MNF Group
Annual Report 2020

Plain-text annual report

MNF Group Limited Annual Report 2020 ABN 37 118 699 853 Year in brief Strong business performance with a leading position in a growing market EBIDTA $38.2m Up 26% on FY19 Recurring Revenue $101.5m Up 37% on FY19 Phone Numbers 4.5m Up 17% on FY19 2 Contents What we do Message from our Chairman Message from our CEO Market Overview Use Case: Software Use Case: Apps & Digital services Use Case: Global Carriers Use Case: Resellers & MVNOs Regions we serve COVID-19 Business Overview Commentary: Leadership team Corporate Social Responsibilities (CSR) People Experience (PX) Financial Report Directors’ report Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the consolidated financial statements Directors’ declaration Auditor’s independence declaration Independent auditor’s report ASX additional information 11 12 13 14 15 16 19 23 25 5 6 8 10 18 27 29 46 47 48 49 50 79 80 81 88 3 What we do We provide a unique software platform that allows access to carrier networks in Australia and New Zealand. Our strategic priority is to expand this capability throughout South East Asia. call routing, fraud mitigation and regulatory compliance. These fea- tures are at the heart of all worldwide calling, confer- encing and collaboration technologies. Using our platform, communication provid- ers can deliver the same specialised features as in-country telecom networks, allowing them to launch rapidly and scale infinitely, without telecom constraints. Cloud communication providers rely on our platform for local phone and mobile numbers, domestic and international About us MNF Group is a leading provider of software and services for cloud communication. Our customers include some of the world’s largest software companies and communication providers. Companies like Zoom, Google, Microsoft and many of the apps and services you use every day. We provide software, APIs and infrastructure to enable cloud communication in Australia and New Zealand. 4 5 Message from our Chairman Message from our Chairman Terry Cuthbertson Chairman, Non-Executive Director Dear Fellow Shareholders, Delivering on our strategic vision The 2020 financial year has been another successful year from MNF Group as we continued to deliver on our purpose of enabling our customers to innovate their voice communications. Despite the unexpected challenges of the global pandemic, the company has overall performed strongly with EBITDA and NPAT finishing at the top end of guidance - $38.2 million and $11.95 million respectively. Pleasingly the key indicators for the future growth of the business are very strong – with 123% net retention rate of the top 10 customers, and 17% organic growth in phone numbers – both of which drive the high margin recurring business. Cash conversion in the second half was very strong, allowing the company to finish with net cash of $16.2 million and additional $60.0 million available through established facilities. MNF Group is well placed to pursue its long-term strategic aspirations of becoming the preferred provider of cloud servicing communications infrastructure, software and APIs in the Asia- Pacific region. This will be achieved due to experience of the leadership team, the financial strength of the business, the demand for its products and services from a high quality customer base, its strong capabilities and the track record of execution. MNF Group’s purpose of “Enabling our customers to innovate their voice communica- tions” has never been more relatable than during the COVID-19 pandemic. Our customers have undergone unprecedented growth as they have powered the communications revolution through collaboration, unified communications and communications platform services. MNF was a key enabler of consumer, business, enterprise and governments in Australia and New Zealand as the countries rapidly pivoted to working from home during lockdowns. The clear sense of urgency and purpose united our global team around the common cause, going above and beyond our regular routines to keep global voice services operating in a very challenging and dynamic environment. Our key strategic priorities remain: • Market Share Growth – striving for 20% YoY organic growth in phone numbers on network across our domestic networks. • Global Growth – expanding our footprint across the Asia-Pacific region with Singapore a key focus for this financial year. • Trusted Partnerships – with key wholesale customers where we integrate deeply with their business acknowledging that their success will be our success. • Software & API – continuing to invest in resilience, scale and automation, across everything we do. The goals we seek are to build a diversified, long-term high margin business with over 80% recurring revenues, and to become the preferred provider of cloud servicing communications infra- structure, software and APIs across Asia-Pacific. Message from our Chairman Board Appointment Ms Gail Pemberton Non-Executive Director In FY21 we are pleased to welcome a new Board member with the appointment of Gail Pemberton AO as a Non-Executive Director effective 1 September 2020. Prior to pursuing a Non-Executive Director career in 2008, Gail amassed over 35 years’ experience in the financial services industry in management and leadership roles at both Macquarie Bank and BNP Paribas Securities Services in Australia and the United Kingdom. She has extensive experience as a Director of both ASX listed and global companies and has participated in several IPOs, numerous acquisitions and divestments and capital raisings. Gail’s current Board roles include Non-Executive Director of Eclipx (ASX: ECX), the Sydney Metro, Land Services WA and Chair of Prospa (ASX: PGL). Gail was awarded the Order of Australia (AO) in the Australia Day Honours list 2018 for dis- tinguished service to the finance and banking industry through a range of roles, as an advocate for technology, and as a mentor to women. She was recognised by the Federal Government with the award of a Centenary Medal in 2002 for outstanding services to Australian business. She was also voted CIO of the Year in 1999 and CIO of the Decade in 2000. Terry Cuthbertson Chairman NRR (Net Retention Rate) is H2/FY20 revenue compared to H2/FY19 revenue of MNF Group’s top 10 customers (excluding those that are minutes trading only). These customers combined represent approximately 20% of FY20 full year revenue. 6 7 Message from our CEO Message from our CEO Rene Sugo Chief Executive Officer Dear Fellow Shareholders, Against the backdrop of what a tumultuous year 2020 has been thus far, MNF Group has performed with resilience and stability. The company has found itself to be a beneficiary of the unfortunate global COVID-19 pandemic. Businesses and consumers alike have found themselves changing in so many ways so quickly, and voice communications has proven to be the one key ingredient that has allowed it all to happen. MNF Group’s long-term purpose of “enabling our customers to innovate their voice communications” has placed us front and centre in this global structural change. Strong Bottom Line Growth MNF Group has delivered another record result at the top end of the guidance range EBITDA rose to $38.2 million, up 26% on prior year, and NPAT rose to $11.95 million. This year saw several large one-off expenses relating to restructuring and integrating the Telcoinabox business, however underlying NPAT-A grew to $16.6 million. This led to an underlying EPS-A rise to 20.7 cents per share. The Company finished the year in a strong cash position with $46.1 million in cash, and retains a finance facility for $60 million of which $30 million is undrawn. Managing through the COVID-19 pandemic I am extremely proud of the way the Company has handled the COVID-19 pandemic crisis this year, and in particular the leadership of my executive team, and all of our companies dedicated employees. The entire global work force was pivoted to “work-from-home” very rapidly and before the mandated Government lockdowns in various countries. This was made possible due to exist- ing Business Continuity Plans, but also with hard work by the leadership and the global IT team. Overall the employees were grateful of the speed of action of the business, and overall employee engagement, morale and productivity has been maintained at an all-time high. The COVID-19 pandemic also had a major impact on our customers and our network, and during March we saw a three-fold increase in the volume of minutes traversing our network. This caused considerable strain on parts of the network with some geographic regions experiencing local congestion. The MNF Group team worked relentlessly internally and with our carrier partners to find real-time solutions as issues emerged – such as redirecting traffic through alternative cities and even alternative countries. This allowed us to ensure the highest level of quality and connectivity was maintained at the height of the traffic surge. As the world has settled down into operating in the “new normal” it has become clear that the world has undergone rapid and fundamen- tal structural changes in the way it operates. Some clear emerging trends will be with us for the long-term, such as working from home and online collaboration. These changes are over- all beneficial to MNF Group’s core business as it drives demand for our cloud enabled phone numbers and also the associated call minutes usage. Our network is still in some cases experi- encing almost double the pre-pandemic volumes. However, all parts of the network are now oper- ating once again at optimal levels. MNF Group is well positioned to capitalise on further rapid growth from our existing and new customers for the remainder of the pandemic, and during the post-pandemic recovery. Some other impacts of the COVID-19 pandemic have not been as beneficial for MNF Group revenues – with small businesses delaying purchasing decisions, increased adoption of online collaboration tools driving down the vol- ume of usage-based audio conferencing, and the lack of international travel decimating mobile roaming traffic. These impacts provided a headwind in Q4 of FY20 and will continue to do so into FY21. Some of these changes may be permanent as user behaviours have undergone permanent changes, while some other changes may be reversed with the easing of travel restrictions and economic recovery. 8 UCaaS - Unified Communications as a Service CPaaS - Communication Platform as a Service Message from our CEO With so much change happening still today, it will be difficult to predict how each and every product and segment in MNF performs in FY21. As businesses and consumers adjust to the new post-pandemic life, some products and services in the MNF portfolio may decline. Overall however MNF is well placed looking forward into a post COVID-19 pandemic future. The still nascent industry segments of UCaaS, CPaaS and collaboration will be here to stay, stronger than ever now, and these segments will need more phone numbers and more connectivity than ever before. Our cash position is strong with strong EBITDA performance and excellent cash conversion. Our bad debts due to COVID-19 have been low to-date, and reassuringly we are adequately provisioned going into the new financial year. MNF has itself not been the recipient of any Australian Government assistance as our overall performance has been consistent with pre-pan- demic levels. In summary, I consider MNF Group a “net-benefi- ciary” of the longer term technological and social changes that will survive COVID-19. Our long-term post COVID-19 pandemic future is looking positive. Strategy Update Our company purpose is to help our customers innovate their voice communications. It is unusual to see situations where an entire company has felt so compelled and excited by its purpose. Our four pillar growth strategy is on track for success in the “new normal” of unified communications, cloud communications platforms and online collaboration: • Market Share Growth – the Company finished the financial year with 4.45 million phone numbers – an organic growth of 17% on the prior year – representing approximate- ly 5% of the Australian market. This market share growth was achieved predominantly from porting phone numbers to our network on behalf of our wholesale partners in Australia and New Zealand. We expect this trend to continue and even accelerate in the “new normal” as more enterprises and Governments hasten their cloud adoption strategies to support remote workers and resilient location independent voice communications. • Global Growth – the planned expansion into Singapore has faced some delays due to local carriers delaying their test windows for our network, however we largely remain on track to launch our Singapore network later this year. Buoyed by the strong demand we are experiencing in Australia and New Zealand for our products we are excited by the future of our Singapore business. • Trusted Partner – one of our key strategies is to build long-term partnerships with our customers, ensuring we not only sell them our products, but we continue to develop new capabilities to help them with their own growth. This fundamentally recognises that our customers’ success is ultimately our suc- cess. This growth pillar was never more criti- cal than during the height of the COVID-19 pandemic where our team worked closely with many key partners to deliver unprecedented traffic loads and capabilities literally over-night to meet urgent communications needs. • Software & API – our final strategy is to continue to invest in our software teams and software platforms. Our target is to deliver even higher levels of resilience, scalability and automation, making us the most trusted partner for our customers globally. The strategic outcomes we are aiming to achieve at MNF Group are a globally diversified and long-term high margin business; and to be the preferred provider of cloud-based voice communications infrastructure and software in the Asia-Pacific market. Thank-you On behalf of my fellow directors, I would like to thank our executive team, and all our employees for achieving what is a great result in the most difficult and unusual year. Without the hard work and dedication of the highly capable team here at MNF Group we would not be in the strong and healthy position we find ourselves today. I also thank all our shareholders for their continued support, and are all looking forward to the future with MNF Group. Rene Sugo CEO and Executive Director 9 Market Overview Use case: Software Powering the UCaaS and CPaaS revolution The global market for cloud communications software is estimated at over $70 Billion.* This includes Unified Communications (UCaaS), video conferencing software, Communication Platforms (CPaaS), Contact Centre software (CCaaS) and emerging technologies such as telehealth. Value proposition for SaaS Capabilities provided Our capabilities bridge the gap between the worlds of software and telecom. By working with us, global software vendors can scale beyond their home market and provide fully compliant, localised services in Australia and New Zealand. Using our platform, software vendors can allocate or port phone numbers, provision digital lines (SIP Trunks) and route calls or messages in and out of connected regions. These carrier features are at the heart of all communication and collaboration software. We handle the complexity of the telecom world – like regulatory compliance, number porting, toll fraud monitoring, caller identity pass-through and HD Voice support – so our customers can focus on building software. *Source: Gartner, IDC 11 Use case: Apps & digital services Use case: Global carriers Enabling communication with a tap or click Apps and digital services provide an ever-expanding universe of cloud communication use cases. High profile examples include ride-sharing apps, online classifieds, virtual answering services and advertising platforms. Trusted by: Value proposition for Apps & Digital services To achieve true scale, apps and digital services must enable any-to-any communication between a global user base. This means supporting local phone and mobile numbers, routing calls and messages via telecom networks, and connecting calls regardless of the end user’s device or location. By working with us, apps and digital services can deliver these carrier-level features without the need to build carrier infrastructure. Capabilities provided We manage the complexities of ANZ carrier interconnect, infrastructure scaling, call termination, fraud mitigation and local compliance. Apps and digital service providers can integrate with us directly via API, or through a CPaaS vendor, who in turn may rely upon our underlying platform Managing long-distance calling and toll fraud As legacy networks begin digital transformation, global carriers are looking for future-proof ways to deliver international communication. Value proposition for Global Carriers By working with us, global carriers can deliver long-distance calls and messages without the need for worldwide infrastructure or complex carrier agreements. We take care of international call and SMS routing, quality and cost optimization, and actively monitor for toll fraud and SPAM. Capabilities we provide Our managed international voice service can deliver calls in 90+ global destinations, using over 14000 routing lines, with pricing optimised automatically every 55 seconds. Our fraud management service helps to detect irregular traffic, typically from hijacked phone numbers and hacked phone systems or IoT devices. Rapid fraud detection helps protect both end-customers and service providers and removes a key funding source for organised crime. Trusted by: 12 13 Use case: Resellers & MVNOs Helping service providers add new revenue Resellers and MVNOs rely on incumbent networks for their voice, data and mobile services. But incumbents often come with technical limits and red tape that stifle innovation. Value proposition for Telecom providers Capabilities we deliver By working with us, service providers can sell modern telecom products to fit the needs of their consumer, small business or enterprise market. Instead of having to build products and back-office systems from scratch, we provide a turnkey solution that can be easily branded and launched. We aggregate a suite of ready-to-sell products, including mobile (MVNO), internet (NBN), hosted phone services, VoIP and number porting. Service providers can then resell these products using their own branding and their preferred go-to-market model. Our solution also includes APIs and software for telecom billing, customer support and service management. We are the trusted partner for hundreds of service providers in Australia. Trusted by: Regions we serve Australia / New Zealand The MNF Group serves Global Wholesale, Domestic Wholesale and Direct customers in Australia and New Zealand. As a key regional partner for UCaaS, CPaaS and Collaboration providers, we are growing rapidly alongside these disruptive technologies. Across Australia and New Zealand, we hold approximately 3% of the total phone number market – giving us ample room for growth. Importantly, our growth is fuelled by structural change in the communications market. Especially the surge in demand for remote working solutions, plus long-term technology tailwinds, such as the ISDN switch-off and migration to NBN and UFB. Singapore The Singapore voice market is ripe for disruption. 97% of phone numbers are held by just three carriers, 85% by the dominant incumbent. These carriers, relying upon legacy voice networks, cannot support the needs of cloud communication providers. Yet demand for cloud tools has never been higher. Entering the Singapore market via the acquisition of Super Internet Group in 2018, we are executing on our international expansion strategy. We have built a core voice network, hold FBO (carrier) accreditation, established a pipeline of customer opportunities, and plan to launch in late 2020. Our vision is to expand our Wholesale business into Singapore. Our value proposition is to take care of technical and regulatory roadblocks, opening this market for UCaaS, CPaaS and Collaboration providers. True to our disruptive pedigree, ours will be the first fixed voice network to launch in Singapore for almost two decades. We look forward to the opportunities our Singapore launch will unlock. 