Serko
Annual Report 2019

Plain-text annual report

2019 ANNUAL REPORT 1 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT ABOUT SERKO 2 SERKO ANNUAL REPORTOUR PURPOSE Our purpose is to transform the way businesses manage travel and expenses. We do this by helping companies drive down the cost of their travel program, using smart technology and making the process of booking and managing travel and reconciling expenses a positive experience for their people. ABOUT SERKO Serko is a market-leading travel and expense technology solution, used by over 6,000 corporate entities through 50+ Travel Management Companies that combined book more than AUD $6 billion of travel a year through Serko’s platforms. Zeno is Serko’s next generation travel management application, using intelligent technology, predictive workflows and a global travel marketplace to transform business travel across the entire journey. Listed on the New Zealand Stock Exchange Main Board (NZX:SKO), and Australian Securities Exchange (ASX:SKO). Serko employs more than 170 people worldwide, with its HQ in New Zealand and offices across Australia, China, India and the United States (US). Visit www.serko.com for more information. 3 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT $24.6m Total Income 17% Increase in booking transactions $26m Peak ATMR, 41% increase over same month prior year $1.6m Net Profit After Tax $2.6m EBITDAF 19% increase over prior year, margin of 11% $15.7m Cash balances increased from $5.2m with net capital raise of $14.3m 28% Operating Revenue Growth to $23.4m 4 SERKO ANNUAL REPORT28% Operating Revenue Growth to $23.4m $24.6m Total Income 17% Increase in booking transactions $26m Peak ATMR, 41% increase over same month prior year $1.6m Net Profit After Tax $2.6m EBITDAF 19% increase over prior year, margin of 11% $15.7m Cash balances increased from $5.2m with net capital raise of $14.3m 5 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT BUILDING FOUNDATIONS FOR THE NEXT PHASE OF GROWTH This annual report is dated 22 May 2019 and is signed on behalf of the Board of Directors (Board) Serko Limited by Simon Botherway, Chairman (Chair), and Darrin Grafton, Chief Executive Officer (CEO). SIMON BOTHERWAY CHAIRMAN DARRIN GRAFTON CHIEF EXECUTIVE OFFICER 6 SERKO ANNUAL REPORTCEO AND CHAIRMAN’S LETTER Dear Fellow Shareholders, Serko has continued to deliver to strategy, with revenue We remain well funded following the completion of an growth and profitability at the upper end of guidance. oversubscribed $15.0 million ($14.3 million net of costs) We continued to enjoy strong growth in our maturing capital raising in August 2018. Serko ended the financial year Australasian business and made good progress laying the with a net $15.7 million of cash on hand, having invested a foundations for our next phase of development — growing into net $3.8 million of our cash reserves primarily into system new Northern Hemisphere markets. development for international growth. In the Australasian business we have benefited from growing transactions and increasing Average Revenue per Booking (ARPB) as we both gain new customers and more customers transfer to our premium Zeno travel and expense management solution. In the new North American and United Kingdom (UK) markets it is very pleasing to note the number, and market presence, of those Travel Management Companies (TMCs) who have signed agreements to roll out Zeno to their customers, including Carlson Wagonlit Travel in the US, one of the world’s largest TMC’s. Operating Revenue up 28% to $23.4 million EBITDAF up 19% to $2.6 million FINANCIAL RESULTS Total Operating Revenue for the year to 31 March 2019 rose 28% to $23.4 million from $18.3 million in the same period a year ago, a result that is at the upper end of guidance. Recurring revenue rose 26% to $20.7 million from $16.4 million in the same period a year ago. Within this result there is a three-month contribution ($0.9 million) from InterplX. Peak fourth quarter ATMR (excluding the contribution from InterplX), an indicator of future recurring product revenue, rose 23% to $22.5 million from $18.4 million at the same time a year ago. Including InterplX, peak ATMR rose 41% to Demand for Zeno in North America has exceeded our in-house $26.0 million. capacity to deliver. In response, we have boosted our resourcing and prioritised development as we configure Zeno to meet the operational and marketing needs of these customers. This includes integrating complex travel content and associated services, as well as customised TMC integration work. Our expanded team and the use of contractors will result in the progressive delivery of the commercial Zeno roll out in the US commencing early in the second half of the 2020 financial year. Earnings before interest, tax, depreciation, amortisation and fair value remeasurement of contingent consideration (EBITDAF) was 19% up at $2.6 million compared to the prior year at $2.2 million, ahead of guidance. Operating expenses were up 32% reflecting the investment into personnel, premises and development for global expansion as well as one-off costs associated with Serko’s ASX foreign-exempt listing completed in June 2018 and professional fees related This investment will result in another year of cash burn, however to the purchase of InterplX. this is an extraordinary level of investment, which is subsequently expected to normalise in the 2021 financial year. We expect to accommodate this investment within our existing balance sheet resources. We anticipate that the customer agreements we have signed to date will generate strong revenue and EBITDAF growth in years to come. Meanwhile, we have improved our ability to service these customers with the acquisition of InterplX effective January 2019, which enhances our suite of expense management solutions and gives us a US-based software development capability close to our North American TMC partners. Serko transitioned from a research and discovery phase in the Northern Hemisphere to development and delivery phase. This required considerable Zeno development work, including porting a broad range of new content (including rail) onto the Zeno platform. Reflecting this development work, we have capitalised more development costs than we did in the 2018 financial year. Total Research and Development (R&D) expenses were up 87% to $9.2 million, with $6.7 million capitalised compared to the prior year of $0.4 million. While this is a considerable investment, we are building to deliver on signed agreements 7 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT with Northern Hemisphere TMCs and there are a number of With Tandem (Air New Zealand’s TMC) signing last year and corporates we expect to take up Zeno once the development now Orbit (House of Travel’s corporate travel arm) signing this work is completed. Net profit after tax (NPAT) at $1.6 million was marginally down on the prior year’s $1.8 million affected by the non-cash fair value remeasurement adjustment for the year and choosing Zeno as their preferred booking tool, we have gained blanket coverage of the Australasian corporate travel and expense management market for all the medium and large TMCs. deferred consideration relating to the InterplX acquisition. We migrated Tandem’s customers to our platform during The result reflects Serko’s determination to deliver a positive the first quarter of the financial year and have started to roll bottom line result, while still investing to take advantage of out our solutions to Orbit’s customers in New Zealand and the significant growth opportunities it sees around the world. Australia. In addition, Serko and Flight Centre have agreed a GROWTH STRATEGY The first thing we had to do in Europe and North America was validate Zeno and we are delighted with the response we have received over the last year. Zeno resonates in these markets and the pipeline of customers continues to grow. The demand for Zeno demonstrates that Serko is leading technological four-year extension of services, which resulted in an uplift to revenue from October 2018 onwards. These agreements give us confidence that we can continue to extend our share of what is now a maturing market in Australasia and grow Average Revenue Per Booking, while continuing to benefit from growth in the market as a whole. innovation in the sector. NORTH AMERICA AND EUROPE Investment for these markets has seen our headcount increase In the US we signed Flight Centre USA, CWT and Direct Travel to 173 from 106 at the same time a year ago. We have made as new TMC reseller partners for the Zeno platform, and we new hires at all levels of the company to increase the speed expect these TMCs to be able to progressively extend the of development and ensure readiness for global deployment, offering beyond ‘beta’ customers in the second half. configuration and support. The Board has been impressed by the resilience of our people Encore Travel TMCs and we are working to complete content in not only adapting to this fast rate of growth but also for integration, language features and system optimisation for In Canada we signed the Custom Travel Solutions and Voyages their generosity in welcoming and integrating new people into both clients. the team. On behalf of shareholders we thank them for their efforts. We are currently in the development phase of Zeno as a global platform for the future. We are evolving the product, recognising the differing systems and processes used within each new market and, of course, porting the relevant content to Zeno. Over the 2020 year the benefits of that ongoing investment will become apparent as we move from start-up to scale-up in those markets. AUSTRALASIA We are delighted with the response to Zeno in Europe and North America In the UK, we integrated UK rail content to Zeno for these customers, which is essential for UK corporates as they compare travel itinerary alternatives. Thanks largely to the Australasian market, where Serko enjoys The intensive development program underway is key to setting a sizable market share of all corporate travel bookings, we the foundations for scale for both our TMCs’ operational needs lifted recurring revenues in the 12 months to 31 March 2019. and the corporations that will use our software. This included a 20% lift in travel platform revenues and a 19% increase in content revenues. Expense platform revenues rose by 76%, including the contribution from InterplX. In excess of 85% of our TMCs in the Australasian region have signed agreements to make Zeno available to their customers and are actively promoting the benefits of Zeno. We have seen a steady migration of customers to Zeno from Serko Online. 8 SERKO ANNUAL REPORT TECHNOLOGICAL INNOVATION OUTLOOK Our efforts to grow average revenue per booking and Serko is in an exciting transitionary phase as we invest in the customer numbers have been supported by the third leg of our development of our global travel and expense management strategy: continued technological innovation. platform for the future. Over the year we expect to make We achieved a world first when Zeno received IATA certification of its connection to the Qantas Distribution significant progress in completing development and the commercial rollout of Zeno for each new international market. Platform (QDP). Qantas, via QDP, is among the first airlines We expect Northern Hemisphere revenues to ramp up making use of the New Distribution Capability (NDC) data particulary in the second half of the 2020 financial year. transmission standard, which allows Zeno customers to access key Qantas travel-related content, such as frequent flyer information and seat and meal select. Internationalisation and the integration of new content and services are critical to delivery of the three pillars of our strategy – growing our customer base; making more Similarly, we also connected Zeno to the NDC Exchange, a revenue from each travel booking made through our platform; distribution service developed by APTCO and SITA based on and continuing to innovate and drive the development and the NDC standard. Through this relationship, Zeno gained adoption of our technology. access to Air Canada and British Airways travel-related content. It is still too early to be definitive about the outcome for the 2020 financial year. However, at this stage we expect Total NDC is becoming the new platform for distribution in the Operating Revenue growth of between 20% and 40% in the sector and we have demonstrated a market-leading capability year to 31 March 2020. As we remain in the build phase and to link to this content through NDC direct connections or via have a significant development workload ahead of us, we legacy platforms. These partnerships provide blueprints for will prioritise delivery to the markets and customers that how we can link with other airlines using the NDC standard represent the best opportunity for Serko. in the future and deliver new opportunities to grow travel content-related revenues. Zeno is also assisting our TMCs to stay ahead of competing technological innovations in the sector. In the prior year we assisted Flight Centre with its migration to the Sabre global distribution system and this year developed and launched Flight Centre’s Savi platform. We have also integrated ride sharing service Uber with our expense management tools. This allows trip information to be sent directly from an Uber for Business account to a Zeno user’s expense report. Finally, we have continued to invest in the resilience of the platform to ensure it can accommodate the growing demands on our infrastructure. Further guidance will be provided at our Annual Shareholders Meeting in August. Signed Chair and CEO SIMON BOTHERWAY CHAIRMAN DARRIN GRAFTON CEO 9 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT STRATEGIC OVERVIEW Grow ARPB by offering increased content and moving customers to Zeno Offer premium, integrated global solutions Expand into new territories through strategic alliances and reach the unserved SME market 10 SERKO ANNUAL REPORTGrow ARPB by offering increased content and moving customers to Zeno Offer premium, integrated global solutions Expand into new territories through strategic alliances and reach the unserved SME market TECHNOLOGY INNOVATION Zeno grew from a concept to a complete product and was deployed globally across hundreds of customers What we achieved: • Zeno was the first online travel and expense solution globally to be certified NDC* Level 3 by IATA, with NDC solutions rolled out with ATPCO NDC Exchange and a strategic alliance with Qantas • We built and launched SAVI, a unique solution customised for Flight Centre, and secured an ongoing technology development fund for customing SAVI features • We built and launched the AskZeno chatbot, rolled out a product integration and partnership with Uber for Business and we scaled our product architecture globally Our focus for FY20: • Leverage opportunities in our software development and engineering practices to establish a competitive advantage in performance and reliability globally • Continue to develop usability and feature enhancements that extend our product leadership • Build on our current products to launch a new generation of expense management solutions GROW CUSTOMER BASE We extended our market leadership in Australia & New Zealand and established reseller partnerships in North America and Europe What we achieved: • Tandem Travel (Air New Zealand corporate travel management division) migrated its customer base to Zeno, and Orbit Travel (House of Travel’s corporate travel arm) began to roll out Zeno to its customers across Australia and New Zealand • In the US and Canada we signed reseller partnerships with CWT, Direct Travel, FCM USA, Vision, Voyages Encore and Custom Travel Solutions • ATPI deployed Zeno to it’s first customers in the UK Our focus for FY20: • Develop the content and systems integration with our reseller partners to enable large-scale deployment of Zeno in North America • Activate our reseller sales channels in North America to gain market share in their existing customer base • Develop a best-in-class sales enablement program to support our partners globally to win and retain more customers with Zeno GROW ARPB What we achieved: The first resellers and customers began migrating to Zeno at a premium transaction cost and we laid the foundations for more widespread adoption • We signed ~85%** of our existing reseller partners to offer Zeno to their customer bases • Existing customers, including Flight Centre and Queensland State Government, signed agreements to upgrade from our legacy products to premium solutions, with associated transaction price uplift • We expanded our content offerings with the option to book rail content in relevant markets and we added regional airlines in Australia and New Zealand Our focus for FY20: • Commercialise our NDC-enabled solutions through airline and GDS partnerships globally • Extend our Marketplace framework to incorporate content from suppliers in new categories of travel spend • Capitalise on the opportunity to offer an integrated expense management offering into our existing travel customer base *NDC (New Distribution Capability) is a travel-industry supported program launched by IATA for the development and market adoption of a new XML-based data transmission standard that enhances the communications between airlines, travel agents and aggregators. Learn all about NDC at www.zeno.travel/NDC. **As measured by share of transaction volume for FY19 11 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT OUR PRODUCTS Serko’s core product, Zeno, is an integrated travel and expense solution that is revolutionising the world of corporate travel and expense management in the Australasian, UK and North America markets. OUR CUSTOMERS The majority of Serko’s revenue comes from Travel Management Companies (TMCs) that act as reseller partners, providing our solutions to their corporate customers as part of their overall managed travel service. Zeno Travel TMCs Example corporates Serko generates revenue through corporate customers paying a booking fee per transaction and through supplier commission. Zeno Travel is an Online Booking Tool (OBT) that corporate travellers use to book flights, trains, hotels, rental cars and airport transfers in line with their corporate travel policies. This provides the oversight and control that travel managers need to ensure spend is effectively managed, with the ease of use and personalised experience that compels corporate travellers to use the OBT and avoid travel program ‘leakage’. Zeno does this with an intuitive interface that makes booking travel super simple, intelligent technology that provides personalised itinerary recommendations based on traveller preferences, and a global marketplace that allows travellers to connect with preferred suppliers at every stage of the journey. The result is greater traveller satisfaction and increased compliance and control over the entire travel program compared with legacy corporate booking tools. Zeno Expense Zeno Expense automates the process of corporate card and out-of-pocket expense submission, reconciliation and reimbursement. Employees capture receipts via the mobile app, or email receipts directly to Zeno, add a description or cost centre if needed and submit for approval there and then. To make it even simpler, Zeno also offers automated integrations with providers such as Uber for Business. Zeno’s intelligent technology proactively identifies and manages out-of-policy claims, preventing expense claim fraud and dramatically streamlining the expense administration function. Zeno also provides managers, approvers and finance teams with a full suite of analysis tools that help them to run their Travel and expense (T&E) budgets more effectively, identify problem areas and optimise Serko earns revenue through corporate customers paying a fee per active user or per expense report submitted. expense policies. The result is less time wasted preparing, approving and processing expense reports and less wastage on duplicate, out-of-policy or fraudulent expense items. 