraisals are conducted at least annually for all employees. Compensation packages may include a mix of fixed compensation, performance-based compensation and equity-based compensation. Remuneration approval process The Board approves the remuneration arrangements of the CEO and executives and all awards made under the LTI plan. The Board also sets the aggregate remuneration of Non-Executive Directors which is then subject to shareholder approval. The Board approves, having regard to the recommendations made by the CEO, the STI bonus plan and any discretionary bonus payments. Remuneration structure In accordance with best practice corporate governance, the structure of Non-Executive Directors and executive remuneration is separate and distinct. Services from remuneration consultants From 1 July 2011, all proposed remuneration consultancy contracts (within the meaning of section 206K of the Corporations Act 2001) are subject to prior approval by the Board or Human Resources. No consultants were engaged during the year ended 30 June 2021 (2020: nil). CHIEF EXECUTIVE OFFICER AND EXECUTIVE KMP REMUNERATION Objective The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group and aligned with market practice. The Group undertakes an annual remuneration review to determine the total remuneration positioning against the market. Structure Orbital Corporation’s remuneration structure for the CEO and executive KMP is comprised of one component that is fixed, being Total Fixed Remuneration (TFR), and two components that are variable, being short-term incentives (STI) and long-term incentives (LTI). The STI is an annual “at risk” component of remuneration for executives. It is payable based on performance against key performance indicators (KPIs) set at the beginning of the financial year. STIs are structured to remunerate executives for achieving annual Company targets and their own individual performance targets. The net amount of any STI after allowing for applicable taxation, is payable in cash. LTI targets are set as a percentage of fixed remuneration, converted to performance rights with vesting conditions subject to the Company’s share price performance. Vesting of performance rights is subject to share price targets with the overall value exposed to the upside or downside of the share price movement, therefore closely aligning with shareholder interests. 9 9 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021 DIRECTORS’ REPORT for the year ended 30 June 2021 The proportion of fixed remuneration and variable remuneration (potential short-term and long-term incentives) established for each executive is approved by the Board and for the year ended 30 June 2021 was as follows: CEO Other executives Fixed Remuneration (50%) Target STI (20%) Target LTI (30%) Fixed Remuneration (69%) Target STI (14%) Target LTI (17%) Fixed Remuneration Variable Remuneration The remuneration structure for the 2021 financial year is explained below: Summary of executive KMP remuneration for the 2021 financial year Total Fixed Remuneration (“TFR”) TFR consists of base compensation, which is calculated on a total cost basis and includes any fringe benefits tax charges related to employee benefits including motor vehicles, as well as employer contributions to superannuation funds. Executive contracts of employment do not include any guaranteed base pay increases. TFR is reviewed annually by the Board. The process consists of a review of Company, business division and individual performance, relevant comparative remuneration internally and externally and, where appropriate, external advice independent of management. The fixed component of executives’ remuneration is detailed in the Statutory Table on page 15. Variable Annual Reward - Short-term incentive (“STI”) Under the STI, all executives have the opportunity to earn an annual incentive award which is delivered in cash. The STI recognises and rewards annual performance. How is performance measured? The STI performance measures were chosen as they reflect the core drivers of short-term performance and provide a framework for delivering sustainable value to the Group, its shareholders and customers. Minimum Group performance targets need to be achieved before STI is eligible. Key performance indicators (“KPIs”) are measured covering financial and non-financial measures of performance. For each KPI, a target and stretch objective is set. A summary of the measures and weightings are set out below: CEO Other Executives Financial Revenue 70% 0% Non-financial Group KPIs 30% 100% Revenue is the measure against which management and the Board assess the short-term performance of the Group. If the revenue measure is met, performance against non-financial KPIs are used to determine the STI that the executive is entitled to, as follows: • • Individual performance rating in respect of the quality of work performed in all essential areas of responsibility; Individual cultural rating in respect of the extent to which demonstrated behavior aligns with the Values of the Group. How much can executives earn? The maximum STI for the Chief Executive Officer is 40 per cent of fixed remuneration. The maximum STI for other executives is 20 per cent of fixed remuneration. The minimum STI that may be awarded to the Chief Executive Officer and other executives is nil where the Company performance factor is zero. When is it paid? The STI award is determined after the end of the financial year following a review of performance over the year against the STI performance measures by the Executive Team. The Board approves the final STI award based on this assessment of performance. 10 10 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 Actual STI performance for the year ending 30 June 2021 The following table outlines the proportion of the maximum STI earned in relation to the 2021 financial year. Please refer to Table 1 on page 15 for further details on the actual STI paid to KMPs for the year ended 30 June 2021. Maximum STI opportunity (Percentage of fixed remuneration) Percentage of maximum STI earned Todd M Alder Geoff P Cathcart David Bonomini Martin Johnston Long-term incentive (“LTI”) 40% 20% 20% 20% 0% 0% 0% 0% Under the LTI, the grant of performance rights and share acquisition performance rights were made to executives to align remuneration with the creation of shareholder value over the long-term. How is it paid? Executives are eligible to receive performance rights and share acquisition performance rights; that is, being the right to receive a given number of ordinary shares in the Group if a nominated performance milestone is achieved. 2018 Performance Rights Plan – Long-term incentives The Company introduced a Performance Rights Plan (“2018 LTI Plan”) which was approved by shareholders on 27 October 2017. Performance rights were issued to the Managing Director and CEO (“CEO LTIs”) and other executives (“Executive LTIs”) under the 2018 LTI Plan in two tranches, with each tranche subject to a separate performance milestone linked to the volume weighted average share price (“VWAP”) of the Company and tested over a three-year period as follows: Tranche Performance condition Expiry date Grant date (CEO LTIs) Grant date (Exec LTIs) 10 August 2020 27 October 2017 23 May 2018 Fair value/right (CEO LTIs) Fair value/right (Exec LTIs) 36.5 cents 20.9 cents Vesting of rights 50 per cent 10 August 2020 27 October 2017 23 May 2018 27.8 cents 13.8 cents 50 per cent 1 2 The Company having a 60-day VWAP of at least $0.90 per share between 27 October 2017 and 10 August 2020. The Company having a 60-day VWAP of at least $1.20 per share between 27 October 2017 and 10 August 2020. The allocation of performance rights to executives was as follows: Executive Title Mr T.Alder Mr G.Cathcart Mr M Johnston Mr D Bonomini Total Managing Director and CEO Chief Technical Officer Chief Operating Officer Chief Financial Officer Performance rights issued Tranche 1 Performance rights issued Tranche 2 340,000 116,284 60,091 19,391 535,766 255,000 87,213 0 0 342,213 Total 595,000 203,497 60,091 19,391 877,979 During the year, the first tranche of 535,766 performance rights vested in full. The remaining 342,213 performance rights expired on 10 August 2020. 11 11 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 Performance Rights Plan – 2018 Share Acquisition Performance Rights (“2018 SAPR Plan”) On 11 August 2017, the Group announced the appointment of Mr Todd Alder as Managing Director and Chief Executive Officer. The announcement also set out the material terms of his employment which included the grant of two Share Acquisition Performance Rights (“SAPRs”) for each share acquired by Mr Alder during the period 11 August 2017 to 31 December 2017. During the relevant period Mr Alder acquired 372,333 shares in the Group resulting in a maximum entitlement of 647,250 SAPRs. The grant of the performance rights was approved by shareholders at an extraordinary general meeting held on 23 May 2018. The performance rights were issued under the terms of the Performance Rights Plan. The SAPRs are subject to a share price performance milestone of a 30-day VWAP of $0.62 tested over a three-year period and 100 per cent of the SAPRs will vest if this performance milestone is achieved. Performance condition Expiry date Grant date Fair value/right Total number of rights granted The Company having a 30-day VWAP equal to or greater than $0.62 per share between 11 August 2017 and 10 August 2020. Total 10 August 2020 23 May 2018 31.6 cents 647,250 647,250 The performance rights vested in full during the year. 2020 Performance Rights Plan – Long-term incentives The Company introduced a new Performance Rights Plan (“2020 LTI Plan”) which was approved by shareholders on 24 November 2020. Performance rights were issued to the Managing Director and CEO (“CEO LTIs”) and other executives (“Executive LTIs”) and employees under the 2020 LTI Plan in two tranches, with each tranche subject to a separate performance milestone linked to the volume weighted average share price (“VWAP”) of the Company and tested over a three-year period as follows: Tranche Performance condition Expiry date Grant date (CEO LTIs) Grant date (Exec LTIs) 30 September 2023 04 December 2020 28 October 2020 Fair value/right (CEO LTIs) Fair value/right (Exec LTIs) 98 cents 97 cents Vesting of rights 50 per cent 1 2 The Company having a 90-day VWAP of at least $1.50 per share between 01 October 2020 and 30 September 2023. The Company having a 60-day VWAP of at least $2.50 per share between 01 October 2020 and 30 September 2023. 30 September 2023 04 December 2020 28 October 2020 73 cents 76 cents 50 per cent The allocation of performance rights to KMPs was as follows: Executive Title Performance rights issued Tranche 1 Performance rights issued Tranche 2 Mr T.Alder Mr G.Cathcart Mr D.Bonomini Mr M.Johnston Total Managing Director and CEO Chief Technical Officer Chief Financial Officer Chief Operating Officer 234,000 77,500 70,000 66,749 448,249 140,400 46,500 42,000 40,049 268,949 Total 374,400 124,000 112,000 106,798 717,198 12 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 When is performance measured? Performance rights may vest at any time during the three-year period to 30 September 2023, subject to the abovementioned performance milestones. Performance rights lapse if the employment of the executive is terminated with cause, or by resignation, prior to vesting. Performance rights may vest prior to the satisfaction of the vesting conditions upon a change of control event, or if the Board allows early exercise on cessation of employment or in light of specific circumstances. No performance rights vested under the 2020 LTI Plan for the year ended 30 June 2021. How is performance measured? Awards are subject to the market capitalisation of the Group. The performance rights link the rewards payable to KMPs to the creation of shareholder value by increasing the share price of the Company. The Company’s share price at the date of calling the AGM to approve the CEO LTIs was $1.14 per share. The vesting of performance rights will only occur where the Company’s share price increases to $1.50 and $2.50 per share as set out in the abovementioned tables. Actual LTI performance for the year ending 30 June 2021 During the financial year, 475,675 performance rights vested under the 2018 LTI Plan and 647,250 performance rights vested under the SAPR Plan (2020: nil). No rights vested under the 2020 LTI Plan or for any other earlier plans issued in previous financial years. OTHER EQUITY PLANS Orbital has a history of providing employees with the opportunity to participate in ownership of shares in the Company using equity to support a competitive base remuneration position. Employee Share Plan Eligible employees are offered shares in the Company, at no cost to the employees, to the value of $1,000 per annum under the terms of the Company’s Employee Share Plan. There are no performance conditions, because the plan is designed to align the interests of participating employees with those of shareholders. No Directors or KMPs participated in the share plan in 2021 (2020: Nil). CONTRACTS FOR KMP All KMP have a contract for employment. The table below contains a summary of the key contractual provisions of the contracts of employment for the executive KMP. Fixed Remuneration Contract Duration Termination notice period (Company)1, 2 Termination notice period (Executive) T Alder G Cathcart 3 D Bonomini M Johnston $390,000 $290,000 $280,000 $290,000 Unlimited Unlimited Unlimited Unlimited 3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months 1 Termination provisions – Orbital may choose to terminate the contract immediately by making a payment in lieu of notice equal to the fixed remuneration the executive would have received during the ‘Company Notice Period’. In the event of termination for serious misconduct or other nominated circumstances, executives are not entitled to this termination payment. Any payments made in the event of a termination of an executive contract will be consistent with the Corporations Act 2001 (Cth). 