Arq: rapport annuel comprenant le rapport financier annuel de l’exercice 2019

30/03/2020 | 03h53 HAE

30 mars 2020

ARQ GROUP LTD (ASX: ARQ)

Rapport annuel, y compris le rapport financier annuel vérifié

Pour l’exercice clos le 31 décembre 2019

Ci-joint le rapport annuel d’Arq Group Ltd (Arq Group), y compris le rapport financier annuel audité pour l’exercice clos le 31 décembre 2019.

Une copie du rapport, accompagnée de l’avis de convocation à l’assemblée générale annuelle, sera envoyée en avril 2020 aux actionnaires qui auront choisi d’en recevoir une copie imprimée. Le rapport sera également disponible sur le site Internet de la Société:

https://arq.group/investor-centre/announcements

Changements aux résultats financiers présentés – Dépréciation des activités des PME

Arq Group se réfère à son annexe 4E et à son rapport financier préliminaire préliminaire non audités du 27 février 2020.

Suite à la finalisation de l’audit du rapport financier de l’exercice clos le 31 décembre 2019, le groupe Arq a réévalué la dépréciation du goodwill alloué à l’activité PME, suite à des informations complémentaires reçues relatives aux coûts de cession estimés pour atteindre les objectifs l’ajustement du prix de base des activités des PME à l’avenir au cours de l’exercice 2020.

La charge de dépréciation révisée associée aux activités PME pour l’exercice 2019 est de 41,1 millions de dollars (contre 38,8 millions de dollars). Il n’y a aucun changement à l’EBITDA sous-jacent1 du Groupe Arq précédemment déclaré par rapport aux activités poursuivies et abandonnées pour l’exercice 2019, et il n’y a pas d’impact sur la trésorerie à la suite de cette révision.

L’impact sur les autres mesures financières statutaires précédemment signalées dans l’annexe 4E et le rapport financier préliminaire, comme requis par les règles d’inscription ASX, est présenté ci-dessous:

2019

2019

Vérifié

Appendice 4E

résultats finaux

résultats préliminaires

$ A’000s

$ A’000s

Perte après impôt des activités poursuivies

(45 951)

(43 676)

Perte après impôt attribuable aux membres du parent

(131 303)

(129 028)

cents

cents

Perte par action des activités poursuivies

(38.01)

(36.13)

Perte par action attribuable aux membres du parent

(108,62)

(106,70)

Il n’y a eu aucun autre changement dans les résultats financiers présentés pour l’exercice 2019.

1Revenus avant intérêts, impôts, amortissement et amortissement

P 1300 638 734

Niveau 23, 680 George Street, Sydney, NSW, 2000

Arq Group Limited ABN 21 073 716 793 ASX: ARQ arq.group

PREND FIN

Veuillez contacter Mme Anne Jordan, secrétaire de la société, si vous avez des questions.

Anne Jordan

Secrétaire de la Société

1. [email protected]

1. 02 9215 6300

La publication de cette annonce a été autorisée par M. Andrew Reitzer, président.

À propos d’Arq Group

Arq Group Ltd est la plus grande agence de marketing numérique à service complet d’Australie pour les petites et moyennes entreprises – alimentant la croissance des entreprises locales du début à l’accélération.

Depuis sa création en 1996, Arq Group Ltd (anciennement Melbourne IT Group) a contribué au succès de plus d’un million de petites et moyennes entreprises australiennes. Avec des racines dans le nom de domaine et l’hébergement, Arq Group Ltd sont les experts en marketing numérique des petites et moyennes entreprises qui catapultent la croissance en aidant les entreprises à se connecter, à améliorer et à protéger leur présence en ligne.

Arq Group Ltd se compose des marques Netregistry, WME et Melbourne IT. La division Arq Group Ltd Enterprise a été cédée en mars 2020.

P 1300 638 734

Niveau 23, 680 George Street, Sydney, NSW, 2000

Arq Group Limited ABN 21 073 716 793 ASX: ARQ arq.group

Nos implantations

Sydney

Niveau 23, 680, rue George

Sydney, Nouvelle-Galles du Sud 2000

T + 61 2 9215 6300

Brisbane

Niveau 3, 192, rue Ann

Brisbane, Queensland 4000

T + 61 7 3230 7373

Melbourne

Niveau 9, 505, rue Little Collins

Melbourne, Victoria 3000

T + 61 3 8624 2300

Assemblée générale annuelle

L’assemblée générale annuelle (AGA) se tiendra:

Jeudi 28 mai 2020 à 11h00

Détails sur notre site Internet.

Tous les actionnaires sont invités à assister à l’AGA ou à remplir et retourner le formulaire de procuration qui accompagne l’avis de convocation

Contenu

1. Examen du président

2. Entreprise

3. SMB

1. Gens et culture

2. Conseil d’administration

1. Rapport des administrateurs et rapport de rémunération

1. États financiers et notes

1. Déclaration d’indépendance de l’auditeur

2. Le rapport du vérificateur indépendant

1. Informations supplémentaires sur ASX

Rapport annuel 2019 du Groupe ARQ 1

Examen du président

2019 a été une année difficile pour Arq Group. Le Conseil a entrepris un certain nombre d’initiatives stratégiques au cours des 18 derniers mois, notamment la mise en œuvre d’un plan de redressement pour la division PME, la cession des activités non essentielles des revendeurs TPP Wholesale, la nomination de Macquarie Capital pour entreprendre un examen stratégique indépendant. de l’entreprise en mettant l’accent sur l’évaluation d’une gamme d’options pour maximiser la valeur pour les actionnaires, et le désinvestissement des activités d’entreprise sous-performantes en février 2020.

SMB

En se concentrant sans relâche sur les clients, un changement de modèle d’exploitation, une gestion efficace des coûts et une approche intégrée de la gestion et de l’exécution des comptes de vente, la division PME a terminé 2019 avec une forte dynamique de vente dans son activité de marketing numérique et a livré une véritable intégration de ancien nom de domaine et entreprise d’hébergement avec des solutions de marketing numérique.

Cette poursuite du redressement de la division PME a entraîné un retour à une croissance positive de l’EBITDA sous-jacent1 en 2019 et une dynamique continue jusqu’en 2020.

Entreprise

2019 a été une année difficile. Après des années de croissance organique soutenue, notre division Entreprise a rencontré des vents contraires sur le marché au second semestre 2019. Le ralentissement de l’activité qui en a résulté a empêché le Groupe d’atteindre ses revenus et ses objectifs d’EBITDA1.

Malgré les mesures de gestion, ces tendances ne se sont pas inversées, nos conseillers ont donc recommandé la cession de la division Entreprise. La vente d’Enterprise a été finalisée le 2 mars 2020.

Avoir hâte de

SMB continue d’améliorer sa dynamique commerciale en mettant davantage l’accent sur la création de valeur client, l’optimisation des coûts et l’excellence opérationnelle. Alors que l’Australie se rapproche d’une économie numérique, la demande sans cesse croissante de solutions numériques par les clients des PME renforcera notre position sur le marché.

1Revenus avant intérêts, impôts, amortissement et amortissement.

Rapport annuel 2019 du Groupe ARQ 2

Entreprise

2019 a été une année difficile pour la division Entreprise. Après des années de croissance organique soutenue, la division Entreprise a rencontré des vents contraires sur le marché au second semestre 2019.

La croissance attendue des comptes existants et nouveaux est restée inférieure aux attentes. Cela a empêché la division Entreprise, puis le Groupe, d’atteindre les objectifs de croissance du chiffre d’affaires.

Une gestion proactive

L’équipe de gestion a identifié les facteurs à l’origine des performances irrégulières de la division Entreprise au cours de l’année écoulée et a pris les mesures appropriées pour y remédier. Ces mesures comprenaient la gestion des frais généraux, un resserrement des processus de prévision des pipelines et des changements organisationnels.

En conséquence, Enterprise a connu une fin d’année plus forte que prévu en raison d’une utilisation facturable plus élevée, ce qui a été un résultat global décevant.

Mise à jour

À la suite d’un examen stratégique par les conseillers de la Société recommandant une cession de l’activité, le 11 février 2020, le Groupe a annoncé qu’il avait conclu un accord contraignant pour vendre la division Entreprise à un consortium comprenant Quadrant Private Equity et certains membres de l’équipe dirigeante Entreprise (en tant que PDG intérimaire actuel du groupe Arq, Tristan Sternson, Justin Parcell et Cameron Boog), pour 35 millions de dollars en espèces et sans dettes. La vente a été conclue le 2 mars 2020.

Rapport annuel 2019 du Groupe ARQ 3

SMB

En 2019, il y a eu un revirement positif dans la division PME. Sur nos marques informatiques Netregistry, WME et Melbourne, nous sommes bien placés pour offrir aux petites et moyennes entreprises des services de domaine, d’hébergement, de messagerie électronique et de marketing numérique abordables pour les aider à se connecter, à améliorer leurs performances en ligne et à protéger leur marque en ligne. Nous nous engageons à fournir des résultats aux clients avec un retour sur investissement numérique clairement défini. À l’avenir, nous nous concentrons sur nos clients, en atteignant l’excellence opérationnelle et la consolidation de la marque.

Hausse des revenus

Tout au long de 2019, la division SMB s’est concentrée sur la croissance des revenus au sein de ses deux catégories de propositions de clients «  Get Online  » et «  Améliorez les performances en ligne  ». Le domaine «  Get Online  », l’hébergement de sites Web, les produits de messagerie électronique et les modèles de sites Web ont été les principaux produits vendus, aidant les petites entreprises dans la phase initiale de leur parcours en ligne, principalement par le biais de la marque Netregistry. Des sites Web sur mesure et des programmes de marketing de performance numérique intégrés et évolutifs vendus sous la marque WME ont aidé nos clients à améliorer leurs performances en ligne. Et en 2019, il était agréable de voir des synergies d’acquisition réalisées avec les marques WME et Netregistry soutenant les clients avec des services PPC et SEO.

La croissance du chiffre d’affaires de WME, notre principale marque de marketing numérique, a été obtenue grâce à des améliorations des capacités et à une automatisation intelligente du marketing. Nous avons investi dans la capacité de vente grâce à une formation à la direction des ventes et une capacité améliorée avec des ventes de première ligne pour soutenir l’acquisition de clients. Nous nous sommes également concentrés sur le développement d’une automatisation marketing intelligente pour améliorer l’efficacité des ventes lors de la maintenance des leads entrants. Le résultat net est une croissance des revenus de ventes de nouveaux produits de marketing numérique d’un mois sur l’autre.

L’amélioration de la rentabilité de Netregistry, notre activité fondamentale pour les enregistrements de domaines, les suites de productivité et les activités de sites Web, a été réalisée grâce à une automatisation du marketing améliorée et à des économies de coûts opérationnels. Cette amélioration sous-jacente des bénéfices a facilité la diversification de l’entreprise sous la forme d’investissements en produits de marketing numérique et en expérience client pour créer un potentiel de croissance en 2020 et au-delà.

Un retour aux fondamentaux

En 2019, l’EBITDA sous-jacent a augmenté de 7% 2. L’amélioration de la performance peut être attribuée à une approche fondamentale, caractérisée par une focalisation sur les clients, un changement de modèle d’exploitation et une gestion efficace des coûts.

Nous nous sommes éloignés de la seule activité d’acquisition et de rétention dans les abonnements et avons déplacé notre objectif vers la réussite de nos clients.

2 Concerne uniquement l’activité SMB Direct, à l’exclusion du segment SMB Indirect (non-core) résultant de la vente de l’activité revendeur TPP Wholesale.

Rapport annuel 2019 du Groupe ARQ 4

Orientation client

Au cours de l’année, la division SMB a adopté de nouvelles approches de gestion des ventes et des comptes pour mieux servir nos clients. Au sein des deux marques WME et Netregistry, une structure d’avant-vente et de vente « Wheeler-and-Dealer » a été introduite pour améliorer les conversations de vente des clients et offrir une valeur de commande client accrue. Au sein de notre marque WME, nous avons introduit une approche intégrée de la gestion des comptes de vente et des équipes d’exécution pour améliorer l’expérience des clients tout au long de leur parcours.

Ce changement d’approche a permis une meilleure compréhension des clients et des segments. Surtout, nous avons identifié des paramètres pour mesurer le succès de nos clients, soutenus par nos équipes d’exécution.

L’introduction d’un nouveau programme d’intégration a aidé les clients à s’établir et à se mettre en place rapidement. Nous avons travaillé en étroite collaboration avec les clients pour les guider de manière proactive à travers les étapes clés de l’adoption, de la valeur et de la croissance au cours de leurs 90 premiers jours avec nous.

Gestion des coûts et efficacité opérationnelle

La gestion rigoureuse des coûts a été un ingrédient clé du redressement réussi de SMB. Le programme de gestion des coûts durable et continu visait à réduire les coûts sans affecter la capacité de l’entreprise à générer à la fois une forte croissance des revenus de premier plan dans les solutions numériques ou un impact négatif sur notre capacité à desservir et à conserver la large base de clients de Foundations. Par conséquent, nous avons pu réduire notre base de coûts opérationnels sous-jacents de plus de 5 millions de dollars.

Au niveau de la marque, l’approche «fondamentaux» englobe une simplification de nos marques. Nous avons continué à retirer nos anciennes marques (Webcentral et Results First), en les consolidant sous Netregistry, Melbourne IT et WME. La consolidation de la marque se poursuivra au cours du premier semestre 2020 avec la migration de la marque Domainz et des clients vers Netregistry.

La vente de l’activité TPP Wholesale à CentralNic a été finalisée pour 21,3 millions de dollars. CentralNic est un registre et un registraire de premier plan avec une grande entreprise de vente en gros dont la clientèle est étroitement alignée sur celle de TPP Wholesale. Cette vente permet à la division PME de se concentrer sur les produits et services de base qui accéléreront la stratégie de croissance des services numériques.

Prix ​​SEMrush

En novembre 2019, notre expertise numérique a été récompensée par un prix de premier plan de l’industrie. Les prix SEMrush AU célèbrent le succès des professionnels du marketing en ligne sur le marché australien et reconnaissent les meilleures campagnes de marketing et les équipes qui travaillent dans l’espace en ligne qui apportent une croissance et des revenus exceptionnels aux entreprises. WME a remporté le prix de la « meilleure campagne intégrée » pour son travail avec notre client Unique Laser.

Notre expertise dans l’optimisation des moteurs de recherche et le PPC a aidé Unique Laser à augmenter le trafic vers son site Web, passant de 400 visites mensuelles à plus de 10 000.

Rapport annuel 2019 du Groupe ARQ 5

Perspective

Les petites et moyennes entreprises sont l’épine dorsale de l’économie australienne. La division SMB a évolué pour devenir un fournisseur leader de solutions de marketing numérique pour plus de 330 000 clients en Australie et en Nouvelle-Zélande. Nous avons passé 2019 à consolider et à construire une plateforme de croissance. SMB continuera à renforcer ses activités, à accroître ses parts de marché et à tenir sa promesse de marque de devenir le partenaire de marketing numérique le plus percutant d’Australie – libérant ainsi le potentiel de croissance des petites et moyennes entreprises locales.

Gens et culture

Le groupe Arq a mis en œuvre d’importants changements organisationnels en 2019.

Martin Mercer, le PDG et directeur général, a quitté l’entreprise en septembre 2019, en raison des mauvaises performances des divisions Entreprise et PME. Tristan Sternson a été promu PDG par intérim en septembre 2019 et a démissionné après la finalisation réussie de la vente de la division Entreprise en mars 2020. Brett Fenton, alors chef de SMB, a été promu PDG par intérim pour diriger le reste de l’examen stratégique. processus, y compris la vente potentielle de PME.

Nous avons également déplacé nos employés dans de nouveaux locaux. En 2019, nous avons finalisé la dernière de nos déménagements avec le déménagement de nos employés de Brisbane au 192 Ann Street dans le CBD. Cette relocalisation a suivi celles de nos habitants de Sydney et de Melbourne vers des espaces de bureaux plus contemporains.

Nous reconnaissons que l’équilibre entre les sexes est un problème commercial majeur. En 2019, nous avons augmenté le nombre de femmes dans nos effectifs de 29% à 31%.

Nous avons effectué beaucoup de travail sur l’équité salariale. En décembre 2018, notre écart de rémunération entre hommes et femmes était inférieur à 5%, par rapport à l’écart de rémunération national moyen de 14,6% en mars 2019.

Nous avons une main-d’œuvre très diversifiée. Nos employés représentent plus de 50 nationalités et nous célébrons activement la diversité culturelle. 2019 a été une année difficile et une année au cours de laquelle notre personnel a connu de nombreux changements. Nous reconnaissons le travail acharné et l’engagement de nos employés et les remercions pour leur patience, leur dévouement et leur fidélité.

Rapport annuel 2019 du Groupe ARQ 6

Andrew Reitzer

Directeur non exécutif et président

(Nommé le 1er août 2018)

Qualifications

Baccalauréat en commerce – Université d’Afrique du Sud

Master of Business Leadership – Université du Sud

Afrique

Expérience et expertise

Andrew Reitzer apporte plus de 35 ans d’expérience mondiale dans les secteurs de la technologie, de la vente au détail et de la vente en gros. Andrew possède une vaste expérience en fusions et acquisitions, en intégration post-acquisition et en changement organisationnel.

De 1988 au 30 juin 2013, Andrew a été PDG de Metcash Limited. Avant sa nomination au poste de PDG, Andrew a occupé divers postes de direction chez METRO Cash & Carry et a dirigé la mise en place des opérations de METRO en Israël et en Russie et a été directeur des opérations du groupe.

Outre les postes d’administrateur non exécutif énumérés ci-dessous, Andrew est administrateur de plusieurs sociétés fermées.

Autres mandats d’administrateur de sociétés cotées

Amaysim Limited (ASX: AYS) (président non exécutif)

(nommé en juin 2015)

SG Fleet Limited (ASX: SGF)) (président non exécutif)

(Nommé en février 2014)

Anciens postes d’administrateur de sociétés cotées au cours des trois dernières années

Néant

Responsabilités spéciales

Président du conseil

Andrew Macpherson

Directeur non-exécutif

(Nommé le 19 juillet 2017)

Qualifications

Baccalauréat en génie industriel (Hons) – Université de NSW

Expérience et expertise

Andrew Macpherson est un cadre supérieur expérimenté avec de forts intérêts et une expérience spécifique dans l’utilisation de la technologie pour transformer les entreprises traditionnelles.

Andrew a travaillé au sein du cabinet de conseil mondial Accenture pendant 27 ans, se spécialisant dans la mise en œuvre de projets de changement technologiques complexes dans les grandes entreprises et les gouvernements en Australie, en Asie et en Europe. Il a pris sa retraite en tant que directeur général régional APAC – Technologie en 2005. Au cours des 13 années suivantes, il a été activement impliqué en tant qu’investisseur, directeur et exécutif dans les secteurs de l’agro-industrie, du commerce de détail, de l’hôtellerie et des services.

Andrew est également président de Workventures et LifeCircle, et administrateur non exécutif de l’Institut Rozetta, qui sont tous des entreprises sans but lucratif.

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Néant

Anciens postes d’administrateur de sociétés cotées au cours des trois dernières années

OneVue Holdings (ASX: OVH) (nommé en octobre 2016, retiré en juin 2019)

Ruralco Holdings (ASX: RHL) (nommé en décembre 2017, retraité en septembre 2019)

Responsabilités spéciales

Président des Ressources Humaines, Rémunération

et comité de nomination

Membre de l’audit et de la gestion des risques

Comité

Rapport annuel 2019 du Groupe ARQ 7

Karl Siegling

Directeur non-exécutif

(Nommé le 23 août 2019)

Qualifications

Baccalauréat en commerce – Université de Melbourne Baccalauréat en droit – Université de Melbourne Master en administration des affaires – INSEAD (France)

Diplôme d’études supérieures en finance au Securities Institute of Australia (FINSIA)

Expérience et expertise

Karl Siegling a plus de 25 ans d’expérience en investissement dans le secteur financier en Australie et à l’étranger.

Me Siegling a commencé à travailler dans le secteur des services financiers en Australie avec Deutsche Morgan Grenfell, négociant des devises au jour le jour, des obligations et des options obligataires sur le Sydney Futures Exchange. M. Siegling a ensuite travaillé au sein de la division de recherche sur les actions de Deutsche Morgan Grenfell avant d’étudier un MBA à l’INSEAD et de travailler en tant qu’associé d’été au sein de la division des actions de Goldman Sachs à Londres.

À son retour en Australie, M. Siegling était le directeur général d’eFinancial Capital Limited (une filiale de Challenger international Limited) qui se consacrait à l’investissement dans les capitaux de démarrage et d’expansion pour les services financiers et les sociétés technologiques. M. Siegling a également travaillé en tant que consultant pour Wilson Asset Management, recherchant des actions, avant de créer Cadence Asset Management Proprietary Limited.

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Cadence Capital Limited (président exécutif)

(nommé le 9 février 2005)

Anciens postes d’administrateur de sociétés cotées au cours des trois dernières années

Néant

Responsabilités spéciales

Néant

Larry Bloch

Directeur non-exécutif

(Nommé le 3 avril 2014)

Qualifications

Baccalauréat en sciences et diplômes de spécialisation en mathématiques pures et en informatique – Université du Cap

Expérience et expertise

M. Bloch est un entrepreneur en série, pionnier et leader dans l’industrie des services aux entreprises en ligne depuis 20 ans. Il a été le fondateur et ancien directeur général de NetBene fi t (UK) en 1994, qui est rapidement devenu le plus grand fournisseur de domaines et d’hébergement en Europe. Il a également fondé Virtual Internet (France) en 1996. Après avoir déménagé en Australie en 1997, il a cofondé Netregistry Group et en a été son principal actionnaire, PDG et président pendant 17 ans, avant de le vendre à Arq Group en 2014.

Autres mandats d’administrateur de sociétés cotées

Néant

Anciens postes d’administrateur de sociétés cotées au cours des trois dernières années

Néant

Responsabilités spéciales

Membre du comité des ressources humaines, des rémunérations et des nominations

Rapport annuel 2019 du Groupe ARQ 8

Simon Martin

Directeur non-exécutif

(Retraité le 27 février 2020)

Qualifications

Baccalauréat en commerce – Université de Melbourne

Master of Business Administration (MBA) –

Université de Melbourne

Membre de Chartered Accountants Australia et

Nouvelle-Zélande, membre de l’Institut australien de

Directeurs d’entreprise

Expérience et expertise

M. Martin a plus de 25 ans d’expérience fi nancière et commerciale, plus récemment en tant qu’investisseur et administrateur. La majeure partie de sa carrière de cadre a été consacrée à des postes de direction, de stratégie et de finance dans le secteur des technologies. Il a été directeur financier et administrateur de MYOB de 2004 à 2012, avant de rejoindre iCareHealth en tant que PDG jusqu’à la vente de ses activités australiennes à Telstra Health en 2014.

M. Martin est également investisseur et administrateur de plusieurs entreprises technologiques axées sur les secteurs des PME et des soins de santé en Australie et au Royaume-Uni. M. Martin est également administrateur non exécutif de Tandem Corporation Pty Ltd (nommé en avril 2018), de BIG4 Holiday Parks of Australia Pty Ltd (nommé en mai 2016) et de Methodist Ladies ‘College Ltd à Melbourne (nommé en janvier 2016).

Autres mandats d’administrateur de sociétés cotées

Néant

Anciens postes d’administrateur de sociétés cotées au cours des trois dernières années

Néant

Responsabilités spéciales

Président de l’audit et de la gestion des risques

Comité

Membre des Ressources Humaines, Rémunération

et comité de nomination

Naseema Sparks AM

Directeur non-exécutif

(Retraité le 27 février 2020)

Qualifications

Master of Business Administration – Melbourne

École de commerce, Université de Melbourne

Membre de l’Australian Institute of Company

Réalisateurs

Expérience et expertise

Mme Sparks est une directrice de la croissance de haut niveau expérimentée avec une expérience dans un éventail de secteurs, en particulier la technologie. Son expertise comprend la stratégie d’entreprise, le numérique mobile, les données, la segmentation des clients et des consommateurs, les médias, l’image de marque et le marketing. Elle était auparavant directrice générale et partenaire mondiale de M&C Saatchi Ltd.

Mme Sparks est directrice non exécutive de Knight Frank Australia (nommé en février 2017) et d’AIG Australia (nommé en 2010).

Mme Sparks siège également au conseil d’administration de plusieurs sociétés technologiques émergentes au stade de la mise à l’échelle et de la pré-introduction en bourse.

Autres mandats d’administrateur de sociétés cotées

Australian Vintage Ltd (McGuigan Wines) (ASX:

AVG) (nommé en février 2015)

Anciens postes d’administrateur de sociétés cotées au cours des trois dernières années

PMP Ltd (2010 – 2016)

Grays eCommerce Group Ltd (2014 – 2016) IncentiaPay Ltd (ASX: INP) (président non exécutif) (nommé en mai 2018, retiré en juin 2019)

Responsabilités spéciales

Membre de l’audit et de la gestion des risques

Comité

Membre des Ressources Humaines, Rémunération

et comité de nomination

Rapport annuel 2019 du Groupe ARQ 9

Martin Mercer

Directeur général et PDG

(Nommé le 7 avril 2014 et démissionnaire le 24 septembre 2019)

Qualifications

Baccalauréat ès arts (avec distinction) et droit – Université de Sydney

Diplôme d’études supérieures en finance – Securities Institute of Australia

Expérience et expertise

M. Mercer a plus de 20 ans d’expérience dans les secteurs des télécommunications et de la technologie.

Avant de rejoindre Arq Group (anciennement Melbourne IT), il était directeur général, Stratégie et fixe, chez Optus après quatre ans en tant que PDG de Vividwireless, et dix ans dans un certain nombre de postes chez Telstra.

Autres mandats d’administrateur de sociétés cotées

Néant

Anciens postes d’administrateur de sociétés cotées au cours des trois dernières années

Néant

Responsabilités spéciales

Directeur général

Rapport annuel 2019 du Groupe ARQ 10

Rapport du directeur et états financiers

Rapport des administrateurs

Vos administrateurs soumettent leur rapport pour l’exercice clos le 31 décembre 2019.

Les administrateurs étaient en poste pour toute la période, sauf indication contraire.

Réalisateurs

MA Reitzer

MA Macpherson

MM Mercer

(Démissionné le 24 septembre 2019)

ML Bloch

Mme N. Sparks, AM

(Retraité le 27 février 2020)

MS Martin

(Retraité le 27 février 2020)

MK Siegling

(Nommé le 23 août 2019)

Secrétaires d’entreprise

MF Bearsley

(Cessation d’emploi le 23 mars 2020)

Mme A. Jordan

Détails de l’expérience, de l’expertise et du mandat des administrateurs

Tous les détails sur l’expérience, l’expertise et les fonctions d’administrateur des administrateurs sont disponibles sur le site Web d’Arq Group Limited à l’adresse www.arq.group

Intérêts dans les actions et droits de performance de la société

À la date du présent rapport, les administrateurs détiennent les intérêts suivants dans les actions et les droits de performance de la société:

Performance

Ordinaire

droits (1) sur

actions

ordinaire

actions

M. Andrew Reitzer (président)

122 500

–

M. Larry Bloch

6 708 363

–

M. Andrew Macpherson

171,340

–

M. Karl Siegling (2)

22 873 712

–

1. Les droits d’exécution sont des options à prix zéro sur les actions ordinaires d’Arq Group Limited.

2. Sa participation comprend 21 230 532 actions attribuées à Cadence Asset Management Pty Ltd ATF Cadence Capital Fund et Cadence Capital Limited, dans lesquelles M. Karl Siegling a un intérêt indirect indirect.

Rapport annuel 2019 du Groupe ARQ 11

Rapport du directeur et états financiers

Activités principales

Les principales activités du Groupe au cours de l’année par segment opérationnel sont décrites comme suit:

Opérations poursuivies (1) – SMB

SMB fournit des enregistrements et des renouvellements de noms de domaine, l’hébergement de sites Web et de courriels, le développement de sites Web, le marketing sur les moteurs de recherche et les campagnes de publicité sociale en Australie et en Nouvelle-Zélande.

Activités abandonnées (1) – Entreprise

Enterprise fournit des services tels que le cloud, le développement d’applications mobiles, des données et des analyses aux entreprises et aux organisations gouvernementales australiennes. La division Entreprise a été vendue le 2 mars 2020.

Revue et résultats d’exploitation

Bénéfice par action

2019

2018

cents

cents

Opérations continues (1)

Perte de base par action

(38.01)

(0,13)

Perte diluée par action

(38.01)

(0,13)

2019

2018

cents

cents

Attribuable aux membres du parent

Perte de base par action

(108,62)

(2.08)

Perte diluée par action

(108,62)

(2.08)

1. Les activités poursuivies se réfèrent au secteur PME, en raison de la classification de l’activité Entreprise en tant qu’activité abandonnée pour l’exercice clos le 31 décembre 2019. À des fins de comparabilité, le comparatif de l’exercice précédent a été présenté de nouveau.

La perte par action déclarée des activités poursuivies au 31 décembre 2019 était de 38,01 cents (2018: perte par action de 0,13 cents). La perte par action attribuable aux membres de la société mère au 31 décembre 2019 était de 108,62 cents (2018: 2,08 cents). Ceci est principalement dû à une charge de dépréciation hors trésorerie sur le goodwill, ainsi qu’à une perte hors trésorerie lors de la réévaluation du groupe de sortie d’entreprise à la juste valeur diminuée des coûts de sortie.

