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Annual Report 2021

Plain-text annual report

Slater & Gordon Ltd Annual Report 2021  01 02 05 06 09 10 12 13 32 33 34 35 36 37 71 72 78 79 Business Highlights Our Business Chair’s Report CEO’s Report People and Culture Social Responsibility Report Financial Statements Directors’ Report Auditor’s Independence Declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Additional ASX Information Corporate Directory Contents Slater & Gordon Ltd ANNUAL REPORT 2021 Business Highlights +14% $197.4m +38% $48.6m Net Revenue1 EBITDA2 +$16m $14.5m Net Profit After Tax +12% $179.5m +410 Basis Points 24.6% EBITDA Margin2 -43% $14.5m Net Tangible Assets Gross Operating Cash Flow -1 23 +9 64 Net Promoter Score3 Employee Engagement4 1. Statutory revenue. 2. EBITDA excluding specified items where specified items are certain cash and non-cash items relating to transformation and normalisation of the Company. 3. Source – Kantar, April 2021. 4. Source – Kincentric, March 2021. 01 Slater & Gordon LtdANNUAL REPORT 2021Our Business What we do How we work Why we do it We access justice for all people. We champion voices struggling to be heard. We unite to treat every client with care and commitment. We make tomorrow start today for our clients. 1 2 60 sites Australia wide 24 15 1 17 Iconic and trusted brand • ＋85+ years of caring for Australians’ rights • Maintained #1 prompted and unprompted recall2 • Net Promoter Score of 233 Highly focused business model • ＋Personal Injury4 89% of revenue • ＋Class Actions5 7% of revenue • ＋Emerging Services6 4% of revenue Deep physical networks staffed by skilled, diverse team Market-leading digital assets • ＋~601 sites in VIC, NSW, ACT, QLD, NT and WA • ＋Well represented in chosen market • ＋Unions and other referral relationships • ＋Online claim assessment tool • ＋Outbound digital capability • ＋ ＋Advanced analytics supporting business decisions 1. Includes permanent and visiting offices. 2. Source – Audience Group, March 2021. # 1Prompted and Unprompted brand awareness across Personal Injury law firms in VIC, NSW and WA. 3. Kantar, April 2021. 4. Personal Injury includes Motor Vehicle Accidents, Workers Compensation and Civil (made up of Medical Negligence, Public Liability, Asbestos and Superannuation/TPD matters). 5. Includes mass tort, consumer protection, product liability, and employee rights. 6. Includes Compulsory Acquisition, Industrial & Employment. 02 Slater & Gordon LtdANNUAL REPORT 2021Our iconic brand and focused business model ensures our clients receive the care and compassion they deserve. 03 Slater & Gordon LtdANNUAL REPORT 2021ANNUAL REPORT 2021 We are using the learnings from new ways of working as a result of the pandemic to embed innovation and more efficient practices into the business in ways which improve our clients’ experiences. 04 Slater & Gordon Ltd Chair’s Report Twelve months on from our 2020 Annual Report we are still battling COVID-19 outbreaks and rolling lockdowns. Our people at Slater & Gordon Ltd (Slater & Gordon or Company) have been incredible in the way they have embraced the challenges of the past 12 months, have come together to support each other and our clients and have worked tirelessly to make tomorrow start today for our clients. I sincerely want to thank each and every one of our people for the tenacity, strength and resilience they have shown and for their unwavering commitment to achieving the best results for our clients. I also want to thank our clients for embracing new ways of engaging with their legal teams and for the support they have shown Slater & Gordon and our people. The COVID-19 pandemic does not appear to have had a material impact on the Company’s financial performance during the financial year ended 30 June 2021 (FY21). There are more details about the Company’s response to the COVID-19 pandemic in the CEO’s Report and the Directors’ Report. While we have navigated through the COVID-19 pandemic well, we also believe it is in the best interests of the community to be vaccinated and we are providing our people with flexibility and support to enable them to attend vaccination appointments during work hours. COVID-19 has also presented opportunities. We are using the learnings from new ways of working as a result of the pandemic to embed innovation and more efficient practices into the business in ways which improve our clients’ experiences. We are looking to build the law firm of the future. The FY21 results show the Company continues to improve and continues to lay strong foundations for future growth. For the first time since its recapitalisation in 2017, the Company has returned to sustainable profitability, with a net profit after tax of $14.5m. This compares favourably to the net loss after tax for the full year ended 30 June 2020 of $1.2m and was driven by an increase in work in progress in both the personal injury law and class actions practices. The Company reported earnings before interest, tax, depreciation and amortisation (EBITDA) before specified items1 of $48.6m, compared to $35.3m in the financial year ended 30 June 2020 (FY20). Revenue was $203.4m, compared to $178.3m in the prior corresponding period. Although our profit and revenue results were pleasing, our cash reserves are funding growth and therefore total cash generation was down on last year. The Board and our management team are managing this carefully and we have a number of initiatives under way aimed at strengthening our balance sheet. Pleasingly this year’s results demonstrate that the Company’s strategy, endorsed by the Board, is delivering value and the Company is heading in the right direction. Importantly, they indicate the Company is returning to strong organic growth. Our challenge remains to be able to fund this growth on terms which make sense for the Company. Slater & Gordon has a long and proud history of leadership in pursuing diversity and inclusion in our workplace. In 2019 the Company established the Inclusion Committee to advise on mechanisms to address inequities in the workplace as well as the drivers of violence against women. The Company continues to address the gender pay gap and in FY21 also introduced paid superannuation for all employees on unpaid parental leave. The Company has fair gender balance at all layers of management. There are more details on the Company’s diversity and inclusion initiatives in the People and Culture Report and the Social Responsibility Report. Our achievements over the past 12 months would not have been possible without our people, our clients and our supporters. I would like to thank our people, our leadership team and our Board for their unwavering commitment to making tomorrow start today for our clients through what has been a year like no other. Their passion for and the care they provide to our clients, along with their fierce determination to uphold access to justice is what makes Slater & Gordon who we are. Our Chair is currently on leave while he seeks treatment for a medical condition and we look forward to his speedy recovery and return. In his absence, I am proud to act as Chair for a company whose values are so strongly entrenched. I would also like to thank our unions, regulators, industry bodies, sponsorship partners and business partners for their ongoing support. It has been a tough and uncertain year for many, so their ongoing support has been all the more appreciated. Overall, Slater & Gordon has had a solid year with further progress being made on the Company’s transformation, but we know that we still have more work to do. I look forward to working with the Board, management and, above all, our people as we continue to build the law firm of the future. Elana Rubin Acting Chair 1. Adjusted for Specified items are certain cash and non-cash items relating to transformation and normalisation of the Company. 05 Slater & Gordon LtdANNUAL REPORT 2021ANNUAL REPORT 2021 CEO’s Report When I read feedback from our clients I am regularly reminded that it is the care they received from their team at Slater & Gordon that has had the most profound impact on their legal journey. This care and compassion has never been more on display amongst our people than it was in the past 12 months. I want to thank our people who rallied around each other and our clients to provide support, to ensure we were able to continue to access justice on behalf of our clients, and to embrace new ways of working, sometimes while also juggling home schooling and caring responsibilities. I am very proud of the way our core values of respect, care and kindness, as well as a fierce passion for social justice, have radiated from our people over the past 12 months. Despite the challenges that COVID-19 presented, our people also saw opportunities to set us up as a law firm of the future. We embraced digital ways of working and we recognised that flexible and hybrid ways of working are the way of the future, implementing new systems and policies to support our clients, enhance flexibility and improve efficiencies in matter processing which are contributing to a better experience for our clients. Our investment in digital ways of working is also having a positive environmental impact as we move away from an historic reliance on paper, physical files and physical storage facilities. Further, our investment in client facing digital technology has delivered solid organic growth. Pleasingly 89% of our people participated in our annual engagement survey and the result saw a marked improvement, which puts Slater & Gordon above the industry benchmark. Gross Operating Cashflow was $14.5m, compared to $25.3m in FY20 reflecting the Company’s growth in Work in Progress (WIP), with fees billed being slightly down on FY20 in part due to the impacts of COVID-19, and the Company’s ongoing investment in transformation and future growth. The financial report also shows the Company ended the full year with: • Total revenue and other income from continuing operations of $203.4m, compared to $178.3m in the prior corresponding period (PCP). • Expenses relating to continuing operations of $182.2m, compared to $178.5m in the PCP, reflecting increased labour costs and investment in marketing and technology to support growth and the ongoing transformation of the Company. • A net profit before income tax from continuing operations of $21.3m (PCP: net loss of $0.2m). • Operating cash inflows generated from continuing operations of $11.1m (PCP: $20.0m), reflecting a reduction in fees billed. • A net asset position of $180.5m (PCP: $162.3m). of state payroll tax and some rental payments to landlords continued in FY21, by agreement. The COVID-19 pandemic does not appear to have had a material impact on the Company’s financial performance during FY21. There has been no impact to asset values and total revenue has been at least in line with the Company’s pre-COVID-19 trajectory. However, government imposed restrictions and lockdowns in FY21, in particular in Victoria, had some impact on the Company’s ability to progress its clients’ claims, with medical panels and courts and tribunals being hampered and delayed in their activities due to the restrictions and lockdowns. This had some negative impact on the Company’s fees billed and cash flows, although WIP continued to improve. In FY21 the Company continued its work to strengthen its balance sheet, and in September 2020 completed a partial repayment of its Super Senior Facility (SSF) as part of a loan repayment tender process. The Company repaid a total of $5m to SSF lenders, but at less than 100 cents in the dollar, reducing the amount outstanding under the SSF (including principal and interest) by approximately $5.4m. In September 2020, the Company also replaced its Disbursement Asset Backed Facility with a new and more favourable Working Capital Term Loan Facility, part of which was used to pay down the Disbursement Asset Backed Facility. As a result, the Company reported a net profit after tax (NPAT) for FY21 of $14.5m, and EBITDA before specified items1 of $48.6m. Revenue on this basis increased by 14.2% and costs increased by 8.5%. The Company did not receive any support under the Federal Government’s JobKeeper support scheme. During FY21, no employee was stood down due to COVID-19 related restrictions. Some deferral 1. Adjusted for Specified items are certain cash and non-cash items relating to transformation and normalisation of the Company. 06 Slater & Gordon LtdANNUAL REPORT 2021extraordinary year. Our people’s determination to advocate for and achieve justice for our clients, the care and compassion they have demonstrated, and their commitment to upholding Slater & Gordon’s values goes to the very heart of who we are. John Somerville Managing Director and Chief Executive Officer The work on the Company’s balance sheet is ongoing and a major focus of the Board and leadership team. Throughout the pandemic the health and wellbeing of our people and our clients has been our highest priority. We conducted regular pulse surveys as well as our annual engagement survey, with our people telling us they felt supported by the Company and supported to work flexibly. Pleasingly 89% of our people participated in our annual engagement survey and the result saw a marked improvement, which puts Slater & Gordon above the industry benchmark. Each year we undertake a national client satisfaction survey to help us better understand our clients’ needs, measure their satisfaction with our service and identify opportunities to help make their tomorrow start today. In addition to our annual client satisfaction survey, throughout FY21, we surveyed our clients more frequently to help us better understand their needs given the impact of the COVID-19 pandemic on their lives. Pleasingly, we were able to identify additional opportunities to support our clients, with an overwhelmingly positive response from our clients. Over the past 12 months the Company filed four new class actions, including one against ANZ and OnePath, the fifth in our Get Your Super Back campaign through which we are advocating for hundreds of thousands of Australians who were gouged by the big banks and were short-changed on their retirement savings. Social justice and helping the most vulnerable in society underpin everything we do. We are proud to have secured findings of a privacy breach affecting almost 10,000 people seeking asylum after the Federal Government accidentally leaked their sensitive and personal information in 2014, which will likely result in many claims for compensation being successful. It will likely be the first time in Australian history that compensation is awarded for a mass data breach. Slater & Gordon undertook this work pro bono and many of our people dedicated hundreds of hours of work to achieve this outcome. As we continue to grow and continue to build the law firm of the future, we will continue to seek out appropriate opportunities for meaningful pro bono work. Slater & Gordon also launched a public-facing healthcare campaign which advocated for support for hospital, allied health, aged and disability care workers and helped them understand their legal rights. The campaign gave a voice to many of our clients in the healthcare sector who have been injured at work and provided a platform to tell their story. Despite the challenges of COVID-19 it was a very busy year and the Company achieved an enormous amount as we continued to grow and invest in our future. It is pleasing that the Company’s strategy is delivering results not only in our financial performance, but for our people and our clients. However, there is still more work to do as we build the law firm of the future. Most importantly, our results reflect the dedication and passion of our people for making tomorrow start today for our clients. I would like to thank our people, our leadership team and our Board for the support they have shown the Company, each other and our clients throughout an 07 Slater & Gordon LtdANNUAL REPORT 2021We believe strongly in the advancement of gender equality and continue to have strong female participation at all levels throughout the Company. Our female employees continue to make up 77% of our workforce and 85% of our promotions were awarded to women. 08 Slater & Gordon Ltd ANNUAL REPORT 2021People and Culture Delivery on the Company’s strategy is underpinned by our purpose- driven and talented people who are passionate and skilled and work as one team to unlock justice for everyday Australians. Our national footprint grew this year enabling our people to provide specialist legal services to more clients within their local communities. We now service 60 locations throughout Victoria, New South Wales, Queensland, Western Australia, ACT and Northern Territory. COVID-19 We continued to support our people and our clients to navigate the enduring uncertainties arising from COVID-19 and proudly did so without any job losses, reduction in our people’s pay and benefits, nor the need to receive government assistance (JobKeeper). Our response to the pandemic remained, and continues to remain, focused on protecting the health and wellbeing of our people and clients and ensuring operational and financial stability of our business, including: • during lockdowns, our offices being closed and employees working from home, save for a small skeleton staff to deal with mail, banking and document retrieval; and • investing in technology to enable our people to continue to support our clients remotely and obtain their compensation entitlements with minimal disruption. A continued focus is to support our people to work flexibly. Pleasingly, the 2021 engagement results told us that 86% of our people felt that the Company takes health and safety seriously and 76% felt supported in making use of flexible work arrangements. Engagement and Delivery on our Strategy Our annual employee engagement survey ensures we continue to listen to and understand our employees when it comes to their work experiences and expectations. A record number (89%) of our people participated in this year’s engagement survey with the Company’s engagement scores again increasing and surpassing the Australian industry benchmark. Our people told us that the greatest improvements were in the areas the Company focused on in its engagement action plans: • investing in tools and resources to enable our people, including in a flexible work environment; • building our people’s capability; • effective communications – communicating the right message, at the right time and; • building change capability to enable the Company. Diversity and Inclusion A diverse and inclusive culture is a fundamental element of who we are as a Company. The 2021 engagement Gender Participation Levels survey results showed that 96% of our people felt Slater & Gordon values diversity and promotes inclusion across gender, gender identity, sexuality, race, religion, age and disability. We believe strongly in the advancement of gender equality and continue to have strong female participation at all levels throughout the Company. Our female employees continue to make up 77% of our workforce and 85% of our promotions were awarded to women. Gender pay parity is reviewed regularly and remains strong against industry standards. The Company’s Inclusion Committee met regularly throughout the year to promote and progress several inclusion activities. Current activities of the Committee include, in partnership with the Victorian Women’s Legal Services, initiatives arising from the Starts With Us project to prevent violence against women, as well as monitoring the Company’s gender pay parity performance and recognising and participating in celebrations of diversity such as NAIDOC Week, Wear it Purple Day and Refugee Week. Employment level Board Senior Executive Team Senior Management Non-Management Overall Organisation 30 June 2021 30 June 2020 Male 71% 45% 46% 20% 23% Female 29% 55% 54% 80% 77% Male 71% 45% 45% 18% 23% Female 29% 55% 55% 82% 77% Our long history of achievements is formidable. It was built on hundreds of committed people being innovative, determined, passionate and the best in the legal profession. Our future will be built in the same way by our people, who are the custodians of our values, unique culture and vision. 09 Slater & Gordon LtdANNUAL REPORT 2021Social Responsibility Report In 2019 Slater & Gordon established the Inclusion Committee to advise on mechanisms that address inequities on the basis of gender, gender identity, sexuality, ethnicity, race, age and disability, and includes preventing violence against women and their children. In January 2021 Slater & Gordon, on a pro bono basis, along with the Refugee Advice and Casework Service (RACS), secured findings of a privacy breach affecting almost 10,000 people seeking asylum whose data was accidentally leaked online. Slater & Gordon is a member of the Diversity Council of Australia and a signatory to the UN LGBTIQ Global Standards for Business. Health Projects and Research Fund Pro Bono Work The Slater & Gordon Health Projects and Research Fund is a philanthropic grants initiative focused on improving care and treatment for people with asbestos-related illnesses, occupation-caused cancers or with significant disability caused by a catastrophic injury. The fund also provides small ongoing education grants to medical and health professionals who are dedicated to the prevention, treatment, care and support of people who have an asbestos-related disease, work- related cancer or a catastrophic spinal or brain injury. Slater & Gordon has a proud history of providing pro bono and public interest legal work in Australia. Our lawyers undertake pro bono work in many areas of law and through that have assisted members of the community, including people with severe disabilities, charities, community and indigenous groups, as well as volunteering at community legal centres. In January 2021 Slater & Gordon, on a pro bono basis, along with the Refugee Advice and Casework Service (RACS) secured findings of a privacy breach affecting almost Slater & Gordon is founded on social justice values and we are committed to inclusion, diversity, social justice and giving back. One of the defining features of our Company is our relationship with the local communities in which we operate. We encourage and support that relationship through pro bono legal support and other activities, as well as giving staff the opportunity to donate a portion of their wage to our Staff Giving Program, which goes towards funding local projects throughout Australia via the Slater & Gordon Community Fund. Slater & Gordon also gives back through its commitment to philanthropic activity, having established a Community Fund in 2001 and an Asbestos Research Fund in 2004. In 2014 the Company broadened its commitment to achieving outcomes for people suffering disease and disability by establishing the Health Projects and Research Fund. The Slater & Gordon Community Fund Our Community Fund is a philanthropic fund which offers grants to community groups in three key areas of focus: • assisting people with disease and disability and promoting their participation and inclusion; • addressing inequality and disadvantage; and • encouraging young people to engage in healthy activity and lifestyles. Financial support is given to projects and initiatives which further these objectives. The fund is supported by donations from Slater & Gordon staff via our Staff Giving Program as well as the Company itself. 