Annual Report 2021 Our true purpose is to improve the oral health of ALL Australians to world’s best. Table of Contents Chairperson’s Letter CEO’s Report 2 4 12 Dental Centre Locations 14 Directors’ Report 16 Board of Directors 19 Remuneration Report 28 Auditor’s Independence Declaration 29 Financial Statements 33 Notes to the Financial Statements 63 Directors’ Declaration 64 70 Shareholder Information 72 Corporate Directory Independent Auditor’s Report ANNUAL REPORT 2021 | PACIFIC SMILES 1 ANNUAL REPORT 2021 | PACIFIC SMILES Chairperson’s Letter Zita Peach In FY21, PSQ reached its highest ever share price of $2.98 and delivered an interim dividend of 2.4 cents per share. For the full year the business saw an EBITDA improvement of 40.8% (including JobKeeper) versus last year, while still investing and opening 15 new centres. 2 ANNUAL REPORT 2021 | PACIFIC SMILES On behalf of PSG, Australia’s fastest growing Dentist Services Organisation, I would like to thank the dentists who choose to use our service and facilities and provide such high quality care to patients. Thank you to our dedicated employees, fellow Directors, and the members of the Executive Leadership Team for their agility and focus this year which enabled a solid performance despite the challenges. Phil McKenzie as Managing Director drove a year of growth for the business, only achievable by facilitating an agile environment. On behalf of the Board, I would like to thank Phil for his resilient leadership. Pacific Smiles’ investment in growth was supported by more new patients and more new centres opened than ever before, delivering 100 new dental chairs into the Australian market. These strong results enabled a successful capital raise of $15.1 million to accelerate growth opportunities and increase liquidity. A strong balance sheet and financial flexibility underpins Pacific Smiles continued capital commitment to growth when conditions normalise in FY22, seeing us continue to be Australia’s fastest growing Dentist Services Organisation. No final dividend was declared as we look to maximise our financial flexibility for when trading conditions normalise. Thank you to our shareholders for your continued support. Zita Peach Chairperson The result Pacific Smiles Group achieved this year, notwithstanding the significant impact of the continued COVID-19 pandemic, indicates a successful growth strategy delivered with operational excellence to support practicing dentists. All the while trading through over 10 lockdowns and under health guidelines, adhering to best practice COVID procedures. Dr Scott Kalniz joined the Board as a Non-Executive Director this year adding his extensive international clinical experience as well as deep commercial knowledge. He has been a part of the growth of several US Dentist Service Organisations, also founding one that grew to a network of over 110 centres. Having held executive roles in two significant US Dentist Services Organisations, Dr Kalniz will harness this knowledge to facilitate a focus on governance, innovation and modern dental insights. In FY21, PSQ reached its highest ever share price of $2.98 and delivered an interim dividend of 2.4 cents per share. For the full year the business saw an EBITDA improvement of 40.8% (including JobKeeper) versus last year, while still investing and opening 15 new centres. The dentists who chose to practice with Pacific Smiles Group delivered nearly one million appointments, which, despite the trying conditions is a record for the Group. Same centre growth combined with the expansion of the network delivered $240.8 million in patient fees and $33.1 million in underlying EBITDA. Pacific Smiles Group’s strong relationship with the Australian Dental Association added confidence in this challenging period, as both organisations partnered through the varying levels of practice restrictions, giving practitioners access to additional resources and support. Another important PSG partnership saw the opening of three of the minimum five HBF Dental Centres agreed to be opened in the first 18 months under the Management Services Agreement. This supports HBF’s vision to diversify the HBF business and ensure HBF is there for its members in the moments that matter. Additionally, the seventeenth consecutive year of operating nib Dental Centres for the nib Health Fund is a testament to the working relationship of the two brands. 2021 Performance Highlights PATIENT FEES UP 29.3% $240.8m SAME CENTRE GROWTH 26.0% DENTAL CENTRES UP 15.9% 109 UNDERLYING EBITDA UP 40.8% $33.1m UNDERLYING NPAT UP 72.8% $14.0m ORDINARY DIVIDENDS unchanged 2.4cps 3 ANNUAL REPORT 2021 | PACIFIC SMILES CEO’s Report Phil McKenzie The long-term plan remains simple and focused on growing the core business through our unique greenfield centre expansion program, and our goal of more than 250 centres and over 800 chairs is unchanged. 4 ANNUAL REPORT 2021 | PACIFIC SMILES We will continue to make decisions with an eye to long-term value creation, consistent with our known success factors and capitalising on technological innovations. Funds remain strong but also expanding, with the launch of three new HBF Dental Centres in Western Australia as part of the Managed Services Agreement with HBF. In FY2021, Pacific Smiles delivered nearly one million patient appointments with a patient net promoter score of greater than 80. We opened 15 new Pacific Smiles Dental Centres. In New South Wales we opened new centres in Glendale, Wollongong, Stockland Greenhills, Lane Cove, Raymond Terrace, Bondi Junction, Ballina, Lismore, Bass Hill, Hurstville and Ashfield. We also opened new centres in Victoria Point, Cleveland and Newstead in Queensland, as well as one new centre in Victoria at Taylors Lakes. The number of centres that dentists can now choose to practice from, under the PSG banner, is over 110 and growing, as we accelerate across the Australian market. This growth was achieved despite restrictions and various lockdowns that occurred in FY2021, and the business also delivered a same centre growth of 26%, the 2-year average 10.8%. I am so proud of the people who delivered these results and our contribution to improving the oral health of all Australians at this time. As Australia’s fastest growing Dentist Services Organisation we have also seen a record number of new dentists choose to practice with us. Retaining our dental centre and support teams are central to building our facilities and supplying services to dentists and we are pleased to report retention rates of employees above 80%. Those same employees also ensured zero infection control breaches in FY21. While expansion provided us with growth opportunities so did a focus on continuous improvement of both the patient experience and service and facilities we provide dentists. In the first half of the year, we commenced the roll out of 3Shape Trios Scanners across the network to improve patient care and education as well as the launch of Smiles Care Kiosks to acquire new patients and expand the referral opportunities to dentists. In the second half we looked at more new patient acquisition initiatives with the launch of a Pacific Smiles Dental app which utilises AI technology to increase people’s understanding of their oral health from the comfort of their own home. The focus on IT as an enabler for speed was also an opportunity to drive improved effectiveness of existing patient retention for dentists as well. Automating the existing patient communications for improved performance made it possible to launch new lifecycle communications to patients to help retain them as profitably as possible for the business. Partnerships with landlords, suppliers and health funds formed another cornerstone for opportunities and our agile response to the unusual conditions encountered in FY21. Suppliers like Henry Schein grew with us and new relationships commenced with Adent in the development of our AI App for new patient growth. Our relationships with Health We are pleased to announce the appointment of Matthew Cordingley to the role of Chief Financial Officer, previously Head of Mergers and Acquisitions at Healius Limited, an ASX-listed healthcare company. Prior to his role at Healius, Matt held several senior Mergers and Acquisitions advisory roles at leading global investment banks over a 20-year period, including RBC Capital Markets and Morgan Stanley. In turn I would also like to thank Allanna Ryan for her considerable contribution over the past six years and wish her all the best in her new endeavours. As we continue to grow and invest in top tier talent, we are also streamlining the experience for core customers, establishing the Professional Services team by unifying several departments within the organisation to solely focus on the success of our core customers the dentists. In July we appointed 2021 Operational Snapshot DENTAL CENTRES 15 new DENTIST RETENTION >90% NEW DENTAL CHAIRS 84 GRADUATES JOINED OUR DEVELOPMENT PROGRAM 26 PATIENT NET PROMOTER SCORE >80 5 EMPLOYEE RETENTION >80% ANNUAL REPORT 2021 | PACIFIC SMILES CEO’s Report Continued Daniel Lawrence to lead this department. Daniel comes to us with experience in the health care sector having worked in the industry for over 20 years and most recently with nib Health Fund for the past 4 years. As part of this change, Dr Alison Hughes has made the decision to formally step down from the Executive Leadership Team and focus on dentists by supporting dentist education and driving clinical excellence. It is incredibly valuable to add executives of Daniel and Matt’s calibre to the Pacific Smiles leadership team and to retain our founder as a considerable influence inside the organisation strengthens our legacy as a Dentist Services Organisation. We continue to remain focused that our true purpose is to improve the oral health of ALL Australians to world’s best. This is the simple yet significant belief which all our people align to as a Dentist Services Organisation. Operational Overview and Insights The 2021 financial year delivered strong underlying EBITDA growth of 40.8% flowing from top line patient fee growth of 29.3%, despite some restrictions relating to COVID-19 being imposed on some of our centres during the financial year. These results were achieved through a continued focus on ensuring practitioners feel respected and enabled to treat their patients with the highest quality care, utilising the latest technology. That patients feel they can trust Pacific Smiles to ensure they receive the highest quality care, and that our employees know that they matter to Pacific Smiles is at the core of what we do. The 2021 financial year also saw Pacific Smiles enter a new relationship with HBF to commission and operate dental centres on their behalf for at least the next 10 years. Although this is a relatively new collaboration, there are already three HBF Dental Number of Centres Patient Fees $m 109 94 89 80 70 58 49 41 34 31 28 FY21 FY20 FY19 FY18 FY17 FY16 FY15 FY14 FY13 FY12 FY11 241 186 187 165 147 134 121 96 95 86 70 FY21 FY20 FY19 FY18 FY17 FY16 FY15 FY14 FY13 FY12 FY11 6 ANNUAL REPORT 2021 | PACIFIC SMILES Dividends EBITDA (underlying) $m Interim Dividend Final Dividend Special Dividend 12.0 10.0 8.0 6.0 4.0 2.0 0.0 33.1 20.9 21.5 22.8 23.51 19.7 18.4 15.1 7 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 1. FY2020 impacted by government mandated dental restrictions due to COVID-19. ANNUAL REPORT 2021 | PACIFIC SMILES CEO’s Report Continued Centres open in Western Australia being managed by Pacific Smiles and this provides another channel for both businesses to grow in the future. The long-term plan remains simple and focused on growing the core business through our unique greenfield centre expansion program, and our goal of more than 250 centres and more than 800 chairs is unchanged. We will continue to make decisions with an eye to long-term value creation, consistent with our known success factors and capitalising on technology innovations. The dedication and discipline of the entire team, focused equally on execution today and tomorrow’s performance objectives, will ensure prosperity. Statutory Results Statutory net profit after tax for the year was $12.9 million. This result is up on the 2020 statutory net profit after tax of $6.4 million, an increase of 102.9%. The statutory results for the year were impacted by COVID-19 and government mandated restrictions on dental services. Further to this, we saw strong business performance in the first half of the financial year as centres returned from restrictions imposed late in financial year 2020. Year on year growth was significantly higher than we would normally expect in the second half of the financial year as we were comparing to operating results achieved during late financial year 2020, which was impacted by restrictions. There are several underlying adjustments for both FY2021 and FY2020, and these are detailed in the table below. The operational overview and insights discussions will focus on the underlying results for FY2021 and the comparative period, excluding the impacts of AASB 16. Removing these impacts enhances the year-on-year performance comparisons. Underlying Results Underlying EBITDA, exclusive of the impacts of AASB 16, increased by 40.8% to $33.1 million compared with the previous financial year. Group revenue was $153.2 million, up by 27.0% over the previous financial year. This revenue consists mainly of the service fees charged to the dentists who practice from our centres. Pacific Smiles provides dentists with fully serviced and equipped facilities including support staff, materials, marketing, and administrative services. This enables dentists to focus on their patients and offer exceptional patient care. Adjustments to the Statutory Income Statement Statutory net profit after tax Severance and HR consultancy expense Executive LTI plan expense/(write-back) Non-scheduled IT outage 8 Asset impairment Restructuring Income tax effect of adjustments Underlying statutory net profit after tax Net tax impacts of AASB 16 Underlying statutory net profit after tax excluding the impacts of AASB 16 2021 $ million 2020 $ million 12.9 0.6 – – 0.9 – (0.4) 14.0 – 14.0 6.4 0.2 0.5 0.5 0.8 0.3 (0.7) 8.0 0.1 8.1 ANNUAL REPORT 2021 | PACIFIC SMILES Group Financial Performance $ millions Revenue Gross profit EBITDA EBIT Net profit after tax Operating metrics Number of Dental Centres Commissioned Dental Chairs Patient Fees ($ millions) Same Centre Patient Fees growth Financial metrics Earnings per share (cents) EBITDA margin EBITDA to Patient Fees margin EBIT margin * Excludes the impacts of AASB 16. Underlying 2021* Underlying 2020* Change 27.0% 30.6% 40.8% 68.0% 72.8% 15.9% 21.9% 29.3% 69.8% 153.2 143.5 33.1 21.0 14.0 109 467 240.8 26.0% 8.9 21.6% 13.7% 13.7% 120.6 109.9 23.5 12.5 8.1 94 383 186.3 (4.5%) 5.3 19.5% 12.6% 10.3% Revenue growth has been achieved through a combination of improved performance in our existing dental centres, the opening of new dental centres and adding capacity (new chairs in vacant surgeries or centre expansion) where patient demand has provided the opportunity to do so. Patient fees increased 29.3% over the previous year to $240.8 million due to same centre fee growth of 26.0%, combined with the full year effect from new centres opened in 2020 and part-year impact of new centre openings in 2021. The 2021 new centre openings have performed in line with expectations and like the centres opened in prior years, will be strong contributors to long-term growth and profit margins over time. Underlying NPAT increased by 72.8% to $14.0 million compared to $8.1 million from the prior year. Depreciation costs (excluding the impact of AASB 16) totalled $12.0 million – an increase of $1.0 million from the prior period. JobKeeper provided an estimated net benefit of $3.1 million in FY2021, net of COVID-19 related EBITDA impacts. Financial Position Pacific Smiles has a strong focus on cash management. Our year end net cash is $9.9 million, drawn from free cashflow due to strong performance and a capital raise in March 2021. The debt drawn amount decreased by $21.0 million, to $1.0 million in the current year. In March 2021 Pacific Smiles successfully completed a capital raising of $15.1 million. This strengthened the Company’s financial flexibility and resilience in pursuing its new centre rollout program objective. The Company will continually evaluate the appropriateness of the rate of opening new centres considering recent and ongoing COVID-19 transmission in the community and attendant restrictions that have been put in place, impacting the operations of our centres. Capital expenditure for the year was higher at $25.7 million (FY2020: $10.1 million), reflecting an increase in new centre and chair commissionings and investment in technology. We invested in 15 new centres, 35 additional chairs in existing centres, as well as 3Shape Trios Scanners allowing dentists to practice with the latest technologies, saving them time, and providing a more accurate impression to work with, while also improving the patient experience and comfort. 