cellnet
Annual Report 2020

Plain-text annual report

ANNUAL REPORT 2020 excited engaged essential ABN 97 010 721 749 Cellnet Group Limited Tenancy E1/5 Grevillea Pl, Brisbane Airport QLD 4008 t: 1300 255 563 www.cellnet.com.au We source products and represent market leading brands of lifestyle technology products into retail and business channels. Our innovative and passionate approach makes us the most exciting and engaging company to partner with. THE CELLNET GROUP Established in 1992, Cellnet listed Turn Left is a leading Interactive Performance Distribution is a leading on the Australian Stock Exchange Entertainment specialist across specialist in online channels and (ASX) in 1999 and now employs Australia and New Zealand. direct to consumer distribution across over 70 people across Australia Partnering with some of the world’s Australia and New Zealand. Providing and New Zealand. Cellnet is one market leading brands, Turn Left brands with website, database of the largest accessory specialist provides a full-service distribution management and digital campaigns distributors in the region. Cellnet’s model, working with vendors and as well as traditional distribution success is derived from its unique partners to manage fully integrated, services. Performance Distribution managed services model, combining localised end-to-end, go-to-market provides an Omni-Channel technology world leading brands, its own 3sixT solutions with overarching marketing, platform to brands and retailers that brand and an innovative category PR and event activations. wish to sell online and strengthens management approach. Cellnet provides extensive reach and coverage across all markets in both the Australian and New Zealand retail and telecommunications channels. the established Cellnet and Turn Left retail network with support for endless aisle and click and collect strategies. cellnet.com.au turnleft.net.au performancedistribution.nz Page 2 Cellnet Group Limited and its consolidated entities Financial Report 2019–20ABOUT OUR COMPANY Cellnet listed on the Australian Stock Exchange in 1999 and and mobility accessories throughout Europe, Asia and Africa. now employs more than 70 staff across Australia and New The investment by Wentronic provides a strong strategic Zealand. partnership whereby Cellnet and Wentronic can ensure products are sourced in the most cost-efficient manner. Cellnet sources products and represent market leading brands of lifestyle technology including mobile accessories and In 2018 Cellnet diversified its product offering into the gaming gaming products into retail, business, and online channels. market with the acquisition of Turn Left Distribution. In 2020 Cellnet acquired online specialist Performance Distribution to In 2017 Wentronic Holdings GmbH acquired a majority accelerate its digital capability. shareholding in Cellnet Group. Wentronic distributes AV, IT Directors Mr Tony Pearson Non-Executive Chairman Mr Michael Wendt Non-Executive Deputy Chairman Mr Brian Danos Non-Executive Director Mr Kevin Gilmore Non-Executive Director Mr Giles Karhan Non-Executive Director Company Secretary Mr Chris Barnes Company Secretary Principal Registered Office Tenancy E1, 5 Grevillea Place, Brisbane Airport QLD 4008 Australia Phone: 1300 255 563 www.cellnet.com.au NUMBER OF YEARS IN OPERATION 28 SINCE 1999 ASX:CLT Page 3 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 CELLNET GROUP THE POWER OF GAMES In 2018, the total retail industry sales for gaming in Australia was $4.03 Billion (2013: $2.04 Billion), by acquiring TLD, Cellnet moved to diversify its business into relevant category adjacencies in this high growth area for our existing trading partners. The TLD acquisition allows Cellnet to benefit from being part produced one of the most vibrant and active communities of of the fastest growing entertainment industry whilst leveraging fans who gather together at major international popular culture its expertise in distribution and category management to take festivals, and who play together online in competitive esports. full advantage of all potential opportunities of growth and Video games are designed and produced in a digital economy diversification. that promotes creativity and, in turn enhances the economic Going beyond being another form of entertainment, today, gift of nations. video games are used to educate in schools and promote Over the next several decades, population ageing will have a creativity amongst students as well as work training in the range of implications for Australia, including health. Gaming for corporate world. They also help us live well through mental and health will play an increasingly positive role as already, those physical stimulation in a range of contexts, including hospital aged 65+ (87 per cent of those surveyed) use video games as care, aged care, and psychological care. Video games have a tool for mental stimulation, and 81 per cent see it as a buffer against dementia. *(2019). Digital Australia 2020. Eveleigh, NSW: IGEA Brand, J. E., Jervis, J., Huggins, P. M., & Wilson, T. W. power of CREATIVITY, power of LIVING WELL, power of EDUCATION, power of ECONOMICS ...THE POWER OF GAMES Page 4 Cellnet Group Limited and its consolidated entities Financial Report 2019–20CELLNET GROUP WELCOMES PERFORMANCE DISTRIBUTION On 1 April 2020 Cellnet Group completed the acquisition of Performance Distribution. This is a strategic purchase for infrastructure, knowledge and experience in direct to consumer distribution. Performance Distribution provides an Omni-Channel technology platform to brands and retailers that wish to sell online across the Australian and New Zealand markets. The technology localises the shopping experience for the familiar. From pricing to payments, shipping to returns, we use customer and manages the end-to-end buyer journey, from our technology to bring brands and shoppers closer together. purchase to customer service. Specialists work across the business, spanning the eCommerce value chain in areas such as marketing, product, operations, logistics and more. Performance Distribution has significant experience in the digital marketplace sales channels, including The Iconic, Kogan, Amazon and more. With 5.2 million Australian households shopping online since April 2020 the importance of online sales channels has never been more important. COVID-19 propelled online shopping into unprecedented growth with sales up 80% YOY. The integration of Performance Distribution strengthens Cellnet’s established retail network with support for endless aisle and click and With an eye on the future the mission is to build a powerful collect strategies. The consumers shopping behaviour has Omni-Channel platform to support our brands and retailers. evolved and Cellnet has positioned itself to engage with this Throughout Australia and New Zealand, wherever the ever developing market. consumer is located the shopping experience will feel local and Page 5 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Page 6 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Page 7 Cellnet Group Limited and its consolidated entities Financial Report 2019–20CHARITY WORK ASPIRATIONS 4KIDS IN SPORT Cellnet is proud of their Platinum partnership with Aspirations 4Kids in Sport Ltd lead by Ian Healy. Aspirations 4Kids in Sport Ltd is a not for profit organisation supporting young Queenslanders through sport, leading to the betterment of society. A4K’s purpose is to identify ‘at risk’ sports students. Their philosophy is based on using the power of sport to initiate meaningful and positive change to the lives of young Queenslanders. Partnering with A4K engages our team with the charity in multiple ways, including: • Staff & executives voluntary before-tax donations. • 2 days annual contribution for each staff member to engage with A4K assisting with Charity Events • Long-term Platinum partner Page 8 Cellnet Group Limited and its consolidated entities Financial Report 2019–20OUR TEAM BOARD MEMBERS TONY PEARSON B. Bus (Management) Non-Executive Chairman Tony is an experienced international executive appointments include as a Commissioner of the and company director, with over ten years’ Independent Planning Commission, chair of White experience on ASX, Hong Kong, Toronto and Ribbon, and non-executive director of Aspire not-for-profit boards. He is currently a Trustee Mining and the International Grammar School. of the Royal Botanic Garden & Domain Trust, Prior to this, Tony was Managing Director at HSBC. and a non-executive director of Peak Resources, Communicare, and the Foundation & Friends of the Botanic Gardens. Tony’s prior non-executive Mr Pearson is a member of the Audit and Risk Committee and the Remuneration and Nomination Committee. MICHAEL WENDT Non-Executive Deputy Chairman Mr Wendt is the Chief Executive Officer of Wentronic accessory industry and has had roles in sales, Group, a market leading electronic accessory marketing and human relations. distributor that is headquartered in Braunschweig, Germany. Wentronic employs over 200 people worldwide and has offices in Germany as well as in Hong Kong and China. Mr Wendt has about 30 years of experience in the international electronic Mr Wendt is currently a member of the Remuneration and Nomination Committee (Chairman). Page 10 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Members of the Board BRIAN DANOS Bachelor of Science (Management) Non-Executive Director – appointed 1 July 2020 Mr Danos is the Chief Operations Officer for to his joining Wentronic Asia Pacific, Mr Danos held Wentronic GmbH. He has held this position since the position of Director of Marketing and Sales with September 2019 and leads the process, supply A&L International Holdings Limited, a Hong Kong chain, quality control and international operations based private label manufacturer. He has also held for Wentronic. From April 2015 until August 2019 senior positions with Philips Consumer Electronic he was the General Manager of Wentronic Asia Accessories in both Europe and the USA. Pacific where he led the overall operations of the Mr Danos is currently a member of the Audit and Asian region and directed Wentronic’s offices in China in all sourcing and logistical operations. Prior Risk Committee. KEVIN GILMORE B. Econ. MBA Non-Executive Director Mr Gilmore is the Managing Partner at Pegu Mr Gilmore is currently a member of Remuneration Partners, a capital and strategy advisory firm. and Nomination Committee and was a member of He has also held management positions with the Audit and Risk Committee during the year. many multinational corporations such as General Electric, Shell Petroleum, Philips Electronics and Belkin where he gained extensive experience in strategy, business development and marketing. GILES KARHAN Non-Executive Director Giles has worked in operations, sales and marketing Arts from Australian National University (ANU), and management across both equities and funds Graduate Diploma in Finance and Investment management for over 15 years. He has worked in (FINSIA) and a Masters of Business Administration both large Australian Banks and Wealth Managers from University of Technology, Sydney. as well as in boutique funds management. Giles is a keen entrepreneur and currently is the CEO and Founder of Rocking Horse, a debt platform for early stage businesses. He has obtained a Bachelor of Mr Karhan is the Chairman of the Audit and Risk Committee. Page 11 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 LEADERSHIP TEAM DAVE CLARK Chief Executive Dave was appointed as Chief Executive of Cellnet Dave is an experienced senior executive with over Group in July 2020, and prior to this was Managing 25 years’ experience in consumer electronics and Director of Cellnet’s New Zealand operations for technology. Prior to Cellnet, Dave was with Sony over 10 years. His appointment ensures continuity and stability, maintaining Cellnet’s commitment to deliver outstanding service to its Australian and New Zealand customers and partners, while bringing a sharper focus to enhancing the Company’s financial performance, inventory management and customer value proposition. for 10 years in sales and product marketing roles managing strategic categories including audio, video, computers and television. After 14 years at Cellnet, Dave has inspired and developed a culture that is highly productive, results driven and rewarding. He is a calming influence and has a commitment in achieving long term growth, sustained profitability and success for customers, stakeholders and shareholders alike. CHRIS BARNES Chief Financial Officer & Company Secretary Chris has been with the Company for 14 years a culture of strong governance is in place. He is and has been the Head of Finance for the past 11 CPA qualified and is a member of the Australian years. Over this time, he has gained significant Institute of Company Directors. experience in accounting, treasury and corporate finance. Chris is also the Company Secretary and works closely with the Cellnet Board to ensure that Craig Kingshott Managing Director Cellnet Australia Belinda Campos Managing Director Turn Left Distribution Dave Clark Chief Executive Paul Elliot Exec Consultant Turn Left Distribution Chris Barnes Group CFO Page 12 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Leadership Team CRAIG KINGSHOTT Managing Director - Cellnet Australia Craig has been with Cellnet since March 2013 in Over the last 30 years he has established, grown the role of Chief Commercial Officer. Craig was and sold four independent distribution businesses appointed Managing Director of Australia July 1, where Craig was appointed and acted as Managing 2020 to spearhead the next exciting chapter for Director. Over the last 7 years Craig has overseen the commercial reconstruction of the Cellnet business to a best-in-class category manager leading the way in accessory retail development. Cellnet Australia. He is an accomplished commercial executive with over 30 years experience in the technology distribution sector, specialising in strategic resets, revenue growth strategies and development of high functional commercial cultures. BELINDA CAMPOS Managing Director - Turn Left Distribution Belinda was one of the owners of Turn Left for Tyco Electronics, completing 15 years’ service. Distribution and was extremely excited to stay on This exposed her to a variety of industries within after the sale to Cellnet in 2018. the Tyco Group including Aviation, I.T Telecom Prior to this, Belinda ran both Turn Left and Q V Software as General Manager until both businesses were consolidated under Turn Left, gaining synergies and efficiencies within the business and and Professional Services, Structured Cabling and Infrastructure Management along with specializing in technical product knowledge and training to support Maritime and Military requirements. into the retail channel. With her strengths in people management and Belinda has over 30 years of experience in Management roles including Commercial Manager strong business acumen developed over the years, it allows her to be a mentor, as well as a leader in any type of business environment. PAUL ELLIOT Executive Consultant - Turn Left Distribution Paul was the co-founder, majority owner and CEO across the interactive entertainment space such of QV Software (QVS) and Turn Left Distribution as; Sony, Nintendo, Microsoft, Capcom, Konami, (TLD). Founded in 2003, both QV Software and Disney, Plantronics, Nacon, Thrustmaster, Razer TLD went on to establish themselves as the leading and Steel Series. independent gaming distributors in Australia. After enjoying years of independent success, QV Software was merged into Turn Left Distribution to build on their combined experience and strengths. Paul’s strengths lie in building partner relations and mapping out long term strategic plans, ensuring Turn Left Distribution remains not only relevant in an ever-evolving industry but to also reinvent itself In 2018, selling Turn Left Distribution to Cellnet to take advantage of potential growth opportunities made for a natural progression fit. Over the span of that come its way. Paul remains involved with Turn 18 years, Paul has worked with key leading brands Left Distribution as Executive Consultant. Page 13 Cellnet Group Limited and its consolidated entities Financial Report 2019–20OUR PARTNERS Page 14 Cellnet Group Limited and its consolidated entities Financial Report 2019–20OUR BRANDS Page 15 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Page 16 RANKED #3 Cellnet Group Limited and its consolidated entities Financial Report 2019–203sixT E N I L E M I T Launch The 3sixT brand is registered as a business and trademarks are placed for the logo and brand name. 3sixTgear.com is registered and an initial online presence is established. Enhanced Roadmap The range of products are consolidated into a core range of categories and products. Sustainability 100% recyclable packaging is released. 100% compostable phone case launched. 3sixT partners with the McGrath Foundation Charity. 3sixT acquires PowerGuard to enter the surge protection power category. 2014 2015 2016 2017 2018 2019 Future Concept Cellnet consolidates all vertical brands to be under the same umbrella. The 3sixT brand is chosen as the vehicle and is given to a brand agency for a face-lift and rebrand. Marketing and Digital 3sixT launches customer focused marketing campaigns. External PR Agency is engaged to assist with making the brand a household name. 3sixTgear.com launches eComm service. Going Global 3sixT goes global, Wentronic starts selling 3sixT to the wider international audience. Category Expansion Adopt ‘doing more with less’ approach to range. Expanding product production and source components that are more sustainable. A 5G focused category roadmap expanding on audio and introduction of mobile gaming and home categories. Page 17 Cellnet Group Limited and its consolidated entities Financial Report 2019–20$200M ANZ revenue since launch 100 Customer groups 6M Units sold in ANZ $10M Audio products 30 Distributed countries 2013 2014 2015 2016 2017 2018 2019 Portable Power Chargers Surge Protection Wearable Accessories Bundles Audio Cases & Screen Protection Mounts & Docks Connectivity Travel Solutions S R E B M U N E H T Y B S E I R O G E T A C Page 18 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 LET’S CHANGE THE WORLD We recognise our place in the world, and understand the products we produce do contribute to the 1 billion cases discarded every year. So we added to our core strategy the goal to reduce our contribution. So, in 2019, we proudly began to remove plastic from our product packaging and invest in the development of biodegradable products with the launch of the BioFleck series. Our journey doesn’t stop there, as we are fully committed to continuing to innovate our development in each major launch cycle and build on the work our team has done. • Removed all plastic from our packaging • • • • 100% recyclable cardboard Soy Ink 100% biodegradable hang sell FSC approved • To materially replace the 1 billion cases discarded each year with a biodegradable product that breaks down into natural elements • Create beautiful and functional product to allow customers to willingly and confidently trade up from plastic to plant based compostable protection solutions • Work with retail to change the way we think about ranging choice, packaging and display Page 19 Cellnet Group Limited and its consolidated entities Financial Report 2019–20SUSTAINABILITY WE ARE JOINING THE FIGHT ON PLASTIC We are working with our brands to materially replace the 1 billion cases discarded each year with the introduction of: Creating beautiful and functional product that is biodegradable and compostable. Using certified recycled plastics in packaging and product. Reducing or removing all plastics from packaging. Working with retailers to change the way we think about ranging choice, use of packaging and displays and the recycling of plastics. Many of our partners have launched sustainable products in 2020 and continue to develop ways of integrating this across all products. Most of our brands have also made a commitment to moving to 100% recycled packaging. Sustainability 3 S I X T B I O F L E C K C A S E - 1 0 0 % C O M P O S T A B L E   PROTECT THE EARTH & YOUR DEVICE. w w w . 