Redbubble
Annual Report 2020

Plain-text annual report

Annual Report 2020 Contents 04 06 08 09 14 34 35 63 109 110 116 119 Year in Review Highlights and Commentary Chair’s Letter CEO’s Review Director’s Report Auditor’s Independence Declaration Remuneration Report Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder and other ASX Required Information Corporate Information Redbubble Limited ABN: 11 119 200 592 Year ended 30 June 2020 RedbubbleFounded in 2006, the Redbubble Group (RB Group) incorporates Redbubble Limited and its subsidiaries including TP Apparel LLC (TeePublic). RB Group owns and operates the leading global online marketplaces Redbubble.com and TeePublic.com. RB Group’s community of passionate creatives sell uncommon designs on high-quality, everyday products such as apparel, stationery, housewares, bags, wall art and so on. Through the Redbubble and TeePublic marketplaces, independent artists are able to profit from their creativity and reach a new universe of adoring fans. For customers, it’s the ultimate in self expression. A simple but meaningful way to show the world who they are and what they care about. This Report covers Redbubble Limited as a consolidated entity consisting of Redbubble Limited (referred to in this report as Redbubble or the Company) and its controlled entities. Redbubble is a company limited by shares, incorporated and domiciled in Australia (ACN 1192002592). Its registered office is at Level 3, 271 Collins Street, Melbourne VIC 3000. Redbubble is listed on the Australian Securities Exchange (ASX:RBL). Through the use of the internet, the Company ensures that our corporate reporting is timely, complete and available globally. All press releases, financial reports and other information are available on the Redbubble Investor Centre at shareholders.redbubble.com 3 RedbubbleAnnual Report 2020Year in Review(1) P&L (A$M) FY YoY (FY20 v FY19) FY20 FY19(1) Growth Total Revenue Less: Artist Revenue 416.3 307.0 (67.4) (50.1) Marketplace (MP) Revenue 348.9 256.9 Gross Profit 134.4 94.5 36% 35% 36% 42% GP % (on MP Revenue) 38.5% 36.8% 1.7pp Paid Acquisition (Marketing) (39.8) (27.0) GPAPA (Gross Profit after Paid Acquisition) 94.5 67.5 47% 40% GPAPA % (on MP Revenue) 27.1% 26.3% 0.8pp Operating Expenses Operating EBITDA Operating EBITDA % (on MP Revenue) (79.3) (61.2) 30% 15.3 6.3 141% 4.4% 2.5% 1.9pp Other Income/Expenses(2) (10.1) (8.3) 22% EBITDA 5.1 (2.0) 358% Depreciation & Amortisation (13.7) (10.4) EBIT (8.6) (12.4) 32% 31% (1) FY19 results include TeePublic from 1 November 2018 onwards. On 1 July 2019 the Group adopted AASB 16 - Leases using the full retrospective method of adoption. As a result of this FY19 comparative information has been restated. (2) Includes non-cash share-based payments, currency gains/losses and rent expenses (as per AASB 16 effective 1 July 2019). 4 RedbubbleHighlights and Commentary FY2020 Financial Performance Redbubble Group’s (“RB Group” or “Group”) FY2020 financial metrics (with YoY growth rates(1), where applicable) are: • Marketplace Revenue of $349 million, up 36% (29% on a constant currency basis(2)) • Gross profit of $134 million, up 42% (36% on a constant currency basis) • GPAPA of $95 million, up 40% (34% on a constant currency basis) • Operating EBITDA(3) of $15.3 million, up 141% (123% on a constant currency basis) Strategic & Business Update Key metrics and highlights(6) for FY2020 include: • 511k selling artists, up 51% and artist earnings were $67 million, up 35% • 6.8 million unique customers, up 30% • Repeat sales accounted for 40% of Marketplace Revenue • Launch of 16 new products across the Group in FY2020, including face masks in April 2020 • Redbubble app sales saw growth of 159% in FY2020 and represented 12.6% of Redbubble Marketplace • EBITDA of $5.1 million, up 358% (886% on a constant currency basis) Revenue in FY20 • Free cash inflow of $38 million(4), compared to an outflow of $0.2 million in FY2019(5), resulting from the Given ongoing uncertainty about COVID-19, RB Group will not be providing forward-looking guidance. Group’s increasing profitability and working capital advantage • Closing cash balance at 30 June 2020 of $58 million During 4Q FY2020, growth and profitability accelerated: • 4Q20 Marketplace Revenue of $103 million, up 73% on 4Q19 (64% on a constant currency basis) • Gross profit grew 88% and GPAPA grew 83% in 4Q20 compared to 4Q19, outpacing topline growth, driven by margin expansion and paid efficiency • 4Q20 recorded Operating EBITDA of $8.4 million and EBITDA of $7.4 million With a diversified network of 37 fulfillers across 10 countries and 41 locations, the Group fulfills products close to customers, keeping shipping timelines and costs competitive. During FY2020, fulfillment capacity was added in Europe, Canada and the United States. RB Group’s marketing efforts maintained efficiency with FY2020 marketing spend at 11.4% of Marketplace Revenue. Operating expenses for the year were $79.3 million. This includes a one off $2.2 million provision for the organisational restructure announced on 25 June 2020. Teams are focused on 4 key initiatives to propel profitable growth: 1) Artist acquisition, activation and retention 2) User acquisition and transaction optimisation 3) Customer understanding, loyalty and brand building 4) Further physical product and fulfilment network expansion RB Group CEO, Martin Hosking, said: “RB Group’s on-demand fulfilment model and differentiated consumer offerings provide us with distinctive advantages. The strong financial performance follows from these fundamentals. It has been pleasing to see the acceleration of existing trends in the last few months. 2021 represents a year of opportunity for the business. We are positioned to build on a decade of momentum and aggressively pursue the global opportunity presented by the shift to online activity and increasing adoption of ecommerce platforms.” (1) FY2020 YoY growth rates based on TeePublic contributions from 1 Nov 2018. (2) “Constant currency basis” reflects the underlying growth before translation to Australian dollars for reporting purposes. Redbubble sources about 94% of its Marketplace Revenue in currencies other than Australian dollars. TeePublic sources about 89% of its Marketplace Revenue in US dollars. (3) Operating EBITDA excludes non-cash share-based payments, currency gains/losses, rent expenses (as per AASB 16 effective 1 July 2019), depreciation and amortisation. Comparative figures have been adjusted accordingly on a like for like basis. 4Q and FY2020 Operating EBITDA also includes the impact of $2.2 million related to one-off reorganisation costs. (4) Aggregate operating and investing cash flows excluding consideration for TeePublic. (5) The AASB 16 change also increased FY2020 free cash flows by $3.6 million. The FY2019 comparative figures have been adjusted upwards by $2.9 million to apply the same treatment to the prior period. (6) Sourced from RB internal data. 6 7 RedbubbleAnnual Report 2020Chair’s Letter CEO’s Review On behalf of the Redbubble Board of directors, I am pleased to present the Annual Report for 2020. The past year has been uniquely challenging and I am proud of Redbubble’s strong business performance during this period. The COVID-19 pandemic has had a profound impact on consumer behaviour and has accelerated the shift to online platforms. The Redbubble and TeePublic marketplaces have benefitted from this shift, with strong growth evident across geographies and product categories. I am particularly pleased with the performance of the Redbubble supply chain, which has proven to be highly resilient and largely unaffected by the pandemic. One sign of a great business is its ability to adapt to changing circumstances. Redbubble was amongst the first to move all staff to remote working, whilst maintaining the usual high levels of productivity. The Redbubble team was also able to design and launch a new facemask product with impressive speed. Facemasks have rapidly grown to be an important sales contributor for both Redbubble and TeePublic. I was delighted to assume the role as Board Chair in March this year. I thank my predecessor Richard Cawsey for his leadership of the Board and many contributions to Redbubble over the past decade. I also thank Redbubble’s co-founder Martin Hosking for coming out of retirement to step in as interim CEO following Barry Newstead’s departure from the company in February. Martin is continuing as interim CEO whilst the Board completes a global search for a permanent CEO. We welcomed Ben Heap to the Redbubble Board in April 2020. Ben is passionate about innovation and his diverse experience has proved to be a great addition to the board. Thanks to our wonderful community of committed artists. We are proud of the quality and diversity of art and design work they bring to the Redbubble and TeePublic marketplaces. This year artists earned over $67 million through our marketplaces. Thanks also to our valued third party fulfillers, content partners and customers for their continued support. My thanks also go to all Redbubble employees. Our success this year would not have been possible without the efforts of our strong executive team and dedicated employees around the globe. Finally, thanks to you, our shareholders. We will continue to focus on building long term value for you as we realise our ambition of creating the world’s largest marketplace for independent artists. The potential for the Redbubble Group (“RB Group”) has become increasingly clear during FY2020 as both marketplaces (Redbubble and Teepublic) have seized on the opportunities presented by the Covid-19 crisis to extend leadership positions serving independent artists and their customers. The Company’s potential is reflected in financial results highlighting rapidly accelerating profitability as the advantages of increasing scale are realised. In this review I want to highlight the four factors that have driven success of the Company through 2020 and which underpin the potential for the Company in the coming decade: changes in the retail landscape, the strong flywheel dynamics, the advantages of the on-demand model and finally our commitment to profitable growth. Changes in the Retail Landscape The Covid-19 crisis that unfolded in the third and fourth quarters of 2020 has accelerated trends that were already underway. 10 years of online growth were achieved over the course of a few months. There are signs of enduring structural changes with consumer behaviour having shifted and online retail retaining share even as reopening occurred. The Group was particularly well suited, versus traditional retailers, by the nature of our offering: more differentiated and personalised products, almost immediate timely product designs created by the artists and negligible stocking or inventory risk as a result of the print-on-demand offering. The combined effect of these factors was that the Redbubble marketplaces had the most relevant products for the customers made available at attractive prices with attractive margins. Growth for the Company was realized in all four of our principal geographies: North America, Continental Europe, the UK and Australia and New Zealand. In the fourth quarter year-on-year growth was 121%, 61%, 124% and 79% respectively. These geographies represent a total addressable market of some 1 billion people. There are very few consumer marketplaces from anywhere in the world, let alone Australia, that have such global spread. Anne Ward Chair 8 9 RedbubbleAnnual Report 2020CEO’s Review (continued) Changes in the Retail Landscape (continued) CEO’s Review (continued) Flywheel Dynamics (continued) Gross Transaction Value by Region(1) (A$m, FY16-FY20) 328 21 37 52 231 17 31 39 175 13 25 23 143 10 23 16 93 Region ROW AU/NZ UK EU % total business FY19-20 YoY 4Q YoY 1% 5% 10% 7% 24% 33% 24% 79% 124% 14% 30% 61% 474 26 49 68 North America 69% 53% 121% Marketplaces are especially difficult to create as without buyers there are no sellers and without sellers no buyers. That means once established they have considerable resilience. They typically also have a second inflection point as the offering is accepted by more mainstream consumers with even more rapid uptake by the sellers. The Group is now moving through this point as in the last year: • We had 511,000 selling artists; • They earned a total of $67 million; • They attracted 6.8 million customers; • Who bought $474 million from these artists; and, • With the products created from 41 fulfilment locations all over the world. It is a flywheel because the more artists in the marketplace, the more relevant content and so more reason for customers to come. The more customers the better the fulfilment network becomes, and this in turn brings back more customers. And with more customers more artists are attracted. Given the overall size of the addressable market this flywheel, which has been operating for more than a decade, will continue to drive growth and profitability for many years. 112 142 215 328 On Demand Retail Model FY16 FY17 FY18 FY19 FY20 Flywheel Dynamics(1) ARTISTS & CONTENT DISCOVERY LOYAL CUSTOMERS SERVICE FULFILMENT & OPTIONS Leading Print-On-Demand marketplaces for independent artists 511,000 selling artists on RB marketplace (↑51% YoY) Aggregated, growing demand 6.8 million customers (↑30% YoY) bought from RB marketplaces spending $474 million GTV (↑44% YoY) Scalable on-demand global 3rd party fulfilment 41 fulfilment locations across global networks (↑9% YoY) The third arm of the marketplace is the fulfilment network. It is this network which enables an artist in Pretoria to sell a facemask to someone in Berlin. The network has taken 13 years to build and is without parallel in any other company. With 41 fulfiller locations at 30 June 2020, 96% of all products sold are fulfilled by a partner local to the same geographic region as the customer who bought them. There are 117 products available in the marketplaces and 16 new products were added last year. Additional products create annuity streams of revenue. Product diversity has provided resilience with year-on-year growth strong in all categories. Areas of expansion for the group extend in all our category areas: apparel, accessories, home and wall art and electronics as well as new categories such as home office, nursery and baby and even pets. Product contribution (% of Marketplace Revenue, FY16 - FY20) 7% 7% 13% 12% 10% 8% 7% 13% 12% 13% 9% 8% 13% 13% 17% 8% 8% 11% 14% 19% 10% 10% 12% 14% 17% Category FY19-20 YoY Homewares Artwork Accessories Other Apparel Stationery and Stickers 63% 68% 52% 30% 21% 51% 47% 40% 40% 38% T-shirts 30% (1) Source: RB internal data FY16 FY17 FY18 FY19 FY20 10 11 RedbubbleAnnual Report 2020CEO’s Review (continued) Profitable Growth Since IPO in 2016 Redbubble has shown consistent growth down the P&L. During 2020 the promise of this was realised with Operating EBITDA(1) profitability of $15.3 million and EBITDA profitability of $5.1 million. This reflected scaling across the Group with low customer acquisition costs, solid margins and low marginal operating expenditure. These are all a feature of the fundamentals of the business model. Looking forward we intend to continue to build on the advantages of the model to drive increasing levels of profitability with solid top-line growth. Marketplace Revenue (A$m, FY16-FY20) +32% CAGR 115 FY16 141 FY17 183 FY18 257 FY19 349 FY20 GP (A$m, FY16-FY20) +36% CAGR 39 FY16 50 FY17 64 FY18 95 FY19 134 FY20 Operating EBITDA (A$m, FY16-FY20) +141% YoY CEO’s Review (continued) 2021 A year of Promise 2021 is a year of promise. The flywheel for the group is turning faster as we become more mainstream. We aim to maintain the momentum through focus on 4 things: 1. Artist activation and retention at Group level. This is to ensure we are the natural home for all artists on the Internet. We need to attract, retain and develop them as they are the foundation for the differentiated consumer experience. 2. User acquisition and transaction optimisation. We have unique assets in the vast content library and diverse product types. This allows us to attract customers in a low cost way but it requires ongoing development activity. 3. Customer understanding, loyalty and brand building. This is the biggest single opportunity for the Company. The improvements in loyalty we are seeing are encouraging. Both the Redbubble and Tee Public have loyal customers and the brands are being built. We need to focus on this, and are bringing in new expertise into the Company to do so. 4. Finally, new physical products and network expansion. We can add 100s of products and many more fulfilment partners. The technology is ever expanding and what seemed fanciful only a few years ago is now everyday. Adding new products and partners will increase the scale and scope of the marketplaces, attracting and satisfying more customers. -4.9 FY16 -3.4 FY17 -2.2 6.3 15.3 FY18 FY19 FY20 (1) Operating EBITDA: excludes non-cash share-based payments, currency gains/losses, rent expenses (as per AASB 16 effective 1 July 2019), depreciation and amortisation. Comparative figures have been adjusted accordingly on a like for like basis. 4Q and FY2020 Operating EBITDA also includes the impact of $2.2 million related to one-off reorganisation costs. Martin Hosking CEO 12 13 RedbubbleAnnual Report 2020Director’s Report Your Directors present their report on the consolidated entity, consisting of Redbubble Limited (the Company or Redbubble) and the entities it controlled during the financial year ended 30 June 2020 (referred to hereafter as the RB Group or Group). Directors The following persons were Directors of the Company during the 2020 financial year and to the date of this Report: Anne Ward Chair, Non-executive Director Review of operations FY2020 Financial Performance The RB Group’s FY2020 financial result reflects a positive shift to online retail reporting the following core metrics with year on year (YoY) growth rates(1), where applicable: • Marketplace Revenue of $349 million, up 36% (29% on a constant currency basis(2)); • Gross profit of $134 million, up 42% (36% on a constant currency basis); • Gross Profit After Paid Acquisition costs (GPAPA) of $95 million, up 40% (34% on a constant currency basis); • Operating EBITDA of $15.3 million, up 141% (123% on a constant currency basis); • EBITDA of $5.1 million, up 358% (886% on a constant currency basis); • Free cash inflow of $38 million(3), compared to an outflow of $0.2 million in FY2019(4), resulting from the Group’s increasing profitability and working capital advantage; and • Closing cash balance at 30 June 2020 of $58 million. Marketplace Revenue growth was evident across both marketplaces, particularly in 4Q. This top line growth has been achieved with strengthening margins, efficiency of paid marketing spend and controlled operating expenses resulting in a record Operating EBITDA profit of $5.1 million. Martin Hosking CEO and Managing Director (reappointed effective 18 February 2020 following earlier appointments as Non-executive Director, Executive Director and first appointment as CEO and Managing Director) Gross profits strengthened in the period with the onboarding of additional fulfillment capacity in Europe, Canada and the United States. The strength of the network across 37 fulfillers, 10 countries and 41 locations allowed products to be produced close to consumers, keeping shipping timelines and costs competitive. Jennifer (Jenny) Macdonald Non-executive Director Greg Lockwood Non-executive Director Ben Heap Non-executive Director (appointed effective 20 April 2020) Richard Cawsey Barry Newstead Grant Murdoch Former Chair, Non-executive Director (resigned effective 30 March 2020) Former CEO and Managing Director (ended effective 18 February 2020) Non-executive Director (resigned effective 23 October 2019) Principal activities RB Group, through its websites at Redbubble.com and TeePublic.com, owns and operates the Redbubble and TeePublic online marketplaces. These marketplaces facilitate the sale and purchase of art and designs on a range of products sold by independent creatives to consumers. The products are produced and shipped by third party service providers (i.e. product manufacturers, printers and shipping companies) referred to as fulfillers. There was no significant change in the nature of RB Group’s activities during the year. The RB Group expanded its paid social channels within the year to include podcast advertising, Twitch, and TikTok, in addition to existing social channels. RB Group’s marketing efforts maintained efficiency with FY2020 marketing spend at 11.4% of Marketplace Revenue. Operating expenses for the period were $79.3 million, however, within this cost base is a $2.2 million restructure provision as a result of the organisational restructure announced on 25 June 2020. This restructure aligns teams to the strategic activities within the organisation. The design commits the Group to deliver against a smaller set of core activities whilst aggressively pursuing profitable growth. FY2020 was the first full year of TeePublic’s inclusion in the RB Group’s Financial Statements. Redbubble made a $7.1 million ($4.8 million USD) deferred consideration payment in May 2020, as required by the Equity Purchase Agreement. The deferred consideration payment was net of agreed actual and contingent liabilities in respect of the period pre-completion of the transaction. At year end, the RB Group retained a cash balance of $58 million, an increase of $29 million ($7.8 million in FY19) demonstrating the Group’s powerful working capital advantage as aggregate operating and investing cash flows were positive for the first time in FY20. (1) FY2020 YoY growth rates based on TeePublic contributions from 1 Nov 2018. (2) “Constant currency basis” reflects the underlying growth before translation to Australian dollars for reporting purposes. Redbubble sources about 94% of its Marketplace Revenue in currencies other than Australian dollars. TeePublic sources about 89% of its Marketplace Revenue in US dollars. (3) Aggregate operating and investing cash flows excluding consideration for TeePublic. (4) The AASB 16 change also increased FY2020 free cash flows by $3.6 million. The FY2019 comparative figures have been adjusted upwards by $2.9 million to apply the same treatment to the prior period. 14 15 RedbubbleAnnual Report 2020A reconciliation of reported results to non-IFRS numbers in this Directors’ report is provided below. Reconciliation of reported results to non-IFRS(1) numbers Total reported revenue from services Less Artists' margin Marketplace revenue Fulfiller expenses Gross profit Gross profit margin on Marketplace revenue Paid acquisition costs Gross Profit After Paid Acquisition costs (GPAPA) Cash Operating Expenses Employee and contractor costs (excluding share based payments) Marketing expenses (excluding paid acquisition costs shown above) Operations and administration costs (excluding TeePublic acquisition costs) Cash Operating Expenses Operating (Cash) earnings before interest, tax, depreciation and amortisation (Operating EBITDA) Share based payments TeePublic acquisition costs Other expenses Earnings before interest, tax, depreciation and amortisation (EBITDA) Depreciation and amortisation Interest expenses Interest income Total Loss before income tax Income tax benefit/(expense) (4) Reported total loss for the year 2020 $’m(2) 416.3 (67.4) 348.9 (214.5) 134.4 38.5% (39.8) 94.5 (51.5) (3.5) (24.3) (79.3) 15.3 (8.0) - (2.1) 5.1 (13.7) (0.6) 0.2 (9.0) 0.2 (8.8) 2019 $’m(2) Restated(3) 307.0 (50.1) 256.9 (162.4) 94.5 36.8% (27.1) 67.5 (41.7) (1.5) (17.9) (61.3) 6.3 (5.9) (1.2) (1.2) (2.0) (10.4) (0.7) 0.3 (12.8) (14.8) (27.6) Business Update Key metrics and highlights(5) for FY2020 include: • 511k selling artists, up 51% and artist earnings were $67 million, up 35%; • 6.8 million unique customers, up 30%; • Repeat sales accounted for 40% of Marketplace Revenue; • Launch of 16 new products across the Group in FY2020, including face masks in April 2020; and • Redbubble app sales saw growth of 159% in FY2020 and represented 12.6% of Redbubble Marketplace Revenue in FY20. COVID-19 The RB Group provided COVID-19 updates in April and June 2020 updating investors of the impact of COVID-19 on trading activity. The initial impact of the global pandemic saw increased volatility in sales and a reduction of demand. However, post this initial decline, the Group has benefited from an acceleration in online activity throughout the last quarter of FY20. Increased demand was evident across both marketplaces, all core geographies and product categories. The Group’s early release of adult masks has led to strong sales performance of 741,000 masks shipped in the period, recognition of $12.1 million of marketplace revenue (on a shipped basis) and $1.4 million of artist earnings generated. Home decor and wall art categories were strong contributors to the Group’s performance. 