10 Slater & Gordon LtdANNUAL REPORT 202110,000 people seeking asylum whose data was accidentally leaked online. This will likely result in many claims for compensation being successful. It is believed the decision was an Australian legal first and represents hundreds of hours of pro bono work by our legal teams across personal injury and class actions practices. Slater & Gordon Inclusion Committee In 2019 Slater & Gordon established the Inclusion Committee to advise on mechanisms that address inequities on the basis of gender, gender identity, sexuality, ethnicity, race, age and disability, and includes preventing violence against women and their children by addressing the drivers of violence in an holistic way, with consideration to the complex nuances associated with diversity and workplace inclusion. The Committee’s membership is representative of the organisation as a whole and brings valuable insights of their lived experience to inform the Committee. Through the Committee the Company has partnered with the Victorian Women’s Legal Service in their Starts With Us project to tackle the issues of sexism and gender inequality in the Legal and Justice Sector, and in particular the drivers of violence against women. Other Initiatives and Memberships Slater & Gordon is a member of the Diversity Council of Australia and a signatory to the UN LGBTIQ Global Standards for Business. Slater & Gordon also supports and sponsors the Next Generation Internship Program, which is run by EMILY’s List Australia, and in 2016 the Class Actions team became a signatory to the Law Council of Australia’s Equitable Briefing Policy. The Company is in the process of rolling this out more broadly across the business. 11 Slater & Gordon LtdANNUAL REPORT 2021Financial Statements 13 32 33 34 35 36 37 71 72 78 79 Directors’ Report Auditor’s Independence Declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Additional ASX Information Corporate Directory 12 Slater & Gordon LtdANNUAL REPORT 2021DIRECTORS REPORT The Directors present their report, together with the financial report of the consolidated entity consisting of Slater & Gordon Ltd (“the Company”) and its controlled entities (jointly referred to as “the Group”), for the financial year ended 30 June 2021 (“FY21”) and the auditor’s report thereon. This financial report has been prepared in accordance with Australian Accounting Standards. Compliance with Australian Accounting Standards ensures compliance with International Financial Reporting Standards (“IFRS”). Directors The Directors in office at any time during the financial year and up to the date of this report are: • James MacKenzie – Chair • Mark Dewar • Merrick Howes • Michael Neilson • Elana Rubin • John Somerville • Jacqui Walters Effective, 1 August 2021, James MacKenzie temporarily stepped down as Chair, to have treatment for a medical condition. Elana Rubin is acting as Chair in the interim. It is expected that Mr MacKenzie will resume as Chair within a few months. Details of the skills, experience, expertise and special responsibilities of each Director are set out in the “Information on Directors and Company Secretary” section of this report. Principal Activities The principal activity of the Group during the financial year was the operation of legal practices in Australia. Review of Operations The Slater & Gordon vision The Company’s vision is to help everyday Australians secure a better future by accessing justice and championing those who struggle to have their voices heard. The Company is united in its purpose to make tomorrow better than today for its clients and treats every client with care and commitment. The Company helps unlock justice for everyday Australians who it believes have a right of redress or compensation, where there is a considerable power imbalance. The Company’s clients come to the Company at what is often the most vulnerable time of their lives. Without the Company’s services, many of the Company’s clients would not be able to access justice. The Company treats clients with compassion and respect and prides itself on being trusted legal advocates for, and delivering the highest quality legal services to, clients. This absolute focus on client care and results makes the Company fierce in its representation and permeates the firm. The Company has a history of innovating and is active in protecting and enhancing the legal rights of clients. The Company’s advocacy extends beyond individual cases to include the issues of social justice and individual rights more broadly. The Company has three core values: + Do it right – we are passionate about the quality of our work and always achieve the highest professional standards in order to deliver the best outcome for our clients. + Work well with others – we share knowledge, experience and ideas. We encourage respect and collaboration within the firm and the community. + Take the lead – we challenge ourselves to be the best, we strive for innovation and we are committed to doing everything that can be done to help our clients. Managing risks The following details some of the material business risks that could affect the growth of the Company’s core services. These are not listed in order of significance and do not comprise every risk that the Company may be exposed to. Description of key risk Key risk mitigation Regulatory & Industry Reform The Company’s operations are subject to extensive regulation. Adverse regulatory or legislative changes may adversely impact the Company’s operations, financial performance and position. Proactive and comprehensive stakeholder and community engagement, government consultation to advocate our position, modelling of the potential impact of changes and business model and the optimisation of practice management service offerings. discussion, informed Slater & Gordon Page 1 13 Slater & Gordon LtdANNUAL REPORT 2021 DIRECTORS REPORT Description of key risk Key risk mitigation Operations and Systems There are a number of key operational risks which arise directly from the operations of the Company as a major participant in the Australian legal services industry and impacted by the ongoing COVID-19 pandemic environment. These include strategic and business decisions, technology and cyber risk, reputation risk, fraud, supplier disruption, increased digitisation and changed employee working conditions, health and safety risk, compliance with legal and regulatory obligations, counterparty performance under outsourcing and referral arrangements, business continuity planning, legal risk, data privacy and integrity risk, client default risk, key personnel risk and external events. The Company’s financial performance and position have been, and in the future may continue to be, impacted by these risks. Growth Strategy, Competition and Market Share in a competitive market, The Company operates competing for its offering of personal injury, class actions and/or other legal services. Competition is on the basis of a number of factors, including the quality of advice and service, innovation, reputation and price. The Company’s marketing and service offerings may not generate sufficient enquiries and opportunities to attract and retain clients and commence class actions to support our growth strategy. Financial performance may be adversely impacted as a result of these risks. People The Company has business performance improvement programs in place designed to standardise, centralise, optimise and promote efficient and innovative operating platforms, IT systems and people strategies. Periodic assessments are undertaken by subject matter experts on the Company’s processes and systems to support the development and implementation of required action plans. Business continuity and crisis management oversight and response activities are in place for the health and safety of the Company’s people and protection of critical business functions. A workplace health and safety framework and initiatives which supports the mental health and wellbeing of the Company’s people. Initiatives are being undertaken to strengthen our information security framework to enhance our resilience to cyber-attacks and for the protection and privacy of the Company’s data. Strategic initiatives are designed and implemented to support including the Company’s growth strategy, diversification of service offerings and digitisation. The Company monitors the markets in which it operates to understand competitive activities and the ongoing demand for the Company’s services whilst operating disciplined pipeline processes for class actions. The Company also protects and strengthens the Company’s brand and maintains long-standing relationships with trade unions and professional groups which provide a consistent source of new client referrals. The Company may be unable to attract, engage, retain and develop talented and motivated people and maintain the Company’s desired culture which may limit its ability to deliver its growth initiatives. People, culture and remuneration initiatives are undertaken to support, engage and develop the Company’s people and maintain its desired culture, deliver on its enterprise agreements and address change in working conditions as a result of the pandemic. Capital Management Funding and management of capital and liquidity remains a key focus following the Company’s recapitalisation in 2017 with work being undertaken associated with the significant work in progress receivable maintained on the Company’s balance sheet and funding growth in service offerings, particularly in class actions. Additional funds may need to be obtained through capital raisings or cash flow may need to be managed through seeking to negotiate current debt and equity arrangements. Implementation of a working capital management program with due diligence of the Company’s service offering the funding requirements and close Company’s lenders to ensure liquidity needs are monitored closely and arrangements are put in place where necessary to bridge short term liquidity needs. Assessment and management of the Company’s capital and ownership structure to align with delivery of strategic plan and objectives. involvement of Refer to the Company’s Corporate Governance Statement for details of the Company’s risk management framework. Slater & Gordon 14 Page 2 Slater & Gordon LtdANNUAL REPORT 2021 DIRECTORS REPORT Financial review The Group reported a net profit before tax from continuing operations of $21.3m for the year ended 30 June 2021, an increase from a loss of $0.2m in the prior year. This was driven by an increase in work in progress in both the personal injury law and class actions practices. The Group reduced its outstanding secured debt and improved working capital through restructuring of the borrowing facilities. As at 30 June 2021, the Group’s total borrowings were $89.2m (excluding lease liabilities), a reduction of $2.6m from prior year. The Group has a positive net current asset balance of $120.8m and positive overall net asset balance of $180.5m. Significant Changes in the State of Affairs COVID-19 During FY21, in response to the COVID-19 pandemic, all Australian state and territory governments imposed restrictions on the movement of people, which impacted the operations of businesses and organisations. In particular, metropolitan Melbourne, where the Company has a significant number of employees and offices, was subject to extended and significant restrictions during the period from August to October 2020. In response to these restrictions, the Company undertook actions to protect the health and wellbeing of its clients and employees and to protect its business, including the following: • • • • Offices being closed and employees working from home. A small skeleton staff continuing to work in offices during periods of restriction to deal with mail, banking and document retrieval. Further laptops and software licenses were acquired to allow employees to continue to support clients and operate the Company’s business with minimal disruption. As restrictions eased in various states, offices were re-opened in a staged manner, in line with recommendations from state governments and health officers. The Company did not qualify for, apply for or receive any support under the Federal Government’s JobKeeper support scheme. During FY21, no employees were stood down due to COVID related restrictions. Some deferral of state payroll tax and some rental payments to landlords continued in FY21, by agreement. The COVID-19 pandemic does not appear to have had a material impact on the Company’s overall financial performance during FY21. There has been no impact to asset values and total revenue has been, at least, in line with the Company’s pre-COVID-19 trajectory. However, government imposed restrictions and lockdowns in FY21, in particular in Victoria, had some impact on the Company’s ability to progress its clients’ claims, with medical panels and courts and tribunals being hampered and delayed in their activities due to the restrictions and lockdowns. This had some negative impact on the Company’s fees billed and cash flows, although work in progress continued to improve. Events Subsequent to Reporting Date On 10 August 2021, the Company announced the resignation of its Chief Financial Officer, Scott Butterworth. Mr Butterworth’s final departure date is under discussion and the process to recruit a replacement has commenced. Likely Developments The Group is focused on organically growing its core service areas of Personal Injury Law and Class Actions in Australia. The continued impact of the COVID-19 pandemic, including in particular the continued imposition of government restrictions and the broader impacts on the Australian economy, may impact the Company’s performance in FY22. That impact (if any) cannot currently be determined with certainty. The Board and Executive Leadership Team continues to monitor the situation closely and to take actions in response as appropriate and as recommended by governments and health authorities. Environmental Regulation The Group’s operations are not subject to any significant environmental regulations or laws in Australia. Environmental, Social and Corporate Governance Pursuant to ASX Corporate Governance Principle and Recommendation 7.4, which provides that companies disclose any material exposure to environmental or social risks, the Company does not consider that the operations are materially exposed to such risk. Dividends Paid, Recommended and Declared The Group has not declared or paid any dividends in respect of the 30 June 2021 financial year. Slater & Gordon Page 3 15 Slater & Gordon LtdANNUAL REPORT 2021 DIRECTORS REPORT The dividends paid and declared since the start of the financial year are as follows: Dividends on ordinary shares No interim dividend paid in 2021 (2020: No interim dividend paid) No final dividend for 2020 (2019: No final dividend paid) 2021 $’000 - - - 2020 $’000 - - - Share Options As reported in the Remuneration Report, as part of the Long Term Incentive Plan (LTIP) and as approved by shareholders at the 2019 Annual General Meeting, in FY20 the Company agreed to award 15,573,000 performance rights (Rights) to certain Directors and members of the Executive Leadership Team subject to the satisfaction of specified vesting and other conditions. Once vesting conditions of awarded Rights are met and the required Exit Event has occurred those Rights are effectively zero priced options. During FY21, the Exit Event occurred, and so all vested Rights are now exercisable. During FY21, the Company issued a further 1,974,105 Rights to 33 senior employees. None of those Rights are yet vested. In FY21, no further Rights were awarded to Directors or Key Management Personnel (KMP) of the Company. 16,716,545 Rights remained outstanding at the end of the financial year. A full description of the LTIP, including the numbers of Rights agreed to be awarded to Directors and other KMP, is contained in the Remuneration Report. Indemnification and Insurance of Directors and Officers and Auditors During the financial year, the Group has provided an indemnity or entered an agreement to indemnify, and paid insurance premiums for a twelve-month period in respect of Directors, Officers and the Company Secretary of the Company against a liability brought against such an Officer. Further disclosure required under section 300(9) of the Corporations Act 2001 is prohibited under the terms of the contract. The Group has agreed (in certain circumstances) to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement. No payment has been pursuant to any indemnity in favour of Ernst & Young during or since the financial year. Information on Directors and Company Secretary The skills, experience, expertise and special responsibilities of each person who has been a Director of the Company at any time during or since the end of the financial year is provided below, together with details of the Company Secretary as at the year end. James MacKenzie B.Bus, FCA, FAICD Chair1 Independent Non- Executive Director Experience James is the Chair of Slater & Gordon, having joined the organisation in December 2017. James is an experienced Australian Company director. He is currently the Chairman of Victorian Funds Management Corporation, Development Victoria, the Suburban Rail Loop Authority Advisory Board and the Interim Melbourne Arts Precinct Board. He is also a Member of the MCG Trust and Director of Monivae College. James was previously serving as the President of the Victorian Arts Centre Trust, Chair of the Transport Accident Commission (TAC) and Worksafe Victoria, Managing Director of Funds Management and Insurance at the ANZ Banking Group, Chief Executive Officer of Norwich Union Australia, and TAC Chief Executive Officer. He has been a member of the COAG Business Advisory Forum and a previous director of VFMC. James has a Bachelor of Business from Swinburne University, and is a Fellow of the Australian Institute of Company Directors and the Institute of Chartered Accountants Australia and New Zealand. In 2001, he was awarded the Centenary Medal for services to Public Administration. James is Chair of the Board and is also a member of the Audit and Risk Committee and the People and Culture Committee. Other directorships of listed companies held in the last three years None Slater & Gordon 16 Page 4 Slater & Gordon LtdANNUAL REPORT 2021 DIRECTORS REPORT Mark Dewar B.Bus. Accounting Chartered Accountant Non-Independent Non- Executive Director Merrick Howes BA LLB Non-Independent Non- Executive Director Experience Mark joined the Board of Slater & Gordon in May 2019 and comes from a Consulting background as well as being a Non-Executive Director for other PE backed companies. Mark is the Australian Practice Leader and is a Senior Managing Director in the Corporate Finance segment at FTI Consulting. His experience is typically focussed in helping clients who are undergoing significant change or embarking on a transformation and specialises in advising companies, private equity investors or lenders across a range of industries including financial services, mining, telecommunications, software, retail, engineering, building and construction, and automotive. Prior to joining FTI Consulting, Mark spent almost ten years with Ernst & Young, where he commenced his career in Australia in the Audit practice before moving to London where he was a director in the Corporate Finance practice. Mark is a Chartered Accountant and a member of the Institute of Chartered Accountants of Australia. Other directorships of listed companies held in the last three years None Experience Merrick founded Aviron Investment Management, a new Australian based private investment fund, in May 2021 after nearly ten years as the head of Anchorage Capital Group LLC’s operations in Australia. Previously, he worked at Aviron Capital, and was also the Co-founder and Managing Director at Shearwater Capital, where he focused on special situations and distressed debt investments. Prior to Shearwater, he was a Partner and Managing Director in the Principal Investment Area at Goldman Sachs in Australia. Merrick was also a Managing Director and European Head of Global Structured Products at Merrill Lynch in Hong Kong and London. He also worked at Macquarie Bank Group from 1989 to 1998. Merrick received a BA in Accounting and a Bachelor of Laws from the Australian National University. Merrick is Chair of Slater & Gordon’s People and Culture Committee. Other directorships of listed companies held in the last three years None Michael Neilson Experience BA LLB GAICD FGIA Executive Director and Company Secretary Michael is the Executive Director, Legal and Governance, having commenced at Slater & Gordon in April 2018. Prior to joining Slater & Gordon, Michael was at Crown Resorts Limited, where he was Group General Counsel and Company Secretary for almost ten years and, prior to that, he was General Counsel for Crown Melbourne. From 1997 to 2004, Michael was at the Lend Lease Group where he was General Counsel and Company Secretary of General Property Trust (which was then managed by Lend Lease) and prior to that General Counsel of Lend Lease Property Management. Michael started his career in the commercial practice at Herbert Geer & Rundle where he spent ten years before moving in house. Michael has a strong track record in implementing governance, legal and regulatory frameworks in complex, multinational businesses as well as deep experience managing risk and compliance in challenging environments. Other directorships of listed companies held in the last three years None Elana Rubin AM Experience BA(Hons) MA SFFin FAICD Independent Non- Executive Director1 Elana is a non-executive director at Slater & Gordon and was appointed to the Board in March 2018. Elana has over 20 years’ experience as a non-executive Company director, across diverse sectors. She is currently Chair of Afterpay and a director of Telstra, as well as a number of unlisted companies and/or government boards. Slater & Gordon Page 5 17 Slater & Gordon LtdANNUAL REPORT 2021 DIRECTORS REPORT Elana was previously the chair of Australian Super and WorkSafe Victoria, and a director of the Transport Accident Commission (TAC) in Victoria. Other previous board roles covered the financial services, insurance, infrastructure, professional services, and not-for-profit sectors. Before becoming a full time non-executive director, Elana worked for one of the (then) largest industry funds and the Australian Council of Trade Unions (ACTU). She is a member of Chief Executive Women and Women Corporate Directors International. Her career reflects an understanding of corporate social licence to operate and a deep commitment to culture, diversity, social equity and participation. Elana is a member of the Audit and Risk Committee and the People and Culture Committee. Other directorships of listed companies held in the last three years Afterpay Limited (ASX:APT) (2017 to current) Telstra Limited (ASX: TLS) (Feb 2020 to current) Mirvac Limited (ASX:MGR) (2010 to Nov 2019) John Somerville Experience BSC GDip Applied Information Systems MBA John is the Managing Director and Chief Executive Officer of Slater & Gordon, having joined the organisation in February 2018. Managing Director and Chief Executive Officer John is a passionate leader with a history of building and leading successful teams that deliver strong business outcomes and people engagement. Prior to joining Slater & Gordon, he was the National Managing Partner of KPMG (Advisory) Australia. Prior to joining Slater & Gordon he spent 25 years advising some of Australia’s largest corporations and governments combined with growing and leading businesses within KPMG. He believes business thrives when people help others be successful. This orientation translates into delivering better outcomes for clients. He is passionate about getting the most from diversity by creating an inclusive workforce. John’s career has involved regional and global activity, including work in Europe, the US, Asia as well as Australia. Other directorships of listed companies held in the last three years Jacqui Walters Experience None BCom (Accounting and Finance) GAICD Independent Non- Executive Director Jacqui joined the Slater & Gordon Board in March 2018 and chairs the Audit and Risk Committee. She has international experience across many industry sectors. Her work has ranged from whole of organisation transformation and restructuring to highly specific areas such as major capital project delivery, new product introduction, professional services strategy and performance, and post-merger culture alignment. Jacqui is a Partner of Era Innovation, an advisory firm enabling long-term resilience in Australian organisations by creating systematic, disciplined innovation capability. She is also a Partner of Era Ventures – investing in all aspects of scale-up for high value food businesses. Jacqui is Chair of CleanCo Queensland Ltd and a non-executive Director of Development Victoria. She is on the Queensland Advisory Committee for the not-for-profit organisation, Second Bite; and a Director of Pathways to Resilience, a youth well-being and resilience not- for-profit organisation. Other directorships of listed companies held in the last three years None 1 Effective 1 August 2021, James MacKenzie temporarily stepped down as Chair to have treatment for a medical condition and Elana Rubin was appointed Acting Chair. It is expected that James will resume as Chair within a few months. Company Secretary Michael Neilson See above Slater & Gordon 18 Page 6 Slater & Gordon LtdANNUAL REPORT 2021 DIRECTORS REPORT Directors’ Meetings The number of meetings of the Board of Directors and of each Board committee held during the financial year and the number of meetings attended by each Director were: Board of Directors Audit and Risk Committee1 Eligible to attend Attended Eligible to attend Attended People and Culture Committee2 Eligible to attend Attended 13 13 13 13 13 13 13 13 13 13 13 13 12 13 4 - - - 4 - 4 4 - - - 4 - 4 4 - 4 - 4 - - 4 - 4 - 3 - - J MacKenzie M Dewar M Howes M Neilson E Rubin J Somerville J Walters 1 All Directors who are not members of the Audit and Risk Committee also attended all meetings of the Committee as invitees, except for one meeting which Mr Somerville was unable to attend. 