12 INDUSTRY RECOGNITION BUSINESS TRAVEL2 0 1 8 P E O P L E ’ S C H O I C E SERKO ANNUAL REPORTOUR PRODUCTS Serko’s core product, Zeno, is an integrated travel and expense solution that is revolutionising the world of corporate travel and expense management in the Australasian, UK and North America markets. OUR CUSTOMERS The majority of Serko’s revenue comes from Travel Management Companies (TMCs) that act as reseller partners, providing our solutions to their corporate customers as part of their overall managed travel service. Zeno Travel TMCs Example corporates Zeno Travel is an Online Booking Tool (OBT) that corporate travellers use to book flights, trains, hotels, rental cars and airport transfers in line with their corporate travel policies. This provides the oversight and control that travel managers need to ensure spend is effectively managed, with the ease of use and personalised experience that compels corporate travellers to use the OBT and avoid travel program ‘leakage’. Zeno does this with an intuitive interface that makes booking travel super simple, intelligent technology that provides personalised itinerary recommendations based on traveller preferences, and a global marketplace that allows travellers to connect with preferred suppliers at every stage of the journey. The result is greater traveller satisfaction and increased compliance and control over the entire travel program compared with legacy Zeno Expense Zeno Expense automates the process of corporate card and out-of-pocket expense submission, reconciliation and reimbursement. Employees capture receipts via the mobile app, or email receipts directly to Zeno, add a description or cost centre if needed and submit for approval there and then. To make it even simpler, Zeno also offers automated integrations with providers such as Uber for Business. Zeno’s intelligent technology proactively identifies and manages out-of-policy claims, preventing expense claim fraud and dramatically streamlining the expense administration function. Zeno also provides managers, approvers and finance teams with a full suite of analysis tools that help them to run their Travel and expense (T&E) budgets more effectively, identify problem areas and optimise The result is less time wasted preparing, approving and processing expense reports and less wastage on duplicate, out-of-policy or fraudulent expense items. Serko generates revenue through corporate customers paying a booking fee per transaction and through supplier commission. corporate booking tools. Serko earns revenue through corporate customers paying a fee per active user or per expense report submitted. expense policies. INDUSTRY RECOGNITION BUSINESS TRAVEL2 0 1 8 P E O P L E ’ S C H O I C E 13 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT BOARD OF DIRECTORS Simon Botherway Independent Non-executive Chairman, New Zealand Appointed 30 April 2014, re-elected August 2018 Simon is based in New Zealand. He holds a BCom, as well as the US-based Chartered Financial Analyst (CFA) designation. Simon has extensive experience in corporate governance, banking and investment management. In 2002 Simon co-founded Brook Asset Management and was Chairman from 2004 to 2008. He is also a past President of the CFA Society of New Zealand and was a member of the CFA Asia-Pacific Advocacy Committee. Simon was appointed as a member of the Securities Commission in 2009 and chaired the Financial Markets Authority Establishment Board in 2010. Simon is currently a Director of Fidelity Life Assurance and is a Guardian of the New Zealand Superannuation Fund. Claudia Batten Independent Non-executive Chairman, United States Appointed 30 April 2014, re-elected August 2017 Claudia is based in the United States. She holds an LLB (Hons) and BCA from Victoria University (Wellington). Claudia has been a founding member of two highly successful entrepreneurial ventures. The first venture was Massive Incorporated, a network for advertising in video games, she helped pioneer ‘digital’ as a media buy. Massive was sold to Microsoft in 2006. In 2009 she co-founded Victors & Spoils (‘V&S’), the first advertising agency built on the principles of crowd-sourcing. V&S was majority acquired by French holding company Havas Worldwide in 2011. Claudia is a strong supporter of the New Zealand start-up scene as an active mentor and adviser. She is also the digital adviser to the Board of Westpac New Zealand. Clyde McConaghy Independent Non-executive Chairman, Australia Appointed 30 April 2014, re-elected August 2017 Clyde is based in Australia. He holds a BBus, and an MBA from Cranfield University United Kingdom (UK). Clyde is a Fellow of the Australian Institute of Company Directors and a Fellow of the Institute of Directors UK. He is the founder of Optima Boards, providing independent director and advisory services to public, private, family office and charitable entities around the world. Clyde has worked in publishing, media, online and technology sectors, living in the UK, Germany, China and Australia. He is a Director of ASX-listed technology company, Infomedia Limited and Chairman of the Board of Chapman Eastway Pty Limited. Darrin Grafton Executive Director, Chief Executive Officer & Co-Founder Appointed 5 April 2007 Darrin has more than 25 years' experience in travel technology and is highly experienced in technology commercialisation. He previously held senior management positions with Gullivers Travel Group (listed on the Australian and New Zealand Stock Exchanges 2004-2006) and Interactive Technologies. Robert (Bob) Shaw Executive Director, Chief Strategy Officer & Co-Founder Appointed 5 April 2007, re-elected August 2018 Bob has more than 25 years' experience creating and commercialising technology for the travel industry. He has held a number of directorships and senior management positions in various high-profile ventures, including Gullivers Travel Group (listed on the Australian and New Zealand Stock Exchanges between 2004 and 2006) and Interactive Technologies. 14 Charlie Nowaczek Chief Operating Officer (COO) Charlie has over 25 years’ experience as an operations executive and management adviser, specialising in business transformation and operational excellence. Over the last decade he has been COO for a number of technology start-ups in the US and Canada. Susan Putt Chief Financial Officer (CFO) Susan has over 25 years’ experience working in New Zealand and has also worked in Australia and Canada. She is a Chartered Accountant and Chartered Member of the Institute of Directors. Susan has worked as CFO, Head of Strategy, and Director for a number of New Zealand businesses and specialises in working with high-growth companies. John Challis Head of Business Development John has 18 years' experience in the corporate travel technology sector across operations, implementations and sales. John has been with Serko for 11 years and was until recently responsible for managing the Australasian sales team, however, as part of Serko's global expansion plans John is now responsible for growth in new markets with a heavy focus on the Northern Hemisphere. Murray Warner Head of Australasian Market Murray has 20 years’ experience working with cloud software technology building new sales and revenue operations. He has previously held several senior management positions with Concur Technologies, an SAP company, across Asia-Pacific, Europe and North America. Tony D’Astolfo Senior Vice President, NORAM Tony is a 35-year travel industry veteran, with rich expertise in travel and technology and a passion for moving the industry forward. His career includes senior leadership positions at Deem, Phocuswright, GroundLink, Sabre/GetThere and United Airlines. Tony is a long-time member of GBTA and ACTE, and a former member of the Board of Directors of both ACTE and WINiT for Women. Darrin Grafton and Bob Shaw are also part of the executive team, see facing page for their details SERKO ANNUAL REPORTSimon Botherway Independent Non-executive Chairman, New Zealand Appointed 30 April 2014, re-elected August 2018 Simon is based in New Zealand. He holds a BCom, as well as the US-based Chartered Financial Analyst (CFA) designation. Simon has extensive experience in corporate governance, banking and investment management. In 2002 Simon co-founded Brook Asset Management and was Chairman from 2004 to 2008. He is also a past President of the CFA Society of New Zealand and was a member of the CFA Asia-Pacific Advocacy Committee. Simon was appointed as a member of the Securities Commission in 2009 and chaired the Financial Markets Authority Establishment Board in 2010. Simon is currently a Director of Fidelity Life Assurance and is a Guardian of the New Zealand Superannuation Fund. Claudia Batten Independent Non-executive Chairman, United States Appointed 30 April 2014, re-elected August 2017 Claudia is based in the United States. She holds an LLB (Hons) and BCA from Victoria University (Wellington). Claudia has been a founding member of two highly successful entrepreneurial ventures. The first venture was Massive Incorporated, a network for advertising in video games, she helped pioneer ‘digital’ as a media buy. Massive was sold to Microsoft in 2006. In 2009 she co-founded Victors & Spoils (‘V&S’), the first advertising agency built on the principles of crowd-sourcing. V&S was majority acquired by French holding company Havas Worldwide in 2011. Claudia is a strong supporter of the New Zealand start-up scene as an active mentor and adviser. She is also the digital adviser to the Board of Westpac New Zealand. Clyde McConaghy Independent Non-executive Chairman, Australia Appointed 30 April 2014, re-elected August 2017 Clyde is based in Australia. He holds a BBus, and an MBA from Cranfield University United Kingdom (UK). Clyde is a Fellow of the Australian Institute of Company Directors and a Fellow of the Institute of Directors UK. He is the founder of Optima Boards, providing independent director and advisory services to public, private, family office and charitable entities around the world. Clyde has worked in publishing, media, online and technology sectors, living in the UK, Germany, China and Australia. He is a Director of ASX-listed technology company, Infomedia Limited and Chairman of the Board of Chapman Eastway Pty Limited. Darrin Grafton Executive Director, Chief Executive Officer & Co-Founder Appointed 5 April 2007 Darrin has more than 25 years' experience in travel technology and is highly experienced in technology commercialisation. He previously held senior management positions with Gullivers Travel Group (listed on the Australian and New Zealand Stock Exchanges 2004-2006) and Interactive Technologies. Robert (Bob) Shaw Executive Director, Chief Strategy Officer & Co-Founder Appointed 5 April 2007, re-elected August 2018 Bob has more than 25 years' experience creating and commercialising technology for the travel industry. He has held a number of directorships and senior management positions in various high-profile ventures, including Gullivers Travel Group (listed on the Australian and New Zealand Stock Exchanges between 2004 and 2006) and Interactive Technologies. MANAGEMENT TEAM Charlie Nowaczek Chief Operating Officer (COO) Charlie has over 25 years’ experience as an operations executive and management adviser, specialising in business transformation and operational excellence. Over the last decade he has been COO for a number of technology start-ups in the US and Canada. Susan Putt Chief Financial Officer (CFO) Susan has over 25 years’ experience working in New Zealand and has also worked in Australia and Canada. She is a Chartered Accountant and Chartered Member of the Institute of Directors. Susan has worked as CFO, Head of Strategy, and Director for a number of New Zealand businesses and specialises in working with high-growth companies. John Challis Head of Business Development John has 18 years' experience in the corporate travel technology sector across operations, implementations and sales. John has been with Serko for 11 years and was until recently responsible for managing the Australasian sales team, however, as part of Serko's global expansion plans John is now responsible for growth in new markets with a heavy focus on the Northern Hemisphere. Murray Warner Head of Australasian Market Murray has 20 years’ experience working with cloud software technology building new sales and revenue operations. He has previously held several senior management positions with Concur Technologies, an SAP company, across Asia-Pacific, Europe and North America. Tony D’Astolfo Senior Vice President, NORAM Tony is a 35-year travel industry veteran, with rich expertise in travel and technology and a passion for moving the industry forward. His career includes senior leadership positions at Deem, Phocuswright, GroundLink, Sabre/GetThere and United Airlines. Tony is a long-time member of GBTA and ACTE, and a former member of the Board of Directors of both ACTE and WINiT for Women. Darrin Grafton and Bob Shaw are also part of the executive team, see facing page for their details 15 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT CORPORATE RESPONSIBILITY Serko aims to be a successful growth company. To realise this ambition we must do the right thing by our people, customers, community and our shareholders. We aim to achieve this through: 1) Focusing on long-term growth and business sustainability; 2) Applying best practice governance and risk management procedures; 3) Cultivating an inclusive workplace of diverse and engaged staff; and 4) Enabling environmentally sustainable choices through technology. Serko is committed to developing long-term value creation and making positive improvements in social, economic and environmental outcomes. Serko’s first Environmental Social and Governance (ESG) Report was produced in 2018. The United Nations (UN) Sustainable Development Goals (SDGs) have been adopted for Serko’s ESG initiatives to be reported against. Further information and our full ESG report can be found online at www.serko.com/investor-centre/. Serko’s ESG framework remains under development and will continue to be progressed over time. The Sustainable Development Goals (SDGs) are a set of global initiatives set by the United Nations for everyone to contribute to. For Serko, the SDGs are a way to see which areas of sustainability we are directly contributing to and how our community initiatives relate to a larger vision for positive change. The UN SDGs relevant to Serko and our actions are as follows: People: Good health and well-being Health and safety policies Quality education Training and intern programmes Gender equality Diversity and inclusion policies Decent work and economic growth Remuneration policies Reduced inequalities Diversity and inclusion policies Customers: Industry, innovation and infrastructure Industry recognition for innovation Responsible consumption and production Privacy and security policies Community: Sustainable cities and communities Sponsorships and donations Climate action Environmental practices 16 SERKO ANNUAL REPORTPeople: Good health and well-being Health and safety policies Quality education Training and intern programmes Gender equality Diversity and inclusion policies Decent work and economic growth Remuneration policies Reduced inequalities Diversity and inclusion policies Customers: Industry, innovation and infrastructure Industry recognition for innovation Responsible consumption and production Privacy and security policies Community: Sustainable cities and communities Sponsorships and donations Climate action Environmental practices 17 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT MANAGEMENT COMMENTARY Please read the following commentary with the financial statements and the related notes in this report. Some parts of this commentary include information regarding the plans and strategy for the business and include forward-looking statements that involve risks and uncertainties. Actual results and the timing of certain events may differ materially from future results expressed or implied by the forward- looking statements contained in the following commentary. All amounts are presented in New Zealand dollars (NZD), except where indicated. All references to a year are the financial year ended 31 March, unless otherwise stated. Non-GAAP (generally accepted accounting practices) measures have been included, as we believe they provide useful information for readers to assist in understanding Serko’s financial performance. Non-GAAP financial measures do not have standardised meanings and should not be viewed in isolation or considered as substitutes for measures reported in accordance with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS). These measures have not been independently audited or reviewed. 18 SERKO ANNUAL REPORT$1.6m NET PROFIT AFTER TAX $2.6m EBITDAF 19% INCREASE BUSINESS RESULTS Year ended 31 March Revenue Other income Total income Operating expenses Percentage of operating revenue Net finance income Net profit before tax Percentage of operating revenue Income tax benefit (expense) Net profit after tax Percentage of operating revenue 2019 2018 $ (000) $ (000) 23,361 1,215 24,576 18,279 994 19,273 Change $ (000) 5,082 221 5,303 % 28% 22% 28% (23,320) (17,684) (5,636) -32% -100% 290 1,546 7% 87 1,633 7% -97% 414 2,003 11% (171) 1,832 10% (124) -30% (457) -23% 258 151% (199) -11% Operating revenue excludes other income, which is primarily grants. Serko remained profitable in the financial year with a net profit after tax of $1.6 million against prior year $1.8 million. The result included increased non-cash elements which affected net profit after tax. Refer below for EBITDAF analysis which excludes these non-cash elements. Annual total operating revenue grew by $5.1 million (28%) to $23.4 million from $18.3 million in the prior year, driven by strong recurring revenue growth across all revenue categories predominantly from our Australasian operations. The company recognised $1.2 million in grants from Callaghan Innovation and New Zealand Trade and Enterprise (NZTE) within other income, leading to total income for the year of $24.6 million up 28% from $19.3 million for the prior year. Total operating expenses increased by $5.6 million to $23.3 million from $17.7 million in the prior year with the planned expansion into Northern Hemisphere markets. EARNINGS BEFORE INTEREST, TAX, DEPRECIATION, AMORTISATION AND FAIR VALUE (EBITDAF) Year ended 31 March Net profit after tax Add back /(deduct): income tax Deduct: net finance income Add back: depreciation and amortisation Add back: Fair value remeasurement of contingent consideration EBITDAF profit EBITDAF margin 2019 2018 $ (000) $ (000) Change $ (000) % 1,633 (87) (290) 1,048 287 2,591 11% 1,832 171 (414) 597 - 2,186 12% (199) -11% (258) -151% 124 451 287 405 30% 76% n/a 19% EBITDAF is a Non-GAAP measure representing Earnings Before the deduction of costs relating to Interest, Taxation, Depreciation, Amortisation and Fair value remeasurement of contingent consideration. Serko uses this as a useful indicator of cash profitability. EBITDAF improved by $0.4 million (19%) from $2.2 million to $2.6 million. This was driven by an increase in total income of $5.3 million offset by an increase in operating costs (excluding depreciation, amortisation and fair value remeasurement of contingent consideration) of $4.9 million. 