2 On termination of employment, executives will be entitled to the payment of any fixed remuneration calculated up to the termination date and any leave entitlement accrued up to the termination date. Unvested LTI awards are forfeited upon termination for serious misconduct or employee initiated termination and at Board discretion if termination is initiated by the Company. 3 In the event of the Group terminating the employment of Mr G Cathcart (Chief Technical Officer), other than by reason of serious misconduct or material breach of service agreement, an equivalent of three months salaries is payable, in addition to: two weeks’ salaries for each completed year of service to ten years of service • one half of a week of salaries for each year of service beyond ten years of service • 13 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 NON-EXECUTIVE DIRECTORS REMUNERATION Objective The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. Structure The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed against fees paid to Non- Executive Directors of comparable companies. The Board considers advice from external consultants when undertaking the review process. The Company’s constitution and the ASX listing rules specify that the Non-Executive Directors’ fee pool shall be determined from time to time by a general meeting. The latest determination was at the 2001 Annual General Meeting (AGM) held on 25 October 2001 when shareholders approved an aggregate fee pool of $400,000 per year. The Board will not seek any increase for the Non-Executive Director pool at the 2021 AGM. Fees Non-Executive Directors do not receive retirement benefits, nor do they participate in any incentive programs. The Chairman of the Board receives a fee of $120,000 (2020: $120,000) and the Non-Executive Directors receive a base fee of $60,000 (2020: $60,000). The remuneration of Non-Executive Directors for the year ended 30 June 2021 and 30 June 2020 is detailed in Table 1 of this report on page 15. The maximum annual aggregate fee pool limit is $400,000 and was approved by shareholders. OTHER TRANSACTIONS WITH KMP AND THEIR RELATED PARTIES There were no other transactions with KMPs and their related parties, such as purchases, sales and investments, for the year ended 30 June 2021. REPORTING NOTES Reporting in Australian dollars In this report, the remuneration and benefits reported are in Australian dollars. This is consistent with the functional and presentational currency of the Company. 14 14 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021DIRECTORS’ REPORT for the year ended 30 June 2021 Statutory tables Table 1 - Compensation of Non-Executive Directors and executive KMP's for the year ended 30 June 2021 and 2020 Short Term Benefits Post- Employment Long- term Benefits Share Based Payments Total s e e F s ' r o t c e r i D & y r a a S l s e s u n o B h s a C y r a t e n o m - n o N l a t o T n o i t a u n n a r e p u S l r e y o p m E s n o i t u b i r t n o C s t n e m e l t i t n E e v a e L i l n a P s t h g R e c n a m r o f r e P n o i t a r e n u m e R l a t o T n o i t a r e n u m e r f o n o i t r o p o r P l d e t a e r e c n a m r o f r e p $ $ $ $ $ $ $ $ % Non-executive Directors J Welborn 2021 109,589 Chairman and Director (Non-executive) 2020 109,589 T Stinson (1) 2021 - Director (Non-executive) 2020 21,781 S Gallagher 2021 60,000 Director (Non-executive) 2020 60,000 K Abbott 2021 60,000 Director (Non-executive) 2020 60,000 Total Consolidated, all non-executive directors Executive Director T Alder 2021 229,589 2020 251,370 2021 366,958 - - - - - - - - - - - Managing Director and Chief Executive Officer 2020 319,034 136,000 Executive Key Management Personnel 109,589 10,411 109,589 10,411 - - 21,781 2,681 60,000 60,000 60,000 60,000 - - - - 229,589 10,411 251,370 13,092 - - - - - - - - - - 120,000 120,000 - 24,462 60,000 60,000 60,000 60,000 240,000 300,000 - - - - - - - - - - - - - - - - - - - - 366,958 21,694 12,382 84,356 475,442 16% 455,034 21,003 12,642 133,539 622,218 43% - - - - - - - - - - - - G Cathcart (2) 2021 277,675 - 58,692 336,367 29,455 22,026 26,765 408,799 5% Chief Technical Officer 2020 292,992 44,988 R Jones (3) 2021 - Chief Financial Officer 2020 239,765 D Bonomini (4) 2021 258,306 - - - Chief Financial Officer 2020 99,614 13,520 M Johnston (5) 2021 250,813 Chief Operating Officer 2020 - Total Consolidated, Executive Key Management Personnel 2021 1,153,752 - - - - - - - - - - 337,980 33,316 30,038 16,420 417,754 15% - - 239,765 21,403 - - - - 12,355 273,523 258,306 21,694 7,875 23,064 306,798 - 5% 6% 113,134 8,078 10,117 131,329 - - 250,813 21,694 13,111 21,993 303,663 6% - - - - - - 58,692 1,212,444 94,537 55,394 156,178 1,494,702 9% 2020 951,405 194,508 - 1,145,913 83,800 52,797 162,314 1,444,824 25% 1. Mr. Stinson retired as Non-Executive Director effective 18 November 2019. 2. Mr. Cathcart was seconded to the USA facility during the financial year ended June 2020 and 2021. Non-monetary benefits arose from the secondment. 3. Ms. Jones ceased as a KMP on 28 February 2020 4. Mr. Bonomini became a KMP on 10 February 2020 5. Mr. Johnston became a KMP on 01 July 2020 15 15 2021 ANNUAL REPORTDIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021 DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021 DIRECTORS’ REPORT for the year ended 30 June 2021 Table 2 – Summary of CEO and Executive T Alder Director and Chief Executive Officer G Cathcart Chief Technical Officer D Bonomini Chief Financial Officer M Johnston Chief Operating Officer T Alder Director and Chief Executive Officer G Cathcart Chief Technical Officer D Bonomini Chief Financial Officer M Johnston Chief Operating Officer Type of equity Grant date Expiry date Equity rights 23 May 2018 10 August 2020 Equity rights 27 October 2017 10 August 2020 Equity rights 27 October 2017 10 August 2020 Equity rights 23 May 2018 10 August 2020 Equity rights 23 May 2018 10 August 2020 Equity rights 23 May 2018 10 August 2020 Equity rights 23 May 2018 10 August 2020 Equity rights 23 May 2018 10 August 2020 Equity rights 23 May 2018 10 August 2020 Equity rights 04 December 2020 30 September 2023 Equity rights 04 December 2020 30 September 2023 Equity rights 28 October 2020 30 September 2023 Equity rights 28 October 2020 30 September 2023 Equity rights 28 October 2020 30 September 2023 Equity rights 28 October 2020 30 September 2023 Equity rights 28 October 2020 30 September 2023 Equity rights 28 October 2020 30 September 2023 Awarded but not vested 647,250 340,000 255,000 116,284 87,213 19,391 - 60,091 - 234,000 140,400 77,500 46,500 70,000 42,000 66,749 40,049 Vested % of total vested Lapsed 647,250 100% 340,000 100% - - - 255,000 116,284 100% - - - 87,213 19,391 100% - - 60,091 100% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Fair value of equity ($) 1 0.316 0.365 0.278 0.209 0.138 0.209 0.138 0.209 0.138 0.808 0.538 0.841 0.614 0.841 0.614 0.841 0.614 1. In accordance with AASB2 Share-based Payments, the fair value of variable pay rights as at the grant date has been determined by applying the Monte Carlo | trinomial valuation model. For the assumptions used in the valuation of the rights, please refer to note F.2. The amount included as remuneration is not related to or indicative of the benefit (if any) that individual executives may ultimately realise should these equity instruments vest Table 3 – KMP share and equity holdings Details of shares and rights help by KMP including their personally related entities for the 2020 financial year are as follows: Type of equity (1) Opening holding at 1 July 2020 Rights allocated in 2021 Rights vested in 2021 Net Changes other Closing holding at 30 June 2021 (2) Non-executive Directors J Welborn S Gallagher K Abbott Executive Directors T Alder Executives G Cathcart D Bonomini M Johnston Shares Shares Shares 850,000 100,000 30,000 Equity Rights Shares 1,242,250 372,333 Equity Rights Shares Equity Rights Shares Equity Rights Shares 203,497 272,720 - - - - - - - 374,400 - 124,000 - 112,000 - 106,798 - - - - - - - 850,000 100,000 30,000 987,250 (255,000) - - 1,361,650 372,333 116,284 (87,213) - 19,391 - 60,091 - - - - - - 240,284 272,720 131,391 - 166,889 - 16 1. Opening holding represents amounts carried forward in respect of KMP 2. Closing equity rights holdings represent unvested rights held at the end of the reporting period. There were 1,183,016 rights vested but unexercised as at 30 June 2021 End of Remuneration Report 16 2021 ANNUAL REPORT DIRECTORS’ REPORT FOR THE YEAR ENDED 30 JUNE 2021 DIRECTORS’ REPORT for the year ended 30 June 2021 Signed in accordance with a resolution of the Directors: J P Welborn Chairman T M Alder Managing Director and Chief Executive Officer Dated at Perth, Western Australia this 27 August 2021 17 17 2021 ANNUAL REPORTAUDITOR’S INDEPENDENCE DECLARATION Auditor’s Independence Declaration As lead auditor for the audit of Orbital Corporation Limited for the year ended 30 June 2021, I declare that 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. This declaration is in respect of Orbital Corporation Limited and the entities it controlled during the period. Ben Gargett Partner PricewaterhouseCoopers Perth 27 August 2021 PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO Box D198, PERTH WA 6840 T: +61 8 9238 3000, F: +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 18 2021 ANNUAL REPORTFINANCIAL STATEMENTS CONTENTS CONTENTS Financial statements Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the financial statements About these statements A. Current year performance A.1 Operating segments A.2 Revenue A.3 Other income A.4 Expenses A.5 Taxes A.6 Earnings per share (EPS) B. Growth assets B.1 Plant and equipment B.2 Intangible assets C. Working capital management C.1 Inventories C.2 Trade and other receivables C.3 Cash and cash equivalents C.4 Other financial assets C.5 Trade and other payables C.6 Deferred revenue C.7 Leases 20 21 22 23 24 27 27 29 30 31 33 34 36 38 39 39 40 40 40 41 D. Debt and capital D.1 Borrowings D.2 Share capital D.3 Reserves E. Other assets and liabilities E.1 Provisions F. Other notes F.1 Key management personnel compensation F.2 Related parties F.3 Share based payments F.4 Subsidiaries F.5 Parent entity information F.6 Auditor remuneration F.7 Events after the end of the reporting period F.8 Other accounting policies F.9 New accounting standards Directors' declaration Independent auditor's report Shareholding details Corporate information 42 42 43 44 45 45 46 48 48 49 49 49 49 50 51 58 59 19 19 2021 ANNUAL REPORTCONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2021 for the year ended 30 June 2021 Continuing operations Sale of goods Engineering services revenue Royalty and licence revenue Interest revenue Total revenue Other income Materials and consumables expenses Employee benefits expenses Depreciation expenses Amortisation of intangibles Engineering consumables and contractor expenses Occupancy expenses Travel and accommodation expenses Communications and computing expenses Patent expenses Insurance expenses Audit, compliance and listing expenses Finance costs Reversal of allowance for impairment of other receivables Asset impairment expenses Warranty expenses Other expenses Foreign exchange loss Profit/(loss) before income tax from continuing operations Income tax (expense)/benefit Profit/(loss) for the year from continuing operations Other comprehensive income Items that will not be reclassified to profit or loss: Exchange differences on translation of foreign operations Total comprehensive profit/(loss) for the year Attributable to: Equity holders of the parent Total comprehensive profit/(loss) for the year Earnings per share Basic profit/(loss) for the year attributable to ordinary equity holders of the parent (cents) Diluted profit/(loss) for the year attributable to ordinary equity holders of the parent (cents) Earnings per share from continuing operations Basic profit/(loss) for the year attributable to ordinary equity holders of the parent (cents) Diluted profit/(loss) for the year attributable to ordinary equity holders of the parent (cents) The accompanying notes form part of the financial statements. Notes A.2 A.3 A.4(d) A.4(a) B.2 A.4(b) B.1, C.7 E.1 A.4(c) A.5 A.6 A.6 A.6 A.6 2021 $'000 25,994 5,054 150 4 31,202 537 (14,837) (11,797) (1,576) (303) (725) (723) (227) (1,074) (414) (1,251) (473) (1,508) 335 (2,514) (2,083) (1,972) (1,034) (10,437) (1,008) (11,445) 464 (10,981) (10,981) (10,981) (14.74) (14.74) (14.74) (14.74) 2020 $'000 31,989 1,617 176 41 33,823 5,079 (13,914) (14,370) (1,633) (247) (781) (532) (449) (1,018) (414) (1,003) (249) (622) 206 - 216 (2,089) (28) 1,975 (118) 1,857 3 1,860 1,860 1,860 2.40 2.35 2.40 2.35 20 20 2021 ANNUAL REPORT CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2021 CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 30 June 2021 ASSETS Current assets Cash and cash equivalents Other financial assets Trade and other receivables Inventories Prepayments Finance lease receivable Total current assets Non-current assets Intangibles Deferred taxation asset Plant and equipment Right-of-use asset Finance lease receivable Total non-current assets Total assets LIABILITIES Current liabilities Trade payables and other liabilities Deferred revenue Borrowings Lease liabilities Provisions Total current liabilities Non-current liabilities Lease liabilities Borrowings Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Accumulated losses Total equity The accompanying notes form part of the financial statements. Notes C.3 C.4 C.2 C.1 B.2 A.5 B.1 C.7 C.5 C.6 D.1 C.7 E.1 C.7 D.1 E.1 D.2 D.3 2021 $'000 2020 $'000 3,116 585 4,004 12,767 245 334 21,051 1,981 4,070 1,647 857 180 8,735 29,786 1,742 4,285 9,986 982 4,530 8,749 585 5,347 9,380 375 332 24,768 898 5,423 4,150 2,062 542 13,075 37,843 4,482 1,321 3,756 1,131 2,227 21,525 12,917 847 - 72 919 22,444 7,342 31,265 3,035 (26,958) 7,342 1,898 4,854 72 6,824 19,741 18,102 31,220 2,395 (15,513) 18,102 21 21 2021 ANNUAL REPORTCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2021 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2021 ) s e s s o l l d e t a u m u c c A ( $'000 e v r e s e r s t i f e n e b y t i u q e e e y o p m E l D.3 $'000 l a t i p a c e r a h S D.2 $'000 e v r e s e r l n o i t a s n a r t y c n e r r u c i n g e r o F D.3 $'000 y t i u q e l a t o T $'000 31,220 (15,513) 2,424 (29) 18,102 - - - 45 (11,445) - (11,445) - 31,265 (26,958) - - - 176 2,600 - 464 464 - 435 (11,445) 464 (10,981) 221 7,342 31,178 (17,370) 2,203 (32) 15,979 - - - 42 1,857 - 1,857 - 31,220 (15,513) - - - 221 2,424 - 3 3 - 1,857 3 1,860 263 (29) 18,102 Notes At 1 July 2020 Loss for the year Foreign currency translation Total comprehensive profit for the year Share based payments At 30 June 2021 At 1 July 2019 Profit for the year Foreign currency translation Total comprehensive loss for the year Share based payments At 30 June 2020 The accompanying notes form part of the financial statements. 