Harmoney
Annual Report 2021

Plain-text annual report

  We believe that the future is direct to consumer. It will be relationship driven and technology enabled. Doing things differently is the business we are in. Here are the results of our journey to date. Annual Report 2021. HARMONEYANNUAL REPORT 2021Contents 04 06 08 10 13 19 28 29 66 72 74 78 2021 highlights Our timeline From the Chair From the CEO Getting started with Harmoney Review of operations Directors’ responsibility statement Consolidated Group Financial Statements Independent auditor’s report Shareholder information Corporate information Directory PAGE 3 2021 highlights Group loan book grew to a record NZ$501 million. Break even pro forma Cash NPAT delivered thanks to attractive net lending margin and scalable platform. Personalised rates driven by Libra’s scorecard is produc- ing an industry leading net interest margin. $ 501mG R O U P L O A N B O O K Break even P R O F O R M A C A S H N P A T . 10.6 % N E T I N T E R E S T M A R G I N HARMONEYANNUAL REPORT 2021 Our Australian loan book reached a new milestone of AU$135 million. Group arrears continue to perform ahead of expectation and are at historical lows. Harmoney’s strong Net Lending Margin of 6.8% takes into account all lending related costs, including losses (charge-offs), demonstrating strength of underlying profit drivers. $ 135mA U S T R A L I A N L O A N B O O K ( A U D ) 0.69% G R O U P 9 0 + A R R E A R S 6.8% N E T L E N D I N G M A R G I N PAGE 5 Our journey. Start up JUL 2013 Harmoney founded by Neil Roberts. Expansion SEP 2014 Launch Official NZ launch. Secured $85m in wholesale funding, including a $50m committed facility. SEP 2016 $300m In cumulative loan originations. JAN 2014 Harmoney team assembles with five employees. JAN 2016 $17m Series B capital raise. Major improvements to Stellare™. CUMULATIVE VOLUME GROWTH $100m $300m $500m 2013 2014 2015 2016 2017 AUG 2014 Beta launch. First loan funded. JAN 2015 $10m Series A capital raise. FEB 2017 Australia Brisbane pilot launched. JUL 2014 First peer-to-peer licence in New Zealand granted by the FMA to Harmoney. AUG 2015 $100m Loan originations under 12 months. AUG 2017 Implemented industry-leading machine learning scorecard. HARMONEYANNUAL REPORT 2021Expansion OCT 2019 $25 million Series C capital raise. NOV 2020 HMY Successful dual listing on ASX and NZX. NOV 2018 $1b In cumulative loan originations. NOV 2019 $1.5 billion in cumulative loan originations. APR 2020 Closure of NZ peer-to- peer for retail lenders. MAR 2021 $2b In cumulative loan originations. $500m $1b $1.7b $2b 2018 2019 2020 2021 MAR 2020 $200m Loan originations reached in Australia. JAN 2020 AU Warehouse First Australian Warehouse Facility. DEC 2018 NZ Warehouse First New Zealand Warehouse Facility. JUL 2021 100,000th Loan issued. PAGE 7 INTRODUCTIONFrom the Chair DAVID FLACKS Dear Shareholder. When Neil Roberts founded Harmoney in 2014 as an ambitious peer-to-peer lending startup, I was invited to join its Board. Neil had a pioneering vision for the company: to connect Kiwis who wanted to lend money with Kiwis who wanted to borrow it. That seemingly simple proposition was encouraged by the government and represented a radical shake-up of New Zealand’s personal lending market. It was an attempt to challenge the status quo and give New Zealander borrowers access to fairer, risk-based interest rates on loans that would help them get ahead; and New Zealand lenders access to retail funding opportunities. At that point, Harmoney was basically Neil and a few other people (most of whom are still with the company) in a small office together. Seven years on, Harmoney’s transformation is remarkable: loans totalling over NZ$2.1bn; over 80 employees in New Zealand and Australia; and a dual listing on the ASX and the NZX. An important moment in Harmoney’s journey came in late 2019, when Neil handed the CEO role to David Stevens. Dave brought a wealth of experience in the Australasian non-bank lending space and was instrumental in our successful IPO. This also freed Neil up to concentrate on Harmoney’s continuing technological innovation, in his role as Chief Product Officer. Like any startup that aims to disrupt an established market, we’ve faced significant headwinds to get to where we are today. We needed to educate the public and the regulators on what we were trying to achieve HARMONEYANNUAL REPORT 2021for New Zealanders. It’s taken time for us to be able to move on from the specific regulatory challenges we faced, but happily, those are now behind us. The entire Harmoney team also did an extraordinary job of getting through the initial shockwaves of Covid-19 in 2020. Some of those headwinds contributed to us reshaping our business, away from a peer-to-peer model and towards simpler on-balance sheet lending. Nonetheless, the business is still based on its foundational principles of fair, risk-based interest rates, market-leading technology and direct-to-customer lending. We see tremendous opportunities to build on these foundations as we push deeper into the Australian market. Harmoney is ideally placed for growth in Australia because of several key competitive advantages. First, we’re the largest 100% consumer-direct money platform in Australia/New Zealand. By not using brokers, we achieve higher margins and can generate repeat business at minimal additional cost. Our new Australian scorecard has also given us a distinct customer data advantage. Not only is this increasing conversion, but it enables us to build more targeted and efficient digital marketing and communications. Our tech-first credit scoring means most of our conversion process is automated as well as providing world-class accuracy, allowing us to achieve scale without significant increases in overhead costs. And after building a great brand presence in New Zealand, we are now focusing our efforts on Australia in the coming months, to build significant brand awareness. Most of these strategic focuses were outlined in our IPO prospectus. I am proud of the way the company has executed its plan and strategy since listing. We are very grateful to our shareholders, and excited about the growth potential ahead of us. With a view to our potential for expansion in Australia, we welcomed Paul Lahiff to Harmoney’s Board this year. Paul has significant governance experience in the Australian financial services sector. Just as Neil recognised the ideal moment to hand the reins to David Stevens, I believe that this is the right time to step down as Chair, while remaining on the Board until a replacement Independent Director is appointed, and hand over to Paul. It has been a privilege to help establish Harmoney as one of Australasia’s leading personal lenders. Paul is the ideal person to chair the company through the exciting growth phase ahead. Finally, my thanks to David, Neil, my other fellow board members, and the Harmoney team for their hard work and dedication; and to all our shareholders for your support of Harmoney. David Flacks, Chair. PAGE 9 INTRODUCTIONFrom the Chief Executive DAVID STEVENS The transition from private ownership to a public listing is a huge moment for any company. Harmoney’s dual listing on the ASX and NZX last November was the next step in our continuing expansion, all the more pleasing because it came against the backdrop of an unprecedented global pandemic. So I’d like to start by acknowledging the entire Harmoney team for the enormous effort and commitment they showed in achieving the IPO. Harmoney’s momentum grows. Australia has been our core focus since going public, and demand for Harmoney’s unique 100% direct-to-consumer model has been gratifyingly strong—loan originations in Australia increased 22% ($23m) from the previous year to $125m. But the real story is our momentum: our Australian originations grew 93% from $43m in the first half to $82m in the second half. This momentum was due to Harmoney’s two key strategic advantages: our unequalled commitment to direct-to-consumer marketing, and Libra 1.7, our first behavioural scorecard designed specifically for the Australian market. This is our unique point-of-difference: we are solely focused on a direct-to- consumer model. By building direct relationships with our consumers rather than relying on brokers, we are able to generate subsequent business from them for little or no additional marketing expense. We call this our “3R” approach: Repeat, Return, Renew. In New Zealand “3R” customers now make up a high proportion of total originations. We expect HARMONEYANNUAL REPORT 2021From the Chief Executive the same in Australia as our portfolio grows. Better yet, our direct model also gives Harmoney direct consumer insights: we’re simultaneously building data superiority that means every new Libra release is creating better-than-ever conversions and credit performance. As you’ll see later in the report, because Libra automates so much of the credit scoring process very accurately, we can scale growth without scaling costs. It’s a powerful model that’s allowed us to dominate the New Zealand online personal lending market in a few short years. A year of two halves. This year was for us as it was for everyone else, a tale of two halves. During the first half, in response to the uncertainty of early COVID-19, tightened credit criteria and marketing expenditure slowed originations. Even so, our execution prior to that led to first-half originations of $194m, which was a 29% increase on the prior half. Then as economic conditions improved and Our direct model also gives Harmoney direct consumer insights: we’re simultaneously building data superiority that means every new Libra release is creating better-than-ever conversions and credit performance. marketing returned to normal levels our second half originations reached $250m, a further 29% increase on the first half of the year. For the year ended 30 June 2021 the Group reported break even pro forma Cash NPAT. Net lending margin improved by $2.8m (9%) to $33m. Post IPO we increased our investment in origination growth and development of our Stellare platform. The loan portfolio ended the year at $501m, with Australia contributing strongly and New Zealand returning to growth in Q4. The portfolio movement largely tracked originations, with growth partly impacted by borrowers repaying their loans early, taking advantage of the low interest environment to refinance through home mortgages, particularly in New Zealand where historically low fixed rates were available. Harmoney’s continued focus on balanced business fundamentals to support long-term growth has enabled us to maintain a strong net interest margin of 10.6% and, with lower credit losses as a percentage of the portfolio, increase our net lending margin to 6.8% from 5.8% last year. We end the year with significant capacity to fund expansion, with NZ$205 million in undrawn capacity—$99m in Australia capacity (supported by a Big-4 Bank backed warehouse). In January 2021, a UK-based global insurer provided our second New Zealand warehouse. This ongoing support of our warehouse funders points to our prudent management and strong credit performance. PAGE 11 INTRODUCTIONWith strong brand momentum our 100% consumer-direct model and scale, Harmoney has an extremely positive growth trajectory for FY22 and beyond. The opportunities ahead. With strong brand momentum our 100% consumer-direct model and scale, Harmoney has an extremely positive growth trajectory for FY22 and beyond. It’s worth noting that while the pandemic has created massive challenges for the global economy, it has also rapidly accelerated consumers’ online adoption across all categories. It also saw them continue to abandon traditional banks for fast, simple, online personal lending, so there is no end to category growth in sight. This category growth combined with Harmoney’s fundamental strategic advantages has meant constant improvements in book growth, revenue growth and conversion. As we further expand Harmoney’s presence and brand awareness in Australia from 2022 onwards, we see significant opportunities ahead. David Stevens, CEO and Managing Director. HARMONEYANNUAL REPORT 2021 Getting started with Harmoney Customer case studies CASE STUDIES PAGE 13 Case Study Hope’s big days Back in 2020, Hope had planned on two things: having her dream wedding with the love of her life, and the dog she’d always wanted. Making both of these things come true turned out to be a little more tricky than expected. That is, until Hope turned to Harmoney for help. HARMONEYANNUAL REPORT 2021Day Before Wedding Surprise Call   📞 After 5 years of waiting a Corgi was available  🐕 How To Get Funding? Had previously seen Harmoney’s ads on TV Went to her long-term bank first. Bank All Online Had To Go Into a Branch Money Secured Quickly No Urgency 24 Hour Funding Long Wait For Funding Quincy 🐕 + Wedding Day  💗 Newest member joins the family Day goes ahead, as planned Gets her dream day CASE STUDIES PAGE 15 Case Study A creative space for kids When his parents’ old house came up for sale, Robert purchased it with a bank loan and converted it into studios where the passion and creative energy of young people are harnessed to host events and create videos for children. It’s both a tribute to his late wife and a way to help children in the community. When he needed to fund more work to the property, he applied online with Harmoney and had an approved loan the next day. HARMONEYANNUAL REPORT 2021Converted his house into an outreach centre for children and young people in the community 🏡 From this, studios and a YouTube channel are created, where kids share their creative ideas and energy 🎥 Needs funds to do more work to the property How to Get Funding? Bank Applied Online Bank Steps Back Approved Loan < 24hrs Work to Property ✅ The studios and YouTube channel continue to gain momentum CASE STUDIES PAGE 17 HARMONEYANNUAL REPORT 2021 Review of opera- tions. FINANCIAL REPORT PAGE 19 Review of Operations Pro forma financial performance The table below sets out the pro forma financial performance for the year compared with the prior year pro forma financial performance, as presented in the Company’s prospectus dated 30 October 2020 (‘Prospectus’). The pro forma results are intended to provide a more meaningful view of the Group’s operating performance, normalising for differences in accounting treatment between warehouse and peer-to-peer funded loans. A reconciliation of the statutory consolidated statement of profit and loss is set out on page 25. Interest income Other income Total income Interest expense Incurred credit losses Net lending margin Movement in expected credit loss provision Net lending margin after loss provision Marketing expenses Verification and servicing expenses Net operating margin Personnel expenses Share based payment expenses Technology expenses General and administrative expenses Depreciation and amortisation expenses Total indirect expenses Loss before income tax Income tax benefit Loss after income tax Non-cash and other normalisation adjustments Movement in expected credit loss provision Share based payment expenses Depreciation and amortisation expenses Borrower establishment fee rebate IPO Expenses Year ended Year ended 30 June 2021 30 June 2020 Pro forma $'000 Pro forma $'000 Change Change % 78,560 85,220 (6,660) 505 79,065 27,410 18,626 33,029 (436) 33,465 16,475 4,006 12,984 9,241 4,078 3,245 7,728 1,046 806 (301) 86,026 31,394 24,382 30,250 8,268 (6,961) (3,984) (5,756) 2,779 (8,704) 21,982 11,483 12,601 3,874 3,428 578 5,953 7,031 6,499 2,742 760 3,331 3,458 1,617 3,318 (86) 4,270 (571) (8%) (37%) (8%) (13%) (24%) 9% N/A 52% 31% 17% 118% 42% 437% (3%) 123% (35%) 25,338 15,665 9,673 62% (12,354) (9,712) (2,642) (27%) 3,459 2,719 740 27% (8,895) (6,993) (1,902) (27%) (436) 4,078 1,046 4,000 3,172 8,268 (8,704) 760 3,318 N/A 437% 1,617 (571) (35%) 3,000 1,000 - 3,172 33% - 13% N/A 0% Income tax impact of adjustments (3,321) (3,821) 500 Cash NPAT (356) 2,831 (3,187) Loan book (period end) 500,831 499,346 1,485 HARMONEY ANNUAL REPORT 2021 For the year ended 30 June 2021 the Group reported a pro forma Cash NPAT of -$0.4m (2020: $2.8m), a reduction of $3.2m. Net lending margin1 improved by $2.8m (9%), but was outweighed by increases to marketing ($3.9m), personnel ($2.7m) and administrative expenses ($1.5m). The increase in marketing expenses was driven by increased activity post the Group’s initial public offering (‘IPO’) including the Group’s rapid expansion in the Australian market. The increase in personnel costs was driven by investment in additional developers for the Group’s proprietary StellareTM platform, post the Group’s IPO. The increase in administrative expenses was driven by costs associated with establishing more efficient funding structures and additional public company costs. Loan originations Originations ($'000) Number of originations 444,044 420,107 23,937 18,164 17,008 1,156 Average value of originations ($) 24,446 24,701 (255) 6% 7% (1%) Year ended Year ended 30 June 2021 30 June 2020 Change Change % Loan originations for the year were $444m, an increase of $24m (6%) on the prior year. During the first half, in response to COVID-19, tightened credit criteria and marketing expenditure restrictions remained in place, slowing originations. These measures were progressively unwound as economic conditions improved, with marketing returning to normal levels in the second half of the year. First half originations were $194m, a 29% increase on the prior half. Second half originations were $250m, a further 29% increase on the first half of the year. In the first half of the year, particularly in the first quarter, originations were focused on 3Rs2 customers, reducing marketing expenditure, with the size and maturity of the New Zealand portfolio in particular, continuing to generate significant originations. Loan origination by geography $180M $120M $60M - H1-FY21 NZ H2-FY21 H1-FY21 AU H2-FY21 3Rs New Loan originations in New Zealand were $319m, an increase of $1m on the prior year. First half originations were $151m, increasing 11% to $168m in the second half. As normal marketing activity resumed in the second half of the year, the proportion of originations from 3Rs customers reduced from 83% in the prior half to 72%. 