ACN 616 150 022 www.victoryoffices.com.au ANNUAL REPORT 2019 Award Winning Flexible Workspace Providers We mind your business Victory Offices Limited Annual Report 2019 CONTENTS Chairman’s Report Chief Executive Officer’s Report Directors’ Report Auditor’s Independence Declaration Financial Statements Consolidated Statement of Profit & Loss and Other Comprehensive Income 2 4 6 20 22 23 Consolidated Statement of Financial Position 24 Consolidated Statement of Changes in Equity 25 Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Directory 26 27 54 55 59 61 Victory Offices Limited Annual Report 2019 1 CHAIRMAN’S REPORT For the 2019 Financial Year Our mission at Victory Offices, as it has been since the business was founded, is to offer a friendly, transparent and genuine serviced workplace experience to our clients. 2 Victory Offices Limited Annual Report 2019 Chairman’s Report The Board believes the 2020 financial year will be another successful year for Victory Offices. As outlined in the recent prospectus the Group is planning on opening eight additional locations throughout the 2020 financial year which will result in 27 locations being open by year end. Three of these locations have been previously announced with the remaining five either subject to heads of agreement or in negotiation. All of the new locations will be in high quality buildings keeping with the Company’s ethos of only providing services in high quality buildings in locations that are in demand. Victory Offices has made very good progress during the 2019 financial year. On behalf of the Board I would like to thank all of our employees for their contribution and commitment and our clients for choosing us as their flexible workspace provider. Yours sincerely Hon Steve Bracks AC Chairman 29 August 2019 Dear shareholders, On behalf of the Directors, I have great pleasure in presenting the Annual Report for Victory Offices Limited, a leading provider of serviced offices, virtual office facilities and coworking within the evolving flexible workspace industry. On the 14 June 2019 the Company successfully listed on the Australian Stock Exchange (ASX) via an Initial Public Offering (IPO). The IPO was oversubscribed and we were delighted to welcome a high calibre investor base as shareholders. Our mission at Victory Offices, as it has been since the business was founded, is to offer a friendly, transparent and genuine serviced workplace experience to our clients. We understand the challenges that businesses face on a day to day basis and we aim to deliver a 6-star service to support our clients and allow them to grow without the additional administration burden and inefficiencies of a traditional office environment. The Company has a growing portfolio of 22 flexible workspaces across Australia (with 19 operational as at 30 June 2019) with the 20th location opening recently in St Kilda Road, Melbourne. The portfolio now comprises in excess of 33,000 square metres of floor space where thousands of clients have been utilising the Group’s services in the 2019 financial year. These are terrific achievements for a business that commenced just over five years ago. Our client base comprises businesses seeking serviced offices, virtual offices and coworking space such as large corporates, multinationals, professional service firms, start-up businesses and sole traders. They are continuing to support our model which results in above average client licence term. For the 2019 financial year, sales revenue was $47.0 million against a prospectus forecast of $45.0 million, actual EBITDA was $33.6 million against a prospectus forecast of $31.8 million and pro-forma net profit after tax was $9.6 million against a forecast of $9.4 million. The results were underpinned by our market leading occupancy and extensive business services offered to clients. We acknowledge that the flexible workspace industry is competitive and we are seeing a maturity in the sector with providers often focusing on either serviced offices or coworking space or a combination of both. We have a firm belief that our market offering is servicing our target market and this will assist in attracting new business for future growth and retaining current businesses for a longer than expected timeframe. At Victory Offices, we are attempting to differentiate on service and we believe in providing a holistic solution that supports and facilitates business growth, no matter the size. Victory Offices Limited Annual Report 2019 3 CHIEF EXECUTIVE OFFICER’S REPORT For the 2019 Financial Year The last 12 months have been very exciting for Victory Offices, with successfully opening eight new locations, listing on the ASX, and increasing overall occupancy. 4 Victory Offices Limited Annual Report 2019 Chief Executive Officer’s Report Dear fellow shareholders, Growing revenues from flexible workspace services I am pleased to present to you the Victory Offices Annual Report for the year ended 30 June 2019. The last 12 months have been very exciting for Victory Offices. We successfully opened eight new locations that are all performing at or above expectations; we successfully listed on the Australian Stock Exchange; we have opened the first of the forecast eight new locations for the 2020 financial year with a further two leases executed; thousands of clients have utilised the Company’s services during the year; and we have been able to increase our overall occupancy. N O I L L I M During the 2019 financial year we opened eight new locations across Melbourne, Sydney and Perth. This took the number of locations from 11 at the beginning of the year to 19 by the end of the year, a year of significant growth. In the 2020 financial year we are forecasting to open an additional eight locations which will take the total number of locations to 27. The key highlights for the 2019 financial year include: • Opening eight new locations taking the total number of locations to 19 as at 30 June 2019; • Having thousands of large corporates, multinationals, professional service firms, start-up businesses and sole traders utilising our services; • Increasing overall occupancy to 93% (up from 85%) with occupancy increasing at both mature centres and centres which have been operating for less than 12 months; • Successfully listing on the Australian Stock Exchange in June 2019; • Continuing expansion in Melbourne and suburbs, opening our first location in Perth and opening our third location in Sydney; • Opening the first and second Victory Lounge offering in Melbourne CBD and Chadstone Shopping Centre; • Revenue from flexible workspace services increased by $17.6 million to $47.0 million as a result of new locations and increased occupancy at exisiting locations; and • Net profit after tax increased by $3.9 million to $9.6 million. Revenues from flexible workspace services has increased from $1.6 million in the Company’s first year of operations in the 2014 financial year to $47.0 million in the 2019 financial year. 50 40 30 20 10 0 47,002,838 29,402,818 1,378,513 2,473,728 7,081,674 FY15 FY16 FY17 FY18 FY19 SQUARE METRES Number of locations Locations opened Total square metres FY15 FY16 FY17 FY18 FY19 2 2 2 - 6 4 11 5 19 8 2,432 2,432 8,378 17,044 26,204 We are continuing to invest in innovative solutions to enhance our client’s experience. Later this year we will be launching the first Victory Offices client portal that will be accessible via a number of platforms. The portal will enable our clients to more easily interact with us and each other as well as better utilise the facilities we provide for them. We have also invested in a new CRM system that will provide us with increased real-time information to better service our clients and manage our growing workforce. The 2020 financial year promises to be another exciting year of growth for Victory Offices. I will ensure it is another year in which our clients are at the core of what we do and that the Victory Offices team continues to deliver 6-star service to our wonderful and diverse client base. Yours sincerely Dan Baxter Chief Executive Officer / Managing Director 29 August 2019 Victory Offices Limited Annual Report 2019 5 DIRECTORS’ REPORT For the Year Ended 30 June 2019 The directors present their report, together with the financial statements, on Victory Offices Limited and its Controlled Entities (referred to hereafter as the ‘consolidated entity’ or ‘entity’) at the end of, or during, the year ended 30 June 2019. 6 Victory Offices Limited Annual Report 2019 Directors' Report MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR On 16 July 2019, the Company announced to the ASX the execution of a new lease for an office location in Fortitude Valley, Brisbane. A further location in St Kilda Road, Melbourne was opened on 23 August 2019. No other matters or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Victory Offices intends to continue its programme of offering serviced offices, coworking, hot desks and virtual offices and facilities for businesses to contract to use on flexible licence arrangements. The Company intends to use the proceeds of the recent IPO to expand by opening and offering new serviced and virtual offices and facilities in cities the Company already operates in and to penetrate new markets by offering its products in new cities nationally. Victory Offices intends to fund the fit-out and bank guarantees of new locations in FY2020. The Company has a Development Program which it intends to implement in FY2020. The objective of the Development Program is to open approximately eight new location’s Australia. DIRECTORS The following persons were directors of the consolidated entity during the whole of the financial year and up to the date of this report, unless otherwise stated: Hon Steve Bracks AC Dan Baxter Alan Jones Ted Chwasta Shane Tanner (appointed 1 April 2019) Brett Lethborg (ceased 25 February 2019) PRINCIPAL ACTIVITIES The principal activities of the consolidated entity was providing flexible office solutions. Its associated revenue is driven from providing comprehensive office serviced packages and other services to its clients. OPERATING RESULTS The operating profit of the consolidated entity for the financial year after provision for income tax was $9,596,498 (2018: $5,742,519). DIVIDENDS There were no dividends paid during the year ended 30 June 2019. REVIEW OF OPERATIONS Refer to the detailed comments in the Chief Executive Officer’s Report and the Operating and Financial Review. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS On 14 June 2019 the Company listed on the Australian Securities Exchange (ASX). The Company completed an initial public offering of 15 million Shares at a price of $2.00 per Share raising $30 million before costs of the offer. The consolidated entity has successfully opened eight new centres Australia wide during the year. There were no other significant changes in the state of affairs of the consolidated entity during the financial year not otherwise disclosed in these accounts. Victory Offices Limited Annual Report 2019 7 Directors' Report INFORMATION ON DIRECTORS Hon Steve Bracks AC Non-Executive Chairman Experience and expertise: Hon Steve Bracks AC was Premier of Victoria for eight years. He now advises several leading Australian finance and service sector corporations. Mr Bracks also holds three major honorary positions: as an Adviser to the Prime Minister of Timor-Leste and Honorary Chair of The Union Education Foundation. He is Chairman of the superannuation fund Cbus and a non-executive Director of Bank of Sydney Limited. Former Chairman of AFL Sports Ready; Former Chairman of the Kardinia Park Stadium Trust; and a member of the Monash Business School’s Business Advisory Board (BAB); The Australian Republican Movement’s Republican Advisory Panel (RAP), and the West Melbourne Alliance Board. Interests in shares: Nil Dan Baxter Managing Director/Chief Executive Officer Experience and expertise: Dan is the founder of Victory Offices with more than 20 years of senior management experience under his belt. Under his leadership, the company has emerged as a prominent player in the flexible work space market. Dan’s creative thinking, vision and passion has led to success of Victory Offices in a short span of 5 years. As the Victory Group Holdings Executive Director, Dan has also successfully led Victory Aluminium to be one of the largest exporters of aluminium from Australia. Dan is a current member of AICD, with academic qualifications in Engineering and Business Management. Interests