ANNUAL REPORT 2020 Contents FY20 Financials 2 Chairman’s Letter 4 CEO’s Report 6 10 Directors’ Report 30 Auditor’s Independence Declaration Consolidated Financial Statements 31 Audinate Group Limited ABN 56 618 616 916 35 Notes to the Consolidated Financial Statements 69 Directors’ Declaration 70 74 Shareholder Information IBC Corporate Directory Independent Auditor’s Report Global leader in audio networking, distributing high quality digital audio signals over computer networks 1 Audinate Annual Report 2020 | FY20 Financials Revenue A$30.3m • 31% growth in Dante- enabled products available on the market EBITDA A$2.0m Gross Margin 76.6% Cash on hand A$29.3m • 8.2 times more products than the nearest audio networking competitor • 21% increase in OEMs shipping Dante-enabled products • 30% increase in software revenue • 57,000 people trained on Dante this year Growing network effect Number of Dante-enabled products drives economic network effect 2,804 2,134 1,639 1,182 874 553 FY15 FY16 FY17 FY18 FY19 FY20 CAGR 38% in number of Dante-enabled products available in the market Note: per financial year 2 | Audinate Annual Report 2020 3 Audinate Annual Report 2020 | Dear Shareholders, On behalf of the Directors, I am pleased to present the Audinate Group Limited Annual Report for the Financial Year ended 30 June 2020 (FY20). The business continues to make good progress in achieving its medium-term objectives despite a very challenging revenue environment in the second half of the fiscal year. The uptake of our new Dante products has been particularly encouraging with the number of design wins across Dante video, Dante Embedded Platform, Dante Application Library and IP Core representing a strong market endorsement of these products. Notably, the Dante Embedded Platform introduces the ability of an end-user to add Dante to an existing AV product in the field. This is a significant step for the evolution of our business model and something that we expect to aid the proliferation of our technology. This product development requires new business infrastructure to enable and support it. Accordingly, it is pleasing to see the progress Audinate has made this year in terms of code protection and in-field licensing and enablement. The fulfillment of these capabilities is an essential strategic objective for the year ahead. The establishment of a manufacturing line in Malaysia was initiated to address the imposition of US tariffs on Chinese imports. As it turned out, this provided critical business continuity and enabled us to maintain supply, as many others experienced disruption. The opening of our office in the Philippines, in the midst of COVID-19, was another important step in building out the business platform to support growth and achieve operational efficiencies. We have made important progress in the video market this year, delivering our Dante AV Product Design Suite to customers in April, securing a number of design wins, facilitating a demo of the first Dante video camera by Bolin, and launching the Authorised Implementer Program to enable production of white-labelled Dante video products. The launch of the first Dante video products by our customers will be another key milestone we expect to achieve in the year ahead. 2020 has been a particularly tumultuous time for even the most seasoned CEOs, let alone for one in his first year in the seat. In that respect Aidan has done a fantastic job in responding to a once in a generation environment and dealing with all the operational and day-to-day challenges that have unexpectedly emerged. The Board have all been impressed by the mature and calm way he has managed to balance immediate tactical demands with an ongoing focus on strategic imperatives. We are also fortunate to have the level of depth, experience and expertise within our Executive Leadership Team that have made an invaluable contribution in supporting Aidan this year. As a Board we have tried to balance the risks and concerns which have arisen from the global uncertainty and dislocation with the opportunities that emerge in challenging times. This is an environment where caution and respect for capital is critical, but it is also equally important to seize the breaks when they emerge. This may be a seminal moment for the AV industry and signal an acceleration in the conversion from traditional analogue cabling to networked audio. Our conviction in the strength of our technology, quality of our strategy, and size of the nascent opportunities were key considerations in deciding to raise more capital. Subsequent to year-end Audinate completed a $40 million equity raise in July and August of 2020. This was an important step in restoring the Group’s growth capital, de-risking the business from ongoing uncertainties and impacts of COVID-19, and enhancing our ability to consider strategic acquisitions. We retain a strong conviction in our business strategy to enable a transformation of the AV industry and genuinely appreciate the support of our institutional and retail shareholders in backing this vision. On behalf of the Board we would also like to recognise and thank Aidan and the entire staff of Audinate for their persistence, dedication, and teamwork in the extremely challenging and demanding environment that we have experienced this year. We remain confident that the milestones being achieved in the near term will position Audinate and our stakeholders to benefit from the inevitable economic recovery to come. DAVID KRALL Chairman 4 Chairman’s Letter| Audinate Annual Report 2020 “ We remain confident that the milestones being achieved in the near term will position Audinate and our stakeholders to benefit from the inevitable economic recovery to come.” 5 Audinate Annual Report 2020 | In FY20 Audinate made good progress in delivering against its medium-term objectives, albeit in a challenging revenue environment due to the impact of COVID-19 in Q4. Whilst dealing with the short-term impacts of COVID-19, the business has focused upon longer term strategic priorities and priming the pump for recovery. Today, the majority of our revenue derives from supplying Dante audio networking components to manufacturers of professional AV equipment and is related to the volume of pro-AV equipment being sold. However, Audinate does not directly influence demand for pro-AV equipment. By way of analogy, Intel’s revenue increases when Dell sells more laptops with one of their chips built inside, however changes in pricing by Intel does not necessarily cause more people to buy Dell laptops. Further, in many cases our technology represents a small proportion of the bill of materials cost for a product and price reductions for our technology are not expected to markedly drive increased sales. Therefore, our energies have been focused on how we can increase the number of AV products using our technology and stimulating demand for networked audio products generally by increasing knowledge and awareness of Dante technology and its associated benefits. Importance of Design Wins The first step in getting another Dante-enabled product to market is convincing an Original Equipment Manufacturer (OEM) to purchase a Dante implementation of some kind – we term this a “design win”. A manufacturer designing their first networked audio product, or an existing customer, may purchase a different Dante implementation option to broaden the application of Dante within their portfolio. Each design win has a meaningful up-front fee to cover customer support costs and signals commitment to the adoption of Dante. Following a design win it typically takes 12-18 months for a manufacturer to design a new Dante-enabled product and make it available for shipping. Audinate receives orders for Dante implementations in chip, module, or software royalty form each time Dante-enabled products are manufactured. A stream of regular repeat orders associated with manufacturing runs is created for each new Dante-enabled product. Successive Dante-enabled product designs are usually completed more quickly as our penetration within their product portfolio grows. Around a year ago, we released a new software Dante implementation called Dante Embedded Platform (DEP). It is a flexible software implementation that scales from single audio channel speakers & microphones to larger multi-channel products like mixing consoles and signal processors. DEP software can share a chip with software provided by the manufacturer greatly reducing cost by eliminating additional chips and circuitry needed to add Dante support to a product. DEP enables Dante proliferation as it can be incorporated into a manufacturer’s platform once and then deployed into a range of products with widely varying channel counts. In comparison, chip and module products require different electronic circuit designs as the channel count varies incurring engineering effort for each design variation. Another strategically important aspect of software implementations like DEP is the ability to add Dante to a product already in the field. Furthermore, it is also possible to upgrade products in the field beyond a base level of Dante support included at manufacturing time. We are very excited to see this vision fulfilled by Dante Embedded Platform in a commercially successful product launched by QSC in April 2020. Importance of training Whilst we are very pleased to have established Dante as the de-facto standard in audio we are still very early in the transition from analogue cabling to networking. As such there are many industry professionals still running cables for a living. Our certification training courses play an important role in teaching them the basics of networking, familiarising them with Dante and credentialing them for their customers. The aim being to provide them with knowledge and confidence to specify, install and use Dante. There are three levels of certification and in many countries, they count towards Continuing Professional Development (CPD) points for industry professionals. Historically we have delivered training at face to face events and via a learning portal, but with the onset of COVID-19 we switched to webinars. We have also added full time training resources in the UK and Mexico to complement our two US based resources and this has also enabled us to extend training to nine different languages. As a result, in FY20 we held 82 webinars (FY19: 6) and trained about 57,000 people on Dante, up 185% from the prior year. 6 CEO’s Report| Audinate Annual Report 2020 as headcount increased to 123, as well as $0.6 million of one- off costs associated with retirement of the former CEO Lee Ellison. The overall impact of these factors led to a decline in EBITDA to approximately A$2.0 million (FY19: $2.8 million). COVID-19 also necessitated a review of tax losses that the Group had recorded as an asset on its balance sheet. The Group retains access to these tax losses to apply against taxable income in future periods and may re-recognise them as an asset when greater certainty returns. This was the main reason that Audinate recorded a net loss after tax of A$4.1 million. Equity Raise The $40 million equity raise that the business completed in July and August 2020 was an important step in replenishing our growth capital, de-risking the business from any ongoing impacts from COVID-19 and restoring our ability to consider strategic M&A. We appreciate that our shareholders share our conviction around the opportunity and long-term strategy for Audinate. Conclusion Lastly, I would like to thank both the Board and all the staff at Audinate for their support during my first year in the CEO role. Despite the challenging environment I have thoroughly enjoyed FY20 and am immensely satisfied with the progress we are making in fulfilling the vision we have for Audinate. We have a dedicated, energetic and creative team at Audinate, and I am looking forward to the year ahead, making further progress in fulfilling our vision to “Pioneer the Future of AV”. AIDAN WILLIAMS Chief Executive Officer Operational results We continued to see strong growth in the number of Dante enabled products released by equipment manufacturers, with 31% growth in the product catalogue to 2,804 products at the end of FY20. Historically tradeshows have been an important platform for the release of new products, so it is particularly reassuring that the cancellation of tradeshows has not adversely impacted new product releases. As a result, we now have more than 8 times the number of products available than our next nearest audio networking competitor (up from 6x a year ago). The number of Dante enabled products is a measure of the size of the Dante ecosystem and the larger this ecosystem becomes the stronger the economic network effect. For OEMs, the Dante ecosystem becomes more attractive based on the growth in the number of other products they can connect to. For end-users, the ecosystem is more attractive based not just on the number of Dante enabled products, but also due to the breadth of products available and the multitude of brand choices. Another important measure of the proliferation of the technology is the number of OEMs adopting Dante and releasing new products. During the year, the number of OEMs with Dante enabled products increased 21% to 328. There are design wins with a further 179 OEMs who are in the process of designing and releasing their first product, representing a pipeline for further growth. Our Chairman has already spoken to some of the other operational achievements during FY20 and I echo his sentiments around Dante video and the building out of the infrastructure needed to support the evolution of our business model. Both areas will continue to be key objectives for further progress during FY21. Financial Results Gross profit increased over FY20 by 10.1% to A$23.2 million, due to an improved gross profit margin of 76.6% and a 7.1% increase in revenue primarily due to USD/AUD exchange rate benefits. In USD, revenue was US$20.4 million compared to US$20.3 million in the prior year, reflecting the Q4 FY20 impact COVID-19. As customers transition to new software-based Dante implementations, Audinate expects to see margin improvement. Accordingly, growth in gross profit dollars is becoming a more significant measure of performance than revenue growth alone. Dollar amounts referenced from this point onwards are exclusively Australian dollars. Operating costs, which consist primarily of staff costs, marketing expenses and administration & other operating expenses, increased to $21.2 million. The increase was primarily due to a $3.1 million increase in employee costs 7 Audinate Annual Report 2020 | Audinate Group Limited ABN 56 618 616 916 Directors’ Report and Financial Statements – 30 June 2020 8 | Audinate Annual Report 2020 Contents 10 Directors’ Report 30 Auditor’s Independence Declaration 31 Consolidated Statement of Profit or Loss and Other Comprehensive Income 32 Consolidated Statement of Financial Position 33 Consolidated Statement of Changes In Equity 34 Consolidated Statement of Cash Flows 35 Notes to the Consolidated Financial Statements 69 Directors’ Declaration 70 74 Shareholder Information IBC Corporate Directory Independent Auditor’s Report to the Members of Audinate Group Limited 9 Audinate Annual Report 2020 | The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘Group’) consisting of Audinate Group Limited (referred to hereafter as the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2020. Directors The following persons were directors of Audinate Group Limited during the whole financial year and up to the date of this report, unless otherwise stated: David Krall Aidan Williams (Appointed on 16 September 2019) John Dyson Roger Price Alison Ledger Tim Finlayson Lee Ellison (Resigned on 13 September 2019) Principal activities The Group’s principal activity is the development and sale of digital Audio Visual (‘AV’) networking solutions. Dante® is the Group’s technology platform that distributes high-quality digital audio and video signals over computer networks. Dante comprises software and hardware that is sold to and integrated inside the AV products of its Original Equipment Manufacturer (‘OEM’) customers. Audinate also sells application software through its own channel to provide management and control for these installations. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Review of operations For the year ended 30 June 2020, the Group reported an increase in revenue of 7.1% to $30.3 million from $28.3 million in the prior year ended 30 June 2019. Gross margin grew 10.1% from $21.1 million for the prior year to $23.2 million for the year ended 30 June 2020. Gross margin percent also improved to 76.6% from 74.4% for the year due to favourable product mix of more software sales relative to lower margin chip sales. The directors consider Earnings Before Interest, Tax, Depreciation and Amortisation (‘EBITDA’) to reflect the core earnings of the Group. EBITDA is a financial measure which is not prescribed by Australian Accounting Standards (‘AAS’) and represents the profit under AAS adjusted for non-cash and significant items. Consolidated 2020 $’000 (4,138) (320) (503) (11) 117 2,465 4,422 2,032 2019 $’000 662 (192) – (104) – (20) 2,419 2,765 (Loss)/profit after income tax (expense)/benefit for the year Interest revenue Grant income Other income Finance costs Income tax expense/(benefit) Depreciation and amortisation EBITDA 10 Directors’ Report| Audinate Annual Report 2020 The Group has grown the number of OEM customers shipping Dante enabled products to 328 OEMs at 30 June 2020, up 21.5% from 270 at 30 June 2019. Once the OEM has designed the Dante platform into one of its products, the Group will receive revenue at each production run in the form of sales of Dante chips, modules or cards or royalties. Dante enabled OEM products available for sale increased to 2,804 products, up 31.4% from 2,134 at 30 June 2019. Whilst Audinate continued to experience growth in key business metrics this did not fully translate into growth in revenue and units as the AV industry experienced headwinds from global economic conditions, including the impact of COVID-19 and US tariffs on Chinese imports. Operating expenses, which consist of employee benefit expenses, marketing expenses and administration and other operating expenses increased by approximately 15.8% to $21.2 million in the year ended 30 June 2020 from $18.3 million in the prior year. This increase was primarily due to $3.1 million increase in employee costs as the Group invested in additional headcount and $0.6 million of costs incurred as a result of Lee Ellison’s (former CEO) retirement at the end of 2019. In response to the impacts of COVID-19 the Group made 8 roles redundant in June 2020 at a one-off cost of $0.1 million recorded within employment costs. EBITDA was $2.0 million in the year ended 30 June 2020 compared to $2.8 million in the prior year. AASB 16 ‘Leases’ was applied for the year ended 30 June 2020 but not for the prior year. The table above therefore shows EBITDA calculated under two different lease accounting policies applied for these respective years. Had the Group applied AASB 16 in the prior year EBITDA would have been $3.4 million. As a result of COVID-19 related stimulus initiatives the Group has received $434,000 in JobKeeper support payments, a $50,000 cash flow boost from the Australian Government and a $19,000 small business grant from the UK Government. All of these amounts were recorded in other income and are therefore excluded from the calculation of EBITDA. In addition to these stimulus amounts, COVID-19 also necessitated a review of tax losses that the Group had recorded as an asset on its balance sheet. Given the adverse impact on revenue in FY20 and the ongoing uncertainty in FY21 the Group considered it prudent and appropriate to write-off tax losses of approximately $3.6 million at year end. These tax losses include the benefit of research and development tax offsets, which the Group expects to continue to receive in future years. The Group retains access to these tax losses to apply against taxable income in future periods and may re-recognise them as an asset when greater certainty returns. During FY20 there was a $2.0 million increase in depreciation and amortisation largely as a result of increased development spending and the amortisation of the right of use assets due to the change in lease accounting standard. As a result of all these items the Group recorded a net loss after tax $4.1 million compared to net profit after tax of $0.7 million in the prior year. Significant changes in the state of affairs During the second half of FY20 COVID 19 had a significant impact on the Group causing revenue to drop approximately 25% (in USD terms) from Q3 to Q4. The main segments that Audinate’s products target have all been impacted to varying degrees: from live sound being negatively impacted to higher education being favourably impacted by the transition to remote learning models. This uncertainty is expected to continue into FY21 and was one of the reasons that prompted the Group to undertake the equity raising. Around 12 months ago, the Group completed a Share Purchase Plan (10 July 2019) which raised $4 million of cash and resulted in the issue of 571,429 shares. A further equity raising was recently completed and is described in matters subsequent to the end of the financial year. Lee Ellison retired as CEO and director of the Company on 13 September 2019 and was replaced in both roles by co-founder Aidan Williams. There were no other significant changes in the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year The Group completed an institutional placement on 22 July 2020 which raised $28 million of cash and resulted in the issue of 5,436,894 ordinary shares on this date. In addition, a Share Purchase Plan was completed on 17 August 2020 which raised $12 million of cash and resulted in the issue of 2,343,750 ordinary shares on this date. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future financial years. 11 Audinate Annual Report 2020 | Likely developments and expected results of operations The Group’s growth strategy is multi-faceted and seeks to: l continue to grow the OEMs adopting Dante; l increase the adoption of Dante across a customer’s product portfolio to expand the ecosystem of available Dante enabled products; l drive other market participants’ adoption of Dante by working with consultants, integrators, and customers to create a ‘network effect’ as the adoption of Dante in partner products expands; and l deliver new products and services to both OEMs and end-users. As the Group increases its customer base, and the number of Dante-enabled devices within the ecosystem increases, more choices are available for consultants, system designers, integrators, and end users to design turnkey systems. This in turn, further entrenches Dante as the preferred networking technology for professional AV installations, and encourages OEMs to be part of the Dante ecosystem to ensure their products are considered for new installations as well as upgrades to existing installations. In the coming year the Group will also continue to focus on the sale of Dante Video, Dante Embedded Platform and Dante Application Library products for incorporation into OEM’s video products. The first step in this process is getting product designs agreed with OEM’s for them to adopt Dante AV technology and bring them to market. Proceeds from the Equity Raising completed subsequent to end of FY20 will be used to accelerate Audinate’s growth opportunities, and strengthen its global leadership position in the AV-industry, while developing its video capabilities. Specifically, the proceeds will be used to: l increase investment in engineering, R&D capabilities and business infrastructure to extend Audinate’s market leading position in the audio networking space; l strengthen the Company’s balance sheet position in the uncertain COVID-19 period; l accelerate investment in additional video and software products; and l provide flexibility to pursue potential M&A opportunities that complement the Company’s medium-term objectives. Environmental regulation The Group is not directly subject to any significant environmental regulation under Australian Commonwealth or State law. Information on Directors Name: Title: Qualifications: Experience and expertise: David Krall Chairman and Non-Executive Director David has a Master of Business Administration from Harvard University and both a Bachelor of Science degree and Masters degree in Engineering from Massachusetts Institute of Technology. David serves as a director and/or strategic advisor to several technology companies, combining a strong educational background in engineering and business with 30 years of professional experience. David currently acts as Strategic Advisor for Roku Inc. He is the former President and Chief Operating Officer of Roku Inc., a market leader in television streaming. He was also formerly President and Chief Executive Officer of Avid Technology Inc. (NASDAQ: AVID) Other current directorships: Director of Progress Software Corporation (NASDAQ: PRGS); Director of Harmonic Inc. (NASDAQ: HLIT); Director of Universal Audio; and, Chairman of WeVideo Inc. Former directorships (last 3 years): Director of Quantum Corp. (NYSE: QTM) Special responsibilities: Member of the Remuneration and Nomination Committee Interests in shares: 400,000 ordinary shares Interests in options: 80,000 options over ordinary shares Interests in rights: None 12 Directors’ Report| Audinate Annual Report 2020 Name: Title: Qualifications: Experience and expertise: Aidan Williams (Appointed on 16 September 2019) Chief Executive Officer Aidan has a BSc in Computer Science, and a BEng (Hons I) in Electrical Engineering, both from the University of New South Wales (UNSW), Australia. Aidan Williams is co-founder and CEO of Audinate. While at the National ICT Australia (NICTA), he was the driving force behind the Digital Audio Networking project that developed the fundamental audio networking technology behind Dante. Prior to joining NICTA, Aidan was at Motorola Labs in Sydney where he worked on advanced networking technologies including zero-configuration IP networking, IPv6, reliable multicast, mobile adhoc networking and residential gateways. He is an inventor on more than twenty patents related to IP networking. Before embarking on an R&D career; Aidan developed extensive skills in networking, security, operating systems, and software development through several years of hands-on experience managing large networks, mission-critical systems and network security for a large university campus. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: None Interests in shares: 1,910,907 ordinary shares Interests in options: None Interests in rights: 276,512 performance rights over ordinary shares Name: Title: Qualifications: Experience and expertise: John Dyson Non-Executive Director John has a Master of Business Administration from RMIT University and a Bachelor of Science degree from Monash University. He has a Graduate Diploma in Finance and Investment from the Securities Institute of Australia and is a member of the Australian Institute of Company Directors. John is a director and one of the founders of Starfish Ventures. He played a crucial role in the establishment of Starfish Ventures and has personally overseen and managed investments across a range of technologies and industries. John is currently a director of Atmail Pty Ltd., Echoview Pty Ltd., Aktana Inc., Design Crowd Pty Ltd and Hearables 3D Pty Limited. John is also a director at the Walter and Eliza Hall Institute of Medical Research. Formerly, John was General Manager (Australia) of JAFCO Investment (Asia Pacific), a Singapore based private equity manager. Prior to joining JAFCO, John worked in the investment banking and stockbroking industries for Schroders, Nomura Securities, KPMG and ANZ McCaughan. Other current directorships: Director of Nitro Software Ltd (ASX: NTO) Former directorships (last 3 years): None Special responsibilities: Member of the Remuneration and Nomination Committee and the Audit and Risk Management Committee Interests in shares: 184,429 ordinary shares Interests in options: Interests in rights: None None 13 Audinate Annual Report 2020 | Name: Title: Roger Price Non-Executive Director Qualifications: Roger has an Engineering degree from the University of Technology, Sydney. Experience and expertise: Roger is currently the Chief Executive Officer of Windlab Limited, a wind energy company (which was listed on the ASX until it was sold and delisted on 29 June 2020). Previously Roger was also a partner at Innovation Capital, a venture capital firm in Sydney, one of the early investors in the Group. Roger has a depth of operational experience including senior engineering, manufacturing, information technology service and international business development roles for a number of technology-based companies. Prior to joining Innovation Capital, Roger was the Chief Executive Officer of Reino Intl., a developer of advanced parking solutions. Roger commenced his career at Alcatel and has held senior positions with a number of Australian technology businesses and NASDAQ listed software companies. Other current directorships: None Former directorships (last 3 years): Formerly Executive Chairman of Windlab Limited (ASX: WND) Special responsibilities: Member of the Audit and Risk Management Committee Interests in shares: 71,156 ordinary shares Interests in options: Interests in rights: Name: Title: Qualifications: Experience and expertise: None None Alison Ledger Non-Executive Director Alison has a Master of Business Administration from Harvard University and a Bachelor of Arts degree in Economics from Boston College. She is a graduate and member of the Australian Institute of Company Directors. Alison is a company director with significant experience in banking, consulting and corporate P&L roles. She is currently a Non-Executive Director of private equity owned Latitude Financial Services, its subsidiary Hallmark Insurance and ASX listed Countplus. As a Partner with Mckinsey & Company, Alison advised leading global and Australian financial institutions on strategy, performance improvement and organisational change. While Executive General Manager, Product, Pricing and eBusinesses at Insurance Australia Group (IAG), Alison led the digital transformation of the direct insurance business. Other current directorships: Non-Executive Director of Countplus Limited (ASX: CUP) Former directorships (last 3 years): None Special responsibilities: Chair of the Remuneration and Nomination Committee Interests in shares: 4,000 ordinary shares Interests in options: Interests in rights: None None 14 Directors’ Report| Audinate Annual Report 2020 Name: Title: Qualifications: Experience and expertise: Tim Finlayson Non-Executive Director Tim has degrees in Economics and Laws from Macquarie University. He is a member of Chartered Accountants Australia and New Zealand and is admitted as a Solicitor of the Supreme Court of New South Wales. He is a graduate and member of the Australian Institute of Company Directors. Tim is a chartered accountant with more than 25 years of experience in professional services, telecommunications and infrastructure industries and has held finance and operational leadership roles in Australia, Singapore and Vietnam. Tim is currently Chief Operating Officer with King & Wood Mallesons Australia, a leading international law firm. During his time at PricewaterhouseCoopers, Tim was a partner of Tax and Legal Services in Indochina advising foreign companies on setting up and operating in Vietnam, Cambodia and Laos, following tax advisory roles in Sydney and Singapore. Tim was previously Chief Financial Officer for Sydney Airport Corporation (ASX: SYD) and Hutchison Telecommunications (Australia) Limited (ASX: HTA). Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Chair of the Audit and Risk Management Committee Interests in shares: 125,094 ordinary shares Interests in options: Interests in rights: Name: Title: Qualifications: Experience and expertise: None None Lee Ellison (Resigned on 13 September 2019) Former Chief Executive Officer Lee has a Bachelor of Science degree from Ohio State University. Lee also completed an executive management program at the University of Virginia’s Darden Business School. Lee has held a series of senior management roles in both start-up and listed companies in the telecom and computer technology industries. Lee has held various senior executive and leadership roles over the last 30 years. Lee formerly served as founding Senior Vice President of Worldwide Sales at Dilithium Networks. Previously, Lee served as Vice President of Global Sales and International Operations for Tektronix, Inc. During his 16-year tenure with Glenayre Electronics, Lee held various executive management positions. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: None Interests in shares: Not applicable as no longer a director Interests in options: Not applicable as no longer a director Interests in rights: Not applicable as no longer a director ‘Other current directorships’ quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. ‘Former directorships (last 3 years)’ quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 15 Audinate Annual Report 2020 | Company Secretary Rob Goss is the Chief Financial Officer and Company Secretary, responsible for finance, risk management and investor relations. He is a member of the Chartered Accountants Australia and New Zealand and has a Bachelor of Business degree, majoring in Accounting, from the University of Technology, Sydney. Before joining the Group in 2017, Rob served as Chief Financial Officer for BuildingIQ, Inc. (ASX: BIQ), a commercial energy platform to manage building heating and cooling via the cloud to save on energy costs. Prior to BuildingIQ, Rob was Chief Financial Officer at iProperty Group Limited (ASX: IPP), an online property portal operating in Malaysia, Hong Kong, Indonesia, Singapore and Thailand. Previously, Rob held senior finance roles at ANZ Bank and Allco Finance Group after commencing his career as a chartered accountant at KPMG. Meetings of Directors The number of meetings of the Company’s Board of Directors (‘the Board’) held during the year ended 30 June 2020, and the number of meetings attended by each director were: David Krall Aidan Williams John Dyson Roger Price Alison Ledger Tim Finlayson Lee Ellison Full Board Remuneration and Nomination Committee Audit and Risk Management Committee Attended Held Attended Held Attended Held 13 11 12 13 12 13 2 13 11 13 13 13 13 2 1 – 1 – 1 – – 1 – 1 – 1 – – – – 2 2 – 2 – – – 2 2 – 2 – Held: represents the number of meetings held during the time the director held office. Note that during the year the transition of the CEO was dealt with by the Full Board under the stewardship of the Chair of the Remuneration and Nomination Committee. Remuneration Report (audited) The remuneration report details the key management personnel remuneration arrangements for the Group, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel (‘KMP’) are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: l Remuneration philosophy and governance l Remuneration framework and structure l Remuneration details l Executive KMP contract details l Equity-based compensation l Additional information l Additional disclosures relating to KMP 16 Directors’ Report| Audinate Annual Report 2020 Remuneration philosophy and governance Remuneration philosophy The Company’s objective is to provide the maximum benefit to the shareholders while ensuring the long-term sustainability of the business. To achieve this the Company must attract, motivate and retain highly skilled directors and executives, and remunerate them fairly and appropriately. The Board of Directors (‘the Board’) has adopted a remuneration framework based on the following principles: l Competitiveness and reasonableness; l Linkage between executive rewards and shareholder value; l Establishment of appropriately demanding performance hurdles for variable executive rewards; and l Transparency. In accordance with best practice corporate governance, the structure of Non-Executive Director and executive remuneration is separate and distinct. Remuneration governance The Board has overall responsibility for the Group’s remuneration principles, practices, strategy and approach to ensure they support the Company’s business strategy and are appropriate for a listed Company given the size and nature of Audinate’s business. The Remuneration and Nomination Committee is responsible for advising the Board on the composition of the Board and its committees, evaluating potential Board candidates and advising on their suitability, and ensuring appropriate succession plans are in place. This Committee is currently comprised of three independent non-executive directors and the CEO and other directors attend at the invitation of the Committee Chair. The Remuneration and Nomination Committee establishes, amends and reviews the compensation and equity incentive plans with respect to the Executive Leadership Team (‘ELT’) and employees of the Group including determining individual elements of the total compensation of the Chief Executive Officer, and other members of the ELT. The Remuneration and Nomination Committee may seek external advice to determine the appropriate level and structure of the remuneration packages from time to time (refer to the section ‘Independent advice’ below). A summary of the annual remuneration review process for the executive leadership team is set out below. CEO Assess each ELT member’s current year performance based on actual outcomes relative to agreed key performance indicators, individual performance and market conditions. Generates recommendations to the Remuneration and Nomination Committee on STI payments for the current year. Provides appropriate recommendations to the Remuneration and Nomination Committee of the amount of fixed remuneration appropriate STI targets and LTI grants for the future measurement period. Remuneration and Nomination Committee Assess the CEO’s recommendations with respect to the ELT and provides recommendations to the Board. Reviews the CEO’s current year performance against agreed key performance indicators, formulating a recommendation to the Board on the CEO’s STI for the current year. Provides recommendations to the Board on the CEO’s and ELT’s fixed remuneration and appropriate STI and LTI targets for the future measurement period, considering all relevant market and external factors. Board Reviews the Remuneration and Nomination Committee recommendations. Approves current year STI payments. Approves the remuneration and remuneration structure for the future measurement period, including STI targets, LTI grants and targets. 17 Audinate Annual Report 2020 | Independent advice During the 2020 financial year no independent advice was sought. During the 2019 financial year the Group engaged AON Hewitt for independent advice. AON Hewitt was paid $40,000 for this service. Voting and feedback from Annual General Meeting (‘AGM’) At the AGM more than 96% of the votes received supported the adoption of the remuneration report for the year ended 30 June 2019. The Company understands that some shareholders expressed support for the waiving of service conditions but not the waiving of market conditions in respect of the retirement benefits approved at the AGM for former CEO, Lee Ellison. This feedback will be taken into account in future analogous situations. Refer to the section headed ‘Retirement benefits to former CEO, Lee Ellison’. Remuneration framework and structure Non-executive director remuneration Fees and payments to non-executive directors reflect the demands and responsibilities of their role. Non-executive directors’ fees and payments are reviewed annually by the Board. The Board may, from time to time, receive advice from independent remuneration consultants to ensure non-executive directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to the determination of his own remuneration. ASX listing rules require the aggregate non-executive directors’ remuneration be determined periodically by a general meeting. This amount is currently capped under the Company’s Constitution at $750,000 per annum. Any increase to the aggregate amount needs to be approved by shareholders. Directors will seek approval from time to time, as appropriate. This aggregate annual sum does not include any special remuneration which the Board may grant to the directors for special exertions or additional services performed by a director for or at the request of the Group, which may be in addition to or in substitution of the director’s fees. The Company has entered into an appointment letter with each of its non-executive directors. Non-executive fees, inclusive of superannuation but exclusive of GST (where applicable), are currently as follows: Name of Non-Executive Director Fees per annum ($) David Krall John Dyson Roger Price Alison Ledger* Tim Finlayson** * Chair of Remuneration and Nomination Committee ** Chair of Audit and Risk Committee 150,000 75,000 75,000 75,000 75,000 Other than the Chairman, non-executive directors also receive an additional $15,000 per annum for chairing a Board committee and $5,000 for being a member of a Board committee. The Chairman’s monthly board fees are fixed to US dollars at the beginning of the year based on the prevailing USD exchange rate at the time. 18 Directors’ Report| Audinate Annual Report 2020 Summary of executive remuneration structure Objective Component Form Assessment Attract and retain employees with the skills and experience associated with the role Incentivise and reward achievement of annual key performance objectives and business outcomes Align motivations with shareholder interests and creation of long-term value Total Fixed Remuneration Short-term Incentive Cash and non-cash benefits Market data, individual experience and performance Annual performance based on financial and non-financial targets Long-term Incentive Performance rights to shares Total shareholder return relative to market index over 3 years Total fixed remuneration (‘TFR’) TFR includes base salary and superannuation contributions and may include, at the discretion of the Board, other benefits such as health insurance for US based employees. TFR is determined with reference to available market data, the scope of an individual’s role and the qualifications and experience of the individual, as well as geographic location. TFR is reviewed annually to account for market movements and individual performance outcomes. See further details in the section headed Executive KMP contract details within the Remuneration Report. Short-term incentive plan (‘STI Plan’) The STI Plan is designed to reward eligible employees for their efforts toward the accomplishment of the Group’s goals during the plan year. Under the STI Plan, the decision to pay any bonus remains at the full discretion of the Board, based on recommendations by the Remuneration and Nomination Committee. The key components of the cash-based STI Plan are: l participants may be entitled to receive a percentage of their fixed remuneration as an annual cash bonus; l payment of an annual cash bonus is based on (i) overall company-wide achievement of corporate financial goals, and (ii) individual performance targets and objectives; l corporate financial goals are set annually and may include measures such as revenue, EBITDA, gross profit margin and growth targets, or other targets as considered appropriate and set by the Board; and l a minimum threshold is set for the payout on the achievement of corporate financial goals and the maximum payout amount is capped at 150% in the event of outperformance. In FY20 the STI for all KMP and the ELT was 70% weighted to the achievement of corporate financial goals and 30% to individual key performance objectives. The corporate financial goals for FY20 were targets for USD revenue, USD gross margin % and EBITDA. These corporate financial goals were not achieved due to the impact of COVID-19 and consequently no STI was paid. 19 Audinate Annual Report 2020 | Long-term incentive plan (‘LTI Plan’) The LTI Plan is designed to assist in the reward, retention and motivation of the ELT and other key employees (‘participants’). Under the rules of the LTI Plan, the Board has the discretion to offer awards to nominated participants. A summary of the rules of the LTI Plan is set out below: l The LTI Plan is open to participants, as determined by the Board. Participation is voluntary; l Awards may be in the form of options to acquire shares; performance rights to acquire shares; and/or shares, including those acquired under a limited recourse loan funded arrangement; l The Board may determine the type/number of awards to be issued under the LTI Plan to each participant and other terms of issue such as: service-based conditions and/or performance hurdles; any amount payable on the grant of the awards; the exercise price of any option granted; the period during which a vested option can be exercised; and any forfeiture conditions or disposal restrictions applying to the awards and any shares that a participant receives upon exercise of their options or performance rights; l The Board may, in certain circumstances, impose a clawback, including the cancellation of unvested performance rights and forfeiture of shares allocated upon vesting of options or performance rights (e.g. in the event of fraud, dishonesty or serious breach of duty); l Tthe Board may, in its discretion, also determine that the Company will issue limited recourse loans to participants to use for the purchase of shares as part of a share award under the LTI Plan; l When any service-based conditions and/or performance hurdles have been satisfied, participants will receive fully vested shares or their options/performance rights will become vested and will be exercisable over shares, as applicable; l Each vested option and performance right enables the participant to be issued or to be transferred one share upon exercise, subject to the rules governing the LTI Plan and the terms of any particular offer; l Participants holding options or performance rights are not permitted to participate in new issues of securities by the Company but adjustments may be made to the number of shares over which the options or performance rights are granted and/or the exercise price (if any) to take into account changes in the capital structure of the Company that occur by way of pro rata and bonus issues in accordance with the rules of the LTI Plan and the ASX Listing Rules; l The LTI Plan limits the aggregate number of awards that the Company may grant without shareholder approval, such that the sum of all awards on issue (assuming all options and performance rights were exercised) do not at any time exceed in aggregate 10% of the total issued capital of the Company as at the date of any proposed new awards; and l The Board may delegate management and administration of the LTI Plan, together with any of their powers or discretions under the LTI Plan, to a committee of the Board or to anyone or more persons selected by them as the Board thinks fit. LTI grants – allocation methodology During the current financial year, the Group issued performance rights to the ELT under the LTI Plan rules outlined above. The Remuneration and Nomination Committee used external benchmarking to determine a base allocation to each member of the leadership team in keeping with the Group’s remuneration philosophy. The number of performance rights to be issued is calculated by dividing the target LTI amount by the 30-day volume weighted share price prior to the annual general meeting. The accounting valuation of performance rights is lower due to the inclusion of performance hurdles. This approach resulted in an LTI grant to the CEO of 75% of his TFR. The Board, based on the input of the Remuneration and Nomination Committee and CEO, may vary the allocation to an individual member of the ELT based on the following factors: l Additional recognition for recent out performance by an individual; l Succession considerations around an individual assuming greater responsibilities in future years; l Strategic importance of tasks and responsibilities assumed by an individual; l Relative weighting of other elements of compensation, including commission plans; l Retention purposes for key roles; and l Non-compliance with the Group’s values, Code of Conduct and other relevant employee policies. In the current year the application of this approach resulted in LTI grants to the ELT of between 25% to 75% of their TFR. None of the employment contracts of the KMP, or the ELT more broadly, contain any future contractual commitments about a specified level of participation in the LTI Plan and the Board retains complete discretion to determine the appropriate level of LTI grants in future periods, within the construct of the LTI Plan rules summarised above. 