For personal use only NOVONIX LIMITED ABN 54 157 690 830 ANNUAL REPORT – 30 JUNE 2020 CONTENTS CORPORATE DIRECTORY ......................................................................................................................... 1 REVIEW OF OPERATIONS AND ACTIVITIES .............................................................................................. 2 DIRECTORS’ REPORT ............................................................................................................................... 8 DIRECTORS AND COMPANY SECRETARY ............................................................................................. 8 PRINCIPAL ACTIVITIES ......................................................................................................................... 8 DIVIDENDS .......................................................................................................................................... 8 COVID 19 IMPACT ............................................................................................................................... 8 REVIEW OF OPERATIONS .................................................................................................................... 8 SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS ............................................................................. 9 LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS ................................................. 10 EVENTS SINCE THE END OF THE FINANCIAL YEAR ............................................................................ 10 ENVIRONMENTAL REGULATION ....................................................................................................... 10 INFORMATION ON DIRECTORS ......................................................................................................... 11 MEETINGS OF DIRECTORS ................................................................................................................. 15 REMUNERATION REPORT (AUDITED) ............................................................................................... 16 SHARES UNDER OPTION AND PERFORMANCE RIGHTS .................................................................... 28 INSURANCE OF OFFICERS AND INDEMNITIES ................................................................................... 29 PROCEEDINGS ON BEHALF OF THE COMPANY ................................................................................. 29 NON-AUDIT SERVICES ....................................................................................................................... 29 AUDITOR’S INDEPENDENCE DECLARATION ...................................................................................... 30 AUDITOR’S INDEPENDENCE DECLARATION .......................................................................................... 31 CORPORATE GOVERNANCE STATEMENT .............................................................................................. 32 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 ...................................................................................... 33 DIRECTORS’ DECLARATION ................................................................................................................... 93 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS ........................................................................ 94 SHAREHOLDER INFORMATION ........................................................................................................... 100 For personal use only CORPORATE DIRECTORY Directors Secretary Registered office in Australia Principal place of business Share register Auditor Solicitors Bankers CORPORATE DIRECTORY A Bellas B.Econ, DipEd, MBA, FAICD, FCPA, FGS G A J Baynton M.Econ St, MBA, B.Bus, FGS P M St Baker B.Eng R Cooper BE (Mining), MEngSc, MAusIMM, MAICD Admiral R J Natter, US Navy (Ret.) Andrew N. Liveris AO, BE (Hons) Doctor of Science (honoris causa) S M Yeates CA, B.Bus McCullough Robertson Level 11, Central Plaza Two 66 Eagle Street Brisbane QLD 4000 Level 8, 46 Edward Street Brisbane QLD 4000 Link Market Services Limited Level 21, 10 Eagle Street Brisbane QLD 4000 www.linkmarketservices.com.au PricewaterhouseCoopers 480 Queen Street Brisbane QLD 4000 www.pwc.com.au Atkinson Corporate Lawyers 99 St George’s Terrace Perth WA 6000 Commonwealth Bank of Australia Stock exchange listing NOVONIX Limited shares are listed on the Australian Securities Exchange (ASX) Website address www.novonixgroup.com 1 For personal use only REVIEW OF OPERATIONS AND ACTIVITIES REVIEW OF OPERATIONS AND ACTIVITIES NOVONIX OVERVIEW NET ASSETS year ending 30 June 2020 CASH & CASH EQUIVALENTS year ending 30 June 2020 STATUTORY AFTER-TAX LOSS year ending 30 June 2020 $66,532,293 $38,807,662 $20,028,526 2019: $15,772,778 2019: $6,054,664 2019: $26,121,912 At the end of the financial year the company had net assets of $66,532,293 (2019: $15,772,778) and $38,807,662 in cash and cash equivalents (2019: $6,054,664). NOVONIX LTD. reported a statutory after-tax loss for the year ended 30 June 2020 of $20,028,526 (2019: $26,121,912). These financial results are in line with management expectations. The individual business unit performances are discussed further below. NOVONIX ANODE MATERIALS NOVONIX Anode Materials (PUREgraphite) was established in March 2017 to develop and commercialise ultra -long-life lithium-ion high-performance anode material for the battery market focused on electric vehicle and energy storage applications that demand life and high performance. long Since 2017, significant progress has been made executing on this business plan. FY 2020 has proven to be a banner year for NOVONIX, notably signing deals with two of the world’s largest battery manufacturers (SAMSUNG SDI and SANYO/PANASONIC) and securing funding to expand production to 2,000 tonnes per annum (tpa) progressively over 2020 and 2021. NOVONIX commenced commercial scale processing in June 2020 at its production facility in Chattanooga, Tennessee, USA, where it will progressively scale to a forecast 2,000 tpa production rate by the end of calendar 2021. NOVONIX BATTERY TECHNOLOGY SOLUTIONS (BTS) NOVONIX Battery Technology Solutions was acquired in June 2017 to provide cutting edge battery R&D and technology advantage. 2 For personal use only REVIEW OF OPERATIONS AND ACTIVITIES NOVONIX BTS is based in Bedford (near Halifax), Nova Scotia, Canada and makes the most accurate lithium-ion battery cell test equipment This equipment is now used by leading battery makers and researchers and equipment manufacturers including Panasonic, CATL, LG Chemical, Samsung SDI and numerous consumer electronic and automotive OEMs. in the world. Since acquisition the company significantly expanded NOVONIX BTS R&D capabilities through direct investment in and through a long term partnership agreement with Dalhousie University. In FY 2020, NOVONIX BTS delivered on all aspects of the company’s strategy, achieving >100% yoy revenue growth and announcing groundbreaking battery technology developments including Dry Particle Micro Granulation (DPMG) and Single Crystal Cathode (SCC). MOUNT DROMEDARY The Mount Dromedary Graphite Project is a world-class, high-grade (18%+) natural graphite deposit located in Australia. Despite the favourable characteristics of this project the company has decided to put a hold on advancing the project at this time. The primary reasons behind this decision are: > Medium term oversupply conditions with the broader natural graphite concentrate market; > Substantially more favourable investment opportunities for the company manufacturing advanced battery anode materials and developing new battery technologies. The company continues to hold the project in good standing while monitoring the market. TENEMENT LIST Tenement Permit Holder Grant date EPM 26025 Exco Resources Limited 14/12/2015 EPM 17323 EPM 17246 MD South Tenements Pty Ltd (Subsidiary of NOVONIX Limited) MD South Tenements Pty Ltd 20/10/2010 NVX Rights 100% (Sub-Blocks Normanton 3123 D, J, N, O and S) 100% Expiry date 13/12/2020 19/10/2021 26/10/2010 100% 25/10/2020 3 For personal use only REVIEW OF OPERATIONS AND ACTIVITIES HIGHLIGHTS OF FISCAL YEAR 2020 COMPLETION OF EQUITY RAISING AND CAPITAL RESTRUCTURE 30 JUNE 2020 The Equity raising announced on 29 May 2020 was completed on 30 June 2020 with $63 million having been raised. All outstanding convertible notes have been redeemed and all loans from Directors and related parties have been repaid and invested in the company in the capital raising. A total of 40.5 million options over new shares in NOVONIX have also been cancelled as part of the broader transaction. In addition to eliminating all debt, the funds raised will provide capex and working capital to fulfil an initial SAMSUNG supply contract, facilitate development and commercialization of the DPMG technology for both anode and cathode and other million-mile battery innovations. It also provides capital investment along with general working capital to allow NOVONIX to increase production to 2,000 tpa. NOVONIX TO SUPPLY SAMSUNG SDI AND PURSUE R&D COLLABORATION 9 DECEMBER 2019 In December 2019, NOVONIX reached a conditional agreement to supply lithium-ion battery anode material to SAMSUNG SDI, an international manufacturer of lithium-ion batteries. The agreement is NOVONIX’s first for its recently launched anode product and positions NOVONIX as a new supplier in this specialised battery materials market. The agreement follows more than six months of technical evaluation of NOVONIX’s anode material and is intended as a first phase of a long-term agreement. Under the agreement NOVONIX will supply SAMSUNG SDI an initial volume of 500 tonnes with first deliveries forecast to commence in late 2020. Larger volumes will be considered each year and will be subject to supply performance by NOVONIX, market conditions and SAMSUNG SDI overall requirements. Signing of the purchasing agreement for 500 tonnes is subject to SAMSUNG SDI’s required quality assurance processes and audit of supplier processes fulfillment. Pricing is commercially sensitive and strictly confidential between the parties. SAMSUNG SDI and NOVONIX will also explore opportunities for the supply of new graphite anode materials use in Samsung SDI products targeting for electric vehicles (EV) and energy storage systems (ESS) under a R&D collaboration. SANYO ELECTRIC AGREEMENT FOR LIB ANODE MATERIAL 28 JANUARY 2020 In January 2020, NOVONIX announced a commercial collaboration with SANYO Electric Co., Ltd. of Japan, a manufacturer of lithium-ion batteries for applications including electric vehicles and energy storage systems. To this end, NOVONIX has signed and executed a non- binding Memorandum of Understanding (MoU) with SANYO. Under the MoU, the parties have agreed to work together to investigate the opportunity for NOVONIX to supply graphite anode material for use in lithium-ion battery manufacturing. 