19 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 28% INCREASE TOTAL REVENUE 28% INCREASE TOTAL INCOME INCOME Year ended 31 March 2019 2018 $ (000) $ (000) Change $ (000) Travel platform booking revenue 15,948 13,283 Expense platform revenue Supplier commissions revenue Other revenues Recurring product revenue Percentage of total revenue Services revenue Total revenue Other income Total income 2,710 1,538 467 20,663 89% 1,539 1,288 334 16,444 90% 2,698 1,835 23,361 18,279 1,215 994 24,576 19,273 2,665 1,171 250 133 4,219 863 5,082 221 5,303 % 20% 76% 19% 40% 26% 47% 28% 22% 28% Recurring product revenue (a Non-GAAP measure) is the revenue derived from transactions and usage of Serko products by contracted customers. It excludes services revenue. Total revenue is operating revenue excluding grants and finance income, while total income includes grants. Recurring product revenue was up 26% to $20.7 million from $16.4 million on the prior year. Recurring revenue as a percentage of total revenue remains comparable to the prior year at 89%. Unfavourable exchange rate movements in the second half negatively impacted revenue by approximately -1%. Total revenue and Total Income including grants was up 28%. Travel platform revenue grew by 20% for the year and was primarily related to a 17% increase in booking numbers. The difference between transaction growth and booking volume growth is owing to minimum volume commitments recognised over the period of the contract term, as well as an increase in average revenue per booking (ARPB). Minimum volume commitments contribute to revenue when actual volumes transacted are less than the stated contractual commitments. Revenue from these sources in FY19 was $0.7 million and is comparable to $0.6 million in the prior year. The anticipated transactional business related to these minimums is expected to be onboarded onto the Serko platform over FY20. ARPB increased marginally by 3% for the year owing to increased Zeno pricing. With further uptake of Zeno expected in FY20, ARPB is expected to increase. Serko launched its premium travel booking tool called Zeno during 2018 and now 85%* of Australasian TMCs have signed contracts and can offer Zeno to their customers. Tandem, Air New Zealand’s TMC, fully onboarded during FY19. New Zealand’s largest corporate travel TMC, Orbit, is now commencing onboarding its customers. In the UK, ATPI has completed beta testing and has onboarded initial customers. Development is under way for NORAM markets, and beta trials continue with wider customer launches expected during FY20. *As measured by FY19 booking volumes 20 SERKO ANNUAL REPORTExpense platform revenue grew 76% to $2.7 million. This includes three months of revenue from the InterplX acquisition of $0.9 million. Without the acquisition, growth of Serko Expense was 19% for the year. Supplier commissions revenue grew by 19% to $1.5 million. The number of bookings that Serko earned additional commission revenue over the travel platform booking fee increased by 25%. The average attachment rate of commission bookings versus total bookings for the year was 6.2% up from 5.4% for the prior year. Other revenues grew by 40%. Total services revenue was up 47% over the prior period. This primarily reflects revenue associated with customising Serko’s travel platform as white-label solutions for its TMCs, as well as payments from content suppliers for the integration of their content to our travel platform. These developments will add to recurring revenue increases for FY20. HOW SERKO MAKES MONEY How Serko makes money Corporate traveller makes a booking via Serko Online/Zeno Corporate books a hotel, car or taxi via Serko Online/Zeno Traveller downloads and uses Serko Mobile Traveller submits receipts using Serko Expense/Zeno Booking & other fees Supplier commissions Mobile subscriptions Monthly user fee Serko’s main source of revenue is Travel platform revenue from Serko Online and Zeno, launched in 2018 in Australasia. Zeno is currently being tailored for Northern Hemisphere markets. It launched exclusively with ATPI in the UK in December 2018. It is now being developed to suit North America and is being trialed with beta customers for launch in the second half of FY20. Travel platform revenue is made up of transaction fees, ancillary service fees and contracted minimum payments (where applicable) and is stated net of volume-related rebates and discounts. The serko.travel platform for small and medium enterprises is a free booking service and Serko earns commission income on those bookings direct from suppliers, therefore income from this platform is included in supplier commissions. Serko also earns income from its expense management platform Serko Expense, which allows registered users of corporate customers to process travel and expense claims for accounting and reimbursement. Revenues are derived from a combination of fees for active users, registered users and reports processed. During the year Serko acquired US based InterplX, which has an expense management solution called Expensenet. Supplier commission revenue is earned when corporates opt to book Serko-sourced hotel and other traveller-related services. Serko is paid directly from the suppliers of those services. Other income includes income from Serko Mobile licence fees and other miscellaneous revenues. Services revenue is derived from installation service and customised software development undertaken on behalf of the TMCs. It also includes the fees charged to develop connections to third party systems wanting to integrate with Serko’s platforms. The basis of charging can vary depending on the contractual terms with the customer, which may specify time and materials, capped or fixed pricing. Other income is primarily government grants for research and development projects, and international growth grants. 21 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT Revenue by Geography Year ended 31 March 2019 2018 Australia New Zealand North America Other Revenue $ (000) $ (000) 18,238 16,599 3,440 1,471 212 1,038 457 185 23,361 18,279 5,082 Change $ (000) 1,639 2,402 1,014 27 % 10% 231% 222% 15% 28% Serko currently earns 78% (FY18 : 91%) of revenue from Australia and 15% (FY18 : 6%) from New Zealand sources, with New Zealand sourced income up 231% over the prior year. The portion of income from New Zealand has increased with the onboarding of Tandem customers during the year. New Zealand-sourced income will continue to grow with the continued onboarding of Orbit signed in July 2018 and commenced in October 2018. The portion of North America income has grown however, this currently relates to content income and Expense income from the InterplX acquisition. Serko is currently undertaking the development required to localise content and integrate its systems with North American markets and expects these regions to grow during FY20. Income related to the UK is included in Other. ATPI UK was in trial phase for most of the year and completed approximately 5,000 bookings during FY19. It is expected that the volumes for this market will increase with the introduction of integrated rail, expected to go live in the first quarter of FY20, and the continued roll out to its UK customer base. 22 SERKO ANNUAL REPORTRevenue Trend Travel platform Expense platform Supplier commissions & other Services Booking Trend1 Travel platform booking trend over the last 7 years Online bookings Other and custom bookings Peak ATMR2 Year-on-year movement $20m $15m $10m $5m 4m 3m 2m 1m $30m $20m $10m FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY13 FY14 FY15 FY16 FY17 FY18 FY19 41% 23% $26m After aquisition $22.5m Before aquisition $18.4m 24% $18.4m $14.8m 2018 2019 1 Peak ATMR is a Non-GAAP measure representing Annualised Transactional Monthly Revenue. Serko uses this as a useful indicator of future recurring revenues from Serko products. It is based on the monthly transactions and average revenue per booking (for its travel platform revenue) and monthly active user charges (for its expense platform revenue) annualised on a constant currency basis. Peak ATMR was February for both 2018 and 2019. 2 Booking volumes are total volumes and include Offline and and Custom Bookings, which can be either bundled into a price per Online booking or at a reduced rate, as these are primarily automated bookings but processed through the booking tool. 23 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT- 17% INCREASE TRAVEL PLATFORM BOOKINGS 41% INCREASE PEAK ATMR ACTIVITY Travel platform bookings increased 17% over the prior year, while expense transaction volumes also grew strongly, driven mainly by growth in our core Australasian markets. Total travel bookings during FY19 were 4.14 million, representing 58% of an estimated addressable market of 7.2 million corporate travel bookings in Australia and New Zealand. Total travel bookings include 0.4 million offline bookings (system automated bookings) which don’t contribute significantly to revenue or are bundled into the ‘Online’ booking rate. Online bookings for the year were 3.74 million and were also up 17% over the prior year. Serko is currently expanding into Northern Hemisphere markets, however, these regions did not make a significant contribution to volumes in 2019 owing to being in development and trial stages. Serko Expense transactions increased by 33% to 273,000 for FY19 from 206,000 in the prior year. ARPB for travel-related revenue (travel platform and supplier commissions) increased marginally during the year by 3% to $4.67 based on Online bookings and was largely related to increases in pricing for the Zeno platform. However, additional content revenue at $1.5 million is contributing significantly to Serko’s profit with a 19% uplift over the prior year. Peak ATMR, an indicative measure of forward revenue from currently transacting customers, rose 23% before the InterplX acquisition for the year to $22.5 million, lifted by increases in ARPB, total bookings and the number of users of our Expense platform. Actual recurring product revenue of $20.7 million for 2019 was ahead of the 2018 Peak ATMR of $18.4 million. ATMR, including InterplX, is $26 million (41% increase). Serko’s TMC partners have indicated they expect additional Australasian corporate customers, that are not currently using an online booking tool, to transition to Serko products over the next year. Therefore, we expect transaction growth in Australia and New Zealand to continue. In addition, Serko is expanding into Northern Hemisphere territories and this segment is also expected to grow over the next financial year. While transaction growth is difficult to forecast, Serko is expecting total operating revenue to grow between 20% and 40% for the 2020 financial year. Continued transition to Zeno at a price uplift and onboarding of new corporates within the Australasian market as well as Northern Hemisphere markets, will contribute to expected revenue uplifts for FY20. Also, with a healthy pipeline of Serko Expense management customers and a full year of InterplX revenue, we expect Expense revenue will also grow. Serko uses Online bookings, Annualised Transactional Monthly Revenue (ATMR) and Average Revenue per Booking (ARPB) as indicators of strategic achievement. 24 SERKO ANNUAL REPORT32% INCREASE OPERATING EXPENSES OPERATING EXPENSES Year ended 31 March 2019 2018 $ (000) $ (000) Change $ (000) Remuneration and benefits 13,135 11,667 Selling and marketing expenses Administration expenses Other expenses Total operating expenses Percentage of operating revenue 1,691 6,563 1,931 23,320 100% 1,258 3,692 1,067 17,684 97% 1,468 433 2,871 864 5,636 % 13% 34% 78% 81% 32% Remuneration and benefits are the total costs of employees and contractors engaged within the business during the financial year, including gross salary, additional payroll taxes, superannuation and KiwiSaver, bonuses, commissions and the value of any share-based remuneration or awards. Selling and marketing expenses comprise all the direct costs of sales that are not people or salary related. Administration expenses are other general overheads and operating costs, including depreciation and amortisation charges. Other expenses comprise direct technology costs, including hosting. Total operating expenses were up 32% or $5.6 million from the prior year to $23.3 million, owing to increases across all categories of expenses as Serko expands its operations. Remuneration and benefits (R&B) increased owing to the increased head count from 106 FTE to 173 FTE as at 31 March. Included in R&B was $2.0 million related to employee share-based payments and options (long-term incentives) and short-term incentive performance payments for 2019, compared to $1.3 million in the prior year. As Serko continues to expand in the Northern Hemisphere, R&B costs will increase, as additional resources are hired to support growth into new territories. This will be offset partially by capitalisation of internal staff time spent on development of revenue-earning modules for the Serko platforms. Selling and marketing expenses increased as expected with the launch of Zeno in Australasia, as well as into Northern Hemisphere markets, which will drive revenue growth in 2020 by supporting the successful acquisition and onboarding of new customers to the product. Administration costs were higher than the prior year owing mainly to recruitment fees for increased head count and professional fees for advice to support international growth. Administration costs also included non-cash costs as well as one-off costs related to capital activities. For 2019, depreciation and amortisation at $1.0 million was $0.5 million higher than the prior year. During the year Serko listed on the ASX as a foreign-exempt listing and acquired InterplX. The one-off cash costs included in net profit related to these items amounted to $0.4 million. The fair value measurement adjustment on contingent consideration (non-cash), related to the InterplX acquisition, included a fair value remeasurement charge of $0.3 million. The InterplX acquisition consideration was by way of issuance of Serko shares, half of which is deferred and contingent on InterplX achieving key milestones. As a result, the liability for the deferred component of this acquisition will vary according to the trading price of the shares at balance date and up until the shares are issued. An increase in the Serko price therfore results in an accounting entry that reduces Serko’s profit and increases the contingent consideration liability which is then extinguished on share issue. The final number of shares issued is subject to InterplX meeting the revenue targets as set out in the purchase agreement. Other expenses are primarily hosting costs. Hosting costs increased with the volume increases and set-up costs associated with new data centres for new territories. 25 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT RESEARCH AND DEVELOPMENT (R&D) COSTS Year ended 31 March 2019 2018 Change % 87% INCREASE R&D COSTS Percentage of operating revenue Total R&D cost (including amounts capitalised) $ (000) $ (000) $ (000) 9,165 39% 4,906 27% 4,259 87% Less: capitalised product development costs (6,740) (383) (6,357) 1660% Percentage R&D costs 74% 8% Research costs (excluding amortisation of amounts previously capitalised) 2,425 4,523 (2,098) -46% Less: Government grants (876) (956) 80 8% Add: Amortisation of capitalised development costs Net product development costs Percentage of operating revenue 754 412 342 83% 2,303 10% 3,979 (1,676) -42% 22% Research & Development (R&D) cost is a Non-GAAP measure representing the internal and external costs related to R&D that have been included in operating costs and capitalised as computer software development during the period. Research expenditure includes all reasonable expenditure associated with R&D activities that does not give rise to an intangible asset. R&D expenses include employee and contractor remuneration related to these activities. It also covers research expenditure defined by NZ IAS 38. Serko has capitalised more development costs for FY19 than in FY18. During 2018 we undertook a research and market discovery and trial programme and established what was required for Zeno to be successful in these new markets. Accordingly, we capitalised only a small proportion of development costs and recorded higher research-related expenditure. By contrast, 2019 was a year of development to add content and enhance the functionality and features of Zeno to address these markets. We also signed new Zeno contracts with large TMCs. As such a portion of employee development costs have been capitalised during the year and this resulted in additions of $6.7 million to intangible assets related to internally produced software. We remain in the build phase and have a significant development workload ahead of us as we prioritise development to deliver to those markets and customers that represent the best opportunity for Serko. We are confident that this investment will generate strong revenue growth in years to come. 26 SERKO ANNUAL REPORT63% INCREASE FTE 201% INCREASE CASH BALANCES EMPLOYEES AND AVERAGE REVENUE FTE Year ended 31 March 2019 2018 Change % Product development and maintenance Sales and marketing Customer support Administration Total employee numbers at end of year (FTE) Average revenue per FTE (NZD $000) 100 16 40 17 173 167 54 12 27 13 106 170 46 4 13 4 67 85% 33% 48% 31% 63% -3 -2% Serko’s staff head count increased during the year, moving to 173 from 106 full-time equivalent (FTE) staff at the end of 2018. Head count was 176 with 87 staff based in New Zealand, 24 in Australia, 38 in China, 26 in the US and one based in India. The increase in staff is primarily in product development and reflects the investment Serko is making in its product to service the Northern Hemisphere. The acquisition of expense management company InterplX in December 2018 added 21 staff to the US operations. Average revenue per FTE decreased by $3,000 to $167,000, reflecting the investment into additional staff as Serko expands. CASH FLOWS Year ended 31 March 2019 2018 Change % $(000) $(000) $(000) Receipts from customers Grant income receipts 21,855 17,754 4,101 1,264 915 349 23% 38% Other operating cash flows (19,472) (17,253) (2,219) -13% Total cash flows from operating activities 3,647 1,416 2,231 158% Investing cash flows Financing cash flows Total net cash flows Net foreign exchange differences (7,279) 14,220 10,588 (88) (519) (6,760) 1303% (46) 851 (70) 14,266 n/a 9,737 1144% (18) -26% Closing cash balances 15,732 5,232 10,500 201% Receipts from customers increased by 23% over the year from $17.8 million to $21.9 million. Other operating cash outflows increased by $2.2 million to $19.5 million. Positive operating cash flows for the year of $3.6 million were up 158% over the prior year’s $1.4 million. Cash outflows for property, plant and equipment and intangibles, reflecting capitalised internal development, were $7.3 million. A capital raise to fund expansion and related acquisitions resulted in a net $14.3 million contribution to cash balances. Cash balances increased by 201% as at 31 March 2019, from $5.2 million to $15.7 million. 27 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT FINANCIAL STATEMENTS 28 SERKO ANNUAL REPORTThe directors of Serko Limited are pleased to present the financial statements for Serko Limited and its subsidiaries (the group) for the year ended 31 March 2019 to shareholders. The directors are responsible for presenting financial statements in accordance with New Zealand law and generally accepted accounting practice, which fairly present the financial position of the group as at 31 March 2019 and the results of its operations and cash flows for the year ended on that date. The directors consider the financial statements of the group have been prepared using accounting policies that have been consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed. The directors believe that proper accounting records have been kept that enable, with reasonable accuracy, the determination of the financial position of the group and facilitate compliance of the financial statements with the Companies Act 1993, NZX Main Board Listing Rules, Financial Reporting Act 2013 and the Financial Markets Conduct Act 2013. The directors consider they have taken adequate steps to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Internal control procedures are also considered to be sufficient to provide a reasonable assurance as to the integrity and reliability of the financial statements. The financial statements are signed on behalf of the Board of Directors 22 May 2019 by: SIMON BOTHERWAY CHAIRMAN DARRIN GRAFTON CHIEF EXECUTIVE OFFICER CONTENTS Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of financial position Consolidated statement of cash flows Notes to the financial statements Independent auditor’s report 30 31 32 33 34-65 66-69 29 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 March 2019 Notes 2019 2018 $ (000) 23,361 1,215 24,576 (1,691) (13,135) (6,563) (1,931) (23,320) 360 (70) 1,546 87 1,633 (126) 1,507 $0.02 $0.02 $ (000) 18,279 994 19,273 (1,258) (11,667) (3,692) (1,067) (17,684) 475 (61) 2,003 (171) 1,832 (52) 1,780 $0.03 $0.02 Revenue Other income Total revenue and other income Operating Expenses Selling and marketing expenses Remuneration and benefits Administration expenses Other expenses Total operating expenses Finance income Finance expenses Profit before income tax Income tax benefit/(expense) Net profit attributable to the shareholders of the company Movement in foreign currency reserve Total comprehensive income for the year Earnings per share Basic profit per share Diluted profit per share The accompanying notes form part of these financial statements. 4 4 5 5 5 6 17 17 30 SERKO ANNUAL REPORTCONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 March 2019 Notes Share Capital Share-based Payment Reserve Foreign Currency Reserve Accumulated Losses Total $ (000) $ (000) $ (000) $ (000) $ (000) Balance as at 1 April 2018 Net profit for the year Other comprehensive income/(loss)* Total comprehensive income for the year Transactions with owners Issue of share capital Cost of equity issued Shares allocated to employees Shares forfeited from employees Share-based payments — employee share options Shares issued in respect of InterplX acquisition Balance as at 31 March 2019 Balance as at 1 April 2017 Net profit for the year Other comprehensive income/(loss)* Total comprehensive income for the year Transactions with owners Shares allocated to employees Shares allocated to employees Shares forfeited from employees 16 16 16 16 16 16 16 16 16 25,185 1,309 (85) (18,065) - - - 15,048 (778) - - - 1,538 40,993 - - - - - 406 (24) 194 - - 1,633 (126) (126) - 1,633 - - - - - - - - - - - - 8,344 1,633 (126) 1,507 15,048 (778) 406 (24) 194 1,538 1,885 (211) (16,432) 26,235 25,185 1,021 (33) (19,897) - - - - - - - - - 252 (23) 59 - 1,832 (52) (52) - 1,832 - - - - - - 6,276 1,832 (52) 1,780 252 (23) 59 Balance as at 31 March 2018 25,185 1,309 (85) (18,065) 8,344 *Items in other comprehensive income may be reclassified to the income statement and are shown net of tax. The accompanying notes form part of these financial statements. 