400,000 masks were donated to Heart to Heart International and Direct Relief to support communities most in need. The financial impact of the increased consumer demand has led to high balances of cash in accordance with the Group’s working capital advantage. Additionally, FY20 has a larger unearned revenue balance reflecting the demand and time taken to produce and deliver goods to consumers. The increased time to deliver goods has been well managed with customer communications and the Group NPS scores remain strong. The impact for the Group’s community of artists has been overwhelmingly positive as evidenced by record numbers of artists joining the marketplaces and artworks uploaded that translated into record numbers of products sold by artists and payments made to them in 4Q FY20. The RB Group did not receive any Government benefits across the jurisdictions in which the Group operates. The RB Group quickly adapted to external health and safety information and transitioned the workforce across our operations of New York, San Francisco, Melbourne and Berlin to a full time remote basis from March 10th. The agility of the team, supported by secure cloud based technology has supported a decentralised working model without losing productivity. Redbubble’s teams remained working remotely through until June 30th and are not expected to return to the office until early in 2021. A range of initiatives have been provided to support the wellbeing of all employees including use of company assets like monitors, allowances for the provision of an ergonomic work from home set up, allowances for home internet costs, the provision of mindfulness activities, the official Employee Assistance Program with trained health professionals as well as remote working wellbeing resource packs. (1) Non-IFRS measures are presented to provide readers a better understanding of Redbubble’s financial performance. The non-IFRS measures are unaudited, however, they have been derived from the audited financial statements. (2) For presentation purposes, numbers have been rounded to millions of dollars, however calculations and totals are based on unrounded numbers. (3) On 1 July 2019 the Group adopted AASB 16 - Leases using the full retrospective method of adoption. Prior year comparatives have been restated to align the accounting treatment across both periods. (4) Details of the movement in the income tax (expense)/benefit are found in note 7(b) of the financial statements. The movement is predominantly due to the decision to write off the deferred tax asset during the prior year. (5) Sourced from RB Group internal data. 16 17 RedbubbleAnnual Report 2020COVID 19 (continued) Dividends The COVID-19 pandemic adds inherent uncertainty into global economic conditions, and as such, the RB Group continues to monitor online sales, trends and the fulfillment networks capacity. No dividends were paid or declared since the start of the 2020 financial year. Financial implications of COVID-19 are identified in the financial statements, specifically: Corporate Sustainability Statement • in confirming the going concern basis of preparation of accounts; and • in assessing the carrying value of intangible assets. In October 2019, the RB Group established an American Depository Receipts (ADR) program with the symbol RDBBY. The program complements the Australian Stock Exchange listing, facilitating existing shares to be issued as ADRs to US and international investors. Strategy The RB Group sells merchandise decorated from a unique collection of 35 million works by independent artists. By leveraging printing technology allowing economic single prints on many types of products, supported by worldwide fulfillment, the RB Group is able to offer amongst the largest catalogue of any ecommerce business while holding no inventory. As the leading business of this kind, the Group’s objective is to expand its market while extending its leadership position, and through this, to bring more creativity into the world. A confluence of factors including a change of leadership and review, sharing of best practice between TeePublic and Redbubble, the environmental shocks of COVID-19 and an increasing profit orientation has led the company to refine strategy by focusing on a narrower set of core growth activities: • Artist acquisition, activation and retention; • User acquisition and transaction optimisation; • Customer understanding, loyalty and brand building; and • Further physical product and fulfilment network expansion. In so doing, the RB Group has been able to restructure to align resources around fewer priorities while supporting the cost discipline required to drive profitability. At the same time, the clarity of a narrower focus on the basic drivers of the RB Group flywheel has been designed to sharpen execution within the business. RB Group takes its corporate social responsibilities seriously and recognises that social, environmental and ethical conduct has an impact on RB Group’s reputation and the broader community. Redbubble’s Board is committed to creating enduring value for shareholders and other stakeholders. This is achieved through: • Implementing sound corporate governance practices; • Operating in a responsible manner towards employees through fair and equitable practices; • Transparent reporting on operations and activities; • Monitoring potential risks and applying mitigating policies; and • Making a positive impact on the community. Examples of RB Group’s contributions to the community are summarised below. ‘Create Some Good’ Redbubble’s commitment to the power of creativity and belief that a simple idea can help open hearts and minds led to the launch of the ‘Create Some Good’ initiative. The Company funded 5 projects by 6 artists from 4 countries. All with a single goal – to use creativity to make the world a little better. ‘Community Collective’ Redbubble’s Community Collective is an employee-driven initiative with one core purpose: to creatively bring compassion into our local communities. We’ve partnered with organizations who focus on issues like the environment, cancer, HIV/AIDS, domestic violence, and poverty. Major Global Incidents Policy When a global incident occurs, the Company often sees works emerge on the Redbubble website as artists respond to real life events. In certain scenarios, the Company donates all profits from related works to the appropriate charity or organization, ensuring the funds will be used in a meaningful and relevant way. Any content created in response to such events must comply with Redbubble’s User Agreement and all of Redbubble’s usual policies. Significant changes in the state of affairs Mask Donations In the Directors’ opinion, there have been no significant changes in the state of affairs of RB Group during the 2020 financial year. Significant events after end of the 2020 financial year Redbubble and TeePublic both launched face masks at the end of April to support the Group’s artist community and have a positive impact on the world during the COVID-19 global pandemic. In June 2020 RB Group announced plans to donate up to 400,000 face masks to Heart to Heart International and DirectRelief for every face mask sold on Redbubble and TeePublic respectively. Donated masks will be given to health workers responding to coronavirus. In the Directors’ opinion, there have been no matters or circumstances arising since the end of the 2020 financial year that has significantly affected, or may significantly affect: Bushfire support • RB Group’s operations in future financial years; • the results of those operations in future financial years; or • RB Group’s state of affairs in future financial years. Redbubble donated $14,000 from bushfire related sales to Zoos Victoria Emergency Wildlife Fund to support teams caring for displaced and injured animals. A number of Australian based Redbubble staff contributed by salary sacrificing donations to the same emergency relief fund. 18 19 RedbubbleAnnual Report 2020Redbubble partnered with the Canberra Times, in conjunction with Artist David Pope, to support bushfire relief efforts. Mr Pope created a special series of works aimed at celebrating some of the areas in Australia that were hardest hit by the bushfires. The goal was to promote tourism to these areas and to raise money for bushfire relief charities. The artworks were promoted on Redbubble and Redbubble donated $10,000 to bushfire recovery efforts through the Foundation for Rural and Regional Renewal Public Fund. Gillian Anderson collaboration Due to popular demand of Gillian Anderson’s original lips design that she promoted and sold for charitable causes on her Redbubble shop in 2019, Gillian partnered with Redbubble on a mask campaign supporting the ‘SayYes’ charity, which trains and supports mentors for youth in transition particularly in Africa. In light of the COVID and BLM movements, supporting this cause was particularly important to Gillian. Gillian’s limited-time shop was live for just under three months on Redbubble and drove more than $55k AUD in sales. Redbubble donated 10% of total revenue from her shop to SayYes. Further details about Redbubble’s Corporate Sustainability initiatives can be found on Redbubble’s Corporate Sustainability page at: redbubble.com/social-responsibility/giving-back/community-collective Environmental regulations RB Group is committed to compliance with all applicable environmental legislation. RB Group adopts responsible environmental practices to meet its compliance requirements and operate consistent with its values. The Directors are not aware of any material breaches of any environmental legislation affecting RB Group’s operations. Ethical Sourcing Policies As a global marketplace, RB Group places great emphasis on its contribution and impact in the wider community, both socially and environmentally. Print on Demand Every product on RB Group’s marketplaces is printed on demand (i.e. made one at a time). That means the product does not exist until the customer orders it. Print on demand allows fulfillers to combine multiple items in the same package. That means fulfillers do not need as much shipping material. Less material means less waste. A Small Footprint Around 95% of packages delivered via the Redbubble marketplace originate within the same region from which they are ordered. For the TeePublic marketplace that proportion is over 90%. This regional fulfillment ensures that less energy is used in the delivery of packages and leads to a smaller carbon footprint. To offset the shipping emissions from annual package delivery, the Company is partnering with a leading third-party carbon offset organisation. Current examples of conservation initiatives in which the Group is investing include a grasslands conservation project in Oregon, USA and a cookstove replacement program to reduce emissions in India. Ethical Production RB Group is committed to ethically-sourced apparel. Only independent third-party printers that source high quality garments and value the health and welfare of their staff are permitted to participate in the RB Group marketplaces. All Redbubble’s participating third-party printers hold formal social compliance approvals such as Worldwide Responsible Accredited Production (WRAP) or equivalent certifications. The same is true for the majority of TeePublic’s participating third-party printers and work continues on obtaining certifications for the remaining manufacturers. RB Group also requires that all third-party printers participating in the marketplace ensure safe working conditions, minimise environmental impacts, and treat their employees with respect and dignity. Redbubble ensures these requirements are met by requiring printers’ adherence to the Fair Labor Association (FLA) Code of Conduct. The same is true for the majority of TeePublic’s printers and, as above, the remainder of printers are being brought into compliance with the FLA Code. The Group works with third-party firms to schedule announced compliance audits of the FLA Code of Conduct. The core purpose is to ensure standards are being met and sustainable management, reporting, and tracking systems have been established. Participants in the Group marketplaces must commit to continual improvement where Code Standards are not met and assure ongoing compliance in a reasonable and timely manner. California Transparency in Supply Chains Act RB Group supports the California Transparency in Supply Chains Act, which requires members of the supply chain to certify compliance, agree to audits, undergo Social Responsibility training and remain accountable for their actions. Australian Modern Slavery Act 2018 requirements The Modern Slavery Act 2018 (Cth) commenced on 1 January 2019. Redbubble is subject to the new statutory modern slavery reporting requirements and, in addition to the activities and processes described above, the Company is reviewing supply chain operations ahead of its with the first mandatory compliance report due in March 2021. Governance and risk RB Group is committed to strong and effective governance and risk management frameworks. These frameworks are described in Redbubble’s Corporate Governance Statement - available in the Corporate Governance section of the Redbubble’s Investor Centre at: shareholders.redbubble.com RB Group manages its risks in an integrated, consistent and practical manner. The overall objective of risk management is to assist the Group to achieve its objectives by appropriately considering both threats and opportunities, and making informed decisions. Redbubble’s Audit and Risk Committee oversees the process for identification and management of risk, as described in the Corporate Governance Statement. The Company Secretaries are responsible for reporting to the Audit and Risk Committee and the Board in relation to the management of RB Group’s significant risks. The Group’s risk management framework, responsibilities and accountabilities are aligned with its business model. The risk management policy and risk appetite is provided in the Corporate Governance Statement. The key organisational controls within the risk management framework help to shape the strategies, capabilities and culture of the Group, identify and address vulnerabilities, strengthen the system of internal controls and build a more resilient organisation. 20 21 RedbubbleAnnual Report 2020Risk Framework RB Group seeks to take and manage risk in ways that will generate and protect shareholder value. The management of risk is a continual process and an integral part of the Group’s business. The Group acknowledges that it has an obligation to shareholders, customers, employees, creatives and contractors to implement a risk management framework that reflects its overall risk appetite and tolerances for risk in specific areas. The Directors believe that this approach contributes to the achievement of the Group’s strategic objectives. The Group is committed to ensuring that a consistent and integrated approach to managing risk is established at all levels and is embedded in its processes and culture. The objective of RB Group’s risk appetite is to foster a culture of innovation. RB Group is aware that an overly cautious approach to risk management may have a harmful impact on the achievement of strategic and operational objectives. For this reason, the Board encourages prudent risk taking by RB Group staff that balances the risks of action versus inaction and subject always to applicable RB Group policies. The Board is ultimately responsible for ensuring risk management processes have been established and are operating effectively. The Audit Risk Committee, through its Charter, is responsible for overseeing RB Group’s ongoing risk management program framework and any key supporting policies and procedures. The CEO and the Executive Team are responsible for managing and embedding risk management practices throughout RB Group. RB Group has adopted a risk management strategy that aims to identify and minimise the potential for loss while also maximising strategic opportunities for growth and enhanced service delivery and profitability. RB Group’s Risk Framework, Principles and Process is consistent with the following model from AS/NZ ISO 31000:2018 Continual Improvement Integrated Human and Cultural Factors Structured and Comprehensive Value Creation and Protection Best Available Information Customized Dynamic Inclusive Principles (clause 4) Integration Design Leadership and Commitment Improvement Implementation Evaluation I N O T A T L U S N O C & N O T A C N U M M O C I I SCOPE, CONTEXT, CRITERIA R I S K A S S E S S M E N T Risk Identification Risk Analysis Risk Evaluation RISK TREATMENT RECORDING & REPORTING I I M O N T O R N G & R E V E W I Framework (clause 5) Process (clause 6) The Risk Framework outlines the responsibilities for risk management at all levels in the organisation. The Board approves a Delegation Register that provides for delegation to management in specific areas and prescribes the limits on such delegations. The Framework also supports these responsibilities by defining a risk reporting structure, expectations and the resources and tools required. The risk management process outlined in the Framework includes risk assessment methodology with identification, analysis, evaluation and treatment in Redbubble’s key risk areas. 22 2323 23 Annual Report 2020Redbubble Privacy and Data Protection Compliance Risk To minimise the impact of this compliance risk we undertook an extensive compliance framework initiative with the enactment of the European General Data Protection Regulation (GDPR) and California Consumer Privacy Act and implemented appropriate IT security measures; including preventative, detective and responsive capabilities. Macroeconomic Risks RB Group is subject to macroeconomic risks affecting consumer demand in relevant retail markets. These risks are largely outside of RB Group’s control, and are mitigated by spreading risk and investments across a wide range of countries and investments of varying sizes and value. The Group has benefited from an acceleration in online activity due to the impacts of the COVID-19 pandemic on consumer behaviour. However, the negative macroeconomic effects of the pandemic in RB Group’s major territories creates greater uncertainty for the Group in the longer term. Information on Directors At the date of this report, the Board comprises four Non-executive Directors and one executive Director, who collectively have a diverse range of skills and experience. The names of Directors and details of their skills, qualifications, experience can be found below on pages 26 to 28 of this Report. Details of the number of Board and Board Committee meetings held during the year and Directors’ attendance at those meetings are shown on page 28 of this report. Details of the qualifications and experience of the Directors and their directorships of other listed companies held by each current Director in the three years before the end of the 2020 financial year are listed below. Principal risks The following are key risks that may impact RB Group’s financial and operating results in future periods: Competitive activity / technological disruption To mitigate the impact of this risk RB Group is focussing on ensuring that its marketplaces provide a market leading experience for artists and customers. Google search channel risk The RB Group has prioritised search engine optimisation (SEO) work with allocation of internal resources and external consultants, including improvements throughout an improved user and crawler navigation experience generated by changes to website linking structures. Fulfillment network capacity risk RB Group has reduced this risk by implementation of a diversification strategy by integration of new fulfillers and improvements to the fulfillment API, systems and tooling, enabling new fulfillers to be onboarded significantly faster. Attracting and retaining top talent in business critical functions Redbubble continues to encounter competition for technology talent in Melbourne. This risk has been mitigated with the introduction of the executive compensation plan during FY2020 and compensation adjustments for key talent roles. Technology Security Risk As a technology‐focused business, managing security, and taking care of consumer and customer data is essential. To manage this risk, the Group has developed and tested its disaster recovery capability and procedures, implemented high availability infrastructure and architectures, and continually monitors our systems for signs of poor performance, intrusion or interruption. The Group maintains appropriate data management, security and compliance policies, procedures and practices in place. Litigation brought against Redbubble for intellectual property infringement Litigation risk arises from RB Group’s role as an intermediary for user-generated content. RB Group mitigates this risk in various ways, including by responding expeditiously to takedown notices from intellectual property rights holders; engaging in collaborative relationships with rights holders to promote the integrity of hosted content (including by facilitating licensing through our Partner Program and by proactively finding and removing content through our Policing Program); developing automated platform software to manage content at scale; and building our litigation capabilities. This approach has reduced risk, especially in the United States, where Redbubble has secured multiple favorable decisions in 2019 and 2020. Although one of these cases is still pending, and plaintiffs in two other cases have appealed the decisions, they are valuable wins for both RB Group and the independent artists who use its marketplaces. The decisions provide a clear indication from the courts that RB Group’s business model and IP enforcement procedures limit exposure to legal claims that assert RB Group is liable for the acts of third-party sellers. RB Group will continue to mitigate risk in this area by further building its capabilities through process and technology improvements. 24 25 RedbubbleAnnual Report 2020Directors’ qualifications and experience Ms Anne Ward Independent Non-executive Director and Board Chair Member of the People and Nomination Committee Chair of the Disclosure Committee Anne Ward is a professional company director with extensive experience in business management, strategy, finance, risk and governance across a range of industries including banking, financial services, technology, healthcare, education, property and tourism. In addition to chairing Redbubble, Anne is independent Chairman of Colonial First State Investments Ltd, a member of the Council at RMIT University, a Director of the Foundation for Imaging Research, and a Governor of the Howard Florey Neuroscience Institutes. Prior to becoming a professional director, Anne was a commercial lawyer for 28 years and was General Counsel for Australia at the National Australia Bank. She holds a Bachelor of Laws and a Bachelor of Arts from the University of Melbourne, is admitted as a barrister and solicitor in the Supreme Court of Victoria and is a Fellow of the Australian Institute of Company Directors. Anne has held the following listed company directorships in the 3 years to 30 June 2020: • MYOB Group Ltd (from March 2015 to May 2019) Mr Martin Hosking CEO and Managing Director Member of the Disclosure Committee Martin Hosking is a co-founder of Redbubble. He first became the CEO and Managing Director in July 2010. Martin resigned as CEO and Managing Director and became an Executive Director on 1 August 2018 and Non-executive Director on 1 October 2018. Martin was appointed CEO and Managing Director on 18 February 2020 following Barry Newstead’s departure. Martin has spent over 20 years scaling Australian technology companies. Previously, Martin was the chair of Aconex, a SaaS provider to construction firms, and Southern Innovation, a digital pulse processing solution. He was instrumental in the development and subsequent listing on the NASDAQ of search company, LookSmart. Martin started his career as a diplomat with the Australian Department of Foreign Affairs and Trade before joining McKinsey & Company, serving clients focusing on emerging technologies. Martin has a Bachelor of Arts (Hons – First class) degree from the University of Melbourne and an MBA (with distinction) from Melbourne Business School, where he has also lectured. Martin is a graduate of the Australian Institute of Company Directors. Martin has not held any other listed company directorships in the 3 years to 30 June 2020. Ms Jenny Macdonald Independent Non-executive Director Chair of the Audit and Risk Committee Member of the People and Nomination Committee Member of the Disclosure Committee Jenny Macdonald is a professional company director, currently serving on the Board and is Remuneration Chair and an audit committee member of ASX-listed Australian Pharmaceuticals Ltd (ASX: API), the parent company of Priceline Pharmacy, Soul Pattinson Chemist and Pharmacist Advice, and serves as the Audit Chair for Bapcor Ltd (ASX:BAP). Jenny was appointed a Non-Executive Director and Audit and Risk Chair of Property Guru Pte Ltd, operator of Singapore’s marketing leading property portal propertyguru.com.sg, effective 10 September 2019. Jenny previously held Non-Executive Director role at Redflow Ltd (ASX: RFX) a producer of innovative energy storage flow batteries. She also has extensive experience working for ASX-listed and global companies at the CFO and general management level, including as CFO and interim CEO at Helloworld Limited, and CFO and General Manager International with REA Group. Jenny holds a Masters of Entrepreneurship and Innovation: Swinburne University (Victoria), a Graduate Diploma from the Securities Institute of Australia and a Bachelor of Commerce from Deakin University (Victoria). She is a Graduate of the Australian Institute of Company Directors and a Member of the Institute of Chartered Accountants ANZ. Jenny has held the following listed company directorships in the 3 years to 30 June 2020: • Australian Pharmaceuticals Ltd (from 9 November 2017 to present) • Bapcor Ltd (from 1 September 2018 to present) • Redflow Ltd (from 22 December 2017 to 30 September 2019) Mr Greg Lockwood Independent Non-executive Director Member of the Audit and Risk Committee Member of the Disclosure Committee Greg Lockwood was appointed as a Non-executive Director with effect from June 2015. Greg is a partner of Piton Capital, which is a shareholder in Redbubble. In 1999, Greg founded UBS Capital’s early stage venture investing activities in Europe. Subsequently, he co-founded Piton Capital, the London-based venture capital fund specialising in marketplaces and business models with network effects. Prior to his venture capital activities, Greg worked in telecommunications corporate finance with UBS in London and Zurich and held operating roles in classified media publishing in Toronto. Greg has an Honours Business degree from the University of Western Ontario, and a Master’s degree in management from the Kellogg Graduate School of Management. Greg has not held any other listed company directorships in the 3 years to 30 June 2020. 