4 For personal use only REVIEW OF OPERATIONS AND ACTIVITIES DRY PARTICLE MICGRANULATION (DPMG) MANUFACTURING METHOD PATENTED BY NOVONIX 15 MAY 2020 In May 2020, NOVONIX announced the development of a breakthrough technology that can be applied to the manufacture of both anode and cathode materials for lithium-ion batteries. The technology, called Dry Particle Microgranulation (DPMG), was developed through the partnership with the Research Group of Professor Mark Obrovac at Dalhousie University. That research program was supported by the Canadian Government through its NSERC Industrial Research Program. DPMG provides a method for synthesizing highly engineered particles through the consolidation of fine materials, that may otherwise be waste, into particles than can be tens of microns and suitable for use in lithium-ion batteries. The recent publication outlines methods of making spherical graphite for use in lithium-ion batteries with 100% yield where current methods have significant yield losses which increase the cost of manufacturing. SINGLE CRYSTAL CATHODE MANUFACTURING PATENTED BY NOVONIX 9 JUNE 2020 In June 2020, NOVONIX announced the development of technology to enable the manufacture of ‘single crystal’ NMC cathode material using its proprietary DPMG technique. This groundbreaking technology was also developed through its partnership with the Research Group of Professor Mark Obrovac at Dalhousie University. Single crystal cathode materials have recently become an aspiration for the lithium-ion battery industry, with demonstrated outperformance over traditional polycrystalline cathode particles (the current standard) for ultra-long life for EV and ESS uses. Single crystal cathode cells far exceed the lifetime of other NMC/graphite cells (J. Dahn et al. Journal of the Electrochemical Society, 2019). This battery material innovation has the potential to deliver breakthrough step-change improvements in cost, performance and sustainability within the battery, electric vehicle and renewable energy sectors. NOVONIX PATENT FOR ELECTROLYTE ANALYSIS GRANTED 2 SEPTEMBER 2019 In September 2019, NOVONIX announced the grant of a US patent for a method of non- destructive evaluation of the liquid electrolyte in rechargeable lithium-ion batteries (No. 10,386,423). The technology underlying this patent was developed at Dalhousie University and the rights to commercialisation are assigned exclusively to NOVONIX under its broad research agreement. NOVONIX has commercialized the Li-ion Differential Thermal Analysis (Li-DTA) system and is marketing this product to customers around the world. Using Li-DTA, researchers and battery developers can understand changes in the amount and composition of the liquid electrolyte in the battery during cycling. The new patented technology and related commercialisation strategy is further evidence of the suite of cutting-edge technologies that is establishing NOVONIX as a leader in battery and materials development. 5 For personal use only NOVONIX RELOCATES INTO NEW ANODE PRODUCTION FACILITY 8 AUGUST 2019 REVIEW OF OPERATIONS AND ACTIVITIES As advised on 3 July 2019, NOVOINX has relocated its anode production operations to a larger facility in Chattanooga, Tennessee with greater expansion capability under pinned by a long- term five-year lease with two options for renewal, each for a further five years. Initially NOVONIX will occupy 3,700 sqm of the 11,150 sqm facility while holding right-of-first offer to lease the balance of the whole facility. The initial 3.700 sqm will house the first 1,000 tpa manufacturing capacity plus the laboratory, office and development pilot plant. NOVONIX BATTERY TECHNOLOGY SOLUTIONS WINS DISCOVERY AWARD FOR INNOVATION 25 NOVEMBER 2019 NOVONIX Battery Technology Solutions was the winner of the Award for Innovation at the 17th Annual Discovery Awards held in Halifax, Nova Scotia on 22 November 2019. The event is held annually in Halifax and is the only one dedicated to recognising achievements in Nova Scotia, specifically in the field of science and technology. The award to NOVONIX was in recognition of its work in the field of lithium-ion battery testing and development. 6 For personal use only REVIEW OF OPERATIONS AND ACTIVITIES NOVONIX OUTLOOK NOVONIX is well positioned with both the necessary people and technology to participate in the rapidly growing electric vehicle and energy storage system markets from its operations in North America. With deals signed for NOVONIX’s anode product, NOVONIX is critically focused on ramping up capacity at its plant in Chattanooga. At the same time, NOVONIX’s R&D centre in Halifax continues to focus on new and improved technologies, strategic partnerships with leading international battery companies, and a growing patent pipeline that will position the company to be at the forefront of battery technology of the future. PRIORITIES FOR NOVONIX FOR FY21 AND BEYOND INCLUDE: > In line with the recent equity fund raising plan, expand anode production capacity to 2,000 tpa > Finalise SDI Samsung production plant audit and commence first product shipments > Expand anode product trials and technical interchange with additional domestic US and global > battery makers In conjunction with NOVONIX’s research partnership with Dalhousie University, and per NOVONIX’s million-mile battery initiatives and technology roadmap, continue to develop and file new battery materials IP > Commence commercialisation of DPMG technology to make high-performance long-life single crystal cathode materials The Company’s Board and management are excited by the immediate opportunities ahead for growth and sales, as well as NOVONIX’s positioning to participate in the broader long-term growth of the international battery market. For additional information on NOVONIX’s future plans. The following is a link the company’s webinar, “What’s Next? Technology Roadmap”. https://us02web.zoom.us/webinar/register/WN_UQCZt_bVS2C9Q2iHQ1J-wA END OF REVIEW OF OPERATIONS AND ACTIVIITES 7 For personal use only DIRECTORS’ REPORT DIRECTORS’ REPORT Your Directors present their report on the consolidated entity consisting of NOVONIX Limited and the entities it controlled at the end of, or during, the year ended 30 June 2020. Throughout the report, the consolidated entity is referred to as the Group. DIRECTORS AND COMPANY SECRETARY The following persons were Directors of NOVONIX Limited during the whole of the financial year and up to the date of this report: Greg Baynton Tony Bellas Robert Cooper Andrew Liveris Robert Natter Philip St Baker Dean Price (alternate for Robert Cooper) was an alternate director from the beginning of the financial year until his resignation on 15 January 2020. The Company Secretary is Suzanne Yeates. Appointed to the position of Company Secretary on 18 September 2015, Ms Yeates is a Chartered Accountant and Founder and Principal of Outsourced Accounting Solutions Pty Ltd. She holds similar positions with other public and private companies. PRINCIPAL ACTIVITIES During the year, the principal activities of the Group included the development and implementation of a downstream integration strategy transforming the business into a supplier of advanced battery materials, equipment and services to the global Lithium-ion Battery (LIB) market. DIVIDENDS The Directors do not recommend the payment of a dividend. No dividend was paid during the year. COVID 19 IMPACT The unprecedented conditions created by Covid 19 have, like all companies, affected the operations of the Group. For example, the Chattanooga PUREgraphite production plant had to be shut down in April and May, and personnel operating restrictions and movements are now implemented. By making these adjustments in our operations and working closely with our customers and suppliers (who are also impacted), the Group has continued to deliver as efficiently as possible considering our personnel safety and health priorities. REVIEW OF OPERATIONS Information on the operations and financial position of the Group and its business strategies and prospects is set out in the review of operations and activities on pages 2 – 7 of this annual report. 8 For personal use only DIRECTORS’ REPORT SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS During the financial year the Company completed a $63 million capital raising via an institutional placement, an accelerated non-renounceable rights issue and a strategic placement. The capital raise has simplified the NOVONIX capital structure through the redemption of Convertible Notes and repayment of short-term loans, along with the cancellation of 40.5 million options held by Directors, employees and convertible note holders. Funds raised have provided capex and working capital to fulfil an initial SAMSUNG supply contract, facilitate development and commercialisation of the DPMG technology for cathode and other million- mile battery innovations, provide general working capital and cover the costs of the capital raising. The components of the transaction are set out below: a) Institutional placement On 5 June 2020, 19,495,469 fully paid ordinary shares were issued to institutional investors at $0.29 per share. b) Rights issue An accelerated 1 for 1 rights issue was completed during the financial year. Under the rights issue, 130,721,435 fully paid ordinary shares were issued at $0.29 per share. The rights issue raised a total of $37.9 million and funds raised consisted of $34 million cash and $3.9 million retirement of debt. c) Repayment of Director loans During the financial year, the Company’s directors entered into short term loan agreements collectively for $3,148,960. The loans to the company were unsecured and accrued interest at 8% pa from the date of drawdown, calculated on a daily basis. These loan funds were used by Directors to fund their entitlements under the rights issue, with any remaining balances being repaid to the relevant Directors from the proceeds of the rights issue. Convertible loan notes d) Prior to the recapitalisation transaction, a total of 11,416,667 loan notes (excluding loan notes held by the St Baker Energy Innovation Fund) were on issue with a face value of $6.4 million. The interest accrued on these loan notes was $1,155,342. The total amount outstanding of $7,555,342 was repaid through either the conversion to equity by underwriting the rights issue ($1,046,798) or settled in cash from the proceeds of the rights issue ($6,508,544). Strategic Placement to St Baker Energy Innovation Fund e) At a General Meeting of Shareholders held on 30 June 2020, Shareholders approved the issue of 67,085,100 fully paid ordinary shares to the St Baker Energy Innovation Fund at an issue price of $0.29 per share raising $19,454,679. The consideration for the shares received consisted of cash and the retirement of both convertible loan notes and short-term loans owing. 9 For personal use only DIRECTORS’ REPORT Cancellation of options f) As part of the capital raise transaction, the Group obtained agreement from holders of a total of 40,500,000 options (half of the options on issue at the time of the transaction) to cancel the options for no consideration. The cancellation of the options has resulted in an acceleration of the expense associated with the options cancelled. During the financial year, the Company also undertook a Share Purchase Plan that provided eligible shareholders with the opportunity to purchase up to $30,000 worth of new shares in the Company at $0.51 per share. A total of 2,485,715 fully paid ordinary shares were issued under the Share Purchase Plan. There were no other significant changes in the state of affairs of the Group during the financial year. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Comments on likely developments and expected results of operations are included in the review of operations and activities on pages 2 – 7. EVENTS SINCE THE END OF THE FINANCIAL YEAR No matters or circumstances have arisen since the end of the financial year which significantly affected or could significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in future financial years. ENVIRONMENTAL REGULATION The Group is subject to environmental regulation in respect of its mining, exploration and development activities in Australia and is committed to undertaking all its operations in an environmentally responsible manner. To the best of the Directors’ knowledge, the Group has adequate systems in place to ensure compliance with the requirements of all environmental legislation and are not aware of any breach of those requirements during the financial year and up to the date of the Directors’ report. 