22 22 2021 ANNUAL REPORT CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2021 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 June 2021 Notes C.3 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Proceeds from legal settlement Interest received Interest paid Net cash (used in)/from operating activities Cash flows from investing activities Proceeds from sale of subsidiary Purchase of plant and equipment Payments for intangible asset Net cash used in investing activities Cash flows from financing activities Principal elements of lease payments Proceeds from borrowings Repayment of borrowings Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 July Effects of exchange rate fluctuations on the balances of cash held in foreign currencies Cash and cash equivalents at 30 June C.3 The accompanying notes form part of the financial statements. 2021 $'000 32,991 (34,498) - 4 (187) (1,690) - (735) (1,386) (2,121) (1,070) - - (1,070) (4,881) 8,749 (752) 3,116 2020 $'000 34,257 (33,763) 3,255 41 (64) 3,726 200 (540) (221) (561) (1,201) 2,276 (2,395) (1,320) 1,845 7,487 (583) 8,749 23 23 2021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 The exchange differences arising on translation for consolidation are recognised in OCI. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is reclassified to profit or loss. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Instrument, amounts in the financial report and Directors’ Report have been rounded off to the nearest thousand dollars unless otherwise indicated. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis. The financial statements comprise the financial results of the Group and its subsidiaries as at 30 June each year. Subsidiaries are fully consolidated from the date of which control is obtained by the Group and cease to be consolidated from the date at which the Group ceases to have control. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intercompany balances and transactions, including unrealised profits and losses arising from intra-group transactions, have been eliminated in full. Profit or loss and other comprehensive income are attributed to the equity holders of the parent of the Group, and to the non- controlling interests, even if this results in the non-controlling interests having a deficit balance. Comparative information has been reclassified where required for consistency with the current year's presentation. Other accounting policies Significant and other accounting policies that summarise the measurement basis used and are relevant to understanding the financial statements are provided throughout the notes to the financial statements. About these statements Orbital Corporation Ltd ("Orbital" or the "Group") is a for- profit company limited by shares, incorporated and domiciled in Australia. Its shares are publicly traded on the Australian Stock Exchange ("ASX"). The registered office is 4 Whipple Street, Balcatta, Western Australia. The nature of the operations and principal activities of the Group are described in the Directors Report and in the segment information in Note A.1. The financial statements were authorised for issue in accordance with a resolution of the Directors on 27 August 2021.The Directors have the power to amend and reissue the financial report. Statement of compliance The financial statements are general purpose financial statements, which have been prepared in accordance with the requirements of the Corporations Act 2001 (Cth), Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial statements comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The Group has not early adopted any standards, interpretations or amendments that have been issued but not yet effective. The adoption of these standards, interpretations or amendments has not significantly affected the Group's accounting policies, financial position or performance. Currency The financial statements are presented in Australian dollars, which is the functional currency of the Company. Transactions are recorded in the functional currency of the transacting entity using the spot rate. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. On consolidation, the assets and liabilities of foreign operations are translated into Australian dollars at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. 24 24 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS for the year ended 30 June 2021 Financial and capital risk management The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management strategy, policy and key risk parameters. The Board of Directors has oversight of the Group's internal control system and risk management process. The Group's management of financial and capital risks is aimed at ensuring that available capital, funding and cash flows are sufficient to meet the Group's financial commitments as and when they fall due and maintain the capacity to fund its committed project developments. During 2021 the Group's strategy remained unchanged from 2020, the gearing ratio at 30 June 2021 was 136% (2020: 48%). Gearing ratio's are calculated by dividing net debt (as per note D.1) divided by total equity. The below risks arise in the normal course of the Group's business. Risk information can be found in the following sections: Section A Foreign currency risk Page 26 Section C Liquidity risk Page 37 Section C Interest Rate risk Page 38 Section C Credit risk Page 38 Section D Capital risk management Page 42 Key estimates and judgements In applying the Group's accounting policies, management continually evaluates judgements, estimates and assumptions based on experiences and other factors, including expectations of future events that may have an impact on the Group. Significant judgements, estimates and assumptions made by management in the preparation of these financial statements are found in the following notes: Note Key estimate/ judgement A.5 B.1 Recoverability of deferred tax assets Impairment of non-current assets Page 32 35 Impact of COVID-19 As a defence industry supplier, Orbital UAV’s business has been largely shielded from the significant economic downturn driven by the COVID-19 pandemic. The defence sector has remained resilient through the pandemic and demand for the Company’s products remains positive. Through proactive and ongoing risk mitigation, the Company has ensured its people remain safe and well during this period, and operations in Australia and the USA have continued with minimal disruption. The Company has continued to deliver on its production commitments and has been focused on managing and supporting its global supply chain where necessary. Distribution of our products continued through our established logistics providers. Going Concern The consolidated financial statements have been prepared on a going concern basis, which assumes the Group will continue its operations and be able to meet its obligations as and when they become due and payable. This assumption is based on the Group’s ability to meet its future cash flow requirements given the cash flow projection for the 30 June 2022 financial year, and existing cash reserves held as at 30 June 2021. The Directors assessed how the current events and conditions impact its operations and while the long-term strategy of the Group remains unchanged, regular forecasting is performed on future expected cashflows. The Group has critically assessed cash flow forecasts for the 12 months from the date of this report based on expected sales and related costs. Furthermore, the Directors have also taken the following matters into consideration in forming the view that the Group is a going concern: - The Group has cash and trade receivables of $7.7 million as at 30 June 2021; - The Group issued a revenue guidance for FY22 - Forecast sales are expected to remain over $30.0 million for FY22 and continue to increase in FY23 due to diversified customer base - Profitability is expected to be achieved and sufficient EBITDA to fund operating expenses and financing obligations over FY22 will be generated - The WA government loan contract was renegotiated to defer the repayments over the next 4 years. The Company also has the option to offset the repayment amounts if it can achieve the determined operational milestones in certain circunstances. 25 25 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS A. CURRENT YEAR PERFORMANCE for the year ended 30 June 2021 In this section This section addresses financial performance of the Group for the reporting period including, where applicable, the accounting policies applied and the key estimates and judgements made. The section also includes the tax position of the Group for and at the end of the reporting period. A. A.1 A.2 A.3 A.4 A.5 A.6 Current Year Performance Operating segments Revenue Other income Expenses Taxes Earnings per share Page 27 Page 27 Page 29 Page 30 Page 31 Page 33 Financial risks in this section Foreign currency risk Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate as a result of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates to the Group’s operating activities, in which sales and purchases are denominated in foreign currencies. The Group manages its exposure to foreign currency risk by regularly monitoring and performing sensitivity analysis on the Group's financial position and performance as a result of movements in foreign exchange rates. The Group holds bank accounts in foreign denominated currencies which are converted to Australian dollars through rate orders for targeted exchange rates. The Group has foreign currency hedging facilities available as part of its bank facilities. Currently the Group does not directly hedge against its foreign currency exchange risk to a material extent. Exposure The Group’s exposure to USD at the reporting date for the years ended 30 June 2021 and 2020 are as follows: Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Trade and other payables 2021 A$'000 2020 A$'000 2,531 2,858 7,101 4,063 192 992 For the year ended 30 June 2021, revenue from external customers denominated in USD was A$27,160,000 (2020: A$29,102,000). Sensitivity The following table demonstrates the sensitivity to a reasonably possible change in USD exchange rates, with all other variables held constant. The impact on the Group’s profit before tax is due to changes in the fair value of monetary assets and liabilities. There is no impact on changes in foreign currencies on other comprehensive income. The Group’s exposure to foreign currency changes for all other currencies is not material. The Group has used the observed range of actual historical rates for the preceding five year period, with a heavier weighting placed on recently observed market data, in determining reasonably possible exchange movements as part of their sensitivity analysis. Past movements in exchange rates are not necessarily indicative of future movements. Change in AUD/USD rate +10% -10% +10% -10% Increase / (Reduction) on profit before taxes (472) 577 (925) 1,130 2021 2020 26 26 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS A. CURRENT YEAR PERFORMANCE for the year ended 30 June 2021 A.1 Operating segments Identification of reportable segments The Group has identified its operating segments based on the internal reports that are reviewed and used by the executive management team (the chief operating decision makers) in assessing performance and in determining the allocation of resources. Segment performance is evaluated based on Revenue and Earnings Before Interest and Tax ("EBIT") which is allocated to the reportable segments according to the geographic location in which the item arose or relates to. The geographical location of the segment assets is based on the physical location of the assets. Segment information Year ended 30 June 2021 Segment revenue EBIT Finance expenses (Loss)/profit before income tax Assets Liabilities Net assets A.2 Revenue Revenue Total external revenue Timing of revenue recognition At a point in time Over time Australia 2021 $'000 26,905 (437) (1,468) (1,905) $'000 25,129 19,362 5,767 Australia 2021 2020 $'000 28,228 2,854 (555) 2,299 2020 $'000 30,140 17,999 12,141 US Consolidated 2021 $'000 4,297 (8,493) (39) (8,532) 2020 $'000 5,595 (257) (67) (324) 2021 $'000 31,202 (8,930) (1,508) (10,437) 2020 $'000 33,823 2,597 (622) 1,975 US Consolidated 2021 $'000 4,657 3,082 1,575 2020 $'000 7,703 1,742 5,961 2021 $'000 29,786 22,444 7,342 2020 $'000 37,843 19,741 18,102 US Consolidated Australia 2021 $'000 26,905 26,905 2020 $'000 28,228 28,228 2021 $'000 4,297 4,297 2020 $'000 5,595 5,595 2021 $'000 31,202 31,202 21,851 5,054 26,905 27,017 1,211 28,228 4,297 - 4,297 5,189 406 5,595 26,148 5,054 31,202 2020 $'000 33,823 33,823 32,206 1,617 33,823 Revenues of approximately $26,462,000 (2020: $29,160,000 ) are derived from a single external customer. Recognition and measurement Revenue is recognised in accordance with the core principle 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 specific recognition criteria described below must also be met before revenue is recognised: 27 27 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS A. CURRENT YEAR PERFORMANCE for the year ended 30 June 2021 A.2 Revenue (continued) · Revenue from rendering of services The Group's general terms and conditions with customers specify a right to payment for work completed, therefore performance obligations are satisfied over time. Using the output method for revenue recognition, the Group recognises revenue based on an appraisal of results achieved or percentage complete. · Sale of goods Revenue from the sale of goods is recognised on a per-unit basis as the goods are delivered to the customer premise which is deemed to be the time when the performance obligation is performed. A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. · License and royalties Revenue earned under licencing and royalty arrangements is recognised on a cash basis upon the delivery of an engine meeting specified performance targets and using the patented technologies of the Group. Under the terms of the licence and royalty agreements, licensees are not specifically obliged to commence production and sale of engines using technology patented by the Group. Licensees may terminate the agreements upon notice to the Group. If a licensee were to terminate its agreement with the Group, the licensee would forfeit the licence and any technical disclosure fees paid through to · Interest revenue Interest revenue is recorded using the effective interest rate method ("EIR"). The EIR is the rate that exactly discounts the estimated cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Assets and liabilities related to contracts with customers The Group has recognised the following assets and liabilities related to contracts with customers: Contract Assets Accrued revenue Contract Liabilities Deferred revenue Refer to Note C.6 deferred revenue for a breakdown of deferred revenue recognised in the current year. 2021 $'000 844 2020 $'000 70 4,285 1,321 28 28 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS A. CURRENT YEAR PERFORMANCE for the year ended 30 June 2021 A.3 Other income Grant income Rental income Research and development grant Legal settlement proceeds Other Recognition and measurement · Grant income 2021 $'000 100 111 89 - 237 537 2020 $'000 75 71 437 4,470 54 5,107 Temporary cash flow boosts were provided by the government to support small and medium businesses and not-for-profit organisations during the economic downturn associated with COVID-19. Eligible businesses who employ staff received between $20,000 to $100,000 in cash flow boost amounts by lodging their activity statements up to the month or quarter of September 2020. During third quarter of FY21, the Company received $100,000 in cash flow boost amounts from the government. · Research and development grant In accordance with research and development tax legislation the Group is entitled to a refundable R&D tax offset accounted for as research and development grant. Government grants are recognised when it is probable that the grant will be received and all attached conditions will be complied with. When the grant relates to an asset, it is recognised as a reduction in the related asset. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. · Legal settlement proceeds On 26 February 2020 Orbital entered into a Settlement and Patent License Agreement (“Agreement”) with Daimler AG, Mercedes-Benz USA LLC, Mercedes-Benz U.S. International, Inc. (collectively “Mercedes”), Robert Bosch GmbH and Robert Bosch LLC ( collectively “Bosch”) in settlement of the patent litigation brought by Orbital against Mercedes and Bosch in the United States District Court Eastern District of Michigan Southern Division Case Number 15-12398 (see ASX announcement 1 December 2014). Under the Agreement: (a) the Parties filed a stipulation of dismissal regarding all claims and counterclaims in the litigation, without making any admissions or concessions concerning the factual or legal positions taken in the litigation; and (b) Orbital granted Mercedes/Bosch a non-exclusive patent license and release in exchange for the payment to Orbital Fluid Technologies Inc. Amounts paid to Orbital Fluid Technologies Inc. were allocated in accordance with the protocols specified in the revenue sharing agreements that Orbital had with its various partners in this litigation, including US law firm Pepper Hamilton. · Other income The other income in current year represents non-recurring IP sales. 29 29 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS A. CURRENT YEAR PERFORMANCE A. CURRENT YEAR PERFORMANCE for the year ended 30 June 2021 A.4 Expenses (a) Employee benefits expense (d) Materials and consumable expenses 2021 $'000 18,224 (3,387) 14,837 2020 $'000 16,596 (2,682) 13,914 Raw materials and consumables Change in inventories Recognition and measurement · Defined contribution plans Obligations for contributions to defined contribution superannuation funds are recognised as an expense as incurred. The Group contributes to defined contribution plans for the provision of benefits to Australian employees on retirement, death or disability. Employee and employer contributions are calculated on percentages of gross salaries and wages. Apart from contributions required under law, there is no legally enforceable right for the Group to contribute to a superannuation plan. Salaries and wages Defined contribution plans Share based payments (Note F.3) Annual and long service leave (Note E.1) Other personnel costs (b) Finance costs Interest expense Loan modification loss (c) Other expenses Administration Legal fees - settlement proceeds Marketing and investor relations Corporate consulting services Other 2021 $'000 9,105 1,049 241 255 1,147 2020 $'000 12,083 889 245 164 989 11,797 14,370 2021 $'000 890 618 1,508 2021 $'000 715 - 99 1,060 98 1,972 2020 $'000 622 - 622 2020 $'000 649 1,214 148 - 78 2,089 The Group incurred legal fees in the Settlement and Patent License Agreement (“Agreement”) with Daimler AG, Mercedes- Benz USA LLC, Mercedes-Benz U.S. International, Inc. (collectively “Mercedes”), Robert Bosch GmbH and Robert Bosch LLC ( collectively “Bosch”) in settlement of the patent litigation brought by Orbital against Mercedes and Bosch in the United States District Court Eastern District of Michigan Southern Division Case Number 15-12398 (see ASX announcement 1 December 2014). Refer note A.3 for further detail. 30 30 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS A. CURRENT YEAR PERFORMANCE A. CURRENT YEAR PERFORMANCE for the year ended 30 June 2021 The Group has unused tax losses that arose in Australia, for which no deferred tax assets have been recognised of $33,040,509 (2020: $$39,532,875) and are available indefinitely for offsetting against future taxable profits of the Group and its controlled entities in which those losses arose. Since 2019, tax loss testing has been undertaken in relation to Australian carried forward tax losses, and that testing determined that approximately $8,590,532 of previously carried forward losses have a high probably of failing the relevant tests. We have therefore conservatively reflected a reduction in the carried forward amount of losses. As those losses were not previously recognised in the deferred tax asset balance, no tax expense adjustments arise. Under the tax laws of the United States of America, unused tax losses that cannot be fully utilised for tax purposes during the current period may be carried forward into future periods, subject to statutory limitations. At 30 June 2021, the Group had unused tax losses for which no deferred tax assets have been recognised of US$18,361,000 (2020: US$12,331,000) of which US$9,518,000 will expire by 2023. Recognition and measurement · Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted at the reporting date in the countries where the Group operates and generates taxable income. · Deferred tax Deferred tax is provided for using the full liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. A.5 Taxes The major components of the income tax benefit/(expense) for the years ended 30 June 2021 and 2020 are: Deferred income tax expense Adjustments in respect of prior years Total income tax benefit/(expense) 2021 $'000 (2,106) 1,098 (1,008) 2020 $'000 (118) - (118) The reconciliation of the income tax benefits/(expenses) and accounting profit multiplied by the Australian domestic tax rate for the years ended 30 June 2021 and 2020 are: Accounting (loss)/profit before tax from continuing operations Accounting (loss)/profit before income tax At Australia's statutory income tax rate of 26.0% (2020: 27.5%) Adjustments in respect of the change in statutory income tax rate Difference in overseas tax rates Non assessable income Recognition of previously unrecognised tax losses Adjustments in respect of prior years Deferred tax asset not recognised Other Non-deductible expenses Income tax expense Income tax expense reported in the statement of profit or loss 2021 $'000 (10,437) (10,437) 2,714 (77) (427) 49 - 1,098 (3,943) (1) (421) (1,008) 2020 $'000 1,975 1,975 (545) - (185) 120 1,398 (601) - (305) (118) (1,008) (118) Deferred tax balances comprise of the following deferred tax assets/(deferred tax liabilities): Inventory Revenue received in advance Plant and equipment Provisions and accruals Intangible asset ROU leasing assets ROU leasing liabilities Foreign exchange gains/losses Other Tax losses Net deferred tax asset 2021 $'000 31 925 (35) 1,336 (427) (347) 361 580 235 1,409 4,070 2020 $'000 44 - (170) 652 (247) - - - - 5,144 5,423 31 31 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS A. CURRENT YEAR PERFORMANCE A. CURRENT YEAR PERFORMANCE for the year ended 30 June 2021 A.5 Taxes (continued) · Deferred tax Deferred tax liabilities are recognised for all taxable temporary differences, except: • When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss • In respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carry forward of unused tax credits and unused tax losses may be utilised, except: • When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit or loss • In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences may be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available or allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it is probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the reporting date. Key estimate: Recoverability of deferred tax assets At 30 June 2021, the Group recognised $4,070,000 (2020: $5,423,000) of deferred tax assets after assessing the likelihood of offsetting unused tax losses against future taxable profits. The unused tax losses for which a deferred tax asset is recognised relate to operations in Australia. The Board assessed that the deferred tax asset was recoverable based on forecast taxable income included in the Business Plan. Forecasted income included in Orbital’s Business Plan is founded on existing supply contracts plus maturing contract negotiations on expanded revenue opportunities. Offsetting deferred tax balances Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset current tax assets and liabilities and when they relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities that the Group intends to settle its current tax assets and liabilities on a net basis. Tax consolidation Orbital Corporation Limited and its 100 per cent owned Australian resident subsidiaries formed a tax consolidated group with effect from 1 July 2002. Orbital Corporation Limited is the head entity of the tax consolidated group. Members of the tax consolidated group have entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts were recognised in the financial statements in respect of this agreement on the basis that the probability of default was assessed as remote. Orbital Corporation Limited and its controlled entities continue to account for their own current and deferred tax amounts. The Group has applied the 'separate taxpayer within Group' approach by reference to the carrying amount in the separate financial statements of each entity and the tax values applying under tax consolidation. In addition to its own current and deferred tax amounts, Orbital Corporation Limited also recognised current tax liabilities (or assets) and deferred tax assets arising from unused tax losses assumed from its controlled entities in the tax consolidated group. 