Knosys
Annual Report 2018

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Knosys Limited ABN 96 604 777 862 Annual Report 30 June 2018 Knosys Limited Chairman’s letter to shareholders 30 June 2018 Dear Shareholders, I have pleasure in presenting to you the 2018 Annual Report of Knosys Limited. I am very pleased to report that the Company has had a successful year during 2018. The initiatives and changes effected by our CEO Mr John Thompson, following his comprehensive review of all aspects of the Company’s business during the prior year, have enabled the Company to progress well in 2018. Under the leadership of the Board and John Thompson, the Company has transformed into a sales-focused technology business. The establishment of a national sales team and the refinement of our sales proposition has resulted in strong sales growth in 2018. This more focused sales strategy, targeting Tier 1 and Tier 2 customers in the Banking, Legal/Government and Telecommunication sectors has resulted in increased use of the Knosys technology by existing customers and has delivered customers of similar scale to the ANZ Bank and in the 200-500 user range during the year. We believe that Knosys is well placed to continue this sales success. The Knosys product offering, Knowledge IQ, has been further refined and developed in 2018 by the Company’s in-house development team to ensure it is a relevant, easy to use and marketable product. This is another key strategic response to feedback from customers and prospective customers that has enabled sales growth and the retention of major customers. The Board is confident that John Thompson and his team will deliver further success for Knosys and its shareholders as we continue to grow and evolve the Company in the years ahead. In May 2018 the Company announced a $4 million capital raising. Knosys completed an oversubscribed share placement to sophisticated investors in May 2018, raising $1.37m (before costs), and followed this with a 7 for 19 Rights Issue, which completed subsequent to year end, on 2 August 2018, raising $2.65m (before costs). The raising of these funds enabled the company to repay the holders of convertible notes maturing on 31 May 2018 and has ensured the Company is well funded to progressively increase investment in the Company’s sales, marketing, product development and customer success teams in order to drive APAC customer and revenue growth. On behalf of the Directors I would like to thank all investors who supported this fund raising initiative and I thank all stakeholders who have taken an interest in the Company and that have continued to support us. The Board also congratulates and thanks John Thompson, Stephen Kerr and Nic Passmore and their team of committed employees on a successful 2018 and looks forward to further success ahead I present to you the report on the Company and its controlled entities for the financial period ended 30 June 2018. Hon. Alan Stockdale AO CHAIRMAN 30 August 2018 Knosys Limited Directors' report 30 June 2018 The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'consolidated entity') consisting of Knosys Limited (referred to hereafter as the 'company' or 'parent entity') and the entities it controlled at the end of, or during, the year ended 30 June 2018. Directors The following persons were directors of Knosys Limited during the period from 1 July 2017 to the date of this report, unless otherwise stated: Hon. Alan Stockdale (Non-executive Chairman) Richard Levy (Non-executive Director) Peter Pawlowitsch (Non-executive Director) Principal activities During the financial year the principal continuing activities of the consolidated entity consisted of: ● Computer software sales, licencing and development. Dividends No dividends were paid or declared during the financial year. Review of operations The 2018 financial year has been a very positive year for Knosys. Key financial metrics have been significantly improved in line with the Board’s plans: • Operating revenue for the consolidated entity increased by 225% to $2,625,906 (2017 revenue: $808,744); • The loss for the consolidated entity after providing for income tax reduced by 61% to a loss of $806,067 (2017 loss: $2,085,018); • The licensed user base of the Knosys product had increased by over 80% to over 29,900 by the end of 2018; and • The consolidated entity had net assets of $1,614,550 at 30 June 2018 and cash on hand of $1,065,266. Subsequent to year end, cash on hand was over $3.0million on 15 August 2018 upon the completion of the non- renounceable rights issue and payment of associated costs (refer to “Matters subsequent to the end of the financial year” on page 2 of this report). The consolidated entity is adequately funded and has the resources to pursue its business objectives and its sales and marketing initiatives and to continue the development of its product. The addition of several high value customer projects coming online toward the end of the 2018 financial year improved overall performance and will help to further drive increased revenue for FY19. Overview of Knosys Knosys is a leading provider of knowledge management software that enables companies through a machine learning approach to discover and deliver personalised information to staff and customers to transform business productivity and engagement. Knosys software helps our users save money and drive the productivity of staff across many areas of their business from contact centres, distributed frontline offices, sales teams, communications and marketing and many more. The solution is designed to be the #1 used app in the life of an information worker being available on their desktop, tablet or smartphone. It drives productivity and optimizes processes by incorporating process wizards, decision guidance, collaboration & feedback while at the same time learning based on user behaviours, patterns and profiles. It also acts as the single knowledge hub from which all digital engagement solutions such as chatbots, web sites, self-service kiosks can consume relevant information interact with end customers in a consistent manner. Our vision is simple but clear, to be a leading knowledge management and business process platform, supporting our end customers transformation and engagement initiatives. Established Growth Platform Knosys has established a strong platform to capitalise on growth in the knowledge management and business process guidance markets. Towards the end of FY17 the consolidated entity commenced a program to expand its Australian based sales teams and delivery teams to support the expected increase in number of customers going forward. The consolidated entity has commenced its expansion into Singapore with its first local customer and once the system is deployed will provide an incredible opportunity to promote further sales in the region. The consolidated entity continues to have a significant sales pipeline in Australia and New Zealand markets, and is actively working to prioritise these opportunities to convert them into subscription based contracts. The SaaS based delivery model is resonating well with the customer base and so is our ability to deploy on-premise which many competitors no longer support. 1 Knosys Limited Directors' report 30 June 2018 Outlook As we continue to see the expansion of the market and the adoption of knowledge management and business process technology, Knosys is well placed to expand its customer base and add to our offerings through internal developments and acquisition of technologies. Whilst our efforts are focused on direct initiatives, Knosys is also planning further developments that will allow greater partnership opportunities with global software vendors to address local and international opportunities going forward. Significant changes in the state of affairs There were no significant changes in the state of affairs of the consolidated entity during the financial year, other than those discussed already in the review of operations. Matters subsequent to the end of the financial year The following matters occurred subsequent to the end of the financial year: • On 31 July 2018 the consolidated entity announced that ANZ Bank had signed a three (3) year contract extension for the continued use of Knosys’ knowledge management platform. ANZ also has the option to extend the contract further via two one-year extensions. The potential value of the contract over the entire 5-year life is expected to exceed $6.5 million; and • On 2 August 2018 the consolidated entity announced the completion of a 7 for 19 non-renounceable rights issue, raising $2.65m (before costs of $0.16m). No other matter or circumstance has arisen since 30 June 2018 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. Likely developments and expected results of operations Following the successful capital raising concluded in early August, the consolidated entity intends to progressively increase investment in the Company’s sales, marketing, product development and customer success teams in order to drive APAC customer and revenue growth. The consolidated entity intends to exploit its successful contract announcements with Singtel and Optus by recruiting additional business development and marketing employees. These additional employees will focus primarily on making sales of the Company’s leading software platform, KnowledgeIQ. The Company also intends to commence a broader digital marketing campaign and sponsorship of industry conferences to build brand awareness of Knosys. Growth aspirations include the intention to expand further into Singapore with the opening of a local office to facilitate better engagement with customers, prospects and partners, with a view to growing Company’s sales footprint in the APAC region. The Company also intends to continue to invest in ongoing product development and innovation, focusing on integrations and enhancements to simplify usage and drive adoption of KnowledgeIQ. Further information on likely developments in the operations of the consolidated entity and the expected results of operations have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the consolidated entity. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. 2 Knosys Limited Directors' report 30 June 2018 Information on directors Name: Title: Experience and expertise: Hon. Alan Stockdale AO Non-Executive Chairman Hon. Alan Stockdale AO served as Treasurer in the Victorian Government from 1992 to 1999 and his responsibilities included the Government reform agenda and general financial management. Alan was responsible for the privatisation of $A30 billion of Government business enterprises. He was also Minister for IT and Multimedia from 1996 to 1999, promoting Victoria as a leader in the application of multimedia and new information technologies. In the private sector, Alan was employed by Macquarie Bank for a total of six years, co-leading the Macquarie team that successfully bid to acquire Sydney Airport. Taking on a number of other corporate advisory roles, he was involved in a wide range of infrastructure transactions, especially in the power, gas and transport sectors in Australia and overseas. Alan has developed a career as a company Chairman and director of a number of ASX- listed companies and of various unlisted companies and not-for-profit organisations. He has been Chairman of Axon Instruments Inc (incorporated in the USA and listed on the ASX), Symex Holdings Limited, Senetas Corporation Limited and a director of Marriner Financial Limited - all companies listed on the ASX. He is also a consultant to Maddocks Lawyers, Metro Trains and Lazard Australia and Chairman of the Medical Research Commercialisation Fund. He was Federal President of the Liberal Party from 2008 to 2014. Alan holds a Bachelor of Laws and a Bachelor of Arts, both completed at the University of Melbourne, is a Barrister of the Supreme Courts of Victoria and NSW and the High Court of Australia and is a Fellow of the Australian Institute of Company Directors. Mr Stockdale has been a director since 30 April 2015. Directorships held in other listed entities in the last 3 years Nil. Interests in shares Interests in options 250,000 ordinary shares 500,000 options Name: Title: Richard Levy Non-Executive Director Experience and expertise: Richard Levy has had 27 years automotive manufacturer (Nissan/Ford) and supplier (Air International) experience in sales and marketing management positions including four years as Director of Sales and Dealer Operations at Nissan. He has also had investments and participation in several commercial ventures including food, travel and now internet businesses. Richard has been a partner and was Managing Director (resigned February 2017) of MMG Interactive for 17 years including involvement with servicing many blue chip and high value SME customers, and has also published papers on the internet and the auto industry - both business-to business and business- to-consumer. He was and continues to be a founding owner of apStream, an internet streaming services company. and is a director and founding owner of Fourth Mode Pty Ltd and a significant shareholder in startup company Mesh Assist Pty Ltd. Richard holds an Economics degree from the ANU. Mr Levy has been a director since 30 April 2015. Directorships held in other listed entities in the last 3 years Nil Interests in shares Interests in options 10,437,260 ordinary shares 1,000,000 options 3 Knosys Limited Directors' report 30 June 2018 Name: Title: Experience and expertise: Peter Pawlowitsch Non-Executive Director Peter Pawlowitsch is an accountant by profession with extensive experience as a director and officer of ASX-listed entities. He brings to the team experience in operational management, business administration and project evaluation in the IT, hospitality and mining sectors during the last 15 plus years. Peter is a non- executive director of Dubber Corporation Limited (appointed a director on 26 September 2011), Ventnor Resources Ltd (appointed 12 February 2010), Novatti Group Limited (appointed 19 June 2015) and a non-executive director of Rewardle Holdings Limited (appointed 30 May 2017) and he was a non-executive director of Department 13 Ltd (30 January 2010 to 18 December 2015), all ASX-listed companies. Peter holds a Bachelor of Commerce from the University of Western Australia, is a current member of CPA Australia and also holds a Masters of Business Administration from Curtin University. Mr Pawlowitsch has been a director since 16 March 2015. Directorships held in other listed entities in the last 3 years Dubber Corporation Limited (ASX:DUB) Ventnor Resources Limited (ASX:VRX) Novatti Group Limited (ASX:NOV) Department 13 International Limited (ASX:D13) Rewardle Holdings Limited (ASX:RXH) Interests in shares Interests in options 1,231,578 ordinary shares 500,000 options Chief Executive Officer John Thompson (BEng Hons, MBA) has held the role of CEO since 18 July 2016. Mr. Thompson brings a wealth of leadership experience having worked for more than 20 years at the helm of renowned technology companies. Most recently, Mr. Thompson spent 11 years as CEO of Sigtec and 5 years as CEO of Wavenet International in addition to 5 years with CS Communications and Systems in New York and London. Mr. Thompson received a first class honours degree in Engineering from the Queensland University of Technology in addition to a Master of Business Administration from the City University Business School in London. Mr. Thompson has a strong record in driving sales and revenue in addition to his ample experience as a capable CEO providing pivotal leadership expertise across UK, US, Australia and New Zealand markets for multi-national, listed, IPO and start-up technology companies. Company Secretary and Chief Financial Officer Stephen Kerr (BCom, CA, FGIA) has held the role of CFO and Company Secretary since July 2015. Stephen Kerr is a qualified chartered accountant and chartered company secretary. He is an experienced CFO and governance professional, having held senior finance positions in private and publicly listed company environments across Australia and New Zealand for over 20 years. Stephen holds a Bachelor of Commerce from the University of Melbourne and is a current member of Chartered Accountants Australia and New Zealand and a Fellow of the Governance institute of Australia. Meetings of directors The number of meetings of the Company's Board of Directors ('the Board') held from 1 July 2017 to the year ended 30 June 2018, and the number of meetings attended by each director were: Hon. Alan Stockdale Richard Levy Peter Pawlowitsch Full board Attended Held 12 12 10 12 12 12 Held: represents the number of meetings held during the time the director held office. 4 Knosys Limited Directors' report 30 June 2018 Remuneration Report (audited) The remuneration report details the key management personnel remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: ● Principles used to determine the nature and amount of remuneration ● Details of remuneration ● Service agreements ● Share-based compensation ● Additional information ● Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration The objective of the consolidated entity's executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders. The Board of Directors ('the Board') ensures that executive reward satisfies the following key criteria for good reward governance practices: ● competitiveness and reasonableness ● acceptability to shareholders ● performance linkage / alignment of executive compensation ● transparency The performance of the consolidated entity depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high-quality personnel. The executive remuneration framework is structured to be market competitive and complementary to the strategy of the consolidated entity. Non-executive directors’ remuneration Fees and payments to non-executive directors reflect the demands and responsibilities of their role. Non-executive directors' fees and payments are reviewed annually by the Board. The Board may, from time to time, receive advice from independent remuneration consultants to ensure non-executive directors' fees and payments are appropriate and in line with the market. No such advice was sought for the financial year ended 30 June 2018. The chairman's fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The chairman is not present at any discussions relating to the determination of his own remuneration. ASX listing rules require the aggregate non-executive directors’ remuneration be determined periodically by a general meeting. The current maximum aggregate remuneration payable to non-executive directors of the consolidated entity in any financial year is $500,000. Executive remuneration The consolidated entity aims to reward executives with a level and mix of remuneration based on their position and responsibility, which has both fixed and variable components. The executive remuneration and reward framework has four components: ● base pay, superannuation and non-monetary benefits ● short-term performance incentives ● share-based payments ● other remuneration such as long service leave The combination of these comprises the executive's total remuneration. Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, are reviewed annually by the Board, based on individual performance and the overall performance of the consolidated entity and comparable market remunerations. 