9 ANNUAL REPORT 2021 | PACIFIC SMILES CEO’s Report Continued The Market The market for dental services in Australia is approximately $10 billion to $11 billion per annum and continues to grow steadily over the long term. Funding for dental services is predominantly from individuals, however private health insurance participation supports dental attendances and spending through co-payment arrangements. The Australian Health Practitioner Regulation Agency’s (AHPRA) latest dental service data reported that nearly 43 million dental services per annum were funded by health funds as at March 2021, with health funds paying more than $2.5 billion per annum in dental benefits. The proportions of total expenditure on dental services by health funds and by government are trending in opposite directions. Health funds have increased their proportion from 14.0% in 2009-10 to 19.1% in 2017-18, according to Australian Institute of Health and Welfare. The proportion by the Australian Government has decreased from 16.3% in 2009-10 to 15.0% in 2017-18, with expenditure by State and Local Governments maintained at 8.2% in 2009-10 and in 2017-18. The Child Dental Benefit Schedule and some partnership arrangements with the States and Territories continue to be the main funding programs of the Commonwealth Government, whereas the various States and Territories operate systems to overflow patients from public clinics to the private sector. The industry continues to be highly fragmented with most providers operating from small scale single locations, although corporate activity in the sector is increasing. There are more branded networks, including some owned and operated by private health insurance organisations, who market to their own members to encourage attendance. The other major feature of the market is the continued growth in the number of registered dentists. The increase in recent years has been the combined impact of overseas trained dentists and local graduates. The number of registered dentists was 18,527 in March 2021, up by 2.0% from the prior year. The demographic shift in the dental workforce continues with females making up 53.3% of registered dentists, increasing by 0.5% from the year earlier. Risk Management Pacific Smiles is subject to various risk factors, both business – specific and of a general nature. Pacific Smiles has not identified any specific, material exposure to its economic, social or environmental sustainability over the long term. Pacific Smiles has established policies and structures for oversight and management of material business risks. Further information regarding how Pacific Smiles recognises and manages risks can be sourced from our Corporate Governance Statement and related governance policies on our website. The risk areas and mitigating factors have been identified by Pacific Smiles are located on page 11. Phil McKenzie Chief Executive Officer and Managing Director 10 ANNUAL REPORT 2021 | PACIFIC SMILES Risk Management Risk Area Mitigating Factors General economic conditions – downturns in general economic conditions could adversely impact demand for dental services, given the discretionary nature of some of those services. Dentists at Pacific Smiles’ dental centres provide a range of treatments to patients in several different geographic zones throughout the eastern States of Australia. Reduction in private health insurance coverage – changes to the nature or extent of private health insurance coverage could impact upon the attendance frequency of patients. Patients at Pacific Smiles’ dental centres are a mix of privately insured and non-insured individuals and there are various payment plans and treatment payment options available. Competition-induced fee pressure – an increase in the number of practicing dentists could increase competition for patients and the degree to which dentists compete based on fee levels. Pacific Smiles’ dental centres are usually differentiated from other local providers and compete based on convenience, value, access and overall patient experience. Termination of Service and Facility Agreements by dentists – under the Service and Facility Agreements between Pacific Smiles and dentists, the dentists may terminate without cause, on a few months’ notice. Reputational damage – actions by employees or dentists could give rise to reputational damage to Pacific Smiles and its brands. Pacific Smiles views the dentists as a key customer group and focuses resources accordingly. There is a close focus on internal procedures and clinical governance by management and the Board. This has been further enhanced by the internal and external appointments to the Dental Advisory Committee. Supply of skilled dentists – should the availability of appropriately skilled and aligned dentists become restricted, then growth and expansion of Pacific Smiles could be slowed, and/or the cost of dentists could escalate. The focus on training and development of dentists, including a structured mentoring program for new graduate dentists, is building a platform of appropriately skilled and aligned dentists for the long term. Pandemic – should a pandemic restrict the dental services able to be performed in specific locations, States or nationally due to the risk of infection to staff, dentists and patients. Cyber Security – actions whereby the Company’s IT systems are accessed and result in the failure of or interruption to key IT systems or a material patient privacy breach. Key Supply Chain – should an event result in the closure, restriction or delay of key consumables or personal protective equipment (PPE) meaning our ability to meet the needs of patients or support dentists could be impacted. Close monitoring and adherence to Government or professional body recommendations. Ensuring adequate stock of appropriate personal protective equipment (PPE), and close focus on internal procedures and clinical governance by management and the Board. Pacific Smiles Group has industry best practice controls in place to minimise technology related business interruptions and to manage the end- to-end cyber lifecycle. It also has cyber and technology roadmaps in place to continually uplift its maturity in both areas to meet compliance and operational expectations. Long-term relationships with national suppliers and back-up suppliers identified. Close monitoring of inventory levels and ensuring adequate stock of appropriate personal protective equipment (PPE). Strategy for emergency store of critical PPE endures. 11 ANNUAL REPORT 2021 | PACIFIC SMILES Dental Centre Locations WA 2 12 QLD 22 NSW 52 ACT 6 VIC 29 ANNUAL REPORT 2021 | PACIFIC SMILES VIC Bairnsdale Bendigo Caroline Springs Chirnside Park Cranbourne Park Drysdale Epping* Glen Iris Glen Waverley Greensborough Keysborough Leopold Melbourne nib Melbourne Melton Mill Park Mulgrave Narre Warren* Ocean Grove* Point Cook Preston Ringwood Sale Taylors Lake** Torquay Traralgon Warragul Waurn Ponds Werribee NSW Ashfield** Balgowlah Bateau Bay Ballina** Bass Hill** Baulkham Hills Belmont Belrose Bondi Junction** Blacktown Brookvale Campbelltown Charlestown nib Chatswood Erina nib Erina Figtree Forster Gladesville Glendale** nib Glendale Greenhills Greenhills Ortho** Hurstville** Jesmond Kotara Lake Haven Lane Cove** Lismore** Marrickville Morisset Mount Hutton Narellan nib Newcastle nib North Parramatta Nowra Parramatta Penrith Queanbeyan Raymond Terrace** Rutherford Salamander Bay Shellharbour‡ Singleton nib Sydney Toronto Town Hall Tuggerah Tweed Heads Wagga Wagga Wollongong** nib Wollongong 13 QLD Aspley Birtinya Bribie Island Brisbane CBD Browns Plains Buddina Burleigh Heads Capalaba Cleveland** Deception Bay Helensvale Mitchelton* Morayfield Mt Gravatt Mt Ommaney Newstead** North Lakes Redbank Plains Robina* Runaway Bay Strathpine Victoria Point** WA Managed services HBDF Joondalup Morley ACT Belconnen Gungahlin Manuka Tuggeranong Woden nib Woden Notes: * FY2020 New Centres ** FY2021 New Centres ‡ Warilla merged with Shellharbour ^ Mandurah opened 6 July 2021 ANNUAL REPORT 2021 | PACIFIC SMILES Directors’ Report 30 June 2021 The Directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘consolidated entity’) consisting of Pacific Smiles Group Limited (referred to hereafter as the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2021. Directors The following persons were Directors of Pacific Smiles Group Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Ms Zita Peach Mr Phil McKenzie Dr Alex Abrahams (resigned 23 July 2020) Mr Mark Bloom Mr Hilton Brett Mr Ben Gisz Dr Scott Kalniz (appointed 28 January 2021) Mr Simon Rutherford Principal activities The consolidated entity principally operates dental centres at which independent dentists practice and provide clinical treatments and services to patients. Revenues and profits are primarily derived from fees charged to dentists for the provision of these fully serviced dental facilities. Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2020 of nil cents (2019: 3.50 cents) per ordinary share, fully franked Interim dividend for the year ended 30 June 2021 of 2.40 cents (2020: 2.40 cents) per ordinary share, fully franked 2021 $’000 – 2020 $’000 5,320 3,830 3,648 3,830 8,968 Dividend reinvestment plan The consolidated entity’s dividend reinvestment plan (DRP) applied to the fully franked interim dividend of 2.40 cents per share announced on 20 February 2020. The DRP allowed eligible shareholders to reinvest all or part of their dividend payments into Pacific Smiles shares. The price at which shares are allocated under the DRP is the daily volume weighted average market price of the Company’s shares sold in the ordinary course of trading on the ASX over a period of five days beginning on 20 April 2020. Shares allocated under the DRP rank equally with the Company’s existing fully paid ordinary shares. The DRP resulted in shareholders electing to receive an additional 1,522,155 shares in total, priced at $1,716,000. The DRP did not apply to the fully franked interim dividend of 2.4 cents per share announced on 16 February 2021. 14 Due to the uncertain outlook due to the impact of rolling COVID-19 restrictions and our focus on having maximum financial flexibility to re-accelerate our rollout of new centres when the environment normalises, the Company has not declared a final dividend. The Company plans to resume dividend distribution following the interim results, assuming trading conditions have normalised at that time. ANNUAL REPORT 2021 | PACIFIC SMILES Review of operations Information on the operations and financial position of the consolidated entity and its business strategies and prospects is set out in the Operating and Financial Review accompanying this report. Significant changes in the state of affairs Capital raising In March 2021, the consolidated entity completed a capital raising to accelerate growth opportunities and broaden its investor base and increase liquidity. The capital raising included an underwritten placement of new shares and a non-underwritten share purchase plan, which resulted in a combined 6,066,388 new shares being issued, generating $15,148,000 in capital. Proceeds of the placement will be used to support organisational preparations for an acceleration of the rate of dental centre rollout, allowing the consolidated entity to capitalise on the strong opportunity to grow the network, as well as for general working capital. Discontinued operation of Everything Dentures Pty Limited In January 2021, the consolidated entity discontinued the operation of Everything Dentures Pty Limited. Impairment losses of the associated assets were recognised during the financial year. The sale of the remaining assets is expected during the next financial year and they were presented as held for sale. There were no other significant changes in the state of affairs of the consolidated entity during the financial year. Matters subsequent to the end of the financial year COVID-19 pandemic The impact of the COVID-19 pandemic is ongoing, and it is not practicable to estimate the potential impact after the reporting date. Whilst short-term financial performance has been impacted by the pandemic and associated Government-imposed measures, these performance impacts are not material to Pacific Smiles’ financial position as at the date of this report. The situation is ongoing and is dependent on measures imposed by the Australian Government and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided. No other matter or circumstance has arisen since 30 June 2021 that has significantly affected, or may significantly affect, the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Likely developments and expected results of operations The consolidated entity will continue to pursue opportunities to enhance the growth and prosperity of its business. Refer to the Operating and Financial Review accompanying this report for further detail. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. 