26 27 RedbubbleAnnual Report 2020Redbubble Mr Ben Heap Independent Non-executive Director Chair of the People and Nomination Committee Member of the Audit and Risk Committee Ben Heap is a professional company director with a portfolio of public, private, government and not-for-profit roles. In addition to Redbubble, Ben is currently serving as a non-executive director of ASX100 company The Star Entertainment Group Limited (ASX:SGR). He is also a founding partner and chairman of H2 Ventures, a venture capital investment firm, and a member of the Commonwealth Government’s Fintech Advisory Group. Ben was previously CEO of UBS Global Asset Management in Sydney and a managing director with UBS in New York. Ben has extensive experience in a range of sectors including asset management, digital & technology transformation, fintech & data science innovation and venture capital investment. He has a bachelor’s degrees in science (Mathematics) and Commerce (Finance) from the University of NSW and is a graduate of the Australian Institute of Company Directors. Ben has held the following listed company directorships in the 3 years to 30 June 2020: • The Star Entertainment Group Limited (from 23 May 2018 to present) Board and Committee Meetings - attendance during FY2020: Board Audit and Risk Committee People and Nomination Committee Held whilst in office Attended whilst in office Held whilst a Committee member Attended whilst in office Held whilst a Committee member Attended whilst in office Anne Ward Martin Hosking Greg Lockwood Jenny Macdonald Ben Heap Richard Cawsey Barry Newstead Grant Murdoch 21 21 21 21 6 13 9 4 20 21 21 21 6 13 8 2 - - 5 7 2 5 - 2 - - 5 7 2 5 - 2 6 3 - 6 2 1 - - 6 3 - 6 2 1 - - Directors’ interests in shares and options Name Anne Ward Martin Hosking Ben Heap Greg Lockwood Jenny Macdonald Total Interests Shareholdings Options outstanding 200,000 50,500,090 - 6,465,131 88,539 57,253,760 50,714 50,714 - - 47,509 148,937 Retirement, election, continuation in office of Directors Under the Company’s constitution, Directors cannot serve beyond three years or the third AGM after their appointment, whichever is longer, without submitting for re-election by the Company. A retiring Director is eligible for re-election without needing to give any prior notice of an intention to submit for re-election and holds office as a Director (subject to re-election) until the end of the general meeting at which the Director retires. Anne Ward and Ben Heap are seeking re-election at the 2020 AGM. Martin Hosking, who is Managing Director and Chief Executive Officer, is not required to be re-elected while he holds the position of Managing Director. Change in key management personnel during the 2020 financial year and since the end of that financial year The “Key Management Personnel” (KMP) during FY2020 are the directors named above and the executive KMP for the purposes of the FY2020 Remuneration Report. The executive KMP have been determined to be: • Martin Hosking, Chief Executive Officer from 18 February 2020; • Barry Newstead - Chief Executive Officer until 18 February 2020; and • Emma Clark - Chief Financial Officer. Whilst each of the Executive Team members listed on page 30 are considered key employees, only the individuals above are considered “Key Management Personnel” within the definition in ‘AASB 124 - Related Party Disclosures’. Company Secretaries RB Group’s Company Secretaries are Ms Corina Davis (based in the US) and Mr Paul Gordon (based in Australia). Ms Corina Davis, Executive Vice President - Business Development, Chief Legal Officer and Company Secretary Corina Davis joined Redbubble in 2012 and oversees the company’s legal function. In 2017 Corina also assumed responsibility for Redbubble’s partnerships and licensing initiatives. Corina has a wide range of cross- functional experience with particular expertise in copyright and trademark law, litigation, compliance and risk management. Before joining Redbubble, Corina practiced law in Los Angeles and New York City at Milstein Adelman, McCurdy & Fuller and Mendes & Mount. Corina is an active member of the Women’s General Counsel Network and the San Francisco General Counsel Group. Corina is a board member of the Australian Digital Alliance, Australia’s peak body representing copyright users and innovators in digital. Corina holds a Bachelor of Arts degree from the University of Michigan, Ann Arbor and a Juris Doctor degree from the University of San Diego School of Law, California. Mr Paul Gordon, Company Secretary Paul Gordon is Principal of Gordon & Co Legal and provides company secretarial services to RB Group as an independent consultant. Paul was previously in-house counsel and company secretary for the Group. Before joining Redbubble in 2015, Paul was the General Counsel for ASX-listed REA Group and prior to that, Paul was a Senior Associate at Nabarro LLP (UK) and also practiced at Hogan Lovells (UK) and Chapman Tripp (NZ). Paul holds a Bachelor of Laws (Hons) and Master of Commerce from the University of Canterbury NZ and a Certificate in Governance Practice from the Governance Institute of Australia. 28 29 Annual Report 2020Executive Team The Executive Team members are: • Mr Martin Hosking, Chief Executive Officer and • Mr Arnaud Deshais, Chief Supply Chain Officer Managing Director • Ms Emma Clark, Chief Financial Officer • Mr Daniel Vydra, Chief Technology Officer • Dr Brett Watson, Chief Commercial Officer • Ms Rebecca Zarate, Chief Marketing Officer • Mr Georg Friedrich, Vice President - • Ms Corina Davis, Executive Vice President, Engineering Business Development, Chief Legal Officer and Company Secretary • Mr Adam Schwartz, CEO – TeePublic • Ms Vanessa Freeman, Chief People and Culture Officer Details of share options and performance rights for Directors and Executives Below are details of options, share appreciation rights and performance rights in respect of ordinary shares in the Company granted to Directors or any of the 5 most highly remunerated officers of the Company (other than the Directors) during the 2020 financial year. Name Anne Ward Martin Hosking Richard Cawsey Ben Heap Greg Lockwood Jenny Macdonald Grant Murdoch Barry Newstead Joseph Burns Emma Clark Corina Davis Arnaud Deshais Adam Schwartz Total granted Number of options / restricted stock units granted Number of ordinary shares granted under options / restricted stock units Number of share appreciation rights granted 27,798 23,910 47,820 - - 27,798 - 27,798 23,910 47,820 - - 27,798 - - - - - - - - 232,937 (1) 232,937 (1) 1,424,755 (1) - 233,097 140,546 131,129 625,561 - 233,097 140,546 131,129 625,561 - 1,069,298 338,405 271,464 - 1,490,596 1,490,596 3,103,922 (1) The options and share appreciation rights granted to Mr Newstead during the year lapsed at the conclusion of his employment on 14 August 2020. There are no options or performance rights granted to this group or since the end of the 2020 financial year to the date of this Report. The following table shows the total numbers of ordinary shares in the Company subject to options, share appreciation rights or performance rights as at the date of this Report: Options Share appreciation rights(1) Restricted Stock Units(2) Total awards outstanding Number outstanding Last expiry date 14,119,702 5,851,406 2,090,647 22,061,755 24 June 2030 1 August 2025 (1) Share appreciation rights (SARs) entitle the holder to equity equal to the appreciation of the Group’s share price over a defined period. There is not a 1 to 1 relationship with the number of SARs on issue and the number of shares that will be issued upon exercise. (2) Restricted stock units granted do not have an expiry date. Ordinarily these vest and are settled according to a participants’ vesting schedule, and any outstanding restricted stock units are otherwise forfeited when a participant no longer satisfies the service conditions in their agreement. Holders of options or performance rights do not, by virtue of their holdings, have any pre-emptive right to participate in any share issue of the Company or any related body corporate. The Financial Report contains details of the total number of ordinary shares in the Company issued following exercise of options and vesting of performance rights during the 2020 financial year. The following table shows the total number of ordinary shares in the Company issued following exercise of options and vesting of performance rights since the end of the 2020 financial year, to the date of this Report: Settlement of vested restricted stock units Exercise of options Total Number Exercise price paid ($) 65,465 2,841,340 2,906,805 - 1,773,227 1,773,227 No amounts remain unpaid in respect of the shares issued, as outlined above. Indemnification and insurance of officers The Company has entered into Deeds of Indemnity with all its Directors in accordance with the Company’s constitution. During the 2020 financial year, the Company paid a premium to insure the Directors, Officers and Managers of RB Group entities. The insurance contract requires that the amount of the premium paid is confidential. Proceedings against entities within the Group As at the date of these financial statements there are current lawsuits filed against entities within RB Group that relate to alleged intellectual property infringement and/or breach of consumer laws. There is no certainty around the amount or timing of any outflow should any of the actions ultimately be successful (at first instance or on appeal, as applicable). 30 31 RedbubbleAnnual Report 2020RB Group does not currently consider that any of the current proceedings are likely to have a material adverse effect on the business or financial position of RB Group. RB Group is not aware of any other current or material threats of civil litigation proceedings, arbitration proceedings, administration appeals, or criminal or governmental prosecutions in which entities within RB Group are directly or indirectly concerned. Non-audit services Taxation services Other services(1) Total 2020 ($) 2019 ($) 39,400 - 18,250 147,715 39,400 165,965 CEO and CFO declaration (1) Other services for FY2019 include a one-off cost relating to the acquisition of TeePublic of $93k. The CEO and CFO have provided a written statement to the Board in accordance with Section 295A of the Corporations Act. With regard to the financial records and systems of risk management and internal compliance in this written statement, the Board received assurance from the CEO and CFO that the declaration was founded on a sound system of risk management and internal control, and that the system was operating effectively in all material aspects in relation to the reporting of financial risks. Fees for Audit services Details of the amounts paid to the auditor for audit services provided throughout the 2020 and 2019 financial years are set out in Note 25 to the Consolidated Financial Statements. Remuneration Report Auditor’s Independence Declaration The Remuneration Report is set out on pages 35 to 62 and forms part of the Directors’ Report for the financial year ended 30 June 2020. A copy of the Auditor’s Independence Declaration, as required under section 307C of the Corporations Act, is set out on page 34. The Auditor’s Independence Declaration forms part of the Directors’ Report. The Directors’ Report is made in accordance with a resolution of the Directors of the Company. Anne Ward Chair 21 August 2020 Rounding of amounts The amounts contained in the Financial Report have been rounded to the nearest $1,000 (where rounding is applicable) where noted ($000) under the option available to the Company under ASIC Legislative Instrument 2016/191. The Company is an entity to which the Legislative Instrument applies. Auditor Ernst & Young was appointed as the Company’s Auditor on 25 November 2014 and continues in office in accordance with section 327 of the Corporations Act 2001. To the extent permitted by law, the Company has agreed to indemnify Ernst & Young, as part of the terms of its audit engagement agreement, against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the end of the 2020 financial year. Commencing from the 2020 AGM the Company’s Audit Partner will be Mr Ashley Butler, Partner at Ernst & Young. Mr Ashley Butler will succeed Ms Kylie Bodenham as she rotates off the RB Group engagement in accordance with independence requirements of Section 324DA of the Corporations Act 2001 and Ernst & Young’s policy. Non-audit services During the year Ernst & Young performed other services in addition to its audit responsibilities. The Directors are satisfied that the provision of non-audit services by Ernst & Young during the reporting period did not compromise the auditor independence requirements set out in the Corporations Act. All non-audit services were subject to the Company’s External Auditor Policy and do not undermine the general principles relating to auditor independence set out in APES 110 Code of Ethics for Professional Accountants as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, or jointly sharing risks and rewards. Details of the amounts paid to the auditor of the Company and its related practices for non-audit services provided throughout the 2020 and 2019 financial years are set out below. 32 33 RedbubbleAnnual Report 2020Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Auditor’s Independence Declaration to the Directors of Redbubble Limited As lead auditor for the audit of the financial report of Redbubble Limited for the financial year ended 30 June 2020, I declare to the best of my knowledge and belief, there have been: Remuneration Report Letter from the People and Nomination Committee a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in Dear Shareholder, relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Redbubble Limited and the entities it controlled during the financial year. Ernst & Young Kylie Bodenham Partner 21 August 2020 On behalf of the Board, I am pleased to present our Remuneration Report for FY2020. The role of the People and Nomination Committee (Committee) is to ensure that the RB Group has appropriate remuneration and retention strategies to attract and retain high quality talent - both locally and globally - to enable the Company to execute its mission and purpose, in order to build long-term value for shareholders. RB Group Executive Compensation Model (RECM) As shareholders may recall, the Committee last year conducted a comprehensive review of the Group’s executive remuneration arrangements and the Board approved a revised model designed to better align with the Group’s strategic intent. During FY2020 the Company has implemented the RECM and transitioned RB Group executives to the RECM. The objectives of the RECM are to: • Link executive performance with RB Group’s financial goals; • Motivate executives to create sustainable, long-term value for shareholders; • Align the leadership team by providing consistent goals that encourage a long-term focus; and • Attract and retain exceptional talent in globally competitive, highly mobile markets. As described in more detail in this Report, the RECM comprises cash compensation, long-term equity (LTE) with restrictions on disposal and long-term incentives (LTI) with vesting and exercise conditions based on compound annual share price growth. The Committee is confident that the RECM will provide a strong foundation to attract and retain talent and align them with building long-term value for shareholders. Key Management Personnel (KMP) This Report details the remuneration arrangements for the KMP being those persons who have authority and responsibility for planning, directing and controlling the major activities of RB Group, directly or indirectly, including any Director (whether executive or otherwise). The current KMP of the RB Group are Mr Martin Hosking, our Managing Director and CEO, and Ms Emma Clark, our CFO, together with our Chair, Ms Anne Ward, and our Non-executive Directors, Mr Greg Lockwood, Ms Jenny Macdonald and myself. During the year, we transitioned the role of the CEO. In February 2020, Barry Newstead ceased to be the Chief Executive Officer of RB Group. Martin Hosking resumed the role of CEO on an interim basis, having retired from this role in 2018. Mr Hosking remains a member of the Board. In addition, we transitioned the role of Chair of the RB Group. In March 2020, Mr Richard Cawsey retired from the Board and Ms Anne Ward was elected as Chair. A member firm of Ernst & Young Global Limited Liability limited on a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 34 23 35 Annual Report 2020 Understanding RB Group’s Approach to Remuneration We appreciate that shareholders may have questions on RB Group’s remuneration approach and structure and so we have sought to provide a brief summary of some of the more common questions together with our responses: How has RB Group responded to the COVID-19 health crisis with respect to remuneration? In response to the COVID-19 health crisis and resulting economic uncertainty, RB Group Non-executive Directors agreed to a 20% reduction in the cash component of their remuneration, effective from 20 April 2020 until 30 June 2020. Mr Hosking (CEO) and Ms Clark (CFO) also agreed to a 20% reduction in the cash component of their remuneration for this period of time. Why did Redbubble Group revise its executive compensation plan? RB Group’s previous compensation plan was developed prior to Redbubble’s IPO in 2016. In 2019 the Committee undertook a review of the plan and concluded that it no longer best served the RB Group or its shareholders. The review had two objectives: to align management to shareholder value creation by focusing on long-term enduring value, and ensuring RB Group is able to attract and retain high quality talent in a globally competitive marketplace. In addition, the Committee sought to simplify and improve the transparency of RB Group’s remuneration arrangements and to recognise RB Group’s rapidly changing context often requires executives to advance long-term objectives at the expense of short-term gains. Which executives are covered by the RECM? The RECM was introduced in FY20 and senior executives are progressively transitioning to this model. It is intended that all senior executives at RB Group will participate in the RECM. Ten senior executives participated in FY2020. TeePublic executives did not participate in the RECM in FY2020 (and are not currently participating) as they remain on acquisition transition agreements. RB Group also offers an equity program to all employees. Employees receive an equity grant of zero-priced options or restricted-stock options, equivalent to 5% - 20% their base salary, vesting annually over three years. How does Redbubble Group assess Executives’ annual performance? The Board sets key result areas for the CEO and tracks performance against those objectives. The CEO sets semi-annual performance objectives with each senior executive, in support of company objectives & key results and personal development areas. Performance against these objectives, along with total company performance informs annual compensation reviews for all executives. The performance of all senior executives reporting to the CEO is also discussed with the Committee semi-annually to ensure all leaders are meeting performance expectations in terms of both behaviours and outcomes. Why did Redbubble Group remove the short-term incentives from the RECM? The Committee believes that traditional short term incentives may encourage a focus on short-term performance at the expense of long-term value creation. This is compounded by the difficulty of setting short- term targets in a fast paced high growth environment. Under the RECM, the value of LTE and LTI components is fundamentally dependent on share price performance, aligning executives with shareholder interests. What is the difference between the long-term equity and long-term incentive, which are key components in the RECM? The long-term equity or LTE is an annual grant of restricted stock units or zero-priced options, with one year vesting and one year disposal restriction period. LTE is intended to be a part of the guaranteed compensation for executives and when included with cash compensation reduces the compensation gap to more established talent competitors. LTE also encourages long-term share ownership by executives. The value of the LTE in the hands of the executive is dependent upon the share price which aligns executive compensation to shareholder outcomes. The long-term incentive or LTI is an annual grant of share appreciation rights with specific vesting conditions based on time and achievement of minimum business health metrics, and exercise conditions linked to share price performance, as detailed in section 3.5 of the Remuneration Report. The share appreciation rights have a strike price. The strike price is set in October of the financial year when grant and vesting commence (e.g. 1 October 2019 for FY2020). The strike price is set based on the 30 (calendar) day VWAP prior to the grant. For FY20 the strike price was $1.4134. How is the LTE and LTI in the RECM accounted for in the annual accounts of RB Group? The cost of the LTE and LTI is recognised by expensing the grant date fair value of the options or rights over the one year vesting period during which the executives become unconditionally entitled to these benefits. The expense is recognised as a share based payment expense in the consolidated income statement, with corresponding amounts recorded in equity. The calculation of fair value includes the estimated impact of any market based performance conditions. The impact of any service and non-market vesting conditions is excluded from the fair value calculation. Instead, this is included in assumptions about the number of options or rights that are expected to vest. These assumptions are revised at the end of each reporting period and when the outcome of the service or non- market vesting condition is known. The amounts recorded as an expense for the LTE and LTI for the year are shown in table 6.1. Why does the RECM run on a different year to the financial year? The Redbubble compensation review period for all employees is effective October 1st. The audited results for the financial year are available in late August each year and announced to the market at that time. A share price is determined following this announcement, using volume weighted average price methodology, that is used for purposes of issuing LTE and LTI. Why is the Managing Director & CEO not a participant in the RECM? Mr Hosking’s reappointment to the Managing Director and CEO role is on an interim basis. In addition, as one of RB Group’s co-founders, Mr Hosking continues to have a substantial shareholding in the Company. The Board has set specific objectives for Mr Hosking as CEO, within a relatively short time period, and on that basis it was not appropriate to compensate Mr Hosking under the RECM. Is the RECM fixed or could it change in the future? The Committee seeks to continuously improve the effectiveness of the RECM, and its other remuneration arrangements with respect to all staff and and to Non-executive Directors, and will make further changes in the future as are appropriate to best meet the objectives referred to above and to build long term value for shareholders. We thank you for your support in FY2020 and welcome any further questions you may have or any other feedback on our Remuneration Report. Yours sincerely Ben Heap Chair of the People and Nomination Committee 36 37 RedbubbleAnnual Report 2020Annual Report 2020 CONTENTS 1. Remuneration Report Overview 2. How Remuneration is Governed 3. Executive Remuneration 4. Performance & Executive Remuneration Outcomes in FY2019 5. Non-executive Director Remuneration 6. Statutory Reporting for FY2019 7. Other Information In this Remuneration Report the following definitions are used: • Redbubble means Redbubble Limited (ACN 119 200 592); • Board means the Board of Directors of Redbubble; • Committee means the People and Nomination Committee of the Board of Redbubble; • Executives means the members of the RB Group senior executive team; • NED means the Non-executive Directors of the Company; • RB Group means Redbubble and its subsidiaries; and • RECM means the RB Group Executive Compensation Model. 1. Remuneration Report Overview The Directors of Redbubble present the Remuneration Report (Report) for the RB Group for the financial year ended 30 June 2020. This Report forms part of the Directors’ Report and has been audited in accordance with section 300A of the Corporations Act 2001. The Report details the remuneration arrangements for Key Management Personnel (KMP) being those persons who have authority and responsibility for planning, directing and controlling the activities of RB Group. 38 39 RedbubbleThe table below outlines the KMP of RB Group during FY2020: 2.2 Use of Remuneration Advisors Classification NED Name Anne Ward Richard Cawsey Ben Heap Martin Hosking Position Chair (appointed Chair on 30 March 2020), Non-executive Director (since 22 March 2018) Chair, Non-executive Director (resigned 30 March 2020) Non-executive Director (appointed 20 April 2020) Non-executive Director (until appointment as CEO on 18 February, 2020) Greg Lockwood Non-executive Director Jennifer (Jenny) Macdonald Non-executive Director Grant Murdoch Executive KMP Martin Hosking Non-executive Director (resigned 23 October 2019) CEO and Managing Director (appointed on 18 February 2020) The Committee periodically engages the services of independent external consultants to provide insights on KMP remuneration trends, regulatory and governance updates, pros and cons of possible alternatives, and market data. No remuneration recommendations as defined in Section 9B of the Corporations Act 2001 were obtained during FY2020. 2.3 Clawback of Remuneration In the event of serious misconduct or a material misstatement of RB Group’s financial statements, the Board has the discretion to reduce, cancel or clawback any unvested STI, LTE or LTI. 2.4 Executive Employment Agreements CEO Employment Agreements The employment of Mr Hosking, as CEO and Managing Director, is governed by an Employment Agreement that commenced 18 February 2020. Due to the interim nature of Mr Hosking’s appointment, his Employment Agreement has a one month termination notice period. The employment of Barry Newstead, as CEO and Managing Director, was initially governed by an Employment Agreement dated 26 June 2018 (that commenced 1 August 2018) and then by an Employment Agreement dated 1 November 2019 that had an effective date of 1 October 2019. Mr Newstead’s employment agreements had a six month termination notice period. Emma Clark CFO Other Executive Employment Arrangements Former Executive KMP Barry Newstead CEO and Managing Director (ceased on 18 February 2020) All other Executives are employed on open ended individual Employment Agreements that set out the terms of their employment. Each Agreement varies according to the individual Executive but typically includes: 2. How Remuneration is Governed 2.1 People and Nomination Committee Role The Committee is responsible for reviewing and advising the Board on remuneration policies and practices. This Committee also reviews and advises the Board on the design and implementation of performance packages, superannuation entitlements, termination entitlements and fringe benefits policies. The Committee also manages the nomination process of Board members and the selection of the CEO. The remuneration of Directors, the CEO, KMP, and other Executives is reviewed by the Committee which then provides recommendations to the Board. The members of the Committee during FY2020 were: • Anne Ward; • Jenny Macdonald; • Martin Hosking (ceased to be a member on 18 February 2020); • Greg Lockwood (was a member between 31 March 2020 and 20 April 2020); and • Ben Heap (from 20 April 2020). Ms Ward was Committee Chair until 20 April 2020 at which time Mr Heap was appointed Committee Chair. • Termination provisions incorporating six month notice periods (to manage business continuity risk during any executive transition); • In the case of termination due to death, disablement, redundancy or notice without cause, the Board may in certain circumstances apply discretion to approve a payment of up to six months’ salary; • Performance and confidentiality obligations on the part of both the employer and employee; • Limited non-solicitation and post-employment restriction provisions; and • Eligibility to participate in the RB Group RECM (or other transitional compensation plans). 3. Executive Remuneration 3.1 Remuneration Objectives & Strategy RB Group’s vision is to build a global leading retail e-commerce platform and an enduring organisation that creates value for shareholders over the long-term. RB Group operates in four highly competitive global talent markets - Melbourne, San Francisco, New York and Berlin. Attracting and retaining talent in these markets must be supported by a compelling remuneration strategy. 40 41 RedbubbleAnnual Report 2020The RECM is designed to attract and retain proven, global executive talent who will successfully execute on RB Group’s vision and strategy in a manner that aligns with the company’s values. The RECM recognises compensation will increasingly need to be positioned to extract mid-career executives on a strong earnings trajectory from roles in companies that provide them with the experience that RB Group needs. Executive remuneration levels are reviewed regularly by the Committee with reference to RB Group’s remuneration strategy, company performance, talent competitor market activity and external benchmarks. 