5 Knosys Limited Directors' report 30 June 2018 Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the consolidated entity and provides additional value to the executive. The short-term incentives ('STI') program is designed to align the targets of the business with the targets of those executives responsible for meeting those targets. STI payments are granted to executives based on specific targets and/or key performance indicators ('KPI's') being achieved. These targets are discussed in further detail in the description of service agreements which forms part of this Remuneration Report. The long-term incentives ('LTI') include long service leave and share-based payments. Options are awarded to executives, vesting over a period of three years based on elapsed time and/or achievement of long-term incentive measures. Consolidated entity performance and link to remuneration Remuneration for certain individuals is directly linked to the performance of the consolidated entity. A portion of cash bonus and incentive payments are dependent on defined revenue and earnings targets being met. The remaining portion of the cash bonus and incentive payments are at the discretion of the Board. In considering the performance of the consolidated entity and benefits for shareholder wealth, the remuneration committee have regard to the following indices in respect of the current financial year and the previous financial years. Profit / (loss) attributable to owners of the parent entity Dividends paid Operating revenue growth Change in operating income Change in share price Return on capital employed 2018 $ (806,067) - 224.7% 61.3% (57%) (69%) 2017 $ (2,085,018) - 9.9% (47.8%) (40%) (80%) 2016 $ (1,411,015) - - - - (48%) Profit is one of the financial performance targets considered in setting the Short Term Incentive (STI). Profit amounts have been calculated in accordance with Australian Accounting Standards (AASB’s). Operating income is operating profit as reported in the statement of profit or loss. Details of remuneration Amounts of remuneration Details of the remuneration of key management personnel of the consolidated entity are set out in the following tables. The key management personnel of the consolidated entity during the year to 30 June 2018 consisted of the following directors of Knosys Limited: ● Alan Stockdale - Non-Executive Chairman ● Peter Pawlowitsch - Non-Executive Director ● Richard Levy - Non-Executive Director And the following persons: ● ● John Thompson – Chief Executive Officer Stephen Kerr - Company Secretary and Chief Financial Officer 6 Knosys Limited Directors' report 30 June 2018 Short-term benefits Post- employment benefits Long-term benefits Share- based payments 2018 $ $ $ $ Cash salary Cash and fees bonus Non- Super- monetary annuation Long service Equity- settled $ leave $ Total $ Non-Executive Directors: Alan Stockdale (Chairman) Peter Pawlowitsch Richard Levy 54,795 36,530 20,000 - - - - - - 5,205 3,470 20,000 Other Key Management Personnel: John Thompson Stephen Kerr 281,715 150,868 88,000 83,000* 22,559 9,629 24,885 24,332 543,908 171,000 32,188 77,892 - - - - - - 1,200 1,200 2,401 61,200 41,200 42,401 27,900 48,882 445,059 316,711 81,583 906,571 * 2018 Cash bonus for Stephen Kerr includes FY18 bonus of $53,000 accrued for in 2018, and FY17 bonus of $30,000, assessed and paid in FY18. Short-term benefits Post- employment benefits Long-term benefits Share- based payments 2017 Cash salary and fees $ Non-Executive Directors: Alan Stockdale (Chairman) Peter Pawlowitsch Richard Levy 54,795 36,530 - 67,548 80,555 Executive Directors: Ashley Gall (resigned 15 July 2016) Alistair Wardlaw (resigned 26 Sept 2016) Other Key Management Personnel: John Thompson Stephen Kerr Gavin Campion (resigned 21 Nov 2016) Cash bonus monetary annuation Super- Non- $ $ $ Long service Equity- settled $ leave $ Total $ - - - - - - - - - - 5,205 3,470 40,000 - - - 3,931 3,931 7,861 63,931 43,931 47,861 6,507 - 15,104 89,159 - - 524 81,079 263,542 136,758 - 15,000 6,969 704 25,036 34,992 - - - 37,083 295,547 224,537 250,333 890,061 - 15,000 - 7,673 - 115,210 1,396 - 251,729 - 69,830 1,097,774 7 Knosys Limited Directors' report 30 June 2018 The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Non-Executive Directors: Alan Stockdale (Chairman) Peter Pawlowitsch Richard Levy Other Key Management Personnel: John Thompson Stephen Kerr Name Non-Executive Directors: Alan Stockdale (Chairman) Peter Pawlowitsch Richard Levy Executive Directors: Ashley Gall (resigned 15 July 2016) Alistair Wardlaw (resigned 26 September 2016) Other Key Management Personnel: John Thompson Stephen Kerr Gavin Campion (resigned 21 November 2016) Fixed remuneration At risk - STI 2018 2018 At risk - LTI 2018 98% 97% 94% 74% 58% -% -% -% 20% 26% 2% 3% 6% 6% 15% Fixed remuneration At risk - STI 2017 2017 At risk - LTI 2017 94% 91% 84% 83% 99% 100% 77% 99% -% -% -% -% -% -% 7% -% 6% 9% 16% 17% 1% 0% 16% 1% Service agreements Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: John Thompson Chief Executive Officer 18 July 2016 No fixed term Annual base salary for the year ending 30 June 2018 of $306,600 including superannuation. Remuneration to be reviewed annually by the Board, 6 month termination notice by either party, STI performance bonus of up to $90,000 (including statutory superannuation) based on financial and non-financial KPI’s, including achievement of budget, over achievement of budget, new sales orders, leadership, customer relations, investor relations, and product development. Non-disclosure, non- solicitation and non-compete clauses apply. An amount of $88,000 relating to performance in the 2018 year was assessed as a bonus entitlement for the 2018 financial year. 8 Knosys Limited Directors' report 30 June 2018 Name: Title: Agreement commenced: Term of agreement: Details: Stephen Kerr Chief Financial Officer and Company Secretary 9 June 2015 No fixed term Annual base salary for the year ending 30 June 2018 of $175,200 including superannuation, employment is for three days per week during normal working hours on days agreed with the CEO and reasonable additional hours during these days in order to perform responsibilities and duties. Remuneration to be reviewed annually by the Board, 3 month termination notice by either party, STI performance bonus of up to $60,000 (including statutory superannuation) based on financial and non-financial KPI’s, non-disclosure, non-solicitation and non-compete clauses. An amount of $30,000 relating to performance in the 2017 financial year was assessed in the 2018 financial year as a bonus entitlement and an amount of $53,000 relating to performance in the 2018 year was assessed as a bonus entitlement in the 2018 financial year. Key management personnel have no entitlement to termination payments in the event of removal for misconduct. Share-based compensation Issue of shares The terms and conditions of each issue of loan funded shares affecting remuneration of directors and other key management personnel in this financial year or future reporting years are as follows: Fair value per loan share Grant date November 2017 January 2018 Number of shares Expiry date Issue price at issue date 1,200,000 500,000 November 2022 February 2023 6 cents 10 cents 2.33 cents 5.85 cents The loan funded shares are subject to time based vesting hurdles only. The 1,200,000 shares were granted to John Thompson in November 2017 and were fully vested at 30 June 2018, with 500,000 shares vesting on grant date and the balance vesting in equal portions each month from grant date to 30 June 2018. The 500,000 shares were granted to Stephen Kerr and were 50% vested at 30 June 2018, with 250,000 vesting on grant date, 25% vesting 6 months after grant date and 25% vesting 12 months after grant date. Participants acquire loan funded shares using a loan provided by the consolidated entity. The loan is interest-free and limited recourse in accordance with the loan terms. The loan shares are restricted securities. The loan terms require the loan to be repaid before a participant can receive any proceeds from the sale of their shares. Refer Note 20 in the notes to the financial statements, for further general terms of the loan funded shares. Options The terms and conditions of each grant of options over ordinary shares affecting remuneration of directors and other key management personnel in this financial year or future reporting years are as follows: Grant date May 2015 June 2015 October 2016 Number of options Expiry date Exercise price at grant date 2,000,000 425,000 500,000 July 2019 July 2019 October 2020 25 cents 25 cents 25 cents 3.14 cents 3.14 cents 14.6 cents Fair value per option 9 Knosys Limited Directors' report 30 June 2018 Options granted carry no dividend or voting rights. No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the company or of any other body corporate. Vesting and Entitlement For the Directors, the 2,000,000 are fully vested. These options vested over time, in equal amounts (except for slight adjustments to avoid fractions) every three months, commencing 1 July 2015 with the final vesting date being 1 April 2018. No performance hurdles were attached to these options. These options are no longer subject to any escrow conditions. For the 425,000 fully vested options issued to Stephen Kerr, these options vested over time, every three months, commencing 1 July 2015 with the final vesting date being 1 April 2018. 