31 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 March 2019 Current assets Cash at bank and on hand Receivables Derivative financial instruments Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred tax asset Total non-current assets Total assets Current liabilities Trade and other payables Contingent consideration Income tax payable Interest-bearing loans and borrowings Total current liabilities Non-current liabilities Trade and other payables Interest-bearing loans and borrowings Total non-current liabilities Total liabilities Equity Share capital Share-based payment reserve Foreign currency reserve Accumulated losses Total equity Total equity and liabilities Notes 11 7 8 9 10 6 12 13 15 12 15 16 16 2019 $ (000) 15,732 5,493 421 21,646 1,129 10,553 84 11,766 33,412 4,791 1,825 224 54 6,894 134 149 283 2018 $ (000) 5,232 3,831 288 9,351 893 1,574 155 2,622 11,973 2,793 - 98 351 3,242 183 204 387 7,177 3,629 40,993 1,885 (211) (16,432) 26,235 33,412 25,185 1,309 (85) (18,065) 8,344 11,973 For and on behalf of the Board of Directors, who authorise these financial statements for issue on 22 May 2019. SIMON BOTHERWAY CHAIRMAN DARRIN GRAFTON CHIEF EXECUTIVE OFFICER The accompanying notes form part of these financial statements. 32 SERKO ANNUAL REPORTCONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 March 2019 Cash flows from operating activities Receipts from customers Interest received Receipts from grants Taxation (paid)/refund received Payments to suppliers and employees Interest payments Net GST refunded (paid) Net cash flows from operating activities Cash flows from investing activities Purchase of property, plant and equipment Capitalised development costs and other intangible assets Net cash flows (used in) investing activities Cash flows from financing activities Issue of ordinary shares Cost of new share issue Net repayment of loans Net cash flows from/(used in)financing activities Net increase (decrease) in total cash Net foreign exchange difference Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Cash and cash equivalents comprises the following: Cash at bank and on hand Notes 21 16 16 11 2019 $ (000) 21,855 304 1,264 (142) 2017 $ (000) 17,754 93 915 (262) (19,395) (17,065) (20) (219) 3,647 (466) (6,813) (7,279) 15,048 (778) (50) 14,220 10,588 (88) 5,232 15,732 15,732 15,732 (22) 3 1,416 (192) (327) (519) - - (46) (46) 851 (70) 4,451 5,232 5,232 5,232 The accompanying notes form part of these financial statements. 33 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 March 2019 1 CORPORATE INFORMATION In reaching their conclusion the directors have considered The financial statements of Serko Limited (‘the company’) and subsidiaries (‘the group’) were authorised for issue in accordance with a resolution of directors. The company is a limited liability company domiciled and incorporated in New Zealand under the Companies Act 1993 and is listed on the New Zealand Stock Exchange (NZX) and the Australian Securities Exchange (ASX). Its registered office is at Unit 14d, 125 The Strand, Parnell, Auckland. The group is involved in the provision of computer software solutions for corporate travel. The group is headquartered in Auckland, New Zealand. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below and within this notes section. These policies have been consistently applied to all the years presented, unless otherwise stated. a) Basis of preparation The financial statements have been prepared in accordance with generally accepted accounting practice in New Zealand (NZ GAAP) and the requirements of the Financial Markets Conduct Act 2013. The financial statements have been prepared on a historical cost basis, modified by the revaluation of certain assets and liabilities as identified in specific accounting policies. The financial statements are presented in New Zealand dollars and all values are rounded to the nearest thousand dollars unless stated otherwise. the following factors: • Cash reserves at 31 March 2019 of $15.7 million provides a sufficient level of headroom to help support the business for at least the next twelve months; and • The directors have made due enquiry into the appropriateness of the assumptions underlying the budgetary forecasts. c) Statement of compliance The financial statements have been prepared in accordance with NZ GAAP. They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards, as appropriate for profit-oriented entities. d) Adoption of new accounting standards and interpretations New accounting standards adopted by Serko Group: A number of new or amended standards become applicable for the current reporting period and Serko has had to change its accounting policies as a result of adopting the following standards: • NZ IFRS 15 Revenue from Contracts with Customers • NZ IFRS 9 Financial Instruments The impact of the adoption of these new standards is disclosed below. NZ IFRS 15 Revenue from Contracts with Customers Impact of adoption The financial statements provide comparative information with Customers from 1 April 2018, which resulted in in respect of the previous period. changes in accounting policies relating to the recognition The group adopted NZ IFRS 15 Revenue from Contracts b) Going concern The directors have carefully considered the ability of the group to continue to operate as a going concern for at least the next 12 months from the date the financial statements are authorised for issue. It is the conclusion of the directors that the group will continue to operate as a going concern and the financial statements have been prepared on that basis. of revenue. Following a detailed review of the group’s portfolio of contracts, management concluded that the implementation of NZ IFRS 15 had no material impact on the way Serko recognises revenue for opening balances. Therefore, there is no requirement to restate revenue reported in prior periods. The details of the review 34 SERKO ANNUAL REPORTprocess, including current year impact of the adoption of accounting policies or adjustments to the amounts NZ IFRS 15, are outlined below. Accounting policies have recognised in the financial statements. been amended to ensure that the five-step method, as outlined in NZ IFRS 15, is applied consistently to revenue recognition processes across the group. Process and policy To quantify the impact of NZ IFRS 15 contracts across the travel platform were assessed and compared to revenue recognition under IAS 18. An assessment was made on each contract to evaluate the service benefits over time, which requires allocations to be made to each service obligation. As the revenue is usage based (depending on the volume of travel bookings), fixed and variable consideration was allocated over the performance period Serko does not currently hold any complex financial instruments. Cash is either held on call or on term deposit and forward contracts (hedging item) held are recognised at fair value through Profit and Loss. Trade receivables are assessed for impairment and an expected credit loss (ECL) provision made based on ‘lifetime expected credit losses’. An ECL provision of $7,000 has been assessed based on an ECL model that considers various aspects of credit risk within a risk matrix, considering history of debtor write off, ageing of invoices, country, market and product risk. The low ECL allowance reflects the low levels of bad debt write off and low value of aged invoices. depending on contract minimum volume requirements and e) Standards on issue not yet adopted estimates of variable volume. For each contract the five-step method was applied to assess the impact on revenue recognition. The five-step method for recognising revenue from contracts with customers involves consideration of the following: • Identifying the contract with the customer; • Identifying performance obligations; • Determining the transaction price; • Allocating the transaction price to distinct performance obligations; and • Recognising revenue NZ IFRS 16 Leases Impact of adoption NZ IFRS 16 Leases, effective for accounting periods beginning on or after 1 January 2019. Serko has elected not to apply the standard early. Under NZ IFRS 16 a contract contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Adopting NZ IFRS 16 will require Serko to recognise a lease liability reflecting the future lease payments and a ‘right-of-use’, asset which will During the current period, a number of new contracts were be depreciated over the lease term. The statement of signed with contracted minimum revenue commitments, comprehensive income will be impacted by the recognition resulting in a $477,000 increase to revenue based on NZ IFRS of an interest expense and a depreciation expense with 15 treatment. The current recognition of non-travel platform premise rental expense removed altogether. Until the project is completed and decisions are made, such as the transition method to apply and applicable discount rate to calculate the lease obligation, it is not practicable to quantify the effect of the standard. The standard will not have any effect on the total amount of cash flows reported but it is expected to have an effect on the presentation of cash flows. This is because applying NZ IAS 17 Leases, cash flows relating to operating leases are presented as cash flows from operating activities while applying NZ IFRS 16 will result in the presentation within financial activities of cash flows relating to the repayment of principal on lease liabilities. Existing operating lease commitments are set out in note 19. revenue is consistent with NZ IFRS 15 treatment, as it relates to revenue recognised ‘as invoiced’, such as customisation work. Under certain contracts, transaction fees are bundled to include the ‘changes post ticketing’ where some revenue may need to be deferred until subsequent changes occur. This is consistent with the prior year where management have determined this adjustement to be immaterial. NZ IFRS 9 Financial Instruments Impact of adoption NZ IFRS 9 Financial Instruments includes a revised model for classification and measurement of financial instruments, including a new expected credit loss model for the calculation of impairment on financial assets and changes to general hedge accounting requirements. The adoption of NZ IFRS 9 Financial Instruments from 1 January 2018 resulted in no significant changes in 35 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT f) Basis of consolidation The consolidated financial statements comprise the financial statements of Serko Limited and its subsidiaries as at and for the year ended 31 March each year. Control is achieved when the group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the group controls an investee if and only if the group has: • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); • Exposure, or rights, to variable returns from its involvement with the investee; and • The ability to use its power over the investee to affect its returns. When the group has less than a majority of the voting or similar rights of an investee, the group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • The contractual arrangement with the other vote holders of the investee; • Reclassifies the parent’s share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate, as would be required if the group had directly disposed of the related assets or liabilities. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree. The identifiable assets acquired and liabilities assumed are measured at their acquisition date fair values. Acquisition-related costs are expensed as incurred and recognised in profit or loss. The difference between the above items and the fair value of the consideration is recorded as either goodwill or gain on bargain purchase. 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 expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are • Rights arising from other contractual arrangements; and assigned to those units. • The group’s voting rights and potential voting rights. The group reassesses whether or not it controls an Goodwill is tested annually for impairment, or immediately if events or changes in circumstances investee if facts and circumstances indicate there are indicate that it might be impaired, and carried at cost less changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the group obtains control over the subsidiary and ceases when the group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the financial statements from the date the group gains control until the date the group ceases to control the subsidiary. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the group loses control over a subsidiary, it: • Derecognises the assets (including goodwill) and liabilities of the subsidiary; • Derecognises the carrying amount of any non- controlling interests; accumulated impairment losses. Impairment losses on goodwill are not reversed. Any gain on bargain purchase is recognised immediately on acquisition to profit and loss. Inter-company transactions, balances and unrealised gains and losses on transactions between group companies are eliminated. Non-controlling interests are allocated their share of comprehensive income after tax in the statement of comprehensive income and are presented within equity in the consolidated statement of financial position, separately from the equity of the owners of the parent. g) Foreign currency translation • Derecognises the cumulative translation differences i) Functional and presentation currency recorded in equity; • Recognises the fair value of the consideration received; • Recognises the fair value of any investment retained; • Recognises any surplus or deficit in profit or loss; and Items included in these financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). These financial statements are presented in New Zealand dollars, which is the group’s presentation currency and the parent’s functional currency. 36 SERKO ANNUAL REPORTii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at balance date. Non-monetary items measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end of exchange rates for monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. iii) Foreign Currency Translation Reserve For the purposes of presenting these consolidated financial statements, the assets and liabilities of the group’s foreign operations are translated into currency units using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in the foreign currency translation reserve. h) Financial instruments Cash at bank and on hand and receivables are financial assets measured at amortised cost. When financial assets are recognised initially they are measured at fair value plus directly attributable transaction costs. The group determines the classification of its financial assets on initial recognition and, when allowed and appropriate, re-evaluates this designation at each financial year end. Derivative financial instruments are recognised at fair value through profit or loss. i) Amortised cost Financial assets measured at amortised cost are those held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments 37 of principal and interest on the principal amount outstanding. They arise when the group provides money, goods or services directly to a debtor with no intention of selling the receivable. Such assets are subsequently carried at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the contract assets and liabilities are derecognised or impaired, as well as through the amortisation process. ii) Financial liabilities Financial liabilities are classified as ‘other financial liabilities’. Other financial liabilities, including interest-bearing loans and borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. The effective interest method calculates the amortised cost of a financial liability and allocates the interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability or, where appropriate, a shorter period to the net carrying amount of the liability. Financial liabilities are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after balance date. iii) Impairment of financial assets The Group recognises a loss allowance for expected credit losses on investments in debt instruments that are measured at amortised cost or at FVTOCI, lease receivables, trade receivables and contract assets, as well as on financial guarantee contracts. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. The Group always recognises lifetime ECL for trade receivables, contract assets and lease receivables. The expected credit losses on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate. For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12-month ECL. 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. In contrast, 12-month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date. The Group writes off a financial asset when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed under liquidation or has entered into bankruptcy proceedings, or in the case of trade receivables, when the amounts are over two years past due, whichever occurs sooner. 3 SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures. Significant judgements and estimates In the process of applying the group’s accounting policies, management has made the following judgements, which have an effect on the amounts recognised in the consolidated financial statements. i) Borrowing costs Share-based payments Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. A qualifying asset is one that takes 12 months or longer to prepare for its intended use or sale. Other borrowing costs are expensed when incurred. The fair value applied to shares granted under the restricted share plan is the volume weighted average price (VWAP) of shares traded in the previous 20 trading days preceding the date of grant. Vesting of the shares is reviewed periodically to determine that the assumptions around vesting dates and employee churn rate are still valid (refer note 18). j) Other taxes Development costs Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) except where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable. All receivables and payables are stated GST inclusive. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Development costs of a project are capitalised in accordance with the accounting policy. Initial capitalisation of costs is based on management’s judgement that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. In determining the amounts to be capitalised, management makes assumptions regarding the expected future cash generation of the project and the expected period of benefits (refer note 10). 38 SERKO ANNUAL REPORT Functional currency The group periodically reviews the functional currency for reporting purposes. The group believes that there are sufficient justifications for the continued use of NZD as the functional currency. The key factors behind this conclusion are: • Serko is NZX listed and has raised capital in NZD; • Research and development grant funding is in NZD; • NZD is the main currency for labour, operating cost and capital expenditure; and • The group also generates certain revenues in NZD. Impairment of intangible or non-financial assets Management reviews the carrying value of intangible and non-financial assets on an annual basis, in particular, computer software and development work in progress. Consideration is placed on a number of factors, depending on the specific asset in question, which may include discounted cash flow forecasts, the ability to continue to generate discrete cash flow and returns, any changes or anticipated changes in the business or product circumstances and the nature of the events that originally gave rise to the recognition of any non-financial assets (refer note 10). Revenue recognition Serko has customer agreements that contain annual minimum transaction volume commitments that span financial reporting periods. Based on this management needs to make a judgement about estimated future transaction volumes to determine related revenue for the specific financial reporting period (refer note 4). 