Annual Report FY2019-20 PERFORMANCE HIGHLIGHTS $2b+ Value of transactions processed annually +60% Processing revenue increase on previous financial year +50% Approximate average total revenue increase each year across past three years +33% Total revenue increase on previous financial year After partnering with Visa in 2019, Novatti now issues physical and digital Visa payment cards, enabling consumers to make digital payments. CONTENTS CORPORATE DIRECTORY ........................................................................................................................................................ 1 ABOUT ......................................................................................................................................................................................... 2 CHAIRMAN’S REPORT .............................................................................................................................................................. 4 MANAGING DIRECTOR’S REPORT .......................................................................................................................................... 5 DIRECTOR PROFILES ............................................................................................................................................................... 6 REVIEW OF OPERATIONS ........................................................................................................................................................ 7 DIRECTORS’ REPORT ............................................................................................................................................................. 14 AUDITOR’S INDEPENDENCE DECLARATION ....................................................................................................................... 30 FINANCIAL STATEMENTS …………………………………………………………………………………………………………… 31 INDEPENDENT AUDITOR'S REPORT ……………………………………………………………………………………………… 73 SHAREHOLDER INFORMATION ……………………………………………………………………………………………………. 79 Novatti Group Limited Corporate directory 30 June 2020 CORPORATE DIRECTORY Directors Peter Pawlowitsch (Non-Executive Chairman) Peter Cook (Managing Director and Chief Executive Officer) Kenneth Lai (Non-Executive Director) Paul Burton (Non-Executive Director) Steven Zhou (Non-Executive Director) Company secretary Ian Hobson Registered office and principal place of business Share register Auditor Solicitors Bankers Level 3 461 Bourke Street Melbourne VIC 3000 +61 3 9011 8490 Automic Registry Services 267 St Georges Terrace Perth WA 6000 +61 8 9324 2099 William Buck Level 20 181 William Street Melbourne VIC 3000 Milcor Legal Level 1 6 Thelma Street West Perth WA 6005 National Australia Bank Level 1 330 Collins Street Melbourne VIC 3000 Stock exchange listing Novatti Group Limited shares are listed on the Australian Securities Exchange (ASX code: NOV) Website www.novattigroup.com Corporate Governance Statement www.novattigroup.com/investors/corporate-governance Australian Financial Services Licence AFSL No.448066 Financial Conduct Authority FCA No. 900631 as an appointed representative of CFS-ZIPP Ltd (FCA No. 900027) for issuance of e-money products 1 Novatti Group Limited About 30 June 2020 ABOUT Who we are? Novatti is a leading digital banking and payments company. Through our innovative technology, and a global network, we enable every person to transact from any device, anywhere. In doing so, we position our customers to thrive as we shift to a digital, cashless society. In recent years, Novatti has been methodically developing and acquiring the complementary capabilities to provide consumers with a fully-digital banking service. Novatti now processes more than $2 billion of transactions annually. In addition to creating a complete business based on digital banking, each of Novatti’s business units operate successfully on their own, providing a sustainable and scalable growth platform. Digital Banking Transaction Processing Leveraging our infrastructure and platforms to process the global digital payments of consumers and businesses from any device Card Issuing Providing consumers with the physical platform to make digital payments through reloadable debit cards, including gifts cards Payment Acquiring Enabling customers to receive funds quickly and securely though fully-digital and borderless payment acceptance solutions 2 Novatti Group Limited About 30 June 2020 What is digital banking? Digital banking is all about connection. In the 1800s, this was done through railways. In the 1900s, the telephone took charge. In the 2000s, the internet took over to truly connect the world. The same revolution is currently taking place in the way we pay for things. Technology has enabled consumers to make purchases digitally, without cash, instantly, seamlessly, and securely. In doing so, this revolution is connecting all of us financially, wherever we are in the world. Novatti is a leader in this revolution, providing the technology platforms and services that enable digital transactions to take place, on any device, anywhere in the world. Merchant Purchase complete Digital payment Novatti processing Revenue streams include: ▪ Payment card issuing ▪ Payment processing ▪ Payment acceptance ▪ International payments ▪ Technology licensing ▪ Subscription billing 3 Novatti Group Limited Chairman’s Report 30 June 2020 CHAIRMAN’S REPORT Over the past financial year, Novatti has continued to grow strongly. This is particularly notable given the challenges and disruption the community faced during COVID-19. Despite these challenges, Novatti continues to make excellent progress against its long-term growth plan. Novatti recorded total revenue of $11.86 million for FY20, an increase of more than 33% on the previous financial year. Importantly, Novatti continues to deliver consistent, long-term growth, with total revenue now growing by an average of approximately 50% each year for the past three financial years. Further, Novatti’s core processing business remained particularly resilient, increasing 60% on the previous financial year. Across the financial year we sought to strengthen our business through a number of strategic activities, including acquiring and successfully integrating Emersion, a leading business process integration platform, with performance beating expectations; launching Novatti’s new payment card issuing business after being awarded a Principal Issuer Licence by Visa; submitting Novatti’s final Restricted Authorised Deposit Taking Institution (RADI) licence application to the Australian Prudential Regulation Authority; securing $10.2 million in new funds through a share placement to fully fund and accelerate Novatti’s current growth strategy. We strongly believe that the shift to a cashless society will only accelerate going forward, particularly with an increase in working and operating remotely following COVID-19. With Novatti already fully-digital, we are in a strong position to capitalise on this rapidly expanding market and will pursue larger, more strategic growth opportunities in the year ahead. On behalf of the Board, I thank all the Novatti team for their efforts during the year, particularly in remaining positive during the challenges of COVID-19. To all our shareholders, I look forward to continuing our journey to deliver long-term growth together. Peter Pawlowitsch Chairman 4 Novatti Group Limited Managing Director’s Report 30 June 2020 MANAGING DIRECTOR’S REPORT In the years ahead, when we reflect on the previous financial year, no doubt a key discussion point will be the impact that COVID-19 had on our community. From a global level to a local level, COVID-19 was felt by all. For Novatti, some of the very real challenges included shifting our workforce to working safely remotely while working constructively with Australia’s banking regulator as it paused the issuing of new banking licences. Despite these challenges, our entire team adapted quickly, maintaining the safety of our workforce, continuing to provide innovative solutions to our customers, and always maintaining a focus on our long-term growth strategy. I’m incredibly proud of our entire team for the way they responded. This positive response helped us achieve a number of strategic goals for the year, including maintaining our record of continuous annual total revenue growth, completing our latest strategic acquisition, Emersion, securing new funding for our current growth strategy, while also beginning a refresh of our corporate brand. For the financial year ahead, we will aim to: Drive further payments processing growth. Continue our strong total revenue growth. Deliver new strategic partnerships. Build payments banking services. While COVID-19 has had many negative impacts on our community, it has also accelerated the shift to a cashless economy, a shift that Novatti is ready for and that will deliver long-term value for our shareholders. I thank you for your ongoing engagement over the past financial year and look forward to another exciting year ahead. Peter Cook Managing Director 5 Novatti Group Limited Director Profiles 30 June 2020 DIRECTOR PROFILES Peter Pawlowitsch Non-Executive Chairman BCom, CPA, MBA, FGIA Peter is an accountant by profession, with extensive experience as a director and officer of ASX-listed entities. He brings to the team experience in operational management, business administration and project evaluation in the IT, hospitality and mining sectors gained during the last 15 years. Peter Cook Managing Director and Chief Executive Officer BSc, Grad Dip Computing, Grad Dip Securities, GAICD Peter has over 25 years of experience as a director and executive with companies including Coopers & Lybrand (now PWC), Catsco Pty Ltd and Advanced Network Management Pty Ltd (Telstra joint venture company) and many start-up technology companies. Peter’s career has been largely based on founding and leading multiple telecommunications and payments companies. Unidial Pty Ltd and Ezipin Canada Inc. are such examples and all with successful exits to private and public companies. Peter was a non- executive Director and Deputy Chairman of ASX-listed Senetas Corporation Limited from June 1999 to January 2006. Paul Burton Non-Executive Director Chartered Accountant Paul has over 14 years of leadership experience in the payments industry and was CEO of Datacash Group Plc, a payments gateway company bought by MasterCard. Datacash had a significant presence in Africa and Paul steered the Company’s expansion in that market. Kenneth Lai Non-Executive Director Bachelor of Science – Majoring in Computer Science Kenneth is the managing director and wholly owner of Prestige Team Limited, an investment company which, together with its subsidiaries, holds an investment portfolio in Hong Kong and Southeast Asia. Prestige Team Limited has interests in real estate, payment processing, digital marketing and information technology support services. Kenneth has funded and invested in various Silicon Valley technology funds focusing on business opportunities within Asia. He also co-founded Legend World Development Technology Limited, a limited liability company incorporated in Hong Kong, which provides information technology solutions and integrated marketing solutions to business setups, and in which he is a shareholder and advisor. Steven Zhou Non-Executive Director Steven Zhou is an experienced executive with payments industry experience in both China and Australia. Steven has recently aided Novatti in a number of deals involving new business operations between Australia and China. 6 Novatti Group Limited Review of Operations 30 June 2020 REVIEW OF OPERATIONS Overview In recent years, Novatti has also been methodically developing and acquiring the complementary capabilities to provide consumers with a fully digital banking service. The 2019-20 financial year saw Novatti continue to deliver on this objective, while maintaining strong results within its existing business. Financial results Revenue Over the past financial year, Novatti continued to experience strong revenue growth, with an ongoing focus on delivering transactional and recurring revenues. Novatti recorded total revenue of $11.86 million for the financial year, an increase of more than 33% on the previous financial year’s result of $8.9 million. Across the last three financial years, Novatti has now grown total revenue by an average of approximately 50% each year, delivering consistent and sustained growth. Total annual revenue 12 10 8 6 4 2 0 $Millions FY16-17 FY17-18 FY18-19 FY19-20 7 Novatti Group Limited Review of Operations 30 June 2020 Novatti’s core processing business recorded revenue of $6.53 million for the financial year, an increase of more than 60% on the previous financial year result of $4.1 million. Importantly, this core business achieved record growth in each quarter. Quarterly processing revenue 2.25 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0 $Millions Cash flow Jun 18 Sep 18 Dec 18 March 19 Jun 19 Sep 19 Dec 19 March 20 Jun 20 Novatti’s cash flow continued to strengthen across the financial year, with a focus on revenue growth and cost base management. This approach enables Novatti to continue to prioritise cashflow for its long-term growth strategy. A continued focus on cost efficiencies delivered savings. Notably, product manufacturing and operating costs as a percentage of receipts from customers reduced from 75.9% in FY2018-19 to 68.5% in FY2019-20, enabling Novatti to deliver increased processing revenue from lower direct costs. While Novatti was almost cashflow positive in the June quarter, with net cash used in operations for the quarter narrowing to just $16,000, the priority remains leveraging cash for future growth. Novatti held $2.6 million in cash at the end of the financial year. However, this does not include the $10.2 million raised through a share placement announced at the end of the June quarter. Going forward, Novatti’s management will continue to prudently balance cashflow to navigate the challenges of COVID-19 while pursuing its growth strategy. Inovapay is a new international wallet designed for the Brazilian market that will enable secure transfers and payments. 8 Novatti Group Limited Review of Operations 30 June 2020 Fundraising At the end of the June quarter, Novatti announced that it had secured $10.2 million in new funds through a share place. This share placement, to be completed in the 2020-21 financial year, will enable Novatti to accelerate its current growth strategy, including: increasing business development resources; acquiring new Visa card issuing programs; securing new strategic, global partnerships; and fast-tracking Novatti’s integration into other payment networks. 9 Novatti Group Limited Review of Operations 30 June 2020 Business operations Across the financial year, Novatti’s operational performance was also strong, with a number of significant achievements. A number of these were particularly notable given the broader disruption to the economy caused by COVID-19. These achievements included: Acquiring and successfully integrating Emersion, with performance beating expectations. Launching Novatti’s new payment card issuing business after being awarded a Principal Issuer Licence by Visa. Securing new tier-one partnerships for further growth. Submitting Novatti’s final Restricted Authorised Deposit Taking Institution (RADI) licence application to the Australian Prudential Regulation Authority. Acquisition and successful integration of Emersion In April, Novatti announced the acquisition of Emersion, a leading business process integration platform. Through Emersion’s platform, businesses are able to combine diverse applications, including subscription billing, payments and provisioning, into existing business platforms, saving time and energy. Emersion integrates with more than 70 software platforms, including majors such as Salesforce, Xero, and ConnectWise, providing a strong platform for ongoing sales. Within the June quarter, Novatti swiftly and smoothly integrated Emersion, with immediate positive impacts, including strengthened revenue. FY21 is expected to be a strong year for Emersion with further plans for international expansion and ongoing demand for customer engagement, integration, automation and payment services post-COVID-19. Emersion is a leading business process integration platform that enables businesses to combine diverse applications, including subscription billing, payments and provisioning, into existing business platforms, saving time and energy. 10 Novatti Group Limited Review of Operations 30 June 2020 Launch of Visa issuing business Novatti launched its Visa issuing business after partnering with leading European payments processor, Decta Limited, to develop new business in the Asia-Pacific region. The launch of this business was the culmination of a multi-year campaign to develop the required infrastructure and resources to operate in this area. In 2018, Novatti acquired Vasco Pay, which provided Novatti with the capabilities to produce reloadable debit cards. In September 2019, Novatti was provided with the platform to leverage these capabilities by being awarded with a Principal Issuer Licence by Visa, one of the world’s largest payments technology companies, enabling Novatti to issue and distribute both physical and digital Visa cards. In launching this new business, Novatti will specifically provide Decta Limited with payment processing support, particularly leveraging its anti-fraud and pre-paid card management capabilities and experience. More broadly, going forward Novatti’s Visa issuing business will provide support to industries that require flexible but secure banking products, including fintech and neobank projects, retail chains and large membership organisations. New tier-one partnerships During the financial year, Novatti secured a number of partnerships with tier-one players, which continues to validate the quality of Novatti’s product and service offering. These partnerships not only create new revenue opportunities for Novatti, they also create opportunities for significant scale and growth in new and expanding markets. Marqeta Global payments leader Marqeta chose Novatti as its partner to launch its prepaid card business in Australia. Marqeta is already a partner of Afterpay, Square, Uber, Affirm, Instacart and DoorDash and has issued around 140 million payment cards globally. It was recently named in the Forbes 2020 Fintech 50 and the CNBC 2020 Disrupter 50 lists. Novatti will support Marqeta by utilising the capabilities of its Visa card issuing licence and platform and will receive fees for project implementation, ongoing services, and also project performance. After partnering with Visa in 2019, Novatti now issues physical and digital Visa payment cards, enabling consumers to make digital payments. 