3.2 Objectives of RECM The objectives of RECM are to: Link Motivate Align executive performance with RB Group’s financial goals executives to create sustainable, long-term value for shareholders the leadership team by providing consistent goals which encourage a long-term focus Attract & Refrain exceptional talent in globally competitive, highly mobile markets 3.3 Elements of Remuneration The RECM is made up of the following components: Component Definition and approach Cash compensation 35% - 60% Long-term Equity (LTE) 15% - 20% Long-term Incentive (LTI) 25% - 50% (1) Australia only. Base salary and superannuation(1) intended to provide the Executives with the financial resources commensurate with executives at companies of a similar size in that location. Annual grant of zero-priced options or restricted stock units with one year vesting and a further one year disposal restriction period. LTE is intended to be a part of the guaranteed compensation for executives and when included with cash compensation reduces the compensation gap to more established talent competitors. Annual grant of share appreciation rights intended to align Executives with long-term value creation. Share appreciation rights have vesting conditions based on time and achievement of minimum Company health metrics, and exercise conditions based on achieving a share price growth target as described below. 3.4 Technical Conditions of the LTE The LTE component of the RECM operates as outlined below: LTE instrument Grant quantum Granting date Restricted Stock Units (RSUs) for US-based executives. RSUs are rights to be issued Redbubble shares upon satisfaction of the applicable vesting conditions. Zero-priced options (ZPOs) for Australian-based executives. ZPOs are call options to acquire Redbubble shares, with a zero exercise price to convert the option into shares. Dollar value of LTE grant is set as a percentage of total compensation as part of an Executive’s contract. Dollar amount is converted to RSUs or ZPOs at the beginning of the grant period, i.e. 1 October of the relevant year. For FY2020 the VWAP (based on 90 (calendar) day volume weighted average price calculated on 1 October 2019) was $1.2879. Grants are made on 1 October of the relevant year, following the setting of total compensation for the year and Board approval. Vesting date Grants vest after 12 months. Disposal restriction period 12 months following vesting. Officers & Executives of the Group are subject to the RB Group share trading policy. Clawback Termination Clawback is available under certain business failure or bad actor conditions. Employees forfeit grants that have not vested. Board discretion in relation to pro-rata vesting for good leavers is available. 3.5 Technical Conditions of the LTI The LTI component of the RECM operates as outlined below: LTI instrument Grant quantum Share Appreciation Rights (SARs) Dollar value of LTI grant is set as a percentage of total compensation as part of an Executive’s contract. The dollar amount is converted to SARs at fair market value determined at the beginning of grant period based on Monte Carlo valuation of the LTI instrument. For FY2020, the fair market value of one SAR for the purpose of grant allocation was $0.5615. Granting date Grants are made on 1 October of the relevant year, following the setting of total compensation for the year and Board approval. 42 43 RedbubbleAnnual Report 2020Vesting date & conditions The LTI’s vest 12 months after grant subject to: • The Executive remaining employed at RB Group (time vesting); and • The Board agreeing that the minimum business health metrics for the year have been achieved, see below. The LTI has an exercise condition (see below) that must be achieved in order for Executives to be able to exercise the grant. The SARs may be exercised at any time before the fifth anniversary of the grant date, conditional on the above vesting conditions having been met, subject to the Redbubble’s share-price achieving a compound annual growth of 10% and maintaining that price for 90 consecutive calendar days at any point over the five year grant period. As noted below, it is possible that the exercise condition could be met on the first anniversary, assuming the minimum Company health metrics have been achieved, in which case Executives could exercise on the first anniversary of the grant date. Company key health metrics (see section 4.2 of this Report) The proportion of the target LTI which vests to participants at the end of the performance year will be determined based on the achievement of three to five Company health metrics for that year. This condition is designed to ensure management is building RB Group for enduring value and not degrading operational metrics to achieve share price gains. The Company will need to meet health metrics targets within the year of grant in order for the LTI grant to be made. As the equity grants motivate both short and long-term out-performance, the minimum thresholds are designed to ensure that enduring value creation is not damaged by any short-term imperatives. The Company health conditions are set by the Board prior to the start of each financial year. The Board will assess performance against the health metrics and may approve for less than 100% of the target LTI grant to vest depending on performance against the metrics. If less than 100% of the LTI vests under the minimum health metrics, the non-vested portion would be cancelled. The weighting between the health metrics is at the Board’s discretion. Share-price appreciation exercise condition The SARs are only exercisable (following vesting) if the share-price appreciation exercise condition is met during the five years of the grant. The share-price appreciation exercise condition can be achieved in the first 12 months of the grant. If this occurs exercise can only occur after the time based and minimum health conditions have been met. The exercise condition will be achieved (subject to vesting) when the 90 (calendar) day VWAP share price is greater than the strike price by an annual compound rate of 10% at any point over the five year exercise period. The exercise condition may be met at any time up to five years from grant at which point the exercise condition will be deemed to have failed and the SARs will expire. There is no holding period following the exercise condition being met. Executives of the company are subject to the RB Group share trading policy. Clawback is available under certain business failure or bad actor conditions. Termination as a bad leaver (for cause) would result in forfeiture of all LTI where the exercise condition had not yet been met. For good leavers, the Board can exercise discretion in relation to the satisfaction of service and performance conditions. Where the exercise condition has been met, but the Executive has not yet exercised the SARs, the Executive would have 90 (calendar) days post- termination to exercise the SARs, after which time the unexercised SARs will be cancelled, unless the Board exercises discretion to extend the post-employment exercise period. Strike price is set in October of the financial year when grant and vesting commence (e.g. 1 October 2019 for FY2020). The strike price is set based on the 30 (calendar) day VWAP prior to the grant. For FY20 the strike price was $1.4134. The valuation is conducted by independent experts for the Committee and the SARs are valued using Monte Carlo simulation. LTI’s expire five years from grant date and therefore the SARs must be exercised by this point or they lapse. Executives are prohibited from hedging under RB Group’s Share Trading policy and clawback under existing rules. Holding period Clawback Termination Strike price SARs valuation Expiration Hedging 44 45 RedbubbleAnnual Report 2020Redbubble Annual Report 2020 Vesting and exercise periods of the LTI YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 PERIOD 1 PERIOD 2 PERIOD 3 PERIOD 4 PERIOD 5 Time based vesting period Share price of 110% of strike price L E G E N D Exercise condition testing period Exercise condition achieved Exercise condition not achieved Exercise condition requirement Share price of 121% of strike price Executive can exercise if YEAR 2 exercise condition is met Executive can exercise if YEAR 1 exercise condition is met Share price of 133% of strike price Executive can exercise if YEAR 3 exercise condition is met Share price of 146% of strike price Executive can exercise if YEAR 4 exercise condition is met Share price of 161% of strike price Executive can exercise if YEAR 5 exercise condition is met 46 47 3.6 KMP participants in the RECM The table below lays out the compensation components for each Executive KMP. Cash compensation Short-term Incentive (STI) Long-term Equity (LTE) Long-Term Incentive (LTI) Current Executive KMP Martin Hosking (CEO) The fixed component comprises base salary, allowances and superannuation. A cash bonus, at the Board’s discretion, achievement in Key Results Areas. Emma Clark (CFO) Following the onset of the COVID-19 crisis, Mr Hosking agreed to a voluntary 20% reduction in cash compensation effective until 30 June 2020. The fixed component comprises base salary, allowances and superannuation. Following the onset of the COVID-19 crisis, Ms Clark agreed to a voluntary 20% reduction in cash compensation effective until 30 June 2020. Annual grant of ZPOs Former Executive KMP Barry Newstead (1/7/19 - 30/9/19) The fixed component comprises base salary, allowances and superannuation. Performance Rights (granted as zero- exercise-price share options) awarded based on the delivery of Key Performance Indicators set by the Board. 1/10/19 - 18/2/19 The fixed component comprises base salary, allowances and superannuation. Annual grant of ZPOs Annual grant of Share Appreciation Rights (SARs) that have vesting conditions based on time and achievement of minimum business health metrics, and exercise conditions based on a share price performance exercise condition. A grant of Share Appreciation Rights (SARs) intended to cover the life of the contract (four years), with share price performance exercise condition. Annual grant of Share Appreciation Rights (SARs) that have vesting conditions based on time and achievement of minimum business health metrics, and exercise conditions based on a share price performance exercise condition. The remuneration of the KMP is set out in detail in section 6 (Statutory Reporting for FY2020). 4. Performance and Executive Remuneration Outcomes in FY2020 4.1 Performance against Financial Metrics RB Group’s key financial measures of performance over the last five years are summarised in the table below: Key indicators Revenue ($'m) Gross profit after paid acquisition (GPAPA) ($'m) Earnings before Interest, taxes, depreciation and amortisation (EBITDA) ($'m) Cash balance ($'m) Share price at year end ($) 2020 416.3 94.5 2019 307.0 67.5 5.1 (2.0)(2) 58.1 2.06 29.0 0.91 2018 218.7(1) 47.1 (7.4) 21.2 1.57 2017 141.0 37.9 (8.1) 27.8 0.97 2016 114.6 31.3 (10.7) 42.0(3) 1.07 (1) On 1 July 2018 the Group adopted AASB 15 - Revenue from Contracts with Customers using the full retrospective method of adoption. The revenues for FY18 and onwards include the impact of this new standard. (2) On 1 July 2019 the Group adopted AASB 16 - Leases using the full retrospective method of adoption. EBITDA for FY19 and FY20 includes the impact of this new standard. (3) Cash balance for 2016 includes net proceeds from issue of pre-IPO convertible notes and shares issued pursuant to the IPO of $39.7 million. 4.2 Performance Against Company Health Metrics RB Group’s performance against Company health metrics are as follows for FY2020: Type of measure Cash Balance Artist and Content Growth Customer Loyalty People and Culture Result Achieved Achieved Achieved Achieved Based on achievement of the health metrics in the table above, 100% of the FY2020 LTI will be awarded, subject to the 12 month service period being reached. 4.3 Performance Against LTI Exercise Hurdle LTI awards are subject to an exercise condition. The exercise condition will be achieved (subject to vesting) when the 90 (calendar) day VWAP of a RB Group share is greater than the strike price of the LTI by an annual compound rate of 10% at any point over the five year exercise period. The exercise condition measurement period runs from each 1st October to the 30th September of the following year. 48 49 RedbubbleAnnual Report 2020Achievement of the LTI exercise hurdle for awards made since the commencement of the RECM is as follows: Grant Date % vested due to service based vesting and health metrics Exercise hurdle result (1) The 12 month service period is not yet complete, therefore none of the FY2020 LTI has vested. (2) The exercise condition can be achieved within a five year period from grant date. FY2020 LTI Award October 2019 -%(1) Not yet achieved(2) 4.4 CEO Remuneration Mr Martin Hosking, CEO and Managing Director (from 18 February 2020) The table below summarises the compensation arrangements of Mr Hosking, and the accounting treatment of each component. Martin Hosking Remuneration Remuneration element Total fixed remuneration, including base salary and superannuation Contracted Annual Remuneration $600,000(1) ($480,000)(2) Statutory Remuneration reported in Table 6.1 $261,977 Cash bonus $300,000(1) $80,211 Long service leave - $275 Details The remuneration reported in Table 6.1 represents salary and superannuation paid for services from 18 February 2020 to the end of the year and annual leave entitlements accrued during the period. The remuneration reported in Table 6.1 represents amounts accrued for the cash bonus during the period. Represents amounts provided for long service leave during the year Total $900,000 ($780,000)(2) $342,463 (1) From 18 February 2020 to 20 April 2020 Mr Hosking’s Interim CEO compensation arrangements consisted of annualised remuneration (inclusive of superannuation) of $900,000 salary. On 20 April 2020 Mr Hosking’s compensation was revised to a base salary (inclusive of superannuation) of $600,000 and a discretionary cash bonus (inclusive of superannuation) of up to $300,000, awarded at the end of Mr Hosking’s appointment, subject to Mr Hosking’s achievement in Key Results Areas, as follows: • stabilisation of the Redbubble Group business; • implementation of the business strategy; • continuing to build the Redbubble Executive Team; and • assistance in recruiting the new long term CEO. (2) From 20 April 2020 to 30 June 2020 Mr Hosking took a voluntary salary reduction of 20% to his base salary and was paid at the rate of $480,000 per annum (inclusive of superannuation) for that period. Mr Barry Newstead, Former CEO and Managing Director (until 18 February 2020) The table below summarises the compensation arrangements of Mr Newstead, and the accounting treatment of each component. Barry Newstead Remuneration Contracted Annual Remuneration Statutory Remuneration reported in Table 6.1 $600,000(1) $358,464 Remuneration element Total fixed remuneration, including base salary and superannuation Long Term Equity (LTE) $300,000(2) Long Term Incentive (LTI) $800,000(3) Cash bonus Termination Benefits Share options - Performance Based Share options - Time Based Share appreciation rights - Performance Based Deferred STI Long service leave - - - - - - - - - $12,760 $316,976 ($297,747) $66,102 $157,312 ($16,481) ($23,001) Details The remuneration reported in Table 6.1 represents salary and superannuation paid for services from 1 July 2019 to 18 February 2020 and annual leave entitlements accrued during the period. As Mr Newstead did not meet the 12 month service condition of the LTE these options lapsed. As Mr Newstead did not meet the 12 month service condition of the LTI these rights lapsed. Mr Newstead received an additional STI payment for the month of July 2018, paid entirely in cash, and amounting to $12,760. This STI payment was made in respect of Mr Newstead’s tenure as Chief Operating Officer between the end of the FY2018 STI period (i.e. 30 June 2018) and the 1 August 2018 date that he commenced his new CEO compensation arrangement. The $12,760 value of this STI payment equalled the average monthly value of Mr Newstead’s FY2018 STI award. Mr Newstead’s salary and benefits paid to him subsequent to 18 February 2020 and up until his employment end date are classified as termination benefits. Represents the forfeiture of unvested equity that had been recognised as an expense in prior periods. Represents expenses recognised for options granted in the prior period but vesting in the current period. Represents expenses recognised for share appreciation rights granted in the prior period but vesting in the current period. Represents the forfeiture of unvested equity that had been recognised as an expense in prior periods. As Mr Newstead did not meet the threshold for payment of long service leave at his employment end date, amounts accrued in prior years were written back in the current period. Total $1,700,000 $574,385 (1) From 1 July 2019 to 30 September 2019 Mr Newstead’s total annualised fixed remuneration (inclusive of superannuation) was $500,000. On 1 October 2019 Mr Newstead’s total annualised fixed remuneration (inclusive of superannuation) was revised to $600,000. (2) The LTE is an annual grant of zero priced options subject to a 12 month minimum service condition. (3) The LTI is an annual grant of share appreciation rights (SARs) subject to a 12 month minimum service condition, minimum health metrics and an exercise hurdle. 50 51 RedbubbleAnnual Report 20204.5 Other KMP Remuneration Ms Emma Clark, Chief Financial Officer 5. Non-executive Director Remuneration 5.1 NED Remuneration Policy The table below summarises the compensation arrangements of Ms Clark, and the accounting treatment of each component. RB Group seeks to attract and retain high calibre NEDs who will provide good governance, strong oversight, independence, a range of skills and alignment of interests with long-term share price appreciation. Emma Clark Remuneration Remuneration element Total fixed remuneration, including base salary and superannuation Contracted Annual Remuneration $450,000 ($360,000)(1) Statutory Remuneration reported in Table 6.1 $441,499(1) Long Term Equity (LTE) $225,000(2) $262,783(2) Long Term Incentive (LTI) $450,000(3) $527,489(3) Long service leave - $742 Details The remuneration reported in Table 6.1 represents salary and superannuation paid for services and annual leave entitlements accrued during the period. Represents expenses recognised for zero priced options vesting in the current period. Represents expenses recognised for SARs vesting in the current period. Represents amounts provided for long service leave during the year Total $1,125,000 ($1,035,000)(1) $1,232,513 (1) From 20 April 2020 to 30 June 2020 Ms Clark took a voluntary salary reduction of 20% to her base salary and was paid at the rate of $360,000 per annum (inclusive of superannuation) for that period. (2) The LTE is an annual grant of zero priced options subject to a 12 month minimum service condition. During the year Ms Clark received the annual grant of LTE and an additional pro rata portion for services from her commencement date on 1 June 2019 up until the date of the annual grant. (3) The LTI is an annual grant of share appreciation rights (SARs) subject to a 12 month minimum service condition, minimum health metrics and an exercise hurdle. During the year Ms Clark received the annual grant of LTE and an additional pro rata portion for services from her commencement date on 1 June 2019 up until the date of the annual grant. 4.6 KMP Terminations during the year Mr Barry Newstead, Former CEO and Managing Director Mr Newstead ceased to be the CEO and Managing Director of RB Group on 18 February 2020. Mr Newstead’s employment with RB Group will end on 14 August 2020. He will continue to be paid his salary and superannuation entitlements under his Employment Agreement until his employment end date. Mr Newstead will retain his employee equity awards that have vested as at 14 August 2020 and, in accordance with Mr Newstead’s employment contract, a further 1,652,778 Share Appreciation Rights that remain on foot, subject to vesting conditions to be applied in August 2022. Mr Newstead’s other employee equity awards, which have not vested at 14 August 2020, will lapse or be forfeited in accordance with applicable executive plan rules. The elements of the NED remuneration policy are as follows: • NEDs receive a Board fee of value $97,612.50 per annum (inclusive of superannuation); • The Board Chair is paid twice the NED Board fee; • Committee Chairs receive additional remuneration of $15,000 per annum; and • NED remuneration is paid two-thirds in cash and one-third in Deferred Stock on the terms outlined in section 5.2. The policy applies to all of Redbubble’s NEDs, except for Mr Lockwood. Mr Lockwood is a partner with Piton Capital, a private equity firm with a shareholding in RB Group. Mr Lockwood receives no remuneration from RB Group, in accordance with Piton Capital’s policy that their partners do not accept remuneration for external board positions. NEDs are also reimbursed for all reasonable travel and other expenses properly incurred by them in attending Board meetings or any meetings of committees of the Board, in attending any general meetings of Redbubble or otherwise in connection with the business or affairs of RB Group. NEDs may be paid additional or special remuneration if they, with the approval of the Board, perform any extra services or make special exertions for the benefit of RB Group. There are no retirement benefit schemes for Directors. The remuneration of the NEDs in FY2020 is set out in detail in section 6 (Statutory Reporting for FY20). In response to the COVID-19 health crisis and resulting economic uncertainty, RB Group’s NEDs agreed to a 20% reduction in the cash component of their remuneration, effective from 20 April 2020 until 30 June 2020. 5.2 NED Deferred Stock Terms NEDs are paid a portion of their fees in Deferred Stock (share options with a zero-exercise price) to provide for alignment with shareholders and RB Group’s objective of share price appreciation over the medium to long term. The Deferred Stock is awarded annually and is priced when the market is fully informed of RB Group’s previous financial year performance i.e. following the release of the results for the previous financial year. Accordingly, For purposes of calculating Deferred Stock allocations, the NED remuneration year runs from 1 November to the following 31 October. The Deferred Stock vests 12 months after the grant date subject to the NED remaining a Director as at that vesting date. If a NED departs within the remuneration year then pro-rata vesting is applied to the month of departure. 52 53 RedbubbleAnnual Report 2020NEDs are subject to restrictions on the sale of shares allotted following exercise of Deferred Stock, with the restrictions released incrementally over the four year period from the Deferred Stock grant date in accordance with the following release schedule: • a third of the shares are released from sale restrictions on the two year anniversary of the grant date; • a further third of the shares are released from sale restrictions on the three year anniversary of the grant date; and • the final third of the shares are released from sale restrictions on the four year anniversary of the grant date. In FY2020 the NEDs’ Deferred Stock remuneration was priced at $1.3504 per share option (the five day VWAP following the release of RB Group’s final quarter results in July 2019). The fair value of the awards at the grant date (November 2019) was $1.89 per share option. NEDs who are appointed to fill a casual vacancy during the year are paid entirely in cash until the next AGM, following which the cash/equity split applies from the following 1 November subject to their re-election at the AGM and shareholders’ approval of their equity grant. 5.3 Maximum Aggregate NED Fee Pool The total amount paid to all Directors for their services must not exceed in aggregate in any financial year the amount fixed by shareholders in a general meeting, currently set at $1,200,000. Any changes to this amount in future will require approval by shareholders in a general meeting in accordance with the ASX Listing Rules. 54 55 RedbubbleAnnual Report 2020Redbubble Annual Report 2020 6. Statutory Reporting for FY20 6.1 Executive KMP remuneration for the year ended 30 June 2020 The following table shows details of the nature and amount of each element of remuneration paid or awarded to Executives for services provided during the year while they were KMP. Short term benefits Post- employment benefits Other benefits Long-term benefits Cash salary(1) $ Cash bonus(2) $ Non-monetary benefits(3) $ Superannuation(4) $ Termination benefits(5) $ Long service leave(6) $ Performance rights (Time based)(7) $ Share-based payments Share options (Performance based)(7) $ Share options (Time based)(7) $ Share appreciation rights (Performance based)(8) $ Deferred STI(9) $ Total remuneration $ Performance -related(10) % Executive director Martin Hosking (appointed as CEO 18 February 2020)(11) Barry Newstead (terminated as CEO 18 February 2020) (5) 2020 2019 2020 2019 Other key management personnel Emma Clark (CFO) 2020 2019 Prior key management personnel Chris Nunn (resigned as CFO 1 June 2019) Total 2020 2019 2020 2019 252,179 87,125 80,211 - 333,464 12,760(12) 487,312 416,499 37,500 - 237,606 1,002,142 849,543 - - - - 56,733 92,971 56,733 - 150 - - - - - 350 - 500 9,798 25,000 25,000 25,000 25,000 - - 25,000 59,798 75,000 - - 275 2,474 - - 23,914 23,428 316,976(5) (23,001)(6) - (297,747)(5) - 28,181 66,102 13,456 23,411 484,900 233,192 - - - - - 742 23 - (2,332) - - - - - - - - - (297,747) 262,783 5,246 - 98,491 328,885 365,110 316,976 (21,984) - 13,621 47,325 508,328 - - 157,312 453,930 527,489 10,491 - - 684,801 464,421 - 3,395 (16,481)(5) 342,463 193,667 574,385 44,096 1,765,297 - - - 1,232,513 53,260 - 40,304 456,152 (16,481) 2,149,361 87,795 2,468,376 23% 14% (25%) 56% 43% 20% - 21% (1) Includes base salary, excess superannuation (refer to footnote 4) and short term compensated absences, such as leave entitlements accrued. For 20 April 2020 to 30 June 2020 Martin Hosking and Emma Clark took a voluntary salary reduction of 20% to their base salary. (2) Represents cash bonus accrued for the year. (3) Non-monetary benefits in the prior year include wellness benefits available to all executives. (4) Staff can elect to have their superannuation capped at $25,000 (2019: $25,000), with any amount above this included in cash salary. These amounts include superannuation on bonus paid during the year. (5) Barry Newstead’s role as CEO ended effective 18 February 2020. Mr Newstead’s salary and benefits paid to him subsequent to this date and up until his employment end date are classified as termination benefits. Share options and rights that lapse due to termination have any previously accrued expenditure written back in the current period. (6) Australian executives are entitled to long service leave. The annual charge reflects long service leave accrued during the period. As Barry Newstead did not meet the threshold for payment of long service leave at his employment end date, amounts accrued in prior years were written back in the current period. (7) Amounts disclosed reflect the value of remuneration consisting of performance rights/options, based on the value of rights/options expensed during the year. The fair value of rights is equivalent to fair value of shares at the grant date. The fair value of options is ascertained using the Black-Scholes model and is amortised over the vesting period. (8) Amounts disclosed reflect the value of remuneration consisting of share appreciation rights (SARs), based on the value of SARs expensed during the year. The fair value is ascertained using the Monte Carlo options model and is amortised over the vesting period. (9) Includes share based payment expenses recognised during the year over the vesting period, in relation to deferred STI awards for prior years. (10) Cash bonus, share options with a performance condition and deferred STI are all considered to be performance-related remuneration, based on their nature at grant date. (11) Martin Hosking was appointed as CEO on 18 February 2020. He was a non-executive director of the Group until 17 February 2020 when he transitioned to an executive director role. The remuneration shown in this table is for his services as CEO only. Remuneration for his non-executive director role is shown in table 6.2. (12) Barry Newstead received an additional STI payment for the month of July 2018, paid entirely in cash, and amounting to $12,760. This STI payment was made in respect of Mr Newstead’s tenure as Chief Operating Officer between the end of the FY2018 STI period (i.e. 30 June 2018) and the 1 August 2018 date that Mr Newstead commenced his CEO compensation arrangement. The $12,760 value of this STI payment equalled the average monthly value of Mr Newstead’s FY2018 STI award. 