in shares: 25,901,500 Alan Jones Non-Executive Director Experience and expertise: With over 35 years’ experience in various management roles within the private and public sector, Alan’s successful career reflects a strong understanding of capital and facilities management and experience in high performing team environments. Alan is currently the Managing Director of AML Advisory, a Melbourne based advisory established in 2003, delivering capital project equipment support and commercial services. Alan has also held senior roles on committees and boards with not for profit organisations. Alan’s commercial career follows an extensive career serving within the Australian Defence Force specialising in operational and strategic logistical support. He holds graduate and post graduate qualifications in logistics, asset management, administration and strategic studies. Special responsibilities: Chairman of the Human Resources & Remuneration Committee, Member of the Audit Committee Interests in shares: 50,000 8 Victory Offices Limited Annual Report 2019 Directors' Report Ted Chwasta Non-Executive Director Experience and expertise: Ted is a career retailer with over 37 years’ experience with some of Australia’s largest public and private companies, including The Brash Group and The Good Guys. Ted previously served as the State Chairman for The Good Guys Victoria and has held positions in various National Advertising Committees. Special responsibilities: Member of the Audit Committee, Member of the Human Resources & Remuneration Committee Interests in shares: Nil Shane Tanner Non-Executive Director Experience and expertise: Shane is currently Chairman of Paragon Care Limited (ASX: PGC) and Rhythm Biosciences Limited (ASX: RHY). Formerly he was Chairman of Vision Eye Institute (ASX: VEI) and Funtastic Limited (ASX: FUN), Chief Executive Officer of Mayne Nickless Diagnostic Services (later named Symbian Health (ASX: SYB)) and Chief Financial Officer of Mayne Group. Shane also has significant strategy and transaction experience through the Mayne Group and via his role in the IPO of Optus Communications. Shane holds Business and Finance qualifications from RMIT University and Swinburne University of Technology. Other current directorships: Paragon Care Limited, Rhythm Biosciences Limited Former directorships (in the last 3 years): Zenitas Healthcare Limited (delisted 12 December 2018) Funtastic Limited (resigned 31 July 2019) Special responsibilities: Chairman of the Audit Committee, Member of the Human Resources & Remuneration Committee Interests in shares: Nil ‘Other current directorships’ quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. ‘Former directorships (last 3 years)’ quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Fady Said Company Secretary Fady has over 13 years’ experience in accounting and finance heading the finance department for various listed and unlisted companies. He has extensive knowledge in taxation and compliance and is a member of the Chartered Accountants Australia and New Zealand. He was appointed as Company Secretary in October 2017. Victory Offices Limited Annual Report 2019 9 Directors' Report MEETINGS OF DIRECTORS The number of meetings of the Company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 30 June 2019, and the number of meetings attended by each director were: FULL BOARD HR & REMUNERATION COMMITTEE AUDIT COMMITTEE ATTENDED HELD ATTENDED HELD HELD ATTENDED 1 1 1 1 1 - 1 1 1 1 1 - n/a n/a - - - n/a n/a - - - n/a n/a - - - n/a n/a - - - n/a n/a n/a n/a Steve Bracks Dan Baxter Alan Jones Ted Chwasta Shane Tanner Brett Lethborg Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. The Human Resources & Remuneration Committee and the Audit Committee members have only recently been appointed. CORPORATE GOVERNANCE Details of the Company’s corporate governance procedures, policies and practices are at: https://victoryofficeslimited.com/corporate-governance OPERATING AND FINANCIAL REVIEW OVERVIEW The Company continued to manage and add to its portfolio of flexible workspace locations during the 2019 financial year. Net profit after tax was $9.6 million (2018: $5.7 million). FINANCIAL AND OPERATING HIGHLIGHTS KEY FINANCIAL DATA Revenue Earnings before interest, tax, depreciation and amortisation Earnings before interest and tax Net profit before tax Net profit after tax Operating cash flow Operating expenses (% revenue)(1) Earnings per share(2) Diluted earnings per share(2) MEASURE FY2019 FY2018 CHANGE CHANGE % A$ millions A$ millions A$ millions A$ millions A$ millions A$ millions % A$ cents A$ cents 47.6 33.6 20.7 13.5 9.6 27.9 29.3 36.0 36.0 31.5 21.5 13.6 8.2 5.7 18.9 32.0 22.2 22.2 16.1 12.1 7.1 5.3 3.9 9.0 (2.7) 13.8 13.8 51 56 52 65 68 48 (8) 62 62 (1) Operating expenses include employee benefits expense, other expenses and occupancy costs (outgoings) (2) FY2018 comparative adjusted to assume similar number of shares as at 30 June 2019 for comparative purposes 10 Victory Offices Limited Annual Report 2019 Directors' Report Included in the table above are several non IFRS measures including earnings before interest and tax, earnings before interest, tax, depreciation and amortisation and net profit after tax. These figures have not been subject to audit but have been provided to give a better understanding of the performance of the Company during the 2019 financial year (and comparatives). ANALYSIS OF INCOME STATEMENT Net profit after tax increased to $9.6 million (2018: $5.7 million). The table below shows the changes to net profit after tax from 30 June 2018 to 30 June 2019. Net profit after tax for the year ended 30 June 2018 Changes in revenues Suite services revenue Service charges revenue Finance revenue Changes in expenses Employee benefits expense Occupancy costs Other expenses Amortisation – right of use assets (AASB 16 lease expense) Depreciation – other P&E Finance costs – lease liability (AASB 16 lease expense) Finance costs – other interest and finance charges Increase in income tax expense Net profit after tax for the year ended 30 June 2019 The key drivers of changes in profitability were: A$ MILLIONS A$ MILLIONS 17.6 (1.5) - (2.1) (1.2) (0.6) (2.5) (2.5) (1.8) (0.1) 5.7 16.1 (10.8) (1.4) 9.6 REVENUE CHANGES • Suite services revenue increased to $47.0 million (2018: $29.4 million) due to an increase in locations as well an increase on occupancy. At year end occupancy was 93% (2018: 85%). • Service charges revenue reduced to $0.6 million (2018: $2.1 million). Service charges related to payment for expenses and utilisation of the Company’s employees by related parties due to capacity. Service charges have no profit impact and all expenses are passed through as revenue with no margin. All service charges revenue occurred prior to the ASX listing and has been phased out. Victory Offices Limited Annual Report 2019 11 Directors' Report EXPENSE CHANGES • Employee benefits expense (net of service charges) increased to $6.5 million (2018: $3.2 million) due to an increase in locations and overhead requirements. The Company had 107 FTE at 30 June 2019, an increase from 75 FTE at 30 June 2018. Each location requires two or three full-time receptionists as well as a barista. In addition to this there are also additional requirements for sales and marketing support. To support growth, the Company has also invested in the back office support teams across finance, sales, marketing, ICT and human resources. • Occupancy costs increased to $3.2 million (2018: $2.0 million) due to increased locations. Occupancy costs related to outgoings incurred in conjunction with leasing obligations. • Other expenses (net of service charges) increased to $3.6 million (2018: $2.8 million) due to increased operations and becoming a listed company. • Amortisation of right of use assets increased to $9.3 million (2018: $6.8 million) due to increased locations. Right of use assets are recorded pursuant to the requirements of AASB 16 ‘Leases’ for each individual lease. They are initially measured at the discounted value of the total expected lease payments (adjusted for lease incentives) and are amortised over the estimated life of the lease. A corresponding lease liability is also recorded upon initial measurement. • Depreciation of plant and equipment increased to $3.6 million (2018: $1.1 million) due to increased fit-out assets at new locations and the adoption of a more conservative (lower) useful life for fit-out assets. • Finance costs relating to lease liabilities increased to $7.0 million (2018: $5.2 million) due to increased locations. Lease liabilities are recorded pursuant to the requirements of AASB 16 ‘Leases’ for each individual lease. They are initially measured at the discounted value of the total expected lease payments (adjusted for lease incentives) and are ‘unwound’ using a consolidated incremental borrowing rate as a discount rate. A corresponding right-of-use asset is also recorded upon initial measurement. ANALYSIS OF CASH FLOW A$ MILLIONS Cash flows related to operations Cash flows related to investing activities Cash flows related to financing activities Net movement in cash Cash at the beginning of the period Cash at the end of the period Add cash on term deposit Total cash and term deposit position FY2019 FY2018 CHANGE 9.0 (27.4) 23.3 27.9 (48.6) 22.5 1.8 1.4 3.2 21.9 25.1 18.9 (21.2) (0.8) (1.5) 2.9 1.4 0.9 2.3 Cash flows related to operations increased to a surplus of $27 million (2018: $18.9 million). The increase is mainly attributable to a $17.2 million increase in receipts from customers. Payments to suppliers and employees also increased (increasing by $5.1 million) reflecting more locations. Also included within cash flows from operation is an interest paid outflow of $5.7 million (2018: $2.5 million) reflecting an apportionment of lease payments pursuant to AASB 16. Cash flows related to investing activities included: $21.0 million for term deposits; and $26.2 million relating to property, plant and equipment (including the fit-out of new locations). Cash flows related to financing activities included: $28.2 net proceeds from the IPO; $4.4 million for payment of lease liabilities; $3.0 million net payment to related parties mainly in relation to share of tax liabilities as the Company was party to a wider tax consolidated group up until listing on the ASX on 14 June 2019; and $1.8 million fit-out incentive received from landlords. 12 Victory Offices Limited Annual Report 2019 Directors' Report FY2019 FY2018 CHANGE CHANGE % 3.2 1.1 139.5 35.4 30.9 210.1 (14.0) - (1.4) (116.5) (3.3) (0.2) (30.0) (165.4) 44.7 28.2 16.5 44.7 1.5 6.1 96.5 29.9 8.5 142.5 (17.4) (0.3) (0.8) (88.1) (2.7) - (26.3) (135.6) 6.9 0.0 6.9 6.9 1.7 (5.0) 43.0 5.5 22.4 67.6 3.4 0.3 (0.6) (28.4) (0.6) (0.2) (3.7) (29.8) 37.8 28.2 9.6 37.8 113 (454) 45 18 264 47 20 100 (75) (32) (22) - (14) 22 559 - 139 548 ANALYSIS OF BALANCE SHEET NET ASSETS AND TOTAL EQUITY A$ MILLIONS Assets Cash and cash equivalents Trade and other receivables Plant and equipment Deferred tax assets Other financial assets Total Assets Liabilities Trade and other payables Borrowings Provisions Lease liabilities Other liabilities Current tax payable Deferred tax liabilities Total Liabilities Net Assets Equity Issued capital Retained earnings Total Equity During the year the Company’s net assets and total equity increased to $44.7 million (2018: $6.9 million) as a result of: net proceeds from the IPO in June 2019 of $28.2 million; and profit during the period of $9.6 million. Trade and other receivables have reduced to $1.1 million (2018: $6.1 million) due to a repayment of a related party receivable of $5.4 million that existed at the end of the 2018 financial year. Plant and equipment has increased to $139.5 million (2018: $96.5 million) as a result of: additions of right of use assets as a result of new locations of $30.4 million; additions of other plant and equipment / fit-out assets as a result of new locations of $25.7 million; being partially offset by depreciation and amortisation expenses of $12.9 million. Deferred tax assets have increased to $35.4 million (2018: $29.9 million) mainly due to increased lease liabilities. Other financial assets related to landlord bank guarantees for each location and term deposits. Landlord bank guarantees have increased to $9.1 million (2018: $7.7 million) as a result of new locations. Term deposits have increased to $21.9 million (2018: $0.9 million) as a result of surplus funds from the IPO. Trade and other payables have reduced to $14.0 million (2018: $17.4 