1 Net lending margin is interest income less interest expense and incurred credit losses. 2 3Rs is a retention strategy involving direct communication with existing and former customers. FINANCIAL REPORT PAGE 21 Loan originations in Australia were $125m, an increase of $23m on the prior year. First half originations were $43m, increasing 93% to $82m in the second half as Harmoney’s direct to customer marketing program accelerated in Australia post its IPO and with the successful implementation of Harmoney’s Libra 1.7 scorecard in February 2021. In the second half of the year new customer originations in Australia were $50m, comprising 60% of total Australian originations. This provides a strong pipeline for 3Rs originations, which lag new originations, as those new customers later return, seeking to borrow for further needs. As the Australian portfolio grows and matures it is expected to trend towards the New Zealand New/3Rs origination mix. Pro forma portfolio Loan book (period end) ($'000) 1 Loan book (average) ($'000) 1 1 Includes warehouse and peer-to-peer funded loans Year ended Year ended 30 June 2021 30 June 2020 Change Change % 500,831 499,346 1,485 480,623 505,928 (25,305) 0% (5%) The loan portfolio ended the year at $501m, up $1.5m on the prior year, but with a substantial variance between the COVID-19 impacted first half, where the portfolio contracted by $31m, and the post IPO second half, where the portfolio grew by $33m. The portfolio movement largely tracked originations however portfolio growth was also impacted by an elevated loan amortisation rate, being the rate at which loans are repaid, with an increase in borrowers refinancing with home mortgages, particularly in New Zealand where historically low fixed rates were available. Pro forma net lending margin Average interest rate (%) Funding debt (period end) ($'000) Funding debt (average) ($'000) Warehouse funded % of book (period end) ($'000) Warehouse funded % of book (average) ($'000) Average funding rate (%) Net interest margin (%) Incurred credit loss ($'000) Year ended Year ended 30 June 2021 30 June 2020 Change Change % 16.3% 16.8% (50bps) 482,192 486,065 (3,873) 473,376 499,483 (26,107) 61% 44% 5.8% 10.6% 27% 20% 6.3% 10.6% 34% 24% (50bps) 0bps N/A (1%) (5%) N/A N/A N/A N/A 18,626 24,382 (5,756) (24%) Incurred credit loss to average gross loans (%) Net lending margin (%) 3.9% 6.8% 4.8% 5.8% (90bps) 100bps N/A N/A Interest income for the year was $78.6m, a decrease of $6.7m on the prior year driven by the lower average portfolio size over the period, due to the impacts of COVID-19 in the second half of FY20 and the first half of FY21. The average interest rate, which represents interest income as a percentage of the portfolio, decreased to 16.3%, from 16.8% in the prior year, with growth in the Australian proportion of the portfolio, where interest rates (and funding costs) are lower. The average funding rate, which represents interest expense as a percentage of the average funding debt, decreased to 5.8% from 6.3% in the prior year driven by continuation of the Group’s transition to warehouse funding, reaching 61% of the portfolio being warehouse funded at 30 June 2021. Incurred credit loss, which represent actual losses on loans written off during the period, were $18.6m, a decrease of $5.8m (24%) from the prior year. Incurred credit loss to average loan portfolio, which represents incurred credit loss as a percentage of the portfolio, decreased to 3.9% from 4.8% in the prior year. HARMONEY ANNUAL REPORT 2021 Harmoney increased its net lending margin to $33.0m, up from $30.3m in the prior year, with funding efficiencies and improved credit performance outweighing lower interest income. Pro forma credit provisioning Movement in expected credit loss provision ($'000) (436) 8,268 (8,704) Provision rate (%) 5.6% 5.7% (10bps) N/A N/A Year ended Year ended 30 June 2021 30 June 2020 Change Change % The Group’s expected credit loss (ECL) provision at 30 June 2021 was $28.3m, representing 5.6% of the portfolio, down from 5.7% of the portfolio at 30 June 2020. The reduction in the ECL provision rate was primarily driven by improvement in the credit performance of the portfolio over the year. The ECL provision was also moderated by a reduction in the overlay applied by management to adjust for future macroeconomic factors not incorporated within the base provisioning model. This reduction in the economic overlay adjustment was in response to the easing of economic uncertainty associated with COVID-19 from the circumstances persisting at 30 June 2020, however the adjustment remains higher than pre-COVID-19 levels reflecting management's assessment that economic uncertainty remains elevated. Pro forma direct expense metrics Marketing to origination ratio Verification & servicing to origination ratio Marketing to income Verification & servicing to income Year ended Year ended 30 June 2021 30 June 2020 Change 3.7% 0.8% 20.8% 4.6% 3.0% 0.8% 14.6% 4.0% 0.7% 0.0% 6.2% 0.6% Change % N/A N/A N/A N/A The Groups direct expenses are those that drive, or are driven by, the level of customer activity, being marketing and customer verification and servicing. Marketing expenses increased to $16.5m in the year from $12.6m in the prior year. This was primarily driven by the Group’s rapid post IPO scale up in the Australian market with average quarterly origination growth of 40% achieved during the year. Customer verification and serving costs increased to $3.6m in the year from $3.4m in the prior year on increased originations. A consequence of Harmoney’s direct to consumer model is that marketing expenses are recognised when incurred, rather than over the expected life of the loan, causing these costs to significantly lead the associated interest income. Accordingly, Harmoney believes that for marketing expenditure the cost to origination ratio is a better measure of efficiency, comparing the expenditure in the period to the loans originated in the period. For Harmoney, the timing difference between marketing expenditure and the revenue that it generates is compounded with Harmoney’s successful 3Rs strategy, which generates subsequent originations from existing customers for little or no additional marketing expense, due to the direct relationship with the customer. The chart below illustrates that in the longer established New Zealand portfolio where 3Rs originations are a much higher proportion of total originations, the marketing expense to total originations ratio is significantly lower. FINANCIAL REPORT PAGE 23 Marketing to originations ratio 8.0% 6.0% 4.0% 2.0% Covid Impacted 0.0% Q1-FY21 Q2-FY21 Australia Q3-FY21 New Zealand Q4-FY21 Pro forma indirect expense metrics Personnel to income ratio Technology to income ratio General and administrative to income Year ended Year ended 30 June 2021 30 June 2020 Change 12% 4% 6% 8% 4% 4% 4% 0% 2% Change % N/A N/A N/A Personnel expenses (excluding share based payments) increased to $9.2m in the year from $6.5m in the prior year on increased investment in Harmoney’s proprietary StellareTM technology platform, following its IPO in November. Administrative expenses increased to $4.9m in the year from $3.5m in the prior year with the increase primarily driven by additional public company costs and costs associated with establishing more efficient funding structures, with three warehouse facilities currently operating across New Zealand and Australia and an additional New Zealand and Australian facility in advanced negotiations. HARMONEY ANNUAL REPORT 2021 Statutory to pro forma reconciliation The table below sets out the pro forma adjustments applied to the statutory consolidated income statement, for the year ended 30 June 2021 and the prior comparative period. The pro forma adjustments are consistent with those made in the Prospectus and are intended to provide a more meaningful view of the Group’s operating performance, normalising for differences in statutory accounting treatment between warehouse and peer-to-peer funded loans. Year ended 30 June 2021 Year ended 30 June 2020 Statutory Pro forma Pro forma Statutory 3 Month Pro forma Pro forma Adjustments 15 Months Adjustment Adjustments $'000 $'000 $'000 $'000 $'000 $'000 Year $'000 Interest income 1 Fee income 2 Other income 3 Total income 37,643 40,917 659 (659) 845 (340) 39,147 39,918 Interest expense 4 9,647 17,763 Impairment expense 5 13,072 5,118 Marketing expenses 16,475 4,006 13,248 3,245 - - 71 - 1,046 - Verification and servicing expenses Personnel expenses 6 Technology expenses Depreciation and amortisation expenses 7 General and administrative expenses 8 78,560 - 505 79,065 27,410 18,190 16,475 4,006 13,319 3,245 1,046 21,552 (2,521) 66,189 85,220 13,829 (7,240) (6,589) - 2,099 - (1,293) 806 37,480 (9,761) 58,307 86,026 5,698 (553) 26,249 31,394 8,898 (638) 24,390 32,650 15,085 (2,484) - 12,601 4,185 (757) - 3,428 13,151 (2,730) (3,162) 7,259 4,135 (804) - 3,331 977 (173) 813 1,617 7,728 - 7,728 5,339 (692) (1,189) 3,458 Loss before income tax (29,320) 16,966 (12,354) (19,988) (930) 11,206 (9,712) Income tax benefit 9 2,286 1,173 3,459 4,616 616 (2,513) 2,719 Loss after income tax (27,034) 18,139 (8,895) (15,372) (314) 8,693 (6,993) Notes: 1. 2. 3. 4. 5. 6. 7. 8. 9. In the statutory income statement, loans funded via warehouse facilities are recorded on-balance sheet, while loans funded via the Group’s peer-to-peer trusts are off-balance sheet for accounting purposes. As the Group is transitioning to full warehouse funding, this creates income statement comparability issues between periods. As such a pro forma adjustment has been made to present the income statement consistently with recognition of peer-to-peer funded loans on-balance sheet, indifferent to funding sources. In the statutory income statement, for loans funded by the Group’s peer-to-peer trusts, expected lifetime fee income is recognised on loan origination, in contrast with warehouse funding where interest income and interest expense are recognised over the life of the loan. The interest income adjustment recognises interest income earned during the period from peer-to-peer funded loans. For the reasons set out in note 1, the fee income adjustment removes fees earned from peer-to-peer funded loans with establishment fees being recognised in the pro forma income statement through interest income over the expected life of the loan and peer-to-peer lender fees being recognised in the pro forma as a deduction from interest expense. The fee income adjustment also reclassifies borrower dishonour and late fees to other income. The other income adjustment reclassifies borrower dishonour and late fees from fee income in the statutory income statement to other income in the pro forma income statement and, for consistency with the pro forma income statement presented in the Prospectus, removes non-recurring benefit of the Wage Subsidy Scheme in New Zealand and the JobKeeper wage subsidy in Australia and in the prior comparative period removes grant income which the Group expects on a go forward basis it would not be eligible to receive on the revised application of its accounting policy for the capitalisation of eligible research and development applied from the current period. For the reasons set out in note 1, the interest expense adjustment recognises net interest paid to peer-to-peer lenders after deducting impairments and fees owed to the Group and, for consistency with the pro forma income statement presented in the Prospectus, removes the interest expense relating to the corporate debt facility, which was repaid prior to the IPO. For the reasons set out in note 1, the impairment expenses adjustment recognises, for peer-to-peer funded loans, both actual impairment costs and the movement in expected credit loss provision during the period. For consistency with the pro forma income statement presented in the Prospectus, the personnel expenses have been adjusted to remove the impact of the salary reductions taken by employees and, in the prior comparative period, remove the portion of costs that the Group estimates could have been capitalised had the current period application of the Group's accounting policy for the capitalisation of eligible research and development expenditure applied. For consistency with the pro forma income statement presented in the Prospectus, the depreciation and amortisation expenses for the prior comparative period adds the Group's estimate of amortisation of capitalised research and development expenditure had the Group's current period application of its accounting policy for the capitalisation of eligible research and development expenditure been applied in prior periods. For consistency with the pro forma income statement presented in the Prospectus, the general and administrative expenses adjustment in the prior comparative period removes the establishment costs relating to the corporate debt facility, which was repaid prior to the IPO, and adds the Group’s estimate of additional public company costs associated with being a publicly listed entity. The income tax benefit adjustment represents the cumulative income tax expense on the pro forma adjustments at an effective income tax rate of 28%. FINANCIAL REPORT PAGE 25 Director’s Report The Directors present their report, together with the financial statements, on the consolidated entity consisting of Harmoney Corp Limited and the entities it controlled at the end of, or during the year ended, 30 June 2021 (“the Group”). Directors The Directors of Harmoney Corp Limited at the date of this report are: David Flacks Tracey Jones Paul Lahiff Neil Roberts Independent Chairman Independent Director Independent Director Founder, Chief Product Officer and Executive Director David Stevens Chief Executive Officer and Managing Director For details of Directors during the year refer to the Company Information. Principal activities Harmoney provides customers with unsecured personal loans that are competitively priced using risk-adjusted interest rate