39 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 4 REVENUE & OTHER INCOME Revenue from services Revenue is recognised and measured at the fair value of Revenue from a contract to provide installation services the consideration received or receivable to the extent it is recognised by reference to the completion of the is probable that the entity will collect the consideration contract or services delivered at balance date. If services to which it will be entitled in exchange for the goods or relate to one-off chargeable work orders, these can services that will be transferred to the customer. Revenue be invoiced as and when the performance obligation is is disclosed net of credit notes, rebates and discounts. satisfied. Revenue is recognised at a point in time by a) Revenue from transaction and usage fees applying the ‘as invoiced’ practical expedient. If these relate to customised set up or installation, the revenues are recognised over the contract term. Revenue from transaction and usage fees is recorded at the time travel or expense transactions are processed through Serko’s platforms. Contracts that have fixed minimum b) Contract assets booking volume arrangements are recognised over the Contract assets relate to accrued revenue for contractual period of volume commitment. For contracts without fixed minimum guarantees (refer note 7). consideration we have applied the ‘as invoiced’ practical expedient. Expense revenue is invoiced monthly on an active user basis and revenue recognised at a point in time. Supplier commission revenue, predominantly from hotel bookings, is recognised at a point in time, once the performance obligation is fulfilled. c) Government grants When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs it is intended to compensate. Revenue is reognised once the criteria of the grant Revenue – transaction and usage fees: Travel platform booking revenue Expense platform booking revenue Supplier commissions revenue Services revenue Other revenue Total revenue Government grants Sundry income Total other income application is met. Notes 14 2019 $ (000) 15,948 2,710 1,538 2,698 467 23,361 1,208 7 1,215 2018 $ (000) 13,283 1,539 1,288 1,835 334 18,279 956 38 994 Total revenue and other income 24,576 19,273 Geographic information Australia New Zealand US Other Total revenue 2019 $ (000) 18,238 3,440 1,471 212 23,361 2018 $ (000) 16,599 1,038 457 185 18,279 40 SERKO ANNUAL REPORT5 EXPENSES Operating profit before taxation includes the following expenses: Auditor remuneration and other assurance fees Expected credit loss allowance on receivables Amortisation of intangibles Depreciation Fair value remeasurement of contingent consideration Rental and operating lease expenses Employee remuneration Contributions to pension plans Share-based payment expenses Marketing expenses Hosting expenses Other operating expenses Expenses from ordinary activities Notes 2019 $ (000) 2018 $ (000) 7 10 9 16 86 (7) 754 294 287 804 79 - 412 185 - 729 11,924 10,764 433 576 1,171 1,931 5,067 23,320 480 288 410 1,067 3,270 17,684 Research expenses (excluding capitalised development costs) 2,425 4,523 Research & Development (R&D) cost is a Non-GAAP measure representing the internal and external costs related to R&D that have been included in operating costs and capitalised as computer software development during the period. Research expenditure includes all reasonable expenditure associated with R&D activities that does not give rise to an intangible asset. R&D expenses include employee and contractor remuneration related to these activities. It also covers research expenditure defined by NZ IAS 38. Notes 2019 $ (000) 2018 $ (000) 305 1 54 360 (20) (50) (70) 290 111 - 364 475 (43) (18) (61) 414 Finance income and expenses includes: Finance income Interest received Dividends received Foreign exchange gains – net Total finance income Finance expenses Interest expense Other finance expenses Total finance expenses Total finance income and expenses 41 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT Auditor remuneration The directors of Serko Limited appointed Deloitte Limited as the auditor of the group from the year ended 31 March 2018. Amounts received or due and receivable by: Audit of financial statements – Deloitte Limited Other assurance-related services (a) Total audit fees Notes 2019 $ (000) 2018 $ (000) 79 7 86 79 - 79 (a) Other assurance-related services include services for research and development assurance procedures. 42 SERKO ANNUAL REPORT 6 INCOME TAX Current tax assets and liabilities for the current period are Deferred income tax assets are recognised for all deductible temporary differences and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. The carry forward of unused tax losses can be utilised except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred income tax assets is reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) relevant to the appropriate tax jurisdiction, that have been enacted or substantively enacted at the balance date. measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted in the jurisdictions on which the group operates at the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of comprehensive income. Management periodically evaluates positions taken in the tax returns, with respect to situations in which applicable tax regulations are subject to interpretation, and establishes provisions where appropriate. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except: • For a deferred income tax liability arising from the initial recognition of goodwill; and • Where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Current income tax Current income tax charge Adjustments in respect of previous years Deferred income tax Origination and reversal of temporary differences Income tax (benefit)/expense reported in the statement of comprehensive income 2019 $ (000) 2018 $ (000) 493 (225) 268 (355) (87) 225 (12) 213 (42) 171 43 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT The prima facie tax payable on profit before income tax is reconciled to the income tax expense as follows: Accounting profit (loss) before income tax At the statutory income tax rate of 28% (2017:28%) Non-deductible items Adjustments in respect of current income tax of previous years Chinese branch tax Share-based payments Tax losses recognised Effect of tax on overseas subsidiaries at different rate Income tax (benefit)/expense At effective income tax rate of: Deferred income tax at 31 March relates to the following: Notes 2019 $ (000) 1,546 433 143 (225) 18 170 (545) (81) (87) -5.6% 2018 $ (000) 2,003 561 7 (12) 98 81 (570) 6 171 8.5% Deferred income tax liabilities recognised Intangibles Unrealised foreign exchange Deferred income tax asset recognised Intangibles and non-current assets Allowance for impairment Employee entitlements Bonus provision Leasehold liabilities Net deferred tax asset recognised Deferred income tax asset not recognised Employee entitlements Bonus provision Allowance for impairment Leasehold liabilities Tax losses available to be carried forward and offset against future income Total deferred tax asset not recognised 2019 2018 Statement of financial position Statement of comprehensive income Statement of financial position Statement of comprehensive income $ (000) $ (000) $ (000) $ (000) 20 22 (13) 2 169 172 (17) 355 (112) (195) - 11 (296) - - - (10) 85 - 80 - - 155 112 195 - (11) 296 3,785 4,081 - 41 (2) - 3 - - 42 5 103 (2) 9 115 - - (406) 13 72 2 248 172 (17) 84 - - - - - 3,240 3,240 44 SERKO ANNUAL REPORT7 RECEIVABLES Receivables are recognised initially at fair value and provision made based on lifetime expected credit losses. subsequently measured at amortised cost using the The ECL model considers various aspects of credit risk effective interest method, less provision for impairment. within a risk matrix, considering history of debtor write Collectibility of receivables is reviewed on an ongoing basis. Debts that are known to be uncollectible are The impairment, and any subsequent movement, written off when identified. Trade receivables are including recovery, is recognised in the statement of assessed for impairment and an expected credit loss (ECL) comprehensive income. off, ageing of invoices, country, market and product risk. Notes 15 Trade receivables Expected credit loss provision Trade receivables (net) Loan receivable Allowance for impairment Other receivables (net) GST receivable Sundry debtors Contract assets Prepayments Funds held in trust Total receivables Foreign currency risk The carrying amounts of the group’s receivables are denominated in the following currencies: New Zealand dollars Australian dollars US dollars British pounds Indian rupees 2019 $ (000) 3,040 (7) 3,033 - - - 229 58 1,593 551 29 5,493 2,981 1,841 666 5 - 2018 $ (000) 2,247 - 2,247 326 (25) 301 30 21 777 454 - 3,831 1,918 1,846 52 - 15 5,493 3,831 45 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 7 RECEIVABLES (CONTINUED) Total 0-30 days 31-60 days 61-90 days 91+ days $ (000) $ (000) $ (000) $ (000) $ (000) At 31 March the ageing analysis of receivables was as follows: 2019 Trade receivables 3,040 2,252 630 2018 Trade receivables Other receivables Allowance for impairment loss i) Trade receivables 2,247 326 2,124 - 15 - 48 46 - 110 62 326 Group trade receivables over 60 days were $158,153 (2018: $108,099). This balance of $158,153 is not considered impaired as amounts outstanding are in accordance with agreed payment plans and payment record of the customers concerned. Trade receivables are non-interest bearing and are generally on 30 - 60-day terms. Serko has historically low levels of impairment on trade receivables. A general ECL provision of $7,000 (2018: $nil) has been made as required under NZ IFRS 9. 8 FINANCIAL INSTRUMENTS Derivative financial instruments The group uses derivatives in the form of forward exchange contracts (FECs) to reduce the risk that movements in the exchange rate will affect the group’s New Zealand dollar cash flows. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The following table presents the group’s foreign currency forward exchange contracts measured at fair value: Notes 2019 $ (000) 2018 $ (000) Current: Foreign currency forward exchange contracts 421 288 Contractual amounts of forward exchange contracts outstanding were as follows: Foreign currency forward exchange contracts 11,016 10,763 Derivative financial instruments have been determined to be within level 2 of the fair value hierarchy. Foreign currency forward exchange contracts have been fair valued using published market foreign exchange rates and contract forward rates discounted at a rate that reflects the credit risk of the counterparties. 46 SERKO ANNUAL REPORT9 PROPERTY, PLANT AND EQUIPMENT a) Impairment All items of property, plant and equipment are recorded The carrying values of property, plant and equipment at cost less accumulated depreciation and impairment. are reviewed for impairment when events or changes in Initial cost includes purchase consideration and those circumstances indicate the carrying value may not costs attributable to bringing the asset to the location and be recoverable. condition necessary for its intended use. Where an item is self-constructed, its construction cost includes the cost of materials, direct labour and an appropriate proportion of production overheads. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amounts. Subsequent expenditure relating to an item of property, b) Disposal plant and equipment is added to its gross carrying amount when such expenditure either increases the future economic benefits beyond its existing service potential or is necessarily incurred to enable future economic benefits to be obtained and if that expenditure would have been included in the initial cost of the item An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the had it been incurred at that time. The carrying amount of carrying amount of the asset) is included in profit or loss in any replaced part is derecognised. the year the asset is derecognised. All other repairs and maintenance expenditure is recognised in profit or loss as incurred. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. The residual value of assets is reviewed and adjusted, if appropriate, at each balance date. The following estimates have been used: • Leasehold improvements 7% • Furniture and fittings 6 - 36% • Computer equipment 17.5 - 48% 47 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 9 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Notes Leasehold improvement Furniture & fittings Computer equipment Total $ (000) $ (000) $ (000) $ (000) 2019 Cost or valuation Balance at 1 April 2018 Additions Acquisition through business combinations 13 Currency translation Balance at 31 March 2019 Depreciation Balance at 1 April 2018 Depreciation expense Balance at 31 March 2019 Net carrying amount 2018 Cost or valuation Balance at 1 April 2017 Additions Currency translation Balance at 31 March 2018 Depreciation Balance at 1 April 2017 Depreciation expense Balance at 31 March 2018 Net carrying amount 367 166 24 (1) 556 175 48 223 333 354 13 - 367 139 36 175 192 574 270 30 (1) 873 421 135 556 317 398 176 - 574 378 43 421 153 1,711 464 68 (2) 2,241 818 294 1,112 1,129 1,519 193 (1) 1,711 633 185 818 893 770 28 14 - 812 222 111 333 479 767 4 (1) 770 116 106 222 548 48 SERKO ANNUAL REPORT10 INTANGIBLES Intangible assets acquired separately or in a business Research and development combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Costs related to internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in profit or loss in the year in which the expenditure is incurred. Research and maintenance costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset. Also how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to reliably The useful lives of intangible assets are assessed to be measure the expenditure attributable to the intangible either finite or indefinite. Intangible assets with finite asset during its development. Following initial recognition lives are amortised over the useful lives and tested for of the development expenditure, the cost model is impairment whenever there is an indication that the applied requiring the asset to be carried at cost less any intangible asset may be impaired. The amortisation period accumulated amortisation and impairment losses. Any and the amortisation method for an intangible asset with a expenditure capitalised is amortised over the period of finite useful life is reviewed at least at each financial year expected benefit from the related project. end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised. An intangible asset with an indefinite useful life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised. Intangible assets under development at balance date are recorded as capital work in progress and are not subject to amortisation. Impairment of non-financial assets Intangible assets that have a indefinite useful lives or are not yet completed are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In undertaking an impairment review of non-financial assets that have definite useful lives the following assumptions were used in the impairment model; • Cash flow projections across a five-year forecast period; • Discount rate of between 11.5% to 15.0% (FY18: 15.0%); • Discount factor applied using a mid-year convention; A summary of the policies applied to the group’s intangible and assets is as follows: • Computer Software (finite, amortised on a straight-line basis 40 - 60%); and • Capitalised software development costs (finite, amortised on 5 years straight-line basis). • Terminal growth rates of between 0% to 2.4%. 49 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 10 INTANGIBLES (CONTINUED) An impairment loss is recognised for the amount under one reporting segment. InterplX has been assessed by which the asset’s carrying amount exceeds its as a seperate CGU and an impairment assessment has recoverable amount. Recoverable amount is the higher of been performed for goodwill and indefinite intangible an asset’s fair value less costs to sell, and value in use. For assets. the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units (‘CGU’s’). Non-financial assets, including development work in progress and computer software are assessed for impairment at a group level Non-financial assets, other than goodwill that suffered impairment, are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. Goodwill Intellectual property Key employee retention Customer contracts Other intangible assets Development work in progress Computer software Total $ (000) $ (000) $ (000) $ (000) $ (000) $ (000) $ (000) $ (000) 2019 Cost Balance at 1 April 2018 Additions 220 - Assets no longer in use (220) Transfer of cost - - - - - Acquisition through business combinations (refer note 13) Currency translation Balance at 31 March 2019 1,444 1,523 (39) 1,405 (46) 1,477 Amortisation and impairment Balance at 1 April 2018 Amortisation 220 - Assets no longer in use (220) Balance at 31 March 2019 - - 76 - 76 Net carrying amount 1,405 1,401 2018 Cost Balance at 1 April 2017 220 Additions Transfer of cost - - Balance at 31 March 2018 220 Amortisation and impairment Balance at 1 April 2017 Amortisation Balance at 31 March 2018 Net carrying amount 220 - 220 - - - - - - - - - 78 - 443 - (78) (443) - - - - 78 - - - - - 443 - (78) (443) - - 78 - - 78 78 - 78 - - - 443 - - 443 443 - 443 - 50 - 73 - - - - 73 - - - - 49 2,915 6,740 - (2,023) - - - (201) 2,023 39 (1) 3,705 6,813 (942) - 3,006 (86) 4,766 4,775 12,496 - - - - 1,390 678 (201) 1,867 2,908 2,131 754 (942) 1,943 10,553 73 4,766 - - - - - - - - 205 328 (484) 2,376 55 484 3,322 383 - 49 2,915 3,705 - - - 49 978 412 1,390 1,525 1,719 412 2,131 1,574 SERKO ANNUAL REPORT11 CASH AT BANK AND ON HAND Cash and short-term deposits in the statement of financial position comprise cash at bank, and on hand, short-term highly liquid investments with an original maturity of three months or less. Cash at bank – New Zealand dollar balances Cash at bank – foreign currency balances 2019 $ (000) 8,945 6,787 15,732 The carrying amounts of the group’s cash at bank and on hand are denominated in the following currencies: New Zealand dollars Australian dollars Chinese Yuan US dollars Indian rupees 12 TRADE AND OTHER PAYABLES 8,945 6,356 290 119 22 15,732 2018 $ (000) 4,529 703 5,232 4,529 532 - 171 - 5,232 Employee benefits Trade and other payables Liabilities for wages and salaries, including non-monetary Trade payables and other payables are carried at benefits, long service leave and annual leave expected amortised cost and represent liabilities for goods and to be settled within 12 months of the reporting date services provided to the group prior to the end of the are recognised in respect of employees’ services up to financial year that are unpaid and arise when the group the reporting date. They are measured at the amounts becomes obliged to make future payments in respect of expected to be paid when the liabilities are settled. the purchase of these goods and services. Liabilities for wages and salaries that are not expected to be settled within 12 months are measured at the present value of the estimated future cash outflows to be made by the group in respect of services provided by employees up to the reporting date. Post-employment benefits Contributions made on behalf of eligible employees to defined contribution funds are recognised in the period they are incurred. The defined contribution funds receive fixed contributions from the group whose legal or constructive obligation is limited to these contributions only. 51 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 12 TRADE AND OTHER PAYABLES (CONTINUED) Trade payables Accrued expenses Lease incentive Annual leave accrual GST payable Total trade and other payables Disclosed as: Current Non-current The average credit period on trade payables is approximately 30 days. 13 BUSINESS COMBINATIONS — INTERPLX INC. Transaction description 2019 $ (000) 1,144 2,701 193 887 - 4,925 4,791 134 4,925 2018 $ (000) 428 1,640 223 665 20 2,976 2,793 183 2,976 On 20 December 2018 Serko announced the acquisition of 100% shareholding in InterplX Inc. (InterplX) based in Minneapolis, US for consideration totalling USD$2,500,000 (in exchange for Serko Limited shares). InterplX is a provider of SaaS expense software in the United States. The company provides business expense management solutions, including expense audit, payment processing and receipt processing to a range of organisations, including Fortune 500 clients. Serko Limited has a 100% shareholding in InterplX and on that basis has achieved control. Serko has consolidated InterplX from 1 January 2019 and included it as a separate cash-generating unit for management reporting purposes. 52 SERKO ANNUAL REPORT13 BUSINESS COMBINATIONS — INTERPLX INC. (CONTINUED) Details of the purchase consideration, the net assets acquired and goodwill are as follows: Shares — Serko Limited Contingent consideration Total purchase consideration Fair value assets and liabilities recognised as a result of the acquisition are as follows: Property, plant and equipment Intangible assets Cash on hand Trade and other receivables Other assets Trade and other payables Other liabilities Intellectual property Deferred tax Net identifiable assets acquired Goodwill Total purchase consideration Consideration Notes 9 10 10 10 2019 $ (000) 1,538 1,538 3,076 68 39 20 628 56 (236) (40) 1,523 (426) 1,632 1,444 3,076 Consideration for the acquisition was part-settled in shares at the market price on 20 December 2018, with the purchase agreement including contingent consideration to be issued in further Serko shares, to be issued 31 January 2020. Contingent consideration is calculated based on achievement of InterplX revenue performance over the period 1 January 2019 to 31 December 2019. For the purposes of quantifying the amount payable, an estimate has been made based on the expected performance of InterplX in 2019 and the fair value of the shares to be issued. Contingent consideration is measured at fair value at each reporting date and remeasurement changes are reognised in profit and loss (fair value at reporting date was $1,825,000). Intangible assets The fair value attributable to intellectual property (IP) is calculated using a royalty valuation method (15% royalty rate) which represents the ‘arms length’ cost to license or sell the IP from a third party. Goodwill Goodwill is attributable to the strength of InterplX business experience and capability in the US market. Serko has recognised revenue included in the statement of comprehensive income from 1 January 2019 to 31 March 2019 of $883,000. InterplX contributed net loss after tax of $59,000 for the same period. Had InterplX been consolidated from 1 April 2018 the impact on the statement of comprehensive income for the full year period ended 31 March 2019 would have been an increase in revenue of $3,678,000 and decrease in net profit after tax of $525,000. 