Les dividendes

Au cours de l’année, un dividende final de 4,5 cents par action, s’élevant à 5,36 millions de dollars, a été payé le 30 avril 2019. Aucun acompte sur dividende n’a été versé.

Aucun dividende final n’a été déclaré sur la période en cours.

Rapport annuel 2019 du Groupe ARQ 12

Rapport du directeur et états financiers

Cession de l’activité revendeur TPP Wholesale

Le 31 juillet 2019, le Groupe a cédé certains actifs et passifs liés à l’activité de revendeur TPP Wholesale à CentralNic Group plc. Le Groupe a reçu 21 300 000 $ en espèces du produit total de la transaction, avec 3 100 000 $ attendus au cours des deux prochaines années liés à la séparation de l’entreprise de la Groupe dans le cadre de la convention de services transitoires. Le produit de la transaction a été utilisé pour réduire la dette du Groupe. À la suite de la transaction, le Groupe a comptabilisé un gain net de 554 000 $ sur la cession de l’actif net associé à l’activité de revendeur TPP Wholesale.

Examen stratégique

Au cours de l’année, la Société avait reçu des approches préliminaires de parties intéressées à discuter des opportunités de création de valeur liées aux unités d’affaires PME et Entreprise. À la lumière de cela, la Société a nommé Macquarie Capital (Australia) Limited pour entreprendre une revue stratégique, explorant toutes les voies pour maximiser la valeur actionnariale, y compris, mais sans s’y limiter, la vente d’une ou plusieurs des unités commerciales Enterprise ou SMB, ainsi que d’autres changements de gestion du capital.

L’un des résultats de l’examen stratégique a été la vente de l’unité commerciale Entreprise, comme décrit ci-dessous. La Revue Stratégique est en cours à la date du présent rapport, se concentrant sur le reste de l’activité du Groupe.

Vente d’entreprise

Le 11 février 2020, le Groupe a conclu un accord de cession de la division Entreprise à un consortium composé de Quadrant Private Equity et de membres de la direction pour 35 000 000 $ en espèces, moins les coûts de transaction et les ajustements du fonds de roulement. Cette transaction a été finalisée le 2 mars 2020. La cession de la division Entreprise étant considérée comme hautement probable au 31 décembre 2019, la division Entreprise a été présentée séparément comme détenue en vue de la vente conformément au CNAC 5: Actifs non courants détenus pour Ventes et activités abandonnées au 31 décembre 2019. Compte tenu de l’importance de la division Entreprise pour les activités du Groupe, la division Entreprise a également été considérée comme une activité abandonnée. Les informations financières contenues dans ce rapport (y compris le retraitement du comparatif de l’exercice précédent) ont donc été présentées conformément au CNAC 5.

Les actifs et passifs de la division Entreprise ont été amortis à leur juste valeur diminuée des coûts de cession, ce qui a entraîné pour le Groupe une perte de réévaluation de 81 258 000 $ par rapport à la valeur des actifs non monétaires affectés à la division Entreprise.

En conséquence, le reste des activités du Groupe a été défini comme «activités poursuivies» conformément aux normes comptables australiennes. Il s’agit de la division SMB, qui comprend à la fois l’activité SMB Direct ainsi que le reste de l’activité SMB Indirect à la suite de la vente de l’activité revendeur TPP Wholesale, et les coûts d’entreprise associés qui continuent d’être supportés par le Groupe.

Rapport annuel 2019 du Groupe ARQ 13

Rapport du directeur et états financiers

Aperçu

Le tableau suivant résume les résultats de l’exercice clos le 31 décembre 2019.

2019

2019

2018

‘000 $

‘000 $

‘000 $

CNAC 16 (1)

AASB 117 (1)

AASB 117

Opérations continues (2)

Produits des contrats avec les clients

Recettes d’inscription

66 425

66 425

74,376

Solutions, hébergement et services

17,190

17,190

25 718

Recettes totales des contrats avec les clients

83 615

83 615

100 094

EBITDA sous-jacent des activités poursuivies (3)

14,795

12,212

15,362

Perte totale d’EBITDA des activités poursuivies (2,3)

(30 699)

(33 282)

(1 550)

Dépréciation et amortissement

(10 537)

(8,124)

(13 379)

Charges d’intérêts nettes

(4 477)

(4 160)

(2 714)

Perte avant impôt liée aux activités poursuivies

(45 713)

(45 566)

(17 643)

Impôt (charge) / avantage

(238)

(429)

2,216

Perte pour l’année des activités poursuivies

(45 951)

(45 995)

(15 427)

(Perte) / bénéfice de l’exercice des activités abandonnées (2)

Perte pour l’année

Bénéfice / (perte) de l’exercice attribuable à:

Membres du parent

Intérêts non-majoritaires

Activités poursuivies et abandonnées

Flux de trésorerie d’exploitation

(85 272)

(85 165)

13 101

(131 223)

(131 160)

(2 326)

(131 303)

(131 240)

(2 456)

80

80

131

(131 223)

(131 160)

(2 326)

11 272

7 180

18 267

1. Le Groupe applique pour la première fois l’AASB 16: Contrats de location («AASB 16») pour l’exercice clos le 31 décembre 2019. Le Groupe a adopté l’approche rétrospective modifiée qui ne nécessite pas le retraitement des états financiers antérieurs. La nature et l’effet de ces changements sont décrits dans la note B4 des états financiers. À des fins de comparaison avec l’exercice clos le 31 décembre 2018, le Groupe a également présenté les résultats non audités de l’exercice clos le 31 décembre 2019 selon l’ancienne norme comptable AASB 117: Contrats de location.

2. Due to the presentation of the Enterprise business as a discontinued operation for the year ended 31 December 2019, the prior period comparatives have been restated in accordance withAASB 5:Non-currentAssets Held for Sale and Discontinued Operations. Refer to the explanation provided in the ‘Sale of Enterprise’ section.

3. EBITDA = Earnings before Interest, Tax, Depreciation and Amortisation. The Group believes this unauditednon-IFRS information is relevant to the user’s understanding of the Group’s underlying performance.

Upon adoption of AASB 16, reported EBITDA loss from continuing operations decreased by $2,583,000, due to a reduction in lease rental expenses. Loss after tax attributable to members of the parent increased by $66,000, owing to a combination of a reduction in lease rental expenses offset by depreciation expense of right-of-use assets and interest on lease liabilities recognised on the Statement of Financial Position.

Operating cash flow for the year ended 31 December 2019, including both continuing and discontinued operations, was $11,272,000 (2018: $18,267,000), a decrease of 38.3%. This was driven by the lower performance of the Enterprise division as well as an ongoing dispute with a major customer impacting the level of our trade receivables, offset by $4,092,000 of net cash outflows associated with payments of lease liabilities now presented in Financing cash flows, less increased interest payments presented in Operating cash flows, on adoption of AASB 16.

ARQ Group Annual Report 2019 14

Director’s Report and Financial Statements

Performance from continuing operations

The following table provides a summary of our key financial metrics related to our continuing operations, being Revenue and Underlying Earnings before Interest, Tax, Depreciation and Amortisation (Underlying EBITDA)(1):

2019

2019

2018

$’000

$’000

$’000

Continuing operations

AASB 16(2)

AASB 117(2)

AASB 117

Revenue from contracts with customers

SMB Direct

66,425

66,425

74,376

SMB Indirect

17,190

17,190

25,718

Total Revenue from contracts with customers

83,615

83,615

100,094

Underlying EBITDA(1)

SMB Direct

9,948

9,948

9,284

SMB Indirect

8,042

8,042

13,004

Unallocated corporate costs

(3,195)

(5,778)

(6,922)

Total Underlying EBITDA

14,795

12,212

15,362

Reported EBITDA loss(1)

(30,699)

(33,282)

(1,550)

1. The Group believes this unauditednon-IFRS information is relevant to the user’s understanding of the Group’s underlying performance.

2. The Group applies, for the first time, AASB 16:Leases(‘AASB 16’) for the year ended 31 December 2019. The Group has adopted the modified retrospective approach which does not require the restatement of previous financial statements. The nature and effect of these changes are disclosed in Note B4 to the Financial Statements. The impact upon adopting AASB 16 for continuing operations was attributed entirely to corporate costs. For comparative purposes to the year ended 31 December 2018, the Group has also presented unaudited results for the year ended 31 December 2019 under the previous accounting standard AASB 117: Leases.

With costs being controlled during the year, along with new sales generated across the business, this resulted in a stronger underlying EBITDA position for the SMB Direct business, meeting our issued guidance.

Both Revenue and Underlying EBITDA has decreased for SMB Indirect following the Group divesting certain assets and liabilities related to the TPP Wholesale reseller business on 31 July 2019.

Reported EBITDA loss from continuing operations (1)increased compared to the prior year by 1,880.6% (2,147.2% on a pre-AASB 16 basis), driven principally by the impairment charge recognised against the carrying value of goodwill in the SMB business. In assessing the recoverable value of the goodwill allocated to the SMB business, an impairment charge of $41,123,000 has been recognised, based on expected fair value less costs of disposal.

ARQ Group Annual Report 2019 15

Director’s Report and Financial Statements

The following table shows a reconciliation of Reported EBITDA loss to Underlying EBITDA from continuing operations:

2019

2019

2018

$’000

$’000

$’000

AASB 16(2)

AASB 117(2)

AASB 117

Reported EBITDA loss from continuing operations

(30,699)

(33,282)

(1,550)

Adjustments to calculate underlying EBITDA(1):

Loss / (Gain) on reassessment of contingent consideration liability

(98)

(98)

9,702

Gain on sale of TPP Wholesale reseller business

(554)

(554)

–

Net TPP Wholesale reseller separation income

(68)

(68)

–

Arq Group brand costs

486

486

2,835

Integration costs

1,567

1,567

2,727

Coûts de transaction

2,259

2,259

892

Restructuring costs

365

365

–

Property costs

642

642

619

Impairment of goodwill

41,123

41,123

–

Other net non-operating (income) / expense

(228)

(228)

137

Underlying EBITDA from continuing operations(1)

14,795

12,212

15,362

1. The Group believes this unauditednon-IFRS information is relevant to the user’s understanding of the Group’s underlying performance.

2. The Group applies, for the first time, AASB 16:Leases(‘AASB 16’) for the year ended 31 December 2019. The Group has adopted the modified retrospective approach which does not require the restatement of previous financial statements. The nature and effect of these changes are disclosed in Note B4 to the Financial Statements. For comparative purposes to the year ended 31 December 2018, the Group has also presented unaudited results for the year ended 31 December 2019 under the previous accounting standard AASB 117: Leases.

2019

$’000

Reported EBITDA loss (under AASB 117)(1)

(33,282)

Leases previously classified as operating expenditure

2,583

Reported EBITDA loss (under AASB 16)(1)

(30,699)

ARQ Group Annual Report 2019 16

Director’s Report and Financial Statements

Performance from discontinued operations

The following table presents a summary of the performance of the Enterprise business that has been classified as a discontinued operation:

2019

2019

2018

$’000

$’000

$’000

AASB 16(2)

AASB 117(2)

AASB 117

Revenue from contracts with customers

86,167

86,167

112,918

Underlying EBITDA(1)

2,555

238

22,206

1. The Group believes this unauditednon-IFRS information is relevant to the user’s understanding of the Group’s underlying performance.

2. The Group applies, for the first time, AASB 16:Leases(‘AASB 16’) for the year ended 31 December 2019. The Group has adopted the modified retrospective approach which does not require the restatement of previous financial statements. The nature and effect of these changes are disclosed in Note B4 to the Financial Statements. For comparative purposes to the year ended 31 December 2018, the Group has also presented unaudited results for the year ended 31 December 2019 under the previous accounting standard AASB 117: Leases.

Underlying EBITDA from discontinued operations for the year ended 31 December 2019 was $238,000 (2018: $22,206,000), a decrease of 98.9%. Contributing to this decline in Underlying EBITDA was a general decline in the performance of the Mobile practice and deferrals of revenue to the back half of 2019 and 2020.

The following table presents a reconciliation of Reported EBITDA loss to Underlying EBITDA from continuing operations:

2019

2019

2018

$’000

$’000

$’000

AASB 16(2)

AASB 117(2)

AASB 117

Reported EBITDA loss from discontinued operations

(79,996)

(82,313)

21,063

Adjustments to calculate underlying EBITDA(1):

Integration costs

440

440

1,084

Restructuring costs

853

853

59

Loss on revaluation of disposal group to fair value

81,258

81,258

–

Underlying EBITDA from continuing operations(1)

2,555

238

22,206

1. The Group believes this unauditednon-IFRS information is relevant to the user’s understanding of the Group’s underlying performance. Please refer to Note D2 to the Financial Statements for the reconciliation between reported EBITDA loss and loss before tax.

2. The Group applies, for the first time, AASB 16:Leases(‘AASB 16’) for the year ended 31 December 2019. The Group has adopted the modified retrospective approach which does not require the restatement of previous financial statements. The nature and effect of these changes are disclosed in Note B4 to the Financial Statements. For comparative purposes to the year ended 31 December 2018, the Group has also presented unaudited results for the year ended 31 December 2019 under the previous accounting standard AASB 117: Leases.

The following table presents total underlying EBITDA as an aggregation of both continuing and discontinuing operations:

2019

2019

2018

$’000

$’000

$’000

AASB 16

AASB 117

AASB 117

Underlying EBITDA

Continuing operations

14,795

12,212

15,362

Discontinued operations

2,555

238

22,206

Total

17,350

12,450

37,568

The financial measures of EBITDA and Underlying EBITDA used in the Directors’ Report are non-IFRS measures and are unaudited. The company believes this non-IFRS information is relevant to the user’s understanding of its results, given its use in determining financial performance.

ARQ Group Annual Report 2019 17

Director’s Report and Financial Statements

Outlook 2020 and beyond

Following the sale of the Enterprise business on 2 March 2020, the Group’s key focus includes:

• Completion of the Strategic Review announced to the market on 24 September 2019, focusing on unlocking and maximising shareholder value for the rest of the Group’s business. This may involve the potential sale of the SMB division.

• Smooth transition of the Enterprise business following its divestment, ensuring the key service deliverables in the Transition Services Agreement (TSA) are met whilst minimising impact to customers.

• Continuing our momentum in solutions revenues as our large portfolio of SMB customers move closer to a digital economy.

• Progressing our cost management initiatives for the remaining business, including the removal of « stranded » shared costs previously shared with the Enterprise business.

Risks review

The Group’s ability to achieve its strategic objectives and secure its future financial prospects may be impacted by the following key risks:

• Business structure- the outcome of the Strategic Review for the remaining SMB business is not yet known and is likely to have significant impacts on the Group’s structure and ownership going forward. The Group is progressing through discussions with interested parties and any material updates will be made known to the market as part of our continuous disclosure obligations.

• Financial risk- the Company is largely dependent on funding provided by its financiers. As described in ‘Significant changes in affairs’, the Group is currently working with its lenders to manage the debt facilities and ensuring the Group has sufficient working capital and liquidity to be able to continue as a going concern.

• Competition- the online business world is rapidly evolving with a heightened environment of change characterised by disruptive technologies. The Group remains abreast of the competitive landscape by investing in new products and customer experience. The acquisitions of Netregistry, Uber Global and WME Group assist in risk mitigation with access to a larger customer pool, increased skill sets, funds available for market investment and product enhancements.

• Markets- a material proportion of registration revenue is derived from the performance of its reseller channel. These revenue streams can be difficult to predict. The Group works closely with its customers to understand their challenges in order to mitigate these risks.

• Regulatory- The Group operates in highly regulated global markets. Success can be impacted by changes to the regulatory environment. The Group plays an active role in consulting with regulators on changes which could impact our business.

• Other macroeconomic factors- at the date of this report, the Group is exposed to general economic risks posed by the ongoing COVID-19 coronavirus outbreak. Whilst the Group currently monitors the impact of COVID-19, the Group to date has executed its business continuity framework and implemented crisis management tools to mitigate the impacts of COVID-19 on its business operations to a sufficiently acceptable level. At this time the Group is unable to estimate what financial impact (if any) the COVID-19 coronavirus may have on the Group’s operations in the future.

ARQ Group Annual Report 2019 18

Director’s Report and Financial Statements

Risk management

The Group takes a proactive approach to risk management and an active risk management plan is in place. The Group’s approach to risk management is to determine the material areas of risk it is exposed to in running the organisation and to put in place plans to manage and/or mitigate those risks.

In addition, risk areas are reviewed by the Group’s risk management staff, with the assistance of external advisors on specific matters, where appropriate. Internal audit of key business processes is scheduled across the Group. The entire risk management plan is reviewed at least annually.

The Audit and Risk Management Committee is responsible for the governance of the risks management framework, including the effectiveness of risk management and compliance systems and the internal control framework.

Significant changes in affairs

As described on page 13, the Group sold the TPP Wholesale reseller business on 31 July 2019, and the Enterprise business on 2 March 2020.

On 12 November 2019, the Group and its financiers revised the terms of the existing finance facility with ANZ Bank and National Australia Bank. The facility provides committed funding of $61,200,000 and an additional $7,500,000 of uncommitted working capital funding tranches. The facility is secured against the Group’s assets and replaced the Company’s existing debt facilities of $142,000,000. This agreement was executed on 23 December 2019.

The Company has sought and received waivers for financial covenant breaches for the quarter ended 30 September 2019 and quarter ended 31 December 2019. As a condition of those waivers, a review event in January 2020 was included in the facility terms, allowing the Company’s financiers discretion to withdraw the facilities by providing 60 days’ advance written notice. The Group is working with its lenders to manage the debt facilities, including an agreed repayment of debt from the net proceeds of sale of the Enterprise business. No action has yet been taken by the Company’s financiers in respect of the January 2020 Review Event.

In the absence of any additional refinancing of facilities, the Company expects to breach its financial covenants during 2020, such that the financiers have the discretion to withdraw the facilities by providing 60 days’ advance written notice, and may also require additional short-term funding whilst it continues to execute actions from the Strategic Review, including the potential sale of the SMB business and implementation of the planned cost reduction program. Therefore, the Company requires the ongoing support of its lenders to continue to provide the existing facilities and any required additional facilities to be able to continue as a going concern.

The identification of the COVID-19 coronavirus as a post-balance date event is described in Note E7 to the Financial Statements. Given the rapid spread of the virus post-balance date, future revenues may be negatively impacted. However, in forecasting future cash flows, the Company is currently unable to reliably estimate the potential future impact of the virus. The Company has identified further cost reduction and cash preservation strategies in the event that revenues are materially negatively impacted. The impacts of the COVID-19 coronavirus on financial markets may also impact the Company’s ability to execute elements of its Strategic Review, including the potential sale of the SMB business or the price at which a sale may occur.

ARQ Group Annual Report 2019 19

Director’s Report and Financial Statements

Whilst reliance on the ongoing support of its lenders and the potential impact of the COVID-19 coronavirus on forecast cash flows represents a material uncertainty, the Company is continuing to work with its financiers, and based on current financier interactions as well as forecasted cash flows and potential opportunities arising from the Strategic Review, the Directors are satisfied there are reasonable grounds to conclude the Company can continue as a going concern. Should the Company sell the SMB business within the short term, the Company will need to further consider whether it can continue as a going concern from that time.

Other than as stated above, there have been no other significant changes in the state of affairs during the year ended 31 December 2019.

Significant events after reporting date

As described on page 13, the Group completed the sale of the Enterprise business on 2 March 2020. The Group is currently working with the buyers to transition essential services under the terms of the Transition Services Agreement (TSA). Proceeds from the sale of Enterprise of $22,108,000 have been allocated against the outstanding drawn-down debt balance, resulting in $39,092,000 remaining in drawn-down debt.

The Company has received an extension on repayments of $2,500,000, due on 31 March 2020 until 31 August 2020 and is in the process of requesting further short-term support.

On 27 February 2020, Mr Simon Martin and Ms. Naseema Sparks, AM retired from their directorships, following the completion of the sale of the Enterprise business.

On 23 March 2020, Mr Fraser Bearsley (Chief Financial Officer) ceased his employment with the Company. Mr Brendan White was appointed as Interim Chief Financial Officer from this date.

As at the date of this report, it is not yet known whether the current COVID-19 coronavirus outbreak will have a significant impact on the financial results of the Group or its business operations.

Other than the above, there has not been any other matter or circumstance in the interval between the end of the year and the date of this report that has materially affected or may materially affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in subsequent financial periods.

Likely developments and expected results

For further information about the likely developments and expected results of the Group, refer to the ‘Outlook 2020’ section on page 18 of this report.

ARQ Group Annual Report 2019 20

Director’s Report and Financial Statements

Indemnification and insurance of Directors and Officers

The Company has entered into a Deed of Insurance and Indemnity with each of the non-executive Directors, certain Officers and Executive Directors of controlled entities. Under the Deed, the Company has agreed to indemnify these Directors and Officers against any claim or for any costs, which may arise as a result of work performed in their capacity as Directors and Officers, to the extent permitted by law.

During the financial year, the Company paid an insurance premium in respect of a Directors and Officers Liability Policy covering all Directors and Officers of the Company and related bodies corporate. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium.

To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young Australia (EY), as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify EY during or since the financial year.

Performance rights

Unissued shares

Refer to note E4 to the Financial Statements for further details of the performance rights outstanding at 31 December 2019. As at the date of this report, there were 137,730 unissued ordinary shares under performance rights (2018: 1,185,303), due to the forfeiture of Mr Fraser Bearsley’s (former Chief Financial Officer) performance rights of 31,426 on 23 March 2020 as he did not meet the relevant service conditions associated with the 2018 LTI Plan. Performance right holders do not have any right, by virtue of the performance right rules, to participate in any share issue of the Company or any related body corporate or in the issue of any other registered scheme.

Shares issued as a result of the vesting of performance rights

A total of 271,100 performance rights were vested during the year ended 31 December 2019 (2018: 584,054).

During the financial year, there were nil rights granted (2018: 295,375 rights) and 745,047 rights forfeited

(2018: 173,626).

ARQ Group Annual Report 2019 21

Director’s Report and Financial Statements

Directors’ meetings

As at the date of this report, the Company had a Human Resources, Remuneration and Nomination Committee (‘HRRNC’) of the Board of Directors. The members of the HRRNC(1)are Mr. A. Macpherson (Chairman) and Mr L. Bloch. The Managing Director and Chief Executive Officer attends each HRRNC by invitation.

The Company’s Audit and Risk Management Committee (ARMC) was composed of the following members during the year ended 31 December 2019: Mr. S Martin (Chair)(2), Ms. N. Sparks, AM(2)and Mr. A. Macpherson.

The below table shows the numbers of meetings of Directors held during 2019. The table also shows the number of meetings attended by each Director and the number of meetings each committee member was eligible to attend.

Directors’ Meetings

Meetings of Committees

ARMC

HRRNC

No. of meetings held in 2019(3)

19

sept

4

Eligible

Attended

Eligible

Attended

Eligible

Attended

Mr Andrew Reitzer

19

18

–

–

–

–

Mr Larry Bloch

19

19

–

–

4

4

Mr Andrew Macpherson(4)

19

14

sept

5

4

4

Mr Simon Martin

19

19

sept

sept

4

4

Mr Martin Mercer

12

12

–

–

–

–

Ms Naseema Sparks, AM

19

17

sept

6

4

3

Mr Karl Siegling(5)

9

9

–

–

–

–

1. Mr S. Martin and Ms. N. Sparks, AM were also members of the HRRNC until their retirement on 27 February 2020.

2. Until 27 February 2020.

3. Excluded from this table is attendance numbers where the Director is not a member of a committee during the year but has attended a committee meeting as a guest or observer.

4. Due to personal issues, Mr Andrew Macpherson was not able to attend all his eligible Board and Committee meetings during the year.

5. Mr Karl Siegling was appointed as a director in August 2019.

Rounding

The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where applicable) under the option available to the Company under ASIC Corporations (Rounding in Financial / Directors’ Report) Instrument 2016/191 (Instrument 2016/191). The Company is an entity to which the Class Order applies.

ARQ Group Annual Report 2019 22

Director’s Report and Financial Statements

Corporate governance

In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of Arq Group Limited support and have adhered to the principles of corporate governance.

The Company’s Corporate Governance Statement is available on the Company’s website www.arq.group.

Employees

The consolidated entity employed 623 full time equivalent (‘FTE’) employees as at 31 December 2019 (2018: 689 FTE).

Auditor independence and non-audit services

The Directors have received an independence declaration from the auditor of Arq Group Limited, as shown on page 114.

Non-audit services

The following non audit services were provided by the Group’s auditor, Ernst & Young (EY). The Directors are satisfied that the provision of non-audit services is compatible with general standards of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised.

EY received or are due to receive the following amounts for the provision ofnon-auditservices:

2019

$

Taxation compliance and due diligence services

28,709

Digital advisory and implementation

129,986

Total

158,695

Signed in accordance with a resolution of the Directors.

Mr. Andrew

Reitzer Chair

Melbourne

30 mars 2020

ARQ Group Annual Report 2019 23

Director’s Report and Financial Statements

Directors’ Declaration

In accordance with a resolution of the Directors of Arq Group Limited, I state that:

1. In the opinion of the Directors:

2. 1. the consolidated financial statements and notes of Arq Group Limited for the financial year ended 31 December 2019 are in accordance with theCorporations Act 2001, including

   2. 1. giving a true and fair view of the consolidated entity’s financial position as at 31 December 2019 and of its performance for the year ended on that date;

      2. complying with Accounting Standards and theCorporations Regulations (2001);

   3. the consolidated financial statements and notes also comply with International Financial Reporting Standards as disclosed in Notes to the Financial Statements.

   4. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

3. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of theCorporations Act 2001for the financial year ended 31 December 2019.

4. In the opinion of the Directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group, as identified in note E9, as parties to a Deed of Cross Guarantee, will be able to meet any obligations or liabilities to which they are, or may become subject to, under the deed as described in note E9.

On behalf of the Board

Mr. Andrew Reitzer

Chair

Melbourne

30 mars 2020

ARQ Group Annual Report 2019 24

Director’s Report and Financial Statements

The information provided in the Remuneration Report has been audited as required by section 308(3C) of the Corporations Act (2001).

Remuneration Report

HRRNC Chair’s Letter

Dear Shareholder,

On behalf of the Board of Arq Group, we present the 2019 Remuneration Report.

Remuneration and incentive – 2019

2019 was a challenging year for Arq Group; although the continuing operations of the Group met management expectations, we did not achieve our operational targets for the Enterprise business and subsequently restructured the business to improve market alignment, operational efficiencies and to reduce cost.

At the beginning of 2019, we undertook work with an external remuneration consultant to simplify the KMP remuneration scheme and these changes were implemented early in 2019. However, by mid-2019, it became clear that the gateway criteria for variable compensation would not be achieved. The focus of the Human Resources Remuneration Nomination Committee (HRRNC) turned towards retention of key management personnel (KMP) and Senior Leaders whilst the organisation restructured.

The Remuneration Report discusses in more detail the 2019 Remuneration Scheme and the actual results achieved.

This Remuneration Report

Consistent with our 2018 Remuneration Report, we continue to adopt ‘plain English’ throughout the report and provide transparency around rewards and performance data for remuneration outcomes. Aditionellement,

we have more clearly displayed remuneration information using tables and diagrams.

Andrew Macpherson

Chair, HRRNC

ARQ Group Annual Report 2019 25

Director’s Report and Financial Statements (Section)

1. KMP information

This Remuneration Report outlines the remuneration arrangements in place during 2019 and the outcomes achieved by Arq Group’s key management personnel (KMP) during that period.

Arq Group’s KMP are those people who have a meaningful capacity to shape and influence the Group’s strategic direction and performance through their actions, either collectively (in the case of the Board) or as individuals acting under delegated authorities (in the case of the CEO and his direct reports).

The names and positions of individuals who were KMP during 2019 either as Executives or as Non-Executive Directors are below.

1(a) Executives

• Brett Fenton was originally the Chief Technology Officer. From 8 July 2019 onwards, he was appointed as the Managing Director, Mass & Middle Markets until 11 February 2020 when he replaced Tristan Sternson as Interim Chief Executive Officer. For clarity, during the entire years ended 31 December 2019 and 31 December 2018, Brett is and remains a KMP.

1(b) Non-Executive Directors

ARQ Group Annual Report 2019 26

Director’s Report and Financial Statements

2. Five-year performance summary

As the sale of the Enterprise business was highly probable at 31 December 2019, the results of the Enterprise business have been classified as discontinued operations for the year ended 31 December 2019. The Enterprise business was sold with the transaction completed on 2 March 2020.

The charts and table below highlight Arq Group’s performance against key metrics for the past five years. For comparability, we have also separated the results attributable to the discontinued operations (Enterprise), as well as continuing operations (representing the remainder of the Group’s business).

1. The Group applies, for the first time, AASB 16:Leasesfor the financial year 2019. The nature and effect of these changes are disclosed in the respective notes to the 2019 financial statements. To enable comparison with prior years on the same basis, these results for Underlying EBITDA and Underlying EPS are presented based on the previous lease accounting standard (AASB 117). Performance is measured based on pre-AASB 16 measures.