and accessed 100% online. The Group operates across New Zealand and Australia. Dividends There were no dividends paid, recommended, or declared during the current or previous financial year. For and on behalf of the Directors’ David Flacks Chairman Auckland 30 August 2021 HARMONEY ANNUAL REPORT 2021 Financial Report FINANCIAL REPORT PAGE 27 Directors’ Responsibility Statement The directors are pleased to present the consolidated financial statements of Harmoney Corp Limited for the year ended 30 June 2021. The directors are responsible for ensuring that the consolidated financial statements give a true and fair view of the financial position of the Group as at 30 June 2021 and its financial performance and cash flows for the year ended on that date. The directors consider that the consolidated financial statements of the Group have been prepared using appropriate accounting policies consistently applied and supported by reasonable judgements and estimates and that all the relevant financial reporting and accounting standards have been followed. The directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of the Group and facilitate compliance of the consolidated financial statements with the Financial Reporting Act 2013. Harmoney Corp Limited's directors do not have the power to amend these consolidated financial statements after issue. The Board of Directors of Harmoney Corp Limited authorised the financial statements set out on pages 29-65 for issue on 30 August 2021. For and on behalf of the Board David Flacks Director 30 August 2021 Tracey Jones Director HARMONEY ANNUAL REPORT 2021 Consolidated Group Financial Statements Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2021 Interest income Fee income Other income Total income Interest expense Impairment expense Marketing expenses Personnel expenses Verification and servicing expenses Technology expenses General and administrative expenses Depreciation and amortisation expenses Loss before income tax Income tax benefit Loss for the period attributable to shareholders of Harmoney Corp Limited Other comprehensive gain/(loss) Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations Gain/(loss) on cash flow hedge Other comprehensive income/(loss) for the period, net of tax Total comprehensive loss for the period attributable to shareholders of Harmoney Corp Limited Earnings per share for loss attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share FINANCIAL REPORT PAGE 29 Year ended 15 months ended 30 June 2021 30 June 2020 Notes $'000 $'000 6 7 8 6 9 10 12 14 13 13 37,643 659 845 39,147 9,647 13,072 16,475 13,248 4,006 3,245 7,728 1,046 21,552 13,829 2,099 37,480 5,698 8,899 15,085 13,150 4,185 4,135 5,339 977 (29,320) (19,988) 2,286 4,616 (27,034) (15,372) 898 841 (250) (818) 1,739 (1,068) (25,295) (16,440) Cents Cents (29.0) (29.0) (20.6) (20.6) Consolidated Statement of Financial Position As at 30 June 2021 Assets Cash and cash equivalents Trade and other assets Finance receivables Property and equipment Intangible assets Deferred tax assets Total assets Liabilities Payables and accruals Borrowings Provisions Lease liability Derivative financial instruments Total liabilities Net assets Share capital Foreign currency translation reserve Share based payment reserve Cash flow hedge reserve Accumulated losses Equity Notes $'000 $'000 30 June 2021 30 June 2020 15 16 17 18 19 12 20 21 22 18 14 23 24 14 24 76,464 1,894 34,779 5,223 294,821 129,222 642 3,455 11,490 1,448 - 9,548 388,766 180,220 7,324 3,263 291,541 132,630 13,405 717 85 12,832 1,684 926 313,072 151,335 75,694 28,885 131,399 56,686 564 216 (85) (334) 2,825 (926) (56,400) (29,366) 75,694 28,885 THE ABOVE CONSOLIDATED STATEMENT OF FINANCIAL POSITION SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING NOTES. HARMONEY ANNUAL REPORT 2021 Consolidated Statement of Changes in Equity For the year ended 30 June 2021 Share capital Foreign currency translation reserve Share based payment reserve Cash flow hedge reserve Accumulated losses Total Notes $'000 $'000 $'000 $'000 $'000 $'000 Balance at 31 March 2019 33,092 (84) 2,386 (108) (13,994) 21,292 Loss for the 15 month period ended 30 June 2020 Other comprehensive loss for the 15 month period ended 30 June 2020, net of income tax Total comprehensive loss for the 15 month period ended 30 June 2020 Recognition of share based payments Transfer to capital Issue of share capital - - - - 125 23,469 24 24 23 - - - (15,372) (15,372) (250) - (818) - (1,068) (250) - (818) (15,372) (16,440) - - - 564 (125) - - - - - - - 564 - 23,469 Balance at 30 June 2020 56,686 (334) 2,825 (926) (29,366) 28,885 Loss for the year ended 30 June 2021 Other comprehensive loss for the year ended 30 June 2021, net of income tax Total comprehensive loss for the year ended 30 June 2021 Recognition of share based payments Transfer to share capital Issue of share capital, net of transaction costs - - - - 7,162 67,551 24 24 23 - 898 898 - - - - - - - (27,034) (27,034) 841 - 1,739 841 (27,034) (25,295) 4,553 (7,162) - - - - - - - 4,553 - 67,551 Balance at 30 June 2021 131,399 564 216 (85) (56,400) 75,694 THE ABOVE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING NOTES. FINANCIAL REPORT PAGE 31 Consolidated Statement of Cash Flows For the year ended 30 June 2021 Year ended 15 months ended 30 June 2021 30 June 2020 Notes $000 $000 Cash flows from operating activities Interest received Interest paid Other income Payments to suppliers and employees Net cash (used in)/generated by operating activities Cash flows from investing activities Net advances to customers Payments for intangibles and equipment Net cash (used in) investing activities Cash flows from financing activities Net proceeds from finance receivables borrowings Net (repayment) / proceeds of debt financing Proceeds from share issue, net of transaction costs Principal element of lease payments Net cash generated by financing activities Cash and cash equivalents at the beginning of the period Net increase / (decrease) in cash and cash equivalents Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the period 15 36,760 (9,773) 6,809 20,650 (5,576) 32,712 (35,384) (41,616) (1,588) 6,170 (180,044) (99,209) (3,694) (33) (183,738) (99,242) 170,227 (10,694) 67,550 (969) 84,863 10,163 23,469 (189) 226,114 118,306 34,779 40,788 897 76,464 9,531 25,234 14 34,779 HARMONEY ANNUAL REPORT 2021 Notes to the Consolidated Financial Statements For the year ended 30 June 2021 1 Corporate information Harmoney Corp Limited (the Company) and its subsidiaries (collectively, the Group) are companies whose primary business is to originate, service and invest in loans. There has been no change in the principal activity of the Group during the period. The results and position of each Group entity are expressed in New Zealand dollars, which is the functional currency of the Company and the presentation currency for the consolidated financial statements, unless otherwise stated. Harmoney Corp Limited is a company incorporated in New Zealand and registered under the Companies Act 1993, whose shares are publicly traded on both the Australian Stock Exchange (ASX) and New Zealand Exchange (NZX) and is required to be treated as a reporting entity under the Financial Market Conducts Act 2013 and the Financial Reporting Act 2013 as it is a licensed peer- to-peer lender. The Company was incorporated on 1 May 2014. These consolidated financial statements are for the year ended 30 June 2021 while the comparative information is for the 15 month period ended 30 June 2020 and accordingly, the results are not directly comparable. 2 Significant accounting policies 2.1 Basis of preparation The consolidated financial statements of Harmoney Corp Limited comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (GAAP). The Company is a for-profit entity for the purposes of complying with GAAP. The Group has transitioned from NZ IFRS Reduced Disclosure Regime to NZ IFRS and International Financial Reporting Standards (IFRS). There were no recognition or measurement differences arising from the Group's transition. The Consolidated group financial statements have been prepared following the historical cost convention, except where otherwise identified. Financial assets are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest rate method, less any expected credit loss allowance. The comparatives have been regrouped for consistency with the current year presentation. The comparatives have not been restated. The Consolidated Statement of Financial Position has been prepared in order of liquidity, including the comparatives. All assets and liabilities are current unless otherwise stated in the notes. The disaggregation of amounts receivable and payable in the next twelve months and beyond is outlined in the accompanying notes to the financial statements and the maturity profile of financial liabilities is outlined in note 28. 2.2 Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved when the Company: Ÿ has power over the investee; Ÿ Ÿ has the ability to use its power to affect its returns. is exposed, or has rights, to variable returns from its involvement with the investee; and HARMONEY PAGE 33 The assets and liabilities of entities whose functional currency is not the New Zealand dollar are translated at the exchange rates ruling at balance date. Revenue and expense items are translated at the spot rate at the transaction date or a rate approximating that rate. Exchange differences are taken to the foreign currency translation reserve. All intragroup assets and liabilities, equity, income, expenses, and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. 2.3 Goods and services tax Revenue, expenses, assets, and liabilities are recognised net of the amount of goods and services tax (GST) except: Ÿ where the amount of GST incurred is not recovered from the taxation authority, the unrecoverable GST expense is Ÿ included in the related expense item in the income statement. receivables and payables which are recognised inclusive of GST (the net amount of GST recoverable from or payable to the taxation authority is included as part of receivables or payables). Ÿ cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority, are presented as operating cash flows. 2.4 Application of new and revised accounting standards Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2021 reporting periods and have not been early adopted by the Group. These standards are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. The Interest Rate Benchmark Reform – Amendments to IFRS 7, IFRS 9 and IAS 39 will have no impact as the Group does not have any IBOR-based contracts. 3 Significant changes in the current reporting period ASX Listing and Initial Public Offering (IPO) On 19 November 2020, the Company completed an IPO and listed on the ASX with a secondary listing on the NZX. Refer to note 23 for further details. 4 Significant accounting judgements, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses and actual results may differ from these estimates. The estimates and underlying assumptions 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. Expected credit loss provision 4.1 The Group has estimated the provision for expected credit losses (ECL) based on historically observed patterns of borrower behaviour adjusted for current and future economic outcomes. These are discussed in detail in note 17 and have a significant impact on these financial statements. The Group measures the allowance for ECL using an expected credit loss impairment model as required by NZ IFRS 9 Financial Instruments (NZ IFRS 9). The Group’s accounting policy for the recognition and measurement of the allowance for ECL is described at note 17. HARMONEY ANNUAL REPORT 2021 4.2 Determination of transaction price for distributing services In respect of peer-to-peer funded loans, the Group has estimated the transaction price for distributing services, being the amount to which the Group expects to be entitled for matching peer-to-peer lenders with borrowers that meet their lending criteria. The transaction price includes a component of variable consideration as the amount of certain payments is correlated with borrower behaviour over which the Group has no control. The Group has estimated the transaction price based on historically observed patterns of borrower behaviour. The assumptions made regarding the rate of default and early repayment by borrowers has a significant impact on these financial statements. The Group measures the transaction price including variable consideration to determine income as required by NZ IFRS 15 Revenue from Contracts with Customers (NZ IFRS 15). The Group's accounting policy for the recognition and measurement of this income is described in note 7. The transaction price is determined based on models of expected customer behaviour which are informed by historical experience. An overlay has been applied to reduce the amount of income recognised to accommodate for the expected deviation from that base given current uncertainties. 4.3 Treatment of development costs incurred in the period The Group has incurred and will continue to incur significant costs on software development projects. The directors believe that the costs fall within the definition of research and development within NZ IAS 38 Intangible Assets. Judgement has been applied in assessing these costs against the recognition and measurement criteria in that standard. The costs have been recorded as Intangible Assets on the balance sheet where the Group believes that they have met all the requirements of the recognition criteria outlined in the accounting policy (note 19) and expensed where they have not been met. 4.4 Deferred tax asset relating to tax losses NZ IAS 12 Income Taxes allows the capitalisation of tax losses as deferred tax assets only to the extent that there is convincing evidence that future taxable profit will be available against which the unused tax losses can be utilised. The tax loss position of the Group arose from significant one-off costs, including those related to the IPO, that will not re-occur and a strategic repositioning. The Group is transitioning to originating loans on balance sheet, and while in the growth phase, this creates a tax profile of high costs being incurred in the short-term and income over time. The Group has estimated the amount of deferred tax assets for which there is convincing evidence that utilisation will occur in the medium term and disclosed the remainder as unrecognised deferred tax assets. 5 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer (considered to be the CODM). 5.1 Description of segments The CODM considers the business from a geographical operating perspective and has identified two reportable segments: New Zealand and Australia. This is a change from previous segment reporting, where there was a third segment for centrally incurred costs allocated to Head Office. The CODM considers performance for New Zealand and Australia with costs allocated as the Australian business has now matured. This change has been reflected in the comparative period. The CODM assesses the business on a Cash NPAT basis. Cash NPAT is a non-GAAP measure and consists of profit/(loss) after income tax, adjusted for determined non-cash and abnormal items. It is intended as a supplementary measure of operating performance for readers to understand the cash generating ability of the Group. Cash NPAT does not have a standard meaning prescribed by GAAP and therefore may not be compared to information presented by other entities. Intersegment revenue is not considered by the chief operating decision maker and is accordingly excluded from segment reporting. 