ANNUAL REPORT For the year ended 30 June 2020 AD1 Holdings Limited ABN 29 123 129 162 ▪ ▪ ▪ ▪ ▪ AD1 Holdings Limited “The Company made significant progress in FY2020 providing a strong foundation for future growth culminating in the Company’s first cashflow positive quarter in June 2020.” 2 Annual Report Contents Corporate Directory Letter from the Chairman and CEO Directors’ Report Auditor's Independence Declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor's Report to the Members Shareholder Information 4 5 8 19 20 21 22 23 24 52 53 58 3 AD1 Holdings Limited Corporate Directory Directors Mr Andrew Henderson Non-Executive Chairman Mr Michael Norster Non-Executive Director Mr Prashant Chandra Managing Director & CEO (appointed 22 October 2019) Mr Nicholas Smedley Non-Executive Director (appointed 6 March 2020) Company Secretaries Mr Prashant Chandra Registered office and principal place of business Mr Harvey Bui (appointed 11 December 2019) Suite 102, 697 Burke Road Hawthorn East, VIC 3123 1300 554 842 Share and debenture register Link Market Services Limited Level 12, 680 George Street Sydney New South Wales 2000 +61 2 8280 7100 Auditor PKF Solicitors Website Level 12, 440 Collins Street Melbourne, 3000 Thomson Geer Level 39, Rialto Towers 525 Collins Street Melbourne Victoria 3000 www.ad1holdings.com.au www.utilitysoftwareservices.com 4 Annual Report Letter from the Chairman and CEO Dear Shareholder On behalf of AD1 Holdings Limited (AD1 or the Company), we are pleased to present to you our 2020 Annual Report. Review of operations and significant milestones As foreshadowed at the Company’s 2019 AGM, the Company undertook a significant realignment in strategy with the primary objective of accelerating the Company’s pathway to breakeven. The key deliverables for the Board and Management in FY2020 to achieve this were to: • • • Successfully integrate the utilities software and managed services revenue stream acquired in late FY2019; Build a strong revenue foundation by renewing existing AD1 contracts; and Rationalise the combined cost base to better align with its revenue. The success in achieving the above objectives was demonstrated in June 2020 as the Company delivered its first cashflow positive quarter, which is a significant milestone for the business. Key contract wins and multi-year extensions During the year, the Company successfully onboarded new clients including the Pharmacy Guild of Australia and iGeno on its employment platform solution and utilities services platform respectively. The Company was selected as the preferred supplier for 3P Energy Pty Ltd, a relationship that recently translated into a three-year Managed Services Agreement between the two parties for the provision of the Company’s full suite of utilities SaaS solutions and related managed services. The Company successfully renewed its employment platform Managed Services Agreements with both the NSW and Victoria Governments, the two largest employers in the country, on multi-year terms. With the NSW Government already a long-standing customer of AD1 for over five years, the renewals demonstrate the strength of our relationship with both clients as well as the confidence that both these clients have in our service offering. Importantly, these contract extensions mean that AD1 has retained all revenue contributing employment platform customers with almost 97% of the associated subscription revenue secured on multi-year terms. Rationalisation of the cost base A key objective for FY2020 was to ensure that the cost run rate was reduced to better align with the Company’s revenue outlook. During the first half of FY2020, the Company completed its cost rationalisation program extending the cost savings to approximately $5 million per annum. This is particularly significant given the acquisition in late FY2019. Importantly, this means that the Company now maintains a cost run rate that is lower than AD1’s pre-acquisition cost run rate. FY2020 financials Operating revenue for FY2020 was $3,400,947, an increase of 74% compared to the prior year. Operating expenses for the year reduced by $1,003,365 (15%) compared to the prior year with the net loss reducing by $2,200,953 (50%) compared to the same period. Capital raising The Company raised approximately $1.83 million in July/August 2019, through private placement to a cornerstone investor, Smedley Family Office (Cornerstone Investor), and Share Purchase Plan, to ensure sufficient capital availability for the successful execution of our strategy. The response under the Share Purchase Plan was strong and we thank our shareholders for their ongoing support. Impact of COVID-19 Following the outbreak of COVID-19 and restrictions imposed by Federal and State authorities, the Company has continued to diligently assess the unfolding situation and proactively put in place the necessary arrangements to ensure the continuity of its business operations. Seamless service delivery to our customers whist ensuring the health and safety of all our staff is our highest priority. In addition to complying with the guidelines recommended by the health authorities through the various stages, the Company enabled all staff to work remotely in the early stages of the outbreak and has continued to maintain its services without any disruptions. The benefit of cloud-hosting all of our solutions also enables our platforms to continue operating with no impact. 5 AD1 Holdings Limited Whilst the existing business revenue stream has not experienced any material adverse impact other than some delay in receiving payments, the Company has experienced some delay in both converting late-stage opportunities and progressing new prospects as a result of the slowdown from the COVID-19 related restrictions. Despite the delays due the pandemic, the Company is now starting to convert its late-stage opportunities with the execution of the Managed Services Agreement with 3P Energy in August 2020 and others across both the platforms expected to follow in the first quarter of FY2021. The Company acknowledges that the full impact of the COVID-19 pandemic on its business and the overall economy remains unknown at this stage. The Company continues to monitor the status of COVID-19 and its impact on our business and will inform the market accordingly. Conclusion and outlook The Company made significant progress in FY2020 providing a strong foundation for future growth culminating in the Company’s first cashflow positive quarter in June 2020. The key objective for FY2021 is to build on this foundation and take the business to a position of sustainable profit through accelerated revenue growth. Further enhancing shareholder value through EPS accretive acquisitions is another important focus area for the Company. The Board and Management are very pleased with the progress and believe the Company is now well placed to progress down this path. Mr Andrew Henderson Chairman Mr Prashant Chandra Managing Director & CEO 6 Annual Report “The Company successfully renewed its employment platform Managed Services Agreements with the NSW & Victoria Governments, the two largest employers in the country, on multi-year terms” 7 AD1 Holdings Limited Directors’ Report In accordance with a resolution of the Board, the Directors present their report on the consolidated entity consisting of AD1 Holdings Limited (formerly ApplyDirect Limited) (the “Company”) and the entities it controlled (together, the “Group” or “AD1”) at the end of, or during the year ended 30 June 2020. Directors The following persons held office as directors of the Company during the financial period and up to the date of this report, unless otherwise stated: • Mr Andrew Henderson (Non-Executive Chairman) • Mr Michael Norster (Non-Executive Director) • Mr Prashant Chandra (Managing Director & CEO) – appointed 22 October 2019 • Mr Bryan Petereit (Managing Director & CEO) – resigned 22 October 2019 • Mr Nicholas Smedley (Non-Executive Director) – appointed 6 March 2020 Principal activities During the reporting period, the Group’s principal activities are providing and delivering of software services and technology platforms to its customers, and other related supporting and consulting services. Dividends No dividends have been paid or declared by the Company since the beginning of the financial year. No dividends were paid for the previous financial year. Review of operations Operating revenue for FY2020 was $3,400,947, an increase of 74% compared to the prior year. Operating expenses for the year reduced by $1,003,365 (15%) compared to the prior year with the net loss reducing by $2,200,953 (50%) compared to the same period. During the year end ed 30 June 2020, the Group has: • • • successfully onboarded new clients on both the employment solution and utilities service platforms; successfully retained all revenue contributing employment platform customers (APM did not proceed to revenue as mutually agreed by both parties) with almost 97% of the associated subscription revenue secured on multi- year terms; and completed the cost rationalisation program to better align cost run rate to revenue outlook, extending the cost savings to approximately $5m per annum. Refer to the Letter from the Chairman and CEO on page 5 for further details. Risks related to our business The Group is subject to normal business risks, including but not limited to interest rate movements, labour conditions, government policies, securities market conditions, exchange rate fluctuations, and a range of other factors which are outside the control of the Board and Management. More specific material risks of the operating sector and the Group include, but are not limited to: Competition The Group operates in a competitive industry which is subject to increasing competition from companies in Australia and throughout the world, through a combination of established organisations and new entrants to the market. The Group cannot predict the timing and scale of its competitors’ actions or whether new competitors will emerge in the online recruitment advertising market. Failure to protect intellectual property The Group’s proprietary cataloguing system and search engine is not protected through any patent or other form of registered intellectual property. The Group considers that, in practical terms, its proprietary cataloguing system and search engine are not likely to be capable of intellectual property registration. A lack of registered protection is likely to enhance the risk that he Group’s intellectual property may be the subject of unauthorised disclosure or unlawfully infringed. The Group may need to incur substantial costs in monitoring, asserting or defending its intellectual property rights. 8 Annual Report Cyber security, computer crime and privacy breaches Increased cyber-security threats and computer crime also pose a potential risk to the security of the Group’s information technology systems, including those of contracted third-party service providers, as well as the confidentiality, integrity and availability of the data stored on those systems. Any breach in information technology security systems could result in the disclosure or misuse of confidential or proprietary information, including sensitive employer, employee or investor information maintained in the ordinary course of business. Any such event could cause damage to reputation, loss of valuable information or loss of revenue and could result in large expenditures to investigate or remediate, to recover data, to repair or replace networks or information systems, or to protect against similar future events. Failure to execute strategic initiatives/ operating costs and margins The Group’s strategy involves a significant expansion of its sales, marketing and business development teams. It will involve the Group in the recruitment of additional senior management personnel and the undertaking of an extensive multi-media brand recognition and awareness campaign. The ability of the Group to achieve growth of its business is dependent on the successful implementation of the Group’s growth strategies, business plans and strategic initiatives. An inability to successfully implement these plans and initiatives, whether wholly or partially, could adversely affect the Group’s operating and financial performance. Significant changes in the state of affairs On 11 December 2019, the Company changed its name to AD1 Holdings Limited to fit its wider strategic growth plan, including the prospect of future acquisitions. Event since the end of the financial year No additional matters or circumstances have occurred subsequent to the financial year end that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group or in future financial years. Likely developments and expected results of operations There were no likely developments in the operations of the Group that were not finalised at the date of this report. Environmental regulation The Group is not affected by any significant environmental regulation in respect of its operations under Australian Commonwealth or state law. Information on directors Andrew Henderson (Non-Executive Chairman) Experience, expertise, and qualifications Andrew has over 20 years of experience in technology products and services businesses. Having worked in Asia in the early 2000’s he returned to Australia to found Phoenix IT&T Consulting Pty Ltd, where he was CEO and Executive Director for 13 years. Phoenix was sold to ASX listed DWS Limited in 2015 with 240 consultants at the time of the sale. Andrew is currently the Managing Director of Jitterbit Inc. (Asia