20 Directors’ Report| Audinate Annual Report 2020 LTI grants – vesting conditions The performance rights will vest over a period of three years subject to the satisfaction of both: 1) a service based vesting condition; and 2) the relevant performance hurdle. The service based vesting condition for the performance rights is that the individual must remain an Employee (as defined in the Plan Rules) up to and including the vesting dates for the performance rights. The performance rights issued in FY20 vest at 30 June 2022 subject to achieving the performance hurdle. The performance metric for the performance rights is aligned to the Company’s share price growth as compared to the ASX 300 Index. The ASX 300 Index has been selected as it represents the market performance of alternative companies that Audinate shareholders may invest in. Prior year grants are measured against the ASX Emerging Companies Index. The percentage of performance rights that vest will be as follows: The Company’s Total Shareholder Return performance compared to the relevant index Percentage of performance rights to vest <50th percentile No vesting ≥50th percentile to 75th percentile Pro-rata straight line vesting between 50% and 100% ≥75th percentile 100% vesting In the event that the Company achieves a negative Total Shareholder Return (‘TSR’) that is better than the relevant index TSR the percentage of performance rights to vest is capped at 50%. Other equity grants The Group recognises the importance of all employees having an equity interest in the ongoing performance of Audinate and during FY19 extended the LTI Plan to other key employees outside of the ELT. Based on the successful achievement of the company financial objectives in FY19 the Group issued performance rights which will vest in two equal tranches over 12 and 24 months, providing that the staff member remains an employee at the time of vesting. No performance right grants will be made to other key employees, outside the ELT, in respect of FY20. Other employees received a grant of $1,000 of shares based on the successful achievement of company financial objectives in FY19, receiving an acceptable performance appraisal, and remaining in employment at the date of issue, post the release of the FY19 financial statements. No share grants will be made in respect of FY20. Retirement benefits to former CEO, Lee Ellison On 29 May 2019, Lee Ellison gave notice of his resignation which took effect at the end of his notice period on 29 November 2019. The Board recommended (and shareholders subsequently approved at the AGM) the accelerated vesting of all 373,410 of the unvested performance rights held by Lee Ellison at the time of his retirement. Lee was integral to building a very successful business over 10 plus years of service with the Group, delivering excellent shareholder returns. He also worked very co-operatively with the Board on succession planning, acting in the best interests of shareholders and the long-term success and growth of the Company. It should be noted that the performance hurdles associated with the grant of these performance rights, assuming the performance hurdles were tested as at the time of the AGM and based on trading prices on the ASX at that time, had been significantly over-achieved. Group performance and link to remuneration Remuneration for all staff is directly linked to the performance of the Group. The overall level of reward is based on the achievement of revenue and EBITDA thresholds as well as the individual’s performance assessment score. No bonus is payable unless the thresholds are met and the ultimate amount payable remains at the discretion of the Board. Refer to the section ‘Additional information’ below for details of the TSR and earnings. TSR is the key performance metric for the LTI plan. 21 Audinate Annual Report 2020 | Remuneration details Amounts of remuneration Details of the remuneration of KMP of the Group are set out in this section. The KMP of the Group consisted of the following directors of Audinate Group Limited: l David Krall – Chairman and Non-Executive Director l Aidan Williams – Chief Executive Officer (Appointed on 16 September 2019, Formerly Chief Technology Officer) l John Dyson – Non-Executive Director l Roger Price – Non-Executive Director l Alison Ledger – Non-Executive Director l Tim Finlayson – Non-Executive Director l Lee Ellison – Former Chief Executive Officer (Resigned on 16 September 2019) And the following persons: l Rob Goss – Chief Financial Officer and Company Secretary Short-term benefits Post- employment benefits Long-term benefits Share-based payments 2020 Cash salary and fees $ Cash bonus $ Non- monetary $ Super- annuation $ Long service leave $ Equity- settled $ Total $ 147,595 81,666 77,501 88,333 88,333 – 7,085 25,085 7,663 7,663 – – – – – – – – – – – – – – – – 21,003 27,500 136,865 559,329 9,148 – – 304,135 503,609 – 9,148 21,003 89,502 3,778 80,518 417,534 31,278 521,518 1,963,900 Non-Executive Directors: David Krall (Chairman) John Dyson Roger Price Alison Ledger Tim Finlayson 147,595 74,581 52,416 80,670 80,670 Executive Directors: Aidan Williams Lee Ellison* 373,961 190,326 Other KMP: Rob Goss 312,235 1,312,454 – – – – – – – – – * Includes remuneration from 1 July 2019 to date of his retirement. 22 Directors’ Report| Audinate Annual Report 2020 Short-term benefits Post- employment benefits Long-term benefits Share-based payments 2019 Cash salary and fees $ Cash bonus $ Non- monetary $ Super- annuation $ Long service leave $ Equity- settled $ Non-Executive Directors: David Krall (Chairman) John Dyson Roger Price Alison Ledger Tim Finlayson Executive Directors: 120,000 59,361 41,000 73,059 73,059 – – – – – – – – – – – 5,639 24,000 6,941 6,941 Lee Ellison 449,194 218,013 20,128 – – – – – – – Total $ 120,000 65,000 65,000 80,000 80,000 – – – – – 146,710 834,045 Other KMP: Rob Goss Aidan Williams 282,666 235,437 75,398 68,870 – – 1,333,776 362,281 20,128 20,531 20,531 84,583 3,328 4,806 8,134 54,471 88,687 436,394 418,331 289,868 2,098,770 The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Executive Directors: Aidan Williams Lee Ellison Other KMP: Rob Goss Fixed remuneration At risk – STI At risk – LTI 2020 2019 2020 2019 2020 2019 76% 40% 62% 56% 81% 70% – – – 16% 26% 24% 60% 22% 18% 17% 19% 13% Non-executive directors did not receive share options or other performance linked incentives during the year ended 30 June 2020 and 30 June 2019. 23 Audinate Annual Report 2020 | Executive KMP contract details Remuneration and other terms of employment for KMP are formalised in services agreement and the key details of these agreements are summarised below: Component Approach for CEO Approach for Executive KMP Total Fixed Remuneration: Contract Duration: Target STI % of TFR: Target LTI % of TFR: $400,000 Ongoing 50% 75% Notice period by individual/company: 6 months $320,000 Ongoing 25% 50% 3 months Restraint: Post termination subject to non-competition and non-solicitation of customers within USA, Australia and UK for 12 months Post termination subject to non-competition and non-solicitation of customers within USA, Australia and UK for 12 months All other members of the executive leadership team are employed under written terms of employment with the Group. The key terms and conditions of their employment include: l Remuneration packages; l Eligibility to participate in the STI and LTI Plans; l Notice of termination of employment provisions, with the relevant notice period of up to 3 months; and l For some of those executives, post-employment restrictions covering non-competition, non-solicitation of clients for a maximum duration of up to 3 months. KMP have no entitlement to termination payments in the event of removal for misconduct. Equity-based compensation Issue of shares There were no shares issued to directors and other KMP as part of compensation during the year ended 30 June 2020. Options There were no options over ordinary shares granted to or vested by directors and other KMP as part of compensation during the year ended 30 June 2020. Performance rights The terms and conditions of each grant of performance rights over ordinary shares affecting remuneration of the executive director and other KMP in this financial year or future reporting years are as follows: Name Number of rights granted Grant date Expiry date Relevant Index Share price hurdle for vesting Fair value per right at grant date Aidan Williams 178,541 30/06/2017 30/06/2022 ASX Emerging Companies Aidan Williams 57,857 26/03/2019 31/08/2022 ASX Emerging Companies Aidan Williams 40,114 30/06/2020 31/08/2022 ASX 300 Rob Goss Rob Goss Rob Goss 89,270 30/06/2017 30/06/2022 ASX Emerging Companies 42,857 26/03/2019 31/08/2022 ASX Emerging Companies 21,401 30/06/2020 31/08/2022 ASX 300 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.780 $2.181 $4.370 $0.780 $2.181 $4.370 24 Directors’ Report| Audinate Annual Report 2020 The performance rights issued on 30 June 2017 vest in three tranches after the release of the annual results in 2020, 2021 and 2022. All other grants vest as a single tranche after three years. Performance rights commence vesting upon achieving total shareholder return equal to the 50th percentile of the relevant index and vest fully at the 75th percentile. Performance rights granted carry no dividend or voting rights. Other than the accelerated vesting of 373,410 performance rights, related to the retirement of the former CEO Mr Lee Ellison, no other performance rights vested during the year. Additional information The earnings of the Group for the five years to 30 June 2020 are summarised below: Sales revenue EBITDA Profit/(loss) after income tax 2016* $’000 2017** $’000 2018 $’000 2019 $’000 2020 $’000 11,903 15,063 19,653 28,313 30,317 (64) 54 784 (20,443) 559 2,544 2,765 662 2,032 (4,138) * Relates to the Group prior to the restructure that occurred at the time of the IPO at 30 June 2017. ** EBITDA in the 2017 financial year is calculated excluding the one-off impacts of IPO expenses and the change in fair value of redeemable preference shares. The factors that are considered to affect TSR are summarised below: Share price at financial year end ($) Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Additional disclosures relating to KMP Shareholding 2018 2019 3.92 4.19 3.95 7.99 1.08 1.02 2020 5.40 (6.17) (6.17) The number of shares in the Company held during the financial year by each director and other members of KMP of the Group, including their personally related parties, is set out below: Balance at the start of the year Received as part of remuneration Additions Disposals/ other Balance at the end of the year 293,958 1,910,907 184,429 71,156 1,500 122,951 – – – – – – 820 2,195,000 204,408 – 106,042 – – – 2,500 2,143 – – – – – – – – (2,195,820) 400,000 1,910,907 184,429 71,156 4,000 125,094 – (101,100) 103,308 2,790,129 2,195,000 110,685 (2,296,920) 2,798,894 Ordinary shares David Krall Aidan Williams John Dyson Roger Price* Alison Ledger Tim Finlayson* Lee Ellison** Rob Goss* Includes indirect holdings * ** Lee held 820 ordinary shares at the date of resignation 25 Audinate Annual Report 2020 | Option holding The number of options over ordinary shares in the Company held during the financial year by each director and other members of KMP of the Group, including their personally related parties, is set out below: Options over ordinary shares David Krall Lee Ellison* Balance at the start of the year 186,042 320,000 506,042 Granted Exercised Other* Balance at the end of the year – – – (106,042) – 80,000 (200,000) (120,000) – (306,042) (120,000) 80,000 * 120,000 options over ordinary shares held indirectly at the date of resignation All of the outstanding options at 30 June 2020 were fully vested and exercisable. Performance rights holding The number of performance rights over ordinary shares in the Company held during the financial year by each director and other members of KMP of the Group, including their personally related parties, is set out below: Performance rights over ordinary shares Aidan Williams Lee Ellison* Rob Goss Balance at the start of the year Granted Expired/ forfeited/ other Balance at the end of the year 236,398 40,114 – 276,512 2,368,410 132,127 2,736,935 – (2,368,410) 21,401 61,515 – (2,368,410) – 153,528 430,040 * During FY20 Lee Ellison exercised 1,995,000 performance rights and at the date of his retirement (29 November 2019) he held 373,410 performance rights which had vested but had not been exercised. Performance rights over ordinary shares Aidan Williams Rob Goss Vested Unvested Balance at the end of the year – – – 276,512 153,528 430,040 276,512 153,528 430,040 Subsequent to 30 June 2020 the first tranche of performance rights issued to Aidan Williams and Rob Goss on 30 June 2017 vested in full, amounting to 59,514 and 29,757 performance rights respectively. Loans to directors and executives Prior to the IPO, Audinate Pty Limited offered option-holders an interest bearing, non-recourse loan in order to fund the exercise price of options for shares in Audinate Pty Limited. As a part of the restructure described in the prospectus these shares were then exchanged for shares in Audinate Group Limited. These loans were fully repaid during the year ended 30 June 2020. The total value of the loans outstanding at 30 June 2019 was $91,237, inclusive of a loan outstanding from Aidan Williams of $40,650. This concludes the remuneration report, which has been audited. 26 Directors’ Report| Audinate Annual Report 2020 Shares under option Unissued ordinary shares of Audinate Group Limited under option at the date of this report are as follows: Grant date 30/06/2017 30/06/2017 30/06/2017 30/06/2017 Expiry date Exercise price Number under option 09/12/2020 11/06/2022 23/08/2022 31/01/2023 $0.0620 $0.2600 $0.2600 $0.2600 130,000 105,000 248,800 24,000 507,800 Shares under performance rights Unissued ordinary shares of Audinate Group Limited under performance rights* at the date of this report are as follows: Grant date 30/06/2017 30/06/2017 30/06/2017 29/06/2018 29/06/2018 29/06/2018 26/03/2019 16/10/2019 16/10/2019 30/06/2020 30/06/2020 30/06/2020 Vesting date Exercise price Number under rights 15/07/2020 15/07/2021 15/07/2022 15/07/2020 15/07/2021 15/07/2022 30/06/2022 31/08/2020 31/08/2021 30/06/2022 06/01/2022 06/01/2023 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 245,104 244,472 239,179 17,425 17,425 17,421 381,958 15,689 15,689 163,864 10,792 10,791 1,379,809 * ASX restricted quoted performance rights No person entitled to exercise the performance rights had or has any right by virtue of the performance right to participate in any share issue of the Company or of any other body corporate. 27 Audinate Annual Report 2020 | Shares issued on the exercise of options The following ordinary shares of Audinate Group Limited were issued during the year ended 30 June 2020 and up to the date of this report on the exercise of options granted: Date options exercised Exercise price Number of shares issued 19/07/2019 19/07/2019 19/07/2019 19/07/2019 19/08/2019 20/09/2019 03/10/2019 03/10/2019 08/11/2019 08/11/2019 22/11/2019 20/03/2020 17/04/2020 17/04/2020 05/06/2020 $0.0620 $0.0620 $0.2600 $0.2600 $0.2600 $0.0620 $0.0620 $0.2600 $0.0620 $0.2600 $0.2600 $0.0620 $0.0620 $0.2600 $0.2600 20,000 9,923 8,000 3,871 8,000 9,916 370,042 12,000 100,000 12,000 2,901 10,000 10,000 3,000 120,000 699,653 Shares issued on the exercise of performance rights The following ordinary shares of Audinate Group Limited were issued during the year ended 30 June 2020 and up to the date of this report on the exercise of performance rights granted: Date performance rights converted to shares 16/09/2019 12/12/2019 12/12/2019 Exercise price Number of shares issued $0.0000 1,995,000 $0.0000 $0.0000 267,811 105,599 2,368,410 28 Directors’ Report| Audinate Annual Report 2020 Indemnity and insurance of officers During the financial year, the Company had a policy in place in respect of directors’ and officers’ liability and legal expenses insurance contracts, for current directors, including senior executives, employees and officers and for former directors, officers and employees of the Company for a period of 12 months. The policy also covers directors, senior executives, secretaries and employees of its Group. The policy prohibits disclosure of the premiums paid. The policy covers: l Costs and expenses incurred by the relevant officers in defending proceedings, whether civil or criminal and whatever their outcome; and l Other liabilities that may arise from their position, with the exception of conduct involving a wilful breach of duty or improper use of information or position to gain a personal advantage. The Company has also entered into a Deed of Access (‘Deed’) and Indemnity with all past and present directors, which provides an indemnity to the directors for legal costs and any liability arising from negligence of the director, to the extent permitted by law. In addition, the Deed allows the Company to advance a director an interest free loan equal to any legal costs which, in the Company’s opinion, are not permitted to be indemnified under the law. Any such advance is repayable by the director at the conclusion of the proceedings. Indemnity and insurance of auditor The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services There were no non-audit services provided during the financial year by the auditor. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Officers of the Company who are former partners of Deloitte Touche Tohmatsu There are no officers of the Company who are former partners of Deloitte Touche Tohmatsu. Auditor’s independence declaration A copy of the auditor’s independence declaration is set out on the following page. Auditor Deloitte Touche Tohmatsu continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors. On behalf of the directors DAVID KRALL Chairman 20 August 2020 Sydney 29 Audinate Annual Report 2020 | Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au 20 August 2020 The Board of Directors Audinate Group Limited Level 7 64-76 Kippax Street Surry Hills NSW Dear Board Members Audinate Group Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Audinate Group Limited. As lead audit partner for the audit of the financial statements of Audinate Group Limited for the financial year ended 30 June 2020, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Helen Hamilton-James Partner Chartered Accountant Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network 22 30 Auditor’s Independence Declaration| Audinate Annual Report 2020 Revenue Sales Cost of goods sold Gross margin Expenses Employee expenses Marketing expenses Administration and other operating expenses Depreciation and amortisation Total expenses Operating (loss)/profit Finance costs Other income (Loss)/profit before income tax (expense)/benefit Income tax (expense)/benefit (Loss)/profit after income tax (expense)/benefit for the year attributable to the owners of Audinate Group Limited Other comprehensive income Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Audinate Group Limited Basic earnings per share Diluted earnings per share Consolidated 2020 $’000 2019 $’000 Note 5 6 6 6 7 8 9 9 30,317 28,313 (7,109) (7,250) 23,208 21,063 (15,797) (12,700) (2,484) (2,895) (4,422) (2,631) (2,967) (2,419) (25,598) (20,717) (2,390) (117) 834 (1,673) (2,465) 346 – 296 642 20 (4,138) 662 1 1 (41) (41) (4,137) 621 Cents Cents (6.17) (6.17) 1.08 1.02 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 31 Consolidated Statement of Profit or Loss and Other Comprehensive Incomefor the year ended 30 June 2020Audinate Annual Report 2020 | ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other assets Total current assets Non-current assets Property, plant and equipment Right-of-use assets Intangibles Deferred tax Other assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Contract liabilities Lease liability Income tax payable Employee benefits Provisions Other liabilities Total current liabilities Non-current liabilities Lease liability Employee benefits Other liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed capital Reserves Accumulated losses Total equity Consolidated 2020 $’000 2019 $’000 Note 10 11 12 13 14 15 16 8 17 18 19 8 20 21 29,286 30,069 1,849 1,645 993 2,872 1,803 812 33,773 35,556 1,455 2,481 12,050 100 444 16,530 50,303 3,034 512 585 258 1,013 – 7,691 2,278 – 10,982 46,538 2,413 308 – 19 1,600 2,474 – 108 47 – 6,097 5,261 2,003 124 112 2,239 8,336 41,967 87,526 1,353 – 133 – 133 5,394 41,144 83,143 775 (46,912) (42,774) 41,967 41,144 The above consolidated statement of financial position should be read in conjunction with the accompanying notes 32 Consolidated Statement of Financial Positionas at 30 June 2020| Audinate Annual Report 2020 Consolidated Balance at 1 July 2018 Profit after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Share-based payments (note 21) Issue of shares on exercise of options Issue of shares Transfer from option reserve Share issue costs, net of tax Balance at 30 June 2019 Consolidated Balance at 1 July 2019 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Share-based payments (note 21) Issue of shares – share purchase plan Issue of shares – exercise of options Issue of shares – vesting of performance rights Issue of shares – under long-term incentive plan Share issue costs, net of tax Balance at 30 June 2020 Contributed capital $’000 Reserves $’000 Accumulated losses $’000 63,288 – – – – 36 20,000 391 (572) 83,143 521 – (41) (41) 686 – – (391) – 775 (43,436) 662 – 662 – – – – – Total equity $’000 20,373 662 (41) 621 686 36 20,000 – (572) (42,774) 41,144 Contributed capital $’000 Reserves $’000 Accumulated losses $’000 83,143 775 (42,774) Total equity $’000 41,144 – – – – 4,000 74 490 36 (217) – 1 1 1,103 – – (490) (36) – (4,138) (4,138) – 1 (4,138) (4,137) – – – – – – 1,103 4,000 74 – – (217) 87,526 1,353 (46,912) 41,967 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes 33 Consolidated Statement of Changes in Equityfor the year ended 30 June 2020Audinate Annual Report 2020 | Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Interest and other finance costs paid Government grants received Research and development incentive received Income taxes refunded Income taxes paid Consolidated 2020 $’000 2019 $’000 Note 31,635 27,747 (27,258) (25,510) 251 (117) 285 – 85 (46) 205 – – 1,327 – (153) 3,616 Net cash from operating activities 32 4,835 Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Payments for long-term secured term deposits Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Share issue transaction costs Repayment of lease liability Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents (914) (669) (7,392) (5,782) (444) – (8,750) (6,451) 4,074 20,036 (299) (642) (789) – 3,133 19,247 (782) 16,412 30,069 13,631 (1) 26 Cash and cash equivalents at the end of the financial year 10 29,286 30,069 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes 34 Consolidated Statement of Cash Flowsfor the year ended 30 June 2020| Audinate Annual Report 2020 Note 1. General information The financial statements cover Audinate Group Limited (‘Company’ or ‘parent entity’) as a consolidated entity consisting of Audinate Group Limited and the entities it controlled (collectively referred to as the ‘Group’) at the end of, or during, the financial year. The financial statements are presented in Australian dollars, which is Audinate Group Limited’s functional and presentation currency. Audinate Group Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 7 64 Kippax Street Surry Hills NSW 2010 A description of the nature of the Group’s operations and its principal activities are included in the directors’ report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of directors, on 19 August 2020. The directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new and amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The following Accounting Standards and Interpretations are most relevant to the Group: AASB 16 Leases The Group adopted AASB 16 ‘Leases’ from 1 July 2019. The standard replaces AASB 117 ‘Leases’ and for lessees eliminates the classifications of operating leases and finance leases. Except for short-term leases and leases of low-value assets, right-of- use assets and corresponding lease liabilities are recognised in the statement of financial position. Straight-line operating lease expense recognition is replaced with a depreciation charge for the right-of-use assets (included in operating costs) and an interest expense on the recognised lease liabilities (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results improve as the operating expense is now replaced by interest expense and depreciation in profit or loss. For classification within the statement of cash flows, the interest portion is disclosed in operating activities and the principal portion of the lease payments are separately disclosed in financing activities. 35 Notes to the Consolidated Financial StatementsAudinate Annual Report 2020 | Consolidated 1 July 2019 $’000 3,767 (20) (3,429) 318 (554) (33) 269 – Consolidated 2020 $’000 2019 $’000 – 79 15 94 682 115 891 378 72 7 457 – – 457 Impact of adoption AASB 16 was adopted using the modified retrospective approach and as such the comparatives have not been restated. There was no impact of adoption on opening accumulated losses as at 1 July 2019 as follows: Operating lease commitments as at 1 July 2019 (AASB 117) Operating lease commitments discount based on the weighted average incremental borrowing rate of 5% (AASB 16) Operating lease commitments committed before 1 July 2019 but commenced after 1 July 2019 Right-of-use assets (AASB 16) Lease liabilities – current (AASB 16) Lease liabilities – non-current (AASB 16) Accrual for lease change-over costs Impact on opening accumulated losses as at 1 July 2019 Impact on profit or loss and cash flows Amounts recognised in profit or loss in relation to leases Administration and other operating expenses Minimum lease payments (refer note 6) Short-term lease payments (refer note 6) Low-value assets lease payments (refer note 6) Depreciation and amortisation Depreciation of right-of-use assets (refer note 6) Finance Costs Interest expense on lease liabilities (refer note 6) 36 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Amounts recognised in the statement of cash flows in relation to leases Cash flows from operating activities Payments to suppliers and employees Interest and other finance costs paid Cash flows from financing activities Repayment of lease liability Consolidated 2020 $’000 2019 $’000 (93) (115) (208) (642) (850) (457) – (457) – (457) Practical expedients applied In applying AASB 16 for the first time, the Group has used the following practical expedients permitted by the standard: l Applying a single discount rate to a portfolio of leases with similar characteristics; l Accounting for leases which end within 12 months of the date of initial application as short-term leases; and l Excluding initial direct costs from the measurement of the right-of-use asset. The lease term was determined through management’s assessment of the contracted lease terms. Interpretation 23 Uncertainty over Income Tax The Group has adopted Interpretation 23 from 1 July 2019. The interpretation clarifies how to apply the recognition and measurement requirements of AASB 112 ‘Income Taxes’ in circumstances where uncertain tax treatments exists. The interpretation requires: the Group to determine whether each uncertain tax treatment should be treated separately or together, based on which approach better predicts the resolution of the uncertainty; the Group to consider whether it is probable that a taxation authority will accept an uncertain tax treatment; and if the Group concludes that it is not probable that the taxation authority will accept an uncertain tax treatment, it shall reflect the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates, measuring the tax uncertainty based on either the most likely amount or the expected value. In making the assessment it is assumed that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations. Interpretation 23 was adopted using the modified retrospective approach and as such comparatives have not been restated. There was no impact of adoption on opening retained profits as at 1 July 2019. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’), as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The financial statements have been prepared under the historical cost convention. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. 37 Audinate Annual Report 2020 | Parent entity information These financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 31. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Audinate Group Limited as at 30 June 2020 and the results of all subsidiaries for the year then ended. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM are responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in Australian dollars, which is Audinate Group Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into the entity’s functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed. Revenue recognition Audinate generates the following streams of revenue: l Chips, cards and modules (including adapters); l Software and licence fees; l Support and maintenance; and l Royalties. 38 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Each of the above products and services delivered to customers are considered separate performance obligations, even though for practical expedience they may be governed by a single legal contract with the customer. Revenue recognition for each of the above is as follows: Revenue stream Performance obligations Timing of recognition Chips, cards and modules (including adapters) Software and licence fees Goods dispatched from warehouse. Recognised at point of dispatch from warehouse, when control is transferred to the customer on basis of ex-works terms. Provision of access to software and activation code. Revenue from software is recognised at point of sale and access to software is granted. Support and maintenance As defined in contract. Revenue is recognised over time as stipulated by terms in contract. Royalties Provision of financial information from OEM partners. At point in time when OEM partners report on sales to end users. Revenue from providing support and maintenance is recognised in the accounting period in which the services are rendered. For fixed-price contracts, revenue is recognised based on the actual service provided to the end of the reporting period. This is determined based on contract terms and period of agreement. Some contracts include multiple deliverables, such as software licences and maintenance. In these cases, the transaction price is split according to performance obligations described above. In fixed-price contracts, the customer pays the fixed amount based on an agreed payment schedule. If the services rendered by the Group exceed the payment, a contract asset (previously referred to as ‘unbilled income’) is recognised. If the payments exceed the services rendered, a contract liability (previously referred to as ‘unearned revenue’) is recognised. Government grants Grants from the government are recognised 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. Government grants are recognised in profit or loss over the period necessary to match with the costs that they are intended to compensate. The Group received COVID-19 related government grants for wage subsidies and cash flow boost in Australia and small business grant in the UK during the year. The grants are recognised as other income and are included in note 7. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Income tax The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: l When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or l When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. 39 Audinate Annual Report 2020 | Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Audinate Group Limited (the ‘head entity’) and its wholly-owned Australian subsidiaries formed an income tax consolidated group under the tax consolidation regime in 2017. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the Group’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents 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. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Inventories Raw materials and finished goods are stated at the lower of cost and net realisable value on a First In, First Out basis. Cost comprises of direct materials and delivery costs, direct labour, import duties and other taxes, an appropriate proportion of variable and fixed overhead expenditure based on normal operating capacity, and, where applicable, transfers from cash flow hedging reserves in equity. Costs of purchased inventory are determined after deducting rebates and discounts received or receivable. 40 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Leasehold improvements Furniture and fittings Computer and engineering equipment Lease term 4 – 10 years 1 – 10 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the Group expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The Group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit or loss as incurred. Intangible assets Intangible assets are initially recognised at cost. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method of amortisation and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Research and development Research costs are expensed in the period in which they are incurred. Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility; the Group is able to use or sell the asset; the Group has sufficient resources; and intent to complete the development and its costs can be measured reliably. Capitalised development costs are amortised, commencing from the time the asset’s development reaches the condition necessary for it to be capable of operating in the manner intended by management. Amortisation is calculated on a straight-line basis over the period of the expected benefit, being the finite useful life of three years. Intellectual property Significant costs associated with intellectual property are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of three years. Software Significant costs associated with software are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 2-5 years. 41 Audinate Annual Report 2020 | Impairment of non-financial assets Non-financial assets are reviewed 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 value exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Contract liabilities Contract liabilities represent the Group’s obligation to transfer goods or services to a customer and are recognised when a customer pays consideration, or when the Group recognises a receivable to reflect its unconditional right to consideration (whichever is earlier) before the Group has transferred the goods or services to the customer. Lease liability A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. Provisions Provisions are recognised when the Group has a present (legal or constructive) obligation as a result of a past event, it is probable the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee related cost in profit or loss when they are due. 42 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Share-based payments Equity-settled transactions are awards of shares, performance rights or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is determined using the Monte Carlo simulation method that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital 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. 43 Audinate Annual Report 2020 | Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Audinate Group Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the 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 tax authority is included in other receivables or other 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 tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 30 June 2020. The Group’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, are set out below. Conceptual Framework for Financial Reporting (Conceptual Framework) The revised Conceptual Framework is applicable to annual reporting periods beginning on or after 1 January 2020 and early adoption is permitted. The Conceptual Framework contains new definition and recognition criteria as well as new guidance on measurement that affects several Accounting Standards. Where the Group has relied on the existing framework in determining its accounting policies for transactions, events or conditions that are not otherwise dealt with under the Australian Accounting Standards, the Group may need to review such policies under the revised framework. At this time, the application of the Conceptual Framework is not expected to have a material impact on the Group’s financial statements. Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Coronavirus (COVID-19) pandemic Judgement has been exercised in considering the impacts that the COVID-19 pandemic has had, or may have, on the Group based on known information. This consideration extends to the nature of the products and services offered, customers, supply chain, staffing and geographic regions in which the Group operates. The COVID-19 pandemic can result in a wide range of potential revenue outcomes in the forthcoming financial year, hence one of the main reasons for the equity raising undertaken subsequent to 30 June 2020. Other than as addressed in specific notes, there does not currently appear to be either any other significant impact upon the financial statements or any other significant uncertainties with respect to events or conditions which may impact the Group unfavourably as at the reporting date or subsequently as a result of the COVID-19 pandemic. 44 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using the Monte Carlo simulation method taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Allowance for expected credit losses The allowance for expected credit losses assessment requires a degree of estimation and judgement. It is based on the lifetime expected credit loss, grouped based on days overdue, and makes assumptions to allocate an overall expected credit loss rate for each group. These assumptions include recent sales experience, historical collection rates, the impact of the COVID-19 pandemic and forward-looking information that is available. The allowance for expected credit losses, as disclosed in note 11, is calculated based on the information available at the time of preparation. The actual credit losses in future years may be higher or lower. Income tax The Group is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on the Group’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Lease term The lease term is a significant component in the measurement of both the right-of-use asset and lease liability. Judgement is exercised in determining whether there is reasonable certainty that an option to extend the lease or purchase the underlying asset will be exercised, or an option to terminate the lease will not be exercised, when ascertaining the periods to be included in the lease term. In determining the lease term, all facts and circumstances that create an economical incentive to exercise an extension option, or not to exercise a termination option, are considered at the lease commencement date. Factors considered may include the importance of the asset to the Group’s operations; comparison of terms and conditions to prevailing market rates; incurrence of significant penalties; existence of significant leasehold improvements; and the costs and disruption to replace the asset. The Group reassesses whether it is reasonably certain to exercise an extension option, or not exercise a termination option, if there is a significant event or significant change in circumstances. Useful life of capitalised development costs The Group regularly considers the useful life of development costs, which is currently estimated to be three years. In determining the appropriate useful life for these assets a range of factors are taken into account including the specific nature of the asset created, risk of technical obsolescence, business performance and market conditions. To the extent that there is a change to the useful life of these assets (not related to impairment) the amortisation charge is changed prospectively. Note 4. Operating segments Identification of reportable operating segments The Group operates in one segment, based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers) in assessing performance and in determining the allocation of resources. As a result, the operating segment information is as disclosed in the statements and notes to the financial statements throughout the report. Major customers Most of the Group’s major customers are multinational companies that Audinate may transact with in multiple countries. Due to the corporate structure of the Group this revenue is accounted for by Audinate Pty Limited in Australia. The top ten customers represent approximately 43% (2019: 41%) of the Group’s revenue during the year ended 30 June 2020 and of that amount the largest customer represents approximately 11% (2019: 13%) of the Group’s revenue. 45 Audinate Annual Report 2020 | Geographical information The majority of the Group’s revenue is generated from sales contracts between Audinate Pty Limited and a range of international companies. The geographic split of this revenue is based on the location of the customer: a) Americas 38% (2019: 39%); b) Asia 32% (2019: 33%); and c) Europe and Middle East 30% (2019: 28%). Occasionally the international offices may generate some revenue related to marketing activities. Australia United Kingdom Hong Kong United States of America * Sales to external customers is based on the domicile of the entity recording the sale. Note 5. Revenue Sales Disaggregation of revenue The disaggregation of revenue from contracts with customers is as follows: Chips, cards and modules (including adapters) Software revenue (including licence fees and royalties) Other revenue (including support and maintenance) Sales to external customers* Geographical non-current assets 2020 $’000 2019 $’000 2020 $’000 2019 $’000 30,317 28,292 16,253 10,306 – – – – – 21 30 3 244 26 4 646 30,317 28,313 16,530 10,982 Consolidated 2020 $’000 2019 $’000 30,317 28,313 Consolidated 2020 $’000 2019 $’000 23,517 24,031 6,123 3,779 677 503 30,317 28,313 Timing of revenue recognition Revenue from providing support and maintenance is recognised over the period of time in which the services are provided. All other revenue is recognised when the service is provided or the goods are dispatched from the warehouse. 46 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Note 6. Expenses (Loss)/profit before income tax includes the following specific expenses: Depreciation and amortisation Depreciation of property, plant and equipment Depreciation of office leases – right-of-use Amortisation of intangibles Depreciation and amortisation – capitalised Total depreciation and amortisation Finance costs Interest and finance charges paid/payable on lease liabilities Interest – other Total finance costs Leases Minimum lease payments Short-term lease payments Low-value assets lease payments Total lease expense Employee benefit expenses Salaries and wages Post-employment benefits Share-based payments Other costs Total employee benefit expenses* Consolidated 2020 $’000 2019 $’000 474 682 3,698 (432) 4,422 115 2 117 – 79 15 94 344 – 2,075 – 2,419 – – – 378 72 7 457 11,217 9,699 1,000 1,103 2,477 676 686 1,639 15,797 12,700 * During the current year director fees and mileage allowances paid to employees have been classified as employee expenses. Consequently comparative information (for the year ended 30 June 2019) for employee expenses has been increased by $412,000 with a corresponding decrease in administration and other operating expenses to agree with the current year presentation. There was no effect on profit, assets, liabilities or equity. Note 7. Other income Net foreign exchange gain Interest revenue Government grants Consolidated 2020 $’000 2019 $’000 11 320 503 834 104 192 – 296 47 Audinate Annual Report 2020 | Government grants During the Coronavirus (‘COVID-19’) pandemic, the Group has received $434,000 from JobKeeper support payments from the Australian Government which are passed on to eligible employees. These have been recognised as government grants in the financial statements and recorded as other income over the periods in which the related employee benefits are recognised as an expense. The JobKeeper payment scheme in its current form runs for the fortnights from 30 March until 27 September 2020. The Group is expected to be eligible for approximately $688,000 of additional JobKeeper support payments from the government to the end of September 2020 on the condition that employee benefits continue to be paid. In addition the Group received a $50,000 cash flow boost from the Australian Government and a $19,000 small business grant from the UK Government. Note 8. Income tax The Group incurs an income tax expense in its overseas subsidiaries relating to the net taxable profit generated on services provided to the Group. Consolidated 2020 $’000 2019 $’000 (2,737) (1,004) (55) 1,627 3,630 2,465 (1,673) (460) 74 2,552 (3,573) 3,630 241 2,464 (55) 56 2,465 36 948 – (20) 642 177 339 1,832 (2,564) – 193 (23) 36 (33) (20) Income tax expense/(benefit) Current tax Under provision prior year Deferred tax – origination and reversal of temporary differences Derecognition of tax losses Aggregate income tax expense/(benefit) Numerical reconciliation of income tax expense/(benefit) and tax at the statutory rate (Loss)/profit before income tax (expense)/benefit Tax at the statutory tax rate of 27.5% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Amortisation of development costs (pre 30 June 2017) Expenditure claimed for research and development incentive Research and development incentive benefit Derecognition of tax losses Non-deductible expenses Under provision prior year Difference in overseas tax rates Income tax expense/(benefit) 48 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Deferred tax asset Net deferred tax asset comprises temporary differences attributable to: Lease liabilities Provisions Carried forward tax losses Blackhole expenditure Trade and other payables Intangible assets Right-of-use assets Property, plant and equipment Other Deferred tax asset Income tax payable Income tax payable Consolidated 2020 $’000 2019 $’000 714 649 424 282 96 (1,324) (684) (70) 13 100 – 777 1,153 347 115 (202) – 59 29 2,278 Consolidated 2020 $’000 2019 $’000 258 19 Income tax payable represents an estimate of tax payable by overseas subsidiaries. The Group has $3,630,000 (2019: $nil) of unused tax credits and offsets for which no deferred tax asset is recognised in the statement of financial position. 49 Audinate Annual Report 2020 | Note 9. Earnings per share (Loss)/profit after income tax attributable to the owners of Audinate Group Limited Consolidated 2020 $’000 (4,138) 2019 $’000 662 Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 67,057,118 61,439,782 Adjustments for calculation of diluted earnings per share: Options over ordinary shares Performance rights – – 1,174,297 1,995,000 Weighted average number of ordinary shares used in calculating diluted earnings per share 67,057,118 64,609,079 Basic earnings per share Diluted earnings per share Cents Cents (6.17) (6.17) 1.08 1.02 At 30 June 2020, options and performance rights over ordinary shares were excluded from the calculation of the weighted average number of ordinary shares used in calculating diluted earnings per share due to being anti-dilutive. Note 10. Current assets – cash and cash equivalents Consolidated 2020 $’000 5,161 2019 $’000 4,315 24,125 25,754 29,286 30,069 Consolidated 2020 $’000 1,394 (11) 1,383 466 1,849 2019 $’000 2,647 (2) 2,645 227 2,872 Cash at bank Cash on deposit Note 11. Current assets – trade and other receivables Trade receivables Less: Allowance for expected credit losses Other receivables 50 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Allowance for expected credit losses The Group has recognised a loss of $22,000 in respect of the expected credit losses for the year ended 30 June 2020 (2019: $2,000). The ageing of the receivables and allowance for expected credit losses provided for above are as follows: Consolidated Not overdue Expected credit loss rate 2020 % 2019 % 0.068% 0.066% Carrying amount Allowance for expected credit losses 2020 $’000 1,394 2019 $’000 2,647 2020 $’000 11 2019 $’000 2 Movements in the allowance for expected credit losses are as follows: Opening balance Additional provisions recognised Receivables written off during the year as uncollectable Closing balance Note 12. Current assets – inventories Raw materials – at cost Finished goods – at cost Note 13. Current assets – other assets Prepayments Deposits Consolidated 2020 $’000 2019 $’000 2 22 (13) 11 – 2 – 2 Consolidated 2020 $’000 395 1,250 1,645 2019 $’000 238 1,565 1,803 Consolidated 2020 $’000 590 403 993 2019 $’000 594 218 812 51 Audinate Annual Report 2020 | Note 14. Non-current assets – property, plant and equipment Leasehold improvements – at cost Less: Accumulated depreciation Furniture and fittings – at cost Less: Accumulated depreciation Computer and equipment – at cost Less: Accumulated depreciation Reconciliations Consolidated 2020 $’000 2019 $’000 792 (134) 658 72 (37) 35 482 (206) 276 83 (45) 38 1,587 1,409 (825) 762 (710) 699 1,455 1,013 Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2018 Additions Depreciation expense Balance at 30 June 2019 Additions Exchange differences Depreciation expense Balance at 30 June 2020 Leasehold improvements $’000 Furniture and fittings $’000 Computer and equipment $’000 104 290 (118) 276 516 – (134) 658 55 6 (23) 38 19 1 (23) 35 532 370 (203) 699 379 1 (317) 762 Total $’000 691 666 (344) 1,013 914 2 (474) 1,455 52 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Note 15. Non-current assets – right-of-use assets Office leases – right-of-use Less: Accumulated depreciation Consolidated 2020 $’000 3,160 (679) 2,481 2019 $’000 – – – Additions to the right-of-use assets during the year were $3,085,000. The Group leases offices under agreements of between 1 to 5 years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Note 