Table 1a: Five-year performance summary

Underlying financial information presented excludes one-off and non-recurring expenses/income and includes the pro forma impacts of acquisitions/divestments made in the financial period as if that acquisition/divestment had applied for the entire financial period.

2015

2016

2017

2018

2019

Total Shareholder Return(1)

61%

-4%

90%

-41%

-78%

Market Capitalisation

198.90m

188.61m

424.86m

233.0m

46.4m

Share price at the end of year

$2.13

$1.86

$3.62

$1.96

$0.38

Staff Engagement

44%

33%

67%

67%

52%

1. Total Shareholder Return has been measured based on aone-year period using a 20-trading day volume weighted average price before the end of the period.

Table 1b: Performance against key metrics

ARQ Group Annual Report 2019 27

Director’s Report and Financial Statements (Section)

3. Executive KMP remuneration

3(a) Remuneration and incentive principles

The objectives of our remuneration philosophy are to attract and retain quality, motivated and skilled people; appropriately compensate team members; and motivate our people to deliver business outcomes. In line with this, the Company’s remuneration strategy is structured to:

• Pay market competitive compensation which allows us to attract, retain and incentivise talent

• Target fixed compensation towards the third quartile of the external market;

• Deliver the variable reward as a mix of upfront cash and deferred equity;

• Reward eligible executives for performance with incentive payments commencing at 25% with exceptional performance offering a 100% uplift on the target award;

• Encourage retention, by granting deferred equity annually and vesting in year three; et

• To ensure alignment of shareholder and executive interests by:

• • awarding incentives only if the Company is profitable;

  • using Underlying Earnings Per Share (uEPS) as the award criteria to focus on business growth; et

  • aligning an individual’s performance directly with the quantum of incentive.

Fixed remuneration

The HRRNC reviews Total Fixed Remuneration (TFR) annually. The process includes a review of company-wide, business unit and individual performance, relevant comparative remuneration in the market and internally, and where appropriate, external advice on policies and practices. The HRRNC has access to external advice independent of management.

Executives receive their fixed (primary) remuneration in cash. The details of the fixed remuneration component received by executives in 2019 is included in tables 2 and 3 in section 3(d) of this report.

Figure 2: 2019 Remuneration Framework

Variable remuneration

For 2019, the Company implemented a combined variable reward which is a combination of a cash award and deferred equity.

The HRRNC reviews variable remuneration annually. The process for the Variable Reward Plan includes the setting and reviewing of annual KPIs aligned with business plans and, for the Deferred Equity Plan, the adoption of the underlying EPS which is set and reviewed by the HRRNC and the Board.

ARQ Group Annual Report 2019 28

Director’s Report and Financial Statements

The actual remuneration mix for FY19 for KMPs during the year ended 31 December 2019 is shown below:

Note: LTIs relate to the amounts expensed for current LTI plans in accordance with accounting standards requirements, based on actual remuneration.

1. Mr Brett Fenton did not earn any amounts related to LTIs due to performance criteria not met.

2. The figures for Mr Martin Mercer, Ms Emma Hunt and Mr Peter Wright reflect their actual remuneration mix for the period that they were KMP during 31 December 2019. These do not include any amounts related to LTIs due to performance and service criteria not met.

Figure 3: Performance against key metrics

Retention bonuses

During the year ended 31 December 2019, the Board approved retention bonus arrangements for Mr Tristan Sternson, Mr Brett Fenton and Mr Fraser Bearsley (as the remaining KMPs at 31 December 2019) to ensure continuity of business as a result of the ongoing Strategic Review and any other changes to the business. The terms of these retention bonus arrangements are set out below:

Tristan Sternson

Brett Fenton

Fraser Bearsley(1)

Service period

6 mois

N/A – not service related

4-7 months

Service effective date

1 Oct 2019

1 Jan 2020

1 Dec 2019

Payment 1: 31 Mar 2020

Service end date

31 Mar 2020

N/A – not service related

Payment 2: 30 June

2020

Amount payable

50 000 $

Payment 1: $155,000

Payment 1: $152,500

Payment 2: $155,000

Payment 2: $76,250

Payment 1: Payable if the potential

Payable if the sale of

sale of SMB is completed.

Payable if role is made

Enterprise is completed

Other conditions

Payment 2: In addition to Payment

redundant prior to the

before service condition is

1’s condition, payable if specified

service end date.

met.

financial performance hurdles also

met for Jan-Apr 2020 period.

1. Following Mr Fraser Bearsley’s termination as KMP on 23 March 2020, his retention bonuses would not be payable as he has not met the required service conditions.

ARQ Group Annual Report 2019 29

Director’s Report and Financial Statements (Section)

Termination payments

During 2019, the Board has exercised its discretion to provide Mr Martin Mercer, Mr Peter Wright and Ms Emma Hunt the following termination payment arrangements:

• Mr Martin Mercer:Following his resignation as KMP on the 24 September 2019, Mr Martin Mercer is serving his notice period of 12 months as per his employment contract, effective 24 September 2019. During this period, he will be paid his fixed remuneration each month until the end of his notice period.

• Mr Peter Wright and Ms Emma Hunt:Both these employees were made redundant on 5 and 8 July 2019 respectively. Their termination payments comprised of their individual contractual notice period, statutory redundancy payments and individual ex-gratia amounts.

The total value of their termination payments has been reflected in the statutory remuneration tables in section 3(d).

3(b) How performance is linked to short-term variable reward outcomes

Objectif

The 2019 Variable Reward Plan aims to link the achievement of the Group’s short-term operational and financial targets with the remuneration received by the executives charged with meeting those targets. The total potential variable reward amount available provides an incentive to the executives and senior leaders to achieve the targets, while also being a reasonable cost to the Group.

Note that the 2019 Variable Reward Plan did not apply to Mr Tristan Sternson, who was only appointed as KMP from 24 September 2019. Mr Tristan Sternson’s STI plan, which was separately approved by the HRRNC, is dependent on either the achievement of FY19 performance targets, or the completion of the sale of the Enterprise business (irrespective of the agreed sales price).

Structure

The percentage of total remuneration that constitutes an executive’s short-term variable reward varies depending on the size of the role and its impact on the attainment of the Group’s short-term targets.

A reward is granted based on achieving two KPI targets: underlying EPS1and high individual performance. These targets represent the key performance indicators for the short-term success of the business and provide a framework for delivering long-term value.

Reward payments are made if the relevant targets are achieved. If the targets are not achieved, then any reward payment is discretionary and will only be made if the executive has demonstrated exceptional performance in meeting other objectives. The total reward payment amount is determined by reference to an executive’s performance against Group and individual targets (‘performance targets’). These targets represent the key performance indicators for the short-term success of the business and provide a framework for delivering long-term value. Achievement against the performance targets is assessed

1Includes both underlying EPS attributed to both continued and discontinued operations.

ARQ Group Annual Report 2019 30

Director’s Report and Financial Statements

annually, within three months of the end of financial year, and all payments are both reviewed and approved by the HRRNC.

Rewards awarded range from nil to 150% of the total potential variable reward for the Group measures, and nil to 100% for the individual performance measures.

Short-term variable reward grants are awarded annually. 50% of the award will be in cash, paid after the end of the grant year. The remaining 50% of the grant will be in deferred equity in the form of rights which vests two years after the grant date, and can then be exercised into shares.

Variable reward performance targets

The Group and divisional performance target consist solely of Underlying EPS. This is a ‘hard’ target used to set reward payments. In addition, there are two gateway criteria: 90% of Group Underlying EPS target and an acceptable Individual Performance rating must both be achieved; if it is not achieved then no reward is payable irrespective of the achievement against any other KPIs.

KPI Measure

Threshold

Cible

Exceeds

Stretch

uEPS

90% of budget

100% of budget

110% of budget

120% of budget

% of TFR

Threshold

Cible

Exceeds

Stretch

PDG

25%

50%

100%

150%

Rest of KMPs

16.7%

33.3%

66.7%

100%

Résultats

For the 2019 financial year, the HRRNC determined that no variable rewards would be awarded to KMPs as the gateway target (90% of uEPS) was not achieved.

For Mr Tristan Sternson, the Board exercised its discretion and his STI will be awarded as the sale of the Enterprise business was highly probable by the end of FY19 and performance hurdles were met.

ARQ Group Annual Report 2019 31

Director’s Report and Financial Statements (Section)

3(c) How performance is linked to LTI outcomes

Objectif

In 2019, the Company changed the Remuneration Scheme to replace the LTI grants with medium term deferred equity awards, which have been discussed above. However, there are legacy LTI Plans still underway which are discussed below.

Structure

LTI grants to executive KMPs were delivered in the form of performance rights. These were annual grants and vesting occurs at the end of year three, subject to performance hurdles being achieved. There are two legacy LTI Plans underway: for 2017 and 2018.

Performance rights issued under the LTI Plan for 2017 have two performance conditions: 50% of the performance rights will vest based on the increase in Underlying Earnings Per Share (‘EPS’) as reported in the annual Financial Report and 50% will vest based on relative total shareholder return (‘TSR’) in comparison to a peer group from the S&P/ ASX Small Ordinaries Index (excluding energy, mining and property trust companies).

Performance rights issued under the LTI Plan for 2018 has one performance condition, being that 100% will vest based on relative Total Shareholder Return (‘TSR’) in comparison to a peer group from the S&P/ ASX Small Ordinaries Index (excluding energy, mining and property trust stocks).

There were no performance rights issued for 2019.

Under the 2017 and 2018 LTI Plans, the performance rights were granted with a zero-exercise price. The proportion of rights that vest under each performance condition is based on a sliding scale with a floor, pro- rata range and a ceiling. If the Company’s actual performance does not exceed the floor criteria, no vesting occurs; if the Company’s actual performance exceeds the floor criteria, vesting is on a pro-rata basis; if the Company’s actual performance exceeds the ceiling, 100% of the grant vests. The performance period is measured over the 36-month period from 1 January of the respective grant year.

The vesting date is the date at which the Board determines the extent to which the performance conditions are satisfied and the performance rights vest, which occurs in March following the performance period. The performance rights will be settled in the equivalent number of ordinary shares of Arq Group.

The TSR performance condition is a relative measure and vesting depends on the comparative performance with an appropriate peer group of companies (made up of the ASX Small Ordinaries Index excluding energy, mining and property trust stocks). The relative TSR performance hurdle is independently tested once at the end of the performance period by a specialist consultant and is based on the 60-trading day average share price before the start and end of the performance period.

ARQ Group Annual Report 2019 32

Director’s Report and Financial Statements

The EPS performance condition is an absolute measure. The HRRNC adopts a three-step process in setting the Underlying EPS performance condition:

1. Management prepares athree-year forecast, including a three-year underlying EPS forecast

2. The HRRNC reviews this forecast and makes any adjustments that it considers appropriate, and

3. The growth in EPS that is required to achieve the resulting Underlying EPS target is then calculated (the starting point Underlying EPS figure for calculating the hurdle growth rate is theUnderlying EPS figure for the immediately preceding year).

Performance rights vesting rules illustrative example – 2015-2017 LTI Plans

Sol

Gamme

Ceiling

Relative TSR achievement

Below than 50th percentile

between 50-75th

Above the 75th percentile

percentile

Relative TSR vesting

no vesting

pro-rata vesting

100%vesting

EPS achievement

less than x% p.a.

between x-y% p.a.

above y% p.a.

EPS vesting

no vesting

pro-rata vesting

100% vesting

Performance rights vesting rules illustrative example – 2018 LTI Plan

Sol

Gamme

Ceiling

Relative TSR achievement

Below than 50th percentile

between 50-75th

Above the 75th percentile

percentile

Relative TSR vesting

no vesting

pro-rata vesting

100% vesting

Following the end of the performance period, the Arq Group Board reviews the achievement against the performance conditions. The Board has discretion to adjust the performance conditions or the number of rights that vest in order to ensure that eligible employees are not unfairly advantaged or disadvantaged.

LTI performance targets

The tables below set out the relevant relative TSR and Underlying EPS targets for the two most recent grants.

2017 LTI Plan (March 2020 vesting date)

Cible

Sol

Gamme

Ceiling

Granted

Vested

Forfeited2

Cible

Actual

Relative TSR

< 50th%

50-75th %

>75th%

269,699

–

183,116

75th percentile

< 50th percentile

Underlying EPS CAGR

<9%

9-14%

>14%

269,699

–

183,116

21.07 cents1

0.00 cents

ARQ Group Annual Report 2019 33

Director’s Report and Financial Statements (Section)

2018 LTI Plan (March 2021 vesting date)

Cible

Sol

Gamme

Ceiling

Granted

Vested

2

Cible

Actual

Forfeited

Relative TSR

< 50th%

50-75th %

>75th%

295,375

N / A

233,025

75th percentile

N / A

1. This is the forecast Underlying EPS target that was approved by the HRRNC and from which the hurdle rate is calculated.

2. This amount represents the total cumulative performance rights forfeited between the grant date to 31 December 2019 for all participants, including those classified as Executive KMP in 2019 and rights cancelled following the resignation of rights holders. For the movement of performance rights specifically related to Executive KMP during the year ended 31 December 2019, refer to table 4 ‘Performance rights awarded, vested and lapsed during the year’.

Résultats

2018 LTI Plan

On 22 May 2018, 295,375 performance rights were granted to all eligible participants, including the CEO’s grant of 137,782 rights. Shareholders at the Annual General Meeting on 22 May 2018 approved the grant to the CEO. During the year ended 31 December 2019, 233,025 performance rights were forfeited as a result of KMP resignations during the year.

2017 LTI Plan

On 29 May 2017, 539,398 performance rights were granted to all eligible participants, including the CEO’s grant of 247,382 rights. Shareholders at the Annual General Meeting on 29 May 2017 approved the grant to the CEO. During the year ended 31 December 2019, 366,232 performance rights were forfeited as a result of KMP resignations during the year.

As at 31 December 2019, 55,497 rights are expected to be forfeited based on non-achievement of the 2017 LTI Plan performance targets. The Board exercised its discretion to accelerate vesting of Ms Amy Rixon’s 51,309 rights associated with the 2017 LTI Plan. These are expected to be vested in March 2020.

ARQ Group Annual Report 2019 34

Director’s Report and Financial Statements

3(d) Executive KMP Remuneration

Statutory remuneration details

Details of the nature and amount of each element of the total remuneration of each member of the KMP for the years ended 31 December 2018 and 2019 are set out in the following table.

Publier

Long term

Share based

Short term benefits

Employment

Autre

benefits

payments

benefits

Executives

Salary & fees

STI

1

Annual

2

Super

Long service

Amortisation

Termination

Total

Performance

leave

3

Autre

contribution

leave

3

expense

4

dix

5

pay

en relation

$

$

$

$

$

$

$

$

$

%

Mr Tristan Sternson

6

2019

93,349

126,667

7,877

4,558

8,868

3,754

–

–

245,073

52%

2018

–

–

–

–

–

–

–

–

–

–

Mr Fraser Bearsley

2019

306,304

–

15,186

9,171

23,287

4,091

11,747

–

369,786

3%

2018

258,448

–

(3,804)

1,639

24,552

2,980

11,747

–

295,561

4%

Mr Brett Fenton

2019

315,947

–

11,901

21,851

24,053

17,044

(6,801)

–

383,995

(2%)

2018

254,795

–

11,556

10,134

24,205

7,182

57,562

–

365,434

16%

Former Key Management Personnel

sept

2019

487,061

–

31,113

23,307

14,603

15,106

(378,872)

668,925

861,243

(44%)

Mr Martin Mercer

2018

634,040

–

(17,647)

15,384

24,960

9,619

259,111

–

925,468

28%

8

2019

194,389

–

27,470

11,054

38,377

46,025

(42,932)

266,531

540,915

(8%)

Mr Peter Wright

2018

325,114

–

3,325

11,052

30,324

4,572

63,997

–

438,385

15%

9

2019

16,376

–

6,003

886

1,565

–

(27,799)

–

(2,969)

936%

Ms Amy Rixon

2018

237,900

–

3,465

9,886

22,600

3,788

40,175

–

317,813

13%

8

2019

67,652

–

74,097

7,253

13,159

–

(50,284)

163,373

275,250

(18%)

Ms Emma Hunt

2018

309,540

–

5,732

11,223

24,960

3,694

50,284

–

405,433

12%

Total 2019

1,481,078

126,667

173,647

78,080

123,912

86,020

(494,940)

1,098,829

2,673,293

Total 2018

2,019,837

–

2,627

59,318

151,601

31,835

482,876

–

2,748,094

1. Represent STIs accrued in relation to 2019 and 2018 financial year, including retention bonuses as described in section 3(a). As described on page 31, except for MrTristan Sternson’s STI and those KMPs eligible to receive retention bonuses, no STIs were accrued in 2019 and 2018 as the STI payment gateway for 2019 and 2018 was not met.

2. Includes the cost to the business of anynon-cash business benefits provided inclusive of fringe benefits tax (FBT).

3. Comprises Annual Leave and Long Service Leave accrued during the year, except for Mr Peter Wright and Ms Emma Hunt, where their amounts represent their annual leave and long service leave cashed out upon their termination (refer to footnotes 8 and 10).

4. Relates to the amortisation booked during the year in relation to the fair value of the 2017 and 2018 Performance Rights. For most KMPs, this is a credit amount during the year in accordance with accounting standards, either due to LTI vesting criteria not met during the year, or the KMP resigned during the year (and therefore the service condition associated with the LTI plans was not met).

5. Calculated as STI plus Amortisation of Performance Rights, as a proportion of total remuneration. These two elements represent theat-risk and discretionary amount payable which will vary depending on the financial performance of the Company. They are in addition to the fixed remuneration.

6. Mr Tristan Sternson became a KMP on 24 September 2019. He is classified as KMP for 2019 and his information has been included in the above table representing the period from 24 September 2019 to 31 December 2019.

7. Mr Martin Mercer is no longer a KMP from 24 September 2019. His information has been included from 1 January 2019 up to the date that he is no longer KMP.

8. Mr Peter Wright and Ms Emma Hunt roles were made redundant on 5 and 8 July 2019 respectively and are no longer KMPs from that date onwards. Their information has been included from 1 January 2019 up to the date that they are no longer KMP.

9. Ms Amy Rixon resigned on 24 January 2019 and is no longer a KMP from that date onwards. Her information has been included from 1 January 2019 up to the date that she is no longer KMP. The Board exercised its discretion to accelerate vesting of her rights associated with the 2017 LTI Plan. These will be vested in line with other 2017 LTI grants. However, her rights associated with the 2018 LTI Plan have been forfeited as she did not meet the required service conditions for the awards to vest.

10. Termination payments were granted to Mr Martin Mercer, Mr Peter Wright and Ms Emma Hunt at the discretion of the Board, the details of which are described in section 3(a).

Table 2: Executive KMP statutory remuneration 2018-2019.

ARQ Group Annual Report 2019 35

Director’s Report and Financial Statements (Section)

Actual remuneration received

The table below represents the ‘actual’ remuneration outcomes for executive key management personnel in the financial year ended 31 December 2019. Statutory remuneration disclosures prepared in accordance with the Corporations Act (2001) and Australian Accounting Standards differ from the numbers presented below, as they include (among other benefits) expensing for rights grants that are yet to vest and may never vest. The statutory remuneration table in respect of the executive KMP is presented in the table on the previous page.

Executives

Fixed

STI

2

3

Termination

Total

1

8

LTI vested

remuneration

pay

$

$

$

$

$

Mr Tristan Sternson

4

106,776

–

–

–

106,776

Mr Fraser Bearsley

338,762

–

–

–

338,762

Mr Brett Fenton

361,851

–

60,254

–

422,105

Former Key Management Personnel

Mr Martin Mercer

5

524,971

–

285,122

668,925

1,479,018

Mr Peter Wright

6

317,317

–

70,534

266,531

654,382

Mrs Amy Rixon

sept

18,827

–

40,412

–

59,239

Ms Emma Hunt

6

162,161

–

–

163,373

325,534

Total 2019

1,830,665

–

456,322

1,098,829

3,385,816

1. Fixed remuneration represents base salary, superannuation andnon-monetary benefits such as motor vehicle, travel and mobile phone allowances. Fixed remuneration excludes accruals for annual and long service leave.

2. STI paid during the financial year. For example, the amount disclosed for 2019 year reflects the 2018 STI paid in April 2019 following the release of the 2017 Group results. No STIs were paid during the current financial year as the STI payment gateway for the 2018 STI was not met. No retention bonuses were paid during 2019 as the applicable service criteria has not been met yet.

3. Relates to the intrinsic value that vested during the financial year. Intrinsic value is the difference between the share price of the shares to which the KMP has the right to subscribe or which the KMP has the right to receive, and the price the KMP is required to pay for those shares. Performance rights are azero-price option and are issued for nil consideration. Hence, the intrinsic value for the LTI in the table above equates to the fair value at vesting date.

4. Mr Tristan Sternson became a KMP on 24 September 2019. He is classified as KMP for 2019 and his information has been included in the above table representing the period from 24 September 2019 to 31 December 2019.

5. Mr Martin Mercer is no longer a KMP from 24 September 2019. His information has been included from 1 January 2019 up to the date that he is no longer KMP.

6. Mr Peter Wright and Ms Emma Hunt roles were made redundant on 5 and 8 July 2019 respectively and are no longer a KMP from that date onwards. Their information has been included from 1 January 2019 up to the date that they are no longer KMP.

7. Ms Amy Rixon resigned on 24 January 2019 and is no longer a KMP from that date onwards. Her information has been included from 1 January 2019 up to the date of her resignation.

8. Termination payments were granted to Mr Martin Mercer, Mr Peter Wright and Ms Emma Hunt at the discretion of the Board as described in section 3(a).

Table 3: KMP actual remuneration.

ARQ Group Annual Report 2019 36

Director’s Report and Financial Statements

Short-term incentives

KPI targets were not achieved so no STI payments were made in 2018 and, with the exception of Tristan Sternson’s STI, no variable reward payments were made in 2019.

Performance rights awarded, vested and forfeited during the year

The performance rights, issued for nil consideration, are issued in accordance with performance guidelines established by the Directors of Arq Group Limited. Each performance right carries an entitlement to one fully paid ordinary share in Arq Group Limited.

The following table discloses the number of performance rights granted, vested, exercised or forfeited as remuneration:

Fair value

Volume

Fair Value of

Fair Value of

Grant of rights

Financial

Rights

weighted

Vesting /

Total

rights granted

rights vested

Award Date

of right at

Total Vested

forfeited during

Année

awarded

average

Expiry date

(2)

pendant le

pendant le

award date

Forfeited

the year

price

(1)

année

année

$

$

$

%

Mr Martin Mercer

3

2018

137,782

28 May 2018

1.12

3.55

31 March 2021

–

137,782

–

–

100%

2017

247,382

29 May 2017

1.99

1.91 31 March 2020

–

247,382

–

–

100%

2016

219,219

27 May 2016

1,29

2.08

31 March 2019

142,561

76,658

–

183,904

35%

Mr Peter Wright

4

2018

32,990

28 May 2018

1.12

3.55

31 March 2021

–

32,990

–

–

100%

2017

61,662

29 May 2017

1.99

1.91 31 March 2020

–

61,662

–

–

100%

2016

54,231

27 May 2016

1,29

2.08

31 March 2019

35,267

18,964

–

45,494

35%

Mr Brett Fenton

2018

30,924

28 May 2018

1.12

3.55

31 March 2021

–

–

–

–

–

2017

55,497

29 May 2017

1.99

1.91 31 March 2020

–

–

–

–

–

2016

46,327

27 May 2016

1,29

2.08

31 March 2019

30,127

16,200

–

38,864

35%

Mrs Amy Rixon

5

2018

28,958

28 May 2018

1.12

3.55

31 March 2021

–

28,958

–

–

100%

2017

51,309

29 May 2017

1.99

1.91 31 March 2020

–

–

–

–

–

2016

31,071

27 May 2016

1,29

2.08

31 March 2019

20,206

10,865

–

26,066

35%

Ms Emma Hunt

4

2018

33,295

28 May 2018

1.12

3.55

31 March 2021

–

33,295

–

–

100%

2017

57,187

29 May 2017

1.99

1.91 31 March 2020

–

57,187

–

–

100%

Mr Fraser Bearsley

2018

31,426

28 May 2018

1.12

3.55

31 March 2021

–

–

–

–

–

1,119,260

228,161

721,943

–

294,328

1. The volume weighted average price (VWAP) for 20 trading days preceding the start of the performance period (i.e. 1 January) is used to determine the number of rights that are issued to a participant in the LTI plan. The number of rights is simply the nominal dollar value of the entitlement of a participant per their remuneration package divided by the VWAP.

2. Rights are forfeited based on actual achievement of LTI plan performance targets or failure to satisfy service conditions of the plan. This is approved by theHRRNC.

3. Mr Martin Mercer is no longer a KMP from 24 September 2019. His information has been included from 1 January 2019 up to the date that he is no longer KMP. The Board has determined that any of his outstanding performance rights awarded will not be able to vest.

4. Mr Peter Wright and Ms Emma Hunt roles were made redundant on 5 and 8 July 2019 respectively and are no longer a KMP from that date onwards. Their unvested rights have been forfeited as they did not meet the required service conditions for the awards to vest.

5. Ms Amy Rixon resigned on 24 January 2019 and is no longer a KMP from that date onwards. The Board exercised its discretion to accelerate vesting of her rights associated with the 2017 LTI Plan. These will be vested in line with other 2017 LTI grants. However, her rights associated with the 2018 LTI Plan have been forfeited as she did not meet the required service conditions for the awards to vest.

Table 4: Performance rights awarded, vested and lapsed during the year.

ARQ Group Annual Report 2019 37

Director’s Report and Financial Statements (Section)

Rights holdings of key management personnel as at 31 December 2019

The following table discloses a summary of performance rights granted under the LTI plans.

Opening

Closing

Vested and

Rights granted as

Rights vested

Rights

balance 31

exercisable at

balance 1

remuneration

and exercised

forfeited

décembre

31 December

January 2019

2019

2019

Mr Martin Mercer

604,383

–

(142,561)

(461,822)

–

–

Mr Peter Wright

148,883

–

(35,267)

(113,616)

–

–

Mr Brett Fenton

132,748

–

(30,127)

(16,200)

86,421

–

Ms Amy Rixon

111,338

–

(20,206)

(39,823)

51,309

–

Ms Emma Hunt

90,482

–

–

(90,482)

–

–

Mr Fraser Bearsley

(1)

31,426

–

–

–

31,426

–

1,119,260

–

(228,161)

(721,943)

169,156

–

Vested and not exercisable at 31 December 2019

– – – – – –

–

1. Following Mr Fraser Bearsley’s employment with the Company ceased on 23 March 2020, his performance rights would be forfeited as he has not met the required performance and service conditions associated with the 2018 LTI Plan.

Table 5: Performance rights granted during the year.

Shares issued on vesting of rights

During the year ended 31 December 2019, 228,161 shares were issued to the KMP (2018: 466,045) upon the vesting of 228,161 performance rights related to the 2016 LTI Plan. The following table presents the number of shares issued on the vesting of rights related to the 2016 LTI Plan:

31 décembre 2019

Number of

Paid per share

shares issued

cents

Mr Martin Mercer

142,561

–

Mr Peter Wright

35,267

–

Mr Brett Fenton

30,127

–

Ms Amy Rixon

20,206

–

228,161

–

Table 6: Shares issued on the vesting of rights, 2016 LTI plan.

ARQ Group Annual Report 2019 38

Director’s Report and Financial Statements

Shareholdings of key management personnel as at 31 December 2019

The number of ordinary shares in Arq Group Limited held during the financial year by each KMP, including details of shares granted as remuneration during the current financial year and ordinary shares provided as the result of the vesting of rights during the current financial year, are included in the table below.

Opening

Number of

Closing

shares issued

Net change

balance 31

balance 1

from vesting

(1)

décembre

January 2019

autre

of rights

2019

Executives

Mr Tristan Sternson

3

1,269,687

–

–

1,269,687

Mr Martin Mercer

2

366,264

142,561

(190,609)

318,216

Mr Fraser Bearsley

17,107

–

14,712

31,819

Mr Peter Wright

2

123,906

35,267

83

159,256

Mr Brett Fenton

100,000

30,127

73,616

203,743

2

44,706

20,206

47

64,959

Ms Amy Rixon

Ms Emma Hunt

2

3,031

–

–

3,031

1,924,701

228,161

(102,151)

2,050,711

1. On market transactions.

2. The closing balance of shareholdings is as at the date these employees ceased to be a KMP.

3. The opening balance of shareholdings is at the date Mr Tristan Sternson became a KMP.

Table 7: KMP shareholdings.

Loans, other transactions and balances with key management personnel and their related parties

Mr Tristan Sternson (Interim CEO2)

Mr Tristan Sternson was one of the previous owners of Infoready Pty Ltd (Infoready) before its acquisition by the Group. As part of the Share Purchase Agreement (SPA) with the previous owners of Infoready, three earn-out payments have been agreed. The first two earn-out payments have already been settled prior to Mr Tristan Sternson becoming KMP.

Instalments for the final earn-out payment were paid during the year ended 31 December 2019. Since the appointment of Mr Tristan Sternson as KMP on 24 September 2019, up until 31 December 2019, $1,000,000 of instalments was paid by the Group to the previous owners of Infoready, of which Mr Tristan Sternson is entitled to a share of the instalments. At 31 December 2019, the remaining balance of the Infoready final earn-out amount of $5,549,000 remains unpaid, inclusive of $676,000 of interest payable. This was settled on 2 March 2020 following the completion of the sale of the Enterprise business.