53 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 14 GOVERNMENT GRANTS Government grants are received for direct reimbursement of expenses to assist with research and development of software solutions to improve service delivery and develop new enhancements to existing platforms. There are no unfulfilled conditions or contingencies attached to these grants. 15 INTEREST-BEARING LOANS AND BORROWINGS Current Loan payable Leasehold fitout loan Non-current Leasehold fitout loan Notes 20 2019 $ (000) 2018 $ (000) - 54 54 149 149 301 50 351 204 204 In 2018, an interest bearing receivable from nuTravel Technology was reassigned back to Financial Equities Limited (FEL), reversing the original assignment to Serko Limited in 2014. FEL is a company associated with directors Bob Shaw and Darrin Grafton. 54 SERKO ANNUAL REPORT16 EQUITY Ordinary share capital is recognised at the fair value of the consideration received. Transaction costs relating to the listing of new ordinary shares and the simultaneous sale and listing of existing shares are allocated to those transactions on a proportional basis. Transaction costs relating to the sale and listing of existing shares are not considered costs of an equity instrument as no equity instrument is issued and, consequently, costs are recognised as an expense in the statement of comprehensive income when incurred. Transaction costs relating to the issue of new share capital are recognised directly in equity as a reduction of the share proceeds received. In the current year the group issued no shares (2018: 2,000,000) under the Restricted Share Plan (RSP). In respect of the RSP 230,050 restricted shares (2018: 710,313) had been allocated to key management personnel and 116,107 (2018: 228,519) allocated to other Serko employees. Unallocated shares are 1,592,299 (2018: 1,819,732) (refer to note 18). 2019 2018 2019 2018 Number of shares Number of shares $ (000) $ (000) (000) (000) Ordinary shares Share capital at beginning of year Issue of shares pursuant to institutional capital placement Transaction costs for issue of new shares Shares issued in respect of InterplX acquisition 25,185 15,048 (778) 1,538 25,185 - - - 74,894 5,455 - 574 74,894 - - - Share capital at 31 March 40,993 25,185 80,923 74,894 Share-based payment reserve Balance at 1 April Shares allocated to employees via Restricted Share Plan Shares forfeited from employees via Restricted Share Plan Share options to non-exec directors Share-based payments — employee share options 1,309 1,021 406 (24) - 194 252 (23) 59 - Share-based payment reserve at 31 March 1,885 1,309 - - - - - - - - - - - - 55 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 17 EARNINGS PER SHARE (EPS) Basic EPS amounts are calculated by dividing the profit for the year, attributable to ordinary equity holders of the parent, by the weighted average number of ordinary shares outstanding during the year. Diluted EPS amounts are calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of shares that would be issued on conversion of all of the dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the basic and diluted EPS computations: Profit attributable to ordinary equity holders of the parent Continuing operations Basic earnings per share Issued ordinary shares (refer note 16) Adjusted for employee restricted share plan shares Weighted average of issued ordinary shares Basic earnings per share (dollars) Diluted earnings per share Weighted average of issued ordinary shares Weighted average of issued ordinary shares for diluted earnings per share Diluted earnings per share (dollars) Notes Notes 16 2019 $ (000) 1,633 1,633 2018 $ (000) 1,832 1,832 2019 Number 2018 Number 80,923 (2,769) 78,154 0.02 77,584 77,584 0.02 74,894 (2,991) 71,903 0.03 74,894 74,894 0.02 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. Net tangible assets per security Notes 2019 Cents 19.38 2018 Cents 9.04 56 SERKO ANNUAL REPORT18 SHARE-BASED PAYMENTS Employees of the group receive remuneration at the Board’s discretion in the form of share-based payment transactions, where services are provided as consideration for the receipt of equity instruments. The cost of share-based payment transactions are recognised, together with a corresponding increase in equity, over the period in which the service conditions are fulfilled. The cumulative expense recognised for share- based transactions at each reporting date, until the vesting date, reflects the extent to which the vesting period has expired and the group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit for a period represents the movement in cumulative expenses recognised at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest except where vesting is conditional upon a market condition. Employee Restricted Share Plan The Serko Limited Employee Restricted Share Plan (RSP) was introduced for selected executives and employees of the group. Under the RSP ordinary shares in Serko Limited are issued to a trustee, Serko Trustee Limited, a wholly- owned subsidiary, and allocated to participants, on grant date, using funds lent to them by the company. The price for each share vested during the year under the RSP is the higher of the market price of the share on the date on which the shares are allocated or the grant price. Under the RSP shares are beneficially owned by the participants. The length of retention period before the shares vest is between one and three years. If the individual is still employed by the group at the end of this specific period, the employee is awarded a cash bonus that must be used to repay the loan and shares are then transferred to the employee. The number of shares awarded is determined by the Remuneration Committee of the Board. The weighted average grant date fair value of restricted shares issued during the year was $2.96 (2018: $0.49) and was determined by the volume weighted average price (VWAP) of shares traded in the previous 20 trading days preceding the date of grant. The group has no legal or constructive obligation to repurchase the shares or settle the RSP for cash. Unvested shares at 1 April Granted Forfeited Vested Unvested shares at 31 March — allocated to employees Ageing of unvested shares Vest within one year Vest within two to five years Ageing of unvested shares at 31 March — allocated to employees 2019 2018 Number of shares Number of shares 1,398,707 345,890 (22,219) (222,435) 1,499,943 842,911 657,032 1,499,943 1,359,226 356,066 (128,633) (187,952) 1,398,707 183,810 1,214,897 1,398,707 Unallocated shares – held by trustee 1,268,628 1,592,299 57 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 18 SHARE-BASED PAYMENTS (CONTINUED) Employee share options scheme Options are granted to selected employees. The exercise price of the granted options is equal to the volume weighted average share price of Serko Limited shares for the 20 trading days preceding the grant date. Options are conditional on the completion of the necessary years of service (the vesting period) as appropriate to that tranche. The options’ tranches vest over two to five years from the grant date. No options can be exercised later than five years from grant date. There were 14 holders of options at 31 March 2019 (2018: nil) The group has no legal or constructive obligation to repurchase or settle the options in cash. Movements in the number of options outstanding and their related weighted average exercise prices are as follows: Outstanding at 1 April Granted Outstanding at 31 March 2019 Weighted average exercise price 2019 Options 2018 Weighted average exercise price 2018 Options ($) - 2.90 2.90 (000) ($) (000) - 287 287 - - - - - - Options outstanding at the end of the year have the following expiry dates and exercise prices: Granted 2018-19 2018-19 2018-19 2018-19 2018-19 2018-19 2018-19 2018-19 Expiry date Grant price 2019 Options 2018 Options $ (000) (000) 2020-21 2021-22 2022-23 2023-24 2023-24 2023-24 2023-24 2023-24 2.68 2.68 2.68 2.68 2.97 2.84 3.32 3.19 29 15 15 15 199 4 2 8 287 - - - - - - - - - The weighted average fair value of options granted during the year, determined using the Black-Scholes valuation model, was $1.64 per option (2018: nil). The significant inputs into the model were the market share price at grant date, the grant price as shown above, expected annualised volatility of between 55% and 66% (FY18: nil), a dividend yield of 0%, an expected option life of between two and five years (FY18: nil) and an annual risk-free interest rate of 3%. The volatility input measured is the standard deviation of continuously compounded share returns and is based on a statistical analysis of daily share prices in the past one to five years. Non-executive director shares The group’s non-executive directors were granted shares in 2014 and are to be settled by way of a non-recourse loan. The non- recourse loan is due for repayment 30 June 2020, following an extension to the previous loan due 30 June 2017. These were valued using Black-Scholes model at the time of loan extention. No change of value recognised for the current year. 58 SERKO ANNUAL REPORT19 LEASE COMMITMENTS a) Operating leases The determination of whether an arrangement is, Operating lease payments are recognised as an expense in or contains, a lease is based on the substance of the profit or loss on a straight-line basis over the lease term. arrangement and requires an assessment of whether the Operating lease incentives are recognised as a liability fulfillment of the arrangement is dependent on the use of when received and subsequently reduced by allocating a specific asset or assets and the arrangement conveys a lease payments between rental expense and reduction right to use the asset. of the liability (refer note 12). These lease commitments primarily relate to property leases. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership, and operating leases under which the lessor effectively retains substantially all such risks and benefits. Operating lease commitments No later than one year Later than one year and not later than five years 2019 $ (000) 601 1,087 1,688 2018 $ (000) 562 1,365 1,927 59 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 20 RELATED PARTIES a) Subsidiaries The consolidated financial statements include the financial statements of Serko Limited and subsidiaries as listed in the following table: Name Balance date 2019 2018 2019 2018 % Equity interest Investment $(000) Serko Australia Pty Limited Serko Trustee Limited Serko India Private Limited Serko Investments Limited Foshan Sige Information Technology Limited Serko Inc InterplX Inc 31 March 31 March 31 March 31 March 31 March 31 March 31 December 100% 100% 99% 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 0% 1 - 2 - - - 3,076 3,079 1 - 2 - - - - 3 Serko Australia Pty Limited’s principal business is the marketing and support of travel booking software solutions supplied by Serko Limited. Serko Trustee Limited was incorporated on 4 June 2014 to hold the shares issued to key management and staff in the Restricted Share Scheme in trust until vesting. Serko India Private Limited was incorporated on 18 February 2015 as a subsidiary for the India-based operations. Serko Investments Limited was incorporated on 5 November 2014 as a holding company. It holds 1% of the shares in Serko India Private Limited. Foshan Sige Information Technology Limited was incorporated on 7 August 2017 as a subsidiary for the China-based operations. Serko Inc was incorporated on 30 October 2017 as a subsidiary for the US-based operations. InterplX Inc was acquired on 20 December 2018 as a subsidiary of the group. InterplX Inc is an Expense solution based in the US. The current balance date for InterplX is 31 December however, this will be changed to align with the balance date of the group. 60 SERKO ANNUAL REPORT20 RELATED PARTIES (CONTINUED) b) Transactions with related parties The following table provides the total amount of transactions that have been entered into with related parties, excluding key management and executive director remuneration. Notes Purchases from related parties Interest to related parties Amounts owed to related parties Amounts owed by related parties $ (000) $ (000) $ (000) $ (000) Other related parties Financial Equities Limited Simon Botherway – Chairman 15 Clyde McConaghy – Non-executive Director Claudia Batten – Non-executive Director Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 - - 108 80 83 74 83 74 274 228 - 21 - - - - - - - - 301 - - - - - - - 21 301 - - - - - - - - - - Non-executive directors provide services to Serko in their capacity as non-executive directors and have service agreements with specified amounts of fees payable per annum. The non-executive directors also hold share options with related non- recourse loans (refer note 18). c) Key management remuneration Short-term benefits employees (*) Share-based payments Post-employment benefits Total compensation 2019 $ (000) 3,800 427 121 4,348 2018 $ (000) 3,294 162 72 3,528 d) Terms and conditions of transactions with related parties. Outstanding balances at year end are unsecured and settlement occurs in cash. For the year ended 31 March 2019, the group has not made any allowance for impairment loss relating to amounts owed by related parties (2018: $nil). An impairment assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates to determine whether there is objective evidence that a related party receivable is impaired. When such objective evidence exists, the group recognises an allowance for the impairment loss. * Key management personnel includes the executive directors in their capacity as Chief Executive Officer and Chief Strategy Officer, the executive management team and their direct reports. 61 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 21 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Net profit after tax Add non-cash items Amortisation Depreciation Fair value remeasurement of contingent consideration Increase/(decrease) in deferred tax Loss/(gain) on foreign exchange transactions Share-based compensation Add/(less) movements in working capital items (Increase)/decrease in receivables excluding loans Increase/(decrease) in trade and other payables Increase/(decrease) in income tax payable Net cash flow from operating activities 2019 $ (000) 1,633 754 294 287 (72) (153) 576 3,319 (1,795) 1,998 125 328 3,647 2018 $ (000) 1,832 412 185 - (42) (556) 288 2,119 (764) 123 (62) (703) 1,416 22 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The group’s principal financial instruments comprise cash at bank, derivatives, receivables, payables and loans. The group manages its exposure to key financial risks, including currency risk, in accordance with the group’s financial risk management policy. The objective of the policy is to support the delivery of the group’s financial targets whilst protecting future financial security. Group capital consists of share capital and retained earnings. To maintain or adjust the capital structure, the group may adjust amounts of dividends paid to shareholders, return capital to shareholders, issue new shares or amend capital spending plans. The main risks arising from the group’s financial instruments are foreign currency, interest, credit and liquidity risk. The group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to foreign exchange risk, and assessments of market forecasts for foreign exchange. Ageing analyses and monitoring of specific credit allowances are undertaken to manage credit risk. Liquidity risk is monitored through the development of future rolling cash flow forecasts. The Board reviews and agrees policies for managing each of these risks as summarised below. 62 SERKO ANNUAL REPORT22 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) a) Risk exposures and responses i) Interest rate risk The group has exposure to interest rate risk to the extent it borrows funds at fixed and floating interest rates. The risk specifically relates to the variability of interest rates and the impact this will have on the group’s financial results. The group manages its cost of borrowing by placing limits on the proportion of borrowings at floating rate and the proportion of fixed rate borrowing repriced in any year. At balance date this year and prior year, the group did not have any financial liabilities exposed to variable interest rate risk. ii) Liquidity and interest rate risk Liquidity risk represents the group’s ability to meet its financial obligations on time. In terms of managing its liquidity risk, the group generates sufficient cash flows from its operating activities and holds sufficient cash reserves to meet its obligations arising from its financial liabilities and has credit lines in place to cover potential shortfalls. The following table sets out the contractual cash flows for all non-derivative financial liabilities settled on a gross cash flow basis. Weighted average effective interest rate % Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years $ (000) $ (000) $ (000) $ (000) $ (000) $ (000) 0% 8% 0% 6% 8% 4,732 233 4,965 4,732 34 4,766 2,754 2,754 301 302 301 34 3,357 3,089 - 34 34 - - 34 34 - 68 68 - - 68 68 - 97 97 - - 166 166 - - - - - - - Group — 2019 Accounts payable Leasehold fitout loan Group — 2018 Accounts payable Related party loans Leasehold fitout loan b) Currency risk The group has exposure to foreign exchange risk as a result of transactions denominated in foreign companies. The risk specifically relates to the variability of foreign exchange rates for the currencies the group trades in and the impact this has on the group’s financial results. The majority of the group’s trading activities occur in New Zealand dollars, however, sales to overseas customers are transacted in United States and Australian dollars. Refer to notes 7 (receivables), 11 (cash at bank and on hand), 12 (trade and other payables) and 13 (business combinations) for further details on the group’s foreign currency denominated accounts receivable and cash balances. 63 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT 22 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) The following table summarises the sensitivity to foreign currency exchange rate movements. A sensitivity of +/- 15% (2018: +/- 15%) has been selected owing to exchange rate volatility observed. Foreign currency risk -15% +15% Carrying amount Post-tax profit Equity Post-tax profit $ (000) $ (000) $ (000) $ (000) Equity $ (000) 6,787 2,507 (173) 9,121 703 1,913 (110) 2,506 862 315 (22) 862 315 (22) 1,155 1,155 89 243 (14) 318 89 243 (14) 318 (637) (239) 16 (860) (66) (180) 10 (236) (637) (239) 16 (860) (66) (180) 10 (236) 2019 Foreign exchange balances Cash at bank Trade receivables Trade payables Net exposure 2018 Foreign exchange balances Cash at bank Trade receivables Trade payables Net exposure c) Credit risk Credit risk arises from the financial assets of the group, which comprise cash and cash equivalents, receivables and contract assets. The group’s exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Exposure at balance date is addressed in each applicable note. The group does not hold any credit derivatives to offset its credit exposure. The expected credit loss provision is monitored on an ongoing basis with the result that the group’s exposure to bad debts is not significant. At reporting date 99% (2017: 100%) of the group’s cash and cash equivalents were with one bank. The group has no other concentrations of credit risk. d) Fair value The directors consider that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair value. 64 SERKO ANNUAL REPORT 23 SEGMENT INFORMATION The Board and senior management team monitors the results of the group’s operations as a whole for the purpose of making decisions about resource allocation and performance assessment and therefore the Board has determined the group is a single reportable operating segment. This reporting segment is predominantly made up of revenue generated from Travel platform booking and Expense revenue. Revenues have been disaggregated at note 4. As required under NZ IFRS 8 Serko is required to report on major customers making up more than 10% of the revenue for the year. Under this disclosure Serko advises that two customers had revenue more than 10% of the revenue for the group. These customers accounted for $10,721,614 of the revenue for the year ended 31 March 2019 (2018: $9,219,226). 