14 15 COVID-19 The COVID-19 pandemic The COVID-19 pandemic has demonstrated the critical importance of communication services in our everyday lives. MNF has been a net beneficiary of the global shift to remote working. Although mindful of short-term headwinds, we have a strong balance sheet and are well positioned for the post-COVID recovery. People & culture • Health and safety of staff remains #1 priority • Continuity plan and transition of global business to work from home successfully executed • Engagement, morale and performance at an all time high Structural tailwinds • COVID-19 accelerated growth of strategic UCaaS, CPaaS and collaboration customers, driving strong H2 results Long term structural changes will benefit MNF in the future however the environment is still dynamic • Structural headwinds A shift from audio conferencing to online collaboration is creating headwinds in our Direct segment, however this benefits our Wholesale segment Government assistance • Received zero Government assistance due to COVID-19 • Overall result is 100% organic performance Short term tailwinds (in FY20) Short term headwinds (into FY21) Variable revenues in all segments spiked in March and April: • Record increases in calling and conferencing traffic volume and duration during initial shutdown • Most variable revenue streams had returned to pre-COVID levels by June Some revenue streams have been negatively impacted with a recovery expected post-COVID: • International mobile roaming decimated due to travel bans • Small Business sales and decision making slowing due to economic uncertainty Long term COVID structural shifts & trends Aussies working from home 4.3M During COVID-19* Visits to workplaces 30% Vs Pre COVID-19* SEP 2019 OCT 2019 NOV 2019 DEC 2019 JAN 2020 FEB 2020 MAR 2020 APR 2020 MAY 2020 JUN 2020 JUL 2020 Collaboration UCaaS CPaaS MNF Customer Usage Data (% of baseline) correct as at 18 Aug 2020 Microsoft Teams meeting minutes 200% In April Vs March* Zoom meeting minutes daily 200m In March Vs Dec 19* Ring Central Subscriptions Revenue 32% Q2 2020 YoY* E-commerce online spending $2.9bn Vs Pre COVID-19* *Source: Roy Morgan, Forbes, Microsoft.com, blog.zoom.us, Ring Central, abs.gov.au 16 17 Business Overview Commentary Leadership team Jon Cleaver Chief Executive – Wholesale Andrew Tierney Executive General Manager – Global The Wholesale Business Unit spans our Domestic Wholesale and Global Wholesale segments, responsible for commercialisation of our domestic networks in Australia, New Zealand, Singapore, our global collaboration “As a Service” providers and interna- tional voice trading under the TNZI brand. recurring revenue streams. Symbio domestic and global drove efficiencies through automation to support continued growth projections as the world adopted these new technologies. Symbio New Zealand recorded continued success and further supported our international expan- sion strategy and our excitement on the impending Singapore deployment. Whilst the year will be remembered as one of unprecedented demand, accel- eration and adoption of collaboration platforms due to COVID-19, it is all the work that was done in prior years and the first eight months of FY20 which set MNF Group up for success this year. The year began with successfully completing the acquisition of Telcoina- box and transitioning the legacy PSTN businesses to the new generation SIP. The combination of a highly skilled Telcoinabox team, along with the proven MNF Group team, once again showed how we can successfully absorb acquisitions whilst remain- ing focussed and executing on our strategy. The Global TNZI business continued to focus on removing the dependence on usage products and introduce Given our well-solidified FY20 strategy we were extremely well positioned when the COVID-19 pandemic hit. For us at MNF it was about the acceleration of our plans, both in capacity and automation. We mobilised our entire workforce to work from home - including operations - without any customer impact, expanded our net- work in a matter of weeks to cater for two years of projected growth we received in a single day and through strong, estab- lished industry relationships kept people connected when it mattered. While what the new normal looks like may not yet be established, one thing is for certain – MNF Group’s strategy remains both relevant and well-chosen. Combined with our diverse, high skilled workforce, we are set to maximise growth in both our domestic and Global Wholesale Busi- nesses. The TNZI brand is part of the Global Wholesale segment and provides global connectivity for international voice minutes across the MNF Group and continues to be seen as a leader in international voice trading and has shown very strong performance in FY20. The COVID-19 pandemic delivered an initial surge in international traffic, however as things have settled down it is currently presenting challenges in the form of a decline in inter-country voice traffic due to travel restrictions reducing international roaming. We do expect a solid recovery to pre- COVID-19 levels once the world opens up international travel, especially between Australia, New Zealand and the Pacific. Consistent with MNF’s strategy we have connected many new global customers in the CPaaS, UCaaS and collaboration space through the TNZI brand over the past 12 months. These segments have not seen the same declines as tradi- tional telco traffic due to COVID-19 and continue to perform strongly. This has been our strategy for the last 18 months and the recent pandemic has validated the strength of implementing that strategy, albeit making us move a little sooner than we anticipated. 19 Commentary Commentary Iain Falshaw Chief Executive – Direct During the year, Express Virtual Meet- ings (EVM) successfully consolidated its many brands into a single coherent brand. Whilst the conferencing market contin- ues to be highly competitive, EVM have performed above expectations, helped in part by the demand related to COVID-19 along with a growing focus on managed conferencing business. This year, we again improved our NPS score for Direct to a new high of +48, an increase of +5 points from the previous year. Similarly, we maintained our strong customer service performance with 94% of enquiries being resolved on the first call. This represents a third year of im- provement in our customers’ experience feedback across these key metrics de- spite the challenges faced with COVID-19 in the latter part of the year. This reflects positively on our staff’s engagement and value of our continued investment in improving customer experience. The Direct Business Unit includes all the commercial and operational elements of MNF Group’s Consumer, Small Business, Enterprise & Govern- ment segments, as well as Express Virtual Meetings, our dedicated audio and video conferencing business. Bringing together the business units in MNF Group that sell direct to the cus- tomer enables MNF Group to uncover synergies across these business units and continue to focus on delivering a strong customer experience. Enterprise & Government have contin- ued to build on the relationship estab- lished with Cisco and have a growing base of Webex Calling customers. Furthermore, the impact of COVID-19 in the latter part of the year has further supported our growing focus in the UCaaS market with continued growth and several good opportunities for Webex and MS Teams solutions. Small Business has continued to grow during the year, despite the impact on small business customers as a result of the bushfires and more recently COVID-19. The re-establishment of the Connexus brand within the SMB market has been very positive and is beginning to show strong results. In the Consumer space, Pennytel has been highly competitive and has continued to grow its base impres- sively. Once again Pennytel’s custom- er-focused approach has resonated well with consumers and the product continues to be rated highly against its competitors. John Boesen Chief Technology Officer Ritsa Hime Chief Product Officer The Technology Business Unit has continued our transformation in FY20, moving supporting workloads into the cloud, reducing our operating and carbon footprints and enabling us to scale these services in a matter of days compared with the previous baseline of months. Our cloud adoption has also posi- tioned our team to deploy new capa- bilities faster, reducing the physical constraints of infrastructure-based deployment from 6+ months to just days, while also enabling our software teams to deploy code faster. Our networks team completed the final stages of our Singapore Network build in FY20 Q3 and our software team continues to develop the re- quired regulatory and market specific features to support a Singapore go live in FY21. Our networks division, in parallel, are also in the final stages of retiring our legacy voice network as we transition customers to our new next generation voice network, capable of supporting voice loads 50x larger than what we can currently support. The biggest challenge for the entire Technology team occurred in FY20 Q4 as a result of COVID-19, generating unprecedented increases in demand for our services as well as a need to shift to a work from home model. Our IT team completed a work from home transition for all employees in under a week, enabling all business units to continue under a new normal with our Networks team fast track- ing additional capacity builds at our edge locations to address increased demand. The Technology team had a very busy FY20 but remain focused and energised on closing out Singapore in FY21. In November 2019, the Products Business Unit was formed to lead the product development and deliv- ery functions for the Group and take responsibility for the overall product experience. This functional centrali- sation encompasses responsibilities of Product Management, Delivery, Customer Experience and Marketing across all channels. In the last nine months, our teams have been actively engaging with stakeholders both internally and externally to develop the MNF Group’s product strategy and roadmap. At the forefront of our product strategy and roadmap is the importance we have placed on understanding the needs and expectations of our customers. Coupled with our insights in consumer behaviours shifts in their use of ap- plications and technologies both pre and post the COVID-19 pandemic, regulatory and compliance changes, market trends in communications services and our competitors, to deliver a comprehensive product roadmap. Our teams are highly motivated and passionate to deliver quality products and services to our customers. Our success is hinged on our use of a disciplined frame- work to project delivery, product develop- ment and the life-cycle management of existing products and services. In the year ahead, our teams will be heav- ily immersed in the delivery and launch of our strategic Singapore network as well as other key initiatives to improve auto- mation and enhance digital experience for our customers. 20 21 The People Experience team has been instrumental in helping the Company navigate through the COVID-19 pandem- ic, providing extensive support in imple- menting the business continuity plan and implementing the pivot for all employees to work from home. The change was per- formed quickly and efficiently, and overall staff engagement and productivity has improved during the period. The People Experience team continue to monitor the situation closely and provide guidance to the Company on keeping our team safe and productive during these uncertain times. Compliance continues to be a priority area to implement changes and improvements as required. We seek to instil a continuous improvement mindset in everything we do, aimed at developing operational efficiencies for our team and colleagues. Commentary Chris Last Chief Financial Officer Helen Fraser General Counsel The Finance Business Unit enables the business in fulfilling its short and long-term growth strategies. We provide the underlying business part- nering to assist the executive team in their decision-making processes. In addition to the core finance teams, the People Experience function, also resides within the Finance Business Unit. The Finance Business Unit has been integral in the successful integration of the Telcoinabox business during the year, consolidating the finance function as well as the accounting and reporting systems into MNF Group’s common platform. During the year the finance team has been focussed on capital manage- ment and strengthening the balance sheet. A prime focus this year has been on debtor’s management, an area that has been brought into the focus due to the COVID-19 pandemic. Together with tight processes and a dedicated team the Company has been able to navigate the pandemic and still improve the overall debtors position relative to last financial year. The Legal & Compliance team provides legal and compliance related support to all areas of the MNF Group business globally, as well as the Board of Directors, and is aimed at enabling the Group to deliver on its strategy. We are valued for the commercially astute advice we give in line with our company value of delivering excellence and for our collaborative and solution-focused approach. We partner with the business on product and business development initiatives where customer experience is kept front of mind. We have been instrumental in the Singapore project, particularly in relation to compliance and contract elements. Corporate Social Responsibility In FY20 MNF continued its commitment to giving back within the community in alignment with one of our core values ‘We Care’ MNF Group company values Honest & Fair Deliver Excellence We care Be brave Collaborate Charity support at MNF We are proud to continue our support for Télécoms Sans Frontières who provide support for critical projects during humanitarian crises including recently in Beirut. We have again supported the Brain Cancer Collective through sponsorship of the Bike Ride for Brain Cancer. This year we launched our payroll giving platform Good2Give, which has been a resounding success. We focused on appeals to help charities supporting Bushfire impacted communities and another to benefit charities supporting those struggling through the COVID-19 pandemic. Pre-tax employee donations plus matched contributions and additional corporate donations from the Group have made a substantial difference to: • The Red Cross • Foodbank • WIRES • NSW Rural Fire Service • St Vincent de Paul Society NSW • Lifeline • OzHarvest • KiwiHarvest Volunteering at MNF 5 events | 82 employees participated | 4 charities supported Ronald McDonald House | Oz Harvest | Landcare | Guide Dogs Victoria Landcare We teamed up with Landcare to take part in their ‘Clean Up Sydney Harbour’ initiative. Ronald McDonald House Our team spent an afternoon at Ronald McDonald house in Westmead. Our team worked hard to remove rubbish along the coastal land and waters of Bradleys Head (including by kayak) and worked on restoration of the coastal area. Duties ranged from cooking up an amazing Mexican feast, arts and crafts with the children, face painting and a game of handball. Educational context was provided on native plants and land management around Sydney Harbour, ensuring a meaningful and memorable contribution was made by all. The kids were able to smile and forget just for a moment what they are going through, however the impact on our employees that helped create those smiles is unforgettable. 22 23 Diversity & Inclusion (D&I) People Experience (PX) MNF Group’s D&I committee guides and assists ongoing efforts towards building and maintaining a diverse and inclusive culture. People Experience at MNF Group support our global employees and their Leaders through the full employee lifecycle Core of pillars of D&I Culture | Gender | Indigenous | Disability & Accessibility Family & work flexibility | LGBTIQ+ Generalist Business Partnering | Learning & Development | Talent Acquisition Core centres of excellence We pride ourselves on holding a range of internal events that brings our employees together and celebrates our diverse backgrounds. Whether it’s encouraging our employees to bring in food from their cultural backgrounds or holding interactive panels discussing unconscious bias and flexible working, we strive to foster an environment of belonging and empowerment in everything we do. International Women’s Day Panel Discussion Mardi Gras Rainbow Bake sale Chinese New Year Fortune cookies Taste of Harmony Cultural buffet STEM Women and Girls in Science Me n 5 Leave Applications Parental leave Launched: 1 July 2019 This FY we launched our Paid Parental Leave, offering 12 weeks’ primary carers leave and 2 weeks partner/secondary carer leave at 100% of base pay. We are proud to report that the uptake of this benefit by fathers was 6 times the average.* We have received feedback from employees that the impact of this benefit on them and their families has been resoundingly positive. 11 m en W o Talent acquisition Updates: Ongoing Employee share plan Launched: Jan 2020 Building on a solid foundation, several initiatives were completed this year to improve talent acquisition. • Framework and risk controls reviewed • Job vacancy program integrated • Employee Referral and Graduate programs reviewed and relaunched • Application Tracking System introduced • Careers website updates Additional projects to enhance our employer brand will occur in FY21, including defining our Employee Value Proposition and improving our onboarding experience. To thank and recognise individuals for their ongoing contribution to the success and growth of MNF Group, employees were invited to participate in the Employee Share Plan. $1000 of shares were issued to each employee who opted to be part of the scheme, with a 96% uptake. 24 *Source: ABS 25 Financial Report For the year ended 30 June 2020 Launchpad Launched: Dec 2019 Introducing Launchpad, our intranet hub for all employee communications, recognition, rewards and benefits. It has now become the go to site for employee communications and resources and comprises: Our Reward & Recognition (R&R) platform incorporating the MNF Wall of Stars, access to details of each of our key employee benefits including a wide range of significant employee discounts and is used to manage our global annual R&R program. Our company Newsfeed Ensures key information and updates can be shared/communicated either globally or segmented as required. It has proved to be an excellent tool whilst we’ve been managing our COVID-19 response in ensuring we can get communications out quickly and provide one location for all key resources. An intranet hub for all key PX-related information and a Health & Wellbeing Centre During the COVID-19 pandemic, Launchpad has proved to be invaluable to provide a single source of timely and regular communications with employees. MNF Flex Launched: Start of FY21 Introducing MNF Flex, our flexible work policy. At MNF Group we are proud of the diversity of our people and recognise that everyone’s flexible work requirements will be unique, one size does not fit all. That’s why we took a thoughtful, and consultative approach to flexibility. By aligning the policy closely with our culture, we have created a flexibility policy that will stand the test of time. Subject to COVID-19 restrictions, we’ll be rolling out these flexible options as the return to workplace program commences. Location Time Leave MNF Group Limited ABN 37 118 699 853 Choice 26 26 27 Contents Directors’ report Directors’ report - audited remuneration report Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the consolidated financial statements 1. Corporate information 2. Significant accounting policies 3. Operating segments 4. Revenue and expenses 5. Income and deferred tax 6. Operating cash flows reconciliation 7. Trade and other receivables 8. Property, plant and equipment 9. Trade and other payables 10. Loans and borrowings 11. Financial instruments 12. Customer deposits 13. Provisions 14. Right-of-use asset 15. Lease liability 16. Issued capital 17. Staff Share-based payments 18. Restructure costs 19. Commitments and contingencies 20. Events after reporting date 21. Auditor’s remuneration 22. Director and executive disclosures 23. Controlled entities 24. Entities over which control has been lost during the financial year 25. Goodwill and other intangibles 26. Impairment testing 27. Earnings per share 28. Dividends paid and proposed 29. Parent entity 30. Financial risk management objectives and policies 31. Company details Directors’ declaration Auditor’s independence declaration Independent auditor’s report ASX additional information 28 29 38 46 47 48 49 50 79 80 81 88 50 50 59 60 62 64 64 65 66 66 66 67 67 68 68 68 69 70 70 70 70 71 72 72 73 73 75 75 76 76 78 Directors’ Report Your directors present this report, together with the financial statements of MNF Group Limited (the Company) and its controlled entities (the Group), for the financial year ended 30 June 2020. Board of directors The names and details of the Company’s directors in office during the financial year and until the date of this report are set out below. Directors were in office for this entire period unless otherwise stated. Mr Terry Cuthbertson Chairman, Non-Executive Director Special responsibilities Chair of the Risk Committee, Member of the Audit and Nomina- tion Committees Interest in: Shares 855,906 Options 100,000 Mr Andy Fung Non-Executive Director Mr Rene Sugo Chief Executive Officer and Executive Director Special responsibilities Member of the Audit, Risk and Nomination Committees Special responsibilities Member of the Risk, Remuneration and Nomination Committees Interest in: Interest in: Shares Options Shares Options 13,625,802 100,000 12,034,214 150,000 Qualifications Bachelor of Business, qualified as a Chartered Accountant in Australia Qualifications Bachelor of Engineering, Master of Commerce, MAICD Qualifications Bachelor of Engineering (Hons), GAICD Experience and expertise Appointed as a Non-Executive Director in March 2006 and has been the Group Chairman since March 2006. Mr Cuthbertson was previously a partner of KPMG and has extensive corporate finance expertise and knowledge. Directorships of listed entities (last 3 years) Chairman of Austpac Resources N.L. from 2004 (Director from 2001); Chairman of South American Iron & Steel Corporation Ltd from 2009; Chairman of Malachite Resources Ltd from 2013 (Director from 2012); Interim Chairman of Mint Payments Ltd from January 2020; Chairman of Australian Whisky Holdings Ltd from 2003 (resigned on 20 May 2019); Director of Isentric Ltd from 2010 (resigned on 31 May 2019). Experience and expertise Appointed as Non-Executive Director in March 2012. Experience and expertise Appointed as CEO and Executive Director in March 2012. Mr Fung is a co-founder of MNF Group Limited and Symbio Networks Pty Ltd. He was formerly Managing Director of the Group from 2006 until 2012. Mr Fung has had extensive tele- communications industry experi- ence in Australia and Asia, having previously held senior management positions with Telstra, Australian Trade Commission, Optus and Lucent Technologies of US. He is also Executive Director of a private company with interests in trade and investments. Directorships of listed entities (last 3 years) None Mr Sugo is a co-founder of MNF Group Limited. He is a strong industry advocate, and has been a director of both the Australian Com- munications Alliance and the INMS (Industry Number Management Services) since 2015. Mr Sugo sits on various industry committees locally and overseas, regularly