Pacific). Andrew has a Diploma in Financial Markets, a Master of Science (Information Technology), he is a Member of the Australian Institute of Company Director and a Senior Associate of FINSIA. Current or Former Directorships held in other listed entities within the last 3 years None Special responsibilities None Interests in shares and options 4,651,765 ordinary shares 444,444 options over ordinary shares 9 AD1 Holdings Limited Michael Norster (Non-Executive Director) Experience, expertise, and qualifications Michael has been and is the major driving force in forming a number of successful, start up, Australian businesses. Michael founded the Australian Energy group of companies that traded under the name Powerdirect in 1997. He was the major shareholder in that group from ASX listing in 2001 until its completed sale to Ergon Energy in early 2006. He is the founder and executive chairman of the Green Generation group of private companies which commenced in 2010. The group owns electricity retailer Blue NRG and renewable energy developer and risk manager GG Renewable Energy. In addition to AD1 Holdings, Michael was also the seed investor in the information technology recruitment company Primex Solutions Pty Ltd. He has assisted in the formation and establishment of one of Australia’s largest telecommunications carriers Axicorp Pty Ltd (which became Primus Telecommunications) and was a director and shareholder in Hotkey Internet Services Pty Ltd (all now a part of Vocus Communications). Current or Former Directorships held in other listed entities within the last 3 years None Special responsibilities Chair of the Audit & Risk Committee Interests in shares and options 137,060,887 ordinary shares 2,055,555 options over ordinary shares Prashant Chandra (Managing Director & CEO) – appointed 22 October 2019 Experience, expertise, and qualifications Prashant is a successful executive with extensive experience in leading and transforming Finance and Operations Functions across Professional Services, Technology, Supply Chain & Logistics and Human Resources sectors. He was appointed Managing Director of AD1 on 22 October 2019. Previously, he held the CFO and Company Secretary position of the Company since May 2018. Prashant was instrumental in leading the successful integration of Utility Software Services Pty Ltd. Prior to joining the Company, Prashant held several leadership roles with Adecco Group Australia (Financial Controller / Director) and efm Logistics Group Pty Ltd (Chief Financial Officer) (FMH Group). Current or Former Directorships held in other listed entities within the last 3 years None Special responsibilities None Interests in shares and options 222,222 ordinary shares 5,411,111 options over ordinary shares Nicholas Smedley (Non-Executive Director) – appointed 6 March 2020 Experience & expertise Nicholas is an experienced Investment Banker and M&A Advisor, with 14 years’ experience at UBS and KPMG. He has worked on M&A transactions in the UK, Hong Kong, China, and Australia with transactions ranging from the A$9bn defence of WMC Resources through to the investment of $65m into Catch.com.au. Nicholas currently oversees investments in the Property, Aged Care, Technology and Medical Technology space. Key areas of expertise include M&A, Debt structuring, Corporate governance and innovation. He holds a Bachelor of Commerce from Monash University. Nicholas is currently the Executive Chairman of Respiri Limited (ASX: RSH) Current or Former Directorships held in other listed entities within the last 3 years Respiri Limited (ASX: RSH) – from 30 October 2019 to current Special responsibilities None Interests in shares and options 68,238,313 ordinary shares 10 Annual Report Bryan Petereit (Managing Director & CEO) – resigned 22 October 2019 Experience, expertise, and qualifications Bryan was the founder and Managing Director of AD1. Bryan commenced his working career with IBM Australia. Subsequently, he worked in the IT sector in management roles with Ferntree Computer Corporation and, following its acquisition, with the IT division of GE Capital. Prior to his current role at AD1, Bryan commenced, ran and ultimately sold (to the Finite Group) his own IT recruitment business. Bryan holds a Master of Applied Finance from Macquarie University and a Bachelor of Science Degree, major in Computer Science. Current or Former Directorships held in other listed entities within the last 3 years None Special responsibilities None Interests in shares and options N/A – no longer a director Company Secretaries The Company Secretaries are Mr Prashant Chandra and Mr Harvey Bui. Mr Harvey Bui was appointed to the position on 11 December 2019. Harvey is a qualified chartered accountant with over 10 years of experience in accounting, finance and corporate compliance. He started his career with EY before transitioning into an advisory role where he acted as and assumed responsibilities of the Company Secretary for several ASX/NASDAQ listed entities. Meetings of directors The numbers of meetings of the Company’s board of directors and of each board committee held during the year ended 30 June 2020, and the numbers of meetings attended by each director were: Full Board Audit and Risk Remuneration Committee2 Director Attended Held1 Attended Held1 Attended Held1 Andrew Henderson Michael Norster Bryan Petereit3 Prashant Chandra4 Nicholas Smedley5 10 10 3 7 1 10 10 3 7 1 5 5 1 4 1 5 5 1 4 1 1 1 - 1 1 1 1 - 1 1 Reflects the number of meetings held in the time the Director held office during the year 1. 2. Committee meetings are open to all Directors to attend 3. Bryan Petereit resigned on 22 October 2019 4. Prashant Chandra was appointed on 22 October 2019 5. Nicholas Smedley was appointed on 6 March 2020 11 AD1 Holdings Limited Remuneration report The directors present the AD1 2020 remuneration report, outlining key aspects of our remuneration policy and framework, and remuneration awarded this year in accordance with the requirements of the Corporations Act 2001 and its Regulations. The report is structured as follows: (a) (b) (c) (d) (e) (f) Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation Relationship between the remuneration policy and group performance Key management personnel disclosures (a) Principles used to determine the nature and amount of remuneration Remuneration governance Remuneration in respect of directors and executives of the Group is overseen by the full Board of Directors of AD1 Group. The Board of Directors of the Group will ensure that the Group has coherent remuneration policies and practices to attract, motivate and retain executives and directors who will create value for shareholders and who are appropriately skilled and diverse, observe those remuneration policies and practice; fairly and responsibly reward executives having regard to the Group and individual performance, the performance of the executives and the general external pay environment, and integrate human capital and organisational issues into its overall business strategy. Remuneration will be reviewed on at least an annual basis with consideration given to individuals' performance and their contribution to the Group's success (against measurable key performance indicators), external market relativities, shareholders' interests and desired market positioning. The Board will review the remuneration of executive and non-executive directors and other executives having regard to any recommendations made by the Chief Executive Officer of the Group and other external advisers. Executive remuneration Executive remuneration consists of fixed remuneration, equity-based remuneration, and termination payments such as superannuation. Superannuation contributions are paid into the executive’s nominated superannuation fund. Non-executive director remuneration Non-executive director remuneration consists of fixed remuneration, equity-based remuneration and superannuation. Fixed remuneration Executive and non-executive Directors are offered a competitive level of base pay which comprises the fixed (unrisked) component of their pay and rewards, which should be reasonable and fair; take into account the Group's legal and industrial obligations and labour market conditions, be relative to the scale of the Group's business, reflect core performance requirements and expectations, and take into account incumbent skills and experience, and the time commitment and responsibilities of the role. Variable performance-based remuneration The Group does not pay any variable performance-based remuneration to its directors and executives. Equity-based remuneration This can include options or performance shares and is especially effective when linked to hurdles that are aligned to the Group's longer-term performance objectives. It should also take into account executive performance. However, programs should be designed so that they do not lead to 'short-termism' on the part of senior executives or the taking of undue risks. Termination payments All directors and executives are not entitled to retirement benefits others than superannuation or those required under law. Securities trading policy The trading of Group’s securities by employees and directors is subject to, and conditional upon, the Policy for Trading in company Securities which is available on the AD1’s website at www.ad1holdings.com.au. 12 (b) Details of remuneration Key Management Personnel (KMP) of AD1 are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any Director (whether Executive or otherwise) of the Group receiving the highest remuneration. Details of the remuneration of the KMP of the Group are set out in the following tables. The following persons held office as directors of AD1 during the whole of the financial year and up to the date of this report: Annual Report • Mr Andrew Henderson (Non-Executive Chairman) • Mr Michael Norster (Non-Executive Director) • Mr Prashant Chandra (Managing Director & CEO) – from 22 October 2019 • Mr Bryan Petereit (Managing Director & CEO) – until 22 October 2019 • Mr Nicholas Smedley (Non-Executive Director) – from 6 March 2020 • Mr. Daniel Pludek (Chief Information Officer) – until 10 June 2020 There are no other key management personnel other than those stated above. Consequences of performance on shareholder wealth In considering the Group’s performance and benefits for shareholder wealth, the Board have regard to the following indices in respect of the current financial year and the previous four financial years: Loss per share (cents) 2020 (0.41) 2019 (1.50) 2018 (2.65) 2017 (2.90) 2016 (3.62) Net loss (2,181,158) (4,382,111) (4,748,183) (4,480,161) (3,457,790) Share price ($) 0.010 0.010 0.050 0.14 0.34 13 AD1 Holdings Limited KMP remuneration for the current and previous financial year: Short-term benefits Post- employment benefits Long- term benefits Share-based payments Cash salary and fees1 Bonus Super- annuation Long service leave Equity- settled shares Equity settled options2 $ $ $ $ $ $ Total $ 2020 Directors: Andrew Henderson Michael Norster Bryan Petereit (until 22 October 2019) Prashant Chandra (from 22 October 2019) Nicholas Smedley (from 6 March 2020) Other Key Management Personnel Mr. Daniel Pludek (until 10 June 2020) 2019 Directors: 59,000 39,333 201,597 288,221 13,206 233,683 835,040 Bryan Petereit 306,949 Michael Norster 54,000 - - - - - - - - - - - 3,737 7,001 - - - 20,651 3,734 - 19,885 - - 51,274 3,734 20,520 22,873 4,750 6,899 - - - - - - - - - - - - - - - - - - - - - - 59,000 43,070 208,597 14,378 326,985 - 13,206 - 253,568 14,378 904,426 - - - - - - - - 350,342 58,750 79,518 20,000 445,136 268,600 84,991 1,307,337 Michael Kay (until 19 March 2019) Andrew Henderson (from 19 March 2019) Other Key Management Personnel Lorcan Barden (until 1 March 2019) Prashant Chandra Mr. Daniel Pludek (from 22 March 2019) 72,619 20,000 - - 389,746 40,000 15,390 243,717 78,367 - - 21,459 3,424 6,624 - 1,165,398 40,000 75,642 26,297 1 Cash salary and fees: Include movements in annual leave liability and leave entitlements payout upon termination of employment. 2 Equity settled options: The value of options granted is expensed over the vesting period and are a non-c ash accounting expense. The remuneration details above, for both financial years were 100% not related to performance. 14 Annual Report (c) Service agreements Name: Title: Andrew Henderson Non-Executive Chairman Agreement commenced: 19 March 2019 Term of agreement: Open Details: Name: Title: On termination, resignation, retirement or removal from office for any reason, the Director shall not be entitled to any damages for, or make any claim against the Group or its officers in relation to, loss of office and, unless expressly agreed by the Board to the contrary, no fee will be payable to the Director in respect of his retirement or any unexpired portion of the term of his appointment. Michael Norster Non-Executive Director Agreement commenced: 29 May 2018 Term of agreement: Open Details: Name: Title: On termination, resignation, retirement or removal from office for any reason, the Director shall not be entitled to any damages for, or make any claim against the Group or its officers in relation to, loss of office and, unless expressly agreed by the Board to the contrary, no fee will be payable to the Director in respect of his retirement or any unexpired portion of the term of his appointment. Prashant Chandra Managing Director & CEO Agreement commenced: 22 October 2019 Term of agreement: Open Details: Name: Title: On termination, resignation, retirement or removal from office for any reason, the CEO shall not be entitled to any damages for, or make any claim against the Group or its officers in relation to, loss of office and, unless expressly agreed by the Board to the contrary, no fee will be payable to the CEO in respect of his retirement or any unexpired portion of the term of his appointment. Nicholas Smedley Non-Executive Director Agreement commenced: 6 March 2020 Term of agreement: Open Details: On termination, resignation, retirement or removal from office for any reason, the Director shall not be entitled to any damages for, or make any claim against the Group or its officers in relation to, loss of office and, unless expressly agreed by the Board to the contrary, no fee will be payable to the Director in respect of his retirement or any unexpired portion of the term of his appointment. 