million) due to timing. Current tax liabilities of $0.2 million represent tax liabilities related to the Victory Offices tax consolidated group which was formed as at the date of listing Being 14 June 2019. Prior to this date the Victory Offices Limited group was part of the Victory Group Holdings Pty Ltd tax consolidated group. Deferred tax liabilities have increased to $30.0 million (2018: $26.3 million) mainly due to increased right-of-use assets. Victory Offices Limited Annual Report 2019 13 Directors' Report OUTLOOK AND RISKS OUTLOOK The Board is pleased with the performance of locations and in particular the strong occupancy levels. As per the Prospectus the Company is forecasting eight new locations in the 2020 financial year. Subsequent to year end the Company has opened a location in St Kilda Rd, Melbourne and announced the execution of two lease agreements for new locations in North Sydney, NSW and Fortitude Valley, QLD. The opening of the eight forecast locations will take the total number of locations to 27 by the end of the 2020 financial year. KEY RISKS The Company’s key risks include: Competition The Company is subject to competition from well-established organisations, including but not limited to Servcorp, Regus and WeWork. Some of the competitors have a long track record of sustained growth. As well as competing for customers, Victory Offices also competes for office space from landlords. Certain market conditions may cause an increase in competition. For instance, an increase in demand may present the opportunity for competitors to expand their operations and markets. The industry is also subject to new entrants from overseas markets. Increased competition may reduce the volume and price of the services that the Company provides, which may have a material and adverse effect on the Company’s revenue and profitability and, in particular, its growth. Decline in economic conditions, unanticipated changes and adverse shift in industry drivers A downturn in the Australian economy, structural changes to the flexible workspace industry or a slower than expected uptake in the demand for serviced offices and coworking space or other industry drivers could lead to reduced demand for the Company’s services and negatively impact the financial performance of the Company. Inability to secure new locations The Company’s ability to achieve growth in FY2020 and beyond will rely on the ability to secure new site locations. There can be various reasons as to why it may become difficult to secure new locations such as: increased competition; reputational damage; onerous lease agreements due to market conditions; and the financial position of the Company. If the Company is unsuccessful in securing new locations, the Company’s operating and financial performance could be adversely affected. Lease term asymmetry and exposure The Company does not, as at the date of this report, own freehold land. Rather, the Company through its subsidiaries enters into long term leases with landlords for office space that the subsidiary then converts into serviced offices. The subsidiary then licences the serviced offices on shorter and flexible terms. This business model gives rise to a potential asymmetry between the timing and coverage of the obligations under the short- term licences relative to the overhead long-term lease under which the subsidiary leases the office space from a landlord. The subsidiary bears the risk of having to meet its obligations under the leases regardless of its ability to licence some or all of the space under licence arrangements. Termination of Head Lease(s) The premises from which the Company (through its subsidiaries) operates the serviced offices are not owned by the relevant subsidiary. Rather, the ability to license these premises to its clients arises from leases of the premises entered into by the relevant subsidiary with the owner or head-lessor of the relevant building. The provisions of each lease govern the relevant subsidiaries’ ability to license those premises to its clients. In the event that the relevant subsidiary defaults in its obligations under a lease, such a default may entitle the owner or head-lessor to terminate the relevant lease. In the case where the relevant subsidiary is a sub-lessee, a default under the head lease by the relevant lessee under the head lease (i.e. the sub-lessor under the sub-lease to the relevant subsidiary) is likely to entitle the head lessor to terminate the relevant lease. If a lease is terminated for any reason, the relevant subsidiary would not be able to continue to grant a valid licence to its clients. Any occurrence of this kind may have a material adverse impact on the Company’s revenue generation capacity and profitability. 14 Victory Offices Limited Annual Report 2019 Directors' Report REMUNERATION REPORT (AUDITED) The remuneration report details the key management personnel remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: • focusing on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on assets as well as focusing the executive on key non-financial drivers of value; and • attracting and retaining high calibre executives. Additionally, the reward framework should seek to enhance executives’ interests by: • • rewarding capability and experience; reflecting competitive reward for contribution to growth in shareholder wealth; and • Principles used to determine the nature and amount of • providing a clear structure for earning rewards. remuneration • Details of remuneration • Service agreements • Share-based compensation • Additional information • Additional disclosures relating to key management personnel PRINCIPLES USED TO DETERMINE THE NATURE AND AMOUNT OF REMUNERATION The objective of the consolidated entity’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to the market best practice for the delivery of reward. The Board of Directors (‘the Board’) ensures that executive reward satisfies the following key criteria for good reward governance practices: • competitiveness and reasonableness; • acceptability to shareholders; • performance linkage / alignment of executive compensation; and • transparency The Human Resources and Remuneration Committee is responsible for determining and reviewing remuneration arrangements for its directors and executives. The performance of the consolidated entity depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The Human Resources and Remuneration Committee has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the consolidated entity. The reward framework is designed to align executive reward to shareholders’ interests. The Board have considered that it should seek to enhance shareholders’ interests by: • having economic profit as a core component of plan design; In accordance with best practice corporate governance, the structure of non-executive director and executive director remuneration is separate. NON-EXECUTIVE DIRECTORS REMUNERATION Fees and payments to non-executive directors reflect the demands and responsibilities of their role. Non-executive directors’ fees and payments are reviewed annually by the Human Resources and Remuneration Committee. The Human Resources and Remuneration Committee may, from time to time, receive advice from independent remuneration consultants to ensure non-executive directors’ fees and payments are appropriate and in line with the market. The chairman’s fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The chairman is not present at any discussions relating to the determination of his own remuneration. Non-executive directors do not receive share options or other incentives. Under the Constitution, subject to the ASX Listing Rules, the Directors as a whole (other than Executive Directors) may be paid or remunerated for their services a total amount or value not exceeding $400,000 per annum or such other maximum fixed by the Company in a general meeting. Non-Executive Directors may not be paid a commission on or a percentage of profits or operating revenue. All Director’s fees include superannuation at statutory amounts (currently 9.5%). EXECUTIVE REMUNERATION The consolidated entity aims to reward executives based on their position and responsibility. Fixed remuneration, consisting of base salary and superannuation, are reviewed annually by the Human Resources and Remuneration Committee based on individual and business unit performance, the overall performance of the consolidated entity and comparable market remunerations. CONSOLIDATED ENTITY PERFORMANCE AND LINK TO REMUNERATION Remuneration for individuals is not directly linked to the performance of the consolidated entity. The Human Resources and Remuneration Committee is of the opinion that the continued improved results of the consolidated entity can be achieved without the adoption of directly linked performance based compensation. Victory Offices Limited Annual Report 2019 15 Directors' Report DETAILS OF REMUNERATION AMOUNTS OF REMUNERATION Details of the remuneration of key management personnel of the consolidated entity are set out in the following tables. The key management personnel of the consolidated entity consisted of the following directors: • Hon Steve Bracks AC Non-Executive Chairman • Dan Baxter Managing Director and Chief Executive Officer • Alan Jones Non-Executive Director • Ted Chwasta Non-Executive Director • Shane Tanner Non-Executive Director (appointed 1 April 2019) • Brett Lethborg Non-Executive Director (ceased 25 February 2019) And the following persons: • Manisha Angirish Chief Operating Officer • Geoff Hollis Chief Financial Officer (appointed 14 February 2019) • George Paolucci Chief Information Officer SHORT-TERM BENEFITS POST- EMPLOYMENT BENEFITS LONG-TERM BENEFITS CASH SALARY AND FEES $ ANNUAL LEAVE $ NON- MONETARY $ SUPER- ANNUATION $ NON- MONETARY $ - - - - - - - - - - 7,230 - - 976 - 25,000 19,135 6,084 14,712 73,137 - - - - - - - - - - TOTAL $ 83,334 - - 11,250 - 555,462 239,782 62,044 170,284 1,122,156 2019 Non-Executive Directors: S Bracks A Jones T Chwasta S Tanner * B Lethborg ** Executive Director: 76,104 - - 10,274 - - - - - - D Baxter 503,539 26,923 Other Key Management Personnel: M Angirish G Hollis *** G Paolucci 201,416 52,223 154,865 998,421 19,231 3,737 707 50,598 * Represents remuneration from 1 April 2019 ** Represents remuneration from 1 July 2018 to 25 February 2019 *** Represents remuneration from 14 February 2019 16 Victory Offices Limited Annual Report 2019 Directors' Report SHORT-TERM BENEFITS POST- EMPLOYMENT BENEFITS LONG-TERM BENEFITS CASH SALARY AND FEES $ ANNUAL LEAVE $ NON- MONETARY $ SUPER- ANNUATION $ NON- MONETARY $ TOTAL $ - - - - - - - - 500,000 500,000 40,193 40,193 - - - - - - - - - 30,000 30,000 - - - - - - - - - 570,193 570,193 2018 Non-Executive Directors: S Bracks A Jones T Chwasta B Lethborg Executive Director: D Baxter No remuneration was paid to Non-Executive Directors in the year ended 30 June 2018. No other employees were considered key management personnel. EXECUTIVE REMUNERATION Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: MANAGING DIRECTOR AND CEO The Company has entered into an employment agreement with Dan Baxter to govern his employment with the Company as Chief Executive Officer and Managing Director. Dan’s employment agreement does not have a fixed term. Either Victory Offices or Dan may terminate the employment by giving three months’ notice or, in the case of Victory Offices, by making a payment in lieu of notice. The Company may terminate Dan’s employment without payment in lieu of notice in circumstances involving serious or wilful misconduct. Dan is entitled to 4 weeks of annual leave per annum. OTHER MEMBERS OF SENIOR MANAGEMENT Each other member of Victory Offices senior management is employed under individual employment agreements. These agreements establish total compensation including a base salary, superannuation contribution and incentive arrangements (where applicable), variable notice and termination provisions, confidentiality provisions and leave entitlements, as a minimum, as per the National Employment Standards. ADDITIONAL INFORMATION The results of the consolidated entity for the past three years are summarised below: Sales revenue EBITDA EBIT Profit after tax 2019 $ 2018 $ 2017 $ 47,002,838 29,402,818 7,081,674 33,641,546 21,429,159 5,084,801 20,737,056 13,531,688 2,282,770 9,596,498 5,742,519 150,123 Victory Offices Limited Annual Report 2019 17 Directors' Report ADDITIONAL DISCLOSURES RELATING TO KEY MANAGEMENT PERSONNEL SHAREHOLDING The number of shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: BALANCE AT THE START OF THE YEAR ADDITIONS DISPOSALS/ OTHER BALANCE AT THE END OF THE YEAR Ordinary shares S Bracks D Baxter** A Jones T Chwasta S Tanner B Lethborg M Angirish G Hollis G Paolucci - 2 - - - - - - - - 25,901,498* 50,000 - - - - - 29,500 2 25,980,998 - - - - - - - - - - - 25,901,500 50,000 - - - - - 29,500 25,981,000 * 25,899,998 relates to a share split prior to the IPO. ** 25,900,000 shares included in the closing balance are held by a related party: Victory Group Holdings Pty Ltd. OTHER TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL AND THEIR RELATED PARTIES Refer to Note 21 to the financial statements for details on transactions with related parties. This concludes the remuneration report, which has been audited. 