10 For personal use only INFORMATION ON DIRECTORS The following information is current as at the date of this report. A G Bellas. Chair – non-executive DIRECTORS’ REPORT Experience and expertise Tony was appointed as Chair of the Company on 11 August 2015. He brings over 30 years of experience in the public and private sectors. Tony was previously CEO of the Seymour Group, one of Queensland’s largest private investment and development companies. Prior to joining the Seymour Group, Tony held the position of CEO of Ergon Energy, a Queensland Government-owned corporation involved in electricity distribution and retailing. Before that, he was CEO of CS Energy, also a Queensland Government-owned corporation and the State’s largest electricity generation company, operating over 3,500 MW of gas-fired and coal-fired plant at four locations. Tony had a long career with Queensland Treasury, achieving the position of Deputy Under Treasurer. Tony is a director of the listed companies shown below and is also a director of Loch Exploration Pty Ltd, Colonial Goldfields Pty Ltd and West Bengal Resources (Australia) Pty Ltd. Other current directorships Chairman of intelliHR Limited and Deputy Chairman of State Gas Limited. Director of the Endeavour Foundation. Former listed directorships in last 3 years Chairman of Corporate Travel Management Ltd (ceased 2019). Chairman of ERM Power Ltd (ceased 2019). Chairman of Shine Justice Limited (ceased 2020). Special responsibilities Interests in shares and options Chairman of the Board Member of the Audit Committee 2,146,374 ordinary shares 11 For personal use only P M St Baker. Managing Director DIRECTORS’ REPORT Experience and expertise Mr Philip St Baker is an experienced entrepreneur active in Australia and the USA. Since 2015 Philip has been Managing Director of NOVONIX Limited. Previously, Philip was the Managing Director of ERM Power Limited for eight years (2006-2014) and Non-Executive Director for three years (2017-2019). During Philip’s time with ERM Power it grew from a $15 million revenue business to a $3 billion revenue business, became the second largest electricity supplier to Australian business customers and was sold to Shell in 2019 for $620 million. Prior to joining ERM Power, Philip had a 16 year career with BHP Billiton gaining international experience in the resources sector. In 2014 Philip received the Ernst & Young Queensland Entrepreneur of the Year Award for Listed Companies and was a nominee for the Australian Entrepreneur of the Year. Philip is also a long term member of the State Advisory Board of Queensland for the Starlight Children’s Foundation. Other current directorships Director of St Baker Energy Holdings Pty Ltd. Former listed directorships in last 3 years Non-executive Director of ERM Power Limited (ceased 2019). Special responsibilities Managing Director Interests in shares and options 21,241,526 ordinary shares 1,895,833 performance rights 12 For personal use only DIRECTORS’ REPORT G A J Baynton. Executive Director Experience and expertise Mr Baynton founded Graphitecorp in April 2012. He has been a Director of Australian exploration companies for over 19 years. He is founder and Executive Director of investment and advisory firm, Orbit Capital. Mr Baynton has experience investment banking, merchant banking, infrastructure investment, IPOs, public company directorships, Queensland Treasury and the Department of Mines and Energy. He is a Fellow of the Geological Society of London. in Other current directorships Non-executive Director of Superloop Limited (ASX: SLC), Non-executive Director of intelliHR Limited (ASX: IHR), and Executive Director of State Gas Limited. Former listed directorships in last 3 years None. Special responsibilities Member of the Audit Committee Executive Director. Interests in shares and options 29,990,019 ordinary shares 500,000 performance rights R Cooper. Non-Executive Director Experience and expertise Mr Cooper is a mining engineer with more than 25 years' industry experience, having held leadership roles across a diverse range of commodities, both in Australia and overseas. He has a broad foundation of operating and technical experience in both operations and project development. Mr Cooper has previously held leadership positions with BHP Billiton as General Manager of Leinster Nickel Operations within Nickel West, and as Asset President of Ekati Diamonds in Canada. He more recently held positions with Discovery Metals as General Manager- Operations in Botswana and as General Manager-Development in their Brisbane office. Robert is currently the CEO of Round Oak Minerals Pty Limited (formerly CopperChem Pty Limited), a 100% owned subsidiary of the Washington H Soul Pattinson Group of companies. Other current directorships None Former listed directorships in last 3 years Non-executive Director of Verdant Minerals Limited (ceased 2019). Non-executive Director of Syndicated Metals Limited (ceased 2019). Special responsibilities Chairman of the Audit Committee. Interests in shares and options 517,646 ordinary shares 200,000 options 13 For personal use only DIRECTORS’ REPORT Admiral R J Natter. Non-Executive Director Experience and expertise Robert Natter retired from active military service a decade ago and now has more than 10 years of experience in both the government and private sectors in the North American market. In his Navy career, Robert Natter served as the Commander of the U.S. Seventh Fleet operating throughout Asia and the Indian Ocean; Commander in Chief of the U.S Atlantic Fleet; and the first Commander of U.S. Fleet Forces, overseeing all Continental U.S. Navy bases, facilities and training operations. For six years until 2018, Natter was Chairman of the US Naval Academy Alumni Association Board of Trustees, representing about 60,000 living graduates. He currently serves on the Board of the Naval Academy Foundation, and also served on the Boards of the National Navy SEAL Museum and the Yellow Ribbon Fund. He serves on the Board of Directors of Allied Universal Security Company with over 200,000 employees and was previously a Director of Corporate Travel Management (CTM), specializing in corporate employee travel throughout Australia, New Zealand, Asia, Europe, and the United States. He also serves on the Board of Physical Optics Corp (POC) in Torrance, CA. Other current directorships Chairman of Physical Optics Corporation. Former listed directorships in last 3 years Non-executive Director of Corporate Travel Management Limited (2014- 2020). Special responsibilities None. Interests in shares and options 1,500,000 ordinary shares 2,000,000 options 14 For personal use only Andrew N. Liveris. Non-Executive Director DIRECTORS’ REPORT Experience and expertise A recognised global business leader with more than 40 years at the Dow Chemical Company, Mr Liveris' career has spanned roles in manufacturing, engineering, sales, marketing, and business and general management around the world. During more than a decade as Dow’s CEO, Liveris led the Company’s transformation from a cyclical commodity chemicals manufacturing company into a global specialty chemical, advanced materials, agro- sciences and plastics company. Other current directorships Non-executive director of Saudi Arabian Oil Company (Saudi Aramco) and Worley Parsons Limited (ASX: WOR). Non-executive director of Corporation (NYSE: IBM). International Business Machines (IBM) Former listed directorships in last 3 years Executive Chairman of DowDuPont Inc (NYSE: DEDO). Chairman and Director of The Dow Chemical Company. Special responsibilities None. Interests in shares and options 4,132,794 ordinary shares 14,000,000 options MEETINGS OF DIRECTORS The number of meetings of the Company’s Board of Directors and of each Audit Committee held during the year ended 30 June 2020, and the number of meetings attended by each Director were: Full meetings of Directors Meetings of Audit Committee A Bellas G A J Baynton P M St Baker R Cooper Admiral R J Natter A Liveris A 16 15 16 14 14 13 B 16 16 16 16 16 16 A 3 3 - 3 - - A = B = Number of meetings attended Number of meetings held during the time the director held office or was a member of the committee during the year B 3 3 - 3 - - 15 For personal use only DIRECTORS’ REPORT REMUNERATION REPORT (AUDITED) The Directors present the NOVONIX Limited 2020 remuneration report, outlining key aspects of our remuneration policy and framework, and remuneration awarded this year. The report is structured as follows: (a) (b) (c) (d) (e) (f) (g) (h) Key management personnel (KMP) covered in this report Remuneration policy and link to performance Elements of remuneration Link between remuneration and performance Remuneration expenses for executive KMP Contractual arrangements for executive KMP Non-executive Director arrangements Additional statutory information (a) Key management personnel covered in this report Non-executive and Executive Directors (see pages 16 to 20 for details about each Director) A Bellas (Non-executive Chairman) G A J Baynton (Executive Director) P M St Baker (Managing Director) R Cooper (Non-executive Director) A Liveris (Non-executive Director) R Natter (Non-executive Director) Other key management personnel Name J C Burns D A Stevens N Liveris Position Group COO and CEO of NOVONIX Battery Testing Services Inc and PUREgraphite LLC. Group CTO Group Business President Development and CFO of NOVONIX Battery Testing Services Inc and PUREgraphite LLC. Vice – Changes since the end of the reporting period David Stevens ceased being a KMP from 1 July 2020. There have been no changes to key management personnel since the end of the reporting period. (b) Remuneration policy and link to performance The role of a remuneration committee is performed by the full Board of Directors. The board reviews and determines the remuneration policy and structure annually to ensure it remains aligned to business needs and conforms with our remuneration principles. In particular, the board aims to ensure that remuneration practices are: • • • • competitive and reasonable, enabling the Company to attract and retain key talent aligned to the Company’s strategic and business objectives and the creation of shareholder value transparent and easily understood, and align with shareholder interests and are acceptable to shareholders 16 For personal use only REMUNERATION REPORT (CONTINUED) DIRECTORS’ REPORT Element Purpose Performance metrics Nil Potential value Positioned at median market rate for FY Changes 2020 None. Fixed remuneration (FR) STI LTI Provide competitive market salary including superannuation and non-monetary benefits Reward for in-year performance Based on individual KPI’s. Alignment to long- term shareholder value Market price and performance vesting conditions 100% of base salary (if bonus paid in cash) 150% of base salary (if bonus paid in shares) Variable subject to share price. None. None. Balancing short-term and long-term performance Annual incentives are set at a maximum of 100% of base salary (150% if paid in shares) in order to drive performance. Long term incentives are assessed periodically and are designed to promote long-term stability in shareholder returns. Assessing performance The board of directors is responsible for assessing performance against KPIs and determining the STI and LTI to be paid. (c) (i) Elements of remuneration Fixed annual remuneration (FR) Executives receive their fixed remuneration as cash. FR is reviewed annually and is benchmarked against market data for comparable roles in companies in a similar industry and with similar market capitalisation. The board has the flexibility to take into account capability, experience, value to the organisation and performance of the individual. The Group has not engaged an external remuneration consultant during FY2020. Superannuation is included in FR for executives. In FY 2020, fixed remuneration was not increased. (ii) Short term incentives Short term incentives for all key management personnel have been in place for FY2020. All KMP are eligible to receive a cash bonus of up to 100% of their base salary at the end of the financial year subject to the executive achieving the KPIs set for them during