15 AD1 Holdings Limited (d) Share-based compensation Issue of shares During the year ended 30 June 2020, there have been no issues of ordinary shares to the Directors and other Key Management Personnel as part of their remuneration. Issue of options over ordinary shares The number of options over ordinary shares granted to and vested by Directors and other Key Management Personnel as part of compensation during the year ended 30 June 2020 are set out below: Name No. of options granted during the year No. of options granted during the prior year No. of options vested during the year No. of options vested during the prior year Prashant Chandra 4,500,0001 - - - 1 On 24 July 2019, Mr Chandra was granted 4,500,000 options across three (3) equal tranches, with exercise prices of $0.05, $0.075 and $0.10 for each tranche. All options vest in three (3) years from grant date and expire in two (2) years from vesting date. Options granted carry no dividend or voting rights. There were no options held by the directors of other key management personnel which were exercised or lapsed during the year. (e) Relationship between the remuneration policy and group performance Remuneration of Executives consists of an unrisked element (base pay) and share bonuses based on performance in relation to key strategic, non-financial measures linked to drivers of performance in future reporting periods. As such, remuneration is not linked to the financial performance of the Group in the current or previous reporting periods. Non-executive director’s remuneration is not affected by the Group performance. (f) Key management personnel disclosures Shareholding The number of shares in the Company held during the financial year by each Director and other members of Key Management Personnel of the Group, including their personally related parties, is set out below: Name Balance at the start of the year Received as part of remuneration Purchases Disposals/ other Balance at the end of the year Andrew Henderson 4,651,765 Michael Norster 137,060,887 Bryan Petereit (until 22 October 2019) Prashant Chandra Nicholas Smedley (from 6 March 2020) Daniel Pludek (until 10 June 2020) 21,237,521 222,222 - - - - - - - - - - - - - - 4,651,765 137,060,887 (21,237,521)1 - - 222,222 1,571,647 66,666,6662 68,238,313 - - - 1 Represents the shareholding balance on 22 October 2019 when Bryan Petereit ceased to be a key management personnel 2 Represents the shareholding balance on 6 March 2020 when Nicholas Smedley became a key management personnel 16 Option holding The number of options over ordinary shares in the Company held during the financial year by each Director and other members of Key Management Personnel of the Group, including their personally related parties, is set out below: Annual Report Granted as remuneration Exercised Name Andrew Henderson Michael Norster Bryan Petereit (until 22 October 2019) Balance at the start of the year 444,444 2,055,555 277,777 - - - Prashant Chandra 911,111 4,500,000 Nicholas Smedley (from 6 March 2020) Daniel Pludek (until 10 June 2020) - - - - Expired, foreited and other Balance at the end of the year - - 444,444 2,055,555 277,7771 - -2 - - 5,411,111 - - - - - - - - 1 Represents the option holding balance on 22 October 2019 when Bryan Petereit ceased to be a key management personnel 2 Represents the option holding balance on 6 March 2020 when Nicholas Smedley became a key management personnel Other transactions with key management personnel During the year ended 30 June 2020 the Group had the following transactions with Blue NRG, an entity in which Mr Michael Norster is a director: • • revenue from contract with customer of $1,466,282 (receivable balance of $98,809 outstanding at year end) payment for electricity supp lied of $7,311 There were no other transactions with key management personnel during the period not disclosed above. [End of Remuneration Report] Shares under options (a) Unissued ordinary shares Unissued ordinary shares under options of the Company as at the date of this report are as follows: Grant date 28-Sep-15 9-Mar-18 4-Oct-18 21-Dec-18 24-Jul-19 24-Jul-19 24-Jul-19 15-Jun-20 15-Jun-20 23-Jul-20 23-Jul-20 23-Jul-20 Expiry date 28-Sep-20 8-Mar-22 4-Oct-21 21-Dec-21 23-Jul-24 23-Jul-24 23-Jul-24 14-Jun-24 14-Jun-25 22-Jul-24 22-Jul-24 22-Jul-24 Exercise price Options over ordinary shares $0.333 $0.250 $0.060 $0.060 $0.050 $0.075 $0.100 $0.020 $0.020 $0.050 $0.075 $0.100 17 750,000 1,250,000 8,555,547 2,777,776 1,500,000 1,500,000 1,500,000 175,000 175,000 666,666 666,666 666,668 20,183,323 AD1 Holdings Limited (b) Shares issued upon the exercise of options During the current financial year, no ordinary shares were issued upon the exercise of options Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Insurance of officers and indemnities The Group has indemnified the Directors and Executives of the Group for costs incurred, in their capacity as a Director or Executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the Group paid a premium in respect of a contract to insure the Directors and Executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Insurance of auditors and indemnities The Group has not, during or since the financial year, indemnified or agreed to indemnify the auditor of the Group or any related entity against a liability incurred by the auditors. During the financial year, the Group has not paid a premium in respect of a contract to insure the auditors of the Group or any related entity. Non-audit services There have been no amounts paid or payable to the current auditors for non-audit services provided during the year. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 19. Corporate governance statement In accordance with ASX listing Rule 4.10.3, the Company’s 2020 Corporate Governance Statement can be found on its website at www.ad1holdings.com.au. The Directors report has been issued following a resolution of the Directors pursuant to section 298(2)(a) of the Corporations Act 2001. For and on behalf of the Board, Mr Prashant Chandra Managing Director & CEO Melbourne 31 August 2020 18 PKF Melbourne AUDITOR’S INDEPENDENCE DECLARATION TO THE DIRECTORS OF AD1 HOLDINGS LIMITED In relation to our audit of the financial report of AD1 Holdings Limited for the year ended 30 June 2020, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. PKF Melbourne, 31 August 2020 Kenneth Weldin Partner PKF Melbourne Audit & Assurance Pty Ltd ABN 75 600 749 184 Level 12, 440 Collins Street, Melbourne, Victoria 3000 T: +61 3 9679 2222 F: +61 3 9679 2288 Liability limited by a scheme approved under Professional Standards Legislation PKF Melbourne Audit & Assurance Pty Ltd is a member firm of the PKF International Limited family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. 19 AD1 Holdings Limited Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Revenue from continuing operations Revenue from contracts with customers Other income Interest income Expenses Employee benefit expense Software development and other IT expense Consulting and professional service expense Advertising and marketing expense Occupancy, utilities and office expense Depreciation and amortisation expense Travel expense Interest expense Other expense Total expenses Loss before income tax Income tax expense Loss for the year Other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive loss for the year Earnings per share attributable to the ordinary equity holders of the Group: Basic earnings per share Diluted earnings per share Notes 4 5 2020 $ 2019 $ 3,400,947 1,953,586 251,069 2,899 465,611 1,913 3,654,915 2,421,110 6 (2,933,314) (2,787,791) (1,214,419) (1,118,016) (1,024,206) (1,805,249) (74,634) (149,052) (227,013) (27,413) (17,238) (132,567) (670,172) (190,228) (53,874) (55,542) (4,177) (118,172) (5,799,856) (6,803,221) (2,144,941) (4,382,111) (36,217) - (2,181,158) (4,382,111) - - (2,181,158) (4,382,111) (0.41) (0.41) (1.50) (1.50) 6 6 8 7 7 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. Comparatives have not been restated for the introduction of AASB 16 Leases 20 Consolidated Statement of Financial Position Annual Report As at 30 June 2020 ASSETS Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Property, plant and equipment Other non-current assets Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Employee benefit obligations Current tax liabilities Lease liability Contract Liability Total current liabilities Non-current liabilities Employee benefit obligations Lease liability Total non-current liabilities Total liabilities Net assets EQUITY Share capital Reserve Accumulated losses Total equity 30 June 2020 30 June 2019 (Restated) Notes $ $ 9 10 11 12 13 14 17 4(c) 14 17 15 16 459,742 771,073 1,230,815 177,397 82,327 1,473,158 1,732,882 838,987 702,123 1,541,110 56,847 67,700 1,596,851 1,721,398 2,963,697 3,262,508 490,509 157,986 525,216 85,690 80,099 525,494 277,721 489,000 - 13,140 1,339,500 1,305,355 24,100 48,187 72,287 1,411,787 1,551,910 69,189 - 69,189 1,374,544 1,887,964 26,368,683 24,535,633 53,702 598,198 (24,870,475) (23,245,867) 1,551,910 1,887,964 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. Comparatives have not been restated for the introduction of AASB 16 Leases. 21 AD1 Holdings Limited Statement of Changes in Equity For the year ended 30 June 2020 Share Capital Reserve Accumulated losses Notes $ $ $ Total $ Balance at 1 July 2018 20,439,014 1,428,928 (19,013,142) 2,854,800 Loss for the year Total comprehensive loss for the year - - Transactions with owners in their capacity as owners: Shares issued Capital raising costs Share-based payment expense Options expired/forfeited 15(b) 15(b) 16(b) 16(b) 4,136,222 (39,603) - - - - - - 4,599 (4,382,111) (4,382,111) (4,382,111) (4,382,111) - - - 4,136,222 (39,603) 4,599 (835,329) 149,386 (685,943) Balance at 30 June 2019 24,535,633 598,198 (23,245,867) 1,887,964 4,096,619 (830,730) 149,386 3,415,275 Adjustment - adoption of AASB 16 2(a)(i) - - (7,252) (7,252) Opening balance at 1 July 2019 24,535,633 598,198 (23,253,119) 1,880,712 Loss for the year Total comprehensive loss for the year - - - - (2,181,158) (2,181,158) (2,181,158) (2,181,158) Transactions with owners in their capacity as owners: Shares issued Options granted Options expired/forfeited Share-based payment expense 15(b) 1,833,050 16(b) 16(b) 16(b) - - - - 4,476 - - (564,490) 563,802 15,518 - 1,833,050 4,476 (688) 15,518 1,833,050 (544,496) 563,802 1,852,356 Balance at 30 June 2020 26,368,683 53,702 (24,870,475) 1,551,910 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Comparatives have not been restated for the introduction of AASB 16 Leases. 22 Statement of Cash Flows for the Period Annual Report For the year ended 30 June 2020 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Government grants and tax incentives (less costs) Interest income Interest and other costs of finance paid Notes 2020 $ 2019 $ 3,638,091 2,403,920 (6,308,374) (7,494,615) 584,198 424,916 2,899 (7,350) 2,007 (4,617) Net cash (outflow) from operating activities 21 (2,090,536) (4,668,389) Cash flows from investing activities Acquisition of Utility Software Services Pty Ltd (net of cash acquired) Payments for property, plant and equipment Payments for office rental deposit Net cash (outflow)/inflow from investing activities - (14,738) (14,626) (29,364) 838,895 (27,020) - 811,875 Cash flows from financing activities Proceeds from issues of shares and other equity securities 1,833,050 2,010,000 Capital raising costs Repayments of lease liabilities Net cash inflow from financing activities - (43,563) (92,395) - 1,740,655 1,966,437 Net (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year (379,245) (1,890,077) 838,987 2,729,064 Cash and cash equivalents at end of period 9 459,742 838,987 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. Comparatives have not been restated for the introduction of AASB 16 Leases. 