18 Victory Offices Limited Annual Report 2019 Directors' Report SHARES UNDER OPTION There are no unissued ordinary shares of Victory Offices Limited under option at the date of this report. PROCEEDINGS ON BEHALF OF THE CONSOLIDATED ENTITY No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the consolidated entity or to intervene in any proceedings to which the consolidated entity is a party, for the purpose of taking responsibility on behalf of the consolidated entity for all or any part of those proceedings. INDEMNITY AND INSURANCE OF OFFICERS The Company has entered into a deed of access, insurance and indemnity (Deed) with each Director. Under the Constitution, to the extent permitted by law and subject to the Corporations Act, the Company indemnifies current and past directors and secretaries of the Company against a liability incurred in their position (or as a director or secretary of a subsidiary of the Company where the Company requested the person to accept that appointment) and reasonable legal costs in defending an action for liability incurred against them in that capacity. The Constitution provides that the Company may enter into a deed to give effect to these rights. The Deed provides that, to the extent permitted by the Corporations Act, the Company indemnifies the Director against liabilities, costs and expenses (including legal costs incurred in defending proceedings brought against the Director) incurred in the Director’s capacity as a director of the Company or its subsidiaries. In addition, the Deed requires the Company to take out and maintain (and pay the premium of) Directors’ and Officers’ insurance during Director’s period of office and for a period of seven years after a Director ceases to hold office (Access Period). During the Access Period, the Director also has rights to access papers, documents and other information relating to the affairs of the Company for specified purposes during the period the Director is an officer of the Company and for a period of seven years after the Director ceases to hold office. During the financial year, the company paid an annual premium of $16,650 in respect of a contract to insure the directors and executives of the company up until 31 March 2020 against a liability to the extent permitted by the Corporations Act 2001. INDEMNITY AND INSURANCE OF AUDITOR The consolidated entity has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the consolidated entity or any related entity against a liability incurred by the auditor. During the financial year, the consolidated entity has not paid a premium in respect of a contract to insure the auditor of the consolidated entity or any related entity. ROUNDING OF AMOUNTS The consolidated entity is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest dollars. NON-AUDIT SERVICES Details of the amounts paid or payable to the auditor for non- audit services provided during the financial year by the auditor were $81,500 (2018: $ 2,250) and are outlined in note 22 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 22 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. OFFICERS OF THE COMPANY WHO ARE FORMER PARTNERS OF RSM AUSTRALIA PARTNERS There are no officers of the company who are former partners of RSM Australia Partners. AUDITOR’S INDEPENDENCE DECLARATION A copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act 2001 is set out on page 20 and forms part of this Director’s Report. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. ENVIRONMENTAL REGULATIONS The consolidated entity is not subject to any significant environmental regulations in respect to its activities. Hon Steve Bracks AC Chairman 29 August 2019 Dan Baxter Managing Director/CEO Victory Offices Limited Annual Report 2019 19 AUDITOR’S INDEPENDENCE DECLARATION AUDITOR’S INDEPENDENCE DECLARATION As lead auditor for the audit of the financial report Victory Offices Limited for the year ended 30 June 2019, I declare that, to the best of my knowledge and belief, there have been no contraventions of: (i) (ii) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. RSM AUSTRALIA PARTNERS R B MIANO Partner Dated: 29 August 2019 Melbourne, Victoria - 20 - 20 Victory Offices Limited Annual Report 2019 Victory Offices Limited Annual Report 2019 21 FINANCIAL STATEMENTS For the year ended 30 June 2019 22 Victory Offices Limited Annual Report 2019 Financial Statements CONSOLIDATED STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 30 June 2019 Revenue Revenue from continuing activities 3 47,002,838 29,402,818 NOTE 2019 $ 2018 $ Interest income Service charges Operating Expenses Employee benefits expense Depreciation and amortisation expense Other administration expenses Occupancy costs Finance costs 35,765 29,064 584,094 2,106,428 47,622,697 31,538,310 4 4 (6,898,921) (4,750,588) (12,904,490) (7,897,471) (3,845,562) (3,295,831) (3,200,903) (2,033,668) (7,292,811) (5,354,317) (34,142,687) (23,331,875) Profit before Income Tax Expense 13,480,010 8,206,435 Income tax expense 7 (3,883,512) (2,463,916) Profit after Income Tax Expense 9,596,498 5,742,519 Other comprehensive income - - Total Comprehensive Income for the Year Attributable to the Owners 9,596,498 5,742,519 Basic earnings per share Diluted earnings per share These financial statements should be read in conjunction with the accompanying notes. CENTS CENTS 14 14 35.97 35.97 22.17 22.17 Victory Offices Limited Annual Report 2019 23 Financial Statements CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2019 Current Assets Cash and cash equivalents Trade and other receivables Other financial assets Total Current Assets Non-Current Assets Other financial assets Deferred tax assets Plant and equipment Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Provisions Borrowings Other liabilities Lease liabilities Current tax liabilities Total Current Liabilities Non-Current Liabilities Trade and other payables Provisions Borrowings Other liabilities Lease liabilities Deferred tax liabilities Total Non-Current Liabilities Total Liabilities Net Assets Equity Issued capital Retained earnings Total Equity These financial statements should be read in conjunction with the accompanying notes. 24 Victory Offices Limited Annual Report 2019 NOTE 2019 $ 2018 $ 5 6 6 6 7 8 9 10 11 12 15 7 9 10 11 12 15 7 3,198,805 1,446,674 1,080,232 6,058,087 20,135,903 889,898 24,414,940 8,394,659 10,795,496 7,683,980 35,419,664 29,949,731 139,452,193 96,507,032 185,667,353 134,140,743 210,082,293 142,535,402 2,926,458 3,343,070 336,775 194,423 - 83,880 2,911,899 2,283,717 5,888,004 3,029,657 156,978 - 12,220,114 8,934,747 11,098,263 14,013,347 1,047,108 648,005 - 210,235 354,776 389,241 110,633,983 85,097,236 30,044,795 26,320,418 153,178,925 126,678,482 165,399,039 135,613,229 44,683,254 6,922,173 13 28,164,585 2 16,518,669 6,922,171 44,683,254 6,922,173 Financial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2019 Balance as at 1 July 2017 Total Comprehensive Income ORDINARY SHARES $ RETAINED EARNINGS $ TOTAL $ NOTE 2 - 1,179,652 1,179,654 5,742,519 5,742,519 Balance as at 30 June 2018 2 6,922,171 6,922,173 Balance as at 1 July 2018 Total Comprehensive Income Issued share capital, net of costs 2 - 6,922,171 6,922,173 9,596,498 9,596,498 13 28,164,583 - 28,164,583 Balance as at 30 June 2019 28,164,585 16,518,669 44,683,254 These financial statements should be read in conjunction with the accompanying notes. Victory Offices Limited Annual Report 2019 25 Financial Statements CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2019 Cash Flows from Operating Activities Receipts from customers (inc GST) Payments to suppliers and employees (inc GST) Interest received Interest paid (includes leases) NOTE 2019 $ 2018 $ 52,808,410 35,595,122 (19,260,901) (14,178,328) 35,765 29,064 (5,722,424) (2,520,967) Net cash inflow from operating activities 16 27,860,850 18,924,891 Cash Flows from Investing Activities Payments for term deposits Payments for bank guarantees Purchase of plant and equipment Net cash outflow from investing activities Cash Flows from Financing Activities Proceeds from shares issued Payments for capital raising costs Repayment of related party borrowings Receipt of funds from related parties Proceeds from incentives received from landlords Payment of hire purchase liabilities Payments for lease liabilities Net cash inflow/(outflow) from financing activities (20,985,780) (1,371,741) - - (26,225,730) (21,246,298) (48,583,251) (21,246,298) 30,000,000 (1,835,417) - - (4,963,531) (571,846) 1,975,015 (5,427,520) 1,755,033 6,930,223 (57,478) (95,145) (4,399,090) (1,629,427) 22,474,532 835,712 Net increase/(decrease) in cash and cash equivalents 1,752,131 (1,485,695) Cash and cash equivalents at start of year 1,446,674 2,932,369 Cash and Cash Equivalents at end of year 5 3,198,805 1,446,674 These financial statements should be read in conjunction with the accompanying notes. 26 Victory Offices Limited Annual Report 2019 Financial Statements NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2019 1 GENERAL INFORMATION B) NEW OR AMENDED ACCOUNTING STANDARDS AND The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Victory Offices Limited was incorporated on 28 November 2016 and shortly thereafter became the sole shareholder of various entities (refer to note 18) previously wholly owned by Victory Group Holdings Pty Ltd (the parent entity of Victory Offices Limited) as part of a group restructure by Victory Group Holdings Pty Ltd. Victory Offices Limited has previously been named Victory Offices (Holdings) Limited, Victory Serviced Offices (Holdings) Limited and Victory Serviced Offices (Holdings) Pty Ltd. On 14 June 2019, the Company was listed on the Australian Securities Exchange (ASX) following an initial public offering (IPO) raising $30 million before costs. As a result of the IPO, the ownership interest of the parent entity was reduced from 100% to 63.3%. The financial statements of Victory Offices Ltd & Controlled Entities (the “consolidated entity”) for 30 June 2019 were authorised for issue by the Directors on 29 August 2019. A) BASIS OF PREPARATION These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). (i) Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of financial assets and liabilities at fair value through profit or loss, investment properties, certain classes of property, plant and equipment and derivative financial instruments. (ii) Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. (iii) Comparatives Comparative figures for the prior year have been re- classified where appropriate to align with current year disclosures. INTERPRETATIONS ADOPTED The consolidated entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. The consolidated entity has also adopted AASB 15 Revenue from contracts with customers and AASB 16 Leases early for the period commencing 1 July 2016. For other standards not adopted early and the impact of these on the consolidated entity refer to note 25 for managements interpretations of the new or amended standards. AASB 9 FINANCIAL INSTRUMENTS The consolidated entity has adopted AASB 9 from 1 July 2018. The standard introduced new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows which arise on specified dates and that are solely principal and interest. A debt investment shall be measured at fair value through other comprehensive income if it is held within a business model whose objective is to both hold assets in order to collect contractual cash flows which arise on specified dates that are solely principal and interest as well as selling the asset on the basis of its fair value. All other financial assets are classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading or contingent consideration recognised in a business combination) in other comprehensive income (‘OCI’). Despite these requirements, a financial asset may be irrevocably designated as measured at fair value through profit or loss to reduce the effect of, or eliminate, an accounting mismatch. For financial liabilities designated at fair value through profit or loss, the standard requires the portion of the change in fair value that relates to the entity’s own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements use an ‘expected credit loss’ (‘ECL’) model to recognise an allowance. Impairment is measured using a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available. There has been no impact from the adoption of AASB 9 on prior year comparatives. Victory Offices Limited Annual Report 2019 27 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONT) C) PRINCIPLES OF CONSOLIDATION The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Victory Offices Ltd as at 30 June 2019 and the results of all subsidiaries for the year then ended. Victory Offices Ltd and its subsidiaries together are referred to in these financial statements as the ‘consolidated entity’. Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. Interconsolidated entity transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. D) GOODS AND SERVICES TAX (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. E) CURRENT AND NON-CURRENT CLASSIFICATION Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. F) IMPAIRMENT OF FINANCIAL ASSETS The consolidated entity recognises a loss allowance for expected credit losses on financial assets which are either measured at amortised cost or fair value through other comprehensive income. The measurement of the loss allowance depends upon the consolidated entity’s assessment at the end of each reporting period as to whether the financial instrument’s credit risk has increased significantly since initial recognition, based on reasonable and supportable information that is available, without undue cost or effort to obtain. Where there has not been a significant increase in exposure to credit risk since initial recognition, a 12-month expected credit loss allowance is estimated. This represents a portion of the asset’s lifetime expected credit losses that is attributable to a default event that is possible within the next 12 months. Where a financial asset has become credit impaired or where it is determined that credit risk has increased significantly, the loss allowance is based on the asset’s lifetime expected credit losses. The amount of expected credit loss recognised is measured on the basis of the probability weighted present value of anticipated cash shortfalls over the life of the instrument discounted at the original effective interest rate. G) OPERATING SEGMENTS IDENTIFICATION OF REPORTABLE OPERATING SEGMENTS The consolidated entity is organised into one operating segment providing comprehensive office serviced packages and other services to customers in Australia. One operating segment is consistent with the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers (‘CODM’)) in assessing performance and in determining the allocation of resources. 28 Victory Offices Limited Annual Report 2019 Financial Statements (iii) Useful lives of plant and equipment The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. (iv) Interest rate implicit in lease arrangements A lessor uses the interest rate implicit in the lease for the purposes of lease classification and to measure the net investments in a finance lease. The interest rate ‘implicit’ in the lease is the discount rate at which, the sum of the present value of (i) the lease payments and (ii) the unguaranteed residual value equals the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor. (v) Impairment of non-financial assets The consolidated entity assesses impairment of non- financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. (vi) Employee benefits provision The liability for employee benefits expected to be settled more than 12 months from the reporting date are recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at the reporting date. In determining the present value of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. NOTES TO THE FINANCIAL STATEMENTS (CONT) 2 CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS AND JUDGEMENTS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. Judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. (i) Income tax The consolidated entity is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The consolidated entity recognises liabilities for anticipated tax audit issues based on the consolidated entity’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Deferred tax assets are recognised for deductible temporary differences only if the consolidated entity considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. (ii) Make good provisions A provision has been made for the present value of anticipated costs for future restoration of leased premises. The provision includes future cost estimates associated with closure of the premises. The calculation of this provision requires assumptions such as application of closure dates and cost estimates. The provision recognised for each site is periodically reviewed and updated based on the facts and circumstances available at the time. Changes to the estimated future costs for sites are recognised in the statement of financial position by adjusting the asset and the provision. Reductions in the provision that exceed the carrying amount of the asset will be recognised in the profit or loss statement. Victory Offices Limited Annual Report 2019 29 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 3 REVENUE Revenue from continuing operations: Suite services Hire of plant and equipment Other revenue: Other income 2019 $ 2018 $ 46,913,383 29,258,079 72,000 144,153 46,985,383 29,402,232 17,455 17,455 586 586 47,002,838 29,402,818 ACCOUNTING POLICY - REVENUE Revenue is measured based on the consideration specified in a contract with a customer and excluded amounts collected on behalf of third parties. The consolidated entity recognises revenue when it transfers control over a product or service to a customer. The following is a description of the principal activities from which the consolidated entity generates its revenue. REVENUE RECOGNITION Revenue is recognised at an amount that reflects the consideration to which the consolidated entity is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the consolidated entity: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the ‘expected value’ or ‘most likely amount’ method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability. SUITE SERVICE INCOME Revenue in relation to the rendering of suite services is recognised on a straight line basis over the term of the lease agreement. Other services revenue has been included in suite services revenue in 2019 and the comparatives figures reclassified. SERVICE CHARGES Services charges is recognised as services are delivered or performed. 30 Victory Offices Limited Annual Report 2019 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) ACCOUNTING POLICY - REVENUE (CONTINUED) OTHER REVENUE Other revenue is recognised when it is received or when the right relevant performance obligation have been met. INTEREST INCOME Interest income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. 4 EXPENSES Depreciation Right-of-use asset Motor vehicles Plant, equipment and other assets Finance costs Interest and finance charges paid/payable Unwinding of the lease liability interest (refer to note 15) 2019 $ 2018 $ 9,346,429 6,831,860 56,359 100,102 3,501,702 965,509 12,904,490 7,897,471 246,387 164,150 7,046,424 5,190,167 7,292,811 5,354,317 ACCOUNTING POLICY - EXPENSES Depreciation and finance costs accounting policy refer to notes 8, 11 and 15 respectively for further details. 5 CASH AND CASH EQUIVALENTS Cash at bank Cash on hand 2019 $ 2018 $ 3,195,246 1,444,098 3,559 2,576 3,198,805 1,446,674 ACCOUNTING POLICY - CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash on hand and money market deposits which have a maturity of three months or less from the date of acquisition, which are readily convertible to cash on hand and are subject to an insignificant risk of changes in value. Bank overdrafts (if applicable) are shown as a current liability on the Statement of Financial Position and are shown as a reduction to the cash balance in the Statement of Cash Flows. Victory Offices Limited Annual Report 2019 31 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 6 TRADE AND OTHER RECEIVABLES Trade receivables Prepayments Related party receivables Other Financial Assets Current Term Deposits Non - current Term Deposits Bank Guarantees 2019 $ 2018 $ 272,660 141,727 807,572 525,011 - 5,391,349 1,080,232 6,058,087 20,135,903 889,898 20,135,903 889,898 1,739,775 - 9,055,721 7,683,980 10,795,496 7,683,980 ACCOUNTING POLICIES TRADE AND OTHER RECEIVABLES Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. The consolidated entity has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. OTHER FINANCIAL ASSETS Other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. Such assets are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on both the business model within which such assets are held and the contractual cash flow characteristics of the financial asset unless, an accounting mismatch is being avoided. Financial assets are derecognised when the rights to receive cash flows have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership. When there is no reasonable expectation of recovering part or all of a financial asset, it’s carrying value is written off. LOANS Related entity loans are financial assets with determinable payments. They arise when the consolidated entity provides money to the related entity. They are included in current assets, except for those that are likely to be repaid greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans are included in receivables and other receivables in the statement of financial position. 32 Victory Offices Limited Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7 INCOME TAX RECONCILIATION (a) The major components of tax expense (income) comprise: Current tax expense Deferred tax expense Under/(over) provision in prior years Income Tax expense Financial Statements 2019 $ 2018 $ 4,440,790 4,829,851 (235,646) (2,365,935) (321,632) - 3,883,512 2,463,916 (b) Reconciliation of income tax to accounting profit Profit before income tax expense 13,480,010 8,206,435 Prima facie income tax on profit before tax @ 30% 4,044,003 2,461,930 Add / deduct Non-deductible expenses Capital gains Over/under provision for income tax in prior year Income Tax expense (c) Recognised deferred tax asset Employee benefits Make good provision Lease liability Make good asset Right-of-use asset accumulated depreciation Black hole expenditure Other Deferred tax asset balance (d) Recognised deferred tax liabilities Right-of-use asset and make good asset Plant and equipment Deferred tax liabilities balance 5,325 155,816 (321,632) 1,986 - - 3,883,512 2,463,916 101,032 68,723 - 194,402 34,956,598 26,438,068 - - 398,556 2,849,619 361,061 973 - 363 35,419,664 29,949,731 29,401,525 26,320,418 643,270 - 30,044,795 26,320,418 Victory Offices Limited Annual Report 2019 33 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7 INCOME TAX RECONCILIATION (CONTINUED) (e) Deferred tax amounts recognised in income tax expense Plant and equipment Right-of-use / Lease liability ASX Fees Black hole expenditure Employee benefits Accruals TAX ADJUSTMENT DTA DTL NET MOVEMENT NET MOVEMENT @ 30% NET MOVEMENT @ 30% $ $ $ (6,194,906) 7,501,326 - - 1,858,472 (2,250,398) 151,902 (45,571) - (783,784) 17,655 217,481 142,352 (42,706) - (31,403) - 9,421 Impact of movements in deferred tax balances on income tax expense (70,622) (165,024) Net impact of movements in deferred tax balances on income tax expense (235,646) ACCOUNTING POLICY - INCOME TAX The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate adjusted by changes in the deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. 