the financial year. 17 For personal use only DIRECTORS’ REPORT REMUNERATION REPORT (CONTINUED) The Company reserves the right to pay any STI cash bonus by way of an issue of fully paid ordinary shares at the sole discretion of the Board of Directors. If the Company determines that the cash bonus is to be paid in shares, the value of the shares the executive shall receive will be calculated at 150% of the cash bonus amount. For the purpose of calculating the number of shares to be issued to the executive, the issue price of the shares shall be based on the 10 day volume weighted average price of shares. If an executive does not achieve each of the KPIs during the financial year, the Managing Director shall determine the appropriate pro rata STI cash bonus to be received by the Executive. The Board of Directors shall make this determination for both the Managing Director and the Executive Director. Structure of the short-term incentive plan Feature Max opportunity Performance metrics Delivery of STI Board discretion 25% June 2020 Target June 2020 Weighting 25% Reason for selection Focus of the Groups growth strategy. Focus of the Groups growth strategy. Description KMP executives: 100% of fixed remuneration if paid in cash; 150% of fixed remuneration if paid in shares. The STI metrics align with our strategic priorities. Metric PUREgraphite production, sales and expansion targets Battery Technology Solutions business expansion and product development targets Execution of business strategy, and management of operations, including investor communications. STI awarded in cash will be paid after the end of the financial year. STI awarded in shares will be awarded as soon as practical after the end of the financial year, and where subject to shareholder approval, after shareholder approval is received. The Board has discretion to adjust remuneration outcomes up or down to avoid any inappropriate or anomalous reward outcomes, including reducing (down to zero, if appropriate) any deferred STI award. Focus on the Groups growth strategy and shareholder value. Ongoing 50% Long-term incentives (iii) Executive KMP participate, at the Board’s discretion, in the Long Term Incentive Program (“LTIP”) comprising one-off grants of options or performance rights, with varying vesting conditions. The company does not have a formal LTIP, rather incentives are awarded at the discretion of the Board. Performance Rights No performance rights have been awarded to Directors or KMP during the financial year. Options No options have been awarded to Directors or KMP during the financial year. 18 For personal use only DIRECTORS’ REPORT REMUNERATION REPORT (CONTINUED) (d) Link between remuneration and performance During the year, the Group has incurred losses from its principal activities supplying advanced battery materials, equipment and services to the global Lithium-ion battery market. As the Company is still growing the business, the link between remuneration, corporate performance and shareholder value is difficult to define. The Company’s share price is influenced by, inter alia, fluctuations in current and expected demand for electric vehicles and energy storage systems, technology adoption, international market prices for battery anode materials, and general market sentiment towards the battery materials and lithium-ion battery sectors, and, as such, increases or decreases in share price may occur quite independently of Executive performance. Given the nature of the Group’s activities and the consequential operating results, no dividends have been paid. There have been no returns of capital in the current or previous financial periods. The details of market price movements are as follows: Year end 30 June 2020 Year end 30 June 2019 Year end 30 June 2018 Year end 30 June 2017 Year end 30 June 2016 IPO price - 2 December 2015 Share price $0.87 $0.44 $0.61 $0.75 $0.35 $0.20 (e) Remuneration expenses for executive KMP The following table shows details of the remuneration expense recognised for the Group’s executive key management personnel for the current and previous financial year measured in accordance with the requirements of the accounting standards. 19 For personal use only REMUNERATION REPORT (CONTINUED) Fixed remuneration Variable remuneration Supplementary information DIRECTORS’ REPORT Name Executive Directors G A J Baynton P M St Baker Year Cash salary 2020 2019 2020 2019 91,324 91,324 103,325 122,318 Other key management personnel (group) C Burns 2020 2019 2020 2019 2020 2019 281,500 227,572 244,516 215,664 246,164 224,204 D Stevens N Liveris Post- employment benefits Non- monetary benefits Performance rights* STI Options* Total Less: Accounting value of cancelled options Revised remuneration totals 8,676 8,676 9,816 11,620 - - - - 17,276 14,895 - 145,688 - - - 212,461 - - - 217,285 95,335 - - - - 51,865 - 186,258 52,832 - 5,848 (7,420) 11,696 (14,840) 572,128 320,592 114,188 21,608 641,184 978,482 943,216 1,062,314 38,596 2,010,940 2,548,321 43,832 1,262,918 1,629,657 263,814 19,298 851,653 1,141,098 21,916 851,398 398,776 2,924 421,791 134,323 (4,463) - (320,592) - (641,184) - (788,932) - - - (15,723) - 251,536 114,188 337,298 1,062,314 1,759,389 1,629,657 263,814 1,141,098 835,675 421,791 Non-executive Director A Bellas R Natter R Cooper - - - - - - - - - - - - - - - - - 761,692 - 200,032 * Performance rights and options are expensed over the performance period, including for options that have been awarded to individuals but have not yet formally been granted, which includes the year in which the rights and options are awarded / granted and the subsequent vesting period. 388,321 - 93,888 - 36,311 - 37,525 - 377,535 - 426,631 - - 2,744,206 2,777,056 - 2,452,717 2,485,567 78,362 6,800,265 8,793,366 39,025 6,106,879 7,412,659 (333,571) - - - (117,675) - - - (2,217,677) - 50,000 50,000 30,000 30,000 30,000 30,000 30,000 30,000 1,106,829 1,021,082 4,750 4,750 2,850 2,850 - - 2,850 2,850 46,218 45,641 54,750 93,888 36,311 37,525 259,860 426,631 2,777,056 2,485,567 6,575,689 7,412,659 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 333,571 39,138 3,461 4,675 347,535 396,631 Total KMP remuneration expensed A Liveris 20 For personal use only DIRECTORS’ REPORT REMUNERATION REPORT (CONTINUED) Supplementary information The amounts in relation to options and performance rights shown in the above table are as expensed in the statement of profit or loss and other comprehensive income, in accordance with AASB 2 Share based payment. This may not necessarily reflect the benefit actually received by the KMP in that year. In the above table, supplementary information has been presented which adjusts the total remuneration by the expense recognised during FY20 in relation to options that have been cancelled as part of the capital raising. The presentation of this supplementary information is not in accordance with accounting standards. (f) Contractual arrangements with executive KMP’s Component Fixed remuneration Philip St Baker $150,000 (part- time) Inclusive of superannuation. Contract duration Ongoing contract 6 months Notice by individual company the / Greg Baynton $100,000 (part- time) Inclusive of superannuation Ongoing contract 6 months Chris Burns $281,500 (CAD$250,000) David Stevens Nick Liveris $244,516 (CAD$205,000) $246,164 (USD$165,000) Ongoing contract 12 months Ongoing contract 12 months Ongoing contract 12 months (g) Non-executive Director arrangements The non-executive chairman receives fees of $50,000 per annum plus superannuation. Other non- executive directors receive $30,000 per annum plus superannuation. Fees are reviewed annually by the board taking into account comparable roles. The current base fees were reviewed with effect from 1 December 2015. The maximum annual aggregate non-executive Directors’ fee pool limit is $250,000 (excluding share based payments) and was set out in the 2015 Prospectus. All Non-executive Directors enter into a service agreement with the company in the form of a letter of appointment. The letter summarises the board policies and terms, including remuneration relevant to the office of Director. (h) Additional statutory information Performance based remuneration granted, forfeited and cancelled during the year (i) The table below shows for each KMP how much of their STI cash bonus was awarded and how much was forfeited. It also shows the value of options and performance rights that were granted, exercised, forfeited and cancelled during FY 2020. The number of options and performance rights and percentages vested/forfeited for each grant are disclosed in section (iv) on pages 24 to 27 below. 21 For personal use only DIRECTORS’ REPORT REMUNERATION REPORT (CONTINUED) Total STI bonus Total opportunity LTI performance rights LTI Options If paid in cash If paid in shares Awarded % Forfeited % Value granted $ Value awarded $ Value exercised $ Value granted $ Value awarded $ Value cancelled* $ Value exercised $ 150,000 100,000 - - - - 281,500 244,516 246,164 225,000 150,000 - - - - 422,250 366,774 369,246 81% 81% - - - - 81% - 81% 19% 19% - - - - 19% 100% 19% - - - - - - - - - - - - - - - - - - - - - - - - - - - 684,400~ 342,200~ 342,200~ - 3,079,800~ 342,200~ - - 1,309,800~ - - - - - - - - - 264,754 132,377 132,377 - - 48,627 610,946 - - - - - - - - - - - 2020 P M St Baker G A J Baynton A Bellas R Cooper A Liveris R Natter C Burns D Stevens N Liveris ~ * Options and performance rights were awarded in the prior financial year and subsequently granted following shareholder approval at either the Shareholder meeting held on 31 July 2019 or the 2019 AGM. The value represents the fair value of the options and performance rights at the date shareholder approval was received. The cancellation of the options has resulted in an acceleration of the share-based payment expense, with the unexpensed portion of the share option fair values being expensed in full at the date of cancellation, which is what the value in the table represents. (iii) Terms and conditions of the share-based payment arrangements Options The terms and conditions of each grant of options affecting remuneration in the current or a future reporting period are as follows: 22 For personal use only REMUNERATION REPORT (CONTINUED) Grant date 21/11/2017 21/11/2017 22/11/2018 22/11/2018 Vesting and exercise date 30/06/2020 14/07/2019 06/03/2020 28/07/2019 29/08/2019 22/11/2018 29/08/2020 22/11/2018 29/08/2021 22/11/2018 24/05/2019 30/06/2020 24/05/2019 30/06/2022~ 31/07/2019 30/06/2020 31/07/2019 30/06/2022~ 13/03/2019 31/05/2022~ 13/03/2019 31/03/2023~ 13/03/2019 30/06/2023~ 13/03/2019 28/03/2024~ 13/03/2019 31/03/2024~ 13/03/2019 31/05/2024~ 13/03/2019 30/06/2024~ 13/03/2019 31/03/2025~ 13/03/2019 30/04/2025~ 13/03/2019 30/04/2025~ 21/11/2019 31/05/2022~ 21/11/2019 31/03/2023~ 21/11/2019 30/06/2023~ 21/11/2019 28/03/2024~ 21/11/2019 31/03/2024~ 21/11/2019 31/05/2024~ 21/11/2019 30/06/2024~ 21/11/2019 31/03/2025~ 21/11/2019 30/04/2025~ 21/11/2019 30/04/2025~ Expiry date 01/07/2021 14/07/2020 06/03/2023 Cessation of employment 29/08/2023 29/08/2023 29/08/2023 05/08/2024 05/08/2024 05/08/2024 05/08/2024 Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Cessation of employment Number Under option 2,000,000 250,000 316,667 1,500,000 500,000 500,000 500,000 500,000 500,000 7,500,000 7,500,000 1,000,000 Number cancelled (Note 11) - - 250,000 1,500,000 - 500,000 500,000 - - 2,000,000 2,000,000 150,000 Exercise price $0.66 $1.10 $1.40 $0.80 $0.90 $1.20 $1.40 $0.50 $0.50 $0.50 $0.50 $0.50 Value per option at grant date $1.14 $0.90 $0.15 $0.28 $0.20 $0.18 $0.17 $0.32 $0.34 $0.33 $0.35 $0.54 1,000,000 150,000 $0.50 $0.55 1,000,000 150,000 $0.50 $0.56 1,000,000 150,000 $0.50 $0.56 1,000,000 150,000 $0.50 $0.57 1,000,000 150,000 $0.50 $0.57 1,000,000 150,000 $0.50 $0.57 1,000,000 150,000 $0.50 $0.57 1,000,000 150,000 $0.50 $0.58 1,000,000 150,000 $0.50 $0.58 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 250,000 - - - - - - - - - - $0.50 $0.36 $0.50 $0.37 $0.50 $0.38 $0.50 $0.38 $0.50 $0.39 $0.50 $0.39 $0.50 $0.39 $0.50 $0.39 $0.50 $0.40 $0.50 $0.40 DIRECTORS’ REPORT Performance achieved % vested 100% 100% 100% - 100% - - 100% - 100% - - 100% 100% 100% - 100% - - 100% - 100% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ Vesting is subject to satisfaction of performance related vesting conditions. The vesting date shown represents an estimate of when vesting conditions will be satisfied. 