23 AD1 Holdings Limited Notes to the Financial Statements 1. (a) General information and basis of preparation Corporate information The financial statements cover AD1 Holdings Limited (formerly ApplyDirect Limited) (the “Company”) and its controlled entity (together referred to as, we, us, our, AD1, Group) for the year ended 30 June 2020. The Company is a ‘for profit’ company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX). The Group’s principal activities are providing and delivering of software services and technology platforms to its customers, and other related supporting and consulting services. (b) Basis of preparation These general-purpose financial statements have been prepared in accordance with Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The Group is a ‘for- profit’ entity for the purpose of preparing the financial statements. (i) Compliance with IFRS The financial statements of AD1 comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) Historical cost convention These financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial instruments to fair value. (iii) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the Group operates (‘the functional currency’). The financial statements are presented in Australian dollars, which is the Group’s functional and presentation currency. (iv) Principles of consolidation These financial statements include the assets and liabilities of the Company and its controlled entity as a whole as at the end of the financial year and the consolidated results and cash flows for the year. An entity is considered to be a controlled entity where we are exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power to direct the activities of the entity. We consolidate the results of our controlled entity from the date on which we gain control until the date we cease control. The acquisition method of accounting is used to account for business combinations by the Group - refer to note 3(d). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. The financial statements of the controlled entity are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies. (c) Going concern During the year ended 30 June 2020, the Group recorded a consolidated loss of $2,181,158 (2019: $4,382,111) and net cash outflow from operating activities of $2,090,536 (2019: $4,668,389). These conditions indicate a material uncertainty that may cast doubt about the entity's ability to continue as a going concern and that it may be unable to realise its assets and discharge its liabilities in the normal course of business. In assessing the Group as a going concern, the Directors have considered the following: • • • • recent contract wins, existing revenue streams and the revenue pipeline of the Group; the cost rationalisation program completed during the year and the Group’s ability to manage its cost run rate; the successful capital raise of approximately $1.83 million as part of the recent placement to a cornerstone investor and share purchase plan during the year; and the Group’s ability to consider available non-dilutive funding alternatives should there be a requirement to manage any short-term timing impacts to the cash flows. Based on these factors, it is the view of the Directors that the Group is sufficiently capitalised to continue as a going concern. The Directors acknowledge that this assessment incorporates a number of assumptions and judgments and have concluded that the range of possible outcomes considered in arriving at this support the entity’s ability to continue as a going concern as at the date of this report. 24 Annual Report Accordingly, the financial statements have been prepared on a going concern basis, which contemplates that continuity of normal business activity, realisation of assets and settlement of liabilities in the normal course of business, and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or liabilities that might be necessary should the entity not continue as a going concern. (d) Restatement of comparatives During the year ended 30 June 2020, the Group reassessed the valuation of the net identifiable assets of Utility Software Services Pty Ltd acquired on 22 March 2019 and concluded that an adjustment of $162,424 is required to be made to the 30 June 2019 comparatives as previously reported. Accordingly, the Group has restated the comparatives at 30 June 2019, as below: Consolidated statement of financial position Previously reported Restatement Restated Trade and other receivables Intangible assets $ 539,699 1,759,275 $ 162,424 (162,424) $ 702,123 1,596,851 The correction does not result in any change on the Group’s total asset, net assets or net operating results for the comparative period. (e) Reclassification of expenses The Group has reclassified and recategorised several comparative expense items to align with the current period presentation. This reclassification does not result in any change on the total expense incurred or net loss of the previous period. Details of the reclassification are provided in the below table: Consolidated statement of profit or loss and other comprehensive income Previously reported Reclassification Reclassified Expenses Employee benefit expense Software development and other IT expense $ (2,787,791) (1,040,125) $ - $ (2,787,791) (77,891) (1,118,016) Consulting and professional service expense (1,722,988) (82,261) (1,805,249) Advertising and marketing expense (723,295) 53,123 (670,172) Occupancy, utilities and office expense Depreciation and amortisation expense Amortisation expense Travel expense Interest expense Other expense Total expenses - - (23,287) (51,545) (4,177) (190,228) (190,228) (53,874) (53,874) 23,287 (3,997) - - (55,542) (4,177) (118,172) (450,013) 331,841 (6,803,221) - (6,803,221) 25 AD1 Holdings Limited 2. (a) New and amended standards and interpretations New and amended standards adopted by the group The Group has adopted the new accounting pronouncements which have become effective this year, and are as follows: (i) AASB 16 Leases AASB 16 Leases (“AASB 16”) replaces AASB 117 Leases (“AASB 117”) and AASB Interpretation 4 Determining whether an arrangement contains a lease (“Interpretation 4”). AASB 16 has been applied using the modified retrospective approach, with the cumulative effect of adopting AASB 16 being recognised in equity as an adjustment to the opening balance of retained earnings (or accumulated losses) for the current period. Prior periods have not been restated. For contracts in place at the date of initial application, the Group has elected to apply the definition of a lease from AASB 117 and Interpretation 4 and has not applied AASB 16 to arrangements that were previously not identified as lease under AASB 117 and Interpretation 4. The Group has elected not to include initial direct costs in the measurement of the right-of-use asset for operating leases in existence at the date of initial application of AASB 16, being 1 July 2019. At this date, the Group has also elected to measure the right-of-use assets at an amount equal to the lease liability adjusted for any prepaid or accrued lease payments that existed at the date of transition. Instead of performing an impairment review on the right-of-use assets at the date of initial application, the Group has relied on its historic assessment as to whether leases were onerous immediately before the date of initial application of AASB 16. On transition to AASB 16 the weighted average incremental borrowing rate applied to lease liabilities recognised under AASB 16 was 12.95% per annum. The Group has benefited from the use of hindsight for determining lease term when considering options to extend and terminate leases. For leases of low-value assets the Group has applied the optional exemptions to not recognise right-of-use assets but to account for the lease expense on a straight-line basis over the remaining lease term. The following is a reconciliation of the financial statement line items from AASB 117 to AASB 16 at 1 July 2019: Property, plant and equipment Lease liability Impact on equity Carrying amount at 30 June 2019 Remeasurement AASB 16 Carrying amount at 1 July 2019 $ 56,847 - 56,847 $ 35,413 (42,665) (7,252) $ 92,260 (42,665) 49,595 The following is a reconciliation of total operating lease commitments at 30 June 2019 to the lease liability recognised at 1 July 2019: Operating lease commitments at 30 June 2019 (less than 12 months) - as per AASB 117 Operating lease liability – before discounting Discounted using incremental borrowing rate Lease liability at 1 July 2019 – as per AASB 16 (ii) Other pronouncements $ 44,292 44,292 (1,627) 42,665 There were no other accounting pronouncements which have become effective from 1 July 2019 and have therefore been adopted, that have a significant impact on the Group’s financial results or position. (b) New standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2020 reporting periods and have not been early adopted by the Group. Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement. New standards, amendments and interpretations not adopted in the current year have not been disclosed as they are not expected to have a material impact on the Group’s financial statements. 26 Annual Report 3. (a) Significant accounting policies Revenue from contracts with customers Revenue arises mainly from SaaS, managed services, IT development and consulting and digital marketing. To determine whether to recognise revenue, the Group follows a 5-step process: 1. 2. 3. 4. 5. Identify the contract with a customer Identify the performance obligations Determine the transaction price Allocating the transaction price to the performance obligations Recognise the revenue when/as performance obligation(s) are satisfied. The Group enters into transactions involving a range of the Group’s products and services, for example for the delivery of managed services, IT consulting, software development etc. In all cases, the total transaction price for a contract is allocated amongst the various performance obligations based on their relative stand-alone selling prices. Revenue is recognised either at a point in time or over time, when (or as) the Group satisfies performance obligations by transferring the promised goods or services to its customers. The Group recognises contract liabilities for consideration received in respect of unsatisfied performance obligations and reports these amounts as contract liability in the statement of financial position. Similarly, if the Group satisfies a performance obligation before it receives the consideration, the Group recognises either a contract asset or a receivable in its statement of financial position, depending on whether something other than the passage of time is required before the consideration is due. (i) Revenue from rendering of services Revenue from rendering of services include SaaS and managed services and digital marketing. SaaS and managed services relate to access to, and use of, software including associated hosting and maintenance. This service is considered a single performance obligation as the customer simultaneous receives and consumes the benefit as the services are rendered. Managed services also include business process outsourcing, which relates to provision of various front and back of house services as detailed in the customer contract. As the services provided can be reliably measured as having been rendered and consumed by the customer, revenue is recognised on a straight-line basis monthly over the life of the contract in line with the service period. Digital marketing services relates to promotion of employer jobs and other marketing campaigns advertised on AD1 websites. Revenue is recognised on a monthly basis over the campaign or service period. (ii) Revenue from fees Revenue from fees include IT development and consulting. IT development activities relate to services involving initial development and implementation of software, subsequent functionality enhancements and new integrations. Consulting is IT professional services offered as a compliment to the broader range of services provided by the Group. Revenue for IT development and consulting is recognised at fair value and where applicable, when services are rendered and invoiced on a time and materials basis or for larger IT projects, when the fulfilment of each performance obligation (milestone) as defined in the commercial contract is satisfied. (b) Government grants The research and development (“R&D”) tax offset (“R&D tax offset”), also known as the R&D Tax Incentive, replaced the R&D Tax Concession for research and development expenditure incurred in income years commencing on or after 1 July 2011. It provides for a 43.5% refundable tax offset for eligible R&D entities with an aggregated turnover of less than $20 million per annum that are not controlled by exempt entities (“refundable R&D credit”), or a non-refundable 38.5% tax offset for all other eligible companies. For financial reporting purposes, the R&D tax offset can be analogised as a government grant or an income tax item. General practice is that refundable R&D credits are accounted for as government grants. The Directors have considered AASB 112 Income Taxes (“AASB 112”) and AASB 120 Accounting for Government Grants and Disclosure of Government Assistance (“AASB 120”). Given the above the directors have determined to recognise the R&D amount in accordance with AASB 120. Government grants are recognised as income at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. 