32 32 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS A. CURRENT YEAR PERFORMANCE A. CURRENT YEAR PERFORMANCE for the year ended 30 June 2021 Performance rights granted to key management personnel were deemed potential ordinary shares. Refer to Notes F.3 for further details. There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorisation of the financial statements. The number of potential ordinary shares not considered dilutive and contingently issuable are as follows: A.6 Earnings per share (EPS) Basic EPS is calculated by dividing the profit for the year attributable to ordinary equity holders of Orbital Corporation Limited (“the Parent”) by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is calculated by dividing the profit attributable to ordinary equity holders of the Parent by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of ordinary shares that would be issued on conversion of all dilutive potential ordinary shares into ordinary shares. The following table reflects the income and share data used in the basic and diluted EPS computations: Performance rights 2021 $'000 2020 $'000 Total Loss/(profit) attributable to ordinary equity holders of the Parent: Continuing operations Discontinued operations Loss/(profit) attributable to equity holders of the Parent for basic earnings Weighted average number of ordinary shares for basic EPS Weighted average number of ordinary shares adjusted for the effect of dilution (11,445) - 1,857 - (11,445) 1,857 2021 2020 Number 77,626,071 Number 77,524,513 77,626,071 79,082,042 Earnings per share Basic (loss)/profit earnings per share Diluted (loss)/profit earnings per share Earnings per share from continuing operations Basic (loss)/profit earnings per share Diluted (loss)/profit earnings per share Cents (14.74) (14.74) Cents (14.74) (14.74) Cents 2.40 2.35 Cents 2.40 2.35 2021 Number 2,230,420 2,230,420 33 33 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2021A. CURRENT YEAR PERFORMANCE2021 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS B. GROWTH ASSETS B. GROWTH ASSETS for the year ended 30 June 2021 In this section This section addresses the strategic growth and assets position of the Group at the end of the reporting period including, where applicable, the accounting policies applied and the key estimates and judgements made. B. B.1 B.2 Current Year Performance Plant and equipment Intangible assets Page 34 Page 36 B.1 Plant and equipment Plant and equipment Leasehold improvements Total $’000 $’000 $’000 Gross carrying amount at cost At 1 July 2019 Additions Disposals At 30 June 2020 Additions Disposals At 30 June 2021 Depreciation and impairment At 1 July 2019 Depreciation charge Disposals At 30 June 2020 Depreciation Impairment Disposals At 30 June 2021 Net book value At 30 June 2021 At 30 June 2020 18,394 475 (408) 18,461 504 (5,664) 13,301 (16,103) (623) 408 (16,318) (607) (651) 5,664 (11,912) 1,389 2,143 2,550 65 (20) 2,595 174 (187) 2,582 20,944 540 (428) 21,056 678 (5,851) 15,883 (325) (282) 19 (588) (260) (1,475) (1) (2,324) (16,428) (905) 427 (16,906) (867) (2,126) 5,663 (14,236) 258 2,007 1,647 4,150 Plant and equipment was pledged as security under the Acknowledgement of Debt entered into with the Department of Jobs, tourism, Science and Innovation and is subject to floating charges. Refer to Note C.7 for lease disclosure and Note D.1 for further details. Recognition and measurement Plant and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. Such costs include the cost of replacing part of the plant and equipment. When significant parts of plant and equipment are required to be replaced at intervals, the Group depreciates those parts separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repairs and maintenance costs are expensed as incurred to occupancy expenses in the statement of profit or loss and other comprehensive income. An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on the de- recognition of the asset, calculated as the difference between the net disposal proceeds and the carrying amount of the assets, is included in other income or other expenses in the statement of profit or loss and other comprehensive income when the asset is derecognised. 34 34 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS B. GROWTH ASSETS B. GROWTH ASSETS for the year ended 30 June 2021 B.1 Plant and equipment (continued) Impairment of non-financial assets The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the recoverable amount of the asset or cash generating unit (“CGU”). The recoverable amount of the asset or the CGU is the higher of its fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash flows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Impairment losses of continuing operations are recognised in the statement of profit or loss in expense categories consistent with the function of the impaired asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposals, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators. Key estimate - Impairment of non-current assets The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. The budgets and forecast calculations cover a period of three years, or the contract period. For the year ended 30 June 2021, a strategic decision was made to cease production in the US and transition it to Australia. As a result, the CGUs located in the US became idle and not expected to generate any future cash flow in the short term, the US assets were written down to nil value. Depreciation Depreciation is calculated on a straight-line basis over the estimated useful life as follows: Plant and equipment: 3 to 15 years Leasehold improvements: 3 to 15 years The residual values, useful lives and methods of depreciation of plant and equipment are reviewed at each financial year- end and adjusted prospectively, as appropriate. 35 35 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS B. GROWTH ASSETS B. GROWTH ASSETS for the year ended 30 June 2021 B.2 Intangible assets Consolidated Year ended 30 June 2021 Cost Accumulated amortisation and impairment R&D tax offset recognised Net carrying amount Movement Net carrying amount at the beginning of the year Additions Amortisation for the year Net carrying amount at the end of the year Year ended 30 June 2020 Cost Accumulated amortisation and impairment R&D tax offset recognised Net carrying amount Movement Net carrying amount at the beginning of the year Additions Amortisation for the year Net carrying amount at the end of the year Model 2019 Development $'000 Model 2021 Development $'000 2,611 (595) (1,421) 595 898 - (303) 595 2,611 (292) (1,421) 898 924 221 (247) 898 1,386 - - 1,386 - 1,386 - 1,386 - - - - - - - - Total $'000 3,997 (595) (1,421) 1,981 898 1,386 (303) 1,981 2,611 (292) (1,421) 898 924 221 (247) 898 The intangible assets comprise of capitalised development costs for the advancement of the modular propulsion systems. The intangible asset will be amortised using the straight-line method over a finite period of five years. Recognition and measurement Intangible assets are measured on initial recognition at cost. Following initial recognition; intangible assets are carried at cost less amortisation, any impairment losses and research and development tax grants received. Intangible assets with finite useful lives are amortised on a straight-line basis over their useful lives and tested for impairment whenever there is an indication that they may be impaired. The amortisation period and method is reviewed at each financial year end. Intangible asset Internally generated intangible Useful life Finite (up to five years) Research and development Research costs are expensed as incurred. Development expenditures on individual projects are recognised as an intangible asset when the Group can demonstrate: • the technical feasibility of completing the intangible asset so that the asset will be available for use or sale • its intention to complete and its ability and intention to use or sell the asset • how the asset will generate future economic developments • the availability of resources to complete the asset • the ability to measure reliably the expenditure incurred during the development of the asset Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when the development is complete and the asset is available for use. It is amortised over the period of expected future benefit. During the period of development, the asset is tested for impairment annually. 36 36 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS C. WORKING CAPITAL MANAGEMENT C. WORKING CAPITAL MANAGEMENT for the year ended 30 June 2021 In this section This section addresses inventories, trade and other receivables, cash, other financial assets and trade and other payables of the Group at the end of the reporting period including, where applicable, the accounting policies applied and the key estimates and judgements made. C. Working Capital Management C.1 Inventories C.2 Trade and other receivables C.3 Cash and cash equivalents C.4 Other financial assets C.5 Trade and other payables C.6 Deferred revenue C.7 Leases Page 38 Page 39 Page 39 Page 40 Page 40 Page 40 Page 41 Financial and capital risks in this section Liquidity risk management Liquidity risk arises from the financial liabilities of the Group and the Group's subsequent ability to meet its obligations to repay financial liabilities as and when they fall due. The liquidity position of the Group is managed to ensure sufficient liquid funds are available to meet its financial commitments in a timely and cost effective manner. The Group's liquidity position is managed by the Board of Directors who regularly review cash-flow forecasts prepared by management, which includes the Group's short and long-term obligations, cash position and forecast liability position to maintain appropriate liquidity levels. At 30 June 2021, the Group has a total of $3,116,000 of cash at its disposal (2020: $8,749,000) and a net current asset position -$474,000 (2020: $11,851,000). The remaining contractual maturities of the Group's financial liabilities are: At 30 June 2021 Borrowings 1 Trade payables and other liabilities Lease liabilities At 30 June 2020 Borrowings Trade payables and other liabilities Lease liabilities Less than 3 months $'000 3-12 months 1-5 years $'000 $'000 Over 5 years Total contractual cashflows $'000 $'000 Carrying amount (assets)/liabilities $'000 9,986 1,742 297 12,025 - - 893 893 - - 775 775 - - - - - 4,482 262 4,744 3,756 6,230 - - 1,091 2,048 8,278 4,847 - - - - 9,986 1,742 1,966 13,694 9,986 4,482 3,401 17,869 9,986 1,742 1,829 13,557 8,610 4,482 3,029 16,121 1 Refer to Note D.1 and F.7 for details. 37 37 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS C. WORKING CAPITAL MANAGEMENT for the year ended 30 June 2021 C. WORKING CAPITAL MANAGEMENT Interest rate risk management Interest rate risk is the risk that the Group's financial position will fluctuate due to changes in the market interest rates. The Group's exposure to market interest rates relates primarily to the Group's cash and term deposits with financial institutions. The primary goal of the Group is to maximise returns on surplus cash, using deposits with maturities of 90 days or less. Management continually monitors the returns on funds invested. The exposure to interest rate risk as at 30 June 2021 is as follows: Cash and cash equivalents (Note C.3) Short-term deposits (Note C.4) 2021 $'000 3,116 585 3,701 2020 $'000 8,749 585 9,334 A reasonable possible change in the interest rate (+0.5%/-0.5%) (2020: +0.5%/-0.5%)), with all variables held constant, would have resulted in a change in post tax profit/(loss) of $16,000/($16,000) (2020: $44,000)/($44,000) and no impact to other comprehensive income. Credit risk management Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating and investing activities, including trade receivables and short-term deposits with financial institutions. Maximum exposure to credit risk equals to the carrying amount of these financial assets (as outlined in each applicable note). The significant concentration of credit risk within the Group relate to receivable balances from the Group's major customer. The maximum exposure to credit risk for the components of the statement of financial position at 30 June 2021 and 2020 is the carrying amounts as illustrated in Note C.2. It is the Group's policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Key individual customer receivable balances are monitored on an ongoing basis. The significant concentrations of credit risk within the Group relate to receivable balances from the Group's major customer and cash held with investment grade financial institutions. The investment of surplus cash in short-term deposits is only invested with a major financial institution to minimise the risk of default of counterparties. C.1 Inventories Raw materials Provision for obsolescence Work in progress Finished goods 2021 $'000 11,741 (123) 990 159 12,767 2020 $'000 7,965 (159) 1,574 - 9,380 Recognition and measurement Inventories are carried at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • Raw materials: weighted average cost • Finished goods and work in progress: weighted average cost of direct materials and direct manufacturing labour and a proportion of manufacturing overhead costs Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 38 38 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS C. WORKING CAPITAL MANAGEMENT for the year ended 30 June 2021 C. WORKING CAPITAL MANAGEMENT C.2 Trade and other receivables C.3 Cash and cash equivalents Trade receivables Other receivables Accrued revenue Allowance for Impairment of other receivables (a) 2021 $'000 3,100 909 844 (849) 4,004 2020 $'000 5,307 1,183 70 (1,213) 5,347 (a) At 30 June 2021, the Group has $849,000 (2020:$1,213,000) as a provision for impaired receivables. This amount represents receivable from Avidsys Pty Ltd as consideration for the disposal of REMSAFE Pty Ltd on 18 December 2017. See the "Credit risk management" section on credit risk of trade receivables, which explains how the Group manages and measures the quality of trade receivables that are neither past due nor impaired. The Group's payment terms on trade receivables range from 30 - 35 days. The credit risk of trade receivables neither past due nor impaired was assessed as remote as historical default rates with associated customers are negligible. Recognition and measurement Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade and other receivables are recognised on initial recognition at fair value. Subsequent to initial recognition, trade receivables are measured at amortised cost using the effective interest rate method, less an allowance for uncollectible amounts. Impairment Trade receivables and contract assets are subject to the expected credit loss model. The Group applies the AASB 9 simplified approach to measuring expected credit losses which uses the lifetime expected loss allowance for all trade receivable and contract assets. The identified impairment loss was immaterial. While cash and cash equivalents are also subject to the impairment requirements of AASB 9, the identified impairment loss was immaterial. Cash at bank 2021 $'000 3,116 3,116 2020 $'000 8,749 8,749 The reconciliation of net profit/(loss) after tax to net cash flows from operations for the years ended 30 June 2021 and 2020 is as follows: (Loss)/profit after income tax from continuing operations (Loss)/profit after income tax Depreciation & amortisation (Note B.1) Impairment of asset Government grants Interest expense Surplus lease space (Note E.1) Warranties (Note E.1) Employee benefits (Note E.1) Provision for doubtful debt Share based payment expense (Note F.3) Net foreign exchange gain Net cash (used in)/from operating activities before changes in assets and liabilities Changes in assets and liabilities during the year: Decrease/(increase) in receivables and prepayments (Increase)/decrease in inventories (Increase)/decrease in deferred tax assets Increase/(decrease) in payables 2021 $'000 (11,445) (11,445) 867 2,499 - 1,376 - 2,074 229 (63) 220 (496) 2020 $'000 1,857 1,857 1,153 - (76) 333 (88) (218) 163 (167) 264 33 (4,739) 3,254 2,346 2,324 (3,387) 1,354 2,736 3,049 (2,683) 118 713 472 Net cash (used in)/generated from operating activities (1,690) 3,726 Recognition and measurement Cash and cash equivalents in the statement of financial position comprise cash at bank and short-term deposits with an original maturity of three months or less, which are subject to an insignificant risk as to change in value. Fair value The carrying amount of trade and other receivables approximates their fair value. Fair value The carrying amount of short-term deposits approximates their fair value. 39 39 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS C. WORKING CAPITAL MANAGEMENT C. WORKING CAPITAL MANAGEMENT for the year ended 30 June 2021 C.4 Other financial assets C.6 Deferred revenue Deferred revenue includes revenue allocated to unsatisfied performance obligations in engineering services contracts with customers, unsatisfied performance obligations on sale of goods to customers and long-term advances received from customers. A reconciliation of deferred revenue for the years ended 30 June 2021 and 2020 is as follows: At 1 July Deferred during the year Released to the statement of profit or loss At 30 June 2021 $'000 1,321 6,803 (3,839) 4,285 2020 $'000 2,911 9,622 (11,212) 1,321 Recognition and measurement Deferred revenue is recognised as a liability when consideration is received prior to performance obligations being satisfied with a customer. The deferred revenue is recognised as income over the periods that the performance obligations are met. Short term deposits 2021 $'000 585 585 2020 $'000 585 585 The Group has pledged short term deposits of $585,000 (2020: $585,000) as collateral for financing facilities. Refer to Note D.1 for details on long-term borrowings. Short-term deposits Recognition and measurement Short-term deposits represent term deposits with financial institutions for periods greater than 90 days and less than 365 days earning interest at the respective interest rate at time of lodgement. Short-term deposits are stated at amortised cost. Fair value The carrying amount of short-term deposits approximates their fair value. C.5 Trade and other payables Trade payables Taxes payable Other payables 2021 $'000 1,668 - 74 1,742 2020 $'000 4,280 11 191 4,482 Recognition and measurement Trade and other payables are financial liabilities recognised when goods and services are received prior to the end of the reporting period, irrespective of whether or not billed to the Group. Trade and other payables are recognised on initial recognition at fair value. Subsequent to initial recognition, trade and other payables are measured at amortised cost. Fair value The carrying amount of trade and other payables approximates their fair value. 40 40 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS C. WORKING CAPITAL MANAGEMENT for the year ended 30 June 2021 C. WORKING CAPITAL MANAGEMENT C.7 Leases The Group leases various premises. Lease terms are negotiated on an individual basis and contain a range of different terms and conditions. Amounts recognised in the balance sheet Set out below is a summary of the amounts disclosed in the Consolidated Statement of Financial Position: Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of variable lease payments that are based on index or a rate. The recognised right-of-use assets relate to the amount of the initial measurement of lease liability. Right-of-use assets Properties Total Lease Liabilities A sub lease has been recognised as a Finance Lease Receivable under AASB 16 Leases. This reduced the right-of-use asset on adoption. Current Non Current 2021 2020 $'000 857 857 $'000 2,062 2,062 2021 2020 $'000 982 847 1,829 $'000 1,131 1,898 3,029 Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Amounts recognised in the statement of profit or loss The statement of profit or loss shows the following amounts relating to leases: Depreciation charge of right-of-use assets Impairment Interest expense (included in finance cost) 2021 $'000 710 373 131 2020 $'000 728 - 146 The total cash outflow for leases in 2021 was $846,000 (2020: $499,000). Key estimate - Impairment of right-of-use assets Refer to Note B.1 for key estimate of asset impairment. 41 41 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS D. DEBT AND CAPITAL D. DEBT AND CAPITAL for the year ended 30 June 2021 In this section This section addresses the debt and capital position of the Group at the end of the reporting period including, where applicable, the accounting policies applies and the key estimates and judgements made. D. D.1 D.2 D.3 Debt and capital Borrowings Share capital Reserves Page 42 Page 42 Page 43 Financial and capital risks in this section Capital risk management For the purposes of the Group's capital management, capital includes contributed shareholder equity. When managing capital, management's objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital, provides a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. In order to maintain or adjust the capital structure, the Group may issue new shares or debt. D.1 Borrowings Current Non-current 2021 $'000 9,986 - 9,986 2020 $'000 3,756 4,854 8,610 The interest-free loan was secured by way of a first ranking floating debenture over the whole of the assets and undertakings of the Group. D.2 Share capital Changes in borrowings arising from financing activities are as follows: Ordinary shares issued and fully paid At 1 July $'000 8,610 8,277 Cash flows $'000 - - Finance costs $'000 1,376 333 At 30 June $'000 9,986 8,610 2021 2020 On 25 January 2010, the Department of Jobs, Tourism, Science and Innovation provided the Group with an interest-free loan of $14,346,000 under the terms of a Deed (Acknowledgment of Debt) (“the Deed”). The terms and conditions attached to the Deed are as follows: • The term of the loan was 25 January 2010 to 30 May 2025 • In early 2021 Orbital commenced renegotiations of its $9.9M WA Government Loan, this was however not concluded at year end. Refer to subsequent event note F.7 for further details. The loan was reclassified as current borrowings under the loan terms in place at year end. As a result of the non-repayment of a portion of the loan in the current year, loan terms were determined to be modified. This did not constitute a substantial modification of the loan terms. As a result of these changes, the amount of $618,000, being the difference in the present value of the cash flows of the loans calculated under the old and new terms, has been recognised in the Consolidated statement of profit or loss and other comprehensive income. Movement in ordinary shares At 1 July 2019 Employee Share plan number 1 At 30 June 2020 At 1 July 2020 Employee Share plan number 1 At 30 June 2021 2021 $'000 31,265 2020 $'000 31,220 Number 77,452,926 133,997 77,586,923 $000's 31,178 42 31,220 77,586,923 71,853 77,658,776 31,220 45 31,265 Recognition and measurement Share capital is recognised at the fair value of the consideration received. The cost of issuing shares is shown in the share capital as a deduction, net of tax, from the proceeds. Own equity instruments that are re-acquired are recognised at cost and deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. The Company does not have authorised capital or par value in respect of its issued shares. Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. In the event of winding up of the Company, ordinary shareholders rank after creditors and are fully entitled to any proceeds of liquidation. 42 42 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS D. DEBT AND CAPITAL D. DEBT AND CAPITAL for the year ended 30 June 2021 D.3 Reserves At 1 July 2019 Foreign currency translation Rights issued pursuant to performance rights plan At 30 June 2020 At 1 July 2020 Foreign currency translation Rights issued pursuant to performance rights plan At 30 June 2021 Nature and purpose of reserves Employee benefits reserve $000's 2,203 - 221 2,424 . 2,424 - 176 2,600 Foreign currency translation reserve $000's (32) 3 - (29) (29) 464 - 435 Total $000's 2,171 3 221 2,395 2,395 464 176 3,035 Employee benefits reserve The employee benefits reserve records the share-based payments provided to key management personnel as part of their long-term incentive remuneration. Refer to Note F.3 for further details. 43 43 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS E. OTHER ASSETS AND LIABILITIES for the year ended 30 June 2021 E. OTHER ASSETS AND LIABILITIES In this section This section addresses the other assets and liabilities position of the Group at the end of the reporting period including, where applicable, the accounting policies applies and the key estimates and judgements made. E. E.1 Other assets and liabilities Provisions Page 44 E.1 Provisions s NC At 1 July 2020 Arising during the year Utilised At 30 June 2021 Current Non-current At 1 July 2019 Arising during the year Utilised Expired At 30 June 2020 Current Non-current Surplus lease space $000's Warranties $000's Employee benefits $000's - - - - - - - 88 - (88) - - - 521 2,083 (9) 2,595 2,595 - 2,595 738 380 - (597) 521 521 - 521 1,778 942 (713) 2,007 1,935 72 2,007 1,614 666 (502) - 1,778 1,706 72 1,778 Total $000's 2,299 3,025 (722) 4,602 4,530 72 4,602 2,440 1,046 (590) (597) 2,299 2,227 72 2,299 Recognition and measurement Provisions are recognised when the Group has a present obligation, legal or construction, as a result of a past event, it is probable that an outflow of resources embodying benefits will be required to settle an obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a pre-tax discount rate that reflects, where appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Provision for warranties The Group provides for a provision for warranties for general repairs for two years after its propulsion system assemblies ("PSA") are sold. The provision for warranties represents the liability for potential warranty claims against the Group and is recognised at the point in time when a PSA is sold. The valuation of the provision for warranties is based on the product of the estimated defect rate, the cost of the PSA and the volume of PSAs sold. Employee benefits The Group does not expect its long-service or annual leave benefits to be settled wholly within twelve months of each reporting date. These liabilities are measured at the present value of the estimated future cash outflow to be made to the employees using the projected unit credit method. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currencies that match, as closely as possible, estimated future cash flows. Other employee benefits expected to be wholly settled within one year after the end of the period in which the employees render the related services are classified as short-term benefits and are measured at the amount due to be paid. 44 44 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS F. OTHER NOTES for the year ended 30 June 2021 F. OTHER NOTES In this section This section addresses information on other items which require disclosure to comply with Australian Accounting Standards and the Corporations Act 2001 (Cth). This section includes Group structure information and other disclosures. Other items F. F.1 Key management personnel compensation F.2 Related parties F.3 Share based payments F.4 Subsidiaries F.5 Parent entity information F.6 Auditor remuneration F.7 Events after the end of the reporting period F.8 Other accounting policies F.9 New accounting standards 45 45 46 48 48 49 49 49 49 F.1 Key management personnel compensation Compensation of key management personnel of the Group Short term employee benefits Post-employment benefits Long-term employee benefits Share based payments 2021 $ 1,442,033 104,948 55,394 156,178 2020 $ 1,397,283 96,892 52,797 162,314 1,758,553 1,709,286 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to key management personnel. The compensation of key management personnel is included in the employee benefits expense in the statement of profit or loss and other comprehensive income. Refer to table 2 and table 3 of the Remuneration report for KMP share and equity holdings, including performance rights. F.2 Related parties Group structure Note F.4 provides information about the Group’s structure, including details of subsidiaries. Transactions with directors There were no transactions with directors during the year. Key management personnel compensation is disclosed in Note F.1. No other director or key management personnel entered into a material contract with the Group from the end of the previous financial year. 45 45 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS F. OTHER NOTES for the year ended 30 June 2021 F. OTHER ITEMS F.3 Share based payments Equity-settled share based payment transactions 2021 $'000 241 241 2020 $'000 245 245 There were no cancellations or modifications to awards in the 2021 or 2020 financial years. Share-based payment plans are explained below: Employee Share Plan No. 1 The Group provides benefits to its employees in the form of share based payments in which employees render services for ordinary shares in the Group. Under the plan, each eligible employee is offered fully paid ordinary shares to a maximum value of $1,000 per annum. For the year ended 30 June 2021, 39,634 ordinary shares (2020: 133,997 ordinary shares) were issued on 23 December 2020 at a market value on the date of issue of $45,000 (2020: $42,000 ). CEO Share Acquisition Performance Rights On 11 August 2017, the Group announced the appointment of Mr. Alder as the Managing Director and Chief Executive Officer of the Group. The announcement set out the material terms of his employment, which include the grant of two performance rights for each share acquired by Mr. Alder during the period from 11 August 2017 to 31 December 2017. During the year ended 30 June 2018, Mr. Alder acquired 372,333 ordinary shares in the Group, resulting in a maximum entitlement of 647,250 share acquisition performance rights ("SAPR's"). The grant of the performance rights was approved by the shareholders at an extraordinary general meeting on 23 May 2018. The terms of the performance rights issued to Mr. Alder are subject to a vesting condition of a 30-day volume weighted average share price of $0.62 per ordinary share. During the year ended 30 June 2021, 647,250 performance rights issued under the plan vested. The share based payment expense recognised for the year ended 30 June 2021 was $8,000 (2020: $68,000). 2018 Executive LTI Plan and 2018 CEO LTI Plan On 27 October 2017 and 23 May 2018, the Group issued 951,622 performance rights to key management personnel as part of their long-term incentive plan. The terms of the performance rights are set out on pages 11-12 of the Directors' Report. During the year ended 30 June 2021, 846,016 performance rights issued under the plan vested. The share based payment expense recognised for the year ended 30 June 2021 was $18,000 (2020: $103,000). 2020 Executive LTI Plan and 2020 CEO LTI Plan On 28 October 2020 and 04 December 2020, the Group issued 717,198 performance rights to key management personnel as part of their long-term incentive plan. The terms of the performance rights are set out on pages 12 of the Directors' Report. During the year ended 30 June 2021, no performance rights issued under the plan vested. The share based payment expense recognised for the year ended 30 June 2021 was $155,000. Movements during the year The following table illustrates the number of performance rights during the year: Outstanding at 1 July Granted during the year Lapsed during the year Outstanding at 30 June 2021 Number 1,557,529 1,157,181 (484,290) 2,230,420 2020 Number 2,010,654 - (453,125) 1,557,529 The weighted average remaining contractual life of performance rights outstanding at 30 June 2021 was 2.25 years (2020: 0 years). The following tables list the inputs into the models used for the plans for the years ended June 30, 2018 and 2021 respectively: 2018 Executive LTI Plan 23/05/2018 2018 CEO LTI Plan 27/10/2017 CEO SAPR's 23/05/2018 2020 Executive LTI Plan 28/10/2020 2020 CEO LTI Plan 4/12/2020 10/08/2020 10/08/2020 30/09/2023 $ 0.44 $ 0.54 $ 0.44 $ 1.19 $ 1.18 10/08/2020 30/09/2023 0.209 0.365 0.316 0.970 0.980 0.138 59% 1.98% 0.278 60% 1.95% - 59% 1.98% 0.760 70% 0.12% 0.730 70% 0.13% 0 years 0 years 0 years 2.25 years 2.25 years Monte Carlo Monte Carlo Monte Carlo Monte Carlo Monte Carlo Grant date Expiry date Share price at grant Fair value ($/right) - Tranche 1 Fair value ($/right) - Tranche 2 Expected volatility Risk-free interest rate Remaining contractual life Model used 46 46 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS F. OTHER NOTES for the year ended 30 June 2021 F. OTHER ITEMS F.3 Share based payments (continued) The expected life of the performance rights is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility of performance rights reflects the assumption that the historical volatility over a period similar to the life of the performance rights is indicative of future trends, which may not necessarily be the actual outcome. Recognition and measurement Employees, including key management personnel, of the Group receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments; that is, equity-settled transactions. The cost of equity-settled transactions is determined using the fair value of the equity instrument at the date when the grant is made using an appropriate valuation model. The cost arising from share-based payments is recognised as an employee benefits expense, together with a corresponding increase in equity over the period in which the service and, where applicable, the performance conditions, are fulfilled; that is, the vesting period. 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. The expense or credit in the statement of profit or loss and other comprehensive income represents the movement in the cumulative expense recognised as at the beginning and end of that period. Service and non-market performance conditions are not taken into account when determining the grant date fair value of the awards, but the likelihood of the condition being met is assessed as part of the Group’s best estimate of the number of shares that will vest. Market performance conditions are reflected within the grant date fair value. 47 47 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS F. OTHER NOTES for the year ended 30 June 2021 F. OTHER ITEMS F.4 Subsidiaries The ultimate parent company of the Group is Orbital Corporation Limited. The consolidated financial statements of the Group include: Entity Orbital Australia Pty Ltd Orbital Australia Manufacturing Pty Ltd OEC Pty Ltd S T Management Pty Ltd OFT Australia Pty Ltd Investment Development Funding Pty Ltd Power Investment Funding Pty Ltd Kala Technologies Pty Ltd Orbital Share Plan Pty Ltd Orbital Holdings (USA) Inc. Orbital Fluid Technologies Inc. Note (b) (c) (a) Class of shares Country of incorporation Ordinary Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Australia Australia Australia Australia Australia Australia Australia Australia United States United States Orbital UAV USA, LLC Ordinary United States Principal activities 2021 2020 % equity interest Production & Development Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Dormant Production & Development 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 (a) Orbital Share Plan Pty Ltd was established on 22 September 2008 and acts as the trustee for Executive Long Incentive Performance Rights Plans. (b) The Production segment is focussed on the manufacture, assembly and delivery of engines and propulsion systems for unmanned aerial vehicles, and the continuous improvement of propulsion system and component part costs; product quality; and timing of product delivery. (c) The Development segment specialises in the development of new UAV propulsion systems and flight critical components, including unmanned aerial vehicle engineering studies, engine mapping, maintenance certification and engineering technical support across the Group. F.5 Parent entity information Current assets Non-current assets Current liabilities Non-current liabilities Net assets Issued capital Accumulated losses Employee benefits reserve Total equity Profit/(loss) of the parent Total comprehensive profit/(loss) of the parent entity 2021 $'000 - 13,417 9,987 - 3,430 31,220 (30,451) 2,661 3,430 (12,966) (12,966) 2020 $'000 2 24,768 - 8,610 16,160 31,220 (17,485) 2,425 16,160 1,357 1,357 48 48 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS F. OTHER NOTES for the year ended 30 June 2021 F. OTHER ITEMS F.6 Auditor remuneration F.8 Other accounting policies The auditor for the Group is PricewaterhouseCoopers ("PwC") Goods and services tax Amounts received or due and receivable for: 2021 $ 2020 $ Revenue, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Audit and review of the consolidated financial statements Tax compliance services Other services 160,000 135,278 113,462 72,670 270,137 543,599 207,948 - Receivables and payables are stated with the amounts of GST included. The net amount of GST recoverable from, or payable to, the Australian Taxation Office (“ATO”) is included as a current asset or liability in the consolidated statement of financial position. F.7 Events after the end of the reporting period Other than the matter sets out below, in the interval between the end of the year and the date of this report there has not arisen any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Group, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future years: • The $9.9M WA Government Loan was under renegotiation during the year (as per Note D.1) and the formal confirmation of a Deed of Variation was received on 12 August 2021. The restructured loan agreement includes an extended repayment schedule over the next four years and repayment offset options that are contingent on the Company achieving operational milestones aligned with its increasing engine business in Western Australia over that period. The repayment offset options provide the potential to forgive the entire value of the loan. In FY22, $4M of the $9.9M loan is expected to be offset due to achievement of operational milestones. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. Intangible assets Patents Patents, licences and technology development and maintenance costs, not qualifying for capitalisation, are expensed as incurred. Fair value measurement All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: ► Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities ► Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable ► Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. F.9 New accounting standards New standards and interpretations The Group has reviewed new standards and interpretations and none of the new and amended accounting standards and interpretations will significantly affect the Group's accounting policies, financial position or performance. 49 49 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 20212021 ANNUAL REPORTDIRECTORS’ DECLARATION DIRECTORS' DECLARATION In accordance with a resolution of the Directors of Orbital Corporation Limited, I state that: 1. In the opinion of the Directors: (a) The financial statements and notes and the additional disclosures included in the Directors’ Report designated as audited, of the Group are in accordance with the Corporations Act 2001, including: (i) (ii) Giving a true and fair view of the financial position of the Group as at 30 June 2021 and of their performance, as represented by the results of their operations and their cash flows, for the year ended on that date; and Complying with Accounting Standards in Australia and the Corporations Act 2001. The financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 2(a). There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. (b) (c) 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, from the Chief Executive Officer and Chief Financial Officer for the financial year 30 June 2021. On behalf of the Board, JP Welborn Chairman TM Alder Managing Director & Chief Executive Officer Dated at Perth, Western Australia 27 August 2021 50 50 2021 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT Independent auditor’s report To the members of Orbital Corporation Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Orbital Corporation Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2021 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: • • • • • • the consolidated statement of financial position as at 30 June 2021 the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the consolidated statement of profit or loss and other comprehensive income for the year then ended the notes to the financial statements, which include significant accounting policies and other explanatory information the directors’ declaration. 