20,000 Options vested on the first two vesting dates, and 38,500 Options vested on subsequent vesting dates. No performance hurdles were attached to these options and these options are not subject to any escrow conditions. For the 500,000 options issued to Stephen Kerr through the employee share option plan (ESOP), the options are service based and vest over time in three equal amounts every 12 months, commencing 1 October 2017 with the final vesting date being 1 October 2019. If the relevant holder is no longer employed or engaged, as the case may be, by the Group on a vesting date, the Options will not vest to that holder. Options that have previously vested in the holder shall be retained by the holder. The Options will entitle the holder to subscribe for one Share upon the exercise of each Option that has vested in the holder. No performance hurdles are attached to these options and these options are not subject to any escrow conditions. Shares issued on the exercise of options No ordinary shares of Knosys Limited were issued during the year ended 30 June 2018 and up to the date of this report on the exercise of options granted. The number of options over ordinary shares granted to and vested by directors and other key management personnel as part of compensation during the year ended 30 June 2018 are set out below: Name Alan Stockdale Peter Pawlowitsch Richard Levy Stephen Kerr 2017 Name Alan Stockdale Peter Pawlowitsch Richard Levy Ashley Gall (resigned 15 July 2016) Gavin Campion (resigned 21 November 2016) Alistair Wardlaw (resigned 26 September 2016) Stephen Kerr Number of options vested and exercisable during the year 2018 % of options vested and exercisable during the year 2018 Number of options forfeited during the year 2018 % of options forfeited during the year 2018 166,667 166,667 333,334 320,667 33% 33% 33% 35% - - - - - - - - Number of options vested and exercisable during the year 2017 % of options vested and exercisable during the year 2017 Number of options forfeited during the year 2017 % of options Forfeited during the year 2017 166,667 166,667 333,333 283,334 166,667 83,334 154,000 33% 33% 33% 8% 33% 20% 17% - - - 983,333 500,000 583,333 - - - - 29% 50% 58% - 10 Knosys Limited Directors' report 30 June 2018 Additional disclosures relating to key management personnel Shareholding The number of shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Ordinary shares Alan Stockdale Peter Pawlowitsch Richard Levy John Thompson Stephen Kerr 1. Shares issued as loan funded shares in the current year. Balance at Received as part of remuneration the start of the year Disposals/ other Balance at the end of the year Additions - 900,000 10,292,260 - 100,000 11,292,260 - - - 1,200,0001 500,0001 1,700,000 - - - - - - - - - - - - - 900,000 10,292,260 1,200,000 600,000 12,992,260 Option holding The number of options over ordinary shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Options over ordinary shares Alan Stockdale Peter Pawlowitsch Richard Levy Stephen Kerr Balance at Granted / the start of exercised / the year expired / forfeited Balance at Balance at Balance at the end of the end of the end of the year the year the year - unvested - vested 500,000 500,000 1,000,000 925,000 2,925,000 - - - - 500,000 500,000 1,000,000 591,667 2,591,667 - - - 333,333 333,333 500,000 500,000 1,000,000 925,000 2,925,000 Other transactions with key management personnel and their related parties During the financial year, payments for technical infrastructure supplied by MMG Interactive Partnership (director-related entity of Richard Levy) of $2,000 were made. All transactions were made on normal commercial terms and conditions and at market rates. This concludes the remuneration report, which has been audited. Options At the date of this report, the unissued ordinary shares of Knosys Limited under option are as follows: Date of expiry 1 July 2019 1 July 2019 1 July 2019 1 July 2020 1 Oct 2020 1 Oct 2020 unlisted unlisted unlisted unlisted unlisted unlisted Exercise price $0.25 $0.25 $0.29 $0.29 $0.25 $0.25 Number under option 2,425,000 3,333,334 200,000 300,000 500,000 900,000 Each option carries no rights other than the right, once vested, to subscribe for one fully paid ordinary share at the exercise price. No options were exercised during the period. 11 Knosys Limited Directors' report 30 June 2018 Indemnity and insurance of officers The company has indemnified the directors and executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the company paid a premium in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. Corporate Governance Statement The company’s corporate governance statement can be found on the company website at https://knosys.it/investor Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. Non-audit services During the year no non-audit services were provided. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on the following page. Auditor William Buck Audit (VIC) Pty Ltd continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ________________________________ Hon. Alan Stockdale AO Director 30 August 2018 Melbourne 12 Knosys Limited Contents 30 June 2018 Contents 15 Statement of profit or loss and other comprehensive income 16 Statement of financial position 17 Statement of changes in equity 18 Statement of cash flows 19 Notes to the financial statements 38 Directors' declaration Independent auditor's report to the members of Knosys Limited 39 Additional information for listed companies 45 General information The financial statements cover Knosys Limited as a consolidated entity consisting of Knosys Limited and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars, which is Knosys Limited's functional and presentation currency. Knosys Limited is listed on the Australian Securities Exchange (ASX:KNO) and is incorporated and domiciled in Australia. Registered office Suite 9.08 Level 9 2 Queen Street Melbourne VIC 3000 Principal place of business Suite 9.08 Level 9 2 Queen Street Melbourne VIC 3000 A description of the nature of the consolidated entity's operations and its principal activities are included in the directors' report, which is not part of the financial statements. The financial statements were authorised for issue on 30 August 2018, in accordance with a resolution of directors. The directors have the power to amend and reissue the financial statements. 14 Knosys Limited Statement of profit or loss and other comprehensive income For the year ended 30 June 2018 Revenue Research and development tax refund Other income Expenses Licence fee and support expenses Payments to suppliers for research and development activities Employee benefits expense Depreciation and amortisation expense Legal and accounting expenses Travel and accommodation Finance costs Other expenses Loss before income tax Income tax (expense) credit Note Consolidated 2018 $ 2017 $ 3 2,625,906 808,774 474,867 78,132 343,890 33,547 (154,179) (385,337) (2,314,468) (28,338) (69,760) (147,720) (323,036) (562,134) (157,887) - (2,214,692) (14,288) (104,986) (89,463) (118,399) (571,514) (806,067) (2,085,018) - - 4 4 5 Loss after income tax expense for the year attributable to owners of the parent (806,067) (2,085,018) Other comprehensive income Other comprehensive income for the year, net of tax - - Total comprehensive loss for the year attributable to owners of the parent (806,067) (2,085,018) Loss per share for loss attributable to the owners of the parent Basic and diluted loss per share 22 Cents (0.99) Cents (2.67) The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 15 Knosys Limited Statement of financial position As at 30 June 2018 Assets Current assets Cash and cash equivalents Trade and other receivables Accrued research and development tax refund receivable Prepayments & sundry debtors Total current assets Non-current assets Plant and equipment Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Provisions for employee benefits Borrowings – Convertible notes Revenue billed in advance Total current liabilities Total liabilities Net assets Equity Issued capital Convertible note equity reserve Share based payments reserve Accumulated losses Total equity Note Consolidated 2018 $ 2017 $ 6 7 1,065,266 708,560 361,073 21,680 2,156,579 2,841,416 385,152 228,071 30,099 3,484,738 57,432 57,432 36,928 36,928 2,214,011 3,521,666 8 23 392,028 142,383 - 65,051 599,462 200,177 93,740 1,494,446 1,006,714 2,795,077 599,462 2,795,077 1,614,549 726,589 9 5,901,852 - 534,615 (4,821,918) 4,403,765 174,958 338,675 (4,190,809) 1,614,549 726,589 The above statement of financial position should be read in conjunction with the accompanying notes 16 Knosys Limited Statement of changes in equity For the year ended 30 June 2018 Consolidated Issued capital $ Reserves Accumulated $ losses $ Total equity $ Balance at 1 July 2016 4,403,765 195,761 (2,105,791) 2,493,735 Loss after income tax expense for the year Total comprehensive loss for the year Vesting of share based payments Equity value attributable to the issue of convertible notes (Note 23) - - - - - (2,085,018) (2,085,518) - (2,085,518) (2,085,518) 142,914 - 142,914 174,958 - 174,958 Balance at 30 June 2017 4,403,765 513,633 (4,190,809) 726,589 Consolidated Issued capital $ Reserves Accumulated $ losses $ Total equity $ Balance at 1 July 2017 4,403,765 513,633 (4,190,809) 726,589 Loss after income tax expense for the year Total comprehensive loss for the year - - - (806,067) (806,067) - (806,067) (806,067 ) Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (Note 9) 1,498,087 - - 1,498,087 Retirement of convertible note reserve to accumulated losses (174,958) 174,958 - Vesting of share based payments - 195,940 - 195,940 Balance at 30 June 2018 5,901,852 534,615 (4,821,918) 1,614,549 The above statement of changes in equity should be read in conjunction with the accompanying notes 17 Knosys Limited Statement of cash flows For the year ended 30 June 2018 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Research and development tax refund Interest received Interest paid Grant revenue Note Consolidated 2018 $ 2017 $ 1,433,257 (3,283,688) (1,850,431) 790,757 (3,044,244) (2,253,487) 341,865 36,967 (167,439) 41,165 583,519 44,833 - - Net cash used in operating activities 19 (1,597,873) (1,625,135)) Cash flows from investing activities Payments for plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares (Repayment) / proceeds from issue of convertible notes Share issue transaction costs Convertible note transaction costs Net cash from financing activities (48,841) (31,462) (48,841) (31,462) 23 1,371,101 (1,410,044) (90,493) - - 1,650,040 - (99,002) (129,436) 1,551,038 Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year (1,776,150) 2,841,416 (105,559) 2,946,975 Cash and cash equivalents at the end of the financial year 6 1,065,266 2,841,416 The above statement of cash flows should be read in conjunction with the accompanying notes 18 Knosys Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New, revised or amending Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the consolidated entity. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). Historical cost convention The financial statements have been prepared under the historical cost convention. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. Legal Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the consolidated entity only. Supplementary information about the legal parent entity is disclosed in note 16. Principles of consolidation A controlled entity is any entity controlled by an accounting acquirer. Control exists where an entity has the capacity and power to govern the decision-making in relation to the financial and operating policies of an investee and also participate in the variable returns of that investee. All inter-group balances and transactions between entities in the Consolidated Entity, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of controlled entities have been changed where necessary to ensure consistencies with those policies adopted by the parent entity. Foreign currency translation The financial statements are presented in Australian dollars, which is Knosys Limited's functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Licence fees and rendering of services Licence fee revenue and rendering of services revenue from implementation and consulting fees is recognised by reference to the stage of completion of the contracts. 19 Knosys Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) Stage of completion is measured by reference to the licence fee period and to labour hours incurred to date as a percentage of total estimated labour hours for each contract. Where the contract outcome cannot be reliably estimated, revenue is only recognised to the extent of the recoverable costs incurred to date. Research and development tax refund income Research and development tax refund income is measured on an accruals basis when the refund can be reliably determined. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment loss. If significant parts of an item of property plant and equipment have different useful lives, then they are accounted for as separate items of property, plant and equipment. Any gain or loss on disposal of an item of property plant and equipment is recognised in profit or loss. Depreciation Depreciation is calculated to write off the costs of the items of property, plant and equipment over their estimated useful lives and is generally recognised in profit and loss. Depreciation methods and useful lives are reviewed at each reporting period and adjusted if appropriate. The estimated useful life of property, plant and equipment for current and comparative periods is as follows: - Plant and equipment 3 years. 20 Knosys Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) Trade and other payables Trade and other payables represent the liability outstanding at the end of the reporting period for goods and services received by the Group during the reporting period, which remains unpaid. The balance is recognised as a current liability with the amount being normally paid within 30 days of recognition of the liability. Provisions Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be wholly settled within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be wholly settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Black-Scholes option pricing model or the Binomial Option Valuation model each of which takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non- vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. 21 Knosys Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) If the non-vesting condition is within the control of the consolidated entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the consolidated entity or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Compound financial instruments – Convertible notes Compound financial instruments issued by the consolidated entity comprise convertible notes and attaching options, as disclosed in Note 23, that can be converted to ordinary shares at the election of the holder by a certain date and where the number of shares to be issued is fixed and does not vary with changes in fair value. The liability component of compound financial instruments is initially recognised at the fair value of a similar liability that does not have an equity conversion option. The equity component of the financial instrument is initially recognised as the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Subsequent to initial recognition, the fair value of the liability component is remeasured at each relevant balance date. The equity component is not remeasured. Interest calculated on the liability component of the compound financial instrument is recognised in the statement of profit and loss. On conversion, the financial liability is reclassified to equity and no gain or loss is recognised. Revenue billed in advance Revenue billed in advance is recognised as a current liability in the statement of financial position. The balance of revenue billed in advance represents the unearned revenue portion of amounts invoiced to customers, in accordance with the terms of customer contracts, and paid or payable by the customer at reporting date. As the revenue billed in advance is earned by the consolidated entity, the relevant portion of revenue is relieved from the balance of revenue billed in advance and taken to the profit and loss in accordance with the consolidated entity’s revenue recognition policy. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset's useful life or over the shorter of the asset's useful life and the lease term if there is no reasonable certainty that the consolidated entity will obtain ownership at the end of the lease term. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. 22 Knosys Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Earnings per share Basic earnings per share is calculated as net profit/loss attributable to members of the Company, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares on issue during the relevant period. Diluted earnings per share is calculated as net profit/loss attributable to members of the Company, adjusted for: • costs of servicing equity (other than dividends); • the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; • and other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; • divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element, during the relevant period. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2017. The consolidated entity's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, are set out below. AASB 15 Revenue from Contracts with Customers This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard provides a single standard for revenue recognition. The core principle of the standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will require: contracts (either written, verbal or implied) to be identified, together with the separate performance obligations within the contract; determine the transaction price, adjusted for the time value of money excluding credit risk; allocation of the transaction price to the separate performance obligations on a basis of relative stand-alone selling price of each distinct good or service, or estimation approach if no distinct observable prices exist; and recognition of revenue when each performance obligation is satisfied. Credit risk will be presented separately as an expense rather than adjusted to revenue. For goods, the performance obligation would be satisfied when the customer obtains control of the goods. For services, the performance obligation is satisfied when the service has been provided, typically for promises to transfer services to customers. For performance obligations satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. Contracts with customers will be presented in an entity's statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity's performance and the customer's payment. Sufficient quantitative and qualitative disclosure is required to enable users to understand the contracts with customers; the significant judgments made in applying the guidance to those contracts; and any assets recognised from the costs to obtain or fulfil a contract with a customer. Management has considered the impact of AASB 15 and note, based on the analysis performed, that the impact on the consolidated entity would not be material. Under AASB 15 the consolidated entity plans to adopt the modified retrospective approach. The consolidated entity does not anticipate that there will be significant implications of this change in respect of current contracts. The consolidated entity will consider the application of AASB 15 with respect to new contracts as they are entered into. The consolidated entity will adopt this standard from 1 July 2018. 