27 AD1 Holdings Limited (c) Income tax The income tax expense or revenue for the period is the tax payable on the current period's taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Tax consolidated group Under Australian taxation law, the Company and its Australian wholly owned entity (member) will form a tax consolidated group from 22 March 2019 and are treated as a single entity for income tax purposes. The Company is the head entity of the Group and, in addition to its own transactions, it recognises the current tax liabilities and the deferred tax assets arising from unused tax losses and tax credits for all members in the Group. Entities within the tax consolidated group have entered into a tax sharing agreement and a tax funding agreement with the head entity. The tax sharing agreement specifies methods of allocating any tax liability in the event the head entity defaults on its Group payment obligations and the treatment where a member exits the tax consolidated Group. Under the tax funding agreement, the head entity and each of the members have agreed to pay/receive a current tax payable to/receivable from the head entity based on the current tax liability or current tax asset recorded in the financial statements of the members. The Company will also compensate the members for any deferred tax assets relating to unused tax losses and tax credits. There are no amounts receivable or payable by the Company or members under the tax funding agreement in the next financial year upon final settlement of the current tax payable for the tax consolidated group. (d) Business combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the: • • • • • fair value of the assets transferred liabilities incurred to the former owners of the acquired business equity interests issued by the Group fair value of any assets or liability resulting from a contingent consideration arrangement, and fair value of any pre-existing equity interest in the subsidiary. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. Acquisition-related costs are expensed as incurred. The excess of the • • • consideration transferred, amount of any non-controlling interest in the acquired entity, and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase. 28 Annual Report Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognised in profit or loss. (e) Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (f) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Impairment For trade receivables, the Group applies the simplified approach permitted by AASB 9 Financial Instruments, which requires expected lifetime losses to be recognised from initial recognition of trade and other receivables. In using this practical expedient, the Group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses using a provision matrix. (g) Plant and equipment Each class of plant and equipment is carried at cost less, where applicable, any accumulated depreciation and impairment losses. The carrying amount of property, plant and equipment is reviewed annually by Directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset's employment and subsequent disposal. The expected net cash flows have been discounted to their present value in determining recoverable amounts. Plant and equipment that have been contributed for no cost or for a nominal cost are valued and recognised as the fair value of the asset at the date it is acquired. The depreciable amount of all fixed assets is recognised on a straight-line basis over the asset's estimated useful life to the Group commencing from the time the asset is held ready for use. The useful life for each class of depreciable assets is: • Office furniture and equipment 1-5 years The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. (h) (i) Intangible assets Goodwill Goodwill is measured as described in note 3(d). Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised but it is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash- generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments. (ii) Licences and customer contracts Separately acquired licences are shown at historical cost. Licences and customer contracts acquired in a business combination are recognised at fair value at the acquisition date. They have a finite useful life and are subsequently carried at cost less accumulated amortisation and impairment losses. 29 AD1 Holdings Limited (iii) Software Costs associated with maintaining software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognised as intangible assets when the following criteria are met: • it is technically feasible to complete the software so that it will be available for use • management intends to complete the software and use or sell it • • • • there is an ability to use or sell the software it can be demonstrated how the software will generate probable future economic benefits adequate technical, financial and other resources to complete the development and to use or sell the software are available, and the expenditure attributable to the software during its development can be reliably measured. Directly attributable costs that are capitalised as part of the software include employee costs and an appropriate portion of relevant overheads. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use, over their useful life. (iv) Research and development Research costs are expensed as incurred. An intangible asset arising from the development expenditure on an internal project is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure, and the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project. Development costs are capitalised only in accordance with this accounting policy. Initial capitalisation of costs is based on management's judgement that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. (v) Amortisation methods and periods Refer to note 12(a) for details about amortisation methods used by the Group for intangible assets. (i) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. (j) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. (k) Contract liabilities When payments received from customers exceed revenue recognised to date on a particular contract, any excess (a contract liability) is reported in the statement of financial position under contract liabilities. (l) Provisions Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. 30 Annual Report (m) (i) Employee benefits Short-term obligations Liabilities for wages and salaries, including non-monetary benefits and accumulating sick leave that are expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liabilities are presented as current employee benefit obligations in the statement of financial position. (ii) Other long-term employee benefit obligations The liabilities for long service leave and annual leave are not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service. They are therefore measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. Re-measurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. The obligations are presented as current liabilities in the statement of financial position if the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. (n) Share-based payments Share-based compensation benefits are provided to employees via the Employee Share Option Plan and an employee share scheme collectively known as employee equity incentive pan (“EEIP”). In addition to this, other share-based payments are undertaken for certain goods and services provided to the Group. The fair value of Options granted under the EEIP is recognised as an employee benefits expense with a corresponding increase in equity (other share-based payments are recognised in the statement of profit or loss or directly in equity depending upon goods or services received). The total amount to be expensed is determined by reference to the fair value of the Options granted, which included any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of Options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the Group revises its estimates of the number of Options that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. The EEIP is designed to provide long-term incentives for staff to deliver long-term shareholder returns. Under the EEIP, participants may be granted Shares, Options and/ or performance rights. Participation in the plan is at the Board's discretion and no individual has a contractual right to participate in the EEIP or to receive any guaranteed benefits. (o) Leases As described in Note 2(a), the Group has applied AASB 16 using the modified retrospective approach and therefore comparative information has not been restated. This means comparative information is still reported under AASB 117 Leases (“AASB 117”) and AASB Interpretation 4 Determining whether an arrangement contains a lease (“Interpretation 4”). (i) Accounting policy applicable from 1 July 2019 For any new contracts entered into on or after 1 July 2019, the Group considers whether a contract is, or contains a lease. A lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether: • • • the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract the Group has the right to direct the use of the identified asset throughout the period of use. The Group assesses whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use. Measurement and recognition of leases as a lessee: At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct 31 AD1 Holdings Limited costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received). The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of- use asset for impairment when such indicators exist. At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero. The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term. On the statement of financial position, right-of-use assets have been included in property, plant and equipment (except those meeting the definition of investment property) and lease liabilities have been included in trade and other payables. (ii) Accounting policy applicable before 1 July 2019 Payments on operating lease agreements are recognised as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. (p) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (q) (i) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing: • • the loss attributable to owners of the Group, excluding any costs of servicing equity other than ordinary shares by the weighted average number of ordinary shares outstanding during the financial year (ii) Diluted earnings per share Diluted earnings per share is calculated by dividing: • • the after-income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (r) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (s) Operating segment The Group operates in one segment, being the provision and delivery of software services and technology platforms to its customers, and other related supporting and consulting services. The segment details are therefore fully reflected in the body of the financial report. 32 Annual Report (t) Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are discussed below. (i) Deferred tax assets The Group has not recognised deferred tax assets relating to carried forward tax losses or timing differences. These amounts have not been recognised given the recognition requirements of AASB 112 Income Taxes and the fact the Group has not previously generated taxable income. (ii) Intangible assets Licenses and customer contracts acquired in a business combination are recognised at fair value on acquisition date. In the process of determining this value, management has exercised judgment and estimation on the useful life of the assets. (iii) Share based payments The determination of the fair value of options granted requires the utilisation of numerous variables. The fair value at grant date was determined using a binomial, Black-Scholes or barrier option pricing model. Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. (iv) Impairment of goodwill In assessing impairment, management estimates the recoverable amount of each asset or cash generating unit based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate. 4. Revenue from contracts with customers (a) Disaggregation of revenue from contracts with customers Rendering of services disaggregation: SaaS and Managed Services (including Business Process Outsourcing) IT Development and Consulting Digital Marketing Timing of revenue recognition: At a point in time Over time 2020 $ 2,556,058 823,208 21,681 3,400,947 823,208 2,577,739 3,400,947 2019 $ 1,079,531 497,136 376,919 1,953,586 497,136 1,456,450 1,953,586 (b) Information about major customers: The Group had the following major customers with revenues amounting to 10 percent or more of the total group revenues: Customer A Customer B Customer C * Less than 10% (c) Contract liabilities 2020 2019 % 43 16 14 % 21 17 * Contract liabilities include deferred service income from payments received or invoices issued in advance of performance that are expected to be recognised as revenue within the next reporting period. 