11 Novatti Group Limited Review of Operations 30 June 2020 Alipay Novatti’s China-focused, cross-border payments platform, ChinaPayments, was successfully integrated directly into the main page of Alipay’s app. ChinaPayments will provide substantial value-add to Alipay’s users by enabling them to pay more than 35,000 different Australian Bpay billers directly using Chinese currency. Novatti will receive a fee per any transaction going forward. Alipay is a leading open digital lifestyle platform operated by Ant Group. It serves more than 1.2 billion users worldwide together with its global e-wallet partners. Rent.com.au Novatti partnered with Rent.com.au to redevelop the rental payments platform, RentPay. RentPay was developed to provide an automated rental payments platform for both tenants and agents. In addition to administering rental payments and value added market place services for tenants, the platform also enables administrative support for agents, including automated missed-payment communications. Novatti will receive $250,000 for access to its technology and will provide paid processing services for three years, with automatic renewal. Novatti also invested directly in RentPay to gain exposure to the rental payments industry. ChinaPayments enables Chinese residents to pay more than 35,000 different Australian BPAY billers using Chinese currency. In June 2020, the business was further validated with a partnership announced with Alipay. 12 Novatti Group Limited Review of Operations 30 June 2020 Development of a digital payments bank The culmination of all Novatti’s capabilities will be a fully-digital banking service. This will enable consumers to obtain the full benefits of a cashless economy, with a flexible product that suits their lifestyle. Novatti is currently developing a borderless, digital-only neobank that will leverage more than 100,000 customers through Novatti’s partners. In November 2019, Novatti submitted its final application for a Restricted Authorised Deposit Taking Institution licence to the Australian Prudential Regulation Authority (APRA), the regulator of Australia’s banking sector. In April 2020, Novatti received guidance from APRA that it would be placing a temporary hold on the issuing of new banking licences during COVID-19. However, following the conclusion of the financial year, APRA announced that it will recommence issuing banking licences in two phases, with licensing of new operations, such as Novatti’s, to begin from March 2021. In the meantime, APRA has noted that Novatti's application will continue to be assessed, minimising any potential delays. While this process takes place, Novatti continues to make great progress in building its new banking business, including developing a strong customer and partner base to be ready for launch. Novatti also continues to actively engage with potential new investment partners for the new banking business following a restructure of its investment partners earlier in the financial year. This new banking business is a key part of Novatti’s long-term growth strategy. Novatti provides the platform to power SplitPay, a new Buy- Now-Pay-Later provider in the United Kingdom. 13 Novatti Group Limited Directors’ Report 30 June 2020 DIRECTORS’ REPORT The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘Group’) consisting of Novatti Group Limited (referred to hereafter as the ‘Company’, ‘Novatti’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2020. Directors The following persons were directors of Novatti Group Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Peter Pawlowitsch (Non-Executive Chairman) Peter Cook (Managing Director and Chief Executive Officer) Kenneth Lai (Non-Executive Director) Paul Burton (Non-Executive Director) Steven Zhou (Non-Executive Director) Brandon Munro (Non-Executive Director) (resigned on 5 August 2020) Principal activities During the financial year the principal continuing activities of the consolidated entity are the provision of payment services by way of financial transaction processing, subscriber billing, card issuing, merchant acquiring services and payment network integration. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Review of operations The loss for the consolidated entity after providing for income tax amounted to $10,960,326 (30 June 2019: $4,954,313). The Group’s net deficit position as at 30 June 2020 was $485,563 with $2,599,878 held in cash and cash equivalents. Net loss from operations Add: Interest Less: Depreciation and amortisation Finance charges Indirect tax expenses EBITDA Add back/(less): Vesting of share-based payments Due diligence costs Loss on embedded derivative Impairment of capitalised bank licensing costs Underlying EBITDA* Cash Operating cash flow 2020 $ 2019 $ Change Change $ % (10,960,326) (4,954,313) (6,006,013) 121% (8,745) (10,282) 1,537 (15%) 904,815 1,366,425 158,987 (8,538,844) 389,337 75,664 245,006 (4,254,588) 515,478 1,290,761 (86,019) (4,284,256) 1,332,486 - 726,942 3,012,715 (3,466,701) 386,085 497,853 - - (3,370,650) 946,401 (497,853) 726,942 3,012,715 (96,051) 2,599,878 (1,237,067) 1,806,924 (2,103,520) 792,954 866,453 132% 1706% (35%) 101% 245% (100%) - - 3% 44% (41%) 14 Novatti Group Limited Directors' report 30 June 2020 * AASB 16 Leases was adopted for the first time requiring capitalisation and amortisation of the Group’s Right of Use Assets, as outlined in note 1 of the financial statements. The modified retrospective approach was used and as such the comparatives have not been restated. Therefore, the current and comparative EBITDA is not directly comparable. In March 2020, the World Health Organisation declared the outbreak of a novel coronavirus (COVID-19) as a pandemic, which continues to spread globally as well as in Australia. The spread of COVID-19 has caused significant volatility in Australian and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19 and therefore the Group has taken precautionary measures by temporarily closing the Company’s offices (for all but essential services) and having arranged for its the employees to work remotely, as well as curtailing travel. At the date of this report, the impact of these measures is not expected to significantly affect Novatti's business operations. Significant changes in the state of affairs During the financial year, the Group impaired the previously capitalised costs associated with the Restricted Authorised Deposit-taking Institution (RADI) license of $2.9M and the previously capitalised costs associated with the Electronic Money Issuing license (EMI) of $120K. On 7 November 2019, the Group raised $2.275 million in convertible notes secured against its US subsidiary Novatti Inc. These funds have been allocated to working capital and funding of a collateral deposit of approximately $147K. In addition, Novatti B Holding Company Pty Ltd, the Parent entity’s wholly owned subsidiary and head of its banking services unit entered into a convertible note loan arrangement with an Australian based investment group. The investment has raised $1.1 million into Novatti B Holding Company Pty Ltd via a non-interest bearing converting note at a $20M pre-money valuation. In February 2020, the Group, entered into an agreement with investors for an extension on its convertible note facility. A further $1.225 million was raised, bringing the total funds in from the parent entity’s convertible note facility to $3.5 million. The terms and conditions of the extension is identical to those of the original convertible note taken up on 15 November 2019. On 2 April 2020, The Group announced the acquisition of the business assets as a going concern from Emersion Software Systems Pty Ltd, a leading business process integration platform. The acquisition extends the Group's capability offering and strengthens core payments business. The consideration for the acquisition comprises a $1 million cash component and a shares component comprising 16,725,000 Novatti fully paid ordinary shares, all of which will be subject to voluntary escrow until 31 March 2021. On 29 June 2020, the Group announced it had secured the funds for its next growth phase, with binding commitments from institutional and sophisticated investors for a $10.2 million capital raising. There were no other significant changes in the state of affairs of the consolidated entity during the financial year. Matters subsequent to the end of the financial year On 3 July 2020, the Group issued 875,000 fully paid ordinary shares on conversion of 175,000 Novatti Group Limited Convertible Notes (4 for 1) and the exercise of 175,000 unlisted options exercisable at $0.25 per share, expiring 30 November 2022. Following this conversion, the Novatti Group Limited Convertible Note facility is now $3.325 million. On 7 July 2020, the Group issued 40,000,000 ordinary shares at $0.25 per share to institutional and sophisticated investors in a placement as announced on 29 June 2020, raising $10 million. An additional 800,000 shares totalling $200,000 will be issued to Directors Peter Pawlowitsch and Peter Cook, for which shareholder approval was granted on 19 August 2020, at the General Meeting of Shareholders. On 8 July 2020, the Group announced that it had exited its investment in cross-border payments provider, SendFX, and ended its provision of ongoing technology and compliance services. Under its exit, the Group will receive $900,000 in cash representing payment for the buy-back of Novatti's shareholding, plus repayment of loan funds from an aggregate cash investment by Novatti of $400,000. The funds will be paid in three equal tranches over six months. 15 Novatti Group Limited Directors' report 30 June 2020 No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. Likely developments and expected results of operations The Group will continue its principal activity of sales and deploying the Novatti Platform, transactions and billing services. The Group will use the $10.2 million received from recent placement to accelerate Novatti's growth strategy, including: ● ● ● ● increasing business development resources; acquiring new Visa card issuing programs; securing new strategic, global partnerships; and fast-tracking Novatti’s integration into other payment networks This next growth phase will continue Novatti’s recent expansion and strategic achievements, that included: ● ● ● ● ● ● Partnering with Alipay to integrate Novatti’s China-focused, cross-border payments platform, ChinaPayments, into Alipay’s app. Being chosen by global payments leader Marqeta as its partner to launch its prepaid card business in Australia. Launching the new Visa card issuing business after being awarded a Principal Issuer Licence by Visa Worldwide Pty Limited. Maintained record quarterly operating revenue of $3.05 million (for the June 2020 quarter), slightly higher than its March 2020 quarter result. Cashflow continued to strengthen over the FY20 year. Product manufacturing and operating costs as a percentage of receipts from customers reduced from 75.9% in FY19 to 68.5% in FY20, reflecting the lower direct costs to deliver its increased processing revenue. Successfully navigating the challenges of COVID-19, including integrating the recent acquisition of the assets of Emersion Software Systems Pty Ltd, with performance beating expectations. Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on directors Name: Title: Qualifications: Experience and expertise: Other current directorships: Peter Pawlowitsch Non-Executive Chairman BCom, CPA, MBA, FGIA Peter is an accountant by profession, with extensive experience as a director and officer of ASX-listed entities. He brings to the team experience in operational management, business administration and project evaluation in the IT, hospitality and mining sectors gained during the last 15 years Non-Executive Chairman, Family Zone Cyber Safety Ltd (ASX: FZO) Non-Executive Director, VRX Silica Ltd (ASX: VRX) Non-Executive Director, Dubber Corporation Ltd (ASX: DUB) Non-Executive Director, Knosys Ltd (ASX: KNO) Former directorships (last 3 years): Non-Executive Director, Rewardle Holdings Limited (ASX: RXH) Special responsibilities: Interests in shares: Interests in options: Member of Audit, Risk and Compliance Committee 3,182,662 fully paid ordinary shares 3,000,000 unlisted options 16 Novatti Group Limited Directors' report 30 June 2020 Name: Title: Qualifications: Experience and expertise: Peter Cook Managing Director and Chief Executive Officer BSc, Grad Dip Computing, Grad Dip Securities, GAICD Peter has over 25 years of experience as a director and executive with companies including Coopers & Lybrand (now PWC), Catsco Pty Ltd and Advanced Network Management Pty Ltd (Telstra joint venture company) and many start-up technology companies. Peter’s career has been largely based on founding and leading multiple telecommunications and payments companies. Integrapay Pty Ltd, Unidial Pty Ltd and Ezipin Canada Inc. are such examples and all with successful exits to private and public companies. Peter was a non- executive Director and Deputy Chairman of ASX-listed Senetas Corporation Limited from June 1999 to January 2006 Non-Executive Director, P2P Transport Limited (ASX: P2P) Other current directorships: Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options: Member of Audit, Risk and Compliance Committee 11,107,904 fully paid ordinary shares 5,000,000 unlisted options Name: Title: Qualifications: Experience and expertise: Kenneth Lai Non-Executive Director BSc Majoring in Computer Science Kenneth is the managing director and wholly owner of Prestige Team Limited, an investment company which, together with its subsidiaries, holds an investment portfolio in Hong Kong and Southeast Asia. Prestige Team Limited has interests in real estate, payment processing, digital marketing and information technology support services. Kenneth has funded and invested in various Silicon Valley technology funds focusing on business opportunities within Asia. He also co-founded Legend World Development Technology Limited, a limited liability company incorporated in Hong Kong, which provides information technology solutions and integrated marketing solutions to business setups, and in which he is a shareholder and advisor. None Other current directorships: Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options: Member of Audit, Risk and Compliance Committee 13,116,118 fully paid ordinary shares 1,000,000 unlisted options Name: Title: Qualifications: Experience and expertise: Paul Burton Non-Executive Director B.Com, B.Accounting Science (honours), Chartered Accountant Paul has over 14 years of leadership experience in the payments industry and was the CEO of Datacash Group Plc, a payments gateway company bought by MasterCard. Datacash had a significant presence in Africa and Paul steered the Company’s expansion in that market. None Other current directorships: Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options: Chair of Audit, Risk and Compliance Committee 263,158 fully paid ordinary shares 1,000,000 unlisted options Name: Title: Qualifications: Experience and expertise: Steven Zhou Non-Executive Director BSc, Grad Dip Computing, Grad Dip Securities, GAICD Steven is an experienced executive with payments industry experience in both China and Australia. Steven has recently aided Novatti in a number of deals involving new business operations between Australia and China. Other current directorships: None Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options: Member of Audit, Risk and Compliance Committee None 1,000,000 unlisted options 17 Novatti Group Limited Directors' report 30 June 2020 Name: Title: Qualifications: Experience and expertise: Brandon Munro Non-Executive Director (resigned on 4 August 2020) BEco, LLB, Grad Dip Applied Finance & Investment from the Securities Institute of Australia, GAICD, F.Fin Brandon is a corporate lawyer by profession with executive experience leading ASX listed companies. He brings regulatory, governance, mergers and acquisitions and capital markets knowledge to the team. Managing Director, Bannerman Resources Limited (ASX: BMN) Other current directorships: Former directorships (last 3 years): None Special responsibilities: Interests in shares: Interests in options: Member of Audit, Risk and Compliance Committee 1,669,348 fully paid ordinary shares on the date of resignation 1,500,000 unlisted options on the date of resignation 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 'Former directorships (last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Company secretary Ian Hobson Ian was appointed Company Secretary on 12 October 2015 and holds a Bachelor of Business degree, is a Chartered Accountant and Chartered Secretary. Ian provides secretarial services and corporate, management and accounting advice to a number of listed companies. Ian’s fees are based on a fee for service arrangement. Meetings of directors The number of meetings of the company's Board of Directors ('the Board') and of each Board committee held during the year ended 30 June 2020, and the number of meetings attended by each director were: Peter Pawlowitsch Peter Cook Kenneth Lai Paul Burton Steven Zhou Brandon Munro Full Board Audit, Risk and Compliance Committee Attended Held Attended Held 5 5 4 5 5 5 5 5 5 5 5 5 2 2 1 1 1 2 2 2 2 2 2 2 Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. Remuneration report (audited) The remuneration report details the key management personnel remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. 18 Novatti Group Limited Directors' report 30 June 2020 The remuneration report is set out under the following main headings: ● ● ● ● ● ● Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation Additional information Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration The objective of the consolidated entity's executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to the market best practice for the delivery of reward. The Board of Directors ('the Board') ensures that executive reward satisfies the following key criteria for good reward governance practices: ● ● ● ● competitiveness and reasonableness acceptability to shareholders performance linkage / alignment of executive compensation transparency The Board is responsible for determining and reviewing remuneration arrangements for its directors and executives. The performance of the consolidated entity depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The full Board has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the Group. Additionally, the reward framework should seek to enhance executives' interests by: ● ● ● rewarding capability and experience reflecting competitive reward for contribution to growth in shareholder wealth providing a clear structure for earning rewards In accordance with best practice corporate governance, the structure of non-executive director and executive director remuneration is separate. Non-executive directors remuneration Fees and payments to non-executive directors reflect the demands and responsibilities of their role. Non-executive directors’ fees and payments are reviewed annually by the Board. The Board may, from time to time, receive advice from independent remuneration consultants to ensure non-executive directors’ fees and payments are appropriate and in line with the market. For the FY20 financial period there was no advice from independent remuneration consultants. The Chairman’s fees are determined independently to the fees of other non-executive directors based on similar roles in the external market. The Chairman is not present at any discussions relating to the determination of his remuneration. Non-executive directors do receive share options. ASX listing rules require the aggregate non-executive directors’ remuneration be determined periodically by a general meeting. The total maximum remuneration of non-executive directors was set by the Constitution and subsequent variation is by ordinary resolution of Shareholders in general meeting with the Constitution, the Corporations Act and the ASX Listing Rules, as applicable. The maximum remuneration has been set at an amount not to exceed $500,000. The current level of fees was approved at the Group’s 27 November 2018 Annual General Meeting. Executive remuneration The consolidated entity aims to reward executives based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. Remuneration policies and arrangements for the Key Executive Members of the Group including the Chief Executive Officer, Chief Operating Officer and the Chief Financial Officer are reviewed by the Board and with the targets outside of the Chief Executive Officer being set by the Managing Director. The Group rewards its executives with a level and mix of remuneration based on their position and responsibility, which may have both fixed and variable components. 