2 All Directors who are not members of the People and Culture Committee also attended all meetings of the Committee as invitees, except for one meeting which Mr Somerville was unable to attend. Directors’ Interests in Shares Directors’ relevant interests in shares of the Company as at the date of this report are detailed below. Ordinary Shares of the Company Performance Rights J MacKenzie1 M Dewar M Howes M Neilson E Rubin J Somerville J Walters - - - - - - - 1,245,840 - - 1,245,840 415,280 3,322,240 415,280 1 James Mackenzie’s Rights have been agreed to be awarded to a Company controlled by him, JACM Pty Ltd. Directors’ Interest in Contracts Directors’ interests in contracts are disclosed in Note 22 to the financial statements. Auditor’s Independence Declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 in relation to the audit for the financial year is provided with this report. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-Audit Services Written approval for non-audit services is provided either by the Board of Directors or by the Audit and Risk Committee and approval is notified to the Board of Directors. The Directors are satisfied that the provision of non-audit services during the year by the auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means the auditor independence was not compromised. Rounding of Amounts The amounts contained in the Directors’ Report and Financial Report have been rounded to the nearest thousand dollars (where rounding is applicable) under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191.The Company is an entity to which the Class Order applies. Slater & Gordon Page 7 19 Slater & Gordon LtdANNUAL REPORT 2021 DIRECTORS REPORT The Directors’ Report and accompanying Audited Remuneration Report is signed in accordance with a resolution of the Directors. Elana Rubin Acting Chair Melbourne 26 August 2021 John Somerville Managing Director and Chief Executive Officer Slater & Gordon 20 Page 8 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report 1.0 Introduction The COVID-19 pandemic does not appear to have had a material impact on the Company’s financial performance during FY21, although government imposed restrictions and lockdowns in FY21, in particular in Victoria, had some impact on the Company’s ability to progress its clients’ claims, with medical panels and courts and tribunals being hampered and delayed in their activities due to the restrictions and lockdowns. This had some negative impact on the Company’s fees billed and cash flows, although work in progress continued to improve. Reflecting this, Executive KMP were awarded an average of 103% of their Short-Term Incentive Plan (STIP) target bonus for performance against a balanced scorecard of measures in FY21 compared to FY20 where an average of 120% of the Short-Term Incentive was paid. However, this award was subject to further conditions, described in section 5.2. The Company made no changes to its overall remuneration framework in FY21. However, the Board has established two ‘once off’ bonus pools from which bonuses will be paid, firstly, to employees on the Company’s Enterprise Agreements and a small number of junior employees on Individual Employment Agreements and, secondly, to more senior employees on individual Employment Agreements. These bonus pools have been established to reward employees for the Company’s strong operational performance (measured in particular by its FY21 underlying EBITDA performance – see section 4.3 below) during the COVID-19 pandemic. The final distribution of those bonus pools will be determined by the Board during the first half of FY22 and payments are expected to be made early in 2022. No KMP will participate in these bonus pools. As disclosed in the FY20 Remuneration Report, a Long-Term Incentive Plan (LTIP) was approved by shareholders at the 2019 Annual General Meeting. During FY21, no further Rights were awarded to Directors or Key Management Personnel of the Company and the Exit Event occurred, and so all vested Rights are now exercisable. The Company issued further Rights to 33 senior employees. None of those Rights are yet vested. A full description of the LTIP is disclosed in the Remuneration Report. The Company remains focused on delivering consistent performance year on year and remains optimistic but cautious about the effects of COVID-19 on its business and the legal industry particularly as courts, government bodies and medico- legal practitioners work through backlogs arising from shutdowns and the implications of ongoing restrictions. Management remains committed to transparency and an ongoing dialogue with shareholders on remuneration. 2.0 Remuneration Report Overview The Directors present the Remuneration Report (the Report) for the Company and its controlled entities for FY21. This Report forms part of the Director’s Report and has been audited in accordance with section 300A of the Corporations Act 2001. The Report details the remuneration arrangements for the Company’s Key Management Personnel (KMP) which is comprised of: • Non-Executive Directors (NEDs) • Executive Directors • Other Executive KMP KMP are those persons who, directly or indirectly, have authority and responsibility for planning, directing and controlling the major activities of the Company. Slater & Gordon Page 9 21 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report The table below outlines the KMP for FY21: Name Position Term as KMP Non-Executive Directors James MacKenzie • Chair of the Board • Non-Executive Director (Independent) Mark Dewar • Non-Executive Director Merrick Howes • Non-Executive Director Elana Rubin • Non-Executive Director (Independent) Jacqui Walters • Non-Executive Director (Independent) Executive Directors John Somerville • Managing Director and Chief Executive Officer Michael Neilson • Executive Director, Legal and Governance Other Executive KMP • • • • • • • Full financial year Full financial year Full financial year Full financial year Full financial year Full financial year Full financial year Scott Butterworth • Chief Financial Officer • Full financial year 3.0 How remuneration is governed The People and Culture Committee assists the Board to oversee the establishment and operation of appropriate policies and strategies that provide the Company with the capability to achieve its short and long-term business objectives, including recommending remuneration changes to the Board for NEDs, Executive Directors and Other Executive KMP. 3.1 Use of remuneration advisors During FY21, the Company did not use remuneration advisors as defined under the Corporations Act 2001. 3.2 Claw back of remuneration The claw back policy was introduced in June 2016. This policy enables the Company to claw back certain elements of an Executive Director’s or Other Executive KMP’s (collectively Executive KMP) remuneration if there has been a misstatement of the financial statements which resulted in the Executive KMP receiving a reward which exceeds the outcome that would have been achieved had the misstatement not been made. 3.3 Share Trading Policy The Company’s Share Trading Policy (Policy) applies to all Directors, officers, employees, contractors and consultants. The Share Trading Policy outlines how and when Directors, officers, employees, contractors and consultants may deal in Company securities. Restricted Persons (as defined in the Policy) may only deal in securities in the Company during defined trading windows and provided they do not possess inside information. There are some limited exceptions set out in the Policy. If a Relevant Person (as defined in the Policy) acquires securities in the Company (other than via an employee share plan), they should not sell or agree to sell any Company securities of that class for at least 30 days. Directors are prohibited from entering margin loans under the Company’s Share Trading Policy. Relevant Persons require prior approval to enter into a margin loan arrangement where the amount of shares mortgaged, provided as security, lent or charged to a financier, amounts to 1% or more of the issued capital in the Company at the relevant time. A Restricted Person must notify the Company Secretary immediately if they are given notice by their financier of an intention to make a margin call and sell the Company’s securities during a prohibited trading period. Relevant Persons must not enter into hedging arrangements in relation to securities in the Company that are unvested or subject to disposal restrictions or minimum shareholding requirements. The Company’s Share Trading Policy is available on the Company’s website www.slatergordon.com.au. 22 Slater & Gordon Page 10 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report 3.4 Executive KMP employment agreements Executive KMP are employed on individual employment agreements that outline the terms of their employment, which include: Length of Contract No fixed term Notice Period Employee Six (6) months Notice Period Slater & Gordon1 Six (6) months Termination Payment Six (6) months Statutory Entitlements Payment of statutory entitlements of long service leave and annual leave applies in all events of separation 1 The Company may also terminate at any time without notice for serious misconduct and/or breach of contract. Post-Employment Restraints The employment agreement contains a restraint of trade provision which applies for a period of 9 months and 12 months 3.5 Cessation and movement of Executive KMP During FY21, there were no cessations or movement of NEDs or Executive KMP. As disclosed to the ASX on 10 August 2021, Chief Financial Officer, Scott Butterworth has resigned and will depart the Company during FY22. 3.6 Other transactions and balances with KMP and their related parties During FY21, there were no additional transactions for Executive KMP and their related parties. 4.0 Overview of Executive KMP Remuneration This section of the Remuneration Report outlines the principles applied to Executive KMP remuneration decisions and the framework used to deliver the various components of remuneration, including explanation of the performance and remuneration linkages. 4.1 How Executive KMP remuneration policies and structures are determined The Company’s remuneration strategy is designed to motivate and focus our people on delivering the best possible outcomes for our clients and shareholders in a manner that supports the growth and sustainability of the Company in the short and long-term. To do this, the following principles are applied to fixed and variable pay: • Aligns employee, client and shareholder interests; • Attracts, retains and engages employees with the requisite skills, expertise and capabilities; • Fosters a high-performance culture which focuses and aligns short and long-term objectives; • Reinforces a pay for performance culture based on both role requirements and performance against company values; • Is compliant with current governance and legislative requirements related to remuneration practices; and • Promotes pay parity and equity. 4.2 Executive KMP Remuneration Structures The Company rewards Executive KMP in a way that secures quality executives for the long-term success of the Company, while fostering a performance-oriented and risk management culture. The Company ensures remuneration packages are equitable, motivating, competitive and affordable. Executive KMP receive fixed remuneration and variable remuneration consisting of short-term and long-term incentive opportunities. Executive KMP remuneration levels are reviewed annually by the People and Culture Committee with reference to the Company’s remuneration principles, market movements and affordability. 4.3 Elements of remuneration Fixed remuneration Fixed remuneration is determined with reference to the size, scope and complexity of the role and relevant individual experience, whilst also considering market positioning, internal equity, affordability and the Company’s ability to attract and retain employees with required capabilities to achieve the Company’s objectives. Fixed remuneration consists of base remuneration, superannuation (based on and up to the maximum of the statutory guarantee level) and other non-monetary benefits. Fixed remuneration is reviewed annually with approved changes effective 1 July or such other date as the Board may nominate. The following factors are taken into consideration when reviewing executive remuneration: • Annual company performance and affordability; • Individual performance and demonstration of company values tied to an annual Performance and Development Review; Slater & Gordon Page 11 23 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report • The Total Target Reward (fixed remuneration and incentive opportunity) of an individual, including the pay mix of fixed and variable reward; • Economic climate and external market movement; • Company and social responsibility; and • Pay parity and equity. Adjustments to Executive KMP remuneration are reviewed by the People and Culture Committee and approved by the Board. STIP Under the STIP, all Executive KMP have the opportunity to earn an annual incentive award. The plan includes two measures, company performance and individual performance. Company performance focuses executives on achieving sustainable success for the enterprise. Individual performance rewards the employee’s own contribution towards Key Performance Indicators (KPIs) and company success. How are bonuses paid? STIP bonuses are paid in cash. How much can executives earn? Executive KMP have a defined on-target STIP opportunity between 23% - 50% of their Full Time Equivalent base remuneration and a maximum STIP opportunity of 200% of their on-target opportunity. Executive KMP STIP On -Target1 John Somerville2 Michael Neilson Scott Butterworth 1Represents on-target for full plan year. 2 J Somerville STIP On-Target is set at 50% of base remuneration plus superannuation. $275,000 $93,380 $104,535 % of Base Remuneration 50% 23% 23% Each Executive KMP’s Total Remuneration Pay Mix% (annualised at target) for FY21 is set out below. Executive KMP John Somerville Michael Neilson Scott Butterworth 1Includes superannuation Total Fixed Remuneration1 66.7% 82.1% 82.0% How is performance measured? Short Term Incentive 33.3% 17.9% 18.0% The STIP performance measures were chosen based on their ability to deliver sustainable company performance and results for clients and shareholders. Company performance against financial targets (EBITDA and cashflow) act as a gateway for rewarding individual performance against individually set KPI’s. For each individual KPI, a target is set. Performance measures are validated and approved by the Board annually. FY21 performance measures are set out below: Executive KMP Managing Director and Chief Executive Officer Executive Director, Legal and Governance Chief Financial Officer Company Financial Performance Client Measure People Measure 50% 50% 50% 20% 20% 20% 20% 20% 20% Operational Measure 10% 10% 10% EBITDA and cashflow targets are the measures against which the Board and management assess the Company’s short term financial performance. Who sets STIP performance measures? Financial performance measures are set by the Board, based on the recommendation of the People and Culture Committee. KPIs are set for the Chief Financial Officer and Executive Director, Legal and Governance by the Managing Director and Chief Executive Officer, then reviewed and endorsed by the People and Culture Committee and Board. Managing Director and Chief Executive Officer KPIs are set and approved by the Board. 24 Slater & Gordon Page 12 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report When are STIP bonuses paid? The STIP outcome is determined after the end of the financial year and at the same time as the Financial Report is approved. The Board approves the final STIP award for the Executive KMP, which is generally paid approximately three months after the end of the performance period. However, the Board has some discretion as to when payment is made. There are no deferral components. What happens if an Executive KMP leaves? The following details the treatment of STIP on termination: Resignation and Dismissal: Any potential STIP payment is forfeited. Retirement and Total and Permanent Incapacity: Any potential STIP will be calculated on a pro-rated basis for portion of year worked within the plan year. Payment will be calculated in accordance with the normal timetable and based on the end of year results. Death: Payments will be made to the estate of a deceased employee pro-rated for the eligible period. Payment will be calculated in accordance with the normal timetable and based on the end of year results. Redundancy: If redundancy occurs during the first half of the financial year, any potential STIP will be forfeited. If redundancy occurs during the second half of the financial year, any potential STIP will be calculated on a pro-rated basis for portion of financial year worked. Payment will be calculated in accordance with the normal timetable and based on the end of year results. LTIP The LTIP and the award of Rights to the independent NEDs and the Executive Directors was approved by shareholders at the 2019 Annual General Meeting. How is LTIP paid? Under the terms of the LTIP, eligible participants are offered rights (Rights) to acquire ordinary shares in the Company at no cost to them. Participants can acquire shares if they remain employed by the Company and satisfy the vesting conditions and exercise conditions. While the Rights remain unexercised the participants do not have the same benefits as other holders of shares in the Company, such as dividend and voting rights. However, once vesting conditions and the exercise condition has been met and a participant exercises their Rights, then, as holders of shares, participants have the same benefits as other holders of shares in the Company, such as dividend and voting rights. In FY20, all Executive KMP were granted a specified number of Rights. Although no further Rights were offered to Executive KMP in FY21, Rights were offered to 33 senior employees. How much can executives earn? The number of Rights granted to participants in the LTIP is determined by the Board. In FY20 five Directors (including two Executive Directors) and nine members of the Executive Leadership Team were granted a specified number of Rights from a pool of 15,573,000 Rights, or 75% of the pool of Rights available to be awarded under the LTIP. Executive KMP LTIP opportunities were determined using a combination of factors, including scope, complexity and responsibility of role, relative seniority, relative base remuneration and length of service with the Company post the recapitalisation in December 2017. Set out below are the Rights awarded to Executive KMP in FY20: Executive KMP John Somerville Michael Neilson Scott Butterworth Number of Rights Awarded 3,322,240 1,245,840 1,453,480 How is performance measured? Under the LTIP rules, the nature and content of any vesting conditions (including the vesting period) are determined by the Board and may include conditions relating to any or all of: • • • • • • continuing employment; performance of the Participant; performance of the Company; the Company's share price; the achievement of specific targets; or the occurrence of specific events The Rights granted to independent NEDs, Executive Directors and certain members of the Executive Leadership Team vest in accordance with the following schedule, subject to continuing employment/engagement of services. Slater & Gordon Page 13 25 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report Vesting Date Tranche A: 30 June 2020 Tranche B: 30 June 2021 Tranche C: 30 June 2022 Tranche D: Date of ‘Exit Event’ Vesting Percentage 22% 22% 22% 34% Vested Rights may only be exercised, i.e. converted to shares in the Company, after an Exit Event occurs. The terms of the award provide that an Exit Event will occur if (a) the Company’s underlying Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) reaches the target specified by the Board of $28.0m and as evidenced by the audited Financial Statements for that financial year and (b) the Board being satisfied that the Company’s approved Budget for the following Financial Year shows underlying EBITDA forecast at or better than the target set by the Board, subject always to the Board’s discretion to ignore or waive any one off transactions or circumstances in calculating underlying EBITDA for this purpose. If an Exit Event had not occurred before the seventh anniversary of the grant of the Rights, then the Rights would have expired. On 18 November 2020, the Board determined that the Exit Event had occurred as disclosed in section 7.3. When is performance measured? Vesting conditions and the Exit Event are measured at the end of each financial year during the term of the LTIP. What happens if a participant leaves? If a participant resigns or is terminated for cause, any unvested and vested but unexercised (as at the date their employment ends) Rights are forfeited, unless otherwise determined by the Board. If a participant ceases employment by reason of redundancy, ill health, death, or other circumstances approved by the Board, unvested Rights will vest pro-rata based on the portion of the Vesting Period that has elapsed as at the cessation date. The vested portion may be retained provided the participant exercises their vested Rights by delivering a signed Exercise Notice to the Company by the earlier of: (i) the expiry date of the Rights; and (ii) the date which is three months after the participant receives notification from the Company that the Exit Event has been achieved. What happens if there is a change of control? If there is a ‘Change of Control’ (as defined in the LTIP rules), all unvested Rights will automatically vest and the Exit Event will be deemed to be satisfied so that participants can elect to either request the Company to buy-back their Rights or exercise the vested Rights and dispose of the shares delivered to the participant. Are Executives eligible for dividends? Participants are not eligible to receive dividends on Rights, vested or unvested. Can further awards be made under the LTIP? There remains a pool of further Rights available for award under the LTIP at the Company’s discretion. In February and April 2021, 33 senior employees were awarded a total of 1,974,105 Rights from the remaining pool of Rights available to be awarded under the LTIP. Of the 33 employees who were awarded Rights in FY21, one was a new senior leader and the other 32 were awarded Rights based on their contribution to the Company’s transformation program. None of those Rights are yet vested and none of those further Rights were awarded to any KMP. The remaining pool contains further Rights which are available for award under the LTIP at the Company’s discretion. 