5.2 Major customers There are no customers who account for more than 10% of the Group’s revenue for the year ended 30 June 2021 (2020: 10% of the Group’s revenue was received from transactions with a single external customer). HARMONEY PAGE 35 The following tables present income and loss information for the Group’s operating segments. Segmented income statement for the Year ended 30 June 2021 $'000 Interest income Fee income Other income Total income Interest expense Incurred credit losses Movement in expected credit loss provision Marketing expenses Verification and servicing expenses Personnel expenses (excl. share-based payments) Share-based payments expenses Technology expenses Depreciation and amortisation expenses General and administrative expenses Loss before income tax Income tax benefit/(expense) New Zealand Australia Group 29,542 (1,079) 715 8,101 1,738 130 37,643 659 845 29,178 9,969 39,147 5,748 3,974 5,939 8,671 2,937 8,107 3,508 3,240 914 6,377 3,899 813 2,346 7,804 1,069 1,063 570 5 132 1,351 9,647 4,787 8,285 16,475 4,006 9,170 4,078 3,245 1,046 7,728 (20,237) (9,083) (29,320) 1,028 1,258 2,286 Loss for the period attributable to shareholders of Harmoney Corp Limited (19,209) (7,825) (27,034) Non-cash and other normalisation adjustments Movement in expected credit loss provision Share based payments expenses Depreciation and amortisation expenses Borrower establishment fee rebate IPO related expenses Income tax impact of adjustments 5,939 3,508 914 4,000 3,172 2,346 570 132 - - 8,285 4,078 1,046 4,000 3,172 (4,908) (914) (5,822) Cash NPAT (6,584) (5,691) (12,275) HARMONEY ANNUAL REPORT 2021 Segmented income statement for the 15 months ended 30 June 2020 $'000 Interest income Fee income Other income Total income Interest expense Incurred credit losses Movement in expected credit loss provision Marketing expenses Verification and servicing expenses Personnel expenses (excl. share-based payments) Share-based payments expenses Technology expenses Depreciation and amortisation expenses General and administrative expenses Loss before income tax Income tax benefit New Zealand 20,473 8,030 2,067 30,570 4,183 2,676 5,036 8,789 3,120 10,865 668 4,131 931 3,212 Australia 1,079 5,799 32 6,910 1,515 - 1,187 6,296 1,065 1,453 164 4 46 2,127 Group 21,552 13,829 2,099 37,480 5,698 2,676 6,223 15,085 4,185 12,318 832 4,135 977 5,339 (13,041) (6,947) (19,988) 4,120 496 4,616 Loss for the period attributable to shareholders of Harmoney Corp Limited (8,921) (6,451) (15,372) Non-cash and other normalisation adjustments Movement in expected credit loss provision Share based payments expenses Depreciation and amortisation expenses Borrower establishment fee rebate Income tax impact of adjustments 5,034 669 931 3,000 (2,697) 1,187 6,221 164 46 - 833 977 3,000 (419) (3,116) Cash NPAT (1,985) (5,473) (7,458) HARMONEY PAGE 37 The following tables present a disaggregation of the Group’s fees income in operating segments. Segment fee income statement for the Year ended 30 June 2021 $'000 New Zealand Australia Group Distributing services Establishment services Borrower establishment fee rebate Protect fees Other fees Total fee income 1,082 921 (4,000) 893 25 982 752 - - 4 (1,079) 1,738 Segment fee income statement for the 15 months ended 30 June 2020 $'000 New Zealand Australia Distributing services Establishment services Borrower establishment fee rebate Protect fees Other fees Total fee income 3,810 4,709 (3,000) 1,553 958 8,030 4,013 1,730 - - 56 5,799 6 Interest Interest Income Interest income Interest Expense Interest Expense Interest on receivables funding Interest on corporate debt Interest on lease liability Total interest expense Year ended 30 June 2021 $000 37,643 Year ended 30 June 2021 $000 8,960 624 63 9,647 2,064 1,673 (4,000) 893 29 659 Group 7,823 6,439 (3,000) 1,553 1,014 13,829 15 months ended 30 June 2020 $000 21,552 15 months ended 30 June 2020 $000 4,973 628 97 5,698 Interest income and interest expense are recognised in the Income Statement for all financial assets and liabilities measured at amortised cost using the effective interest method. The effective interest method allocates interest income or interest expense over the life of the contract, or when appropriate a shorter period, using the effective interest rate. The effective interest rate is the discount rate at which the present value of the future cash flows equals the net carrying amount of the financial asset or liability. Where the Group is the lender, origination fees are required to be amortised over the expected life of the finance receivable in accordance with NZ IFRS 9 Financial Instruments. The deferred amount is recognised as a reduction to the finance receivable (note 17). HARMONEY ANNUAL REPORT 2021 7 Fee Income Borrower fee income Establishment services Borrower establishment fee rebate Protect fees Other fees Total borrower fee income Lender fee income Distributing services Total fee income Year ended 30 June 2021 $000 15 months ended 30 June 2020 $000 1,673 (4,000) 893 29 (1,405) 2,064 659 6,439 (3,000) 1,553 1,014 6,006 7,823 13,829 Establishment services Establishment fees are a brokerage fee charged to borrowers on peer-to-peer loans for arranging the loan. The performance obligation of arranging the loan is fulfilled at the point in time the loan is matched. Given only one material performance obligation the transaction price is allocated to the single performance obligation. The Borrower establishment fee rebate relates to movements in the provision for rebate (note 22) and the basis for the rebate is disclosed in note 31. Protect Fees In New Zealand, some of the finance receivable assets have the payment protect feature attached. If the borrower under the loan contract has elected the payment protect feature and makes a successful claim within the required period, principal and interest repayments covered by the claim will be waived by the lender. No amounts are paid to the borrower in the event of a waiver. Protect fee revenue is the amount charged to the borrower for the payment protect feature on finance receivables. This Protect fee revenue is recognised in the income statement from the attachment date over the period of the contract. Protect fee revenue is earned in accordance with the pattern of the underlying exposure to risk expected under the payment protect feature of the loan contract. The portion of Protect fee revenue included in the financial receivable asset but not yet earned as at the balance date is included in payables and accruals as waiver fee revenue in advance (note 20). Where the loan is off balance sheet, the Protect fee revenue is the amount charged to the peer-to-peer lender for arrangement and management of the Protect loan. Given only one material performance obligation, the transaction price is allocated to the single performance obligation. At the point the performance obligation of matching the lender with a borrower is satisfied, the Group estimates and records as revenue the amount of variable consideration to the extent that it is highly probable that a significant reversal in the cumulative revenue recognised will not occur. The Group’s estimate of rebateable amounts is included in provision as distributing services rebate provision (note 22). Other fees Other fees include fees charged when borrower repayments are dishonoured or in arrears. A performance obligation arises every time the credit event occurs. The Group performs the debt collection activity following every credit event and recognises revenue at the point in time the follow up activity is undertaken. Given only one material performance obligation the transaction price is allocated to the single performance obligation. Revenue is recognised only to the extent that it is likely that the amount will be recovered. HARMONEY PAGE 39 Distributing services Distributing services refer to Harmoney facilitating the matching of credit worthy borrowers with off balance sheet lenders within criteria chosen by the lender. The fees charged for this service are recognised at the point matching is complete and to the extent that it is highly probable that a significant reversal will not occur. Given only one material performance obligation the transaction price is allocated to the single performance obligation. Payment for distributing services is made by the lender via a combination of fees payable at the point of matching with a borrower when borrower repayments are received and on a monthly invoice cycle where fees are calculated based on lender portfolio performance. Certain fees charged at the point of matching lenders with borrowers are rebateable if the lender does not achieve the required return on their investment. This is typically due to the borrower loan closing earlier than stated on their contract due to early repayment or default. At the point the performance obligation of matching the lender with a borrower is satisfied, the Group estimates and records as revenue the amount of variable consideration to the extent that it is highly probable that a significant reversal in the cumulative revenue recognised will not occur. The Group's estimate of rebateable amounts are booked as distributing services rebate provision note 22. 8 Other Income Grant income Wage subsidy Total other income Year ended 30 June 2021 $000 476 369 845 15 months ended 30 June 2020 $000 1,614 485 2,099 Grant and wage subsidy Grants from the New Zealand Government are recognised at their fair value where there is reasonable assurance that the grant will be received, and the Group will comply with all attached conditions. Harmoney received grants related to Research and Development activity as funded by Callaghan Innovation and the R&D Loss Tax Credit as funded by Inland Revenue. Grants that compensate the Group for expenses incurred are recognised in profit or loss on a systematic basis in the same periods in which the expenses are recognised. The Group received $239,006 (2020: $452,923) of wage subsidies funded by the Ministry of Social Development for New Zealand operations. The subsidy was part of the New Zealand Government's COVID-19 response plan. The wage subsidy was predicated on certain criteria which were considered in the Group's application. The Group also received $23,813 (2020: $32,185) of JobKeeper subsidies and $106,361 (2020: $Nil) of Cash flow boost grant funded by the Australian Tax Office, these are recognised as wage subsidies above. The subsidy and grant were predicated on certain criteria which were considered in the Group's application. HARMONEY ANNUAL REPORT 2021 9 Impairment expense Change in expected credit loss provision Incurred credit loss Change in protect waiver provision Impairment expense Year ended 15 months ended 30 June 2021 30 June 2020 $000 $000 8,285 4,853 (66) 13,072 6,223 2,510 166 8,899 Change in expected credit loss provision The expense is recognised when there is a movement in the provision due to the composition of the finance receivables (note 17). For example, due to the growth in the finance receivable. Incurred credit loss Financial assets are written off when there is no reasonable expectation of recovery, such as the borrower failing to engage in a repayment plan with the Group. The Group categorises a finance receivable as incurred credit loss when the borrower fails to make contractual payments more than 120 days past due. Where finance receivables have been written off, the Group continues to engage in enforcement activity to attempt to recover the receivable due. Where recoveries are made, these are recognised in profit or loss. 10 Depreciation and Amortisation Depreciation charge on right-of-use assets Buildings Equipment Depreciation charge on Property Plant and Equipment Furniture and Fixtures IT Equipment Amortisation charge Software development Total depreciation and amortisation expense Amounts recognised in the statement of profit and loss relating to leases Interest expense (included in interest expense) Expense relating to short-term leases Cash outflows relating to leases Cash outflow for leases in the period HARMONEY PAGE 41 Year ended 15 months ended 30 June 2021 30 June 2020 $'000 $'000 779 8 9 23 227 1,046 63 4 908 11 14 37 7 977 97 106 1,032 287 11 Research and Development Research and development costs capitalised Research and development costs expensed Total research and development Year ended 15 months ended 30 June 2021 30 June 2020 $000 3,682 544 4,226 $000 - 6,425 6,425 Research and development costs capitalised are discussed in note 19. Expenditure on research activities is recognised as an expense in the period in which it is incurred. 12 Income Taxes Income tax recognised in profit or loss 12.1 The income tax expense for the period can be reconciled to the accounting profit/(loss) as follows: Current tax In respect of the current period Deferred tax In respect of the current period Total income tax benefit recognised in the period Loss before tax from continuing operations Income tax benefit calculated Effect of expenses that are not deductible Research and Development Tax Credits Movement in temporary differences Income tax benefit not recognised Other Income tax benefit recognised in profit or loss Year ended 15 months ended 30 June 2021 30 June 2020 $000 27 $000 36 (2,313) (2,286) (4,652) (4,616) Year ended 30 June 2021 $000 (29,320) (8,333) (8,227) 476 263 13,503 32 (2,286) 15 months ended 30 June 2020 $000 (19,988) (5,698) 453 392 142 - 95 (4,616) The tax rate used for the reconciliation above is the corporate tax rate of 28% payable by corporate entities in New Zealand and 30% for those in Australia, on taxable profits under tax law in their respective jurisdictions. Income tax expense represents the sum of the tax currently payable and deferred tax. HARMONEY ANNUAL REPORT 2021 Current tax The tax currently payable is based on taxable profit for the period. Taxable profit differs from ‘profit/(loss) before tax’ as reported in the consolidated statement of profit or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other periods and items that are never taxable or deductible. The Group's current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that there is convincing other evidence that taxable profits will be available against which those deductible temporary differences can be utilised. 12.2 Deferred tax balances The following is the analysis of deferred tax assets/(liabilities) presented in the consolidated statement of financial position Deferred tax assets Losses Deferred R&D expenses Share based payments Accruals and other Deferred tax assets Deferred tax liabilities Distributing services Plant & equipment and intangibles Deferred tax liabilities Net deferred tax assets 30 June 2021 30 June 2020 $'000 $'000 6,800 2,283 - 5,342 14,425 (2,870) (65) (2,935) 11,490 7,494 4,355 901 2,284 15,034 (2,143) (5) (2,148) 12,886 The recognised tax losses are subject to meeting the requirements of the applicable tax legislation. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset recognised to be utilised. The Group has further tax losses of $11.9m at 30 June 2021 (June 2020: nil) which have not been recognised and are available to offset future taxable profits. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. 12.3 Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited equity: Share based payments 371 269 30 June 2021 30 June 2020 $'000 $'000 HARMONEY PAGE 43 13 Earnings per share Loss after tax for the period attributable to the owners of the Group 30 June 2021 30 June 2020 $'000 $'000 (27,034) (15,372) Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 93,358,795 74,576,613 Weighted average number of ordinary shares used in calculating diluted earnings per share 93,358,795 74,576,613 Basic earnings per share Diluted earnings per share Cents Cents (29) (29) (21) (21) Number Number Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 93,358,795 74,576,613 Adjustments for calculation of diluted earnings per share: Options Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share - - 93,358,795 74,576,613 Options Performance rights (zero strike price options) under the Groups Long Term Incentive Plan (‘LTIP’) as detailed in note 24 are considered to be potentially ordinary shares. They have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The calculation of diluted earnings per share does not include 4,224,000 options granted on 15 June 2021 because they are antidilutive for the year ended 30 June 2021. These options could potentially dilute basic earnings per share in the future. 