23 For personal use only DIRECTORS’ REPORT REMUNERATION REPORT (CONTINUED) The number of options over ordinary shares in the Company provided as remuneration to key management personnel is shown in the table below on page 25. The options carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share of NOVONIX Limited. Performance rights The terms and conditions of each grant of performance rights affecting remuneration in the current or a future reporting period are as follows: P M St Baker G A J Baynton C Burns D Stevens N Liveris Grant date 22/11/2018 22/11/2018 13/02/2018 13/02/2018 22/11/2018 Vesting date 01/01/2020 01/01/2020 01/01/2020 01/01/2020 01/01/2020 Grant date value $0.05 $0.05 $0.33 $0.33 $0.05 The number of performance rights over ordinary shares in the Company provided as remuneration to key management personnel is shown on page 26. The performance rights carry no dividend or voting rights. These performance rights were subject to the following performance related vesting conditions: • • • • The executive remains employed in the capacity of an executive as at the vesting date; 1,000 tonnes of sales contracts for PUREgraphite anode material; Production capability of 1,000 tonnes per annum at PUREgraphite; Expansion to 10,000 tonnes per annum planned and costed ready for final investment decision with funding plan; • Maintained or exercised rights to increase the Group’s interest in PUREgraphite by 25%; • Sales revenue for NOVONIX Battery Testing Services, Inc. exceeding CAD$3 million in any 12 month period; and The 10 day VWAP of NOVONIX’s shares exceeds $1.575 at the vesting date. • Although not all vesting conditions were satisfied, the overall performance of the Company and the Executives has been high, the board awarded 60% of the long-term incentive on a discretionary basis. When exercisable, each performance right is convertible into one ordinary share of NOVONIX Limited. If an executive ceases employment before the rights vest, the rights will be forfeited, except in limited circumstances that are approved by the board on a case-by-case basis. (iv) Reconciliation of options, performance rights, ordinary shares and loan notes held by KMP The table below shows a reconciliation of options held by each KMP from the beginning to the end of FY2020. No options were forfeited during the year. As part of the capital raise transaction (refer note 11), the Group obtained agreement of KMP to cancel options for no consideration. The cancellation of the options has resulted in an acceleration of the expense associated with the options cancelled. 24 For personal use only REMUNERATION REPORT (CONTINUED) DIRECTORS’ REPORT Balance at the start of the year Unvested Vested Granted as compensation Vested Balance at the end of the year Number % Cancelled Vested and exercisable Unvested Options 2020 Name & Grant dates R Natter 21 Nov 2017 22 Nov 2018 31 July 2019 P M St Baker 21 October 2016 31 July 2019 A Bellas 22 Nov 2018 31 July 2019 G Baynton 31 July 2019 R Cooper 22 Nov 2018 A Liveris 21 Nov 2017 31 July 2019 C Burns 27 June 2017 13 March 2019 24 May 2019 D Stevens 27 June 2017 N Liveris 22 Nov 2018 31 July 2019 21 November 2019 250,000 1,500,000 - - - 500,000 500,000 - - - 1,000,000 250,000 500,000 500,000 - - - 2,000,000 - 1,000,000 250,000 - 500,000 - - 1,000,000 250,000 500,000 33% 25% 50% - 50% 33% 50% - 1,000,000 - - 2,000,000 750,000 1,000,000 - - 1,000,000 500,000 50% 1,000,000 66,667 133,333 - 66,667 33% 2,000,000 - - 10,000,000 1,000,000 3,000,000 - 3,000,000 - - - 3,000,000 - 9,000,000 2,000,000 4,500,000 - - 500,000 - - - - - - - 3,000,000 1,500,000 - 40% 50% - - 50% 750,000 1,000,000 500,000 - - 500,000 - - - - - 200,000 - - - - - - 5,000,000 4,500,000 - 4,500,000 - - 500,000 - 8,500,000 500,000 - - 1,500,000 1,500,000 - 1,500,000 - - - - - - 1,000,000 2,500,000 - 500,000 - - 50% - 1,500,000 - - - 500,000 - - 500,000 2,500,000 25 For personal use only REMUNERATION REPORT (CONTINUED) There were no options exercised by KMP during the financial year. The table below shows how many performance rights were granted and vested during the year. No performance rights were forfeited during the year. Performance rights DIRECTORS’ REPORT Balance at the start of the year Unvested Vested Balance at the end of the year Unvested Vested Maximum value yet to vest* $ Name P M St Baker - - - - - - The maximum value of the performance rights yet to vest has been determined as the amount of the grant date fair value of the rights that are yet to be expensed. The minimum value of deferred shares yet to vest is nil, as the shares will be forfeited if the vesting conditions are not met. - 1,000,000 500,000 500,000 250,000 250,000 895,833 - - - - - 895,833 600,000 300,000 300,000 150,000 150,000 - 400,000 200,000 200,000 100,000 100,000 G Baynton C Burns D Stevens N Liveris - - - - - - * Exercised during the year Vested during the year - 600,000 300,000 300,000 150,000 150,000 Granted as compensation - - - - - - Year granted 2016 2019 2019 2018 2018 2019 26 For personal use only DIRECTORS’ REPORT REMUNERATION REPORT (CONTINUED) Shareholdings 2020 Name Ordinary shares A Bellas G A J Baynton P M St Baker R Cooper R Natter A Liveris C Burns D Stevens N Liveris Balance at the start of the year Participation in entitlement offer Participation in Share Purchase Plan Shares disposed Balance at the end of the year 1,179,354 29,561,827 14,976,903* 200,000 750,000 2,007,574 1,765,968 2,609,948 - 908,197 369,369 6,205,800 258,823 750,000 2,066,397 1,765,968 2,609,948 - 58,823 58,823 58,823 58,823 - 58,823 - - - - - - - - (1,200,000) (1,309,948) - 2,146,374 29,990,019 21,241,526 517,646 1,500,000 4,132,794 2,331,936 3,909,948 - * includes 5,000,000 shares issued on the exercise of 5,000,000 options in the prior year that were funded by a loan agreement between Mr Philip St Baker and the Company. The Company has placed a holding lock over the shares to secure repayment of the loan. (v) Other transactions with key management personnel During the financial year, Philip St Baker was paid rent totalling $77,579 (USD$52,000), for the use of property owned by Mr St Baker in Colorado, USA. Mr St Baker’s salary has been adjusted down by $36,859 to reflect the additional benefit Mr St Baker is receiving. There have been no other transactions with key management personnel. End of remuneration report (audited) 27 For personal use only DIRECTORS’ REPORT SHARES UNDER OPTION AND PERFORMANCE RIGHTS Unissued ordinary shares Unissued ordinary shares of NOVONIX Limited under option at the date of this report are as follow: Date options granted Expiry date Exercise price Number under option 27 June 2017 14 July 2017 21 November 2017 7 February 2018 2 November 2018 6 December 2018 22 November 2018 22 November 2018 22 November 2018 22 November 2018 22 November 2018 13 March 2019 14 March 2019 24 May 2019 31 July 2019 5 August 2019 21 November 2019 17 December 2019 4 February 2020 Cessation of employment 14 July 2022 1 July 2021 7 February 2023 2 November 2023 6 December 2023 6 March 2023 6 March 2023 6 March 2023 29 August 2023 29 August 2023 Cessation of employment Cessation of employment 5 August 2024 5 August 2024 Cessation of employment Cessation of employment Cessation of employment Cessation of employment $0.74 $0.90 $0.66 $0.785 $0.55 $0.55 $0.90 $1.20 $1.40 $0.70 $0.90 $0.50 $0.50 $0.50 $0.50 $0.50 $0.50 $0.50 $0.50 1,500,000 450,000 5,000,000 100,000 160,000 40,000 66,666 66,667 66,667 500,000 500,000 11,000,000 666,667 1,000,000 11,000,000 2,500,000 2,500,000 1,000,000 1,000,000 Unissued ordinary shares of NOVONIX Limited under performance right at the date of this report total 3,395,833. 895,833 of these performance rights were the performance rights granted as remuneration to Mr St Baker during previous years. The remaining 2,500,000 performance rights were granted to KMP during previous years. No performance right holder or option holder has any right to participate in any other share issue of the Company or any other entity. 28 For personal use only DIRECTORS’ REPORT INSURANCE OF OFFICERS AND INDEMNITIES Insurance of officers During the financial year, NOVONIX Limited paid a premium of $122,000 to insure the Directors and Secretaries of the Company. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. 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. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. NON-AUDIT SERVICES The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. The Board of Directors has considered the position and, in accordance with advice received from the Audit Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • • all non-audit services have been reviewed by the Audit Committee to ensure they do not impact the impartiality and objectivity of the auditor none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. During the year there were no fees were paid or payable for non-audit services provided by the auditor of the parent entity (2019: Nil). 29 For personal use only DIRECTORS’ REPORT AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 31. This report is made in accordance with a resolution of Directors. A Bellas Chairman Brisbane 21 September 2020 END OF DIRECTORS’ REPORT 30 For personal use only Auditor’s Independence Declaration As lead auditor for the audit of Novonix Limited for the year ended 30 June 2020, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Novonix Limited and the entities it controlled during the period. Michael Shewan Partner PricewaterhouseCoopers Brisbane 21 September 2020 PricewaterhouseCoopers, ABN 52 780 433 757 480 Queen Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 T: +61 7 3257 5000, F: +61 7 3257 5999, www.pwc.com.au 31 Liability limited by a scheme approved under Professional Standards Legislation. For personal use only CORPORATE GOVERNANCE STATEMENT CORPORATE GOVERNANCE STATEMENT NOVONIX Limited and the board are committed to achieving and demonstrating the highest standards of corporate governance. NOVONIX Limited has reviewed its corporate governance practices against the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council. The 2020 corporate governance statement is dated as at 30 June 2020 and reflects the corporate governance practices in place throughout the 2020 financial year. The 2020 corporate governance statement was approved by the board on 21 September 2020. A description of the Group's current corporate governance practices is set out in the Group's corporate governance statement which can be viewed at https://www.novonixgroup.com/governance/. 