4.4 Changes for FY21 There were no material changes to the Executive Remuneration framework during FY21. 5.0 FY21 Executive KMP Performance and Remuneration Outcomes 5.1 Actual Remuneration earned by Executive KMP in FY21: The actual remuneration earned by Executive KMP in FY21 is set out in section 7 below. The FY21 cash bonus STIP and LTIP Rights awarded to Executive KMP is set out in section 7 below. The table in section 7 represents what has been awarded to Executive KMP under the STIP and LTIP, although the STIP has not yet been paid. 26 Slater & Gordon Page 14 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report 5.2 STIP Performance Measures for FY21 A combination of financial and non-financial measures is used to measure Executive KMP performance for STIP awards which are underpinned by the Company’s values and behaviours. A summary and performance against each measure is as follows: Key:  Below target  At target  Exceed target Managing Director and Chief Executive Officer Company Financial Performance  Cash Generation  Business Performance Executive Director, Legal and Governance  Cash Generation  Business Performance  Client satisfaction Chief Financial Officer  Cash Generation  Business Performance  Client satisfaction Client Measure People Measure  Client satisfaction  Engagement & compliance to people activities  Engagement & compliance to people activities  Engagement & compliance to people activities Operational Measure  Strategic initiatives  Strategic initiatives  Strategic initiatives The Company met and exceeded its Business Performance target (based on underlying EBITDA), but did not meet its Cash Generation target (based on gross operational cashflow). The Executive KMP were assessed to have met or exceeded their non-financial measures. Based on this assessment, the Board determined that the average STIP bonus awarded to those Executive KMP who were eligible for a STIP bonus in FY21 as a percent of target was 103%. The Chief Financial Officer had resigned and so was not eligible for a STIP bonus in FY21. However, the Board determined that all STIP bonuses are subject to a condition that the Company meet its Cash Generation target for the first quarter of FY22. If this condition is not met, the STIP bonuses awarded in FY21 will be reduced by 20%, including the bonus awarded to the Executive Director, Legal and Governance. The Managing Director and Chief Executive Officer’s STIP bonus is contractually payable at target where his performance rating has been assessed as meeting or exceeding his overall targets. The table in section 7.1 discloses actual FY21 STIP awarded to Executive KMP and assumes the Cash Generation target for the first quarter of FY22 is met. 5.3 LTIP Performance Measures and Vesting outcomes for FY21 On 30 June 2020, Tranche A of the LTIP vested in accordance with the terms of the award to independent NEDs and Executive KMP. Given the uncertainty around the impact of the COVID-19 pandemic on Australia’s economy and, in turn, the Company’s financial performance in FY21, the Board deferred its consideration of whether an Exit Event had occurred under the LTIP Rules to November 2020 and on 18 November 2020, determined that the Exit Event had occurred. As a result, Tranche D vested and both Tranche A and Tranche D, became exercisable by the participants. On 30 June 2021, Tranche B of the LTIP vested in accordance with the terms of the award to independent NEDs and Executive KMP and also became exercisable. The Company has valued the benefit to independent NEDs and Executive KMP of their participation in the LTIP in FY21 using the Black Scholes valuation method and that value has been added to each NED and Executive KMP’s remuneration in the tables in sections 6 and 7. The value of these benefits does not represent cash received by the relevant participant and these values may need to be adjusted over time, based on performance, changes in model parameters and LTIP outcomes. Slater & Gordon Page 15 27 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report 5.4 Overview of company performance (FY17 to FY21) The table below sets out information about the Company’s earnings and movements in shareholder wealth for the past five years up to and including the current financial year. Company Performance Revenue from continuing operations ($'000) Profit before tax from continuing operations ($'000) Profit after tax from continuing operations ($'000) Basic earnings per share (dollars) Diluted earnings per share (dollars) 2 Gross Operating Cash Flow less CAPEX($'000) Dividends per share - paid during financial year (cents) Total dividends paid during financial year (cents) 20171 20181 2019 2020 2021 611,485 162,501 160,372 178,339 203,443 (551,149) (29,044) (141) (199) 21,263 (546,831) (31,722) 33,010 (1,660) 14,186 (15,542.50) (0.84) 0.425 (0.013) 0.098 (15,542.50) (0.84) 0.450 (0.013) 0.094 (34,308) (682) 5,230 24,921 13,677 - - - - - - - - - - 1. Financial performances were not restated for the discontinued operations that occurred in FY18. However, the basic earnings per share, diluted earnings per share and share price at 30 June have been restated for the 100 to 1 share consolidation that took place on 8 December 2017. 2. Basic earnings per share and diluted earnings per share were restated for the impact of the 100 to 1 share consolidation that took place on 8 December 2017. 2018 earnings per share is shown excluding discontinued operations. Prior years are shown for the overall business and have not been restated for discontinued operations. 6.0 Overview of Non-Executive Director remuneration 6.1 Overview of Non-Executive Director remuneration The fees paid to the Company’s NEDs are designed to attract and retain high caliber directors who can discharge their roles and responsibilities required in terms of good governance, strong oversight, independence and objectivity. NED remuneration is based on fixed director fees and superannuation contributions and is reviewed annually by the People and Culture Committee. The chairs of the Board and each Committee do not receive any additional committee fees in addition to base fees. 6.2 Maximum aggregate NED fee pool The maximum aggregate fee amount that may be paid to NEDs for their services is $950,000 during any financial year, as approved by shareholders at the 2015 AGM held in November 2015. The table below summarises Board and Committee fees paid to NEDs for FY21 (inclusive of superannuation). 1 July 2020 - 30 June 2021 Board Chair Fee Board Director Fee Committee Fees Audit and Risk Committee People and Culture Committee Annual Fee Pool Chair Member Chair Member $250,000 $175,0001 Nil Nil Nil Nil $950,000 1 Non- Executive Director Merrick Howes and Executive Directors John Somerville and Michael Neilson do not receive payment of Board director fees from the Company. 6.3 FY21 NED Remuneration The table below sets out the FY21 NED remuneration. The table includes an entry for short term benefits to Merrick Howes, an executive who was employed by Anchorage Capital Group LLC (Anchorage) until May 2021. Anchorage is the parent entity of the Group. Merrick ceased his employment with Anchorage in May 2021. The Company does not pay any remuneration to Merrick Howes. Australian Accounting Standards require disclosure of fees for his role as a Director of the Company, where he is paid by his employer. The fees paid by the Company to other NEDs are considered representative of this. The Executive Directors do not receive Board director’s fees. Their remuneration does not count towards the total 28 Slater & Gordon Page 16 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report NED Annual Fee Pool. Please refer to table 7.1 KMP Remuneration: Statutory Remuneration Outcomes for Executive Director remuneration. Amounts $ Current NEDs James MacKenzie (Chair) Mark Dewar Merrick Howes 1 Disclosure required by Australian Accounting Standards – no remuneration was actually paid by the Company Elana Rubin 2 Jacqui Walters Total3 Short-term benefits Fees3,5 Post-employment benefits Superannuation benefits 5 LTIP Value4 Rights Total 236,962 221,927 165,872 155,207 159,817 158,375 181,630 162,361 165,872 155,207 750,336 694,702 21,276 20,520 15,758 14,745 - - - 7,591 15,758 14,745 52,792 57,601 260,999 384,341 - - - - 87,000 128,114 87,000 128,114 434,999 640,569 519,237 626,788 181,630 169,952 159,817 158,375 268,630 298,066 268,630 298,066 1,238,127 1,392,872 Year FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY206 1 M Howes was employed by Anchorage until May 2021. He was not remunerated by the Company for his service as Non-Executive Director. The Company was not charged for his service. Amounts shown in this table for M Howes are not included in the total NED Annual Fee Pool. 2 E Rubin received an exemption certificate from receiving Superannuation Guarantee contributions paid by the Company during FY21. 3 The fee shown attributable to M Howes is not counted towards the maximum aggregate NED Annual Fee Pool. 4 The Company has valued the benefit to independent NEDs of their participation in the LTIP in FY21 using the Black Scholes valuation method. The value of these benefits does not represent cash received by the relevant participant. The value of the benefit under the LTIP does not count towards the total NED Annual Fee Pool. 5 In FY21, the Company was required to pay fees and Superannuation Guarantee according to the required 27 pay periods compared to 26 pay periods in FY20. 6 As disclosed in FY20, the Director fees shown for FY20 reflect a temporary voluntary reduction to their base pay to assist the Company and potential impacts of the COVID-19 pandemic. In FY20 three of the NEDs were awarded Rights under the Company’s LTIP, as follows: NED James MacKenzie1 Elana Rubin Jacqui Walters Number of Rights Awarded 1,245,840 415,280 415,280 1 James Mackenzie’s Rights were awarded to a company controlled by him, JACM Pty Ltd. These awards were approved by shareholders at the Company’s 2019 Annual General Meeting. Section 4.3 and 5.3 contains a description of the LTIP. No further Rights were awarded to NEDs in FY21 and no NEDs exercised any vested Rights in FY21. Slater & Gordon Page 17 29 Slater & Gordon LtdANNUAL REPORT 2021 f o n o i t r o p o r P l a t o T n o i t a r e n u m e R e c i v r e S f o d n E e v i l e D s a d e r y t i u q e m r o f r e P e c n a - d e t a l e r l a t o T - n u m e R n o i t a r e l a u t c a r t n o C d e s u n U y r o t u t a t S e v a e L l a t o T d o i r e P e c i t o N s e c n a l a B l a t o T y a P e l b a i r a V m r e t - g n o L e c n a m r o f r e P / s t h g R i 2 s n o i t p O - t r o h S m r e t h s a C 1 s u n o B l a t o T % 9 . 4 4 % 5 . 5 5 % 6 . 1 3 % 1 . 1 4 % 7 . 2 6 % 8 . 0 7 % 1 . 4 4 % 0 . 5 5 2 8 6 , 9 4 5 , 1 8 6 4 , 7 5 8 , 1 9 6 5 , 5 2 8 7 4 9 , 4 3 9 % 5 . 7 3 % 6 . 2 4 % 5 . 7 3 % 2 . 5 5 4 8 0 , 1 1 8 8 8 3 , 2 5 0 , 1 % 6 . 9 3 % 3 . 8 4 % 4 . 1 5 % 7 . 2 6 5 3 3 , 6 8 1 , 3 3 0 8 , 4 4 8 , 3 - - - - - - - - - - - - - - - - - - - - - - - - 8 9 9 , 0 7 9 8 9 9 , 5 9 6 0 0 0 , 5 7 2 4 8 6 , 8 7 5 4 7 4 , 5 1 3 , 1 9 0 9 , 4 2 0 , 1 5 6 5 , 0 9 2 4 9 9 , 1 4 5 7 1 7 , 3 6 3 9 6 4 , 4 1 5 9 9 4 , 4 0 3 4 4 3 , 1 8 5 9 9 9 , 0 6 2 1 4 3 , 4 8 3 8 1 7 , 2 0 1 8 2 1 , 0 3 1 2 5 8 , 1 6 4 8 7 4 , 0 2 4 9 9 4 , 4 0 3 8 9 3 , 8 4 4 - 6 4 9 , 2 3 1 5 8 5 , 6 0 5 4 4 0 , 1 7 4 4 1 2 , 9 3 6 , 1 7 8 2 , 1 1 4 , 2 6 9 4 , 1 6 2 , 1 8 4 6 , 7 5 8 , 1 8 1 7 , 7 7 3 9 3 6 , 3 5 5 1 2 1 , 7 4 5 , 1 6 1 5 , 3 3 4 , 1 0 0 2 , 1 2 1 2 7 , 6 1 - g n o L m r e t g n o L e c i v r e s e v a e l 0 7 6 , 8 3 5 2 , 7 7 5 4 , 6 7 8 1 , 5 3 7 0 , 6 1 8 2 , 4 - t s o P t n e m y o p m e l n o i t a r e n u m e R d e x F i m r e t - t r o h S - r e p u S n o i t a u n n a 3 s t i f e n e b r e h t O s t i f e n e b - n o N y r a t e n o m s t i f e n e b 4 9 6 , 1 2 3 0 0 , 1 2 4 9 6 , 1 2 3 0 0 , 1 2 4 9 6 , 1 2 3 0 0 , 1 2 2 8 0 , 5 6 9 0 0 , 3 6 - - - - - - - - - - - - - - - - 3 y r a l a S r a e Y e m a N r o t c e r i D e v i t u c e x E , 0 2 3 8 4 5 , 8 3 7 3 1 5 , 1 0 7 3 3 4 , 8 8 2 4 9 3 1 2 Y F 0 2 Y F 1 2 Y F 0 2 Y F n h o J e l l i v r e m o S l e a h c M i n o s l i e N 9 3 8 , 0 6 4 , 1 6 8 7 , 3 5 3 , 1 1 2 Y F 0 2 Y F l a t o T l a t o T , 8 1 8 8 7 4 , 0 6 7 5 4 4 1 2 Y F 0 2 Y F t t o c S 4 h t r o w r e t t u B P M K e v i t u c e x E r e h t O i . t n a p c i t r a p t n a v e e r l e h t y b d e v e c e r i h s a c t n e s e r p e r t o n s e o d s t i f e n e b e s e h t f o l e u a v e h T . d o h t e m n o i t a u a v l l s e o h c S k c a B e h t l i g n s u 1 2 Y F d n a 0 2 Y F n i I P T L e h t n i i n o i t a p c i t r a p r i e h t f o P M K e v i t u c e x E o t t i f e n e b e h t d e u a v l s a h y n a p m o C e h T 2 . 0 2 Y F r o f s u n o b h s a c n i t n e m t s u d a j o n s a w e r e h T i . d a p n e e b t e y t o n i s a h h c h w P M K e v i t u c e x E o t I d e d r a w a P T S 1 2 Y F s t n e s e r p e r s u n o b h s a c 1 2 Y F e h T 1 . 0 2 Y F n i s d o i r e p y a p 6 2 o t d e r a p m o c s d o i r e p y a p 7 2 d e r i u q e r i e h t o t g n d r o c c a e e t n a r a u G n o i t a u n n a r e p u S d n a y r a a s l y a p o t d e r i u q e r s a w y n a p m o C e h t , 1 2 Y F n I 3 . I P T S / s u n o b h s a c 1 2 Y F l a i t n e t o p d e t i e f r o f t l u s e r a s a d n a 1 2 0 2 t s u g u A n i r e c i f f o l i a c n a n F i i f e h C f o n o i t i s o p i s h m o r f d e n g s e r h i t r o w r e t t u B S 4 8 1 e g a P n o d r o G & r e t a S l e r u s o l c s i D y r o t u t a t S – e l b a T n o i t a r e n u m e R P M K d n a r o t c e r i D e v i t u c e x E 1 . 7 n o i t a r e n u m e R P M K d n a r o t c e r i D e v i t u c e x E l a u t c A 0 . 7 t r o p e R n o i t a r e n u m e R d e t i d u A t r o p e R ’ s r o t c e r i D 30 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ Report Audited Remuneration Report 7.2 Executive KMP Equity Plans As described in section 4.3, the LTIP is the only equity plan in which Executive KMP participated during FY21. 7.3 Vesting and Exercise of Performance Rights granted as Remuneration As described in section 5.3, an Exit Event occurred on 18 November 2020 and Tranche D of the LTIP vested on that date in accordance with the terms of the award to independent NEDs, Executive Directors and Other Executive KMP. Tranche B of the LTIP vested and became exercisable on 30 June 2021 in accordance with the terms of the award to independent NEDs, Executive Directors and Other Executive KMP. Given that an Exit Event has occurred, participants in the LTIP, including the Executive KMP, may exercise their vested Rights by applying to have their Rights converted to shares. No KMP exercised any vested Rights in FY21. 7.4 Shareholding of Executive KMP and NEDs In accordance with the Corporations Act (section 205G (1)), the Company is required to notify the interests (shares and rights to shares) of directors to the ASX. In the interests of transparency and completeness of disclosure, this information is provided for each NED (as required under the Corporations Act) and all Executive KMP. Please refer section 3.3 for more information on prohibition on hedging and margin lending. The table below indicates shareholdings of the Executive KMP and NEDs: KMP James MacKenzie Mark Dewar Merrick Howes Elana Rubin Jacqui Walters John Somerville Michael Neilson Scott Butterworth Total Number held at 1 July 2020 Acquisitions Disposals Number held at 30 June 2021 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7.5 Movement in Executive KMP Holdings: Performance rights over ordinary shares During the financial year, the movement in the number of performance rights over ordinary shares of the Company acquired under the LTIP, held by Executive KMP and NEDs is detailed below: Acquisitions Rights Vested2 Rights Exercisable Rights Exercised KMP James MacKenzie1 Mark Dewar Merrick Howes Elana Rubin Jacqui Walters John Somerville Michael Neilson Scott Butterworth Number of Rights at 1 July 2020 1,245,840 - - 415,280 415,280 3,322,240 1,245,840 1,453,480 - - - - - - - - 971,755 971,755 - - 323,918 323,918 - - 323,918 323,918 2,591,347 2,591,347 971,755 971,755 1,133,714 1,133,714 Total 6,316,407 8,097,960 1 James Mackenzie’s Rights were awarded to a company controlled by him, JACM Pty Ltd. 2 Rights vested comprise Tranches A, B and D as at 30 June 2021. - 6,316,407 Number of Rights at 30 June 2021 1,245,840 415,280 415,280 3,322,240 1,245,840 1,453,480 8,097,960 - - - - - - - - - End of Remuneration Report Slater & Gordon Page 19 31 Slater & Gordon LtdANNUAL REPORT 2021 32 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Auditor’s independence declaration to the directors of Slater & Gordon Ltd As lead auditor for the audit of the financial report of Slater & Gordon Ltd for the financial year ended 30 June 2021, I declare to the best of my knowledge and belief, there have been: a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Slater & Gordon Ltd and the entities it controlled during the financial year. Ernst & Young David Shewring Partner Melbourne 26 August 2021 Slater & Gordon LtdANNUAL REPORT 2021Consolidated Statement of Profit or Loss and Other Comprehensive Income For the Year Ended 30 June 2021 Revenue Fee revenue Net movement in work in progress Revenue from contracts with customers Other income Total revenue and other income Less expenses Salaries and employee benefit expense Administration and office expense Advertising, marketing and new business development expense Finance costs Depreciation and amortisation expense Consultant fees Bad and doubtful debts Rental expense Other expenses Total expenses Profit / (Loss) before income tax expense from continuing operations Income tax expense Profit / (Loss) after income tax expense from continuing operations Profit after income tax expense from discontinued operations Profit / (Loss) after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income / (loss) for the year Total comprehensive income / (loss) for the year is attributable to: Continuing operations Discontinued operations Total comprehensive income / (loss) for the year Earnings / (Loss) per share from continuing operations Basic earnings / (loss) per share Diluted earnings / (loss) per share Earnings per share from discontinued operations Basic earnings per share Diluted earnings per share Earnings / (Loss) per share Basic earnings / (loss) per share Diluted earnings / (loss) per share Note 30 June 2021 $'000 30 June 2020 $'000 154,245 48,096 202,341 1,102 203,443 (113,068) (17,511) (12,319) (11,791) (7,978) (5,540) (4,983) (2,689) (6,301) (182,180) 21,263 (7,077) 14,186 284 14,470 - 14,470 14,186 284 14,470 161,407 15,839 177,246 1,093 178,339 (107,969) (17,992) (11,207) (12,713) (9,444) (7,680) (4,849) (1,766) (4,918) (178,538) (199) (1,461) (1,660) 475 (1,185) - (1,185) (1,660) 475 (1,185) Cents Cents 9.8 9.4 0.2 0.2 10.0 9.6 (1.3) (1.3) 0.4 0.4 (0.9) (0.9) 3 4 4 4 4 4 6 28 8 8 8 8 8 8 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes Slater & Gordon Page 21 33 Slater & Gordon LtdANNUAL REPORT 2021 Consolidated Statement of Financial Position As at 30 June 2021 Assets Current assets Cash and cash equivalents Receivables Work in progress Other assets(1) Assets held for sale Total current assets Non-current assets Property, plant and equipment Receivables Work in progress Right-of-use assets Intangible Assets Other assets(1) Total non-current assets Total assets Liabilities Current liabilities Payables Financing arrangements Leases Provisions Total current liabilities Non-current liabilities Payables Financing arrangements Leases Deferred tax Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity Note 30 June 2021 $'000 30 June 2020 $'000 16 10 11 12 13 10 11 18 9 14 17 18 15 14 17 18 6 15 20 20,697 57,098 122,577 10,981 - 211,353 2,690 23,096 163,554 15,572 907 1,428 207,247 26,461 63,894 107,460 11,047 1,375 210,237 3,643 21,288 131,753 19,705 1,618 318 178,325 418,600 388,562 60,758 - 6,628 23,154 90,540 13,317 89,214 16,542 22,418 6,114 147,605 54,833 8,415 8,185 20,333 91,766 8,889 83,435 24,110 15,219 2,810 134,463 238,145 226,229 180,455 162,333 1,435,177 9,293 (1,264,015) 1,434,793 6,025 (1,278,485) 180,455 162,333 (1) Other assets includes prepayments, professional indemnity insurance asset (see Note 15) and lease rental guarantees (see Note 26). The above consolidated statement of financial position should be read in conjunction with the accompanying notes Slater & Gordon 34 Page 22 Slater & Gordon LtdANNUAL REPORT 2021 Consolidated Statement of Changes In Equity For the Year Ended 30 June 2021 Contributed equity $'000 Share-based payment reserve $'000 Accumulated losses $'000 Total equity $'000 Balance at 1 July 2019 1,351,533 9,933 (1,277,314) 84,152 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive loss for the year Transfer from share-based payments reserve Issuance of shares under rights offer Performance rights granted under LTIP - - - - - - (1,185) - (1,185) - (1,185) (1,185) 8,698 74,562 - (8,712) - 4,804 14 - - - 74,562 4,804 Balance at 30 June 2020 1,434,793 6,025 (1,278,485) 162,333 Contributed equity $'000 Share-based payment reserve $'000 Accumulated losses $'000 Total equity $'000 Balance at 1 July 2020 1,434,793 6,025 (1,278,485) 162,333 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Issuance of shares under rights offer Performance rights granted under LTIP - - - 384 - - - - (384) 3,652 14,470 - 14,470 - 14,470 14,470 - - - 3,652 Balance at 30 June 2021 1,435,177 9,293 (1,264,015) 180,455 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes Slater & Gordon Page 23 35 Slater & Gordon LtdANNUAL REPORT 2021 Consolidated Statement of Cash flows For the Year Ended 30 June 2021 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Borrowing costs paid Net cash flow from continuing operations Net cash from operating activities of discontinued operations Note 30 June 2021 $'000 30 June 2020 $'000 223,372 (208,853) 1,050 (4,429) 11,140 406 234,116 (208,848) 174 (5,451) 19,991 750 Net cash provided by operating activities 5 11,546 20,741 Cash flows from investing activities Payment for software development Payment for plant and equipment Proceeds from disposal of business(1) Proceeds from disposal of intangible asset Net cash (used in) / provided by investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Payment of principal portion of lease liabilities Transaction costs of rights issue Net cash used in financing activities Net (decrease) / increase in cash held Cash and cash equivalents at the beginning of the financial year - (842) 839 - (45) (304) 884 1,000 (3) 1,535 5,676 (14,627) (8,356) - 19,500 (19,372) (7,106) (1,470) (17,307) (8,448) (5,764) 26,461 13,828 12,633 Cash and cash equivalents at the end of the financial year 16 20,697 26,461 (1) Deferred consideration received for sale of client files. Refer to Note 12. The above consolidated statement of cash flows should be read in conjunction with the accompanying notes Slater & Gordon 36 Page 24 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 1. Basis of Preparation This note sets out the accounting policies adopted by Slater & Gordon Ltd (the “Company”) and its consolidated entities (the “Consolidated Entity” or the “Group”) in the preparation and presentation of the financial report. Where an accounting policy is specific to one note, the policy is described within the note to which it relates. The financial report was authorised for issue by the Directors as at the date of the Directors’ Report on 26 August 2021. The Company is limited by shares and is incorporated and domiciled in Australia. Its shares are publicly traded on the Australian Securities Exchange. 