contributing articles and opinions on issues affecting the in- dustry, such as the NBN, regulatory policy and innovation. Mr Sugo started his career at the CSIRO. Prior to making the move into the Communications industry, Mr Sugo worked at Lucent Technologies Bell Labs in Australia, the USA and Asia. Directorships of listed entities (last 3 years) None 29 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ Report Directors’ Report Mr Michael Boorne Non-Executive Director Mr David Stewart Non-Executive Director Ms Catherine Ly Company Secretary Special responsibilities Chair of the Audit Committee Special responsibilities Chair of the Remuneration and Nomination Committees Qualifications Bachelor of Business and Certified Practising Accountant Interest in: Shares 384,605 Options 100,000 Interest in: Shares 200,000 Options - Qualifications Diploma in Electronics Engineering Qualifications GAICD Experience and expertise Ms Ly joined the MNF Group in April 2006 as CFO and Company Secretary, and has focused on the role of Company Secretary and Treasurer since August 2013 follow- ing the expansion of the Group. Experience and expertise Appointed as Non-Executive Director in December 2006. Experience and expertise Appointed as Non-Executive Director on 13 August 2019. Mr Boorne is a successful entrepreneur with extensive experience in combining technical expertise with commercial and corporate experience. He has founded start-up businesses Sprit Modems and Mitron, and is a director and committee member of numerous private companies and charitable foundations. He was previously a Non-Executive Director of Netcomm Ltd. Directorships of listed entities (last 3 years) None Mr Stewart is an experienced CEO and successful entrepreneur with more than 30 years in management and business leadership roles. Mr Stewart founded Banksia Technology Pty Limited in 1988 and became Managing Director of Net- comm Limited in 1997, remaining at the helm of the Company until December 2016. A year later he was appointed as a Non-Executive Director of NetComm Wireless, a position he held until June 30, 2019. Mr Stewart also joined the board of Lockbox Technologies in early 2018 until July 2020. Directorships of listed entities (last 3 years) Director of Beam Communications Holding Limited from November 2017; Director of Netcomm Wireless Limited from 1997 (resigned on 30 June 2019). Board and Committees Meetings From 1 July 2019 to 30 June 2020, the directors held 15 board meetings, 2 audit committee meetings and 1 remuneration meeting. Each director’s attendance at those meetings is set out in the following table: Directors Mr. Terry Cuthbertson (Board Chairman) Mr. Michael Boorne (Audit Committee Chair) Mr. Andy Fung Mr. David Stewart (Remuneration Committee Chair) Mr. Rene Sugo Board Audit Remuneration Eligible to attend Attended Eligible to attend Attended Eligible to attend Attended 15 15 15 14 15 15 15 15 14 15 2 2 2 2 2 2 2 2 2 2 - 1 - 1 1 - 1 1 1 1 During financial year, Mr David Stewart (Chair), Mr Michael Boorne and Mr Rene Sugo are the members of Remuneration Committee. Mr Andy Fung attended by invitation. In May 2020, a new Nomination Committee and a new Risk Committee were formed. No meetings were held during the financial year. Principal activities and significant changes in nature of activities The principal activity of the MNF Group is providing software and services for voice communication. The overall nature of the business has not changed during the financial year. In the financial year the MNF Group derived recurring and variable revenue from the sale of its software and services in Australia, New Zealand and internationally. Business segments Wholesale The Wholesale business unit provides voice and communications capabilities including phone numbers, voice carriage services and telco cloud services. Domestic Wholesale customers are predominantly Retail Service Providers (RSPs), Managed Services Providers (MSPs) and IT companies in Australia or New Zealand. Domestic Wholesale services are typically sold through subsidiary brands Symbio Networks, iBoss and Telcoinabox. Global Wholesale customers are predominantly international UCaaS, CPaaS and CCaaS vendors, software and app developers and global telecom providers. Global Wholesale services are typically sold through Symbio Networks and TNZI. Direct The Direct business unit provides mobile, conferencing and collaboration services directly to residential, small business, enterprise and Government customers, predominantly in Australia. Enterprise and Government customers are served through the MNF Enterprise brand in Australia and Supernet in Singapore. Small business customers are served by Connexus and Express Virtual Meetings, while residential customers are served by Pennytel and MyNetFone. Operating Result Excluding costs associated with acquisitions, earnings before net interest, tax expense, depreciation and amortisation expense (EBITDA) increased by 40.5% to $38.2m, with net profit after tax (NPAT) increasing by 20.2%* to $11.9m, compared to the prior year. The total dividend for the full year is 6.1 cents per share (fully franked), with the Company declaring a final dividend of 3.6 cents per share for the second half of the 2020 financial year. The full year dividend payments represent 41% of the 2020 full year EPS. *Restated based on a correction of deferred tax made to the 30 June 2019 financial year. See Note 5 of the consolidated finan- cial statements for details. 30 31 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesDirectors’ Report Directors’ Report MNF Group performance at a glance Revenue $230.9m Group recurring margin increase $11.4m 300 250 200 M $ 150 100 50 - 161.2 191.8 220.7 215.6 230.9 77.2 100.4 104.0 117.5 118.9 84.0 91.4 116.7 98.1 112.0 FY16 FY17 FY18 FY19 FY20 H1 Revenue H2 Revenue M $ 120 100 80 60 40 20 0 48.6 58.6 69.0 82.5 96.4 36.7 34.2 31.9 38.5 29.5 19.1 26.7 30.5 48.3 59.7 FY16 FY17 FY18 FY19 FY20 Recurring margin Variable margin Margin $96.4m Phone numbers 4.5m M $ 120 100 80 60 40 20 - 48.6 58.6 69.0 82.5 96.4 51.4 M 26.2 31.9 34.9 46.7 22.4 26.7 34.1 35.8 45.0 FY16 FY17 FY18 FY19 FY20 H1 Revenue H2 Revenue GM% 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - 2.5 2.8 3.2 3.8 4.5 FY16 FY17 FY18 FY19 FY20 EBITDA $38.2m # FY19 EBITDA has been adjusted to reflect the impact of AASB 16 Lease accounting Underlying NPAT-A $16.6m^ M $ 45 40 35 30 25 20 15 10 5 - 17.6 22.8 24.5 30.0# 38.2 9.5 13.5 12.9 19.0 21.3 8.1 9.3 11.6 11.0 16.9 FY16 FY17 FY18 FY19 FY20 H1 H2 EBITDA % Revenue 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% M $ 20.0 15.0 10.0 5.0 - 10.7 14.3 14.1 14.1* 16.6 5.9 4.8 8.6 6.9 5.7 7.2 9.3 4.8 10.1 6.5 FY16 FY17 FY18 FY19 FY20 H1 H2 EPS 14.88 cents Underlying EPS-A 20.7 cents^ s t n e c 25.00 20.00 15.00 10.00 5.00 - 13.45 17.32 16.25 13.56* 14.88 7.44 10.15 7.88 9.33 10.05 6.01 7.17 8.37 4.23 4.83 25.00 20.00 s t n e c 15.00 10.00 5.00 - 15.9 20.6 19.3 19.2* 20.7 12.1 9.7 12.2 8.8 12.7 7.1 8.5 9.6 6.5 8.5 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 H1 H2 H1 H2 ^ Underlying NPAT-A & EPS-A exclude acquisition costs, amortisation of acquired customer contracts & acquired software and tax effected restructure costs only * Prior year restated based on a correction of deferred tax made to the 30 June 2019 financial year. See Note 5 of the consoli- dated financial statements for details. Review of operations A review of the operations of the Group during the financial year and the results of those operations are as follows: Record Margin and EBITDA Margin increased $13.9m (16.9%) on the prior year to a record $96.4m (2019: $82.5m). EBITDA of $38.2m was up 40.5% on the prior year. Net profit after tax (NPAT) for the year was up at $11.9m (2019*: $9.9m) with Earnings per share (EPS) increasing to 14.88 cents per share (2019*: 13.56 cents per share). Year ended 30 June 2020 Year ended 30 June 2019 % change Revenue Gross profit EBITDA NPAT EPS $230.9m $96.4m $38.2m $11.9m $215.6m $82.5m $27.2m $9.9m* 14.88 cents 13.56 cents* 7.1% 16.9% 40.5% 20.2% 9.7% The current pandemic is creating greater demand for voice and collaboration technology as the working environment evolves to a more remote working model. The Group has seen a small percentage of customers struggle in these difficult times and assess each case individually to offer a suitable tailored plan to assist their circumstance. The Group has ensured allowance for doubtful debts is updated to reflect the change in risk of default since initial recognition, based on current economic environment. Reconciliation of NPAT to EBITDA NPAT Add back: Depreciation & Amortisation1 Income tax expense Net interest Costs related to acquisition Discontinued data product Restructuring costs Non-cash share option costs EBITDA 2020 $’000 2019 $’000 11,947 9,943* 16,117 4,703 2,769 - - 1,300 1,377 $38,213 8,973 4,450* 1,744 1,168 500 - 420 27,198 1 Following the adoption of AASB 16 Leases, depreciation and interest in the current period include amounts accounted for under the new requirements. Prior period has not been restated. Refer to Note 2 for further details. * Financial year 2019 numbers have been restated based on a correction of deferred tax made to the 30 June 2019 financial year. See Note 5 of the 2020 Financial Report. Cash and debt The cash balance as at 30 June 2020 was $46.1m (2019: $15.5m). Total debt as at 30 June 2020 is $30.0m (2019: $55.6m). During the year, the Group raised $52.1m ($49.7m net) by way of share placement of 10,410,000 shares at $5 per share. This allowed the Group to repay $25.6m of debt. The Group retains its finance facilities totalling $60.0m revolving credit facility, of which $30.0m is undrawn at 30 June 2020. The Group’s balance sheet is well positioned to support future acquisitions with $46.1m in cash and $30.0m of undrawn facilities. 32 33 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesDirectors’ Report Directors’ Report Business outlook The MNF Group operates with three solid independent segments – Domestic Wholesale, Global Wholesale and Direct. Inside each segment are multiple product lines with excellent diversity of customers and profit contribution. All segments operate in our core area of specialisation, being enabling new and disruptive voice communications through software development and network deployment. Each segment has a well-defined strategy for investment and growth. The Group is focussed on growing Monthly Recurring Revenue (MRR) across all three segments. These recurring revenue streams tend to be high gross margin and very sticky for customers. There is a transition away from transactional (or usage) based revenues which tend to be low margin and dynamic in nature. The Group grew recurring revenues by 37% on prior year to $101.5m during the year, with corresponding recurring gross margins growing 24% to $59.7m during the year (and 62% of overall margin is now off recurring sources). 300.0 250.0 200.0 M $ 150.0 100.0 50.0 0.0 161.2 192.2 220.2 215.6 230.9 129.4 135.8 134.3 155.6 175.8 26.9 36.6 44.4 79.8 101.5 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 41% 38% 54% 56% 61% 39% 46% 44% 59% 62% FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 Recurring revenue Variable revenue Recurring margin Variable margin MNF Group is confident of long-term sustainable organic Monthly Recurring Revenue (MRR) and gross margin growth across all three segments. Trio of Industry Tailwinds The Company is experiencing strong organic growth in its core product areas – being hosting of next generation voice services in the cloud. This growth is being driven by strong structured tailwinds in the industry - comprising of: a) b) c) cease sale of legacy PSTN/ISDN services, the NBN Roll out, the UCaaS, CPaaS and CCaaS communications revolution. The Company is well positioned to leverage all three tailwinds thanks to its network infrastructure, software assets and customer relationships. The COVID-19 Pandemic – Ongoing Business Operations The Company’s key priorities are the health and safety of its people and the reliable continuity of business operations, maintaining its high standard of service whilst continuing software development that underpins and enables critical communications services across the globe. The Company successfully pivoted all global employees into a working-from-home mode prior to it being mandated by Governments in many jurisdictions. This was made possible due to pre-existing Business Continuity Plans, as well as strong leadership from the executive and people experience teams. The Company has implemented several initiatives to monitor the mental health and well-being of its staff globally. This has been supplemented by regular staff surveys, manager interviews and deployment of additional training and resources to support the broader team during what has been a challenging and stressful time. Overall the Company can report that morale and productivity levels have been maintained at all time high levels for the duration of the pandemic thus far. The Company continues to monitor the COVID-19 pandemic closely and continues to provide advice to staff with regards to ongoing safety and well-being. The corporate offices globally continue to operate only on skeleton staff where necessary. The Company has conducted extensive return-to-workplace planning in preparation for an eventual return to the office setting. This includes implementing best-practice policies to ensure the safety of staff within the office environment for when they are required to return to the offices. The Company has also accelerated the implementation of its global “MNF Flex” initiative allowing for long-term flexible working arrangements to support employees globally past the pandemic crisis. MNF Group is confident it can continue business operations to its usual high standard for the long term should the lock down restrictions continue for a protracted period. The COVID-19 Pandemic – Trading Update and Outlook The COVID-19 pandemic has caused large amounts of economic and social disruption globally. Despite these disruptions MNF Group has overall been a net beneficiary from the structural changes to the global economy caused by the pandemic. The COVID-19 pandemic created a greater demand for voice communications and collaboration technology as work and school shifted to a work-from-home mode, and the demand for information and connectivity through technology increased. The demands for voice communications have been from a very broad base of business, enterprises and Governments, domestically and globally, and underscore the continued importance of real-time high-quality voice communications to the global economy. As a key provider of software and services for telecommunications and unified communication technologies, MNF experienced strong demand for its core products from existing and new customers. Overall the Company has been able to respond positively to all requests from customers to provide augmentation and additional services. In order to move quickly, the Company had to divert resources from other projects as well as expend additional capital expense to ensure sufficient capacity was maintained. There have however been major disruptions to the Australian Telecommunications industry’s number portability processes due to other carriers losing their operational capabilities offshore during lockdowns. This disruption to porting has adversely impacted future growth in recurring revenues in H2 for all MNF Group segments. This will cause roll-forward knock on effects for recurring revenues into FY21. While number portability services are now largely restored, it will take up to 6 months to clear the backlog of orders that were accumulated during the affected period. MNF Group is working closely with its carrier peers to clear the back logged orders as quickly as possible. The Domestic Wholesale segment benefitted strongly from the additional demand for domestic voice minutes from existing and established customers. Sales to new domestic wholesale customers has remained strong during the pandemic despite the obvious challenges of operating during a lock down. There were some industry wide disruptions to number portability which are causing some negative impact to recurring revenue growth in this segment. Backlogs in customer orders remain and normality is not expected to be restored until January 2021. Overall the Domestic Wholesale business remains in a strong position for growth into the future and will be a net long-term beneficiary of the structural changes due to the pandemic. The Global Wholesale segment experienced a positive impact from a surge in usage of collaboration, CPaaS and UCaaS services, with voice minutes volumes consistently up 80% during most business days in April relative to February. While there has been some softening in volumes recently, it appears that these segments have undergone positive structural change, and elevated volumes can be expected to continue into the future. There were some industry wide disruptions to number portability which are causing some negative impact to recurring revenue growth in this segment. Backlogs in customer orders remain and normality is not expected to be restored until January 2021. Overall the Global Wholesale business remains in a very strong position for growth into the future and will be a net long-term beneficiary of the structural changes due to the pandemic. MNF’s Direct segment experienced higher than normal usage volumes, given the surge in demand for voice services from small business, enterprise and Government customers as they seek to remain connected. The Express Virtual Meetings service, (formerly known as CCI), experienced the strongest demand in this segment with conferencing minutes in March up 186% from the prior month. As the pandemic and the associated lockdowns continued, business and enterprise customers adapted quickly to the new normal. This has seen a greater adoption of “online” collaboration tools and a shift away from traditional tools like audio conferencing. As such the gains made in MNF’s Direct business should be considered short term. Usage volumes in the direct business have now restored to pre-pandemic levels and may continue to decline as customers continue to migrate to online collaboration tools. Domestic Wholesale Segment Operating under the Symbio brand, the Domestic Wholesale segment offers a complete range of wholesale telecommunications products, services and capabilities to small Carriage Service Providers (CSP) in Australia and New Zealand. The Domestic Wholesale business generates both MRR and transactional (usage) based revenues. The business is focussed on growing the MRR which is mostly high margin and very sticky for customers. 34 35 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesDirectors’ Report Directors’ Report Global Wholesale Segment The Global Wholesale segment offers a complete A-Z service for global voice minutes termination under the globally recognised TNZI brand. Additionally, the segment offers access to the next generation Symbio brand of services for next generation global companies. This segment is strategic to the Group and has the biggest potential for long term organic growth through leveraging its global market reach to sell the Company’s high margin products. Initial focus for global growth is the Asia-Pacific region where the opportunity for the Company is strongest. The Symbio brand offers access to the Australian, New Zealand and soon Singapore markets for global software and telecommunications companies to deliver their product value proposition locally without having to build extensive in-country infrastructure. Direct Segment A portion of our business is selling directly to end customers. Enterprise and Government customers are served through the MNF Enterprise brand in Australia and Supernet in Singapore. Small business customers are served by Connexus and Express Virtual Meetings, while residential customers are served by Pennytel and MyNetFone. a. Residential Last year the business divested its direct residential DSL and NBN customer base in May 2019. This decision to divest this asset was driven by the customer base being sub-scale in a highly regulated and competitive market. The Company maintains its original MyNetFone residential VoIP customer base, and the Pennytel mobile customer base. b. Small Business The Small Business sub-segment consists of selling business grade MyNetFone Virtual PBX and SIP trunks, as well as business grade DSL, NBN and Ethernet broadband services within Australia. The sub-segment operates under the brands MyNetFone, Connexus and CallStream. Each brand has its own value proposition, website, and product range; however, all brands are operated across the same network and same operations team, providing a high level of synergy. The small business market sub-segment is strategic to MNF with strong prospects for future growth. The Company has some leading products in the market and continues to innovate. The NBN roll out will provide additional growth impetus to this segment when the NBN reaches more centralised business areas, as it will force customers to move off legacy copper PSTN services and find new alternatives for telephony. c. Enterprise & Government The Enterprise & Government sub-segment consists of selling enterprise grade telecommunications solutions such as SIP Trunks, Microsoft Skype for Business, Cisco BroadSoft/BroadCloud and other solutions within Australia, New Zealand and Singapore. The sub-segment operates under the MNF Enterprise brand, holding unique partnerships with Cisco and Microsoft. MNF Group maintains purchasing panel arrangements with the Singapore Government, New Zealand Government, NSW Government, Victorian Government, Tasmanian Government, the Municipal Association of Victoria, and the West Australian Association of Local Government. These panel arrangements allow for MNF to bid for business tenders as and when they become available matching our product portfolio. d. Conferencing & Collaboration The conferencing and collaboration business provides audio, video and desktop sharing services for small to medium, enterprise and Government customers in Australia and New Zealand. This segment is undergoing transformation from traditional voice collaboration to multi-media voice, video and desktop sharing. Significant changes in the state of affairs There were no significant changes in the state of affairs of the Group during the financial year. Events occurring after the end of the financial year The directors are not aware of any matter or circumstances which have occurred since the end of the 2020 financial year which has significantly affected or could significantly affect the results of Group’s operations or performance, other than the final dividend for the financial year 2020 and the dividend reinvestment plan (DRP), as noted below. 