3 s i x t g e a r . c o m Page 21 Cellnet Group Limited and its consolidated entities Financial Report 2019–20CATMAN SERVICES GUIDED BY PURPOSE, DRIVEN BY DATA, POWERED BY TECHNOLOGY, AND ENABLED BY CELLNET Category Management or Catman is the single biggest differentiator between Cellnet and its competitors. It has been the key to not only the survival of the company in recent economic times, it has been the driving force behind our growth and our customers growth. Managing categories requires a deep understanding of the market, the consumer, and the products. The term Catman refers to a number of business functions and principles that all contribute to a seamless enjoyable experience for a consumer, and an efficient profitable business for the retailer. For our customers and partners, this program results in substantial revenue and margin growth, training programs, seamless merchandising, and the removal of their risk in inventory. OUR SERVICES KEY DELIVERABLES Data integration Data analytics Cost of business reduction for the retailer Flexible financial modelling Product marketing One touch support team Space management Field services Financial services Consistent customer experience Strategic ranging and life cycle management Revenue and share growth Page 22 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Category Management BUSINESS INTELLIGENCE Cellnet uses a range of high-powered tools to: • Measure true return on investment • Increase sales through world class planograms, clear • • Explore new categories with external market insights Exploit world leading tools with little IT development or ranging strategy and segmentation training required • Increase margin by ensuring focusing on lifting average • Empower customers with detailed insights by state, store sell price and attachment and staff • Cut the cost of doing business by reduced capital • Know the customer, using demographics and age investment, obsolescence and administration segmentation • Identify trends in categories and devices • Customer experience management • Produce more reliable business forecasts SPACEMAN • Bespoke space planning developed with Nielsen • Weekly analysis • Range development • Weekly replenishment • Individual store Planograms and ordering • Bespoke Planogram evolution • Min-Max architecture • Weekly data feed • Heat-mapping Page 23 Cellnet Group Limited and its consolidated entities Financial Report 2019–20CHAIR & CHIEF EXECUTIVE’S REPORT Letter to Shareholders Dear Shareholder, 2019 was a challenging year for many businesses, marked by the significant impact of Covid-19, which saw incredible changes in the way that we live and work. The other significant event during the year was the completion of an accelerated renounceable entitlement offer, which saw the Company raise $5.03m. While Cellnet was not immune from the impact of Covid-19, it is pleasing to report that the Company ended the year with a significant 34% year-on-year increase in sales in June, together with a healthy balance sheet, with $6.9m in cash and an enhanced free cash position of $11.8m. Pleasingly, the Company has continued its sales momentum into FY21, with strong sales being recorded in both July and August. While Cellnet’s audited net loss before tax for the financial year was $1.962m, after adjusting for one-off and other non-cash items, the Company recorded an underlying operating EBITDA of $372,000. Cellnet’s positive operating EBITDA was achieved through strong attention to costs, and a focused drive in online opportunities combined with increased demand for gaming products from its Turn Left Distribution business in Australia. The year also saw the retirement of the Company’s chief executive officer, Mr Alan Sparks. Mr Sparks led the company for six years and had been instrumental in the acquisitions of Turn Left Distribution, PowerGuard and Performance Distribution. Mr Sparks was succeeded by Mr Dave Clark. Mr Clark continues to focus on Cellnet’s core strengths, leveraging the Company’s capabilities in distribution, gaming and online sales. The Company’s stronger than anticipated trading performance over June, July and August 2020, together with support from Westpac, has meant that the Company has been able to continue funding its business through its invoice finance and trade finance facilities. As a result, the Company still has access to the $5.03 million raised from its entitlement offer. The Company is also anticipating the launch of next generation gaming consoles from Sony (PlayStation 5) and Microsoft (Xbox), and the introduction of 5G technology in Australia. Finally, the key to the Company’s success is its relationships with its brand and distribution partners, supported by a talented and committed team of over 70 professionals. We would like to thank our partners and team members for their support and commitment, ensuring that Cellnet remains a market leading distributor of lifestyle technology products. We look forward to a successful year in FY21. Tony Pearson Chair Dave Clark Chief Executive Page 25 Cellnet Group Limited and its consolidated entities Financial Report 2019–20CONTENTS Corporate information ........................................... 27 13 Non-current assets – Directors’ Report Financial Report 28 43 property, plant and equipment .................... 71 14 Non-current assets – intangibles ................ 72 15 Current liabilities – Statement of financial position ............................. 44 trade and other payables ............................ 74 Statement of comprehensive income ..................... 45 16 Provisions ................................................... 74 Statement of changes in equity ............................. 46 Statement of cash flows ........................................ 47 Notes to the financial statements ........................... 48 1 Corporate information ................................. 48 2 Significant accounting policies ................... 48 3 Financial risk management objectives and policies ............................... 59 4 Fair value measurement .............................. 63 5 Operating segments ................................... 65 6 Other income .............................................. 66 7 Items included in profit/(loss) ..................... 66 8 Income tax .................................................. 67 17 Interest bearing loans and borrowings ......... 74 18 Derivative financial instruments .................. 75 19 Leases ........................................................ 75 20 Contributed equity and reserves ................. 76 21 Share based payments ................................ 78 22 Financial guarantees ................................... 79 23 Business combinations ............................... 79 24 Key management personnel remuneration .. 81 25 Related party disclosure ............................. 81 26 Subsequent events ..................................... 82 27 Parent entity information ............................ 83 9 Earnings per share ...................................... 68 28 Auditors’ remuneration ............................... 83 10 Current assets – cash and cash equivalents ......................... 69 29 Dividends franking account......................... 83 30 Cash flow statement reconciliation ............. 84 11 Current assets – trade and other receivables ......................... 69 Directors’ declaration ............................................ 85 12 Current assets – inventories ....................... 70 Independent auditors’ report ................................. 86 ASX Additional Information ................................... 91 DIRECTORS’ REPORT Corporate Information ABN 97 010 721 749 Directors T. Pearson (Independent Chairman) M. Wendt (Deputy Chairman) K. Gilmore B. Danos G. Karhan Company Secretary C. Barnes Principal Registered Office Cellnet Group Limited E1 / 5 Grevillea Place Brisbane Airport Qld 4008 Phone: 1300 255 563 Fax: 1800 255 563 Banker Westpac Banking Corporation 260 Queen Street Brisbane QLD 4000 Auditor Pitcher Partners 345 Queen Street Brisbane QLD 4000 Share Register Link Market Services Ltd Level 21, 10 Eagle Street Brisbane QLD 4000 Phone: 1300 554 474 Solicitors Reddie Lawyers Level 40, 140 William Street Melbourne VIC 3008 Securities Exchange The Company is listed on the Australian Securities Exchange. The home exchange is Brisbane. Corporate Governance All corporate governance related matters and associated disclosures regarding the company, including the company’s corporate governance statement, can be found on the company’s website in the investor relations section at: http://www.cellnet.com.au/investorrelations/ Page 27 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Directors’ Report Your Directors submit their report for the year ended 30 June 2020. Kevin Gilmore B. Econ. MBA (Non-Executive Director) Directors The names and details of the Company’s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. Names, qualifications, experience and special responsibilities Tony Pearson B. Com (Management) (Non-Executive Chairman - appointed 4 October 2018) Mr Pearson is an experienced international executive and company director, with over ten years’ experience on ASX, Hong Kong, Toronto and not-for-profit boards. He is currently a Trustee of the Royal Botanic Garden & Domain Trust, and a non-executive director of Peak Resources, Communicare, and the Foundation & Friends of the Botanic Gardens. Mr Pearson’s prior non-executive appointments include as a Commissioner of the Independent Planning Commission, chair of White Ribbon, and non-executive director of Aspire Mining and the International Grammar School. Prior to this, Mr Pearson was Managing Director at HSBC. Mr Pearson is a member of the Audit and Risk Committee and the Remuneration and Nomination Committee. Michael Wendt (Non-Executive Deputy Chairman) Mr Wendt is the Chief Executive Officer of Wentronic Group, a market leading electronic accessory distributor that is headquartered in Braunschweig, Germany. Wentronic employs over 200 people worldwide and has offices in Germany as well as in Hong Kong and China. Mr Wendt has about 30 years of experience in the international electronic accessory industry and has had roles in sales, marketing and human relations. Mr Wendt is currently a member of the Remuneration and Nomination Committee (Chairman). Mr Gilmore is the Managing Partner at Pegu Partners, a capital and strategy advisory firm. He has also held management positions with many multinational corporations such as General Electric, Shell Petroleum, Philips Electronics and Belkin where he gained extensive experience in strategy, business development and marketing. Mr Gilmore is currently a member of Remuneration and Nomination Committee and was a member of the Audit and Risk Committee during the year. Giles Karhan B. Arts, Grad. Dip. Finance & Investment, MBA (Non-Executive Director - appointed 9 June 2020) Mr Karhan has worked in operations, sales and marketing, and management roles across both equities and funds management for over 20 years. He has worked in both large Australian banks and wealth managers as well as in boutique funds management. He currently is founder and CEO of Rocking Horse Finance, which accelerates a company’s growth prospects and supports cash flow by providing financing against eligible R&D. Mr Karhan is a keen entrepreneur and has invested in a number of innovative businesses over the past 10 years. He has a wide range of asset management experience with institutional and wholesale clients. Mr Karhan in the Chairman of the Audit and Risk Committee. Brian Danos B. Bus (Management) (Non-Executive Director - appointed 1 July 2020) Mr Danos is the Chief Operations Officer for Wentronic GmbH. He has held this position since September 2019 and leads the process, supply chain, quality control and international operations for Wentronic. From April 2015 until August 2019 he was the General Manager of Wentronic Asia Pacific, where he led the overall operations of the Asian region and directed Wentronic’s offices in China in all sourcing and logistical operations. Prior to his joining Wentronic Asia Pacific Mr Danos held the position of Director of Marketing and Sales with A&L International Holdings Limited, a Hong Kong based private label manufacturer. He has also held senior positions with Philips Consumer Electronic Accessories in both Europe and the USA. Mr Danos is currently a member of the Audit and Risk Committee. Page 28 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Directors’ Report Michael Reddie LLB, BCom (Hons), Monash University (Non-Executive Director - resigned 1 May 2020) Mr Reddie is an Australian Legal Practitioner and is a Director of Reddie Lawyers Pty Ltd. Mr Reddie was formerly a partner at a national law firm. Mr Reddie advises Australian and international clients in negotiated mergers and acquisitions, joint ventures, strategic alliances and corporate governance. Mr Reddie was a member of the Audit and Risk Committee. Chris Barnes B. Acc, CPA (Current: Company Secretary and Chief Financial Officer; Former: Executive Director) Mr Barnes has been with the Company since 2006. He holds a Bachelor of Accounting Degree and is CPA qualified. He was appointed to the Board 1 May 2020 and resigned as a Board member 9 June 2020, and continues in the role of Company Secretary and Chief Financial Officer Operating and financial review The Directors hereby present the results of Cellnet Group for the 2020 financial year. • Net loss before tax of $1.962m • Positive operating EBITDA of $372,000 under challenging conditions • Increased focus on costs, down 22% year on year • Strong balance sheet with $6.9m cash at bank • Enhanced free cash position of $11.8m • Strong start to new financial year, July 2020 unaudited profit up on prior year. Cellnet has announced an operating EBITDA of $372,000 for the year ended 30 June 2020. After including one-off and other non-cash items, the net after tax loss was $2.4 million. Operating EBITDA is reconciled to net loss after tax as follows: As at the date of this report, the interest of the directors (including their related parties) in the shares and options of Cellnet Group Limited were: Total revenue Operating EBITDA FY2020 $000 FY2019 $000 VAR $000 96,225 110,714 (14,489) 372 1,751 (1,379) Number of ordinary shares Number of options/ performance rights Non-operational item adjustments: Director M. Wendt T. Pearson K. Gilmore G. Karhan B. Danos Dividends 131,159,372 - 3,288,000 - - - - - - - No dividend has been declared for the 2020 financial year (2019: nil). Principal activities The principal activities of the group are: • Sourcing products and the distribution of market leading brands of lifestyle technology products including mobile phone, gaming, tablet and notebook/hybrid accessories into retail and business channels in Australia and New Zealand; and • Fulfilment services to the mobile telecommunications and retail industries in Australia and New Zealand. Fair value increase to inventory acquired - (405) 405 Fair value gain on revalue of deferred consideration Impairment of loan receivable from joint venture Statutory EBITDA Depreciation and amortisation Amortisation of intangibles acquired through business combination Finance costs Profit/(loss) before tax Income tax (expense)/benefit Net profit/(loss) attributable to shareholders 172 683 (511) (454) 90 (569) (638) (845) (1,962) (411) (2,373) - (454) 2,028 (228) (531) (915) 354 51 405 (1,938) (341) (107) 70 (2,316) (462) (2,778) The Company experienced a 13 per cent reduction in revenue year on year due to the impact on retail spending during the Covid-19 lockdowns in Australia and New Zealand since March. However, a 34% (year-on-year) surge in revenue in June 2020 and continued strong revenues in July are encouraging signs for the first quarter of new financial year. Page 29 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Directors’ Report continued Operating EBITDA remained positive despite the challenges thrown up by Covid-19. Cellnet was able to partially offset the downturn in sales occurring at the height of the community lockdowns through strong attention to costs, and a focused drive in online opportunities combined with increased demand for gaming products from its Turn Left Distribution business into Australia. In February 2020, Cellnet also started supply of gaming products into the New Zealand market. With strong trading performance over the last two months and support from its bank, Westpac, the Company has been able to draw on working capital funding through its invoice finance and trade finance facilities. As a result, the Company still has access to the $5.03 million raised from its recent entitlement issue. These funds together with existing finance facilities now provide Cellnet with a healthy balance sheet and enhanced free cash position (cash balances plus current drawable funds under borrowing facilities) of more than $11.8 million as of 30 June 2020. Cellnet was also assisted by lower employee, finance, rental, labour costs and warehousing costs, predominantly due to a voluntary 20 per cent wage cut in the June quarter, the JobKeeper benefit in Australia and wage subsidy in New Zealand. including reduced Significant changes in the state of affairs Other than as noted below, there have been no significant changes in the state of affairs of the company during or since the end of the financial year. Issue of shares On 7 May 2020, the group announced an accelerated renounceable pro-rata (2.7 for 1) entitlement offer to raise a total of $5.07m. The offer consisted of both a fully subscribed institutional component and a fully underwritten retail component. The institutional offer extended to the controlling shareholder of the company, Wentronic Holding GmbH, was fully subscribed with 90,966,727 shares issued at an issue price of $0.03 per share on 12 May 2020, raising a total of $2.73m. A total of 78,040,033 shares were issued on 5 June 2020 on completion of the retail offer, raising a total of $2.34m. Share issue costs of $134,000 (net of tax) were incurred and have been offset against issued capital in equity. Significant events after balance date There are no other matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the group, the results of those operations, or the state of affairs of the group in future periods. Likely developments In respect of future strategy and future performance, the group is constantly reviewing the strategic value inherent in the business. In conjunction with this, the group will continue to pursue its trading activities to further improve on operational aspects to produce the most beneficial long term results for the shareholders of the Company. Page 30 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Directors’ Report Share options At the date of this report there were a total of 1,587,500 share options over ordinary shares in the company on issue. No option holder has any rights under the terms of the instruments to participate in any other share issue of the company or any other entity. Details of these instruments are outlined as follows: Grant Date Vest Date Expiry Date Exercise Price ($) Opening Granted Forfeited Exercised Closing 29/11/2017 30/08/2020 30/08/2022 17/04/2018 30/08/2020 30/08/2022 10/10/2018 30/08/2020 30/08/2022 0.280 0.375 0.280 1,587,500 312,500 500,000 - - - (312,500) - (500,000) - - - 1,275,000 312,500 - Indemnification and insurance of officers Indemnification The Company has agreed to indemnify the current and former Directors and Company Secretaries of its controlled entities for all liabilities to another person, other than the Company or a related body corporate that may arise from their position, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Insurance premiums Insurance premiums have been paid in respect of Directors’ and Officers’ Liability Insurance. Insurance premiums paid for Directors insurance covers Directors whilst they are appointed as Directors of the Company and for a period of seven years after their resignation. The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of Directors’ and Officers’ liability insurance as such disclosure is prohibited under the terms of the contract. Directors’ meetings The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Company during the financial year are: Meetings Board Audit & Risk Nomination & Remuneration Held Attended Held Attended Held Attended 17 17 13 17 2 2 17 17 13 17 2 2 - 2 2 2 - - - 2 2 2 - - 1 1 - 1 - - 1 1 - 1 - - M. Wendt K. Gilmore M. Reddie T. Pearson G. Karhan C. Barnes Page 31 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Directors’ Report continued Committee membership Rounding The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Report) Instrument 2016/191 dated 1 April 2016 and