23 Knosys Limited Notes to the financial statements 30 June 2018 Note 1. Significant accounting policies (continued) AASB 16 Leases AASB 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities, on a net present value basis, for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right of use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments. A lessee recognises depreciation of the right of use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows. Management has considered the impact of AASB 16 and note, based on the analysis performed, that there would be a material impact on the consolidated entity. It is expected that the operating lease commitments identified in Note 14 to the financial statements will be required to be included in the consolidated statement of financial position when AASB 16 becomes effective. 24 Knosys Limited Notes to the financial statements 30 June 2018 Note 2. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The following key judgements are relevant to these financial statements: Estimation of accrued research and development tax refund As at 30 June 2017 the consolidated entity had accrued $228,071 in accrued research and development tax refund credits in-respect of the 2017 tax return. The directors of the consolidated entity engaged an industry expert to prepare and lodge this return. This amount plus an additional $113,547 was receipted into the bank in May 2018 in regard to the 2017 tax return and R&D claim. Based upon the methodology adopted by the industry expert, the consolidated entity has accrued a research and development tax refund receivable of $361,073 for the 2018 financial year. Key matters considered by the directors in calculating this accrual included the following: - The historical success of lodging and receipting such claims; - The quantum of eligible research and development spend made during the period; and - A consideration of any potential change in the assessment of eligibility criteria as gazetted by the Federal government. Convertible notes As stated in Note 23, under Australian accounting standards AASB 132, the convertible note is classified as a compound financial instrument. When the initial carrying amount of a compound financial instrument is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The issuer must first determine the carrying amount of the instrument’s liability component by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole. Management judgements and estimates are required in referencing market interest rates for such instruments and in determining the fair value of a similar liability that does not have an associated equity component. Management has determined that a discount rate of 24% is appropriate, this being derived by referencing required rates of return for private capital markets. Share based payments As stated in Note 1, the consolidated entity has issued options and loans shares to directors, executives and staff as part of their remuneration arrangements and has issued options and shares to third parties in consideration for consultancy services received. Management judgements and estimates are required in determining the cost of these equity-settled transactions which have been measured by taking into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the consolidated entity considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. 25 Knosys Limited Notes to the financial statements 30 June 2018 Note 3. Revenue Sales revenue Licence and support fees Rendering of services Revenue Note 4. Expenses Loss before income tax includes the following specific expenses: Rental expense relating to operating leases Minimum lease payments Employee benefits expense Superannuation expense Accumulation fund Superannuation expense Share based payments expense Consolidated 2018 $ 2017 $ 1,450,544 1,175,362 803,474 5,300 2,625,906 808,774 Consolidated 2018 $ 2017 $ 92,666 81,881 142,532 178,593 195,940 142,914 26 Knosys Limited Notes to the financial statements 30 June 2018 Note 5. Income tax expense Income tax expense Current Tax benefit Deferred tax - origination and reversal of temporary differences Deferred tax assets not recognised Aggregate income tax expense Consolidated 2018 $ 2017 $ (63,876) (13,377) 77,252 (481,572) (5,198) 486,769 - - Unrecognised deferred tax assets Unused tax losses for which no deferred tax asset has been recognised 736,186 658,934 Numerical reconciliation of income tax expense and tax at the statutory rate Loss before income tax expense Tax at the statutory tax rate of 27.5% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Entertainment expenses Research and development costs Share based payments expense Non-assessable R&D refund Deferred tax assets not recognised Income tax expense Note 6. Current assets - cash and cash equivalents Cash at bank (806,067) (2,085,018) (221,668) (573,380) 464 220,656 53,884 (130,588) 2,653 139,226 39,301 (94,570) (77,252) 77,252 (486,769)) 486,769 - - Consolidated 2018 $ 2017 $ 1,065,266 2,841,416 27 Knosys Limited Notes to the financial statements 30 June 2018 Note 7. Current assets - trade and other receivables Trade receivables As at 30 June 2018, the aging analysis of trade receivables is as follows: Consolidated 2018 $ 2017 $ 668,215 385,152 2018 2017 Neither past Total due nor impaired - $13,896 668,215 385,152 < 30 days $597,197 $1,544 Past due but not impaired 30-60 days $56,412 $368,168 61-90 days - $1,544 90+ days $14,606 - As at 30 June 2018 no trade receivables were impaired (2017: Nil) Refer Note 1 – Trade and other receivables, which explains how the consolidated entity manages and accounts for trade receivables. Note 8. Current liabilities - trade and other payables Trade payables Related party payables Other payables Consolidated 2018 $ 2017 $ 77,571 - 314,457 167,071 1,000 32,106 392,028 200,177 The table below summarises the maturity profile of the consolidated entities current trade and other payables. 2018 2017 Total $77,571 $200,177 On demand - - < 3 months $77,571 $200,177 3 to 12 months - - Refer Note 1 – Trade and other payables, which explains how the consolidated entity manages and accounts for trade and other payables. Note 9. Equity - issued capital Ordinary shares - fully paid Consolidated 2018 $ 2017 $ 5,901,852 4,403,765 28 Knosys Limited Notes to the financial statements 30 June 2018 Note 9. Equity - issued capital (continued) Movements in ordinary share capital Details Legal parent Balance start of year Date No. of shares Legal Parent 2018 No. of shares Legal Parent 2017 78,099,386 78,099,386 Issue of shares on conversion of convertible notes Issue of loan funded shares to executives and staff Issue of shares on conversion of convertible notes Issue of share capital to shareholders 06 Feb 2018 19 Feb 2018 20 Mar 2018 31 May 2018 1,000,000 3,250,000 1,000,000 19,587,347 - - - - Balance at end of year Details Consolidated entity As at start of the financial year 102,936,733 78,099,386 Date $ $ 4,403,765 4,403,765 Issue of shares on conversion of convertible notes Issue of shares on conversion of convertible notes Issue of share capital to shareholders Costs of issuing shares 06 Feb 2018 20 Mar 2018 31 May 2018 120,000 120,000 1,371,101 (113,014) - - Balance as at end of the financial year 5,901,852 4,403,765 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Movements in options on issue Details Date No. of options Legal Parent 2018 No. of options Legal Parent 2017 Legal parent Balance start of year 06 Feb 2018 Options issued on conversion of convertible notes 20 Mar 2018 Options issued on conversion of convertible notes Expiry of options issued on conversion of convertible notes 31 May 2018 Options issued under the employee share option plan 25 Oct 2016 Options expired / lapsed Balance at end of year 7,758,334 120,000 120,000 (240,000) - (100,000) 8,625,000 - - - 1,400,000 (2,266,666) 7,658,334 7,758,334 5,758,334 options (all of which are vested at 30 June 2018) are exercisable at $0.25 and expire on 1 July 2019. 200,000 options (all of which are vested at 30 June 2018) are exercisable at $0.29 and expire on 1 July 2019. 300,000 options (all of which are vested at 30 June 2018) are exercisable at $0.29 and expire on 1 July 2020. 1,400,000 options (466,667 of which are vested at 30 June 2018) are exercisable at $0.25 and expire on 1 October 2020. All options are unlisted and are subject to a range of vesting conditions. 29 Knosys Limited Notes to the financial statements 30 June 2018 Note 9. Equity - issued capital (continued) Capital risk management The consolidated entity's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the consolidated entity may issue new shares or return capital to shareholders. Note 10. Financial instruments Financial risk management objectives The consolidated entity's activities expose it to two financial risks: credit risk and liquidity risk. The consolidated entity's overall risk management program, which is managed at Board level, focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the consolidated entity. The consolidated entity uses different methods to measure different types of risk to which it is exposed. These methods include ageing analysis for credit risk and cash flow forecasting for liquidity risk. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has a code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The consolidated entity obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The consolidated entity does not hold any collateral. Liquidity risk Vigilant liquidity risk management requires the consolidated entity to maintain sufficient liquid assets (mainly cash and cash equivalents) to be able to pay debts as and when they become due and payable. All amounts payable are within agreed terms. All third party payment terms are less than 60 days (2017: less than 60 days). The consolidated entity manages liquidity risk by maintaining adequate cash reserves by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reasonably approximate their fair value. Note 11. Key management personnel disclosures Compensation The aggregate compensation made to directors and key management personnel of the consolidated entity is set out below: Short-term employee benefits Share based payments Post-employment benefits 30 Consolidated 2018 $ 2017 $ 747,096 81,583 77,892 912,734 69,830 115,210 906,571 1,097,774 Knosys Limited Notes to the financial statements 30 June 2018 Note 12. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by William Buck Audit (VIC) Pty Ltd (“William Buck”), the auditor of the company, its network firms and unrelated firms: Assurance services – William Buck Audit or review of the financial statements Consolidated 2018 $ 2017 $ 32,969 21,650 32,969 21,650 Note 13. Contingent liabilities At reporting date there is a bank guarantee in place of $60,663 in place, which relates to a security deposit for the rental of the Melbourne premises. At reporting date there is a bank guarantee in place of $21,025 in place, which relates to a documentary letter of credit issued by the entity’s banker as a performance guarantee for a customer contract. The consolidated entity has no other contingent liabilities at reporting date. Note 14. Commitments Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Consolidated 2018 $ 2017 $ 55,080 - - 90,468 52,773 - 55,080 143,241 Operating lease commitments includes contracted amounts for the head office premises under a non-cancellable operating lease, the term of which expires on 31 January 2019. Note 15. Related party transactions Legal Parent entity Knosys Limited is the legal parent entity. Subsidiaries Interests in subsidiaries are set out in note 17. 31 Knosys Limited Notes to the financial statements 30 June 2018 Note 15. Related party transactions (continued) Key management personnel Disclosures relating to key management personnel are set out in note 11 and the remuneration report in the directors' report. Transactions with related parties The following transactions occurred with related parties: In the statement of profit and loss and other comprehensive income for the Consolidated Entity the following related party transactions took place: Payment for goods and services: Payment for services from MMG Interactive (a partnership associated with Richard Levy) 2,000 41,109 Consolidated 2018 $ 2017 $ Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Note 16. Legal parent entity information Set out below is the supplementary information about the legal parent entity. Statement of profit or loss and other comprehensive income Loss after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Convertible note equity reserve Share based payments reserve Accumulated losses Total equity 32 Legal Parent 2018 $ 2017 $ (6,464,286) (272,148) (6,464,286) (272,148) Legal Parent 2018 $ 2017 $ 1,410,329 2,371,359 6,654,592 12,886,958 66,642 1,528,749 66,642 1,528,749 13,036,974 11,538,887 174,958 - 338,675 534,615 (694,311) (6,983,639) 6,587,950 11,358,209 Knosys Limited Notes to the financial statements 30 June 2018 Note 16. Legal parent entity information (continued) Contingent liabilities The legal parent entity had no contingent liabilities as at 30 June 2018 and 30 June 2017. Capital commitments - Property, plant and equipment The legal parent entity had no capital commitments for property, plant and equipment as at 30 June 2018 and 30 June 2017. Significant accounting policies The accounting policies of the legal parent entity are consistent with those of the consolidated entity, as disclosed in note 1. The group does not designate any interests in subsidiaries as being subject to the requirements of accounting standards specifically applicable to financial statements. Note 17. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of Knosys Limited and the following wholly-owned subsidiaries in accordance with the accounting policy described in note 1: Name Principal place of business / Country of incorporation Knosys Solutions Pty Ltd Principal activities – Main operating company of the Knosys group, providing operational infrastructure, employees, resources, Knosys Platform research, development and support. sales Australia Knosys Products Pty Ltd Principal activity – Holder of the Knosys Platform intellectual property. Australia Ownership interest 2017 2018 % % 100% 100% 100% 100% Note 18. Events after the reporting period The following matters occurred subsequent to the end of the financial year: • On 31 July 2018 the consolidated entity announced that ANZ Bank had signed a three (3) year contract extension for the continued use of Knosys’ knowledge management platform. ANZ also has the option to extend the contract further via two one-year extensions. The potential value of the contract over the entire 5-year life is expected to exceed $6.5 million; and • On 2 August 2018 the consolidated entity announced the completion of a 7 for 19 non-renounceable rights issue, raising $2.65m (before costs of approximately $0.16m). No other matter or circumstance has arisen since 30 June 2018 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. 33 Knosys Limited Notes to the financial statements 30 June 2018 Note 19. Reconciliation of profit after income tax to net cash from operating activities Loss after income tax expense for the year Adjustments for: Depreciation and amortisation Finance costs Share based payments expense Change in operating assets and liabilities: Decrease/(Increase) in trade and other receivables (Decrease)/increase in revenue billed in advance Increase in prepayments and other debtors Decrease/(increase) in accrued research and development tax refund receivable Increase/(decrease) in trade and other payables Increase in provision for employee benefits Net cash used in operating activities Consolidated 2018 $ 2017 $ (806,067) (2,085,018) 28,338 155,597 195,940 14,288 118,367 142,914 (323,408) (941,663) 8,419 (133,002) 169,330 48,643 (1,597,873) (385,154) 298,485 35,208 239,630 (22,758) 18,902 (1,625,135) Note 20. Share-based payments Loan funded share plan and loan funded shares A loan funded share plan (LFSP) has been established by the consolidated entity, whereby the consolidated entity may, at the discretion of the Board, issue loan funded fully paid ordinary shares in the company to personnel of the consolidated entity. Participants acquire loan funded shares using a loan provided by the consolidated entity. The loan is interest-free and limited recourse in accordance with the loan terms and the LFSP rules. The LFSP rules require the loan to be repaid before a participant can receive any proceeds from the sale of their shares. The Board has the discretion to impose such vesting conditions in relation to the loan funded shares as it deems appropriate. These may include conditions relating to continued employment or service, performance (of the participant or the consolidated entity) and the occurrence of specific events. The consolidated entity has also issued loan funded fully paid ordinary shares in the company to executives on the same terms as the LFSP, The issuing of these loan funded shares gives rise to an ongoing employment benefit expense each financial period and this is accounted for in accordance with the accounting policy on employee benefits, as detailed in Note 1. The expense is included in the share based payment expense amount listed in Note 4. As at 30 June 2018 the following loan funded shares had been granted under the LFSP: Grant date Issue date Loan Expiry date Issue price Balance at 30 June 2017 Number Issued during the period Number Sold during the period Number Forfeited during the period Number Balance at 30 June 2018 Number Vested at end of the period Number 28/11/2017 19/02/2018 27/11/2022 30/01/2018 19/02/2018 18/02/2023 $0.06 $0.10 Total Weighted average issue price - - - - 1,200,000 2,050,000 3,250,000 $0.085 - - - - - - 1,200,000 1,200,000 2,050,000 1,025,000 3,250,000 2,225,000 $0.078 $0.085 For the loan funded shares issued during the 2018 financial year, the valuation model inputs to be used to determine the fair value at each vesting date, were as follows: Grant date Loan Expiry Share price at issue date date Issue price Marketability Expected Dividend Risk-free Fair value Discount volatility yield interest rate at issue date 28/11/2017 27/11/2022 30/01/2018 18/02/2023 $0.052 $0.115 $0.06 $0.10 0.00% 0.00% 68.24% 68.24% 0.00% 0.00% 2.155% 2.500% $0.0233 $0.0585 The fair value at issue date is an average of graded tranches. 