32 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 NOVONIX LIMITED ABN 54 157 690 830 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Financial statements Consolidated statement of profit or loss and other comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration 34 35 36 37 38 93 These financial statements are consolidated financial statements for the Group consisting of NOVONIX Limited and its subsidiaries. A list of major subsidiaries is included in note 27. The financial statements are presented in the Australian currency. NOVONIX Limited is a Company limited by shares, incorporated and domiciled in Australia. All press releases, financial reports and other www.novonixgroup.com. information are available at our website: 33 For personal use only Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2020 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Continuing operations Revenue from contracts with customers Other income Cost of goods sold Administrative and other expenses Borrowing costs Impairment losses Depreciation and amortisation expenses Marketing and project development costs Share based compensation Employee benefits expense Share of net losses of joint ventures Loss before income tax expense Income tax (expense) benefit Loss from continuing operations Other comprehensive income for the year, net of tax Items that may be reclassified to profit or loss Foreign exchange differences on translation of foreign operations Consolidated 2020 $ 2019 $ Notes 4 5 6 6 6 7 4,253,435 844,877 (1,245,187) (3,115,665) (5,330,961) - (1,380,303) (2,423,546) (7,558,953) (4,072,223) - 1,817,049 3,024,684 (741,280) (1,536,897) (1,565,032) (15,918,925) (494,948) (1,560,551) (6,673,510) (2,104,176) (751,981) (20,028,526) - (26,505,567) 383,655 (20,028,526) (26,121,912) 550,243 809,396 Total comprehensive loss for the year (19,478,283) (25,312,516) Earnings per share for loss from continuing operations attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share Cents Cents 10 10 (14.7 cents) (14.7 cents) (21.2 cents) (21.2 cents) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 34 For personal use only Consolidated balance sheet As at 30 June 2020 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventory Total current assets Non-current assets Property, plant and equipment Right-of-use assets Exploration and evaluation assets Intangible assets Other assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Contract liabilities Lease liabilities Borrowings Total current liabilities Non-current liabilities Lease liabilities Borrowings Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Accumulated losses Consolidated 2020 $ 2019 $ Notes 13 14 15 16 21 17 18 19 20 21 22 21 22 38,807,662 1,227,792 1,366,985 6,054,664 683,103 1,116,991 41,402,439 7,854,758 9,620,797 2,853,427 2,988,921 18,367,245 24,589 5,984,517 - 2,838,749 18,233,245 8,630 33,854,979 27,065,141 75,257,418 34,919,899 3,494,227 98,783 141,124 274,917 1,404,366 580,845 - 4,145,069 4,009,051 6,130,280 2,778,979 1,937,095 - 13,016,841 4,716,074 13,016,841 8,725,125 19,147,121 66,532,293 15,772,778 23 24 99,851,510 30,537,967 (63,857,184) 38,163,405 21,438,031 (43,828,658) Total equity The above consolidated balance sheet should be read in conjunction with the accompanying notes. 66,532,293 15,772,778 35 For personal use only Consolidated statement of changes in equity For the year ended 30 June 2020 Consolidated Group Balance at 1 July 2018 Loss for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Equity component of convertible notes, net of transaction costs Share-based payments Contributed equity $ 38,163,405 - - - Accumulated losses $ (17,706,746) (26,121,912) - (26,121,912) - - - - - - Share based payments reserve $ 8,585,446 - - - - - 6,673,510 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Reserves Foreign currency translation reserve $ 140,608 - 809,396 809,396 Convertible loan note reserve $ 2,426,120 - - - Total $ 31,608,833 (26,121,912) 809,396 (25,312,516) - - - - - 2,802,951 - 2,802,951 6,673,510 Balance at 30 June 2019 38,163,405 (43,828,658) 15,258,956 950,004 5,229,071 15,772,778 Loss for the year Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs Equity component of convertible notes, net of transaction costs Share-based payments - - - (20,028,526) - (20,028,526) 61,688,105 - - - - - - - - - - 7,558,952 - 550,243 550,243 - - - - - - - (20,028,526) 550,243 (19,478,283) 61,688,105 990,741 - 990,741 7,558,952 Balance at 30 June 2020 99,851,510 (63,857,184) 22,817,908 1,500,247 6,219,812 66,532,293 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 36 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Consolidated statement of cash flows For the year ended 30 June 2020 Cash flows from operating activities Receipts from customers (GST inclusive) Payments to suppliers and employees (GST inclusive) Interest received Income taxes paid Payment of borrowing costs Consolidated 2020 $ 2019 $ Notes 4,386,441 (9,748,625) 723 - (232,055) 2,613,477 (6,464,050) 4,533 - (154,047) Net cash outflow from operating activities 26 (5,593,517) (4,000,087) Cash flows from investing activities Payments for exploration assets Net outflow from the acquisition of PUREgraphite LLC Payments / refunds of security deposits Payments for property, plant and equipment (146,195) - (16,369) (5,339,448) (270,027) (5,195,171) (500) (1,888,231) Net cash outflow from investing activities (5,502,012) (7,353,929) Cash flows from financing activities Proceeds on issue of shares Proceeds on issue of loan notes (net of expenses) Payment of capital raising costs Proceeds from borrowings Principal elements of lease repayments Repayment of borrowings 45,845,239 - (1,308,596) 6,603,722 (141,968) (6,996,422) - 12,334,899 - 4,582,160 - (56,319) Net cash inflow from financing activities 44,001,975 16,860,740 Net increase (decrease) in cash and cash equivalents 32,906,446 5,506,724 Effects of foreign currency Cash and cash equivalents at the beginning of the year (153,448) 6,054,664 182,348 365,592 Cash and cash equivalents at the end of the year 13 38,807,662 6,054,664 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 37 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies Basis of preparation These general purpose financial statements have been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards and Interpretations of the Australian Accounting Standards Board and International Financial Reporting Standards as issued by the International Accounting Standards Board. The Group is a for-profit entity for financial reporting purposes under Australian Accounting Standards. Material accounting policies adopted in the preparation of these financial statements are presented below and have been consistently applied unless stated otherwise. Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. Going concern The financial report has been prepared on a going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the normal course of business. As disclosed in the financial report, the consolidated entity incurred a net loss of $20,028,526 (2019: $26,121,912) and net operating cash outflows of $5,593,517 (2019: $4,000,087) for the year ended 30 June 2020. As at 30 June 2020, the consolidated entity has net assets of $66,532,293 (2019: $15,772,778). The ability of the consolidated entity to continue as a going concern is principally dependent upon one or more of the following: • • • the successful and profitable growth of the battery materials, battery consulting and battery technology businesses; the ability of the consolidated entity to meet its cashflow forecasts; and the ability of the consolidated entity to raise capital as and when necessary and/or secure prepayments from customers for product. These conditions give rise to material uncertainty which may cast significant doubt over the consolidated entity’s ability to continue as a going concern. The directors believe that the going concern basis of preparation is appropriate due to the following reasons: • during the financial year the Company successfully raised $63m as set out in Note 11 and also has a strong history of being able to raise capital from debt and equity sources; • The directors believe there is sufficient cash available for the consolidated entity to continue operating and scale the PUREgraphite business over the next 12 months and beyond. The Directors have considered the impact of Covid 19 and found that the pandemic has not had a significant effect on the Company’s ability to continue as a going concern, as evidenced by the capital raising outlined in Note 11. 38 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) Should the consolidated entity be unable to continue as a going concern, it may be required to realise its assets and extinguish its liabilities other than in the ordinary course of business, and at amounts that differ from those stated in the financial report. This financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities and appropriate disclosures that may be necessary should the consolidated entity be unable to continue as a going concern. The financial statements were authorised for issue by the Directors on 21 September 2020. The Directors have the power to amend and reissue the financial statements. a. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of NOVONIX Limited (‘Company’ or ‘Parent Entity’) as at 30 June 2020 and the results of all subsidiaries for the year then ended. NOVONIX Limited and its subsidiaries together are referred to in these financial statements as the ‘Group’. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. 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. Where equity instruments are issued in a business combination, the fair value of the instruments is their published market price as at the date of exchange. Transaction costs arising on the issue of equity instruments are recognised directly in equity. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. With limited exceptions, all identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the consideration transferred, amount of any non-controlling interest in the acquired entity, over the net fair value of the Group's share of the identifiable net assets acquired is recognised as goodwill. If the consideration transferred of the acquisition is less than the Group's share of the net fair value of the identifiable net assets of the subsidiary, the difference is recognised as a gain in the profit and loss in the Consolidated Statement of Profit or Loss and Other Comprehensive Income, but only after a reassessment of the identification and measurement of the net assets acquired. 39 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) Where settlement of any part of the cash consideration is deferred, the amounts payable in the future are discounted to their present value, as at the date of exchange. The discount rate used is the entity's incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. b. 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. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: ● When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or ● When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. 40 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) c. Revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Sales of Goods Revenue for the hardware is recognised at a point in time when the hardware is delivered, the legal title has passed and the customer has accepted the hardware. Consulting services The consulting division provides battery cell design, implementation and support services under fixed-price and variable price contracts. Revenue from providing services is recognised in the accounting period in which the services are rendered. For fixed-price contracts, revenue is recognised based on the actual service provided to the end of the reporting period as a proportion of the total services to be provided because the customer receives and uses the benefits simultaneously. This is determined based on the actual labour hours spent relative to the total expected labour hours. Where the contracts include multiple performance obligations, the transaction price will be allocated to each performance obligation based on the stand-alone selling prices. Where these are not directly observable, they are estimated based on expected cost plus margin. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. OTHER INCOME Interest Interest income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Grant revenue Grants from government bodies are recognised at their fair value where there is a reasonable assurance that the grant will be received and the group will comply with all attached conditions. 41 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) d. 