34 Victory Offices Limited Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 8 PLANT AND EQUIPMENT Office furniture Cost - Office Furniture Accumulated depreciation - Office Furniture Motor vehicles Cost - Motor Vehicles Accumulated depreciation - Motor Vehicles Office equipment Cost - Office Equipment Accumulated depreciation - Office Equipment Computer equipment Cost - Computer equipment Accumulated depreciation - Computer equipment Computer software Cost - Computer Software Accumulated depreciation - Computer Software Leasehold Improvements Cost - Improvements Accumulated depreciation - Improvements Artwork Cost - Artwork Accumulated depreciation - Artwork Right of use asset Cost - Right-of-use asset Accumulated depreciation - Right-of-use asset Financial Statements 2019 $ 2018 $ 6,528,358 1,334,747 (499,815) (226,872) 6,028,543 1,107,875 - - - 718,353 (418,047) 300,306 10,525,955 6,506,164 (1,099,050) (145,059) 9,426,905 6,361,105 2,156,859 498,831 (377,746) (190,986) 1,779,113 307,845 141,849 77,778 (53,863) (35,403) 87,986 42,375 26,773,214 11,981,851 (2,967,758) (760,806) 23,805,456 11,221,045 325,414 262,519 (6,308) (3,516) 319,106 259,003 116,625,486 86,181,451 (18,620,402) (9,273,973) 98,005,084 76,907,478 139,452,193 96,507,032 Victory Offices Limited Annual Report 2019 35 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 8 PLANT AND EQUIPMENT (CONTINUED) ACCOUNTING POLICY - PLANT AND EQUIPMENT Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of plant and equipment (excluding land) over their expected useful lives as follows: Fixed asset class Useful Life (in years) Office furniture Motor vehicles Office equipment Computer equipment Computer software 10 4 5 5 3 Leasehold Improvements Life of lease Office fit out Artwork Life of lease 40 Right-of-use asset Life of lease The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. Right-of-use assets under lease are depreciated over the unexpired period of the lease term. An item of plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. 36 Victory Offices Limited Annual Report 2019 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 8 PLANT AND EQUIPMENT (CONTINUED) RECONCILIATION OF CARRYING AMOUNT The following table shows a reconciliation from the opening balances to the closing balances for the current and prior financial year. OFFICE FURNITURE $ MOTOR VEHICLES $ OFFICE EQUIPMENT $ COMPUTER EQUIPMENT $ COMPUTER SOFTWARE $ LEASEHOLD IMPROVE- MENTS $ ARTWORK $ RIGHT-OF- USE ASSET $ TOTAL $ 737,624 400,408 95,864 331,403 23,078 4,591,031 169,684 33,454,638 39,803,730 Balance at 1 July 2017 Additions 485,553 - 6,385,634 51,819 35,638 7,261,518 91,293 50,284,700 64,596,155 Disposals - written down value Depreciation expense Balance at 30 June 2018 Balance at 1 July 2018 - - - 4,618 - - - - 4,618 (115,302) (100,102) (120,393) (79,995) (16,341) (631,504) (1,974) (6,831,860) (7,897,471) 1,107,875 300,306 6,361,105 307,845 42,375 11,221,045 259,003 76,907,478 96,507,032 1,107,875 300,306 6,361,105 307,845 42,375 11,221,045 259,003 76,907,478 96,507,032 Additions 5,193,611 - 4,012,772 1,658,028 64,071 14,658,186 62,895 30,444,035 56,093,598 Disposals - written down value Depreciation expense Balance at 30 June 2019 - (243,947) - - - - - - (243,947) (272,943) (56,359) (946,972) (186,760) (18,460) (2,073,775) (2,792) (9,346,429) (12,904,490) 6,028,543 - 9,426,905 1,779,113 87,986 23,805,456 319,106 98,005,084 139,452,193 Victory Offices Limited Annual Report 2019 37 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 9 TRADE AND OTHER PAYABLES Current Trade payables GST and PAYG withholding payable Accrued expenses Non-Current Amounts due to related parties Related party income tax payable 2019 $ 2018 $ 2,325,017 2,339,691 527,006 968,725 74,435 34,654 2,926,458 3,343,070 9,067,512 7,323,678 2,030,751 6,689,669 11,098,263 14,013,347 ACCOUNTING POLICY - TRADE AND OTHER PAYABLES These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. 10 PROVISIONS Current Provision for annual leave Non - current Provision for make good on leased premises Movement in provision for make good on leased premises Carrying amount at the start of the year Additional provisions recognised Amounts used Carrying amount at the end of the year 38 Victory Offices Limited Annual Report 2019 2019 $ 2018 $ 336,775 194,423 336,775 194,423 1,047,108 648,005 1,047,108 648,005 648,005 348,553 399,103 299,452 - - 1,047,108 648,005 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 10 PROVISIONS (CONTINUED) ACCOUNTING POLICY - PROVISIONS MAKE GOOD The provision for make good on leased premises represents the present value of the estimated costs to make good the premises leased by the consolidated entity at the end of the respective lease terms. Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. EMPLOYEE BENEFITS Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Victory Offices Limited Annual Report 2019 39 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 11 BORROWINGS Current Hire purchase (current) Non-current Hire purchase (noncurrent) 2019 $ 2018 $ - - - - 83,880 83,880 210,235 210,235 ACCOUNTING POLICY - BORROWINGS Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Borrowings are classified as current liabilities unless the consolidated entity has an unconditional right to defer settlement of the liability for at least 12 months after balance date. Borrowing costs are recognised as expenses in the period in which they are incurred. Borrowing costs include: • interest on bank overdrafts and short-term and long-term borrowings; • finance lease charges; and • certain exchange differences arising from foreign currency borrowings. 12 OTHER LIABILITIES Current Client deposits Contractual liabilities Non-current Client deposits 2019 $ 2018 $ 2,615,540 2,137,681 296,359 146,036 2,911,899 2,283,717 354,776 389,241 354,776 389,241 ACCOUNTING POLICY - OTHER LIABILITIES CLIENT DEPOSITS Deposits received are security bonds payable at the commencement of the lease to insure against any potential damage to properties. Bonds are repayable upon final inspection of the premise at the end of the lease term. CONTRACTUAL LIABILITIES Income received in advance is recognised as revenue over the life of the lease as services are rendered in accordance with the terms of the lease agreement. 40 Victory Offices Limited Annual Report 2019 Financial Statements 2 2 - - - 2 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 13 CONTRIBUTED EQUITY Ordinary shares 40,900,000 2 28,164,585 2019 SHARES 2018 SHARES 2019 $ 2018 $ Movements in Share Capital Opening Balance Share split - 12 June 2019(i) Shares issued at $2.00 each - 12 June 2019 Capital raising costs, net of tax Closing Balance (i) Share split prior to the IPO at $nil value. ACCOUNTING POLICY - CONTRIBUTED EQUITY ORDINARY SHARES 2 25,899,998 15,000,000 - 40,900,000 2 - 2 - - 30,000,000 - 2 (1,835,417) 28,164,585 Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. DIVIDENDS Provision is made for the amount of any dividend declared on or before the end of the financial year but not distributed at balance date. CAPITAL RISK MANAGEMENT The consolidated entity’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The capital risk management policy remains unchanged from the 30 June 2018 Annual Report. Victory Offices Limited Annual Report 2019 41 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14 EARNINGS PER SHARE Earnings per share for profit from continuing operations Profit after income tax 9,596,498 5,742,519 2019 $ 2018 $ Weighted average number of ordinary shares Basic earnings per share Diluted earnings per share ACCOUNTING POLICY - EARNINGS PER SHARE BASIC EARNINGS PER SHARE NUMBER NUMBER 26,680,822 25,900,000 CENTS CENTS 35.97 35.97 22.17 22.17 Basic earnings per share is calculated by dividing the profit attributable to the owners of Victory Offices Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. DILUTED EARNINGS PER SHARE Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. 42 Victory Offices Limited Annual Report 2019 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 15 LEASE LIABILITIES As a lessee Right-of-use assets The right-of-use assets comprises leased offices. Information about leases for which the consolidated entity is a lessee is presented below: Right-of-use assets Balance at 1 July 2018 Additions Depreciation charge for the year Balance at 30 June 2019 Lease liabilities Maturity analysis - contractual undiscounted cash flows Less than one year One to five years More than five years Total undiscounted lease liabilities Financial Statements 2019 $ 2018 $ 98,005,084 76,907,478 98,005,084 76,907,478 76,907,478 33,454,638 30,444,035 50,284,700 (9,346,429) (6,831,860) 98,005,084 76,907,478 13,413,820 8,698,995 80,339,831 55,681,961 76,008,494 68,922,187 169,762,145 133,303,143 Lease liabilities included in the statement of financial position 116,521,987 88,126,893 Current ((Lease liability) Non-current (Lease liability) Amounts recognised in profit or loss Interest on lease liabilities Amounts recognised in the statement of cash flows Total cash outflow for leases 5,888,004 3,029,657 110,633,983 85,097,236 7,046,424 5,190,167 (10,121,514) (4,150,393) Victory Offices Limited Annual Report 2019 43 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 15 LEASE LIABILITIES (CONTINUED) ACCOUNTING POLICY - LEASES The consolidated entity has early adopted AASB 16 lease standard from 1 July 2016. Leasing expenses are recognised as operating costs on a straight line basis over the term of the lease. The adoption of the new lease standard results in costs being capitalised as a lease liability and unwound over the term of the lease. In addition a right to use asset is to be recognised and depreciated over the term of the lease. LEASED OFFICES The consolidated entity has numerous commercial office leases include leases of shared office spaces. The consolidated entity classified these as operating leases under AASB 16. The non-cancellable period of the leases varies between 2 and 10 years and the consolidated entity has an option to extend the leases up to an additional term of the lease and in many cases it is up to the discretion of the lessor. The lease payments are adjusted every year, based on either a fixed annual rate increase or a change in the consumer price index in the preceding year. The lease payments also include reimbursement of the lessor’s taxes and insurance payments which are annually adjusted. If the consolidated entity exercises the renewal option, then the lease payments in the renewal period will reflect the then market rate or an equivalent index dependent on the terms of the lease agreement. At inception of a contract, the consolidated entity assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the consolidated entity assess whether: • • • • • • • • the contract involves the use of an identified asset - this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; the consolidated entity has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; the consolidated entity has the right to direct the use of the asset. The consolidated entity has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the consolidated entity has the right to direct the use of the asset if either: the consolidated entity has the right to operate the asset; or the consolidated entity designed the asset in a way that predetermines how and for what purpose it will be used. At inception or on reassessment of a contract that contains a lease component, the consolidated entity allocate the consideration in the contract to each lease component on the basis of their relative stand-alone prices. However, for the lease of land and buildings in which it is a lessee, the consolidated entity has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component. the consolidated entity has the right to direct the use of the asset. The consolidated entity has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the consolidated entity has the right to direct the use of the asset if either: the consolidated entity has the right to operate the asset; or the consolidated entity designed the asset in a way that predetermines how and for what purpose it will be used. At inception or on reassessment of a contract that contains a lease component, the consolidated entity allocate the consideration in the contract to each lease component on the basis of their relative stand-alone prices. However, for the lease of land and buildings in which it is a lessee, the consolidated entity has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component. 