34 Knosys Limited Notes to the financial statements 30 June 2018 Note 20 Share-based payments (continued) Employee share option plan An employee share option plan (ESOP) has been established by the consolidated entity, whereby the consolidated entity may, at the discretion of the Board, grant options over ordinary shares in the company to personnel of the consolidated entity. The options are issued for nil consideration and are granted in accordance with time based and/or performance targets established by the Board. The granting of these options gives rise to an ongoing employment benefit expense each financial period and this is accounted for in accordance with the accounting policy on employee benefits, as detailed in Note 1. The expense is included in the share based payment expense amount listed in Note 4. As at 30 June 2018 the following options had been granted under the ESOP: Option Issue date Option Expiry date Exercise price Balance at 30 June 2017 Number Issued during the period Number Exercised during the period Number Expired or forfeited during the period Number Balance at 30 June 2018 Number Vested and exercisable at end of the period Number 25/10/2016 01/10/2020 $0.25 Total Weighted average exercise price 1,400,000 1,400,000 $0.25 - - - - - - 1,400,000 1,400,000 $0.25 466,667 466,667 $0.25 As at 30 June 2017 the following options had been granted under the ESOP: Option Issue date Option Expiry date Exercise price Balance at 30 June 2016 Number Issued during the period Number Exercised during the period Number Expired or forfeited during the period Number Balance at 30 June 2017 Number Vested and exercisable at end of the period Number 25/10/2016 01/10/2020 $0.25 Total Weighted average exercise price - 1,400,000 - 1,400,000 - - - - - 1,400,000 1,400,000 $0.25 - - - For the options issued during the 2017 financial year, the valuation model inputs to be used to determine the fair value at each vesting date, were as follows: Issue date Expiry date at issue date price Discount volatility yield interest rate at issue date Share price Exercise Marketability Expected Dividend Risk-free Fair value 25/10/2016 01/10/2020 $0.235 $0.25 0.00% 87.57% 0.00% 1.83% $0.14597 35 Knosys Limited Notes to the financial statements 30 June 2018 Options issued to Directors and senior management As at 30 June 2018 the following unvested options over ordinary shares in Knosys Limited had been issued to Directors and senior management (Options). These Options were issued separately to the ESOP. Set out below are summaries of Options issued to Directors and senior management: 2018 Issue date Expiry date price Exercise Balance at the start of the year(1) Exercised Expired/ forfeited Issued Balance at the end of the year Number vested 09/05/2015 29/06/2015 01/07/2019 01/07/2019 $0.25 $0.25 Weighted average exercise price 2,000,000 425,000 2,425,000 $0.25 - - - - - - - - 2,000,000 425,000 2,425,000 2,000,000 425,000 2,425,000 $0.25 $0.25 (1) The balance at the start of the 2018 year excludes options held by former Directors and former KMP who ceased holding office during the 2017 year (but who still held their options during 2017) and were included in the 2017 table. Vesting and Entitlement For the options issued on 9 May 2015, the Options vested over time, in equal amounts (except for slight adjustments to avoid fractions) every three months, commencing 1 July 2015 with the final vesting date being 1 April 2018. For the Options issued on 29 June 2015, 20,000 Options vested on the first two vesting dates, and 38,500 Options vested on subsequent vesting dates. If the relevant holder is no longer employed or engaged, as the case may be, by the Group on a vesting date, the Options will not vest to that holder. Options that have previously vested in the holder shall be retained by the holder. The Options will entitle the holder to subscribe for one Share upon the exercise of each Option that has vested in the holder. The weighted average remaining contractual life of options outstanding at the end of the financial year was 1 year. 2017 Issue date Expiry date price Exercise Balance at the start of the year Exercised Expired/ forfeited Issued Balance at the end of the year Number vested 09/05/2015 29/06/2015 01/07/2019 01/07/2019 $0.25 $0.25 Weighted average exercise price 7,400,000 425,000 7,825,000 $0.25 - - - - (2,066,666) - (2,066,666) 5,333,334 425,000 5,758,334 4,416,668 271,000 4,687,668 - $0.25 $0.25 Note 21 Segment information During the year the consolidated entity operated as a developer and licensor of computer software in the APAC region. The concentration of customers for the 2018 year was as follows: • A major customer in Australia in the finance sector represented 40.3% of operating revenue • A major customer in Australia in the Telecommunications sector represented 32.6% of operating revenue • A major customer in Singapore in the telecommunications sector represented 18.9% of operating revenue (In 2017 a major customer in Australia in the finance sector represented 98.5% of operating revenue) 36 Knosys Limited Notes to the financial statements 30 June 2018 Note 22 Loss per share Consolidated 2018 $ 2017 $ Loss after income tax attributable to the owners the parent (806,067) (2,085,018) Weighted average number of ordinary shares used in calculating basic and diluted earnings per share 81,549,716 78,099,386 Number Number Basic loss per share The 7,658,334 (2017: 7,758,334) options issued could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they are anti-dilutive for the periods presented. Cents Cents (0.99) (2.67) Note 23 Convertible Note During the previous financial period the Company raised $1,650,040 through the issue of 13,750,337 convertible notes on the following terms: • Face value per note: 12 cents • Conversion ratio: 1 note = 1 ordinary share • Attaching option: 1:1 attaching option received on note conversion. • Maturity date of convertible note: 31 May 2018. • Conversion date of convertible note: Maturity date or earlier at the option of the noteholder • • • Exercise price of an attaching option: 15 cents • Expiry date of an attaching option: 31 May 2018 Interest payment date: At the earlier of maturity date or conversion date Interest rate: 10% per annum Under Australian accounting standards AASB 132, the Company has classified the convertible note as a compound financial instrument. The initial carrying amount of the convertible note has been allocated to its equity and liability components. The equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The Company determined the carrying amount of the liability component by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the convertible note represented by the option to convert the instrument into ordinary shares was then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole. During the year 2,000,000 convertible notes were converted to fully paid ordinary shares, with an issue price of 12 cents per share. The balance of 11,750,337 convertible notes matured on 31 May 2018 and were repaid in full and accrued interest was also paid at that time. 37 Knosys Limited Directors' declaration 30 June 2018 In the directors' opinion: ● the attached financial statements and notes comply with the Corporations Act 2001, the Australian Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; ● the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; ● the attached financial statements and notes give a true and fair view of the consolidated entity's financial position as at 30 June 2018 and of its performance for the financial year ended on that date; and ● there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors ________________________________ Hon. Alan Stockdale AO Director 30 August 2018 Melbourne 38 Knosys Limited Additional information for listed companies 1. Shareholding as at 24 August 2018 a. Distribution of Shareholders Category (size of holding) 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 Above 100,001 Number Number Holders Ordinary Shares 11 39 66 2,991 144,414 583,093 288 11,670,686 162 128,459,392 335 140,860,576 b. c. The number of shareholdings held in less than marketable parcels is 63, with a total of 228,522 ordinary shares, amounting to 0.16% of issued capital. The names of the substantial shareholders listed in the holding Consolidated Group’s register as at 24 August 2018 are: Shareholder Number Ordinary shares % 1 Earthrise Holdings Pty Ltd 19,100,000 13.58 2 Vabake Pty Ltd and Vabake Pty Ltd 10,437,260 7.41 d. Voting Rights The voting rights attached to each class of equity security are as follows: Ordinary shares — Each ordinary share is entitled to one vote when a poll is called, otherwise each member present at a meeting or by proxy has one vote on a show of hands. 45 Number of Ordinary Fully Paid Shares Held 19,135,000 10,066,130 7,000,270 6,680,000 5,714,286 4,483,307 % Held of Issued Ordinary Capital 13.58 7.15 4.97 4.74 4.06 3.18 3,140,700 2,250,000 1,993,857 1,954,886 1,759,116 1,714,288 1,692,850 1,618,473 1,500,000 1,425,000 1,368,421 1,342,857 1,260,000 1,257,142 2.23 2.88 1.42 1.39 1.25 1.22 1.20 1.15 1.06 1.01 0.97 0.95 0.89 0.89 77,356,583 54.92 Knosys Limited Additional information for listed companies e. 20 Largest Shareholders — Ordinary Shares Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Earthrise Holdings Pty Ltd Vabake Pty Ltd Mrs Tracey Lee Cunningham Panchito Services Pty Ltd Moat Investments Pty Ltd Mast Financial Pty Ltd BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd Gale Enterprises (Aust) Pty Ltd National Nominees Limited Chifley Portfolios Pty Limited Vonetta Pty Ltd MR GARRY JAMES COTTERILL TDF Properties Pty Ltd ADC (Investing) Pty Ltd Parry Segregated Portfolio Company Jet Invest Pty Ltd Pethol (Vic) Pty Ltd Helen Thompson Hardmail Pty Ltd Baxter Manor Pty Ltd 2. 3. The name of the Company Secretary is Mr Stephen Kerr. The address of the principal registered office in Australia is: Suite 9.08, Level 9, 2 Queen Street MELBOURNE VIC 3000 Telephone 03 9046 9700 4. Registers of securities are held at the following addresses: Automic Registry Services Suite 310, Level 3, 50 Holt Street SURRY HILLS NSW 2010 5. Securities Exchange Listing Quotation has been granted for all the ordinary shares of the Company on all Member Exchanges of the Australian Securities Exchange Limited. 6. In accordance with ASX Listing Rule 4.10.19, the Consolidated Group advises that, since listing on 9 September 2015, it has used its cash in a way consistent with its business objectives. 46

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