in accordance with that Instrument, amounts in the financial report and Directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. Auditor’s independence declaration The Auditor’s independence declaration is set out on page 8 and forms part of the Directors’ report for the financial year ended 30 June 2020. As at the date of this report the Company had an Audit and Risk Committee, and a Nomination and Remuneration Committee. Members acting on the committees of the Board during the year were: Audit & Risk Nomination & Remuneration G. Karhan (Chairman) M. Wendt (Chairman) T. Pearson B. Danos T. Pearson K. Gilmore Non-audit services Non-audit services were provided by the entity’s current auditor, Pitcher Partners during the year. Pitcher Partners received or are due to receive the following amounts for the provision of non-audit services Taxation Services Consolidated 2020 $ 103,236 2019 $ 62,130 The board of directors, in accordance with advice provided by the audit and risk committee, is satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non- audit services by the auditor did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • All non-audit services have been reviewed by the audit and risk committee to ensure they do not impact the impartiality and objectivity of the auditor; and • None of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants (including Independence Standards). Page 32 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Directors’ Report Auditor’s independence declaration Auditor’s Independence Declaration To the Directors of Cellnet Group Limited In relation to the independent audit for the year ended 30 June 2020, to the best of my knowledge and belief there have been: (i) No contraventions of the auditor independence requirements of the Corporations Act 2001; and (ii) No contraventions of APES 110 Code of Ethics for Professional Accountants (including Independence Standards). This declaration is in respect of Cellnet Group Limited and the entities it controlled during the year. PITCHER PARTNERS DANIEL COLWELL Partner Brisbane, Queensland 31st August 2020 Page 33 Cellnet Group Limited and its consolidated entities Financial Report 2019–201. Individual key management personnel disclosures (i) Directors T. Pearson M. Wendt K. Gilmore G. Karhan M. Reddie C. Barnes A. Sparks B. Danos (ii) Executives A. Sparks D. Clark C. Barnes Chairman (Non-Executive) – Appointed 4 October 2018 Director (Non-Executive) Director (Non-Executive) Director (Non-Executive) – Appointed 9 June 2020 Director (Non-Executive) – Retired 1 May 2020 Director (Executive) – Appointed 1 May 2020, Retired 9 June 2020 Director (Executive) – Retired 3 October 2018 Director (Non-Executive) – Retired 3 October 2018; Reappointed 1 July 2020 Chief Executive Officer – Retired 16 June 2020 Chief Executive Officer (appointed 16 June 2020) & General Manager - New Zealand Chief Financial Officer and Company Secretary Remuneration Report (audited) This remuneration report for the year ended 30 June 2020 outlines the remuneration arrangements of the group in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308 (3C) of the Act. The remuneration report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the group, directly or indirectly, including any director (whether executive or otherwise) of the parent. Remuneration report approval at FY19 AGM The FY19 remuneration report received positive shareholder support at the FY19 AGM with a vote of 99.5% in favour. For the purposes of this report, the term “executive” includes the executive directors, senior executives, general managers and secretaries of the group and the term “director” refers to non-executive directors only. The remuneration report is presented under the following sections: 1. Individual key management personnel disclosures 2. Remuneration at a glance 3. Board oversight of remuneration 4. Non-executive director remuneration arrangements 5. Executive remuneration arrangements and the link to company performance 6. Executive contractual arrangements 7. Additional statutory disclosures Page 34 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Directors’ Report 2. Remuneration at a glance Remuneration strategy Cellnet Group Limited’s remuneration strategy is designed to attract, motivate and retain employees and non-executive directors by identifying and rewarding high performers and recognising the contribution of each employee to the continued growth and success of the group. To this end, key objectives of the Company’s reward framework are to ensure that remuneration practices: • are aligned to the group’s business strategy; • offer competitive remuneration benchmarked against the external market; • provides strong linkage between the individual and the performance and rewards of the group. Remuneration structure In accordance with best practice corporate governance, the structure of non-executive director and executive remuneration is separate and distinct. 4. Non-executive director remuneration arrangements Total remuneration for all Non-Executive Directors, last voted upon by shareholders at the 1999 AGM, is not to exceed $300,000 per annum. The Chairman’s base fee is $30,000 per annum ($10,000 per annum for the months of July and August 2018) and Non- Executive Directors’ base fees are presently $30,000 per annum ($10,000 per annum for the months of July and August 2018). Non-Executive Directors do not receive performance related remuneration. Non-executives may, at the discretion of the Remuneration Committee and subject to shareholder approval, receive compensation in the form of shares or share options. 875,000 shares are to be issued to a non-executive director, subject to shareholder approval at the forthcoming AGM, in respect of services provided in the current year. No share-based remuneration was issued to Non-Executive Directors during the comparative financial year. Remuneration levels for key management personnel are competitively set to attract and retain appropriately qualified and experienced executives. The Board as necessary obtains independent advice on the appropriateness of remuneration packages of the group given trends in comparative companies both locally and internationally and the objectives of the Company’s remuneration strategy. Non-Executive Directors receive a fixed fee for their services, although may from time to time receive compensation in the form of shares or share options subject to the approvals outlined in section 4. The remuneration structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. The remuneration structures take into account: • • the capability and experience of the key management personnel; the key management personnel’s ability to control performance; • the group’s performance including: – the group’s earnings; and – the growth in share price and delivering of constant returns on shareholder wealth; • the amount of incentives within each key management person’s remuneration. Remuneration packages include a mix of fixed and variable remuneration including short and long-term performance- based incentives. 3. Board oversight of remuneration Nomination and remuneration committee The nomination and remuneration committee is responsible for making recommendations to the board on the remuneration arrangements of directors and executives. The nomination and remuneration committee assesses the appropriateness of the nature and amount of remuneration of non-executive directors and executives on a periodic basis by reference to the relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high performing director and executive team. Page 35 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Remuneration Report (audited) continued 5. Executive remuneration arrangements and the link to company performance 5.1 Fixed remuneration Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any fringe benefits tax charges related to employee benefits including motor vehicles) as well as employer contributions to superannuation funds. Remuneration levels are reviewed annually by the Board. 5.2 Variable remuneration – short term incentive (STI) and long term incentive (LTI) Performance includes both linked remuneration STI and LTI and is designed to reward executives for meeting or exceeding their financial and personal objectives. The STI is an ‘at risk’ bonus provided in the form of cash. 5.3 STI bonus The group operates an annual STI program that applies to executives and awards a cash bonus subject to the attainment of clearly defined group, business unit and individual measures. Actual STI payments awarded to each executive depends on the extent to which specific targets set at the beginning of each 12 months are met. The targets consist of a number of key performance indicators (KPIs) covering financial and non-financial, corporate and individual measures of performance. A summary of these measures and weightings are set out below. Net Cash Position EBITDA Chief Executive Officer General Manager New Zealand Chief Financial Officer 30% 30% 30% 70% 70% 70% These performance indicators were chosen as they represent the key drivers for the short term success of the business and provide a framework for delivering long-term value. At the end of the financial year the Board assesses the actual performance of the group and the individual against their respective financial KPI’s set at the beginning of the financial year. A percentage of the pre-determined maximum amount is only awarded where results are achieved of between 100% and 200%. No bonus is awarded where performance falls below 100%. Performance of beyond 200% is not awarded as it is capped. The following table outlines the proportion of the maximum STI that was earned and forfeited in relation to the 2020 financial year. Proportion of maximum STI earned in FY20 Proportion of maximum STI forfeited in FY20 A. Sparks (CEO – resigned 16 June 2020) D. Clark (GM NZ 1 July 2019 – 15 June 2020. Appointed CEO 16 June 2020) C. Barnes 0% 70% 0% 100% 30% 100% No other executives were eligible to earn an STI in the 2020 financial year. STI awards for 2019 and 2020 financial years For the 2020 financial year, a total payment of $53,893 was made which represents 100% of the total STI cash bonus previously accrued in that period which has vested to executives. For the 2019 financial year, no payment was made as no STI cash bonus was achieved for that period. 5.4 LTIs Executive Share Option Plan The Board has established an Executive Share Option Plan which is designed to provide incentives to the Executives of the group. The plan was approved by shareholders at the Annual General Meeting held on 18 December 2007. Under the plan the Board has the discretion to issue options to Executives as long as the issue does not result in the Executive owning or controlling the exercise of voting power attached to 5% or more of all shares then on issue. Each option is convertible to one ordinary share. The exercise price of the option is determined by the Board. Page 36 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Directors’ Report The rules governing the operation of the plan may be amended, waived or modified, at any time by resolution of the Board provided there is no reduction of rights to Executives in the plan. If an amendment reduces the rights of Executives in the plan, it requires written consent of three-quarters of affected Executives. The plan may be terminated or suspended at any time by a resolution of the Board, provided the termination or suspension does not materially adversely affect the rights of persons holding options issued under the plan at that time. The following table summarises the options issued to KMP in the 2019 and 2020 financial years. Performance Rights Plan On 10 October 2018 at the Company’s Annual General Meeting, shareholders approved a performance rights plan. Under this plan, performance rights are issued to executives. The rights deliver ordinary shares to executives (at no cost to the executive) where the performance hurdle in relation to those performance rights is met. Following the exercise of a Right, the Company must, within such time as the Board determines, issue or allocate ordinary shares. There are currently no rights issued to any executive under this plan (2019: nil). KMP Grant Date No. Granted Exercise Price ($) Vesting Date No. Forfeited Closing Balance 5.5 STI structure The Board considers that the above performance- linked remuneration structure is appropriate at this time. It provides both short-term focus on operating performance and longer term focus on share price growth. Improving the performance of the operations was the main focus in setting the financial year 2020 short- term incentive. A. Sparks 10/10/2018 166,667 $0.28 30/08/2020 (166,667) A. Sparks 10/10/2018 166,667 $0.28 30/08/2021 (166,667) A. Sparks 10/10/2018 166,666 $0.28 30/08/2022 (166,667) D. Clark 29/11/2017 124,000 $0.28 30/08/2020 D. Clark 29/11/2017 124,000 $0.28 30/08/2021 D. Clark 29/11/2017 177,000 $0.28 30/08/2022 C. Barnes 29/11/2017 124,000 $0.28 30/08/2020 C. Barnes 29/11/2017 124,000 $0.28 30/08/2021 C. Barnes 29/11/2017 177,000 $0.28 30/08/2022 - - - - - - - - - 124,000 124,000 177,000 124,000 124,000 177,000 Options are subject to successfully achieving profit before tax performance hurdles over the financial years 2019 to 2021. LTI Plan The Board has established a Long Term Incentive Plan which is designed to provide incentives to the Executives of the group. The plan was approved by shareholders at the Annual General Meeting held on 18 December 2007. The purpose and rules of the plan are the same as the Executive Share Option Plan described above, except that there is no prohibition on issuing shares if it would result in an Executive owning (legally or beneficially) or controlling the exercise of voting power attached to 5% or more of all shares then on issue. 117,778 shares were issued under the plan in July 2020, for services provided in the 2020 financial year. No shares were issued under the LTI plan during the 2019 year. Page 37 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Remuneration Report (audited) continued 5.6 Consequences of performance on shareholder wealth In considering the group’s performance and benefits for shareholder wealth, the Board has regard to the following indices in respect of the current financial year and previous financial years. Net profit / (loss) attributable to equity holders of the Company ($2,373,000) $405,000 $5,982,000 $2,035,000 $1,748,000 Dividends paid - $782,439 $688,946 $649,325 $557,071 Reduction (increase) of share capital $(4,936,000) - - - $746,000 2020 2019 2018 2017 2016 Change in share price 5.7 Other benefits ($0.189) ($0.165) $0.105 $0.07 - During the current and prior year, there were no non-cash bonuses or benefits provided to executives. 6. Executive contractual arrangements It is the group’s policy that service contracts for executives are unlimited in term but capable of termination as per the relevant period of notice and that the group retains the right to terminate the contract immediately, by making payment that is commensurate with pay in lieu of notice. The service contract outlines the components of remuneration paid to the executive but does not prescribe how remuneration levels are modified year to year. Remuneration levels are reviewed each year to take into account cost-of- living changes, any change in the scope of the role performed by the senior executive and any changes required to meet the principles of the remuneration policy. Standard executive termination payment provisions apply to all current executives, including the Chief Executive Officer. The standards contractual provisions are as follows: Notice period Payment in lieu of notice Treatment of STI on termination Treatment of LTI on termination Employer initiated termination 3 months 3 months Pro-rated for time and performance Pro-rated for time and performance Termination for serious misconduct None None Unvested awards forfeited Unvested awards forfeited Employee initiated termination 3 months 3 months Pro-rated for time and performance Pro-rated for time and performance. Page 38 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Directors’ Report 6.1 Directors’ and executive officers’ remuneration The remuneration report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the group, directly or indirectly, including any director (whether executive or otherwise). Remuneration of Directors and executive officers are as follows: Short Term $ Post Employment $ Long Term Benefits $ Year Salary & Fees STI Cash Bonus Motor Vehicle Allowances Non- Monetary benefits Superannuation Benefits Cash Incentives Long Service Leave Share-based Payment Termination/ Retention Benefits Total % Performance Related % Options/ Rights 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 30,000 26,667 - 4,167 30,000 26,667 25,000 26,667 - - - - - - - - 30,000 18,500# 22,117 2,500 - - - - 117,500 18,500 2019 106,285 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 31,500# - - - 31,500 - - - - - - - - - - - - - - - 30,000 26,667 - 4,167 30,000 26,667 25,000 26,667 80,000 22,117 2.500 22,117 167,500 106,285 - - - - - - - - - - - - - - - 62.50 62.5 - - - - - - - - - - Short Term $ Post Employment $ Long Term Benefits $ Year Salary & Fees STI Cash Bonus Motor Vehicle Allowances Non- Monetary benefits Superannuation Benefits Cash Incentives Long Service Leave Share-based Payment Termination/ Retention Benefits Total % Performance Related % Options/ Rights 2020 2019 2020 2019 2020 2019 279,848 291,936 - - 215,101 53,893 218,680 - 206,528 4,240# 225,071 - - - 17,127 17,709 - - 2020 701,477 58,133 17,127 2019 735,687 - 17,709 2020 818,977 76,633 17,127 2019 841,972 - 17,709 - - - - - - - - - 22,181 21,402 6,813 9,230 20,136 20,531 49,130 51,163 49,130 51,163 - - - - - - - - - 5,224 (6,802) 112,785 413,236 26,924 3,276 7,510 (2,055) 17,813 5,609 4,259 (945) 1,705# (945) - - - - - 343,538 298,389 262,487 238,218 248,916 17,343 (7,152) 112,785 948,843 48,996 1,386 - 854,941 17,343 24,348 112,785 1,116,343 48,996 1,386 - 961,226 (1.6) 1.0 17.4 (0.4) 2.5 (0.4) 5.4 0.2 9.1 0.1 (1.6) 1.0 (0.7) (0.4) 0.7 (0.4) (0.8) 0.2 2.1 0.1 Non-executive directors M. Wendt B. Danos K. Gilmore M. Reddie T. Pearson Giles Karhan Total Executives A. Sparks D. Clark C. Barnes Total executives Total key management personnel # On 25 June 2020 the board approved a bonus of $50,000 for Mr Pearson and $8,000 for Mr Barnes in acknowledgement of their efforts in connection with the entitlement offer announced on 7 May 2020. The bonus relates to services provided prior to 30 June 2020, and there are no outstanding vesting conditions. A total of 117,778 shares were issued to Mr Barnes at an issue price of 3.6 cents per share in July 2020, while 875,000 shares will be issued to Mr Pearson at an issue price of 3.6 cents per share subject to approval at the forthcoming AGM, after allowing for withholding tax payable on the bonuses. Page 39 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Remuneration Report (audited) continued 7. Additional statutory disclosures This section sets out the additional disclosures required under the Corporations Act 2001. Transactions with related parties: Wentronic Holding GmbH and its associated entities hold 56.64% (2019: 53.82%) of the ordinary shares in Cellnet Group Limited. During the 2020 financial year, Cellnet purchased inventory from Wentronic Asia Pacific Limited (‘WAPL’), a fellow subsidiary of Wentronic Holding GmbH, to the value of $5,764,000 (2019: $12,291,000). As at 30 June 2020 Cellnet has an outstanding balance payable to Wentronic Asia Pacific to the value of $5,178 (2019: 475,000). Prior to 27 February 2020, WAPL sold inventory to Cellnet at cost price plus a fee to cover WAPL’s operating costs. The fee paid was approximately 9% of the gross amount of purchases paid in United States Dollars. Following 28 February 2020, and as announced to the ASX on 2 March 2020, Cellnet started purchasing products directly from suppliers and now pays WAPL a 6% management / services fee for coordination of the purchasing and logistics function provided by WAPL under a service agreement between Cellnet Group Limited, Cellnet Limited and WAPL. During the year Cellnet obtained an independent expert’s report concluding that the transactions with WAPL prior to 27 February 2020 were fair and reasonable. The purchasing arrangements prior to that date were ratified by shareholders on 26 June 2020. Joint venture with entity with ultimate control over the group During the year, the group made loan contributions of $26,000 (2019: $168,000) to Wentronic International Pty Ltd, being a joint venture between the group and its controlling shareholder Wentronic Holding GmbH. The group held a 49% interest in this entity and the investment was equity accounted for on the group’s balance sheet. The joint venture was dissolved during the year. The group’s share of losses of the joint venture for the year ended 30 June 2020 was $6,702 (2019: $5,827). An impairment charge of $454,000 was recognised in profit and loss for the year ended 30 June 2020 on write-off of loans extended to the joint venture. Option/right holdings The tables below details the number of options or rights over ordinary shares in the company held by directors, KMP or their related parties: 2020 Director/KMP No. Held at 1/7/2019 No. Granted No. forfeited No. Exercised No. Held at 30/6/2020 No. Vested & Exercisable M. Wendt B. Danos K. Gilmore M. Reddie T. Pearson A. Sparks C. Barnes D. Clark 2019 - - - - - 500,000 425,000 425,000 - - - - - - - - - - - - - (500,000) - - - - - - - - - - - - - - - - 425,000 425,000 - - - - - - - - Director/KMP No. Held at 1/7/2018 No. Granted No. Lapsed No. Exercised No. Held at 30/6/2019 No. Vested & Exercisable - - - - - 425,000 425,000 - - - - 500,000 - - - - - - - - - - - - - - - - - - - - 500,000 425,000 425,000 - - - - - - - M. Wendt B. Danos K. Gilmore M. Reddie A. Sparks C. Barnes D. Clark Page 40 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Directors’ Report Shareholdings: The table below details the number of ordinary shares in the company held by directors, KMP or their related parties. Unless otherwise stated, shares were acquired on-market. 