44 Victory Offices Limited Annual Report 2019 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 15 LEASE LIABILITIES (CONTINUED) ACCOUNTING POLICY - LEASES (CONTINUED) AS A LESSEE The consolidated entity recognise a right-of-use asset and a lease liability at the lease commencement date. The right- of-use asset is initially measured at cost, which compromises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right- of-use assets are determined on the same basis as those property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be easily determined, the consolidated entity incremental borrowing rate. Generally, the consolidated entity use its incremental borrowing rate as the discount rate. Lease payments included in the measurement of the lease liability compromise the following: • fixed payments, including in-substance fixed payments; • variable lease payments that depend on an index or a rate, initially measured using the index or a rate as at the commencement date; • amounts expected to be payable under a residual value guarantee; and • the exercise price under a purchase option that the consolidated entity is reasonably certain to exercise, lease payments in an optional renewal period if the consolidated entity is reasonably to exercise an extension option, and penalties for early termination of a lease unless the consolidated is reasonably certain to terminate early. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the consolidated entity estimate of the amount expected to be payable under a residual value guarantee, or if the consolidated entity changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss in the carrying amount of the right-of-use asset has been reduced to zero. SHORT-TERM LEASES AND LEASES OF LOW-VALUE ASSETS The consolidated entity has elected not to recognise right-of-use assets and lease liabilities for short-term leases of machinery that has a lease term of 12 months or less and leases of low-value assets, including IT equipment. The consolidated entity recognise the lease payments associated with these leases as an expense on a straight-line basis over the lease term. Victory Offices Limited Annual Report 2019 45 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 16 RECONCILIATION OF THE NET PROFIT TO THE NET CASH FLOW FROM OPERATIONS Net Profit from continuing activities after income tax Operating profit after income tax 9,596,498 5,742,519 2019 $ 2018 $ Non-cash expense items: - Depreciation - Rent free incentive periods Changes to assets and liabilities relating to operating activities: (Increase)/decrease in trade and other receivables (Increase)/decrease in prepayments (Increase)/decrease in tax assets and liabilities Increase/(decrease) in trade and other payables Increase/(decrease) in contractual liabilities Increase/(decrease) in other liabilities Increase/(decrease) in provisions 12,904,490 7,897,471 1,570,387 2,669,200 (130,933) 934,951 (282,561) (383,433) 3,883,512 (2,365,946) (416,612) 3,042,801 150,323 23,418 443,394 1,270,795 142,352 93,115 Net Cash Flow from Operating Activities 27,860,850 18,924,891 Non-cash investing and financing activities: Acquisition of right-of-use lease assets Disposal of motor vehicles 30,444,035 50,284,700 243,947 - ACCOUNTING POLICY - STATEMENT OF CASH FLOWS The following is the definition of the terms used in the Statement of Cash Flows: • Operating activities are the principal revenue producing activities of the consolidated entity and other activities that are not investing or financing activities; • Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents; and • Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the consolidated entity. 46 Victory Offices Limited Annual Report 2019 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 17 FINANCIAL INSTRUMENTS CREDIT RISK Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has a strict code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The consolidated entity obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The consolidated entity does hold a security deposit (refer to note 12) which acts as a form of collateral. LIQUIDITY RISK Vigilant liquidity risk management requires the consolidated entity to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The consolidated entity manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. REMAINING CONTRACTUAL MATURITIES The following tables detail the consolidated entity’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. FINANCIAL RISK MANAGEMENT OBJECTIVES The consolidated entity’s activities expose it to a variety of financial risks: market risk (including price risk and interest rate risk), credit risk and liquidity risk. The consolidated entity’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the consolidated entity. The consolidated entity uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and price risks and ageing analysis for credit risk. Risk management is carried out by senior finance executives (‘finance’) under policies approved by the Board of Directors (‘the Board’). These policies include identification and analysis of the risk exposure of the consolidated entity and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within the consolidated entity’s operating units. Finance reports to the Board on a monthly basis. MARKET RISK FOREIGN CURRENCY RISK The consolidated entity’s exposure to currency risk is minimal at this stage of the operations. INTEREST RATE RISK Interest rate risk is the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Interest rate risk arises from fluctuations in interest bearing financial assets and liabilities that the consolidated entity uses. Interest bearing assets comprise cash and cash equivalents which are considered to be short-term liquid assets and investment decisions are governed by the monetary policy. The consolidated entity’s cash and cash equivalents and term deposits were $25,074,483 as at 30 June 2019 (2018: $2,336,572). Borrowings and lease liabilities were $116,521,987 as at 30 June 2019 (2018: $88,421,008). An official increase/decrease in interest rates of 100 (2018: 100) basis points would have an adverse/favourable effect on profit before tax of $(914,475) (2018: $860,844) per annum. The percentage change is based on the expected volatility of interest rates using market data and analysts forecasts. It is the consolidated entity’s policy to settle trade payables within the credit terms allowed and therefore not incur interest on overdue balances. Victory Offices Limited Annual Report 2019 47 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 17 FINANCIAL INSTRUMENTS (CONTINUED) LIQUIDITY RISK (CONTINUED) 2019 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - fixed rate Borrowings Lease liability 1 YEAR OR LESS BETWEEN 1 AND 2 YEARS BETWEEN 2 AND 5 YEARS OVER 5 YEARS REMAINING CONTRACTUAL MATURITIES $ $ $ $ $ 2,926,458 - 2,911,899 354,776 - - - - - - - - 2,926,458 3,266,675 - 13,413,820 14,786,406 65,553,425 76,008,494 169,762,145 Total non-derivatives 19,252,177 15,141,182 65,553,425 76,008,494 175,955,278 As at 30 June 2019 the weighted average interest discount rate for lease liabilities was 6.9% (2018: 6.7%) 2018 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - fixed rate Borrowings Lease liability 1 YEAR OR LESS BETWEEN 1 AND 2 YEARS BETWEEN 2 AND 5 YEARS OVER 5 YEARS REMAINING CONTRACTUAL MATURITIES $ $ $ $ $ 3,343,070 2,283,717 - - 83,880 210,235 - - - - - - 3,343,070 2,283,717 294,115 3,029,657 10,491,609 22,100,898 52,504,729 88,126,893 Total non-derivatives 8,740,324 10,701,844 22,100,898 52,504,729 94,047,795 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. FAIR VALUE OF FINANCIAL INSTRUMENTS Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. 48 Victory Offices Limited Annual Report 2019 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 18 CONSOLIDATED ENTITIES GROUP ACCOUNTING POLICY The Group consolidation comprises all subsidiaries controlled by the consolidated entity. Control exists when the consolidated entity: • Has the power to direct the relevant activities such as key operating, financial and investing decisions; • Has exposure or rights to variable returns from its involvement with the investee such as dividends, loans and fees; and • Has the ability to use its power over the investee to affect the amount of returns. In assessing control, potential voting rights that are presently exercisable or convertible are taken into account. Management uses accounting judgement in determining whether the consolidated entity controls an entity by applying the above control criteria and reviewing the substance of its relationship with the entity. The financial statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies with adjustments made to bring into line any dissimilar accounting policies that may exist. External non controlling interests are allocated their share of total comprehensive income and are presented within equity in the consolidated Statement of Financial Position, separately from the equity of securityholders. The material consolidated entities of the Group are listed below. Parent Entity: Victory Offices Limited Subsidiaries: Victory Management Services Pty Ltd Victory Equipment & Leasing Pty Ltd Victory Offices (420 Collins) Pty Ltd Victory Offices (35 Collins) Pty Ltd Victory Offices (600 Bourke) Pty Ltd Victory Offices (727 Collins) Pty Ltd Victory Offices (200 George) Pty Ltd Victory Offices (175 Eagle) Pty Ltd Victory Offices (Box Hill) Pty Ltd Victory Offices (Chadstone) Pty Ltd Victory Offices (Barangaroo) Pty Ltd Victory Offices (333 Collins) Pty Ltd Victory Offices (2 Esplanade) Pty Ltd Victory Offices (Dandenong) Pty Ltd Victory Offices (Sunshine) Pty Ltd Victory Offices (420 George) Pty Ltd Victory Offices (St Kilda) Pty Ltd 2019 2018 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - - - Victory Offices Limited Annual Report 2019 49 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 19 PARENT ENTITY INFORMATION Set out below is the supplemented information about the parent entity. Statement of profit or loss and other comprehensive income Loss after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Total net assets Total equity 2019 $ 2018 $ - - - 28,166,097 - 1,512 28,164,585 28,164,585 - - - 1,114 - 1,112 2 2 CONTINGENT LIABILITIES The parent entity had no contingent liabilities as at 30 June 2019 and 30 June 2018. CAPITAL COMMITMENTS The parent entity had no capital commitments as at 30 June 2019 and 30 June 2018. SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the parent entity are consistent with those of the consolidated entity. 20 KEY MANAGEMENT PERSONNEL DISCLOSURES Key management personnel remuneration included within employee expenses for the year is shown below: Short term employee benefits Post employment benefits For details of other transactions with key management personnel, refer to Note 21. 2019 $ 2018 $ 1,049,019 540,193 73,137 30,000 1,122,156 570,193 50 Victory Offices Limited Annual Report 2019 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 21 RELATED PARTIES TRANSACTIONS PARENT ENTITY The ultimate parent entity, which exercises control over the group, is Victory Group Holdings which is incorporated in Australia and owns 63.3% (2018: 100%) of Victory Offices Limited & Controlled Entities. Refer to note 18. KEY MANAGEMENT PERSONNEL Any person(s) having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity are considered key management personnel. For details of remuneration disclosures relating to key management personnel, refer to note 20. Other transactions with KMP and their related parties are shown below. Other related parties include close family members of key management personnel and entities that are controlled. TRANSACTIONS WITH RELATED PARTIES The following transactions occurred with related parties of Mr Dan Baxter: 2019 KMP related parties Dan Baxter Controlling entities Victory Group Holdings Pty Ltd Other related parties Victory Aluminium Pty Ltd Victory Constructions Pty Ltd Victory Realty Pty Ltd Victory Metals Australia Pty Ltd 2018 KMP related parties Dan Baxter Controlling entities Victory Group Holdings Other related parties Victory Aluminium Victory Constructions Victory Realty PURCHASES $ SALES $ OTHER TRANSACTIONS $ RECEIVABLE $ PAYABLE $ - - - - - - - - 503,760 150,000 210,000 - - - - - - 243,947 - 9,067,512 - 2,030,751 - - - - - - - - PURCHASES $ SALES $ OTHER TRANSACTIONS $ RECEIVABLE $ PAYABLE $ - - - - - 87,273 - - - - 7,092,496 - 6,689,517 1,040,882 1,380,441 3,237,304 35,832 744,993 28,681 374,670 1,587,459 - 351,319 330,326 3,084 Victory Offices Limited Annual Report 2019 51 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 21 RELATED PARTIES TRANSACTIONS (CONTINUED) LOANS TO/FROM RELATED PARTIES Unsecured loans are made to the ultimate parent entity, subsidiaries, directors, key management personnel and other related parties on an arm’s length basis. There are no set repayment