16. Non-current assets – intangibles Development costs Less: Accumulated amortisation Intellectual property Less: Accumulated amortisation Software – at cost Less: Accumulated amortisation Consolidated 2020 $’000 2019 $’000 18,964 11,956 (8,488) 10,476 518 (284) 234 1,579 (239) 1,340 (5,093) 6,863 335 (158) 177 713 (62) 651 12,050 7,691 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2018 Additions Amortisation expense Balance at 30 June 2019 Additions Amortisation expense Balance at 30 June 2020 Development costs $’000 Intellectual property $’000 Software $’000 3,514 5,270 (1,921) 6,863 7,008 (3,395) 10,476 194 75 (92) 177 183 (126) 234 171 542 (62) 651 866 (177) 1,340 Total $’000 3,879 5,887 (2,075) 7,691 8,057 (3,698) 12,050 53 Audinate Annual Report 2020 | Note 17. Non-current assets – other assets Security deposit* * Represents amount held as security for Sydney office lease. Note 18. Current liabilities – trade and other payables Trade payables Accrued expenses Other payables Refer to note 23 for further information on financial instruments. Note 19. Current liabilities – contract liabilities Contract liabilities Consolidated 2020 $’000 444 2019 $’000 – Consolidated 2020 $’000 1,541 385 1,108 3,034 2019 $’000 1,122 726 565 2,413 Consolidated 2020 $’000 512 2019 $’000 308 Reconciliation Reconciliation of the written down values at the beginning and end of the current financial year is set out below: Consolidated 2020 $’000 308 – 2019 $’000 – 134 1,640 1,152 – (1,436) 512 (134) (844) 308 Opening balance Transfer from unearned revenue on 1 July 2018 Billings in advance Transfer to revenue – included in the opening balance Transfer to revenue – relating to current period Closing balance 54 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Unsatisfied performance obligations The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied at the end of the reporting period was $512,000 as at 30 June 2020 ($308,000 as at 30 June 2019) and is expected to be recognised as revenue in future periods as follows: Within 6 months 6 to 12 months Note 20. Equity – contributed capital Fully paid ordinary shares Consolidated 2020 $’000 279 233 512 2019 $’000 204 104 308 Consolidated 2020 Shares 2019 Shares 2020 $’000 2019 $’000 Ordinary shares – fully paid 67,940,499 64,296,003 87,526 83,143 Ordinary shares Ordinary shares entitle the holder to participate in any dividends declared and any proceeds attributable to shareholders should the Company be wound up, in proportions that consider both the number of shares held and the extent to which those shares are paid up. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The Group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The capital risk management policy remains unchanged from the 30 June 2019 financial statements. 55 Audinate Annual Report 2020 | Movements in ordinary share capital Details Balance Date Shares Issue price 1 July 2018 60,936,358 $’000 63,288 Issue of shares – exercise of options 21 September 2018 10,000 $0.0360 Issue of shares – exercise of options 21 September 2018 100,000 $0.0620 50,000 20,000 50,000 8,000 8,000 20,000 10,000 12,000 $0.0620 $0.0360 $0.0620 $0.2600 $0.2600 $0.0620 $0.0620 $0.0620 8,000 $0.2600 10,000 99,502 15,000 38,000 $0.0620 $0.2600 $0.2600 $0.0620 8,000 $0.2600 – 6 3 1 3 2 2 1 1 1 2 1 – 4 2 2 2,857,143 $7.0000 20,000 20,000 16,000 – – $0.0620 $0.2600 – – 1 4 (572) 391 Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares Issue of shares – exercise of options Issue of shares – exercise of options Share issue costs, net of tax Transfer from share-based payments reserve 2 November 2018 19 November 2018 25 February 2019 6 March 2019 13 March 2019 13 March 2019 14 March 2019 25 March 2019 25 March 2019 5 April 2019 5 April 2019 17 May 2019 17 May 2019 7 June 2019 13 June 2019 21 June 2019 21 June 2019 56 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Details Balance Issue of shares – share purchase plan Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Date Shares Issue price 30 June 2019 64,296,003 11 July 2019 19 July 2019 19 July 2019 19 July 2019 19 July 2019 571,429 $7.0000 20,000 $0.0620 9,923 8,000 3,871 8,000 $0.0620 $0.2600 $0.2600 $0.2600 Issue of shares – exercise of options 19 August 2019 Issue of shares – vesting of performance rights 16 September 2019 1,995,000 $0.0000 Issue of shares – exercise of options 20 September 2019 9,916 $0.0620 Issue of shares – exercise of options Issue of shares – exercise of options 3 October 2019 3 October 2019 370,042 $0.0620 12,000 $0.2600 Issue of shares – under long-term incentive plan 16 October 2019 5,004 $7.2150 Issue of shares – exercise of options 8 November 2019 100,000 $0.0620 Issue of shares – exercise of options 8 November 2019 12,000 $0.2600 Issue of shares – exercise of options 22 November 2019 2,901 $0.2600 Issue of shares – vesting of performance rights 12 December 2019 267,811 $0.8000 Issue of shares – vesting of performance rights 12 December 2019 105,599 $2.6110 Issue of shares – exercise of options 20 March 2020 Issue of shares – exercise of options Issue of shares – exercise of options Issue of shares – exercise of options Share issue costs Deferred tax credit recognised directly in equity 17 April 2020 17 April 2020 5 June 2020 10,000 10,000 $0.0620 $0.0620 3,000 $0.2600 120,000 $0.2600 – – – – $’000 83,143 4,000 1 – 2 – 2 – – 23 3 36 6 3 – 214 276 1 1 1 31 (299) 82 Balance 30 June 2020 67,940,499 87,526 The table above includes shares issued to employees under a cashless exercise election. 57 Audinate Annual Report 2020 | Note 21. Equity – reserves Foreign currency reserve Share-based payments reserve Consolidated 2020 $’000 (145) 1,498 1,353 2019 $’000 (146) 921 775 Foreign currency reserve The reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and directors as part of their remuneration, and other parties as part of their compensation for services. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 July 2018 Foreign currency translation Share-based payments Transfer to equity for vested options Balance at 30 June 2019 Foreign currency translation Share-based payments Transfer to equity for issue of shares – vested performance rights Transfer to equity for issue of shares – under long-term incentive plan Balance at 30 June 2020 Foreign currency $’000 Share-based payments $’000 (105) (41) – – (146) 1 – – – (145) 626 – 686 (391) 921 – 1,103 (490) (36) 1,498 Total $’000 521 (41) 686 (391) 775 1 1,103 (490) (36) 1,353 Note 22. Equity – dividends There were no dividends paid, recommended or declared during the current or previous financial year. 58 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Note 23. Financial instruments Financial risk management objectives The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program seeks to minimise potential adverse effects on the financial performance of the Group. The Group’s policy is not to trade in or use financial instruments to hedge its risks. Risk management is carried out by the Board of Directors (‘the Board’). The Board uses different methods to measure different types of risks to which the Group is exposed. These methods include ageing analysis for credit risk and sensitivity analysis in the case of interest rate risk. Market risk The Group’s US dollar denominated sales, on which the risk of foreign exchange movement, was partially offset against exchange rate movement of US dollar denominated for purchases which is set below: US dollar denominated – sales US dollar denominated – purchases Interest rate risk Consolidated 2020 $’000 2019 $’000 20,374 20,251 (13,141) (11,714) At the reporting date, the Group had no variable rate borrowings. Cash at bank earns interest at floating rates based on daily bank deposit rates. As at the reporting date, the Group had the following variable rate cash and cash equivalents: Cash at bank Cash on deposit 2020 2019 Weighted average interest rate % Weighted average interest rate % Balance $’000 Balance $’000 – 5,161 – 4,315 0.65% 24,125 1.59% 25,754 Net exposure to cash flow interest rate risk 29,286 30,069 No sensitivity analysis has been performed for the exposure to interest rate risk on the Group’s bank balance as the exposure is not significant. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group trades only with recognised and creditworthy independent third parties. The Group has a strict code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The Group monitors the receivables on an ongoing basis and its exposure to bad debts is not significant. The Group has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables through the use of a provisions matrix using fixed rates of credit loss provisioning. These provisions are considered representative across all customers of the Group based on recent sales experience, historical collection rates and forward-looking information that is available. 59 Audinate Annual Report 2020 | Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. Liquidity risk Prudent liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Remaining contractual maturities The following tables detail the Group’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. Consolidated – 2020 Non-interest bearing Trade payables Accrued expenses Other payables Interest-bearing – fixed rate Lease liability Other liabilities Total non-derivatives Consolidated – 2019 Non-interest bearing Trade payables Accrued expenses Other payables Total non-derivatives Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – – 4.08% 4.00% 1,541 385 1,108 679 117 3,830 – – – 665 117 782 – – – 1,472 – 1,472 – – – – – – 1,541 385 1,108 2,816 234 6,084 Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – – 1,122 726 565 2,413 – – – – – – – – – – – – 1,122 726 565 2,413 The cash flows in the maturity analysis above are not expected to occur earlier than contractually disclosed above. 60 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Note 24. Fair value measurement The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. Note 25. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by Deloitte Touche Tohmatsu, the auditor of the Company, and unrelated firms: Audit services Audit or review of the Group financial statements Audit of the controlled entities Note 26. Contingent liabilities The Group had no contingent liabilities at 30 June 2020 or 30 June 2019. Note 27. Commitments Capital commitments Committed at the reporting date but not recognised as liabilities, payable: Property, plant and equipment Intangible assets Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Refer to note 2 for details on the impact of AASB 16 ‘Leases’ adopted by the Group from 1 July 2019. Consolidated 2020 $ 2019 $ 127,270 115,990 23,145 – 150,415 115,990 Consolidated 2020 $’000 2019 $’000 – – – – – – 492 450 719 2,984 64 3,767 61 Audinate Annual Report 2020 | Note 28. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel of the Group is set out below: Consolidated 2020 $ 2019 $ 1,352,880 1,724,319 89,502 84,583 521,518 289,868 1,963,900 2,098,770 Short-term employee benefits Post-employment benefits Share-based payments Note 29. Related party transactions Parent entity Audinate Group Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 30. Key management personnel Disclosures relating to key management personnel are set out in note 28 and the remuneration report included in the directors’ report. Transactions with related parties There were no transactions with related parties during the current and previous financial year. Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Loans to/from related parties As described in the directors’ report, Audinate Pty Limited offered employees interest bearing, non-recourse loans in order to fund the exercise of options prior to the IPO. These loans were fully repaid during the year ended 30 June 2020. The total value of the loans outstanding at 30 June 2019 was $91,237, inclusive of a loan outstanding from Aidan Williams of $40,650. There were no other loans to or from related parties at the current and previous reporting date. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. 62 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Note 30. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: Name Principal place of business/ Country of incorporation Audinate Pty Limited Australia Audinate, Inc. Audinate Limited Audinate Limited Audinate Holdings Pty Limited United States of America United Kingdom Hong Kong Australia Note 31. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Net assets Equity Contributed capital Reserves Accumulated losses Total equity Ownership interest 2020 % 100% 100% 100% 100% 100% 2019 % 100% 100% 100% 100% 100% Parent 2020 $’000 61 61 2019 $’000 (1,303) (1,303) Parent 2020 $’000 2019 $’000 36,569 29,668 95,888 91,111 175 175 419 419 95,713 90,692 95,807 91,424 1,498 (1,592) 921 (1,653) 95,713 90,692 The contributed capital of the parent entity differs from the contributed capital of the Group, as Audinate Group Limited’s acquisition of Audinate Pty Limited was accounted for on the basis that the transaction was a form of capital reconstruction and group reorganisation, rather than a business combination. 63 Audinate Annual Report 2020 | Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2020 or 30 June 2019. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2020 or 30 June 2019. Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2020 or 30 June 2019. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 2, except for the following: l Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. l Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. Note 32. Cash flow information Reconciliation of (loss)/profit after income tax to net cash from operating activities (Loss)/profit after income tax (expense)/benefit for the year Adjustments for: Depreciation and amortisation Share-based payments Net unrealised foreign exchange loss/(gain) Change in operating assets and liabilities: Consolidated 2020 $’000 (4,138) 4,422 1,103 10 2019 $’000 662 2,419 686 (29) Decrease/(increase) in trade and other receivables 1,061 (1,063) Decrease/(increase) in inventories Decrease/(increase) in deferred tax assets Decrease/(increase) in current tax asset Increase in other operating assets Increase in trade and other payables Increase/(decrease) in income tax payable Increase/(decrease) in other operating liabilities Net cash from operating activities 158 2,269 – (162) 641 235 (764) (578) (187) 1,344 (722) 117 (4) 971 4,835 3,616 64 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Non-cash investing and financing activities Consolidated Additions to the right-of-use assets Depreciation and amortisation capitalised to development costs Changes in liabilities arising from financing activities Consolidated Balance at 1 July 2018 Balance at 30 June 2019 Net cash used in financing activities Leases recognised on the adoption of AASB 16 Acquisition of leases Modification of leases Transfer from onerous lease accrual Exit of lease Foreign currency translation Balance at 30 June 2020 2020 $’000 3,085 432 3,517 2019 $’000 – – – Lease liability $’000 – – (642) 318 3,085 (88) 269 (361) 7 2,588 65 Audinate Annual Report 2020 | Note 33. Share-based payments Options Under the legacy Employee Share Option Plan (‘ESOP’), the Company’s Board of Directors (‘Board’), or a committee of the Board, granted incentive and non-qualified stock options to employees, officers, directors, consultants, independent contractors, and advisors to the Company, or to any parent, subsidiary, or affiliate of the Company. The purpose of the legacy ESOP was to attract, retain, and motivate eligible persons whose present and potential contributions are important to the Group’s success by offering them an opportunity to participate in the Company’s future performance through equity awards of stock options and stock bonuses. The legacy ESOP has been superseded by the LTI plan which is explained in the remuneration report. Set out below are summaries of options granted under the plan: 2020 Start date End date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other* Balance at the end of the year 30/06/2017 17/10/2019 $0.0620 370,042 30/06/2017 09/12/2019 30/06/2017 09/01/2020 30/06/2017 21/08/2020 $0.0620 $0.0620 $0.0620 10,000 10,000 10,000 30/06/2017 09/12/2020 $0.0620 260,000 30/06/2017 11/06/2022 $0.2600 135,000 30/06/2017 23/08/2022 $0.2600 372,800 30/06/2017 31/01/2023 $0.2600 40,000 1,207,842 * Other includes the impact of cashless exercise of options. – – – – – – – – – (369,958) (10,000) (9,923) (10,000) (130,000) (29,901) (123,871) (16,000) (699,653) (84) – (77) – – (99) (129) – – – – – 130,000 105,000 248,800 24,000 (389) 507,800 2019 Start date End date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other* Balance at the end of the year 30/06/2017 23/11/2018 $0.0360 30,000 30/06/2017 17/10/2019 $0.0620 448,042 30/06/2017 09/12/2019 30/06/2017 09/01/2020 30/06/2017 21/08/2020 $0.0620 $0.0620 $0.0620 10,000 10,000 42,000 30/06/2017 09/12/2020 $0.0620 460,000 30/06/2017 11/06/2022 $0.2600 158,000 30/06/2017 23/08/2022 $0.2600 508,800 30/06/2017 31/01/2023 $0.2600 48,000 1,714,842 * Other includes the impact of cashless exercise of options. – – – – – – – – – – (30,000) (78,000) – – (32,000) (200,000) (23,000) – – – – – – – – 370,042 10,000 10,000 10,000 260,000 135,000 (131,502) (4,498) 372,800 (8,000) – 40,000 (502,502) (4,498) 1,207,842 507,800 options were exercisable at the end of the financial year (2019: 1,207,842). The weighted average share price of the Company during the financial year was $6.46 (2019: $5.47). 