33 AD1 Holdings Limited 5. Other income R&D incentive 6. Expenses 2020 $ 251,069 2019 $ 465,611 Loss before income tax from continuing operations includes the following specific expenses: Employee benefit expense Share-based payment Salaries and wages Superannuation Other employee related expenses Depreciation and amortisation expense Depreciation of right-of-use assets Depreciation of other property, plant and equipment Amortisation of intangible assets Interest expense Interest expense on lease liability Other interest expenses 2020 $ 2019 $ 19,305 (680,532) 2,733,639 2,809,280 250,949 (70,579) 2,933,314 78,131 25,189 123,693 227,013 9,888 7,350 17,238 244,434 414,609 2,787,791 - 30,587 23,287 53,874 - 4,177 4,177 During the year ended 30 June 2020, the Group recognised $810,020 of expenditure related to R&D activities in profit or loss. 7. (a) Earnings per share Basic & diluted earnings per share Basic earnings per share Diluted earnings per share (b) Reconciliation of loss used in calculating earnings per share 2020 Cents (0.41) (0.41) 2020 $ 2019 Cents (1.5) (1.5) 2019 $ Loss attributable to the ordinary equity holders of the Group used in calculating basic & diluted earnings per share (2,181,158) (4,382,111) 34 (c) Weighted average number of shares used as denominator Annual Report 2020 2019 No. of Shares No. of Shares Weighted average number of ordinary shares used as the denominator in calculating basic & diluted earnings per share 532,061,638 292,221,513 As the Group is still loss making, options over ordinary shares outstanding at 30 June 2020 and 30 June 2019 are considered anti-dilutive and were excluded from the diluted weighted average number of ordinary shares calculation 8. (a) Income Tax Expense Income tax expense 2020 2019 Current tax Adjustment to tax liabilities of USS (pre-acquisition) $ - 36,217 (b) Numerical reconciliation of income tax expense to prima facie tax payable Loss from continuing operations before income tax expense Tax at the Australian tax rate of 27.5% (2019: 27.5%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non-assessable R&D rebate Non-allowable expenses Tax losses and other timing differences for which no DTA is recognised Current tax expense Adjustment to tax liabilities of USS (pre-acquisition) Income tax expense 2020 $ (2,144,941) (589,859) (69,044) 100,718 558,185 - 36,217 36,217 $ - - 2019 $ (4,382,111) (1,205,081) (128,043) 177,754 1,155,370 - - - Deferred taxes arising from temporary differences and unused tax losses calculated at a tax rate of 27.5% (2019: 27.5%) disclosed in the table below have not been recognised given the recognition requirements of AASB 112 and the fact the Group has not previously generated taxable income. Deferred tax assets not recognised at the reporting date Unused tax losses Potential tax benefit at 27.5% (2019: 27.5%) 2020 $ 2019 $ 20,482,320 18,452,556 5,632,638 5,074,453 35 AD1 Holdings Limited 9. Cash and cash equivalents Cash at bank 10. Trade and other receivables Current Trade receivables Unbilled revenue Prepayments GST receivable R&D tax claim receivable Less: allowance for expected credit losses 2020 $ 2019 $ 459,742 838,987 2020 2019 (Restated) $ $ 213,606 179,071 33,651 42,000 308,314 (5,569) 771,073 52,663 162,424 9,555 11,870 465,611 - 702,123 All amounts are short-term. The net carrying value of trade receivables is considered a reasonable approximation of fair value. Allowance for expected credit losses The Group has recognised a loss of $5,569 in profit or loss in respect of the expected credit losses for the year ended 30 June 2020. Note 23(b) includes disclosures relating to the credit risks exposures and analysis relating to the allowance for expected credit losses. 36 11. Property, plant and equipment Office furniture and equipment Right-of-use asset $ $ As at 30 June 2018 Cost Accumulated depreciation Net book value Movements: Opening net book value Acquisition via business combinations Additions Disposals Depreciation charge Closing net book value As at 30 June 2019 Cost Accumulated depreciation Net book value Movements: Opening net book value Adjustment - adoption of AASB 16 Additions Disposals Depreciation charge Closing net book value As at 30 June 2020 Cost Accumulated depreciation Net book value 74,927 (40,341) 34,586 34,586 27,133 27,020 (6,956) (24,936) 56,847 134,088 (77,241) 56,847 56,847 - 14,738 - (25,189) 46,396 142,425 (96,029) 46,396 - - - - - - - - - - - - - 35,413 173,719 - (78,131) 131,001 386,199 (255,198) 131,001 Information on the right-of-use assets are presented in note 17(a). 37 Annual Report Total $ 74,927 (40,341) 34,586 34,586 27,133 27,020 (6,956) (24,936) 56,847 134,088 (77,241) 56,847 56,847 35,413 188,457 - (103,320) 177,397 528,624 (351,227) 177,397 AD1 Holdings Limited 12. Intangible assets As at 30 June 2018 Cost Accumulated amortisation Net book value Movements: Opening net book value Goodwill (Restated) Software & licenses Customer contracts Total $ - - - - $ - - - - $ - - - - $ - - - - Acquisition via business combinations 1,195,139 Amortisation and/or impairment charge - 201,801 (11,057) 223,198 1,620,138 (12,230) (23,287) Closing net book value 1,195,139 190,744 210,968 1,596,851 As at 30 June 2019 Cost Accumulated amortisation 1,195,139 - 201,801 (11,057) 223,198 1,620,138 (12,230) (23,287) Net book value 1,195,139 190,744 210,968 1,596,851 Movements: Opening net book value 1,195,139 190,744 210,968 1,596,851 Amortisation and/or impairment charge - (40,692) (83,001) (123,693) Closing net book value 1,195,139 150,052 127,967 1,473,158 As at 30 June 2020 Cost Accumulated amortisation 1,195,139 - 201,801 (51,749) 223,198 1,620,138 (95,231) (146,980) Net book value 1,195,139 150,052 127,967 1,473,158 (a) Amortisation methods and useful lives The Group amortises intangible assets with a limited useful life using the straight-line method over the following periods: • • Software & licenses: 5 years Customer contracts: 3 years See note 3(h) for other accoun ting policies relevant t o intangible assets and note 3( i) the Group’s policy regarding impairments. The customer contracts were acquired as part of a business combination in the prior year. They were recognised at their fair value at the date of acquisition and are subsequently amortised on a straight-line based on the timing of projected cash flows of the contracts over their estimated useful lives. 38 Annual Report Impairment test for goodwill (b) The Group tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of a the use of cash generating unit assumptions. The calculations use cash flow projections based on financial budgets covering a five-year period. is determined based on value-in-use calculations which require (CGU) Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The following key assumptions are used: • • Discount rate is the weighted average cost of capital (WACC) fo r the Group, estimated at 12% per annum. Revenue growth rate of between 20% to 30% per annum from FY21 to FY 25, generating an annual gross mar gin of 25% to 30%. • Overheads % of revenue rate of betwee n 20% to 25% per annum from FY21 to FY25. • Terminal value is ca lculated based on a growth rate of 1% per annum. The inherent nature of future projected results means that, by definition, the resulting accounting estimates will seldom equal the related actual results. The recoverable amount is particularly sensitive to key assumptions including, revenue growth, gross margin, and overheads rate. As a result, the Group has conducted a sensitivity analysis on the recoverable amount. Based on this analysis, the Group’s projected results will need to achieve a minimum annual gross margin and maximum overheads % of revenue rate of 25% and 25%, respectively for there to be no impairment charge. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. 13. Trade and other payables Current Trade payables Accruals Other payables Information on the liquidity risk management are presented in note 23(c). 14. Employee benefit obligations Current Annual leave Non-current Long -service leave 2020 $ 195,867 124,016 170,626 490,509 2020 $ 157,986 157,986 24,100 24,100 2019 $ 248,572 111,455 165,467 525,494 2019 $ 277,721 277,721 69,189 69,189 Amounts not expected to be settled within the next 12 months The current provision for annual leave includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire balance is presented as current, since the Group does not have an unconditional right to defer settlement. However, based on past experience, the Group does not expect all employees to take the full amount of accrued annual leave or require payment within the next 12 months. The amount of annual leave balance that is not expected to be taken or paid within the next 12 months is $48,401. 39 AD1 Holdings Limited 15. Share capital (a) Ordinary shares 2020 Shares 2019 Shares 2020 $ 2019 $ Ordinary shares – full paid 548,058,530 425,855,214 26,368,683 24,535,633 548,058,530 425,855,214 26,368,683 24,535,633 Ordinary shares participate in dividends and the proceeds on winding up of the Group in proportion to the number of shares held. At shareholder meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. The ordinary shares have no par value. (b) Movements in ordinary share capital As at 1 July 2018 Number of shares $ 222,299,656 20,439,014 Issue of new ordinary shares under private placements 70,666,665 2,010,000 Less: transaction costs Issue of new ordinary shares As at 30 June 2019 - (39,603) 132,888,893 2,126,222 425,855,214 24,535,633 Issue of new ordinary shares to a cornerstone investor 66,666,666 1,000,000 Issue of new ordinary shares under Share Purchase Plan 55,536,650 833,050 As at 30 June 2020 548,058,530 26,368,683 Date 2019 4-Oct-18 21-Dec-18 22-Mar-19 22-Mar-19 2020 19-Jul-19 30-Aug-19 13-Sep-19 Details $ $ Number of shares Issue price Amount Issue of shares to sophisticated investors under private placement Issue of shares to sophisticated investors under private placement Issue of shares to sophisticated investors under private placement Issue of shares for the acquisition of a subsidiary Issue of shares to a cornerstone investor Issue of shares under the Share Purchase Plan Issue of shares to a cornerstone investor 25,666,667 0.030 770,000 8,333,332 0.030 250,000 36,666,666 0.027 990,000 132,888,893 0.016 2,126,222 203,555,558 4,136,222 43,333,333 0.015 650,000 55,536,650 23,333,333 122,203,316 40 0.015 0.015 833,050 350,000 1,833,050 Annual Report 16. Reserve (a) Options reserve 2020 Options 2019 Options Options over ordinary shares 18,183,323 57,399,053 18,183,323 57,399,053 2020 $ 53,702 53,702 2019 $ 598,198 598,198 The reserve is used to recognise: • • The fair value of options issued to employees but not exercised; and The fair value of options issued for goods and services received but not exercised. (b) Movements in options reserve As at 1 July 2019 Issue of new options over ordinary shares Share based payments expense Options forfeited/expired As at 30 June 2019 Issue of new options over ordinary shares Share based payments expense Options forfeited/expired As at 30 June 2020 Date 2019 Details Number of options $ 60,069,478 1,428,928 20,333,323 199,262 - 4,599 (23,003,748) (1,034,591) 57,399,053 598,198 4,850,000 - 4,476 15,518 (44,065,730) (564,490) 18,183,323 53,702 Number of options Amount $ 1-Jul-18 Issue of share-based payments under EEIP to employees 9,000,000 19-Jul-18 Options expired 27-Jul-18 Options expired 23-Sep-18 Options expired 4-Oct-18 Capital raise options issued – October 2018 16-Dec-18 Options expired 16-Dec-18 Options expired 21-Dec-18 Capital raise options issued – December 2018 31-Dec-18 Issue of options under ESOP to employees 1-Mar-19 Options forfeited 1-Mar-19 Options forfeited 12-Feb-19 Options forfeited 16-Jun-19 Options expired (233,766) (825,174) (194,808) 8,555,547 (600,000) (600,000) 2,777,776 - (11,000,000) (9,000,000) (300,000) (250,000) - (3,740) (53,637) (6,039) - (40,000) (40,000) - 199,262 (883,496) - (1,709) (5,970) 30-Jun-19 Share-based payment expense for options granted in prior period - 4,599 (2,670,425) (830,730) 41 AD1 Holdings Limited 2020 24-Jul-19 Options granted 18-Aug-19 Options lapsed 23-Aug-19 Options lapsed 4-Sep-19 Options lapsed 8-Sep-19 Options lapsed 29-Sep-19 Options lapsed 5-Oct-19 Options lapsed 11-Oct-19 Options forfeited 13-Oct-19 Options lapsed 28-Nov-19 Options lapsed 1-Dec-19 Options lapsed 11-Dec-19 Options lapsed 18-Dec-19 Options lapsed 20-Dec-19 Options lapsed 28-Jan-20 Options lapsed 19-Feb-20 Options lapsed 27-Apr-20 Options lapsed 30-Apr-20 Options lapsed 15-Jun-20 Options granted 30-Jun- 2020 Share-based payment expense for options granted in prior period (c) Outstanding options As at 30 June 2020, the Group had the following unlisted options in existence: 4,500,000 (125,000) (750,000) (750,000) (250,000) (500,000) 4,447 (2,985) (17,913) (17,913) (5,971) (11,942) (1,000,000) (23,883) (75,000) (50,000) (1,000,000) (950,000) (250,000) (688) (1,194) (23,883) (22,689) (5,971) (875,000) (20,898) (13,879,834) (4,928,119) (277,777) - - - (15,000,000) (345,000) (3,405,000) (63,560) 350,000 29 - 15,518 (39,215,730) (544,496) Grant date 28-Sep-15 9-Mar-18 4-Oct-18 21-Dec-18 24-Jul-19 24-Jul-19 24-Jul-19 15-Jun-20 15-Jun-20 Expiry date 28-Sep-20 8-Mar-22 4-Oct-21 21-Dec-21 23-Jul-24 23-Jul-24 23-Jul-24 14-Jun-24 14-Jun-25 Exercise price Number of options 750,000 1,250,000 8,555,547 2,777,776 1,500,000 1,500,000 1,500,000 175,000 175,000 18,183,323 $0.333 $0.250 $0.060 $0.060 $0.050 $0.075 $0.100 $0.020 $0.020 42 Annual Report 17. (a) Leases Lease liabilities Lease liabilities are presented in the consolidated statement of financial position as follows: Current Non-current 2020 85,690 48,187 133,877 2019 - - - The Group has leases for the main office and some IT equipment. With the exception of short-term leases and leases of low-value underlying assets, each lease is reflected on the balance sheet as a right-of-use asset and a lease liability. Variable lease payments which do not depend on an index or a rate (such as lease payments based on a percentage of Group sales) are excluded from the initial measurement of the lease liability and asset. The Group classifies its right-of-use assets in a consistent manner to its property, plant and equipment (see note 11). Each lease generally imposes a restriction that, unless there is a contractual right for the Group to sublet the asset to another party, the right-of-use asset can only be used by the Group. Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee. The Group is prohibited from selling or pledging the underlying leased assets as security. For the main office lease, the Group must keep the premise in a good state of repair and return the premise in their original condition at the end of the lease. Further, the Group must insure items of property, plant and equipment and incur maintenance fees on such items in accordance with the lease contract. Key terms of the main office lease are summarised below: • Remaining terms: 18 months • Option to purchase: No • • Variable payments linked to an index: No Termination option: No The lease liability for the main office is secured by a long-term guarantee deposit. Future minimum lease payments at 30 June 2020 were as follows: Minimum lease payments due Within 1 year 1-2 years 2-3 years 3-4 years 4-5 years $ $ Lease payments 98,124 50,024 Finance charges (12,434) (1,837) Net present values 85,690 48,187 $ - - - $ - - - $ - - - After 5 years $ - - - Total $ 148,148 (14,271) 133,877 (b) Lease payments not recognised as a liability The group has elected not to recognise a lease liability for leases of low value assets. Payments made under such leases are expensed on a straight-line basis, which amounted to $3,846 in the current financial year. As at 30 June 2020, the Group was not committed to any other short-term leases, variable leases payments that were not recognised as a lease liability, or to any leases which had not yet commenced. (c) Additional disclosures • • • Expense incurred in relation to low value asset was $3,846 Total cash outflow for leases for the year ended 30 June 2020 was $101,586 for the office lease and 4,230 for the low value asset. The Group has not entered into any operating lease arrangements as lessor. 43 AD1 Holdings Limited 18. Share based payments The Company’s Employee and Executive Incentive Plan (“EEIP”) is designed to provide long-term incentives for eligible employees to deliver long-term shareholder returns. Under the EEIP, participants are granted options over ordinary shares. Participation in the plan is at the board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. (a) Options granted during the period 2020 2020 2019 2019 Number of options Average exercise price $ Number of options Average exercise price $ 57,399,053 4,850,000 - (44,065,730) 18,183,323 0.17 0.07 - 0.20 0.09 60,069,478 20,333,323 - (23,003,748) 57,399,053 0.34 0.06 - 0.15 0.17 Note 16 16 16 16 Opening balance Granted during the year Exercised during the year Forfeited/expired during the year Closing balance (b) Fair value of options granted The assessed fair value of options granted at grant date was determined using the barrier option pricing model that takes into account the exercise price, barrier price, life of the options, share price at grant date, the expected share price volatility of the underlying share, the expected dividend yield, the risk-free rate for the life of the options, as following: Grant date Expirydate Exercise price $ $ No. of options granted Share price at grant date Dividend Yield Expected volatility Risk-free Interest Rate Fair value at grant date 24-Jul-19 23-Jul-24 0.050 1,500,000 0.014 24-Jul-19 23-Jul-24 0.075 1,500,000 0.014 24-Jul-19 23-Jul-24 0.100 1,500,000 0.014 15-Jun-20 14-Jun-24 0.020 175,000 15-Jun-20 14-Jun-25 0.020 175,000 0.011 0.011 Nil Nil Nil Nil Nil 69% 69% 69% 75% 75% $ 1.00% 6.150 1.00% 4,500 1.00% 3,600 0.40% 0.40% 788 928 (c) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Expense from options granted in current year Expense from options granted in prior year Reversal of expense from options forfeited in current year 2020 $ 4,476 15,518 (688) 19,306 2019 $ 199,262 4,599 (885,205) (681,344) 44 19. Investments in controlled entities The Group’s principal subsidiary at 30 June 2020 is set out below. Unless otherwise stated, it has share capital consisting solely of ordinary shares that is held directly by the Group, and the proportion of ownership interests held equals the voting rights held by the Group. The country of incorporation or registration is also their principal place of business. Annual Report Ownership held by the group Ownership interest held by non- controlling interests Place of business/county of incorporation 2020 % 2019 % 2020 % 2019 % Australia Australia 100 100 - - Name of entity Ultimate parent entity AD1 Holdings Limited Controlled entity Utility Software Services Pty Ltd 20. Related party transactions (a) Key management personnel compensation Below are the key management personnel compensation included within employee benefit expense for the year: 2020 $ 2019 $ 835,040 1,205,398 3,734 51,274 14,378 904,426 26,297 75,642 (193,528) 1,113,809 2019 $ 416,158 22,905 102,648 Short-term employee benefits Long-term employee benefits Post-employment benefits Share-based payments (b) Other transactions with related parties The Group had the following transactions with Blue NRG, of which Michael Norster is a director Revenue from contract with customer Payment for electricity supplied Receivables for services rendered 2020 $ 1,466,282 7,311 98,809 All transactions were made on normal commercial terms and conditions and at market rates 45 AD1 Holdings Limited 21. Cash flow information Reconciliation of loss after income tax to net cash outflow from operating activities (net of acquisitions and disposals of controlled entity balances) Loss for the year Adjustment for: Depreciation Amortisation Share based payment expense Interest expense from lease liabilities Change in operating assets and liabilities: (Increase)/decrease in trade receivables (Increase)/decrease in other current assets Increase/(decrease) in accounts payable Increase/(decrease) in fees in advance Increase/(decrease) in provisions Increase/(decrease) in other current liabilities 2020 $ 2019 $ (2,181,158) (4,382,111) 103,320 123,693 19,305 9,888 (68,950) - (34,988) 66,959 (164,824) 36,219 24,936 23,287 (681,344) - 340,105 16,589 (25,307) (61,243) 141,412 (64,713) Net cash outflow from operating activities (2,090,536) (4,668,389) 22. Parent entity financial information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Statement of financial position Current assets Total assets Current liabilities Total liabilities Share capital Options Reserve Accumulated losses Total equity Statement of profit and loss and other comprehensive income Loss for the year Total comprehensive loss 46 2020 $ 965,080 3,128,114 433,414 449,814 2019 $ 857,971 3,018,800 643,124 712,313 26,368,683 24,535,633 53,702 598,198 (23,744,084) (22,827,344) 2,678,300 2,306,487 1,480,542 1,480,542 3,963,589 3,963,589 Annual Report (b) Determining the parent entity financial information The financial information for the parent entity has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of AD1 Holdings Limited. (ii) Tax consolidation legislation AD1 Holdings Limited and its wholly-owned Australian controlled entity have implemented a tax consolidation. The parent entity, AD1 Holdings Limited, and the controlled entity within the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right. In addition to its own current and deferred tax amounts, AD1 Holdings Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate the parent entity for any current tax payable assumed and are compensated by the parent entity for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the parent entity under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. (c) Commitments and contingencies of the parent entity The parent entity did not have any contingent liabilities or commitments as at 30 June 2020 (2019: nil). 23. Financial risk management The Group’s activities expose it to various types of risk that are associated with the financial instruments and markets in which it invests. The most important types of financial risk to which the Group is exposed to are market risk, credit risk and liquidity risk. The exposure to each of these risks, as well as the Group’s policies and processes for managing these risks are described below. (a) Market risk Market risk embodies the potential for both loss and gains and includes currency risk, interest rate risk and other price risk. The Group’s strategy on the management of investment risk is driven by the Group’s investment objective. The Group’s market risk is managed by the Chief Executive Officer and overseen by the Board. (i) Currency risk The Group is not exposed to material currency risk arising from any financial assets or financial liabilities as all material transactions are denominated in Australian dollars. 47 AD1 Holdings Limited (ii) Interest rate risk The Group is exposed to interest rate risk via the cash and cash equivalents that it holds. Interest rate risk is the risk that a financial instrument’s value will fluctuate as a result of changes in market interest rates. To reduce risk exposure, the Group ensures that cash and cash equivalents are placed in high credit quality financial institutions. The objective of managing interest rate risk is to minimise the Group’s exposure to fluctuations in interest rate that might impact its interest revenue and cash flow. The Group’s exposure to interest rate risk and the weighted average interest rates on the Group’s financial assets and financial liabilities are as follows: Interest rate Fixed interest rate Floating interest rate Non-interest bearing $ $ Total $ 2020 Financial assets Cash at bank Trade and other receivables % $ - - Other non-current assets 1.20 82,327 459,742 - 459,742 - - - - 771,073 - 771,073 82,327 (490,506) (490,506) - (133,877) - 12.95 (133,877) (51,550) 459,742 280,567 688,759 - - 1.00 67,700 - 838,987 - 838,987 - - - 702,123 702,123 - 67,700 (525,494) (525,494) 67,700 838,987 176,629 1,083,316 Financial liabilities Trade and other payables Lease liabilities Net position 2019 Financial assets Cash at bank Trade and other receivables (restated) Other non-current assets Financial liabilities Trade and other payables Net position Sensitivity of profit or loss to movements in market interest rates for instruments with cash flow risk: Market interest rates changed by ± 50 basis points (iii) Price risk 2020 $ ± 258 2019 $ ± 4,195 The Group is not exposed to price risk arising from any financial assets or financial liabilities. 48 (b) Credit risk Credit risk is the risk that a counterparty fails to discharge an obligation to the Group. The Group is exposed to credit risk from financial assets including cash and cash equivalents held at banks, trade and other receivables. Annual Report Cash at bank Receivables Maximum exposure to credit risk (i) Credit risk management 2020 $ 459,742 771,073 1,230,815 2019 $ (Restated) 838,987 702,123 1,541,110 The credit risk in respect of cash at banks and deposits is managed by only having accounts with major reputable financial institutions. The Group continuously monitors the credit quality of customers based on regular review of the debtors. Where available, external credit ratings and/or reports on customers are obtained and used. The group’s policy is to deal only with credit worthy counterparties. The credit terms range between 14 and 30 days. The credit terms for customers as negotiated with customers are subject to an approval process which forms part of the overall contract approval when signing up new customers. The ongoing credit risk is managed through regular review of ageing analysis, together with on-going correspondences with customers. Trade receivables consist of customers within one geographical area (Australia), across two major industries (public and utility sectors). (ii) Expected credit losses The Group applies the AASB 9 simplified model of recognising lifetime expected credit losses for all trade receivables as these items do not have a significant financing component. In measuring the expected credit losses, the trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics. They have been grouped based on the days past due and also according to the geographical location of customers. The expected loss rates are based on the payment profile for sales over the past 48 months before 30 June 2020 and 30 June 2019 respectively as well as the corresponding historical credit losses during that period. The historical rates are adjusted to reflect current and forwarding looking macroeconomic factors affecting the customer’s ability to settle the amount outstanding. However given the short period exposed to credit risk, the impact of these macroeconomic factors has not been considered significant within the reporting period. Trade receivables are written off (i.e. derecognised) when there is no reasonable expectation of recovery. Failure to make payments within 180 days from the invoice date and failure to engage with the Group on alternative payment arrangement amongst other is considered indicators of no reasonable expectation of recovery. On the above basis the expected credit loss for trade receivables as at 30 June 2020 was determined as follows (for the financial year ended 30 June 2019, the expected credit loss was immaterial): Trade receivables days past due Current More than 30 days More than 60 days More than 90 days Expected credit loss rate $ 0% $ 0% Gross carrying amount ($) 140,803 10,084 Lifetime expected credit loss ($) - - $ 9% 62,719 5,569 $ 27% - - Total $ 213,606 5,569 The closing balance of the of the trade receivables loss allowance as at 30 June 2020 reconciles with the trade receivables loss allowance opening balance as follows: Loss allowance as at 30 June 2019 Loss allowance recognised during the year Loss allowance as at 30 June 2020 49 $ - 5,569 5,569 AD1 Holdings Limited (c) Liquidity risk The Group monitors its exposure to liquidity risk by ensuring that there is sufficient cash on hand to meet the contractual obligations of financial liabilities as they fall due. The management monitors cash flows. The maturity of financial liabilities at reporting date are shown below, based on the contractual terms of each liability in place at reporting date. The amounts disclosed are based on undiscounted cash flows. Interest rate Less than 12 months 1 -5 years Total contractual cash flows Carrying amount of liabilities % $ $ $ $ 2020 Financial liabilities Trade and other payables Lease liabilities 12.95 2019 Financial liabilities Trade and other payables (d) Fair value hierarchy 490,509 85,690 576,199 525,494 525,494 - 490,509 490,509 48,187 48,187 133,877 133,877 624,386 624,386 - - 525,494 525,494 525,494 525,494 The following information classifies financial instruments recognised in the statement of financial position at fair value according to the hierarchy stipulated in AASB 7 Financial Instruments: Disclosure (“AASB 7”) that reflects the subjectivity of the inputs used in making the measurements as follows: • • • Level 1 – the instrument has quoted prices (unadjusted) in active markets for identical assets or liabilities; or Level 2 – a valuation technique is used using inputs other than quoted prices within Level 1 that are observable for the financial instrument, either directly (i.e. as prices), or indirectly (i.e. derived from prices); or Level 3 – a valuation technique is used using inputs that are not based on observable market data (i.e. unobservable inputs). The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ requires significant judgement by the directors. The directors consider observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. 