15 ANNUAL REPORT 2021 | PACIFIC SMILES Board of Directors Ms Zita Peach Non-Executive Chairperson, appointed February 2020 Non-Executive Director, appointed August 2017 Member of the Nomination and Remuneration Committee BSc, FAICD, FAMI Zita has more than 25 years of commercial experience in the pharmaceutical, biotechnology, medical devices and health services industries. She has extensive sales and marketing experience across a broad range of sectors in healthcare, locally and internationally, as well as leading international expansions and conducting major business transactions. At leading global healthcare company Fresenius Kabi, Zita was Executive Vice President for South Asia Pacific, Managing Director for Australia and New Zealand and Chair of the Boards for Malaysia, Australia and New Zealand. Zita was Vice President of Business Development at CSL Limited and has an extensive track record in mergers and acquisitions deals, licensing and commercialising products and technologies on a global scale. Zita is a Non-Executive Director of Monash IVF Group Limited, Starpharma Holdings Limited and Visioneering Technologies, Inc. Zita is also a member of the Hudson Institute of Medical Research Board. Zita is a Fellow of the Australian Institute of Company Directors and a Fellow of the Australian Marketing Institute. Other current directorships: Monash IVF Group Limited, Starpharma Holdings Limited, Visioneering Technologies, Inc. Former directorships (last 3 years): AirXpanders Inc. Interests in shares: 22,095 16 Mr Phil McKenzie Chief Executive Officer and Managing Director, appointed October 2018 B.Bus (Auckland Uni) Prior to joining Pacific Smiles, Phil was Chief Executive Officer for Audiology Management Group (AMG), a leading audiology services business with a network of more than 200 clinic locations across the USA. During his time at AMG, Phil balanced and transitioned the model from acquisition driven to greenfield expansion and delivered strong financial performance for the group. Prior to his role as CEO of AGM, Phil was CEO of Widex Australia, New Zealand, Singapore, Hong Kong and India retail where he successfully turned around and grew those operations. Phil has also held leadership positions at Apple Retail as Australian Market Director and was a driver of Apple’s retail entry into the Australian market from 2008 to 2011, and Luxottica as National Operations Manager from 2005 to 2007. Other current directorships: Nil Former directorships (last 3 years): Nil Interests in shares: 10,600 Mr Mark Bloom Non-Executive Director, appointed October 2019 Member of the Audit and Risk Management Committee B.Comm, B.Acc, CA ANZ Up until April 2019, Mark held the position of Chief Financial Officer at ASX 20 listed Scentre Group Limited (owner and operator of Westfield in Australia and NZ). Mark’s executive career as a Finance Executive has spanned 36 years as Chief Financial Officer and an Executive Director at three top 20 listed entities in Real Estate (Westfield and Scentre Group – 16 years) and Insurance and diversified Financial Services (Liberty Life, South Africa and Manulife Financial, Toronto – 20 years). He has had extensive experience in running global and local Finance and IT teams encompassing Treasury, Tax, Operations Finance, Compliance, Risk Management, Financial Reporting, Legal and Information Technology. Mark has extensive experience in corporate transactions and restructuring. Mark is a Non-Executive Director at AGL Energy Limited and Abacus Property Group. Other current directorships: AGL Energy Limited Abacus Property Group Former directorships (last 3 years): Nil Interests in shares: 277,952 ANNUAL REPORT 2021 | PACIFIC SMILES Dr Scott Kalniz Non-Executive Director, appointed in 2021 DDS and BS in Business Administration, Economics (The Ohio State University) Dr Kalniz has over 20 years of dental industry experience in the United States. He started his career as a practicing dentist with a single location practice and purchased a number of other dental practices, eventually selling his group to North American Dental. At North American Dental, he helped grow the business to over 50 locations. Dr Kalniz then partnered with a private equity firm, as CEO and Chief Dental Officer, to create a new Chicago headquartered Dental Services Organisation (DSO), Elite Dental Partners. In under five years, the business grew to over 110 locations in 12 States. Dr Kalniz retired from the Board of Elite Dental Partners in September 2020. Mr Simon Rutherford Non-Executive Director, appointed in 2003 Chairman of the Audit and Risk Management Committee B.Comm, CA, FAICD Simon is a chartered accountant and partner with PKF in business advisory services. He has been with the firm for 36 years. He works with corporate and family owned groups as an advisory board member and lead adviser on strategy, governance, structuring, business sales, mergers and acquisitions. He is also a Director of PKF Wealth. In his role Simon has assisted various companies with capital raising and listing requirements. Simon was a Director of the Trustee of Canyon Property Trust and is involved with other syndicated investments. He has also served on a number of boards including National Brokers Group and Vow Financial Group. Other current directorships: Signature Dental Partners Other current directorships: Nil Former directorships (last 3 years): Elite Dental Partners Heartland Veterinary Partners Interests in shares: 20,000 Former directorships (last 3 years): Nil Interests in shares: 1,744,863 17 Mr Hilton Brett Non-Executive Director, appointed August 2018 Member of the Nomination and Remuneration Committee Mr Ben Gisz Non-Executive Director, appointed in 2012 Chairman of the Nomination and Remuneration Committee B.Comm, PGDA B.Comm, CFA Ben is Director of TDM Growth Partners, a Sydney based global investment firm which invests in fast growing businesses run by passionate management teams. Ben has extensive financial markets experience, including prior roles in private equity investing and investment banking. Other current directorships: Nil Former directorships (last 3 years): Nil Interests in shares: 23,074,485 Hilton is an Operating Advisor at TDM Growth Partners (TDM), a private global investment firm founded in 2004, with offices in Sydney and New York which invests in fast growing companies run by passionate management teams. Hilton is a Non- Executive Director of Guzman Y Gomez Mexican Taqueria (GYG), and Somnomed Ltd (ASX: SOM). Prior to joining TDM, Hilton was the Co-CEO of Accent Group Limited (AX1), formerly RCG Corporation Ltd, which is the regional leader in the retail and distribution of performance and lifestyle footwear Australia and New Zealand. Hilton joined RCG in 2006 when the business had a market capitalisation of $8 million. Over the 12 years from 2006 to 2018, the team grew the business to $800 million market capitalisation and delivered total shareholder returns in excess of 25% CAGR. Hilton has over 25 years’ experience as CEO of multiple consumer businesses with proven skills in growing the businesses and delivering outstanding returns for shareholders. Other current directorships: Somnomed Ltd Former directorships (last 3 years): Accent Group Limited Interests in shares: 424,020 ANNUAL REPORT 2021 | PACIFIC SMILES Directors’ Report Continued ‘Other current directorships’ quoted above are current directorships for listed entities only and exclude directorships of all other types of entities, unless otherwise stated. ‘Former directorships (last three years)’ quoted above are directorships held in the last three years for listed entities only and exclude directorships of all other types of entities, unless otherwise stated. Company Secretary Mark Licciardo of Mertons Corporate Services (Mertons) is the Company Secretary. Mark is the founder of Mertons and a Director of various Australian Securities Exchange (ASX) listed public and private companies. Meetings of Directors The number of meetings of the Company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 30 June 2021, and the number of meetings attended by each Directors’ were: Full Meetings of Directors Remuneration Committee Audit and Risk Committee Attended Held Attended Held Attended Held Nomination and Ms Zita Peach Mr Phil McKenzie Mr Ben Gisz Mr Simon Rutherford Mr Mark Bloom Mr Hilton Brett Dr Scott Kalniz 11 11 11 11 10 11 5 11 11 11 11 11 11 5 3 – 3 – – 3 – 3 – 3 – – 3 – – – – 4 4 – – – – – 4 4 – – Held: represents the number of meetings held during the time the Director held office or was a member of the relevant committee. 18 ANNUAL REPORT 2021 | PACIFIC SMILES Remuneration report (audited) The remuneration report details the key management personnel remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all Directors. The remuneration report is set out under the following main headings: • Principles used to determine the nature and amount of remuneration • Details of remuneration • Share-based compensation • Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration The objective of the consolidated entity’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to the market best practice for the delivery of reward. The Board of Directors (‘the Board’) ensures that executive reward satisfies the following key criteria for good reward governance practices: • competitiveness and reasonableness • acceptability to shareholders • performance linkage/alignment of executive compensation • transparency The Nomination and Remuneration Committee is responsible for determining and reviewing remuneration arrangements for its Directors and executives. The performance of the consolidated entity depends on the quality of its Directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The reward framework is designed to align executive reward to shareholders’ interests. The Board has considered that it should seek to enhance shareholders’ interests by: • having economic profit as a core component of plan design • focusing on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on assets as well as focusing the executive on key non-financial drivers of value • attracting and retaining high calibre executives Additionally, the reward framework should seek to enhance executives’ interests by: • rewarding capability and experience • reflecting competitive reward for contribution to growth in shareholder wealth • providing a clear structure for earning rewards In accordance with best practice corporate governance, the structure of Non-Executive Director and Executive Director remuneration is separate. Non-Executive Directors remuneration Fees and payments to Non- Executive Directors reflect the demands and responsibilities of their role. Non- Executive Directors’ fees and payments are reviewed annually by the Nomination and Remuneration Committee. The Nomination and Remuneration Committee may, from time to time, receive advice from independent remuneration consultants to ensure Non- Executive Directors’ fees and payments are appropriate and in line with the market. The Chairperson’s fees are determined independently to the fees of other Non- Executive Directors based on comparative roles in the external market. The Chairperson is not present at any discussions relating to the determination of her own remuneration. Non- Executive Directors do not receive share options or other incentives. The Non- Executive Director fees are reviewed annually to ensure that the fees reflect market rates. There are no guaranteed annual increases in any Directors’ fees. 19 ANNUAL REPORT 2021 | PACIFIC SMILES Directors’ Report Continued Non- Executive Directors are entitled to be reimbursed for their reasonable expenses incurred in connection with the affairs of the consolidated entity. The consolidated entity’s constitution provides that Non- Executive Directors are entitled to receive compensation for their services as determined by approval at a general meeting. As at 30 June 2021, the current Directors’ fees pool is an aggregate sum of $800,000. The base fee payable to the Chairperson is $125,000 per annum, and the base fee payable to other Non- Executive Directors is $75,000 per annum. Any change to this aggregate annual amount is required to be approved by shareholders. The Board may approve additional remuneration for special exertions and additional services performed by a Director outside of the aggregated pool. Remuneration paid to Directors in their capacity as employees also falls outside of the aggregated pool. Executive remuneration The consolidated entity aims to reward executives based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. In determining executive remuneration, the Board aims to ensure that remuneration practices are: • competitive and reasonable, enabling the consolidated entity to attract and retain key talent, • aligned to the consolidated entity’s strategic and business objectives and the creation of shareholder value, • transparent, • acceptable to shareholders, and • rewarding for performance. The executive remuneration and reward framework has four components: • base pay and non-monetary benefits • short-term performance incentive (STI) plan • long-term equity incentive (LTI) plan • other remuneration such as superannuation and long service leave The combination of these comprises the executive’s total remuneration. Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, is reviewed annually by the Nomination and Remuneration Committee based on individual and business unit performance, the overall performance of the consolidated entity and comparable market remunerations. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the consolidated entity and provides additional value to the executive. The short-term incentives (STI) program is designed to provide executives the opportunity to earn an annual incentive linked to the achievement of performance hurdles. The actual level of STI paid to each executive is determined at the end of the financial year based on the consolidated entity’s financial performance and non-financial key performance indicators (KPIs). Financial performance is assessed based on consolidated underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) meeting or exceeding Board approved targets. Non-financial KPIs are Group KPIs, rather than individual KPIs and relate to Net Promoter Score (NPS) for patients, dentists and employees for the consolidated entity exceeding specific NPS targets. Targets are reviewed annually. The executive STI plan performance criteria are summarised below: 20 Underlying EBITDA targets Non-financial performance metrics Total maximum STI % of base salary Chief Executive Officer % of base salary Other Executive Officers Up to 35.0% Up to 15.0% Up to 50.0% Up to 24.5% Up to 10.5% Up to 35.0% ANNUAL REPORT 2021 | PACIFIC SMILES Ongoing participation by executives in the STI plan is at the discretion of the Board. With reference to recommendations from the Nomination and Remuneration Committee, the Board will approve all executive STI payments, and may use its discretion to adjust STI remuneration up or down, to prevent any inappropriate reward outcomes. The STI amounts are paid in cash, and are those earned during the financial year and provided for in the annual financial statements. STI cash bonuses are generally payable in September following the end of the financial year, and once the financial results of the year have been subject to independent external audit. The consolidated entity has an LTI plan to assist in the motivation, retention and reward of executives. The LTI plan is designed to align the interests of senior management more closely with the interests of shareholders by providing an opportunity for senior management to receive an equity interest in the consolidated entity through the granting of performance rights. Performance rights have been issued to the Chief Executive Officer and selected senior managers, at the absolute discretion of the Board, pursuant to the LTI plan in financial years from 2017 to 2021. Vesting of the performance rights on issue for the years 2019, 2018 and 2017 is subject to: • satisfaction of earnings per share (EPS) performance hurdles for a four-year performance