Further details relating to the Infoready earn-out payments are included in the notes to the Group’s financial statements.

The Enterprise business was sold on 2 March 2020 to a consortium of buyers, in which Mr Tristan Sternson has a direct interest.

2Until 11 February 2020

ARQ Group Annual Report 2019 39

Director’s Report and Financial Statements (Section)

Other KMPs

For the years ended 31 December 2019 and 31 December 2018, there have been no other loans or other transactions including purchases, sales or investments to KMP and their related parties. In relation to the exercise of performance rights upon vesting, shares were purchased on market.

3(e) What is the remuneration outlook for 2020?

Recruiting and retaining talent is a key challenge for all technology companies in order to drive growth in a highly competitive environment. We need a contemporary employee value proposition, a key part of which is a compelling model for remuneration and reward.

As one of the outcomes of the Strategic Review announced to the market on 24 September, we have completed the sale of the Enterprise business on 2 March 2020. The Strategic Review is still ongoing as the Group reviews the remainder of its business, whilst ensuring a smooth divestment process is carried out following the sale of the Enterprise business. Given these activities are a key focus for the Group in 2020, the Group intends to carry out a further review of its remuneration framework such that it is fit-for-purpose for the remainder of the Group’s business operations.

In light of the potential for further review to the Group’s executive compensation plans, the key elements of executive compensation as it currently stands in 2020 are noted as follows.

LTI

Currently, the Group does not have any plans to grant additional performance rights in 2020. Therefore, the 2018 LTI Plan that was granted to eligible KMPs in FY18 will continue for the remaining KMPs, subject to performance against vesting criteria.

Variable reward

Half the variable reward is received in cash, and half consists of « deferred » equity. This will continue in 2020. The deferred component is awarded in the form of rights which vest equally two years after the grant date (dependent on the achievement of a service condition – i.e. the recipient remains employed at the second and third anniversaries).

All variable reward payments continue to be based on the achievement of the annual KPIs.

On 20 December 2019, the Board approved Mr Brett Fenton’s retention bonus arrangement. Effective 1 January 2020, Mr Brett Fenton is now entitled to a total opportunity of $310,000, subject to meeting the following criteria:

• Half the amount ($155,000) is payable contingent only on the completion of the potential sale of the SMB business;

• Half the amount ($155,000) is payable contingent on both the completion of the potential sale of the SMB business, as well as additionally meeting specified financial performance hurdles related to the SMB business for theyear-to-date ended April 2020.

These amounts are payable in July 2020 subject to the satisfaction of the above performance criteria.

ARQ Group Annual Report 2019 40

Director’s Report and Financial Statements

Other components

The HRRNC and the Board may exercise its discretion to award other incentive components to eligible KMP, depending on the outcome of the ongoing Strategic Review over the remainder of the Group business. This may include, but is not limited to, retention bonuses, termination payments and completion bonuses.

We believe that this remuneration structure optimally aligns the interests of our shareholders and management. We also see it as being an important factor in helping us to attract and retain key talent in these competitive times.

3(f) Executive KMPs’ service arrangements

Before Mr Tristan Sternson’s appointment as the Interim Chief Executive Officer (CEO) on 24 September 2019, he was on a standard employment contract. Following his appointment as Interim CEO on 24 September 2019, the terms of Mr Tristan Sternson’s employment include:

• a fixed remuneration plus superannuation per year, reviewed annually;

• eligibility to receive a discretionary variable reward opportunity based on the performance of the Group’s business and the successful completion of the sale of the Enterprise business;

• his appointment as the Interim CEO continues on a monthly basis until the earlier of the sale of the Enterprise business, or upon discretion by the Board;

• the option to resign from this position and thus terminate the contract by giving one month’s notice.

All other executives are on standard contracts and are remunerated as stipulated in this report. For executives other than the CEO, termination of employment requires advanced written notice in accordance with the terms of their employment contract.

Upon termination, the provisions for KMPs are as follows:

• Total fixed remuneration will be paid as usual, until the agreed last working day;

• Variable reward and legacy LTI plan arrangements are treated in accordance with the respective plan rules;

• Should termination for cause occur, fixed remuneration and accrued leave is paid until the final working day and any variable rewards or benefits are forfeited; et

• Company restraint periods post termination restrict KMPs from engaging in competitive business activity and solicitation of clients or staff.

During the year, Mr Peter Wright and Ms Emma Hunt were made redundant and Mr Martin Mercer resigned and, in accordance with statutory requirements and individually agreed outcomes, termination payments were paid upon resignation. For Mr Peter Wright and Ms Emma Hunt, the key terms of their redundancy payments are as follows:

• Total fixed remuneration, outstanding leave balances and other statutory entitlements will be paid, with total fixed remuneration paid equivalent to their notice period in their employment contracts from the date they are made redundant;

• Additional minimum statutory redundancy payments are paid and determined in accordance with relevant state legislation;

• Amounts above minimum statutory redundancy payments asex-gratia payments are individually negotiated with the KMP.

ARQ Group Annual Report 2019 41

Director’s Report and Financial Statements (Section)

4. Non-Executive Directors’ remuneration

Short Term

Post Employment

Directors

Salary & fees

Superannuation

Total

Contribution

$

$

$

Mr Andrew Reitzer

2019

176,813

16,797

193,610

2018

73,672

6,999

80,671

Ms Naseema Sparks

2019

83,542

7,936

91,478

2018

86,875

8,253

95,128

Mr Larry Bloch

2019

76,875

7,303

84,178

2018

76,875

7,303

84,178

Mr Simon Martin

2019

95,128

8,253

103,381

2018

82,708

7,857

90,565

Mr Andrew Macpherson

2019

113,882

10,819

124,701

2018

76,875

7,303

84,178

Mr Karl Siegling

(1)

2019

25,625

2,434

28,059

2018

–

–

–

Ms Gail Pemberton

(2)

2019

–

–

–

2018

73,672

6,999

80,671

Mr John Armstrong

(2)

2019

–

–

–

2018

36,198

3,439

39,637

Total 2019

571,865

53,542

625,407

Total 2018

506,875

48,153

555,028

1. Appointed as aNon-Executive Director on 23 August 2019. The amounts shown reflect his entitlement during the period from his appointment as KMP to 31 December 2019.

2. Retired 29 May 2018. Their information has been included for comparative purposes only.

Table 8: Non-Executive Directors’ remuneration.

4(a) Remuneration principles

Objectif

The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain directors of the highest calibre, while incurring a cost that is acceptable to shareholders.

Structure

The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined by a general meeting. The last such determination was at the AGM on 20 May 2008, when shareholders approved an aggregate remuneration of $1,000,000 per year.

The amount of aggregate remuneration sought to be approved by shareholders and how it is apportioned amongst Directors is reviewed periodically. The Board considers advice from external consultants, the fees paid to non-executive directors of comparable companies, as well as company performance when undertaking the annual review process.

Each Director receives a fee for being a director of the company and is expected to be a member of at least one committee (except for Non-Independent Directors who are invited guests to all committees). In recognition of the additional time commitment and responsibility required, an additional fee is paid for chairing a Board committee. The remuneration of Non-Executive Directors is reviewed annually. As it is considered good governance for directors to have a stake in a company on whose board they sit, non- executive directors are now required to hold shares in the company. This new shareholding policy was introduced in December 2017 and is discussed further below in section 4(b).

ARQ Group Annual Report 2019 42

Director’s Report and Financial Statements

Details of the nature and amount of each element of the remuneration of each Non-Executive Director of Arq Group Limited Ltd for the past two financial years are shown in the table on page 42.

4(b) Minimum shareholding requirements

In December 2018, the Board approved a policy requiring all Non-Executive Directors to hold a minimum shareholding in the Company to the value of their annual fixed remuneration. This requirement needs to be met by December 2021 for all existing directors, and within three years of their appointment date for new directors.

As at 31 December 2019, Non-Executive Directors hold the value of shares in the Company as shown in the table in section 4(c) below.

4(c) Salary sacrifice scheme

To encourage and assist Non-Executive Directors to acquire and retain shares in the Company, Directors are allowed to sacrifice up to 50% of their annual fees to purchase company shares. These shares are purchased on-market by a third-party agency.

Shareholdings of Non-Executive Directors as at 31 December 2019

Opening

Net change

Closing balance

balance 1

other(1)

31 December

January 2019

2019

Non-Executive Directors

Mr Andrew Reitzer

–

122,500

122,500

Ms Naseema Sparks

19,128

23,432

42,560

Mr Larry Bloch

8,558,363

(1,850,000)

6,708,363

Mr Simon Martin

41,899

173,454

215,353

Mr Andrew Macpherson

38,000

133,340

171,340

Mr Karl Siegling2

22,573,712

300,000

22,873,712

31,231,102

(1,097,274)

30,133,828

1. On market transactions

2. The opening balance of shareholdings is at the date Mr Karl Siegling was appointed as a KMP. He was appointed asNon-Executive Director effective 23 August 2019. Included in his shareholding is 21,230,532 of shares attributed to Cadence Asset Management Pty Ltd ATF Cadence Capital Fund and Cadence Capital Limited, in which Mr Karl Siegling has an indirect relevant interest.

Table 9: Non-Executive Directors’ shareholding.

ARQ Group Annual Report 2019 43

Director’s Report and Financial Statements (Section)

5. Governance

5(a) Human Resources, Remuneration and Nomination Committee (HRRNC)

The HRRNC of the Board of Directors of Arq Group determines and reviews compensation policy and arrangements for Directors and executives. The HRRNC periodically assesses the appropriateness of the nature and amount of remuneration of Directors and executives by reference to relevant employment market conditions and the overall objective of ensuring maximum stakeholder benefit from the retention of a high- quality, high-performing Directors and executive team.

5(b) Independent advice

To support Arq Group’s review of the executive and non-executive remuneration framework during the 2019 financial year, the HRRNC sought independent information, observations and advice from Egan Associates in relation to remuneration strategy, structure and market practice. Potential conflicts of interest were considered by the HRRNC, and both the HRRNC and the Board are satisfied that the advice provided by Egan Associates was free from undue influence. Any advice provided by Egan Associates was used as a guide only and was not a substitute for detailed consideration of all the relevant issues by the HRRNC. No remuneration recommendations, as defined by the Corporations Act 2001, were provided during the year.

5(c) Securities trading policy

The Company has approved a Share Trading Policy aimed at ensuring that no Director or employee of the Company makes use of his or her position or information acquired by being a Director or employee to gain (directly or indirectly) an advantage for any person or to cause detriment to the Company.

The policy provides guidance on what share trading activities by Directors or employees are deemed acceptable and those which are not. Such guidance includes identifying conduct that may constitute insider trading, how an employee or Director can minimise the risk of insider trading, and the closed periods during which Directors, officers and KMP (and parties related to them) are not permitted to trade in Arq Group shares.

The policy also details the steps for Directors and employees to take when buying or selling shares in Arq Group which includes requiring any Director or KMP buying or selling Arq Group’s shares, or exercising any options, to first obtain approval from the Chair of the Board (for Directors) or from the Chief Executive Officer (for KMP).

ARQ Group Annual Report 2019 44

Director’s Report and Financial Statements

Consolidated Statement of Financial Position

As at 31 December 2019

Remarques

2019

2018

$’000

$’000

Cash and cash equivalents

E1

8,949

8,279

Trade and other receivables

B1

13,910

26,403

Prepayments of domain name registry charges

7,810

7,327

Lease receivable

B4

2,064

–

Current tax refund

375

–

Other assets

B2

2,928

6,634

36,036

48,643

Assets held for sale

D2

38,674

32,698

Total Current Assets

74,710

81,341

Plant and equipment

B3

8,198

13,899

Right-of-use asset

B4

16,554

–

Intangible assets

B5

77,804

225,239

Prepayments of domain name registry charges

678

2,508

Lease receivable

B4

1,830

–

Deferred tax assets

A3

7,323

6,775

Financial assets

B6

1,375

1,870

Other assets

560

696

Total Non-Current Assets

114,322

250,987

TOTAL ASSETS

189,032

332,328

Trade and other payables

B7

8,692

17,138

Income received in advance

22,792

28,632

Current tax liability

–

1,909

Des provisions

B8

1,585

3,406

Derivative financial instruments

C6

510

80

Interest bearing loans and borrowings

C4

61,929

–

Other financial liabilities

C5

5,549

12,971

Current lease liabilities

B4

6,160

–

107,217

64,136

Liabilities directly associated with assets held for sale

D2

15,931

11,292

Total Current Liabilities

123,148

75,428

Income received in advance

11,297

9,563

Des provisions

B8

3,187

3,530

Deferred tax liabilities

A3

7,549

5,469

Interest bearing loans and borrowings

C4

–

74,992

Non-current lease liabilities

B4

12,970

850

Total Non-Current Liabilities

35,003

94,404

TOTAL LIABILITIES

158,151

169,832

NET ASSETS

30,881

162,496

Contributed equity

C2

91,179

85,724

Foreign currency translation reserve

C3

(533)

(552)

Share based payments reserve

C3

193

1,136

Other reserves

C3

(278)

9

Retained earnings

(59,806)

76,053

Equity attributable to members of the parent

30,755

162,370

Non-controlling interests

126

126

TOTAL EQUITY

30,881

162,496

The above consolidated statement of financial position should be read in conjunction with the accompanying notes. Comparative figures as at 31 December 2018 have not been restated for the effect of AASB 16 and therefore may not be directly comparable.

ARQ Group Annual Report 2019 45

Director’s Report and Financial Statements (Section)

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2019

Remarques

2019

2018

(Re-

presented)

$’000

$’000

Continuing operations

Revenue from contracts with customers

A1

83,615

100,094

Cost of sales

(27,672)

(34,981)

Gross profit

55,943

65,113

Other income

A7

1,315

68

Gain/(loss) on reassessment of contingent consideration liability

98

(9,702)

Salaries and employee benefits expenses

A2

(30,576)

(35,685)

Depreciation expenses

A2

(7,026)

(4,376)

Amortisation of intangible assets

A2

(3,511)

(9,004)

Other expenses

A2

(12,953)

(18,878)

Finance costs

A2

(5,810)

(4,287)

Coûts de transaction

(2,259)

(892)

Restructuring costs

(365)

–

Impairment of goodwill

B5

(41,123)

–

Gain on disposal of assets

D2

554

–

Loss before tax

(45,713)

(17,643)

Income tax (expense) / credit

A3

(238)

2,216

Loss after tax from continuing operations

(45,951)

(15,427)

Discontinued operation

(Loss) / profit from discontinued operation, net of tax

D2

(85,272)

13,101

Loss after tax for the year

(131,223)

(2,326)

Other comprehensive income

Items that may be reclassified to the profit or loss in subsequent periods (net of tax):

Currency translation differences

19

(5)

Changes in fair value of cash flow hedges, net of tax

C6

(297)

–

Items that will not be reclassified to profit or loss in subsequent periods (net of tax):

Net gains on equity instruments designated at fair value through other

comprehensive income

dix

152

Other comprehensive (loss) / income for the period, net of tax

(268)

147

TOTAL COMPREHENSIVE LOSS FOR THE PERIOD

(131,491)

(2,179)

Loss for the year attributable to:

Members of the parent

(131,303)

(2,457)

Non-controlling interests

80

131

(131,223)

(2,326)

Total comprehensive loss attributable to:

Members of the parent

(131,571)

(2,310)

Non-controlling interests

80

131

(131,491)

(2,179)

Earnings per share

Remarques

2019

2018

Cents

Cents

From continuing operations

Basic loss per share

A5

(38.01)

(0.13)

Diluted loss per share

A5

(38.01)

(0.13)

Attributable to members of the parent

Basic loss per share

A5

(108.62)

(2.08)

Diluted loss per share

A5

(108.62)

(2.08)

The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. Prior year comparatives have been re-presented due to the classification of the Enterprise business as discontinued operations (refer to Note D2). Comparative figures as at 31 December 2018 have not been restated for the effect of AASB 16 and therefore may not be directly comparable.

ARQ Group Annual Report 2019 46

Director’s Report and Financial Statements

Consolidated Statement of Changes in Equity

For the year ended 31 December 2019

Foreign

Share based

Autre

Contributed

Treasury

Retained

Non-

Total

devise

payments

Total

controlling

reserves

équité

actions

gains

équité

reserve

reserve

intérêt

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

As at 1 January 2019

(552)

1,136

9

85,724

–

76,053

162,370

126

162,496

Impact of change in accounting policy

–

–

–

–

–

911

911

–

911

As at 1 January 2019 (restated)

(552)

1,136

9

85,724

–

76,964

163,281

126

163,407

Profit/(loss) for the period

–

–

–

–

–

(131,303)

(131,303)

80

(131,223)

Other comprehensive income

19

–

(287)

–

–

–

(268)

–

(268)

Total comprehensive income for the period

19

–

(287)

–

–

(131,303)

(131,571)

80

(131,491)

Transactions with owners in their capacity as owners:

Share based payment/(writeback)

–

(471)

–

–

–

–

(471)

–

(471)

Issue of shares for long term incentive plan

–

(472)

–

472

–

–

–

–

–

Issue of shares for Infoready earn out liability settlement

–

–

–

4,000

–

–

4,000

–

4,000

Dividend reinvestment plan

–

–

–

983

–

–

983

–

983

Dividend associated with InfoReady earn out

–

–

–

–

–

(110)

(110)

–

(110)

Equity dividends

–

–

–

–

–

(5,357)

(5,357)

(80)

(5,437)

As at 31 December 2019

(533)

193

(278)

91,179

–

(59,806)

30,755

126

30,881

As at 1 January 2018

(547)

2,331

(211)

83,507

(1,884)

91,503

174,699

100

174,799

Profit/(loss) for the period

–

–

–

–

–

(2,457)

(2,457)

131

(2,326)

Other comprehensive income

(5)

–

152

–

–

–

147

–

147

Total comprehensive income for the period

(5)

–

152

–

–

(2,457)

(2,310)

131

(2,179)

Transactions with owners in their capacity as owners:

Share based payment

–

490

–

–

–

–

490

–

490

Issue of shares for long term incentive plan

–

(685)

–

685

–

–

–

–

–

Issue of shares for Outware accelerated purchase settlement

–

(1,000)

–

1,000

–

–

–

–

–

Dividend reinvestment plan

–

–

–

2,633

–

–

2,633

–

2,633

Capital raising (net transaction costs)

–

–

–

(217)

–

–

(217)

–

(217)

Equity dividends

–

–

–

–

–

(12,993)

(12,993)

(105)

(13,098)

Transfer from/(to) contributed equity

–

–

–

(1,884)

1,884

–

–

–

Transfer from/(to) financial liabilities

–

–

68

–

–

–

68

–

68

As at 31 December 2018

(552)

1,136

9

85,724

–

76,053

162,370

126

162,496

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Comparative figures as at 31 December 2018 have not been restated for the effect of AASB 16 and therefore may not be directly comparable.

ARQ Group Annual Report 2019 47

Director’s Report and Financial Statements (Section)

Consolidated Statement of Cash Flows

For the year ended 31 December 2019

Remarques

2019

2018

$’000

$’000

CASH FLOWS FROM OPERATING ACTIVITIES

Receipt of service revenue and recoveries

187,353

228,893

Payments to suppliers and employees

(168,489)

(200,828)

Interest received

202

68

Interest paid

(3,390)

(2,687)

Bank charges and credit card merchant fees paid

(1,135)

(1,530)

Income tax refunds

–

1,121

Income tax paid

(3,269)

(6,770)

NET CASH FLOWS FROM OPERATING ACTIVITIES

E1

11,272

18,267

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of plant and equipment and intangible assets

(3,423)

(13,894)

Proceeds from subleases

1,869

–

Payment of financial liability for InfoReady earn out (incl. dividends)

(4,110)

(5,668)

Return of capital from Tiger Pistol

505

–

Coûts de transaction

(2,394)

(85)

Sale of the TPPW Reseller business

21,268

–

NET CASH FLOWS FROM / (USED IN) INVESTING ACTIVITIES

13,715

(19,647)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from borrowings

C4

7,375

–

Repayment of borrowings

C4

(21,292)

–

Payment of dividend on ordinary shares, net of dividend reinvestment

(4,378)

(10,361)

Payment of dividend to non-controlling interests

(80)

(105)

Payment of lease liabilities

(5,961)

(120)

NET CASH FLOWS USED IN FINANCING ACTIVITIES

(24,336)

(10,586)

NET DECREASE IN CASH AND CASH EQUIVALENTS

651

(11,966)

Net foreign exchange differences

19

(5)

Cash and cash equivalents at beginning of period

8,279

20,250

CASH AND CASH EQUIVALENTS AT END OF PERIOD

E1

8,949

8,279

The above statement of cash flows should be read in conjunction with the accompanying notes and includes cash flows from both continuing and discontinued operations. Refer to Note D2(b) for the cash flows relating to discontinued operations. Comparative figures as at 31 December 2018 have not been restated for the effect of AASB 16 and therefore may not be directly comparable.

ARQ Group Annual Report 2019 48

Director’s Report and Financial Statements

Notes to the Financial Statements

Section A: Financial performance

A1 Revenue from contracts with customers

A2 Expenses

A3 Income tax

A4 Dividends

A5 Earnings/(loss) per share

A6 Segment reporting

A7 Other income

Section B: Operating assets and liabilities

B1 Trade and other receivables

B2 Other current assets

B3 Plant and equipment

B4 Leases

B5 Intangible assets

B6 Non-current financial assets

B7 Trade and other payables

B8 Provisions

Section C: Capital and financial risk management

C1 Financial risk management objectives and policies

C2 Contributed equity

C3 Reserves

C4 Interest bearing loans and borrowings

C5 Other financial liabilities

C6 Derivative financial liabilities and assets

C7 Fair value measurement

Section D: Group structure

D1 Controlled entities

D2 Disposal groups held for sale and discontinued operations

Section E: Other information

E1 Cash Flow Statement information

E2 Related party disclosures

E3 Key Management Personnel (KMP) disclosures

E4 Performance rights

E5 Auditors’ remuneration

E6 Contingent assets and liabilities

E7 Events subsequent to reporting date

E8 Information relating to Arq Group Limited (Parent Entity)

E9 Closed group class order disclosures

E10 New accounting policies

ARQ Group Annual Report 2019 49

Director’s Report and Financial Statements (Section)

About this report

This is the financial report of Arq Group Limited (‘the Company’ or ‘Arq Group’) (formerly Melbourne IT Ltd) and of its controlled entities (collectively ‘the Group’) for the year ended 31 December 2019. The financial report was authorised for issue in accordance with a resolution of the Directors on 30 March 2020.

It is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act (2001), Australian Accounting Standards, and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board.

Arq Group Limited is a company limited by shares, incorporated and domiciled in Australia, whose shares are publicly traded on the Australian Stock Exchange. The company is a for-profit entity. The nature of the operations and principal activities of the Group are described in the Directors’ Report.

Basis of preparation

The financial report has been prepared on a historical cost basis, except for derivative financial instruments and contingent consideration which have been measured at fair value, and investments designated at fair value through other comprehensive income.

The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000), unless otherwise stated, under the option available to the company under ASIC Corporations (Rounding in Financial/Directors’ Report) Instrument 2016/191 (Instrument 2016/191). The Company is an entity to which Instrument 2016/191 applies.

On 11 February 2020, as part of the outcomes arising from the Strategic Review described in the Directors Report, the Group entered into an agreement to divest the Enterprise business unit to a consortium consisting of Quadrant Private Equity and members of management for $35,000,000 in cash. The transaction was completed on 2 March 2020. As the intention to divest the Enterprise business was highly probable considering the progress of the Group’s strategic review at 31 December 2019, the Enterprise disposal group has been separately presented as held for sale in accordance with AASB 5: Non-current Assets Held for Sale and Discontinued Operations as at 31 December 2019. Given the significance of the Enterprise business to the Group’s operations, the Enterprise business unit has also been determined to be a discontinued operation. The financial information in this report (including the restatement of the prior year comparative) has therefore been presented in accordance with AASB 5.

The assets and liabilities of the Enterprise disposal group have been written down to their fair value less costs of disposal, resulting in the Group incurring a $81,258,000 revaluation loss against the value of non- monetary assets allocated to the Enterprise disposal group.

Accordingly, the remainder of the Group’s business has been defined as « continuing operations » in accordance with Australian accounting standards. This consists of the SMB segment, which includes both the SMB Direct business as well as the remainder of the SMB Indirect business following the sale of the TPP Wholesale Reseller business, and associated corporate costs that continue to be incurred by the Group.

ARQ Group Annual Report 2019 50

Director’s Report and Financial Statements

Going concern

The Company has sought and received waivers for financial covenant breaches for the quarter ended 30 September 2019 and quarter ended 31 December 2019. As a condition of those waivers, a Review Event in January 2020 was included in the facility terms, allowing the Company’s financiers discretion to withdraw the facilities by providing 60 days’ advance written notice. The Group is working with its lenders to manage the debt facilities, including an agreed repayment of debt from the net proceeds of sale of the Enterprise business. No action has yet been taken by the Company’s financiers in respect of the January 2020 Review Event.

Proceeds from the sale of Enterprise of $22,108,000 have been allocated against the outstanding drawn- down debt balance, resulting in $39,092,000 remaining in drawn-down debt. The Company has received an extension on repayments of $2,500,000 due on 31 March 2020 until 31 August 2020 and is in the process of requesting further short-term support.

In the absence of any additional refinancing of facilities, the Company expects to breach its financial covenants during 2020, such that the financiers have the discretion to withdraw the facilities by providing 60 days’ advance written notice, and may also require additional short-term funding whilst it continues to execute actions from the Strategic Review, including the potential sale of the SMB business and implementation of the planned cost reduction program. Therefore, the Company requires the ongoing support of its lenders to continue to provide the existing facilities and any required additional facilities to be able to continue as a going concern.

The identification of the COVID-19 coronavirus as a post-balance date event is described in Note E7. Given the rapid spread of the virus post-balance date, future revenues may be negatively impacted. However, in forecasting future cash flows, the Company is currently unable to reliably estimate the potential future impact of the virus. The Company has identified further cost reduction and cash preservation strategies in the event that revenues are materially negatively impacted. The impacts of the COVID-19 coronavirus on financial markets may also impact the Company’s ability to execute elements of its Strategic Review, including the potential sale of the SMB business or the price at which a sale may occur.

Whilst reliance on the ongoing support of its lenders and the potential impact of COVID-19 on forecast cashflows represent a material uncertainty, the Company is continuing to work with its financiers, and based on current financier interactions as well as current forecast cash flows and potential opportunities arising from the Strategic Review, the Directors are satisfied there are reasonable grounds to conclude the Company can continue as a going concern.

Should the Company sell the SMB business within the short term, the Company will need to further consider whether it can continue as a going concern from that time.

The financial statements and notes have been prepared on a going concern basis at 31 December 2019 and does not include adjustments, if any, relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.

ARQ Group Annual Report 2019 51

Director’s Report and Financial Statements (Section)

Significant accounting policies

Accounting policies are selected and applied in a manner that ensures that the resulting financial information satisfies the concept of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported.

The below describes significant accounting policies applicable to the Group’s financial statements. Other specific significant accounting policies are described in respective notes to the financial statements.

(a) Basis of consolidation

The consolidated financial statements comprise the financial statements of Arq Group Limited and its subsidiaries (the Group) as at 31 December each year. The Group controls a subsidiary if and only if the Group has:

• power over the subsidiary (i.e. existing rights that give it the current ability to direct the relevant activities of the subsidiary)

exposure or rights to variable returns from its involvement with the subsidiary

the ability to use its power over the subsidiary to affect its returns.

The financial statements of subsidiaries are prepared for the same reporting period as for the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.

Subsidiaries are fully consolidated from the date on which control is transferred to Arq Group Limited, and cease to be consolidated from the date on which control is transferred out of Arq Group Limited.

Investments in subsidiaries held by Arq Group Limited are accounted for at cost in the separate financial statements of the parent entity less any impairment charges. Dividends received from subsidiaries are recorded as a component of other revenues in the separate income statement of the parent entity, and do not impact the recorded cost of the investment. Upon receipt of dividend payments from subsidiaries, the parent will assess whether any indicators of impairment of the carrying value of the investment in the subsidiary exist. Where such indicators exist, to the extent that the carrying value of the investment exceeds its recoverable amount, an impairment loss is recognised.

The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The identifiable assets acquired, and the liabilities assumed, are measured at their acquisition date fair values. The difference between the above items and the fair value of the consideration (including the fair value of any pre-existing investment in the acquiree) is goodwill or a discount on acquisition.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units (CGUs) that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquirer are assigned to those units. Where goodwill forms part of a CGU, and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of, and the portion of the cash-generating unit retained.

ARQ Group Annual Report 2019 52

Director’s Report and Financial Statements

Significant accounting policies (cont.)

Acquisitions of subsidiaries that include put options to acquire non-controlling interests in the future are accounted for in accordance with AASB 10: Consolidated Financial Statements(AASB 10).

Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which Arq Group Limited has control. A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction.

On the loss of control of a subsidiary, the Group derecognises the assets and liabilities of the subsidiary, and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss.

(b) Foreign currency transactions

Both the functional and presentation currency of Arq Group Limited and its Australian subsidiaries is Australian dollars (AUD).

Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction.

The functional currency of each overseas subsidiary is as follows:

Investment in New Zealand subsidiaries

– NZD (New Zealand Dollar)

Investment in USA subsidiaries

– USD (US Dollar)

The assets and liabilities of these overseas subsidiaries are translated into the presentation currency of Arq Group Limited at the rate of exchange ruling at the reporting date, and the statement of comprehensive income is translated at the weighted average exchange rates for the period.

The exchange differences arising on retranslation are taken directly to other comprehensive income. On disposal of a foreign entity, the deferred cumulative amount recognised in other comprehensive income relating to that particular foreign operation is recognised in the determination of profit and loss for the year.

On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designed as hedges of such investments, are taken to the foreign currency translation reserve in equity. When a foreign operation is sold, or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences is recognised in the statement of comprehensive income, as part of the gain on sale or loss on sale where applicable.

(c) Financial assets

1. Recognition and measurement

Financial assets are classified at initial recognition as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.

ARQ Group Annual Report 2019 53

Director’s Report and Financial Statements (Section)

Significant accounting policies (cont.)

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs.

In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding on specified dates. This assessment is referred to as the SPPI test and is performed at an instrument level.

The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

Financial assets at amortised cost (debt instruments)

This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows.

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method, and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.

The Group’s financial assets at amortised cost include trade receivables (note B1).

Financial assets designated at fair value through OCI (equity instruments)

Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under AASB 132: Financial Instruments: Presentationand are not held for trading. The classification is determined on an instrument-by-instrument basis.

Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment.

The Group elected to classify irrevocably its non-listed equity investments (note B5) under this category.

ARQ Group Annual Report 2019 54

Director’s Report and Financial Statements

Significant accounting policies (cont.)

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model.

Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value, with net changes in fair value recognised in the statement of profit or loss.

The Group has not designated any financial asset as at fair value through profit or loss.

1. Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e. removed from the Group’s consolidated statement of financial position) when:

• the rights to receive cash flows from the asset have expired, or

• the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a »pass-through » arrangement, and either

• the Group has transferred substantially all the risks and rewards of the asset, orthe Group has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset.

1. Impairment of financial assets

The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

ARQ Group Annual Report 2019 55

Director’s Report and Financial Statements (Section)

Significant accounting policies (cont.)

For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

(d) Financial liabilities

1. Recognition and measurement

Financial liabilities are classified at initial recognition as financial liabilities at fair value through profit or loss, loans and borrowings, or payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognised initially at fair value, and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Group’s financial liabilities include trade and other payables, loans and borrowings, derivative financial instruments and contingent consideration.

Loans and borrowings

This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised, as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition, and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss.

This category generally applies to interest-bearing loans and borrowings (note C4).

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss include financial liabilities held for trading, and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by AASB 9. Gains or losses on liabilities held for trading are recognised in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in AASB 9 are satisfied.

The Group has measured the financial liability in relation to the InfoReady earn-out at fair value through profit or loss. Refer to note C5 for further information.

ARQ Group Annual Report 2019 56

Director’s Report and Financial Statements

Significant accounting policies (cont.)

1. Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss.

1. Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts, and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.

(e) Prepayment of domain name registry charges

Domain name registry charges are deferred in the statement of financial position and are recognised in the statement of comprehensive income using the same principles as revenue from the sale of domain names, as explained in accounting policy in note A1.

ARQ Group Annual Report 2019 57

Director’s Report and Financial Statements (Section)

Changes in accounting policies

The Group applies, for the first time, AASB 16: Leases(AASB 16). The Group adopted AASB 16 using the modified retrospective method of adoption with the date of initial application being 1 January 2019. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening statement of financial position on 1 January 2019. As the Group adopted the modified retrospective method, there was no restatement of previous financial statements. The right-of-use assets were measured on adoption as if AASB 16 had always applied. The nature and effect of these changes are disclosed in the respective notes to the financial statements.

Significant accounting estimates and judgements

The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenues and expenses. Management bases its judgements and estimates on historical experience and on other various factors it believes to be reasonable under the circumstances, the result of which forms the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

Management has identified the following critical accounting policies for which significant judgements, estimates and assumptions are made. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods.

Information on significant estimates and judgements considered when applying the accounting policies can be found in the following notes:

Accounting estimates and judgments

Remarques

Revenue

A1

Taxation

A3

Trade and other receivables

B1

Leases

B4

Intangibles and useful lives

B5

Impairment of goodwill

B5

Other financial liabilities

C5

Share-based payment transactions

E4

ARQ Group Annual Report 2019 58

Director’s Report and Financial Statements

Section A: Financial performance

A1. Revenue from contracts with customers

1. Disaggregation of revenue from contracts with customers

Set out below is the disaggregation of the Group’s revenue from contracts with customers:

For the year ended

31 décembre 2019

Continuing operations

$’000

Types of goods or services

Registration revenue

30,289

Solutions, hosting & services

53,326

Total revenue from contracts with customers

83,615

Timing of revenue recognition

Services/goods transferred at a point in time

291

Services transferred over time

83,324

Total revenue from contracts with customers

83,615

For the year ended

31 December 2018

Continuing operations

$’000

Types of goods or services

Registration revenue

35,004

Solutions, hosting & services

65,090

Total revenue from contracts with customers

100,094

Timing of revenue recognition

Services/goods transferred at a point in time

867

Services transferred over time

99,227

Total revenue from contracts with customers

100,094

(b) Contract balances

Set out below is the amount of revenue from contracts with customers recognised from:

2019

2018

Continuing operations

$’000

$’000

Amounts included in contract liabilities at the beginning of the year

32,853

37,114

Set out below is the amount of cost of sales recognised from:

2019

2018

Continuing operations

$’000

$’000

Amounts included in prepaid costs to fulfil contract at the beginning of the year

7,925

13,098

ARQ Group Annual Report 2019 59

Director’s Report and Financial Statements (Section)

A1. Revenue from contracts with customers (cont.)

Prepayments of domain name registry charges are considered costs to fulfil a contract and is deferred as an asset, and income received in advance is considered a contract liability. The amounts included in contract liabilities reflect a significant portion of the aggregate amount of performance obligations not yet satisfied at the end of the reporting period. For any remaining contracts, the Group has applied the practical expedient available under AASB 15.121 whereby the performance obligations are not disclosed as they have an original expected duration of one year or less. See further details on contract assets in note B2.

(c) Accounting policy

(i) Rendering of services – domain name registration

Domains revenue primarily consists of domain registrations and renewals, as well as aftermarket sales. Domain registrations are assessed as a distinct service that provides a customer with the exclusive use of the domain name over the contracted period, including the provision of Domain Name System services.

Consideration is recorded as income received in advance when it is received, which is typically at the time of sale and revenue, with the exception of aftermarket sales, is recognised evenly over the contract period as performance obligation is satisfied. As the customer simultaneously receives and consumes the benefits of the domain services provided, this revenue is recognised evenly over the contract period.

Aftermarket sales are recognised as revenue when ownership of the domain has been transferred.

Prepayments of domain name registry charges are direct costs to fulfil a contract. See Key judgement and estimates section for further information.

(ii) Rendering of services – hosting (email and web)

Hosting revenue primarily derives from website and email hosting services provided over a contracted period of time. Where consideration is received in advance of performance, it is initially recorded as income received in advance. Revenue is recognised as the performance obligations are satisfied, which is considered to be evenly over the contracted term that the hosting services are provided.

(iii) Rendering of services – online marketing

Online marketing revenue consists of search engine optimisation (SEO), pay-per-click (PPC) advertising, and social media advertising. Where consideration is received in advance of performance, it is initially recorded as income received in advance. Revenue is recognised as the performance obligations are satisfied, which is considered to be evenly over time in line with the contracted term as the customer simultaneously receives and consumes the benefits of online marketing services.

ARQ Group Annual Report 2019 60

Director’s Report and Financial Statements

A1. Revenue from contracts with customers (cont.)

(iv) Rendering of services – website build

Website build revenues consist of fees charged for the creation of websites for customers. Where the Group has an enforceable right to payment for performance completed to date, and no alternative use for the asset, it recognises revenue over the period of the build based on time incurred, because there is a direct relationship between the Group’s effort and the transfer of service to the customer. In the absence of such a right, the Group recognises revenue at a point in time being transfer of the website to the customer.

Revenue from the build of websites are recognised over an average build period of three months.

Contract fulfilment costs incurred in advance of revenue recognition are capitalised when they are directly attributable to the contract, generate the resources to satisfy the performance obligations, and will be recovered. These costs are expensed over the period when revenue is recognised.

(v) Transaction prices

The Group’s customer contracts may include multiple performance obligations. In these cases, the Group allocates the transaction price to each performance obligation based on the relative stand-alone selling prices of each distinct service. Stand-alone selling prices are determined based on prices charged to customers for individual products and services, taking into consideration the size and length of contracts, service rate cards, and the Group’s overall go-to-market strategy.

(vi) Principal versus agent considerations

The Group sells products and services both directly to customers, and in some instances, through resellers. The Group assesses each arrangement to determine whether the Group acts as principal or agent, based on whether the Group controls the product or service before transferring it to the end customer. Where the Group acts as principal, revenue is recorded on a gross basis versus on a net basis where the Group acts as agent.

Key judgement and estimates

Prepayments of domain name registry charges are direct costs to fulfil a contract. The Group defers these costs as an asset and amortises the asset over the contract period, consistent with the satisfaction of performance obligations and the recognition of revenue. The Group re-assesses costs to fulfil contracts on a periodic basis to reflect significant changes in the expected timing of satisfying performance obligations to which the asset relates, and when there is a significant change in the carrying amount of the asset.

ARQ Group Annual Report 2019 61

Director’s Report and Financial Statements (Section)

A2. Expenses

2019

2018

Continuing operations

$’000

$’000

(a) Salaries and employee benefits

Included in cost of sales:

Salaries and employee benefits expenses

2,133

2,766

Superannuation expense

181

240

Included in Salaries and employee benefits expenses:

Salaries and employee benefits expenses

24,325

27,659

Superannuation expense

2,096

2,261

Expensing of share-based payments(1)

(438)

382

(b) Depreciation of non-current assets

Right-of-use assets

2,996

–

Plant and equipment

1,752

2,137

Leasehold improvements

1,748

1,572

Meubles

526

308

Leasehold make-good

4

359

Total depreciation of non-current assets

7,026

4,376

(c) Amortisation of identifiable intangible assets

Capitalised software

2,117

1,910

Customer contracts

1,394

1,748

Marketing related intangibles

–

5,346

Total amortisation of identifiable intangible assets

3,511

9,004

(d) Other Expenses

Included in other expenses:

Commercialisation

3,357

3,749

Software licences

2,275

2,247

Consulting fees

2,569

4,126

Expected credit losses arising on trade receivables

1,290

1,584

Foreign exchange gains

(298)

(318)

Foreign exchange losses

212

319

(e) Finance costs

Interest expense on debt and borrowings

2,488

2,689

Interest expense on lease liabilities

492

–

Interest expense on Infoready financial liability

676

–

Loss on modification of debt facility

968

–

Bank charges and credit card merchant fees

1,131

1,505

Unwinding of discount on other financial liabilities

55

93

Total finance costs

5,810

4,287

1. Included in this amount for 31 December 2019 are writebacks associated with LTIs andshort-term deferred share rewards for both key management personnel (KMP), as well as non-KMP eligible to receive short-term deferred share rewards. The amounts disclosed here only relate to writebacks associated with continuing operations only. Refer to the Remuneration Report and Notes E3 and E4 for amounts related to KMP.

On 31 October 2017, Arq Group Limited approved the retirement of the WebCentral brand in line with a group-wide brand review. The Group anticipated the retirement of the WebCentral brand being completed within 12 months, and as a result, the useful life of the related brand intangible asset was revised to 12 months ended 31 October 2018. As a result, $5,346,000 of accelerated amortisation expense has been recognised in the statement of comprehensive income in the prior year.

In accordance with the requirements AASB 9: Financial Instruments, a $968,000 loss was recognised in profit

• loss owing to the changed terms and conditions in the Group’s revised debt facility arrangements with its financiers as described in Note C4, which was determined to be a modification to the financial liability.

ARQ Group Annual Report 2019 62

Director’s Report and Financial Statements

A3. Income tax

The major components of income tax expense are:

1. Statement of comprehensive income2019 2018

$’000

$’000

Current income tax

Current income tax charge

638

4,689

Adjustments in respect of current income tax of previous periods

(486)

9

Deferred income tax

Relating to origination and reversal of temporary differences

(2,350)

(1,280)

Derecognition of deferred tax asset

2,666

–

Income tax expense reported in the statement of comprehensive income

468

3,418

(b) Statement of changes in equity

2019

2018

$’000

$’000

Deferred income tax related to items charged or credited directly to equity

Net gain on revaluation of cash flow hedges

(129)

(24)

Deferred tax asset recognised on equity raise costs

145

145

Income tax expense reported in equity

16

121

1. A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the Group’s applicable income tax rate is as follows:

2019

2018

$’000

$’000

Loss before income tax from continuing operations

(45,713)

(17,643)

(Loss) / profit before income tax from discontinued operations

(85,042)

18,735

(Loss) / profit before income tax

(130,755)

1,092

At the Group’s statutory income tax rate of 30% (2018: 30%)

(39,227)

328

Adjustments in respect of current income tax of previous years

(486)

9

Non-assessable income

(107)

–

Non-deductible loss on revaluation of disposal group held for sale

24,375

–

Non-deductible goodwill impairment charge

12,337

–

Other non-deductible expenses

372

273

Reassessment of contingent consideration

(30)

2,911

Adjustment for sale of TPPW Reseller business

(166)

–

Unwinding of discount on other financial liabilities

16

28

Adjustments in deferred tax balances

(77)

–

Derecognition of deferred tax asset

2,666

–

Estimated R&D tax incentive claims

–

(67)

Unrecognised tax loss for the year

868

–

Autre

(73)

(64)

Income tax expense at the effective income tax rate

468

3,418

Income tax expense / (credit) reported in the statement of comprehensive income:

– From continuing operations

238

(2,216)

– From discontinued operations

230

5,634

Income tax expense at the effective income tax rate

468

3,418

ARQ Group Annual Report 2019 63

Director’s Report and Financial Statements (Section)

A3. Income tax (cont.)

The Group derecognised $2,666,000 in deferred tax assets on the basis the Group cannot conclude that it is probable it can realise its gross deferred tax assets in excess of its deferred tax liabilities at 31 December 2019. This has been allocated to individual line items in table d) below, to the extent they will not be recoverable by offsetting deferred tax liabilities.

As at 31 December 2019, the Group has unrecognised income tax losses of $868,000 tax-effected at 30% (2018: none), and capital losses of $499,000 arising from the sale of the TPP Wholesale Reseller business

(2018: none).

(d) Deferred tax assets and liabilities

2019

2018

$’000

$’000

Deferred tax assets at 31 December relate to the following:

Unrealised foreign exchange gains

134

2,121

Employee benefits

845

1,781

Lease liabilities

5,740

697

Income received in advance

–

585

Blackhole expenditure

–

548

Expected credit loss provision

–

395

Interest expense

–

–

Accruals

–

300

Other non-current liabilities

–

255

Derivative financial instruments

–

24

Intangible assets

604

11

Autre

–

58

7,323

6,775

2019

2018

$’000

$’000

Deferred tax liabilities at 31 December relate to the following:

Intangible assets

1,285

2,807

Lease assets (incl. make-good)

6,134

494

Unrealised foreign exchange losses

65

1,958

Autre

65

210

7,549

5,469

Current taxes

Current tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.

Current income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation, and establishes provisions where appropriate.

Deferred taxes

Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

ARQ Group Annual Report 2019 64

Director’s Report and Financial Statements

A3. Income tax (cont.)

Deferred income tax liabilities are recognised for all taxable temporary differences:

• except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination, and at the time of the transaction, affects neither the accounting profit nor taxable profit or loss, and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised:

• except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination, and at the time of the transaction, affects neither the accounting profit nor taxable profit or loss, and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of comprehensive income.

Tax consolidation

The Group and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation as of 1 January 2006. Members of the tax consolidated group have entered into a tax-funding agreement. Each entity is responsible for remitting its share of the current tax payable (receivable) assumed by the head entity.

In accordance with UIG 1052 and Group accounting policy, the Group has applied the ‘separate taxpayer within group approach’, in which the head entity, Arq Group Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts.

In addition to its own current and deferred tax amounts, the Group also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax credits assumed from controlled entities in the tax consolidated group. The allocation of taxes to the head entity is recognised as an increase/decrease in the controlled entity’s inter-company accounts with the tax consolidated Group head entity.

ARQ Group Annual Report 2019 65

Director’s Report and Financial Statements (Section)

A3. Income tax (cont.)

Members of the Group have entered into a tax-sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement, on the grounds that the possibility is remote.

Other taxes

Revenues, expenses and assets are recognised net of the amount of GST except:

• where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable, and

• receivables and payables are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.

Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority, is classified as operating cash flows.

Key judgement and estimates

The Group’s accounting policy for taxation requires management’s judgement in assessing whether deferred tax assets and certain deferred tax liabilities are recognised in the statement of financial position. Deferred tax assets are recognised only when it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits.

ARQ Group Annual Report 2019 66

Director’s Report and Financial Statements

A4. Les dividendes

Equity dividends on ordinary shares

(a) Dividends declared and paid during the year on ordinary shares

2019

2018

$’000

$’000

(i) Final franked dividend for the financial year ended 31 December 2018:

5,357

8,846

4.5 cents per share (2017: 7.5 cents per share)

(ii) Dividend for the Infoready earn out year ended 31 December 2019:

109

–

Total dividends paid during the year

5,466

8,846

(b) Dividends proposed and not recognized as a liability

Final franked dividend for the year ended 31 December 2019:

0.0 cents per share (2018: 4.5 cents per share)

–

5,349

(c) Franking credit balance

The amount of franking credits available for the subsequent financial year are:

– franking account balance as at the end of the financial year at 30% (2018: 30%)

3,134

2,320

ARQ Group Annual Report 2019 67

Director’s Report and Financial Statements (Section)

A5. Earnings/(loss) per share

2019

2018

Cents

Cents

From continuing operations

Basic loss per share

(38.01)

(0.13)

Diluted loss per share

(38.01)

(0.13)

Attributable to members of the parent

Basic loss per share

(108.62)

(2.08)

Diluted loss per share

(108.62)

(2.08)

The following reflects the income and share data used in the calculations of basic and diluted earnings per share:

Loss for the year from continuing operations

(45,951)

(15,427)

(Loss) / profit for the year from discontinued operations

(85,272)

13,101

Less profit attributed to non-controlling interests

(80)

(131)

Loss for the year attributable to members of the parent

(131,303)

(2,457)

Number of shares

Weighted average number of ordinary shares used in the calculation of basic earnings per share

Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share

120,887,297 118,876,222

120,887,297 118,876,222

Basic earnings/(loss) per share is calculated as profit/(loss) for the year attributable to members of the parent, divided by the weighted average number of ordinary shares.

Diluted earnings/(loss) per share is calculated as profit/(loss) for the year attributable to members of the parent, divided by the weighted average number of ordinary shares and the dilutive potential ordinary shares.

Performance rights granted to employees are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent that they are dilutive. Where an operating loss is incurred, performance rights are not dilutive. These performance rights have not been included in the determination of basic earnings per share.

There have been no transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these financial statements.

ARQ Group Annual Report 2019 68

Director’s Report and Financial Statements

A6. Segment reporting

Identification of operating segments

An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Operating segments have been identified based on the information provided to the chief operating decision makers. being the CEO.

As described in the Basis of Presentation, following the presentation of the Enterprise business as a disposal group held for sale and as a discontinued operation during the year ended 31 December 2019, the Group’s continuing operations as presented in the Statement of Comprehensive Income represent only one operating segment, being the SMB business.

A7. Other income

2019

2018

$’000

$’000

Dividend income

125

–

Interest income

202

68

Management fees – TPPW Reseller

587

–

Sundry income

401

–

Total other income

1,315

68

Under the terms of the Transitional Services Agreement for the sale of the TPP Wholesale Reseller business, the Group is entitled to receive ongoing management fees associated with the separation of the business. This agreement will continue over the next two years.

ARQ Group Annual Report 2019 69

Director’s Report and Financial Statements (Section)

Section B: Operating assets and liabilities

B1. Trade and other receivables

(a) Disaggregation of trade and other receivables

2019

2018

$’000

$’000

Trade receivables

14,840

27,179

Allowance for expected credit losses (ECLs)

(1,840)

(1,370)

Other receivables

910

594

Total trade and other receivables

13,910

26,403

Set out below is the movement in the allowance for ECLs of trade receivables:

2019

2018

$’000

$’000

Opening balance

1,370

1,030

Additional provision for ECLs taken to the P&L

1,290

1,359

Amount written off

(821)

(1,019)

Closing balance

1,840

1,370

At 31 December, the ageing analysis of trade receivables is as follows:

2019

2018

ECL

Gross

ECL

ECL

Gross

ECL

Rate

$’000

$’000

Rate

$’000

$’000

Continuing Operations

Actuel

13.25%

1,025

(136)

1.08%

9,936

(107)

0-90 days past due

5.52%

2,017

(111)

4.51%

8,529

(385)

91 days + past due

13.50%

11,797

(1,593)

10.08%

8,714

(878)

Closing balance

14,840

(1,840)

27,179

(1,370)

Compared to the prior year, the ECL rate is higher as the receivables balances at 31 December 2019 solely reflects receivables associated with the SMB business, which typically has a greater credit risk exposure as the majority of SMB’s customers are small/medium businesses and individuals. Information about credit exposures are disclosed in note C1.

(b) Accounting policies

A description of accounting policies applicable to the Group for Trade and other receivables can be found in the Financial assets section of the ‘Significant accounting policies’.

Key judgement and estimates

In prior periods, a customer disputed the calculation of amounts being charged in relation to a contract for services, which is still ongoing. At balance date an amount recorded in trade receivables of $10,006,000 (31 December 2018: $5,445,000) is subject to this dispute. Based on the Group’s interpretation of the contract applied over a number of years and supporting legal advice the Group is confident that the amount will be fully recovered.

ARQ Group Annual Report 2019 70

Director’s Report and Financial Statements

B2. Other current assets

2019

2018

$’000

$’000

Accrued revenue

75

4,363

Prepayments

2,853

2,168

Lease incentive receivable

–

103

Total other assets (current)

2,928

6,634

Accrued revenue is defined as a contract asset under AASB 15.

B3. Plant and equipment

Leasehold

Plant and

Meubles

Make-

Capital

et

bien

work in

Total

improvements

equipment

fittings

les atouts

progress

$’000

$’000

$’000

$’000

$’000

$’000

At cost

At 1 January 2018

1,969

19,246

379

–

347

21,941

Additions

6,532

2,349

2,026

2,006

79

12,992

Transferts

266

(28)

–

–

(266)

(28)

Disposals

(695)

(430)

(35)

–

–

(1,160)

At 31 December 2018

8,072

21,137

2,370

2,006

160

33,745

Additions

194

697

24

–

–

915

Transferts

151

9

–

–

(160)

–

Disposals

(34)

(123)

–

–

–

(157)

Adjustments on application of new accounting

–

–

–

(2,006)

–

(2,006)

normes

Transfers to disposal group held for sale

–

(1,180)

–

–

–

(1,180)

At 31 December 2019

8,383

20,540

2,394

–

–

31,317

Accumulated depreciation and impairment

At 1 January 2018

1,158

14,532

234

–

–

15,924

Depreciation charge for the year

1,572

2,677

308

359

–

4,916

Transferts

–

(59)

58

–

–

(1)

Disposals

(528)

(429)

(36)

–

–

(993)

At 31 December 2018

2,202

16,721

564

359

–

19,846

Depreciation charge for the year

1,748

1,752

526

4

–

4,031

Transferts

–

(dix)

17

(7)

–

–

Disposals

(34)

(123)

–

–

–

(157)

Adjustments on application of new accounting

–

–

–

(359)

–

(359)

normes

Transfers to disposal group held for sale

–

(244)

–

3

–

(242)

At 31 December 2019

3,916

18,096

1,107

–

–

23,119

Net book value

At 31 December 2018

5,870

4,416

1,806

1,647

160

13,899

At 31 December 2019

4,467

2,444

1,287

–

–

8,198

Plant and equipment are stated at cost less accumulated depreciation and any impairment in value.

ARQ Group Annual Report 2019 71

Director’s Report and Financial Statements (Section)

B3. Plant and equipment (cont.)

Depreciation is provided on a straight-line or diminishing value basis on all plant and equipment. Major depreciation periods are:

2019

2018

Leasehold improvements

The lease term

The lease term

Plant and equipment

2 to 4 years

2 to 4 years

Furniture and fittings

2 to 5 years

2 to 5 years

An item of plant and equipment is derecognised upon disposal, or when no future economic benefits are expected from its use or disposal. Any gain or loss arising from the derecognition of the asset (calculated as the difference between net disposal proceeds and the carrying amount of the asset) is included in the statement of comprehensive income upon derecognition. The residual values, useful lives, and methods of depreciation of plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.

B4. Leases

Right-of-use assets

Lease

Premises

Autre

Total

liabilities

equipment

$’000

$’000

$’000

$’000

As at 31 December 2018

–

–

–

–

Additions on transition

16,058

283

16,341

19,564

Additions during the year

5,500

–

5,500

5,527

Depreciation expense

(5,068)

(219)

(5,287)

–

Interest expense

–

–

–

796

Paiements

–

–

–

(6,757)

As at 31 December 2019

16,490

64

16,554

19,130

Set out below are the amounts recognised in profit and loss during the period:

2019

$’000

Depreciation expense of right-of-use assets(1)

5,287

Interest expense on lease liabilities

796

Rent expense – short-term leases

48

Rent expense – leases of low-value assets(2)

32

Rent expense – variable lease payments(3)

1,958

Total amount recognised in profit or loss

8,121

1. Included in this amount is depreciation ofright-of-use assets associated with discontinued operations of $2,302,000 for the year ended 31 December 2019.

2. Leases oflow-value assets excludes short-term leases of low value.

3. Included in this amount is rent expense related to variable lease payments associated with discontinued operations of $956,000 for the year ended 31 December 2019, which has already been included in the discontinued operations result.

ARQ Group Annual Report 2019 72

Director’s Report and Financial Statements

B4. Leases (cont.)

Set out below is a maturity analysis of lease liabilities:

31-Dec-19

$’000

Leases

Leases in

committed to

Maturity analysis – contractual undiscounted cash flows

effect during

Total

but not yet

year ended

commenced

Less than one year

–

6,782

6,782

One to five years

–

13,611

13,611

More than five years

–

91

91

Total undiscounted lease liabilities at 31 Dec

–

20,484

20,484

Lease liabilities included in the Statement of Financial Position

19,130

at 31 Dec

Actuel

6,160

Non-current

12,970

Set out below are amounts related to finance leases where the Group is a lessor:

2019

$’000

Finance income on the net investment in the lease

174

Total amount recognised in profit or loss

174

Set out below is a maturity analysis of lease receivables for finance leases where the Group is a lessor:

2019

$’000

Maturity analysis – contractual undiscounted cash flows

Less than one year

2,170

One to two years

1,298

Two to three years

580

More than three years

–

Total undiscounted lease receivable at 31 Dec

4,048

Unearned finance income

(154)

Net investment in lease

3,894

Set out below is a reconciliation of lease receivables for finance leases where the Group is a lessor:

2019

$’000

At 31 December 2018

–

Additions on transition

5,343

Additions on entering into sublease during the year

421

Interest income

174

Receipts from lessees

(2,044)

Lease receivables as at 31 December 2019

3,894

ARQ Group Annual Report 2019 73

Director’s Report and Financial Statements (Section)

B4. Leases (cont.)

(a) Adoption of AASB 16: Leases(‘AASB 16’)

AASB 16 supersedes AASB 117: Leases(‘AASB 117’), AASB Interpretation 4: Determining whether an

Arrangement contains a Lease, Interpretation 115:Operating Leases-Incentivesand Interpretation 127:Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

AASB 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model. Lessor accounting under AASB 16 is substantially unchanged from AASB 117. Lessors will continue to classify leases as either operating or finance leases using similar principles as in AASB 117. However, on adoption of AASB 16 there was a change in the classification of sub-leases as a net investment in the sublease by reference to the head lease.

Impact on transition

The Group has lease contracts for office premises as both a lessor (in relation to sub-leases) and lessee and for IT equipment as a lessee. Before the adoption of AASB 16, the Group classified each of its leases at the inception date as either a finance lease or an operating lease. A lease was classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to the Group; otherwise it was classified as an operating lease.

Finance leases were capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments were apportioned between interest (recognised as finance costs) and reduction of the lease liability. In an operating lease, the leased property was not capitalised, and the lease payments were recognised as rent expense in the statement of profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised under other assets and other liabilities, respectively.

Upon adoption of AASB 16, the Group applied a single on balance sheet approach for all leases that it is the lessee, except for short-term leases and leases of low-value assets. The Group recognised lease liabilities to make lease payments and ROU assets representing the right to use the underlying assets.