2020 Director/ KMP No. Held at 1/7/2019 No. Acquired No. Acquired – Exercise of Options No. Disposed Shareholding at date of appointment/ resignation M. Wendt K. Gilmore T. Pearson M. Reddie B. Danos A. Sparks C. Barnes D. Clark 40,192,645 400,000 90,966,727* 2,888,000* - - - - - - 1,300,000 3,510,000* 322,375 500,000 322,042* 500,000* - - - - - - - - - - - - - - - (250,000) - - - - - (4,810,000) - - No. Held at 30/6/2020 131,159,372 3,288,000 - - - - 644,750 750,000 * All shares were acquired through the 2.7: 1 renounceable pro-rata entitlement offer announced on 7 May 2020. Acquisitions were on the same terms and conditions as other shareholders. 2019 Director/ KMP No. Held at 1/7/2018 No. Acquired No. Acquired – Exercise of Options No. Disposed Shareholder at date of appointment/ resignation M. Wendt K. Gilmore T. Pearson M. Reddie B. Danos A. Sparks C. Barnes D. Clark 40,192,645 400,000 - - - 1,300,000 322,708 500,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - No. Held at 30/6/2019 40,192,645 400,000 - - - 1,300,000 322,708 500,000 End of Remuneration Report This report is made with a resolution of the Directors: Tony Pearson Chairman Signed at Brisbane on 31 August 2020 Page 41 Cellnet Group Limited and its consolidated entities Financial Report 2019–20FINANCIAL REPORT Page 43 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report Statement of financial position As at 30 June 2020 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Current tax assets Derivative financial instruments Total current assets Non-current assets Receivables from associates Investment in associates Property, plant and equipment Right of use asset Deferred tax assets (net) Intangible assets Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Provisions Current tax liabilities Lease liability Interest-bearing loans and borrowings Total current liabilities Non-current liabilities Provisions Lease liability Interest-bearing loans and borrowings Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY Note 10 11 12 18 13 19 8(c) 14 15 16 8(c) 19 17 16 19 17 20(a) 20(b) Consolidated 2020 $000 6,936 15,027 15,377 1,409 - 37 38,786 - - 299 700 2,750 6,812 10,561 49,347 11,905 768 33 360 9,042 22,108 168 420 1,250 1,838 23,946 25,401 2019 $000 1,311 16,285 18,232 1,056 25 146 37,055 428 7 300 - 3,055 6,637 10,427 47,482 12,358 1,266 185 - 8,878 22,687 150 - 1,639 1,789 24,476 23,006 38,389 10,473 (23,461) 25,401 33,453 10,641 (21,088) 23,006 The above statement of financial position should be read in conjunction with the accompanying notes. Page 44 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Statement of comprehensive income Consolidated For the year ended 30 June 2020 Revenue from contracts with customers Other income Materials, packaging and consumables used Depreciation and amortisation expense Employee benefit expense Finance costs Freight expense Occupancy expense Warehousing expense Other expense Profit / (loss) from continuing operations before income tax Income tax (expense) / benefit Net profit / (loss) for the period Items that may be reclassified subsequently to profit or loss Foreign currency translation Total comprehensive income / (loss) for the period Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the Company Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Earnings per share for profit attributable to the ordinary equity holders of the Company Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Note 5 6 8(a) 9 9 9 9 2020 $000 96,225 172 (78,113) (1,207) (9,827) (845) (2,719) (213) (2,525) (2,910) (1,962) (411) (2,373) (152) (2,525) (2.28) (2.28) (2.24) (2.24) 2019 $000 110,714 682 (87,186) (759) (11,979) (915) (2,897) (645) (3,954) (2,707) 354 51 405 219 624 0.47 0.47 0.47 0.47 The above statement of comprehensive income should be read in conjunction with the accompanying notes. Financial Report Page 45 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report continued Statement of changes in equity At 1 July 2019 Loss for the period Foreign currency translation Total comprehensive loss for the period Transfers to/from reserves Transactions with owners in their capacity as owners: Issue of shares Share issue costs Share based payments Dividends paid Balance as at 30 June 2020 At 1 July 2018 Profit for the period Foreign currency translation Total comprehensive income for the period Transfers to/from reserves Transactions with owners in their capacity as owners: Share based payments Issue of shares Dividends paid Balance as at 30 June 2019 Share capital $000 33,453 - - - - 5,070 (134) - - 38,389 31,453 - - - - 2,000 - - 33,453 Reserve for own shares $000 Foreign Currency translation reserve $000 Share based payment reserve $000 Reserve for Profits $000 Accumulated losses $000 Total equity $000 (25) - - - - - - - - (25) (25) - - - - - - - (187) - (152) (152) - - - - (339) (406) - 219 219 - - - - 1,711 - - - - - (16) - 9,142 - - - (21,088) (2,373) - (2,373) 23,006 (2,373) (152) (2,525) - - - - - - - - 5,070 (134) (16) - 1,695 9,142 (23,461) 25,401 1,713 - - - - - (2) - 9,519 - - - 405 - - (782) 9,142 (21,088) 405 - 405 (405) - - - 21,166 405 219 624 - 2,000 (2) (782) (21,088) 23,006 (25) (187) 1,711 The above statement of changes in equity should be read in conjunction with the accompanying notes. Page 46 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Statement of cash flows For the year ended 30 June 2020 Note Consolidated 2020 $000 Cash flows from / (used in) operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Income tax paid Interest paid Net cash flows from / (used in) operating activities Cash flows used in investing activities Interest received Loans to associates Payment for acquisition of businesses, net of cash acquired Purchase of property, plant and equipment Payments for purchase of intangibles Lease incentives received Payment of contingent consideration Net cash flows used in investing activities Cash flows from / (used in) financing activities Proceeds from issuance of shares Share issue costs Principal repayments on leases Proceeds from borrowings Repayment of borrowings Dividends Net cash flows from financing activities Net increase / (decrease) in cash and cash equivalents Net foreign exchange differences Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period The above statement of cash flows should be read in conjunction with the accompanying notes. 108,874 (104,240) (197) (812) 3,625 - (26) (1,001) (87) (24) 71 (1,131) (2,198) 5,070 (191) (353) 28,738 (28,963) - 4,301 5,728 (103) 1,311 6,936 30 6 23 4 20 20 19 17 17 10 2019 $000 122,322 (126,401) (463) (697) (5,239) 5 (168) (2,578) (76) (331) - - (3,148) - - - 34,534 (26,420) (782) 7,332 (1,056) 114 2,253 1,311 Financial Report Page 47 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 1. Corporate Information Cellnet Group Limited (the ‘Company’) is a company limited by shares and incorporated in Australia. The consolidated financial report of the Company for the financial year ended 30 June 2020 comprises the Company and its subsidiaries (together referred to as the ‘group’ or the ‘consolidated entity’). The company is a for-profit entity for the purpose or preparing these financial statements. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company. The financial report was authorised for issue by the Directors on 31 August 2020. The nature of the operations and principal activities of the group are described in the directors’ report. 2. Significant accounting policies (a) Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. is presented The financial report in Australian dollars and has been prepared on the historical cost basis, except for derivative financial instruments and contingent consideration liabilities which are measured at fair value. (Rounding The Company is of a kind referred to in ASIC Corporations in Financial/Directors’ Report) Instrument 2016/191 dated 1 April 2016 and in accordance with that Instrument, amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. and underlying assumptions The estimates are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Page 48 The financial report complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. (b) New accounting standards and interpretations (i) Application of new accounting standards AASB 16 Leases is applicable to the group for the first time in preparing these financial statements. The group has applied the modified retrospective approach permitted under AASB 16 to account for the initial application of the standard, meaning that comparative balances have not been restated. Rather, the reclassifications and adjustments arising from initial application of the new leasing standard are recognised in the opening balance sheet on 1 July 2019. On initial application, the group made an election to measure right-of-use assets for all leases at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to each lease recognised on the balance sheet at 30 June 2019. As a result of this election, there was no impact on accumulated losses or reserves from applying the new standard for the first time. The group used the following practical expedients permitted by the standard in applying AASB 16 for the first time: • The use of a single discount rate for a portfolio of leases with reasonably similar characteristics; and • The accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short-term leases. The group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the group has relied on its assessment made applying previously applicable accounting standards and interpretations. Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report (ii) Accounting standards and interpretations issued but not yet effective The AASB has issued a number of new and amended Accounting Standards and Interpretations that have mandatory application dates for future reporting periods, some of which are relevant to the group. The group has decided not to early adopt any of these new and amended pronouncements. The directors have assessed that none of these standards will have a material impact on the group’s financial statements in the period of initial application. (c) Basis of Consolidation The consolidated financial statements comprise the financial statements of Cellnet Group Ltd and its subsidiaries (as outlined in note 25) as at and for the year ended 30 June each year (the group or the consolidated entity). Interests in associates are equity accounted and are not part of the group. Subsidiaries are all those entities over which the group has control. The group controls an entity where it has power over the entity, exposure or rights to variable returns from its involvement with the entity, and for which it has the ability to use its power over the entity to affect the amount of its returns. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances and transactions, income and expenses and profit and losses resulting from intra-group transactions have been eliminated in full. Intra-group balances and any unrealised gains and losses or income and expenses arising from intra- group transactions, are eliminated in preparing the consolidated financial statements. Page 49 On adoption of AASB 16, the group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the group’s incremental borrowing rate as of 1 July 2019. The weighted average incremental borrowing rate applied in the measurement of the lease liabilities was 5.0%. The table below provides a reconciliation of the operating lease commitments as at 30 June 2019, and the carrying value of the lease liabilities as at 1 July 2019: Operating lease commitments disclosed as at 30 June 2019 Less than one year Between one and five years Total operating lease commitments as at 30 June 2019 Discounted using the lessee’s incremental borrowing rate at the date of initial application Less: Leases with a contractual maturity date of less than 12 months from the date of initial application Lease liability recognised as at 1 July 2019 Of which are: Current lease liabilities Non-current lease liabilities $000 227 99 326 319 (51) 268 169 99 268 The group’s right-of-use assets relate entirely to leases of premises. The carrying value of right- of-use assets recognised at 1 July 2019 was $268,000. The only financial statement line items affected by the initial application of the new standard were current and non-current lease liabilities and right-of-use assets, which were impacted in the amounts disclosed above. Revised lease accounting policies under AASB 16 are disclosed in note 1(s). Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Notes to the financial statements 2. Significant accounting policies continued (d) Foreign currency (e) Business combinations (i) Functional and presentation currency Both the functional and presentation currency of Cellnet Group Limited and its Australian subsidiaries are Australian dollars ($). The functional currencies of the New Zealand and Hong Kong subsidiaries are New Zealand dollars and United States dollars respectively, which are translated to the presentation currency as described in (iii) below. (ii) Transactions and balances Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities the denominated balance date are translated to Australian dollars at the foreign exchange rate ruling at reporting date. Foreign exchange differences arising on translation are recognised in net income. foreign currencies at in Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. (iii) Financial statements of foreign operations The assets and liabilities of foreign operations are translated to Australian dollars at foreign exchange rates ruling at the balance date. The revenues and expenses of foreign operations are translated to Australian dollars at rates approximating rates ruling at the dates of the transactions. Foreign exchange differences arising on translation are recognised directly in a separate component of equity. foreign exchange the Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination the group elects whether it measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses. When the group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss. (f) Revenue from contracts with customers Revenue from the sale of goods is recognised at the point in time when control of the products has transferred, being when the products are delivered to the customer. Products are typically sold with an attaching contractual or constructive entitlement to rebates and other incentive arrangements. As such, revenue from the sale of goods is recognised based on the price specified in the contract (i.e. the gross sale price) net of the estimated rebates and incentives. is used to estimate Accumulated experience and provide for the rebates and incentives, using the expected value method, and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. A refund liability (included in trade and other payables) is recognised for expected rebates and incentives payable to customers in relation to sales made until the end of the reporting period. In addition, products sold by the group carry a right of return. A refund liability (included in trade and Page 50 Cellnet Group Limited and its consolidated entities Financial Report 2019–20other payables) and a right to returned goods asset (other current assets in the statement of financial position) are recognised for the products expected to be returned. Accumulated experience is used to estimate such returns at the time of sale at an operating segment level (expected value method). Because the percentage of sales returns has been steady for a number of years, it is highly probable that a significant reversal in the cumulative revenue recognised will not occur. The validity of this assumption and the estimated amount of returns are reassessed at each reporting period. Sales are made with credit terms of 60 days or less; as such no element of financing is deemed present in sales of goods made to customers. The group does not generally receive funds in advance of providing goods nor provide goods in advance of contractual entitlement to invoice the customer. Disaggregation of revenue The group’s sole material source of revenue is the sale of goods to customers. The nature of contracts with customers for sale of goods is consistent across the group. Required disaggregation disclosures under AASB 15 are made within note 5. (g) Financial instruments (i) Financial assets Initial recognition and measurement Financial assets within the scope of AASB 9 Financial Instruments are classified as at amortised cost, at fair value through profit and loss, or at fair value through other comprehensive income. The group determines the classification of its financial assets at initial recognition. Financial Report All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through the profit or loss, on the basis of both the group’s business model for managing the financial assets, and the contractual cash flow characteristics of the financial asset. The group’s financial assets include cash and short term deposits (amortised cost), trade and other receivables (amortised cost), and derivative financial instruments (fair value through profit and loss). (ii) Financial liabilities Initial recognition and measurement Financial liabilities within the scope of AASB 9 Financial Instruments are classified as at amortised cost, at fair value through profit and loss, or as derivatives designated as hedging The group instruments as appropriate. determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair values plus, in the case of loans and transaction borrowings, directly attributable costs. The group’s financial liabilities include trade and other payables (amortised cost), and contingent consideration payable (fair value through profit and loss). Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. (iii) Fair value of financial instruments Information regarding fair value measurements made by the group is included in note 4. Page 51 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 2. Significant accounting policies continued (h) Receivables (i) Inventories Receivables from contracts with customers, loans, and other receivables are stated at their amortised cost less allowances for expected credit losses. Receivables from contracts with customers are recognised at the time the goods are delivered to the customer, as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. Other receivables are recognised when the entity becomes party to the contractual provisions of the asset. The group applies the simplified expected credit loss model prescribed in AASB 9 to determine an allowance for expected credit losses on its receivables from contracts with customers and its other receivables. Under this approach, the lifetime expected credit losses are estimated using a provision matrix based on historical rates of losses observed on similar assets, as adjusted for the group’s forecasts of future economic conditions. The measurement of expected credit losses reflects the group’s ‘expected rate of loss’, which is a product of the probability of default and the loss given default, and its ‘exposure at default’, which is typically the carrying amount of the relevant asset. In determining the allowance for expected credit losses, the group has consideration to expected recoveries through collateral or trade credit insurance arrangements. The group has identified contractual payments more than 90 days past due as default events for the purpose of measuring expected credit losses. These default events have been selected based on the company’s historical experience. Receivables are written off when they exceed 150 days past due and have been submitted to the group’s trade credit insurer for processing. Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost is calculated using the average cost method and includes direct and allocated costs incurred in acquiring the inventories and bringing them to their present location and condition. A provision is recognised when there is objective evidence that the group will not be able to sell the inventory at normal reseller pricing. (j) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise of cash at bank and in hand and short term deposits with a maturity of 60 days or less that are readily convertible to known amounts of cash and which are subject to insignificant risks of change in values. (k) Property, plant and equipment impairment Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and losses (see accounting policy (m)). Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is charged to net income on a straight- line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives in the current and comparative periods are as follows: Leasehold improvements Plant and equipment 3–5 years 2–3 years The residual value, useful life and depreciation method applied to an asset are reassessed at least annually. An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Page 52 Cellnet Group Limited and its consolidated entities Financial Report 2019–20(l) Intangible assets (i) Goodwill Goodwill acquired in a business combination is initially measured at cost of the business combination being the excess of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. (ii) Other intangible assets Other intangible assets that are acquired by the group are stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy (m)). The group’s other intangible assets represent software assets purchased by the entity or developed by a third party, and customer and supplier relationships acquired combination transactions. business through (iii) Subsequent expenditure on expenditure capitalised Subsequent is capitalised only when intangible assets it future economic benefits the increases embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. (iv) Amortisation Amortisation is charged to net income on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment at each balance date. Other intangible assets are amortised from the date they are available for use over their estimated useful lives. Financial Report (m) Impairment The carrying amounts of the group’s property, plant and equipment and intangible assets, are reviewed at each balance date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated (see below). For goodwill, intangible assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance date. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in net income. Impairment losses recognised in respect of cash- generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash- generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro-rata basis. Calculation of recoverable amount The recoverable amount of property, plant and equipment and intangible assets is the greater of their fair value less costs to sell or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash- generating unit to which the asset relates. Impairment losses, other than in respect of goodwill, are reversed when there is an indication that the impairment loss may no longer exist and there has been a change in the estimate used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Page 53 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 2. Significant accounting policies continued (n) Trade and other payables Trade and other payables are stated at their amortised cost. Trade payables are non-interest bearing and are normally settled on average between 30 day and 45 day terms. They represent liabilities for goods and services provided to the group prior to the end of the financial year that are unpaid and arise when the group becomes obliged to make future payments in respect of the purchase of these goods and services. (o) Interest-bearing loans and borrowings Interest-bearing borrowings are recognised initially at fair value of the consideration received less related transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in net income over the period of the borrowings on an effective interest basis. (p) Provisions and employee leave benefits (i) Provisions Provisions are recognised when the group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in net income net of any reimbursement. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance date using a discounted cash flow methodology. The risks specific to the provision are factored into the cash flows and as such a risk-free government bond rate relative to the expected life of the provision is used as a discount rate. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. (ii) Long-term service benefits The group’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using the rates attached to high quality corporate bonds at the balance date which have maturity dates approximating the terms of the group’s obligations. (iii) Wages, salaries, annual leave and sick leave Liabilities for employee benefits for wages, salaries and annual leave that are expected to be wholly settled within 12 months of the reporting date represent present obligations resulting from employees’ services provided to reporting date, and are calculated using undiscounted amounts based on remuneration wage and salary rates that the group expects to pay as at reporting date including related on-costs, such as worker’s remuneration insurance and payroll tax. Amounts not expected to be wholly settled within 12 months are carried at a net present value determined in the same manner as long service leave benefits described in note 2(m) (ii). Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. Page 54 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report lease payments are discounted using the The interest rate implicit in the lease. If that rate cannot be determined, the group’s incremental rate of borrowing is used, being the rate that the group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are measured at cost comprising the following: The amount of the initial measurement of • lease liability • Any lease payments made at or before the commencement date less any lease incentives received • Any initial direct costs, and • Restoration costs Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture. Page 55 (q) Share based payment transactions The group provides incentives to KMP in the form of share based payments. There are currently share based payment plans in place for the KMP. The cost of share based payments with KMP is measured by reference to the fair value of the equity instrument at the date at which they are granted (refer note 21 for further details). (r) Share 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. (s) Leases Accounting policy from 1 July 2019 From 1 July 2019, leases are recognised as a right- of-use asset and a corresponding liability at the date at which the leased asset is available for use by the group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right- of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight- line basis. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • Fixed payments (including in-substance fixed payments), less any lease incentives receivable • Variable lease payments that are based on an index or a rate • Amounts expected to be payable by the group under residual value guarantees • The exercise price of a purchase option if the group is reasonably certain to exercise that option, and • Payments of penalties for terminating the lease, if the lease term reflects the group exercising that option. Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 2. Significant accounting policies continued Accounting policy for comparative year ended 30 June 2019 (i) Operating lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in net income as an integral part of the total lease expense and spread over the lease term. (ii) Finance leases Finance leases, which transfer to the group substantially all the risks and benefits incidental to ownership of the leased item are capitalised at the inception of the lease at fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in net income. (t) Income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period’s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Deferred tax is provided using the statement of financial position method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for - initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Tax consolidation The Company and its wholly-owned Australian resident subsidiaries have formed a tax-consolidated entity with effect from 1 July 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated entity is Cellnet Group Limited. Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated Page 56 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report (u) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the relevant taxation authority is included as a current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified as operating cash flows. (v) Critical accounting estimates and judgements Management discussed with the Audit Committee the development, selection and disclosure of the group’s critical accounting judgements and estimates and the application of these policies and estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Revenue recognition As described in note 2(f) revenue is recognised net of expected sales returns, incentives and rebates offered to customers. Management applies the expected value method in making estimates of the amounts of incentives and rebates outstanding and the value of expected returns (including any associated right to returned goods asset) as at balance date based on customer trading and claim history, the terms of underlying contractual arrangements, and historical rates of product return. Such estimates involve the use of management’s judgement and the actual amount of incentives and rebates settled, and products returned, may vary from the amounts accrued at balance date. Page 57 in the separate financial entity are recognised statements of the members of the tax-consolidated entity using the ‘separate taxpayer’ within the consolidated entity approach. Deferred tax assets and deferred tax liabilities are measured by reference to the carrying amounts in the separate financial statements of each entity and the tax values applied under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses or unused tax credits of the subsidiaries are assumed by the head entity in the tax consolidated entity and are recognised as amounts payable / (receivable) to / (from) other entities in the tax-consolidated entity in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution. The Company recognises deferred tax assets arising from unused tax losses and unused tax credits of the tax-consolidated entity to the extent that it is probable that future taxable profits of the tax-consolidated entity will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses and unused tax credits as a result of revised assessments of the probability of recoverability are recognised by the head entity only. The head entity, in conjunction with other members of the tax-consolidated entity, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated entity in respect of tax amounts. The tax funding arrangements require payments to / (from) the head entity equal to the current tax liability / (asset) assumed by the head entity and any tax-loss or tax credit related deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity payable / (receivable) equal in amount to the tax liability / (asset) assumed. The inter-entity payable / (receivable) is at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 2. Significant accounting policies continued Valuation of consideration paid and net assets acquired in business combinations Consideration paid and net assets acquired in business combination transactions are recognised at their acquisition date fair values, as outlined in Note 23 (net assets acquired) and Note 4 (fair value of contingent consideration). The most significant judgements and assumptions are made in determining the fair value of identifiable intangible assets (customer and supplier relationships) and contingent consideration payable. These assumptions include forecast cash flows (including growth rates), probability weightings applied to different earn-out scenarios, customer and supplier attrition rates, contributory asset charges and discount rates. Impairment assessment for cash-generating units containing goodwill The group completes an impairment assessment on cash-generating units to which goodwill is allocated on an annual basis or where there are indicators that CGU assets may be impaired. This assessment involves comparison of the value-in-use of the cash- generating unit to its carrying value. There are a number of assumptions made in the determination of value-in-use, which are outlined in detail in note 14(b). inventory Impairment losses for stock on hand is exposed to a risk of The group’s obsolescence. A provision for obsolescence is raised where there is evidence suggesting that the net realisable value of inventory is less than its cost to the group. Management relies on inventory ageing data, days stock on hand (based on recent sales data), and future sales forecasts in determining the required provision against inventory at an individual product level. The group’s revenues declined in the last quarter of the financial year as a result of government imposed restrictions following the onset of the COVID-19 pandemic, with a degree of uncertainty prevailing regarding potential future restrictions and implications of the pandemic on end consumer demand. This has resulted in an increase in the risk of obsolescence in stock holdings at 30 June 2020 and therefore an increase in the provision for inventory obsolescence recognised, which is disclosed in note 12. Note 7 discloses the amount of stock which has been scrapped throughout the course of the year, or which has been written down to net realisable value in accordance with the policy outlined in note 2 (i). Share based payments 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 management using a binomial model. The related assumptions are detailed in note 21. 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 expenses and equity. Recovery of deferred tax assets Deferred tax assets are recognised for tax losses and deductible temporary differences to the extent that management considers that it is probable that future taxable profits will be available to utilise temporary differences and recognised tax losses. Where the group has made a taxable loss in the current or preceding year, a deferred tax asset for carry forward tax losses is only recognised to the extent that there is convincing other evidence that sufficient taxable profit will be available against which the recognised unused tax losses can be utilised. Significant judgement was required to determine the amount of deferred tax assets that can be recognised, based upon the probability weighted forecasts of future taxable profits over the next three years. Page 58 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report (w) Earnings per share The group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. Potential ordinary shares shall be treated as dilutive when their conversion to ordinary shares would decrease earnings per share or increase loss per share from continuing operations. (x) Government grants Government grants are recognised when there is reasonable certainty that the grant will be received and all grant conditions are met. Grants relating to expense items are recognised as income over the periods necessary to match the grant to the costs they are compensating. Grants relating to depreciable assets are credited to deferred income and are recognised in profit or loss over the period and in the proportions in which depreciation expense on those assets is recognised. Government grants include amounts received or receivable under the Australian Federal Government’s JobKeeper Payment Scheme, and the New Zealand Federal Government’s Job Subsidy Scheme, which provides a temporary subsidy to eligible businesses significantly affected by coronavirus (COVID-19). Wage subsidies received have been offset against the related employee benefits expense in the statement of comprehensive income. The amount of these subsidies received during the year has been disclosed in note 7. 3. Financial risk management objectives and policies The group’s principal financial instruments comprise of receivables, payables, cash and short-term deposits, interest bearing loans, lease liabilities and forward foreign currency contracts. Risk exposures and responses The group manages its exposure to key financial risks, including interest and currency risk in accordance with the group’s financial risk management policy. The objective of this policy is to support the delivery of the group’s financial targets whilst protecting future financial security. instruments are The group enters into derivative transactions, principally forward currency exchange contracts. The purpose is to manage the currency risks arising from the group’s operations. The main risks arising from the group’s financial interest rate risk, foreign currency risk, credit risk and liquidity risk. The group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate and foreign exchange risk and assessment of market forecasts for interest rate and foreign exchange prices. Ageing analysis and monitoring of specific credit allowances are undertaken to manage credit risk. Liquidity risk is monitored through using future rolling cash flow forecasts. Primary responsibility for identification and control of financial risks rests with the Audit & Risk Committees under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below, including the setting of limits for forward currency contracts, credit allowances and future cash flow forecast projections. Page 59 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 3. Financial risk management objectives and policies continued Interest rate risk Foreign currency risk The group’s exposure to market interest rates relates solely to the group’s short-term cash deposits and interest bearing loans and borrowings as disclosed in note 10 and 17. The group is exposed to foreign currency risk on sales and purchases that are denominated in a currency other than Australian dollars. The currencies giving rise to risk are primarily U.S dollars and New Zealand dollars. The group enters into forward foreign exchange contracts to hedge certain anticipated purchase commitments in foreign currencies (principally U.S denominated dollars). The terms of these commitments are no more than 45 days. It is the group’s policy not to enter into forward contracts until a firm commitment is in place. The group has subsidiaries with function currencies of New Zealand and United States dollars. There are currently no hedges in place to mitigate the foreign currency risk for these subsidiaries. into forward Entering foreign currency exchange contracts minimises the risk of sharp fluctuations in foreign exchange rates and allows for better cash flow management in relation to paying international suppliers. At balance date, the group had the following exposure to US$ foreign currency that is not designated as cash flow hedges: Financial assets Trade and other receivables Financial liabilities Trade and other payables Forward foreign currency contracts* Net exposure 2020 2019 USD $000 USD $000 244 244 (1,608) (3,949) (5,557) (5,313) 428 428 (2,622) (16,931) (19,553) (19,125) *Denotes the amount of USD to be exchanged