19 Novatti Group Limited Directors' report 30 June 2020 The executive remuneration and reward framework can have four components: ● ● ● ● base pay and non-monetary benefits short-term performance incentives share-based payments other remuneration such as superannuation and long service leave The combination of these comprises the executive's total remuneration. Short Term Incentive program (STI) The STI program awards a cash bonus based on key members achieving targets from a Group, Business Unit and individual perspective. STI awarded to each executive depends on the extent to which specific targets set at the beginning of the financial year by the Board or the Managing Director are met. Targets are set by a cascading process from the Board through the executive Group. The targets consist of financial and non-financial Key Performance Indicators ('KPIs'). These may include but are not limited to: ● ● ● ● Product management and project platform implementation Financial and Business Unit operational targets linked to the achievement of the Group’s growth in annual sales revenue and controllable financial drivers including cash, market growth (including geographical market growth), expense management control and capital management improvement Corporate development matters including employment, retention, and remuneration of core personnel, leadership and succession, cultural development and communication activities Establishment of business operational frameworks and procedures as well as Risk Management in respect of financial and operational issues These measures were chosen as they represent the key drivers for the short-term success of the business and provide a framework for delivering long-term value. These measurement methods were selected as they directly reflect whether the STI performance targets have been met or not, as set by the Board or the Managing Director as the case may be. Long Term Incentive program (LTI) LTI awards are reviewed annually to executives and are provided in order to align the remuneration of Key Executive Members with the creation of shareholder value. LTI comprise equity instruments including shares and options, where the incentive involves the time-based vesting of options on the basis that the executive or employee continues to be employed by the Group and are eligible under the Company’s Employee Share Plan ('ESP') and or Option Plan ('ESOP'). The vesting of these awards is dependent on the length of time and service of the executive or employee, and alternatively, they can also be awarded at the discretion of the Board. In addition, the Managing Director has performance options that are tied to total shareholder return with that being measured by providing share price targets. The achievement of the Group’s strategic and financial objectives is the key focus of the efforts of the Group. As indicated above, over the course of each financial year, the Board reviews the Group’s executive remuneration policy to ensure that the remuneration framework remains focused on driving and rewarding executive performance, while being closely aligned to the achievement of Group strategic objectives and the creation of shareholder value. LTI are based on participation within Novatti’s ESP and or ESOP. LTI, based on equity remuneration (being either the issue of securities and or rights or the issue of options), are made in accordance with thresholds as set out in the executive remuneration policy. By using the Group’s ESP and or ESOP to offer shares and options to employees, the interest of employees is aligned with shareholder wealth. A copy of the ESP and ESOP can be found via the Group’s website. 20 Novatti Group Limited Directors' report 30 June 2020 Consolidated entity performance and link to remuneration The following table illustrates how the Group’s remuneration strategy aligns with the Group’s strategic direction and links remuneration outcomes to performance: Novatti Group's business objective: To provide global software technology, utility billing and payment services. Through technology and services, Novatti helps economies, corporations and consumers digitise cash transactions. Align the interest of executives with shareholders Attract, motivate and retain high performing individuals - The remuneration strategy incorporates “at-risk” components, with short-term paid in cash and long-term elements delivered in equity - Performance is assessed against a suite of financial and non-financial measures relevant to the success of the Company and generating returns for shareholders - Remuneration is competitive with companies of a similar size and complexity - Deferred and long-term remuneration is designed to encourage long-term consistent performance and employee retention Remuneration Component Fixed Remuneration Short Term Incentive Vehicle Purpose Consisting of base salary, superannuation and nonmonetary benefits. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the Group and provides additional value to the executive. Is paid in cash. To provide competitive fixed remuneration set with reference to role, market, experience and performance. Long Term Performance Equity including Options, Shares and/or Rights. This is designed to reward executives for their contribution to the achievement of annual Group, business unit and individual outcomes. Reward executives for their contribution to the creation of shareholder value over the longer term. Link to Performance Reviewed annually by the Board, based on individual and business unit performance, the overall performance of the Group and comparable market remunerations. Directly linked to pre-agreed KPIs. Reviewed regularly with the relevant executive member. Final performance is determined by the Board. It aims to align the targets of the business units with the targets of those executives responsible for meeting those targets. Voting and comments made at the company's 2019 Annual General Meeting ('AGM') At the 2019 AGM, 99.7% of the votes received supported the adoption of the remuneration report for the year ended 30 June 2019. The company did not receive any specific feedback at the AGM regarding its remuneration practices. Details of remuneration Details of the remuneration of key management personnel of the consolidated entity are set out in the following tables. The key management personnel of the consolidated entity consisted of the following directors of Novatti Group Limited: ● ● ● ● ● ● Peter Pawlowitsch (Non-Executive Chairman) Peter Cook (Managing Director and Chief Executive Officer) Kenneth Lai (Non-Executive Director) Paul Burton (Non-Executive Director) Steven Zhou (Non-Executive Director) Brandon Munro (Non-Executive Director) (resigned on 4 August 2020) 21 Novatti Group Limited Directors' report 30 June 2020 Other key management personnel: ● ● Alan Munday (Group Chief Operating Officer) Steven Stamboultgis (Chief Financial Officer) Amounts of remuneration Short-term benefits Long-term benefits Post- employment benefits Share- based payments Cash salary and fees monetary Non- $ $ Annual leave $ Long service leave $ Super- annuation $ Equity- settled $ Total $ - - - 45,662 45,662 - - - - - - - - - - - - - - - 10,845 - - 4,338 4,338 248,322* 73,434* 85,934* 35,934 45,233 259,167 73,434 85,934 85,934 95,233 286,029 37,318 38,613 6,753 17,768 311,500 697,981 250,500 183,691 811,544 - - 37,318 23,742 13,327 75,682 5,224 3,720 15,697 347,432 47,435 20,531 17,451 256,137 37,948 75,271 885,740** 1,901,252 2020 Non-Executive Directors: Peter Pawlowitsch Kenneth Lai Paul Burton Steven Zhou Brandon Munro Executive Directors: Peter Cook Other Key Management Personnel: Alan Munday Steven Stamboultgis * ** Director fees were paid through the issue of shares, see Share Based Payments Section below for further information. FY20 share-based payments charge includes $288,368 of equity instruments issued in prior financial years. Short-term benefits Long-term benefits Post- employment benefits Share- based payments Cash salary and fees monetary Non- $ $ Annual leave $ Long service leave $ Super- annuation $ Equity- settled $ Total $ 104,560 - - 33,485 38,814 - - - - - - - - - - - - - - - 6,940 - - 3,181 3,687 131,833 52,733 52,733 52,733 79,100 243,333 52,733 52,733 89,399 121,601 335,432 45,568 31,223 7,180 19,000 131,833 570,236 261,196 191,781 965,268 - - 45,568 (9,207) 3,930 25,946 4,956 2,854 14,990 20,531 18,219 71,558 - - 277,476 216,784 500,965 1,624,295 2019 Non-Executive Directors: Peter Pawlowitsch Kenneth Lai Paul Burton Steven Zhou Brandon Munro Executive Directors: Peter Cook Other Key Management Personnel: Alan Munday Steven Stamboultgis 22 Novatti Group Limited Directors' report 30 June 2020 The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Non-Executive Directors: Peter Pawlowitsch Kenneth Lai Paul Burton Steven Zhou Brandon Munro Executive Directors: Peter Cook Other Key Management Personnel: Alan Munday Steven Stamboultgis Fixed remuneration 2019 2020 At risk - STI At risk - LTI 2020 2019 2020 2019 4% - 58% 58% 53% 46% - - 41% 35% 55% 77% 86% 85% 100% 100% - - - - - - - - - - - - - - - - 96% 100% 42% 42% 47% 54% 100% 100% 59% 65% 45% 23% 14% 15% - - Service agreements Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: Peter Cook Managing Director and Chief Executive Officer 20 November 2015 The term is not fixed. Base salary of $400,000 (including statutory superannuation). 2.5M incentive options exercisable at $0.19 upon the achievement of three milestones. Remuneration is subject to an annual review to be conducted by the Board. Factors to be considered include personal competency progression, achievement of personal development targets and KPIs, company remuneration policy, its financial position and current market equivalent positions. KPIs to be agreed each year and may be varied by mutual agreement. The agreement may be terminated, (A) by either party without cause with six months’ notice, or at the election of the Group, immediately with payment in lieu of six months’ notice (subject to the limitation of the Corporations Act and Listing Rules). (B) By the Group on one months’ notice, if the executive is unable to perform his duties due to illness, accident or incapacitation, for three consecutive months or a period aggregating more than three months in any 12-month period. 23 Novatti Group Limited Directors' report 30 June 2020 Name: Title: Agreement commenced: Term of agreement: Details: Alan Munday Group Chief Operating Officer 20 November 2015 The term is not fixed. Base salary of $304,468 (including statutory superannuation). Remuneration is subject to an annual review to be conducted by the Board. Factors to be considered include personal competency progression, achievement of personal development targets and KPIs, company remuneration policy, its financial position and current market equivalent positions. KPIs to be agreed each year and may be varied by mutual agreement. The agreement may be terminated, (A) without cause, with three months’ notice from the Group or two months from the executive, or payment in lieu of notice at the Group’s election (subject to the limitation of the Corporations Act and Listing Rules). (B) by Novatti on one month’s notice, if the executive is unable to perform his duties due to illness, accident or incapacitation, for three consecutive months or a period aggregating more than three months in any 12-month period or (C), summarily following material breach or in the case of serious misconduct. Name: Title: Agreement commenced: Term of agreement: Details: Steven Stamboultgis Chief Financial Officer 20 November 2015 The term is not fixed. Base salary of $213,368 (including statutory superannuation). Remuneration is subject to an annual review to be conducted by the Board. Factors to be considered include personal competency progression, achievement of personal development targets and KPIs, company remuneration policy, its financial position and current market equivalent positions. KPIs to be agreed each year and may be varied by mutual agreement. The agreement may be terminated by either party without cause with three months’ notice, or in the case of the Group, immediately with payment in lieu of notice (subject to the limitation of the Corporations Act and Listing Rules), by the executive on one month’s notice, if Steven is unable to perform his duties due to illness, accident or incapacitation, for three months or a period aggregating more than three months in any 12 month period, or summarily following material breach or in case of serious misconduct. Key management personnel have no entitlement to termination payments in the event of removal for misconduct. Share-based compensation Issue of shares Details of shares issued to directors and other key management personnel as part of compensation, in lieu of cash salary, during the year ended 30 June 2020 are set out below: Name Peter Pawlowitsch Paul Burton Kenneth Lai Date 9 June 2020 9 June 2020 9 June 2020 Shares Issue price $ 600,816 263,158 197,368 $0.190 $0.190 $0.190 114,155 50,000 37,500 24 Novatti Group Limited Directors' report 30 June 2020 Options The terms and conditions of each grant of options over ordinary shares affecting remuneration of directors and other key management personnel in this financial year or future reporting years are as follows: Name Peter Pawlowitsch Peter Pawlowitsch Peter Pawlowitsch Peter Cook Peter Cook Peter Cook Brandon Munro Brandon Munro Brandon Munro Peter Pawlowitsch Peter Pawlowitsch Peter Pawlowitsch Peter Cook Peter Cook Peter Cook Brandon Munro Brandon Munro Kenneth Lai Kenneth Lai Kenneth Lai Paul Burton Paul Burton Paul Burton Steven Zhou Steven Zhou Steven Zhou Alan Munday Alan Munday Alan Munday Steven Stamboultgis Steven Stamboultgis Steven Stamboultgis Number of options granted Grant date Vesting date and exercisable date Expiry date Fair value Exercise per option price at grant date 166,666 25 November 2019 166,666 25 November 2019 166,667 25 November 2019 833,333 25 November 2019 833,333 25 November 2019 833,333 25 November 2019 166,666 25 November 2019 166,666 25 November 2019 166,667 25 November 2019 833,333 27 November 2018 833,333 27 November 2018 833,334 27 November 2018 833,333 27 November 2018 833,333 27 November 2018 833,334 27 November 2018 500,000 27 November 2018 500,000 27 November 2018 333,333 27 November 2018 333,333 27 November 2018 333,334 27 November 2018 333,333 27 November 2018 333,333 27 November 2018 333,334 27 November 2018 333,333 27 November 2018 333,333 27 November 2018 333,334 27 November 2018 375,000 19 December 2019 187,500 19 December 2019 187,500 19 December 2019 300,000 19 December 2019 150,000 19 December 2019 150,000 19 December 2019 30 November 2020 30 November 2023 30 November 2020 30 November 2023 30 November 2020 30 November 2023 30 November 2020 30 November 2023 30 November 2020 30 November 2023 30 November 2020 30 November 2023 30 November 2020 30 November 2023 30 November 2020 30 November 2023 30 November 2020 30 November 2023 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 30 November 2022 22 March 2019 22 March 2019 30 November 2022 31 December 2019 19 December 2022 31 December 2020 19 December 2022 31 December 2021 19 December 2022 31 December 2019 19 December 2022 31 December 2020 19 December 2022 31 December 2021 19 December 2022 $0.200 $0.200 $0.200 $0.200 $0.200 $0.200 $0.200 $0.200 $0.200 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.195 $0.200 $0.200 $0.200 $0.200 $0.200 $0.200 $0.106 $0.086 $0.074 $0.106 $0.086 $0.074 $0.106 $0.086 $0.074 $0.106 $0.086 $0.074 $0.106 $0.086 $0.074 $0.086 $0.074 $0.106 $0.086 $0.074 $0.106 $0.086 $0.074 $0.106 $0.086 $0.074 $0.104 $0.087 $0.063 $0.104 $0.087 $0.063 Options granted carry no dividend or voting rights. 25 Novatti Group Limited Directors' report 30 June 2020 The number of options over ordinary shares granted to and vested by directors and other key management personnel as part of compensation during the year ended 30 June 2020 are set out below: Name Peter Pawlowitsch Peter Cook Brandon Munro Kenneth Lai Paul Burton Steven Zhou Alan Munday Steven Stamboultgis Number of Number of Number of Number of options granted options granted options vested options vested during the during the during the during the year 2020 year 2019 year 2020 year 2019 500,000 2,500,000 500,000 - - - 750,000 600,000 2,500,000 2,500,000 1,500,000 1,000,000 1,000,000 1,000,000 - - - - - - - - 375,000 300,000 833,334 833,334 500,000 333,334 333,334 333,334 250,000 200,000 Additional information The factors that are considered to affect total shareholders return ('TSR') are summarised below: Share price at financial year end ($) Total dividends declared (cents per share) Basic earnings per share (cents per share) 0.310 - (6.398) 0.165 - (3.098) 0.225 - (1.530) 0.115 - (5.030) 0.140 - (9.060) 2020 2019 2018 2017 2016 Additional disclosures relating to key management personnel Shareholding The number of shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Balance at Received Participation Exercise the start of as part of the year remuneration of share placement of Balance at the end of options the year Ordinary shares Peter Pawlowitsch Peter Cook Brandon Munro Kenneth Lai Paul Burton Alan Munday Steven Stamboultgis 2,343,750 11,107,904 1,562,500 12,918,750 - 50,000 20,000 28,002,904 600,816 - - 197,368 263,158 - - 1,061,342 238,096 - - - - - - 238,096 106,848 - 3,182,662 - 11,107,904 1,669,348 - 13,116,118 263,158 - 50,000 - 20,000 - 106,848 29,409,190 * Mr Steven Zhou does not hold any fully paid ordinary shares. 