14 Cash flow hedge Cash flow hedge reserve The Group borrows funds (note 21) in order to purchase finance receivables (note 17). The interest rate payable on the borrowings is floating while the interest receivable is fixed at the point the funds are lent. The interest rate risk is managed and mitigated through the use of interest rate swaps, which exchange floating interest payments with fixed interest payments. The swaps are entered into to match the maturity profile of estimated repayments of the Group's borrowings. These are accounted for at trade date. The cash flow hedge reserve is used to recognise the effective portion of gains or losses on derivatives (interest rate swaps) that are designated and qualify as cash flow hedges. At inception of the hedge relationship, the Group documents the economic relationship between hedging instruments and hedged items including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of hedged items. The Group documents its risk management objective and strategy for undertaking its hedge transactions. The valuations for New Zealand were based on market rates at 30 June 2021 of 0.26% for the 1-month BKBM and 1.35% for the 5-year swap rate for (2020: 0.27% and 0.36%) and for Australia 0.01% for the 1-month BBSW and 0.92% for the 5-year swap rate (2020: 0.09% and 0.27%). HARMONEY ANNUAL REPORT 2021 15 Cash and cash equivalents Cash and cash equivalents at the end of the reporting period as shown in the consolidated statement of cash flows can be reconciled to the related items in the consolidated statement of financial position as follows: Cash on hand and demand deposits Short term deposits Restricted cash Total cash and cash equivalents 30 June 2021 $'000 44,343 - 32,121 76,464 30 June 2020 $'000 10,266 17,139 7,374 34,779 No adjustment has been made for counterparty credit risk in cash and cash equivalents as the risk of impairment is not expected to be material. Short term deposits are presented as cash equivalents if they have a maturity of three months or less from the date of acquisition and are repayable with 24 hours notice with no loss of interest. Restricted cash is held by Harmoney Warehouse Trust No. 1, Harmoney Warehouse No.2 Trust and Harmoney Australia Warehouse No. 1 Trust, controlled entities (note 26). These funds may only be used for purposes defined in the Trust documents, and therefore not available for general use by the Group. Reconciliation of (loss)/profit for the period to net cash generated by operating activities Year ended 30 June 2021 15 months ended 30 June 2020 $'000 (27,034) 13,072 4,925 1,046 1,471 (497) 2 3,329 (2,316) 4,783 640 (1,009) (1,588) $'000 (15,372) 8,899 832 59 268 263 (8) 7,493 (4,651) 2,354 6,546 (513) 6,170 Loss for the period Non-cash adjustments: Impairment expense Share-based payments Depreciation and amortisation Change in deferred establishment fee Warehouse establishment fees Other movements Change in operating assets and liabilities: Decrease in trade and other assets Increase in deferred tax assets Increase in payables and accruals Increase in provisions Increase in accrued interest Net cash (used in)/generated by operating activities HARMONEY PAGE 45 Non-cash transactions During the current period, the Group did not enter into any non-cash investing and financing activities (2020: Nil). Changes in liabilities arising from financing activities Balance at 1 April 2019 Operating cash flows Financing cash flows Non-cash adjustments New leases Borrowings $'000 (36,952) 396 (95,556) (518) - Lease liability $'000 - - 287 (97) Total $'000 (36,952) 396 (95,269) (615) (1,874) (1,874) Balance at 30 June 2020 (132,630) (1,684) (134,314) Operating cash flows Financing cash flows Non-cash adjustments Balance at 30 June 2021 16 Trade and other assets Trade receivables Prepayments GST receivable Current tax assets Total trade and other assets 985 (159,533) (363) (291,541) - 985 1,030 (158,503) (63) (426) (717) (292,259) 30 June 2021 $'000 30 June 2020 $'000 1,059 654 87 94 1,894 4,253 327 625 18 5,223 In 2020 trade receivables included $1.25m, which was the portion of distributing services fees held by the lender in a bank account controlled by them which could only be withdrawn once certain conditions were met. The conditions did not require further performance obligations to be satisfied by the Group. No adjustment has been made for counterparty credit risk in the financial assets above as all counterparties are considered to be of good credit standing and the risk of impairment is expected to be not material. 17 Finance receivables Finance receivables Accrued interest Protect receivables Deferred establishment fees Expected credit loss (ECL) provision Total finance receivables HARMONEY ANNUAL REPORT 2021 30 June 2021 $'000 310,124 2,051 389 (2,368) (15,375) 294,821 30 June 2020 $'000 134,917 1,168 1,109 (897) (7,075) 129,222 Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Group. The Group's main exposure to credit risk arises from finance receivables. The finance receivable credit risk management framework comprises: underwriting and risk policies; anti-money laundering (AML) and counter-terrorism financing (CTF) protocols; collection and recovery policies; a proprietary credit scorecard; a risk-based pricing model; and fraud detection services. In response to COVID-19 the Group made changes to credit underwriting and collections processes to mitigate the impacts of economic downturn and the related credit risk. For example, by: directing additional resource towards helping borrowers in financial hardship, reducing the permitted borrowing limits across all customers, and limiting exposure to high-risk segments. ECL Provision The Group measures the allowance for expected credit losses (ECL) using an expected credit loss impairment model as required by NZ IFRS 9 Financial Instruments (NZ IFRS 9). The estimated impact of COVID-19 has been incorporated into forward-looking inputs as described below. Under the ECL model, the Group applies a three-stage approach to measuring the ECL based on credit migration between the stages. The ECL model is based on loan performance history calculated separately for New Zealand and Australia. As the product is unsecured personal loans there is no further segmentation. Management then applies a further adjustment to incorporate future macroeconomic factors using forward looking inputs. Stage 1: 12 month ECL - No significant increase in credit risk Finance receivables in this category have not had a significant increase in credit risk since initial recognition. ECL resulting from default events that are possible within the next 12 months (’12-month ECL’) are recognised for financial instruments that remain in stage 1. Stage 2: Lifetime ECL - Significantly increased credit risk An assessment of whether credit risk has increased significantly since initial recognition is performed at the end of each reporting period by considering the change in the risk of default occurring over the remaining life of the finance receivable. Unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30 days past due but less than 90 days past due, or where a payment deferral has been granted following a successful hardship application. A lifetime ECL provision is recorded for stage 2 receivables. Stage 3: Lifetime ECL - Credit-impaired The Group determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily whether contractual payments of either principal or interest are past due for more than 90 days. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due. Movement between stages The Group determines that loans may move in both directions through the stages of the impairment model. Loans previously in Stage 2 may move back to Stage 1 if it is no longer considered that there has been a significant increase in credit risk. Similarly, loans in Stage 3 may move back to Stage 1 or Stage 2 if they are no longer assessed to be nonperforming. Forward-looking economic inputs (FLI) The Group has a process for incorporating forward-looking economic scenarios and determining the probability weightings assigned to each scenario in determining the overall ECL. The economic overlay is a forward-looking provision in addition to the standard modelled provision. The Group has identified a number of key indicators that are considered in modelling the overlay, the most significant of which are gross domestic product, unemployment rate, employment and hours worked, public demand, household consumption, income and savings rate, investment and inflation which are obtained from publicly available date (range of market economists and official data sources). These indicators are assessed semi-annually and judgement is applied in determining the probability weighting assigned across the four economic scenarios (Base Case, Worst Case, Poor Case and Best Case). The Group’s Assets and Liabilities Committee provides ultimate approval for FLI inputs and the resulting overlay applied. HARMONEY PAGE 47 The Group expects there to be further impacts as a result of the COVID-19 pandemic, including anticipated increases in delinquencies, as Government stimulus and other measures are progressively removed, and we potentially see continued outbreaks of the virus leading to Government mandated restrictions on activity. These impacts would flow through to the modelled expected loss provision, but currently due to the evolving economic impact of the pandemic, may not be fully captured in the modelled outcome. Over time, it is anticipated the economic overlay will need to be adjusted as additional factors are embedded into the base case of the modelled provision. The table below presents the gross exposure and related ECL allowance for finance receivables: 30 June 2021 Expected loss rate Stage 1 4.18% $'000 Stage 2 17.32% $'000 Stage 3 70.50% $'000 Total 4.92% $'000 Gross carrying amount 299,200 11,819 1,156 312,175 Expected credit loss provision (12,513) (2,047) Net carrying amount 286,687 9,772 (815) 341 (15,375) 296,800 30 June 2020 Expected loss rate Stage 1 4.08% $'000 Stage 2 10.47% $'000 Gross carrying amount 122,345 12,965 Expected credit loss provision (4,993) (1,358) Net carrying amount 117,352 11,607 Stage 3 93.43% $'000 775 (724) 51 Total 5.20% $'000 136,085 (7,075) 129,010 Movements in the expected credit loss provision are as follows: Opening balance Additional provision recognised due to: (Decrease)/Increase in economic overlay Increase in gross finance receivables Finance receivables written off during the period as uncollectible Total provision 30 June 2021 30 June 2020 $'000 7,075 (831) 13,984 (4,853) 15,375 $'000 830 1,900 6,855 (2,510) 7,075 HARMONEY ANNUAL REPORT 2021 The reconciliation of the provision for ECL and finance receivables by stage are presented below. The key line items in the reconciliation are: Ÿ The “transfers between stages” lines represent transfers between Stage 1, Stage 2 and Stage 3 prior to remeasurement of the provision for ECL. Ÿ The “business activity during the year” line represents new accounts originated during the year net of those that were derecognised due to final repayments during the year. Ÿ The “net remeasurement of provision for ECL” line represents the impact on the provision for ECL due to changes in credit quality during the year (including transfers between stages) and changes due to forward-looking economic scenarios. Ÿ “Incurred credit loss” represent a reduction in the provision for ECL as a result of derecognition of exposures where there is no reasonable expectation of full recovery Total provisions for ECL on loans as at 31 March 2019 Transfers to Stage 1 Transfers to Stage 2 Transfers to Stage 3 Business activity during the year Net remeasurements of provision for ECL Incurred credit loss Exchange rate and other adjustments Performing Non Performing Stage 1 Stage 2 $'000 791 $'000 39 2,008 (1,482) (374) 474 - (1,851) 3,491 (841) (82) - 112 4,336 (270) - Stage 3 $'000 - (526) (100) 1,851 Total $'000 830 - - - 175 3,778 1,482 4,977 (2,158) (2,510) - - Total provisions for ECL on loans as at 30 June 2020 4,993 1,358 724 7,075 Transfers to Stage 1 Transfers to Stage 2 Transfers to Stage 3 3,142 (2,460) (689) 892 (682) (203) - (3,601) 3,601 - - - Business activity during the year 9,685 (158) - 9,527 Net remeasurements of provision for ECL (4,553) 6,475 1,685 3,607 Incurred credit loss Exchange rate and other adjustments (82) 17 (460) (4,311) (4,853) 1 1 19 Total provisions for ECL on loans as at 30 June 2021 12,513 2,047 815 15,375 HARMONEY PAGE 49 Gross carrying amount as at 31 March 2019 Movements with P&L impact Transfers from Stage 1 to Stage 2 Transfers from Stage 1 to Stage 3 Transfers from Stage 2 to Stage 1 Transfers from Stage 2 to Stage 3 Transfers from Stage 3 to Stage 1 Transfers from Stage 3 to Stage 2 Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL $'000 38,363 $'000 100 (11,409) 11,409 - - 5,317 (5,317) - 862 - (4,298) - 152 $'000 - - - - 4,298 (862) (152) Total $'000 38,463 - - - - - - - Net of new financial assets and repayments during the year 89,292 11,110 (22) 100,380 FX movements Incurred credit loss - (80) - (191) - - (2,487) (2,758) Gross carrying amount as at 30 June 2020 122,345 12,965 775 136,085 Movements with P&L impact Transfers from Stage 1 to Stage 2 Transfers from Stage 1 to Stage 3 Transfers from Stage 2 to Stage 1 Transfers from Stage 2 to Stage 3 Transfers from Stage 3 to Stage 1 Transfers from Stage 3 to Stage 2 (12,334) 12,334 - - 5,509 (5,509) - 670 - (4,770) - 179 - - - 4,770 (670) (179) - - - - - - - Net of new financial assets and repayments during the year 184,067 (2,546) 147 181,668 FX movements Incurred credit loss 445 (1,502) 3 (837) - 448 (3,687) (6,026) Gross carrying amount as at 30 June 2021 299,200 11,819 1,156 312,175 18 Property and equipment Right of use asset Furniture and fixtures IT equipment Total property and equipment 30 June 2021 30 June 2020 $'000 $'000 534 62 46 642 1,319 71 58 1,448 Property and equipment is recognised at historic cost less depreciation. Depreciation is calculated on a diminishing balance method using the following rates: Furniture and fixtures IT equipment 13-50% 30-50% HARMONEY ANNUAL REPORT 2021 Cost Depreciation Net book amount Opening net book amount Additions Depreciation Closing net book amount Leases The balance sheet shows the following amounts relating to leases: Right of use asset Buildings Equipment Total right of use asset Lease liabilities Current lease liabilities Non-current lease liabilities Total lease liability 30 June 2021 30 June 2020 $'000 416 (308) 108 129 287 (308) 108 $'000 405 (276) 129 371 34 (276) 129 30 June 2021 30 June 2020 $'000 519 15 534 $'000 1,296 23 1,319 30 June 2021 30 June 2020 $'000 710 7 717 $'000 969 715 1,684 The lease payments are discounted using the incremental borrowing rate, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security, and conditions. Lease payments are allocated between principal 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. Right-of-use assets are measured at cost comprising the amount of the initial measurement of lease liability and any lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Payments associated with short-term leases and all 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. HARMONEY PAGE 51 19 Intangible assets The intangible assets held consist of internally developed software. The carrying amount of the Groups’ software is: Cost Accumulated amortisation Net book amount Opening net book amount Additions - internal development Amortisation charge Closing net book amount 30 June 2021 30 June 2020 $'000 4,546 (1,091) 3,455 - 3,682 (227) 3,455 $'000 864 (864) - 7 - (7) - The Group has incurred and will continue to incur significant costs on software development projects. Internally developed software is capitalised using an internal framework, which was established in March 2017. Following the evolution of the Groups’ technical capability and delivery process, the capitalisation criteria is met much earlier in the delivery process and development phases are now able to be capitalised. An internally-generated intangible asset arising from development is recognised if, and only if, all of the following have been