at the forward exchange rate. Cash and cash equivalents Interest bearing loans and borrowings Note 10 17 2020 $000 6,936 2019 $000 1,311 (10,292) (10,517) (3,356) (9,206) The group frequently analyses its interest rate exposure. Within this analysis consideration is given to potential renewals of existing positions, alternative hedging positions and the mix of fixed and variable interest rates. The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date. At 30 June 2020, if interest rates had moved as illustrated in the table below, with all other variables held constant, post-tax profit and net assets would have been affected as follows: Post tax profit higher/(lower) Net assets higher/(lower) 2020 $000 2019 $000 2020 $000 2019 $000 (23) (64) (23) (64) 12 32 12 32 Consolidated +1% (100 basis points) (2019: 1%) -0.5% (50 basis points) (2019: 0.5%) The movements in profit are due to higher / lower cash receipts / payments from variable rate net interest bearing balances. Page 60 Cellnet Group Limited and its consolidated entities Financial Report 2019–20At 30 June 2020, had the Australian dollar moved, as illustrated in the table below, with all other variables held constant, post-tax profit and other comprehensive income would have been affected as follows: Post tax profit higher/(lower) Net assets higher/(lower) 2020 $000 2019 $000 2020 $000 2019 $000 579 1,919 579 1,919 (707) (2,346) (707 (2,346) Consolidated AUD / USD +10% (2019: +10%) AUD / USD -10% (2019: -10%) Significant assumptions: - The reasonably possible movement was calculated by taking the USD spot rate as at balance date, moving the spot rate by the reasonably possible movements and then re-converting the USD into AUD with the ‘new spot rate’. This amount was then tax effected. This methodology reflects the translation methodology undertaken by the group. Financial Report Credit Risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The maximum exposure to credit risk on financial assets of the group is the carrying amount, net of any allowance for expected credit losses, as disclosed in the maturity analysis table below. The group mitigates this risk by adopting procedures whereby it only deals with creditworthy customers. Wherever possible the group also insures debtors that have an approved credit limit of greater than $5,000 through trade credit insurance. Where possible trade receivables that are greater than $5,000 are insured up to 90% of the approved credit limit, with a $5,000 excess payable per claim. Details regarding the determination of the allowance for expected credit losses are contained in note 11(a). Liquidity risk Liquidity risk arises from both the financial liabilities and lease liabilities of the group and the group’s subsequent ability to meet its obligations to repay its financial liabilities as and when they fall due. The group’s objective is to maintain a balance between continuity of at cash funding and short-term fixed cash deposits. The group manages its liquidity risk by monitoring the total cash inflows and outflows expected on a daily basis. Page 61 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 3. Financial risk management objectives and policies continued Maturity analysis of financial assets, financial liabilities and lease liabilities based on management’s expectation is presented below. Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Financial liabilities Trade and other payables Interest bearing loans and borrowings Lease liabilities Net inflow / (outflow) Liquid financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Trade and other payables Interest bearing loans and borrowings Net inflow Carrying Value $000 Note Total contractual cash flows 6 months or less 6 – 12 months 1 – 5 years 2020 10 11 18 15 17 10 11 18 15 17 6,936 15,027 37 6,936 15,027 37 22,000 22,000 (11,905) (10,292) (22,197) (780) (977) (11,905) (10,374) (22,279) (842) (1,121) - - - - - (8,897) (8,897) (225) (9,122) 2019 - - - - - (227) (227) (166) (393) - - - - - (1,250) (1,250) (451) (1,701) Carrying Value $000 Total contractual cash flows 6 months or less 6 – 12 months 1 – 5 years 1,311 16,285 146 17,742 (12,358) (10,517) (22,875) (5,133) 1,311 16,285 146 17,742 (12,358) (10,686) (23,044) (5,302) 1,311 16,285 146 17,742 (12,358) (8,745) (21,103) (3,361) - - - - - - - - - - (227) (227) (227) (1,714) (1,714) (1,714) Page 62 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report 4. Fair Value Measurement The fair values together with the carrying amounts of financial assets and financial liabilities shown in the statement of financial position are outlined in the table below. For short term trade receivables and payables with a maturity date of less than one year, the carrying amount, as adjusted for any allowances for impairment, is deemed to reflect the fair value. 2020 2019 Note Carrying amount $000 Fair value $000 Carrying amount $000 Fair value $000 Amortised cost Cash and cash equivalents Trade and other receivables Trade and other payables Borrowings Fair value through profit or loss Contingent consideration payable Derivative financial instruments 10 11 15 17 15 18 6,936 15,027 (11,905) (10,292) - 37 (197) 6,936 15,027 (11,905) (10,292) - 37 (197) 1,311 16,285 (11,186) (10,517) (1,172) 146 (3,961) 1,311 16,285 (11,186) (10,517) (1,172) 146 (3,961) Fair value hierarchy Outlined below are the judgements and estimates made in determining the fair value of assets and liabilities that are recognised and measured at fair value. To provide an indication about the reliability of the inputs used in determining fair value, the group has classified its assets and liabilities into the three levels prescribed under the accounting standards, as follows: Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. Level 2: The fair value of financial instruments that are not traded in an active market is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. That is, all valuation inputs are observable. Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. The only balances on the group’s balance sheet which is measured at fair value are forward foreign exchange contracts (refer note 18), and contingent consideration payable (refer note 15). The fair value of forward foreign exchange contracts forward exchange rates at the balance sheet date. Such fair value measurement is included in level 2, as it is based on an observable input. is determined using surrounding expectations The fair value of contingent consideration is calculated based on a probability weighted assessment of management’s the performance targets outlined below. Key inputs into the valuation factors which are determined based on forecast future cash flows and margins, which are unobservable (Level 3 inputs). Details of the assumptions made in valuing contingent consideration liabilities in respect of business combinations described in note 23 are as follows:. include scenario probability Page 63 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 4. Fair Value Measurement continued Turn Left Distribution (TLD) PowerGuard Contingent consideration consists of contractual earn- out arrangements based on the financial performance of the PowerGuard business over the FY20 and FY21 financial years. These arrangements grant the vendor an entitlement to 25% of the gross profit generated above a gross profit floor of $600,000 per financial year. The fair value of the contingent consideration liability at both the acquisition date and at 30 June 2020 was $131,000. This amount was prepaid at the acquisition date and is recognised as both a liability and prepayment at 30 June 2020. The valuation of contingent consideration allows for gross profit margins of $0.8m and $1m respectively for the FY19 and FY20 earn-out periods. Reasonably possible changes in these assumptions may result in an increase or decrease in the fair value of the contingent consideration liability of up to $131,000. Performance Distribution Contingent consideration consists of contractual earn- out arrangements amounting to 35% of net profit before tax generated by the acquired business for a three year period subsequent to the acquisition date of 1 April 2020. The fair value of the contingent consideration liability at both the acquisition date and at 30 June 2020 was $364,000, which allows for net profit before tax over the earn-out period of $1.115m, discounted at a rate of 4.5%. Reasonably possible changes in these assumptions may result in an increase or decrease in the fair value of the contingent consideration liability by $73,000. The contingent consideration consists of contractual earn-out, over-performance and incentive payment arrangements based on the financial performance of TLD over the FY19 and FY20 financial years. These are summarised as follows: Earn-out: Over-performance: Incentive: From $0.8m up to $1m per annum where gross profit on sales of software in FY19 and FY20 is between $1.6m and $2.0m. 25% of cumulative gross profit on sales of software over the earn-out period (i.e. FY19-FY20) where gross profit for this period exceeds $4.0m, uncapped in amount. 25% of all net profit over the earn- out period (i.e. FY19-FY20) where net profit (less any earn-out and payments) over-performance in exceeds $4.0m, uncapped amount. At 30 June 2019, the group adopted probability factors of 100% and 20% in respect of earn-out payments for FY19 and FY20, and probability factors of 0% for incentive and overperformance payments. The fair value of the contingent consideration liability at 30 June 2019 was $1,172,000 (note 15). A payment of $1m was made during FY20 in respect of earn-out entitlement arising on FY19 performance. At the conclusion of the earn-out period, being 30 June 2020, the group has assessed that remaining earn-out targets as described above have not been met and the liability has been valued at $nil as at 30 June 2020, resulting in a gain on remeasurement of the contingent consideration liability in the current financial year of $172,000 (note 6). Page 64 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report 5. Operating segments Identification of reportable segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity’s chief operating decision maker (the Chief Executive Officer) to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. Operating segments are identified by management based on the manner in which products are sold. The group has identified three operating segments, being Cellnet Australia, Cellnet New Zealand, and Turn Left Distribution. The Cellnet Australia and Cellnet New Zealand operating segments are aggregated into the one reportable segment (Cellnet), based on the similar economic characteristics that exist between these two segments, and similarities in the nature of products, type and class of customer for these products, distributions methods and similar economic and regulatory environments in Australia and New Zealand. Financial information for each of the group’s reportable segments is set out below: June 2020 Australia New Zealand Total Revenue from contracts with customers Other income Profit before tax Segment assets Segment liabilities June 2019 Australia New Zealand Total Revenue from contracts with customers Other income Profit before tax Segment assets Segment liabilities Cellnet $000 64,566 13,339 77,905 - (1,851) 34,710 17,834 77,507 16,597 94,104 5 340 32,588 17,807 Turn Left $000 Corporate and Eliminations $000 18,320 - 18,320 - 15 11,105 4,368 16,606 4 16,610 - (554) 10,713 3,498 - - - 172 (126) 3,532 1,744 - - - 677 568 4,181 3,171 Total $000 82,876 13,339 96,225 172 (1,962) 49,347 23,946 94,113 16,601 110,714 682 354 47,482 24,476 Page 65 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 6. Other income 7. Items included in profit/(loss) Interest Share of profits of associates Fair value gain on revaluation of contingent consideration payable Total other revenue 2020 $000 - - 172 172 2019 $000 5 (6) 683 682 Bad debts expense / (recoveries) Increase / (decrease) in credit loss allowance Loss on scrapping of / provisioning for obsolete inventory Minimum lease payments – operating leases Rent expense on short-term leases Depreciation of right-of-use assets Interest expense on lease liabilities Government grants – wage subsidies1 Defined contribution employee superannuation expense Share-based payments expense/ (income) Write-off of investment / receivables from associate Fair value (gains) / losses on FX derivatives 2020 $000 - 149 2019 $000 (254) 113 2,751 1,407 - 113 362 40 424 618 (16) 454 109 528 - - - - 722 (2) - (108) (277) Net foreign exchange losses/(gains) (1,384) 1 During the year the group received $297,000 under the Australian government’s JobKeeper wage subsidy scheme, and $126,735 under the New Zealand government’s wage subsidy scheme. These amounts have been offset against employee benefits expense in the statement of comprehensive income. Page 66 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 8. Income Tax (a) Income tax (expense)/benefit The major components to income tax are: Current income tax charge Prior year under/over provision – current tax Prior year under/over provision – deferred tax Deferred income tax charge Total income tax expense/(benefit) reported in net income Financial Report 2020 $000 80 (31) - 362 411 2019 $000 130 5 22 (208) (51) (b) Numerical reconciliation between aggregate tax expense / (benefit) recognised in net income and tax expense / (benefit) calculated per the statutory income tax rate. A reconciliation between tax expense / (benefit) and the product of accounting profit / (loss) before income tax multiplied by the group’s applicable income tax rate is as follows: Accounting profit/(loss) before tax At the parent entity’s statutory income tax rate 30% (2019: 30%) Adjustments in respect of income tax of previous years Entertainment Share-based payments Effect of lower tax rate in New Zealand (28%) Fair value gain on revaluation of contingent consideration payable Other De-recognition of deferred tax assets for tax losses Current year losses not recognised Aggregate income tax expense / (benefit) (1,962) (589) (31) 16 (5) 1 (52) 140 445 486 411 2019 $000 354 106 27 23 (1) (4) (205) 3 - - (51) 2019 $000 2020 $000 Consolidated 2020 $000 (c) Recognised deferred tax assets and liabilities Current tax liability Deferred tax asset Current tax liability Deferred tax asset Opening balance Business combinations Tax paid Charged to income / (expense) Charged to equity Prior year over / (under) provision FX translation Closing balance (185) 3,055 - 197 (80) - 31 4 (33) - - (362) 57 - - 2,750 (136) (351) 437 (130) (5) - (185) 3,844 (975) - 208 (22) - 3,055 Page 67 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 8. Income Tax continued Deferred income tax at 30 June relates to the following: 9. Earnings per share Net deferred tax assets Allowance for expected credit losses Right of return liabilities (net of right to returned goods asset) Lease liabilities (net of right-of-use assets) Employee provisions Foreign exchange differences Sundry accruals Other Inventory Intangible assets Tax losses carried forward Net deferred tax asset 2020 $000 52 119 24 278 (18) 506 67 - (991) 2,713 2,750 2019 $000 48 159 - 423 (42) 375 30 17 (1,113) 3,158 3,055 The group suffered a taxable loss on its Australian tax consolidated operations for the year ended 30 June 2020. At 30 June 2020, the group has assessed that deferred tax assets recognised above relating to carried forward tax losses of the Australian tax consolidated group are recoverable. This assessment is based on a probability weighted assessment of forecast taxable profits of $2.713m over a three year period, and a history of taxable profits arising in years prior to the current financial year. As a result of this assessment, $445,000 in deferred tax assets relating to carried forward tax losses was de-recognised at 30 June 2020. In addition, no deferred tax asset has been recognised for tax losses incurred in the current period. (d) Tax losses not recognised The group has gross tax losses, stated in the reporting currency of Australian dollars, for which no deferred tax asset is recognised on the statement of financial position of $3,467,319 (Tax effected: $1,040,196) (2019: $nil) which are available indefinitely for offset against future gains subject to meeting the relevant statutory tests. The following reflects the income used in the basic and diluted earnings per share computations: (a) Earnings used in calculating earnings per share 2020 $000 2019 $000 For basic earnings per share Profit / (Loss) from continuing operations Net profit/(loss) attributable to ordinary equity holders For diluted earnings per share Profit / (loss) from continuing operations Net profit/(loss) attributable to ordinary equity holders (2,373) (2,373) (2,373) (2,373) 405 405 405 405 (b) Weighted average number of shares Weighted average number of shares (basic) at 30 June Weighted average number of shares adjusted for effect of dilution 105,907 86,935 105,907 86,935 Potential ordinary shares under option and restricted shares are considered non-dilutive where the current share price is lower than the exercise price. The weighted average number of shares used in the calculation of basic and diluted ordinary shares for both the current and comparative periods has been adjusted for the bonus element in the entitlement offer completed during the year. Refer to note 20 for details of this offer. The bonus element represents the discount of the offer price under the entitlement offer to the fair value of shares on issue immediately prior to the close of the offer. The previously reported weighted average number of ordinary shares for 2019 was 61,559,000 and earnings per share was 0.66c, for both ordinary and diluted earnings per share. Page 68 Cellnet Group Limited and its consolidated entities Financial Report 2019–20(c) Earnings per share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 2020 $000 (2.24) (2.24) 10. Current assets – cash and cash equivalents Cash at bank and in hand 2020 $000 6,936 6,936 2019 $000 0.47 0.47 2019 $000 1,311 1,311 Cash and funds held at bank earns interest at floating rates based on daily bank deposit rates. Financial Report 11. Current assets – trade and other receivables Receivables from contracts with customers Allowances for expected credit losses Other receivables and prepayments Carrying amount of trade and other receivables 2020 $000 2019 $000 13,875 15,516 (176) 13,699 1,328 (164) 15,352 933 15,027 16,285 (a) Allowance for expected credit losses As described in note 2(h), the group applies the simplified expected credit loss model prescribed in AASB 9 to determine an allowance for expected credit losses on its receivables from contracts with customers. To measure the expected credit losses, receivables from contracts with customers have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles for sales over a 4-5 year period prior to 30 June 2020 and 30 June 2019 respectively, and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward looking macroeconomic factors affecting the ability of customers to settle the receivables. The group has identified retail trade industry output growth (GDP) and retail sector gross margin trends as the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. Page 69 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 11. Current assets trade and other receivables continued 12. Current assets – inventories Stock on hand Less: provision for obsolescence Total inventories at the lower of cost and net realisable value 2020 $000 18,646 (3,269) 2019 $000 19,998 (1,766) 15,377 18,232 The tables below show the calculation of the expected credit loss provision for receivables from contracts with customers at both 30 June 2020 and 30 June 2019. At 1 July Charge for the year Amounts written off As at 30 June 2020 $000 118 51 (38) 131 2019 $000 66 54 (2) 118 At 30 June, the ageing analysis of trade receivables is as follows: Expected loss rates % Gross carrying amount $000 Loss allowance 30 June 2020 Current 0-30 days past due 31-60 days past due Over 60 days past due Total 30 June 2019 Current 0-30 days past due 31-60 days past due Over 60 days past due Total 0.06% 1.19% 2.42% 4.96% 1.27% 0.04% 0.20% 0.50% 3.75% 1.05% 9,582 880 387 3,026 13,875 9,643 1,470 258 4,145 15,516 6 11 9 150 176 4 3 1 156 164 loss allowances from The closing contracts with customers as at 30 June 2020 reconcile to the opening loss allowance as follows: for receivables At 1 July Adjustment on initial application of AASB 9 Increase in loss allowances recognised in profit or loss