24. Remuneration of auditors This table below shows the total fees to the Group’s external auditors, PKF (2019: Grant Thornton) split between audit and non-audit services. Audit of financial statements Other services 2020 $ 44,000 - 44,000 2019 $ 44,644 16,500 61,144 50 Annual Report 25. Contingencies The Group had no contingent liabilities at 30 June 2020 (2019: nil). 26. Events occurring after the reporting period No additional matters or circumstances have occurred subsequent to the financial year end that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group or in future financial years. 51 AD1 Holdings Limited Directors' Declaration In the opinion of the Directors of AD1 Holdings Limited: (a) the financial statements and notes of the Group are in accordance with Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 30 June 2020 and its performance for the year ended on that date; and complying with Accounting Standards and Corporations Regulations 2001 and other mandatory professional reporting requirements; there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable; and the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as disclosed in note 1. (b) (c) This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2020. Signed in accordance with a resolution of Directors. ______________________ Mr Prashant Chandra Managing Director & CEO Melbourne 31 August 2020 52 PKF Melbourne Independent Auditor’s Report to the Members of AD1 Holdings Limited Report on the Audit of the Financial Report Our Opinion We have audited the accompanying financial report of AD1 Holdings Limited (the Company), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the Company and the Group comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. In our opinion the accompanying financial report of AD1 Holdings Ltd is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its performance for the year then ended; and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Material Uncertainty Related to Going Concern We draw attention to Note 1(c) in the financial report, which indicates that the Group incurred a consolidated loss of $2,181,158 (2019: $4,382,111) during the year ended 30 June 2020 and, as of that date, the Group is in a net cash outflow position from operating activities of $2,090,536 (2019: $4,668,389). As stated in Note 1(c), these events or conditions, along with other matters as set forth in Note 1(c), indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. PKF Melbourne Audit & Assurance Pty Ltd ABN 75 600 749 184 Level 12, 440 Collins Street, Melbourne, Victoria 3000 T: +61 3 9679 2222 F: +61 3 9679 2288 www.pkf.com.au Liability limited by a scheme approved under Professional Standards Legislation PKF Melbourne Audit & Assurance Pty Ltd is a member firm of the PKF International Limited family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. 53 PKF Melbourne Matter and Significance How our audit addressed the key audit matter Revenue recognition The Group’s operating revenue amounted to $3,400,947 during the financial year made up of the following revenue streams, namely: SaaS and Managed Services IT Development and Consulting Note 3(a) Revenue Recognition describes the accounting policies applicable to distinct revenue streams, noting that revenue is generated both from rendering of services over a period of time and from fees at a point in time. All revenue streams are recognised in accordance with AASB 15 Revenue from Contracts with Customers. The recognition of revenue and associated unearned revenue is considered a Key Audit Matter due to risks associated with revenue recognition and the various recognition points relative to the different revenue streams and performance obligations. Our audit procedures included, but were not limited to, the following: considering the appropriateness of management’s assessment of revenue streams in accordance with the applicable accounting standard AASB 15; evaluating a sample of major contracts secured during the financial year by agreeing revenue amounts to the records accumulated as financial statements, including billing systems and bank records; inputs the to assessing the values recorded and the timing of revenue recognition as appropriate to the completion of performance obligations and the timeframe of delivery; performing detailed analytical review procedures on the various revenue streams, including an assessment of revenue recorded against supporting documentation to ensure reasonable; substantiating sales transactions in events of exceptions and/or anomalies to assess whether revenue is being recognised in accordance with the Group’s revenue policies; analytically reviewing deferred revenue balances at balance date to ensure complete and accurate; assessing the adequacy of disclosures in the financial report for compliance with AASB 15. 54 PKF Melbourne Matter and Significance How our audit addressed the key audit matter Valuation of Goodwill and Other Intangible Assets Our audit procedures included, but were not limited to, the following: Assessing and challenging: As set out in Note 12 of the financial statements, as at 30 June 2020, the Group has intangible assets including goodwill of $1,473,158 (Restated 2019: $1,596,851). The accounting policy in respect of these assets is outlined in Note 3(h) Intangible Assets. An annual impairment test for intangible assets is required under AASB 136 Impairment of Assets. The evaluation of the recoverable amount of the Cash Generating Unit (CGU) to which the intangibles are allocated requires the Group to exercise significant judgement in determining key assumptions, which include: Preparation of a 5-year cash flow forecast; Preparation of forecasted profit margins and overheads; Determination of a growth rate and terminal growth factor; Determination of a discount rate; and Assumption of intangible assets excluding goodwill the useful life of o the assumption that one CGU is appropriate in the context of acquisitions and the goodwill and other intangible assets allocated to it; o the reasonableness of the financial year 2021 budget approved by the Board by comparing it to actual results, trends, strategies and outlooks; o the assumptions used for forecast profit margins and overheads; o the assumptions used for the future growth rate and terminal growth rates in the forecast model; and o the determination of the discount rate applied in the impairment model, comparing to available industry data. Reviewing the mathematical accuracy of the cash flow models including o agreeing the inputs in the cash flow model to the reviewed assumptions considered above; and o reviewing the calculated terminal value. the appropriateness of Assessing including relating those assumptions used in Note 12. to the disclosures the in sensitivities The outcome of the impairment assessment could vary if different assumptions were applied. As a result, the evaluation of the recoverable amount of intangible assets, including goodwill, is a Key Audit Matter. Other Information Other information is financial and non-financial information in the annual report of the Group which is provided in addition to the financial report and the auditor’s report. The Directors are responsible for other information in the annual report. The other information we obtained prior to the date of this auditor’s report was the director’s report. The remaining other information is expected to be made available to us after the date of the auditor’s report. Our opinion on the financial report does not cover the other information and, accordingly, the auditor does not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the remuneration report. In connection with our audit of the financial report, our responsibility is to read the other information. In doing so, we 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. 55 PKF Melbourne We are required to report if we conclude that there is a material misstatement of this other information in the financial report and based on the work we have performed on the other information that we obtained prior the date of this auditor’s report we have nothing to report. Directors’ Responsibilities for the Financial Report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the 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 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 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 Australian Auditing Standards, we exercise professional judgement 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 other 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 Group financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. 56 PKF Melbourne We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguard applied. From the matters communicated with 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 Remuneration Report Opinion We have audited the remuneration report included in the directors’ report for the year ended 30 June 2020. In our opinion, the remuneration report of AD1 Holdings Limited, for the year ended 30 June 2020, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PKF Melbourne, 31 August 2020 Kenneth Weldin Partner 57 AD1 Holdings Limited Shareholder Information The shareholder information set out below was applicable as at 10 August 2020. A. Distribution of equity securities Analysis numbers of ordinary share holders by size of holding: Holding 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5000 1 to 1,000 Unmarketable parcels Securities 533,922,371 13,300,760 743,154 89,477 2,769 548,058,531 305,936 B. Equity security holders % 97.42 2.43 0.14 0.02 0.00 100.00 0.06 No. of holders 316 332 82 27 28 785 84 % 40.25 42.29 10.45 3.44 3.57 100.00 10.70 Twenty largest quoted equity security holders The Group’s twenty largest equity securities holders of quoted equity securities are listed below: Security holder POTENTATE INVESTMENTS PTY LTD MORE CAPITAL HOLDINGS PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED MR CHRISTOPHER KUPERMAN POTENTATE INVESTMENTS PTY LTD WERNDEX PTY LTD HAMPTON EAST DEVELOPMENT PTY LTD MR JASON SCOTT DOVETON KAY INVESTMENTS PTY LTD BLUEBELL LODGE PTY LTD MORCKSTOW PTY LTD VERNBROOK PTY LTD NAMEBLANK PTY LTD PRAGMATIC PTY LTD DUNCLYN INVESTMENTS PTY LTD STEWART WILLIAM JACKSON & MICHAEL ALEXANDER JACKSON CS FOURTH NOMINEES PTY LIMITED COMSEC NOMINEES PTY LIMITED G S ANDREWS CONSULTING PTY LTD ALLEGRO CAPITAL NOMINEES PTY LTD Number held 109,376,043 43,333,333 33,454,858 31,085,981 28,383,594 19,431,967 9,922,779 8,320,600 7,277,776 6,602,595 5,092,000 4,863,435 4,731,760 4,663,641 4,500,003 4,288,406 4,285,955 3,514,578 3,500,000 3,400,000 Percentage of issued shares (%) 19.96 7.91 6.10 5.67 5.18 3.55 1.81 1.52 1.33 1.20 0.93 0.89 0.86 0.85 0.82 0.78 0.78 0.64 0.64 0.62 340,029,304 62.04 58 Annual Report Substantial holders The Group’s substantial equity securities holders of quoted equity securities are listed below: Security holder POTENTATE INVESTMENTS PTY LTD MORE CAPITAL HOLDINGS PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED MR CHRISTOPHER KUPERMAN Number held 137,759,637 43,333,333 33,454,858 31,085,981 Percentage of issued shares (%) 25.14 7.91 6.10 5.67 C. Shareholder enquiries Shareholders with enquiries about their shareholdings should contact the share registry: Link Market Services Limited Level 12, 680 George Street, Sydney, New South Wales 2000 Telephone: +61 2 8280 7100 D. Change of address, change of name, consolidation of shareholdings Shareholders should contact the Share Registry to obtain details of the procedure required for any of these changes. E. Annual report Shareholders do not automatically receive a hardcopy of the Group’s Annual Report unless they notify the Share Registry in writing. An electronic copy of the Annual Report can be viewed on the website www.ad1holdings.com.au F. Tax file numbers It is important that Australian resident Shareholders, including children, have their tax file number of exemption details noted by the Share Registry. G. CHESS (Clearing House Electronic Subregister System) Shareholders wishing to move to uncertified holdings under the Australian Securities Exchange CHESS system should contact their stockbroker. H. Uncertified share register Shareholding statements are issued at the end of each month that there is a transaction that alters the balance of an individual/Group’s holding. 59 AD1 Holdings Limited 60