The Group adopted AASB 16 using the modified retrospective method of adoption with the date of initial application being 1 January 2019. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening statement of financial position on 1 January 2019. As the Group adopted the modified retrospective method, there was no restatement of previous financial statements. The right-of-use assets were measured on adoption as if AASB 16 had always applied.

ARQ Group Annual Report 2019 74

Director’s Report and Financial Statements

B4. Leases (cont.)

The effect of adopting AASB 16 is as follows:

Impact on the statement of financial position (increase/(decrease)) as at 1 January 2019:

Right-of-use assets Lease receivable Plant and equipment Other assets Deferred tax assets

Total Assets

Lease liabilities Provisions Other liabilities Deferred tax liabilities

Total Liabilities

Retained earnings

Total Equity

1-Jan-19 $’000 16,341 5,343 (1,647)

(101)

5,578

25,514

19,566

(124)

(850)

6,011

24,603

911

911

There is no impact on the statement of comprehensive income, basic and diluted EPS or the statement of cash flows for the prior period as the Group has elected to adopt the modified retrospective approach.

Set out below is a reconciliation to the opening balance for lease liabilities as at 1 January 2019, based on the operating lease commitments as at 31 December 2018:

$’000

Operating lease obligations at 31 December 2018

31,792

Change in lease term

(959)

Lease-type obligations (service components)

92

Items not previously considered as lease

79

Future commitments(1)

(10,117)

Gross lease liabilities at 1 January 2019

20,887

Weighted average incremental borrowing rate as at 1 January 2019

3.86%

Discounting

(1,321)

Lease liabilities at 1 January 2019

19,566

1. Future commitments represent leases that have been committed to as at 31 December 2018 and have a commencement date during the year ended 31 December 2019.

1. Summary of new accounting policies

Set out below are the new accounting policies of the Group upon adoption of AASB 16:

(i) Right-of-use assets

The Group recognises right-of-use (‘ROU’) assets at the commencement of a lease. Subsequently, ROU assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities.

ARQ Group Annual Report 2019 75

Director’s Report and Financial Statements (Section)

B4. Leases (cont.)

The cost of ROU assets includes:

• the amount of lease liabilities recognised;

• any lease payments made at or before the commencement date less any lease incentives received;

• any initial direct costs incurred by the lessee; et

• an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset.

Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised ROU assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. ROU assets are subject to impairment.

(ii) Lease liabilities

At the commencement date of a lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate.

The variable lease payments that do not depend on an index or a rate are recognised as expense in the period in which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the date of initial application if the interest rate implicit in the lease is not readily determinable. After the date of initial application, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, which is not accounted for as a separate lease, a change in the lease term, a change in the in-substance fixed lease payments, a change in future lease payments resulting from a change in an index or a rate used to determine those payments, or a change in the assessment to purchase the underlying asset.

(iii) Lease receivable

The Group is an intermediate lessor of some subleases, which were previously classified as operating leases under AASB 117. The Group accounts for a head lease and sublease as two separate contracts, applying both lessee and lessor accounting requirements respectively. On the date of initial application, the Group reassessed its existing operating subleases to determine whether the sublease is classified as an operating or finance lease under AASB 16. The reassessment is based on the remaining contractual terms of the head lease and sublease with reference to the right-of-use assets associated with the head lease and not the underlying asset.

ARQ Group Annual Report 2019 76

Director’s Report and Financial Statements

B4. Leases (cont.)

On identifying finance subleases that were previously classified as operating subleases, the Group derecognises the ROU asset relating to the head lease that is transferred to the sublessee and recognises the net investment in the sublease equal to the present value of lease receivables. Where the interest rate implicit in the sublease cannot be readily determined, the Group utilises the incremental borrowing rate from the head lease (adjusted for any initial direct costs associated with the sublease) to discount the lease receivable to its present value.

The Group is required to calculate an expected credit loss for the lease receivable in accordance with AASB 9 and elected to apply the simplified approach to recognise the lifetime expected credit losses of the lease receivable. The Group considered both historical information and a forward outlook in determining the lifetime expected credit loss on lease receivables.

(iv) Short-term leases and leases of low-value assets exemptions

The Group applies the short-term lease recognition exemption made by class of underlying assets to the right-of-use asset related to its short-term leases (i.e. those leases that have a lease term at the commencement date of 12 months or less from the date of initial application and do not contain a purchase option).

The Group applies the lease of low-value assets recognition exemption to leases that are considered of low value (i.e., below $7,000 AUD). This amount has been determined with reference to the threshold example set by the International Accounting Standards Board in the Basis for Conclusion on IFRS 16 Leases BC of $5,000 USD. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.

Key judgement and estimates

Significant judgement in determining the lease term of contracts with renewal options

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The Group has the option, under some of its premises leases to lease the assets for additional terms of five years. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. The Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy). The Group excluded the renewal period as part of the lease term for leases of rental premises as the Group is not reasonably certain to exercise the renewals.

Significant judgement in determining the incremental borrowing rate

The Group has applied judgement to determine the incremental borrowing rate, which significantly affects the amount of lease liabilities or ROU assets recognised. The Group applies the incremental borrowing rate on a lease by lease basis based on the remaining lease term from the initial date of application. The Group reassesses the incremental borrowing rate for any leases with commencement dates after the initial date of application.

ARQ Group Annual Report 2019 77

Director’s Report and Financial Statements (Section)

B5. Intangible assets

2019

2018

$’000

$’000

Goodwill

70,923

211,671

Market-related intangibles

1,494

9,053

Accumulated amortisation

–

(7,164)

1,494

1,889

Customer contracts

9,224

10,520

Accumulated amortisation

(8,702)

(7,309)

522

3,211

Capitalised software

16,632

18,503

Accumulated amortisation

(11,767)

(10,035)

4,865

8,468

Total intangible assets

77,804

225,239

Reconciliation of carrying amounts at the beginning and end of the period

Capitalised

Client

Market-

Goodwill

Total

en relation

Logiciel

Contracts

Intangibles

$’000

$’000

$’000

$’000

$’000

Net balance at 1 January 2018

8,604

5,756

7,236

237,500

259,096

Transfer to assets held for sale

–

–

–

(25,829)

(25,829)

Additions

2,764

–

–

–

2,764

Amortisation

(2,900)

(2,545)

(5,347)

–

(10,792)

Net balance at 31 December 2018

8,468

3,211

1,889

211,671

225,239

Transfer to assets held for sale

(3,588)

(1,296)

–

(101,727)

(106,611)

Adjustments to assets previously classified as

–

–

(395)

2,103

1,708

held for sale

Additions

2,102

–

–

–

2,102

Amortisation (continuing operations)

(2,117)

(1,394)

–

–

(3,511)

Impairment of goodwill

–

–

–

(41,123)

(41,123)

Net balance at 31 December 2019

4,865

521

1,494

70,924

77,804

Adjustments to assets previously classified as held for sale relate to the disposal of the goodwill associated with the sale of the TPP Wholesale Reseller business. The carrying amount of goodwill disposed has been calculated based on its estimated recoverable amount relative to the estimated recoverable amount of the SMB CGU. Due to an improvement in the forecast cash flows, and therefore the recoverable amount, of the wider, ongoing operations of the SMB CGU during the year, the proportion of goodwill disposed decreased from $25,829,000 at 31 December 2018 to $23,726,000 upon disposal.

ARQ Group Annual Report 2019 78

Director’s Report and Financial Statements

B5. Intangible assets (cont.)

(a) Goodwill

Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units (CGUs) expected to benefit from the combination’s synergies. Goodwill has been allocated for impairment purposes to CGUs that are significant individually or in aggregate, taking into consideration the nature of services, resource allocation, how operations are monitored, and where independent cash flows are identifiable.

As at 31 December 2019, $101,727,000 of goodwill associated with the Enterprise business has been reclassified to disposal group held for sale and, as part of the disposal group held for sale, subsequently written down to its fair value less costs of disposal. Further detail is described within note D1.

(b) Marketing-related intangibles

Marketing-related intangibles represent brand names of past acquisitions. They have been assessed as having indefinite useful lives as they are expected to contribute to future economic benefits indefinitely as Arq Group Limited continues to sell its products under these brand names indefinitely, and therefore invests in these brands through its marketing activities. An annual impairment assessment is required for intangible assets with an indefinite useful life.

(c) Customer contracts

Customer contracts are amortised over the period of 3-5 years based on the historical attrition rate.

(d) Capitalised software

Included in capitalised software is $853,254 of capitalised labour and other directly attributable costs. The capitalised labour in progress which has not started amortisation relates to product and service customer platform enhancements. The remaining balance of capitalised software relates to legacy software and cloud platforms from acquired entities, as well as newly developed software platforms eligible to begin amortisation during the year.

Intangible assets acquired both separately and from a business combination

Intangible assets acquired separately are capitalised at cost, and from a business combination are capitalised at fair value as at the date of acquisition. Following initial recognition, the cost model is applied to the class of intangible assets. Where amortisation is charged on assets with finite lives, this expense is taken to profit and loss through the ‘amortisation of identifiable intangible assets’ line item.

ARQ Group Annual Report 2019 79

Director’s Report and Financial Statements (Section)

B5. Intangible assets (cont.)

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognised in the profit and loss when the asset is derecognised.

Internally generated intangible assets

Costs relating to the research phase of the project are expensed while costs relating to the development phase are capitalised as Capitalised Software when the project meets the definition of an asset; and is identifiable. The costs capitalised are being amortised over a useful life of four to six years.

A summary of the policies applied to the Group’s intangible assets is as follows:

Customer contracts

Useful lives

Finite

Amortisation

Amortised over the estimated churn of the customer base

Impairment testing

When indicators exist

Market-related Intangibles

Useful lives

Indefinite

Amortisation

No amortisation

Impairment testing

Annually and more frequently when indicators exist

Capitalised software projects

Useful lives

4-6 years

Impairment testing

Amortisation method reviewed annually and when indicators exist

The carrying value of any intangible assets denominated in foreign currencies is revalued at the year-end spot rate of each reporting period, leading to changes in the carrying value of the intangible assets in reporting currency. Any revaluation amounts are recognised directly in the foreign currency translation reserve.

Impairment of assets

At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

The carrying values of assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the asset belongs. If any such indication exists, and where the carrying values exceed the estimated recoverable amount, the assets or CGUs are written down to their recoverable amount.

ARQ Group Annual Report 2019 80

Director’s Report and Financial Statements

B5. Intangible assets (cont.)

Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell, and it does not generate cash inflows that are largely independent of those from other assets, or groups of assets; in which case, the recoverable amount is determined for the CGU to which the asset belongs.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Goodwill and other intangible assets impairment testing

The Group has performed its annual impairment testing over the carrying value of goodwill. The entire balance of goodwill not held for sale (i.e. $112,047,000) has been allocated to the SMB CGU at 31 December 2019.

Under the impairment testing, the carrying amount of the SMB CGU is compared to its recoverable amount. The recoverable amount of the SMB CGU was determined based on a fair value less costs of disposal method.

Key assumptions used in fair value less costs of disposal (‘FVLCD’) calculations

Fair values were obtained based on preliminary information of indicative transaction prices for the SMB business provided by potential interested parties as part of the ongoing due diligence process as part of the Group’s Strategic Review. These indicative transaction prices were based on anticipated future earnings of the SMB business after adjustments to the cost base. The costs of disposal were estimated based on anticipated advisor costs as well as anticipated costs to achieve the planned adjustment to the cost base. As such, these fair value measurements would be categorised within the Level 3 fair value hierarchy.

Results of impairment test

Based on current indicative transaction prices for the SMB business, the Group recognised an impairment charge of $41,123,000, recognised in profit and loss. As the Strategic Review process is ongoing, the Group has not disclosed these indicative transaction prices due to their commercial sensitivities as at balance date. Disclosure of these prices would likely prejudice the outcome of the Strategic Review for current and potential interested parties.

Sensitivity to changes in assumptions

Following the impairment loss recognised in the SMB CGU, the recoverable amount was equal to the carrying amount. Therefore, any adverse change in a key assumption will result in further impairment.

ARQ Group Annual Report 2019 81

Director’s Report and Financial Statements (Section)

B5. Intangible assets (cont.)

Key judgement and estimates

The Group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the CGU, using fair value less costs of disposal (FVLCD), to which the goodwill and intangibles with indefinite useful lives are allocated. The Group considers that the indicative transaction prices received from potential interested parties approximates fair value as it represents an indicative agreeable price between willing market participants under current market conditions.

The identification of the COVID-19 coronavirus outbreak as a post-balance date non-adjusting event is described in Note E7 and notes that fair values as used in the determination of the recoverable amount may have materially changed since balance date as a consequence of the COVID-19 coronavirus outbreak. The impairment assessment at 31 December 2019 reflects conditions known at that date and do not factor in any potential future impact of COVID-19.

B6. Non-current financial assets

2019

2018

$’000

$’000

Investment in Tiger Pistol – ordinary shares

1,375

1,870

1,375

1,870

The Group holds 603,205 shares in Tiger Pistol. These shares have been accounted for as a financial asset and valued by reference to the most recent arm’s length transaction of Tiger Pistol shares.

Reconciliation of fair value measurement of non-current financial assets

2019

2018

$’000

$’000

As at 1 January

1,870

2,085

Foreign exchange gain on revaluation of the Investment in Tiger Pistol

dix

175

Bank guarantee receivable

–

(390)

Return of capital

(505)

–

As at 31 December

1,375

1,870

B7. Trade and other payables

2019

2018

$’000

$’000

Trade creditors

1,574

2,682

Sundry creditors

4,325

5,408

Deposits received in advance

477

829

Accrued expenses

2,316

8,219

Total trade and other payables

8,692

17,138

ARQ Group Annual Report 2019 82

Director’s Report and Financial Statements

B7. Trade and other payables (cont.)

Terms and conditions relating to trade and sundry creditors:

• Trade creditors arenon-interest bearing and are normally settled within agreed trading terms.

• Sundry creditors arenon-interest bearing and are normally settled within agreed trading terms.

The carrying amount of trade and other payables is a reasonable approximation of fair value.

B8. Des provisions

2019

2018

$’000

$’000

Actuel

Employee benefits

1,585

3,406

1,585

3,406

Non-current

Employee benefits

528

1,207

Autre

2,659

2,323

3,187

3,530

Total provisions

4,772

6,936

2019

2018

$’000

$’000

The aggregate employee benefit liability comprises:

Provisions (current)

1,585

3,406

Provisions (non-current)

528

1,207

2,113

4,613

Employee benefits

Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave, and long service leave.

Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date, are measured at their nominal amounts based on remuneration rates, which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at the reporting date on corporate bonds is used, which has terms to maturity approximating the terms of the related liability.

Employee benefit expenses arise in respect of the following categories:

• Wages and salaries,non-monetary benefits, annual leave, long service leave and other entitlements;

• Other types of employee entitlements are recognised against profits on a net basis in their respective categories.

ARQ Group Annual Report 2019 83

Director’s Report and Financial Statements (Section)

B8. Provisions (cont.)

Other provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Other non-current provisions include leasehold make-good provisions of $2,659,000. Properties occupied by the Group are subject to make-good costs when vacated at the termination of the lease. A make-good provision is recognised at the present value of the provision as at 31 December 2019, with the asset capitalised as part of the right-of-use lease asset. Movements in the liability, as the time to make-good payment advances one period, are recognised as a finance expense. Any difference between the provision and the amount paid in the final settlement is recognised as a make-good expense or gain in the statement of comprehensive income.

A reconciliation of other provisions is shown below:

2019

2018

$’000

$’000

Opening balance at 1 January

2,323

–

Reversal of surplus lease provision on adoption of AASB 16

(124)

–

Additions to make-good provision

407

2,176

Additions to surplus lease provision

–

124

Unwinding of the discount

53

23

Closing balance at 31 December

2,659

2,323

ARQ Group Annual Report 2019 84

Director’s Report and Financial Statements

Section C: Capital and financial risk management

C1. Financial risk management objectives and policies

The Group’s principal financial instruments comprise of receivables, payables, interest-bearing loans, cash, short-term deposits, derivatives, non-current financial assets and other financial liabilities. The Group manages its exposure to key financial risks in accordance with the Group’s financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets, whilst protecting financial security.

The purpose is to manage the financial risks arising from the Group’s operations. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to foreign exchange risk and interest rate risk, assessments of market forecasts for foreign exchange and interest rates. Liquidity risk is monitored through the development of rolling cash flow forecasts.

The Board reviews and agrees policies for managing each of these risks as summarised below. Primary responsibility for identification and control of financial risks rests with management under the supervision of the Audit and Risk Management Committee and under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below, including the setting of limits for trading in derivatives, hedging cover of foreign currency and interest rate risk, credit allowances and cash flow forecast projections.

Capital management

For the purpose of the Group’s capital management, capital includes issued capital, all other equity reserves attributable to the equity holders of the parent and debt capital, principally raised from the Group’s banking partners, but inclusive of other debt-like instruments, such as earn-outs due. As a result of the ongoing Strategic Review of the Group’s businesses, the Board’s current primary objective is to maximise the value of the Group’s operations to its shareholders. This may involve the sale of one or more of its operations, restructuring its cost base, all whilst maintaining sufficient liquidity for ongoing operations for the short to medium term as well as returning surplus cash flows (or, in the event of a sale of assets, proceeds from sales) to shareholders and debt providers.

The Group manages its capital structure and financing facilities and makes adjustments in light of changes in economic and market conditions, requirements of the business operations and requirements of its financial covenants. To maintain or adjust the capital structure, the Group may raise or repay debt, adjust the dividend payment to shareholders, return capital to shareholders, issue new shares, or sell assets to fund these activities.

During 2019, the Group paid dividends to members of the parent Company of $5,357,000 (2018: $12,993,000)

at 4.5 cents per share (2018: 11.0 cents per share).

The Group’s exposure to market interest rates is related primarily to the Group’s short-term deposits held and drawdowns on available financing facilities. Refer to note C4 for details of available financing facilities.

ARQ Group Annual Report 2019 85

Director’s Report and Financial Statements (Section)

C1. Financial risk management objectives and policies (cont.)

Risk exposures and responses

Interest rate risk

At balance date, the Group had the following mix of financial assets and liabilities exposed to variable interest rate risk.

2019

2018

$’000

$’000

Financial assets

Cash and cash equivalents

8,949

8,279

Financial liabilities

Bank loan1

61,929

74,992

1. Of the financial assets and liabilities that are exposed to variable interest rates, $22,500,000 of bank loans drawn are covered by interest rate swap agreements. Refer to note C6 for further detail.

The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date.

At 31 December 2019 and 2018, if interest rates had moved as illustrated in the table below, with all other variables held constant, post-tax profit and equity would have been affected as follows:

Net profit

Equity

Higher / (Lower)

Higher / (Lower)

2019

2018

2019

2018

$’000

$’000

$’000

$’000

Assets + 0.25% (25 basis points), liabilities +

(132)

(64)

(132)

(64)

0.25% (25 basis points)

Assets – 0.25% (25 basis points), liabilities –

132

64

132

64

0.25% (25 basis points)

The sensitivities have been calculated based on average holdings of interest-bearing assets and liabilities, offset by the impact of interest rate swaps (refer to Note C6 for details about the Group’s interest rate swaps). Interest-bearing assets are predominantly sensitive to movements in Australian interest rates.

Credit risk

Credit risk arises from the financial assets of the Group, which comprise of cash and cash equivalents, trade and other receivables and derivative instruments. The Group’s exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Exposure at balance date is addressed in each applicable note.

The Group provides credit only with recognised, creditworthy third parties and as such collateral is not required, nor is it the Group’s policy to securitise its trade and other receivables.

It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures, which may include an assessment of their financial position, past experience and industry reputation, depending on the amount of credit to be granted.

ARQ Group Annual Report 2019 86

Director’s Report and Financial Statements

C1. Financial risk management objectives and policies (cont.)

Outstanding customer receivables are regularly monitored. Receivables are written off when the Group determines that there is no reasonable expectation of recovering the trade receivable in full. Indicators that there is no reasonable expectation of recovery include, amongst others, the referral of a debtor to an external debt collection agency. The Group considers that there is a correlation between credit risk and the contractual payments past due, which is reflected in the ECL provision matrix. Historical evidence indicates trade receivables remain collectable more than 90 days past due.

Foreign currency risk

The Group conducts some of its business in US dollars (‘USD’) and is therefore exposed to movements in the AUD/USD dollar exchange rate. The Group actively manages the gross margin risk by its foreign currency risk management strategy. Please refer to Note C6 for further details.

Both the functional and presentation currency of Arq Group Limited is in Australian dollars (AUD). The consolidated Group contains functional currencies in USD and NZD. Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date.

The exchange differences arising on the retranslation are taken directly to other comprehensive income. On disposal of a foreign entity, the deferred cumulative amount recognised in other comprehensive income relating to that particular foreign operation is recognised in the determination of profit and loss for the year.

At 31 December 2019, the Group had the following exposures to USD denominated assets and liabilities, where the functional currency is not USD. The Group’s exposure to foreign currency changes for all other currencies is not material. Assets and liabilities that are designated in cash flow hedges are not included:

2019

2018

$’000

$’000

Financial assets

Cash and cash equivalents

533

68

Trade and other receivables

24

107

557

175

Financial liabilities

Trade and other payables

(1,814)

(1,640)

Net exposure

(1,257)

(1,465)

The following sensitivity is based on foreign currency risk exposures in existence at the reporting date. At 31 December 2019, had the AUD moved as illustrated in the table below with all other variables held constant, post-tax profit and equity would have been affected as follows:

Net profit

Equity

Higher / (Lower)

Higher / (Lower)

2019

2018

2019

2018

$’000

$’000

$’000

$’000

Consolidated

– AUD/USD +10%

113

133

113

133

– AUD/USD -10%

(139)

(162)

(139)

(162)

ARQ Group Annual Report 2019 87

Director’s Report and Financial Statements (Section)

C1. Financial risk management objectives and policies (cont.)

The Group also has exposures to foreign exchange when retranslating foreign currency subsidiaries into AUD. The sensitivity range has been determined using an expected range of 0.635 to 0.776 USD/AUD for the retranslation of USD denominated balances for the forthcoming year. The Group has determined that the sensitivity for the Group’s exposure to the NZD is not material.

Liquidity risk

Liquidity risk is managed via the regular review of forecasted cash inflows and outflows, with any surplus funds being placed in short term deposits to maximise interest revenue.

The risk implied from the values shown in the table below, reflects a balanced view of cash inflows and outflows. Trade payables and other financial liabilities mainly originate from the financing of assets used in ongoing operations such as plant, equipment and investments in working capital (e.g. trade receivables). These assets are considered in the Group’s overall liquidity risk. To monitor existing financial assets and liabilities, as well as to enable an effective controlling of future risks, the Group has established comprehensive risk reporting covering its business units that reflects expectations of settlement of financial assets and liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows including interest.

< 6 months

6 to 12

1 to 5 years

> 5 years

Total

months

$’000

$’000

$’000

$’000

$’000

31 décembre 2019

Financial assets

Cash and cash equivalents

8,949

–

–

–

8,949

Trade and other receivables

13,910

–

–

–

13,910

Other financial assets

–

–

1,375

–

1,375

22,859

–

1,375

–

24,234

Financial liabilities

Trade and other payables

(8,692)

–

–

–

(8,692)

Borrowings

(62,870

–

–

–

(62,870)

Other financial liabilities

(5,549)

–

–

–

(5,549)

Derivative liability (interest rate swap)

–

–

(510)

–

(510)

(77,111)

–

(510)

–

(77,621)

Net inflow/(outflow)

(54,252)

–

865

–

(53,387)

< 6 months

6 to 12

1 to 5 years

> 5 years

Total

months

$’000

$’000

$’000

$’000

$’000

31 December 2018

Financial assets

Cash and cash equivalents

8,279

–

–

–

8,279

Trade and other receivables

26,403

–

–

–

26,403

Other financial assets

–

–

1,870

–

1,870

34,682

–

1,870

–

36,552

Financial liabilities

Trade and other payables

(17,138)

–

–

–

(17,138)

Borrowings

(1,339)

(1,339)

(79,008)

–

(81,686)

Current tax liabilities

(1,909)

–

–

–

(1,909)

Other financial liabilities

(12,971)

–

–

–

(12,971)

Derivative liability (foreign exchange contract)

(80)

–

–

–

(80)

(33,437)

(1,339)

(79,008)

–

(113,784)

Net inflow/(outflow)

1,245

(1,339)

(77,138)

–

(77,232)

ARQ Group Annual Report 2019 88

Director’s Report and Financial Statements

C2. Contributed equity

Ordinary shares

2019

2018

$’000

$’000

Issued and paid-up capital

Ordinary shares each fully paid

91,179

85,724

Movements in ordinary shares on issue

2019

2018

Number of

Number of

actions

$’000

actions

$’000

Beginning of the financial year

118,876,222

85,724

117,368,988

83,507

Issued during the year:

– Capital raising

271,100

472

–

–

– Performance rights vested

544,778

983

584,054

685

– Dividend reinvestment plan

2,439,024

4,000

923,180

2,633

– Outware accelerated purchase

–

–

–

1,000

settlement

– Transfer from treasury shares

–

–

–

(1,884)

– Transaction costs for capital raising and

–

–

–

(217)

share repurchase, net of tax

End of the financial year

122,131,124

91,179

118,876,222

85,724

C3. Réserves

2019

2018

$’000

$’000

Share-based payments reserve

193

1,136

Foreign currency translation reserve

(533)

(552)

Fair value reserve – financial assets at FVOCI

79

70

Hedging reserve

(357)

(60)

(618)

593

Share-based payments reserve

The share-based payments reserve is used to recognise the value of equity-settledshare-based payment transactions provided to employees, including KMP, as part of their remuneration. Refer to note E4 for further details of these plans.

Foreign currency translation reserve

The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.

ARQ Group Annual Report 2019 89

Director’s Report and Financial Statements (Section)

C3. Reserves (cont.)

Other reserves

Other reserves represent the hedging reserve and fair value reserve (for equity investments at fair value through equity). The hedging reserve contains the effective portion of the hedge relationships incurred as at the reporting date. The fair value reserve of financial assets at FVOCI is used to record changes to the fair value of non-current financial asset as disclosed in note B5 to the financial statements.

C4. Interest bearing loans and borrowings

2019

2018

$’000

$’000

Actuel

Interest-bearing loan

61,929

–

61,929

–

Non-current

Interest-bearing loan

–

74,992

–

74,992

Interest-bearing loans and borrowings

A description of accounting policies applicable to the Group for interest-bearing loans and borrowings can be found in the financial liabilities section under ‘Significant accounting policies’.

Fees paid on the establishment of loan facilities are included as part of the carrying amount of the loans and borrowings. Borrowings are classified as current liabilities, unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

Borrowing costs are recognised as an expense when incurred in the Statement of Comprehensive Income. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Interest rate is based on the relevant period BBSY rate.

On 12 November 2019, the Group and its financiers revised the terms of the existing finance facility with ANZ Bank and National Australia Bank. The facility provides committed funding of $61,200,000 and an additional $7,500,000 of uncommitted working capital funding tranches. The facility is secured against the Group’s assets and replaced the Company’s existing debt facilities of $142,000,000. This agreement was executed on 23 December 2019. The facility is contractually due for repayment on 2 July 2021.

The Group was subject to a review event on 31 January 2020 allowing the financiers the discretion to withdraw the facilities. No action has yet been taken by the financiers in respect of the January 2020 review event. Therefore, the Group has classified the entire amount of the bank loan as current at 31 December 2019. As described in the Basis of Preparation and Going Concern section of the Financial Statements, the Company has subsequently paid down $22,108,000 of the drawn-down debt from proceeds received from the sale of the Enterprise business, and it has also received an extension on repayments of $2,500,000 due on the 31 March 2020 until 31 August 2020, and is in the process of requesting further short-term support.

ARQ Group Annual Report 2019 90

Director’s Report and Financial Statements

C4. Interest bearing loans and borrowings (cont.)

In the absence of any additional refinancing of facilities, the Company expects to breach financial covenants during 2020, such that the financiers have the discretion to withdraw the facilities upon providing the Company 60 days’ advance written notice. Therefore, the Company requires the ongoing support of its lenders to continue to provide the existing facilities and any required additional facilities to be able to continue as a going concern.

Included in the balance of the bank loan at 31 December 2019 is a $969,000 loss on modification of the loan agreement as described in Note A2 to the financial statements.

During the year ended 31 December 2019, the Group repaid $21,292,000 of drawn-down debt.

Financing facilities available

At reporting date, the following financing facilities had been negotiated and were available:

Total facilities

Facilities used at

reporting date

2019

2018

2019

2018

$’000

$’000

$’000

$’000

Business lending – cash advance facility (committed)

61,200

90,000

61,075

74,992

Business lending – cash advance facility (uncommitted)

7,500

–

–

–

Business lending – bank guarantees

4,485

7,480

4,369

5,610

Standby letters of credit

1,130

2,135

1,130

1,124

Asset finance – leasing

–

10,000

–

–

Commercial cards

2,000

2,000

64

51

Uncommitted acquisition facility

–

30,000

–

–

Performance guarantees

385

385

–

–

76,700

142,000

66,636

81,777

The face value of financial guarantees issued by the Group are presented below:

• Bank guarantees of AUD $4,369,000 have been issued in favour of various parties in accordance with the Group’s property commitments.

• The company has standby letters of credit totalling USD $770,000 (equivalent to AUD $1,130,000) in accordance with various registry licence agreements.