terms and no interest is charged. Loans are unsecured and repayable in cash. No interest is paid on loans to key management personnel and there are no set repayment terms. During the 2019 financial year Dan Baxter paid $2,778,907 (2018: $571,846) for bank guarantees (included on the Statement of Financial Position in Note 6) for new leases with the amount recorded as a related party loan. During the 2019 financial year Victory Group Holdings Pty Ltd paid $4,283,512 (2018: $nil) in settlement of tax liabilities on behalf of the consolidated entity with the amount recorded as a related party loan. OTHER RELATED PARTIES - SALES Sales relate to the use of suite services and cost recharges in the normal course of business. OTHER RELATED PARTIES - OTHER TRANSACTIONS Other transactions in Victory Metals Australia Pty Ltd includes the sale of a motor vehicle for $243,947 (2018: $ nil) which represented its book carrying value at the time of sale. LEASES WITH RELATED PARTIES The consolidated entity has four leases with the lessors being related entities of Dan Baxter. The consolidated entity considers that all leases are on arm’s length terms which reflect customary provisions commonly found in commercial leases of a similar nature. Each lease has the following consistent material terms: on termination the lessee is responsible for make good of the premises; rent is payable in advance by monthly instalments; and the lessee is responsible for maintaining appropriate insurance coverage. Other material terms of each lease have been disclosed below: Ground floor, 416-420 Collins Street, Melbourne – The lessor is DB CLS-G1 Pty Ltd, a related entity of Dan Baxter. This lease commenced on 1 July 2018 with an initial term of ten years plus a five year option. Level 1, 416-420 Collins Street, Melbourne – The lessor is DB CLS-1 Pty Ltd, a related entity of Dan Baxter. This lease commenced on 4 August 2014 with an initial term of five years plus two, five year options. The first five year option was exercised on 4 August 2019. Level 2, 416-420 Collins Street, Melbourne – The lessor is DB CLS-2 Pty Ltd, a related entity of Dan Baxter. This lease commenced on 4 August 2014 with an initial term of five years plus two, five year options. The first five year option was exercised on 4 August 2019. Level 9, 416-420 Collins Street, Melbourne – The lessor is DB CLS-9 Pty Ltd, a related entity of Dan Baxter. This lease commenced on 1 July 2018 with an initial term of ten years plus a five year option. 52 Victory Offices Limited Annual Report 2019 Financial Statements NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 22 REMUNERATION OF AUDITORS During the financial year the following fees were paid or payable for services provided by the auditor of the consolidated entity: Audit services Audit or review of the financial statements Other services Corporate finance fees related to IPO Taxation advice Total fees 23 CAPITAL COMMITMENTS 2019 $ 2018 $ 162,280 40,000 162,280 40,000 77,000 4,500 81,500 - 2,250 2,250 243,780 42,250 The consolidated entity had capital commitments of $588,438 relating to future fit-out expenditure at 30 June 2019 (2018: $nil). Refer also to note 15 for lease liability commitments. 24 CONTINGENT LIABILITIES The consolidated entity has no contingent liabilities at 30 June 2019 or 2018. 25 NEW OR AMENDED ACCOUNTING STANDARDS AND INTERPRETATIONS ADOPTED STANDARDS ISSUED NOT YET EFFECTIVE The Consolidated entity has adopted AASB 16 Leases early from the period commencing 1 July 2016. Other Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting year ended 30 June 2019. The consolidated entity’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, is no significant impact. 26 EVENTS AFTER THE REPORTING PERIOD On 16 July 2019, the Company announced to the ASX the execution of a new lease for an office location in Fortitude Valley, Brisbane. A further location in St Kilda Road, Melbourne was opened on 23 August 2019. No other matters or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Victory Offices Limited Annual Report 2019 53 DIRECTORS’ DECLARATION For the year ended 30 June 2019 In the directors’ opinion: • • • • the attached financial statements and notes and the remuneration disclosures that are contained within the Remuneration report within the Directors’ report 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 consolidated entity’s financial position as at 30 June 2019 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. Hon Steve Bracks AC Chairman 29 August 2019 Dan Baxter Managing Director/CEO 54 Victory Offices Limited Annual Report 2019 INDEPENDENT AUDITOR’S REPORT For the year ended 30 June 2019 INDEPENDENT AUDITOR’S REPORT To the Members of Victory Offices Limited Opinion We have audited the financial report of Victory Offices Limited (the Company) and its subsidiaries (the Consolidated entity), which comprises the consolidated statement of financial position as at 30 June 2019, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and 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 Consolidated entity is in accordance with the Corporations Act 2001, including: I. giving a true and fair view of the Consolidated entity's financial position as at 30 June 2019 and of its financial performance for the year then ended; and II. 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 Consolidated entity 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 confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor's report. 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 judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. - 55 - Victory Offices Limited Annual Report 2019 55 Independent Auditor’s Report Key Audit Matters (Continued.) Key Audit Matter How our audit addressed this matter Recognition of Revenue Refer to Note 3 in the financial statements The Consolidated entity generates income from providing a range of services with the main revenue driver being the licencing of serviced and coworking offices with a typical licence term of 12 to 18 months. Some of the contracts that account for revenue include rent free periods. risk that is a There revenue recognition will lead to a material misstatement of income and related receivables. The risk is heightened due to the timing of invoicing. inappropriate Leases Refer to Note 15 in the financial statements The Group has entered into 21 material leases for each of their leased office spaces across Australia, the new AASB 16 Leases standard has a material impact on the Consolidated entity. Whilst the Consolidated entity early adopted this standard, applying it from the year ended 30 June 2017, the complexity of the standard, and the extent of judgements and estimates involved means that the application of AASB 16 Leases, and the valuation of both the lease liability and right-of-use asset are considered a significant risk. Our audit procedures in relation to the recognition of revenue included: • Assessing whether the Consolidated entity’s revenue recognition policies were in compliance with AASB 15 Revenue from Contracts with Customers; • Evaluating the operating effectiveness of revenue related to management’s controls recognition; • Performing substantive analytical review procedures on suite revenue; • Performing detailed testing on a sample of suite revenue recognised and assessing the allocation of revenue to various elements in the contracts with customers; and • Reviewing sales transactions before and after year-end to ensure that revenue is recognised in the correct period. Our audit procedures in relation to leases included: ▪ Reviewing the leasing model used by management to calculate the right-of-use assets and lease liabilities, including reviewing the accuracy of key inputs into the model, and the operation of the model; ▪ Reviewing any new material lease agreements entered during the year and ensure including any incentives and make-good provisions have been correctly captured in the leasing model; and that all clauses ▪ Review all leasing disclosures within the financial the completeness and accuracy, and overall compliance with AASB 16 Leases. statements ensure to - 56 - 56 Victory Offices Limited Annual Report 2019 Independent Auditor’s Report Other Information The directors are responsible for the other information. The other information comprises the information included in the Consolidated entity's annual report for the year ended 30 June 2019 but does not include the financial report and the auditor's report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Consolidated entity to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Consolidated entity 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 further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar2.pdf. This description forms part of our auditor's report. - 57 - Victory Offices Limited Annual Report 2019 57 Independent Auditor’s Report Report on 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 2019. In our opinion, the Remuneration Report of Victory Offices Limited, for the year ended 30 June 2019, 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. RSM AUSTRALIA PARTNERS R B MIANO Partner Dated: 29 August 2019 Melbourne, Victoria - 58 - 58 Victory Offices Limited Annual Report 2019 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 28 August 2019. DISTRIBUTION OF EQUITABLE SECURITIES Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel NUMBER OF HOLDERS OF ORDINARY SHARES 26 71 70 116 14 297 1 EQUITY SECURITY HOLDERS TWENTY LARGEST QUOTED EQUITY SECURITY HOLDERS The names of the twenty largest security holders of quoted equity securities are listed below: Victory Group Holdings Pty Ltd HSBC Custody Nominees (Australia) Limited National Nominees Limited CS Third Nominees Pty Ltd Sargon CT Pty Ltd BNP Paribas Noms Pty LtdBNP Paribas Nominees Pty Ltd BNP Paribas Nominees Pty Ltd UBS Nominees Pty Ltd BNP Paribas Nominees Pty Ltd BNP Paribas Nominees Pty Ltd Mr John and Mrs Jennifer Bamford J P Morgan Nominees Australia Pty Ltd NDPM Pty Ltd Ossum Holdings Pty Ltd Mrs Wendi Louise Dawson Bramscorp Pty Ltd Mrs Leora Shamgar Citicorp Nominees Pty Ltd Formula Properties Pty Ltd ORDINARY SHARES NUMBER HELD % OF TOTAL SHARES ISSUED 25,900,000 63.33 3,828,632 3,433,024 875,559 577,514 500,000 402,594 400,000 256,059 221,000 212,046 143,001 132,313 110,000 80,000 79,500 74,230 70,000 63,250 62,500 9.36 8.39 2.14 1.41 1.22 0.98 0.98 0.63 0.54 0.52 0.35 0.32 0.27 0.20 0.19 0.18 0.17 0.15 0.15 37,421,222 91.49 Victory Offices Limited Annual Report 2019 59 Shareholder Information SUBSTANTIAL HOLDERS Substantial shareholders in the company registered as at 28 August 2019 are set out below: Victory Group Holdings Pty Ltd IOOF Holdings Limited Perpetual Limited VOTING RIGHTS The voting rights attached to ordinary shares are set out below: ORDINARY SHARES ORDINARY SHARES NUMBER HELD 25,900,000 3,696,556 2,250,000 % OF TOTAL SHARES ISSUED 63.33 9.04 5.50 On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. RESTRICTED SECURITIES – ESCROW ARRANGEMENTS Victory Group Holdings Pty Ltd and Dan Baxter as a controller of Victory Group Holdings Pty Ltd (Escrowed Persons) agreed to enter into a voluntary restriction deed in respect of the Shares they own or control for a maximum period of two years following completion of the IPO. This deed prevents them from dealing with their escrowed Shares for the applicable escrow periods. 25.9 million Shares (100% of the holding) will be escrowed until Victory Offices lodges with the ASX its Appendix 4E for FY2020 and 19.4 million Shares (75% of the holding) will be escrowed until Victory Offices lodges with the ASX its Appendix 4E for FY2021. CLASS Ordinary shares EXPIRY DATES NUMBER OF SHARES As described above. 25,900,000 60 Victory Offices Limited Annual Report 2019 CORPORATE DIRECTORY DIRECTORS Hon Steve Bracks AC Dan Baxter Alan Jones Ted Chwasta Shane Tanner (Chairman, Non-Executive Director) (Chief Executive Officer, Managing Director) (Non-Executive Director) (Non-Executive Director) (Non-Executive Director) COMPANY SECRETARY Fady Said REGISTERED OFFICE Level 2, Victory Tower 416-420 Collins Street Melbourne VIC 3000 ACN: 616 150 022 LEGAL ADVISORS Hall & Wilcox Level 11 525 Collins Street Melbourne VIC 3000 AUDITOR RSM Australia Partners Level 21 55 Collins Street Melbourne VIC 3000 SHARE REGISTRY Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Website: www.linkmarketservices.com.au Victory Offices Limited Annual Report 2019 61 ACN 616 150 022 www.victoryoffices.com.au ANNUAL REPORT 2019