26 Novatti Group Limited Directors' report 30 June 2020 Option holding The number of options over ordinary shares in the company held during the financial year by each director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Options over ordinary shares Peter Pawlowitsch Peter Cook Brandon Munro Kenneth Lai Paul Burton Steven Zhou Alan Munday Steven Stamboultgis Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 2,500,000 2,500,000 1,500,000 1,000,000 1,000,000 1,000,000 - - 9,500,000 500,000 2,500,000 500,000 - - - 750,000 600,000 4,850,000 - - (500,000) - - - - - (500,000) 3,000,000 - 5,000,000 - 1,500,000 - 1,000,000 - 1,000,000 - 1,000,000 - 750,000 - - 600,000 - 13,850,000 Loans to key management personnel and their related parties Novatti Group Ltd entered into a loan agreement on 10 June 2019, for $600,000 with an entity associated with Peter Pawlowitsch. The loan drawn down as at 30 June 2019 was $400,000. The interest rate payable on the loan facility is 12% per annum. The loan was fully repaid during the 2020 financial year. Novatti Group Ltd entered into a loan agreement on 12 February 2020, for $400,000 with an entity associated with Peter Pawlowitsch. The interest rate payable on the loan facility is 12% per annum. The loan was fully repaid on 27 March 2020. Other transactions with key management personnel and their related parties Services No other payments were made to Directors outside of their normal duties as Directors for Novatti Group Ltd. Current and non-current liabilities to a Director There are no other current or non-current liabilities outstanding to Directors of the Group as at 30th June 2020. This concludes the remuneration report, which has been audited. Shares under option Unissued ordinary shares of Novatti Group Limited under option at the date of this report are as follows: Grant date 27 November 2018 15 November 2019 25 November 2019 19 December 2019 10 July 2020 10 July 2020 10 July 2020 10 July 2020 10 July 2020 Expiry date 30 November 2022 30 October 2022 30 November 2023 19 December 2022 10 July 2023 1 March 2024 1 March 2025 1 March 2026 31 December 2022 Exercise Number price under option $0.196 $0.250 $0.200 $0.200 $0.200 $0.200 $0.200 $0.200 $0.200 9,000,000 3,325,000 3,500,000 5,370,000 850,000 441,667 441,667 66,666 3,200,000 26,195,000 No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the company or of any other body corporate. 27 Novatti Group Limited Directors' report 30 June 2020 Shares issued on the exercise of options The following ordinary shares of Novatti Group Limited were issued during the year ended 30 June 2020 and up to the date of this report on the exercise of options granted: Date options granted 21 July 2016 27 November 2018* 20 October 2019 Exercise price Number of shares issued $0.200 $0.190 $0.250 200,000 106,848 175,000 481,848 * On 24 June 2020, Mr Brandon Munro exercised 500,000 unlisted options using the cashless exercise facility contained in the option terms. 106,848 fully paid ordinary shares were issued. Shares issued on conversion of convertible notes On 3 July 2020, the Group issued 700,000 ordinary shares on conversion of 175,000 convertible notes (4 for 1). As at the date of this report, the Group has 3,325,000 convertible notes on issue. Indemnity and insurance of officers The company has indemnified the directors and executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the company paid a premium in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. Proceedings on behalf of the company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 24 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 24 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ● all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision- making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. ● 28 Novatti Group Limited Directors' report 30 June 2020 Officers of the company who are former partners of William Buck There are no officers of the company who are former partners of William Buck. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors' report. Auditor William Buck continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Peter Pawlowitsch Chairman 27 August 2020 29 AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF NOVATTI GROUP LIMITED 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 — no contraventions of any applicable code of professional conduct in relation to the audit. William Buck Audit (Vic) Pty Ltd ABN 59 116 151 136 N. S. Benbow Director Dated this 27th day of August, 2020 Novatti Group Limited Statement of profit or loss and other comprehensive income For the year ended 30 June 2020 Revenue Other income Expenses Client hosting fees and other direct services Employee benefits Depreciation and amortisation expense Occupancy Finance charges Foreign currency translation (losses)/gains Travel expenses Marketing and selling expenses Insurance Data management expenses Share of net profit of joint ventures accounted for using the equity method Accounting fees Due diligence costs Public company running costs Gain/(loss) on embedded derivative - convertible note facility into Novatti Group Ltd the parent entity Impairment of capitalised bank licensing costs Other expenses Loss before income tax expense Income tax expense Consolidated Note 2020 $ 2019 $ 4 11,003,666 8,416,464 853,469 473,938 (3,134,471) (11,234,811) (904,815) (144,720) (1,366,425) (181,631) (248,043) 123,213 (179,191) (254,766) 17,322 (290,985) - (190,383) (1,879,065) (7,684,661) (389,337) (336,365) (75,664) (248,644) (478,069) (602,196) (157,977) (226,394) (40) (160,167) (497,853) (246,957) 13 (726,942) (3,012,715) (1,041,307) - - (831,567) (10,913,535) (4,924,554) 5 (46,791) (29,759) Loss after income tax expense for the year attributable to the owners of Novatti Group Limited (10,960,326) (4,954,313) Other comprehensive income Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Novatti Group Limited Basic earnings per share Diluted earnings per share 90,343 102,049 90,343 102,049 (10,869,983) (4,852,264) Cents Cents 31 31 (6.398) (6.398) (3.098) (3.098) The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 31 Novatti Group Limited Statement of financial position As at 30 June 2020 Assets Current assets Cash and cash equivalents Trade and other receivables Financial assets - funds in trust Other investments Other current assets Total current assets Non-current assets Investments accounted for using the equity method Other investments Plant and equipment Right-of-use assets Intangible assets Other non-current assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Settlement and remittance funds payable Loans Lease liabilities Unearned revenue Convertible note facilities Employee benefits Total current liabilities Non-current liabilities Lease liabilities Convertible note facilities Employee benefits Total non-current liabilities Total liabilities Net assets/(liabilities) Equity Issued capital Reserves Accumulated losses Total equity/(deficiency) Consolidated Note 2020 $ 2019 $ 6 7 8 10 9 10 11 12 13 14 15 16 17 18 16 18 2,599,878 2,784,991 17,452,001 560,000 360,133 23,757,003 1,806,924 4,287,947 3,754,633 - 512,772 10,362,276 22,456 300,000 572,509 2,244,594 5,703,440 239,567 9,082,566 5,224 800,000 623,124 - 4,645,343 99,739 6,173,430 32,839,569 16,535,706 5,854,239 17,452,001 - 245,027 860,863 1,100,000 920,714 26,432,844 4,641,419 3,754,633 402,506 - 937,160 - 508,095 10,243,813 2,233,365 4,544,578 114,345 6,892,288 117,334 - 51,502 168,836 33,325,132 10,412,649 (485,563) 6,123,057 19 20 26,684,947 2,376,730 (29,547,240) 24,074,324 2,180,965 (20,132,232) (485,563) 6,123,057 The above statement of financial position should be read in conjunction with the accompanying notes 32 Novatti Group Limited Statement of changes in equity For the year ended 30 June 2020 Consolidated Share based payment reserve $ Foreign currency translation reserve $ Issued capital $ Accumulated losses $ Total equity $ Balance at 1 July 2018 22,234,239 1,265,108 427,723 (15,177,919) 8,749,151 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued during the period net of transaction costs Vesting of share-based payments - - - - - - - (4,954,313) (4,954,313) 102,049 - 102,049 102,049 (4,954,313) (4,852,264) 1,840,085 - - 386,085 - - - - 1,840,085 386,085 Balance at 30 June 2019 24,074,324 1,651,193 529,772 (20,132,232) 6,123,057 Consolidated Share-based payment reserve $ Foreign currency translation reserve $ Issued capital $ Accumulated losses $ Total deficiency in equity $ Balance at 1 July 2019 24,074,324 1,651,193 529,772 (20,132,232) 6,123,057 Adjustment on initial application of AASB 16– Leases, (note 1) - - - 53,940 53,940 Balance at 1 July 2019 - restated 24,074,324 1,651,193 529,772 (20,078,292) 6,176,997 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Vesting of share-based payments Issue of shares as consideration for acquisition of assets from Emersion Software Systems Pty Ltd Issue of shares to Directors in lieu of fees Issue of shares for the settlement of convertible note debt Lapse of expired share options Issue of options from convertible notes Issue of convertible notes - - - - - - - (10,960,326) (10,960,326) 90,343 - 90,343 90,343 (10,960,326) (10,869,983) 143,000 1,279,484 2,207,700 201,655 - - 58,268 - - - (14,518) (1,491,378) 293,847 37,987 - - - - - - - - 1,422,484 - - 2,207,700 201,655 - 1,491,378 - - 43,750 - 293,847 37,987 Balance at 30 June 2020 26,684,947 1,756,615 620,115 (29,547,240) (485,563) The above statement of changes in equity should be read in conjunction with the accompanying notes 33 Novatti Group Limited Statement of cash flows For the year ended 30 June 2020 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Receipt of research and development grant Receipt of Government Stimulus Interest and other finance costs paid Consolidated Note 2020 $ 2019 $ 28,972,915 (31,377,788) 36,599 1,021,818 270,615 (161,226) 27,464,350 (30,380,369) (35,496) 923,660 - (75,665) Net cash used in operating activities 30 (1,237,067) (2,103,520) Cash flows from investing activities Payment for purchase of business, net of cash acquired Payments for acquisition of investment partnership Loans to investment business Payments for plant and equipment Payments for intangible assets Payments for security deposits Payments for banking licence Proceeds from disposal of plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from related party borrowing Repayment of borrowings Interest and other finance costs paid Proceeds from issue of convertible note facility Cost of debt - convertible note facilities Share issue transaction costs Repayment of lease liabilities Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 27 11 13 (190,000) - - (51,477) (1,138,788) (146,952) - 850 - (200,000) (200,000) (527,511) - - (1,662,628) - (1,526,367) (2,590,139) 133,750 400,000 (800,000) (2,506) 4,600,000 (353,360) - (239,865) 1,972,094 400,000 - - - - (132,009) - 3,738,019 2,240,085 974,585 1,806,924 (181,631) (2,453,574) 4,509,142 (248,644) Cash and cash equivalents at the end of the financial year 6 2,599,878 1,806,924 The above statement of cash flows should be read in conjunction with the accompanying notes 34 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies Statement of Compliance The consolidated financial statements are general-purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB). For the purposes of preparing the consolidated financial statements, the Company is a for-profit entity. The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New, revised or amending accounting standards and interpretations adopted The Group has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current financial year ended 30 June 2020. Disclosures required by these standards that are deemed material have been included in this financial report on the basis that they represent a significant change in the information from that previously made available. Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the year ended 30 June 2020. The Group’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, are set out below: AASB 16 Lease The Group has adopted AASB 16 from 1 July 2019. The standard replaces AASB 117 'Leases' and for lessees eliminates the classifications of operating leases and finance leases. Except for short-term leases and leases of low value assets, right- of-use assets and corresponding lease liabilities are recognised in the statement of financial position. Straight-line operating lease expense recognition is replaced with a depreciation charge for the right-of-use assets (included in operating costs) and an interest expense on the recognised lease liabilities (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results improve as the operating expense is now replaced by interest expense and depreciation in profit or loss. For classification within the statement of cash flows, the interest portion is disclosed in operating activities and the principal portion of the lease payments are separately disclosed in financing activities. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. AASB 16 was adopted using the modified retrospective approach and as such the comparatives have not been restated. The impact of adoption on opening retained profits as at 1 July 2019 was as follows: Assets Right-of-use assets Liabilities Lease liabilities Total adjustment on equity Reduction in opening accumulated losses as at 1 July 2019* 1 July 2019 $ 2,460,324 (2,514,264) (53,940) *The adjustment to opening accumulated losses arises from lease incentive liability on the date of AASB 16 adoption. The lease liabilities as at 1 July 2019 can be reconciled to the operating lease commitments as of 30 June 2019 as follows: 35 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Operating lease commitments as at 1 July 2019 Discounted operating lease commitments using weighed average incremental borrowing rate of 5.25% at 1 July 2019 Less: Commitments relating to short-term leases Lease liabilities as at 1 July 2019 1 July 2019 $ 3,343,032 (793,419) (35,349) 2,514,264 The short term leases which were exempted from AASB 16 have been expensed in the statement of profit or loss and comprehensive income. $135,699 was recognised and disclosed in occupancy expenses for the year ending 30 June 2020. Right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the Group expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of-use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The Group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit or loss as incurred. Lease liabilities A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. Basis of preparation The financial statements have been prepared on an accruals basis and are based on the historical cost convention. Unless otherwise stated the carrying amounts of financial assets and liabilities reflect their fair value. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2. 36 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the legal parent entity is disclosed in Note 27. Principles of consolidation These are the financial statements of Novatti Group Limited (the ‘Company’) and its controlled entities (the ‘Group’) as at 30 June 2020. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: ● ● ● Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation The financial statements are presented in Australian dollars, which is Novatti Group Limited's functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. 37 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Revenue recognition The Group recognises revenue as follows: Platform sales Deployment and the support of specialist mobile and alternative payment technology. There are two primary components, the recognition of revenue on the completion and delivery of agreed milestones that are recognised at the stage of performance completion and the revenue for ongoing maintenance and support, recognised on a straight-line basis, monthly over the subscription term. Billing solutions Provision of technologically advanced billing and customer information system platforms for the utilities industry. Yearly licence fees are amortised over the relevant year and professional services revenue is recognised in the month the service is provided at that point in time. Transaction sales Included within transaction sales are: ● ● ● ● Fees for software as a service Fees for the facilitation of top up vouchers Settlement Services of financial transactions Fees from ‘Prepaid’ reloadable cards Revenue from transaction sales are recognised at the point in time for which the transaction takes place. Interest Interest revenue is recognised on a time proportional basis that takes into account the effective yield on the financial asset. Unearned revenue Unearned revenue includes revenue from clients whereby services are billed in advance of their performance obligations and have outstanding services owing for the financial year ended 30 June 2020. Other revenue Other revenue is recognised at the time it is received or when the right to receive payment is established. Accrued revenue Accrued revenue includes revenue from the sales of services unbilled as at 30 June 2020. Government grants Government grants, including Research and Development revenues, are recognised at the point in time where there is reasonable assurance that the grant will be received and all attached conditions will be fulfilled. Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Novatti Group Limited (the ‘head legal entity’) and its wholly owned Australian subsidiaries have formed an income tax consolidated Group under the tax consolidation regime. The head entity and each subsidiary in the tax-consolidated Group continue to account for their own current and deferred tax amounts. The tax-consolidated Group has applied the ‘separate taxpayer within Group’ approach in determining the appropriate amount of taxes to allocate to members of the tax-consolidated Group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated Group. 38 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Assets or liabilities arising under tax funding agreements with the tax-consolidated entities are recognised as amounts receivable from or payable to other entities in the tax-consolidated Group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated Group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. Such assets are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on both the business model within which such assets are held and the contractual cash flow characteristics of the financial asset unless an accounting mismatch is being avoided. Financial assets are derecognised when the rights to receive cash flows have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When there is no reasonable expectation of recovering part or all of a financial asset, it's carrying value is written off. Financial assets at amortised cost A financial asset is measured at amortised cost only if both of the following conditions are met: (i) it is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and (ii) the contractual terms of the financial asset represent contractual cash flows that are solely payments of principal and interest. Financial assets at fair value through profit or loss Financial assets not measured at amortised cost are classified as financial assets at fair value through profit or loss. Typically, such financial assets will be either: (i) held for trading, where they are acquired for the purpose of selling in the short-term with an intention of making a profit, or a derivative; or (ii) designated as such upon initial recognition where permitted. Fair value movements are recognised in profit or loss. Impairment of financial assets The Group recognises a loss allowance for expected credit losses on financial assets which are measured at amortised cost. The measurement of the loss allowance depends upon the Group's assessment at the end of each reporting period as to whether the financial instrument's credit risk has increased significantly since initial recognition, based on reasonable and supportable information that is available, without undue cost or effort to obtain. Where there has not been a significant increase in exposure to credit risk since initial recognition, a 12-month expected credit loss allowance is estimated. This represents a portion of the asset's lifetime expected credit losses that is attributable to a default event that is possible within the next 12 months. Where a financial asset has become credit impaired or where it is determined that credit risk has increased significantly, the loss allowance is based on the asset's lifetime expected credit losses. The amount of expected credit loss recognised is measured on the basis of the probability weighted present value of anticipated cash shortfalls over the life of the instrument discounted at the original effective interest rate. 39 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Plant and equipment Plant and equipment are measured on the cost basis and therefore carried at cost less accumulated depreciation and any accumulated impairment. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised either in profit or loss. A formal assessment of recoverable amount is made when impairment indicators are present. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. 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 recognised as expenses in profit or loss during the financial period in which they are incurred. The depreciable amount of all fixed assets is depreciated on a straight-line basis over the asset’s useful life to the Group commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The estimated useful lives for the current period are as follows: Plant and equipment Leasehold fixtures and fittings at cost 2 years 10 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. An item of plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to the statement of profit or loss and other comprehensive income in the period in which they arise. Intangible assets Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The estimated useful lives for intangibles for the current period are: Product Development: Technology Customer lists Intellectual Property: Technology - Billing Software Vasco Pay brand 5 years 5 - 10 years 10 years 10 years Intangible assets acquired in a business combination Intangible assets, including customer lists, intellectual property and brand acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. 40 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Impairment of tangible and intangible assets At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash- generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest Group of cash- generating units for which a reasonable and consistent allocation basis can be identified. Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Convertible note facilities During the year the Group issued convertible note tranches with conversion clauses that were both fixed and variable. For convertible notes with variable conversion terms, at initial recognition an embedded derivative is recognised on the statement of financial position at fair value and that embedded derivative is subsequently recorded at its fair value thereafter, with changes in fair value going through to the statement of profit or loss and other comprehensive income. The difference between the consideration received (net of costs) and the embedded derivative is reflected in the principal value of the convertible note liability. For convertible notes with fixed conversion terms, at initial recognition the separate debt component of the note is recorded at its fair value (net of costs of the note) with the residual difference between the note and equity taken to a convertible note reserve in equity. Over the duration of the maturity of the convertible note, the discount applied to the note at initial recognition is unwound through a finance charge using the effective interest rate up to the face value of the note at maturity. Costs directly attributable to the issue of the convertible notes are amortised over the life of the underlying note. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Share-based payments Equity-settled and cash-settled share-based compensation benefits are provided to employees. 41 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. Cash-settled transactions are awards of cash for the exchange of services, where the amount of cash is determined by reference to the share price. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Binomial or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. The cost of cash-settled transactions is initially, and at each reporting date until vested, determined by applying either the Binomial or Black-Scholes option pricing model, taking into consideration the terms and conditions on which the award was granted. The cumulative charge to profit or loss until settlement of the liability is calculated as follows: ● during the vesting period, the liability at each reporting date is the fair value of the award at that date multiplied by the expired portion of the vesting period. from the end of the vesting period until settlement of the award, the liability is the full fair value of the liability at the reporting date. ● All changes in the liability are recognised in profit or loss. The ultimate cost of cash-settled transactions is the cash paid to settle the liability. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Issued capital Ordinary shares are classified as equity. 42 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree's identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group's operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the Group remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer's previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Novatti Group Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. 43 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 1. Significant accounting policies (continued) Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2020. The Group's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the consolidated entity, are set out below. The revised Conceptual Framework is applicable to annual reporting periods beginning on or after 1 January 2020 and early adoption is permitted. The Conceptual Framework contains new definition and recognition criteria as well as new guidance on measurement that affects several Accounting Standards. Where the Group has relied on the existing framework in determining its accounting policies for transactions, events or conditions that are not otherwise dealt with under the Australian Accounting Standards, the Group may need to review such policies under the revised framework. At this time, the application of the Conceptual Framework is not expected to have a material impact on the Group's financial statements. Note 2. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Coronavirus (COVID-19) pandemic Judgement has been exercised in considering the impacts that the Coronavirus (COVID-19) pandemic has had, or may have, on the Group based on known information. This consideration extends to the nature of the products and services offered, customers, supply chain, staffing and geographic regions in which the Group operates. Other than as addressed in specific notes, there does not currently appear to be either any significant impact upon the financial statements or any significant uncertainties with respect to events or conditions which may impact the Group unfavourably as at the reporting date or subsequently as a result of the Coronavirus (COVID-19) pandemic. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Black-Scholes or Binomial models taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Allowance for expected credit losses The allowance for expected credit losses assessment requires a degree of estimation and judgement. It is based on the lifetime expected credit loss, grouped based on days overdue, and makes assumptions to allocate an overall expected credit loss rate for each group. These assumptions include recent sales experience and historical collection rates. 44 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 2. Critical accounting judgements, estimates and assumptions (continued) Fair value measurement hierarchy The Group is required to classify all assets and liabilities, measured at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs for the asset or liability. Considerable judgement is required to determine what is significant to fair value and therefore which category the asset or liability is placed in can be subjective. The fair value of assets and liabilities classified as level 3 is determined by the use of valuation models. These include discounted cash flow analysis or the use of observable inputs that require significant adjustments based on unobservable inputs. The financial asset investments have been classified by the Group in level 3 (refer note 10). These investments are in private entities where obtaining input values is not readily possible. Input values recognised were based on judgement and most recent transaction values. Estimation of useful lives of finite life intangible assets The Group determines the valuation, estimated useful lives and related amortisation charges for its finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The amortisation charge will increase where the useful lives are less than previously estimated lives, or, technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences only if the Group considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The directors have determined that the losses to date do not validate the requirement to book any DTA for carry forward losses and will consider the recognition of DTAs in future periods. Lease term The lease term is a significant component in the measurement of both the right-of-use asset and lease liability. Judgement is exercised in determining whether there is reasonable certainty that an option to extend the lease or purchase the underlying asset will be exercised, or an option to terminate the lease will not be exercised, when ascertaining the periods to be included in the lease term. In determining the lease term, all facts and circumstances that create an economical incentive to exercise an extension option, or not to exercise a termination option, are considered at the lease commencement date. Factors considered may include the importance of the asset to the Group's operations; comparison of terms and conditions to prevailing market rates; incurrence of significant penalties; existence of significant leasehold improvements; and the costs and disruption to replace the asset. The Group reassesses whether it is reasonably certain to exercise an extension option, or not exercise a termination option, if there is a significant event or significant change in circumstances. Incremental borrowing rate Where the interest rate implicit in a lease cannot be readily determined, an incremental borrowing rate is estimated to discount future lease payments to measure the present value of the lease liability at the lease commencement date. Such a rate is based on what the Group estimates it would have to pay a third party to borrow the funds necessary to obtain an asset of a similar value to the right-of-use asset, with similar terms, security and economic environment. Assessment of the conversion features of the convertible notes During the year the Group issued convertible note tranches with conversion clauses that were both fixed and variable. For the convertible note tranches with variable conversion terms, at initial recognition an embedded derivative is recognised on the statement of financial position at fair value and that embedded derivative is subsequently recorded at its fair value thereafter, with changes in fair value going through to the statement of profit or loss and other comprehensive income. The difference between the consideration received (net of costs) and the embedded derivative is reflected in the principal value of the convertible note liability. The fixed component of the convertible note tranches in accordance with AASB 132 Financial instruments, are classified as equity. 45 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 2. Critical accounting judgements, estimates and assumptions (continued) Business combinations As discussed in note 1, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the Group taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. Note 3. Operating segments Identification of reportable operating segments The Group is organised into five operating business segments: (1) Novatti Platform, incorporating enterprise sales and Maintenance & Support via the Novatti Platform (2) Billing Solutions, incorporating Basis2 operating under Novatti Incorporated (3) Transaction Services incorporating Flexewallet Pty Ltd, Flexe Payments (South Africa) Pty Ltd, Flexe Payments Ltd, Vasco Pay Pty Ltd and Emersion Software Systems Pty Ltd. (4) Banking, incorporating the banking services under Novatti IBA Pty Ltd. Novatti B Holding Company Pty Ltd hold the financial assets as its parent entity (5) Novatti Group Limited, the legal parent that holds the financial assets for the Group These operating business segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers (‘CODM’) in assessing performance and in determining the allocation of resources. The CODM reviews EBITDA (earnings before interest, tax, depreciation and amortisation). The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. The information reported to the CODM is on at least a monthly basis. Types of products and services The principal products and services of each of these operating segments are as follows: Novatti Platform Billing Solutions Transaction Processing Banking Services Develops, deploys and supports specialised mobile and alternate payment technology, primarily through the deployment of the Novatti Platform. Basis2 trading under Novatti Inc. provides a technologically advanced billing and CIS solution to service providers in the utilities industry. TransferBridge: Provides a comprehensive global network that interconnects emerging payment platforms, remittance operators, financial institutions, retailers, utilities and all types of telecommunication operators. Flexewallet and Flexe Payments: Offers customers an alternative payment method in the form of a prepaid cash voucher. Vouchers can be used for a multitude of payment methods such as prepaid account top-ups and for secure online payment of goods and services. Vouchers are available in a variety of currencies and locations globally. Emersion Software Systems Pty Ltd integrates diverse business applications, such as subscription billing, payments and provisioning, into existing business platforms such as Customer Relationship Management Software. Vasco Pay Pty Ltd: Provides a payment system centred around reloadable prepaid cards that meets the needs and wants of international and local university and college students. Novatti IBA Pty Ltd, on approval as a Restricted Authorised Deposit-Taking Institution ('RADI') or its banking licence by APRA, Novatti IBA Pty Ltd will offer new banking services to Australian customers with a focus on the migrant demographic. Intersegment transactions Intersegment transactions were made at market rates. Intersegment transactions are eliminated on consolidation. 46 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 3. Operating segments (continued) Intersegment receivables, payables and loans Intersegment loans are initially recognised at the consideration received. Intersegment loans are eliminated on consolidation. Operating segment information Consolidated - 2020 Revenue Sales to external customers Other revenue Total revenue EBITDA Depreciation and amortisation Interest revenue Finance costs Other costs Profit/(loss) before income tax expense Income tax expense Loss after income tax expense Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities Novatti Platform $ Billing Solutions Transaction Services Banking Services $ $ $ Novatti Group Limited $ Total $ 2,271,796 175,807 2,447,603 2,214,263 - 2,214,263 6,517,607 42,823 6,560,430 - 45,500 45,500 - 11,003,666 580,594 844,724 580,594 11,848,390 (2,241,059) (325,929) 4,556 (194,367) (43,385) 294,662 (211,742) - (2,839) (22,976) (94,420) (212,927) 3,799 (79,947) (45,836) (4,669,248) (12,785) 2 (38,143) (139,700) (1,828,778) (141,433) 388 (605,701) (305,727) (8,538,844) (904,815) 8,745 (920,997) (557,624) (2,800,184) 57,105 (429,331) (4,859,874) (2,881,251) (10,913,535) (46,791) (10,960,326) 4,292,554 1,779,062 24,112,444 33,721 4,874,838 545,241 21,218,049 1,804,496 2,621,788 32,839,569 32,839,569 4,882,508 33,325,132 33,325,132 Employee Benefits 5,628,300 34,856 2,664,075 1,236,320 1,671,260 11,234,811 Additions to non-current assets (other than financial assets, deferred tax, post- employment benefits assets, rights under insurance contracts) 2,405,024 - 3,546,928 30,620 - 5,982,572 47 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 3. Operating segments (continued) Consolidated - 2019 Revenue Sales to external customers Other revenue Total revenue EBITDA Depreciation and amortisation Interest revenue Finance costs Other costs Profit/(loss) before income tax expense Income tax expense Loss after income tax expense Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities Novatti Platform $ Billing Solutions Transaction Services Banking Services $ $ $ Novatti Group Limited $ Total $ 2,289,873 - 2,289,873 2,224,146 - 2,224,146 3,902,445 - 3,902,445 - - - - 463,656 463,656 8,416,464 463,656 8,880,120 (1,771,002) (43,021) 4,760 (29,637) (9,899) 248,963 (198,153) - (795) (28,849) (1,793,756) (63,509) 15 (39,508) (176,499) (66,231) - - - - (872,562) (84,654) 5,507 (5,724) - (4,254,588) (389,337) 10,282 (75,664) (215,247) (1,848,799) 21,166 (2,073,257) (66,231) (957,433) (4,924,554) (29,759) (4,954,313) 2,112,875 2,872,489 7,124,600 1,782,082 2,643,660 16,535,706 16,535,706 Employee Benefits 4,678,844 42,287 2,397,542 2,427,419 472,741 6,204,495 - - 1,307,994 10,412,649 10,412,649 565,988 7,684,661 Additions to non-current assets (other than financial assets, deferred tax, post- employment benefits assets, rights under insurance contracts) 518,568 - 8,942 - 1,662,628 2,190,138 For the breakdown of operating segment revenue into disaggregated revenue components, refer to Note 4. Revenue from Australian customers is $3,549,440 (FY19: $2,038,278). Revenue from customers in other countries is $7,454,226 (FY19: $6,378,186). Revenue from a single customer in a country other than Australia is $3,497,650 (FY19: $1,959,434), generated from Billing Solution and Transactional Services segments. 