1.1 Basis of Accounting This financial report is a general purpose financial report, for a ‘for-profit’ entity, which has been prepared in accordance with Australian Accounting Standards, Interpretations and other applicable authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated financial statements of Slater & Gordon Ltd also comply with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). The financial report has been prepared under the historical cost convention, except where noted. The consolidated financial statements provide comparative information in respect of the previous period. Where necessary, comparative figures have been reclassified and repositioned for consistency with current year disclosures. The parent entity and the consolidated entity have applied the relief available under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and accordingly, amounts in the consolidated financial statements and Directors’ Report have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. Going Concern The financial statements have been prepared using the going concern assumption which contemplates the realisation of assets and the settlement of liabilities in the ordinary course of business. As at 30 June 2021, the Group’s total borrowings (excluding lease liabilities), were $89.2m (30 June 2020: $91.9m). Of this, nil (30 June 2020: $8.4m) is presented as current liabilities, being due for repayment in the next 12 months. The remaining $89.2m (30 June 2020: $83.4m) of debt is non-current. Furthermore, as at 30 June 2021, the Group has a positive net current asset balance of $120.8m (30 June 2020: $118.5m) and a positive overall net asset balance of $180.5m (30 June 2020: $162.3m). The Group’s borrowings are subject to covenants which have been complied with as at 30 June 2021. These covenants are expected to be complied with in the next 12 months based on the most recent forecast. The Directors have assessed forecasts of the Group’s trading and cash flows. The potential impact of the COVID-19 pandemic on the Group’s operations and potential cash flows has been considered, noting that the rapidly evolving nature of COVID-19 makes it inherently difficult to forecast outcomes with certainty. Nevertheless, various mitigation strategies are able to be deployed to manage cash to appropriate levels in the event an unfavourable outcome occurs. On this basis, the Directors have concluded that there are reasonable grounds to believe that the Group will continue to be able to pay its debts as and when they become due and payable, and the preparation of the 30 June 2021 financial report on a going concern basis is appropriate. Basis of Consolidation The consolidated financial statements comprise the financial statements of the parent entity and of all entities which the parent entity controls. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity. Adjustments are made to bring into line any dissimilar accounting policies which may exist. Slater & Gordon Page 25 37 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 1. Basis of Preparation (continued) All inter-company balances and transactions, including any unrealised profits or losses, have been eliminated on consolidation. Subsidiaries are consolidated from the date on which control is established and are de-recognised from the date that control ceases. Non-controlling interests in the results of subsidiaries are shown separately in the consolidated statement of profit or loss and other comprehensive income and consolidated statement of financial position. Any changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. 1.2 Foreign Currency Translations and Balances Functional and Presentation Currency The consolidated financial statements are presented in Australian dollars which is also the functional currency of the parent entity and all Australian subsidiaries. 1.3 Adoption of New and Amended standards The Group did not apply any new and/or amended standards as of 1 July 2020 that have a material impact on the financial statements of the Group. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. 1.4 Significant Accounting Judgements, Estimates and Assumptions In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are regularly reviewed. Revisions to estimates are recognised prospectively. The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty are outlined in detail within the specific note to which they relate. Note 2. Segment Reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenue and expenses that relate to transactions with any of the Group's other components. The Group has one reportable segment relating to provision of legal services in Australia. Information provided to the chief operating decision maker for the purposes of making decisions about allocating resources to the segment and assessing its performance is consistent with amounts presented in the consolidated financial statements. The Group’s revenues and assets are wholly based in Australia. The Group is not reliant on any single customer. Note 3. Revenue from Contracts with Customers 3.1 Accounting Policies Provision of Legal Services – Personal Injury Law Claims The Group's personal injury law practice operates on the basis of No Win – No Fee (“NWNF”) conditional fee arrangements, whereby fees are earned only in the event of a successful outcome of a client’s claim. Fees may be fixed depending on the stage at which a matter concludes or determined based on an agreed scale detailed within the legal cost agreement, which is often a mix between time-based charging and set rates for certain activities. Contracts with clients may comprise a single performance obligation, being the provision of services in pursuit of the successful settlement of a customer’s claim, or may contain multiple performance obligations, such as legal services in respect of a statutory claim and a common law claim, or initial pre-issue work and litigation work. In both circumstances, the transaction price is allocated to a single distinct performance obligation given the services being performed are highly integrated. Slater & Gordon 38 Page 26 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 3. Revenue from Contracts with Customers (continued) The NWNF arrangement introduces transaction price variability as the final fees receivable under a contract are generally only known upon the matter’s conclusion. Expected fees are only recognised as revenue to the extent that it is highly probable that the cumulative amount of revenue recognised will not be subject to significant reversal when a matter is concluded. The transaction price for revenue recognition is estimated using the expected value method basis using the Group’s historical experience in similar contracts and is influenced by the following factors: Factor Basis Sensitivity expected fee historical fee data success rate risk adjustment historical rates of successful and unsuccessful outcomes of similar matters simulated at each reporting period using a Monte Carlo method The higher the expected fee, the higher the estimated revenue. The higher the success rate, the higher the estimated revenue. The higher the risk adjustment, the lower the estimated revenue. The additional risk adjustment is applied to consider the variability of the final outcomes of contracts in a particular group of matters and determines a percentage adjustment that should be applied to the expected outcome in order to satisfy that it is ‘highly probable that a significant reversal of revenue recognised will not occur’ when the uncertainty associated with the amount of variable consideration is resolved. Where historical averages are not predictive of the probability of outcomes for a given contract, or where the Group has limited historical experience with similar contracts, the expected amount of variable consideration is estimated using a 'most likely amount' approach on a contract by contract basis. In such circumstances, a level of judgement is required to determine the likelihood of success of a given matter, as well as the estimated amount of fees that will be recovered in respect of the matter. Revenue is recognised when control of a service is transferred to the client. The Group recognises revenue in respect of personal injury matters 'over time' (as opposed to at a 'point in time') using a milestone-based approach. The percentage completion is determined: ● ● by calculating the average fee received for matters that resolve at a particular status code as a percentage of the average fee received for matters that resolve at that status and any later status; or by use of defined completion allocations based on historical performance. Estimates of revenues (including interim billing), costs or extent of progress toward completion are revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known by management. The Group also arranges for the disbursement activities provided by third parties on behalf of the client where the Groups acts as an agent because the Group does not control the output from those activities and cannot influence the content of the medical reports or certain court filings. No profit margin is recognised on the activities when clients are charged the direct cost incurred by the Group. The amount recognised for the expected reimbursement does not exceed the relevant costs incurred. Disbursements are treated as a separate asset reduced by an allowance for non-recovery based on past experience. Refer to Note 10. Provision of Legal Services – Litigation and Emerging Services The Group earns revenue from the provision of general legal services, including project litigation. Revenue for general legal services is recognised over time in the accounting period when services are rendered. Revenue recognised is carried as ‘Work in progress’ until the matter is finalised and a client invoice is raised. Fee arrangements from general legal services include NWNF arrangements, fixed fee arrangements, and partially or fully funded litigation. NWNF arrangements: Revenue is estimated using a most likely amount approach on a contract by contract basis. Management makes a detailed assessment of the amount of revenue expected to be received and the probability of success of each case. Variable consideration is included in revenue only to the extent that it is highly probable that a significant reversal will not occur. Partially or fully funded litigation: The Group enters into arrangements with third party funders to provide a portion of the fees on a matter over time as services are performed. In such arrangements, the funded portion of fees, referred to as time and materials, is billed regularly over time and is not contingent on the successful outcome of the litigation. The remaining portion of fees is variable consideration which is conditional on the successful resolution of the litigation. The variable consideration is included in revenue as services are performed only to the extent that it is highly probable that the amount will not be subject to significant reversal when the uncertainty is resolved. Slater & Gordon Page 27 39 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 3. Revenue from Contracts with Customers (continued) Fixed fee arrangements: Revenue is recognised based on the stage of completion tracked on a contract by contract basis using a milestone-based approach, similar to Personal Injury Law Claims as explained above. As in the case of personal injury claims, estimates of revenues, costs or extent of progress toward completion are revised if circumstances change. Any resulting increases or decreases in estimated revenues or costs are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known by management. The Group has determined that no significant financing component exists in respect of all its revenue streams. This is because: ● ● a substantial amount of the consideration promised by the client is variable subject to the occurrence or non-occurrence of a future event that is not substantially within the control of the client or the Group; and for fixed and funded fee arrangements, the period between when the entity transfers a promised good or service to a client and when the client pays for that good or service will be one year or less. A receivable in relation to the Group’s services is recognised when a bill has been invoiced, as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. When an invoice is raised, the amount receivable is transferred from ‘Work in progress’ to ‘Accounts receivable’. Contract Costs Applying the practical expedient in paragraph 94 of AASB 15 Revenue from Contracts with Customers, the Group recognises the incremental costs of obtaining contracts as an expense when incurred. Critical Accounting Estimates and Judgements Area Detail Identifying the performance obligation As referred to above, some Personal Injury Law Claims contracts contain multiple deliverables. The Group has assessed that these multiple deliverables represent a single distinct performance obligation, given there is a significant integration between the various deliverables provided to clients. Estimating the variable consideration on NWNF arrangements As referred to above, the uncertainty around the fees ultimately receivable under these types of contracts is generally only fully resolved when a matter is concluded. To estimate the revenue recognised over the period of the contract, significant estimation is employed by the Group as described above. Measuring the stage of completion As referred to above, the Group recognises revenue in respect of personal injury matters 'over time' (as opposed to at a 'point in time'). The determination on the stage of completion involves significant estimation as described above. 3.2 Disaggregation of Revenue from Contracts with Customers The Group derives revenue from the transfer of goods and services over time and at a point in time, in the major product lines of Personal Injury Law and Litigation and Emerging Services and the geographical regions of Australia: 30 June 2021 Type of contract No Win - No Fee Time and Materials Fixed Fee Revenue from contracts with customers Personal Injury Law $'000 Litigation and Emerging Services $'000 Total $'000 175,726 - - 13,046 13,537 32 188,772 13,537 32 175,726 26,615 202,341 Slater & Gordon 40 Page 28 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 3. Revenue from Contracts with Customers (continued) 30 June 2020 Type of contract No Win - No Fee Time and Materials Fixed Fee Revenue from contracts with customers Note 4. Expenses 4.1 Accounting Policies Personal Injury Law $'000 Litigation and Emerging Services $'000 Total $'000 156,156 - - 5,527 15,123 440 161,683 15,123 440 156,156 21,090 177,246 Expenses are recorded in the period in which the goods or services are received or used. Interest After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Depreciation The depreciable amounts of all property, plant and equipment, excluding land, are depreciated over their estimated useful lives, commencing from the time the asset is held ready for use. Leased right of use assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. The depreciation rates used for each class of assets are: Class of Fixed Asset Depreciation Rates Depreciation Method Plant and equipment Right of use asset Low value asset pool Amortisation 5.00 - 66.67% 10.00 - 50.00% 18.75 - 37.50% Straight Line and Diminishing Value Straight Line Diminishing Value Amortisation is calculated using a straight-line method to allocate the cost of intangible assets over their estimated useful lives. Amortisation commences when the intangible asset is available for use. The amortisation rates used for each class of assets are: Class of Intangible Asset Amortisation Rates Amortisation Method Software and development Client lists Share Based Payments 33.33% 33.33% Straight Line Straight Line The accounting policy for share based payments is included in Note 21. Slater & Gordon Page 29 41 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 4. Expenses (continued) 4.2 Expense Analysis Profit / (Loss) before income tax from continuing operations includes the following specific expenses: 30 June 2021 $'000 30 June 2020 $'000 Salaries and employee benefit expense Wages and salaries Post-employment benefits Share based payment expense Redundancy costs Administration and office expense IT and computer Professional fees Utilities and insurance Printing, postage and stationery Sundry Finance costs Interest and fees on loans (includes costs of borrowing) Interest on lease obligations Interest on make good and hire purchases Depreciation and amortisation Right of use assets Property, plant and equipment Software development Bad and doubtful debts Disbursements Trade receivables Work in progress 101,122 7,525 3,652 769 93,970 7,122 4,804 2,073 113,068 107,969 5,546 4,068 3,611 2,222 2,064 4,959 2,841 4,090 3,066 3,036 17,511 17,992 10,195 1,544 52 10,273 2,436 4 11,791 12,713 5,485 1,782 711 7,978 5,064 240 (321) 4,983 5,643 3,246 555 9,444 5,252 107 (510) 4,849 Slater & Gordon 42 Page 30 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 5. Cash Flow Information Reconciliation of profit for the period to cash flows from operating cash flows Profit / (Loss) after income tax expense for the year Adjustments for: Interest expense capitalised Depreciation and amortisation Bad and doubtful debts Share based payment expenses Foreign exchange loss Change in operating assets and liabilities: Decrease in receivables Increase in work in progress Increase in other assets Increase in payables Increase in provisions and other liabilities Increase in net deferred tax 30 June 2021 $'000 30 June 2020 $'000 14,470 (1,185) 8,338 7,978 4,983 3,652 - 5,764 (45,803) (1,759) 3,446 3,278 7,199 8,260 9,444 4,849 4,804 985 4,522 (15,834) (2,133) 3,296 1,993 1,740 Net cash provided by operating activities 11,546 20,741 Slater & Gordon Page 31 43 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 6. Income tax expense 6.1 Accounting Policies Income and other taxes consist of income tax and goods and services tax. Income Tax Current income tax expense or benefit for the current and prior periods is measured at the amount expected to be recovered from or paid to the tax authorities. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Group operates. Deferred tax assets and liabilities are recognised for temporary differences at the applicable tax rates when the assets are expected to be recovered or liabilities are settled. Deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Except for those arising from right-of-use assets and lease liabilities, deferred tax is also not recognised if it arises from initial recognition of an asset or liability in a transaction that is not a business combination and does not affect accounting profit or taxable profit. Deferred tax assets are recognised for unused tax losses to the extent that management considers the similar business test to have been satisfied and only if management considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets are reviewed at each reporting date. Unrecognised deferred tax assets are reassessed at each reporting date. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Current and deferred tax for the year are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. Goods and Services Tax (“GST”) Revenue and expenses are recognised net of the amount of GST, except where the GST incurred is not recoverable from the Australian Taxation Office (“ATO”), and is therefore recognised as part of the asset’s cost or as part of the expense item. Receivables and payables are stated inclusive of GST. The net amount of GST recoverable from, or payable to, the ATO is included as part of receivables or payables in the consolidated statement of financial position. Critical Accounting Estimates and Judgements Area Detail No adverse change will occur in the income tax legislation Deferred tax assets and liabilities are based on the assumption that no adverse change will occur in the income tax legislation in Australia and the anticipation that the Group will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Recognition of deferred tax assets Deferred tax assets are recognised only if management considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Slater & Gordon 44 Page 32 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 6. Income tax expense (continued) 6.2 Income Tax Expense The major components of income tax expense are: Income tax expense Adjustment for tax expense relating to prior periods Deferred income tax expense Aggregate income tax expense Income tax expense is attributable to: Profit / (Loss) from continuing operations Profit from discontinued operations Aggregate income tax expense The prima facie tax payable on profit before tax differs from the income tax expense as follows: Profit / (Loss) before income tax expense from continuing operations Profit before income tax expense from discontinued operations Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Non-deductible expenses Income tax expense before prior period adjustments Adjustment for tax expense relating to prior periods Income tax expense Deferred income tax expense included in income tax expense: Increase in deferred tax assets Increase in deferred tax liabilities 30 June 2021 $'000 30 June 2020 $'000 (401) 7,600 7,199 7,077 122 7,199 21,263 406 21,669 6,501 1,099 7,600 (401) 7,199 23 1,717 1,740 1,461 279 1,740 (199) 754 555 167 1,550 1,717 23 1,740 30 June 2021 $'000 30 June 2020 $'000 (4,052) 11,251 (8,036) 9,776 7,199 1,740 Slater & Gordon Page 33 45 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 6. Income tax expense (continued) 6.3 Recognised Tax Assets and Liabilities Deferred tax assets Lease liabilities Employee benefits Provision for impairment Accruals Property, plant and equipment Solicitor liability provision Provision for make good Blackhole tax asset(1) Other Revenue losses carried forward(2) Total Offset of deferred tax assets and deferred tax liabilities Balance at the end of the year 30 June 2021 $'000 30 June 2020 $'000 6,901 5,972 4,940 3,264 2,604 1,737 953 923 110 52,905 80,309 9,689 5,519 4,724 3,121 2,720 1,254 170 1,760 247 47,053 76,257 (80,309) (76,257) - - (1) Blackhole tax asset relates to capital expenditures which are not deductible immediately during the period it was incurred, but instead, deductible over 5 years using the straight-line method under the income tax regime. (2) The Group’s revenue losses carried forward arose in prior periods and are available indefinitely for offsetting against future taxable profits, subject to compliance with the Similar Business Test. Deferred tax liabilities Work in progress Unrendered disbursements Right of use asset Sub-lease receivable Professional indemnity insurance asset Other Total Offset of deferred tax assets balance Net deferred tax liability balance at the end of the year Note 7. Dividends 30 June 2021 $'000 30 June 2020 $'000 (87,077) (8,836) (4,671) (1,080) (744) (319) (102,727) (73,488) (9,909) (5,912) (1,525) (397) (245) (91,476) 80,309 76,257 (22,418) (15,219) No interim or final dividend was paid, declared or proposed for the years ended 30 June 2021 or 30 June 2020. Note 8. Earnings / (Loss) per Share The following reflects the profit/(loss) and share data used in the calculations of basic and diluted profit/(loss) per share: Slater & Gordon 46 Page 34 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Earnings / (Loss) per share from continuing operations Profit / (Loss) after income tax Note 8. Earnings / (Loss) per Share (continued) Earnings per share from discontinued operations Profit after income tax Earnings / (Loss) per share Profit / (Loss) after income tax 30 June 2021 $'000 30 June 2020 $'000 14,186 (1,660) 30 June 2021 $'000 30 June 2020 $'000 284 475 30 June 2021 $'000 30 June 2020 $'000 14,470 (1,185) 2021 '000 2020 '000 Weighted average number of ordinary shares used in calculating basic earnings / (loss) per share Adjusted weighted average number of ordinary shares used in calculating diluted earnings / (loss) per share 145,219 124,810 151,161 124,810 Note 9. Intangible Assets 9.1 Accounting Policies Goodwill Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests) and any previous interest held over the net identifiable assets acquired and liabilities assumed. Goodwill is not amortised, but it is tested annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. Software Development Costs Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility; the entity is able to use or sell the asset; the entity has sufficient resources and intent to complete the development and its costs can be measured reliably. Capitalised development expenditure is stated at cost less accumulated amortisation and accumulated impairment losses. See Note 4 for the amortisation policy. Slater & Gordon Page 35 47 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 9. Intangible Assets (continued) Non-current assets Goodwill - at cost Software development - at cost Less: Accumulated amortisation Client Lists - at cost Less: Accumulated amortisation Total intangible assets 30 June 2021 $'000 30 June 2020 $'000 879 879 15,898 (15,898) - 102 (74) 28 907 15,898 (15,221) 677 102 (40) 62 1,618 Total $'000 2,155 45 (556) (26) 1,618 (711) 907 Movement in carrying amounts: Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below Balance at 1 July 2019 Additions Amortisation expense Disposals Balance at 30 June 2020 Amortisation expense Balance at 30 June 2021 9.2 Impairment Testing of Goodwill Goodwill $'000 Software development $'000 Client lists $'000 879 - - - 879 - 879 1,179 45 (521) (26) 677 (677) - 97 - (35) - 62 (34) 28 For the purposes of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable, largely independent, cash inflows (cash generating units “CGU’s”). Impairment testing is completed at least annually for goodwill, or more frequently if events or changes in circumstances indicate that the asset may be impaired. An impairment loss is recognised where the carrying amount of the asset or CGU exceeds its recoverable amount. The recoverable amount of an asset or CGU is defined as the higher of its fair value less costs of disposal and value-in-use. Slater & Gordon 48 Page 36 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 9. Intangible Assets (continued) Critical Accounting Estimates and Judgements Area Detail Impairment of Goodwill Determining whether goodwill is impaired requires an estimation of the value-in-use or fair-value less cost of disposal of the CGU’s to which goodwill has been allocated. The value-in-use calculation requires management to estimate the future cash flows expected to arise from the CGU and a post-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset in order to calculate present value. A material impairment loss may arise where the present value of future cash flows as currently assessed are less than expected. Key assumptions and inputs into the determination of the recoverable value of the Group’s CGUs such as forecast cash flows and discount rates, are subject to significant estimation. Sensitivity considerations Sensitivities to the key assumptions were also tested and the Group has determined that no reasonably possible changes would give rise to impairment at 30 June 2021. 