Receivables written off during the year as uncollectable At 30 June 2020 $000 164 - 149 (137) 176 2019 $000 78 (20) 113 (7) 164 Page 70 Cellnet Group Limited and its consolidated entities Financial Report 2019–2013. Non-current assets – property, plant and equipment Reconciliation of the carrying amounts at the beginning and end of the period. Leasehold improvements Plant & Equipment $000 $000 For the year ended 30 June 2020 At 1 July 2019 net of accumulated depreciation and impairment Additions Disposals Depreciation charge for the year At 30 June 2020 net of accumulated depreciation and impairment At 30 June 2020 Cost Accumulated depreciation and impairment Net carrying amount For the year ended 30 June 2019 At 1 July 2018 net of accumulated depreciation and impairment Additions Disposals Depreciation charge for the year At 30 June 2019 net of accumulated depreciation and impairment At 30 June 2019 Cost Accumulated depreciation and impairment Net carrying amount 54 47 - (6) 95 527 (432) 95 3 - 62 (11) 54 480 (426) 54 246 40 - (82) 204 7,183 (6,979) 204 133 76 145 (108) 246 7,145 (6,899) 246 Financial Report Total $000 300 87 - (88) 299 7,710 (7,411) 299 136 76 207 (119) 300 7,625 (7,325) 300 Page 71 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 14. Non-current assets - intangible assets Software Goodwill Customer relationships Supplier relationships Net carrying amount (a) Movements in intangible asset balances during the year 2020 $000 884 2,854 24 3,050 6,812 For the year ended 30 June 2020 Written down value at 1 July Additions Additions through business combinations (note 23) Amortisation charge for the year Written down value at 30 June 2020 At 30 June 2020 Cost Accumulated amortisation and impairment Net carrying amount For the year ended 30 June 2019 Written down value at 1 July Additions Additions through business combinations (note 23) Amortisation charge for the year Written down value at 30 June 2018 At 30 June 2019 Cost Accumulated amortisation and impairment Net carrying amount Software $000 Goodwill $000 Customer Relationships Supplier Relationships $000 $000 979 24 - (119) 884 1,207 (323) 884 757 331 - (109) 979 1,183 (204) 979 1,946 - 908 - 2,854 2,854 - 2,854 - - 1,946 - 1,946 1,946 - 1,946 167 - - (143) 24 286 (262) 24 - - 286 (119) 167 286 (119) 167 3,545 - - (495) 3,050 3,957 (907) 3,050 - - 3,957 (412) 3,545 3,957 (412) 3,545 2019 $000 979 1,946 167 3,545 6,637 Total $000 6,637 24 908 (757) 6,812 8,304 (1,492) 6,812 757 331 6,189 (640) 6,637 7,372 (735) 6,637 Software, customer relationships and supplier relationships are amortised over useful lives of 10, 2 and 8 years respectively (2019: 10, 2 & 8 years). Remaining useful lives at 30 June 2020 for these assets are 7.41, 0.17, and 6.17 years respectively (2019: 8.41, 1.17 and 7.17). No reasonably possible changes in these assumptions would have resulted in an impairment of the CGU carrying value at 30 June 2019. Page 72 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Financial Report (b) Impairment testing At each balance date, the group completes an impairment assessment for each cash-generating unit (CGU) to which goodwill is allocated. Where indicators of impairment are present for other CGUs, these CGUs are also tested for impairment. As the carrying value of the group’s net assets exceeds its market capitalisation, the group recorded a loss for the year, and operations continue to be affected to varying degrees by the impact of the COVID-19 pandemic on consumer demand, impairment indicators are deemed to be present for each CGU within the group at balance date and each has been tested for impairment. The recoverable amount of each CGU has been determined as its value-in-use. Value-in-use is determined as the present value of future CGU cash flows. In calculating value-in-use, the group has projected cash flows over a 5 year period, based on the board approved budget/forecast for FY21. The results of the impairment assessments completed indicated that value-in-use of each CGU exceeds the CGU carrying value. The table below summarises the key assumptions applied in testing CGUs for impairment: Cash-Generating Unit Cellnet Australia Cellnet New Zealand Turn Left Distribution PowerGuard Performance Distribution Goodwill allocated to CGU ($’000) - - 1,946 481 427 EBITDA ($’000) 1,931 1,223 1,243 1,066 1,221 Average Annual Revenue growth Terminal growth Pre-tax discount % 2% 2% 3% 2% 14.7% % 2% 2% 2% 2% 2% % 18% 18% 18% 18% 20% For the Cellnet Australia, Cellnet New Zealand, and Turn Left Distribution CGUs, the following reasonably possible changes in the EBITDA assumption would have resulted in an impairment charge being recognised at 30 June 2020: Cash-Generating Unit Cellnet Australia Cellnet New Zealand Turn Left Distribution Change in EBITDA Required for Impairment ($’000) (452) (643) (380) No reasonably possible change in any of the assumptions above for the PowerGuard or Performance Distribution CGUs would result in an impairment of the carrying value of these CGUs at 30 June 2020. At the comparative balance date, only the Turn Left Distribution CGU was tested for impairment, as the entire balance of the group’s goodwill at 30 June 2019 was allocated to this CGU. The following assumptions were applied in this assessment: Goodwill allocated to CGU ($’000) EBITDA ($’000) Cash-Generating Unit Turn Left Distribution 1,946 1,017 Average Annual Revenue growth Terminal growth Pre-tax discount % 9% % 2% % 18% No reasonably possible changes in these assumptions would have resulted in an impairment of the CGU carrying value at 30 June 2019. Page 73 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 15. Current liabilities – trade and other payables Trade payables Rebate and incentive liability Right of return liability# Contingent consideration payable^ Other payables and accrued expenses 2020 $000 5,656 3,072 1,810 495 872 2019 $000 6,088 2,641 1,587 1,172 870 11,905 12,358 ^ refer note 4 for reconciliation of movements in contingent consideration payable, and description of how fair value has been determined. # An associated right to returned goods asset is recognised in other current assets, representing the expected value of goods to be returned by customers in future periods. 17. Interest bearing loans and borrowings Weighted Average Interest Rate Maturity 2020 2019 % 3.14 4.51 4.72 5.06 $000 $000 Current (a) Business Finance 6 - 29 July 2020 1 - 30 July 2019 2,128 - - 3,577 (b) Invoice Finance Various 6,542 4,940 (c) Business Loan 6 July 2021 Non-Current (d) Business Loan 372 9,042 1,250 1,250 361 8,878 1,639 1,639 16. Provisions 5.06 6 July 2021 Current Provision for long-service leave Provision for annual leave Non-Current Provision for long-service leave 2020 $000 248 520 768 168 168 2019 $000 377 889 1,266 150 150 (a) $3,500,000 Business Finance Facility This facility consists of three individual facilities, namely surrendered bills of lading, trade finance- imports and special documentary import letters of credit. The combined limit of $3,500,000 applies across these individual facilities. As at 30 June 2020, the company has drawn down $2,128,000 (2019: $3,577,000) under its trade finance – imports facility. The facility was overdrawn at 30 June 2019 by $77,000, with the facility being reduced below the limit on 1 July 2019. This facility is subject to annual review, and individual trade finance drawdowns under the facility as at balance date mature on the dates disclosed above. (b) $17,000,000 Invoice finance This is a facility for terms of trade. The total limit of the facility is $17,000,000 (2019: $10,000,000). As at 30 June 2020, $6,523,000 was outstanding under this facility (2019: $4,940,000). Amounts owing under the facility are matched to the trade terms of the underlying financed transaction up to a maximum of 60 days. Page 74 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Financial Report (c) $2,000,000 Business loan facility 19. Leases The following information relates to the current financial year only, and is presented in accordance with AASB 16 Leases (which was applied by the group for the first time in the current financial year). Refer to note 1(b) for transitional disclosures: (a) Right-of-use assets All of the group’s right-of-use assets relate to leases of premises. Reconciliation of changes in the carrying amount of right-of-use assets during the period is as follows: Recognised on initial application of AASB 16 on 1 July 2019 Additions Lease incentives received Depreciation Closing value at 30 June 2020 At 30 June 2020 Cost Accumulated depreciation Net carrying amount 2020 $000 268 865 (71) (362) 700 2020 $000 1,062 (362) 700 The business loan facility was provided to fund the acquisition and initial working capital requirements of Turn Left Distribution Pty Ltd. The facility requires interest repayments of monthly principal and $37,800 and the facility has an expiry date of 6 July 2021. Undrawn facilities The group has access to an additional business loan facility of $2,000,000 for working capital finance purposes. The facility was undrawn as at 30 June 2020. All facilities above are secured by a general security agreement given by Cellnet Group Limited and Turn Left Distribution Pty Ltd over all existing and future assets and undertakings. Reconciliation of changes in borrowings to related financing cash flows per the statement of cash flows There were no non-cash movements in borrowings during the current or prior financial years. 18. Derivative Financial Instruments Current Forward foreign currency exchange contracts 2020 $000 37 37 2019 $000 146 146 Forward foreign currency exchange contracts are carried at fair value at balance date. Changes in the fair value of forward foreign currency exchange contracts that economically hedge monetary assets and liabilities in foreign currencies are recognised in profit or loss. Both the changes in fair value of the forward contracts and the foreign exchange gains and losses relating to the monetary items are recognised as part of materials, packaging and consumables used expenditure in the statement of comprehensive income, and are included in foreign currency gains or losses disclosed in note 7. Page 75 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 19. Leases continued (b) Lease liabilities 20. Contributed equity and reserves Recognised on initial application of AASB 16 on 1 July 2019 Additions (non-cash) Principal repayments (cash outflow) Closing value at 30 June 2020 At 30 June 2020 Current Non-current Total lease liability 2020 $000 268 865 (353) 780 2020 $000 360 420 780 During the year the group entered into a 5 year lease of a new head office premises in Brisbane and a 2 year lease extension on its existing lease arrangement in Auckland. These non-cash financing activities resulted in an increase in lease liabilities of $865,000 on initial recognition. 2020 2019 No. of shares No. of shares (a) Share capital Ordinary shares on issue at 1 July 62,595,096 57,115,644 Shares issued – renounceable entitlement offer Shares issued – business combination (Note 23) Ordinary shares on issue 30 June 169,006,760 - - 5,479,452 231,601,856 62,595,096 2020 $000 2019 $000 Share capital at 1 July 33,453 31,453 Shares issued – renounceable entitlement offer Share issue costs, net of tax Shares issued – business combination (Note 23) 5,070 (134) - - - 2,000 Share capital at 30 June 38,389 33,453 Fully paid ordinary shares carry one vote per share and carry the right to receive a dividend. Renounceable Entitlement Offer On 7 May 2020, the group announced an accelerated renounceable pro-rata (2.7 for 1) entitlement offer to raise a total of $5.07m. The offer consisted of both a fully subscribed institutional component and a fully underwritten retail component. The institutional offer extended to the controlling shareholder of the company, Wentronic Holding GmbH, was fully subscribed with 90,966,727 shares issued at an issue price of $0.03 per share on 12 May 2020, raising a total of $2.73m. A total of 78,040,033 shares were issued on 5 June 2020 on completion of the retail offer, raising a total of $2.34m. Share issue costs of $134,000 (net of tax) were incurred and have been offset against issued capital in equity. Page 76 Cellnet Group Limited and its consolidated entities Financial Report 2019–20(b) Reserves Translation reserve Reserve for own shares Reserve for profit Share based payment reserve 2020 $000 (339) (25) 9,142 1,695 2019 $000 (187) (25) 9,142 1,711 10,473 10,641 Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations whose functional currency is different to the presentation currency of the reporting entity. Reserve for own shares The reserve for own shares represents the cost of shares held by an equity remuneration plan that the group is required to include in the financial report. At 30 June 2020 the group held 18,209 of the Company’s shares (2019: 18,209). This reserve will be reversed against share capital when the underlying shares are exercised under performance rights. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the group’s own equity instruments. Reserve for profit Profits are transferred to the reserve for profits to facilitate future dividend payments in accordance with Australian taxation requirements for dividend payments to be sourced from profits. Share based payment reserve The share based payment reserve is used to recognise the value of equity-settled share based payments to employees. Financial Report (c) Capital management When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity. Management adjusts the capital structure to take advantage of favourable costs of capital or high returns on assets. As the market is constantly changing, management may change the amount of dividends to be paid to shareholders, return capital to shareholders, or issue new shares. Management monitors capital through the capital adequacy ratio (net assets/total assets). The target for the group’s capital adequacy ratio is between 40% and 60%. The capital adequacy ratios based on continuing operations at 30 June 2020 and 2019 were as follows: Net assets Total assets Capital adequacy ratio 2020 $000 25,401 49,347 51% 2019 $000 23,006 47,482 48% Page 77 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 21. Share based payments (a) Long term incentive plan - performance rights At 30 June 2020 a total of 1,587,500 employee share options were outstanding under the company’s long-term incentive plan. Details of the options issued are as follows: Options granted 1,900,000, 312,500 and 500,000 Grant date Issue date 29 November 2017, 17 April 2018 and 10 October 2018 1 July 2018, 1 July 2018 and 10 October 2018 Consideration payable Nil $ Exercise price $0.28, $0.375 and $0.28 Last exercise date 5pm Brisbane time on the date which is 12 months subsequent to market release of FY2021 result. Exercise conditions Subject to the Plan Rules, an option cannot be exercised unless the Board acting reasonably is satisfied that the following conditions have been satisfied: • The employee remains employed by the company • There is no outstanding breach of the terms of engagement with the Company. • No notice of termination of engagement has been either been given by the employee or received by the Company. • All performance hurdles have been met. Performance hurdles Options will vest upon meeting various profit before tax performance hurdles over the financial years 2019 to 2021. The fair value of the options granted was determined by management using a binomial option pricing model. Expected volatility was determined based on historical stock price volatility over a period consistent with the life of the options. The table below summarises the key inputs into the valuation model for each tranche of options granted in the comparative period: Tranche Vesting Condition Vesting Date No. of Options Exercise Price $ Expected Volatility % Risk Free Rate % Value per Option $ Tranche 7 Tranche 8 Tranche 9 PBT PBT PBT 30/08/20 30/08/21 30/08/22 145,000 145,000 210,000 0.280 0.280 0.280 50 50 50 2.03 2.11 2.11 0.2162 0.2178 0.2175 An assumed dividend yield of 5% was applied in each of the valuations above. The following table illustrates movements in the number of employee share options on issue during the year: Opening balance Granted during the period Forfeited during the period Outstanding as at 30 June Vested and exercisable 2020 2019 Number of Options Weighted Average Exercise Price $ Number of Options Weighted Average Exercise Price $ 2,400,000 - (812,500) 1,587,500 - 0.292 - 0.280 0.315 - 2,212,500 500,000 (312,500) 2,400,000 - 0.293 0.280 0.280 0.292 - Page 78 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Financial Report (b) Long term incentive plan – KMP shares 23. Business combinations On 25 June 2020 the board approved bonuses of $58,000 for a non-executive director and the group’s chief financial officer, in acknowledgement of their efforts in connection with the entitlement offer announced on 7 May 2020. The bonus relates to services provided prior to 30 June 2020, and there are no outstanding vesting conditions. A total of 117,778 shares were issued at an issue price of 3.6 cents per share in July 2020, while 875,000 shares will be issued at a future date at an issue price of 3.6 cents per share, subject to approval at the forthcoming AGM. The value of shares issued/to be issued represents the amount of bonus payments due after allowing for withholding tax payable on the bonuses. 22. Financial guarantees The group has provided financial guarantees in respect of rental leasing arrangements disclosed in Note 19. The group’s financier has also provided performance guarantees in the form of standby letters of credit to the group’s suppliers. The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required. Bank guarantees provided – rental leases 2020 $000 37 2019 $000 130 Standby letters of credit 1,594 1,000 PowerGuard On 1 July 2019, the group completed the acquisition of 100% of the business assets of Service Smart Pty Ltd, being the business of designing, procuring the manufacture of, and distributing PowerGuard branded products. The primary purpose of the acquisition was to expand the group’s product offering. Details of the transactions were: Cash consideration paid Fair value of contingent consideration Total consideration paid Less: Fair value of identifiable net assets acquired (see below) Goodwill recognised on acquisition $000 714 131 845 (364) 481 Refer to note 4 for a description of the contingent consideration arrangement and details of how the fair value of the contingent consideration liability has been determined at the acquisition date and as at 30 June 2020. Goodwill represents the access to products obtained in the transaction. No amount of goodwill is expected to be deductible for tax purposes. Assets and liabilities acquired as part of the transaction are set out below: Trade and other receivables Inventory Trade and other payables Fair value of net assets acquired $000 212 192 (40) 364 Management have assessed the fair value of identifiable intangible assets acquired to be $nil. Since the acquisition date, the PowerGuard business has recorded revenue of $1,374,000 and net profit before tax of $192,000. Page 79 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 23. Business combinations continued Performance Distribution Turn Left Distribution On 1 September 2018, the group acquired 100% of the share capital of Turn Left Distribution Pty Ltd (“TLD”), a software and accessories distributor focusing on the Australian and New Zealand markets. The primary purpose of the acquisition was to expand the group’s product offering. Details of the transactions were: Cash consideration paid Shares issued Fair value of contingent consideration Total consideration paid Less: Fair value of identifiable net assets acquired (see below) Goodwill recognised on acquisition $000 4,000 2,000 1,855 7,855 (5,909) 1,946 Refer to note 4 for a description of the contingent consideration arrangement and details of how the fair value of the contingent consideration liability was determined at the acquisition date, 30 June 2019 and 30 June 2020, and a reconciliation of changes in the fair value of the contingent consideration liability subsequent to the date of the business combination. No amount of goodwill is expected to be deductible for tax purposes. On 1 April 2020, the group completed the acquisition of 100% of the business assets of Performance Distribution (AUS) Pty Ltd and Performance Distribution Limited, being an ecommerce and distribution business with comparable