48 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 4. Revenue 2020 Sales revenue: Platform sales Billing Solutions Transaction processing 2019 Sales revenue Platform sales Billing Solutions Transaction processing Note 5. Income tax expense Timing of revenue recognition Timing of revenue recognition Services provided at point in time $ Services provided over time $ Consolidated 2020 $ - 1,287,820 6,517,608 2,271,796 926,442 - 2,271,796 2,214,262 6,517,608 7,805,428 3,198,238 11,003,666 Timing of revenue recognition Timing of revenue recognition Services provided at point in time $ Services provided over time $ Consolidated 2019 $ - 1,418,910 3,902,445 2,289,873 805,236 - 2,289,873 2,224,146 3,902,445 5,321,355 3,095,109 8,416,464 Numerical reconciliation of income tax expense and tax at the statutory rate Loss before income tax expense Tax at the statutory tax rate of 27.5% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Adjustment for tax rate differences in foreign jurisdictions Adjustment for income tax payable in foreign jurisdictions Adjustment for tax exempt research and development tax Adjustments from prior periods Share-based payments Adjustment for R&D accounting expense included within R&D incentive Other non-deductible expenses Current year tax losses not brought to account Current year temporary differences not brought to account Adjustments in respect of current income tax of previous year Income tax expense 49 Consolidated 2020 $ 2019 $ (10,913,535) (4,924,554) (3,001,222) (1,354,252) 40,806 46,791 (155,462) 390,490 366,434 357,384 67,435 (1,887,344) 2,353,782 328,227 (747,874) 23,800 27,395 (126,695) 20,546 107,563 291,252 21,075 (992,774) 814,248 520,084 (311,799) 46,791 29,759 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 5. Income tax expense (continued) Deferred tax assets not brought to account: Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit @ 27.5% Note 6. Current assets - cash and cash equivalents Cash on hand Cash at bank Note 7. Current assets - trade and other receivables Trade receivables Less: Allowance for expected credit losses Accrued revenue Consolidated 2020 $ 2019 $ 18,906,227 10,982,770 5,199,212 3,020,262 Consolidated 2020 $ 2019 $ 595 2,599,283 7,910 1,799,014 2,599,878 1,806,924 Consolidated 2020 $ 2019 $ 2,376,159 (87,086) 2,289,073 3,787,197 - 3,787,197 495,918 500,750 2,784,991 4,287,947 Allowance for expected credit losses The consolidated entity has recognised a loss of $87,086 (2019: Nil) in statement of profit or loss and other comprehensive income in respect of the expected credit losses for the year ended 30 June 2020. Other than the provision noted above, management are of the opinion that these receivables are reflective of fair value and should not be impaired. The ageing of the past due but not impaired receivables are as follows: Trade receivables Current 3 to 6 months overdue Over 6 months overdue Other receivables Accrued revenue 50 Consolidated 2020 $ 2019 $ 1,319,909 93,985 875,179 1,462,811 467,979 1,856,407 495,918 500,750 2,784,991 4,287,947 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 8. Current assets - financial assets - funds in trust Settlement funds* Remittance funds* * Refer to Note 15 Current liabilities – Settlement and Remittance funds payable Note 9. Current assets - other current assets Prepayments Loan to unlisted entity* Other Consolidated 2020 $ 2019 $ 9,102,731 8,349,270 1,934,582 1,820,051 17,452,001 3,754,633 Consolidated 2020 $ 2019 $ 115,553 200,000 44,580 144,184 200,610 167,978 360,133 512,772 *Terms of loan agreement include: Borrower: SendFX Principal amount: $200,000 Term: 12 months from the first drawdown. The loan was first drawn down on 20 May 2019. Interest: 6% Repayment: The principal is repayable at the expiry of the term. The borrower may extend the date for repayment by up to 6 months. The borrower may repay all or any portion of the principal and interest prior to the end of the loan term. Conversion: Where the principal amount and interest has not been repaid within 6 months after the end of term, as may be extended, the lender may convert some or all of the monies outstanding into fully paid ordinary shares in the borrower. Security: The borrower charges in favour of the lender all its right, title and interest in present and after acquired property including any interest to grant a security interest. The charge continues to real property. The borrower has no power to create any security in the collateral ranking in priority or equal rank to the agreement without obtaining the lender's prior written consent. On 8 July 2020, the Group announced that, by mutual agreement, it had exited its investment in SendFX and ended its provision of ongoing technology and compliance services. Under the terms of the exit agreement, the Group will receive $900,000 in cash representing payment for the buy-back of the Group's shareholding (refer note 10) and repayment of the outstanding loan balance as at 30 June 2020. Note 10. Other investments Current Investment in SendFX* Non-current Investment in SendFX* Investment in Slice Payments* Consolidated 2020 $ 2019 $ 560,000 - - 300,000 560,000 240,000 860,000 800,000 * These investments are in private entities where obtaining input values is not readily possible. Input values recognised were based on judgement and most recent transaction values (refer note 2). 51 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 11. Non-current assets - plant and equipment Leasehold fixture and fittings - at cost Less: Accumulated depreciation Plant and equipment - at cost Less: Accumulated depreciation Consolidated 2020 $ 2019 $ 534,436 (102,504) 431,932 708,684 (568,107) 140,577 495,636 (27,636) 468,000 626,781 (471,657) 155,124 572,509 623,124 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2018 Additions Depreciation expense Balance at 30 June 2019 Additions Disposals Depreciation expense Balance at 30 June 2020 Note 12. Non-current assets - right-of-use assets Buildings - right-of-use Less: Accumulated depreciation Leasehold Plant & Equipment at cost $ Fixtures & Fittings at cost $ 136,571 57,957 (39,404) 155,124 38,604 (743) (52,408) 5,936 469,553 (7,489) 468,000 12,873 - (48,941) Total $ 142,507 527,510 (46,893) 623,124 51,477 (743) (101,349) 140,577 431,932 572,509 Consolidated 2020 $ 2019 $ 2,525,761 (281,167) 2,244,594 - - - 52 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 12. Non-current assets - right-of-use assets (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Buildings - Right-of-use $ 2,460,324 30,270 35,167 (281,167) 2,244,594 Consolidated 2020 $ 2019 $ 567,630 (116,183) 451,447 847,000 (262,542) 584,458 567,630 (59,637) 507,993 847,000 (177,657) 669,343 3,784,726 (723,679) 3,061,047 2,017,760 (423,221) 1,594,539 - 1,661,863 45,592 211,605 1,642,764 (81,868) 1,560,896 - - - 5,703,440 4,645,343 Consolidated Recognition on adoption of AASB 16 (note 1) Additions Exchange differences Depreciation expense Balance at 30 June 2020 Note 13. Non-current assets - intangible assets Brand Asset Less: Accumulated amortisation Intellectual property - at cost Less: Accumulated amortisation Customer Lists Less: Accumulated amortisation Licences Other intangible assets Product development Less: Accumulated amortisation 53 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 13. Non-current assets - intangible assets (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2018 Reclassification of Brand Asset and Other Intangible Assets Additions Exchange differences Amortisation expense Balance at 30 June 2019 Additions Additions through business combinations (note 27) Exchange differences Impairment of assets* Amortisation expense Brand Asset $ Intellectual Property $ Customer Lists $ Licences $ Intangible Assets $ Product Development $ Total $ Other - 753,997 1,703,724 208,840 779,235 - 3,445,796 567,630 - - (59,637) - - - (84,654) - - - 1,453,023 - - 88,968 (198,153) (567,630) - - - 507,993 - 669,343 1,594,539 1,661,863 - 1,138,788 - 211,605 - - - - 1,453,023 88,968 - (342,444) - - 4,645,343 - 1,138,788 - - - (56,546) - - - (84,885) 1,727,841 36,517 (297,850) - 2,459 - (2,803,110) - 43,592 - (209,605) - 1,642,764 3,414,197 - 38,976 - (3,012,715) (521,149) (81,868) Balance at 30 June 2020 451,447 584,458 3,061,047 - 45,592 1,560,896 5,703,440 *During November 2018, Novatti’s management team submitted an application to the Australian Prudential Authority (APRA) for a Restricted Authorized Deposit-taking Institution license (ADI license). Due to the difficulty in assessing the potential financial impact of the granting of the license and notwithstanding the uncertainty as to when the licence will be granted by APRA, the Directors have determined that the costs in relation to its license should be impaired from the statement of financial position. The full impact of this impairment charge has been recorded as a charge to the statement of profit or loss and other comprehensive income. Note 14. Current liabilities - trade and other payables Trade payables Accrued expenses Amounts payable to Emersion Software Systems Pty Ltd (note 27) Other payables Consolidated 2020 $ 2019 $ 3,018,037 1,914,520 810,000 111,682 3,592,651 1,038,221 - 10,547 5,854,239 4,641,419 54 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 15. Current liabilities - settlement and remittance funds payable Settlement funds payable* Remittance funds payable* Consolidated 2020 $ 2019 $ 9,102,731 8,349,270 1,934,582 1,820,051 17,452,001 3,754,633 * Client Funds held for Settlement and Remittance, refer to Note 8. All amounts are short term and the carrying values are considered to be a reasonable approximation of fair value. Note 16. Lease liabilities Consolidated 2020 $ 2019 $ 245,027 - - 2,233,365 117,334 - 2,478,392 117,334 Consolidated 2020 $ 2019 $ 860,863 937,160 Consolidated 2020 $ 2019 $ 937,160 3,131,941 (3,198,238) 660,532 3,008,561 (2,731,933) 860,863 937,160 Current Office lease liabilities for Melbourne, United Kingdom and Malta Non-Current Lease incentive liability - Melbourne office Office lease liabilities for Melbourne, United Kingdom and Malta Note 17. Current liabilities - unearned revenue Revenue billed in advance Reconciliation of the values at the beginning and end of the current and previous financial year: Opening balance Amounts billed in advance (ex GST) Less revenue recognised over a period of time Closing balance 55 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 18. Convertible note facilities Current Loan payable - Convertible note facility for $1.1M at 0% pa Non-current Loan payable - Convertible note facility for $2,275M and $1.225M at 9% pa Embedded derivative - Convertible note facility Consolidated 2020 $ 2019 $ 1,100,000 2,817,927 1,726,651 5,644,578 - - - - $2.275 million 9% convertible note facility - Proceeds from issue $2,275,000, less transaction costs of $150,150. On 7 November 2019, Novatti Group issued convertible notes for the amount of $2.275 million to professional and sophisticated investors. The primary terms of the convertible note facility are: Issuer: Novatti Group Ltd Face value: $2.275M ($1 per note) Interest: 9% pa – payable quarterly based on the face value Term: 15 November 2019 to 30 July 2021 Conversion price: Lesser of i. $0.25 and ii. lowest share issue price under any capital raising by Novatti Group Ltd between the date of issue of the notes and the date of receipt of conversion notice. Bonus options issued as attaching to the convertible notes: 2.275 million options exercisable at $0.25 per share fixed price exercisable any time before 30 October 2022. The value attached to the options is $188,735, classified in equity reserve. $1.225 million 9% convertible note facility - Proceeds from issue $1,225,000, less transaction costs of $63,500. On 18 February 2020, Novatti Group issued an additional convertible note facility for the amount of $1.225 million to professional and sophisticated investors under the same terms as the $2.275 million notes noted above. The primary terms of the convertible note facility are: Issuer: Novatti Group Ltd Face value: $1.225M ($1 per note) Interest: 9% pa – payable quarterly based on the face value Term: 18 February 2020 to 30 July 2021 Conversion price: Lesser of i. $0.25 and ii. lowest share issue price under any capital raising by Novatti Group Ltd between the date of issue of the notes and the date of receipt of conversion notice. Bonus options issued as attaching to the convertible notes: 1.225 million options exercisable at $0.25 per share fixed price exercisable any time before 30 October 2022. The value attached to the options is $105,112, classified in equity reserve. 56 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 18. Current liabilities - convertible note facilities (continued) $1.1million convertible note facility - Proceeds from issue $1,100,000 less transaction costs of $139,710. On the 8 November 2019, Novatti B Holding Company Pty Ltd (NBHC) the Group’s wholly owned subsidiary and head of its banking services unit, issued a $1.1 million convertible note to Australian Fintech Investment Group Pty Ltd (AFIG). The primary terms of the convertible note facility are: Issuer: NBHC Holder: AFIG Face value: $1.1M Interest: nil Term: 8 November 2019 to 31 March 2020*. Conversion formula: If NBHC obtains its Restricted Authorised Deposit-taking Institution (RADI) license from the Australian Prudential Regulation Authority (APRA), the facility automatically converts into the number of NBHC shares equal to 5.5% of its issued capital, (1,100,000 NBHC shares based on 20M shares on issue at the time of agreement). The value attached to the conversion of notes into NBHC shares is equal to $37,987, classified in equity reserve. * The Group had held multiple discussions with AFIG on possible options including extending the term of the convertible note. As at the date of this report, no agreement has been reached and AFIG continues to await the outcome of NBHC's application of RADI license. As financial instruments, the Group’s convertible note facilities are initially measured at fair value. The loan component, or the financial liability of the convertible notes are accounted for at amortised cost using the effective interest method in accordance with AASB 9. As part of its convertible note, Novatti Group’s embedded derivative is subsequently valued at fair value with gains or losses recognised in the statement of profit or loss and other comprehensive income. The three convertible notes are measured at level two of the fair value hierarchy as these have been calculated utilising market observable factors. The convertible notes are unsecured. Note 19. Equity - issued capital Ordinary shares - fully paid 185,210,500 166,879,214 26,684,947 24,074,324 Consolidated 2020 Shares 2019 Shares 2020 $ 2019 $ 57 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 19. Equity - issued capital (continued) Movements in ordinary share capital Details Date Shares $ Balance Fully paid ordinary shares on exercise of options Placement to further the Company’s application for a restricted banking licence Placement fee to corporate adviser for share placement 1 July 2018 28 February 2019 157,508,333 22,234,239 21,954 84,500 29 March 2019 9,286,381 - 1,950,140 (132,009) Balance Take up of fully paid ordinary shares Fully paid ordinary shares on exercise of options Issue of shares as consideration for acquisition of assets from Emersion Software Systems Pty Ltd Issue of shares to Directors in lieu of fees Conversion of 500,000 director options Issue of shares for the settlement of convertible note debt* 30 June 2019 25 November 2019 31 December 2019 166,879,214 24,074,324 50,000 40,000 238,096 200,000 2 April 2020 9 June 2020 24 June 2020 16,725,000 1,061,342 106,848 - 2,207,700 201,655 53,000 58,268 Balance 30 June 2020 185,210,500 26,684,947 *On 3 July 2020, the Group issued 875,000 fully paid ordinary shares for the settlement of convertible note debt. Ordinary shares Ordinary shares entitle the holder to participate in dividends, when declared and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The Group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current company’s share price at the time of the investment. Note 20. Equity - reserves Foreign currency reserve Share-based payments reserve Consolidated 2020 $ 2019 $ 620,115 1,756,615 529,772 1,651,193 2,376,730 2,180,965 58 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 20. Equity - reserves (continued) Foreign currency reserve The reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Share-based payments reserve The option reserve is used to record the fair value of options issued to employees and directors as part of their remuneration. It is also used to record the fair value of options issued. The balance is transferred to Issued Capital when options are exercised and balance is transferred to retained earnings when options lapse. The following options form part of the reserve for the year ended 30 June 2020: On the 25 November 2019, 5,370,000 unlisted options were granted to staff and contractors under the Group’s Employee Share Option Plan (ESOP). The options issued have an exercise price of $0.20 each. The options will vest in three tranches: ● ● ● 50% of options provided to employees will vest on grant date A further 25% will vest 12 months from grant date, on the 25 November 2020 The remaining 25% will vest 24 months from grant date on the 25 November 2021 All unexercised options will lapse 36 months after grant date on the 25 November 2022. The fair value of these options are valued at “grant date” using the Black-Scholes option pricing model. At the FY19 AGM of shareholders, 3.5 million unlisted incentive options were approved to be issued to Group Directors at an exercise price of $0.22 per share. In accordance with Resolution 9 of the AGM the incentive options will be issued free of charge and within one month after the date of the meeting, options issued to directors will be exercisable upon the successful completion of three milestones: ● ● Options that are linked to a specific milestone will not “vest” unless and until the relevant milestone has been achieved within the prescribed timeframe or a “Change of Control Event” occurs during that period. If neither of these events occurs within the prescribed timeframe, then the relevant number of Incentive Options will automatically lapse. In addition, all “unvested” Options will be forfeited and automatically lapse upon the recipient terminating or being removed from their role with the Company, unless the Board determines otherwise. See the terms and conditions in Schedule 3 of the Notice of 2019 AGM for further details. Details of these milestones and timeframes for achievement are as follows: Milestone 1: The 20-day VWAP achieving a price greater than or equal to 130% of the November 2019 20- day VWAP at any time during the period commencing 1 December 2019 and ending 30 November 2020 (inclusive). Milestone 2: The 20-day VWAP achieving a price greater than or equal to 160% of the November 2019 20- day VWAP at any time during the period commencing 1 December 2019 and ending 30 November 2021 (inclusive). Milestone 3: The 20-day VWAP achieving a price greater than or equal to 190% of the November 2018 20- day VWAP at any time during the period commencing 1 December 2019 and ending 30 November 2022 (inclusive). The exercise price for the Incentive Options will be equal to the November 2019 20-day VWAP. The Incentive Options will expire on 30 November 2023 after which date all of the Incentive Options not yet exercised automatically lapse. As part of the Group’s convertible note facility issued during the year ended 30 June 2020: (1) the bonus options exercisable for a fixed number of shares (3,500,000 shares) for a fixed price ($0.25 per share) has been categorised as equity. (2) The conversion of the 1.1 million convertible note resulting in a fixed number of shares (1,100,000 million Novatti B Holding Company shares) for a fixed price ($1 per share) has been classed as equity under the ‘fixed’ test guidelines of AASB 132 Financial Instruments Presentation (2014) 59 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 20. Equity - reserves (continued) Accordingly, the equity component of the financial instrument is never remeasured in subsequent reporting periods. Please see note 18 for further information on the terms of the convertible notes Note 21. Equity - dividends There were no dividends paid, recommended or declared during the current or previous financial year. Note 22. Financial instruments Financial risk management objectives The Group is exposed to risks that arise from the use of its financial instruments. This Note describes Novatti Group’s objectives, policies and processes for managing those risks and the methods used to measure them. There have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this Note. The Board assumes the role of the Group’s Audit, Risk & Compliance Committee and oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Principal financial instruments The principal financial instruments used by Novatti Group, from which financial instrument risk arises, are as follows: ● ● ● ● ● Cash at bank and on deposit Trade receivables Trade and other payables Lease liabilities Convertible note facilities Client funds held for settlement and remittance are not recognised as financial instruments as the net value of the two net off in total. The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and whilst retaining ultimate responsibility for them, has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group’s finance function. The Board receives regular reports from the Chief Financial Officer through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below. 