9.3 Impairment Losses Recognised As at 30 June 2021, the Group did not recognise an impairment expense (30 June 2020: nil). Note 10. Receivables 10.1 Accounting Policies Trade receivables are amounts due from customers for services performed in the ordinary course of business. Other receivables are non- derivative financial assets with fixed or determinable payments that are not quoted in an active market. Other receivables are mainly related to deferred consideration for sale of client files. If collection of the amounts is expected in one year from the reporting date or less, they are classified as current assets. If not, they are presented as non-current assets. Disbursements receivables are only recognised when it is assessed that a reimbursement will be received from the client or on his or her behalf. The disbursements are initially recognised at the amount disbursed. The disbursements are treated as a separate asset. Current assets Trade receivables Provision for Impairment Trade receivables, net Disbursements Provision for Impairment Disbursements, net Other receivables Total current assets Non-current assets Disbursements Provision for impairment Disbursements, net Other receivables Total non-current assets Slater & Gordon 30 June 2021 $'000 30 June 2020 $'000 31,474 (5,403) 26,071 31,912 (3,376) 28,536 39,984 (5,958) 34,026 31,104 (3,185) 27,919 2,491 1,949 57,098 63,894 33,778 (13,503) 20,275 30,429 (12,739) 17,690 2,821 3,598 23,096 21,288 Page 37 49 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 10. Receivables (continued) Collectability of trade receivables is reviewed at each reporting period. The Group applies the AASB 9 Financial Instruments simplified approach to measuring the expected credit loss (“ECL”) for all receivables, which uses a lifetime expected loss allowance. Where there is no reasonable expectation of recovery, receivables are written off. The ECL is based on three main parameters: probability of default, loss given default and exposure at default. These parameters are generally derived from internally developed statistical models combined with historical, current and forward-looking information, including macro-economic data: Parameter Detail Probability of default (“PD”) Lifetime PD represents the expected point-in-time probability of a default, based on conditions existing at the balance sheet date and future economic conditions that affect credit risk. Debtors that roll into an above 90 days overdue category are assumed to have a PD of 100%. Loss given default (“LGD”) Represents expected loss conditional on default. Exposure at default (“EAD”) Represents the expected exposure at default, taking into account the repayment of outstanding amounts from the balance sheet date to the default event. The provision matrix is initially based on the Group’s historical observed default rates. The Group calibrates the matrix to adjust the historical credit loss experience with forward-looking information. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed. The use of forward-looking information such as macro-economic forecasts increases the degree of judgement required to assess how changes in these data points will affect ECLs. The assumptions, including any forecasts of future economic conditions, are reviewed regularly. Disbursements and work in progress (Note 11) relate to unbilled work in progress and have substantially the same risk characteristics as zero days past due trade receivables for the same types of contracts. ECLs related to disbursements and work in progress are discounted at the risk free rate. The recoverability of debtors at 30 June 2021 has been assessed considering the impact of the COVID-19 pandemic. The methodology of the Group's ECL calculation was updated as at 30 June 2021. No material recoverability issues have been identified. The ECL as at 30 June 2021 and 30 June 2020 was determined as follows: Total $'000 <30 days $'000 30-60 days $'000 61-90 days $'000 91-180 days $'000 >180 days $'000 Trade receivables 30 June 2021 Gross carrying amount Provision for impairment 30 June 2020 Gross carrying amount Provision for impairment Trade receivables - provision for impairment Opening balance as at 30 June Receivables written off as uncollectible (Increase) / release of provisions Closing Balance as at 30 June 31,474 5,403 39,984 5,958 20,051 402 19,560 359 2,980 171 8,076 775 1,492 320 4,403 798 1,517 410 2,683 556 2021 $'000 5,434 4,100 5,262 3,470 2020 $'000 (5,958) (11,013) 775 (220) 4,524 531 (5,403) (5,958) Slater & Gordon 50 Page 38 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 10. Receivables (continued) Critical Accounting Estimates and Judgements Area Detail Provision for ECL of trade receivables and billed disbursements As referred to above, the Group uses a provision matrix to calculate ECLs for trade receivables and billed disbursements. The ECL is calculated based on the PD, LGD and EAD, generally derived from internally developed statistical models combined with historical, current and forward-looking information, including macro-economic data. The assessment of the correlation between historical observed default rates, forecast economic conditions and ECL involves significant estimation. Note 11. Work in progress 11.1 Accounting Policies Work in progress represents client cases which have not yet reached a conclusion and comprises personal injury cases, services performed ancillary to personal injury cases, non-personal injury cases and project litigation cases. Refer to Note 3 for further details. Contracts for legal services are billed based on time incurred or regulated prices. As permitted under AASB 15, the transaction price allocated to the unsatisfied or partially unsatisfied performance obligations under these contracts has not been disclosed. The Group allocates work in progress between current and non-current classifications based on a historical analysis of the Group’s work in progress balances and case velocity rates to determine expected timing of settlements. The Group maintains a provision to take account of potential errors in the data input of the work in progress of the personal injury law practice. Current assets Personal Injury Litigation and emerging services Provision for impairment Total current assets Non-current assets Personal injury Litigation and emerging services Provision for impairment Total non-current assets 30 June 2021 $'000 30 June 2020 $'000 112,853 10,549 (825) 105,550 2,901 (991) 122,577 107,460 160,186 6,668 (3,300) 130,419 5,296 (3,962) 163,554 131,753 The ECL for work in progress is calculated using the same methodology as described in Note 10. The closing provision for impairment for work in progress as at 30 June 2021 reconciles to the opening provision for impairment as follows: Opening balance as at 30 June Change in provisions Closing balance Slater & Gordon 30 June 2021 $'000 30 June 2020 $'000 4,953 5,463 (828) (510) 4,125 4,953 Page 39 51 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 11. Work in progress (continued) Critical Accounting Estimates and Judgements Area Detail Valuation of work in progress Refer to the disclosures made in Note 3. Provision for ECL of work in progress Refer to the disclosures made in Note 10. Note 12. Assets held for sale Current assets Assets held for sale 30 June 2021 $'000 30 June 2020 $'000 - 1,375 In June 2020, the Group performed a restructure of its Commercial and General Litigation, Estate Litigation, and Compulsory Acquisition department. As part of the restructure, departing employees in the Estate Litigation and Commercial and General Litigation practice areas purchased several of those practices’ client files. Sale agreements were executed on 11 September 2020. Work in progress for these practices was disposed and the discounted deferred consideration was recognised as a receivable. The credit risk associated with the transaction has been captured in the expected credit loss according to AASB 9. Note 13. Property, plant and equipment 13.1 Accounting Policies Property, plant and equipment is measured at cost less accumulated depreciation and any accumulated impairment losses. An asset’s residual value and useful life is reviewed, and adjusted if appropriate, at the end of each reporting period. Any depreciation and impairment losses of an asset are recognised in profit or loss – see Note 4.1 for the depreciation policy. Gains and losses on disposal are determined by comparing the proceeds obtained for the disposal with the carrying value of the relevant asset. These gains and losses are included in profit or loss when the asset is derecognised. Non-current assets Plant and equipment - at cost Less: Accumulated depreciation Carrying value Low Value Asset Pool - at cost Less: Accumulated depreciation Carrying value Total 30 June 2021 $'000 30 June 2020 $'000 27,520 (25,130) 2,390 3,102 (2,802) 300 26,707 (23,545) 3,162 3,107 (2,626) 481 2,690 3,643 Slater & Gordon 52 Page 40 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 13. Property, plant and equipment (continued) Reconciliations Movements in the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2019 Additions Disposals Depreciation expense Balance at 30 June 2020 Additions Disposals Depreciation expense Balance at 30 June 2021 Note 14. Payables 14.1 Accounting Policies Plant & Equipment $'000 Low Value Asset Pool $'000 5,945 238 (44) (2,977) 3,162 842 (12) (1,602) 2,390 685 66 (1) (269) 481 - (1) (180) 300 Total $'000 6,630 304 (45) (3,246) 3,643 842 (13) (1,782) 2,690 Trade creditors and accruals are carried at amortised cost and represent future amounts payable for goods and services provided to the Group prior to the end of the financial year. They arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. Legal creditors are carried at amortised cost and represent disbursements payable by the Group. Most of the balance is related to counsel fees which will not be paid until the Group receives payment from settlement proceeds on the matter. Current liabilities Legal creditors Trade creditors and accruals Third party disbursements Balance Non-current liabilities Third party disbursements Balance 30 June 2021 $'000 30 June 2020 $'000 26,727 21,449 12,582 28,360 17,518 8,955 60,758 54,833 13,317 13,317 8,889 8,889 The Group has an agreement with a third-party disbursement funder, Equal Access Funding Proprietary Limited (“EAF”), who funds disbursements in respect of certain individual matters. They are reimbursed out of any settlement proceeds on the matter. The Group has provided a financial guarantee to EAF for the repayment of clients’ obligations in certain circumstances. In July 2018, the Group entered into an Exclusive Service Provider Deed with MAF Credit Pty Ltd ("MAF") to provide disbursement funding to clients. The funding facility was initially available for 36 months. On 8 January 2021, the Group extended the terms of the funding for an additional 18 months expiring on 2 January 2023. The Group has provided a financial guarantee to MAF for the repayment of clients’ obligations in certain circumstances. Slater & Gordon Page 41 53 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 14. Payables (continued) Both disbursement funding facilities are presented in the statement of financial position within payables with a corresponding financial asset in receivables. An assessment of the financial asset has been performed in line with AASB 9 and a provision has been recognised against the asset in accordance with the impairment policy described. Note 15. Provisions 15.1 Accounting Policies Non-employee related provisions are recognised when the Group has a present obligation (legal or constructive) as a result of past events, for which it is probable that an outflow of economic benefits will result in an amount that can be reliably measured. Employee related provisions are recognised by the Group in line with the requirements of AASB 119 Employee Benefits. Solicitor Liability Claims A provision for solicitor liability claims is made for the potential future cost of claims brought against the Group by former clients. The provision relates to open claims and potential future claims as identified at the end of the reporting period. The provision is determined based on historical data, taking into account the nature of existing claims. The estimate includes the estimated maximum amount payable by the Group under its Professional Indemnity Insurance Policy on all claims notified to its insurer. Employee Benefits Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at the amounts based on remuneration rates which are expected to be paid when the liability is settled. Liabilities arising later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. These estimated future cash flows have been discounted using market yields, at the reporting date, on high quality corporate bonds with matching terms to maturity. A bonus provision is recognised when it is payable in accordance with the employee’s contract of employment and the amount can be reliably measured. A provision for termination benefits is recognised when the entity can no longer withdraw the offer of those benefits, or if earlier, when the termination benefits are included in a formal restructuring plan that has been announced to those affected by it. Employee benefit obligations are presented as current liabilities if the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. The Group has reviewed its provisions for employee benefits in light of the economic environment created by COVID-19. As a result, the Group has increased its provision for annual leave due to the lower attrition rates and lower leave rates that have been experienced during the COVID-19 period. Make Good For the Group’s obligation to dismantle and remove a leased asset or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under AASB 137 Provisions, Contingent Liabilities and Contingent Assets. This includes costs of removing furniture and fixtures, equipment, partitions and signage within the Group’s leased offices. Adjustments to the make good provision are generally included in the Group’s right-of-use asset under AASB 16 Leases. However, if the make good obligation specifically relates to leasehold improvements undertaken by the Group, the make good provision is capitalised as part of the relevant leasehold improvement asset rather than to the right-of-use asset. Slater & Gordon 54 Page 42 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 15. Provisions (continued) Unexpired Risk Liability In certain legal proceedings the Company’s client may be liable to pay the legal costs of the defendant if the matter is unsuccessful (also known as an adverse cost order (“ACO”)). In certain cases, the Group indemnifies the client against an ACO. The unexpired risk liability represents the costs for expected future claims from the indemnities provided to the client. The liability recognised at 30 June 2021 reflects management’s best estimate of potential adverse costs payable under each indemnity. As at 30 June 2021, no outstanding claims are associated with these current indemnities. To manage its adverse cost exposure, the Group regularly assesses its indemnified cases and may enter into insurance arrangements when necessary. The Group recognised an unexpired risk liability expense of $0.6m during 30 June 2021 (30 June 2020: nil) included as part of other expenses in the consolidated statement of profit or loss. 15.2 Provisions Current Employee benefits Solicitor liability claims Provision for make good Unexpired risk liability Balance Non-current Employee benefits Solicitor liability claims Provision for make good Unexpired risk liability Balance 30 June 2021 $'000 30 June 2020 $'000 19,056 3,024 906 168 17,013 3,294 26 - 23,154 20,333 1,246 2,136 2,269 463 6,114 1,384 886 540 - 2,810 There have been no significant COVID-19 related provisions identified as a result of the assessment performed by management for the balances as at 30 June 2021. Note 16. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits held at call with banks and short-term deposits with an original maturity of three months or less. For the purposes of the consolidated statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding banking overdrafts. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. Cash and cash equivalents Cash in hand Cash in bank Balance 30 June 2021 $'000 30 June 2020 $'000 26 20,671 20,697 26 26,435 26,461 Slater & Gordon Page 43 55 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 17. Financing arrangements 17.1 Accounting Policies Borrowing Costs Borrowing costs can include interest expense, finance charges in respect of finance leases, amortisation of loan discounts or premiums, ancillary costs relating to borrowings, and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. 17.2 Financing arrangements Debt facilities At the reporting date, the Group had the following debt facilities: (a) Super Senior Facility ($65.0m) with a termination date of 31 July 2023. The facility incurs fixed fees and a fixed interest rate, with a portion of the interest payable in cash at regular intervals since 1 January 2021. The remaining interest owing will be capitalised to the loan balance. From 1 January 2023, all interest will be payable in cash at regular intervals. The balance is $79.9m at 30 June 2021 (30 June 2020: $80.5m). The total undrawn amount of the facility is nil at 30 June 2021 (30 June 2020: nil). (b) Term Loan ($15.0m) – the facility size increased from $10.0m to $20.0m in July 2020, of which $5m of the facility commitment was lapsed on a voluntary basis as at 31 December 2020. It is secured against a borrowing base of eligible receivables and has a termination date of 6 February 2023. Of the $15.0m outstanding facility commitment, $3.0m is revolving credit and $12.0m is term loan. The facility incurs fixed fees and a fixed interest rate, with interest payable monthly in arrears. The balance is $10.0m as at 30 June 2021 (30 June 2020: $5.5m). The total available undrawn amount of the facility is $5.0m as at 30 June 2021 (30 June 2020: $4.5m) and is available until 30 September 2021, subject to availability of eligible receivables. Net Debt As at 30 June 2021, the Group has fully drawn its Super Senior Facility. The Group had cash on hand of $20,697,000 (30 June 2020: $26,461,000), offset by debt of $112,384,000 (including lease liabilities of $23,170,000), resulting in net debt of $91,687,000 (30 June 2020: $98,099,000). Covenants position The Group was in compliance with all financial covenants as at 30 June 2021. Debt reconciliation Balance at 30 June 2020 Drawdowns Repayments Borrowing costs Lease non-cash movements Gain on repayment Borrowing costs unwind Accrued interest Balance at 30 June 2021 Super senior facility $'000 Term loan $'000 Disbursement asset backed facility $'000 Lease liabilities $'000 Insurance Premium financing $'000 Total $'000 80,507 - (6,967) - - (368) - 6,756 79,928 4,896 4,500 - (425) - - 315 - 9,286 6,448 32,294 - 124,145 - (6,448) - - - - - - (10,258) - (768) - - 1,902 1,176 (1,212) - - - - 36 5,676 (24,885) (425) (768) (368) 315 8,694 - 23,170 - 112,384 17.3 Summary of Borrowing Arrangements At reporting date, the following banking facilities had been executed and were available: Slater & Gordon 56 Page 44 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 17. Financing arrangements (continued) Total banking facilities Maturity Super senior facility Term loan Disbursement asset backed facility Total credit facilities Disbursement asset backed facility Super senior facility 29 Dec 2020 31 Jul 2023 Total credit facilities - current Super senior facility(1) Term Loan Total credit facilities - non-current 31 Jul 2023 6 Feb 2023 (1) Includes interest capitalised to the loan balance. 2021 $'000 65,000 15,000 - 2020 $'000 65,000 10,000 33,000 80,000 108,000 - - - 79,928 9,286 89,214 6,448 1,967 8,415 78,539 4,896 83,435 Slater & Gordon Page 45 57 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 18. Leases 18.1 Accounting Policies The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee. This approach excludes short-term leases (defined as leases with a lease term of 12 months or less, and leases of low value assets such as laptop computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate (“IBR”). Lease payments included in the measurement of the lease liability comprise: ● ● ● ● ● Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable; Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; The amount expected to be payable by the lessee under residual value guarantees; The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease. The lease liability is presented as a separate line in the consolidated statement of financial position. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability and by reducing the carrying amount to reflect the lease payments made. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: ● ● ● The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of an option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which case the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate A lease contract is modified, and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses; and adjusted for remeasurement of the lease liability. Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under AASB 137. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use asset. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If the lease transfers ownership of the underlying asset to the Group by the end of the lease term or if the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The Group applies AASB 136 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in Note 13. Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event occurs and are included in the line Other expenses in profit or loss. As a practical expedient, AASB 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Group has not used this practical expedient. In light of COVID-19, the Group has reassessed all of the assumptions contained within the impairment model for AASB 16 right-of-use assets. No impairment was identified or recognised as at 30 June 2021 as a result of this process. Slater & Gordon 58 Page 46 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 18. Leases (continued) 18.2 Right of use assets At 1 July 2019 Additions Disposals Lease adjustments Depreciation charge Depreciation charge - discontinued operations At 30 June 2020 Additions Lease adjustments(1) Depreciation charge Makegood recognised As at 30 June 2021 Buildings Plant & Equipment $'000 $'000 25,036 23 (177) 485 (5,643) (19) 19,705 1,125 (2,341) (5,447) 2,296 - - - - - - - 272 - (38) - Total $'000 25,036 23 (177) 485 (5,643) (19) 19,705 1,397 (2,341) (5,485) 2,296 15,338 234 15,572 (1) Reassessment of lease term. The extension period for some of the offices is no longer expected to be taken up. 18.3 Lease Liabilities The closing lease liability balances are shown below. Movements in the overall lease liabilities are outlined in Note 17. Current liabilities Lease liability Total current Non-current liabilities Lease liability Total non-current Refer to note 19 for further information on financial risk management. 18.4 Amounts recognised in profit and loss The amounts shown below are recognised in the consolidated statement of profit or loss. Depreciation and amortisation Depreciation expense of right-of-use assets Finance costs Interest expense on lease liabilities Income from sub-leasing of right-of-use assets Slater & Gordon 30 June 2021 $'000 30 June 2020 $'000 6,628 6,628 8,185 8,185 16,542 24,110 16,542 24,110 30 June 2021 $000 30 June 2020 $000 5,485 5,643 1,902 (357) 2,911 (475) Page 47 59 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 18. Leases (continued) Rental expense Expenses relating to short term leases Expenses relating to variable payments not included in lease liability Critical Accounting Estimates and Judgements Area Detail 815 1,515 457 1,454 Estimating the IBR The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its IBR to measure lease liabilities. The Group estimates the IBR using observable inputs (e.g. market interest rates) when available and is required to make certain entity-specific estimates (e.g. Group’s credit rating). Determining the lease term of contracts with renewal options The Group has several property lease contracts that include extension options. These options are negotiated by management to provide flexibility in managing the leased-asset portfolio and align with the Group’s business needs. Management exercises significant judgement in determining whether these extension options are reasonably certain to be exercised. As at 30 June 2021, the undiscounted potential future rental payments relating to periods following the exercise date of extension options that are not included in the lease term amounted to $33.7m. Note 19. Financial Risk Management 19.1 Accounting Policies The Group’s principal financial instruments comprise cash and cash equivalents, receivables, work in progress, trade payables and loans. The classification of financial instruments depends on the purpose for which the instruments were acquired. Management determines the classification of its financial instruments at initial recognition. Financial assets Under AASB 9, the Group assesses which of its financial assets are measured at fair value through other comprehensive income, fair value through profit or loss, or amortised cost. The classification is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. The determination of the business model within which a financial asset is held has been made on the basis of the facts and circumstances that existed at the date of initial application. Based on the necessary assessments, the Group has designated all its financial assets to be measured at amortised cost. Receivables are non-interest bearing, non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These are initially recognised based on fair value plus directly attributable transaction costs that are subsequently measured using the effective interest method at amortised cost and are subject to impairment. Financial assets are tested for impairment on a forward-looking basis to calculate the associated ECL and to establish whether there is any objective evidence of resulting impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The impairment loss is reversed through profit or loss if the amount of the impairment loss decreases in a subsequent period and the decrease can be related objectively to an event occurring after the impairment was recognised. Financial liabilities Under AASB 9, the Group assesses which of its financial liabilities are measured at either fair value through profit or loss or at amortised cost. Financial liabilities include trade payables, other creditors and loans from third parties including loans from or other amounts due to director-related entities. Based on the necessary assessments, the Group has designated all its financial liabilities to be measured at amortised cost. Financial liabilities are recognised at amortised cost, comprising original debt, net of directly attributable transaction costs less principal payments and amortisation using the effective interest rate method. The implied interest expense is recognised in profit or loss. Slater & Gordon 60 Page 48 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 19. Financial Risk Management (continued) 19.2 Interest Rate Risk The Group's exposure to interest rate risk and the effective interest rates of non-derivative financial assets and financial liabilities both recognised and unrecognised at the end of the reporting period are as follows: Variable interest rate 2021 $'000 Variable interest rate 2020 $'000 Fixed interest rate 2021 $'000 Fixed interest rate 2020 $'000 Total 2021 $'000 Total 2020 $'000 Financial assets Financial assets held at amortised cost Cash and bank guarantees on deposit Total financial assets Financial liabilities Financial liabilities held at amortised cost Lease liabilities Disbursement backed asset facility Super senior facility Term Loan Total financial liabilities 25,581 25,581 30,638 30,638 - - - - 25,581 25,581 30,638 30,638 - - - - - - - - - - 23,170 - 79,928 9,286 32,294 6,448 80,507 4,896 23,170 - 79,928 9,286 32,294 6,448 80,507 4,896 112,384 124,145 112,384 124,145 The Group manages the exposure through the ongoing monitoring of interest rates. 19.3 Foreign Exchange Risk The Group has no significant exposures to foreign exchange risk. 19.4 Credit risk The main exposure to credit risk in the Group is represented by receivables (debtors and disbursements) owing to the Group. The Group’s exposure to credit risk arises from the potential default of the counterparty, with a maximum exposure equal to the carrying amount of those assets as disclosed in the statement of financial position and notes to the financial statements. The Group held cash and cash equivalents and restricted bank guarantees on deposit of $25,581,000 at 30 June 2021 (30 June 2020: $30,638,000). The credit risk associated with cash and cash equivalents is considered minimal as the cash and cash equivalents are held with Authorised Deposit Institutions in Australia which are regulated by the Australian Prudential Regulatory Authority. Receivables Once client matters are billed, a significant portion of receivables are considered low risk. This is because these receivables are collected directly from settlements that are mainly paid by insurers or government bodies or litigation funders into trust accounts held on behalf of the Group’s clients. The Group applies the AASB 9 simplified approach to measuring the ECL for receivables, which uses a lifetime expected loss allowance for ECL for all receivables, see Note 10 for further details. Management of Credit Risk The Group actively manages its credit risk by: ● ● ● ● ● ● where applicable, assessing the capability of a client to meet its obligations under the fee and retainer agreement; periodically reviewing the reasons for bad debt write-offs in order to improve the future decision-making process; maintaining an adequate provision against the future recovery of debtors and disbursements; including in management key performance indicators (KPIs) measures in respect of debtors, disbursements and collections; holding regular meetings with relevant teams on debtor profiling, including ageing of the portfolios; and where necessary, pursuing the recovery of debts owed to the Group through external mercantile agents and the courts. Slater & Gordon Page 49 61 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 19. Financial Risk Management (continued) Due to the nature of the NWNF arrangements applicable to the majority of the legal matters managed by the Group there can be considerable time between initiation and settlement of a matter. While time increases the ageing profile of receivables, particularly disbursements, it does not always increase the associated credit risk. Management performs periodic assessment of the recoverability of receivables, and provisions are calculated based on historical write- offs of the receivables as well as any known circumstances relating to the matters in progress. Management has revisited the assumptions underlying the recoverability of receivables and calculation of provisions at 30 June 2021 in light of the impact of the COVID-19 pandemic. No material changes to management’s assessment of credit risk have been identified. 19.5 Liquidity risk The Group’s objective is to maintain a balance between the continuity of funding and flexibility through the use of operating cash flows and committed available credit facilities. The Group actively reviews its funding position to ensure the available facilities are adequate to meet its current and anticipated needs. The Group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate borrowing facilities are maintained. Refer to the statement of cash flows and Note 5, for further information on the historical cash flows. Further information in relation to debt facilities available and utilised are outlined in Note 17. Maturity Analysis The table below represents the estimated and undiscounted contractual settlement terms for financial instruments and management’s expectation for settlement of undiscounted maturities. Cash flows for floating rate financial instruments have been presented based on the rate prevailing at the balance date. 2021 Non-derivative financial liabilities Payables Borrowings Lease liabilities Financial liability maturities 2020 Non-derivative financial liabilities Payables Borrowings Lease liabilities < 12 Months $'000 1 - 5 years $'000 > 5 years $'000 Total contractual cash flows $'000 Carrying amount $'000 60,758 6,225 8,207 13,317 107,014 18,135 75,190 138,466 - - 530 530 74,075 113,239 26,871 74,075 89,214 23,170 214,185 186,459 54,833 10,625 10,329 8,889 111,690 26,767 - - 1,421 63,722 122,315 38,517 63,722 91,850 32,294 Financial liability maturities 75,787 147,346 1,421 224,554 187,866 Note 20. Contributed equity Ordinary shares - fully paid 139,093,565 138,428,817 1,435,177 1,434,793 30 June 2021 Shares 30 June 2020 30 June 2021 $'000 Shares 30 June 2020 $'000 Slater & Gordon 62 Page 50 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 20. Contributed equity (continued) Movements in ordinary share capital Details Balance Transfer from share based payment reserve Conversion of warrants Issuance of shares under rights issue Balance Issue of shares under LTIP Balance Ordinary shares Date 1 July 2019 30 June 2020 Shares $'000 69,527,235 - 3,156,535 65,745,047 138,428,817 664,748 1,351,533 1,273 7,425 74,562 1,434,793 384 30 June 2021 139,093,565 1,435,177 Ordinary shares participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held. At shareholders meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. During the period, the Company issued 664,748 shares for nil consideration as part of the Long Term Incentive Plan ("LTIP"). The Company did not pay any dividends during the financial year ended 30 June 2021 (30 June 2020: nil). For the purpose of the Group’s capital management, capital includes issued capital. The primary objective of the Group’s capital management is to maximise the shareholder value. Note 21. Share-based payments 21.1 Accounting policies The consolidated entity operates a share-based payment employee share scheme. Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value of the equity to which employees become entitled is measured at grant date and recognised as an expense over the vesting period, with a corresponding increase to an equity account. In respect of share-based payments that are dependent on the satisfaction of performance conditions, the number of shares and options expected to vest is reviewed and adjusted at each reporting date. The amount recognised for services received as consideration for these equity instruments granted is adjusted to reflect the best estimate of the number of equity instruments that eventually vest. Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. 21.2 Employee Equity Incentive Plan The Company has one employee Equity Incentive Plan (the Plan), which was approved by the shareholders of the Company at the Annual General Meeting held on 14 November 2019. Slater & Gordon Page 51 63 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 21. Share-based payments (continued) The Plan provides participants with a nil-exercise price right to acquire shares in the Group which are subject to restrictions to be determined by the Board. There have been three issuances (Tranches 1 to 3) to date related to the Plan as follows: Tranche 1: The Rights under Tranche 1 are provided to participants in four tranches, A through D. The number of Rights that will vest in Tranches A to C is based on the fulfillment of service conditions, while Rights vesting for Tranche D depend on the occurrence of a performance-based exit event condition. That same exit event condition must be met for all tranches to become exercisable. Tranche 2: The Rights under Tranche 2 will vest based on the fulfillment of a service condition of remaining in the Group’s employ to 1 January 2022. Tranche 3: The Rights under the Plan are provided to participants in three tranches, A through C. The number of Rights that will vest in Tranches A to C is based on the fulfillment of service conditions as well as the achievement of a performance-based condition. (i) Recognition The Group’s Plan is an equity-based share-based payment, in accordance with the definition under AASB 2 Share-based Payment (AASB 2). Equity-settled share-based payments are measured at the grant date fair value for employee services. Equity-settled share-based payment transactions are not subsequently re-measured once the grant date fair value has been determined. Where unallocated Rights exist at year end, these will not be recognised until the allocation occurs, as no obligation is attached to these rights as at 30 June 2021. AASB 2 requires the fair value of equity instruments granted to be based on market price, if available, and to consider the terms and conditions which those equity instruments were granted. The cost of the Rights issued is recognised as an expense from the Grant date over the defined vesting period. Management assumptions of service conditions (i.e. employment retention) are based on best estimate and reflected in the employee expenses recognised for the respective financial year. (ii) Valuation A Black Scholes option pricing model has been used to value Rights given the performance hurdle is a non-market hurdle, being the underlying Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). The grant date fair values of the Rights have been determined to be $9,000,000, $812,463 and $348,750 for Tranches 1, 2 and 3, respectively, using the following inputs: Exercise Price (AUD$) Spot price (AUD$) Time to maturity (years) Dividend yield Discounted for lack of control Valuation date (i.e. grant date) Tranche 1 Tranche 2 Tranche 3 0.00 0.89 7.00 0.00% 28% 13 December 2019 0.00 0.80 0.91 0.00% 25% 5 February 2021 0.00 0.75 1.22 to 3.22 0.00% 25% 12 April 2021 The employment termination of the participant will forfeit his/her rights to the share options, unless the participant is assessed to be a 'good leaver'. The Group estimates the following departures for each of the tranches: Tranche 1: 7% of the participants will leave throughout the subsequent 2 years, with no departure at the end of first year (30 June 2020). Tranche 2: 6% of the participants will leave throughout the subsequent 1 year, with no departure at the end of first year (30 June 2021). Tranche 3: the participant is not expected to leave the Group throughout the vesting period. The estimated percentage of employee departure will be reassessed at the end of each respective financial year. Slater & Gordon 64 Page 52 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 21. Share-based payments (continued) (iii) Measurement The Plan is a staged vesting plan, with the following tranches: Vesting date / event Vesting percentage Cumulative value of vested award ($) Tranche 1 Tranche A Tranche B Tranche C Tranche D 30 June 2020 30 June 2021 30 June 2022 Date of 'Exit Event' Tranche 2 1 January 2022 Tranche 3 Tranche A Tranche B Tranche C 1 July 2022 1 July 2023 1 July 2024 22% 22% 22% 34% 100% 33% 33% 34% 1,980,000 3,960,000 5,940,000 9,000,000 812,463 116,250 232,499 348,750 The following table illustrates the expected vesting of the LTIP, considering that estimates described under (ii) above: Vesting Date ($) 30 June 2020 30 June 2021 30 June 2022 30 June 2023 30 June 2024 1,980,000 729,474 447,097 1,647,692 - - - - - 1,216,697 638,026 1,412,308 346,220 20,043 10,967 7,549 - - 685,341 - 415,464 96,207 52,641 36,234 - - - - - - 52,641 36,234 - - - - - - - 36,234 Total cumulative expense 1,980,000 1,946,171 1,770,464 3,060,000 761,684 116,250 116,249 116,251 Tranche 1A Tranche 1B Tranche 1C Tranche 1D Tranche 2 Tranche 3A Tranche 3B Tranche 3C Total 4,804,263 3,651,810 1,285,887 88,875 36,234 9,867,069 A $3.7m share based payment expense was recognised at 30 June 2021. (iv) Movements during the year The following table illustrates the number and movements in Rights during the year: Balance at 1 July Granted during the year Forfeited/Lapsed during the year Exercised during the year Expired during the year Outstanding at 30 June Exercisable at 30 June All of the Rights under the LTIP have a nil exercise price. 30 June 2021 (Number) 30 June 2020 (Number) 15,573,000 1,974,105 (165,812) (664,748) - - 15,573,000 - - - 16,716,545 15,573,000 11,499,103 - Slater & Gordon Page 53 65 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 22. Related Party Disclosures 22.1 Equity Interests in Related Parties The table below lists the primary operating controlled entities of the Group. Individual controlled entities that are dormant have not been listed. All are owned 100% unless noted. Country of Incorporation Australia: Slater and Gordon (TML) Queensland Pty Ltd Slater & Gordon Lawyers NSW Pty Limited Conveyancing Works (Qld) Pty Limited Schultz Toomey O'Brien Pty Ltd All States Legal Co Pty Ltd SG NSW Pty Ltd % Equity % Equity interest 2021 interest 2020 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% The Immediate Parent Entity of the Group is AIO V Finance (Ireland) DAC, incorporated in Ireland. The Ultimate Parent Entity is Anchorage Capital Group LLC incorporated in the United States of America. 22.2 Guarantees for S&G UK lease obligations The Company and Slater and Gordon (UK) 1 Limited (“S&G UK”) entered into certain transitional arrangements that are governed by a business separation agreement (“BSA”) to effect the separation of the Group’s previous UK operations and subsidiaries from its Australian operations under the Senior Lender Scheme entered into in December 2017. The transitional arrangements required the parties to the BSA to seek to procure that the Company be released from parent guarantees and other forms of security and financial support that it has provided to the UK operations. Any potential material contingent liability relates to parent guarantees for UK leases for the major office premises used by the UK operations. The BSA provides that S&G UK must use reasonable endeavours to have the parent guarantees released and that this must be completed within 18 months of the date of implementation of the Recapitalisation on 15 December 2017 (or such longer period as agreed between the Company and S&G UK). This due date was first extended by agreement until 22 June 2020. Subsequently in June 2020, the Company and S&G UK agreed to extend this period by six further terms of one month each in return for the payment of a guarantee fee equal to 5% of the monthly guaranteed amount, payable in advance of each one month extension. The final extension expired on 22 December 2020 and no further extension has been agreed to. Despite the failure of S&G UK to meet its obligations under the BSA to have the parent guarantees released by the extended due date, S&G UK remains under a continuing obligation to use its reasonable endeavours to have the parent guarantees released. During the year ended 30 June 2021, S&G UK surrendered its lease of its Watford office and agreed to sub lease three of the eight floors at its Manchester office to a government sub tenant. While the sub lease does not terminate the parent company guarantee in respect of those premises, it does reduce the risk of default. The Manchester office leases are the only remaining leases for which parent company guarantees have been given by the Company. If S&G UK defaults on the UK leases subject to the parent guarantees, and those parent guarantees have not yet been released, the Company may be liable for any unpaid amounts under those leases at the time of default. Any contingent liability has the potential to be material in the event that the UK operations were in default and the parent guarantees were called upon and the Company was unable to take steps that are typically commercially available to mitigate its loss, such as sub-leasing. At 30 June 2021, the aggregate unpaid amounts under these lease agreements for the remainder of the lease term expiring on 1 January 2030 are $67,578,492 (GBP 36,993,837), (30 June 2020: $82,200,842; GBP 45,823,188). It is not currently possible for the Company to estimate any liability or contingent liability under these guarantees as there would need to be an event of default by the UK operations to cause any liability. In addition, numerous factors would impact the extent of any potential liability in that event, such as when the guarantee would be called and the amounts outstanding at that time, the Company’s ability to take steps to mitigate loss, including subleasing the premises, and its capacity to negotiate with the third parties who have the right to call on those guarantees. Liability in respect of these guarantees will only arise if the UK operations default on their obligations under the leases and other material contracts subject to a parent guarantee, prior to an agreement being made to release that guarantee. Slater & Gordon 66 Page 54 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 22. Related Party Disclosures (continued) 22.3 Deed of Cross Guarantee All Australian entities are parties to a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare a financial report and directors’ report under Corporations Instrument 2016/785 dated 17 December 2016 issued by the Australian Securities and Investments Commission. 