period. The number of performance rights vesting will be determined on a sliding scale from nil vesting for an EPS compound annual growth rate (CAGR) of 15% per annum or less and 100% vesting for an EPS CAGR of 25% per annum; and • the participant remaining employed by the Pacific Smiles Group (or its subsidiaries) over a four-year period through to the vesting date, subject to certain ‘good leaver’ exemptions. Vesting of the performance rights on issue for the years 2021 and 2020 is subject to: • satisfaction of EPS performance hurdles for a four-year period. The number of performance rights vesting will be determined on a sliding scale from nil vesting for an EPS CAGR of 10% per annum or less and 100% vesting for an EPS CAGR of 20% per annum; and • the participant remaining employed by Pacific Smiles Group (or its subsidiaries) over a four-year period through to the vesting date, subject to certain ‘good leaver’ exemptions. Performance rights that do not vest on the relevant vesting date will lapse. Performance rights will also lapse if total shareholder return (TSR) does not reach a minimum threshold per annum over the relevant performance period. In the event of serious misconduct or a material misstatement in the consolidated entity’s financial statements, the Board may determine that certain performance-based remuneration (including STIs and/or LTIs) should not have been paid and may claw back performance-based remuneration paid in the preceding three financial years. Consolidated entity performance and link to remuneration The following table shows key performance indicators (KPIs) for the consolidated entity over the last five years. Revenue ($’000) 153,175 120,055 122,156 104,528 2021 2020 2019 2018 EBITDA (statutory – $’000) Net profit after tax (statutory – $’000) Dividends per share – ordinary (cents) Earnings per share (cents) Increase/(decrease) in share price ($) 44,760 12,953 32,859 6,383 22,300 8,573 18,439 6,604 2.4 8.3 1.20 2.4 4.2 0.40 5.8 5.6 6.1 4.3 (0.40) (0.24) (0.28) 2017 91,471 20,552 10,037 5.9 6.6 21 ANNUAL REPORT 2021 | PACIFIC SMILES Directors’ Report Continued Details of remuneration Amounts of remuneration Details of the remuneration of key management personnel of the consolidated entity are set out in the following tables. The key management personnel of the consolidated entity consisted of the following Directors of Pacific Smiles Group Limited: • Ms Zita Peach • Mr Phil McKenzie • Dr Alex Abrahams (until 23 July 2020) • Mr Mark Bloom • Mr Hilton Brett • Mr Ben Gisz • Dr Scott Kalniz (appointed 28 January 2021) • Mr Simon Rutherford And the following persons: • Mr Paul Robertson • Ms Allanna Ryan (until 8 April 2021) • Mr Matthew Cordingley (appointed 12 April 2021) Short-term benefits Post- employment benefits Long-term benefits Share- based payments Cash bonus $ Other $ Super- annuation $ Long service leave $ Rights $ Total $ Cash salary and fees $ 113,147 67,510 67,510 75,000 48,657 75,000 2021 Non-Executive Directors: Ms Zita Peach Mr Mark Bloom Mr Hilton Brett Mr Ben Gisz Dr Scott Kalniz Mr Simon Rutherford Executive Directors: – – – – – – Mr Phil McKenzie 625,316 365,900 Other Key Management Personnel: Mr Paul Robertson 342,867 172,512 251,999 64,571 237,215 – – – – – – – – 10,749 6,413 6,413 – – – – – – – – – – – – – – – 123,896 73,923 73,923 75,000 48,657 75,000 25,000 25,704 429,413 1,471,333 25,000 25,000 59,877 100,583 700,839 24,682 – 603,467 22 Ms Allanna Ryan (until 8 April 2021) Mr Matthew Cordingley (appointed 15 April 2021) 78,911 – – 4,172 1,334 11,550 95,967 1,745,917 602,983 237,215 102,747 111,597 541,546 3,342,005 ANNUAL REPORT 2021 | PACIFIC SMILES Short-term benefits Post- employment benefits Long-term benefits Share- based payments Cash salary and fees $ Cash bonus $ Other $ Super- annuation $ Long service leave $ Rights $ Total $ 2020 Non-Executive Directors: Ms Zita Peach (appointed Chairperson 19 February 2020) Mr Robert Cameron AO (resigned 19 February 2020) Dr Alex Abrahams Mr Mark Bloom (appointed 18 October 2019) Mr Hilton Brett Mr Ben Gisz Mr Simon Rutherford Executive Directors: 72,048 71,654 61,250 37,521 56,797 61,250 61,250 Mr Phil McKenzie 506,398 Other Key Management Personnel: Mr Paul Robertson 261,318 Ms Allanna Ryan 260,599 1,450,085 – – – – – – – – – – – – – – – – – – – – – – 6,845 6,807 – 3,434 5,396 – – – – – – – – – – – 9,806 – – – – 78,893 78,461 71,056 40,955 62,193 61,250 61,250 21,003 8,750 204,581 740,732 21,716 21,003 4,719 4,498 73,563 361,316 66,322 352,422 86,204 17,967 354,272 1,908,528 * Other benefits include termination benefits paid to Ms Allana Ryan in 2021. There were no termination benefits paid or payable to key management personnel during 2020. Termination benefits paid were in accordance with employment contracts. STI awarded For each STI bonus included in the 2021 remuneration table above, the percentage of the available bonus that was earned in the financial year and the percentage that was forfeited because the person did not meet the target performance criteria are set out below. Mr Phil McKenzie Mr Paul Robertson Ms Allanna Ryan (until 8 April 2021) % of maximum STI awarded % of STI forfeited 92.5% 92.5% 92.5% 7.5% 7.5% 7.5% Mr Matthew Cordingley (appointed 12 April 2021) – 100.0% 23 Based on significant outperformance in 2021 an additional bonus will be available to Executive Managers. ANNUAL REPORT 2021 | PACIFIC SMILES Directors’ Report Continued Employment contracts Remuneration and other terms of employment for the executives are formalised in employment contracts. The employment contracts specify the remuneration arrangements, benefits, notice periods and other terms and conditions. Participation in the STI and LTI plans is subject to the Board’s discretion. The current executive contracts do not have fixed terms. Contracts may be terminated by the executive with notice, or by the Company with notice or by payment in lieu of notice, or with immediate effect in circumstances involving serious or wilful misconduct. Executive key management personnel (EKMP) Mr Phil McKenzie Mr Paul Robertson Ms Allanna Ryan (until 8 April 2021) Mr Matthew Cordingley (appointed 15 April 2021) Termination notice by EKMP Termination notice by Company 6 months 6 months 3 months 3 months 6 months 6 months 6 months 6 months Share-based compensation Issue of shares There were no shares issued to Directors and other key management personnel as part of compensation during the year ended 30 June 2021. Options There were no options over ordinary shares issued to Directors and other key management personnel as part of compensation that were outstanding as at 30 June 2021. Performance rights The terms and conditions of each grant of performance rights over ordinary shares affecting remuneration of Directors and other key management personnel in this financial year or future reporting years are as follows: Grant date Number of rights granted Vesting date Fair value per right at grant date 30 November 2016 1 December 2017 4 March 2019 13 February 2020 28 April 2021 2,200,000 * 30 November 2020 2,100,000 ** 1 December 2021 3,026,000 *** 4 March 2023 3,500,000 **** 13 February 2024 2,902,430 28 April 2025 $0.760 $0.620 $0.470 $0.610 $0.880 * ** 500,000 rights were forfeited on 28 October 2018, 200,000 rights were forfeited on 30 November 2019, the remaining 1,500,000 rights were forfeited on 30 November 2020. 500,000 rights were forfeited on 28 October 2018, 325,000 rights were forfeited on 30 November 2019, 400,000 rights were forfeited on 8 April 2021. *** 282,000 rights were forfeited on 8 April 2021. **** 838,000 rights were forfeited on 8 April 2021. Performance rights granted carry no dividend or voting rights. 24 ANNUAL REPORT 2021 | PACIFIC SMILES Additional disclosures relating to key management personnel Shareholding The number of shares in the Company held during the financial year by each Director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Ordinary shares Ms Zita Peach Mr Hilton Brett Mr Mark Bloom Mr Ben Gisz Dr Scott Kalniz Mr Simon Rutherford Mr Phil McKenzie Mr Paul Robertson Balance at the start of the year Received as part of remuneration Additions Disposals/ other Balance at the end of the year 22,095 655,290 102,128 35,705,996 – 1,744,863 – 300,000 38,530,372 – – – – – – – – – – – 59,468 (290,738) 175,824 – 22,095 424,020 277,952 2,368,489 (15,000,000) 23,074,485 20,000 – 10,600 – – – – 20,000 1,744,863 10,600 – 300,000 2,634,381 (15,290,738) 25,874,015 Performance rights holding The number of performance rights over ordinary shares in the Company held during the financial year by each Director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Balance at the start of the year Granted Vested Expired/ forfeited/ other Balance at the end of the year Performance rights over ordinary shares Mr Phil McKenzie Dr Alex Abrahams Mr Paul Robertson Ms Allanna Ryan 3,500,000 700,000 225,000 – 1,326,000 355,000 1,120,000 – Mr Matthew Cordingley – 350,000 6,171,000 1,405,000 Loans to key management personnel and their related parties There were no loans to key management personnel during the year. – – – – – – – 4,200,000 (225,000) – (350,000) 1,331,000 (1,120,000) – – 350,000 (1,695,000) 5,881,000 Other transactions with key management personnel and their related parties Transactions with key management personnel and/or their related parties are detailed below. These transactions were conducted on terms no more favourable than those reasonably expected under arm’s length dealings with unrelated parties. Key management personnel or their related parties held shares in the consolidated entity during 2021 and 2020, and as such, participated in dividends. 25 Exandal Investments, an entity related to Alex Abrahams and Alison Hughes, leased business premises to the consolidated entity during 2021 and 2020 on normal commercial terms and conditions. 88 Park Avenue Pty Limited ATF the Key Health Unit Trust, an entity related to Alex Abrahams, leased business premises to the consolidated entity during 2021 and 2020 on normal commercial terms and conditions. ANNUAL REPORT 2021 | PACIFIC SMILES Directors’ Report Continued The consolidated entity paid fees for consultancy services to PKF during 2021. The entity is related to Simon Rutherford. The fees paid were based on normal commercial terms and conditions. Refer to Note 33 for further information on related party transactions. This concludes the remuneration report, which has been audited. Indemnity and insurance of officers During the financial year, the Company paid a premium in respect of a contract to insure the Directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. Non-audit services During the financial year the following fees were paid or payable for services provided to KPMG, the auditor of the Company: Audit services – audit or review of the financial statements Other services – tax compliance and advisory services 2021 $ 150,000 26,400 176,400 2020 $ 130,012 26,134 156,146 The Directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services as disclosed in Note 30 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. 26 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this Directors’ report. Auditor KPMG continues in office in accordance with section 327 of the Corporations Act 2001. ANNUAL REPORT 2021 | PACIFIC SMILES Voting of shareholders at last year’s annual general meeting The Group received more than 81% of ‘yes’ votes on its remuneration report for the 2020 financial year. The Group did not receive any specific feedback at the annual general meeting or throughout the year on its remuneration practices. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors Zita Peach Chairperson 17 August 2021 27 ANNUAL REPORT 2021 | PACIFIC SMILES Auditor’s Independence Declaration Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Pacific Smiles Group Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Pacific Smile Group Limited for the financial year ended 30 June 2021 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Sarah Cain-Frost Partner Melbourne 17 August 2021 28 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. 16 Liability limited by a scheme approved under Professional Standards Legislation. ANNUAL REPORT 2021 | PACIFIC SMILES Consolidated Statement of Profit or Loss and Other Comprehensive Income FOR THE YEAR ENDED 30 JUNE 2021 Revenue Other income Expenses Direct expenses Consumable supplies expenses Employee expenses Impairment of assets Occupancy expenses Marketing expenses Administration and other expenses Depreciation and amortisation expense Net finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Basic earnings per share Diluted earnings per share Note 5 6 7 7 7 8 37 37 2021 $’000 2020 $’000 153,175 120,055 9,385 9,820 (9,752) (10,639) (13,070) (72,921) (761) (3,114) (2,656) (15,526) (22,445) (3,374) (9,243) (58,078) (836) (2,825) (1,948) (13,447) (20,033) (3,455) 18,941 9,371 (5,988) (2,988) 12,953 6,383 – – 12,953 6,383 Cents Cents 8.3 8.2 4.2 4.2 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 29 ANNUAL REPORT 2021 | PACIFIC SMILES Consolidated Balance Sheet AS AT 30 JUNE 2021 ASSETS Current assets Cash and cash equivalents Receivables Inventories Other Assets of disposal groups classified as held for sale Total current assets Non-current assets Receivables Property, plant and equipment Right-of-use assets Intangibles Deferred tax Total non-current assets Total assets LIABILITIES Current liabilities Payables Lease liabilities Income tax Provisions Liabilities directly associated with assets classified as held for sale Total current liabilities Non-current liabilities Borrowings Lease liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity 30 Note 2021 $’000 2020 $’000 9 10 11 12 13 14 15 16 17 8 18 19 8 20 21 22 23 24 25 26 10,947 15,279 1,803 5,756 797 19,303 21 19,324 29 65,088 55,607 10,145 11,077 141,946 161,270 18,699 10,754 2,922 4,573 36,948 – 36,948 1,000 58,625 3,515 63,140 4,261 4,051 462 24,053 630 24,683 227 51,199 51,805 10,608 9,101 122,940 147,623 16,168 9,959 1,654 4,354 32,135 122 32,257 22,000 53,240 3,233 78,473 100,088 110,730 61,182 36,893 51,917 13,075 (3,810) 61,182 36,769 3,934 (3,810) 36,893 The above consolidated balance sheet should be read in conjunction with the accompanying notes. ANNUAL REPORT 2021 | PACIFIC SMILES Consolidated Statement of Changes in Equity FOR THE YEAR ENDED 30 JUNE 2021 Contributed equity $’000 Reserves $’000 Retained profits $’000 Balance at 1 July 2019 35,053 180 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transfers between reserves Transactions with owners in their capacity as owners: Share-based payments – performance rights Dividends paid (Note 27) Dividend reinvestment plan Balance at 30 June 2020 – – – – – – 1,716 36,769 – – – 490 (8,968) – 3,934 12,232 (12,232) Total equity $’000 37,272 6,383 – 6,383 – 490 (8,968) 1,716 2,039 6,383 – 6,383 – – – (3,810) 36,893 Balance at 1 July 2020 36,769 3,934 (3,810) 36,893 Contributed equity $’000 Reserves $’000 Retained profits $’000 Total equity $’000 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transfer from reserves to retained profits Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (Note 25) Share-based payments – performance rights Dividends paid (Note 27) Balance at 30 June 2021 – – – – – – – 12,953 12,953 – – 12,953 12,953 12,953 (12,953) – 15,148 – – 51,917 – 18 (3,830) 13,075 – – – (3,810) 15,148 18 (3,830) 61,182 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 31 ANNUAL REPORT 2021 | PACIFIC SMILES Consolidated Statement of Cash Flows FOR THE YEAR ENDED 30 JUNE 2021 Note 2021 $’000 2020 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Government grant received Interest and finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payments for property, plant and equipment Proceeds from disposal of property, plant and equipment Lease payments received from finance leases Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from borrowings Dividends paid Repayment of borrowings Repayment of lease liabilities Net cash used in financing activities 36 15 25 27 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 9 172,259 133,390 (131,284) (102,222) 40,975 31,168 34 8,023 (3,408) (6,697) 77 5,043 (3,532) (4,179) 38,927 28,577 (25,589) (10,107) 52 362 64 359 (25,175) (9,684) 15,148 – (3,830) (21,000) (8,402) – 5,000 (7,252) – (8,313) (18,084) (10,565) (4,332) 15,279 10,947 8,328 6,951 15,279 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 32 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 30 JUNE 2021 Note 1. Corporate information The consolidated financial statements cover Pacific Smiles Group Limited as a consolidated entity consisting of Pacific Smiles Group Limited (the ‘Company’) and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars, which is Pacific Smiles Group Limited’s functional and presentation currency. Pacific Smiles Group Limited is a listed public company limited by shares, incorporated and domiciled in Australia. On 21 November 2014, Pacific Smiles Group Limited was listed on the ASX. Its registered office and principal place of business is: 6 Molly Morgan Drive, Greenhills, New South Wales A description of the nature of the consolidated entity’s operations and its principal activities are included in the Directors’ report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 17 August 2021. The Directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The financial statements have been prepared on an accruals basis and are based on historical costs, modified where applicable by the measurement at fair value of selected non-current assets, financial assets and financial liabilities, and assets and liabilities held for sale. Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, include non-financial asset impairment testing. New or amended Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. New and revised Standards and amendments thereof and Interpretations effective for the current year that are relevant to the consolidated entity are: • AASB 2018-6 Amendments to Australian Accounting Standards – Definition of a Business • AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material • AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework • AASB 2019-5 Amendments to Australian Accounting Standards – Disclosure of the Effect of New IFRS Standards Not Yet Issued in Australia • AASB 2020-4 Amendments to Australian Accounting Standards – COVID-19-Related Rent Concessions 33 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the consolidated entity. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in Note 34. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Pacific Smiles Group Limited (‘Company’ or ‘parent entity’) as at 30 June 2021 and the results of all subsidiaries for the year then ended. Pacific Smiles Group Limited and its subsidiaries together are referred to in these financial statements as the ‘consolidated entity’. Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the consolidated entity’s Chief Executive Officer (the chief operating decision maker). The chief operating decision maker is responsible for allocating resources and assessing performance of the operating segments. Revenue recognition The consolidated entity recognises revenue as follows: Service and facility fees The consolidated entity provides services and facilities to dentists practicing out of consolidated entity owned dental centres. Services and facilities include the use of fully equipped surgeries, staff, marketing and other support infrastructure. The monthly fee the consolidated entity invoices the dentists is a percentage of patient receipts net of direct costs, which are costs directly incurred by the dentists. The percentage is determined based on monthly patient receipts and the hours worked in accordance with a Services and Facilities Agreement. Revenue is recognised over time as the service is provided to the dentists. The Services and Facilities Agreement with the dentists allows the dentists the right to cancel the arrangement with one to three months of notice without penalty. 34 ANNUAL REPORT 2021 | PACIFIC SMILES Professional dental fees Employed and contracted dentists provide a range of dental services to patients. Revenue is recognised once the service is provided for the amount charged to the patient, based on standard list price. Prosthetist fees Prosthetist fees include revenue for the manufacture and fitting of custom-made dental prosthesis such as dentures. Upon completion and receipt of the product, control is passed to the customer and invoicing occurs. Revenue is recognised when the prosthesis is provided to the customer as although a denture is produced to a customer’s specification, if the contract is terminated by the customer the consolidated entity is not entitled to payment for services performed to date. Sale of dental products The consolidated entity sells a range of dental products. Revenue is recognised when the product is provided to and paid for by the customer as this is when the performance obligation is satisfied. Management services fees The consolidated entity provides comprehensive operational support to HBF Dental (HBFD) Centres across Western Australia. Revenue is recognised as performance obligation is performed and service is provided to HBFD. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Income tax The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amounts of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the assets. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. 35 Pacific Smiles Group Limited (the ‘head entity’) and its wholly owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Current and non-current classification Assets and liabilities are presented in the balance sheet based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, and other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. The consolidated entity has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Inventories Finished goods are stated at the lower of cost and net realisable value on a ‘first in first out’ basis. Cost comprises purchase and delivery costs, net of rebates and discounts received or receivable. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Non-current assets or disposal groups classified as held for sale Non-current assets and assets of disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continued use. They are measured at the lower of their carrying amount and fair value less costs of disposal. For non-current assets or assets of disposal groups to be classified as held for sale, they must be available for immediate sale in their present condition and their sale must be highly probable. 36 ANNUAL REPORT 2021 | PACIFIC SMILES An impairment loss is recognised for any initial or subsequent write-down of the non-current assets and assets of disposal groups to fair value less costs of disposal. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, or employee benefit assets, which continue to be measured in accordance with the consolidated entity’s other accounting policies. A gain is recognised for any subsequent increases in fair value less costs of disposal of non-current assets and assets of disposal groups, but not in excess of any cumulative impairment loss previously recognised. Non-current assets are not depreciated or amortised while they are classified as held for sale. Interest and other expenses attributable to the liabilities of assets held for sale continue to be recognised. Non-current assets classified as held for sale and the assets of disposal groups classified as held for sale are presented separately on the face of the balance sheet, in current assets. The liabilities of disposal groups classified as held for sale are presented separately on the face of the balance sheet, in current liabilities. Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Leasehold improvements 10-20 years Plant and equipment 3-10 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the consolidated entity expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The consolidated entity has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit or loss as incurred. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. 37 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Goodwill is allocated to relevant cash-generating units (CGUs) for the purpose of impairment testing. Rights and licences Contractual rights and licences have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of the rights and licences over their estimated useful lives, being 15 years. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Cash inflows considered for the purposes of impairment testing are discounted to present value. Significant judgement has been used in testing assets for impairment and in determining the amounts recognised as impairment losses at reporting date. Further details of the key judgements and estimates along with any impairment loss recognised in the financial statements are provided in the notes dealing with the relevant asset categories. Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Borrowings Borrowings are measured at amortised cost. Borrowing costs are expensed as incurred. Borrowings are classified as current liabilities unless the consolidated entity has an unconditional right to defer settlement of the liabilities for at least 12 months after the reporting period. Lease liabilities As a lessee: 38 Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option; and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. ANNUAL REPORT 2021 | PACIFIC SMILES Rent concessions: The consolidated entity has applied the practical expedient to not assess rent concessions affecting payments due before 30 June 2021 that have occurred as a direct consequence of the COVID-19 pandemic as a lease modification. The consolidated entity has recognised the amount as ‘other income’ in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient. When the consolidated entity acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the consolidated entity makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the consolidated entity considers certain indicators such as whether the lease is for the major part of the economic life of the asset. As a lessor: When the consolidated entity acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the consolidated entity makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the consolidated entity considers certain indicators such as whether the lease is for the major part of the economic life of the asset. When the consolidated entity is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the consolidated entity applies the exemption described above, then it classifies the sub-lease as an operating lease. If an arrangement contains lease and non-lease components, then the consolidated entity applies AASB 15 to allocate the consideration in the contract. The consolidated entity applies the derecognition and impairment requirements in AASB 9 to the net investment in the lease. The consolidated entity further regularly reviews estimated unguaranteed residual values used in calculating the gross investment in the lease. The consolidated entity recognises lease payments received under operating leases as income on a straight-line basis over the lease term as part of ‘other revenue’. Generally, the accounting policies applicable to the consolidated entity as a lessor in the comparative period were not different from AASB 16 except for the classification of the sub-lease entered into during the current reporting period that resulted in a finance lease classification. Finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred. Provisions Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. 39 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Make good provision The consolidated entity is required to restore most leased premises to their original condition at the end of their respective lease terms. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements and repair any associated damage. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets. Employee benefits Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. The liabilities are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short- term employee benefit obligations are presented as payables. Other long-term employee benefits The consolidated entity’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. The benefit is discounted to determine its present value. Re-measurements are recognised in profit or loss in the period in which they arise. The obligations are presented as a current liability in the balance sheet if the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Share-based compensation benefits are provided to selected employees via a long-term incentive plan (LTI plan). The fair value of performance rights granted under the LTI plan is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the performance rights granted, which includes any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are satisfied. At the end of each period, the consolidated entity revises its estimates of the number of performance rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. 40 ANNUAL REPORT 2021 | PACIFIC SMILES Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Company, on or before the end of the financial year but not distributed at the reporting date. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity’s operating or accounting policies and other pertinent conditions in existence at the acquisition date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non- controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre- existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. 41 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Pacific Smiles Group Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Government grants Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. The consolidated entity recognises a government grant relating to JobKeeper payments as other income when the grant becomes receivable and when the consolidated entity has complied with the conditions associated with the grant. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2021. The consolidated entity has not yet assessed the impact of these new or amended Accounting Standards and Interpretations. 