product ranges to those sold by the existing Cellnet business. The primary purpose of the acquisition was to create alternative pathways to market for the group’s product offering. Details of the transactions were: Cash consideration paid Fair value of contingent consideration Total consideration paid Less: Fair value of identifiable net assets acquired (see below) Goodwill recognised on acquisition $000 287 364 651 (224) 427 Refer to note 4 for a description of the contingent consideration arrangement and details of how the fair value of the contingent consideration liability has been determined at the acquisition date and as at 30 June 2020. Goodwill represents the established selling platforms within the acquired business. No amount of goodwill is expected to be deductible for tax purposes. Assets and liabilities acquired as part of the transaction are set out below: Inventory Employee provisions Fair value of net assets acquired $000 240 (16) 224 Management have assessed the fair value of identifiable intangible assets acquired to be $nil. Since the acquisition date, the Performance Distribution business has recorded revenue of $384,000 and net profit before tax of $272,000. Page 80 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report Assets and liabilities acquired as part of the transaction are set out below: 24. Key management personnel remuneration Cash and cash equivalents Trade and other receivables Inventory Other current assets Property, plant and equipment Intangible assets – customer relationships Intangible assets – supplier relationships Trade and other payables Provisions Net deferred tax liability Fair value of net assets acquired $000 1,422 2,934 2,434 318 207 286 3,957 (4,343) (331) (975) 5,909 The gross carrying value of acquired trade and other receivables was $2.934m. A refund liability of $1.536m and a right of return liability of $0.349m were also recognised, which represent management’s best estimate of the contractual cash flows not expected to be collected. The amount of revenue and profit/(loss) before tax of TLD since the acquisition date are reported in note 5. If the results of TLD were consolidated from the start of the 2019 financial year, revenue for the 2019 financial year would have been $115.988m while profit before tax would have been $0.606m. Short-term employee benefits Post-employment benefits Termination benefits Long-term employee benefits 2020 $000 912,737 49,130 112,785 41,691 Total compensation 1,116,343 2019 $000 859,681 51,163 - 50,382 961,226 25. Related party disclosure include the The consolidated financial statements financial statements of Cellnet Group Ltd and the subsidiaries included in the following table: Name Country of incorporation Cellnet Group Ltd (Parent) Australia Cellnet Ltd New Zealand C&C Warehouse (Holdings) Pty Ltd Regadget Pty Ltd OYT Pty Ltd Turn Left Distribution Pty Ltd 3SixT Pty Ltd (formerly Cellnet Online Pty Ltd) Australia Australia Australia Australia Australia 3SixT Limited Hong Kong % of equity interest 2020 2019 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Page 81 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 25. Related party disclosure continued During the year Cellnet obtained an independent expert’s report concluding that the transactions with WAPL prior to 27 February 2020 were fair and reasonable, and the purchasing arrangements prior to that date were ratified by Cellnet’s shareholders at a general meeting held on 26 June 2020. Joint venture with entity with ultimate control over the group During the year, the group made loan contributions of $26,000 (2019: $168,000) to Wentronic International Pty Ltd, being a joint venture between the group and its controlling shareholder Wentronic Holding Gmbh. The group held a 49% interest in this entity and the investment was equity accounted for on the group’s balance sheet. The joint venture was dissolved during the year. The group’s share of losses of the joint venture for the year ended 30 June 2020 was $6,702 (2019: $5,827). Loans extended to the joint venture of $454,000 were impaired during the year, as disclosed in note 7. 26. Subsequent events There are no other matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the group, the results of those operations, or the state of affairs of the group in future periods. Entity with ultimate control over the group Wentronic Holding GmbH and its associated entities holds 56.64% (2019: 53.82%) of the ordinary shares in Cellnet Group Limited. The following table provides the total amount of transactions which have been entered into with related parties during the twelve month periods ending 30 June 2020 and 30 June 2019. 2020 $000 2019 $000 Fellow subsidiaries of Wentronic Holdings GmbH: Wentronic Asia Pacific Interest paid on loans from related parties Services from related parties - - - - Purchases from related parties 5,764 12,291 Amounts owing to related parties for purchases 5 475 Transactions with entities under common control During the 2020 and 2019 financial years, Cellnet purchased inventory from Wentronic Asia Pacific Limited (WAPL), as disclosed in the table above. WAPL is a wholly owned subsidiary of Wentronic Holding GmbH. A function of WAPL is to source and purchase inventory through bulk buying arrangements with third party suppliers on behalf of the Wentronic Group. WAPL sells inventory to Cellnet at cost price plus a fee to cover WAPL’s operating costs. The fee paid is approximately 9% of the gross amount of purchases paid in United States Dollars. Prior to 27 February 2020, WAPL sold inventory to Cellnet at cost price plus a fee to cover WAPL’s operating costs. The fee paid was approximately 9% of the gross amount of purchases paid in United States Dollars. Following 28 February 2020, and as announced to the ASX on 2 March 2020, Cellnet started purchasing products directly from suppliers and now pays WAPL a 6% management / services fee for coordination of the purchasing and logistics function provided by WAPL under a service agreement between Cellnet Group Limited, Cellnet Limited and WAPL. Page 82 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report 27. Parent entity information 28. Auditors’ remuneration Current assets Total assets Current liabilities Total liabilities Net assets Issued capital 2020 $000 28,785 42,700 2019 $000 27,751 41,375 (20,031) (21,403) (21,809) (23,193) 20,891 18,182 38,389 33,453 2020 $000 2019 $000 Amounts received or due and receivable by the auditors for: Audit or review of the financial report of the entity and any other entity in the group Pitcher Partners 89,000 95,000 Taxation services in relation to the entity and any other entity in the group Pitcher Partners 103,236 62,130 192,236 157,130 Retained earnings / (accumulated losses) (27,240) (25,029) Reserve for own shares Reserve for profits Reserve for share based payment (25) 8,072 1,695 (25) 8,072 1,711 Total shareholder’s equity 20,891 18,182 Profit / (loss) of the parent entity after tax (2,446) Total comprehensive income of the parent entity (2,446) 627 627 The parent has not issued any guarantees in relation to the debts of its subsidiaries and has no contingent liabilities or contractual obligations as at 30 June 2020 (2019: Nil). 29. Dividends franking account Franking credit balance The amount of franking credits available for the subsequent financial year are $nil (2019: $nil). Page 83 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Notes to the financial statements 30. Cash flow statement reconciliation Reconciliation of net profit after tax to net cash flows from operations: Net profit / (loss) Adjustments for: Depreciation and amortisation Interest revenue classified as investing cash flow Impairment of joint venture loan Share based payments expense / (benefit) Share of (profits) / losses of associates Fair value gain on revaluation of contingent consideration payable Changes in assets and liabilities: (Increase) / decrease in trade and other receivables (Increase) / decrease in right to returned goods asset (Increase) / decrease in inventories (Increase) / decrease in current tax asset (Increase) / decrease in deferred tax assets (Decrease) / increase in trade and other payables (Decrease) / increase in provisions (Decrease) / increase in current tax liability Change in other financial instruments Consolidated 2020 $000 (2,373) 1,207 - 454 (16) 7 (172) 1,561 (357) 3,258 25 361 205 (492) (152) 3,625 2019 $000 405 759 (5) - (2) 5 (683) 1,131 293 (5,315) (25) (185) (1,915) 357 49 (5,239) Page 84 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Financial Report Directors’ declaration In accordance with a resolution of the Directors of Cellnet Group Limited, I state that: In the opinion of the Directors: a) the financial statements and notes of the company are in accordance with the Corporations Act 2001, including: i) giving a true and fair view of the company’s financial position as at 30 June 2020 and of their performance for the year ended on that date; ii) complying with Australian Accounting Standards and Corporations Regulations 2001; b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 2(a); c) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and d) this declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 June 2020. On behalf of the Board Tony Pearson Chairman Brisbane 31st August 2020 Page 85 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 Independent Auditor’s Report to the Members of Cellnet Group Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Cellnet Group Limited (“the Company”) and its controlled entities (“the Group”), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes to the financial statements including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its financial performance for the year then ended; and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We 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. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Page 86 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report Key Audit Matter How our audit addressed the key audit matter Impairment testing for non-current assets Refer to note 14 Intangible assets and note 2(v) Critical accounting estimates and judgements Impairment testing for goodwill is required to be completed annually under Australian Accounting Standard AASB 136 Impairment of Assets. This standard also requires impairment testing to be conducted for other non-current assets where there is an indicator that those assets may be impaired. At the reporting date the carrying value of the Group’s net assets exceeded the Group’s market capitalisation, which is an indicator that non-current assets may be impaired. The negative and ongoing impact of the COVID-19 pandemic on FY20 results within the Cellnet Australia and Cellnet New Zealand cash-generating units (CGU) is also considered an indicator of potential impairment within those CGUs. Impairment testing for non-current assets is a key audit matter due to the high degree of estimation and assumptions (as disclosed in notes 2(v) and 14) made by the Group, specifically concerning discounted cash flows. Our procedures included, amongst others: • Understanding and evaluating the relevant controls to identify if indicators of impairment exist in respect of the Group’s non-current assets; • Assessing management’s determination of the Group’s CGUs based on our understanding of the nature of the Group’s business and the identifiable groups of cash generating assets; • Comparing the cash flow forecasts used in the value-in-use calculation to Board approved budgets for the 2021 financial year; • Confirming that forecasts used in value-in-use calculations include reasonable expectations regarding the impact of COVID-19 on the business over the forecast period; • Checking the mathematical accuracy of the impairment testing model and its consistency with the requirements of AASB 136; • Assessing the reasonableness of significant estimates and assumptions used for the impairment assessment, in particular, those relating to the discount rate and growth rates used in the cash flow forecasts; • Evaluating the impact of sensitivities in respect of reasonable changes to forecast cash flows, discount rates, and growth rates used in management’s impairment testing calculations; and • Assessing the adequacy of disclosures. Recoverability of deferred tax assets Refer to note 8 Income tax and note 2(v) Critical accounting estimates and judgements At 30 June 2020, the Group has a total of $2.750m of deferred tax assets recognised on its balance sheet, including $2.713m that relate to carried forward tax losses of the Australian tax consolidated group. Australian Accounting Standards require deferred tax assets to be recognised to the extent that it is probable that sufficient future taxable profits will be generated in order for the benefits of the deferred tax assets to be realised. These benefits are realised by reducing tax payable on future taxable profits. Recoverability of deferred tax assets is a key audit matter due to the taxable loss recorded by the Australian tax consolidated group for the current financial year, and high degree of estimation and assumptions (as disclosed in notes 2(v) and 8) made by the Group concerning forecast taxable profits. We have assessed the Group’s ability to utilise the deferred tax assets by: • Understanding and evaluating relevant controls in place for assessing the recoverability of deferred tax assets; • Obtaining management’s forecast of taxable income for the next 3 years and agreeing the FY21 forecast to the latest Board approved budget; • Performing procedures over forecast information as outlined above in response to the key audit matter regarding impairment testing for non- current assets, noting that the same baseline forecasts for the Group’s CGUs are used in management’s assessment regarding recoverability of deferred tax assets; • Checking the mathematical accuracy of management’s calculation of forecast taxable profit; and • Assessing the adequacy of disclosures. Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Page 87 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Valuation of inventory Refer to note 12 Inventories and note 2(v) Critical accounting estimates and judgements The Group held inventory of $15.377m at 30 June 2020. The valuation of inventory is a key audit matter for the following reasons: • Retailer demand in segments serviced by the Group in Australia and New Zealand has declined during the financial year as a result of the COVID-19 pandemic, with prevailing uncertainty in future consumer demand for these markets; • A large portion of the Group’s inventory is considered to be at risk of obsolescence due to its attachment to electronic and telecommunications devices, such as smartphone handsets; and • There has been a reduction in vendor funding commitments for the sell-down of slow-moving stock. Our procedures included, amongst others: • Understanding and evaluation of relevant controls over the determination of the provision for inventory obsolescence; • Evaluating the appropriateness of the Group’s obsolescence model, including the basis for obsolescence triggers and the percentage write- downs applied at each trigger point; • Confirming the methodology applied for providing for inventory obsolescence is consistent with that applied in previous reporting periods, adjusted where necessary for changes in assumptions due to the COVID-19 pandemic; • Verifying the net realisable value of a sample of inventory items through subsequent sales transactions, and confirming results of this testing align with assumptions applied in the obsolescence model; • Performing trend analysis of changes in the obsolescence provision by product over the past 12 months, and confirming trends correlate with age of related product technology; and • Vouching vendor funding commitments obtained to documented agreement of terms Revenue recognition – variable consideration Refer to note 2(v) Critical accounting estimates and judgements Revenue is recognised net of estimated incentives, rebates and expected returns. Rebate and incentive arrangements offered by the Group vary and are customer specific. These obligations are established either in contract or through principal of constructive obligation based on customary business practice. The expected reversal of sales through customers exercising their right of return goods is estimated based on historical rates of return. Due to the variety of contractual terms with customers and the degree of judgement involved, the estimation of variable consideration in respect of these items is considered to be complex. There is a risk that revenue could be misstated due to the level of estimation and judgement required in accounting for these obligations. As such, we considered revenue recognition to be a key audit matter. Our procedures included, amongst others: • Understanding and evaluation of the relevant controls over the recognition of rebates, incentives and rights of return; • Evaluating the appropriateness of the Group’s revenue recognition accounting policies; • Assessing the accuracy of rebates and incentives recognised throughout the year based on the terms of underlying contractual or constructive obligations; • Recalculating the valuation of refund liabilities for outstanding rebates and incentives at year end, having regard to contractual arrangements in place, sales volumes, and customer claim history; • Assessing the calculation of the right of return liability and associated right to returned goods asset at year end, including testing the accuracy of the historical rate of return applied and the valuation of the right to returned goods asset; and • Assessing the adequacy of disclosures. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2020, but does not include the financial report and our auditor’s report thereon. Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Page 88 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the 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’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Page 89 Cellnet Group Limited and its consolidated entities Financial Report 2019–20• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions 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 9 to 17 of the directors’ report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Cellnet 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. PITCHER PARTNERS DANIEL COLWELL Partner Brisbane, Queensland 31st August 2020 Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Page 90 Cellnet Group Limited and its consolidated entities Financial Report 2019–20Financial Report ASX Additional information As at 3 September 2020 Substantial shareholders Additional information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. The number of shares held by substantial shareholders and their associates, as advised in substantial holder notices given to the Company, are set out below: Name Wentronic Holding Gmbh Thundering Herd Pty Ltd Distribution of equity security holders Category 1 – 1000 1,001 – 5,000 5,001 – 10,000 10,001 – 50,000 50,001 – 100,000 100,001 and over Ordinary share held 118,738,107 13,333,331 No. of holders 77 321 82 109 34 80 The number of shareholders holding less than a marketable parcel of ordinary shares is 504. Shareholdings 20 largest shareholders Name Wentronic Holding Gmbh Thundering Heard Pty Ltd Faraday Capital Pty Ltd Talento Holdings Pty Ltd Equitas Nominees Pty Limited JEJ Group Limited Michael Wendt Mr Lachlan Wilson Sparks Superannuation Investments Pty Ltd EDP Investments Kevin Gilmore Velkov Funds Management Pty Ltd Chemical Trustee Ltd Galvez Investments Lax Capital Pty Ltd Device Co Pty Ltd Ganeson-Eckhart Pty Ltd Brown Cairns Admin Services Pty Ltd Mr Nicholas Heim Philadelphia Investments Pty Ltd Top 20 Holders All other holders All holders Ordinary share held % of capital held 118,738,107 51.05% 13,333,331 8,333,333 8,333,333 6,666,668 6,500,000 5,920,000 4,862,374 4,810,000 4,109,589 3,288,000 2,800,000 1,820,000 1,734,271 1,700,000 1,686,667 1,666,667 1,666,667 1,667,667 1,650,274 5.73% 3.58% 3.58% 2.87% 2.79% 2.55% 2.09% 2.07% 1.77% 1.41% 1.20% 0.78% 0.75% 0.73% 0.73% 0.72% 0.72% 0.72% 0.71% 201,287,213 31,291,416 86.55% 13.45% 232,578,629 100.00% Page 91 Cellnet Group Limited and its consolidated entities Financial Report 2019–20 ABN 97 010 721 749 Cellnet Group Limited Tenancy E1/5 Grevillea Pl, Brisbane Airport QLD 4008 t: 1300 255 563 www.cellnet.com.au 

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