36 Dividends proposed The dividend as recommended by the Board will be paid subsequent to the balance date. Refer to Note 28 in the Financial Report for details. Future developments The Board is committed to growing the Company organically as well as by way of targeted acquisitions. The Company has a strict policy around the evaluation of acquisition targets and will continue to look to build through leveraging synergies, adding products and services through the acquisition of intellectual property and avoiding companies that are pure re-sellers of other networks. Environmental issues The Group’s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or Territory. Dividends paid or recommended Fully franked dividends paid or declared for payment during the financial year are as follows: Dividends paid during the year: 2019 final dividend of 4.0 cents per share paid on 03 October 2019 2020 Interim dividend of 2.5 cents per share paid on 02 April 2020 Dividends recommended (subsequent to year end): $000 Franking 2,940 2,106 100% 100% 2020 Final dividend of 3.6 cents per share recommended on 25 August 2020 3,035 100% The 2020 final dividend is to be paid on 1 October 2020 to shareholders registered as at 7 September 2020. Options Shares under option or issued on exercise of options pertaining to directors The Directors did not acquire any shares through the exercise of options during the year. On 25 October 2016 at the Annual General Meeting, shareholders voted in favour of granting 450,000 options to Directors. The details of those options are detailed in the table below: Director Terry Cuthbertson Michael Boorne Andy Fung Rene Sugo Date of expiry Exercise price Number of options 30 June 2021 30 June 2021 30 June 2021 30 June 2021 $7.15 $7.15 $7.15 $7.15 100,000 100,000 100,000 150,000 450,000 Shares under option or issued on exercise of options for the Group At the date of this report, the unissued ordinary shares of MNF Group Limited under options which were granted as at 30 June 2020 is as follows: Grant Date 27 October 2016 11 December 2018 11 December 2018 Date of expiry Exercise price Number of options 30 June 2021 30 June 2021 30 June 2022 $7.15 Nil Nil 620,000 120,000 120,000 860,000 37 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesDirectors’ report - audited remuneration report Audited Remuneration Report Message from the Remuneration Committee Chair Dear fellow Shareholders, On behalf of your company’s Remuneration Committee, I am pleased to present MNF Group’s FY20 Remuneration Report. In May 2020, the MNF Group Remuneration Committee was reconstituted. Prior to this the functions of the Remuneration Committee were undertaken by the full Board (comprising of Mr Michael Boorne (Chair), Mr Terry Cuthbertson, Mr Andy Fung, Mr David Stewart and Mr Rene Sugo). In May 2020, the current Remuneration Committee structure was approved and the Remuneration Committee Charter by which the committee is governed was refreshed and reap- proved by the Board in June 2020. The Remuneration Framework was designed to responsibly reward senior executives through the components of Fixed Remuneration, Short-Term Incentives (STI) and Long-Term Incentives (LTI). We benchmark against like companies utilising data compiled by an independent third-party data provider. STIs are based on achievement of the financial target (Financial KPI) and the key stra- tegic objectives for the Company (Individual KPI). The LTI scheme is directly linked to Sharehold- er value creation and designed to only provide benefit to participants when there is share price growth in the long term and the employee remains engaged by the Group. During the latter part of the financial year a Steering Committee has reviewed and developed a revised Senior Executive Incentive plan which is proposed to come into effect from 1 July 2020, having taking guidance from independent third-party executive remuneration specialists. This plan aims to deliver a standardised motivational incentive plan that also combines with securing employee retention and is aligned to acceptable market practice. We will monitor the effectiveness of our MNF Group remuneration framework, particularly in the initial stages of implementation and as the Company continues to evolve hence ensuring shared success amongst our Board, executive team, employees and shareholders. Sincerely, David Stewart Directors’ report - audited remuneration report This report details the remuneration structures and outcomes for key management personnel (KMP) of the Group for the year ended 30 June 2020. This report forms part of the directors’ report and has been prepared and audited in accordance with section 300A of the Corporations Act 2001. For the purposes of this report, KMP is defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, and includes directors (whether executive or otherwise) of the Company, the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and other senior executives of the Group. The table below outlines the KMPs of the Group and their movements during the 2020 financial year: Name Position Term as KMP Non-executive directors Mr Terry Cuthbertson Mr Michael Boorne Mr Andy Fung Mr David Stewart Executive director Mr Rene Sugo Other KMPs Mr Matt Gepp(i) Mr Chris Last(ii) Non-executive Chairman Non-executive Director Non-executive Director Full financial year Full financial year Full financial year Non-executive Director From 13 August 2019 Chief Executive Officer Full financial year Chief Financial Officer Until 11 September 2019 Chief Financial Officer From 12 September 2019 Ms Catherine Ly Company Secretary and Treasurer Full financial year (i) Mr Matt Gepp ceased as CFO of the Group on 11 September 2019 and his employment ceased on 20 September 2019. (ii) Mr Chris Last commenced with the Group as CFO on 12 September 2019. Remuneration Committee The Remuneration Committee’s purpose is to review and make recommendations to the Board on the level and composition of remuneration for non-executive directors, the CEO and CFO, and senior executives reporting directly to the CEO; and to review and make recommendations to the Board in respect of the LTI and STI scheme available to executives and other employees and to ensure that such remuneration and scheme is appropriate and not excessive while remaining competitive to attract and retain high quality directors and to attract, retain and motivate senior executives. The Committee is also responsible for reviewing and reporting to the Board in respect of whether there is any gender or other inappropriate bias in remuneration for directors and senior executives; overseeing compliance with statutory responsibilities in relation to remuneration disclosure; and reviewing and approving the WGEA reports. The Remuneration Committee charter and composition was revised in May 2020 and the committee comprises the following directors: • Mr David Stewart - Non-executive Director (Committee Chair) • Mr Michael Boorne - Non-executive Director • Mr Rene Sugo - Executive Director (CEO) The Group does not currently engage remuneration consultants to provide a formal remuneration recommendation, however, it may consider the use of remuneration consultants to provide such a recommendation in the future as the Group continues to grow. The Board sets the aggregate remuneration of non-executive directors, which is then subject to shareholder approval. The current aggregate maximum amount of non-executive directors’ fees of $500,000 per annum (inclusive of superannuation guarantee charge contribution) was approved by shareholders at the 2014 AGM. The 2019 audited remuneration report received positive shareholder support at the 2019 annual general meeting (AGM) with a vote of 99.30% in favour (2018: 87.87%). 38 39 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesDirectors’ report - audited remuneration report Executive remuneration arrangements Remuneration principles and strategy Remuneration levels for KMPs of the Group are designed to attract and retain appropriately qualified and experienced directors and executives. The Group aims to reward executives based on their position and responsibility whilst maintaining comparability with other companies in the sector of similar revenue, market capitalisation and earnings levels. The executive remuneration structure remains unchanged from the prior year, and includes a combination of the following components: Fixed Remuneration Variable Remuneration Short-term Incentive (STI) Long-term Incentive (LTI) Cash Equity • Base salary plus superannuation. • Set based on market benchmarks and individual performance, qualifications and experience • Eligibility for payment is dependent on the Group exceeding budgeted financial per- formance metrics such as EBITDA and NPAT. • Paid within the quarter following financial year- end. • Share options to vest after each successive tranche, conditional upon continuation of employment. • Aimed to retain key KMPs. • Share options are linked to share price performance. It incentivises KMPs to create shareholder wealth, by utilising their individual skills, qualifications and experience. Fixed remuneration Fixed remuneration consists of base salary, employer superannuation contributions and non-monetary benefits. Non-monetary benefits typically comprise leave entitlements. It is market competitive and set to attract, motivate and retain highly skilled personnel. Details of the short-term incentive plan The objective of the STI plan is to link the Group’s financial and operational targets with the remuneration received by senior managers charged with meeting those targets. As part of their respective employment agreements the CEO, CFO and other senior managers are eligible for a cash bonus subject to the attainment of these clearly defined objectives. The STI plan applies to the period from 1 July 2019 to 30 June 2020. 100% of the STI target for financial year 2020 was linked to the Group achieving its annual financial targets. The determination and agreement of these targets are set at the start of each financial year and align with the Group’s longer-term strategic goals. The FY20 STI plan depends on the Group achieving its budgeted EBITDA and NPAT target after provisioning for the STI, as set by the Board. The Board believes that the objective being set is challenging for the executives and senior managers. It will be paid out annually in the quarter following financial year-end should the target be met, subject to Board approval, as they have ultimate discretion. The Group delivered FY20 EBITDA and FY20 NPAT in line with its guidance to the stock market and exceeded EBITDA budget as restated for new lease accounting standards. The Board has approved STI payments at 100% levels for FY20. Directors’ report - audited remuneration report The below chart illustrates the structured employee entitlements of eligible KMPs as a percentage of their fixed remuneration: 16% 84% 16% 84% 14% 73% 18% 76% FY20 FY19 13% FY20 6% FY19 CEO (Mr R Sugo) CFO (Mr C Last) CFO (Mr M Gepp) Fixed Remuneration STI LTI Non-executive directors are not eligible for an STI. Details of long-term incentive plans LTI plans are offered under the Company’s Employee Option Plans to align remuneration with the creation of shareholder value over the long term. As such, LTI awards are only made to executives and other key employees who have an impact on the Group’s performance. Currently, the Group has three LTI schemes in place from current and prior years. The first two plans (Share Plan 1 and Share Plan 2) are share-based option plans aimed at retaining highly skilled directors, KMPs and employees to appropriately remunerate in line with similar organisations in the market. The third plan (Share Plan 3) is also a share-based option plan but only aimed at directors and KMPs of the Group. The options granted for Share Plan 1 and 2 have an exercise price of $Nil with a vesting of each tranche being conditional upon the recipient continuing employment with the Group up until date of vesting. Subject to the Board’s discretion, should the employee resign, be terminated by the Group for any reason, or be terminated from the plan for any reason, the options granted prior to vesting date will be forfeited. The Share Plan 3 has similar terms except with the additional inclusion of an exercise price of $7.15 and an expiration date of 30 June 2021. These options were granted on 27 October 2016. The options granted to directors were approved by shareholders at the 2016 AGM. Plan Attributes Option Grant Date Number of Tranches Mr T Cuthbertson Mr M Boorne Mr A Fung Mr D Stewart Mr R Sugo Mr C Last Ms C Ly Option Exercise Price Options Vested as of 30 June 2020 Options available Share Plan 1 Share Plan 2 Share Plan 3 15 September 2016 07 January 2020 27 October 2016 4 - - - - - - 1,500 $ NIL 1,500 - 3 - - - - - 30,000 - $ NIL 10,000 20,000 1 100,000 100,000 100,000 - 150,000 - 20,000 $7.15 - 470,000 Mr Matt Gepp ceased as CFO of the Group on 11 September 2019 and he is still eligible for 50,000 option with an exercise price of $7.15, which expires on 30 June 2021. 40 41 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesDirectors’ report - audited remuneration report Directors’ report - audited remuneration report Shareholders returns KMP remuneration is rewarded with consideration of the Group’s earnings and performance. The following table sets out MNF Group’s key financial results and shareholder wealth generation over the past five years: Remuneration details of directors and KMPs for the year ended 30 June 2020 Details of the nature and amount of benefits and payments for each director and KMP of the Company for the 2019 and 2020 financial years are as follows, represented on an accrual basis: Performance metric 2020 2019 2018 2017 2016 Revenue (‘000) NPAT (‘000) Basic EPS (cents) Dividends paid (‘000) Dividends declared per share (cents) Share price (as at 30 June) Change in share price Market Capitalisation (as at 30 June) $230,913 $215,587 $220,728 $191,752 $161,217 $11,947 $9,943* $11,859^ $12,066^ $8,990^ 14.88 $5,046 6.10 $5.63 $1.78 $475m 13.56* $4,505 6.10 $3.85 ($1.40) $282m 16.25^ $6,417 8.35 $5.25 $0.88 17.32^ $5,099 8.25 $4.37 $0.37 13.45^ $4,512 7.00 $4.00 $0.18 $384m $318m $270m * Restated based on correction of deferred tax made to the 30 June 2019 financial year. See Note 5 for details. ^ Financial years 2016 – 2018 results have not been restated. See Note 5 for details. Short term benefits Post- employment benefits Share based payments Total Cash salary & fees (i) STI/ Bonus paid(ii) STI/Bonus accrued(iii) Non- monetary benefits(iv) Superannuation Options(v) (vi) $ $ Directors Mr T Cuthbertson 2020 120,000 Mr M Boorne Mr A Fung Mr D Stewart(vii) 2019 2020 2019 2020 2019 2020 2019 CEO and Executive Director Mr R Sugo Other KMPs Mr M Gepp(viii) Mr C Last(ix) Ms C Ly 2020 2019 2020 2019 2020 2019 2020 2019 120,000 103,000 103,000 82,400 82,400 65,733 - 517,025 517,025 101,455 344,563 276,548 - 174,250 169,167 Total 2020 1,440,411 2019 1,336,155 - - - - - - - - - - - - - - - - - $ - - - - - - - - 100,000 - - - 51,750 - - - $ - - - - - - - - 8,943 7,340 1,182 4,880 574 - - - $ $ $ 11,400 11,400 9,785 9,785 7,828 7,828 6,245 - 25,000 25,000 - - - - - - - - - - 131,400 131,400 112,785 112,785 90,228 90,228 71,978 - 650,968 549,365 6,250 64,329 173,216 25,000 30,233 404,676 20,441 49,513 398,826 - - - 16,554 16,071 6,730 197,534 7,558 192,796 151,750 10,699 103,503 120,572 1,826,934 - 12,220 95,084 37,791 1,481,250 (i) (ii) Cash salaries paid are reviewed annually. STI amounts paid in 2020 financial year relate to the achievement of 2020 targets and were accrued for in the 2019 results. (iii) STI amounts accrued in the current financial year are in relation to the 2020 financial year and would be paid in the subsequent financial year when applicable. The category “Non-monetary benefits” represent other benefits such as car parking. Black-Scholes model is used to value options issued. The FY20 share-based payments include the Employee Share Plan and the fair value of options granted in the period. Mr David Stewart commenced his directorship on 13 August 2019. (iv) (v) (vi) (vii) (viii) Mr Matt Gepp ceased as CFO of the Group on 11 September 2019 and his employment ceased on 20 September 2019. (ix) Mr Chris Last commenced with the Group as CFO on 12 September 2019. 42 43 Key terms of employment agreements The Group has entered into an executive employment agreement with the CEO. The remuneration and terms of employment for other key executives are also set out in written agreements. Each of these employment agreements are unlimited in term but may be terminated by written notice by either party or by the Company making payment in lieu of notice. Each of these agreements sets out the arrangements for total fixed remuneration, performance-related cash bonus opportunities, superannuation, termination rights and obligations and eligibility to participate in the For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Directors’ report - audited remuneration report Directors’ Report employee equity-based incentive scheme. Executive salaries are reviewed annually. The executive employment agreements do not require the Company to increase base salary, incentive bonuses or to continue the participants’ participation in equity-based incentive programs. Payment of any STI is at the Board’s discretion. The Company may terminate the employment of the key executives without notice and without payment in lieu of notice in some circumstances. These include if the executive: • Commits an act of serious misconduct; • Commits a material breach of the executive employment agreement; • Denigrates or engages in any behaviour that may materially damage the reputation of, or otherwise bring the Group into disrepute; or is convicted of any criminal offence which would in the reasonable opinion of the Board of Directors adversely affect the carrying out of the executive’s duties. The Company may terminate the employment of the key executive at any time by giving the executive notice of termination or payment in lieu of such notice. The amount of notice required from the Company in these circumstances is set out in the following table: KMP Company notice period Employee notice period Termination provision Details Mr R Sugo 6 months 1 month Mr C Last 3 months 3 months Ms C Ly 6 months 1 month 6 months’ base salary 3 months’ base salary 6 months’ base salary Fixed salary package of $542,025, consisting of base salary and superannu- ation, reviewed annually by the Remuneration Committee Fixed salary package of $370,000, consisting of base salary and superannu- ation, reviewed annually by the Remuner- ation Committee in September Fixed salary package of $197,735, consisting of base salary and superannu- ation, reviewed annually by the Remuneration Committee in September Directors’ interests in shares and options of the Company At the date of this report, the particulars of shares and options held by the directors and other KMPs of the Company in the Company or in related bodies corporate which are required to be declared in the register of directors’ share holdings are as follows: Directors Mr T Cuthbertson Mr M Boorne Mr D Stewart Mr A Fung Executive Director Mr R Sugo Other KMPs Mr C Last Ms C Ly Total 2020 2019 Shareholding Options Shareholding Options Shareholding movement % 855,906 384,605 200,000 100,000 100,000 - 920,906 709,543 - 100,000 100,000 - 13,625,802 100,000 14,213,185 100,000 -7.1% -45.8% 100.0% -4.1% 12,034,214 150,000 11,915,431 150,000 1.0% 10,282 301,476 20,000 20,000 - - 299,775 21,500 100% 0.6% 27,412,285 490,000 28,058,840 471,500 In 2019, Mr Matt Gepp held a total of 49,000 shares and 56,000 options. Mr Matt Gepp ceased as CFO of the Group on 11 September 2019 and he is still eligible for 50,000 option with an exercise price of $7.15, which expires on 30 June 2021. This concludes the audited remuneration report. 44 Directors’ benefits No director has received or has become entitled to receive, during or since the financial year, a benefit because of a contract made by the Company, controlled entity or related body corporate with a director, a firm which a director is a member or an entity in which a director has a substantial financial interest. Indemnifying officers or auditor The Group has in place a contract insuring the directors, the Company secretary and all executive officers of the Group and any related body corporate, against a liability incurred by a director, company secretary or executive officers to the extent permitted by the Corporations Act 2001. The Group has indemnified the directors, the Company secretary and all executive officers of the Group for costs incurred, in their capacity as officers of the Group, for which they may be held personally liable, except where there is a lack of good faith. Details of the amount of the premium paid in respect of the insurance policies are not disclosed as such disclosure is prohibited under the terms of the contract. No indemnities have been given or agreed to be given or insurance premiums paid or agreed to be paid, during or since the end of the financial year, to the auditors of the Group or any related entities against a liability incurred by the auditors. Proceedings on behalf of the Company No person has applied for leave of a Court to bring proceedings on behalf of the Group or intervene in any proceedings to which the Group is a party for the purpose of taking responsibility on behalf of the Group for all or any part of those proceedings. The Group was not a party to any such proceedings during the year. Non-audit services During the current and prior year MNSA Pty Ltd Chartered Accountants, the Group’s auditor, did not provide any non-audit services. The total amount received by MNSA Pty Ltd Chartered Accountants for non-audit services was $Nil (2019: $Nil). Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 has been received and can be found on page 55 of the financial report. Rounding off MNF Group Limited is a company of the kind referred to in ASIC Legislative Instrument (Rounding in Financial/ Directors’ Reports) 2016/191 and in accordance with that Instrument, amounts in the Directors’ report and the consolidated financial statements are rounded to the nearest thousand dollars, except where otherwise indicated. This directors’ report, incorporating the audited remuneration report, is signed in accordance with a resolution of the Board of Directors. Terry Cuthbertson Chairman Sydney, 25 August 2020 Rene Sugo CEO and Executive Director 45 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Consolidated financial statements 2020 Consolidated statement of financial position Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June Continuing operations Revenue Cost of sales Gross profit Other income Employee benefits expense Depreciation and amortisation Other expenses Costs related to acquisition Financing costs Restructure costs Profit before income tax Income tax expense Profit from continuing operations Net profit for the year Other comprehensive income/(loss) Items that may be reclassified to profit or loss: Exchange differences on translation of foreign operations Changes in fair value of cash flow hedges Total comprehensive income for the year Earnings per share from continuing operations - Basic earnings per share (cents) - Diluted earnings per share (cents) Consolidated group Notes 2020 $'000 2019 Restated $'000 4a 4a 4b 4c 4d 4e 18 5a 27 27 230,913 (134,486) 96,427 215,587 (133,120) 82,467 1,216 2,508 (43,107) (16,117) (17,476) - (2,993) (1,300) 16,650 (38,989) (8,973) (19,578) (1,168) (1,874) - 14,393 (4,703) (4,450)* 11,947 11,947 44 (214) (170) 11,777 14.88 14.72 9,943 9,943 537 (519) 18 9,961 13.56* 13.37* * See Note 5 for details on a correction made to deferred tax balances and opening retained earnings as reflected in the 30 June 2019 and 2020 financial year. The accompanying notes form part of these consolidated financial statements. As at 30 June Assets Current assets Cash and cash equivalents Trade and other receivables Income tax receivable Inventories Total current assets Non-current assets Property, plant and equipment Right-of-use asset Deferred tax asset Goodwill and other intangibles Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Customer deposits Provisions Lease liability Income tax payable Total current liabilities Non-current liabilities Loans and borrowings Financial instruments Provisions Lease liability Deferred tax liability Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Consolidated group Notes 2020 $'000 2019 Restated $'000 6a 7 8a 14 5c 25 9 12 13 15 10 11 13 15 5d 16a 46,164 42,027 - 1,906 90,097 30,246 18,209 3,102 93,149 144,706 234,803 27,988 3,938 4,456 3,160 1,643 41,185 30,000 841 1,357 17,776 4,691 54,665 95,850 138,953 101,771 3,138 34,044 138,953 15,481 42,030 853 1,548 59,912 30,776 - 2,227* 89,785 122,788 182,700 32,158 1,494 3,797 - - 37,449 55,600 628 1,236 - 5,804* 63,268 100,717 81,983 51,125 1,931 28,927* 81,983 * See Note 5 for details on a correction made to deferred tax balances and opening retained earnings as reflected in the 30 June 2019 and 2020 financial year. The accompanying notes form part of these consolidated financial statements. 46 47 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesConsolidated statement of cash flows Consolidated statement of changes in equity Attributable to owners of the Group Consolidated group Notes 2020 $'000 2019 $'000 For the year ended 30 June Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Income tax paid Net cash from operating activities 6b Cash flows from investing activities Purchase of property, plant and equipment Payment for business acquisitions Software development costs Purchase of other intangible assets Net cash used for investing activities Cash flows from financing activities Proceeds from share placement and options exercised – share placement/SPP Proceeds from share placement and options exercised - DRP Dividends paid Proceeds from borrowings Repayment of borrowings Repayment of finance lease liability Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Impact of FX on cash and cash equivalents Cash and cash equivalents at 1 July Cash and cash equivalents at 30 June 6a The accompanying notes form part of these consolidated financial statements. 235,147 (199,556) 214 (2,885) (4,058) 28,862 (6,782) - (8,883) - (15,665) 49,736 910 (5,046) - (25,600) (2,638) 17,362 30,559 124 15,481 46,164 229,837 (217,219) 167 (1,601) (5,663) 5,521 (7,334) (35,070) (8,283) (74) (50,761) 286 618 (4,505) 46,160 (1,250) (56) 41,253 (3,987) 598 18,870 15,481 Balance at 30 June 2018 (as previously reported) Net correction of deferred tax* Balance at 1 July 2018 (restated)* Profit for the period* Other comprehensive income Dividends paid Shares issued - DRP Shares issued-SPP Ordinary share capital Share-based payment reserve Translation reserve Hedging reserve Retained earnings Total $'000 $'000 $'000 $'000 $'000 $'000 50,221 2,042 (438) (111) 24,519 76,233 - - - - (1,030) (1,030) 50,221 2,042 (438) (111) 23,489 75,203 - - - 618 286 - - - - - - - 9,943 537 (519) - 9,943 18 - - - - - - - - (4,505) (4,505) - - - 618 286 420 Share-based payments - 420 Balance at 30 June 2019 (restated)* Net correction of deferred tax* 51,125 2,462 99 (630) 28,927 81,983 - - - - (293) (293) Balance at 1 July 2019* 51,125 2,462 99 (630) 28,634 81,690 Adjustment for change in accounting standard (Note 2) Profit for the period Other comprehensive income Dividends paid Shares issued - DRP Shares issued - share placement - - - - 910 49,736 - - - - - - Share-based payments - 1,377 - - - - (1,491) (1,491) 11,947 11,947 44 (214) - (170) - - - - - - - - (5,046) - - - (5,046) 910 49,736 1,377 Balance at 30 June 2020 101,771 3,839 143 (844) 34,044 138,953 * See Note 5 for details on a correction made to deferred tax balances and opening retained earnings as reflected in the 30 June 2019 and 2020 financial year. The accompanying notes form part of these consolidated financial statements. 48 49 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesNotes to the consolidated financial statements Notes to the consolidated financial statements 1. Corporate information These consolidated financial statements and notes represent those of MNF Group Limited (the Company) and its controlled entities (collectively, the Group) for the year ended 30 June 2020. The financial statements were authorised for issue on 25 August 2020 in accordance with a resolution by the directors of the Company. MNF Group Limited is a for-profit entity limited by shares and incorporated and domiciled in Australia. Shares are publicly traded on the Australian Securities Exchange (ASX). The nature of the operations and principal activities of the Group are described in the Directors’ report. The separate financial statements of the MNF Group Limited, the parent entity of the Group, have not been presented within this financial report as permitted by the Corporations Act 2001. The financial information of the Company has been disclosed in Note 29. 2. Significant accounting policies a. Basis of preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in the financial statements containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB). Material accounting policies adopted in the preparation of these financial statements are presented below and have been consistently applied unless otherwise stated. The financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. b. New and amended accounting policies adopted by the Group and New Accounting Standards for application in future periods The accounting policies applied by the Group in this financial report are the same as those applied by the Group in its consolidated annual financial report as at and for the year ended 30 June 2020, with the exception of the new accounting policy adopted as disclosed below. In the current year, the Group has adopted all applicable new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are effective for the current reporting period and relevant to the Group. Unless specifically outlined below, the adoption of these amendments has not resulted in any changes to the Group’s accounting policies and has had no effect on the amounts reported for the current or prior periods. as operating expenses is now replaced by depreciation and interest expense. Interest expense is disclosed as operating activities in the statement of cash flows and the principal portion of the lease payments are separately disclosed in financing activities. The Standard AASB 16 had an impact on the current period. The impact of adoption of the standard on opening retained profits as at 1 July 2019 was: Operating lease commitments as at 1 July 2019 (AASB 117) Operating lease commitments discount based on the weighted average incremental borrowing rate of 5% (AASB 16) Additional minimum lease commitment as at 1 July 2019 Accumulated depreciation as at 1 July 2019 (AASB 16) Right of use assets (AASB 16) Lease liabilities - current (AASB 16) Lease liabilities – non-current (AASB 16) Tax effect on the above adjustments Reduction in opening retained profits as at 1 July 2019 1 July 2019 $’000 25,772 (220) 1,264 (5,301) 21,515 (2,705) (20,804) 598 (1,396) In addition, the current profit before income tax expense was reduced by $613,000. This included an increased depreciation and amortisation expense of $3,318,000 and increased finance costs of $895,000, offset by a reduc- tion in other expenses (reclassification of lease expenses) of $3,600,000. As at 30 June 2020, net current assets were reduced by $3,160,000 (attributable to current lease liabilities) and net assets were reduced by $2,129,000 (attributable to right-of-use assets, lease liabilities and deferred tax assets). c. Principles of consolidation The consolidated financial statements incorporate the assets, liabilities and results of entities controlled by the Company at the end of the reporting period. A controlled entity is any entity over which MNF Group Limited has the ability and right to govern the financial and operating policies so as to obtain benefits from the entity’s activi- ties. Control will generally exist when the Company owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity. In assessing the power to govern, the existence and effect of holdings of actual and potential voting rights are also considered. In preparing the consolidated financial statements, all inter-group balances and transactions between entities in the consolidated group have been eliminated. Accounting policies of subsidiaries have been changed where nec- essary to ensure consistency with those adopted by the parent entity. Where controlled entities have entered or left the Group during the year, the financial performance of those enti- ties are included only for the period of the year that they were controlled. A list of controlled entities is contained in Note 23 to the consolidated financial statements. AASB 16 Leases (AASB 16) d. Business combinations The Group has adopted AASB 16 Leases (the Standard) from 1 July 2019. The Standard replaces AASB 117 Leases and for lessees eliminates the classifications of operating leases and finance lease. The Group has applied the Standard using a modified retrospective approach with the cumulative effect of initial application recognised as an adjustment to the opening balance of retained earnings at 1 July 2019 with no restatement of comparative information. Except for short-term leases and leases of low value assets, right-of-use assets and corresponding lease liabilities are recognised in the statement of financial position. Depreciation charge for the right-of-use assets and interest expenses on the lease liabilities replaces the straight-line operating lease expense. The adoption will in effect increase expenses in earlier periods of the lease compared to lease expense under AASB 117. However, EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) results improve Business combinations occur where an acquirer obtains control over one or more businesses and results in the consolidation of its assets and liabilities. All business combinations, including those involving entities under common control, are accounted for by applying the acquisition method. Consideration transferred for the acquisition comprises the fair value of the assets transferred, liability incurred and the equity interests issued by the acquirer. Identifiable assets acquired and liabilities and contingent liabili- ties assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. Any deferred consideration payable is discounted to present value using the entity’s incremental borrowing rate. Acquisition-related costs are expensed as incurred. Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of fair value of consideration transferred, over the acquisition-date fair values of identifiable net assets. See Note 2p for further details regarding impairment testing. 50 51 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Notes to the consolidated financial statements Notes to the consolidated financial statements e. Critical accounting estimates and judgments The Directors evaluate estimates and judgments incorporated into the consolidated financial statements based on historical knowledge and best available current information. Estimates assure a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the Group. Key estimates that have a significant risk of causing adjustments to the carrying amounts of certain assets and liabili- ties within the next annual reporting period are: (i) Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an independent valuer using the Black-Scholes model. The accounting estimates and assumptions relating to equity-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may have impact on profit or loss and equity. (ii) Useful lives of property, plant and equipment The Group reviews the estimated useful lives of property, plant and equipment at the end of each financial year. The Group adjusts the remaining effective useful life of its assets to better reflect their actual usage and future economic benefit. (iii) Utilisation of tax losses The Company and its wholly-owned Australian subsidiaries are members of a tax consolidated group under Aus- tralian taxation law. Each entity in the tax consolidated group contributed tax losses to the Group. The Australian tax group has no tax losses to currently utilise. (iv) Research & Development (R&D) tax concession When calculating the income tax provision for the year, the Research & Development tax incentive for the cur- rent financial year is based on management’s operational knowledge and best estimate at the time, utilising prior year’s claim as a benchmark. The directors believe the estimate is reasonable and conservative. This may be subject to change following the finalisation of the Research & Development tax incentive when we finalise our Australian tax Return. (v) Determination of cash generating units (CGUs) and their recoverable amount for impairment assessment Impairment assessment compares the carrying value of identified CGUs with their recoverable amounts. Management judgement is applied to identify these CGUs and determine the recoverable value. Refer to Note 2p and Note 26 for further information. f. Revenue recognition (i) Revenue from Contracts with Customers In accordance with AASB 15 Revenue from Contracts (AASB 15), the Group recognises revenue to depict the transfer of goods and services to customers, in an amount that reflects the consideration to which the Group is entitled in exchange for those goods and services. Note 4 provides specific information to assist users to under- stand the nature, timing and uncertainty of revenues and cash flows from contracts with customers. All reported revenue for the Consolidated Group, apart from interest revenue and other income, is generated from Contracts with Customers. The Group provides telecommunication services, including data and voice services and provision of low value hardware as part of total business communication solutions. Accordingly, performance obligations for contracts with customers are generally satisfied over time, and revenue is recognised accordingly. Where hardware is pur- chased outright by a customer, revenue is recognised at the time of purchase. This does not represent a material level of revenue for the Group. Where payment is received by the Group in advance of a performance obligation being satisfied, a contract liability is recognised in the balance sheet. Where a performance obligation has been satisfied and the Group is yet to issue an invoice to the customer, a contract asset is recognised in the balance sheet. Where a performance obligation has been satisfied and an invoice has been issued to a customer but not yet paid, a trade receivable is recognised in the balance sheet. Transaction prices for provision of goods and services are agreed within Contracts with Customers. The Group determines its transaction prices based on the cost to the Group in acquiring or supplying the good or service it- self, plus a margin to cover operating costs and return requirements of the Group. The Group may offer discounts to customers for bulk supply of particular goods or services. Discounts are recognised in line with corresponding revenue recognition. The cost to the Group in fulfilling return, refund and warranty obligations is negligible. The majority of the Group’s revenue is generated from the provision of voice services and call connections that do not have enduring obliga- tions. Impairment of contract assets and trade receivables for Contracts with Customers is assessed by the Group on an ongoing basis and allowed for within the Group’s provisions for doubtful debts calculation (refer Note 7). Costs incurred in obtaining contracts with customers are not material at the Group level, and the Group does not recognise any assets in relation to costs to obtain or fulfil contracts with customers, outside of contract assets as identified above. (ii) Interest income Interest revenue is recognised using the effective interest rate method, which, for floating rate financial assets, is the rate inherent in the instrument. g. Leases The Group as lessee has applied the standard using a modified retrospective approach with the cumulative effect of initial application recognised as an adjustment to the opening balance of retained earnings at 1 July 2019 with no restatement of comparative information. Except for short-term leases and leases of low value assets, the Group applies a single recognition and measure- ment approach for all leases representing the right to use the underlying asset: right-of-use assets recognised at the commencement date of the lease and corresponding lease liabilities measured at the present value of lease payments over the lease term are recognised in the statement of financial position. Depreciation charges for the right-of-use assets and interest expenses on the lease liabilities replaces the straight-line operating lease expense. h. Cash and cash equivalents Cash and cash equivalents in the consolidated statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity 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. For the purposes of the consolidated statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. i. Trade and other receivables Trade and other receivables are non-interest bearing financial assets with fixed or determinable payments that are not quoted on an active market. The balance is recognised and carried at original invoice amount net of any provision for doubtful debts. See Note 7 for further details. j. Foreign currency transactions and balances (i) Functional and presentation currency The functional currency of each group entity is measured using the currency of the primary consolidated environ- ment in which the entity operates. The consolidated financial statements are presented in Australian dollars which is the Company’s functional and presentation currency. (ii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retrans- lated at the rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the 52 53 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesNotes to the consolidated financial statements exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. n. Property, plant and equipment (iii) Group Companies The financial results and position of foreign operations whose functional currency is different from the Group’s presentation currency are translated as follows: • Assets and liabilities are translated at year end exchange rates prevailing at the reporting date. • • Retained earnings are translated at the exchange rates prevailing at the date of the transaction. Income and expenses are translated at average exchange rates for the period. On consolidation, assets and liabilities have been translated into Australian dollars at the closing rate at the reporting date. Income and expenses have been translated into the Group’s presentation currency at the average rate over the reporting period. The exchange differences are taken to other comprehensive income (OCI) in the consolidated statement of profit or loss and other comprehensive income. k. Income tax (i) Current tax Current income tax expense charged to the profit or loss is the tax payable on taxable income, calculated using applicable income tax rates enacted as at reporting date. Current tax liabilities are measured at the amounts expected to be paid to the relevant taxation authority. (ii) Deferred tax Deferred taxes arise due to temporary timing differences between accounting and tax treatments of income and expenses. They are calculated at the tax rates expected to apply to the period when the asset is realized, or the liability is settled. Deferred tax assets relating to unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Except for busi- ness combinations, no deferred tax is recognised from the initial recognition of an asset or liability where there is no effect on accounting or taxable profit or loss. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. (iii) Tax consolidation MNF Group Limited and its wholly-owned Australian subsidiaries are part of a tax consolidation group under Aus- tralian taxation law. MNF Group Limited is the head entity in the tax consolidation group. Tax expense, deferred tax liabilities and deferred tax assets arise from temporary differences of the members of the tax-consolidation group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in each separate entity and the tax values applying under Australian taxation Law. MNF Group Limited, as the head entity in the tax consolidated group, recognises the current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of all entities in Australia. Members of MNF tax consolidated group have entered into a tax sharing agreement. l. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. m. Inventories Costs of purchased inventory are determined after deducting rebates and discounts. Inventories are measured at the lower of cost and net realisable value. Cost of inventories are determined on a weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of com- pletion and the estimated costs necessary to make the sale. (i) Carrying amount Plant and equipment are measured on the cost basis. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not more than the recoverable amount from these assets. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of profit or loss and other comprehensive income during the financial period in which they are incurred. (ii) Depreciation The depreciable amount of all fixed assets is depreciated on a straight-line basis over the asset’s useful life to the consolidated group commencing from the time the asset is held ready for use. The depreciation rates used for each class of depreciable assets are: Furniture & fittings Office equipment Leasehold improvements 6 to 10 years 3 to 5 years 3 to 9 years Network infrastructure and IT systems 2 to 10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate at the end of each reporting period. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the consolidated statement of profit or loss and other comprehensive income. When re-val- ued assets are sold, amounts included in the revaluation surplus relating to that asset are transferred to retained earnings. o. Financial instruments Non-derivative financial assets and financial liabilities are recognised when the entity becomes a party to the con- tractual provisions to the instrument. For financial assets, this is equivalent to the date that the Company commits itself to either the purchase or sale of the asset (i.e. trade date accounting is adopted). Financial instruments are initially measured at fair value plus transaction costs, except where the instrument is classified ‘at fair value through profit or loss’, in which case transaction costs are expensed to profit or loss imme- diately. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Loans and receivables are included in current assets, except for those which are not expected to mature within 12 months after the end of the reporting period (all other loans and receivables are classified as non-current assets). (ii) Investments in subsidiaries held by the parent Investments in subsidiaries held by the parent entity are recognised and subsequently measured at cost in the separate financial statements of the Company, less any impairment. (iii) Derivative financial instruments and hedge accounting The Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if certain criteria are met. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exer- cised, or the designation is revoked, then the hedge accounting is discontinued prospectively. If the forecast trans- action is no longer expected to occur, then the amount accumulated in reserves is reclassified to profit or loss. 54 55 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesNotes to the consolidated financial statements Derivatives are initially recognised at fair value; any directly attributable transaction costs are recognised in profit or loss as incurred. Cash flow hedges When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair val- ue of the derivative is recognised in other comprehensive income (OCI) and accumulated in the hedging reserve. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount accumulated in equity is retained in OCI and reclassified to profit or loss in the same period or peri- ods during which the hedged item affects profit or loss. Fair value hedges When a derivative is designated as a fair value hedging instrument, the hedged item is re-measured to take into account the gain or loss attributable to the hedged risk, with the gains or losses arising recognised in profit or loss. This offsets the gain or loss arising on the hedging instrument which is measured at fair value through profit or loss. Changes in fair value of the derivative instrument are recognised in profit or loss. p. Intangible assets and goodwill (impairment testing) Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indef- inite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or loss- es recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. At the end of each reporting period, goodwill, Indefinite life intangibles and intangibles not ready for use are tested for impairment irrespective of whether there are indications of impairment. Intangibles with definite useful lives are only tested for impairment if there is any indication of impairment. The assessment will include the consideration of external and internal sources of information including dividends received from subsidiaries, associates or jointly controlled entities deemed to be out of pre-acquisition profits. If such an indication exists, an impairment test is carried out on the asset by comparing the recoverable amount of the asset, being the higher of the asset’s fair val- ue less costs to sell and value in use, to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of profit or loss and other comprehensive income. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recov- erable amount of the cash-generating unit to which the asset belongs. Notes to the consolidated financial statements Recognition and measurement: Goodwill Brands Software Development Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated im- pairment losses. Goodwill assets are not subject to amortisation and are tested for impair- ment annually, or whenever an indication of impairment exists. Brands identified on acquisitions are measured and recorded at valuation less accumulated impairment losses. Brands are not subject to amortisation and are tested for impairment annually, or whenever an indication of impairment exists. Expenditure on research is recognised in profit or loss as incurred. Development expenditure is capitalised only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Group intends to and has sufficient resources to complete develop- ment and to use or sell the asset. Otherwise, it is recognised in profit or loss as incurred. Subsequent to initial recognition, development expenditure is measured at cost less accumulated amortisation and any accumulated impairment losses. The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use or more frequently when an indication of impair- ment arises during the reporting period. Other intangible assets Other intangible assets, including customer contracts, patents and trademarks and software acquired by the Group that have finite lives are measured at cost less accumulated amorti- sation and any accumulated impairment losses. Amortisation Amortisation is calculated to write off the cost of intangible assets less their residual values using the straight-line method over their estimated useful life and is generally recognised in profit or loss. Goodwill is not amortised. The estimate useful life of intangibles is as follows: Patents and trademarks Software and software development costs Customer relationships 5 to 20 years 3 to 10 years 3 to 10 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. q. 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. r. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of profit or loss and other compre- hensive income net of any reimbursement. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the statement of financial position date. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. s. Employee leave benefits Provision is made for the Group’s liability for employee benefits arising from services rendered by employees to balance date. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled. Employee benefits payable later than one year have 56 57 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesNotes to the consolidated financial statements 3. Operating segments The MNF Group operates two Business Units, Wholesale and Direct. The Wholesale Business Unit is managed as two segments, Domestic Wholesale and Global Wholesale, reflecting the different markets and product suites of each segment. Domestic Wholesale Domestic Wholesale customers are predominantly Retail Service Providers (RSPs), Managed Services Providers (MSPs) and IT companies in Australia or New Zealand. Key products include: • Australian and New Zealand phone numbers with number portability • Terminating calls in Australia / New Zealand (CTS) • Software for telecom billing and compliance management • Whitelabel cloud phone systems and mobile services (MVNO) Domestic Wholesale services are typically sold through subsidiary brands Symbio Networks, iBoss and Telcoinabox. Global Wholesale Global Wholesale customers are predominantly international UCaaS, CPaaS and CCaaS vendors, software and app developers and global telecom providers. Key products include: • Australian and New Zealand phone numbers with number portability • Terminating calls in Australia / New Zealand (CTS) • International toll-free phone numbers (ITFS) • Management of international routing with toll fraud mitigation Global Wholesale services are typically sold through Symbio Networks and TNZI. Direct Direct customers are small and medium businesses and households in Australia, as well as Enterprise and Government organisations in Australia, New Zealand and Singapore. Key products include: • Australian and New Zealand phone numbers with number portability • Enterprise UCaaS: Cisco Webex and Microsoft Teams • SMB cloud phone systems, audio and video conferencing • Residential home phone and mobile services Enterprise and Government customers are served through the MNF Enterprise brand in Australia and Supernet in Singapore. Small business customers are served by Connexus and Express Virtual Meetings, while residential customers are served by Pennytel and MyNetFone. Notes to the consolidated financial statements been measured at the present value of the estimated future cash outflows to be made for those benefits. In deter- mining the liability, consideration is given to employee wages increases and the probability that the employee may satisfy vesting requirements. Those cash outflows are discounted using market yields on national Government bonds with terms to maturity that match the expected timing of cash flows. t. Contributed capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or op- tions are shown in equity as a deduction, net of tax, from the proceeds. u. Earnings per share Basic earnings per share is determined as net profit/(loss) attributable to members of the Group, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares. Diluted earnings per share include options outstanding that will have the potential to convert to ordinary shares and dilute the basic earnings per share. v. De-recognition of financial assets and financial liabilities Financial assets are de-recognised where the contractual rights to receipt of cash flows expires or the asset is transferred to another party whereby the entity no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are de-recognised where the related obligations are either discharged, cancelled or expired. The difference between the carrying value of the financial liability extin- guished or transferred to another party and the fair value of consideration paid, including the transfer of non-cash assets or liabilities assumed, is recognised in profit or loss. w. Share-based payment transactions The Group provides benefits to its employees and directors (including KMPs) in the form of share-based pay- ments, whereby employees render services in exchange for shares or rights over shares (equity-settled transac- tions). The cost of these equity-settled transactions with employees and directors is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using the Black-Scholes model. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees and directors become fully entitled to the award (the vesting date). At each subsequent reporting date until vesting, the cumulative charge to the consolidated statement of profit or loss and other comprehensive income is the product of: (i) (ii) the grant date fair value of the award; the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and (iii) the expired portion of the vesting period. The charge to the consolidated statement of profit or loss and other comprehensive income for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corre- sponding credit to equity. 58 59 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesNotes to the consolidated financial statements Notes to the consolidated financial statements The information is consistent with the results presented for internal management reporting purposes, measured at gross margin level. The accounting policies used by the Group in reporting segment information internally, are the same as those contained in Note 2 to the 2020 financial statements. Disaggregation of revenue from contracts with customers The disaggregation of the Group’s revenue based on the nature and timing of transfer of goods and services is set out below: 2020 External revenue Inter-segment revenue Segment revenue Segment margin 2019 External revenue Inter-segment revenue Segment revenue Segment margin For the year ended 30 June 4. Revenue and expenses a. Revenue and other income Rendering of services and sale of goods Interest on bank deposits Bargain purchase gain on acquisition Other income Domestic Wholesale $'000 Global Wholesale $'000 Direct $'000 Total $'000 89,741 10,285 100,026 41,212 67,851 10,081 77,932 33,414 107,268 6,393 113,661 32,462 111,322 4,671 115,993 27,047 33,904 - 33,904 22,753 36,414 - 36,414 22,006 230,913 16,678 247,591 96,427 215,587 14,752 230,339 82,467 2020 $'000 2019 $'000 230,913 215,587 224 - 992 1,216 130 1,317 1,061 2,508 Revenue type Revenue recognition External revenue Over time Inter-segment revenue Total Over time Revenue type Revenue recognition External revenue Over time Inter-segment revenue Total Over time 2020 Domestic Wholesale $’000 Global Wholesale $’000 Direct $’000 Total $’000 89,741 10,285 107,268 33,904 230,913 6,393 - 16,678 100,026 113,661 33,904 247,591 2019 Domestic Wholesale $’000 Global Wholesale $’000 Direct $’000 Total $’000 67,851 10,081 77,932 111,322 36,414 215,587 4,671 - 14,752 115,993 36,414 230,339 Disaggregation of revenue is presented in line with the Operating Segment reporting as included in Note 3. Revenue disaggregated to geographical market and customer type allows for consideration on how economic factors could affect the Group’s revenue streams. For the year ended 30 June b. Employee benefits expense Wages and salaries Superannuation Share based payments expense Other employee benefits expense c. Depreciation and amortisation Depreciation of fixed assets Depreciation of leases1 Amortisation of intangible assets 2020 $'000 2019 $'000 35,457 2,810 1,377 3,463 43,107 7,230 3,318 5,569 16,117 31,841 3,678 420 3,050 38,989 5,597 - 3,376 8,973 1 Following the adoption of AASB 16 Leases, amounts accounted for under the new requirements and prior period comparatives have not been restated. Refer to note 2 for further details. 60 61 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesNotes to the consolidated financial statements Notes to the consolidated financial statements 2020 $'000 2019 $'000 For the year ended 30 June 2020 $'000 2019 $'000 For the year ended 30 June d. Other expenses Marketing Managed service Property1 Technology and support Accounting and audit Legal and consulting Insurance Unrealised Foreign exchange loss/(gain) Bank and transaction costs Other administrative expenses e. Financing costs Finance charges on bank loan Finance charges on lease liability1 Finance charges related to hedge instrument 926 3,602 1,173 5,050 671 650 754 68 429 4,153 17,476 1,821 894 278 2,993 1,744 3,321 4,397 3,790 603 447 680 (302) 388 4,510 19,578 1,874 - - 1,874 2,878 (210) 326 1,456 4,450 1 Following the adoption of AASB 16 Leases, amounts accounted for under the new requirements and prior period comparatives have not been restated. Refer to note 2 for further details. 5. Income and deferred tax a. Income tax expense The major components of income tax expense are as follows: Current tax Adjustment in respect of prior year tax Origination and reversal of temporary differences - as previously reported - correction of deferred tax* 5,117 (414) - - 4,703 *For further details on the correction of deferred tax balances, see the Note 5(d). b. Reconciliation between tax expense and the accounting profit Profit before income tax 16,650 14,393 At the Group’s statutory rate of 30% (2019: 30%) Tax incentives Effect of tax rates in foreign jurisdictions Non-temporary differences Adjustment in respect of prior year Correction of deferred tax* Effective income tax rate 4,995 (183) (57) 362 (414) - 4,703 28% 4,318 (1,541) 128 299 (210) 1,456 4,450 31% *For further details on the correction of deferred tax balances, see the Note 5(d). 62 c. Movement in deferred tax balances The movement in the Deferred Tax Account is shown below. Deferred tax balances at 1 July Deferred tax asset Deferred tax liability Overall deferred tax balance at 1 July 2,227 (6,097) (3,870) 1,040 (2,379) (1,339) Recognised in profit & loss 2,281 (2,238) Deferred tax balance at 30 June Deferred tax asset Deferred tax liability Overall deferred tax balance at 30 June 3,102 (4,691) (1,589) 2,227 (5,804) (3,577) There has been a restatement of the 2019 opening and closing balances and 2020 opening balances for deferred tax due to a correction of deferred tax balances carried out in 2020. For further details on the correction of deferred tax balances, see the Note 5(d). For the year ended 30 June 2020 $'000 d. Deferred Tax Asset and Deferred Tax Liability arise from the following: Deferred Tax Asset Temporary differences relating to Allowance for doubtful debt Employee leave entitlements provision Other Unrealised gains and losses Lease accounting Deferred Tax Liability Temporary differences relating to Fixed assets Intangible assets Software development costs Other receivables, prepayments and other assets Losses carried forward 767 1,470 637 46 182 3,102 (732) (2,695) (1,147) (68) (49) (4,691) Deferred Tax Correction During the financial year ended 30 June 2020, MNF Group increased its focus on tax governance and has adopted a formal Tax Risk Governance Framework along with associated tax management policies to ensure we are both compliant with, and are able to, meet our obligations and additionally have appropriate internal tax management procedures in place. In parallel and aligned with the Group’s increasing scale, the Group recognised the need to expand the depth and breadth of in-house tax resource with the appointment of a full time Group Tax Manager. A result of these process improvements and after a comprehensive internal review, a correction has been made to the Deferred Tax Balances as previously reported at 30 June 2019. The correction has been applied prospectively from the earliest date in the comparative period where practicable, and at 1 July 2019 in the current year for a portion of the restatement where it was impracticable to do so. It should be noted that all historic ATO tax payments are up to date and correct, and all other ATO compliance obligations have been satisfied. 