42 ANNUAL REPORT 2021 | PACIFIC SMILES Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Coronavirus (COVID-19) pandemic Judgement has been exercised in considering the impacts that the Coronavirus (COVID-19) pandemic has had, or may have, on the consolidated entity based on known information. This consideration extends to the nature of the products and services offered, customers, supply chain, staffing and geographic regions in which the consolidated entity operates. Other than as addressed in specific notes, there does not currently appear to be either any significant impact upon the financial statements or any significant uncertainties with respect to events or conditions which may impact the consolidated entity unfavourably as at the reporting date as a result of the Coronavirus (COVID-19) pandemic. Share-based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share- based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Estimation of useful lives of assets The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non- strategic assets that have been abandoned or sold will be written off or written down. Goodwill and other indefinite life intangible assets The consolidated entity tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in Note 2. The recoverable amounts of cash-generating units have been determined based on fair value less cost of disposal, estimated using discounted cash flow. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The consolidated entity assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Income tax The consolidated entity is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The consolidated entity recognises liabilities for anticipated tax audit issues based on the consolidated entity’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. 43 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the consolidated entity considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Employee benefits provision As discussed in Note 2, the liability for employee benefits expected to be settled more than 12 months from the reporting date is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at the reporting date. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. Lease make good provision A provision has been made for the present value of anticipated costs for future restoration of leased premises. The provision includes future cost estimates associated with closure of the premises. The calculation of this provision requires assumptions such as application of closure dates and cost estimates. The provision recognised for each site is periodically reviewed and updated based on the facts and circumstances available at the time. Changes to the estimated future costs for sites are recognised in the balance sheet by adjusting the asset and the provision. Reductions in the provision that exceed the carrying amount of the asset will be recognised in profit or loss. Note 4. Operating segments The consolidated entity is organised into one operating segment, being activities within the dental sector throughout Eastern Australia. This operating segment is based on the internal reports that are reviewed and used by the consolidated entity’s Chief Executive Officer, who is identified as the chief operating decision maker, in assessing performance and in determining the allocation of resources. The consolidated entity’s operation inherently has one profile and performance assessment criteria. The financial results from this segment are consistent with the financial statements for the consolidated entity as a whole. Note 5. Revenue Revenue from contracts with customers Dental service fees Dental product sales Other revenue Management fees Revenue Note 6. Other income 44 Government grants Rents Sundry income Other income 2021 $’000 2020 $’000 150,540 119,584 530 471 151,070 120,055 2,105 – 153,175 120,055 2021 $’000 8,023 630 732 9,385 2020 $’000 8,373 747 700 9,820 Government grants Government grant income relates to JobKeeper payments received or receivable from the Federal Government. The consolidated entity became eligible for the JobKeeper scheme from its inception in March 2020 and continued receiving payments under the Scheme until September 2020. ANNUAL REPORT 2021 | PACIFIC SMILES Note 7. Expenses Profit before income tax includes the following specific expenses: Depreciation Leasehold improvements Plant and equipment Right-of-use assets Total depreciation Amortisation Rights and licences Total depreciation and amortisation Impairment Plant and equipment Software development asset Goodwill Total impairment Finance costs Interest and finance charges paid/payable on borrowings Interest and finance charges paid/payable on lease liabilities Interest received/receivable Finance costs expensed Superannuation expense 2021 $’000 2020 $’000 5,914 5,887 10,578 22,379 5,236 5,548 9,183 19,967 66 66 22,445 20,033 98 – 663 761 596 2,812 (34) 3,374 – 836 – 836 742 2,790 (77) 3,455 Defined contribution superannuation expense 5,788 4,342 Share-based payments expense Share-based payments expense Direct expenses Direct expenses 18 490 9,752 10,639 Direct expenses relate to the cost of the sale of dental products and dental practitioner employment costs. 45 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 8. Income tax Income tax expense Current tax Deferred tax Adjustment recognised for prior periods Adjustment on initial application of AASB 16 Aggregate income tax expense Deferred tax included in income tax expense comprises: 2021 $’000 7,966 (1,976) (2) – 5,988 2020 $’000 4,455 (3,093) (7) 1,633 2,988 Increase in deferred tax assets (1,976) (3,093) Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Entertainment expenses Impairment of goodwill Share-based payments Building write-off deduction Adjustment recognised for prior periods Income tax expense 18,941 5,682 74 199 5 30 5,990 (2) 5,988 9,371 2,811 39 – 147 (2) 2,995 (7) 2,988 46 ANNUAL REPORT 2021 | PACIFIC SMILES Deferred tax asset Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Allowance for expected credit losses Property, plant and equipment Employee benefits Lease liabilities Accrued expenses Intangibles Lease receivables Right-of-use assets Prepayments and others Deferred tax asset Movements: Opening balance Credited to profit or loss Closing balance Provision for income tax Note 9. Current assets – cash and cash equivalents Cash at bank and in hand Note 10. Current assets – receivables Trade receivables Less: Allowance for expected credit losses Finance lease receivables Other receivables Note 11. Current assets – inventories Inventories – at cost 2021 $’000 2020 $’000 143 3,847 1,697 53 3,314 2,276 20,813 18,959 868 (157) (68) 349 (176) (177) (16,075) (15,541) 9 11,077 9,101 1,976 11,077 44 9,101 6,008 3,093 9,101 2,922 1,654 2021 $’000 10,947 2020 $’000 15,279 2021 $’000 1,385 (477) 908 610 285 1,803 2020 $’000 567 (176) 391 362 3,508 4,261 2021 $’000 5,756 2020 $’000 4,051 47 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 12. Current assets – other Prepayments Other 2021 $’000 667 130 797 2020 $’000 315 147 462 Note 13. Current assets – assets of disposal groups classified as held for sale Assets held for sale 2021 $’000 21 2020 $’000 630 In January 2021, the consolidated entity discontinued the operation of Everything Dentures Pty Limited. The associated assets were consequently presented as held for sale. The sale of the remaining assets is expected to realise during the next financial year. Assets of disposal group held for sale Property, plant and equipment Goodwill Inventory Assets held for sale 2021 $’000 2020 $’000 21 – – 21 293 265 72 630 Refer to Note 21 for further information on liabilities of the disposal group classified as held for sale. Note 14. Non-current assets – receivables Finance lease receivables Note 15. Non-current assets – property, plant and equipment 2021 $’000 29 2020 $’000 227 Leasehold improvements – at cost Less: Accumulated depreciation and impairment 48 Plant and equipment – at cost Less: Accumulated depreciation and impairment 2021 $’000 71,375 (31,225) 40,150 61,987 (37,049) 24,938 65,088 2020 $’000 57,045 (25,168) 31,877 50,496 (31,174) 19,322 51,199 ANNUAL REPORT 2021 | PACIFIC SMILES Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2019 Additions Classified as held for sale Disposals Impairment of assets Reversal of make good assets on initial application of AASB 16 Depreciation expense Balance at 30 June 2020 Additions Classified as held for sale Disposals Impairment of assets Depreciation expense Balance at 30 June 2021 Leasehold improve- ments $’000 35,231 3,215 (40) (93) – (1,200) (5,236) 31,877 11,408 39 (5) (27) (5,914) 37,378 Plant and equipment $’000 19,411 6,892 (253) (344) (836) – (5,548) 19,322 14,181 232 (67) (71) (5,887) 27,710 Total $’000 54,642 10,107 (293) (437) (836) (1,200) (10,784) 51,199 25,589 271 (72) (98) (11,801) 65,088 Impairment of assets The consolidated entity has discontinued the operation of Everything Dentures Pty Limited in January 2021. Therefore, impairment losses of the associated assets were recognised during the financial year. Note 16. Non-current assets – right-of-use assets Leases – right-of-use Less: Accumulated depreciation 2021 $’000 74,504 (18,897) 55,607 2020 $’000 60,956 (9,151) 51,805 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2019 Adjustment on initial application of AASB 16 Disposals Additions Depreciation expense Balance at 30 June 2020 Adjustment on carrying value Additions Transfers in/(out) Depreciation expense Balance at 30 June 2021 $’000 – 54,187 (32) 6,833 (9,183) 51,805 (33) 14,827 (414) (10,578) 55,607 49 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 17. Non-current assets – intangibles Goodwill Less: Impairment Rights and licences Less: Accumulated amortisation 2021 $’000 12,517 (2,894) 9,623 985 (463) 522 2020 $’000 12,915 (2,894) 10,021 985 (398) 587 10,145 10,608 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2019 Classified as held for sale Amortisation expense Balance at 30 June 2020 Impairment of assets Transfers in/(out) Amortisation expense Balance at 30 June 2021 Goodwill $’000 10,286 (265) – 10,021 (663) 265 – 9,623 Rights and licences $’000 653 – (66) 587 – – (65) 522 Total $’000 10,939 (265) (66) 10,608 (663) 265 (65) 10,145 Impairment testing for cash-generating units (CGUs) The impairment assessments for each CGU are made on the basis of fair value less cost of disposal, estimated using discounted cash flow. The fair value measurement was categorised as a Level 3 fair value. Based on the inputs in the valuation technique used, recoverable amounts of the CGUs exceeded their carrying values, therefore no impairment losses were recorded in the financial year. For the purpose of impairment testing, the carrying amount of goodwill has been allocated to groups of CGUs as below: New South Wales Victoria Queensland Total goodwill 50 2021 $’000 4,546 2,631 2,446 9,623 2020 $’000 4,944 2,631 2,446 10,021 The calculations use discounted cash flow projections covering a five-year period, which is consistent with the typical lease term entered into for the consolidated entity’s dental centre locations, and matches the average growth profile of our dental centres. The cash flows for years one to five are based on detailed management projections, which consider historical financial results and trends, the Board-approved financial budget for the next financial year and reasonable expectations regarding future business and market circumstances. The cash flow projections for years one to five are based on key assumptions including dentist numbers, number of operating chairs, practitioner hours, patient demand and associated costs. ANNUAL REPORT 2021 | PACIFIC SMILES A long-term growth rate of 2.5% is used beyond year five in determining the terminal values, which is considered reasonable in the context of the long-term growth rates for the markets in which each CGU operates. Future cash flows are discounted using the consolidated entity’s weighted average cost of capital of 10.00% (2020: 9.6%). Rights and licences As part of the consolidated entity’s acquisition of the three former AHM dental centres, the consolidated entity received preferential provider support from AHM. These rights and licences relate to AHM marketing rights at each Pacific Smiles dental centre with nine amortisation periods remaining as at balance date. Note 18. Current liabilities – payables Trade payables Note 19. Current liabilities – lease liabilities Lease liability Refer to Note 28 for further information on financial instruments. Note 20. Current liabilities – provisions Employee benefits 2021 $’000 18,699 2020 $’000 16,168 2021 $’000 10,754 2020 $’000 9,959 2021 $’000 4,573 2020 $’000 4,354 Refer to Note 24 for further information on movements in provisions. Note 21. Current liabilities – liabilities directly associated with assets classified as held for sale Liabilities held for sale Liabilities of disposal group held for sale Employee benefits – annual leave Employee benefits – other Liabilities held for sale 2021 $’000 – 2021 $’000 – – – 2020 $’000 122 2020 $’000 77 45 122 51 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 22. Non-current liabilities – borrowings Bank loans Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans 2021 $’000 1,000 2020 $’000 22,000 2021 $’000 1,000 2020 $’000 22,000 Assets pledged as security The bank loans are secured by a registered equitable mortgage over the whole of the assets and undertakings of the consolidated entity, including uncalled capital and inter-entity guarantees. Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank overdraft Bank loans Bank guarantees Used at the reporting date Bank overdraft Bank loans Bank guarantees Unused at the reporting date Bank overdraft Bank loans Bank guarantees Covenants attached to bank borrowings were complied with during the financial year. 52 Note 23. Non-current liabilities – lease liabilities Lease liability Refer to Note 28 for further information on financial instruments. 