24 EVENTS AFTER BALANCE SHEET DATE There have been no events subsquent to 31 March 2019 which materially impact the results reported (2018: nil). 25 CONTINGENT LIABILITIES There were no contingent liabilities at balance date (2018: $nil). 65 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT INDEPENDENT AUDITOR’S REPORT To the Shareholders of Serko Limited OPINION We have audited the consolidated financial statements of Serko Limited and its subsidiaries (the ‘Group’), which comprise the consolidated statement of financial position as at 31 March 2019, and the consolidated statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of Other than in our capacity as auditor and the provision of assurance services, we have no relationship with or interests in the Company or any of its subsidiaries, except that partners and employees of our firm deal with the Company and its subsidiaries on normal terms within the ordinary course of trading activities of the business of the Company and its subsidiaries. significant accounting policies. AUDIT MATERIALITY In our opinion, the accompanying consolidated financial We consider materiality primarily in terms of the magnitude statements, on pages 30 to 65, present fairly, in all material of misstatement in the financial statements of the Group that respects, the consolidated financial position of the Group as in our judgement would make it probable that the economic at 31 March 2019, and its consolidated financial performance decisions of a reasonably knowledgeable person would be and cash flows for the year then ended in accordance with changed or influenced (the ‘quantitative’ materiality). In New Zealand Equivalents to International Financial Reporting addition, we also assess whether other matters that come to Standards (‘NZ IFRS’) and International Financial Reporting our attention during the audit would in our judgement change Standards (‘IFRS’). BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (‘ISAs’) and International Standards on Auditing (New Zealand) (‘ISAs (NZ)’). Our responsibilities or influence the decisions of such a person (the ‘qualitative’ materiality). We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We determined materiality for the Group financial statements as a whole to be $260,000 under those standards are further described in the Auditor’s KEY AUDIT MATTERS Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These sufficient and appropriate to provide a basis for our opinion. matters were addressed in the context of our audit of the We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 66 SERKO ANNUAL REPORTKey audit matter How our audit addressed the key audit matter Revenue recognition The Group has reported revenue of $23.4 million, as set out in note 4 ‘Revenue and other income’. Revenue is based on multiple customer contracts that contain different pricing schedules and varying revenue recognition triggers. Complexity exists because of the specific nature of each customer contract, which can include transactional and usage fees, establishment and installation fees, and chargeable work orders. Management judgment is required to estimate revenue recognition where cash flows do not align to contract performance obligations, in particular when minimum transaction volume We considered the application of NZ IFRS 15: Revenue from Contracts with Customers to Serko’s key revenue streams, and challenged the Group’s transition assessments. We performed walkthroughs of the major revenue processes and evaluated the design and implementation of key controls. We tested a sample of transactions by agreeing invoices to signed customer contracts in order to validate pricing inputs and assess whether revenue has been recorded in the correct period. commitments have period end dates that do not align to the We used data analytic tools to: financial year end. The recognition of revenue is a key audit matter due to the • identify outlying revenue transactions and ensure they were supported by contractual arrangements significance of revenue to the financial statements and the specific or trasactional data nature of individual customer contracts. This is also the year of adopting the new revenue standard NZ IFRS 15: Revenue from Contracts with Customers’. Acquisition of InterplX Business Combination As discussed in note 13, at 20 December 2018, Serko acquired InterplX Inc (‘InterplX’) for a total fair value consideration of NZ$3.1m, of which NZ$1.5m has been deferred as contingent consideration based on the achievement of InterplX’s future revenue performance. On acquisition, the Group is required to identify the assets and liabilities acquired in a business combination, including intangible assets, and to measure them at fair value at the date of acquisition. Goodwill arising is the excess of consideration paid over the fair value of the assets and liabilities acquired. Intellectual property totaling $1.5m has been valued using the relief from royalty method. The key assumptions applied in this model were forecast sales volumes and profitability and the royalty rate. The acquisition of InterplX is included as a key audit matter due to the size of the acquisition and because significant judgement is required to determine the fair value of assets and liabilities acquired, especially in relation to the fair value of intangible assets acquired representing intellectual property. 67 • agree travel booking transactions recorded in IT systems to the financial ledger • test samples of manual journal entries recorded outside of normal business processes by profiling for outlying revenue impacting journals. We assessed key judgements adopted by the Group in recognising revenue including the timing and disclosure of revenue net of credit notes, rebates and discounts. We read the sale and purchase agreement (the ‘agreement and plan of merger’) and other key documents related to the acquisition in order to identify whether all identifiable intangible assets were recognised. We worked with our internal valuation specialists to challenge the fair value measurement of contingent consideration. We challenged key assumptions used in the royalties from relief valuation model, including: • revenue and expense growth rates; • comparing forecast sales and profitability to Board approved forecasts; and • utilised our internal valuation specialists to conclude on the appropriateness of the use of the relief from royalty valuation model and rates applied. 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT Key audit matter How our audit addressed the key audit matter Capitalisation and impairment considerations of software development The Group capitalised $6.7 million in relation to software For each product, we have understood the nature of development, as set out in note 10 ‘Intangibles’, of which $4.8 expenditure, the stage of product development, and million relates to development work in progress at balance how the group distinguishes expenditure between date. research, development and maintenance costs. As a Software as a Service (‘SaaS’) provider, the Group incurs We performed audit procedures over development significant expenditure in developing new software products. costs capitalised as computer software, by testing a Judgement is required to determine if the recognition criteria under NZ IAS 38 Intangible Assets have been met in order to sample of additions and evaluating if the recognition criteria under NZ IAS 38 have been met. capitalise the applicable costs of development, which include For development work in progress, we used our technical feasibility, likelihood of generating future economic internal valuation specialists to assist in evaluating benefits and sufficient funding for completion. the assumptions used in the Group’s discounted The Group must also assess each period whether there are any indications that the software development assets are impaired and must perform impairment testing on any capitalised development costs for which there are indicators of impairment cash flow model, specifically the discount rate and terminal growth rates used, to support the carrying value as at 31 March 2019 of computer software including that which is in development. or which relate to software that is not yet available for use. We assessed key judgements adopted by We have included capitalisation and impairment considerations of software development as a key audit matter due to the level of judgement required for management to determine whether: • internal staff time incurred meet the criteria to be capitalised; and • information exists as at year end that would indicate the need to impair an intangible asset. management to determine whether indicators for impairment exist. In particular we considered existing software for technical obsolescence, by ensuring appropriate revenues exist for those products and corroborating with management whether features or product enhancements previously capitalised are still in use. 68 SERKO ANNUAL REPORT OTHER INFORMATION The directors are responsible on behalf of the Group for the other information. The other information comprises A further description of our responsibilities for the audit of the consolidated financial statements is located on the External the information in the Annual Report that accompanies the Reporting Board’s website at: : consolidated financial statements and the audit report. https://www.xrb.govt.nz/standards-for-assurance- Our opinion on the consolidated financial statements does not practitioners/auditors-responsibilities/audit-report-1 cover the other information and we do not express any form of assurance conclusion thereon. This description forms part of our auditor’s report. RESTRICTION ON USE This report is made solely to the Company’s shareholders, as a body. Our audit has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed. Bryce Henderson, Partner for Deloitte Limited Auckland, New Zealand 22 May 2019 Our responsibility is to read the other information and consider whether it is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If so, we are required to report that fact. We have nothing to report in this regard. DIRECTORS’ RESPONSIBILITIES FOR THE CONSOLIDATED FINANCIAL STATEMENTS The directors are responsible on behalf of the Group for the preparation and fair presentation of the consolidated financial statements in accordance with NZ IFRS and IFRS, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the directors are responsible on behalf of the Group for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related 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 CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are 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 ISAs and ISAs (NZ) 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 these consolidated financial statements. 69 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT CORPORATE GOVERNANCE & DISCLOSURES For the year ended 31 March 2019 INTRODUCTION OVERVIEW OF SERKO’S GOVERNANCE STRUCTURE The Board and management of Serko Limited (Serko or The Serko Board has been appointed by shareholders to the company) are very committed to ensuring that Serko protect and enhance the long-term value of Serko and to act maintains corporate governance practices that are in line in the best interests of Serko and its shareholders. The Board with or, where possible, exceed best practice and that Serko is the ultimate decision-making body of the company and is adheres to the highest ethical standards. responsible for the corporate governance of the company. The The Board has considered the NZX Listing Rules and a number of corporate governance recommendations when establishing its governance framework, including the revised NZX role and responsibilities of the Board are set out in the Board Charter, which can be found on the investor centre of the company’s website. Corporate Governance Code 1 January 2019 (NZX Code) and The Board currently comprises an independent non-executive the Third Edition of the Australian Securities Exchange (ASX) Chair, two independent non-executive directors and two Corporate Governance Council Principles executive directors, as detailed on page 14 of this Annual and Recommendations. Report. These directors held office through out the financial The NZX Listing Rules require Serko to formally report year ended 31 March 2019. its compliance against the recommendations contained The Board has established two standing Board Committees to in the NZX Code. How Serko has implemented these assist in the execution of the Board’s responsibilities: recommendations is set out in Serko’s Corporate Governance Statement, which is included in its ESG Report and can be found on the investor centre of the company’s website. Go to: www.serko.com/investor-centre/. The Board considers that Serko’s corporate governance structures, practices and processes have followed all of the recommendations in the NZX Code during the financial year ended 31 March 2019. Serko’s Corporate Governance Statement and governance charters and policies can be found on the investor centre of the company’s website. Go to: www.serko.com/investor- centre/. Serko’s corporate governance charters and policies have been approved by the Board and are regularly reviewed by the Board and amended (as appropriate) to reflect developments in corporate governance practices. • Audit and Risk Committee – The current members of the Committee are Clyde McConaghy (Chair), Simon Botherway and Claudia Batten. All members are independent, non-executive directors. Their qualifications and experience is set out under Board of Directors in this Annual Report; and • Remuneration and Nominations Committee – The current members of the Committee are Claudia Batten (Chair), Simon Botherway and Clyde McConaghy. All members are independent, non- executive directors. Their qualifications and experience is set out under Board of Directors in this Annual Report. STOCK EXCHANGE LISTINGS Serko is listed on the New Zealand Stock Exchange (NZX Main Board) and on the Australian Securities Exchange (ASX) as an ASX Foreign Exempt Listing. As an ASX Foreign Exempt Listing, Serko needs to comply with the NZX Listing Rules (other than as waived by NZX) but does not need to comply with the vast majority of the ASX Listing Rule obligations. Serko is incorporated in New Zealand. DIRECTOR REMUNERATION Serko’s shareholders have approved a total cap of $350,000 per annum for non-executive directors’ fees for the purposes of the NZX Listing Rules. This annual fee pool has not been increased since it was approved by shareholders in 2014 but will be reviewed this calendar year with a view to providing flexibility for Serko to appoint an additional non-executive director in the future. Serko currently pays directors’ fees that, in aggregate, amount to AUD$300,0001 per annum. More information about remuneration payable to directors is set out in Serko’s Corporate Governance Statement, which is located on the investor centre of the company’s website. 1 Approximately NZ$320,000 subject to exchange rate fluctuations 70 SERKO ANNUAL REPORTThe Board has agreed that the following fixed annual fees will apply to all non-executive directors for the year ending 31 March 2020: Position Fees per annum Board of Directors Chair Audit & Risk Committee Non-executive directors Committee Chair Committee Member Remuneration & Nominations Committee Committee Chair Committee Member AUD$120,000 AUD$75,0001 AUD$15,000 - AUD$15,000 - Non-executive directors received the following directors’ fees, remuneration and other benefits from the company in the year ended 31 March 2019: Name of director Non-executive Audit & Risk directors’ Board fees2 Committee fees Remuneration & Nominations Committee fees Shares and other payments or benefits3 Total remuneration Remuneration and value of other benefits received1 Simon Botherway $57,829 (Chair) Clyde McConaghy $70,3984 - $13,037 (Chair) Claudia Batten $20,398 - TOTAL $148,625 $13,037 - - $13,037 (Chair) $13,037 $50,000 $107,829 - $83,435 $50,000 $83,435 $100,000 $274,699 1 The figures shown are gross amounts, which have been converted into NZD and exclude GST (where applicable). 2 Board fees includes the amount of base fees payable to Mr Botherway and Ms Batten, which are used to acquire shares in the company under the Non-executive Director Fixed Trading Plan (refer to the Corporate Governance Statement on the investor centre of Serko’s website for more information on the Plan). 3 In addition to directors’ fees, Serko meets costs incurred by non-executive directors that are incidental to the performance of their duties. This includes paying the costs of directors’ travel. As these costs are incurred by Serko to enable directors to perform their duties, no value is attributable to them as benefits to directors for the purposes of the above table. 4 Includes Australian superannuation payable. 71 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT The executive directors, Darrin Grafton and Bob Shaw, receive remuneration and other benefits in their respective executive roles as Chief Executive Officer and Chief Strategy Officer and, accordingly, do not receive directors’ fees. The table below (and accompanying notes) sets out the total remuneration and value of other benefits earned by, or paid to, each executive director of Serko during, and in respect of, the financial period ended 31 March 2019: Base salary1 Taxable benefits2 Subtotal Pay for performance Total remuneration STI LTI5 Subtotal Darrin Grafton $350,334 $30,000 $380,334 $50,4003 Bob Shaw $254,229 $30,000 $284,229 $21,6004 $200,000 in the form of 43,252 restricted shares $125,000 in the form of 24,921 restricted shares $250,400 $630,734 $146,600 $430,829 1 Base salary includes employer contributions towards KiwiSaver at 3%. 2 Taxable benefits include a car allowance, carpark and medical insurance. 3 The short-term incentive stated was earned in FY19 and will be paid in FY20. Darrin Grafton’s potential short-term incentive payment for FY19 was $140,000. During the financial period Darrin Grafton also received a short-term incentive of $85,000, which was earned in FY18 and paid in FY19. 4 The short-term incentive stated was earned in FY19 and will be paid in FY20. During the financial period Bob Shaw also received a short-term incentive of $50,000, which was earned in FY18 and paid in FY19. 5 The FY19 long-term incentive was granted in July 2018, following partial achievement of pre-grant performance targets based on FY18 performance. The restricted shares will vest three years after the allocation date. The value stated is the gross amount earned. 72 SERKO ANNUAL REPORTEMPLOYEE REMUNERATION DIVERSITY The table below shows the number of employees and former The respective numbers and proportions of men and women at employees of Serko and its subsidiaries, not being directors various levels within the Serko workforce as at 31 March 2018 of Serko, who, in their capacity as employees, received and 31 March 2019 are set out in the table below: remuneration and other benefits during the period ended 31 March 2019 totalling at least NZ$100,000. The remuneration of those employees paid outside of New Zealand has been converted into New Zealand dollars. No employee appointed as a director of a subsidiary company of Serko receives any remuneration or other benefits for acting in that capacity. Female All directors Non-executive directors Remuneration range (NZD) Total number of employees Officers1 Senior employees2 2019 2018 no. % no. % 1 1 1 4 20% 33% 14% 29% 1 1 1 4 20% 33% 20% 33% $100,000 - $110,000 $110,001 - $120,000 $120,001 - $130,000 $130,001 - $140,000 $140,001 - $150,000 $150,001 - $160,000 $170,001 - $180,000 $190,001 - $200,000 $200,001 - $210,000 $210,001 - $220,000 $220,001 - $230,000 $230,001 - $240,000 $250,001 - $260,000 $270,001 - $280,000 $290,001 - $300,000 $300,001 - $310,000 $320,001 - $330,000 $350,001 - $360,000 $430,001 - $440,000 Remaining workforce 61 39% 35 39% Male All directors Non-executive directors Officers1 Senior employees2 Remaining workforce 2019 2018 no. % no. % 4 2 6 10 94 80% 66% 86% 71% 4 2 4 8 80% 66% 80% 67% 61% 54 61% 1 Officers are considered to be the Chief Executive Officer and his direct reports (the Executive Team). Note that Chief Executive Officer, Darrin Grafton and Chief of Strategy, Bob Shaw, are included in both the number of directors and officers reported. 2 Direct reports to the Executive Team with managerial responsibilities. 7 5 9 3 7 2 2 2 2 1 2 1 1 1 1 1 2 1 1 Total number of employees and former employees 51 The Board’s assessment of Serko’s performance against its Diversity and Inclusion Policy is set out in the latest ESG report, which can be found on the investor centre of the company’s website. The table above includes base salaries, short-term incentives and vested or exercised long-term incentives. The table does not include long-term incentives that have been granted and have not yet vested. Where the individual is a KiwiSaver member, contributions of 3% of gross earnings towards that individual’s KiwiSaver scheme are included in the above table. Where the individual works in Australia, contributions of 9.5% of gross earnings towards Australian Superannuation are included in the above table. 