60 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 22. Financial instruments (continued) Credit risk Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents, trade and other receivables and other financial assets. The Group’s exposure to credit risk arises from potential default by the counter-party, with maximum exposure equal to the carrying amount of these instruments. Exposure at the reporting date is addressed in each applicable note. Clients of the Group range from financial service providers, telecommunication operators to airline companies. New client contracts may require customers to pay fees based on ‘project milestone arrangements’ in accordance with agreed upon contract terms. Moving from milestone to milestone requires the payment of each to move onto the next. In addition, companies may be charged for on-going service and maintenance contracts on a monthly or quarterly basis based on the initial contract value and last up to 5 - 10 years. Transactional sales obligations are settled generally on 21-day terms and after receipt from distributors. The Group undertakes transactions with a large number of customers and regularly monitors payments in accordance with credit terms, the financial assets that are neither past due nor impaired, are expected to be received in accordance with the credit terms. Refer to Note 7 trade and other receivable for the ageing analysis. The Group does not have any material credit risk exposure for other receivables or other financial instruments. Market risk Foreign currency risk The Group’s policy is, where possible, to allow Group entities to settle liabilities denominated in their functional currency with the cash generated from their own operations in that currency. Where Group entities have liabilities denominated in a currency (and have insufficient reserves of that currency to settle them), cash already denominated in that currency will, where possible, be transferred from elsewhere within the Group. In order to monitor the continuing effectiveness of this policy, the Board receives a monthly forecast, analysed by the geographical region’s cash balances, commitments and receipts, converted to the Group’s main functional currency, Australian Dollars (AUD). The Group is exposed to currency risk on cash at bank, accounts receivable and payable accounts and on its financial assets in Canadian Dollars (CAD) to fund its Canadian operations, Euro (EUR) and Great British Pounds (GBP) to service its European Operations in the UK and also US Dollars (USD). The carrying amount of the consolidated entity's foreign currency denominated financial assets and financial liabilities at the reporting date were as follows: Consolidated Canadian dollars US dollars Euros GBP Assets 2020 $ 2019 $ Liabilities 2020 $ 2019 $ 3,463,134 1,052,126 9,217,938 35,113 3,108,184 2,323,458 1,067,922 14,300 (692,804) (226,950) (188,433) (36,090) (1,327,733) (135,958) (819,300) (37,965) 13,768,311 6,513,864 (1,144,277) (2,320,956) The following tables below illustrate the sensitivity of the net result for the year and equity in regard to the Group’s financial assets and financial liabilities compared with the currency on deposit and AUD exchange rate. It assumes a +/- 5% change in the exchange rate for the year ended at 30 June 2020. This percentage has been determined based on average market volatility in exchange rates in the previous 12 months. The sensitivity analysis is based on the Group’s foreign currency financial instruments held at each reporting date. This assumes that other variables, in particular interest rates, remain constant. 61 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 22. Financial instruments (continued) Consolidated - 2020 % change profit before tax Effect on equity % change profit before tax Effect on equity AUD strengthened Effect on AUD weakened Effect on Canadian dollars US dollars Euros GBP 5% 5% 5% 5% (131,920) (39,294) (429,976) 47 (601,143) AUD strengthened Effect on Consolidated - 2019 % change profit before tax Effect on equity Canadian dollars US dollars Euros GBP 5% 5% 5% 5% (84,783) (104,167) (11,839) 1,127 (199,662) - - - - - - - - - - 5% 5% 5% 5% 145,807 43,430 475,237 (51) 664,423 AUD weakened Effect on % change profit before tax Effect on equity 5% 5% 5% 5% 93,708 115,132 13,085 (1,246) 220,679 - - - - - - - - - - Price risk The Group is exposed to other price risk on its investments in unlisted entities. These investments are classified on the statement of financial position as investment assets initially recorded at cost and are subsequently measured at fair value through the statement of profit or loss and other comprehensive income. The investments are in two different entities. The assets and liabilities within these investments indirectly expose the Group to equity price risks. It is not considered practicable to ‘look through’ the investments to analyse these risks in detail. These investments were acquired in the FY19 year. If the fair value of investments increased by 10% this would have increased other income for both the Group by $86,000. A decrease of 10% would have reduced other income by the same amount. Investments measured at fair value in the statement of financial position are grouped into three levels of a fair value hierarchy: ● ● ● Level 1 – the instrument has quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 – a valuation technique is applied using inputs other than quoted prices within Level 1 that are observable for the financial instrument, either directly (i.e. as prices), or indirectly (i.e. derived from prices) Level 3 – a valuation technique is applied using inputs that are not based on observable market data (unobservable inputs) 2020 Assets Shares in unlisted entities 2019 Assets Shares in unlisted entities Level 1 $ Level 2 $ Level 3 $ Total $ Level 1 $ - - - 860,000 860,000 Level 2 $ Level 3 $ Total $ - 800,000 800,000 These investments are in private entities where obtaining input values is not readily possible. Input values recognised were based on judgement and most recent transaction values. 62 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 22. Financial instruments (continued) Liquidity risk Liquidity risk arises from the Group’s management of working capital. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. To achieve this aim, it seeks to maintain cash balances to meet expected requirements for a period of at least three months. The Group also seeks to reduce liquidity risk by ensuring that its cash deposits are earning interest at the best rates. At balance date, these reports indicate that the Group is expected to have sufficient liquid resources to meet its obligations under all reasonably expected circumstances. As at 30 June 2020, the financial liabilities of the Group include: ● ● ● Trade and other payables. For further details including breakdown of balances, refer to trade and other payables in Note 14 for a breakdown of account balances Lease liabilities. Refer to Note 16 for a summary of the outstanding lease liabilities Convertible note facilities. Refer to Note 18 for a summary of terms and conditions The contractual amounts of financial liabilities are equal to their carrying values. The following tables detail the Group's remaining contractual maturity for its financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Consolidated - 2020 Non-derivatives Non-interest bearing Trade payables and other payables Interest-bearing - fixed rate Convertible note facilities Lease liabilities Total non-derivatives Consolidated - 2019 Non-derivatives Non-interest bearing Trade payables and other payables Lease liabilities Total non-derivatives Weighted average interest rate % 1 year or less $ Between 1 and 2 years $ Between 2 and 5 years $ Over 5 years $ Remaining contractual maturities $ - 5,854,239 - 9.00% 5.21% 1,100,000 245,027 7,199,266 4,544,578 2,233,365 6,777,943 - - - - - 5,854,239 - 5,644,578 2,478,392 - - 13,977,209 Weighted average interest rate % 1 year or less $ Between 1 and 2 years $ Between 2 and 5 years $ Over 5 years $ Remaining contractual maturities $ - - 4,641,419 117,334 4,758,753 - - - - - - - - - 4,641,419 117,334 4,758,753 63 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 23. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel of the consolidated entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Note 24. Remuneration of auditors Consolidated 2020 $ 2019 $ 924,544 75,271 15,697 885,740 1,036,782 71,558 14,990 500,965 1,901,252 1,624,295 During the financial year, the following fees were paid or payable for services provided by William Buck, the auditor of the Company, its network firms and unrelated firms: Consolidated 2020 $ 2019 $ 90,500 79,540 72,635 - 58,905 11,970 72,635 70,875 163,135 150,415 Audit services - William Buck Audit or review of the financial statements Other services - William Buck Preparation of the tax return and associated tax services (including R&D) Investigative consulting Note 25. Related party transactions Parent entity Novatti Group Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 28. Key management personnel Disclosures relating to key management personnel are set out in note 23 and the remuneration report included in the directors' report. Transactions with related parties There were no transactions with related parties during the current and previous financial year. Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. 64 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 25. Related party transactions (continued) Loans from Directors Current and non-current liabilities to a Director There were no other Director related services that have been provided to the Group outside of the Directors normal fiduciary duties and responsibilities as Directors of Novatti Group other than as outlined in this report. Loans to/from related parties Loan provided to the Group’s joint venture partner, Hi Impact. This loan agreement is for a total of USD 18,335 (AUD 26,611) as at 30 June 2020 (FY19, USD 18,335 (AUD 29,940)). The loan is on commercial terms and interest has been calculated daily at 6% per annum. There were no other loans to or from related parties at the current reporting date. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Note 26. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Loss after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Share-based payments reserve Accumulated losses Total equity Parent 2020 $ 2019 $ (2,812,836) (964,177) (2,812,836) (964,177) Parent 2020 $ 2019 $ 31,081,847 1,172,317 32,115,258 27,413,112 629,064 1,307,994 5,173,642 1,307,994 29,601,950 2,318,628 (4,978,962) 26,991,327 2,251,193 (3,137,402) 26,941,616 26,105,118 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries There exists a bank guarantee for offices leased in Melbourne. As at 30 June 2020, this totalled $79,169 (FY19: $78,031). No other guarantees exist. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2020 (2019: Nil). 65 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 26. Parent entity information (continued) Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2020 (2019: Nil). Significant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in note 1, except for the following: ● ● ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Investments in associates are accounted for at cost, less any impairment, in the parent entity. Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. Note 27. Business combinations Acquisition of Emersion Software Systems Pty Ltd On 2 April 2020, Novatti Group Limited announced the acquisition of business assets from Emersion Software Systems Pty Ltd, a leading business process integration platform. The acquisition extends the Group's capability offering and strengthens core payments business. The acquisition has been accounted as a Business Combination under AASB 3. The goodwill of $43,592 was primarily related to the Company’s growth expectations through customer expansion. The acquired business contributed revenues of $479,295 and loss after tax of $258,963 to the consolidated entity for the period from 2 April 2020 to 30 June 2020. If the acquisition occurred on 1 July 2019, the full year contributions would have been revenues of $1,891,632 and loss after tax of $373,829. The fair values of the identifiable net assets acquired are detailed below: Prepayments Customer Lists Product Development Employee benefits Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: shares issued by company as part of consideration Net cash used Fair value $ 6,735 1,727,841 1,642,764 (213,232) 3,164,108 43,592 3,207,700 3,207,700 (2,207,700) 1,000,000 *The $1 million in cash is payable over monthly instalments of varying amounts until June 2021. The Group paid $190,000 prior to 30 June 2020, with the remaining balance of $810,000 to be paid in 2021 financial year (refer note 14). The share consideration was issued to the Seller and third party nominees of the Seller (including to holders of outstanding convertible notes in the Seller) in two tranches, the first being 7,493,256 shares at completion and the balance of 9,231,744 shares on 29 May 2020 upon receiving shareholder approval from a general meeting. Neither the Seller nor any of the third- party nominees are related to Novatti. 66 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 28. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1: Name Novatti Group Ltd Subsidiaries Novatti Pty Ltd Flexe Payments Ltd Flexe Payments Pty Ltd Flexe Payments (MLT) Ltd Novatti Commerce Solutions Inc. Novatti Commerce Solutions (MLT) Ltd Novatti Technologies Ltd Novatti Inc. Vasco Pay Pty Ltd Novatti B Holding Pty Ltd Principal place of business / Country of incorporation Ownership interest 2019 2020 % % Australia United Kingdom South Africa Malta Canada Malta United Kingdom United States of America Australia Australia - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 67 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 28. Interests in subsidiaries (continued) Name Novatti IBA Pty Ltd Novatti Billing Solutions Pty Ltd Flexe Payments (AUS) Pty Ltd UAB Novtec Global Emersion Systems Pty Ltd Novatti Pty Ltd Subsidiaries Flexewallet Pty Ltd Flexewallet (NZ) Ltd TransferBridge Pty Ltd Principal place of business / Country of incorporation Ownership interest 2019 2020 % % Australia Australia Australia Lithuania Australia Australia New Zealand Australia 100% 100% 100% 100% 100% - 100% 100% 100% 100% 100% 100% 100% - - 100% 100% 100% Note 29. Events after the reporting period On 3 July 2020, the Group issued 875,000 fully paid ordinary shares on conversion of 175,000 Novatti Group Limited Convertible Notes (4 for 1)and the exercise of 175,000 unlisted options exercisable at $0.25 per share, expiring 30 November 2022. Following this conversion, the Novatti Group Limited Convertible Note facility is now $3.325 million. On 7 July 2020, the Group issued 40,000,000 ordinary shares at $0.25 per share to institutional and sophisticated investors in a placement as announced on 29 June 2020, raising $10 million. An additional 800,000 shares totalling $200,000 will be issued to Directors Peter Pawlowitsch and Peter Cook, for which shareholder approval was granted on 19 August 2020. On 8 July 2020, the Group announced that it had exited its investment in cross-border payments provider, SendFX, and ended its provision of ongoing technology and compliance services. Under its exit, the Group will receive $900,000 in cash representing payment for the buy-back of Novatti's shareholding, plus repayment of loan funds from an aggregate cash investment by Novatti of $400,000. The funds will be paid in three equal tranches over six months. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect the consolidated entity's operations, the results of those operations, or the consolidated entity's state of affairs in future financial years. 68 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 30. Reconciliation of loss after income tax to net cash used in operating activities Loss after income tax expense for the year (10,960,326) (4,954,313) Consolidated 2020 $ 2019 $ Adjustments for: Depreciation and amortisation Share-based payments Equity investments received for services rendered Share of joint venture profit Unrealised foreign exchange gain Impairment of capitalised bank licensing costs Non-cash finance changes Gain on convertible notes Movements in reserves Change in operating assets and liabilities: Increase in trade and other receivables Increase in trade and other payables Increase in employee benefits Increase/(decrease) in deferred income Net cash used in operating activities Note 31. Earnings per share 904,815 1,601,659 (60,000) (17,322) 201,017 3,010,255 1,900,119 (726,942) 374,596 389,337 391,138 - (40) 248,644 - 5,054 - - (12,666,053) 15,015,183 262,229 (76,297) (2,398,156) 3,760,425 177,763 276,628 (1,237,067) (2,103,520) Consolidated 2020 $ 2019 $ Loss after income tax attributable to the owners of Novatti Group Limited (10,960,326) (4,954,313) Weighted average number of ordinary shares used in calculating basic earnings per share 171,307,937 159,902,694 Weighted average number of ordinary shares used in calculating diluted earnings per share 171,307,937 159,902,694 Number Number Basic earnings per share Diluted earnings per share Cents Cents (6.398) (6.398) (3.098) (3.098) As at 30 June 2020, the Group has 21,370,000 unlisted options on issue. These options are considered to be non-dilutive whilst the Group is in a loss position. Note 32. Share-based payments Options issued under employee share option plan A share option plan has been established by the Group and approved by shareholders at a general meeting, whereby the Group may, at the discretion of the Board, grant options over ordinary shares in the Company to certain key management personnel and staff of the Group. 