56 57 6.2 NED Remuneration for the year ended 30 June 2020(1) Short term benefits Post- employment benefits Director Fees(2) $ Superannuation $ Share-based payments Share-based payments - Share options (Time based)(3) $ Non-executive directors Richard Cawsey(4) Ben Heap(5) Martin Hosking(6) Jenny Macdonald Grant Murdoch(7) Anne Ward Hugh Williams(8) Greg Lockwood(9) Total 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 94,803 123,000 17,940 - 35,960 46,125 64,760 65,525 20,594 65,297 83,369 74,658 - 56,375 - - 317,426 430,980 - - 1,704 - 3,416 - 2,864 6,225 1,956 6,203 7,920 7,092 - - - - 29,658 74,660 - - 15,788 27,818 37,194 27,818 2,720 43,396 37,575 32,341 - 27,095 - - 17,860 19,520 122,935 233,128 Total $ 124,461 197,660 19,644 - 55,164 73,943 104,818 99,568 25,270 114,896 128,864 114,091 - 83,470 - - 458,221 683,628 (1) The NED remuneration table has been prepared in accordance with Australian Accounting Standards and Section 300A of the Corporations Act 2001 (Cth). (2) In response to the COVID-19 health crisis and resulting economic uncertainty, RB Group non-executive directors agreed to a 20% reduction in the cash component of their remuneration, effective from 20 April 2020 until 30 June 2020. (3) Amounts disclosed reflect the value of remuneration consisting of options, based on the value of options expensed during the year. The fair value of options is ascertained using Black-Scholes model. (4) Richard Cawsey resigned effective 30 March 2020. His fees are paid to and options / rights are issued to Denali Venture Partners (Aust). (5) Ben Heap was appointed effective 20 April 2020. In accordance with the NED remuneration policy Mr Heap is not granted equity remuneration until it is approved at the next AGM. Mr Heap is paid entirely in cash until this time. (6) Martin Hosking was appointed as CEO on 18 February 2020. He was a non-executive director until 17 February 2020 when he transitioned to the CEO role. The remuneration shown in this table is for his services as a non-executive director from 1 July 2019 to 17 February 2020. (7) Grant Murdoch resigned effective 23 October 2019. (8) Hugh Williams resigned effective 29 May 2019. Amounts are provided for prior year comparatives. 7. Other Information 7.1 Options and Share Appreciation Rights The tables below disclose the number of share options and share appreciation rights granted, exercised, vested or forfeited during the year. Option holdings Share options do not carry any voting or dividend rights, and can only be exercised once the vesting conditions have been met, until their expiry date. Balance at the start of the year Granted during the year as compensation Exercised during the year Cancelled during the year Balance at the end of the year Vested and exercisable at the end of the year Unvested at the end of the year Vested during the year 2020 Non-executive directors Jenny Macdonald Grant Murdoch(1) 19,711 27,798 120,649 - Anne Ward 22,916 27,798 Executive director Martin Hosking 19,711 23,910(2) Former Executive director - - - - - - - - 47,509 19,711 27,798 8,217 120,649 120,649 - 9,553 50,714 22,916 27,798 9,553 43,621 19,711 23,910 8,217 Barry Newstead (3) 3,491,940 232,937(4) - 772,917(5) 2,951,960 2,440,811 511,149(4) 370,699 Other key management personnel - 233,097 - - 233,097 39,423 47,820 39,423 27,895 19,925 - - 233,097 - 19,925 16,428 Emma Clark Related party Denali Venture Partners Pty Ltd (Beneficiary: Richard Cawsey)(6) Total 3,714,350 593,360 39,423 800,812 3,467,475 2,623,798 843,677 422,667 (1) Grant Murdoch resigned from his role as Director on 23 October 2019. The table above reports activity for his period of service up until resignation date. (2) The options granted to Martin Hosking were for his services as a non-executive director (NED). Mr Hosking was appointed as CEO on 18 February 2020 and ceased as a NED on this date. The amount of options he will receive at his vest date will be subject to adjustment based on what proportion of the NED remuneration year that Mr Hosking was a NED for. (3) Barry Newstead’s role as CEO ceased effective 18 February 2020. The table above reports activity for his period of service up until 18 February 2020. (4) The options granted to Mr Newstead during the year and all unvested options were forfeited or lapsed at the conclusion of his employment on 14 August 2020. (5) As part of Mr Newstead’s transition to the RECM a proportion of his equity entitlements under his earlier CEO Employment Agreement were cancelled, reflecting the proportion of the four year equity vesting period that was yet to be completed. (9) Greg Lockwood is a partner with Piton Capital, a private equity firm with a shareholding in Redbubble Ltd. Greg receives no remuneration from the Group, in accordance with Piton Capital’s policy that their partners do not accept remuneration for external board positions. (6) Richard Cawsey resigned from his role as Chair on 30 March 2020. The table above reports activity for his period of service up until resignation date. 58 59 RedbubbleAnnual Report 2020Share Appreciation Rights holdings Share appreciation rights do not carry any voting or dividend rights. 7.3 Shareholdings of Directors and KMP Balance at the start of the year Granted during the year as compensation Exercised during the year Cancelled during the year Balance at the end of the year Vested and exercisable at the end of the year Unvested at the end of the year Vested during the year 2020 Former Executive director Barry Newstead(1) 5,666,668 1,424,755(2) - 4,013,890(3) 3,077,533 - 3,077,533(2)(3) Other key management personnel Emma Clark - 1,069,298 Total 5,666,668 2,494,053 - - - 1,069,298 4,013,890 4,146,831 - – 1,069,298 4,146,831 - - _ (1) Barry Newstead’s role as CEO ceased effective 18 February 2020. The table above reports activity for his period of service up until 18 February 2020. (2) The 1,424,755 SARs granted to Mr Newstead during the year and shown within the balance of unvested equity at the end of the year were subsequently forfeited on 14 August 2020 as he did not meet the service period vesting requirements. (3) As part of Mr Newstead’s transition to the RECM a proportion of his equity entitlements under his earlier CEO Employment Agreement were cancelled, reflecting the proportion of the four year equity vesting period that was yet to be completed. As noted in section 4.6 of this Report, 1,652,778 of Mr Newstead’s SARs remain on foot subject to vesting conditions to be applied in August 2022 in accordance with Mr Newstead’s CEO employment contract arrangements. 7.2 Shares on exercise of options/rights 2020 Related party Denali Venture Partners (Aust) (Beneficiary: Richard Cawsey) Total Number of ordinary shares on exercise of options Exercise price per option Share price per share at exercise / settlement dates Value at exercise / settlement dates(1) Nature of grant Options 39,423 $0.00 $1.91 75,298 39,423 75,298 (1) Value at exercise / settlement date is calculated as share price on exercise date less exercise price paid, multiplied by number of options exercised. 2020 - Redbubble Limited ordinary shares (1) Non-executive directors Richard Cawsey(2) Ben Heap(3) Jennifer Macdonald Anne Ward Executive director Martin Hosking Former Executive director Barry Newstead(4) Other key management personnel Emma Clark Related parties Beneficiary Cawsey Superannuation Fund Pty Ltd Richard Cawsey(2) Denali Venture Partners Fund 1 LP Denali Capital Managers Pty Ltd Denali Investors Pty Ltd Denali Venture Partners (Aust) Denali Ventures Pty Ltd Jellicom Pty Ltd as trustee for the Three Springs Family Trust Three Springs Foundation Pty Ltd as trustee for the Three Springs Foundation Piton Capital Venture Fund II LP Piton Capital Investments Cooperatief B G & M Murdoch Pty Ltd as trustee for the Murdoch Family Superannuation Fund Richard Cawsey(2) Richard Cawsey(2) Richard Cawsey(2) Richard Cawsey(2) Richard Cawsey(2) Martin Hosking Martin Hosking Greg Lockwood Greg Lockwood Grant Murdoch(5) Balance at the start of the year Received on exercise of options / rights Purchase of shares Sale / transfer of shares Balance at the end of the year 1,440,000 - 56,539 100,000 2,393,552 562,413 - 8,893,980 1,840,240 654,560 875,200 - - - - - - - - - - - 320,713 39,423 41,856 51,606,538 2,500,000 5,537,291 927,840 140,000 - - - - - - - - - - 32,000 - - - - - - - - - - - - - - - - 100,000 - - - - - - - - - - 1,440,000 - 88,539 100,000 2,393,552 562,413 - 8,893,980 1,840,240 654,560 (562,000) 313,200 - - 360,136 41,856 (5,000,000) 46,606,538 (1,000,000) 1,500,000 - - - - - 5,537,291 927,840 140,000 80,971 100,000 G & M Murdoch Pty Ltd as trustee for the Murdoch Family Grant Murdoch(5) 80,971 Walros Pty Ltd as trustee for the Anagnostou Super Fund Anne Ward - Total 77,971,693 39,423 132,000 (6,562,000) 71,581,116 (1) Includes shares held directly, indirectly and beneficially by KMP. (2) Richard Cawsey resigned as Chair on 30 March 2020. The total balance represents his shareholding at the date he ceased to be a KMP. (3) Ben Heap was appointed effective 20 April 2020. (4) Barry Newstead role as CEO ended effective 18 February 2020. The total balance represents his shareholding at the date he ceased to be a KMP. (5) Grant Murdoch resigned as Director on 23 October 2019. The total balance represents his shareholding at the date he ceased to be a KMP. 60 61 RedbubbleAnnual Report 2020Consolidated Financial Statements 7.4 Details of equity awards granted # of options / rights granted Grant date Type of equity Vest date(1) Expiry date (2) Exercise price Unit value at grant date Total Value at grant date (3) Non-executive directors Jenny Macdonald 01-Nov-19 27,798 Options 01-Nov-20 01-Nov-29 $0.00 $1.89 $52,497 Anne Ward 01-Nov-19 27,798 Options 01-Nov-20 01-Nov-29 $0.00 $1.89 $52,497 Executive director Martin Hosking 01-Nov-19 23,910(4) Options 01-Nov-20 01-Nov-29 $0.00 $1.89 $45,154 Former Executive director Barry Newstead 23-Oct-19 232,937(5) Options 01-Oct-20 23-Oct-29 $0.00 $1.42 $330,072 23-Oct-19 1,424,755 SARs 01-Oct-20 01-Oct-24 $0.00 $0.62 $883,348 Other key management personnel Emma Clark 24-Jun-20 233,097 Options 01-Oct-20 24-Jun-30 $0.00 $1.42 $330,298 24-Jun-20 1,069,298 SARs 01-Oct-20 01-Oct-24 $0.00 $0.62 $662,965 Other related parties Denali Venture Partners (Aust) - (Beneficiary - Richard Cawsey) Total 01-Nov-19 47,820(6) Options 01-Nov-20 01-Nov-29 $0.00 $1.89 $90,308 3,087,413 $2,447,139 (1) The vesting of equity is subject to the director or KMP (as applicable) remaining in service with Redbubble as at the vest date and, in relation to the SARs, the minimum health conditions being satisfied. (2) If the director or KMP (as applicable) leaves Redbubble service then the expiry date is brought forward to be 90 days after the employment end date. (3) The value at grant date for options has been determined using the Black-Scholes method. The value for share appreciation rights has been determined using the Monte Carlo method. For presentation purposes, share price has been rounded to two decimal places, however the value at grant date has been calculated based on unrounded numbers. (4) The options granted to Mr Hosking were for his services as a non-executive director (NED). Mr Hosking was appointed as CEO on 18 February 2020 and ceased as a NED on this date. The amount of options he will receive at the vest date will be subject to adjustment based on what proportion of the NED remuneration year that Mr Hosking was a NED for. (5) The options and SARs granted to Mr Newstead during the year were subsequently forfeited on 14 August 2020 as he did not meet the service period vesting requirements. (6) Richard Cawsey resigned effective 30 March 2020. Under the terms of the NED remuneration policy he received a pro-rata portion of this grant to reflect his service period. 7.5 Other Transactions with KMP Richard Cawsey, Redbubble’s former Board Chair, is a Director and shareholder of Denali Holdings Pty Ltd, which is the owner of the ‘Bondle’ messaging application. Redbubble engaged Denali Holdings Pty Ltd in respect of a licence of the Bondle application in May 2019 and paid $4,788 at that time for a two year licence period. No further fees were paid for the Bondle application in FY2020. The engagement is on an arm’s length basis and the fees charged are comparable to similar application licensors in the market. At the year end, there were no balances outstanding in relation to this engagement (also nil in 2019). 62 RedbubbleConsolidated Statement of Comprehensive Income for the year ended 30 June 2020 Consolidated Statement of Financial Position as at 30 June 2020 Revenue from contracts with customers Marketplace revenue Artists’ revenue Total revenue from contracts with customers Operating expenses Artists' margin Fulfiller expenses (2) Employee and contractor costs Marketing expenses Operations and administration Depreciation and amortisation Total operating expenses Other income(3) Other expenses(4) Loss before income tax Income tax benefit / (expense) Total loss for the year attributable to owners Other comprehensive income / (loss) Items that will be reclassified subsequently to profit or loss Gain / (loss) on foreign currency translation Total other comprehensive income / (loss) attributable to owners Notes 2020 $'000 2019 $'000 Restated(1) 3 3 4 5 6 348,888 256,889 67,369 50,065 416,257 306,954 (67,369) (50,065) (214,521) (162,354) (59,496) (43,300) (24,342) (47,603) (28,577) (19,180) (10,355) 12, 13 & 14 (13,727) (422,755) (318,134) 342 (2,838) (8,994) 223 (8,771) 441 (2,013) (12,752) (14,817) (27,569) 7(a) 1,512 1,512 (52) (52) Total comprehensive loss for the year attributable to owners (7,259) (27,621) Loss per share attributable to the ordinary equity holders of the company Basic loss per share Diluted loss per share 8 8 (0.03) (0.03) (0.12) (0.12) (1) The full retrospective approach has been selected by the Group in the first time application of AASB 16 Leases. Details regarding the change in accounting policy are in Note 29. The comparative information has been restated as outlined in Note 28. (2) Fulfiller expenses comprise product and printing, shipping and transaction costs, and are equivalent to cost of goods sold. (3) Other income includes finance income. (4) Other expenses include interest expenses on lease liabilities and net foreign exchange losses. The above Consolidated Statement of Comprehensive Income should be read in conjunction with accompanying notes. Current assets Cash and cash equivalents Other receivables Prepayments Net investment in sublease Current tax assets Other assets Total current assets Non-current assets Property, plant and equipment Intangible assets Right of use assets Net investment in sublease Prepayments Deferred tax assets Other assets Total non-current assets Total assets Current liabilities Trade and other payables Unearned revenue(2) Employee benefit liabilities Provisions Tax liabilities Lease liabilities Other liabilities Total current liabilities Non-current liabilities Lease liabilities Employee benefit liabilities Deferred tax liabilities Other liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Treasury reserve Share based payment reserve Foreign currency translation reserve Accumulated losses Total equity Notes 9 10(b) 14(b) 11 12 13 14(a) 14(b) 7(c) 11 15 16 14(a) 17 14(a) 16 7(c) 17 18(a) 18(b) 18(d) 18(d) 2020 $'000 58,129 5,236 4,063 994 1,032 7,328 76,782 2,229 71,576 6,649 - 46 617 1,621 82,738 159,520 44,991 28,855 5,059 1,780 - 3,944 1,326 85,955 5,819 198 - 70 6,087 92,042 67,478 145,438 (5,303) 13,699 (335) (86,021) 67,478 2019 As at 1 July 2018 $'000 $’000 Restated(1) Restated(1) 29,030 2,562 2,786 677 - 2,274 37,329 2,925 71,417 8,378 571 132 72 1,463 84,958 122,287 26,520 8,101 2,423 1,121 849 3,278 7,773 50,065 8,570 227 45 - 8,842 58,907 63,380 135,194 (1,394) 8,677 (1,847) (77,250) 63,380 21,247 997 1,968 595 - 2,066 26,873 3,596 10,532 8,509 1,184 129 13,956 1,200 39,106 65,979 19,524 5,305 2,045 192 438 2,252 - 29,756 10,198 149 - - 10,347 40,103 25,876 74,555 (1,895) 4,692 (1,795) (49,681) 25,876 (1) The full retrospective approach has been selected by the Group in the first time application of AASB 16 Leases. Details regarding the change in accounting policy are in Note 29. The comparative information has been restated as outlined in Note 28. (2) Unearned revenue represents the value of goods paid for by customers that are not yet delivered. Higher sales volumes and increased delivery times at the end of the financial year have increased this balance. The above Consolidated Statement of Financial Position should be read in conjunction with accompanying notes. 64 65 RedbubbleAnnual Report 2020 Consolidated Statement of Changes in Equity for the year ended 30 June 2020 Consolidated Statement of Changes in Equity for the year ended 30 June 2020 Share capital Treasury reserve (1) Share based payments reserve Foreign exchange translation reserve Accumulated losses Total Notes $’000 $’000 $'000 $'000 $'000 $'000 135,194 (1,394) 8,677 (1,847) (77,250) 63,380 - - - 18(b) 3,556 3,009 - - - - - - - 18(b) 10,321 (10,321) 18(b) (6,412) 6,412 18(b) (230) - - - - - (3,009) 8,031 - - - - (8,771) (8,771) 1,512 - 1,512 1,512 (8,771) (7,259) - - - - - - - - - - - - 3,556 - 8,031 - - (230) 145,438 (5,303) 13,699 (335) (86,021) 67,478 For the year ended 30 June 2020 Balance as at 1 July 2019 (restated) Loss for the year Other comprehensive income Total comprehensive loss for the year Exercise of share options Transfer to issued capital (2) Share based payments expense Shares issued to Employee Share Trust Shares issued / allocated to participants (3) Payment of withholding taxes (4) Balance as at 30 June 2020 (1) The Group operates an Employee Share Trust (the Trust) for the purpose of issuance of shares to participants on exercise of options / restricted stock units. The balance in the Treasury Reserve represents the book value of shares held by the Trust for future issue to participants on exercise of options / restricted stock units. (2) Transfer to issued capital on issuance of shares for exercised options / restricted stock units. (3) Shares issued / allocated to participants from the Employee Share Trust. (4) Payment of withholding taxes to US tax authorities on issuance of restricted stock units funded by shares withheld. The above Consolidated Statement of Changes in Equity should be read in conjunction with accompanying notes. Treasury reserve (1) Share based payments reserve Foreign exchange translation reserve Share capital Accumulated losses Total Notes $’000 $’000 $'000 $'000 $'000 $'000 74,555 (1,895) 4,692 (1,795) (49,809) 25,748 - - - - 128 128 74,555 (1,895) 4,692 (1,795) (49,681) 25,876 - - - 18(b) 2,249 1,930 - - - - - - - - - (1,930) - - 5,915 18(b) 7,515 (7,515) 18(b) (8,016) 8,016 18(b) (110) 60,572 (3,501) - - - _ - - - - - (27,569) (27,569) (52) - (52) (52) (27,569) (27,621) - - - - - - - - - - - - - - - - 2,249 - 5,915 - - (110) 60,572 (3,501) 135,194 (1,394) 8,677 (1,847) (77,250) (63,380) For the year ended 30 June 2019 Balance as at 1 July 2018 Effect of adoption of new accounting standards (2) Balance as at 1 July 2018 (restated) Loss for the year (restated) Other comprehensive loss Total comprehensive loss for the year (restated) Exercise of share options Transfer to issued capital (3) Share-based payments expense Shares issued to Employee Share Trust Shares issued / allocated to participants (4) Payment of withholding taxes (5) Shares issued to fund the acquisition of TeePublic LLC Transaction costs for above issued share capital Balance at 30 June 2019 (restated) (1) The Group operates an Employee Share Trust (the Trust) for the purpose of issuance of shares to participants on exercise of options / restricted stock units. The balance in the Treasury Reserve represents the book value of shares held by the Trust for future issue to participants on exercise of options / restricted stock units. (2) The comparative information has been restated as a result of the initial application of AASB 16 as discussed in Note 28. (3) Transfer to issued capital on issuance of shares for exercised options / restricted stock units. (4) Shares issued / allocated to participants from the Employee Share Trust. (5) Payment of withholding taxes to US tax authorities on issuance of restricted stock units funded by shares withheld. The above Consolidated Statement of Changes in Equity should be read in conjunction with accompanying notes. 66 67 RedbubbleAnnual Report 2020 Consolidated Statement of Cash Flows for the year ended 30 June 2020 Cash flows from operating activities Receipts from customers Payments to artists Payments to fulfillers Payments to other suppliers and employees Payment of interest Receipt of interest Income taxes received / (paid) Net cash provided by / (used in) operating activities Cash flows from investing activities Payment for property, plant and equipment Acquisition of subsidiary (net of cash acquired) Proceeds from net investment in subleases Payment for development of intangible assets Net cash provided by / (used in) investing activities Cash flows from financing activities Proceeds from exercise of share options Payment of withholding taxes to US tax authorities on settlement of restricted stock units funded by shares withheld Payments for lease liabilities Proceeds from issue of share capital Transaction costs arising from issue of share capital Net cash provided by / (used in) financing activities Net increase / (decrease) in cash and cash equivalents held Cash and cash equivalents at beginning of year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year Notes 2020 $’000 2019 $’000 Restated (1) 471,973 330,793 (63,114) (48,199) (217,810) (158,707) (142,058) (115,499) (456) 232 (2,165) 46,602 (527) 326 (349) 7,838 14(a) (476) (428) 19 (7,104) (46,674) 14(b) 785 616 13 (9,205) (9,412) (16,000) (55,898) 18(b) 18(b) 14(a) 18(b) 18(b) 3,556 2,249 (230) (110) (3,576) - - (250) 30,352 29,030 (1,253) (2,911) 60,572 (3,501) 56,299 8,239 21,247 (456) 58,129 29,030 (1) The comparative information has been restated as a result of the initial application of AASB 16 as discussed in Note 28. The above Consolidated Statement of Cash Flows should be read in conjunction with accompanying notes. Notes to the consolidated financial statements For the year ended 30 June 2020 NOTES PAGE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Basis of Preparation Changes in significant accounting policies Performance Revenue Employee and contractor costs Marketing expenses Operations and administration expenses Income tax Loss per share Cash Cash and cash equivalents Financial risk management Assets Other assets Property, plant and equipment Intangible assets Liabilities Leases Trade and other payables Employee benefits liabilities Other liabilities Equity 18. Contributed equity and reserves 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. Group Structure Business combinations Interest in subsidiaries Parent entity financial information Unrecognised items Commitments and contingencies Others Share-based payments Related party transactions Remuneration of auditors Segment information Events occurring after the balance sheet date Impact of new accounting standards Other significant accounting policies 70 71 71 72 72 72 73 76 77 78 82 82 84 87 89 90 91 91 93 93 94 95 95 98 99 99 100 100 104 68 69 RedbubbleAnnual Report 2020 1. Basis of preparation The consolidated financial statements of Redbubble Limited and its controlled entities (the Group) for the year ended 30 June 2020 were authorised for issue by a resolution of the Directors on 21 August 2020. Redbubble Limited (the Company or the parent) is a limited company incorporated and domiciled in Australia and whose shares are publicly traded on the Australian Stock Exchange. The Group, through its websites at Redbubble.com, TeePublic.com and three foreign language Redbubble. com websites, owns and operates the Redbubble and TeePublic online marketplaces. These marketplaces facilitate the sale and purchase of art and designs on a range of products between independent creatives and consumers. The products are produced and shipped by third party service providers (i.e. product manufacturers, printers and shipping companies) referred to as fulfillers. These financial statements: • are general purpose financial statements; • cover Redbubble Limited and its controlled entities as the consolidated Group. Redbubble Limited is the ultimate parent entity of the Group; • have been prepared in accordance with Australian Accounting Standards (AASBs) and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001; • comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB); • have been prepared on a going concern basis under the historical cost convention; • are presented in Australian dollars with all values rounded off in accordance with the Australian Securities and Investments Commission 2016/191 Legislative Instrument, to the nearest thousand dollars or in certain other cases, nearest dollar, unless otherwise stated; and • apply significant accounting policies consistently to all the years presented, unless otherwise stated. Comparatives are also consistent with prior years, unless otherwise stated. The preparation of financial statements requires the use of certain critical accounting estimates and exercise of significant judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement and use of estimates are disclosed in the relevant notes. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under circumstances. The Group makes estimates and assumptions concerning the future which may not equal the actual results. At 30 June 2020, the Group had a net current asset deficiency of $9.2 million (2019: $12.7 million). Included in this is $7.0 million of goods in transit and $28.9 million of unearned revenue that is not a cash liability of the Group but will be recognised in the Statement of Comprehensive Income in the next financial year. The group also has $3.9 million of lease liabilities in current liabilities but is required to report the corresponding right of use asset as a non-current asset. Excluding these items the Group is in a positive net current asset position. The Directors have satisfied themselves that the continued application of going concern basis is appropriate as it is expected that the Group will be able to fully repay its debts as and when they become due. The Directors have considered the potential impacts of trading volatility from COVID-19 in this assessment. 2. Changes in significant accounting policies The Group applied AASB 16 Leases for the first time using the full retrospective approach that requires restatement of previous years financial statements. The nature and effect of the changes as a result of adoption of this new accounting standard are disclosed in Note 28. The Group has also applied other amendments and interpretations for the first time in this period, but these do not have a material impact on the consolidated financial statements. 3. Revenue The Group provides internet-based marketplace platforms and associated services to facilitate the sale of goods from artists to those who want to purchase goods bearing the artists’ designs. Artists display and sell art via the Group’s websites. The Group aggregates demand from the buyers to support preferential relationships between third party suppliers, fulfillers and drop shippers and the artists, using the Group’s platforms. The Group has concluded that when the customer contracts with the Group, there is only one performance obligation for goods bearing the artists’ designs. Both the artist and the Group are involved in satisfying the performance obligation. However, as the Group controls a substantial part of the process it is construed to be the party primarily responsible for satisfying the performance obligation, the Group is determined (for accounting purposes) to be the principal in the sale. Under AASB 15 Revenue the performance obligation is satisfied (and therefore revenue is recognised) when control of the goods is transferred to the customer, which is deemed to be when the product is delivered. As the Group is seen as the principal (for accounting purposes) in the sale of goods bearing artists’ designs, artists’ revenue is included in revenue with the corresponding artists’ margin being recognised in operating expenses. Amounts disclosed as revenue are net of trade discounts, returns, rebates, taxes and transaction fraud. All of the unearned revenue balance as at 30 June 2019 was recognised as revenue during the FY2020 year. High sales volumes at the end of the financial year combined with extended delivery times across all regions has led to an increase in the unearned revenue balance as at 30 June 2020. This balance is expected to be recognised as revenue within 12 months. Where possible the Group uses delivery tracking information to calculate the volume of goods in transit at the end of the reporting period. When delivery tracking information is not available the group estimates the likely delivery timeframe using average delivery times and information from shipping partners. For information regarding disaggregated revenue from contracts with customers refer to note 26. 70 71 RedbubbleAnnual Report 20204. Employee and contractor costs Salary costs Contractor costs Share-based payments expense Superannuation and other pension related costs (1) Termination benefits Restructure costs 2020 $'000 39,113 6,569 8,031 2,708 530 2,545 2019 $'000 33,139 5,974 5,915 2,422 153 - Total employee and contractor costs 59,496 47,603 (1) Includes contribution to 401K funds, which is the superannuation equivalent for the US subsidiaries, and contributions to pension funds in Germany. 5. Marketing expenses Paid marketing (1) Other marketing expenses Total marketing expenses 2020 $'000 39,840 3,460 43,300 2019 $'000 27,051 1,526 28,577 (1) Paid marketing represents affiliate marketing and other paid marketing costs paid per click basis on search engines like Google, and advertising on social media platforms such as Instagram, Facebook, Pinterest and SnapChat. 6. Operations and administration Technology infrastructure and software costs Travel expenses Rental expenses (1) TeePublic acquisition costs Other operations and administration expenses Total operations and administration 2020 $'000 14,704 928 155 - 8,555 24,342 2019 $'000 Restated 10,306 1,133 111 1,235 6,395 19,180 (1) Includes short-term leases with a lease term of 12 months or less. This amount is also recognised in the statement of cash flows as cash flows from operating activities. 7. Income tax Recognition of tax expense / (benefit) The tax expense recognised in the statement of comprehensive income relates to current income tax expense plus deferred tax expense (being the movement in deferred tax assets and liabilities and unused tax losses during the year). Current and deferred tax is recognised as income or an expense and included in the income statement for the period except where the tax arises from a transaction which is recognised in other comprehensive income or equity, in which case the tax is recognised in other comprehensive income or equity respectively. Current tax Current tax is the amount of income taxes payable / (recoverable) in respect of the taxable profit / (taxable loss) for the year and is measured at the amount expected to be paid to / (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Current tax assets and liabilities are offset where there is a legally enforceable right to set off the recognised amounts and there is an intention either to settle on a net basis or to realise the asset and settle the liability simultaneously. Deferred tax Deferred tax is provided on temporary differences which are determined by comparing the carrying amounts of tax bases of assets and liabilities to the carrying amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets are recognised for all deductible temporary differences and unused tax losses to the extent: • • • it is probable that future taxable profits will be available against which the deductible temporary differences and losses can be utilised; the likelihood of achieving appropriate continuity of ownership levels and continuing to meet the relevant definitions of “same business” are met; and there are no changes in tax legislation that adversely affect the ability to realise the deferred tax asset benefits. Deferred tax assets and liabilities are offset where they relate to income taxes levied by the same taxation authority and the intention is to realise the assets and settle the liabilities simultaneously in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. Critical accounting estimates and judgements Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense, the incurrence of tax losses and entitlement to non-refundable tax offsets. In evaluating the Group’s ability to recover deferred tax assets within the jurisdiction from which they arise, the Group considers all available positive and negative evidence, including probability of achieving appropriate continuity of ownership levels, likelihood of meeting relevant definitions of “same business”, expected reversals of temporary differences, projected future taxable income and results of recent operations. This evaluation requires significant management estimates and judgments. 72 73 RedbubbleAnnual Report 20207. Income tax (continued) In the prior year the Group de-recognised $13.9 million of the deferred tax asset balance during the year aligning the accounting position on recognition of pre and post IPO losses. This asset predominantly related to Australian carried forward tax losses and non-refundable research and development (R&D) tax offsets. These losses remain in existence for taxation purposes. The Group has in aggregate $83.7 million (2019: $72.0 million) of unrecognised losses and $8.7 million (2019: $7.6 million) of unrecognised R&D tax offsets. An unrecognised deferred tax asset of $33.9 million exists as at 30 June 2020 (2019: $29.2 million), in relation to these items. a) Income tax expense / (benefit) Current tax Current tax expense / (benefit) Under/(over) provision in prior years Deferred tax Deferred tax expense / (benefit) (1) Under/(over) provision in prior years Total income tax expense / (benefit) 2020 $'000 339 18 (530) (50) (223) 2019 $'000 Restated 1,141 (420) 13,848 248 14,817 (1) In the prior year the group de-recognised its deferred tax asset on Australian tax losses. These losses remain in existence for taxation purposes. (b) Numerical reconciliation of income tax expense / (benefit) to prima facie tax payable Loss from ordinary activities before income tax expense / (benefit) Income tax calculated @ 30% Tax effect of amounts that are not deductible / (taxable) in calculating income tax: Tax effect of foreign jurisdictions’ different tax rates US income tax benefit due to exercise / disposition of employee stock options Research and development Share-based payments Other non-deductible / non-assessable items Effect of movements in foreign exchange Over provision in prior year 2020 $'000 2019 $'000 Restated (8,994) (12,752) (2,698) (3,826) (171) (163) (217) 1,517 226 193 (32) (412) 165 (57) 1,217 224 85 (172) Australian income tax benefit arising from deductibility of the issue of shares to Employee Share Trust (3,096) (2,255) Unrecognised tax losses and R&D tax offsets Income tax expense / (benefit) attributable to loss from ordinary activities 4,218 (223) 19,848 14,817 7. Income tax (continued) (c) Deferred tax (liability) / assets Deferred tax assets Deferred tax liabilities Net deferred tax asset / (liability) The balance comprises temporary differences attributable to: Amounts recognised in profit or loss: Employee benefits Property, plant, equipment Lease assets and liabilities Unrealised FX Intangible assets Other items Net deferred tax (liability) / assets Movements: Opening balance at 1 July Credited / (debited) due to the acquisition of TeePublic Credited / (debited) to the consolidated statement of comprehensive income Exchange differences Closing balance at 30 June 2020 $'000 617 - 617 2020 $'000 873 (275) 395 1,347 (1,395) (328) 617 27 - 580 10 617 2019 $'000 Restated 72 (45) 27 2019 $'000 Restated 71 (898) 396 1,114 (588) (68) 27 13,956 161 (14,096) 6 27 74 75 RedbubbleAnnual Report 20208. Loss per share Basic earnings per share (EPS) Basic EPS is calculated by dividing the profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the financial year. Diluted EPS Diluted EPS is calculated by dividing the profit attributable to ordinary equity holders of the Company (after adjusting for the after income tax effect of interest and other financing costs associated with the dilutive potential ordinary shares) by the weighted average number of ordinary shares outstanding during the financial year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. Potential ordinary shares None of the options over ordinary shares and restricted stock units over ordinary shares that could be considered as potential ordinary shares have been included in determination of diluted EPS, since they are anti-dilutive. Due to losses incurred during the current as well as the prior year, inclusion of potential ordinary shares in weighted average number of shares would increase the denominator used in calculating diluted EPS and thereby reduce the loss per share. Basic and diluted loss per share Basic and diluted loss per share attributable to the ordinary equity holders of the company is $0.03 (2019: $0.12). The calculation for basic and diluted loss per share is detailed below. Loss attributable to the ordinary equity holders of the company used in calculating basic and diluted loss per share 2020 $'000 2019 $'000 (8,771) (27,569) Weighted average number of shares used as the denominator Weighted average number of shares used as denominator in calculating basic and diluted loss per share 2020 2019 259,379,690 237,934,306 There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorisation of these financial statements that would significantly impact the above calculations. 9. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and short-term deposits which are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Cash at bank and on hand(1) Fixed term bank deposits(2) Total cash and cash equivalents 2020 $'000 58,219 - 58,219 2019 $'000 18,028 11,002 29,030 (1) FY20 includes cash held in interest bearing accounts as described in note 10(b). (2) Fixed term bank deposits attract interest at normal term deposit rates. They are placed for various periods of up to 12 months. All deposits are capable of being called at 31 days’ notice with minimal financial impact. (a) Reconciliation of loss for the year to net cash outflow from operating activities Notes Loss for the year Non-cash items (Recognition) / de-recognition of net deferred tax asset 7(c) Depreciation and amortisation Amortisation of share-based payments Net exchange differences Net loss on the disposal / write off of property, plant and equipment and intangible assets Unwinding of discount on deferred consideration Change in operating assets and liabilities Net (increase) in trade and other receivables, prepayments and other financial assets Net increase / (decrease) in current tax liabilities Net increase in trade and other payables, employee benefit and other liabilities and provisions Net increase in unearned revenue Net cash provided by operating activities 2020 $'000 (8,771) (580) 13,727 8,031 2,233 171 188 2019 $'000 Restated (27,569) 14,096 10,355 5,915 (93) 171 143 (9,077) (1,004) (1,881) 21,807 20,754 46,602 415 4,412 997 7,838 76 77 RedbubbleAnnual Report 20209. Cash and cash equivalents (continued) (b) Changes in liabilities arising from financing activities Lease liabilities Opening balance at 1 July Cash flows New leases Foreign exchange movement Closing balance 30 June Notes 14(a) 14(a) 14(a) 2020 $'000 11,848 (3,576) 1,335 156 9,763 2019 $'000 12,450 (2,911) 1,807 502 11,848 10. Financial risk management (continued) (a) Market risk Foreign exchange risk The Group collects funds from customers in five currencies (USD, AUD, EUR, CAD and GBP) and maintains bank accounts in these currencies. The Group has liabilities to fulfillers, artists and other suppliers in these currencies. Where possible, the Group settles its liabilities in the native currency hence creating a natural hedge. Any surplus funds are converted in to the required currencies’ operating accounts when management feels it is prudent to do so. Increased sales volumes during the year have led to larger foreign currency cash balances as at 30 June 2020. The net exposure to foreign currency financial instruments (expressed in AUD) held by the Group, which are largely held by the US subsidiaries whose functional currency is USD, are as follows: 10. Financial risk management This note explains the Group’s financial risk management and how the exposure to these risks affects the Group’s future financial performance. The Group’s risk management framework is maintained by senior management through delegation from the Board of Directors. The Board oversees and monitors senior management’s implementation of the Group’s risk management framework. This is based on recommendations from the Audit and Risk Committee, where appropriate. The risk management framework includes policies and procedures approved by the Board and managed by internal legal counsel and the Finance function. Net exposure (asset / (liability) 30 June 2020 30 June 2019 Foreign Currency Sensitivity GBP $'000 4,206 (278) USD $’000 (766) 380 EUR $’000 (525) (409) CAD $’000 2,984 242 Total $’000 5,899 (65) Financial assets Cash and cash equivalents Other receivables Security bonds Net investment in sublease Financial liabilities Fulfiller payables Artist payables Staff payables Other payables Deferred consideration Lease liabilities Notes 9 10(b) 11 14 15 15 15 15 17 14(a) 2020 $'000 58,129 5,236 1,930 994 22,319 9,892 1,781 5,453 1,227 9,763 2019 $'000 Restated 29,030 2,562 1,873 1,248 14,877 4,663 1,252 3,311 7,773 11,848 The carrying value of the assets and liabilities disclosed in the table equals or closely approximates their fair value. The following table demonstrates the sensitivity to a reasonably possible change in exchange rates with all other variables held constant. The impact on the Group’s profit before tax is due to changes in the fair value of monetary assets and liabilities. Year Change in FX rate 30 June 2020 30 June 2019 + 10% - 10% + 10% - 10% Effect on profit before tax (amounts shown in AUD) GBP $'000 421 (421) (28) 28 USD $’000 (77) 77 38 (38) EUR $’000 (53) 53 (41) 41 CAD $’000 298 (298) 24 (24) Total $’000 590 (590) (7) 7 78 79 RedbubbleAnnual Report 202010. Financial risk management (continued) 10. Financial risk management (continued) (b) Credit risk (c) Liquidity risk Credit risk is the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group. The Group faces primary credit risk from potential default on receivables by payment service providers. The Group receives payments of the balance due from two of the three service providers, every day, two to three days in arrears. The credit risk of balances held with the third party service provider is managed by regularly sweeping funds out of the provider accounts into a portfolio of managed banking facilities held with highly rated and regulated financial institutions. The credit risk for net investment in subleases is considered negligible due to the credit worthiness of lessees. Cash and bank balances / other financial assets As at 30 June 2020, the Group holds $13 million (2019: $11.0 million) in bank deposits, classified as cash and cash equivalents and other assets, that attract interest at normal rates. The Group’s bank accounts are predominantly non-interest bearing accounts. These operating bank accounts are not concentrated with any one bank. Funds in excess of the short-term liquidity requirements are moved to interest-bearing accounts. The other financial assets include certain other operational deposits over and above the deposits placed with banks as security. The banks with which securities are held are reputable financial institutions and hence, the credit risk is considered low. Other receivables The Group is not exposed to any significant credit risk on account of other receivables. The Group accepts payments either via credit card platforms, PayPal, Amazon Pay or Apple Pay. In any case, the Group ensures that cash is received prior to the product being manufactured. The other receivables balance as at 30 June 2020 represents amounts receivable from these payment service providers. It is believed that the credit risk from collections from payment service providers is low. Other receivables (1) Total other receivables 2020 $’000 5,236 5,236 2019 $’000 2,562 2,562 (1) None of the other receivables balances are impaired or past due date. The Group does not hold any collateral in relation to these receivables. The Group encounters credit card fraud typical of the industry in which it operates, representing less than 0.1% (2019: less than 0.1%) of marketplace revenue. Prudent liquidity risk management implies maintaining sufficient cash in accordance with forecast cash usage. Due to the dynamic nature of the underlying business, flexibility in funding is maintained by ensuring ready access to the cash reserves of the business. Term deposits classified as cash and cash equivalents in the prior year are placed for various periods up to 12 months. These can, however, be called at 31 days’ notice, with minimal financial impact. All financial liabilities (excluding lease liabilities) are current and anticipated to be repaid over the normal payment terms, usually 30 days. Financial arrangements The Group had no borrowing facilities at the end of reporting period nor at the end of the prior reporting period. Maturities of financial liabilities Financial liabilities owed by the Group at 30 June 2020 are $55.8 million (2019: $41.4 million). These items are based on contractual undiscounted payments. The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments: Year ended 30 June 2020 Trade and other payables Lease liabilities 1 to 3 months 3 to 12 months 1 to 3 years > 3 years Total $’000 44,991 - - - $'000 1,169 3,315 3,864 2,458 44,991 10,806 Year ended 30 June 2019 Trade and other payables Lease liabilities 1 to 3 months 3 to 12 months 1 to 3 years > 3 years Total $’000 26,520 - - - $'000 984 2,975 5,443 4,038 26,520 13,440 Total $'000 46,160 3,315 3,864 2,458 55,797 Total $'000 27,504 2,975 5,443 4,038 39,960 80 81 RedbubbleAnnual Report 202010. Financial risk management (continued) 12. Property, plant and equipment (continued) (d) Capital management The Group’s policy is to maintain a capital structure for the business which ensures sufficient liquidity, provides support for business operations, maintains shareholder confidence and positions the business for future growth. The Group manages its capital structure and makes adjustments in light of changes in economic conditions. The ongoing maintenance of the Group’s policy is characterised by ongoing cash flow forecast analysis and detailed budgeting which is directed at providing a sound financial positioning for the Group’s operations and financial management activities. The Group is not subject to externally imposed capital requirements. 11. Other assets Consolidated Security bonds Goods in transit (1) Total other assets Current Non-current 2020 $’000 309 7,019 7,328 2019 $’000 410 1,864 2,274 2020 $'000 1,621 - 1,621 2019 $'000 1,463 - 1,463 (1) Goods in transit represents the cost of goods that have been manufactured but are in transit to customers. 12. Property, plant and equipment Plant and equipment is measured on a cost basis and carried at cost less accumulated depreciation and any accumulated impairment losses.   Depreciation The depreciable amount of all fixed assets is depreciated on a straight-line basis over the asset’s useful life to the Group commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The depreciation rates used for each class of depreciable asset are shown below: Class of Fixed Assets Leasehold improvements Computer equipment Furniture and equipment Useful life Life of the applicable lease 3 years 2-5 years At the end of each annual reporting period, the depreciation method, useful life and residual value of each asset is reviewed. Any revisions are accounted for prospectively as a change in estimate. Leasehold improvements Furniture and equipment Computer equipment $'000 $'000 $'000 Cost Balance at 1 July 2019 Additions Disposals Exchange differences Balance at 30 June 2020 Balance at 1 July 2018 Additions Disposals Exchange differences Balance at 30 June 2019 Accumulated depreciation Balance at 1 July 2019 Charge for the year Disposals Exchange differences Balance at 30 June 2020 Balance at 1 July 2018 Charge for the year Disposals Exchange differences Balance at 30 June 2019 Net book value As at 30 June 2020 As at 30 June 2019 3,883 - - 42 3,925 3,754 8 - 121 3,883 (2,017) (560) - (7) (2,584) (1,360) (622) - (35) (2,017) 1,341 1,866 721 66 (8) 7 786 671 27 - 23 721 (356) (140) 3 (1) (494) (227) (123) - (6) (356) 292 365 Total $'000 7,359 476 (347) 74 7,562 6,739 428 (4) 196 7,359 (4,434) (1,159) 285 (25) (5,333) (3,143) (1,213) - (78) 2,755 410 (339) 25 2,851 2,314 393 (4) 52 2,755 (2,061) (459) 282 (17) (2,255) (1,556) (468) - (37) (2,061) (4,434) 596 694 2,229 2,925 82 83 RedbubbleAnnual Report 202013. Intangible assets (continued) Critical accounting estimates and judgements Key assumptions used in value in use calculations and sensitivity to changes in assumptions The Group assesses the recoverability of its goodwill and brand name in the TeePublic CGU annually. Recoverable amounts have been determined based on a value in use calculation using cash flow projections over a 5 year period. Management have considered the potential impacts of trading volatility from COVID-19 in this assessment. The key assumptions in the calculation are as follows: (a) Growth rate The long-term business growth rate is based upon Management’s experience with the historical growth of the business and expectations about future performance. Cash flows beyond the forecast period are projected using a growth rate of 2.5%. (b) Gross margins Gross margins are based on historical values and expectations about future performance. These values are increased over the forecast period for anticipated efficiency improvements as the business scales. (c) Discount rates The pre-tax discount rate applied to cash flow projections is 12.2%. Discount rates represent the consideration of the time value of money and the individual risks of the underlying assets. The discount rate calculation is based on the specific circumstances of the Group and is derived from its weighted average cost of capital (WACC). Adjustments to the discount rate are made to factor in the specific amount and timing of the future tax flows in order to reflect a pre-tax discount rate. Impairment The Group performed an impairment test as at 30 June 2020. Using the above assumptions, it was concluded that the carrying value of the Group’s CGUs does not exceed its value in use and therefore no impairment charge has been recognised. Sensitivity analysis has been completed which considered a range of possible scenarios. There is no reasonably possible change in key assumptions used to determine the recoverable amount that would result in impairment. 12. Property, plant and equipment (continued) Critical accounting estimates and judgements At the end of each reporting period, the Group assesses whether there is any indication that any property, plant & equipment asset may be impaired. If such an indication exists, an impairment test is carried out on the asset by comparing the recoverable amount of the asset, being the higher of the asset’s fair value less costs to dispose, and value in use, to the asset’s carrying amount. Any excess of the asset’s carrying amount over its recoverable amount is recognised immediately as a loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. No items of property, plant and equipment have been impaired in the financial year ending 30 June 2020 (2019: $nil). 