2021 $’000 500 40,000 4,000 44,500 – 1,000 3,610 4,610 500 39,000 390 39,890 2020 $’000 500 30,000 4,000 34,500 – 22,000 3,025 25,025 500 8,000 975 9,475 2021 $’000 58,625 2020 $’000 53,240 ANNUAL REPORT 2021 | PACIFIC SMILES Note 24. Non-current liabilities – provisions Employee benefits Lease make good 2021 $’000 1,085 2,430 3,515 2020 $’000 1,016 2,217 3,233 Movements in provisions Movements in each class of provision (current and non-current) during the current financial year, other than employee benefits, are set out below: 2021 Carrying amount at the start of the year Additional provisions recognised Carrying amount at the end of the year 2020 Carrying amount at the start of the year Change in accounting policy Additional provisions recognised Carrying amount at the end of the year Straight-line lease adjustment $’000 Make good provision $’000 Onerous contracts $’000 – – – 2,217 213 2,430 – – – Straight-line lease adjustment $’000 Make good provision $’000 Onerous contracts $’000 5,420 (5,420) – – 2,130 – 87 2,217 33 (33) – – Note 25. Equity – contributed equity Ordinary shares – fully paid 159,581,938 153,515,550 51,917 36,769 2021 Shares 2020 Shares 2021 $’000 2020 $’000 Movements in ordinary share capital Details Balance Balance New shares placement Share purchase plan Balance Date Shares Issue price 1 July 2020 153,515,550 30 June 2020 153,515,550 3 March 2021 5,769,231 23 March 2021 297,157 30 June 2021 159,581,938 $2.60 $2.60 $’000 36,769 36,769 14,437 711 51,917 53 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of shares held. At shareholders’ meetings, each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. Capital risk management The consolidated entity’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, maintain sufficient financial flexibility to pursue its growth objectives, and maintain an optimum capital structure to reduce the cost of capital. The consolidated entity monitors its working capital continually and manages it within a Board-approved finance facility. Debt covenants are consistently achieved and monitored monthly. Capital is regarded as total equity, as recognised in the balance sheet, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. Note 26. Equity – reserves Profits reserve Share-based payments reserve 2021 $’000 12,387 688 13,075 2020 $’000 3,264 670 3,934 Profits reserve The profits reserve represents current year profits transferred to a reserve to preserve the characteristic as a profit so as to quarantine from being appropriated against accumulated losses arising from the adoption of AASB 16. Such profits are available to enable payment of franked dividends in the future should the Directors declare so by resolution. Note 27. Equity – dividends Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2020 of nil cents (2019: 3.50 cents) per ordinary share, fully franked Interim dividend for the year ended 30 June 2021 of 2.40 cents (2020: 2.40 cents) per ordinary share, fully franked There were no dividends declared but not recognised at the end of the financial year. 54 Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% 2021 $’000 – 2020 $’000 5,320 3,830 3,648 3,830 8,968 2021 $’000 15,301 2020 $’000 10,296 ANNUAL REPORT 2021 | PACIFIC SMILES The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for franking credits that will arise from the payment of the amount of income tax payable or collection of income tax receivable. The consolidated amount includes franking credits that would be available to the parent entity if distributed profits of subsidiaries were paid as dividends. Note 28. Financial instruments Financial risk management objectives The consolidated entity’s activities expose it to a variety of financial risks: market risk (interest rate risk), credit risk and liquidity risk. The Board has overall responsibility for the establishment and oversight of the risk management framework, and is supported by the Board Audit and Risk Management Committee. Senior management develops and monitors risk management policy, and reports regularly to the Directors on issues and compliance matters. Risk management principles and systems are reviewed regularly to reflect changes in market conditions and the consolidated entity’s activities. The consolidated entity’s principal financial instruments during the 2021 and 2020 financials years comprised bank and other loans, and cash. The main purpose of these instruments has been to raise finance for the consolidated entity’s operations and investments. The consolidated entity has various other financial instruments such as trade and other debtors and creditors, which arise directly from its operations. The consolidated entity does not trade in financial instruments. Market risk Interest rate risk The consolidated entity’s exposure to market risk for changes in interest rates at the end of the year was minimal, with bank debt partially offset by cash balances at 30 June. Cash balances are held in a combination of short-term fixed interest deposit accounts and other cheque and on-call accounts which attract variable interest rates. The weighted average interest rate on cash balances at the end of the year was 0.13% (2020: 0.25%). Variable rate bank loans drawn of $1,000,000 (2020: $22,000,000) form part of an ongoing loan facility which was updated during the 2021 financial year. The overall facility term expires on 30 September 2022. The loans are subject to interest charged at the prevailing variable rate payable on each reset date. The weighted average interest rate on borrowings at the end of the year was 4.11% (2020: 4.11%). Basis points increase Basis points decrease Basis points change Effect on profit before tax Effect on equity 100 (40) (40) Basis points change (100) Effect on profit before tax Effect on equity 40 40 Basis points increase Basis points decrease Basis points change Effect on profit before tax Effect on equity 100 (138) (138) Basis points change (100) Effect on profit before tax Effect on equity 138 138 55 2021 Variable rate bank loans 2020 Variable rate bank loans ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Credit risk The consolidated entity has no significant concentrations of credit risk. The consolidated entity does not have significant credit exposure to any one financial institution or customer. The consolidated entity only transacts with reputable Australian banks and its credit risk on trade receivables is not considered significant. Liquidity risk The consolidated entity’s objective is to maintain a balance between continuity of funding and flexibility through the use of working capital and bank borrowings. The consolidated entity aims to achieve this flexibility by keeping committed credit lines available. Opportunities to raise additional capital from shareholders are also considered where appropriate. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows to ensure sufficient liquidity is always available to meet liability obligations as they fall due. The Group’s balance sheet shows an excess of current liabilities over current assets at balance date of $17.6 million. Liabilities have been classified as current where it is probable that they will be settled within 12 months or if there is a contractual obligation that may require settlement within 12 months, regardless of how likely settlement under contractual arrangements is judged to be. The Group’s current assets, available financing facilities, and ongoing positive operating cash flows continue to be sufficient to satisfy all payment obligations within the time-frames required. Remaining contractual maturities The following tables detail the consolidated entity’s remaining contractual maturities for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the balance sheet. 2021 Non-derivatives Non-interest bearing Trade payables Interest-bearing – variable Bank loans Total non-derivatives 2020 Non-derivatives Non-interest bearing Trade payables Interest-bearing – variable Bank loans Total non-derivatives 56 Less than 6 months $’000 Between 6 and 12 months $’000 Between 1 and 5 years $’000 Remaining contractual maturities $’000 18,699 1,000 19,699 – – – – – – 18,699 1,000 19,699 Less than 6 months $’000 Between 6 and 12 months $’000 Between 1 and 5 years $’000 Remaining contractual maturities $’000 16,168 – – 16,168 236 16,404 236 236 22,591 22,591 23,063 39,231 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Fair value Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. ANNUAL REPORT 2021 | PACIFIC SMILES Note 29. Key management personnel disclosures Compensation The aggregate compensation made to Directors and other members of key management personnel of the consolidated entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments 2021 $ 2020 $ 2,358,950 1,450,085 92,697 111,597 237,215 541,546 86,204 17,967 – 354,272 3,342,005 1,908,528 Note 30. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by KPMG, the auditor of the Company: Audit services Audit or review of the financial statements 150,000 130,012 2021 $ 2020 $ Other services Tax compliance and advisory services Note 31. Contingent liabilities Bank guarantees 26,400 176,400 26,134 156,146 2021 $’000 3,610 2020 $’000 3,025 The consolidated entity has given bank guarantees as at 30 June 2021 of $3,609,736 (2020: $3,025,000) to various landlords as security for leased premises. 57 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 32. Commitments Capital commitments Committed at the reporting date but not recognised as liabilities, payable: Property, plant and equipment Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years Lease commitments – finance Committed at the reporting date and recognised as liabilities, payable: Within one year One to five years More than five years Total commitment Less: Future finance charges Net commitment recognised as liabilities Note 33. Related party transactions Parent entity Pacific Smiles Group Limited is the parent entity. 2021 $’000 2020 $’000 2,055 952 37 3 40 111 40 151 11,719 45,552 22,351 12,522 41,742 19,041 79,622 73,305 (10,224) (10,106) 69,398 63,199 Key management personnel Disclosures relating to key management personnel are set out in Note 29 and the remuneration report included in the Directors’ report. Transactions with related parties Other than remuneration for their positions as Directors and executives of the consolidated entity, key management personnel or entities related to them entered into a number of transactions with the consolidated entity. Information on these transactions is set out below. Key management personnel or their related parties held shares in the consolidated entity during 2021 and 2020, and as such, participated in dividends. Exandal Investments, an entity related to Alex Abrahams and Alison Hughes, leased business premises to the consolidated entity during 2021 and 2020 on normal commercial terms and conditions. 58 88 Park Avenue Pty Limited ATF the Key Health Unit Trust, an entity related to Alex Abrahams, leased business premises to the consolidated entity during 2021 and 2020 on normal commercial terms and conditions. The consolidated entity paid fees for consultancy services to PKF during 2021. The entity is related to Simon Rutherford, fees were based on normal commercial terms and conditions. ANNUAL REPORT 2021 | PACIFIC SMILES The following transactions occurred with related parties: Dividends paid Rental expenses Consulting fees paid 2021 $ 2020 $ 1,408,392 3,408,498 444,333 313,315 30,000 30,000 The following balances are outstanding at the reporting date in relation to transactions with related parties: Current payables: Trade payables to other related party Note 34. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit after income tax Total comprehensive income Balance sheet Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Profits reserve Share-based payments reserve Accumulated losses Total equity 2021 $ 2020 $ – 17,416 2021 $’000 13,533 13,533 2020 $’000 6,362 6,362 2021 $’000 19,213 2020 $’000 23,811 160,825 146,009 35,454 98,591 30,238 108,643 51,917 12,953 688 (3,324) 36,769 3,264 670 (3,337) 62,234 37,366 Contingent liabilities The parent entity had no contingent liabilities, other than bank guarantees as at 30 June 2021 totalling $3,609,736 (30 June 2020: $3,025,000). 59 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 35. Events after the reporting period COVID-19 pandemic The impact of the COVID-19 pandemic is ongoing, and it is not practicable to estimate the potential impact after the reporting date. Whilst short-term financial performance has been impacted by the pandemic and associated Government-imposed measures, these performance impacts are not material to Pacific Smiles’ financial position as at the date of this report. The situation is ongoing and is dependent on measures imposed by the Australian Government and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided. No other matter or circumstance has arisen since 30 June 2021 that has significantly affected, or may significantly affect, the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Note 36. Cash flow information Reconciliation of profit after income tax to net cash from operating activities Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Impairment of property, plant and equipment Impairment of intangibles Net loss on disposal of property, plant and equipment Share-based payments Change in operating assets and liabilities: Decrease/(increase) in receivables Increase in inventories Increase in deferred tax assets Decrease/(increase) in other operating assets Increase in payables Increase in other provisions Increase/(Decrease) in income tax Net cash from operating activities Note 37. Earnings per share 60 Profit after income tax Basic earnings per share Diluted earnings per share 2021 $’000 12,953 2020 $’000 6,383 22,446 20,033 98 663 23 18 2,709 (1,634) (1,976) (334) 2,405 288 1,268 – – 1,209 490 (2,815) (450) (1,459) 90 3,810 1,018 268 38,927 28,577 2021 $’000 12,953 2020 $’000 6,383 Cents Cents 8.3 8.2 4.2 4.2 ANNUAL REPORT 2021 | PACIFIC SMILES Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Performance rights Weighted average number of ordinary shares used in calculating diluted earnings per share Number Number 155,492,882 152,214,420 2,108,224 – 157,601,106 152,214,420 Performance rights Performance rights granted to employees under the consolidated entity’s long-term incentive plan are considered to be potential ordinary shares and are only included in the determination of diluted earnings per share to the extent to which they are dilutive. From 9,183,430 performance rights on issue, a total of 5,406,000 performance rights are included in the calculation of diluted earnings per share because they are contingently issuable ordinary shares and the conditions for these rights to be satisfied are probable as at 30 June 2021. The remaining performance rights could potentially dilute basic earnings per share in the future. Note 38. Share-based payments Long-term incentive plan overview The consolidated entity has established a long-term incentive plan (LTI) to assist in the motivation, retention and reward of senior management. The LTI plan is designed to align the interests of senior management more closely with the interests of shareholders by providing an opportunity for senior management to receive an equity interest in the consolidated entity through the granting of performance rights. Performance rights have been issued to the Chief Executive Officer and selected senior managers, at the absolute discretion of the Board, pursuant to the LTI plan in financial years 2021, 2020, 2019, 2018 and 2017. The performance rights will vest after a set term (the performance period), and are conditional on the achievement of relevant performance and service conditions. Vesting of the performance rights for the years 2019, 2018 and 2017: • satisfaction of earnings per share (EPS) performance hurdles for a four-year performance period. The number of performance rights vesting will be determined on a sliding scale from nil vesting for an EPS compound annual growth rate (CAGR) of 10% per annum or less and 100% vesting for an EPS CAGR of 25% per annum; and • the participant remaining employed by Pacific Smiles Group, or its subsidiaries over a four-year period through to the vesting date, subject to certain ‘good leaver’ exemptions. Vesting of the performance rights for the years 2021 and 2020 will be subject to: • satisfaction of EPS performance hurdles for a four-year performance period. The number of performance rights vesting will be determined on a sliding scale from nil vesting for an EPS CAGR of 10% per annum or less and 100% vesting for an EPS CAGR of 20% per annum; and • the participant remaining employed by Pacific Smiles Group, or its subsidiaries over a four-year period through to the vesting period, subject to certain ‘good leaver’ exemptions. Performance rights that do not vest on the relevant vesting date will lapse. Performance rights will also lapse if total shareholder return does not reach a minimum threshold over the relevant performance period. 