69 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 32. Share-based payments (continued) The Employee Share Option Plan is designed to provide long-term incentives for Senior Management (including Directors) and staff to deliver long-term shareholder returns. Options are issued for nil consideration and are granted in accordance with performance guidelines established by the Board. The options granted in FY20 were calculated based on the Binomial model method of calculation for share-based payments. The following Share-based payment arrangements were in existence during the current financial year and are supported by the table below. Options issued to senior management and staff of the Group vest in three equal portions each year from the first year of vesting over 36 months. Set out below are summaries of options granted under the plan: 2020 Grant date Expiry date price Exercise Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 21/07/2016 21/07/2016 21/07/2016 27/11/2018 25/11/2019 19/12/2019 31/12/2019 31/12/2019 31/12/2019 30/11/2022 30/11/2023 19/12/2022 $0.200 $0.200 $0.200 $0.190 $0.200 $0.200 333,333 333,333 333,334 9,500,000 - - 10,500,000 - - - - 3,500,000 5,370,000 8,870,000 - - - (500,000) - - (500,000) (333,333) (333,333) (333,334) - - - - - - 9,000,000 3,500,000 5,370,000 (1,000,000) 17,870,000 Weighted average exercise price $0.191 $0.200 $0.190 $0.200 $0.185 2019 Grant date Expiry date price Exercise Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 12/11/2015 12/11/2015 12/11/2015 12/11/2015 08/01/2016 03/02/2016 08/02/2016 31/05/2016 31/05/2016 24/06/2016 24/06/2016 24/06/2016 21/07/2016 21/07/2016 21/07/2016 27/11/2018 30/06/2019 30/06/2019 30/06/2019 30/06/2019 30/06/2019 30/06/2019 30/06/2019 30/06/2019 30/06/2019 30/06/2019 30/06/2019 30/06/2019 31/12/2019 31/12/2019 31/12/2019 30/11/2022 $0.200 13,750,000 1,150,000 $0.200 1,150,000 $0.200 1,150,000 $0.200 2,859,250 $0.200 750,000 $0.200 2,005,750 $0.200 750,000 $0.250 750,000 $0.250 259,489 $0.200 741,217 $0.200 1,035,628 $0.200 333,333 $0.200 333,333 $0.200 333,334 $0.200 - $0.190 27,351,334 - - - - - - - - - - - - - - - 9,500,000 9,500,000 - - - - - - (84,500) - - - - - - - - - (84,500) (13,750,000) (1,150,000) (1,150,000) (1,150,000) (2,859,250) (750,000) (1,921,250) (750,000) (750,000) (259,489) (741,217) (1,035,628) - - - - - - - - - - - - - - - - 333,333 333,333 333,334 9,500,000 (26,266,834) 10,500,000 Weighted average exercise price $0.203 $0.190 $0.200 $0.203 $0.191 * Refer to Note 2 'Critical accounting estimates' for share-based payment assumptions and Note 20 'Share based payments reserve' for details on the option vesting conditions. 70 Novatti Group Limited Notes to the financial statements 30 June 2020 Note 32. Share-based payments (continued) For the options granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date 25/11/2019 25/11/2019 25/11/2019 19/12/2019 19/12/2019 19/12/2019 30/11/2023 30/11/2023 30/11/2023 19/12/2022 19/12/2022 19/12/2022 Share price Exercise at grant date price Expected volatility Dividend Risk-free Fair value yield interest rate at grant date $0.215 $0.215 $0.215 $0.195 $0.195 $0.195 $0.200 $0.200 $0.200 $0.200 $0.200 $0.200 100.00% 100.00% 100.00% 80.00% 80.00% 80.00% - - - - - - 0.82% 0.82% 0.82% 0.98% 0.98% 0.98% $0.106 $0.086 $0.074 $0.104 $0.087 $0.063 The options granted on 25 November 2019 were valued using the Binomial valuation model, which took into account the following market performance vesting conditions: ● ● ● Milestone 1: The 20-day VWAP achieving a price greater than or equal to 130% of the November 2019 20-day VWAP at any time during the period commencing 1 December 2019 and ending 30 November 2020 (inclusive). Milestone 2: The 20-day VWAP achieving a price greater than or equal to 160% of the November 2019 20-day VWAP at any time during the period commencing 1 December 2019 and ending 30 November 2021 (inclusive). Milestone 3: The 20-day VWAP achieving a price greater than or equal to 190% of the November 2019 20-day VWAP at any time during the period commencing 1 December 2019 and ending 30 November 2022 (inclusive). Options issued for convertible notes The Group issued 3,500,000 bonus options to the convertible note holders as part of the convertible note facility arrangement. These options were valued using on the Binomial model method of calculation for share-based payments. Set out below are summaries of options granted to convertible note holders: Grant date Expiry date Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year 15/11/2019 18/02/2020 30/10/2022 30/10/2022 $0.25 $0.25 Weighted average exercise price - - - - 2,275,000 1,225,000 3,500,000 $0.250 - - - - - - - - 2,275,000 1,225,000 3,500,000 $0.250 For the options granted to convertible note holders during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price Exercise at grant date price Expected volatility Dividend Risk-free Fair value yield interest rate at grant date 15/11/2019 18/02/2020 30/10/2022 30/10/2022 $0.210 $0.200 $0.250 $0.250 80.00% 80.00% - - 0.74% 0.59% $0.085 $0.087 71 Novatti Group Limited Directors' declaration 30 June 2020 In the directors' opinion: ● ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; the attached financial statements and notes give a true and fair view of the consolidated entity's financial position as at 30 June 2020 and of its performance for the financial year ended on that date; and there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Peter Pawlowitsch Chairman 27 August 2020 72 Novatti Group Limited Independent auditor’s report to members Report on the Audit of the Financial Report Opinion We have audited the financial report of Novatti Group Limited (the Company) and its controlled entities (the Group), which comprises the consolidated statement of financial position as at 30 June 2020, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information, and the directors’ declaration. In our opinion, the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its financial performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. REVENUE RECOGNITION Area of focus Consistent with the prior year the Group continues to enter agreements with new trading partners for generating new sources of income and include the following: - Platform sales; - Software as a Service fees (Saas); - Support and maintenance fees; and - Licence fees. The Group continues to expand its product and service offerings and geographical reach; this has necessitated transacting with customers to which the Group has limited or no trading history. As a consequence, some of these customers have long payment terms which have impacted the age of the Group’s book of debtors. Each revenue stream requires a bespoke revenue recognition model to ensure that revenue is only recognised: a) when a performance milestone is achieved; b) can be reliably measured; and c) there is a low likelihood for dispute by the customer for revenues that are recognised which are beyond that originally scoped at the inception of the engagement. How our audit addressed it Our audit procedures included: - Determining whether revenue recognised - is in-compliance with the Group’s accounting policies; Identifying and verifying the achievement of performance milestones and recognition of revenue relative to the accretion of that achievement; - Agreeing revenue streams to a sample of underlying contracts with third parties; - Examining the existence of the revenue, both by testing to contract and to subsequent receipt of invoicing of the revenue to the customer; - Examining significant aged debtors for evidence of collectability and/or dispute with the services provided; and - Analytically reviewing the reasonableness of accrued revenue and billings-in-advance accounts. We also assessed the appropriateness of disclosures attached to revenues and expected credit losses on receivables, particularly those mandatorily required by the Accounting Standard AASB 15 and AASB 9. ACQUISITION OF EMERSION SOFTWARE Area of focus How our audit addressed it Our audit procedures involved the following: - A detailed review of the Emersion Software asset sale agreement, and concurring with management, notwithstanding the legal nature of the transaction as an asset purchase, that from an accounting perspective the acquisition met the definition of a business; - Consulting our Group Technical Team on the accounting treatment of the acquisition; - Comparing the completion accounting to independent purchase price allocation reports; - Assessing the impact of the acquisition on the results of the Group; - Consulting our tax team for any indirect tax obligations arising from the purchase, including any possible stamp duty and goods and services tax; and - Vouching the accounting treatment of the transaction to the date of execution of the sale to ensure that the results of the Emersion business were appropriately consolidated into the results of the Group from that date. We also considered the adequacy of the Group’s disclosures in relation to the business combination. On 2 April 2020 the Group completed an acquisition of Emersion Software. This acquisition was material to the results of the Group in the following respects: - Intangible assets totalling $3,414,197 were capitalised to the Statement of Financial Position; and - New revenues streams totalling $479,295 were recognised in the Statement of Profit or Loss and Other Comprehensive Income. The Group’s Directors have assessed that Emersion met the definition of a business under AASB 3 Business Combinations owing to strength of Emersion’s existing trading relationships with its suppliers and customers and its workforce. We note that at reporting date the fair value attribution accounting is complete (which under Accounting Standards they are afforded 12 months from the date of acquisition), including: a) the attribution of provisional goodwill calculations to identifiable intangible assets; b) the setting of tax cost bases for calculating deferred tax assets and liabilities; and c) identifying any vendor guarantees or contingent liabilities that may be separately fair valued as part of the business purchase. ISSUE OF CONVERTIBLE NOTES Area of focus The Group has issued three convertible notes during the year to meet its working capital needs and to continue to finance its project of applying for an ADI licence from APRA. Two of these convertible notes have variable equity conversion formulae, entitling the investor to the lesser of a 25 cent price conversion or the lowest share price between the date of issue and the date of the conversion notice. Because of this variable feature, the right of conversion has been recorded as a derivative liability in the Statement of Financial Position. In-addition to this, bonus call options were issued to investors in order to incentivise their investment in the convertible notes. The fair value of these call options has been accounted for as an amortised cost of the convertible note. In accounting for these convertible notes and in- particular, measuring the fair value of the convertible note conversion feature, the Group contracted an external expert. How our audit addressed it Our audit procedures involved the following: - A detailed review of the terms and conditions of the convertible notes; - Corroborating the accounting treatment of the notes with our Group Technical Team; - Examining the skill and experience of the expert contracted by the Group; and - Recalculating the value of the derivative liability, attaching options and amortised cost value of the convertible notes, both at initial recognition and at report date. - We also reviewed the disclosures of the convertible notes made in the financial statements to ensure that they were appropriate and complete. ISSUE OF SHARES AND MANAGEMENT OF AVAILABLE WORKING CAPITAL Area of focus How our audit addressed it On 29 June 2020, in order to continue to finance its organic and transactional growth strategy the Group announced an intention to issue 40,800,000 shares at 25 cents per share to raise $10,200,000. Our audit procedures involved the following: - Tracing to bank funds raised from the successful fundraising; 40,000,000 of these shares were subsequently issued and quoted on 7 July 2020. As at 30 June 2020 the Group was in the process of fundraising for the issue of those shares, and any proceeds from the raise were held in trust. The cash raised from the fundraising and the access to working capital it delivered will clearly allow the Group to execute its strategic and operational goals over the next 12 months. - Accounting for the cut-off of the fundraising – that is, funds and shares issued are accounted for as a non-adjusting subsequent event, disclosed in the financial statements; and - Examining the latest cashflow forecast of the Group as at report date, to ensure that those funds would be sufficient for the Group’s working capital needs for the period of 12 months from the date of this report. IMPAIRMENT OF BANKING LICENCE Area of focus How our audit addressed it As recorded in the interim December 2019 financial statements and in response to the difficulty in assessing the financial impact and uncertainty of when APRA may grant an ADI licence to Novatti, the Group impaired licences, website and software totalling $3,012,715. This impairment charge significantly impacts upon the profit or loss result of the Group for the financial year ended 30 June 2020. In testing this impairment charge we performed the following: — We corroborated our understanding of the progress of the licence project with discussions with management, legal counsel and market announcements; — We reviewed key file documentation discussing the delays in granting the licence by APRA and management’s assessment thereon as to how those delays may impact the capitalised value of the licence; and — We vouched charges made to the profit or loss in-respect of the licence to the carrying value subtracted from the value of the Group’s intangible assets. We also assessed the adequacy of the Group’s disclosures in respect of the impairment of the licence. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2020, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Director’s for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of these financial statements is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf This description forms part of our independent auditor’s report. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in of the directors’ report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Novatti Group Limited, for the year ended 30 June 2020, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. William Buck Audit (Vic) Pty Ltd ABN: 59 116 151 136 N. S. Benbow Director Melbourne, dated this 27th day of August, 2020 Novatti Group Limited Shareholder information 30 June 2020 The shareholder information set out below was applicable as at 17 August 2020. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Ordinary shares 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Unquoted options 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Convertible notes 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Number of holders of ordinary shares Number of ordinary shares % of ordinary shares 27 440 306 824 184 5,396 1,431,077 2,568,223 30,779,539 191,301,264 0.01 0.63 1.14 13.61 84.61 1,781 226,085,499 100.00 129 194,548 0.09 Number of holders of unquoted options Number of unquoted options % of unquoted options - - 6 40 30 - - 60,000 1,915,000 24,220,000 - - 0.23 7.31 92.46 76 26,195,000 100.00 Number of holders of convertible notes Number of % convertible of convertible notes notes - - 6 17 5 28 - - 60,000 670,000 2,770,000 - - 1.71 19.14 79.15 3,500,000 100.00 79 Novatti Group Limited Shareholder information 30 June 2020 Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: 1. BRAYTER LIMITED 2. QING LI 2. XIADI CHEN 3. CORANGAMITE PTY LTD (LAKE CORANGAMITE A/C) 4. MR CHI WAI KENNETH LAI 5. MADAM QINGLI 6. MR QIANG WEI 7. EMERSION SOFTWARE SYSTEMS PTY LTD 8. CITICORP NOMINEES PTY LIMITED 9. DASISTAS PTY LTD (DASISTAS SUPER FUND A/C) 10. MR KENNETH LAI 11. MR PAUL MCLAREN 12. DAK DRAFTING SERVICES PTY LTD (THE PETER DIAMOND FAMILY A/C) 13. KAPAU ENTERPRISES PTY LTD (DUNDAS INVESTMENT A/C) 14. UBS NOMINEES PTY LTD 15. COALHILL INVESTMENTS PTY LTD 16. GOLDFIRE ENTERPRISES PTY LTD 17. BEARAY PTY LIMITED (BRIAN CLAYTON S/F A/C) 18. VAULT (WA) PTY LTD (VAULT A/C) 19. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 20. MOSCH PTY LTD Unquoted equity securities Options over ordinary shares issued Ordinary shares % of total 17 August 2020 Number held 46,631,507 12,500,000 12,500,000 11,107,904 10,532,368 10,407,452 7,705,589 6,683,826 3,742,132 2,677,802 2,583,750 2,312,500 2,000,000 1,797,918 1,700,000 1,608,439 1,331,577 1,328,609 1,229,537 1,219,942 1,171,875 shares issued 20.63 5.53 5.53 4.91 4.66 4.60 3.41 2.96 1.66 1.18 1.14 1.02 0.88 0.80 0.75 0.71 0.59 0.59 0.54 0.54 0.52 142,772,727 63.15 Number on issue Number of holders 26,195,000 76 There are no holders of unquoted equity securities holding 20% or greater of the number of unquoted equity securities on issue. Substantial holders Substantial holders in the company are set out below: Ordinary shares % of total shares issued Number held 46,631,506 22,907,452 12,918,750 20.63 10.13 5.71 BRAYTER LIMITED QINGLI XAIDI CHEN 80 Novatti Group Limited Shareholder information 30 June 2020 Voting rights The voting rights attached to ordinary shares are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. Securities subject to voluntary escrow Class Ordinary shares Use of funds Expiry date 31 March 2021 Number of shares 16,725,000 Since admission, the Company has used its cash in a way consistent with business objectives. 81 Novatti Group Limited Shareholder information 30 June 2020 Novatti invites investors to keep up to date with news, events and industry research by joining the Novatti mailing list at: https://www.novattigroup.com/subscribe For further information, please contact: Peter Cook Managing Director Novatti Group Limited peter.cook@novatti.com +61 411 111 153 This report has been approved for release to the ASX by Peter Cook, Managing Director. 82
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