66 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 Share rights Set out below are summaries of performance rights granted: 2020 Grant date Vesting date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ lapsed/other Balance at the end of the year 30/06/2017 15/07/2020 $0.0000 334,375 30/06/2017 15/07/2021 $0.0000 334,375 30/06/2017 15/07/2022 $0.0000 334,349 02/08/2017 15/09/2019 $0.0000 1,995,000 29/06/2018 15/07/2020 29/06/2018 15/07/2021 29/06/2018 15/07/2022 $0.0000 $0.0000 $0.0000 17,425 17,425 17,421 26/03/2019 30/06/2022 $0.0000 487,557 – – – – – – – – (89,271) (89,271) (89,269) (1,995,000) – – – (105,599) 16/10/2019 31/08/2020 16/10/2019 31/08/2021 30/06/2020 30/06/2022 30/06/2020 06/01/2022 30/06/2020 06/01/2023 $0.0000 $0.0000 $0.0000 $0.0000 $0.0000 – – – – – 16,485 16,485 163,864 10,792 10,791 – – – – – – 245,104 (632) 244,472 (5,901) 239,179 – – – – – (796) (796) – – – – 17,425 17,425 17,421 381,958 15,689 15,689 163,864 10,792 10,791 3,537,927 218,417 (2,368,410) (8,125) 1,379,809 2019 Grant date Vesting date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ lapsed/other Balance at the end of the year 30/06/2017 15/07/2020 $0.0000 340,277 30/06/2017 15/07/2021 $0.0000 340,277 30/06/2017 15/07/2022 $0.0000 340,250 02/08/2017 15/09/2019 $0.0000 1,995,000 29/06/2018 15/07/2020 29/06/2018 15/07/2021 29/06/2018 15/07/2022 26/03/2019 30/06/2022 $0.0000 $0.0000 $0.0000 $0.0000 17,425 17,425 17,421 – – – – – – – – 487,557 3,068,075 487,557 – – – – – – – – – (5,902) (5,902) (5,901) – – – – – 334,375 334,375 334,349 1,995,000 17,425 17,425 17,421 487,557 (17,705) 3,537,927 The weighted average remaining contractual life of performance rights outstanding at the end of the financial year was 1.1 years (2019: 1 year). 67 Audinate Annual Report 2020 | The 163,864 performance rights issued with a grant date of 30 June 2020 were externally valued based on a share price of $7.32, an exercise price of zero, volatility of 35% – 45%, a risk-free interest rate of 0.71% and probability weighting reflecting the probability of meeting the vesting conditions. The fair value of the share rights based on these inputs is $4.37 per share. These performance rights vesting upon: l Achieving total shareholder return equal to the 50th percentile of the relevant Index and vest fully at the 75th percentile; and l The employee remaining an employee up to an including the vesting date. The remaining performance rights issued in the current year with a grant date of 16 October 2019 and 30 June 2020 were valued using the 30-day Volume Weighted Average Price (‘VWAP’) at $7.21 and $8.24 respectively. These performance rights vest upon the employee remaining an employee up to and including the vesting date. At the Annual General Meeting on 24 October 2019, the shareholders approved the removal of the vesting conditions and performance hurdles from the 373,410 performance rights held by the former CEO, Lee Ellison as outlined below. 267,811 performance rights issued on 30 June 2017 under the Employee Incentive Offer as part of the IPO which were subject to the following vesting conditions and performance hurdles: l A vesting condition that Lee remains an employee of the Group up to and including the vesting dates for the relevant tranches of performance rights; and l Performance hurdles which are based on the Company’s total shareholder return as compared to the S&P/Emerging Companies Index with such performance to be tested in three tranches over three years on 15 July 2020, 15 July 2021 and 15 July 2022; and 105,599 performance rights issued on 26 March 2019 following shareholder approval at the 2018 Annual General Meeting, which were subject to the following vesting conditions and performance hurdles: l A vesting condition that Lee remains an employee of the Group up to and including the vesting date for the performance rights; and l Performance hurdle which is based on the Company’s total shareholder return as compared to the S&P/Emerging Companies Index with such performance to be tested on 15 July 2021. The removal of the vesting condition that Lee remains an employee of the Group up to and including the vesting date for the performance rights resulted in an acceleration of the share based payments expense of $198,651 in the year ended 30 June 2020. The removal of the performance condition was externally valued based on a share price of $7.32, an exercise price of zero, volatility of 35% – 45%, a risk-free interest rate of 0.56% to 0.71% and probability weighting reflecting the probability of meeting the vesting conditions. The fair value of the removal of the performance conditions for the 267,811 share rights resulted in a value of $0.02 per performance right. The fair value of the removal of the performance conditions for the 105,599 performance rights resulted in a value of $0.43 per performance right. This resulted in an additional share-based payments expense of $50,764 in the year ended 30 June 2020. Shares issued On 16 October 2019, the Company issued 5,004 shares (issue price $7.21460) to staff under Company’s the long-term incentive plan following the release of the Company’s 2019 results. Note 34. Events after the reporting period The Group completed an institutional placement on 22 July 2020 which raised $28 million of cash and resulted in the issue of 5,436,894 ordinary shares on this date. In addition, a Share Purchase Plan was completed on 17 August 2020 which raised $12 million of cash and resulted in the issue of 2,343,750 ordinary shares on this date. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future financial years. 68 Notes to the Consolidated Financial Statements| Audinate Annual Report 2020 In the Directors’ opinion: l The attached financial statements and notes comply with the Accounting Standards and other mandatory professional reporting requirements; l The attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; l The attached financial statements and notes give a true and fair view of the Group’s financial position as at 30 June 2020 and of its performance for the financial year ended on that date; and l There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. On behalf of the Directors DAVID KRALL Chairman 20 August 2020 Sydney 69 Directors’ DeclarationAudinate Annual Report 2020 | Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au Independent Auditor’s Report to the members of Audinate Group Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Audinate Group Limited (the “Company”) and its subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the 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. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network 70 Independent Auditor’s Reportto the members of Audinate Group Limited| Audinate Annual Report 2020 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 for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter How the scope of our audit responded to the Key Audit Matter Capitalisation and carrying value of development costs As at 30 June 2020, the group has capitalised development costs totalling $10.476 million as disclosed in Note 16. The group capitalises internal and external costs that are directly attributable to the development of intangible assets. As disclosed in Note 3, significant judgement is involved in assessing whether the criteria for capitalisation of such costs has been met per the relevant accounting standard, particularly in determining: • • The appropriateness of the costs that can be capitalised and whether these costs were directly attributable to relevant products developed; and The extent to which these capitalised development costs will generate sufficient economic benefit to support their carrying values. Our procedures included, but were not limited to: • Discussed the products for which development costs have been capitalised with management to understand the nature and feasibility of the products at 30 June 2020, • a basis, sample • Obtained an understanding of the key controls in place over the process for recording and identifying qualifying costs to be capitalised, Assessed the on appropriateness of costs capitalised by agreeing the material costs, overheads and engineers’ hours to external invoices, internal timesheets and payroll records, and Evaluated the carrying value of the capitalised development costs by major product, with reference to historical and forecast cashflow and analysis of sale trends. the appropriateness of incurred • We also assessed the appropriateness of the disclosures included in the Notes to the financial statements. 71 Audinate Annual Report 2020 | Other Information The directors are responsible for the other information. The other information comprises the information included in the Directors’ Report and ASX Additional Information, which we obtained prior to the date of this auditor’s report, the other information also includes the annual report (but does not include the financial report and our auditor’s report thereon) which is expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group 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 has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional 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 internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group 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. 72 Independent Auditor’s Reportto the members of Audinate Group Limited| Audinate Annual Report 2020 • • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards 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 period 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 on the Remuneration Report We have audited the Remuneration Report included on pages 16 to 26 of the Directors’ Report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Audinate Group 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. DELOITTE TOUCHE TOHMATSU Helen Hamilton-James Partner Chartered Accountants Sydney, 20 August 2020 73 Audinate Annual Report 2020 | Shareholder Information required by the Australian Securities Exchange Limited (ASX) Listing Rules and not disclosed elsewhere in the Report is set out below. Substantial shareholders The number of securities held by substantial shareholders and their associates, as advised to the Company and ASX, are set out below: Name Yamaha Corporation Smallco Investment Manager Limited Australian Super Pty Ltd Date of Notice Number of Securities 10/07/2017 6,289,308 05/03/2020 8,234,011 28/07/2020 4,359,029 % 10.57 9.20 6.42 Number of security holders and securities on issue Audinate Group Limited has issued the following securities: (a) 75,786,756 fully paid ordinary shares held by 13,898 shareholders; (b) 440,200 unlisted options held by 18 option holders; and (c) 1,379,809 unlisted performance rights held by 48 performance right holders. Voting rights The voting rights attached to ordinary shares are that on a show of hands, every member present, in person or proxy, has one vote and upon a poll, each share shall have one vote for each share held. Option holders and performance right holders do not have any voting rights on the options and rights held by them. Distribution of quoted security holders Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Fully Paid Ordinary shares Holders Shares 7,929 3,487,407 4,570 10,710,047 857 6,175,367 511 10,941,345 31 44,472,590 % 4,60 14.44 8.15 14.44 58.58 13,898 75,786,756 100.00 Unmarketable parcel of shares The number of shareholders holding less than a marketable parcel of ordinary shares is 545 based on Audinate Group Limited’s closing share price of $5.40 on 25 August 2020. 74 Shareholder Informationas at 25 August 2020| Audinate Annual Report 2020 Twenty largest shareholders of quoted equity securities Details of the 20 largest shareholders of quoted securities by registered shareholding are: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Name J P Morgan Nominees Australia Pty Limited HSBC Custody Nominees (Australia) Limited Yamaha Corporation Mr Aidan Williams Citicorp Nominees Pty Limited National Nominees Limited Geetha Varuni Witana Mr David John Myers BNP Paribas Nominees Pty LtdBNP Paribas Noms Pty Ltd Mirrabooka Investments Limited BNP Paribas Nominees Pty Ltd Mr David Krall ITR Investments Pty Limited BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd Bond Street Custodians Limited Fabemu No 2 Pty Ltd Mr Chris Ware Trujon Investment Holdings Pty Ltd Dunecove Pty Limited Total Total on Register Restricted securities and securities subject to voluntary escrow There are no restricted securities or shares under voluntary escrow. No. of shares % 18,821,224 24.83 6,546,018 6,289,308 1,910,907 1,646,138 1,569,909 934,882 700,000 658,657 573,267 491,680 400,007 400,000 345,360 337,811 233,353 204,919 200,270 169,795 168,003 8.64 8.30 2.52 2.17 2.07 1.23 0.92 0.87 0.76 0.65 0.53 0.53 0.46 0.45 0.31 0.27 0.26 0.22 0.22 42,601,508 56.21 75,786,756 100.00 75 Audinate Annual Report 2020 | Unquoted securities There are 440,200 unquoted options with varying exercise prices and expiry dates held by 18 options holders. All options are held under the Company’s employee incentive scheme. Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Options (unquoted) Holders Options – 5 7 5 1 18 – 20,000 62,000 248,200 110,000 440,200 % – 4.54 14.08 56.38 24.99 100% There are 1,379,809 unquoted Performance Rights held by 48 performance right holders. All Performance Rights are held under the Company’s employee incentive scheme. Category 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total On market buy-back There is no current on market buy-back. Performance Rights (unquoted) Holders Performance Rights 21 2 – 19 6 48 13,184 2,134 – 356,234 1,008,257 1,379,809 % 0.96 0.15 – 25.82 73.07 100% 76 Shareholder Informationas at 25 August 2020| Audinate Annual Report 2020 Directors David Krall Aidan Williams John Dyson Roger Price Alison Ledger Tim Finlayson Company Secretary Rob Goss Notice of annual general meeting The annual general meeting of Audinate Group Limited will be held on 15 October 2020. The safety of our shareholders, our people and the broader community are important to your Board. Accordingly, like many other companies, the Company proposes to hold a virtual annual general meeting. Further information, including how to attend and participate in the meeting, will be provided in due course. Registered office Share register Auditor Solicitors Level 7 64 Kippax Street Surry Hills NSW 2010 Tel: 02 8280 7100 Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Tel: 1300 554 474 Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 Maddocks Level 27 123 Pitt Street Sydney NSW 2000 Stock exchange listing Audinate Group Limited shares are listed on the Australian Securities Exchange (ASX code: AD8) Website www.audinate.com Corporate Governance Statement The directors and management are committed to conducting the business of Audinate Group Limited in an ethical manner and in accordance with high standards of corporate governance. Audinate Group Limited has adopted and has substantially complied with the ASX Corporate Governance Principles and Recommendations (Third Edition) (‘Recommendations’) to the extent appropriate for the size and nature of its operations. The Corporate Governance Statement, which sets out the corporate governance practices that were in operation during the financial year and identifies and explains any Recommendations that have not been followed, which is approved at the same time as the Annual Report can be found at: https://www.audinate.com/company/governance Audinate Annual Report 2020 | Corporate Directory30 June 2020 www.audinate.com