Changes in liabilities arising from financing activities

2019

2018

$’000

$’000

Opening balance – 1 January

74,992

74,992

Cash flows from financing activities

Net repayment of borrowings

(13,917)

–

Net repayment of lease liabilities

(5,961)

Non-cash changes

Adoption of new lease accounting standard

19,564

–

Additions to lease liabilities

5,527

–

Loss on modification to financial liability

968

–

Adjustment to interest on modification of financial liability

(114)

–

81,059

74,992

ARQ Group Annual Report 2019 91

Director’s Report and Financial Statements (Section)

C5. Other financial liabilities

2019

2018

$’000

$’000

Actuel

Contingent consideration liability

–

12,971

Financial liability

5,549

–

5,549

12,971

Reconciliation of fair value measurement of other financial liabilities

2019

2018

$’000

$’000

As at 1 January

12,971

11,627

Payment of consideration liability for InfoReady – cash

(4,000)

(5,668)

Payment of consideration liability for InfoReady – equity issue

(4,000)

–

Settlement of Outware remuneration liability

–

(2,683)

(Gain) / Loss on reassessment of consideration liability recognised in profit and loss

(98)

9,702

Interest on consideration liability for Infoready

676

–

Autre

–

(7)

As at 31 December

5,549

12,971

Other financial liabilities comprise the financial liabilities in relation to acquisition of InfoReady Pty Ltd.

As part of the Share Purchase Agreement (‘SPA’) with the previous owners of InfoReady, three earn out payments have been agreed. The earn out payments are calculated based on the excess of the EBITDA performance during the earn out periods over the EBITDA threshold amount specified in the SPA for each of the earn out periods multiplied by three. The earn out periods start from 1 April to 31 March the following year with the final earn out period ending 31 March 2019. If the EBITDA threshold amount is not achieved during any of the earn out periods, then no contingent consideration will be payable. The maximum amount payable is dependent upon the excess of the of the EBITDA performance during the earn out period over the EBITDA threshold amount specified in the SPA for each of the earn out period multiplied by three.

As at the acquisition date, the fair value of the contingent consideration was estimated to be $9,337,000 representing the total of the three earn out amounts. Key input assumptions used in the determination of the contingent consideration include forecast EBITDA performance for the first earn out period (1 April 2016 to 31 March 2017), and revenue and EBITDA growth rates for the second and third earn out periods from the end of the first earn out period. The fair value is determined using the discounted cash flow method. The final earn-out amount of $12,872,000 was agreed between Arq Group and InfoReady vendors.

On revaluation of the financial liability based on the final earn-out amount, a gain of $98,000 was recognised in profit and loss. In March 2019, Arq Group has entered into a Deed of Variation in relation to the payment arrangement of the earn- out amount. The default payment option was enacted which resulted in an initial instalment of $1,500,000 plus a share placement representing a value of $4,000,000, followed by six monthly instalments with a final balloon payment in December with interest calculated at 14% on the third earn-out amount less $5,000,000. The issue of ordinary shares also resulted in a $109,000 dividend paid based on 4.5 cents for each ordinary share issued.

At 31 December 2019, the remaining balance of $5,549,000 remains unpaid. Arq Group and Infoready have agreed to defer the final balloon payment on completion of the sale of the Enterprise business (refer to Notes D2 and E7).

ARQ Group Annual Report 2019 92

Director’s Report and Financial Statements

C5. Other financial liabilities (cont.)

Key judgement and estimates

The contingent consideration liability was calculated based on the excess of the EBITDA performance during the earn-out periods over the EBITDA threshold amount specified in the Sales and Purchase Agreement, relating to the acquisition of InfoReady, for each of the earn-out period multiplied by three.

C6. Derivative financial liabilities and assets

(a) Disaggregation of derivative financial liabilities

2019

2018

$’000

$’000

Foreign exchange contracts (i)

–

(80)

Interest rate swap (ii)

(510)

–

(510)

(80)

(i) Foreign exchange contracts

At 31 December 2019, the Group held no (2018: six) foreign exchange contracts designated as cash flow hedges of expected net USD cash payments for which the company has firm commitments. The terms of these foreign exchange contracts were negotiated to match the terms of the commitments. The exchange contracts were used to reduce the exposure of foreign exchange risk.

(ii) Interest rate swap

At 31 December 2019, the Group held one (2018: nil) interest rate swap contracts designated as cash flow hedges designed to hedge the variable interest rate exposure relating to the interest-bearing bank loan. The terms of the interest rate swap were negotiated to match the principal amount of the bank loan.

As at 31 December 2019, an unrealised loss of $297,000 (2018: $68,000 gain) was included in other comprehensive income in respect of these contracts. In line with the maturity date of the interest-bearing bank loan, the interest rate swap expires on 30 June 2021.

(b) Accounting policy

The Group uses derivative financial instruments, such as forward currency contracts and interest rate swaps, to hedge its foreign currency risks and interest rate risks respectively. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. For the purpose of hedge accounting, hedges are classified as:

• fair-valuehedges, when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment

• cash-flowhedges, when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment

• hedges of a net investment in a foreign operation.

ARQ Group Annual Report 2019 93

Director’s Report and Financial Statements (Section)

C6. Derivative assets/(liabilities) (cont.)

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the Group will assess whether the hedging relationship meets the hedge effectiveness requirements (including the analysis of sources of hedge ineffectiveness and how the hedge ratio is determined).

A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements:

• There is ‘an economic relationship’ between the hedged item and the hedging instrument

• The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship

• The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item.

For the purposes of hedge accounting, the Group has classified the hedges applicable to the year ending 31 December 2019 as cash-flow hedges. Hedges that meet all the qualifying criteria for hedge accounting are accounted for as described in the following.

Cash-flow hedges

The effective portion of the gain or loss on the hedging instrument is recognised in OCI in the cash-flow hedge reserve, while any ineffective portion is recognised immediately in the statement of profit or loss. The cash-flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item.

The Group uses forward currency contracts as hedges of its exposure to foreign currency risk in forecast transactions and firm commitments. The ineffective portion relating to foreign currency contracts is recognised as other expense.

The Group designates the entire forward contract as a hedging instrument. The amounts accumulated in OCI are accounted for, depending on the nature of the underlying hedged transaction. If the hedged transaction subsequently results in the recognition of a non-financial item, the amount accumulated in equity is removed from the separate component of equity and included in the initial cost or other carrying amount of the hedged asset or liability. This is not a reclassification adjustment and will not be recognised in OCI for the period. This also applies where the hedged forecast transaction of a non-financial asset or non-financial liability subsequently becomes a firm commitment for which cash flow hedge accounting is applied.

For any other cash flow hedges, the amount accumulated in OCI is reclassified to profit or loss as

a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss. If cash flow hedge accounting is discontinued, the amount that has been accumulated in OCI must remain in accumulated OCI if the hedged future cash flows are still expected to occur. Otherwise, the amount will be immediately reclassified to profit or loss as a reclassification adjustment. After discontinuation, once the hedged cash flow occurs, any amount remaining in accumulated OCI must be accounted for depending on the nature of the underlying transaction as described above.

ARQ Group Annual Report 2019 94

Director’s Report and Financial Statements

C6. Derivative assets/(liabilities) (cont.)

There is an economic relationship between the hedged items and the hedging instruments as the terms of the foreign exchange and interest rates match the terms of the hedged item (i.e., notional amount and expected payment date). The Group has established a hedge ratio of 1:1 for the hedging relationships as the underlying risk of the foreign exchange and interest rates are identical to the hedged risk components. To test the hedge effectiveness, the Group uses the hypothetical derivative method and compares the changes in the fair value of the hedging instruments against the changes in fair value of the hedged items attributable to the hedged risks.

The hedge ineffectiveness can arise from:

• differences in the timing of the cash flows of the hedged items and the hedging instruments

• different indexes (and accordingly different curves) linked to the hedged risk of the hedged items and hedging instruments

• the counterparties’ credit risk differently impacting the fair value movements of the hedging instruments and hedged items.

• Changes to the forecasted amount of cash flows of hedged items and hedging instruments

1. Impact of hedging on financial statement items

The impact of the hedging instrument on the statement of financial position is as follows:

Change in the value of

Derivative

Notional

Carrying

Line item in the statement of

the hedging instrument

used for measuring

amount

amount

financial position

hedge ineffectiveness

for the period:

$’000

$’000

$’000

Interest rate swap

22,500

510

Derivative financial instruments

297

The impact of the hedged item on the statement of financial position is as follows:

Change in the value

Carrying

Accumulated

Line item in the statement of financial

of the hedged item

Hedged item

fair value

used for measuring

amount

position

adjustments

hedge ineffectiveness

for the period:

$’000

$’000

$’000

Fixed-rate

22,500

510

297

borrowing

Interest-bearing loans and borrowings

The entire change in the value of the hedging instrument was taken to OCI. Because the terms of the hedged item and the hedging relationship continue to perfectly match, and the effect of credit risk is neither material nor dominant in the economic relationship, the hedge was highly effective during the year.

ARQ Group Annual Report 2019 95

Director’s Report and Financial Statements (Section)

C7. Fair value measurement

The Group measures financial instruments such as derivatives at fair value at each reporting date. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The fair-value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

in the principal market for the asset or liability, or

in the absence of a principal market, in the most advantageous market for the asset or liability.

The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that the market participants act in their economic best interest.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within their fair-value hierarchy, described as follows, based on the lowest level of input that is significant to the fair value measurement as a whole:

• Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

• Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

• Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

The following table provides the fair value measurement hierarchy of the Group’s assets and liabilities. Fair value measurement hierarchy for assets as at 31 December 2019:

Fair value measurement using

Quoted prices

Significant

Significant

in active

observable

unobservable

marchés

inputs

inputs

Date of

Total

(Level 1)

(Level 2)

(Level 3)

évaluation

$’000

$’000

$’000

$’000

Assets/ (liabilities) measured at fair value:

Derivative financial instruments

Interest rate swap1

31 décembre 2019

(510)

–

(510)

–

Financial assets

Investment in Tiger Pistol shares2

31 décembre 2019

1,375

–

–

1,375

Other financial liabilities

Financial liablity3

31 décembre 2019

(5,548)

–

–

(5,548)

Interest-bearing loan4

31 décembre 2019

(61,929)

–

(61,929)

–

ARQ Group Annual Report 2019 96

Director’s Report and Financial Statements

C7. Fair value measurement (cont.)

Fair value measurement hierarchy for assets as at 31 December 2018:

Fair value measurement using

Quoted

Significant

Significant

prices in

observable

unobservable

actif

inputs

inputs

marchés

Date of

Total

(Level 1)

(Level 2)

(Level 3)

évaluation

$’000

$’000

$’000

$’000

Assets/ (liabilities) measured at fair value:

Derivative financial instruments

Foreign exchange contracts1

31 December 2018

(80)

–

(80)

–

Interest rate swap1

31 December 2018

(80)

–

(80)

–

Financial assets

Investment in Tiger Pistol shares2

31 December 2018

1,870

–

–

1,870

Other financial liabilities

Financial liablity3

31 December 2018

(12,971)

–

–

(12,971)

Interest-bearing loan4

31 December 2018

(74,992)

–

(74,992)

–

1. Reflects the fair value of interest rate swaps contracts (31 December 2018: foreign exchange rate contracts), which have been designated ascash-flow hedges.

2. Reflects the fair value by reference to the most recentarms-length transaction basis of Tiger Pistol shares and subsequent Tiger Pistol’s financial performance of the investee compared with budget.

3. The fair value of the financial liability (representing the Inforeadyearn-out) was estimated based on the excess of the EBITDA performance during the earn out periods over the EBITDA threshold amount specified in the Share Purchase Agreement (SPA) for each of the earn out period multiplied by three. The earn out periods start from 1 April to 31 March the following year until 31 March 2019. Significant unobservable inputs used in the determination of the financial liability include forecast EBITDA performance for the first earn out period (1 April 2017 to 31 March 2018) and revenue and EBITDA growth rates for the second and third earn out periods from the first earn out period. The fair value is determined using the discounted cash flow method. Refer to other details as disclosed in notes C5 to the financial statements.

4. The carrying value of theinterest-bearing loan approximates its fair value.

There have been no transfers between Level 1, 2 and 3 during the period.

ARQ Group Annual Report 2019 97

Director’s Report and Financial Statements (Section)

Section D: Group structure

D1. Controlled entities

Investments in controlled entities are initially recognised at cost, being the fair value of the consideration given. Following initial recognition, investments are measured at cost less any accumulated impairment losses.

The consolidated financial statements include the financial statements of Arq Group Limited and the subsidiaries in the following table:

Nom

Country of

Equity interest %

incorporation

2019

2018

WebCentral Group Pty Ltd

(une)

Australie

100

100

WebCentral Pty Ltd

(une)

Australie

100

100

Netregistry Group Limited

(a),(c)

Australie

100

100

Netregistry Pty Ltd

(une)

Australie

100

100

TPP Wholesale Pty Ltd

(une)

Australie

100

100

Planet Domain Pty Ltd

(une)

Australie

100

100

TPP Domains Pty Ltd

(une)

Australie

100

100

NetAlliance Pty Ltd

(une)

Australie

50

50

Ziphosting Pty Ltd

(une)

Australie

100

100

Uber Global Pty Ltd

(une)

Australie

100

100

Uber Australia E1 Pty Ltd

(une)

Australie

100

100

Uber Business Pty Ltd

(une)

Australie

100

100

Uber Enterprise Pty Ltd

(une)

Australie

100

100

ubergeek.com.au Pty Ltd

(une)

Australie

100

100

Uber Reseller Network Pty Ltd

(une)

Australie

100

100

Uber Wholesale Pty Ltd

(une)

Australie

100

100

Outware Systems Pty Ltd

(une)

Australie

100

100

InfoReady Pty Ltd

(une)

Australie

100

100

Web Marketing Experts Pty Ltd

(une)

Australie

100

100

Nothing But Web Pty Ltd

(une)

Australie

100

100

Arq Group Enterprise Pty Ltd

(une)

Australie

100

100

Arq Group Operations Pty Ltd

(une)

Australie

100

100

Arq Group Services Pty Ltd

(une)

Australie

100

100

Results First Limited

(b)

Nouvelle-Zélande

100

100

Domainz Ltd

(b)

Nouvelle-Zélande

100

100

Internet Names Worldwide (US), Inc

(b)

Etats-Unis

100

100

Melbourne IT GP Holdings Pty Ltd

(une)

Australie

100

100

Names By Request Pty Ltd

(une)

Australie

100

100

Advantate Pty Ltd

(une)

Australie

100

100

1. Investments in controlled entities are initial capital investments and are eliminated in the consolidated financial statements.

2. Investments in foreign entities are revalued to theyear-end foreign exchange spot rates.

3. Netregistry Group Limited has a 50% ownership in NetAlliance Pty Ltd.

ARQ Group Annual Report 2019 98

Director’s Report and Financial Statements

D2. Disposal groups held for sale and discontinued operations

The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value, less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset (disposal group), excluding finance costs and income tax expense.

The criteria for held for sale classification is regarded as met only when the sale is highly probable, and the asset or disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be made or that the decision to sell will be withdrawn. Management must be committed to the plan to sell the asset and the sale expected to be completed within one year from the date of the classification.

Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. Assets and liabilities classified as held for sale are presented separately as current items in the statement of financial position.

(a) Sale of the TPP Wholesale Reseller business

On 5 December 2018, the Board of Directors approved the sale of the TPP Wholesale reseller (TPPW) business. The TPP Wholesale reseller business together with the Telecommunications reseller business form the SMB Indirect division. SMB Indirect together with SMB Direct form the SMB segment, which is one of the two operating segments of the Group. The other operating segment is Enterprise.

The sale of the TPP Wholesale reseller business was completed on 31 July 2019. It is not classified as a discontinued operation on the basis that the TPP Wholesale reseller business represents less than 10% of the Group’s revenue and is not considered a separate major line of business.

The net gain on disposal of the TPPW business was $554,000, presented in the Statement of Comprehensive Income.

The major classes of assets and liabilities of the TPP Wholesale Reseller business disposed as at 31 July 2019 are as follows:

$’000

Prepayments of domain name registry charges

6,616

Intangible assets

24,121

Total assets disposed

30,737

Trade and other payables

(387)

Income received in advance

(10,378)

Liabilities directly associated with assets disposed

(10,765)

Net assets disposed

19,972

The remaining balance of intangible assets disposed relates to a brand-related intangible of $395,000 representing the value of the TPP Wholesale Reseller brand.

ARQ Group Annual Report 2019 99

Director’s Report and Financial Statements (Section)

D2. Disposal groups held for sale and discontinued operations (cont.)

(b) Disposal group held for sale – Enterprise

On 24 September 2019, the Board of Directors initiated a Strategic Review of the Group’s business. Due diligence advisers were appointed by the Group to investigate the potential sale of each of the SMB and Enterprise divisions.

The sale of the Enterprise business is considered highly probable at 31 December 2019 given the sufficiently advanced progress of the Strategic Review as at that date. Therefore, at 31 December 2019, the Enterprise segment was classified as a disposal group held for sale. Due to the significance of the operations, and financial contribution, of the Enterprise business to the Group, the Enterprise segment has also been presented as a discontinued operation.

Whilst the potential sale of the SMB business is being investigated as part of the continuing Strategic Review, the sale of the SMB business is not considered highly probable at 31 December 2019.

The associated net assets for the Enterprise disposal group has been revalued to its fair value less costs of disposal in accordance with accounting standards, resulting in the recognition of a revaluation loss of $81,258,000, which has been applied against the carrying value of goodwill allocated to the Enterprise business. The fair value has been calculated based on information available to the Group as at 31 December 2019, comprising: the indicative transaction price for the sale of the Enterprise disposal group, being $35,000,000, less transaction costs and adjustment for the Group’s working capital estimate on completion date as agreed with the buyer.

The total fair value less costs of disposal is $22,743,000. This is classified as Level 3 under the fair value hierarchy due to the availability of an agreed transaction price between the purchaser and the Group, adjusted for working capital adjustments and transaction costs that are not observable.

Financial information relating to the discontinued operation is set out below at 31 December 2019:

2019

$’000

Trade and other receivables

9,175

Prepayments

440

Other assets (accrued revenue)

4,190

Total Current Assets

13,805

Property, plant and equipment

492

Intangible assets

23,359

Deferred tax asset

1,018

Total Non-Current Assets

24,869

Total Assets Held for Sale

38,674

Trade and Other Payables

(10,904)

Income received in advance

(2,239)

Des provisions

(2,180)

Total Current Liabilities

(15,323)

Des provisions

(608)

Total Non-Current Liabilities

(608)

Total Liabilities directly associated with assets held for sale

(15,931)

Net assets directly associated with the disposal group

22,743

ARQ Group Annual Report 2019 100

Director’s Report and Financial Statements

D2. Disposal groups held for sale and discontinued operations (cont.)

As at 31 December 2019, the net assets related to the disposal group identified in the previous page represents the Group’s best estimate of the fair value of the disposal group at 31 December 2019.

The results of the discontinued operations during the year is presented below:

2019

2018

$’000

$’000

Revenue from contracts with customers

86,167

112,918

Cost of sales

(51,822)

(58,414)

Gross profit

34,345

54,504

Other operating expenses

(33,083)

(33,441)

Loss on revaluation of disposal group net assets to fair value

(81,258)

–

(Loss) / earnings before interest, tax, depreciation and amortisation

(79,996)

21,063

Depreciation and amortisation expense

(4,742)

(2,328)

Interest expense

(304)

–

(Loss) / profit before tax from discontinued operations

(85,042)

18,735

Tax expense

(230)

(5,634)

(Loss) / profit for the year from discontinued operations

(85,272)

13,101

Included in the above amounts disclosed in Other Operating Expenses are allocations of shared services costs between continuing and discontinued operations during the current and prior financial years. These costs will continue to be incurred by the continuing operations until such time the cost base can be restructured.

The net cash flows from the discontinued operations are as follows:

2019

2018

$’000

$’000

Net cash inflows from operating activities

9,166

27,228

Net cash outflows from investing activities

(450)

(1,465)

Net cash inflows

8,716

25,763

1. No amounts of interest and income tax were allocated to the discontinued cash flows as these are attributed to the continuing operations.

The transaction to sell the Enterprise business was announced to the market on 11 February 2020 and was completed on 2 March 2020. Refer to Note E7 for further details.

ARQ Group Annual Report 2019 101

Director’s Report and Financial Statements (Section)

Section E: Other information

E1.

Cash Flow Statement information

2019

2018

Continuing and discontinued operations(1)

$’000

$’000

Reconciliation of the operating profit after tax to the net cash flow from

operations:

Loss for the year

(131,223)

(2,326)

Depreciation of non-current assets

9,774

4,916

Amortisation of non-current assets

5,505

10,791

Loss on revaluation of disposal group held for sale to fair value

81,258

–

Impairment of goodwill

41,123

–

(Credit writeback) / expense of share-based payments

(471)

490

Coûts de transaction

2,016

–

Derecognition of deferred tax asset

2,666

–

Infoready contingent consideration

577

9,702

Gain on disposal of TPP Wholesale Reseller business

(554)

–

Unwinding of discount on other financial liabilities

55

93

Deferred rent and incentives

–

196

Other income

(125)

–

Other expenses

24

–

Changes in assets and liabilities

Decrease/(Increase) in trade debtors

3,318

(1,158)

Decrease in prepayments

1,538

1,142

Increase in current tax receivables / liabilities

(2,267)

(936)

Increase in provisions

639

(334)

Increase in deferred tax asset

1,577

1,035

Decrease in deferred tax liability

(3,931)

(2,122)

Increase/(decrease) in accounts payable

2,458

(2,561)

Decrease in income received in advance

(2,359)

(2,423)

(Increase)/decrease in other assets

(326)

1,762

Net cash flow from operating activities

11,272

18,267

1. Included in net cash flow from operating activities are $9,166,000 (31 December 2018: $27,228,000) of net operating cash inflows related to discontinued operations. Refer to Note D2 for further information.

Reconciliation of cash and cash equivalents

Cash and short-term deposits in the statement of financial position comprise cash-at-bank and on-hand, and short-term deposits with an original maturity of three months or less.

For the purposes of the Statement of Cash Flows, cash and cash equivalents comprise the following:

2019

2018

$’000

$’000

Cash and cash equivalents on hand

8,949

8,279

Closing cash and cash equivalents balances

8,949

8,279

ARQ Group Annual Report 2019 102

Director’s Report and Financial Statements

E2. Related party disclosures

Ultimate parent

The ultimate Australian parent entity in the wholly owned Group is Arq Group Limited. During the year various intercompany transactions were undertaken between companies in the wholly owned Group. These transactions were undertaken on a net-margin basis. The effects of these transactions are fully eliminated on consolidation. All intercompany balances, payable and receivable, are on an arm’s length basis with standard terms and conditions.

Other related party transactions

Mr Tristan Sternson, the Group’s Interim CEO (until 11 February 2020), was one of the previous owners of Infoready Pty Ltd (Infoready) before its acquisition by the Group. As part of the Share Purchase Agreement (SPA) with the previous owners of Infoready, three earn-out payments have been agreed. For further details, please refer to section 3(d) in the Remuneration Report and note C5 in the financial statements.

The Enterprise business was sold on 2 March 2020 to a consortium of buyers, of which Mr Tristan Sternson has a direct interest in.

There were no other transactions with related parties during the year ended 31 December 2019, or 2018, other than detailed within the annual report.

E3. Key management personnel (KMP) disclosures

For the purposes of this report, the KMP as at 31 December 2019 are:

• Tristan Sternson- Interim Chief Executive Officer (from 24 September 2019 until 11 February 2020);

• Fraser Bearsley- Chief Financial Officer (until 23 March 2020); et

• Brett Fenton- Managing Director, Mass and Middle Market (Chief Technology Officer until 8 July 2019, Interim Chief Executive Officer from 11 February 2020).

During the year ended 31 December 2019, the following personnel were also considered to be KMP:

• Martin Mercer- Chief Executive Officer (until 24 September 2019);

• Peter Wright- Managing Director, Enterprise (until 8 July 2019)

• Emma Hunt- Managing Director, SMB (until 8 July 2019)

• Amy Rixon- Chief Brand, People & Culture Officer (until 24 January 2019)

Remuneration of KMP

Compensation of key management personnel

Short-term benefits

2,353

2,589

Post-employment benefits

177

200

Termination payments

1,099

–

Long-term benefits

86

32

Share-based payments

(495)

483

3,220

3,304

ARQ Group Annual Report 2019 103

Director’s Report and Financial Statements (Section)

E3. Key management personnel (KMP) disclosures (cont.)

Other transactions and balances with key management personnel

Sales to KMP are made at arm’s length at normal market prices, on normal commercial terms and are negligible.

E4. Performance rights

Executive LTI Plan

The Arq Group Long-Term Incentive Plan (LTI Plan) has been established where the Managing Director and selected employees of the company are issued with performance rights (zero-priced), over the ordinary shares in Arq Group Limited. The performance rights, issued for nil consideration, are subject to the terms of the LTI plan. The performance rights cannot be transferred and will not be quoted on the ASX. The Managing Director and some selected employees of the group, or any of its related body corporate, are eligible to participate in the LTI Plan.

Each performance right is to subscribe for one fully paid ordinary share. When issued, the ordinary share will rank equally with other ordinary shares. The performance rights are not transferrable except to the legal personal representative of a deceased or legally incapacitated option holder.

Performance rights issued under the LTI Plan for 2015-2017 have two performance conditions: 50% of the performance rights will vest based on the increase in Underlying Earnings Per Share (EPS) as reported in the annual financial report and 50% will vest based on relative Total Shareholder Return (TSR) in comparison to a peer group from the S&P/ ASX Small Ordinaries Index. The performance rights relating to the 31 December 2015 financial year vested in the financial year ended 31 December 2017 and ordinary shares were issued on 28 March 2018.

Performance rights issued under the LTI Plan for 2018 has one performance condition being 100% will vest based on TSR in comparison to a peer group from the S&P/ ASX Small Ordinaries Index.

There were no performance rights issued for 2019.

Performance rights vest on a sliding scale so that the amount of performance rights vesting to the individual depends on the performance level achieved. The performance period is measured over the 36- month period from 1 January of the respective grant year. The vesting date is the date on which the Board determines the extent to which the performance conditions are satisfied and the performance rights vest, which occurs in March following the performance period. The performance rights will be settled in the equivalent number of ordinary shares of Arq Group Limited.

The fair value was determined by an external valuer using a Monte Carlo Simulation Model. In valuing equity-settled transactions, no account was taken of any performance conditions other than conditions linked to the price of the shares of Arq Group Limited (market conditions).

The cost of equity-settled transactions will be recognised together with a corresponding increase in equity over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees became fully entitled to the award (vesting date).

ARQ Group Annual Report 2019 104

Director’s Report and Financial Statements

E4. Performance rights (cont.)

The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflected: (i) the extent to which the vesting period had expired and (ii) the number of awards that, in the opinion of the directors of Arq Group Limited, would ultimately vest. This opinion was formed based on the best available information at the reporting date.

No expense was recognised for awards that do not ultimately vest, except for awards where vesting was conditional upon a market condition. Where the terms of an equity-settled award were modified, as a minimum an expense, was recognised as if the terms had not been modified. In addition, an expense was recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification.

The dilutive effect, if any, of outstanding performance rights was reflected as additional share dilution in the computation of earnings per share.

The Board has adopted certain policies concerning the terms of the performance rights to be granted under the LTI Plan. The Board has the absolute discretion to change these policies at any time, although any change in its policies will have an effect only on performance rights that are issued at or after the time of the change.

There were no performance rights granted during the year ended 31 December 2019.

Performance rights relating to the year ended 31 December 2018 financial year (hereafter referred to as 2018 Grant) were issued on 28 May 2018 in respect to the performance rights granted to the Chief Executive Officer (CEO) and other eligible employees. The 2018 Grant and the performance rights granted to the CEO were approved by shareholders in the Annual General Meeting on 28 May 2018.

The expected volatility reflects the assumptions that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.

Executive STI plan

Under the Executive Short-Term Incentive Plan (STI Plan) introduced in 2018 and continuing for 2019, a portion of the STI is deferred to performance rights. The number of performance rights granted is calculated by dividing the value of deferred STI by an allocation price. The allocation price in respect of the performance rights is calculated as the volume weighted average price of the Group’s shares over the 20 trading days immediately preceding the commencement of the performance period. The performance rights vest in two equal tranches and are subject to a two- and three-year service period.

For the years ended 31 December 2019 and 31 December 2018, except for the Interim CEO (until 11 February 2020), there was no expense recognised for the deferred STI as the gateway annual KPI was not achieved.

For the Interim CEO’s STI, his STI is payable upon either the completion of the sale of the Enterprise business, or satisfaction of annual KPIs. Since the sale of Enterprise was highly probable at 31 December 2019, the full amount of his STI payable was expensed during the year ended 31 December 2019.

During the year ended 31 December 2019, the Board approved retention bonus arrangements for certain KMPs to ensure continuity of business as a result of the ongoing Strategic Review and any other changes to the business. Details of these retention bonuses are outlined in the Remuneration Report.

ARQ Group Annual Report 2019 105

Director’s Report and Financial Statements (Section)

E4. Performance rights (cont.)