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence 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 & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO Box D198, PERTH WA 6840 T: +61 8 9238 3000, F: +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 51 51 2021 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. The Group specialises in designing and manufacturing unmanned aerial vehicle propulsion systems for its customers. The Group has manufacturing operations in Australia and in the United States of America. The accounting processes are structured around a Group finance function at its corporate head office in Perth, where we predominantly performed our audit procedures. Materiality • For the purpose of our audit we used overall Group materiality of $310,000, which represents approximately 1% of the Group’s total Revenue. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. • We chose Group Revenue because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. • We utilised a 1% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds for entities of this nature. Audit Scope • Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. 52 52 2021 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit and Risk Committee. Key audit matter How our audit addressed the key audit matter Basis of preparation of financial report (Notes to the Financial Statements – pg25) As described in the financial report, the financial statements have been prepared by the Group on a going concern basis, which contemplates that the Group will continue to meet its commitments, realise its assets and settle its liabilities in the normal course of business. At year end, the Group’s current liabilities exceeded its current assets by $0.5 million Assessing the appropriateness of the Group’s basis of preparation for the financial report was a key audit matter due to its importance to the financial report as a whole and the level of judgement involved in assessing the operational status, future funding and cash flows from sales in particular with respect to the Group forecasting future cash flows for a period of at least 12 months from the date of the financial report (cash flow forecasts). In assessing the appropriateness of the Group’s going concern basis of preparation for the financial report, we performed the following procedures, amongst others: • • • evaluated the appropriateness of the Group's assessment of its ability to continue as a going concern, including whether the level of detail in the assessment is appropriate given the nature of the Group, the period covered is at least 12 months from the date of our auditor’s report and relevant information of which we are aware as a result of the audit has been included enquired of management and the directors as to their knowledge of events or conditions that may cast significant doubt on the Group's ability to continue as a going concern, including the potential impact of COVID-19 on the Group evaluated selected data and assumptions in the Group’s cash flow forecasts for at least 12 months from the date of signing the auditor’s report, including comparing selected elements, such as purchase orders from customers, in the cash flow forecasts to existing contracts and agreements 53 53 2021 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT Key audit matter How our audit addressed the key audit matter • • • • evaluated the Deed of Variation to the interest-free loan contract (as per Note D1) received subsequent to year end evaluated the Group’s plans for future actions, including the renegotiation of the Group’s borrowings requested written representations from management and the board of directors regarding their plans for future action and the feasibility of these plans evaluated whether, in view of the requirements of Australian Accounting Standards, the financial report provides adequate disclosures. We performed the following procedures, amongst others: • • • • • attended the inventory counts at Perth and Hood River and traced our inventory count samples to the Group’s inventory listings assessed the application of inventory costing methodologies and whether this was consistent with Australian Accounting Standards compared a sample of inventory cost items to third party invoices on a sample basis, evaluated the direct labour costs allocated to engines in inventory by inspecting timesheets and agreeing the labour cost to the payroll system on a sample basis, recalculated the mathematical accuracy of sub-assembly bill of materials that comprise engines in inventory Carrying value of Inventory (Refer to note C1) $12.8 million At 30 June 2021 the Group held inventory with a carrying value of $12.8 million. This inventory comprises parts, consumables and sub-assemblies of engines which will be used in the construction of engines by the Group. Inventory for the Group is held in Perth, Australia and Hood River, USA. We focused on this area due the significance of the inventory balance to the Consolidated Statement of Financial Position and the complexities associated with the allocation of direct labour and direct material costs due to the multiple stages of assembly in the construction of the engines. 54 54 2021 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT Key audit matter How our audit addressed the key audit matter • • assessed the adequacy of the provision for obsolete stock, particularly in light of the decision to cease production in the US during the year evaluated whether inventory was carried at the lower of cost and net realisable value by comparing costs per unit in inventory against sale prices in customer contracts Carrying value of US Operations and deferred tax assets (Refer to notes A5, B1 and C7) We evaluated the Group’s assessment that there were indicators of asset impairment at 30 June 2021 for its US CGU. The Group performed an assessment for impairment indicators across its cash generating units (CGUs) as required by Australian Accounting Standards. We also performed the following procedures, amongst other, on the Group’s impairment assessment: During the year, the Group identified indicators of impairment for US operations due to the restructuring of the US operations and recorded an impairment expense of $2.5 million. The Group made a number of judgements, including assessing whether it has access to carry forward tax losses and its forecast taxable income in the US for the period during which the carry forward tax losses are available for use. As a result, deferred tax assets of $1.3 million in the US were no longer deemed to be probable of utilisation and were written off during the year. • • • • assessed whether the US CGU appropriately included all directly attributable assets and liabilities evaluated the Group’s plan for its assets in the US CGU evaluated the Group’s assessment of future cash flows for the US CGU, including consideration of the most recent budget approved by the directors evaluated the adequacy of the disclosures made in note B1 and C7 including those regarding key assumptions used in the impairment assessment, in light of the requirements of Australian Accounting Standards. 55 55 2021 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT Key audit matter In light of the Group’s decision to cease production in the US, assessing the appropriateness of recognising the impairment expense and the derecognition of deferred tax assets was a key audit matter due to the level of judgement applied by the Group in forecasting future cash flows, future taxable income and the probability of the carry forward tax losses being utilised. How our audit addressed the key audit matter With regards to the deferred tax assets on unused tax losses, we performed the following procedures, amongst others: • • Obtained the calculation of forecast taxable income for the US CGU to evaluate the Group’s conclusion that it is not probable that sufficient taxable profit will be available, prior to the expiry of unused tax losses, against which a deferred tax asset could be recognised evaluated the adequacy of the disclosures made in Note A5 in light of the requirements of Australian Accounting Standards. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2021, 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. 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 that we 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. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the 56 56 2021 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT 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 the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 8 to 16 of the directors’ report for the year ended 30 June 2021. In our opinion, the remuneration report of Orbital Corporation Limited for the year ended 30 June 2021 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. PricewaterhouseCoopers Ben Gargett Partner Perth 27 August 2021 57 57 2021 ANNUAL REPORTSHAREHOLDING DETAILS SHAREHOLDING DETAILS Class of Shares and Voting Rights As at 16 August 2021 there were 5,040 shareholders of the ordinary shares of the Company. The voting rights attaching to the ordinary shares, set out in Article 8 of the Company’s Constitution, subject to any rights or restrictions for the time being attached to any class or classes of shares, are: a) b) at meetings of members or class of members, each member entitled to vote may vote in person or by proxy or representative; and on a show of hands every person present who is a member has one vote, and on a poll every person present in person or by proxy or representative has one vote for each ordinary share held. Substantial Shareholders and Holdings as at 16 August 2021 UIL Limited (as notified 13 April 2017) Mitsubishi UFJ Financial Group, Inc. Comprising voting power of 100% in First Sentier Investors Holdings Pty Ltd; and voting power of over 20% in Morgan Stanley Australia Securities (as notified 6 May 2021) 23,627,904 30.33% 11,283,347 8,779,248 2,504,099 14.48% Distribution of Shareholdings as at 16 August 2021 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Number of shareholders Total Shares on Issue Number of unmarketable parcels Top 20 Shareholders as at 16 August 2021 J P MORGAN NOMINEES AUSTRALIA PTY LIMITED CITICORP NOMINEES PTY LIMITED ANNAPURNA PTY LTD MORGAN STANLEY AUSTRALIA SECURITIES (NOMINEE) PTY LIMITED DEBUSCEY PTY LTD MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED BIRKETU PTY LTD BNP PARIBAS NOMINEES PTY LTD MR MICHAEL WILLIAM FORD & MRS NINA BETTE FORD MR CHRISTOPHER IAN WALLIN & MS FIONA KAY MCLOUGHLIN & MRS SYLVIA FAY BHATIA MR JOHN PAUL WELBORN & MS CAROLINE ANNE WELBORN BNP PARIBAS NOMS PTY LTD BOND STREET CUSTODIANS LIMITED 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 WEEWAC PTY LTD BNP PARIBAS NOMINEES PTY LTD SIX SIS LTD MR TODD MATHEW ALDER MR JOHN AYRES TEXAS HOLDINGS PTY LTD FUNDING SECURITIES PTY LTD MR DARRYL JAMES SMALLEY 2,788 1,407 412 403 52 5,062 77,899,027 - % OF SHARES 33.70 13.31 3.38 3.02 2.37 2.34 1.87 1.45 1.39 0.88 0.87 0.71 0.64 0.59 0.48 0.46 0.42 0.39 0.39 NUMBER OF SHARES HELD 26,254,202 10,368,180 2,635,000 2,355,415 1,850,000 1,822,558 1,455,688 1,132,541 1,086,672 689,200 679,103 555,793 500,000 460,853 372,333 356,667 325,000 307,249 300,000 Top 20 Shareholders Total 53,506,454 68.69 The 20 largest shareholders hold 68.85% of the ordinary shares of the Company (2020: 68.58%). On-market share buy-back There is no current on-market buy-back. 58 58 2021 ANNUAL REPORTCORPORATE INFORMATION | @OrbitalCorpASX | OrbitalUAV ABN 32 009 344 058 REGISTERED AND PRINCIPAL OFFICE 4 Whipple Street Balcatta, Western Australia 6021 Australia CONTACT DETAILS Australia Telephone: 61 (08) 9441 2311 Facsimile: 61 (08) 9441 2111 USA Address: 210 Wasco Loop, Hood River, OR 97031, USA Telephone: +1 541.716.5930 INTERNET ADDRESS http://www.orbitaluav.com Email: contact@orbitalcorp.com.au DIRECTORS J.P. Welborn, Chairman T.M. Alder, Managing Director and Chief Executive Officer S.B. Gallagher F.K. Abbott COMPANY SECRETARY D. Bonomini SHARE REGISTRY Link Market Services Limited Level 12, QV1 Building 250 St Georges Terrace Perth, Western Australia 6000 Telephone: 61 (08) 9211 6670 SHARE TRADING FACILITIES Australian Stock Exchange Limited (Code “OEC”) AUDITORS PricewaterhouseCoopers 125 St Georges Terrace Perth, Western Australia 6000 O r b i t a l C o r p o r a t i o n L i m i t e d | 2 0 2 1 A n n u a l R e p o r t ORBITAL CORPORATION LIMITED ASX:OEC | ABN 32 009 344 058 A: 4 Whipple Street Balcatta, Western Australia, 6021 | PO Box 901, Balcatta, Western Australia, 6914 P : +61 (08) 9441 2311 | F : +61 (08) 9441 2345 | E : contact@orbitalcorp.com.au | ORBITALUAV.COM 

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