22.4 Key Management Personnel Compensation Compensation by category Short-term employee benefits Post-employment benefits Other long-term employment benefits Share based payments Total 22.5 Transactions with AIO V Finance (Ireland) DAC (Immediate Parent Entity) Loans from Immediate Parent Entity Opening balance Repayments Interest capitalised Closing balance outstanding 30 June 2021 $ 30 June 2020 $ 2,588,893 117,874 21,200 1,696,495 2,602,127 120,610 16,721 2,498,217 4,424,462 5,237,675 30 June 2021 $'000 30 June 2020 $'000 45,220 (4,120) 3,795 42,008 (1,105) 4,317 44,895 45,220 The loan facilities are advanced by the Immediate Parent Entity as one of the lenders under the super senior facility, on the same terms as those agreed with the other lenders. The facilities are unsecured, and repayable in cash on maturity. Further details of the terms of the facilities are provided in Note 17.2. 22.6 Transactions with Other Related Parties The shareholdings of related parties and remuneration of KMP are disclosed in the Directors’ Report. Note 23. Parent Entity Disclosures As at, and throughout, the financial year ended 30 June 2021 the parent entity of the Group was Slater & Gordon Ltd. Investments in subsidiaries are accounted for at cost, less any impairment recognised since acquisition. Statement of profit or loss and other comprehensive income Profit / (Loss) after income tax Total comprehensive income / (loss) 30 June 2021 $'000 Parent 30 June 2020 $'000 13,754 (1,951) 13,754 (1,951) Slater & Gordon Page 55 67 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 23. Parent Entity Disclosures (continued) Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Share-based payments reserve Accumulated losses Total equity 30 June 2021 $'000 Parent 30 June 2020 $'000 140,815 118,709 343,934 292,204 109,603 88,421 247,782 213,458 1,435,124 9,309 (1,348,281) 1,434,740 6,041 (1,362,035) 96,152 78,746 Note 24. Auditor's Remuneration The auditor of the Group for the year ended 30 June 2021 is Ernst & Young (30 June 2020: Ernst & Young). Fees to Ernst & Young Fees for auditing the statutory financial report of the parent covering the group and auditing the statutory financial reports of any controlled entities Fees for other assurance and agreed-upon-procedures services under other legislation or contractual arrangements where there is discretion as to whether the service is provided by the auditor or another firm · Trust account audits Fees for other services · Other non-audit services Total 2021 $ 2020 $ 555,000 585,000 112,000 92,000 50,000 - 717,000 677,000 Note 25. Accounting Standards issued but not yet effective at 30 June 2021 At the date of authorisation of the financial statements, there are a number of amendments to accounting standards that become applicable for annual reporting periods commencing on or after 1 July 2021, but they do not have a material effect on the Group's financial statements. Note 26. Unrecognised Items 26.1 Guarantees The Group has entered into lease rental guarantees and performance guarantees with a face value of $4,884,105 (30 June 2020: $4,177,712). Refer to Note 22 for details of the lease guarantees the Company has provided for certain offices located in the United Kingdom. Slater & Gordon 68 Page 56 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 26. Unrecognised Items (continued) 26.2 Contingent Liabilities – Class Action Proceedings On 12 October 2016 legal proceedings were filed against the Company in the Federal Court of Australia (“Federal Court”) by Matthew Hall on behalf of an open class of the Company’s shareholders (the “Hall proceeding”). The class action proceeding asserted that the Company engaged in misleading or deceptive conduct and breached its continuous disclosure obligations during the period from 30 March 2015 to 24 February 2016 and sought compensation or refund of investments, plus interest and costs. This class action proceeding was settled by agreement in July 2017 through a Federal Court mediation, subject to creditor, shareholder and Court approval of a shareholder claimant and senior lender scheme of arrangement. On 20 June 2017, the Company announced that legal proceedings were filed against it by Babscay Pty Ltd (the “Babscay proceeding”) on behalf of persons who acquired an interest in shares of the Company between 24 August 2012 and 19 November 2015. The statement of claim asserted that the Company’s financial statements for the financial years ended 30 June 2013, 2014 and 2015 contained false or misleading statements. This claim was later amended to also include the Company’s financial statements for the financial year ended 30 June 2012. The allegations focus on the way in which the Company recognised revenue and, in financial year 2015, accounted for acquisitions in accordance with Australian Accounting Standards. On 14 December 2017 the Federal Court approved a scheme of arrangement between the Company and all shareholder claimants (“Shareholder Claimant Scheme”), including claimants in the Hall and Babscay proceedings. The Shareholder Claimant Scheme resolves and compromises all potential shareholder claims against the Company and its officers. The Shareholder Claimant Scheme became legally effective on 15 December 2017. Under the Scheme, shareholder claimants have released the Company and officers from any shareholder claims and the Scheme can be pleaded as a bar to any shareholder claim. On 14 December 2017 the Federal Court also approved the settlement of the Hall proceeding and dismissed that proceeding. The Company’s contribution to this settlement of $5.0m was recognised as a provision at 30 June 2017. The Hall proceeding settlement is implemented by the Shareholder Claimant Scheme. The Babscay proceeding has not yet been formally dismissed or discontinued, however the Shareholder Claimant Scheme releases the Company and its officers and bars the prosecution of that claim. The Shareholder Claimant Scheme limits the ability of a shareholder claimant to bring proceedings against third parties and also provides for an indemnity from the shareholder claimants in favour of the Company and its directors and officers in the event that a shareholder claimant brings a permitted claim against a third party and that third party then brings a claim against the Company. On 1 November 2017, class action legal proceedings were filed against the Company’s former auditors, Pitcher Partners, by Babscay Pty Ltd (the “Babscay Pitcher proceeding”). On 23 February 2018, Pitcher Partners served a cross claim on the Company and certain former directors and officers. On 31 July 2018, further class action legal proceedings were filed against the Company’s former auditors, Pitcher Partners, by Matthew Hall (the “Hall Pitcher proceedings”). On 26 October 2018 Pitcher Partners served a cross claim in the Hall Pitcher proceedings on the Company and certain former directors and officers. The Company has filed defences against both cross claims and has, in turn, filed cross claims against the plaintiffs, claiming the benefit of the indemnity in the Shareholder Claimant Scheme. In May 2019, Pitcher Partners brought a further cross claim against another party. In November 2020, the Babscay Pitcher proceeding was discontinued by the plaintiff and the plaintiff has been ordered to pay Pitchers and the Company their legal costs. In September 2019, class action proceedings were commenced against the Company’s former solicitors, Arnold Bloch Leibler, by Matthew Hall on behalf of an open class of the Company’s shareholders (the “Hall ABL proceedings”). In December 2020, Arnold Bloch Leibler brought a cross claim against the Company and a former director and a former officer of the Company. The Company has filed its Defence to the Cross Claim and has, in turn, filed a cross claim against the plaintiff, claiming the benefit of the indemnity in the Shareholder Claimant Scheme. Evidence in both proceedings is being prepared. A trial of the Hall Pitcher Proceedings has been scheduled for November 2021 and it is expected that the Hall ABL proceedings will be heard at the same time. A mediation will take place before the trial. If the trial proceeds, the Company will be defending both cross claims against it and will be relying on its own cross claims against the plaintiffs to enforce the indemnity under the Shareholder Claimant Scheme. 26.3 Contingent Liabilities – Solicitor liability Entities within the Group are defendants from time to time in legal proceedings arising from the conduct of their business. There are contingent liabilities in respect of claims, potential claims and court proceedings against entities of the Group. Slater & Gordon Page 57 69 Slater & Gordon LtdANNUAL REPORT 2021 Notes to the Financial Statements For the Year Ended 30 June 2021 Note 26. Unrecognised Items (continued) 26.4 Contingent Liabilities – Prior year acquisition (ProLearn) The Financial Statements for the financial year ending 30 June 2020 referred to a contingent liability relating to a further payment as part of the Pre-Legal acquisition in May 2019. The final payment of $366,868 excluding GST has now been paid and no contingent liability remains. Note 27. Events after the reporting period Subsequent events On 10 August 2021, the Company announced the resignation of its Chief Financial Officer, Scott Butterworth. Mr Butterworth’s final departure date is under discussion and the process to recruit a replacement has commenced. Other than the matter described above, no matters have arisen since the end of the year which have significantly affected or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group in future financial periods. Note 28. Discontinued operations Summary of financial performance of discontinued operations This note shows the results of the discontinued operations. Discontinued results represent one major operation: ● Downsize of General Law business, following the internal review on 7 February 2018. For further information, refer to the Financial Statements for the year ended 30 June 2018. Revenue Other income Total revenue Expenses(1) Profit before income tax expense Income tax expense Profit after income tax expense Net loss from disposal of discontinued operations Income tax benefit Loss on disposal after income tax benefit Profit after income tax expense from discontinued operations (1) Reversal of bad debt provision. 30 June 2021 $'000 30 June 2020 $'000 63 3 66 379 445 (134) 311 (39) 12 (27) 284 81 12 93 838 931 (279) 652 (177) - (177) 475 Slater & Gordon 70 Page 58 Slater & Gordon LtdANNUAL REPORT 2021 Directors’ declaration For the Year Ended 30 June 2021 In the Directors' opinion: ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; the attached financial statements and notes give a true and fair view of the Group's financial position as at 30 June 2021 and of its performance for the financial year ended on that date; and ● there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors ___________________________ Elana Rubin Acting Chair 26 August 2021 ___________________________ John Somerville Managing Director and Chief Executive Officer Slater & Gordon Page 59 71 Slater & Gordon LtdANNUAL REPORT 2021 Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Independent Auditor's Report to the Members of Slater & Gordon Ltd Report on the Audit of the Financial Report Opinion We have audited the financial report of Slater & Gordon Ltd (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2021, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2021 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have determined the matters described below to be the key audit matters to be communicated in our report. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. 72 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Slater & Gordon LtdANNUAL REPORT 2021 Work in Progress and Associated Revenue Recognition Why significant How our audit addressed the key audit matter Work in progress (WIP) is significant to the Group, comprising 68% of total assets. Movements in WIP are included in revenue recognised for the year. The Group’s disclosures regarding WIP and the associated revenue recognised are included in Notes 3 and Note 11 of the financial report. Our procedures included the following:  Considered whether the Groups’ accounting policy for WIP complied with Australian Accounting Standards, in particular AASB 15 Revenue from Contracts with Customers.  Obtained details of WIP recognised for each revenue The directors’ determination of the carrying value of WIP and its associated revenue streams involves significant judgement, data analysis and complexity. stream at balance date and applied sampling techniques to select individual legal matters (“cases”) for testing. The Group considers each revenue stream in isolation and makes judgements in relation to:  The identification of a contract  The identification of the performance obligations as part or within a contract  Obtained evidence to support the case status that had been allocated to each of these case files by the responsible legal professional. Evidence obtained was assessed against the coding guidelines of the Group.  Considered the assumptions supporting the key judgements that were made in the data models.  Determination of the transaction price, particularly for revenue streams accounted under a “no win no fee” basis  Assessed the movements in the legal case profile including changes in status and ageing.  Allocation of the transaction price  Recognition of revenue when a performance obligation is satisfied  Involved our data quality specialists to assess the mathematical accuracy of the models. This involved data analytic procedures to reperform, re-calculate and test key calculations. To validate the judgements made in relation to WIP, the Group develops a series of data models based on historical information over a two-year period. Data included in these models provides a methodology to determine the valuation status.  Considered the adequacy of the disclosures contained in Notes 3 and Note 11, of the financial report, in particular those regarding assumptions to which the outcome of the data models is most sensitive. Accordingly, this was considered a Key Audit Matter. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 73 Slater & Gordon LtdANNUAL REPORT 2021 Going concern Why significant As disclosed in Note 1.1 to the financial report the directors concluded that in their opinion, there are reasonable grounds to believe that the Group has the ability to pay its debts as and when they fall due. The financial report has been prepared on a going concern basis. In making this assessment, consideration has been given to potential impacts of COVID-19 on the Group’s operations and forecast cash flows based on best estimates within a range of future market scenarios, noting that the evolving nature of COVID-19 makes it inherently difficult to forecast outcomes with certainty. For the year ended 30 June 2021, the Group generated a net profit after tax of $14.5 million, had $20.7 million of cash on hand and had $5.0 million of undrawn debt facilities. The going concern assumption is fundamental to the basis of preparation of the financial report. Given the judgment involved in the preparation of cash flow forecasts to support the going concern conclusion, this was considered a Key Audit Matter. How our audit addressed the key audit matter Our procedures included the following:  Evaluated the assumptions made in the budget and the cash flow forecasts approved by the Board.  Assessed the reasonableness of the assumptions included in the cash flow model with statements related to future plans and commitments contained in the approved FY22 budget.  Considered the historical accuracy of the Group’s cash flow forecasting by reference to actual results in prior periods.  Considered the impact of a range of sensitivities to the cash flow model to assess the breakeven position, including reference to financial covenants related to the Group’s borrowing facilities.  Assessed the adequacy of the going concern disclosures contained in Note 1.1. Recoverability of Trade Receivables and Disbursements and Associated Provisioning Why significant How our audit addressed the key audit matter Trade receivables and disbursements are significant to the Group, comprising 18% of total assets, net of provisions for impairment. The recoverability of trade receivables and disbursements is a subjective area due to the nature of the legal case profile and the level of judgement applied by the Group in determining provisions. The timing of the recognition of disbursements is also subject to judgement as it is relates to the progress and expectation of successful case outcomes. In accordance with AASB 9 Financial Instruments, a forward-looking expected credit loss (ECL) impairment model was applied by the Group. This involved judgement as to expected credit losses. The Group’s disclosures are included in Note 10 of the financial report which outlines the accounting policy for determining the allowance for doubtful debts and details of the period on period movement in gross and net trade receivables. Accordingly, this was considered a Key Audit Matter. Our procedures included the following:  Considered whether the Group’s provisioning policy was in accordance with the requirements of AASB 9.  Assessed the assumptions used to calculate the trade receivables and disbursements provisions for impairment.  For a sample of disbursements we obtained evidence to support the case status for ongoing matters.  Performed analyses of the ageing of receivables and disbursements, collection history, future collections strategies and assessment of significant overdue individual trade receivables and disbursements.  Assessed the incremental overlay to the specific and general ECL provisions to address the additional and future credit risks on the Group’s customer portfolio as a result of the current economic downturn due to COVID-19.  Considered the adequacy of the associated disclosures contained in Note 10 of the financial report. 74 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Slater & Gordon LtdANNUAL REPORT 2021 Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2021 Annual Report other than the financial report and our auditor’s report thereon. The Company’s 2021 Annual Report is expected to be made available to us after the date of this auditor’s report. We obtained the Directors’ Report that is to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 75 Slater & Gordon LtdANNUAL REPORT 2021 As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.  Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 76 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Slater & Gordon LtdANNUAL REPORT 2021 77 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in the directors' report for the year ended 30 June 2021. In our opinion, the Remuneration Report of Slater & Gordon Ltd for the year ended 30 June 2021, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young David Shewring Partner Melbourne 26 August 2021 Slater & Gordon LtdANNUAL REPORT 2021Additional ASX Information In accordance with the Australian Stock Exchange Limited Listing Rules, the Directors provide the following information as at 27 August 2021. (a) Distribution of shareholders and option holders Holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – Over Number of Ordinary Shareholders 1,098 474 120 117 18 There are 753 shareholders holding less than a marketable parcel of 589 shares each (i.e. less than $500 per parcel of shares). (b) Twenty largest shareholders Shareholder AIO V FINANCE (IRELAND) DAC CITICORP NOMINEES PTY LIMITED TCA OPPORTUNITY INVESTMENTS SARL PERPETUAL CORPORATE TRUST LIMITED RIVER BIRCH MASTER FUND LP HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA PA VIEW OPPORTUNITY IV LIMITED NATIONAL NOMINEES LIMITED 1 2 3 4 MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED 5 6 7 8 9 10 MRS CAROLYN NOUMERTZIS 11 12 13 14 MR PETER JOHN KLASEN 15 16 MR ALEXANDER JUNE + MS LILIAN LYNE 17 MR PENG REN 18 MR ANDREW SEYMOUR 19 MR XIANG LIU 20 MR FRANK CHUNG LEUNG NG + MRS GLORIA MAN YUNG NG IRWIN BIOTECH NOMINEES PTY LTD RIZZO SUPER PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 RIZZO PTY LTD TOTAL: Top 20 holders of Fully Paid Ordinary Shares (c) Substantial shareholders Number of Shares Held 74,371,573 17,915,047 12,988,257 9,020,425 7,408,982 6,023,362 2,426,073 889,563 768,339 480,692 250,000 220,000 198,090 181,110 140,000 120,023 109,000 102,000 98,942 97,292 133,808,770 % Held 53.47 12.88 9.34 6.49 5.33 4.33 1.74 0.64 0.55 0.35 0.18 0.16 0.14 0.13 0.10 0.09 0.08 0.07 0.07 0.07 96.20 A substantial shareholder is one who has a relevant interest in 5% or more of the total issued shares in the Company. Following are the substantial shareholders in the Company based on notifications provided to the Company under the Corporations Act 2001: Shareholder AIO V FINANCE (IRELAND) DAC TCA OPPORTUNITY INVESTMENTS SARL YORK GLOBAL FINANCE BDH LLC 1 2 3 4 MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED 5 PERPETUAL CORPORATE TRUST LIMITED Number 37,100,2442 6,190,7362 5,802,8772 9,020,6083 3,591,5002 Ordinary Shares %1 53 9 8 7 5 1. Percentage of shares in which a relevant interest is held based on total issued capital of the Company at the time a substantial shareholder notice was provided to the Company. 2. Substantial shareholder notice received pre entitlement offer completed on 20 September 2019 and based on issued shares of 69,527,235. 3. Substantial shareholder notice received post entitlement offer completed on 20 September 2019 and based on issued shares of 138,428,817. (d) Voting rights All issued ordinary shares carry one vote per share. (e) Corporate Governance Statement The Company’s Corporate Governance Statement can be found on the Company’s website at: https://www.slatergordon.com.au/the-firm/governance 78 Slater & Gordon LtdANNUAL REPORT 2021Corporate Directory Directors James MacKenzie, Chair Mark Dewar Merrick Howes Michael Neilson Elana Rubin John Somerville Jacqui Walters Company Secretary Michael Neilson Registered Office and Corporate Office Level 12 485 La Trobe Street Melbourne Victoria 3000 Telephone: (03) 9602 6888 Facsimile: (03) 9600 0290 Company Website www.slatergordon.com.au Company Numbers ACN 097 297 400 ABN 93 097 297 400 Auditors Ernst & Young 8 Exhibition Street Melbourne Victoria 3000 Bankers Macquarie Bank Level 23 101 Collins Street Melbourne Victoria 3000 Solicitors MinterEllison Level 20 447 Collins Street Melbourne Victoria 3000 Securities Exchange Listing Slater & Gordon Ltd shares are listed on the Australian Securities Exchange. The Home Exchange is Melbourne. ASX Code: SGH Share/Security Registers The Registrar Computershare Investor Services Pty Ltd Yarra Falls 452 Johnston Street Abbotsford Victoria 3067 GPO Box 2975 Melbourne Victoria 3001 Telephone Toll Free 1300 850 505 (Australia) +61 3 9415 4000 (Overseas) Investor Centre Website www.computershare.com.au Email web.queries@computershare.com.au 79 Slater & Gordon LtdANNUAL REPORT 2021

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