(a) Rights held at the beginning of the reporting period

There were 1,185,503 rights held as at 1 January 2019 in relation to 2017, 2016 and 2015 LTI Plan.

As at 1 January 2019, no performance rights were exercisable as the vesting date for performance rights under the 2016 LTI Plan vested on 28 March 2019.

(b) Movement of rights during the reporting period

The following table summarises the movement in performance rights issued during the year:

2019 Number

2018 Number

Outstanding at the beginning of the year

1,185,303

1,473,982

Granted during the year

–

295,375

Vested during the year

(271,100)

(584,054)

Lapsed/forfeited during the year

(745,047)

–

Outstanding at year end

169,156

1,185,303

1. Rights vested during the reporting period

During the year ended 31 December 2019, 271,100 rights were vested (2018: 584,054 rights).

(d) Rights forfeited during the reporting period

745,047 rights lapsed or were forfeited (2018: Nil) with a weighted average exercise price of Nil (2018: Nil) by employees during the year.

(e) Rights held at the end of the reporting period

The following table summarises information about performance rights held by Directors and employees as at 31 December 2019:

Number of

Vesting

Expiry

Weighted average

LTI Plan

rights

Grant date

date

date

exercise price

2017 LTI Plan1

106,806

29/05/17

31/03/20

31/03/20

–

2018 LTI Plan2

62,350

30/05/18

31/03/21

31/03/21

–

169,156

1. The 2017 LTI Plan includes rights granted of 539,398, less rights forfeited of 432,592

2. The 2018 LTI Plan includes rights granted of 295,375, less rights forfeited of 233,025

1. Pricing model: LTI grants

The fair values of the equity-settledshare-based payments granted under the 2016, 2017 and 2018 LTI grants are estimated as at the date of grant using an adjusted forma combination of the Black-Scholes Option Pricing Model (BSM) that includes, a Monte Carlo Simulation Model to value the TSR Rights. For market- based conditions, the Monte Carlo Model simulation methodology has been modified to incorporate an estimate of the probability of achieving the TSR hurdle and the number of associated rights. For non- market-based vesting conditions, the BSM has been utilised to value the EPS growth rights approach.

ARQ Group Annual Report 2019 106

Director’s Report and Financial Statements

E4. Performance rights (cont.)

The following table lists the inputs to the models used for the LTI Grants:

2018 LTI grant

2017 LTI grant

2016 LTI grant

Share price

$3.35

$2.58

$1.77

Dividend yield

3,5%

4.5%

2,7%

Expected volatility

30.0%

30.0%

31.0%

Risk-free interest rate

2.00%

1,66%

1,6%

The dividend yield is based on historical and future yield estimates. The expected volatility was determined using the group’s average three-year share price. The risk-free rate is derived from the yield on Australian Government Bonds of an appropriate term. The weighted average fair value of the performance rights granted during the year was nil as no rights were granted during the year (2018: $1.12).

Key judgement and estimates

The fair value is determined by an external valuer using a binomial model and/or Monte Carlo simulation model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Arq Group Limited.

E5. Auditors’ remuneration

2019

$

Amounts received or due and receivable by the auditors of Arq Group Limited (Ernst & Young) for:

Audit or review of the statutory financial report of Arq Group Limited and its

522,000

controlled subsidiaries

Assurance services required by legislation to be provided by the auditors of Arq

–

Group Limited

Other assurance and agreed-upon procedures services under other legislation or

–

contractual arrangements

Other services in relation to Arq Group Limited and its controlled subsidiaries:

– Taxation compliance and due diligence services

28,709

– Debt refinancing advisory

–

– Digital advisory and implementation

129,986

2018

$

429,000

–

–

121,310

24,767

–

680,695 575,077

E6. Contingent assets and liabilities

The Group is not aware of the existence of any contingent assets at balance date.

The Group is subject to claims from time to time in the ordinary course of business. There are currently no claims of individual significance against the Group.

ARQ Group Annual Report 2019 107

Director’s Report and Financial Statements (Section)

E7. Events subsequent to reporting date

COVID-19 coronavirus outbreak

Subsequent to the end of the financial year, the COVID-19 coronavirus outbreak was declared a pandemic by the World Health Organisation on 11 March 2020.

The Group has not seen a significant impact on its business to date. The outbreak and the response of governments in dealing with the pandemic is interfering with general activity levels within the community, the economy and the operations of the Group’s business. The scale and duration of these developments remain uncertain as at the date of this report however they will likely have an impact on the Group’s earnings, cash flows and financial condition.

It is not possible to estimate the impact of the outbreak’s near-term and longer effects or governments’ varying efforts to combat the outbreak and support businesses. This being the case, the Group does not consider it practicable to provide a quantitative or qualitative estimate of the potential impact of this outbreak on the Group at this time. The Group notes that the value of certain assets and liabilities recorded in the Statement of Financial Position determined by reference to fair or market values at 31 December 2019 may have materially changed by the date of this report. These include the recoverable amount of intangible assets and the valuation of financial assets.

The financial statements have been prepared based upon conditions existing at 31 December 2019 and, considering those events occurring subsequent to that date, that provide evidence of conditions that existed at the end of the reporting period. As the outbreak of the COVID-19 coronavirus occurred after 31 December 2019, its impact is considered an event that is indicative of conditions that arose after the reporting period and, accordingly, no adjustments have been made to financial statements as at 31 December 2019 for the impacts of the COVID-19 coronavirus.

Other subsequent events

On 11 February 2020, the Group entered into a binding sale agreement with a consortium consisting of Quadrant Private Equity and members of management for the sale of the Enterprise business for $35,000,000 in cash consideration, less transaction costs and working capital adjustments. The transaction was completed on 2 March 2020.

The consideration was used to partially settle the Group’s existing debt (and the balance of the Infoready earn-out settlement (refer to Note C5), with the remainder to fund the Group’s working capital requirements. Refer to Note D2 for the discontinued operation relating to, and assets and liabilities associated with, the Enterprise business that has been presented as a disposal group held for sale.

On 23 March 2020, Mr Fraser Bearsley (Chief Financial Officer’s) employment with the Group ceased. Mr Brendan White was appointed as Interim Chief Financial Officer from that date.

Other than the above, there has not been any other matter or circumstance in the interval between the end of the year and the date of this report that has materially affected or may materially affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial periods.

ARQ Group Annual Report 2019 108

Director’s Report and Financial Statements

E8. Information relating to Arq Group Limited (the Parent Entity)

2019

2018

$’000

$’000

Current assets

11,879

6,108

Total assets

186,487

263,082

Current liabilities

175,517

84,061

Total liabilities

195,604

171,308

Contributed equity

91,179

85,724

Share-based payments reserve

1,067

2,003

Other reserves

(278)

9

Retained earnings

(101,085)

4,038

(9,117)

91,774

Loss of the parent entity

(99,463)

(9,918)

Total comprehensive loss of the parent entity

(99,731)

(9,766)

Included in the loss of the parent entity result for 31 December 2019 is an impairment charge of $92,283,000 against the carrying value of the parent entity’s investments in its subsidiaries, following the sale of the Enterprise business as well as the impairment charge against the SMB CGU (refer to Note B5 for further details). This impairment charge has no impact on the Group’s results as the carrying value of its investments in subsidiaries are eliminated on consolidation.

E9. Closed group class order disclosures

Entities subject to class order relief

Pursuant to Class Order 98/1418, Arq Group Limited, WebCentral Group Pty Ltd, WebCentral Pty Ltd, Netregistry Group Limited and its controlled entities, Uber Global Pty Ltd and its controlled entities, InfoReady Pty Ltd, Outware Systems Pty Ltd, Web Marketing Experts Pty Ltd and Nothing But Web Pty Ltd have entered into a Deed of Cross Guarantee. The effect of the deed is that Arq Group Limited has guaranteed to pay any deficiency in the event of winding up of any controlled entity, or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that Arq Group Limited is wound up, or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. These entities form the Closed Group and are relieved from the Corporations Act (2001)requirements for the preparation, audit and lodgement of their financial reports.

During the year ended 31 December 2019, entities related to the WME Group (being Web Marketing Experts Pty Ltd and Nothing But Web Pty Ltd) entered into the Closed Group.

ARQ Group Annual Report 2019 109

Director’s Report and Financial Statements (Section)

E9. Closed group class order disclosures (cont.)

The consolidated statement of comprehensive income of the entities that are members of the Closed Group are as follows:

Closed Group

2019

2018

$’000

$’000

Consolidated statement of comprehensive income

Continuing operations

Revenue from contracts with customers

80,959

79,436

Cost of sales

(27,209)

(30,072)

Gross profit

53,750

49,364

Other income

1,277

53

Gain/(loss) on reassessment of contingent consideration liability

98

(9,702)

Salaries and employee benefits expenses

(30,392)

(29,810)

Depreciation expenses

(7,026)

(4,286)

Amortisation of intangible assets

(3,511)

(7,737)

Other expenses

(12,458)

(14,597)

Finance costs

(5,804)

(4,425)

Coûts de transaction

(2,259)

(892)

Restructuring costs

(365)

–

Impairment of goodwill

(41,123)

–

Gain on disposal of assets

554

–

Loss before tax

(47,259)

(22,032)

Income tax expense

(238)

3,690

Net profit for the period

(47,497)

(18,342)

Loss from discontinued operation, net of tax

(85,272)

13,101

Net profit for the year

(132,769)

(5,241)

Retained earnings at the beginning of the period

73,252

96,942

Transfers into closed group

1,225

–

Adjustments on adoption of new accounting standards

911

(5,455)

Dividends provided for or paid

(5,466)

(12,994)

Retained earnings at the end of the period

(62,847)

73,252

ARQ Group Annual Report 2019 110

Director’s Report and Financial Statements

E9. Closed group class order disclosures (cont.)

The consolidated statement of financial position of the entities that are members of the Closed Group are as follows:

Closed Group

2019

2018

$’000

$’000

ASSETS

Current assets

Cash and cash equivalents

8,663

7,731

Trade and other receivables

9,572

24,947

Prepayment of domain name registry charges

7,302

6,778

Lease receivable

2,064

–

Current tax receivables

942

–

Other assets

2,924

6,485

Assets held for sale

38,674

32,698

Total current assets

70,141

78,639

Non-current assets

Investment in subsidiaries

–

40,502

Plant and equipment

8,198

13,693

Right-of-use asset

16,554

–

Intangible assets

77,804

188,269

Deferred tax assets

7,310

6,334

Lease receivable

1,830

–

Prepayment of domain name registry charges

678

2,220

Non-current financial assets

1,375

1,870

Other assets

561

596

Total non-current assets

114,310

253,484

TOTAL ASSETS

184,451

332,123

LIABILITIES

Current liabilities

Trade and other payables

8,688

16,521

Interest-bearing loans and borrowings

61,929

–

Des provisions

1,585

3,233

Current tax liabilities

–

765

Derivative financial instruments

510

80

Other financial liabilities

5,549

12,971

Income received in advance

21,091

26,511

Current lease liabilities

6,160

–

Liabilities directly associated with assets held for sale

15,931

11,292

Total current liabilities

121,443

71,373

Non-current liabilities

Interest-bearing loans and borrowings

–

65,992

Intercompany

–

831

Deferred tax liability

7,549

6,629

Des provisions

3,187

801

Income received in advance

11,237

12,115

Other financial liabilities

–

6,593

Other liabilities

–

728

Non-current lease liabilities

12,972

–

Total non-current liabilities

34,945

93,689

TOTAL LIABILITIES

156,388

165,062

NET ASSETS

28,063

167,061

EQUITY

Contributed equity

91,178

81,066

Treasury shares

–

(1,884)

Foreign currency translation reserve

(309)

–

Share-based payments reserve

193

2,331

Other reserves

(278)

(518)

Non-controlling interest

126

100

Retained earnings

(62,847)

90,578

TOTAL EQUITY

28,063

171,673

ARQ Group Annual Report 2019 111

Director’s Report and Financial Statements (Section)

E10. New accounting policies

The accounting policies adopted are consistent with those of the previous financial year except as follows:

(i) New and amended accounting standards adopted

The Group has adopted the following new and amended Australian Accounting Standards as of 1 January 2019.

• AASB 16:Leases

• 2018-1Amendments to Australian Accounting Standards: Annual Improvements2015-2017Cycle

• AASB Interpretation 23:Uncertainty over Income Tax Treatments

The nature and effect of the adoption of AASB 16 is disclosed in note B5 to the financial statements.

The adoption of other standards/improvements had no material impact on the financial position or performance of the Group.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

1. Accounting standards and interpretations issued but not yet effective

Australian Accounting Standards that have recently been issued or amended but which are not yet effective and have not been adopted by the Group for the annual reporting period ended 31 December 2019 are outlined below:

AASB 2018-6 Amendments to Australian Accounting Standards: Definition of a Business

The Standard amends the definition of a business in AASB 3: Business Combinations. The amendments clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test.

Group’s assessment performed to date

The Group notes that it is not required to revisit business combinations that occurred in prior periods to determine whether these satisfy the new definition of a business. Accordingly, the Group does not believe that its impact will be material. The Group will first apply the revised definition of a business in AASB 3 on 1 January 2020.

Amendments to the Conceptual Framework for Financial Reporting

The revised Conceptual Framework includes some new concepts, provides updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. AASB 2019-1 has also been issued, which sets out the amendments to other pronouncements for references to the revised Conceptual Framework. The changes to the Conceptual Framework may affect the application of accounting standards in situations where no standard applies to a particular transaction or event.

ARQ Group Annual Report 2019 112

Director’s Report and Financial Statements

E10. New accounting policies (cont.)

Group’s assessment performed to date

The Group is currently assessing the impact of this amendment. However, the Group will apply the revised Conceptual Framework beginning 1 January 2020.

AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material

This Standard amends AASB 101 Presentation of Financial Statements and AAS 108 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The amendments clarify that materiality will depend on the nature or magnitude of information. An entity will need to assess whether the information, either individually or in combination with other information, is material in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users.

Group’s assessment performed to date

The Group is currently assessing the impact of this amendment. However, the Group will apply this amendment beginning 1 January 2020.

AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material

This Standard amends AASB 1054 by adding a disclosure requirement for an entity intending to comply with IFRS Standards to disclose the information specified in paragraphs 30 and 31 of AASB 108 on the potential effect of an IFRS Standard that has not yet been issued by the AASB so that such entity complying with Australian Accounting Standards can assert compliance with IFRS Standards.

Group’s assessment performed to date

The Group does not expect the impact on adoption of this amendment will be material. The Group will apply this amendment beginning 1 January 2020.

ARQ Group Annual Report 2019 113

Ernst & Young

Tel: +61 3 9288 8000

8 Exhibition Street

Fax: +61 3 8650 7777

Melbourne VIC 3000 Australia

ey.com/au

GPO Box 67 Melbourne VIC 3001

Auditor’s Independence Declaration to the Directors of Arq Group Limited

As lead auditor for the audit of the financial report of Arq Group Limited for the financial year ended 31 December 2019, I declare to the best of my knowledge and belief, there have been:

1. no contraventions of the auditor independence requirements of theCorporations Act 2001in relation to the audit;and

2. no contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Arq Group Limited and the entities it controlled during the financial year.

Ernst & Young

David Petersen

Partner

30 mars 2020

A member firm of Ernst & Young Global Limited

Liability limited by a scheme approved under Professional Standards Legislation

Ernst & Young

Tel: +61 3 9288 8000

8 Exhibition Street

Fax: +61 3 8650 7777

Melbourne VIC 3000 Australia

ey.com/au

GPO Box 67 Melbourne VIC 3001

Independent Auditor’s Report to the Members of Arq Group Limited

Report on the Audit of the Financial Report

Opinion

We have audited the financial report of Arq Group Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 31 December 2019, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration.

In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act

2001, including:

1. giving a true and fair view of the consolidated financial position of the Group as at 31 December 2019 and of its consolidated financial performance for the year ended on that date; et

2. complying with Australian Accounting Standards and theCorporations 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 Reportsection of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants(the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Emphasis of Matter

Material Uncertainty Related to Going Concern

We draw attention to the Going Concern disclosure on page 51 which outlines the conditions which give rise to a material uncertainty regarding going concern, in particular the Group’s reliance on the ongoing support of its financiers as well as the potential for future impacts on cashflows and strategic review actions arising from the COVID-19 coronavirus. These events or conditions indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the entity not continue as a going concern. Our opinion is not modified in respect of this matter.

A member firm of Ernst & Young Global Limited

Liability limited by a scheme approved under Professional Standards Legislation

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in theAuditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report.

Assets disposed and discontinued operations

Why significant

How our audit addressed the key audit matter

In September 2019, the Board of Directors initiated a Strategic Review of the Group, which included commencing processes to sell either one or both the SMB and Enterprise Services (« ES ») businesses. As at 31 December 2019, the SMB sale process had not reached a state of being highly probable however, the ES sale process had progressed sufficiently to meet the requirements under AASB 5 Non-currentAssets Held for Sale and Discontinued Operations.This resulted in the fair value of the ES net assets being classified as held for sale and the results of ES being presented as a discontinued operation. As a result, the Group has recognised a revaluation loss of $81.3m on the net assets of ES. This has been outlined in Note D2 to the financial statements.

We considered this a key audit matter as ES being a separate CGU and segment, is a material component of the Group. In addition, management is required to make judgements in applying AASB 5, particularly in determining whether the disposal is highly probable as at 31 December 2019 and further judgements and estimates were required in determining the fair value of net assets.

As part of our audit response we performed the following procedures:

• Assessed the accounting treatment of SMB and ES businesses against the requirements of AASB 5. We considered whether the ongoing sales process at year end met the ‘highly probable’ threshold;

• Agreed the carrying amount of assets and liabilities included in the ES disposal group to underlying accounting records;

• Assessed the fair value of the ES disposal group net assets by reference to the expected sale price less costs to sell;

• Checked the mathematical accuracy of the revaluation loss on the net assets of ES;

• Agreed the costs of disposal to underlying support;

• Agreed amounts presented as discontinued operations to accounting records for the ES business;

• Checked the mathematical accuracy of the net loss attributable to discontinued operations; et

• Assessed the adequacy of the disclosures in the Financial Statements.

A member firm of Ernst & Young Global Limited

Liability limited by a scheme approved under Professional Standards Legislation

Recoverable value of goodwill and other intangibles assets

Why significant

How our audit addressed the key audit matter

At 31 December 2019 the Group’s goodwill and other intangible assets balance is $77.8 million which represents 41% of total assets.

The Group performs an impairment test of its goodwill and indefinite-lived intangible assets on at least an annual basis. Before estimating the recoverable amount of the assets, the Group first identifies cash generating units (‘CGUs’) and then allocates the goodwill and intangible assets to the identified CGUs. As outlined in Note B5 to the financial statements, the remaining balance of goodwill and indefinite-lived intangible assets have been allocated to the SMB CGU.

The determination of recoverable amount, being the higher of value-in-use and fair value less costs to dispose, was considered a key audit matter as the assessment process requires judgement in valuing the SMB CGU. In performing the impairment assessment, the Group has determined the recoverable amount of the SMB CGU based on the fair value less cost to dispose which has been derived from indicative transaction prices from potential acquirers.

As a result of this assessment, the Group has recorded an impairment charge of $41.1m.

The Group has disclosed that the impacts of the COVID-19 virus post balance date may materially impact the recoverable amount however as this is considered a post balance date event no adjustment is reflected in the financial statements.

We assessed the appropriateness of the identification of the CGU and the allocation of assets.

Involving our valuation specialists, we assessed the reasonableness of the fair value less cost of disposal in line with AASB 136 Impairment of Assets. In doing so, we:

• Tested the mathematical accuracy of the impairment calculation;

• Assessed the reasonableness of the fair value against evidence of indicative pricing from potential acquirers;

• Agreed the estimated costs of disposal to underlying support.

• Considered recent market transactions of comparable businesses as a valuation cross check to the Group’s determination of recoverable amount; et

We further assessed the adequacy of the Group’s disclosures in Note B5 to the financial statements including the disclosure regarding potential impact of COVID-19 virus as a post balance date event.

A member firm of Ernst & Young Global Limited

Liability limited by a scheme approved under Professional Standards Legislation

Revenue recognition

Why significant

The Group offers many services to its customers that require different revenue recognition accounting policies based on the satisfaction of performance obligations as outlined in Note A1 to the financial statements. Revenue recognition was assessed as a key audit matter due to the judgments involved in determining appropriate revenue recognition for these various services.

A significant trade receivable of $10.01m recorded at balance date is currently subject to dispute by the relevant customer. The Group is confident that the receivable will be fully recovered based on external legal advice.

How our audit addressed the key audit matter

Our audit procedures included considering the appropriateness of the Group’s revenue recognition accounting policies in accordance with AASB 15 Revenue from Customer Contracts as well as the judgments applied in determining the period of which revenue is recognised for different services.

We assessed the design and operating effectiveness of the Group’s controls, including automated controls, over the recognition of transactions, the deferred revenue and related cost of sales calculations. We performed sample testing of transactions to determine that revenue was being recognised in accordance with revenue recognition policies.

In relation to receivable balance subject to dispute, we considered amounts recognised for consistency with the Group’s interpretation of the contractual provisions. We also considered management’s rationale for recording revenue as well as the legal advice supporting their position.

Information Other than the Financial Statements and Auditor’s Report

The directors are responsible for the other information. The other information comprises the information included in the Group’s 2019 Annual Report other than the financial report and our auditor’s report thereon.

Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and or related assurance opinion.

In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, 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 2001and 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.

A member firm of Ernst & Young Global Limited

Liability limited by a scheme approved under Professional Standards Legislation

In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Financial Report

Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report.

As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

• Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern.If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

A member firm of Ernst & Young Global Limited

Liability limited by a scheme approved under Professional Standards Legislation

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on the Audit of the Remuneration Report

Opinion on the Remuneration Report

We have audited the Remuneration Report included in pages 25 to 44 of the Directors’ Report for the year ended 31 December 2019.

In our opinion, the Remuneration Report of Arq Group Limited for the year ended 31 December 2019, complies with section 300A of the Corporations Act 2001.

Responsabilités

The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Ernst & Young

David Petersen

Partner

Melbourne

30 mars 2020

A member firm of Ernst & Young Global Limited

Liability limited by a scheme approved under Professional Standards Legislation

Directors’ Report and Financial Statements

ASX Additional Information

Additional information required by the Australian Securities Exchange (ASX) Listing Rules and not shown elsewhere in this report is as follows. The following information was current as at 23 March 2020.

Distribution schedule of equity security holders

Full details of the directors’ experience, expertise and directorships can be found on the Arq Group website at www.arq.group/investor-centre-homeand this Annual Report.

The distribution schedule of the number of holders in each class of equity securities are as follows:

Gamme

Ordinary Share

Performance Rights

Holders

Holders

100,001 and over

100

1

10,001 to 100,000

1,053

2

5,001 to 10,000

876

–

1,001 to 5,000

2,443

–

1 to 1,000

1,879

–

Total number of equity security holders

6,351

3

As at the close of trading on 23 March 2020, the company’s share price was 6.8 cents. Based on this closing price, there were 4,795 shareholders holding less than a marketable parcel of 7,353 ordinary shares.

Twenty largest shareholders

The names of the twenty largest holders of quoted equity securities, and the number of equity securities and percentage of capital each holds, are listed below:

Number of

Percentage

of Issued

Rang

Name of Registered Security Holder

Ordinary Shares

Ordinary

held

Actions

1

HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED

31,132,004

25.49

2

J P MORGAN NOMINEES AUSTRALIA PTY LIMITED

12,202,056

9.99

3

CORPSAND PTY LTD

5,558,363

4.55

4

CITICORP NOMINEES PTY LIMITED

4,203,085

3.44

5

MR NIKOLA SORMAZ

1,401,139

1.15

6

KTAP PTY LTD

1,328,807

1.09

sept

SEAN FARMER GROUP PTY LTD

1,105,745

0.91

8

MR JUSTIN PARCELL

996,999

0.82

9

MERSEY CORPORATION PTY LTD

945,780

0.77

dix

MR GARETH JOHN RATCLIFFE

830,155

0.68

11

NEWECONOMY COM AU NOMINEES PTY LIMITED

617,878

0.51

<900 ACCOUNT>

12

MOUNT IDA HOLDINGS PTY LTD

604,045

0,49

13

NATIONAL NOMINEES LIMITED

557,290

0.46

Arq Group Annual Report 2019 121

Directors’ Report and Financial Statements

Number of

Percentage

of Issued

Rang

Name of Registered Security Holder

Ordinary

Ordinary

Shares held

Actions

14

NATIONAL NOMINEES LIMITED

545,539

0.45

15

CORPSAND PTY LTD

500,000

0,41

16

MR XUAN JU

483,056

0.40

17

PACIFIC CUSTODIANS PTY LIMITED

454,835

0.37

A/C>

18

RATCLIFFE SMSF PTY LTD

452,112

0.37

19

YORK INVESTMENTS LIMITED

407,236

0.33

20

MR PING WANG + MS LONG MEI SONG

400,000

0.33

Sub-Total

64,726,124

53.00

Balance of register

57,405,000

47.00

Total

122,131,124

100.00

Unquoted equity securities

As at 23 March 2020, there were 137,730 unlisted performance rights over unissued ordinary shares in the company, granted to two holders.

Voting rights

The voting rights attaching to each class of equity securities are as follows:

1. Ordinary shares- All ordinary shares carry one vote per share without restriction.

2. Performance rights- Performance rights do not carry any voting rights.

Substantial holders

The names of substantial holders in the company and the number of securities to which each substantial holder and their associates have a relevant interest are listed below. The following information is extracted from the substantial holder notices received by the company as at 23 March 2020:

Nom

Number of Ordinary

Percentage

Shares held

of Issued

Ordinary Shares

Cadence Asset Management Entities

21,220,323

17.39%

Investors Mutual Limited

10,800,000

8.84%

BlackRock Group

10,392,292

8.51%

Mr Larry Bloch

6,058,363

4.96%

On-market buyback

As at the date of this report, there is no on-market share buyback.

Arq Group Annual Report 2019 122

Corporate Directory

Arq Group Ltd

ABN: 21 073 716 793

Arq Group Limited is a publicly listed company, limited by shares. It is incorporated and domiciled in Australia.

Non-Executive Directors

Mr. A. Reitzer (Chair)

Mr. A. Macpherson

Ms. G. Pemberton, AO (Chair to 29 May 2018, retired on 29 May 2018)

Mr. L. Bloch

Ms. N. Sparks, AM (retired on 27 February 2020)

Mr. S. Martin (retired on 27 February 2020)

Chief Executive Officer

Mr. B. Fenton (Interim Chief Executive Officer from 11 February 2020)

Mr. T. Sternson (from 24 September 2019 to 11 February 2020)

Mr. M. Mercer (until 24 September 2019)

Chief Financial Officer

Mr. F. Bearsley (ceased employment 23 March 2020)

Mr. B. White (Interim Chief Financial Officer from 23 March 2020)

Secrétaire de la Société

Mr. F. Bearsley (ceased employment 23 March 2020) Ms. A. Jordan

Stock Exchange Listing

Arq Group Limited shares (ARQ) are listed on the Australian Stock Exchange.

Registered Office

Level 23, 680 George St

Sydney, New South Wales 2000

1. +61 2 9215 6300 www.arq.group

Auditors

Ernst & Young

8 Exhibition Street

Melbourne, Victoria 3000

1. +61 3 9288 8000F+61 3 8650 7777

Share Registry

Link Market Services Limited

Tower 4, 727 Collins Street

Melbourne, Victoria 3000

Postal Address

Locked Bag A14

Sydney South, New South Wales 1235

1. +61 1300 554 474

1. registrars@linkmarketservices.com.auwww.linkmarketservices.com.au

Corporate Governance Statement

https://arq.group/investor-centre/corporate-governance

Avertissement

ARQ Group Limited a publié ce contenu sur 30 mars 2020 et est seul responsable des informations qui y sont contenues. Distribué par Public, non édité et inchangé, sur 30 March 2020 07:52:02 UTC

Latest news on ARQ GROUP LIMITED

      
          
      
    
        
         
        
            
                
                    
                        
                            Sales 2019
                            173 M
                        
                        
                            EBIT 2019
                            -2,74 M
                        
                        
                            Net income 2019
                            -4,26 M
                          
                        
                            Debt 2019
                            55,7 M
                        
                        
                            Yield 2019
                                                        –
                        
                      
                
                
                    
                        
                                                        P/E ratio 2019
                            -1,10x
                        
                        
                                                        P/E ratio 2020
                            -6,50x
                        
                                                
                            EV / Sales2019
                            0,37x
                        
                        
                            EV / Sales2020
                            0,51x
                          
                        
                            Capitalization
                            7,94 M
                         
                    
                
            
        
           

             
              

Duration :
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Technical analysis trends ARQ GROUP LIMITED

Short TermMid-TermLong TermTrendsBearishBearishBearish

Income Statement Evolution

Consensus

Vendre
                       
                       
                            
                            
                            
                            
                            
                        
                   
                   
                   Acheter
                                 
                
             
        
        
            
                Mean consensus
                HOLD
            
                Number of Analysts
                2
            
            
                Average target price
                
                0,13  AUD
            
            
                Last Close Price
                
                0,07  AUD
            
            
                Spread / Highest target
                
                92,3%
                 
            
                Spread / Average Target
                
                92,3%
            
            
                Spread / Lowest Target
                
                92,3%