63 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesNotes to the consolidated financial statements Notes to the consolidated financial statements e. The Company and its wholly-owned Australian entities are members of a tax consolidated group. Transactions within the tax consolidated group have been eliminated in full on consolidation. The Australian tax consolidated group is treated as a single entity for income tax purposes. the COVID-19 impacts, management has updated the methodology used to reflect the change in risk of default since initial recognition. Bad debts are written off when it is determined the debt is irrecoverable. These amounts have been included in other expenses. For the year ended 30 June 2020 $'000 2019 $'000 8. Property, plant and equipment 6. Operating cash flows reconciliation a. Cash and cash equivalents Cash at bank and on hand 46,164 15,481 b. Reconciliation of net profit after tax to net cash flows from/(used for) operating activities Profit for the year Add/(subtract) non-cash items Depreciation and amortisation Share based payments expense Gain on acquisition Loss on disposal of property, plant and equipment Lease depreciation Cash movements in operating assets and liabilities (Increase)/decrease in trade and other receivables Increase in inventory (Increase)/decrease in deferred tax assets Decrease in trade and other payables Decrease in current tax liabilities Increase/(decrease) in customer deposits Increase/(decrease) in deferred tax liabilities Increase in provisions and employee benefits 11,947 11,399 12,799 1,377 - 23 3,318 17,517 (429) (360) (85) (4,152) (1,105) 2,445 2,370 714 (602) 8,973 420 (1,317) - - 8,076 10,344 (850) 259 (21,192) (2,888) (923) (36) 1,332 (13,954) Net cash flows from/(used for) operating activities 28,862 5,521 7. Trade and other receivables Trade receivables Doubtful debts provision Other receivables, prepayments and other assets 38,592 (3,171) 6,606 42,027 37,499 (1,508) 6,039 42,030 Trade receivables balance is mostly made up of contractual agreements with customers. Generally, the terms and conditions of these contracts require settlement between 14 to 30 days from the date of invoice. Allowance for doubtful debts The Group applies professional judgement to estimate the allowance for doubtful debts for our trade receivables. Assessment is based on historical trends (using the expected credit loss model and prior write-off movements) and management’s assessment of general economic conditions. As a result of the current pandemic, which has impacted the global economic environment which our customers operate in, the Group has undertaken stringent review of our allowance for doubtful debt. With consideration for Office furniture & equipment Leasehold improvements Network infrastructure & equipment Work in progress Total $’000 $’000 $’000 $’000 $’000 4,165 5,075 32,631 88 41,959 a. Reconciliation of carrying amount Cost: At 1 July 2018 Acquisition Additions Disposals Transfers from work in progress Effect of movement in exchange rates 2,883 698 (66) - 16 3 331 (956) - 19 3,741 6,677 (14) 2,303 592 At 30 June 2019 7,696 4,472 45,930 At 1 July 2019 Acquisitions Additions Disposals Reclassify asset category Transfer to Software, and other assets Effect of movement in exchange rates - 723 (582) - - 2 - 1,315 (164) - - (7) - 4,793 (5) (12) - 30 At 30 June 2020 7,839 5,616 50,736 2,211 51 - (2,303) 4 51 8,838 7,757 (1,036) - 631 58,149 - 5 (12) 12 (51) - 5 - 6,836 (763) - (51) 25 64,196 7,696 4,472 45,930 51 58,149 Accumulated depreciation: At 1 July 2018 Acquisitions Depreciation expense Disposals Effect of movement in exchange rates (2,058) (1,514) (15,243) - (18,815) (2,056) (920) 59 (9) (2) (603) 990 (12) (1,622) (4,074) 14 (323) - - - - (3,680) (5,597) 1,063 (344) At 30 June 2019 (4,984) (1,141) (21,248) - (27,373) At 1 July 2019 Depreciation expense Disposals Effect of movement in exchange rates (4,984) (1,141) (21,248) - (27,373) (1,038) 559 (1) (733) 164 1 (5,459) 5 (75) - - - (7,230) 728 (75) At 30 June 2020 (5,464) (1,709) (26,777) - (33,950) Net Book Value: At 30 June 2019 At 30 June 2020 2,712 3,331 24,682 51 30,776 2,375 3,907 23,959 5 30,246 b. Disposals Asset disposals mostly relate to equipment that is fully written down to net book value $Nil and is no longer in use. There was no material impact to the profit or loss account in relation to these disposals. 64 65 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entitiesNotes to the consolidated financial statements For the year ended 30 June 9. Trade and other payables Trade payables Other creditors and accruals Security deposits held 10. Loans and borrowings Non-current liabilities Secured bank loan 2020 $'000 2019 $'000 16,877 10,729 382 27,988 30,000 30,000 18,434 13,318 406 32,158 55,600 55,600 The Group’s finance facilities consist of $60.0m (2019: $60.0m) in revolving credit facilities and a $3.0m (2019: $3.0m) revolving multi-option credit facility. In December 2019, the Group paid down the loan payable amount to $30m to further reduce the borrowing cost. A total of $45.0m in facilities have a maturity date of 16 May 2022 and a $15.0m facility has a maturity date of 16 May 2024. Facilities are interest only and principal is repayable on termination. $2.5m of the revolving multi-option credit facility has been utilised as bank guarantees for property leases and supplier securities as required. Facilities are secured by a fixed and floating charge over the assets of the Group. Interest rates payable under the bank facilities are based on BBSY rates plus a variable margin based on the net leverage ratio of the Group (calculated quarterly). For more information about the Group’s exposure to interest rate and foreign currency risk, see Note 30. For the year ended 30 June 11. Financial instruments Non-current liabilities Interest rate swap contract - cash flow hedge 2020 $'000 2019 $'000 841 841 628 628 Notes to the consolidated financial statements Interest rate swap contract - cash flow hedge The Group’s bank facility is a variable interest rate facility. It is the Group’s policy to protect a portion of the bank facility from exposure to fluctuations in interest rates. In April 2019, the Group rolled into a new interest rate swap contract to protect the loan facility from exposure to increasing interest rates, with swap balance of $30m. A hedge relationship was designated on this date. Under this interest rate swap, the Group is obliged to receive interest at a variable rate and pay interest starting April 2019 at fixed rate of 1.835% (2019: 1.835%) per annum. The swap covers 100% (2019: 54%) of the floating rate exposure under the Facility. The contract requires settlement of the net interest receivable or payable each 90 days which coincides with the dates on which interest is payable on the underlying facility making it highly effective. The gain or loss from remeasuring the hedging instrument at fair value is recognised in other comprehensive income and deferred in equity in the hedge reserve. It is reclassified into profit or loss when the hedged interest expense is recognised. 12. Customer deposits For the year ended 30 June 2020 $'000 2019 $'000 Pre-paid accounts 3,938 1,494 Customer deposits mostly relate to cash received in advance from customers with respect to prepaid customer accounts. The balance represents the unused call credits as at balance date. 13. Provisions As at 1 July 2019 Arising during the year Utilised during the year Movement due to change in foreign currency translation rates As at 30 June 2020 Current Non-current Annual leave $’000 Long service leave Make good provision $’000 $’000 Total $’000 2,659 2,997 (2,408) 19 3,267 3,267 - 1,393 302 (285) - 981 183 (22) (6) 1,410 1,136 1,116 294 73 1,063 5,033 3,482 (2,715) 13 5,813 4,456 1,357 A provision has been recognised for employee entitlements relating to long service leave. In calculating the present value of future cash flows in respect of long service leave, the probability of long service leave being taken is based on historical data. The measurement and recognition criteria relating to employee benefits have been included in Note 2. 66 67 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Notes to the consolidated financial statements Notes to the consolidated financial statements 14. Right-of-use asset For the year ended 30 June Land and buildings – right-of-use Less: Accumulated depreciation Effect of movement in exchange rate in Accumulated depreciation The right-of-use assets during the full year were $21,515,000. 2020 $'000 2019 $'000 21,515 (3,318) 12 18,209 - - - - The Group leases buildings for its offices with agreements between three to seven years and in some cases with options to extend. On renewal, the terms of the leases are renegotiated. The Group also leases office equipment but these are either short term or low value and have been expensed as incurred, not capitalised as right-of-use assets. 15. Lease liability For the year ended 30 June Current Non-current 16. Issued capital For the year ended 30 June a. Ordinary shares Issued capital 3,160 17,776 20,936 2020 $'000 2020 $'000 - - - 2019 $'000 2019 $'000 101,771 51,125 2020 2019 Movements in ordinary shares on issue: At 1 July Exercise of share options (i) Issued for cash (ii) Issued from DRP participation (iii) Issued from SPP participation Issued for Staff Share Plan (iv) Number of shares $'000 Number of shares $'000 73,410,315 51,125 73,117,908 50,221 210,000 10,410,000 214,799 - 66,330 - 49,736 910 - - 86,000 - 140,738 65,669 - - - 618 286 - At 30 June 84,311,444 101,771 73,410,315 51,125 In 2020, 210,000 options were exercised with an exercise price of $Nil (2019: 86,000 options). Shares issued as a result of share placement at a price of $5. (i) (ii) (iii) Shares issued as a result of participation in the MNF Group dividend reinvestment plan (at an issue price of $4.75 and $3.05, 2019: $4.63 and $3.81). (iv) Shares issued under Staff Share Plan to all eligible staff at $Nil. Share capital movements above are presented net of transaction costs. Ordinary shares have the right to receive dividends as declared and in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company. 68 b. Share options Movements in ordinary shares on issue: Outstanding at 1 July Granted during the year Exercised during the year Expired during the year Outstanding at 30 June Exercisable 2020 2019 Number WAEP $ Number WAEP $ 1,070,000 4.14 - (210,000) - 860,000 860,000 - - - 5.15 5.15 800,000 360,000 (86,000) (4,000) 1,070,000 1,070,000 5.54 - - - 4.14 4.14 The outstanding options balance as at 30 June 2020, issued under the share-based payment option scheme to directors and executives is represented by 620,000 options with an exercise price of $7.15 each and an expiry date of 30 June 2021. Two tranches of options at 120,000 each were issued to employees with an exercise price of $Nil and expiry dates of 30 June 2021 and 30 June 2022 respectively. For the year ended 30 June 17. Staff share-based payments Outstanding options Employee option plan Options granted to directors Total a. Employee option plan (EOP) 2020 Number 2019 Number 410,000 450,000 860,000 620,000 450,000 1,070,000 The Board may issue options under the EOP to any employee of the Group, including executive directors and non-executive directors. Options will be issued free of charge, unless the Board determines otherwise. Each option is to subscribe for one share and when issued, the shares will rank equally with other shares. Unless the terms on which an option was offered specify otherwise, an option may be exercised at any time after one year from the date it is granted, provided the employee is still employed by the Company. An option may also be exercised in special circumstances, that is, at any time within six months after the employee’s death, total and permanent disablement, or retrenchment. An option lapses upon the termination of the employee’s employment by the Company and, unless the terms of the offer of the option specify otherwise, lapses three years after the date upon which it was granted. The maximum number of options on issue under the EOP must not at any time exceed 5% of the total number of shares on issue at that time. b. Share options granted to directors 450,000 options were granted to directors prior to the 2019 financial year. The following table illustrates the number and weighted average exercise prices (WAEP) of movements of share options held by directors during the year: 2020 2019 Number WAEP $ Number WAEP $ Outstanding as at 1 July 450,000 7.15 450,000 Granted during the year Exercised during the year - - - - - - Outstanding as at 30 June 450,000 7.15 450,000 7.15 - - 7.15 69 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Notes to the consolidated financial statements 18. Restructure costs In September 2019, the Group underwent reassessment of the internal personnel structure; this assessment is not associated with the ongoing activities of the entity. The restructuring costs charged to profit or loss consist of the following: For the year ended 30 June Redundancy costs 19. Commitments and contingencies Commitments There were no commitments as at 30 June 2020. 2020 $'000 2019 $'000 1,300 1,300 - - Guarantees There were no new guarantees as at 30 June 2020. The Company has a guarantee to Telstra Corporation Limited. This guarantee covers all primary obligations including any debts of its wholly owned subsidiaries. It does not impose any greater liability of the Company than is already in place for the subsidiaries collectively. Other matters From time to time, the Group is subject to legal claims and commercial disputes. The majority of these are subsequently proven to be without merit and resolved with no cash outflow. 20. Events after reporting date Dividends The dividend as recommended by the Board will be paid subsequent to the balance date. There are no other events after reporting date. 21. Auditor’s remuneration The auditor of the Group is MNSA Pty Ltd Chartered Accountants. For the year ended 30 June 2020 $'000 2019 $'000 Auditors of the Group Amounts received or due and receivable by MNSA Pty Ltd Chartered Accountants for: Audit and review of the annual report of the entity Non-audit services Other Auditors Audit and review of financial statements 322 - 93 415 377 - 49 426 Notes to the consolidated financial statements 22. Director and executive disclosures a. Details of Key Management Personnel (KMP) Mr Terry Cuthbertson Chairman and Non-executive Director Mr Michael Boorne Non-executive Director Mr Andy Fung Non-executive Director Mr David Stewart(i) Non-executive Director Mr Rene Sugo Mr Matt Gepp(ii) Mr Chris Last(ii) Director & Chief Executive Officer Chief Financial Officer Chief Financial Officer Ms Catherine Ly Company Secretary Mr David Stewart commenced his appointment on 13 August 2019; (i) (ii) Mr Matt Gepp resigned as CFO of the Group on 11 September 2019. His final day at the Group was 20 September 2019. Mr Chris Last commenced with the Group as CFO on 12 September 2019. b. Compensation of KMPs The Group has applied the exemption under Corporations Amendments Regulation 2006 No 4 which exempts listed companies from providing remuneration disclosures in relation to their key management personnel in their annual financial reports as required by AASB 124 Related Party Disclosures. These disclosures are provided in the directors’ report designated as audited. c. Shareholdings of KMPs Directors Other KMPs Year Balance at the beginning of period Acquired/ (disposed) during the year Options exercised Balance at end of period 2020 2019 2020 2019 27,759,065 27,679,270 348,775 338,676 (658,538) 79,795 15 2,599 - - 27,500 7,500 27,100,527 27,759,065 376,290 348,775 The above shareholdings are held directly and indirectly through controlled entities. d. Share options of KMPs Year Balance at the beginning of period Granted Options exercised Options forfeited* Balance at end of period Directors Other KMPs 2020 2019 2020 2019 450,000 450,000 77,500 85,000 - - - - - - 450,000 450,000 40,000 (27,500) (50,000) 40,000 - (7,500) - 77,500 * Mr Matt Gepp ceased as CFO of the Group on 11 September 2019 and he is still eligible for 50,000 option with an exercise price of $7.15, which expires on 30 June 2021. 70 71 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Notes to the consolidated financial statements 23. Controlled entities Notes to the consolidated financial statements 25. Goodwill and other intangibles The consolidated financial statements include the financial statements of MNF Group Limited and the subsidiaries listed in the following table: Name Country of incorporation My Net Fone Australia Pty Limited Symbio Networks Pty Limited Symbio Wholesale Pty Limited Internex Australia Pty Limited Pennytel Australia Pty Limited Mobile Enablement Australia Pty Limited (i) Symbio Wholesale (Singapore) Pte Limited TNZI International Pty Limited TNZI USA LLC TNZI New Zealand Limited TNZI Australia Pty Limited TNZI UK Limited TNZI Singapore Pte Limited Symbio Wholesale NZ Pty Limited Conference Call International Pty Limited Express Virtual Meetings Pty Limited Eureka Teleconferencing Pty Limited Conference Call Asia Pty Limited Ozlink Conferencing Pty Limited Superinternet (S) Pte Limited Superinternet Access Pte Limited Telcoinabox Operations Pty Limited IVox Pty Limited Neural Networks Pty Limited Symmetry Networks Pty Limited (ii) Mobile Service Solutions Pty Limited Australia Australia Australia Australia Australia Australia Singapore Australia USA New Zealand Australia United Kingdom Singapore New Zealand Australia Australia Australia Australia Australia Singapore Singapore Australia Australia Australia Australia Australia Ownership interest 2020 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 2019 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% (i) (ii) Mobile Enablement Australia Pty Ltd was officially de-registered on 21 August 2019. On 1 December 2019, the MNF group completed the sale of Symmetry Networks Pty Ltd. Goodwill# Brands# Customer contracts# Software development costs Software and other assets# $’000 $’000 $’000 $’000 Total $’000 Cost Balance at 1 July 2018 30,789 4,823 2,933 3,779 12,180 54,504 Additions Acquisition of TIAB Balance at 1 July 2019 Additions Transfer from Work in Progress - 15,493 46,282 - - - 596 5,419 - - - 5,518 8,451 - - 8,283 74 8,357 - 14,444 36,051 12,062 26,698 98,912 8,817 - 65 51 8,882 51 Balance at 30 June 2020 46,282 5,419 8,451 20,879 26,814 107,845 Accumulated Amortisation Balance at 1 July 2018 - - (1,358) Amortisation - - (971) Balance at 1 July 2019 - - (2,329) (427) (378) (805) (3,965) (2,028) (5,993) (5,750) (3,377) (9,127) Amortisation - - Balance at 30 June 2020 - - (1,110) (3,439) (1,823) (2,636) (5,569) (2,628) (8,629) (14,696) Net Book Value At 30 June 2019 At 30 June 2020 46,282 46,282 5,419 5,419 6,122 5,012 11,257 20,705 89,785 18,251 18,185 93,149 # Acquired externally or purchased as part of a business combination 26. Impairment testing Impairment tests for intangible assets with definite useful lives For the purpose of annual impairment testing, indefinite life intangible assets are allocated to the Group’s CGUs. As at 30 June 2020, the Group had three CGUs, being Domestic Wholesale, Global Wholesale and Direct. Carrying amount of Goodwill have been allocated to the following CGUs: 24. Entities over which control has been lost during the financial year For the year ended 30 June Symmetry Networks Pty Ltd, a subsidiary of the Group was sold for a total consideration of $300,000. Name Symmetry Networks Pty Ltd Date of ownership ceased 1 December 2019 CGUs Domestic Wholesale Global wholesale Direct Total goodwill 2020 $'000 2019 $'000 21,579 5,376 19,327 46,282 21,579 5,376 19,327 46,282 72 73 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Notes to the consolidated financial statements Notes to the consolidated financial statements Carrying amount of Brands have been allocated to the following CGUs: For the year ended 30 June CGUs Domestic Wholesale Global Wholesale Direct Total Brands 2020 $'000 2019 $'000 596 1,823 3,000 5,419 596 1,823 3,000 5,419 The recoverable amount of the Group’s indefinite life intangible assets have been determined based on value-in- use calculations using cash flow projections based on five-year financial forecasts and assumptions that represent management’s best estimate of the range of business and economic conditions at the time. Calculations are reviewed and approved by the Board of Directors. Value-in-use represents the present value of the future net cash flow arising from the assets continued use and subsequent disposal. Any reduction in the carrying value is recognised as an expense in the consolidated statement of profit or loss and other comprehensive income in the reporting period in which the impairment loss is incurred. In determining value-in-use, management apply their best judgement in establishing forecasts of future operating performance, as well as a selection of growth rates, terminal rates and discount rates. These judgements are applied based on management’s understanding of historical information and expectation of future performance. Key assumptions used The following describes the key assumptions on which the Group has based its cash flow projections when determining value in use relating to the cash-generating units: Discount rate (Post tax) Terminal value Growth rate Domestic Wholesale Global Wholesale Direct 2020 8% 2.5% 2019 10% 2.5% 2020 10% 2.5% 2019 14% 2.5% 2020 8% 2.5% 2019 10% 2.5% The discount rate is based on the Group’s weighted average costs of capital adjusted to reflect an estimate of specific risks assumed in the cashflow projections The Terminal value growth rate is based on the Group’s expectation of long term performance of the CGUs in line with industry expectations. This is used to extrapolate cashflows beyond the five year period. Other key assumptions used in the value-in-use calculations include: • Gross profit is based on expected customer growth rates and direct costs to deliver the services. Management have used assumptions based on historical trends and expected trends within market expectations. • Overheads were forecast based on current expenditure adjusted for inflationary increases. • Capital expenditure forecast based on requirement to maintain and expand network infrastructure to support the future growth assumed in profit projections Based on the results of the impairment testing and evaluation, no impairment identified for the CGUs. Sensitivity analysis For all CGUs, any reasonable change in the key assumptions such as the terminal value growth rate and discount rate on which the recoverable amount is based would not cause any of the CGU’s carrying amount to exceed its recoverable amount. 