demonstrated: the technical feasibility of completing the intangible asset so that it will be available for use or sale; the intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; Ÿ Ÿ Ÿ Ÿ how the intangible asset will generate probable future economic benefits; Ÿ the availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset; and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Ÿ The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. For capitalised development costs which are considered work in progress, amortisation of the asset begins when the development is complete, and the asset is available for use. The Group amortises development with a limited useful life using straight-line method over 5 years. HARMONEY ANNUAL REPORT 2021 20 Payables and accruals Accruals Employee benefits accrual Trade and other payables Waiver fee revenue in advance Total payables and accruals Employee benefits accrual Current employee incentives Employee incentive accrual Annual leave accrual Long service leave accrual Total current employee incentives Non-current employee incentives Long service leave accrual Total employee benefits accrual 21 Borrowings Receivables funding Corporate debt Total borrowings 30 June 2021 30 June 2020 $'000 $'000 4,450 1,531 954 389 7,324 1,162 461 531 1,109 3,263 30 June 2021 30 June 2020 $'000 $'000 767 693 63 1,523 8 1,531 17 444 - 461 - 461 30 June 2021 30 June 2020 $'000 $'000 291,541 121,636 - 10,994 291,541 132,630 The receivables funding relates to borrowings specific to the warehouse entities and are secured by their assets. The maturity profile of the receivables funding borrowings are aligned with the receivables held in the relevant warehouse facilities, and therefore considered current. As detailed in note 28, the borrowings have a contractual maturity which may be more than 12 months from the reporting date. The contractual maturity date refers to the date until which the Trusts may continue to purchase further receivables using principal payments of the finance receivables and further drawdowns of the facility. After that date, unless the agreement terms are extended, the borrowings are required to be paid down as customers make repayments on the finance receivables. Under the terms of the receivables funding facilities, the Group is required to comply with financial and non-financial covenants. The corporate debt borrowings were repaid on 18 November 2020 and the Group has subsequently been released from the associated guarantees. HARMONEY PAGE 53 Warehouse facilities Total facilities Used at reporting date Unused at reporting date 30 June 2021 30 June 2020 $'000 $'000 543,214 338,371 204,843 263,380 140,559 122,821 The unused amount of the warehouse facilities relates to amounts that are available for drawdown from funders but does not include restricted cash that has already been drawn but has not yet been utilised for funding purposes. Refer to note 15 for further information. 22 Provisions Distributing services rebate provision Borrower establishment fee rebate provision Protect claims provision Total provisions Carrying amount at start of the period Charged/(credited) to profit or loss - additional provisions recognised Amounts used during the period Carrying amount at end of the period 30 June 2021 30 June 2020 $'000 6,305 7,000 100 13,405 $'000 9,666 3,000 166 12,832 12,832 3,120 6,667 20,777 (6,094) (11,065) 13,405 12,832 Distributing services rebate provision The distributing services rebate provision represents an estimate of distributing services revenue which may be rebated as at reporting date. The estimate has been made on the basis of historical trends across the existing loan portfolio and may vary. These amounts have not been discounted for the purposes of measuring the provision because the effect is not material. Borrower establishment fee rebate provision The basis for the borrower establishment fee rebate is disclosed in note 31. Protect claims provision The protect claims provision is measured as the central estimate of the value of expected future payments under payment protect contracts issued by the Group, with an additional risk margin to allow for inherent uncertainty in the central estimate. The claims provision has been estimated based on claims history experienced with this product by a similar portfolio of finance receivables with the same repayment waiver feature attached and an increase for the likely impact of current and future economic scenarios. The estimated cost of claims includes direct expenses to be incurred in settling claims i.e., the amount of finance receivable principal that will be waived. The following table discloses the amount and number of finance receivables with payment protect. Payment protect receivables 30 June 2021 30 June 2020 Finance receivables with payment protect ($'000) Number of contracts with payment protect 9,888 610 22,808 1,165 HARMONEY ANNUAL REPORT 2021 23 Share capital Fully paid ordinary shares Fully paid Series A shares Fully paid Series B shares Fully paid Series C shares Total issued capital Number of shares Share capital Number of shares Share capital 30 Jun 2021 30 Jun 2020 100,912,724 131,399 141,967,409 $'000 - - - - - - 26,256,128 33,768,253 58,203,070 100,912,724 131,399 260,194,860 $'000 8,100 8,146 16,971 23,469 56,686 As at 30 June 2020 141,967,409 26,256,128 33,768,253 58,203,070 Ordinary shares Series A Series B Series C Shares issued under share based payment arrangements Share conversion Share consolidation Shares issued under share based payment arrangements Shares issued upon IPO As at 30 June 2021 27,397,192 - - - 118,227,451 (26,256,128) (33,768,253) (58,203,070) (215,694,035) 9,014,707 20,000,000 100,912,724 - - - - - - - - - - - - Share consolidation and conversion On 29 October 2020, all Series A, B and C classes of shares were converted to ordinary shares and a 4:1 share consolidation occurred for no consideration, decreasing the total number of shares held by equity holders. ASX listing and Initial Public Offering On 19 November 2020, the Company completed an IPO and listed on the ASX with a secondary listing on the NZX. Shares issued under share based payment arrangements 27,397,192 shares (6,849,298 shares post 4:1 share consolidation) were issued in settlement of the options on or before 18 September 2020. 9,014,707 shares were issued in settlement of the options on 16 November 2020. The options were net settled on a cashless basis based on the exercise price of each option. See note 24 for details. Ordinary shares Ordinary shares carry a right to one vote per share, to an equal share in dividends, and to a pro-rata share of net assets on wind up. HARMONEY PAGE 55 24 Accumulated losses and reserves Foreign Currency Translation Reserve Exchange differences relating to the translation of the results and net assets of the Group's foreign operations from their functional currencies to the Group's presentation currency (i.e. NZD) are recognised directly in other comprehensive income and accumulated in the foreign currency translation reserve. Share Based Payments Reserve Opening balance Arising on equity settled benefits Deferred tax on share based payments Transferred to share capital Closing balance 30 June 2021 30 June 2020 $'000 2,825 4,925 (372) (7,162) 216 $'000 2,386 833 (269) (125) 2,825 In relation to share options plan settled in the year, the Group recognised an expense of $3.9m within the consolidated income statement for the year ended 30 June 2021. Share-based compensation plan The Group receives services from employees and directors as consideration for equity instruments (zero strike price options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense over the relevant vesting period. The total amount to be expensed is determined by reference to the fair value of the options granted: - including any market performance conditions; - excluding the impact of any service and non-market performance vesting conditions; and - including the impact of any non-vesting conditions. At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions and service conditions. It recognises the impact of the revision to original estimates, if any, in the income statements, with a corresponding adjustment to equity. When the options are exercised, the company issues new shares, or purchases shares from the market. Set out below are summaries of options granted by the Group. As at the start of the period Granted during the year Share consolidation Exercised during the year Forfeited during the year As at 30 June Year ended 30 June 2021 15 months ended 30 June 2020 Average exercise price per share option Number of options Average exercise price per share option Number of options 65,524,733 29,287,605 $ nil 8,900,000 $ nil 38,737,794 (27,044,121) $0.02 $ nil (38,436,338) $ nil (601,500) (44,274) $0.01 (1,899,166) 8,900,000 65,524,733 The weighted average share price at the date of exercise of options exercised during the year the year ended 30 June 2021 was $2.64 (2020: $0.38). No options expired during the periods covered by the table above. HARMONEY ANNUAL REPORT 2021 The following table provides details of the options granted by the Group as remuneration to employees and directors. Exercise price Grant date fair value Opening balance 01/07/2020 Granted Share consolidation Exercised Forfeited Number of share options Closing balance 30/06/2021 Vested & exercisable 30 June 2021 Grant date Post IPO Scheme 15 Jun 2021 $ nil $ 1.51 - 8,900,000 - - - 8,900,000 - Scheme 2 28 Feb 2020 $ nil $ 0.11 36,103,102 - (27,044,121) 9,014,707 44,274 - - Scheme 1 1 Apr 2020 $ nil $ 0.26 1,634,692 24 Feb 2020 $ nil $ 0.26 750,000 21 May 2018 $ 0.16 $ 0.09 2,000,000 21 Aug 2017 $ nil $ 0.17 8,860,423 21 Aug 2017 $ 0.10 $ 0.11 2,384,000 21 Aug 2017 $ 0.17 $ 0.09 1,792,516 Other options - - - - - - - 1,634,692 - - 750,000 - - 2,000,000 - - 8,860,423 - - 2,384,000 - - 1,792,516 - - - - - - - - - - - - - 1 Mar 2014 $ nil $ 0.00 12,000,000 - - 12,000,000 - - - Total 65,524,733 8,900,000 (27,044,121) 38,436,338 44,274 8,900,000 - On 29 October 2020, all Series A, B and C classes of shares were converted to ordinary shares and a 4:1 share consolidation occurred for no consideration. 30 June 2020 Grant date Scheme 2 Exercise price Grant date fair value Opening balance 01/04/2019 Granted Exercised Forfeited Number of share options Closing balance 30/06/2020 Vested & exercisable 28 Feb 2020 $ nil $ 0.11 - 36,103,102 - - 36,103,102 - Scheme 1 1 Apr 2020 $ nil $ 0.26 - 1,634,692 - - 1,634,692 817,346 24 Feb 2020 $ nil $ 0.26 - 1,000,000 250,000 - 750,000 250,000 21 May 2018 $ 0.16 $ 0.09 2,000,000 - - - 2,000,000 2,000,000 21 Aug 2017 $ nil $ 0.17 10,938,315 - 351,500 1,726,392 8,860,423 8,860,423 21 Aug 2017 $ 0.10 $ 0.11 2,436,000 21 Aug 2017 $ 0.17 $ 0.09 1,913,290 - - - 52,000 2,384,000 2,384,000 - 120,774 1,792,516 - Other options 1 Mar 2014 $ nil $ 0.00 12,000,000 - - - 12,000,000 12,000,000 Total 29,287,605 38,737,794 601,500 1,899,166 65,524,733 26,311,769 HARMONEY PAGE 57 Current schemes at 30 June 2021 Post IPO Scheme The Post IPO scheme was approved by the board on 27 April 2021. The plan is designed to provide long-term incentives for senior managers to attract, motivate and retain talent while also aligning interests of management and shareholders with regards to Company performance. The Board may determine which persons will be eligible to participate in the plan from time to time and will invite them to participate. The amount of performance rights that will vest depends on the achievement of applicable performance hurdles over the relevant period and continued employment. The performance hurdles are designed to align participants’ objectives with the fundamental values of the Company and reward achievements which will deliver significant long-term value to the shareholders of the Company. The hurdles relate to revenue and loan book growth as well as strategic initiatives. The rights expire 5 years from grant date. Options are granted under the plan for no consideration and carry no dividends or voting rights. The fair value at grant date of options granted on 15 June 2021 $1.51 based on the share price at grant date. Other Options The Company has granted warrants to an investment group pursuant to an agreement dated 15 February 2016 enabling them to subscribe for shares at a strike price of $2.03 per share within five years of grant date. The grant of the warrants formed part of the investment group's remuneration for its services to the Company. Of the 187,587 warrants granted, 6,223 have expired and the remaining have a final expiration date of 30 June 2022. Completed schemes at 30 June 2021 Scheme 2 On 28 February 2020 share options were granted under a performance rights based long term incentive plan. The allocation of rights provided participants with an opportunity to be rewarded for company performance and aligned employee interests with the interests of shareholders. The fair value at grant date was determined using a Monte Carlo simulation model that took into account the exercise price, the term of the option, the share price at grant date, the vesting hurdles, the expected price volatility of the underlying share, the expected dividend yield, and the risk-free interest rate for the term of the option. Scheme 1 The scheme 1 share option plan was designed to provide long-term incentives for Directors and senior management to deliver long-term shareholder returns. Under the plan, participants were granted options which vested when certain performance standards were met. Options were granted in August 2017, May 2018, February 2020 and April 2020 with their fair value determined using a Black- Scholes option pricing model which took into account the exercise price, the term of the option, the share price at grant date, expected price volatility of the underlying share and the risk-free interest rate for the term of the option. For options granted in August 2017 the share price on grant date was based on a discounted cash flow valuation. For subsequent options granted the share price on grant date was based on comparable arm's length transactions. Other options These options were granted in March 2014. As they carried a nil exercise price their value on grant date was determined as equivalent to the Company's share price at grant date, which was calculated as a single share of the midpoint of the Company's net assets and its capital. HARMONEY ANNUAL REPORT 2021 25 Related party transactions Balances and transactions between the Company, its subsidiaries, and controlled entities which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Key management personnel (KMP) are defined as those persons having authority and responsibility for planning, directing, and controlling the activities of the Group, directly or indirectly, and include the Executive Directors, Independent Directors and the Chief Financial Officer. The aggregate compensation made to KMP of the Group is set out below: Short-term employee benefits Share-based payments Post-employment benefit Long-term benefits 30 June 2021 30 June 2020 $'000 2,193 1,698 83 - $'000 1,805 494 152 - Total remuneration of key management personal 3,974 2,451 Under the terms of the historical share-based compensation plan, at IPO, vesting of options was accelerated. This resulted in all unrecognised expense in relation to outstanding options being recognised as an expense in the period. The expense for option related share-based payments is therefore at an elevated level in 2021. 