13. Intangible assets Recognition and measurement Capitalised development costs Goodwill Other intangible assets Amortisation Development expenditure is capitalised when future economic benefits are probable. Expenditure during the research phase of a project is recognised as an expense when incurred. Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. All of the goodwill held by the Group is attributable to the TeePublic cash generating unit (CGU). Other intangible assets include brand name assets that have been acquired by the Group. Amortisation is calculated to write off the cost of intangible assets using the straight-line method over their estimated useful lives, and is recognised in profit or loss. Goodwill is not amortised. The estimated useful lives for current and comparative periods are as follows: Capitalised development costs: Goodwill (attributable to the TeePublic CGU): Brand name asset (attributable to the TeePublic CGU): 2–3 years Indefinite Indefinite The Brand name asset is considered to have an indefinite useful life as it is expected to contribute to future economic benefits as the Group continues to sell its products under the brand name indefinitely. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if deemed necessary. 84 85 RedbubbleAnnual Report 202013. Intangible assets (continued) Brand name Capitalised development costs $'000 $'000 6,756 - - 122 6,878 - - 6,694 - 62 39,692 9,205 (109) 3 48,791 29,077 9,412 1,216 (185) 172 Goodwill $'000 Restated 50,501 - - 988 51,489 - - 49,916 - 585 Cost Balance at 1 July 2019 Additions Disposals Exchange differences Balance at 30 June 2020 Balance at 1 July 2018 Additions Acquisition of a subsidiary Disposals Exchange differences Balance at 30 June 2019 6,756 39,692 50,501 Accumulated amortisation Balance at 1 July 2019 Charge for the year Exchange differences Balance at 30 June 2020 Balance at 1 July 2018 Charge for the year Exchange differences Balance at 30 June 2019 Net book value As at 30 June 2020 As at 30 June 2019 - - - - - - - - 6,878 6,756 (25,532) (10,041) (9) (35,582) (18,545) (6,873) (114) (25,532) 13,209 14,160 - - - - - - - - 51,489 50,501 No intangible assets have been impaired in the financial year ending 30 June 2020 (2019: nil). Total $'000 96,949 9,205 (109) 1,113 107,158 29,077 9,412 57,826 (185) 819 96,949 (25,532) (10,041) (9) (35,582) (18,545) (6,873) (114) (25,532) 71,576 71,417 14. Leases a) Group as a lessee The Group leases various offices in Australia, the United States and Germany. Rental contracts are typically made for fixed periods of between 1 to 8 years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Set out below are the carrying amounts of right-of-use assets and lease liabilities and the movements during the period: Right of use assets Lease liabilities Balance at 1 July 2019 Additions Disposals (1) Depreciation and amortisation expense Interest expense Lease liability repayment Exchange differences Balance as at 30 June 2020 Balance at 1 July 2018 Additions Disposals Depreciation and amortisation expense Interest expense Lease liability repayment Exchange differences Balance as at 30 June 2019 (1) The disposal is a result of recognising net investment in sublease during the year. Classification of lease liabilities Current Non-current Total lease liabilities Amounts recognised in the statement of cashflow Operating – payments of interest Financing – payments of principal Total cash (outflow) relating to leases Total $'000 8,378 1,348 (654) (2,527) - - 104 6,649 8,509 1,807 - (2,269) - - 331 8,378 2020 $’000 3,944 5,819 9,763 2020 $’000 (456) (3,576) (4,032) Total $'000 11,848 1,335 - - 456 (4,032) 156 9,763 12,450 1,807 - - 527 (3,438) 502 11,848 2019 $’000 3,278 8,570 11,848 2019 $’000 (527) (2,911) (3,438) 86 87 RedbubbleAnnual Report 202014. Leases (continued) 14. Leases (continued) The Group has several lease contracts that include an extension. Management exercises significant judgement in determining whether these extension options are reasonably certain to be exercised. Set out below are the undiscounted potential future rental payments relating to periods following the exercise date of extension options that are not included in the lease term: Extension options expected not to be exercised b) Group as a lessor Within five years More than five years $'000 3,025 $’000 8,386 Total $'000 11,411 Amounts recognised in the statement of cashflow Operating – receipt of interest Investing – receipt of principal Total cash inflow relating to leases 2020 $’000 53 785 838 2019 $’000 69 616 685 The table below summarises the maturity profile of the Group’s net investment in sublease based on contractual undiscounted receipts with a reconciliation to the carrying amount of net investment in sublease: The Group has sub-let offices in the United States. These subleases have original terms of up to 4 years. Set out below are the carrying amounts of net investment in sublease and the movements during the year: Undiscounted lease receipts Net investment in sublease Balance at 1 July 2019 Additions Disposals Interest income Net investment in sublease receipts Exchange differences Balance as at 30 June 2020 Balance at 1 July 2018 Additions Disposals Interest income Net investment in sublease receipts Exchange differences Balance as at 30 June 2019 Classification of net investment in sublease Current Non-current Total net investment in sublease 2020 $’000 994 - 994 Total $’000 1,248 500 - 53 (838) 31 994 1,779 - - 69 (685) 85 1,248 2019 $’000 677 571 1,248 Year 1 Year 2 Year 3 > 3 years Total undiscounted lease receipts Less: unearned finance income Exchange differences Net investment in sublease 15. Trade and other payables Fulfiller payables Artist payables Staff payables Sales tax payables Other payables (1) Total trade and other payables (1) Other payables consist of operations, administration and marketing payables. 2020 $’000 1,046 - - - 1,046 (22) (30) 994 2020 $’000 22,319 9,892 1,781 5,546 5,453 44,991 2019 $’000 754 611 - - 1,365 (52) (65) 1,248 2019 $’000 14,877 4,663 1,252 2,417 3,311 26,520 88 89 RedbubbleAnnual Report 202016. Employee benefit liabilities Wages, salaries, annual and long service leave A provision is made for the Group’s liability for employee benefits arising from services rendered by employees to the end of the reporting period. Employee benefits that are expected to be settled within one year represent the amounts expected to be paid when the liability is settled. Employee benefits expected to be settled more than twelve months after the end of the reporting period have been measured at the present value of the estimated future cash outflows to be made for those benefits. In determining the liability, consideration is given to employee wage increases and the probability that the employee may satisfy service period requirements. Cash flows are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity that match the expected timing of cash flows. Employee benefits are presented as current liabilities in the balance sheet if the Group does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date regardless of the classification of the liability for measurement purposes under AASB 119 Employee Benefits. Changes in the measurement of the liability are recognised in the income statement. Defined contribution schemes Obligations for contributions to defined contribution superannuation plans are recognised as an employee benefit expense in the income statement in the periods in which services are provided by employees. Termination benefits and restructure costs Termination benefits are those benefits paid to an employee as a result of either the Group’s decision to terminate an employee’s employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment. The Group also implemented a restructure program in the current year. Termination payments made and restructure costs payable to employees are disclosed in Note 4. Termination benefits and restructure costs are recorded as a provision when the Group can no longer withdraw the offer of those benefits. Annual leave Long service leave Termination benefits Total employee benefit liabilities Current Non-current 2020 $’000 2,572 307 2,180 5,059 2019 $’000 2,058 212 153 2,423 2020 $'000 - 198 - 198 2019 $'000 - 227 - 227 17. Other liabilities Deferred consideration payable (1) Other Total other liabilities Current Non-current 2020 $’000 1,227 99 1,326 2019 $’000 7,773 - 7,773 2020 $'000 - 70 70 2019 $'000 - - - (1) A US $4.8 million (AU $7.1 million) payment of deferred consideration in relation to the TeePublic acquisition in May 2020. The estimated fair value of the remaining deferred consideration at 30 June 2020 was US $0.8 million (AU $1.2 million). 18. Contributed equity and reserves (a) Share capital Consolidated and parent entity Ordinary shares (1) Issued and fully paid Transferred from share based payments reserve 2020 Shares 2019 Shares 2020 $'000 2019 $'000 263,462,966 256,156,543 135,965 128,730 - - 9,473 6,464 Total share capital 263,462,966 256,156,543 145,438 135,194 (1) The holders of ordinary shares are entitled to participate in dividends and the proceeds on winding up of the Company. On a show of hands at meetings of the Company, each holder of ordinary shares has one vote in person or by proxy, and upon a poll each share is entitled to one vote. The Company does not have authorised capital or par value in respect of its shares. (b) Movements in ordinary share capital Balance at 1 July 2019 Exercise of options / warrants Settlement of restricted stock units (RSUs) Shares issued to Employee Share Trust Number of shares $’000 256,156,543 128,730 4,521,415 3,556 465,844 - 7,267,000 10,321 Shares allocated to participants from the Employee Share Trust (4,795,461) (6,412) Payment of withholding taxes to US tax authorities (1) Balance at 30 June 2020 (including treasury shares) Treasury shares - unallocated (2) Balance at 30 June 2020 (excluding treasury shares) (152,375) (230) 263,462,966 135,965 (3,865,657) (5,303) 259,597,309 130,662 (1) Represents payment of withholding taxes accounted for as a deduction from equity in accordance with AASB 2 Share-based Payments. (2) The unallocated treasury shares balance represents book value of shares held by the Trust for future issue to participants on exercise of options / restricted stock units. 90 91 RedbubbleAnnual Report 202018. Contributed equity and reserves (continued) 19. Business combinations (b) Movements in ordinary share capital (continued) Balance at 1 July 2018 Number of shares 209,940,096 $’000 70,021 Shares issued to fund the acquisition of TeePublic LLC 40,381,447 60,572 Transaction costs for issued share capital Exercise of options / warrants Settlement of restricted stock units (RSUs) Shares issued to Employee Share Trust - (3,501) 5,151,049 2,249 353,095 - 5,835,000 7,515 Shares allocated to participants from the Employee Share Trust (5,432,588) (8,016) Payment of withholding taxes to US tax authorities (1) Balance at 30 June 2019 (including treasury shares) Treasury shares - unallocated (2) Balance at 30 June 2019 (excluding treasury shares) (71,556) (110) 256,156,543 128,730 (1,394,118) (1,394) 254,762,425 127,336 (1) Represents payment of withholding taxes accounted for as a deduction from equity in accordance with AASB 2 Share-based Payments. (2) The unallocated treasury shares balance represents book value of shares held by the Trust for future issue to participants on exercise of options / restricted stock units. (c) Dividends No dividends were declared or paid during the year (2019: $nil). The Group’s franking account balance is $nil (2019: $nil). (d) Nature and purpose of reserves Share based payment reserve The share-based payments reserve arises on issue of share options / restricted stock units as payment for services to Board members, employees (including senior executives) and contractors. Foreign Currency Translation Reserve Exchange differences arising on translation of the foreign controlled entities are recognised in the foreign currency translation reserve within other comprehensive income. The cumulative amount is reclassified to the income statement when the foreign controlled entity to which it relates is disposed of. Treasury reserve The treasury reserve is used to hold the book value of shares held by the Employee Share Trust for future issue to participants on exercise of options / restricted stock units. There were no business combinations entered into in the current period. In the prior period the Group acquired 100% of TP Apparel LLC and its subsidiary TP Apparel Europe Limited (TeePublic). Details of this business combination were disclosed in Note 17 of the Group’s annual financial statements for the year ended 30 June 2019. US $4.8 million (AU $7.1 million) of deferred consideration in relation to this acquisition was paid during the financial year. 20. Interests in subsidiaries Information about subsidiaries The consolidated financial statements of the Group include: Name of entity Country of incorporation Principal activitiest Redbubble Incorporated USA Provider of global sales, marketing and distribution services in respect of the Redbubble marketplace Redbubble Europe Limited UK Marketing and distribution services in Europe Redbubble Europe GmbH Germany Marketing and distribution services in Europe TP Apparel LLC USA Provider of global sales, marketing and distribution services in respect of the TeePublic marketplace TP Apparel Europe Limited (1) Ireland Marketing and distribution services in Europe (1) The TP Apparel Europe Limited entity was voluntarily deregistered during the year. Equity holding 2020 % Equity holding 2019 % 100 100 100 100 - 100 100 100 100 100 92 93 RedbubbleAnnual Report 202021. Parent entity financial information 22. Commitments and contingencies The financial information for the parent entity, Redbubble Limited, has been prepared on the same basis as the consolidated financial statements except for investments in subsidiaries. They are recognised at cost in the financial statements of the parent entity. (a) Capital commitments The Group had no capital commitments as at 30 June 2020 (2019: $nil). (a) Summary financial information Statement of financial position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Equity Contributed equity Share based payment reserve Treasury reserve Accumulated losses Total equity Loss and other comprehensive income Loss for the year Total comprehensive loss 2020 $’000 51,499 15,006 66,505 5,828 381 6,209 145,438 13,699 (5,303) (93,538) 60,296 (7,686) (7,686) 2019 $’000 Restated 49,092 12,932 62,024 3,921 1,476 5,397 135,194 8,677 (1,394) (85,850) 56,627 (31,554) (31,554) (b) Guarantees entered into by the parent entity The parent entity has not entered into any guarantees as at 30 June 2020 (2019: $nil). (c) Contingent liabilities of the parent entity As at the date of these financial statements there are current lawsuits filed against the Company that relate to alleged intellectual property infringement and / or breach of consumer laws. There is no certainty around the amount or timing of any outflow should any of the actions ultimately be successful (at first instance or on appeal, as applicable). The Company does not consider that any of the current actions are likely to have a material adverse effect on the business or financial position of the Company. (d) Capital commitments The parent entity had no capital commitments as at 30 June 2020 (2019: $nil). (b) Contingencies Legal claim contingencies As at the date of these financial statements there are current lawsuits filed against some of the entities within the Group that relate to alleged intellectual property infringement and/or breach of consumer laws. There is no certainty around the amount or timing of any outflow should any of the actions ultimately be successful (at first instance or on appeal, as applicable). The Group does not consider that any of the current actions are likely to have a material adverse effect on the business or financial position of the Group. 23. Share-based payments The Group operates equity-settled share-based payment employee share and option schemes. The fair value of the equity to which employees become entitled is measured at grant date and recognised as an expense over the vesting period, with a corresponding increase to an equity account. The fair value of options with a strike price and share appreciation rights are ascertained using industry standard valuation models. A Black-Scholes pricing model is used for options and the Monte Carlo simulation model is used for share appreciation rights. The amount to be expensed is determined by reference to the fair value of the options or shares granted. This expense takes into account any market performance conditions and the impact of any non-vesting conditions but ignores the effect of any service and non-market performance vesting conditions. Non-market vesting conditions are taken into account when considering the number of options expected to vest and at the end of each reporting period, the Group revisits its estimate. Revisions to the prior period estimate are recognised in the income statement and equity. The fair value of zero priced options and restricted stock units is equal to the fair market value of a Redbubble Ltd share at the grant date. Critical accounting estimates and judgements Some of the inputs to the pricing models require application of significant judgement. The Black-Scholes and Monte Carlo simulation pricing models require inputs for the expected share price volatility of Redbubble Limited shares for a period similar to the expected life of the options. The Group has used its historical share price volatility to estimate expected future volatility.  94 95 RedbubbleAnnual Report 202023. Share-based payments (continued) Options over ordinary shares Redbubble Equity Incentive Plan for Australian and German employees The “Redbubble Equity Incentive Plan” has been established to grant options over ordinary shares to Redbubble Limited Board members, employees (including senior executives) and contractors. The options are subject to service conditions and have a predetermined time-based vesting schedule. The grantees of options under this Plan may exercise vested options at any time before the earlier of: (a) a specified expiry date (generally 10 years from the grant date); and (b) 90 days after ceasing to be a Director, employee or contractor for the Group. Some of the options have a zero exercise price, so as to be akin to performance rights or restricted stock units. 2014 Option Plan Options to employees / contractors of the US subsidiaries are granted under this plan. The vesting conditions and expiry period under this plan are akin to the Redbubble Equity Incentive Plan. Restricted Stock Units (RSUs) Restricted Stock Units are granted under the Restricted Share and Performance Rights Plan to certain employees including senior executives and consultants. Once granted, the rights have a predetermined time- based vesting schedule. All the restricted stock units are subject to service conditions. Share appreciation rights Share appreciation rights have been granted to the Chief Executive Officer and the Executive team. The rights are subject to the achievement of health metrics as agreed by the Board and are subject to a share price exercise hurdle. Refer to the Remuneration Report for further details. 23. Share-based payments (continued) (a) Movement The table below summarises the movement in the number of options / restricted stock units during the year: 2020 2020 2019 2019 Number WAEP ($) (1) Number WAEP ($)(1) Options over ordinary shares Outstanding at 1 July Granted during the year (2) Exercised during the year Forfeited during the year Expired during the year Outstanding at 30 June Exercisable at 30 June Restricted stock units Outstanding at 1 July Granted during the year Settled during the year Forfeited during the year Outstanding at 30 June Share appreciation rights (SARs) (3) Outstanding at 1 July Granted during the year Forfeited during the year Outstanding at 30 June Exercisable at 30 June 23,376,683 2,921,778 (4,521,415) (2,788,674) (478,314) 18,510,058 9,510,335 727,766 2,110,590 (465,844) (172,112) 2,200,400 5,666,668 6,029,146 (4,419,653) 7,276,161 - 0.76 0.04 0.77 0.83 1.28 0.85 0.81 - - - - - - - - - - 22,111,251 9,472,033 (5,151,049) (2,014,819) (1,040,733) 23,376,683 10,656,430 337,707 789,201 (353,095) (46,047) 727,766 - 5,666,668 - 5,666,668 - 0.74 0.73 0.44 1.00 1.18 0.76 0.79 - - - - - - - - - - (1) WAEP stands for Weighted Average Exercise Price. (2) 2,846,778 options granted during the year have a zero exercise price (2019: 900,431). The expiry period for options and RSU grants made during the current and prior year is 10 years. (3) SARs do not have an exercise price, however they do have a base share price from which any share appreciation is measured. (b) Modifications to the awards The table below details modifications to a number of options / restricted stock units during the year. Accelerated vesting of unvested options over ordinary shares upon termination 2020 Number 154,082 2019 Number 180,619 Total 154,082 180,619 96 97 RedbubbleAnnual Report 2020 23. Share-based payments (continued) (c) Additional disclosures Weighted average fair value of Share at the date of exercise of options / settlement of restricted stock units during the year Share options and share appreciation rights granted during the year Restricted stock units granted during the year Weighted average remaining contractual life of Share options and share appreciation rights outstanding at the end of the year Inputs to pricing models for options and SARs granted during the year (weighted average) Expected volatility (%) (1) Risk-free interest rate (%) Expected life (years) Fair market value of share ($) (2) 2020 $ 1.63 0.87 1.58 2020 7.81 2020 68.41 0.41 4.29 1.42 2019 $ 1.39 0.63 1.55 2019 7.57 2019 33.08 2.58 6.20 1.35 (1) The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome. The range of exercise prices for options outstanding at the end of the year is $nil to $1.62 (2019: $nil to $1.62). (2) The fair market value of a share has been calculated using the volume weighted average price over the seven trading days preceding grant date. 24. Related party transactions Compensation of the key management personnel of the Group Short-term employee benefits Post-employment benefits Share-based employee benefits Other long-term benefits Termination benefits 2020 $ 2019 $ 1,412,539 1,337,755 77,658 822,393 (21,984) 316,976 94,520 1,706,107 13,622 - 24. Related party transactions (continued) Transactions with related parties Richard Cawsey, Redbubble’s former Board Chair, is a director and shareholder of Denali Holdings Pty Ltd, which is the owner of the ‘Bondle’ messaging application. Redbubble engaged Denali Holdings Pty Ltd in respect of a licence of the Bondle application in May 2019 and paid $4,788 at that time for a two year licence period. No further fees were paid for the Bondle application in FY2020. The engagement is on an arm’s length basis and the fees charged are comparable to similar application licensors in the market. At the year end, there were no balances outstanding in relation to this engagement (also nil in 2019). 25. Remuneration of auditors Ernst & Young (Australia) Fees for auditing the statutory financial report of the parent covering the group and auditing the statutory financial reports of any controlled entities Fees for other services: Taxation services Other services (1) Remuneration of Ernst & Young (1) Other services for FY2019 include a one-off cost relating to the acquisition of TeePublic of $93k. 2020 $ 2019 $ 280,144 278,342 39,400 - 18,250 147,715 319,544 444,307 26. Segment information AASB 8 Operating Segments allows for the aggregation of operating segments where they exhibit similar economic characteristics. The Group considers the Redbubble and TeePublic marketplaces to have similar economic characteristics and therefore have been aggregated to form a single reportable operating segment. Geographical information required per AASB 8 and disaggregated revenue reporting is detailed below: 2020 Revenue Non-current assets (1) $’000 22,624 287,810 43,299 62,524 416,257 $’000 14,708 66,564 - 176 81,448 2019 Revenue $’000 19,215 200,061 34,277 53,401 306,954 Non-current assets (1) $’000 12,838 70,337 1 792 83,968 Australia United States United Kingdom Rest of the world Total (1) Non-current assets for this purpose consist of property, plant and equipment, intangible assets, right of use assets and net investment in Total transactions with key management personnel 2,607,582 3,152,004 sublease. 98 99 RedbubbleAnnual Report 202027. Events occurring after the balance sheet date 28. Impact of new accounting standard (continued) The financial report was authorised for issue on 21 August 2020 by the Board of Directors. Other than the above, there have been no further significant events after the balance sheet date that require disclosure. AASB 16 Leases (continued) Impact on lease accounting (continued) Former operating lease (continued) 28. Impact of new accounting standard AASB 16 Leases AASB 16 supersedes AASB 117 Leases. The date of initial application of AASB 16 for the Group is 1 July 2019. AASB 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to lessee accounting by removing the distinction between operating and finance leases and requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases. Short-term leases and leases of low value assets are exempt. In contrast to lessee accounting, the requirements for lessor accounting have remained largely unchanged other than in respect of sub-leases for which lease classification is performed by reference to the head lease right-of-use asset rather than the underlying asset. The impact of the adoption of AASB 16 on the Group’s consolidated financial statements is described below. The Group’s leasing activities The Group leases various offices in Australia, the United States and Germany. Rental contracts are typically made for fixed periods of between 1 to 8 years. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Impact of the new definition of a lease The change in definition of a lease mainly relates to the concept of control. AASB 16 determines whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time in exchange for consideration. The new definition in AASB 16 will not significantly change the scope of contracts that meet the definition of a lease for the Group. Impact on lease accounting Former operating lease AASB 16 changes how the Group accounts for leases previously classified as operating leases under AASB 117. Leases classified as operating leases under AASB 16 have been amended under AASB 16 to bring values onto the Consolidated statement of financial position which were previously off balance sheet. Applying AASB 16, for all leases (except as noted below), the Group: • Recognises right-of-use assets and lease liabilities in the consolidated statement of financial position, initially measured at the present value of the future lease payments; • Recognises depreciation of right-of-use assets and interest on lease liabilities in consolidated statement of comprehensive income; and • Separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the consolidated statement of cash flows. Lease incentives (e.g. a rent-free period) are now recognised as part of the measurement of the right- of-use assets and lease liabilities. In contrast under AASB 117 they resulted in the recognition of a lease incentive, amortised as a reduction of rental expenses generally on a straight-line basis. AASB 16 requires right-of-use assets to be tested for impairment in accordance with AASB 136 Impairment of Assets. For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as tablet and personal computers, small items of office furniture and telephones), the Group has opted to recognise a lease expense on a straight-line basis as permitted by AASB 16. This expense is presented within operations and administration expenses in statement of comprehensive income. Impact on lessor accounting AASB 16 does not substantially change how a lessor accounts for leases. Under AASB 16, a lessor continues to classify leases as either finance leases or operating leases and account for those two types of leases differently. Under AASB 117, subleases were previously accounted for as an operating lease and has now been classified under AASB 16 as a finance lease as the sublease has the majority of the remaining term to the main lease. Under AASB 16, an intermediate lessor accounts for the head lease and the sub-lease as two separate contracts. The intermediate lessor is required to classify the sub-lease as a finance or operating lease by reference to the right-of-use asset arising from the head lease (and not by reference to the underlying asset). Because of this change, the Group has reclassified some of its sub-lease agreements as finance leases and recognised a net investment in sublease. The tables below shows the amount of adjustments for each financial statement line item affected by the application of AASB 16 for prior years. The impact on profit/(loss) for the year ended 30 June 2019 is outlined below with explanatory notes on page 103. Summary of impacts 30 June 2019 Impact on profit/(loss) for the year Operations and administration (1) Depreciation and amortisation (1) Other income (7) Other expenses (1) Deferred tax (expense)/benefit (5) Increase/(decrease) in profit for the year As previously reported AASB 16 Adjustments 30 June 2019 As restated $’000 (22,338) (8,086) 1,053 (1,486) (15,162) $’000 3,158 (2,269) (612) (527) 345 95 $’000 (19,180) (10,355) 441 (2,013) (14,817) 100 101 RedbubbleAnnual Report 202028. Impact of new accounting standard (continued) 28. Impact of new accounting standard (continued) AASB 16 Leases (continued) Summary of impacts (continued) Impact on assets, liabilities and equity as at 1 July 2018 Right-of-use assets (1) Net investment in sub-lease – current & non-current (7) Deferred rent received – current & non-current (7) Deferred tax assets (6) Net impact on total assets Lease liabilities – current & non-current (1) Lease incentive liability - current & non-current (2) Deferred rent – current & non-current (7) Rent received in advance (7) Net impact on total liabilities Retained earnings As previously reported AASB16 Adjustments As restated $’000 - - 60 13,952 14,012 - (1,450) (842) (54) $’000 8,509 1,779 (60) 4 10,232 (12,450) 1,450 842 54 $’000 8,509 1,779 - 13,956 24,244 (12,450) - - - (2,346) (10,104) (12,450) 128 The implementation of AASB 16 resulted in an increase in net assets (over what was reported in the prior period) of $128,000 at 1 July 2018. Impact on assets, liabilities and equity as at 30 June 2019 Summary of impacts (continued) The Group as a lessee: 1. The application of AASB 16 to leases previously classified as operating leases under AASB 117 resulted in the recognition of right-of-use assets and lease liabilities. It also resulted in a decrease in rent expenses for the year ended 30 June 2019 of $3,158,000, an increase in depreciation of $2,269,000 and interest expenses of $527,000. 2. Lease incentive liabilities previously recognised with respect to operating leases have been derecognised and factored into the measurement of the right-of-use assets. 3. Prepaid rent has been derecognised and factored into the measurement of right-of-use assets. 4. The value of Goodwill has reduced due to a change in the fair value of identifiable net assets of TeePublic on acquisition. 5. Deferred tax expense has decreased by $345,000. 6. Deferred tax assets have been recognised in relation to the right-of-use assets and lease liabilities. The Group as an intermediate lessor: 7. The Group, as an intermediate lessor, has reclassified its sub-lease agreements as finance leases and recognised a net investment in sublease. Deferred rent received in relation to the sub-lease has been derecognised and a net investment in sublease has instead been recognised. Rental income of $612,000 has been de-recognised. The consolidated statement of cash flows of the Group has been amended in accordance with AASB 16 as follows: • Short-term lease payments, payments for leases of low-value assets and variable lease payments are not included in the measurement of the lease liability as part of operating activities; As previously reported AASB16 Adjustments As restated • Cash received and paid for the interest portion of net investment in sublease and lease liability respectively are presented as operating activities, as permitted by AASB 107 Statement of Cash Flows; Right-of-use assets (1) Net investment in sub-lease – current & non-current (7) Deferred rent received – current & non-current (7) Intangibles (4) Prepayments (3) Deferred tax assets (6) Net impact on total assets Lease liabilities – current & non-current (1) Lease incentive liability – current & non-current (2) Deferred rent – current & non-current (7) Deferred tax liabilities – non-current (6) $’000 - - 60 71,492 2,804 - 74,356 - (807) (1,377) (296) $’000 8,378 1,248 (60) (75) (18) 72 9,545 (11,848) 807 1,377 251 $’000 8,378 1,248 - 71,417 2,786 72 83,901 (11,848) - - (45) Net impact on total liabilities (2,480) (9,413) (11,893) Retained earnings 132 The implementation of AASB 16 resulted in an increase in net assets (over what was reported in the prior period) of $132,000 at 30 June 2019. • Cash receipts for the principal portion of the net investment in sublease are presented as part of investing activities; and • Cash payments for the principal portion of the lease liability are presented as part of financing activities. AASB 117 required all lease payments on operating leases to be presented as part of cash flows from operating activities. Consequently, under AASB 16 the net cash generated by operating activities has increased by $2,295,000, being the lease liability payments (now shown in net cash used in financing activities) and proceeds from net investment in subleases (now shown in net cash used in investing activities). 102 103 RedbubbleAnnual Report 202029. Other significant accounting policies (a) Principles of consolidation Subsidiaries are all entities over which the Group has control. Control is established when the Group 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 relevant activities of the entity. Subsidiaries are fully consolidated from the date on which the Group gains control. They would be deconsolidated from the date that control ceases. A list of the subsidiaries is provided in note 20 to the financial statements. Intercompany transactions, balances and unrealised gains or losses on transactions between Group entities are fully eliminated on consolidation. Accounting policies of subsidiaries have been aligned where necessary to ensure consistency with the policies adopted by the Group. (b) Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in operations and administration expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of AASB 9 Financial Instruments, is measured at fair value with the changes in fair value recognised in the statement of profit or loss in accordance with AASB 9. Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. 29. Other significant accounting policies (continued) Where goodwill has been allocated to a single cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. (c) Foreign currency transactions Functional and presentation currency The functional currency of each of the Group’s entities is the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency. Transactions and balances Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. At the end of the reporting period: • Foreign currency monetary items are translated using the closing exchange rate; • Non-monetary items that are measured at historical cost are translated using the exchange rate at the date of the transaction; and • Non-monetary items that are measured at fair value are translated using the exchange rate at the date when fair value was determined. Exchange differences arising on the settlement of monetary items or on translating monetary items at exchange rates different from those at which they were translated on initial recognition or in prior reporting periods are recognised through the statement of comprehensive income, except where they relate to an item of other comprehensive income. Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency (none of which has the currency of a hyperinflationary economy) as follows: • Assets and liabilities for each balance sheet are translated at the closing exchange rate at the date of that balance sheet; • Income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates; and • All resulting exchange differences are recognised in other comprehensive income. (d) Other income Finance income Finance income is recognised on an accruals basis using the effective interest method. (e) Inventories Inventories of packaging materials are measured at the lower of cost and net realisable value. Cost of inventory is determined using the first-in-first-out basis and are net of any rebates and discounts received. 104 105 RedbubbleAnnual Report 202029. Other significant accounting policies (continued) 29. Other significant accounting policies (continued) Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the costs necessary to make the sale. Net realisable value is estimated using the most reliable evidence available at the reporting date and inventory is written down through an obsolescence provision if necessary. (f) Financial assets Trade and other receivables and other financial assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial recognition, loans and trade and other receivables are measured at amortised cost using the effective interest method. Any change in their value is recognised in the statement of comprehensive income. The Group assesses at the end of each financial reporting period whether there is any objective evidence that a financial asset is impaired. If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. (g) Trade and other payables Trade and other payables represent the liabilities for goods and services received by the Group that remain unpaid at the end of the reporting period. The balance is recognised as a current liability with the amounts normally paid within 30 days of recognition of the liability. (h) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to a provision is presented in the statement of income net of any reimbursement. (i) Sales Tax (includes Goods and Services Tax (GST) and Value Added Tax (VAT)) Revenue, expenses and assets are recognised net of the amount of sales tax, except where the amount incurred is not recoverable from the Australian Taxation Office (ATO) or other similar international bodies. Receivables and payables are stated inclusive of sales tax, where applicable. The net amount of sales tax recoverable from, or payable to, the ATO or other similar international bodies, is included as part of receivables or payables in the statement of financial position. The statement of cash flows includes cash on a gross basis and the sales tax component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. Critical accounting estimates and judgements The Group currently collects and remits sales tax on sales made in a number of States in the United States where management believes that a sales tax nexus may exist. (j) Leases Set out below are the new accounting policies of the Group upon adoption of AASB 16, which have been applied from the date of initial application: Group as a lessee Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred and lease payments made at or before the commencement date of the lease less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right- of-use assets are subject to impairment in accordance with AASB 136 Impairment of Assets. Lease liabilities The Group recognises lease liabilities at the commencement date of the lease (i.e., the date the underlying asset is available for use), measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in- substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs. Significant judgement in estimating the incremental borrowing rate In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. The rate is determined using a government bond (risk free) rate adjusted for a risk premium commensurate with each lessee’s profile. The bond rates used are for a bond with a term and security similar to each lease and are country specific. After the commencement date, the amount of the lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. The carrying amount of lease liabilities are adjusted if there is a modification, a change in the lease terms or a change in the in-substance fixed lease payments. Group as a lessor (subleases) In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows: • if the head lease is a short-term lease, the Group will classify the sublease as an operating lease; • otherwise, the sublease will be classified by reference to the right-of-use asset arising from the head lease, rather than by reference to the underlying asset. Sublease classified as finance lease The Group recognises net investment in sublease at the commencement date of the sublease (i.e., the date the underlying asset is subleased) due to the term of the sublease constituting a major part of the economic life of the right-of-use asset relating to the head lease. The net investment in the sublease is measured using the discount rate for the head lease. The Group dercognises the right-of-use asset relating to the head lease that it transfers to the sublessee and replaces it with a net investment in the sublease. Any difference between the right-of-use asset and the net investment in the sublease is recognised in profit or loss. The lease liability relating to the head lease is retained and represents the lease payments owed to the head lessor. During the term of the sublease, the Group recognises both interest income on the sublease and interest expense on the head lease. 106 107 RedbubbleAnnual Report 202029. Other significant accounting policies (continued) Sublease classified as operating lease Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. Rental income arising is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of comprehensive income due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. Short-term leases and leases of low-value assets Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term. Significant judgement in determining the lease term of contracts with renewal options The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has the option under some of its leases to extend the term of the original lease. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for the Group to exercise the renewal option. After the commencement date, the Group reassesses the lease term when there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew. The Group has determined that no lease extension options will be exercised as they are not reasonably certain that those options will be exercised and therefore, the extended periods have not been included in calculations. Practical expedients applied In applying AASB 16 for the first time, the Group has used the practical expedients permitted by the standard. The Group has made use of the practical expedient on transition to AASB 16 not to reassess whether a contract is or contains a lease. Accordingly only leases in existence at 1 July 2019 have been assessed and transitioned into the new standard. The definition of a lease in accordance with AASB 117 Leases and Interpretation 4 Determining whether and Arrangement contains a Lease will continue to be applied for those leases entered or modified before 1 July 2019. (k) Accounting standards issued but not yet effective The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. There are other new accounting standards, interpretations or amendments issued but not yet effective, however they are not considered relevant to the activities of the Group and are not expected to have a material impact on the financial statements of the Group. Director’s Declaration In accordance with a resolution of the Directors of Redbubble Limited, we state that in the Directors’ opinion: (a) the financial statements and notes, as set out on pages 64 to 108 are in accordance with the Corporations Act 2001 including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2020 and of its performance for the financial year ended on that date; and (b) there are reasonable grounds to believe that Redbubble Limited will be able to pay its debts as and when they become due and payable. The financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by Section 295A of the Corporations Act 2001. Anne Ward Chair Melbourne 21 August 2020 Martin Hosking Chief Executive Officer Melbourne 21 August 2020 108 109 RedbubbleAnnual Report 2020 Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Independent Auditor's Report to the Members of Redbubble Limited Why significant How our audit addressed the key audit matter Capitalised development costs Report on the Audit of the Financial Report Opinion We have audited the financial report of Redbubble Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2020 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. As disclosed in Note 13 to the financial statements, the carrying value of capitalised development costs in the consolidated statement of financial position at 30 June 2020 was $13.2m. The accounting for capitalised development costs involves judgment, including considering technical feasibility, the Group’s intention and ability to complete the intangible asset, future economic benefits to be generated by the asset, the ability of the Group to measure the costs reliably, and determining the useful lives for capitalised development costs. In addition, determining whether there is any indication of impairment of the carrying value of assets requires judgment in making assumptions which are affected by future market or economic developments. This was considered a key audit matter given the judgement required in accounting for it, the value of development cost assets relative to total assets, the rapid technological change in the industry, and the specific Australian Accounting Standards criteria that have to be met to enable costs incurred to be capitalised. Revenue recognition Why significant As disclosed in Note 3 to the financial report, revenue is recognised when the goods are transferred to the customer, which is deemed to be when the product is delivered. Due to the volume of online transactions processed on a daily basis, and the arrangement in place with suppliers whereby suppliers dispatch goods directly to the Group’s customers, the judgement involved in the timing of when revenue is recognised is considered to be a Key Audit Matter. Our audit procedures included the following: • assessing the eligibility of the development costs for capitalisation as an intangible asset in accordance with Australian Accounting Standards; selecting a sample of capitalised development costs by project and assessing whether the nature of projects and costs incurred were supported by underlying evidence such as employee time sheets, employee contracts and supplier invoices; checked the clerical accuracy of the capitalised development cost rollforward; assessing whether the amortisation rates used are appropriate; testing for a sample of projects, the feasibility and benefits expected from each based on the current status, forecast performance and related assumptions. This included discussions with project managers and developers; considering whether there were any indicators of impairment; and evaluation of the disclosures in Note 13 of the financial report. • • • • • • How our audit addressed the key audit matter Our audit procedures included the following: • Testing the operating effectiveness of • controls over the capture and measurement of revenue transactions; For a sample of revenue transactions, testing whether the revenue was recorded in the appropriate period and whether management’s estimate of sale transactions not delivered to the customer at 30 June 2020 were appropriately included as unearned revenue as at that date; • Assessing whether the revenue recognition policy applied to the terms and conditions of sale was in accordance with Australian Accounting Standards; and • Considered the adequacy of the revenue recognition policy disclosure contained in Note 3. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 96 110 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 97 111 Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2020 Annual Report other than the financial report and our auditor’s report thereon. We obtained the Directors’ Report that is to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • • • • • • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 98 112 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 99 113 Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 24 to 49 of the directors' report for the year ended 30 June 2020. 35 62 In our opinion, the Remuneration Report of Redbubble Limited for the year ended 30 June 2020, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Kylie Bodenham Partner Melbourne 21 August 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 100 114 Shareholder and other ASX Required Information The shareholder information set out below was applicable as at 21 September 2020 (except as otherwise stated). A. Distribution of shareholders Analysis of numbers of ordinary shareholders by size of holding: Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Grand Totals Total holders Shares % of Issued Capital 97 359 350 1,290 1,548 3,644 251,989,564 10,249,113 2,615,536 3,365,330 743,423 268,962,966 2.66 9.85 9.60 35.40 42.48 100 There were 97 holders of less than a marketable parcel of ordinary shares. B. Top 20 Registered Holders of Fully Paid Ordinary Shares The names of the twenty largest registered holders of quoted fully paid ordinary shares are listed below: Name J P Morgan Nominees Australia Pty Limited HSBC Custody Nominees (Australia) Limited National Nominees Limited Jellicom Pty Ltd Citicorp Nominees Pty Limited Blackbird FOF Pty Ltd Piton Capital Venture Fund II LP CBC Co Pty Limited HSBC Custody Nominees (Australia) Limited-GSCO ECA BNP Paribas Nominees Pty Ltd Radiata Investments Pty Ltd UBS Nominees Pty Ltd Continued on next page Number of ordinary shares % of Issued Capital 46,706,045 34,040,215 33,493,391 28,509,720 12,488,257 11,361,819 5,537,291 4,404,907 4,245,263 4,118,404 3,914,640 3,620,241 17.37 12.66 12.45 10.60 4.64 4.22 2.06 1.64 1.58 1.53 1.46 1.35 B. Top 20 Registered Holders of Fully Paid Ordinary Shares (continued) Name Number of ordinary shares % of Issued Capital BNP Paribas NOMS Pty Ltd BNP Paribas Nominees Pty Ltd Solium Nominees (Australia) Pty Ltd CS Third Nominees Pty Limited Martin Hosking Radiata Super Pty Ltd HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited - A/C 2 Top 20 holders of Ordinary Fully Paid Shares (TOTAL) Total Remaining Holders Balance Grand Totals 3,463,584 3,013,209 2,920,448 2,808,042 2,393,552 1,945,568 1,919,048 1,880,591 212,784,235 56,178,731 268,962,966 C. Unquoted equity securities The numbers of unquoted equity securities in the Company are set out below: Type of equity security Share Options Share Appreciation Rights Performance Rights Total number of ordinary shares subject of options and performance rights 1.29 1.12 1.09 1.04 0.89 0.72 0.71 0.70 79.11 20.89 100.00 Number held 10,700,599 5,851,406 2,t097,508 18,649,513 D. Redbubble’s American Depository Receipt (ADR) program Redbubble ADRs are negotiable certificates issued by BNY Mellon, with one ADR representing ten RBL ordinary shares. They are traded under the symbol RDBBY and are classified as Level 1. They are traded over the counter via brokers. BNY Mellon is the depositary bank for the ADRs and plays a key role in the process of issuance and cancellation of ADRs. For additional questions about ADRs please contact: BNY Mellon Shareowner Services P. O. Box 505000 Louisville, KY 40233-5000 U.S. Toll Free Telephone: 1-888-BNY-ADRS (1-888-269-2377) Telephone for International Callers: 1-201-680-6825 Website: http://www.mybnymdr.com/ E-Mail: shrrelations@cpushareownerservices.com Further information about Redbubble’s ADR program can be found on Redbubble’s Investor Centre website at: https://shareholders.redbubble.com/site/investor-information/adr-information 116 117 RedbubbleAnnual Report 2020E. Substantial Holders Substantial holders in the Company are set out below (as at 8 September 2020): Name Mr Martin Hosking Osmium Partners Greencape Capital BlackRock Investment Mgt (Australia) Number held % of Issued Capital 32,403,272 18,035,631 15,033,803 13,575,234 12.0% 6.7% 5.6% 5.0% F. Securities subject to escrow arrangements There are no shares on issue that are subject to voluntary escrow. G. Voting Rights The voting rights attaching to each class of equity securities are set out below: Corporate Information Directors Anne Ward (Chair) Martin Hosking (Managing Director and Chief Executive Officer) Ben Heap Jennifer (Jenny) Macdonald Greg Lockwood Company Secretaries Corina Davis Ordinary Shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Options, Share Appreciation Rights and Performance Rights No voting rights Registered Office Share Register Paul Gordon Level 3, 271 Collins Street Melbourne VIC 3000 Australia Link Market Services Tower 4, 727 Collins Street Melbourne VIC 3008 Australia H. Other ASX Required Information Auditors Ernst & Young The Company has used the cash and assets in a form readily convertible to cash, that it had at the time of admission to the ASX, in a way consistent with its business objectives. This statement is made pursuant to ASX Listing Rule 4.10.19. 8 Exhibition Street Melbourne VIC 3000 Australia Bankers Commonwealth Bank of Australia Stock Exchange Listing Redbubble shares are listed in the Australian Securities Exchange (ASX: RBL) ADR Program Redbubble ADRs are negotiable instruments issued by BNY Mellon, with one ADR representing ten RBL ordinary shares. They are traded under the symbol RDBBY. Website Redbubble.com Investor Centre Shareholders.redbubble.com 118 119 RedbubbleAnnual Report 2020120 Redbubble

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