73 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT BOARD AND COMMITTEE ATTENDANCE The table below shows the Board and Committee meeting attendance during the year ended 31 March 2019: Director attendance Board Special meetings Sub-committee Audit & Risk meetings Committee Remuneration & Nominations Committee Darrin Grafton Bob Shaw Simon Botherway Clyde McConaghy Claudia Batten 12/12 11/12 12/12 11/12 12/12 6/8 6/8 8/8 6/8 7/8 3/3 - 3/3 1/1 - * * 5/5 5/5 5/5 * * 4/4 3/4 4/4 *Indicates the director is not a member of the Committee (although they were in attendance for these meetings). DIRECTOR INDEPENDENCE The Board currently comprises five directors – being the two co-founders and executive directors, Darrin Grafton and Bob Shaw, and three non-executive directors – Claudia Batten, Simon Botherway and Clyde McConaghy. The Board has determined, based on information provided by directors regarding their interests, which has been evaluated against the criteria in the Board Charter, that as at 31 March 2019 and the date of this Annual Report, Simon Botherway, Claudia Batten and Clyde McConaghy are independent directors. The Board has also determined that Darrin Grafton and Bob Shaw are not independent directors owing to also being executives and major shareholders in Serko. DIRECTOR INTEREST DISCLOSURES Directors have given notices disclosing interests pursuant to section 140(1) of the Companies Act 1993. Those interests (and any changes to interests) notified and recorded in Serko’s Interests Register during the financial year ended 31 March 2019 are set out below: Date of disclosure Director Entity 8 May 2018 Darrin Grafton Gave notice to the Board that Financial Equities Limited, in which they are shareholders and directors, is interested in an Assignment Agreement to be entered into between Serko Limited and Financial Equities Limited in respect of a loan to nuTravel Technology Solutions. 74 SERKO ANNUAL REPORTDirectors have given general notices disclosing interests pursuant to section 140(2) of the Companies Act 1993. All of those interests, and any changes to interests notified and recorded in Serko’s Interests Register during the financial year ended 31 March 2019 and subsequently, are set out below: Director Entity Relationship Claudia Batten Simon Botherway Darrin Grafton AIDER International Limited Broadli Inc New Zealand Trade & Enterprises Serko Inc1 Westpac New Zealand Limited Arrow Trust Callaghan Innovation Board EBT Capital Limited Fidelity Life Insurance Guardians of NZ Super Fund Landcorp Board MSH Trustee (Arrow Limited) Financial Equities Limited Grafton-Howe No.2 Trust InterplX Inc.1 Serko Australia Pty Limited1 Serko Inc1 Serko India Private Limited1 Serko Investments Limited1 Travelog World for Windows Pty. Limited Appointed Adviser Director Ceased to be Regional Director Director Board Adviser Trustee Ceased to be a Board member2 Ceased to be Director Director Appointed Guardian Ceased to be Board Adviser Trustee Director Trustee Appointed Director Director Director Director Director Director Clyde McConaghy Chapman Eastway Pty Limited Infomedia Limited Optima Boards Chairman (Advisory Board) Director Director Bob Shaw Financial Equities Limited Ripon Trust Serko Australia Pty Limited1 Serko India Private Limited1 Serko Investments Limited1 Travelog World for Windows Pty. Limited Director Trustee Director Director Director Director 1 Serko subsidiary as detailed on page 81. 2 Simon Botherway ceased to hold this position from 9 May 2019 75 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT In accordance with Section 148(2) of the Companies Act 1993, directors disclosed the following acquisitions or disposals of relevant interests in Serko ordinary shares during the financial year ended 31 March 2019: Name Nature of relevant interest Claudia Batten On-market acquisition of beneficial interest in ordinary shares (held in custody for Claudia Batten pursuant to Non-executive Director Fixed Trading Plan)1 Simon Botherway On-market acquisition of beneficial interest in ordinary shares (held in custody for Simon Botherway pursuant to Non-executive Director Fixed Trading Plan)1 Darrin Grafton Beneficial interest in ordinary shares with restrictive conditions allocated pursuant to the Serko Limited Employee Restricted Share Plan, held in trust until vesting. Indirect interest in restricted shares allocated pursuant to the Serko Limited Employee Restricted Share Plan to Ms Bailey, by virtue of a personal relationship with Ms Bailey. Date of acquisition/ (disposal) 10-Apr-18 7-May-18 5-Jun-18 5-Jul-18 6-Aug-18 5-Sep-18 5-Oct-18 14-Nov-18 4-Dec-18 8-Jan-19 5-Feb-19 5-Mar-19 10-Apr-18 7-May-18 5-Jun-18 5-Jul-18 6-Aug-18 5-Sep-18 5-Oct-18 14-Nov-18 4-Dec-18 8-Jan-19 5-Feb-19 5-Mar-19 Number of shares acquired/(disposed) Consideration paid/received5 1,668.42 ordinary shares 1,339.29 ordinary shares 1,370.43 ordinary shares 1,367.66 ordinary shares 1,452.46 ordinary shares 1,422.41 ordinary shares 1,166.71 ordinary shares 1,195.29 ordinary shares 1,328.57 ordinary shares 1,482.97 ordinary shares 1,246.50 ordinary shares 1,201.13 ordinary shares 1,668.42 ordinary shares 1,339.29 ordinary shares 1,370.43 ordinary shares 1,367.66 ordinary shares 1,452.46 ordinary shares 1,422.41 ordinary shares 1,166.71 ordinary shares 1,195.29 ordinary shares 1,328.57 ordinary shares 1,482.97 ordinary shares 1,246.39 ordinary shares 1,201.03 ordinary shares $4,104.98 $4,125.00 $4,125.00 $4,062.58 $4,125.00 $4,125.00 $4,000.86 $3,871.58 $4,038.85 $4,078.17 $4,016.94 $4,035.79 $4,104.98 $4,125.00 $4,125.00 $4,062.58 $4,125.00 $4,125.00 $4,000.87 $3,871.58 $4,038.85 $4,078.17 $4,016.58 $4,035.46 6-Jul-18 43,252 restricted shares2 $128,000.004 6-Jul-18 1,125 restricted shares2, 3 $3,328.004 76 SERKO ANNUAL REPORTBob Shaw Change in nature of relevant interest by virtue of a change in the registered holder (via change of trustee) of shares in which Mr Shaw holds a beneficial interest. Beneficial interest in ordinary shares with restrictive conditions allocated pursuant to the Serko Limited Employee Restricted Share Plan, held in trust until vesting. 13-Apr-18 - - 6-Jul-18 24,921 restricted shares2 $73,750.004 1 Shares are acquired automatically, on a monthly basis, by an independent broker pursuant to the Non-executive Director Fixed Trading Plan. For more details refer to Serko’s Corporate Governance Statement on the investor centre of Serko’s website. These shares may not be disposed of while the holder remains a director of Serko and, in any event, for three years from the commencement of the Plan. 2 These shares are subject to a deed restricting exercise of voting rights attached to the shares. 3 By virtue of Darrin Grafton’s personal relationship, he is implied to have the power to exercise, or to control the exercise of, a right to vote attached to these shares by virtue of a personal relationship with the beneficial holder of these shares. These shares are subject to a deed restricting exercise of voting rights attached to the shares. 4 Paid in the form of services to Serko. 5 The consideration for on-market trades is stated as the market price paid, excluding fees and taxes. In accordance with the NZX Listing Rules, as at 31 March 2019, directors had a relevant interest (as defined in the Financial Markets Conduct Act 2013) in Serko ordinary shares as follows: Name Darrin Grafton1 Bob Shaw2 Simon Botherway3 Claudia Batten4 Clyde McConaghy5 Relevant interest Percentage 14,032,868 12,943,426 2,339,350.84 202,169.25 181,818 17.341% 15.995% 2.891% 0.250% 0.225% 1 12,667,629 shares are held via a trust in which the director is a trustee and beneficiary. This includes an indirect interest in (and by virtue of the indirect interest is considered to have the power to exercise, or to control the exercise of, a right to vote attached to) 1,221,404 shares and 6,611 restricted shares by virtue of a personal relationship with the legal and beneficial holder of these shares. This includes beneficial interest in 137,224 restricted shares allocated pursuant to the Serko Employee Restricted Share Plan and held on trust until vesting. 2 12,884,296 shares are held via a trust in which the director is a trustee and beneficiary. This includes beneficial interest in 59,130 restricted shares allocated pursuant to the Serko Employee Restricted Share Plan and held on trust until vesting. 3 2,034,091 shares are held via a trust in which the director is a trustee and beneficiary. 284,909 shares are held directly. 20,350.84 ordinary shares are held in custody pursuant to the Serko Non-executive Director Fixed Trading Plan. 4 20,351.25 ordinary shares are held in custody pursuant to the Serko Non-executive Director Fixed Trading Plan. 5 Held via a trust in which the director is a trustee and beneficiary. 77 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT For the purposes of section 161 of the Companies Act 1993, the following entries were made in the Interests Register in relation to the payment of remuneration and other benefits to directors: Date Director Particulars of Board authorisation 6 Jul 18 Bob Shaw Darrin Grafton The payment of remuneration and the provision of other benefits by the company and making of the loan by the company under the Restricted Share Plan on the terms set out in the resolution dated 6 July 2018 and in accordance with the terms of the Serko Employee Restricted Share Plan documentation. 23 Oct 18 Simon Botherway Claudia Batten Clyde McConaghy The payment of increased directors’ fees and the provision of other benefits by the company to the non-executive directors on the terms detailed in the Board minutes dated 23 October 2018 and on the grounds set out in the corresponding directors’ certificate. For the purposes of section 162 of the Companies Act 1993, an entry was made in the Interests Register in relation to insurance effected for directors and officers of Serko in relation to any act or omission in their capacity as directors. There were no entries made in the subsidiary company Interests Register during the financial reporting period. SHAREHOLDING INFORMATION As at 30 April 2019 there were 80,922,809 Serko ordinary shares on issue, each conferring on the registered holder the right to vote on any resolution at a meeting of shareholders, held as follows: Size of shareholding Number of holders1 % Number of ordinary shares % 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over TOTAL 659 700 256 255 50 1,920 34.32 36.46 13.33 13.28 2.60 100 377,228 0.47 1,990,790 2.46 2,012,546 2.49 6,892,091 8.52 69,650,154 86.07 80,922,809 100 1 Includes 2,768,571 ordinary shares with restrictive conditions held by Serko Trustee Limited on behalf of 42 beneficial holders (with 1,268,628 of those ordinary shares allocated) pursuant to the Serko Restricted Share Plan. Restricted shares have voting rights attached, which are exercised on behalf of a beneficial holder by the Trustee at the direction of the beneficial holder. 78 SERKO ANNUAL REPORTAs at 30 April 2019 there were 42 beneficial holders holding a total of 1,499,943 ordinary shares with restrictive conditions pursuant to the Serko Restricted Share Plan and 14 participants holding a total of 286,901 options pursuant to the Serko US Share Incentive Plan. Further information on these incentive plans is contained in note 18 to the financial statements and in Serko’s ESG Report, which can be found on the investor centre of the company’s website. Go to: www.serko.com/investor-centre/. Set out below are details of the 20 largest shareholders of Serko as at 30 April 2019: Shareholder1 Number of ordinary shares held % 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Robert James Shaw & Geoffrey Robertson Ashley Hosking 12,884,296 Darrin Grafton & Geoffrey Robertson Ashley Hosking 12,667,629 National Nominees New Zealand Limited TEA Custodians Limited Serko Trustee Limited HSBC Nominees (New Zealand) Limited Citibank Nominees (NZ) Ltd 8,168,404 2,827,274 2,768,571 2,702,878 2,298,076 Simon John Botherway & MSH Trustee (Arrow) Limited 2,034,091 Philip Rodger Ball JPMORGAN Chase Bank Donna Bailey Joanne Maree Phipps Sherie Robyn Hammond Public Trust Forte Nominees Limited Cogent Nominees Limited Robert Alan Hawker & Elizabeth Anne Hawker Accident Compensation Corporation Michael John Thorburn John S Challis & AH Trustees (Challis Holdings) Ltd J P Morgan Nominees Australia Pty Limited 1,476,411 1,379,882 1,221,404 1,219,031 1,193,512 1,073,406 987,166 957,100 930,000 760,897 665,762 635,281 15.92 15.65 10.09 3.49 3.42 3.34 2.84 2.51 1.82 1.71 1.51 1.51 1.47 1.33 1.22 1.18 1.15 0.94 0.82 0.79 1 The shareholding of New Zealand Central Securities Depository Limited (custodian for members trading through NZClear) has been re-allocated to the applicable members. 79 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT According to notices given to Serko under the Financial Markets Conduct Act 2013 (and Securities Markets Act 1978), the following persons were substantial product holders as at 31 March 2019. As at the balance date (31 March 2019) there were 80,922,809 Serko ordinary shares on issue: Substantial product holder Geoffrey Hosking Darrin Grafton Robert Shaw First NZ Capital Group Limited1 Milford Asset Management Limited Number of ordinary shares in % of class held at date of last which relevant interest is held2 notice3 25,573,925 14,032,868 12,943,426 7,475,876 6,095,817 31.603% 17.341% 15.995% 9.238% 7.533% 1 First NZ Capital Group Limited files substantial product holder notices on behalf of First NZ Capital Group Limited’s and Harbour Asset Management Limited’s aggregated relevant interests. As at 31 March 2019 First NZ Group Limited held an interest in 10,688 ordinary shares (0.013% of class at the date of last notice filed) and Harbour Asset Management Limited held an interest in 7,465,188 (9.291% of the class at the date of the last notice filed). 2 Based on last substantial product holder notice filed. 3 Based on issued share capital of 80,922,809 as at 31 March 2019. 80 SERKO ANNUAL REPORTSUBSIDIARY COMPANY DIRECTORS Directors of Serko’s subsidiaries do not receive any remuneration or other benefits in respect of their appointments. The remuneration and other benefits of any such directors who are employees of the group totalling $100,000 or more during the year ended 31 March 2019 are included in the relevant bandings for remuneration disclosed on page 73 of this Annual Report. The following persons held office as directors of subsidiary companies as at 31 March 2019: Subsidiary Serko Australia Pty Limited (Australia) Serko Investments Limited (New Zealand) Serko India Private Limited (India) Serko Inc (US) Serko Trustee Limited (New Zealand) Foshan Sige Information Technology Limited (China)2 InterplX Inc. (US)3 Directors1 Darrin Grafton Bob Shaw John Challis Darrin Grafton Bob Shaw Darrin Grafton Bob Shaw Yogita Chadha Darrin Grafton Claudia Batten Susan Putt Fiona Rockel Gerard Neilsen Darrin Grafton4 Tony D’Astolfo4 1 No subsidiary directors retired during the financial year, other than Chuck Buckner on the acquisition of InterplX Inc.3. 2 Serko also has a representative office in China. 3 InterplX Inc. was acquired on 20 December 2018. 4 Appointed during the year. REGULATORY MATTERS On 22 July 2015, NZX regulation granted Serko a waiver from NZX Listing Rule 7.6.4(b)(iii) to the extent required to allow Serko to provide financial assistance to executive directors, and an associated person of one of the executive directors, to enable them to participate in Serko’s Restricted Share Plan. The full waiver is available on Serko’s website. Go to: www.serko.com/investor-centre/. DONATIONS Serko did not make any donations during the financial year. CREDIT RATING Serko does not presently have an external credit rating status. 81 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT GLOSSARY ARPB Average Revenue Per Booking Asia Pacific ASX ATMR Vietnam, Thailand, Taiwan, Sri Lanka, South Korea, South Africa, Singapore, Philippines, Pakistan, New Zealand, Malaysia, Japan, Indonesia, India, Hong Kong, China, Bangladesh and Australia for the purposes of this Annual Report ASX Limited, also known as the Australian Securities Exchange ATMR (Annualised Transactional Monthly Revenue) is a Non-GAAP measure.  Serko uses this as a useful indicator of recurring revenue from Serko products based on the monthly transaction AUD or A$ Australian dollars Australasia New Zealand and Australia for the purposes of this Annual Report Board or Board of Directors Cloud or cloud- based The board of directors of Serko Cloud computing is when the software and associated data is hosted outside the customer’s premises and delivered over a network or the Internet as a service, which allows immediate access to the software Company or Serko Serko Limited, a New Zealand incorporated company EBITDA (refer page 19) ESG FTE FX FY GST IFRS EBITDA is a Non-GAAP measure representing Earnings Before the deduction of costs relating to Interest, Taxation, Depreciation and Amortisation Environmental Social Governance Full-time equivalent Foreign exchange Financial year ended, or ending, on 31 March (unless otherwise stated) Goods and Services Tax International Financial Reporting Standards Independent Directors Simon Botherway, Claudia Batten and Clyde McConaghy IPO Initial Public Offering Listing The date Serko shares started trading on the NZX Main Board, 24 June 2014 NZ New Zealand NZD or NZ$ New Zealand dollars NZ GAAP or GAAP New Zealand Generally Accepted Accounting Practice NZ IAS New Zealand equivalents to International Accounting Standards NZ IFRS or IFRS New Zealand equivalents to International Financial Reporting Standards NZX NZX Limited, also known as the New Zealand Stock Exchange NZX Listing Rules or Listing Rules The Listing Rules applying to the NZX Main Board as amended from time to time NZX Main Board The New Zealand main board equity security market operated by NZX R&D SAAS Research and Development expenditure Software-as-a-service Serko Expense Management business Serko’s online expense management solution that enables the capture and processing of corporate credit cards and out-of-pocket claims Serko Mobile Serko’s mobile app for iPhones and Android devices that gives users access to information and travel booking functionality on their mobile devices Serko Online Serko’s cloud-based online travel booking solution for large organisations serko.travel Serko’s cloud-based online travel booking solution for small to medium enterprises (SMEs) SME Small and medium enterprise TMC, Travel Agency or Travel Management Company A travel management company that provides specialised travel-related services to corporate customers USD or US$ United States dollars Zeno $ Serko’s premium cloud-based online travel booking solution All figures are in New Zealand dollars, unless otherwise stated 82 SERKO ANNUAL REPORTCOMPANY DIRECTORY Serko is a company incorporated with limited liability under the New Zealand Companies Act 1993 New Zealand Companies Office registration number 1927488 Australian Registered Body Number (ARBN) 611 613 980 For investor relations queries contact: InvestorRelations@serko.com REGISTERED OFFICE PRINCIPAL SHARE REGISTRAR New Zealand Saatchi Building Unit 14D 125 The Strand Parnell, 1010 +64 9 309 4754 ADMINISTRATION OFFICE New Zealand Saatchi Building Unit 14D 125 The Strand Parnell, 1010 +64 9 309 4754 New Zealand Link Market Services Limited Level 11, Deloitte House 80 Queen Street Auckland 1140, New Zealand +64 9 375 5998 serko@linkmarketservices.co.nz Australia Australia Australia c/- Sly & Russell Legal Nominees Pty Ltd Level 18 225 George Street Sydney 2000 NSW, Australia Level 8 75 Elizabeth Street Sydney 2000 NSW, Australia +61 2 9435 0380 Link Market Services Limited Level 12 680 George Street Sydney 2000 NSW, Australia +61 1300 554 474 DIRECTORS AUDITOR Simon Botherway (Chairman) Claudia Batten Robert (Clyde) McConaghy Darrin Grafton Robert (Bob) Shaw Deloitte Limited Deloitte Centre 80 Queen Street Auckland 1040, New Zealand +64 9 303 0700 KEY DATES 21 AUGUST 2019 Annual Shareholders’ Meeting 30 SEPTEMBER 2019 Half-year End 20 NOVEMBER 2019 Half-year Results Announced 31 MARCH 2020 Financial-year End Serko’s ESG Report, which includes its Corporate Governance Statement, can be found at www.serko.com/investor-centre. 83 02 S E R K O A B O U T 04 I H G H L I G H T S 06 L E T T E R 10 O V E R V I E W S T R A T E G C I 12 P R O D U C T S 14 L E A D E R S H P I 16 C O R P O R A T E R E S P O N S I B I L I T Y 18 M A N A G E M E N T C O M M E N T A R Y 28 F I N A N C A L I S T A T E M E N T S 70 D I S C L O S U R E S G O V E R N A N C E & 83 I D R E C T O R Y SERKO ANNUAL REPORT Serko Limited Annual Report 2019 www.serko.com 84 SERKO ANNUAL REPORT

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