61 ANNUAL REPORT 2021 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Set out below are summaries of options granted under the plan: 2021 Grant date Expiry date 30/11/2016 30/11/2020 01/12/2017 01/12/2021 04/03/2019 04/03/2023 13/02/2020 13/02/2024 28/04/2021 28/04/2025 Balance at the start of the year 1,500,000 1,275,000 3,026,000 3,500,000 – 9,301,000 Granted – – – – 2,902,430 2,902,430 Expired/ forfeited/ other (1,500,000) (400,000) (282,000) (838,000) – (3,020,000) Balance at the end of the year – 875,000 2,744,000 2,662,000 2,902,430 9,183,430 The weighted average remaining contractual life of options outstanding at the end of the financial year was 2.51 years (2020: 2.48 years). The fair values at grant dates have been determined via pricing models which use a Monte Carlo simulation, and take into account the following inputs: Grant date Fair value of right Share price at grant date Exercise price Term Expected price volatility Expected dividend yield Risk free interest rate 2021 2020 28 April 2021 13 February 2020 $0.88 $2.64 Nil 4 years 30.0% 4.0% 1.2% $0.61 $1.82 Nil 4 years 30.0% 4.0% 1.2% 62 ANNUAL REPORT 2021 | PACIFIC SMILES Directors’ Declaration In the Directors’ opinion: • the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; • the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in Note 2 to the financial statements; • the attached financial statements and notes give a true and fair view of the consolidated entity’s financial position as at 30 June 2021 and of its performance for the financial year ended on that date; and • there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors Zita Peach Chairperson 17 August 2021 63 ANNUAL REPORT 2021 | PACIFIC SMILES Independent Auditor’s Report Independent Auditor’s Report To the shareholders of Pacific Smiles Group Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Pacific Smiles Group Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: giving a true and fair view of the Group’s financial position as at 30 June 2021 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises: Consolidated balance sheet as at 30 June 2021; Consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended; Notes including a summary of significant accounting policies; and Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. 64 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. 55 ANNUAL REPORT 2021 | PACIFIC SMILES Key Audit Matters The Key Audit Matters we identified are: Carrying value of intangible assets Revenue recognition Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Carrying value of intangible assets ($10,145,000) Refer to Note 17 to the Financial Report The key audit matter How the matter was addressed in our audit The carrying value of intangible assets, including the Group’s annual testing of goodwill for impairment was identified as a key audit matter due to the: Size of the balance; and Significant level of judgement required to assess the Group’s forecasts and discounted future cashflows, including higher estimation uncertainty arising from the continuing impact of the COVID-19 global pandemic. We focused on the significant forward-looking assumptions the Group applied in its fair value less cost of disposal model, including: Forecast operating cash flows, growth rates and terminal growth rates – the Group has experienced business disruption in the current year as a result of COVID-19, at both the start and end of the financial year. These conditions and continued uncertainty increase the possibility of goodwill and intangible assets being impaired, and the risk of inaccurate forecasts or a wider range of possible impacts such as government imposed restrictions for us to consider. We focused on the expected period for return to normal operations for the Group when assessing the feasibility of the Group’s forecast cashflows. Discount rates - these are complicated in nature and vary according to the conditions and environment the Cash Generating Units (CGUs) are subject to from time to time, Our procedures included: We considered the appropriateness of the fair value less cost of disposal method applied by the Group to perform its annual impairment testing of intangible assets against the requirements of the relevant accounting standards. We: - - - - Assessed the Group’s underlying methodology and documentation for the allocation of corporate costs to the forecast cash flows in the fair value less cost of disposal model for consistency with our understanding of the business and the criteria in the accounting standards; Assessed the Group’s determination of its CGUs based on our understanding of the operations of the Group’s business including the impact of the new centres opened during the financial year and how independent cash inflows were generated, against the requirements of the relevant accounting standards; Assessed the Group’s allocation of corporate assets to CGUs for reasonableness and consistency based on the requirements of the accounting standards; Assessed the Group’s determination of CGU assets for consistency with the assumptions used in the forecast cash flows and the requirements of the accounting standards; 56 65 ANNUAL REPORT 2021 | PACIFIC SMILES Independent Auditor’s Report Continued and the models approach to incorporating risks into the cash flows or discount rates. The Group’s modelling is sensitive to changes in the discount rate. Complex modelling, particularly those containing highly judgemental allocations of corporate assets and costs to CGUs, using forward-looking assumptions, tend to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us. The Group has a large number of individual dental centre locations, which includes new centres opened during the financial year, necessitating our consideration of the Group’s determination of Cash Generating Units (CGUs), based on the smallest group of assets to generate largely independent cash inflows. - - - Compared forecast cash flows in the model to Board approved forecasts; Checked the consistency of the growth rates to the Group's forecasts and our experience regarding the COVID-19 economic environment in which it operates; and Assessed the accuracy of previous Group forecasts to inform our evaluation of forecasts incorporated in the model. We considered the sensitivity of the model by varying key assumptions, such as forecast growth rates, terminal growth rates and discount rates, within a reasonably possible range, to identify those CGUs at higher risk of impairment and to focus our further procedures; Working with our valuation specialists we: - - - Developed a discount rate range using publicly available market data for comparable entities, adjusted by risk factors based on the size and location of the Group’s CGUs; Assessed the integrity of the model used, including the accuracy of the underlying calculation formulas; and Challenged the Group's significant forecast cash flows and growth assumptions in light of the uncertainty of impacts of the COVID-19 pandemic. We compared forecast growth rates and terminal growth rates to published studies of industry trends and expectations, and considered differences for the Group's operations. We used our knowledge of the Group, its past performance, business and customers, and our industry experience. We assessed the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the relevant accounting standards. 57 66 ANNUAL REPORT 2021 | PACIFIC SMILES Revenue recognition ($153,175,000) Refer to Note 5 to the Financial Report. The key audit matter How the matter was addressed in our audit Our procedures included: We evaluated the appropriateness of the Group’s revenue recognition policies against the requirements of the accounting standard; We tested key controls in the services fee revenue recognition process, including: - Management review and approval of monthly bank account reconciliations; - Management’s check of the monthly total patient billings, monthly timesheet reports, and agreed dentist percentages used by the Group in the monthly dentist payment calculations; and - Management’s dual authorisation of dentist payments and the monthly dentist payment calculations. For a sample of service fees recognised throughout the financial year, we agreed the underlying inputs from the dentist fee calculation to the monthly total patient billings derived from the Group’s bank statements, and the Group’s dentists’ monthly timesheet reports to check the consistency of the agreed dentist percentages to the underlying Service Facility Agreements; For a sample of service fees recognised in the last fortnight of the financial year and first fortnight of the next financial year, we agreed the underlying inputs from the dentist fee calculation to the monthly total patient billings derived from the Group’s bank statements, and the Group’s dentists’ monthly timesheet reports to check the consistency of the agreed dentist percentages to the underlying Service Facility Agreements; A substantial amount of the Group’s revenue relates to revenue from the rendering of services, being service fees charged to dentists who practice using the Group’s dental centres. Service fees represent the net amount the Group is entitled to after paying the dentists a share of total patient billings (dentist payments). Dentist payments are based on percentages agreed with each dentist per underlying Service Facility Agreements (agreed dentist percentages) which are variable based on the following drivers: Monthly total patient billings; and Actual time spent by the dentists at the Group’s dental centres for the month per timesheet reports. We focused on revenue recognition of service fees as a key audit matter due to the significant audit effort to test the: High volume of transactions recorded as revenue and significant value of revenue recognised; Largely manual nature of the Group’s calculation of dentist payments and therefore service fee revenue. This increases the risk of potential error and inconsistent application due to the number of different agreed dentist percentages and drivers, in particular around the last month of the year; and The opening of new dental centres during the current year, which necessitated us to assess the new Service Facility Agreements and increased our audit effort in this key area. During the year, the Group entered into a contract generating management service fees revenue. We focused on recognition of management service fees revenue due to the complexity of the contractual arrangement and the judgement required in determining the criteria for revenue recognition. We checked total patient billings and dentist payments throughout the year to the Group’s bank statements. We compared service fees recognised during the year, to the total patient billings received less dentist payments made by the Group. For a sample of management fees revenue recognised during the year, we assessed whether the criteria for revenue recognition had been met. 58 67 ANNUAL REPORT 2021 | PACIFIC SMILES Independent Auditor’s Report Continued Other Information Other Information is financial and non-financial information in Pacific Smiles Group Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Operational overview and insights, Directors’ Report, the Remuneration Report, the Shareholder Information, and the Corporate Directory. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001; implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and assessing Group and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. 68 59 ANNUAL REPORT 2021 | PACIFIC SMILES Auditor’s responsibilities for the audit of the Financial Report Our objective is: to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: 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 Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Pacific Smiles Group Limited for the year ended 30 June 2021, complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 11 to 18 of the Directors’ report for the year ended 30 June 2021. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Sarah Cain-Frost Partner Melbourne 17 August 2021 60 69 ANNUAL REPORT 2021 | PACIFIC SMILES Shareholder Information The shareholder information set out below was applicable as at 30 June 2021. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,0001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the 20 largest security holders of quoted equity securities are listed below: HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Alexander J Abrahams Alison J Hughes National Nominees Limited Citicorp Nominees Pty Limited Susan L Abrahams Just Paddling Pty Ltd Channings Holdings Pty Ltd Robert G Cameron and Paula S Cameron UBS Nominees Pty Limited Karen Wright BNP Paribas Nominees Pty Ltd Sudemo Pty Ltd Citicorp Nominees Pty Limited Sterling Surgical Pty Ltd Lodka Pty Ltd Trevor Collins and Dianne E Collins CS Third Nominees Pty Limited Amanda Taylor 70 Number held 29,750,660 21,984,574 17,026,779 16,197,850 10,629,027 10,535,827 4,118,021 3,454,646 3,090,150 2,608,480 2,585,300 2,022,000 1,818,065 1,744,863 1,518,000 1,515,000 1,434,804 1,128,480 1,105,536 1,000,000 Ordinary shares Number of holders 319 355 180 314 1,168 205 Ordinary shares % of total shares issued 18.64 13.78 10.67 10.15 6.66 6.60 2.58 2.16 1.94 1.63 1.62 1.27 1.14 1.09 0.95 0.95 0.90 0.71 0.69 0.63 135,268,062 84.76 ANNUAL REPORT 2021 | PACIFIC SMILES Unquoted equity securities Performance rights issued under the consolidated entity’s LTI plan 9,183,430 9 Number on issue Number of holders Substantial holders Substantial holders in the Company are set out below: Mr Alexander J Abrahams TDM Growth Partners Ms Alison J Hughes QVG Capital Celeste Funds Mgt Number held 24,990,599 23,097,325 16,197,850 11,831,850 8,994,627 Ordinary shares % of total shares issued 15.66 14.47 10.15 7.41 5.64 Voting rights Each ordinary share carries the right to one vote. No voting rights are attached to performance rights. There are no other classes of equity securities. 71 ANNUAL REPORT 2021 | PACIFIC SMILES Corporate Directory Directors Ms Zita Peach Non-Executive Chairperson Mr Phil McKenzie Managing Director and Chief Executive Officer Mr Mark Bloom Non-Executive Director Mr Hilton Brett Non-Executive Director Mr Ben Gisz Non-Executive Director Dr Scott Kalniz Non-Executive Director Mr Simon Rutherford Non-Executive Director Company Secretary Mark Licciardo Registered office Level 1, 6 Molly Morgan Drive Greenhills NSW 2323 T: 02 4930 2000 F: 02 4930 2099 W: www.pacificsmiles.com.au Share register Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 T: 1300 554 474 F: 02 9287 0303 E: registrars@linkmarketservices.com.au Auditor KPMG Tower Three, 300 Barangaroo Avenue Sydney NSW 2000 Stock exchange listing Pacific Smiles Group Limited shares are listed on the Australian Securities Exchange (ASX code: PSQ) Corporate Governance Statement The 2021 corporate governance statement is dated 30 June 2021 and reflects the corporate governance practices in place for the 2021 and 2022 financial years. The 2021 corporate governance statement was approved by the Board on 17 August 2021; a copy can be found on the Pacific Smiles website. 72 ANNUAL REPORT 2021 | PACIFIC SMILES The 2021 Pacific Smiles Group Limited annual report is printed using ecoStar+ 100% Recycled Silk. ecoStar+ is a FSC® certified paper. ecoStar+ is an environmentally responsible paper made Carbon Neutral and the fibre source is FSC (CoC) Recycled certified. ecoStar+ is manufactured from 100% post-consumer recycled paper in a process chlorine free environment under the ISO 14001 environmental management system. 73 ANNUAL REPORT 2021 | PACIFIC SMILES