27. Earnings per share Earnings and weighted average number of ordinary shares used in calculating basic and diluted earnings per share are: For the year ended 30 June 2020 $'000 2019 Restated* $'000 Net profit attributable to ordinary equity holders of the Company 11,947 9,943 * Restated based on correction of deferred tax made to the 30 June 2019 financial year. See Note 5 for details. For the year ended 30 June Weighted average number of shares: 2020 '000 2019 '000 Weighted average number of ordinary shares for basic earnings per share 80,282 73,316 Add effect of dilution: - Share options Weighted average number of ordinary shares for diluted earnings per share 860 81,142 1,070 74,386 28. Dividends paid and proposed Recognised amounts: 2019 fully franked final dividend declared and paid 2020 fully franked interim dividend declared and paid Unrecognised amounts: Cents per share $'000 Date of payment 4.00 2.50 2,940 2,106 4-Oct-19 2-Apr-20 2020 fully franked final dividend declared(i) 3.60 3,035 1-Oct-20 (i) The final dividend was declared on 25 August 2020. The amount has not been recognised as a liability in the 2020 financial year and will be brought to account in the 2021 financial year. The proposed payment date of the 2020 final dividend is 1 October 2020. The amount of franking credits available for future reporting periods is $11,625.833 (2019: $9,069,796). The tax rate at which paid dividends have been franked is 30% (2019: 30%). Dividends proposed will be franked at the rate of 30%. 74 75 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Notes to the consolidated financial statements Notes to the consolidated financial statements (iii) Liquidity risk Liquidity risk represents the Group’s ability to meet its contractual obligations as they fall due. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of current accounts, short term deposits, long-term borrowings, preference shares, finance leases and a revolving multi-option credit facility. The Group has access to a sufficient variety of sources of funding to adequately mitigate liquidity risks. At the end of reporting period, the Group has $22,000,000 short term deposits due within 91-279 days, detailed schedule is as per below: For the year ended 30 June Term deposit Not later than 1 month Later than 1 and not later than 3 months Later than 3 and not longer than 12 months Longer than 1 year Total 2020 $'000 2019 $'000 - 8,000 14,000 - 22,000 - - - - - (iv) Credit risk The Group has considered the impact of COVID-19 on its current economic environment and how this has affected our exposure to credit risk. For credit sales, the Group only trades with recognised creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. Ageing analysis and ongoing credit evaluation are performed on the financial condition of our customers and, where appropriate, an allowance for doubtful debts is raised. Management has undertaken a stringent review of this process as a direct result of the current pandemic. Receivable balances are monitored on an ongoing basis so that our exposure to bad debts is not significant. Refer to Note 7 for further information. 29. Parent entity Key financial information relating to the parent entity is summarised below: For the year ended 30 June 2020 $'000 2019 $'000 Statement of profit or loss and other comprehensive income Loss attributable to the owners of the Company Other comprehensive (loss)/gain Total comprehensive loss attributable to the owners of the Company Statement of financial position Total current assets Total non-current assets Total current liabilities Total non-current liabilities Net assets Issued Capital Reserves Retained earnings Total equity (6,857) (214) ( 7,071) 29,822 111,629 (17,129) (56,505) 67,817 106,585 2,997 (41,765) 67,817 (3,732) (593) (4,325) 3,852 100,301 (6,461) (61,598) 36,094 55,936 1,393 (21,235) 36,094 30. Financial risk management objectives and policies The Group’s principal financial instruments as at year end comprise cash at bank, trade and other receivables, trade payables, forward foreign exchange contract and a loan facility. The main risks arising from the Group’s financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below: (i) Foreign currency risk The Group is exposed to foreign exchange risks arising from various currency exposures, primarily with respect to the United States Dollar (USD) and the New Zealand Dollar (NZD). Much of the USD exposure is subject to a natural hedge, as the buy and sell side of most foreign currency transactions are in USD. Any unhedged foreign exchange positions associated with our transactional exposures will directly affect profit or loss as a result of foreign currency movements. The Group’s objective is to manage its foreign exchange risk against its functional currency and to hedge firm commitments and highly probable and material forecast transactions over varying time horizons using forward exchange contracts. Contracts are in place with all major creditworthy financial institutions. Sensitivity to foreign currency movements: A movement of +/- 10% in the Australian dollar at 30 June 2020 would impact the profit or loss by less than $138k (30 June 2019: $445k). This analysis assumes a movement in the Australian dollar across all currencies and only includes the effect of foreign exchange movements on monetary financial instruments. (ii) Interest rate risk The Group’s interest rate exposure relates to short term cash and long-term loans, both are subject to the floating interest rate. The Group’s objective is to minimise the cost of net borrowings and to minimise the impact of interest rate movements on the Group’s interest expense and net earnings. The Group allows for up to 100% of its long- term loan at fixed rates using interest rate swaps whereby the Group agrees to exchange at defined periods the net difference between fixed and floating interest rates based on an agreed notional principal amount. This interest rate swap is designated into a hedge relationship and satisfies the requirements for hedge accounting. 76 77 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Notes to the consolidated financial statements Directors’ declaration Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial instruments recognised in the financial statements Directors’ declaration In accordance with a resolution of the directors of MNF Group Limited, the directors of the Company declare that: For the year ended 30 June 2020 2019 1. The consolidated financial statements and notes, as set out on pages 27 to 78, are in accordance with the Financial assets Cash Weighted average effective interest rate 0.3% (2019: 1.2%) Carrying amount Fair value Carrying amount Fair value $'000 $'000 $'000 $'000 Corporations Act 2001 and: a. comply with Australian Accounting Standards, which, as stated in accounting policy Note 2 to the financial statements, constitutes compliance with International Financial Reporting Standards (IFRS); and 22,164 22,164 14,481 14,481 b. give a true and fair view of the financial position as at 30 June 2020 and of the performance for the year ended on that date of the Group; Short-term Term Deposit 22,000 22,000 - - Weighted average effective interest rate 0.69% (2019: Nil) Cash at call 2,000 2,000 1,000 1,000 Weighted average effective interest rate 1.5% (2019: 2.0%) Trade and other receivables 42,027 42,027 42,030 42,030 Financial liabilities On statement of financial position Trade payables 27,988 27,988 32,158 32,158 Loans and borrowings 30,000 30,000 55,600 55,600 Weighted average effective interest rate 3.23% (2019: 4.7%) Interest rate swap contract – cash flow hedge 841 841 628 628 31. Company details The registered office and principal place of business of MNF Group Limited is: Level 4, 580 George Street, Sydney, NSW, 2000, Australia 2. in the directors’ opinion 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 3. the directors have been given the declarations required by s295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer. On behalf of the Board Terry Cuthbertson Chairman Sydney, 25 August 2020 Rene Sugo CEO and Executive Director 78 79 For the year ended 30 June 2020For the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesMNF Group Limited | ABN 37 118 699 853 and controlled entities Auditor’s independence declaration Independent auditor’s report MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MNF GROUP LIMITED and Controlled Entities i. ii. i. the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. any applicable code of professional conduct in relation to the audit. ii. MNSA PTY LTD MNSA PTY LTD Allan Facey Director Allan Facey Director Dated in Sydney this 25th day of August 2020 Dated in Sydney this 25th day of August 2020 i. ii. the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and Report on the Audit of the Financial Report Opinion any applicable code of professional conduct in relation to the audit. We have audited the financial report of MNF Group Limited (the Group), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and the directors’ declaration. MNSA PTY LTD In our opinion the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its performance for the year then ended; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001. Allan Facey Director Basis for Opinion Dated in Sydney this 25th day of August 2020 We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 80 81 Independent auditor’s report Independent auditor’s report Revenue recognition Key Audit Matter How Our Audit Addressed the Key Audit Matter Carrying Value of Goodwill MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities MNF Group Limited has goodwill of $46.3m contained within three Cash Generating Units. AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and entry of the billing system reports to the financial accounting records. the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and any applicable code of professional conduct in relation to the audit. any applicable code of professional conduct in relation to the audit. i. For the Cash Generating Units, the determination of recoverable amount, being the value-in-use, requires judgement on the part of management in both identifying and then valuing the relevant Cash Generating Units. Recoverable amounts are based on future financial forecasts and Management’s view of a range of variables such as business and economic conditions including operating performance and the most appropriate growth and discount rates. ii. Refer to Note 2 of the Financial Statements, Significant accounting policies. MNSA PTY LTD Allan Facey Director Dated in Sydney this 25th day of August 2020 We evaluated the appropriateness of Management’s identification of the Group’s Cash Generating Units and tested the effectiveness of the impairment assessment process, including indicators of impairment, noting no significant exceptions. Our procedures included challenging Management on the suitability of the impairment model, and the reasonableness of the assumptions, with particular attention to the business segments, by performing the following: • • • • assessing MNF Group’s key market-related assumptions in Management’s valuation models with industry comparators and with assumptions made in the prior years including revenue and margin trends, capital expenditure on assets, market share, foreign exchange rates and discount rates, against external data where available; testing the mathematical accuracy of the cash flow models and agreeing relevant data to Board approved long range plans; assessing the reliability of Management’s forecast through a review of actual performance against previous forecasts;and consideration of COVID-19 impacts to managements assumptions and forecasts. We validated the appropriateness of the related disclosures in Note 25 and Note 26 to the Financial Statements, including the sensitivities provided with respect to acquisitions. Based on our procedures, we noted no issues of concern, and consider Management’s key assumptions to be within a reasonable range. MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES Revenue represents a material balance consisting of a high volume of individually low value transactions and we have identified the following types of transactions and assertions related to revenue recognition which give rise to key risks: the accuracy and completeness of revenue recorded as a result of reliance on the output of billing systems; and • • In responding to these matters, our audit approach included testing of systems and controls, in particular procedures covering: • • • • • segments, products, billing systems, cash collection and other relevant support systems around the recognition of material revenue streams; the reconciliation of billing systems to the general ledger, including validation of material journals processed between the billing system and general ledger; the accuracy and completeness of recording customer bills; reconciliation of cash receipts from customers with the receivable’s ledger; and consideration of COVID-19 impacts to collection of receivables and related provisions. i. ii. MNSA PTY LTD Capitalisation of Software Development and asset lives Allan Facey Director There are a number of areas where management judgement impacts the carrying value of intangible assets and their respective Dated in Sydney this 25th day of August 2020 amortisation profiles. These include: • • the decision to capitalise or expense costs; and the review of the annual asset life including the impact of changes in the Group’s strategy. Based on our work, we noted no significant issues on the accuracy of revenue recorded in the year. We evaluated the appropriateness of capitalisation policies, performed tests on costs capitalised and assessed the timeliness of the transfer of assets in the course of development. There were no exceptions noted from our testing. Our testing on the application of the asset life review identified no issues. In performing these procedures, we considered the judgements made by management including: • • • • the nature of underlying costs capitalised as part of the cost of the software billing and delivery platforms; the appropriateness of asset lives applied in the calculation of amortisation; assessing the need for accelerated amortisation; and changes in development activities due to COVID-19 business environment. No significant issues were noted from our testing. 82 83 Independent auditor’s report Independent auditor’s report Taxation – Deferred tax assets/ liabilities and income tax expense During the year the management undertook a review of its taxation policies and recalculated existing tax bases across the group. MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities In conducting our audit, we considered the updated tax policies of the group and evaluated the recalculated tax base. As a result of this review, corrections from prior periods were identified by management and have resulted in the restatement of prior period balances. AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES Our procedures included challenging Management on the suitability of the updated tax policies of the group, and the accuracy and reasonableness of the recalculated tax base, by performing the following: I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: Refer to Note 5 of the Financial Statements, Income and deferred tax. the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and i. Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2020, but does not include the financial report and our auditor’s report thereon. MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. i. the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. ii. any applicable code of professional conduct in relation to the audit. ii. any applicable code of professional conduct in relation to the audit. Responsibility of the Directors for the Financial Report MNSA PTY LTD Allan Facey Director Dated in Sydney this 25th day of August 2020 • assessing tax calculations of the tax base going forward; • questioning management and its external taxation advisor on the accuracy of the corrected figures and quantifying the identified corrections from prior periods; and considered management judgements and external advice received timing of the corrections and disclosure requirements in line with the Australian Accounting Standards. • Based on our procedures, we noted no issues of concern, and consider Management’s key assumptions and disclosures to be reasonable. There were no restrictions on our reporting of Key Audit Matters. The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. MNSA PTY LTD In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Allan Facey Director Dated in Sydney this 25th day of August 2020 Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. 84 85 Independent auditor’s report Independent auditor’s report If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities modify our opinion. • Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 However, future events or conditions may cause the Group to cease to continue as a going concern. TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES • Evaluate the overall presentation, structure and content of the financial report, including the • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for the auditor independence requirements as set out in the Corporations Act 2001 in relation to the our audit opinion. audit; and i. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. any applicable code of professional conduct in relation to the audit. ii. Report on the Remuneration Report Opinion on the Remuneration Report MNF GROUP LIMITED ABN 37 118 699 853 and Controlled Entities We have audited the Remuneration Report included in pages 13 to 19 of the Directors’ report for the year ended 30 June 2020. 39 to 44 AUDITOR’S INDEPENDENCE DECLARATION UNDER S 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF MNF GROUP LIMITED AND CONTROLLED ENTITIES In our opinion the Remuneration Report of MNF Group Limited for the year ended 30 June 2020, complies with section 300A of the Corporations Act 2001. I declare that, to the best of my knowledge and belief, during the year ended 30 June 2020 there have been no contraventions of: Responsibilities i. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and ii. any applicable code of professional conduct in relation to the audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. MNSA PTY LTD From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Allan Facey Director Dated in Sydney this 25th day of August 2020 MNSA PTY LTD MNSA PTY LTD Allan Facey Director Allan Facey Director Dated in Sydney this 25th day of August 2020 Dated in Sydney this 25th day of August 2020 86 87 ASX additional information Additional information required by ASX Ltd and not shown elsewhere in this report is as follows. The information is current as at 13 August 2020. ASX additional information (c) Twenty largest holders of quoted equity securities (a) Distribution of equity securities (i) Ordinary share capital 84,311,444 fully paid ordinary shares are held by 4,061 individual shareholders. All issued ordinary shares carry one vote per share and carry the rights to dividends. (ii) Options 860,000 unlisted options are held by 29 individual option holders. Options do not carry a right to vote. The numbers of shareholders, by size of holding, in each class are: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Fully paid ordinary shares 1,998 1,205 365 463 30 4,061 The number of security investors holding less than a marketable parcel of ordinary shares is 201. (b) Substantial shareholders Ordinary shareholders Mr Andy Fung and related parties Mr Rene Sugo and related parties NAOS Asset Management Ltd Fully paid Number 13,625,802 12,034,214 5,626,276 Percentage 16.17 14.28 6.67 National Nominees Limited Mr Andy Kam Kan Fung & Ms My Van Monique Ly HSBC Custody Nominees (Australia) Limited Avondale Innovations Pty Ltd J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited RACS SMSF Pty Ltd BNP Paribas Nominees Pty Ltd Boorne Gregg Investments Pty Ltd Kore Management Services Pty Ltd Boorne Superannuation Fund Pty Ltd Neweconomy Com AU Nominees Pty Limited L & C Pty Ltd Sandhurst Trustees Ltd G & E Properties Pty Ltd Lee Superfund Mgmt Pty Limited Mr Michael John Boorne Ms Le Quan Catherine Ly Endan Pty Ltd UBS Nominees Pty Ltd (d) On-Market Buy Back There is currently no on-market buy back. Fully paid Number 14,062,813 13,417,448 11,749,517 10,838,955 3,998,428 2,015,307 1,195,259 985,734 901,234 855,906 811,226 769,017 700,000 649,980 529,247 385,000 371,199 301,275 273,951 255,483 Percentage 16.68 15.92 13.93 12.86 4.74 2.39 1.42 1.17 1.07 1.02 0.96 0.91 0.83 0.77 0.63 0.46 0.44 0.36 0.32 0.30 65,066,979 77.18 88 89 www.mnfgroup.limitedMNF Group Limited | ABN 37 118 699 853 and controlled entitiesFor the year ended 30 June 2020MNF Group Limited | ABN 37 118 699 853 and controlled entitiesCorporate Information Principal Place of Business Level 4, 580 George Street Sydney NSW 2000 Australia Phone: 61 2 8008 8000 Share Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Australia Phone: 61 2 8280 7100 Auditors MNSA Pty Ltd Chartered Accountants Level 1, 283 George Street Sydney NSW 2000 Australia Directors Terry Cuthbertson (Chairman) Michael Boorne Andy Fung David Stewart Rene Sugo (CEO) Gail Pemberton Company Secretary Catherine Ly Chief Financial Officer Chris Last Registered Office Level 4, 580 George Street Sydney NSW 2000 Australia Bankers Westpac Banking Corporation Westpac Place Sydney NSW 2000 Australia HSBC Bank Australia Limited, Head Office, Sydney NSW 2000, Australia This annual report covers both MNF Group Limited as an individual entity and the consolidated group comprising MNF Group Limited and its subsidiaries. The Group’s functional and presentation currency is AUD. The Company is listed on the Australian Securities Exchange under the code MNF. Annual Report Copies of the 2020 Annual Report with the Financial Statements can be downloaded from: www.mnfgroup.limited/investors/annual-reports 90 MNF Group Limited | ABN 37 118 699 853 and controlled entitieswww.mnfgroup.limited MNF Group Limited Annual Report 2020 

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