26 Controlled entities Details of the Group's material subsidiaries and controlled entities at the end of the reporting period are as follows. Subsidiary Harmoney Limited Harmoney Services Limited Harmoney Investor Trustee Limited Harmoney Australia Pty Ltd Harmoney Services Australia Pty Limited Harmoney Nominee Limited Harmoney Warehouse Limited Harmoney Australia Warehouse No.1 Trust Controlled entity Harmoney Warehouse Trust No.1* Harmoney Warehouse No.2 Trust* Harmoney Collections Trust* Date of incorporation Place of incorporation and operation Proportion of ownership interest and voting power held by the Group 2021 2020 15-May-14 New Zealand 16-May-14 New Zealand 9-Jul-14 New Zealand 20-Feb-15 Australia 22-Sep-15 Australia 28-Nov-17 New Zealand 14-Mar-18 New Zealand 4-Dec-19 Australia 3-Dec-18 New Zealand 22-Dec-20 New Zealand 22-Dec-20 New Zealand 100% 100% 100% 100% 100% 100% 100% 100% n/a n/a n/a 100% 100% 100% 100% 100% 100% 100% 100% n/a n/a n/a * Management have determined that Harmoney Warehouse No.1 Trust, Harmoney Warehouse No.2 Trust, and Harmoney Collections Trust are controlled entities. Harmoney Group subsidiaries have been appointed Manager, Servicer, and residual income beneficiary in each entity. Under NZ IFRS 10: Consolidated Financial Statements, an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. As the Group controls the financing and operating activities of the Trusts and is the residual income beneficiary, the controlled entities are controlled by the Group and are required to be consolidated into the Group financial statements. HARMONEY PAGE 59 27 Financial assets and liabilities The total carrying amount of the Group’s financial assets and liabilities by category are detailed below: Financial assets at amortised cost Cash and cash equivalents Trade and other receivables Finance receivables Financial liabilities at amortised cost Payables and accruals Borrowings Lease liability Derivative financial instruments Used for hedging 30 June 2021 30 June 2020 $'000 $'000 76,464 1,059 294,821 372,344 5,403 291,541 717 297,661 34,779 4,253 129,222 168,255 2,152 132,630 1,686 136,468 85 926 NZ IFRS 9 requires financial asset debt instruments to be classified based on two criteria: a) b) the business model within which financial assets are managed; and their contractual cash flow characteristics (whether the cash flows represent solely payment of principal and interest (SPPI)). There are three resulting classifications of financial asset debt instruments under NZ IFRS 9: a) Amortised cost: financial assets with contractual cash flows that comprise SPPI, and which are held in a business model whose objective is to collect their contractual cash flows are measured at amortised cost; b) Fair value through other comprehensive income (FVTOCI): financial assets with contractual cash flows that comprise SPPI, and which are held in a business model whose objective is to both collect their contractual cash flows and to sell are measured at FVTOCI; and c) Fair value through profit or loss (FVTPL): financial assets with contractual cash flows that do not represent SPPI, or which are held under a different business model are measured at FVTPL. Financial assets can also be designated at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. Other than derivative financial instruments, which are held at fair value, all other financial assets are held at amortised cost. For these instruments, the fair values are not materially different to their carrying amounts since the interest receivable/payable is either close to current market rates or the instruments are short-term in nature. The following table presents the Group’s financial assets and financial liabilities measured and recognised at fair value on a recurring basis: Level 1 Level 2 Level 3 June 2021 $'000 Financial Liabilities Derivative financial instruments Hedging derivatives - interest rate swaps - 85 - Level 1 Level 2 Level 3 June 2020 $'000 Financial Liabilities Derivative financial instruments Hedging derivatives - interest rate swaps - 926 - HARMONEY ANNUAL REPORT 2021 There have been no transfers between levels in the period (June 2020: Nil). The Group’s policy is to recognise transfers into and out of fair value hierarchy levels as at the end of the reporting period. Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and equity securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1. Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. Fair value The interest rate swaps are initially recognised at fair value through profit and loss on the date the derivative contract is entered into and are subsequently measured at their fair value at each reporting date. All significant inputs required to measure their fair value are observable, therefore the swaps are level 2 in the fair value hierarchy. The fair value of the interest rate swaps are determined from valuations prepared by independent advisors. These are calculated using a discounted cash flow model using forward interest rates extracted from observable yield curves. Discount rates include an adjustment for counterparty credit risk. 28 Financial risk management Financial risk management objectives The Group’s activities expose it to a variety of financial risks, primarily market risk (including interest rate risk and foreign currency risk), credit risk and liquidity risk. The Group’s risk management program focuses on understanding drivers of financial risk and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments (interest rate swaps) to hedge interest rate risk. Derivatives are exclusively used for hedging purposes i.e. not as trading or other speculative instruments. The Board have overall responsibility for the establishment and oversight of the risk management framework. The Board is responsible for developing and monitoring risk management policies. Risk management procedures are established by the Board and carried out by management to identify and analyse the risks faced by the Group and to set controls and monitor risks. Market risk Market risk is the risk that changes in market prices such as interest rates that will affect the Group’s income or the value of holdings in its financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Interest rate risk Interest rate risk is the risk that changes interest rates negatively impact the Group's financial performance. The Group's main interest rate risk arises from cash at bank, term deposits and borrowings. Cash at bank, term deposits and borrowings obtained at variable rates expose Harmoney to interest rate risk. Cash at bank and term deposits obtained at fixed rates expose Harmoney to fair value interest rate risk. Harmoney originates loans to customers that have fixed interest rates that are repaid over a relatively short period. HARMONEY PAGE 61 At 30 June 2021, the Group had the following financial assets and liabilities exposed to variable interest rate risk. Financial assets Cash on hand and demand deposits Short term deposits Restricted cash Total financial assets Financial liabilities Borrowings 30 June 2021 30 June 2020 $'000 $'000 44,343 10,266 - 17,139 32,121 7,374 76,464 34,779 (291,541) (121,637) Receivables funding are variable rate borrowings where the rates are reset monthly to current market rates. Interest rate risk is managed on these borrowings by entering interest rate swaps, whereby Harmoney pays fixed rate and receives floating rate. The contracts require settlement monthly of net interest receivable or payable. The settlement dates coincide with the dates on which interest is payable on the underlying borrowings. The gain or loss from remeasuring the hedging instruments at fair value is recognised in other comprehensive income and deferred in equity in the cash flow hedge reserve, to the extent that the hedge is effective. It is reclassified into the Income Statement when the hedged item effects it. In the year ended 30 June 2021, no amount was reclassified into profit or loss (2020: Nil) due to hedge ineffectiveness. Harmoney’s policy is to hedge a portion of the variability in future cash flows attributable to the interest rate risk on floating rate borrowings using interest rate swaps. As at 30 June 2021, the notional value of swaps was 33% (2020: 64%) of floating rate borrowings. The effects of the interest rate swaps on the Group’s financial position and performance are as follows: Carrying amount held in derivative financial instruments Notional amount Hedge ratio Change in fair value of outstanding hedging instruments during the period Change in fair value of outstanding hedged item used to determine hedge effectiveness Year ended 30 June 2021 15 months ended 30 June 2020 $'000 $'000 (85) (926) 95,629 77,416 1:1 1:1 841 (818) 841 818 The interest rate sensitivity analysis below has been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the end of the reporting period and assumes that the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 50 basis point increase or decrease is used which represents management’s assessment of the reasonably possible change in interest rates. If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group’s profit for the year ended 30 June 2020 would decrease/increase by $1.0m (2020: $0.2m). This is attributable to the Group‘s exposure to interest rates on its variable rate borrowings. HARMONEY ANNUAL REPORT 2021 Foreign exchange risk Foreign currency risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured. The Group's main foreign exchange risk arises from inter-company receivables and payables which do not form part a net investment in a foreign operation. The Group has not hedged any foreign exchange risk during the period. The Group has the following exposure to Australian dollars, expressed in New Zealand dollars. The Group's exposure to foreign currency changes for all other currencies is not material. Financial assets Foreign currency payable Foreign currency receivable Net exposure AUD Exposure 30 June 2021 30 June 2020 $'000 $'000 3,075 6,627 (5,788) (6,614) (2,713) 13 The following table demonstrates the sensitivity to a 5% increase or decrease in the Australian dollar exchange rate, which represents management's assessment of the reasonably possible change in this exchange rate. The impact on the Group's loss before tax is due to changes in the fair value of monetary assets and liabilities. NZD/AUD +5% NZD/AUD -5% Impact on post-tax profit Year ended 30 June 2021 15 months ended 30 June 2020 $'000 136 (136) $'000 (1) 1 Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group has a diversified funding model and currently comprises of a mix of cash reserves and committed undrawn credit facilities to meet anticipated funding requirements for new business. In addition, the Group can redraw against its committed credit limits if the principal outstanding is reduced. Details of unused available loan facilities are set out in note 21. The Group manages operational liquidity risk by maintaining cash reserves and available borrowing facilities and by continuously monitoring actual and forecast cash flows. The Group seeks to have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions. Remaining contractual maturities The following tables detail the Group's remaining contractual maturity for its financial instrument liabilities. The tables are based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. HARMONEY PAGE 63  Contractual maturities of financial liabilities at June 2021 Less than 1 year 1 to 2 years More than 2 years $'000 $'000 $'000 Non-derivatives Non-interest bearing Payables and accruals Interest bearing Borrowings Lease liability Total non-derivatives Derivatives Interest rate swaps Total derivatives Total $'000 5,403 296,820 731 302,954 5,403 - 141,229 155,591 722 9 147,354 155,600 - - - - 225 225 (71) (71) (70) (70) 84 84 Contractual maturities of financial liabilities at June 2020 Less than 1 year $'000 1 to 2 years $'000 More than 2 years Total $'000 $'000 Non-derivatives Non-interest bearing Payables and accruals Interest bearing Borrowings Lease liability Total non-derivatives Derivatives Interest rate swaps Total derivatives 2,152 - - 2,152 118,599 24,228 14,714 157,541 1,031 728 - 1,759 121,782 24,956 14,714 161,452 550 550 270 270 108 108 928 928 Capital risk management The Group’s objectives when managing capital are to safeguard the ability to continue as a going concern and to maintain an optimal capital structure to facilitate growth in the business while reducing the cost of capital. The Group’s capital structure comprises equity raised by the issue of ordinary shares and external borrowings. There is significant capacity to fund finance receivables growth with warehouse facility headroom of $205m (2020: $123m). HARMONEY ANNUAL REPORT 2021 29 Fees paid to auditors Fees paid for audit and assurance services Statutory annual audit fees Statutory half-year review Other non-audit assurance services Total audit and assurance services fees Fees paid for other services Investigating Accountant assurance services * Tax related services paid in respect of the ASX IPO* Tax related services paid in respect of warehouse facilities Preparation of tax returns and other services Total other services fees Total fees paid to auditors Year ended 15 months ended 30 June 2021 30 June 2020 $'000 $'000 351 113 95 559 426 283 102 57 868 1,427 248 - 60 308 - - - 100 100 408 * The portion of these fees related to the issue of new shares is included within equity transaction costs. 30 Contingent liabilities There are no contingent liabilities as at 30 June 2021. 31 Events after the reporting period The New Zealand Commerce Commission filed charges against the Group in 2017, alleging that the loan establishment fee it charged to borrowers in New Zealand was a credit fee subject to the Credit Contracts and Consumer Finance Act 2003 (CCCFA), and that this fee exceeded the amount of the reasonable costs which were recoverable under the CCCFA. The proceedings were due to take place in the New Zealand High Court in September 2021. However, the parties entered into a settlement agreement on 26 August 2021. Under the agreement, the Commerce Commission agreed to discontinue the proceedings, and to not issue any other legal proceedings against the Group in respect of establishment fees charged up to the date of this agreement. The Group agreed to: admit breaching the CCCFA and consent to the Court making declarations; pay total compensation of $7m to eligible borrowers over a two year period; and set its go-forward establishment fee at no more than $165 for five years. The compensation amount is fully provided for in these financial statements as the borrower establishment fee rebate (note 22). There were no other material events subsequent to year end. HARMONEY PAGE 65 Independent auditor’s report Independent auditor’s report To the shareholders of Harmoney Corp Limited Our opinion In our opinion, the accompanying Consolidated Group Financial Statements of Harmoney Corp Limited (the Company), including its subsidiaries (the Group), present fairly, in all material respects, the financial position of the Group as at 30 June 2021, its financial performance and its cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards (IFRS). What we have audited The Consolidated Group Financial Statements comprise: • • • • • the Consolidated Statement of Financial Position as at 30 June 2021; the Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year then ended; the Consolidated Statement of Changes in Equity for the year then ended; the Consolidated Statement of Cash Flows for the year then ended; and the Notes to the Consolidated Financial Statements, which includes Significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs NZ) and International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Consolidated Group Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with Professional and Ethical Standard 1 International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand) (PES 1) issued by the New Zealand Auditing and Assurance Standards Board and the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our firm carries out other services for the Group in the areas of investigating accountant assurance services and tax related services in respect of the IPO, warehouse facilities and the preparation of tax returns. The provision of these other services has not impaired our independence as auditor of the Group. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. HARMONEY ANNUAL REPORT 2021 Our audit approach Overview Overall Group materiality: $1.94 million, which represents approximately 0.5% of total assets. We chose total assets as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and is a generally accepted benchmark. We utilised a 0.5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. We have determined that there are three key audit matters: ● Expected credit loss provisions on finance receivables (note 17, $15.4m) ● Deferred tax assets (note 12, $11.5m) ● Interest income (note 6, $37.6m) As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the Consolidated Group Financial Statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the Consolidated Group Financial Statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Consolidated Group Financial Statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the Consolidated Group Financial Statements as a whole as set out above. These, together with qualitative considerations, helped us to determine the scope of our audit, the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the Consolidated Group Financial Statements as a whole. Audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the Consolidated Group Financial Statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. HARMONEY PAGE 67 Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Consolidated Group Financial Statements of the current year. These matters were addressed in the context of our audit of the Consolidated Group Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter How our audit addressed the key audit matter Expected credit loss provisions on finance receivables (note 17, $15.4m) We have performed the following procedures, amongst others: This was a key audit matter because the determination of the provision was driven by subjective judgements made by the Group in predicting expected credit losses (ECL). The majority of the customer loan balances were low value and therefore the provision was modelled and calculated on a collective basis. Key elements in determining ECL include: • • • • Judgements applied in setting the assumptions used in the ECL models, including the application of expected loss rates applied to each underlying portfolio segment. Judgements applied model changes, to reflect emerging trends or particular situations which are not otherwise captured. Judgements applied in incorporating forward-looking impacts, which use macroeconomic forecasts for a range of scenarios that are weighted to consider the potential economic outcomes that may impact ECL Judgements applied in determining exposures that have had a significant increase in credit risk, which is assessed by the Group based on the delinquency or hardship status of an account. • Together with PwC credit modelling experts o o o o examined and assessed the ECL model developed by the Group in considering key judgements and assumptions supporting ECL, focusing on changes and new developments assessed the appropriateness of modelled outcomes over time by comparing its outcomes, and underlying expected loss rates, to actual losses re-performed the automated calculation for ECL as at 30 June 2021 assessed the appropriateness of forward-looking information incorporated into the impairment calculations by assessing macroeconomic assumptions and probability weightings applied, and comparing them to external evidence where applicable • Assessed the integrity of data used as inputs into the models, including delinquency and hardship data, by tracing a sample of inputs used in the models to underlying audit evidence • Assessed the reasonableness of the Group’s disclosures in the financial report in light of the requirements of NZ IFRS. HARMONEY ANNUAL REPORT 2021 Key audit matter How our audit addressed the key audit matter Deferred tax assets (note 12, $11.5m) The Group was subject to taxation in each location in which it operated. The assessment of the amounts expected to be paid in the future to tax authorities was considered by the Group in respect of recognising deferred tax assets (DTAs), including those related to tax losses, at 30 June 2021. This was a key audit matter due to the extent of judgement involved by the Group. Our procedures included evaluating the tax analysis performed by the Group, which set out the basis for judgements made in respect of DTAs by: • Considering the appropriateness of forecasting methods used by management to calculate future taxable profits • Assessing certain judgements and, where relevant, comparing them to available internal and external data on a sample basis • Assessing management's forecasting accuracy over time by comparing previous forecasts to actual outcomes • Agreeing relevant input data to supporting records on a sample basis. • Assessed the reasonableness of the Group’s disclosures in the financial report in light of the requirements of NZ IFRS. Interest income (note 6, $37.6m) We performed the following procedures, amongst others: The Group’s main stream of revenue is interest income from providing loans to customers. The recognition of interest income over time requires the Group to apply judgement and determine an effective interest rate to be applied in accordance with NZ IFRS. This was a key audit matter because of the significance of interest income in the context of the performance of the Group, and the judgement involved in determining an effective interest rate. • Re-performed the automated calculation for 100% of interest income from loans to customers • Assessed the Group’s methodology for recognising revenue in light of the requirements of NZ IFRS • Inspected that the effective interest rate applied was determined in line with the methodology used by the Group and assessed its consistency with internal information • Inspected and compared contract data contained in the product system to a sample of contracts, including interest rates and loan period. HARMONEY PAGE 69 Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, but does not include the Consolidated Group Financial Statements and our auditor’s opinion thereon. Our opinion on the Consolidated Group Financial Statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the Consolidated Group Financial Statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Consolidated Group Financial Statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Consolidated Group Financial Statements The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of the Consolidated Group Financial Statements in accordance with NZ IFRS and IFRS, and for such internal control as the Directors determine is necessary to enable the preparation of Consolidated Group Financial Statements that are free from material misstatement, whether due to fraud or error. In preparing the Consolidated Group Financial Statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Consolidated Group Financial Statements Our objectives are to obtain reasonable assurance about whether the Consolidated Group Financial Statements, as a whole, are 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 ISAs NZ and ISAs 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 these Consolidated Group Financial Statements. A further description of our responsibilities for the audit of the financial statements is located at the External Reporting Board’s website at: https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors- responsibilities/audit-report-1/. This description forms part of our auditor’s report. HARMONEY ANNUAL REPORT 2021 Who we report to This report is made solely to the Company’s shareholders, as a body. Our audit work has been undertaken so that we might state those matters which we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed. The engagement partner on the audit resulting in this independent auditor’s report is Rob Spring. For and on behalf of: PricewaterhouseCoopers Rob Spring Partner Sydney 30 August 2021 HARMONEY PAGE 71 Shareholder Information The shareholder information set out below was applicable as at 31 July 2021. Distribution of equitable securities Analysis of number of equitable holders by size of holding. 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 101,001 and over Total Ordinary shares Options over ordinary shares Number of holders % of total shares issued Number of holders % of total shares issued 146 310 185 220 48 909 0.07 0.91 1.41 6.14 91.47 100 - - - - - - - - - - - - There were 46 holders of less than a marketable parcel of ordinary shares. Equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Number of holders Neil Roberts Trustee Company Limited Michael Lookman and 187 Bridge Trustees 53 Limited Kirwood Capital Partners IB Pty Limited Heartland Group Holdings Limited Trade Me Limited National Nominees Limited Alternative Credit Investments PLC HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited Ventures Harmoney Holdings Limited Brad Hagstrom, Renai Hagstrom and Guy Hagstrom CS Third Nominees Pty Limited David John Stevens and C R Trustees Limited Heartland Group Holdings Limited Tap Capital Pty Ltd Monde Five Limited Duncan Gross Andrew Cathie Mono Lake Trustee Limited New Zealand Depository Nominee Total HARMONEY ANNUAL REPORT 2021 % of total shares issued 18.44 8.99 8.65 8.44 7.55 5.10 3.90 3.11 2.99 2.19 2.10 1.90 1.85 1.70 1.34 1.08 0.99 0.98 0.90 0.86 83.06 Unquoted equity securities Options issued under post IPO employee long term incentive scheme Options issued to Blue Line Ventures, LLC Number on issue Number of holders 8,900,000 181,364 17 1 Substantial holders Substantial holders in the Company are set out below: Name of holder Neil Roberts Business Trust Heartland Group Holdings Limited Lookman Family Trust Kirwood Capital Partners IB Pty Limited Trade Me Limited Number held % of total shares issued Date of notice 18,611,152 10,197,693 9,069,618 8,730,461 7,620,959 18.4 10.1 9.0 8.7 7.6 23-Nov-20 7-Jul-21 19-Nov-20 19-Nov-20 19-Nov-20 Voting rights The voting rights attached to ordinary shares are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and, upon a poll, each share shall have one vote. There are no other classes of equity securities. Securities subject to voluntary escrow Class Fully paid ordinary shares Expiry date 1 4:15pm on the trading day after Harmoney releases its full-year results to ASX and NZX for the financial year ending 30 June 2021. Fully paid ordinary shares 4:15pm on the trading day after Harmoney releases its half-year results to ASX and NZX for the half year ending 31 December 2021. Fully paid ordinary shares 4:15pm on the trading day after Harmoney releases its full-year results to ASX and NZX for the financial year ending 30 June 2022. Total Number of shares 28,259,331 28,259,328 16,433,356 72,952,015 1. The expiry date is the day that the escrowed shares can be released. HARMONEY PAGE 73 Corporate Information For the year ended 30 June 2021 Directors The following persons held office as Directors of the Company and the Company’s subsidiaries during the year ended 30 June 2021. Harmoney Corp Limited Richard Dellabarca David Flacks Luke Forster Udhav Goenka Tracey Jones Paul Lahiff Neil Roberts David Stevens Andrew Yeadon (Resigned 30 October 2020) (Resigned 13 July 2020) (Appointed 27 July 2020, Resigned 30 October 2020) (Appointed 15 February 2021) (Appointed 30 October 2020) (Resigned 30 October 2020) Harmoney Australia Pty Ltd David Nesbitt Brad Hagstrom Ben Taylor Simon Ward (Appointed 28 April 2021) Harmoney Services Australia Pty Limited Brad Hagstrom David Nesbitt Ben Taylor Simon Ward (Appointed 28 April 2021) (Appointed 28 April 2021) Harmoney Investor Trustee Limited Brad Hagstrom Neil Roberts Simon Ward Harmoney Limited Brad Hagstrom Neil Roberts Simon Ward Harmoney Services Limited Brad Hagstrom Neil Roberts Simon Ward HARMONEY ANNUAL REPORT 2021 Harmoney Nominee Limited Brad Hagstrom Neil Roberts Simon Ward Harmoney Warehouse Limited Brad Hagstrom Neil Roberts Simon Ward Employee Remuneration Remuneration 110,000 - 120,000 120,000 - 130,000 130,000 - 140,000 140,000 - 150,000 150,000 - 160,000 160,000 - 170,000 180,000 - 190,000 200,000 - 210,000 210,000 - 220,000 230,000 - 240,000 260,000 - 270,000 270,000 - 280,000 280,000 - 290,000 310,000 - 320,000 320,000 - 330,000 350,000 - 360,000 400,000 - 410,000 430,000 - 440,000 520,000 - 530,000 570,000 - 580,000 700,000 - 710,000 880,000 - 890,000 2,340,000 - 2,350,000 Number of employees 6 2 4 5 5 1 1 2 4 1 1 1 1 1 1 1 3 1 1 1 1 1 1 Under the terms of the historical share-based compensation plan, at IPO, vesting of options was accelerated. This resulted in all unrecognised expense in relation to outstanding options being recognised as an expense in the period. The expense for option related share-based payments is therefore at an elevated level in 2021 and included in the remuneration and other benefits values reported above. HARMONEY PAGE 75 Directors’ Interests The following are particulars of general disclosures of interest by Directors of Harmoney Corp Limited holding office at 30 June 2021, pursuant to section 140(2) of the Companies Act 1993. Where applicable, the disclosures also include directorships of subsidiaries of the relevant companies. David Flacks AFT Pharmaceuticals Limited Asteron Life Limited Collaborative Advanced Genetic Technologies Limited Flacks & Wong Limited Harmoney Share Sale Company Limited Project Janszoon Trust Company The Todd Corporation Limited Todd Offshore Limited Vero Insurance New Zealand Limited Vero Liability Limited Zero Invasive Predators Limited NZX Regulatory Governance Committee Brad Hagstrom Hagstrom Family Trust Tracey Jones Cove Road Soapworks Limited Harmoney Share Sale Company Limited Jones Family Office Partners Ltd Kepa Investments Ltd N’Godwi Trust New Plymouth PIF Guardians Ltd Nikko Asset Management NZ Limited Petal Foundation RC Custodian Ltd Sandat Consulting Ltd Tutanekai Investments Ltd Paul Lahiff 86 400 Holdings Ltd 86 400 Ltd 86 400 Technology Pty Ltd AUB Group Limited Lahiff Consulting Australia Pty Ltd NESS Super Pty Ltd P&R Lahiff Pty Ltd RSW Lane Cove Pty Ltd Sezzle Inc. David Nesbitt Chair Chair Director Director Director Director Director Director Chair Chair Director Chair (ceased) Trustee Director Director Director Director Trustee Director (ceased) Chair Trustee and Chair Director Director Director Chair Director Director Director Director Chair Director Director Director Neslan Pty Ltd as trustee for the Nesbitt Family Trust Trustee HARMONEY ANNUAL REPORT 2021 Neil Roberts Minc Limited Harmoney Share Sale Company Limited Neil Roberts Trustee Company Ltd Neil Roberts Business Trust Roberts Family Trust Fintech NZ Executive Council David Stevens Harmoney Share Sale Company Ltd Liquid Asset Enterprises Pty Ltd Liquid Asset Trust Ben Taylor Tap Capital Pty Limited Simon Ward Monde Five Ltd Indemnities and insurance Director Director Director Trustee Trustee Co Chair (Ceased) Director Director Trustee Director Director Pursuant to section 162 of the Companies Act 1993 and the Constitution, Harmoney Corp Limited has entered into insurance for the directors of the Group to indemnify them, against liabilities which they may incur in the performance of their duties as directors of any company within the Group. Remuneration and other benefits received by Directors during the period Richard Dellabarca David Flacks Tracey Jones Paul Lahiff Donations The Group made no donations in the current period (2020: $8,635). Directors’ fees $ 17,417 155,000 74,500 44,083 HARMONEY PAGE 77 Directory Registered Office Harmoney Corp Limited Ground Floor, 79 Carlton Gore Road Newmarket, Auckland 2013, New Zealand Auditor PricewaterhouseCoopers One International Towers, Watermans Quay Barangaroo NSW 2000 Australia Share register Link Market Services Limited ACN 083 214 537 Capital Markets Manager, Link Market Services, Level 21, 10 Eagle Street, Brisbane, QLD 4000, Australia Stock exchange listing Harmoney Corp Limited shares are listed in the Australian Securities Exchange (ASX) and New Zealand Exchange (NZX). The Company was admitted to the official list of the ASX and NZX on 19 November 2020 (ASX issuer code HMY). Notice of Annual General Meeting The Annual General Meeting of Harmoney Corp Limited will be held on 30 November 2021. Corporate Governance Statement https://www.harmoney.com.au/investor HARMONEY ANNUAL REPORT 2021 

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