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 (‘CODMs’). The CODMs is responsible for the allocation of resources to operating segments and assessing their performance. e. Current and non-current classification Assets and liabilities are presented in the balance sheet based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. f. 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. For the statement of cash flows presentation purposes, cash and cash equivalents also includes bank overdrafts, which are shown within borrowings in current liabilities on the balance sheet. g. Other receivables Other receivables are recognised at amortised cost, less any provision for impairment. 42 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) h. Inventories Inventories are measured at the lower of cost and net realisable value. The cost of manufactured products includes direct materials, direct labour and an appropriate proportion of variable and fixed overheads. Costs are assigned to individual items of inventory on the basis of weighted average costs. i. Exploration and evaluation assets Exploration and evaluation expenditure incurred is accumulated in respect of each identifiable area of interest. Such expenditures comprise net direct costs and an appropriate portion of related overhead expenditure but do not include overheads or administration expenditure not having a specific nexus with a particular area of interest. These costs are only carried forward to the extent that they are expected to be recouped through the successful development of the area or where activities in the area have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserves and active or significant operations in relation to the area are continuing. A regular review has been undertaken on each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. An impairment charge is recognised when the Directors are of the opinion that the carried forward net cost may not be recoverable or the right of tenure in the area lapses. When production commences, the accumulated costs for the relevant area of interest are amortised over the life of the area according to the rate of depletion of the economically recoverable reserves. j. Loan notes Loan notes are initially measured at fair value less transaction costs. Amortised cost is calculated as the amount at which the loan note is measured at initial recognition less principal repayments, and adjusted for any cumulative amortisation of the difference between that initial amount and the maturity amount calculated using the effective interest method. The effective interest method is used to allocate interest expense over the relevant period and is equivalent to the rate that discounts estimated future cash payments over the expected life of the financial instrument to the net carrying amount of the financial liability. Non-derivative financial liabilities, other than financial guarantees, are subsequently measured at amortised cost. Gains or losses are recognised in profit or loss through the amortisation process and when then financial liability is derecognised. 43 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) k. Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Buildings Plant and equipment 25 years 2 - 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 profit or loss. l. 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. m. 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 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 long service leave not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 44 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, options or performance rights over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is determined using various valuation methods including Black Scholes, Binomial and the Monte Carlo Simulation method that takes into account the exercise price, the term of the performance right, the impact of dilution, the share price at grant date and expect price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the performance right. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore, any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. Share-based payment expenses are recognised over the period during which the employee provides the relevant services. This period may commence prior to the grant date. In this situation, the entity estimates the grant date fair value of the equity instruments for the purposes of recognising the services received during the period between service commencement date and grant date. Once the grant date has been established, the earlier estimate is revised so that the amount recognised for services received is ultimately based on the grant date fair value of the equity instruments. 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. 45 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) n. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. o. Investments in Joint Venture Interests in joint ventures are accounting for using the equity method, after initially being recognised at cost (including transaction costs) and adjusted thereafter for the post-acquisition change in the Group’s share of net assets of the joint venture. In addition, the Group’s share of the profit or loss of the joint venture is included in the Group’s profit or loss. The carrying amount of the investment includes, when applicable, goodwill relating to the joint venture. Any discount on acquisition, whereby the Group’s share of the net fair value of the joint venture exceeds the cost of investment, is recognised in profit or loss in the period in which the investment is acquired. Profits and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the Group’s interest in the joint venture. When the Group’s share of losses in a joint venture equals or exceeds its interest in the joint venture, the Group discontinues recognising its share of further losses unless it has incurred legal or constructive obligations or made payments on behalf of the joint venture. When the joint venture subsequently makes profits, the Group will resume recognising its share of those profits once its share of the profits equals the share of the losses not recognised. p. Impairment of Non-Financial Assets At the end of each reporting period, the Group assesses whether there is any indication that an asset may be impaired. The assessment will include the consideration of external and internal sources of information, including dividends received from subsidiaries, associates or joint ventures deemed to be out of pre-acquisition profits. If such an indication exists, an impairment test is carried out on the asset by comparing the recoverable amount of the asset, being the higher of the asset’s fair value less costs of disposal and value in use, to the asset’s carrying amount. Any excess of the assets carrying amount over its recoverable amount is recognised immediately in profit or loss, unless the asset is carried at a revalued amount in accordance with another Standard. Any impairment loss of a revalued asset is treated as a revaluation decrease in accordance with that other Standard. 46 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) Where 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. Impairment testing is performed annually for goodwill, intangible assets with indefinite lives and intangible assets not yet available for use. q. Intangible Assets Other than Goodwill Brand Name Brand names are recognised at fair value on the date of acquisition. They have a finite life and are subsequently carried at cost less any accumulated amortisation and any impairment losses. Brand names are amortised over their useful life of 10 years. Technology Technology is recognised at fair value on the date of acquisition. It has a finite life and is subsequently carried at cost less any accumulated amortisation and any impairment losses. Technology is amortised over its useful life of 5 years. r. Goodwill Goodwill acquired on a business combination is initially measured at cost, being the excess of the consideration transferred for the business combination over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually, or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired (refer note 12). As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units that are expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Disposed goodwill in this circumstance is measured on the basis of the relative values of the disposed operation and the portion of the cash-generating unit retained. 47 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) s. Borrowing costs Borrowing costs are recognised in the profit or loss in the period in which they are incurred. t. Foreign Currency Transactions and Balances Functional and presentation currency The functional currency of each of the Group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars, which is the parent entity’s functional currency. Transactions and balances Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Non-monetary items measure at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. Exchange differences arising on the translation of monetary items are recognised in profit or loss, except where deferred in equity as a qualifying cash flow or net investment hedge. Exchange differences arising on the translation of non-monetary items are recognised directly in other comprehensive income to the extent that the underlying gain or loss is recognised in other comprehensive income; otherwise the exchange difference is recognised in profit or loss. Group companies The financial results and position of foreign operations, whose functional currency is different from the Group’s presentation currency, are translated as follows: - Assets and liabilities are translated at exchange rates prevailing at the end of the reporting period; Income and expenses are translated at the average exchange rates for the period; and - - Accumulated losses are translated at the exchange rates prevailing at the date of the transaction. Exchange differences arising on translation of foreign operations with functional currencies other than Australian dollars are recognised in other comprehensive income and included in the foreign currency translation reserve in the balance sheet. The cumulative amount of these differences is reclassified into profit or loss in the period in which the operation is disposed of. 48 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) u. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of NOVONIX 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. v. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the balance sheet. 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. w. New and Amended Accounting Policies Adopted by the Group 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 reporting period. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. AASB 16 Leases The group leases a warehouse in Tennessee from which the PUREgraphite business operates. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes. 49 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Until the 2020 financial year, leases of property, plant and equipment were classified as either finance leases or operating leases. From 1 July 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the group. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable • variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date • amounts expected to be payable by the group under residual value guarantees • the exercise price of a purchase option if the group is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the group exercising that option. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. To determine the incremental borrowing rate, the group: • where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received • uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by NOVONIX Limited, which does not have recent third party financing, and • makes adjustments specific to the lease, e.g. term, country, currency and security. The group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset. Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. 50 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) Right-of-use assets are measured at cost comprising the following: the amount of the initial measurement of lease liability • • any lease payments made at or before the commencement date less any lease incentives received • any initial direct costs, and • restoration costs. Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. The group does not revalue the right-of-use buildings held by the group. Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture. Extension options are included in property and equipment leases across the group. These are used to maximise operational flexibility in terms of managing the assets used in the group’s operations. The extension options held are exercisable only by the group and not by the lessor. There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. y. Critical accounting estimates and judgements The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed below. Exploration and evaluation costs Exploration and evaluation costs have been capitalised on the basis that the Group intend to commence commercial production in the future, from which time the costs will be amortised in proportion to the depletion of the mineral resources. Key judgements are applied in considering costs to be capitalised which includes determining expenditures directly related to these activities and allocating overheads between those that are expensed and capitalised. 51 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 1 Summary of significant accounting policies (continued) ANNUAL FINANCIAL REPORT – 30 JUNE 2020 In addition, costs are only capitalised that are expected to be recovered either through successful development or sale of the relevant mining interest. Factors that could impact the future commercial production at the mine include the level of reserves and resources, future technology changes, which could impact the cost of mining, future legal changes and changes in commodity prices. To the extent that capitalised costs are determined not to be recoverable in the future, they will be written off in the period in which this determination is made. Value of intangible assets relating to acquisitions The Group has allocated portions of the cost of acquisitions to technology intangibles, valued using the relief from royalty method. These calculations require the use of assumptions including future revenue forecasts and a royalty rate. Technology is amortised over its useful life of 5 years. Impairment of goodwill and identifiable intangible assets The Group determines whether goodwill is impaired on an annual basis. This assessment requires an estimation of the recoverable amount of the cash-generating units to which the goodwill is allocated. 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 a binomial or Monte Carlo option pricing model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions, including share price volatility, interest rates and vesting periods would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact the profit or loss and equity. Other areas of critical accounting estimates and judgements Other areas of critical accounting estimates and judgements include: - - - Unused tax losses for which no deferred tax asset has been recognised (Refer to Note 7) The vesting dates of share options (Refer to Note 28) The accelerated expense on cancellation of share options and the loss on redemption of convertible loan notes (Refer to Note 11) 52 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 2 Changes in accounting policies This note explains the impact of the adoption of AASB 16 Leases on the group’s financial statements. As indicated in note 1 above, the group had adopted AASB 16 Leases retrospectively from 1 July 2019, but has not restated comparatives for the 2019 reporting period, as permitted under the specific transition provisions in the standard. The reclassification and the adjustments arising from the new leasing rules are therefore recognised in the opening balance on 1 July 2019. The new accounting policies are disclosed in note 1. On adoption of AASB 16, the group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 July 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 4%. Measurement of lease liabilities Operating lease commitments disclosed as at 30 June 2019 Discounted using the lessee’s incremental borrowing rate of 4% at the date of initial application Add/(less): adjustments as a result of a different treatment of extension options Lease liability recognised as at 1 July 2019 Of which are: Current lease liabilities Non-current lease liabilities 2019 1,286,391 1,165,323 1,827,378 2,992,701 135,386 2,857,315 2,992,701 Measurement of right-of-use assets The associated right-of-use asset for property leases was measured at an amount equal to the liability. Adjustments recognised in the balance sheet on 1 July 2019 The change in accounting policy affected the following items in the balance sheet on 1 July 2019: • right-of-use assets – increase by $2,992,701 • lease liabilities – increase by $2,992,701 53 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 3 Parent information The following information has been extracted from the books and records of the parent and has been prepared in accordance with Australian Accounting Standards. Balance sheet ASSETS Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Other receivables Plant and equipment Exploration and evaluation assets Investments Other assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Borrowings Total current liabilities Non-current liabilities Borrowings Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Accumulated losses Total equity 2020 $ 2019 $ 37,455,678 159,777 5,240,110 73,952 37,615,455 5,314,062 10,139,051 1,068 3,210,798 17,748,704 8,450 709,194 5,042 2,838,749 21,938,847 7,000 31,108,071 25,498,832 68,723,526 30,812,894 2,191,233 - 134,586 4,000,000 2,191,233 4,134,586 - - 10,905,530 10,905,530 2,191,233 15,040,116 66,532,293 15,772,778 99,851,510 29,037,721 (62,356,938) 38,163,405 20,488,027 (42,878,654) 66,532,293 15,772,778 Statement of Profit or Loss and Other Comprehensive Income Total loss and total comprehensive loss (19,478,284) (25,312,516) 54 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 3 Parent information (continued) Guarantees NOVONIX Limited has not entered into any guarantees, in the current or previous reporting period, in relation to the debts of its subsidiaries. Contingent liabilities At 30 June 2020, NOVONIX Limited did not have any contingent liabilities (2019: Nil). Contractual commitments At 30 June 2020 , NOVONIX Limited did not have any contractual commitments (2019: Nil). Note 4 Revenue (a) Revenue from contracts with customers The group derives revenue from the transfer of goods and services over time and at a point in time in the following major product lines and geographical regions: 2020 Graphite Mining and exploration $ Hardware sales Consulting sales Revenue from external customers Timing of revenue recognition At a point in time Over time 2019 Hardware sales Consulting sales Revenue from external customers Timing of revenue recognition At a point in time Over time - - - - - - Graphite Mining and exploration $ - - - - - - Battery Technology $ 2,113,416 2,140,019 4,253,435 2,113,416 2,140,019 4,253,435 Battery Technology $ 1,461,266 355,783 1,817,049 1,461,266 355,783 1,817,049 Battery Materials $ Battery Materials $ - - - - - - - - - - - - Total $ 2,113,416 2,140,019 4,253,435 2,113,416 2,140,019 4,253,435 Total $ 1,461,266 355,783 1,817,049 1,461,266 355,783 1,817,049 Revenues from external customers come from the sale of battery testing hardware equipment and the provision of battery testing and development consulting services. 55 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 4 Revenue (continued) (i) Assets and liabilities related to contracts with customers The group has recognised the following assets and liabilities related to contracts with customers: Notes 2020 $ 2019 $ Contract liabilities – Hardware sales Total current contract liabilities 98,783 98,783 580,845 580,845 Revenue recognised in relation to contract liabilities The following table shows how much of the revenue recognised in the current reporting period relates to carried-forward contract liabilities and how much relates to performance obligations that were satisfied in a prior year. Revenue recognised that was included in the contract liability balance at the beginning of the period Hardware sales Note 5 Other income Interest received from unrelated parties COVID-19 Government stimulus Grant funding Fair value gain on borrowings Gain on revaluation of equity accounted investment Other 2020 $ 2019 $ 580,845 - 2020 $ 723 59,000 785,154 - - - 844,877 2019 $ 4,533 - 329,573 114,106 2,576,131 341 3,024,684 56 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 6 Loss for the year Loss before income tax from continuing operations includes the following specific expenses: Consolidated 2020 $ 2019 $ Share based payments expense^ Performance rights granted Options granted Options cancelled Total share based compensation expense ^ Refer to note 28 for further information regarding share-based payments. Borrowing costs Interest accrued on loan notes Loss on redemption of loan notes Unwinding of fair value gain Interest accrued on borrowings Total borrowing costs Impairment losses Exploration and evaluation assets Goodwill Identified intangibles – Brand Name Identified intangibles - Technology Total impairment losses 78,362 6,291,510 1,189,081 39,025 6,634,485 - 7,558,953 6,673,510 3,062,598 1,765,353 48,377 454,633 5,330,961 - - - - - 1,373,581 - 30,113 161,338 1,565,032 10,667,897 4,812,127 374,126 64,775 15,918,925 57 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Income tax expense Note 7 This note provides an analysis of the Group’s income tax expense, shows what amounts are recognised directly in equity and how the tax expense is affected by non-assessable and non-deductible items. It also explains significant estimates made in relation to the Group’s tax position. Consolidated 2020 $ 2019 $ Numerical reconciliation of income tax expense (a) to prima facie tax payable Profit/(loss) before income tax expense (20,028,526) (26,505,567) Tax at the Australian tax rate of 27.5% (2018: 27.5%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Impairment of goodwill Share based payments Gain on acquisition of PUREgraphite LLC Share of results of joint venture Borrowing costs Other non-assessable amounts Difference in overseas tax rate Adjustments for current tax of prior periods Adjustment to deferred tax assets and liabilities for tax losses and temporary differences not recognised (5,507,845) (7,289,031) - 2,078,713 - - 855,518 (156,386) 385,615 - 1,323,335 1,835,215 (540,987) 206,795 377,735 (24,234) (90,888) (93,052) 2,344,385 3,911,457 Income tax expense / (benefit) - (383,655) Tax losses (b) Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit Tax expense (income) recognised directly in (c) equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity: Deferred tax: Share issue costs 23,275,774 15,128,752 6,054,860 4,122,864 - - 58 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 7 Income tax expense ANNUAL FINANCIAL REPORT – 30 JUNE 2020 temporary differences Deferred tax assets (d) The balance comprises attributable to: Tax losses Exploration and evaluation assets Business capital costs Right of use asset Accrued expenses Consolidated 2020 $ 2019 $ 6,304,468 1,137,319 899,256 8,982 38,665 4,351,897 1,433,506 49,212 - 17,067 Total deferred tax assets 8,388,690 5,851,682 Set-off of deferred tax liabilities pursuant to set-off provisions Deferred tax assets not recognised Net deferred tax assets (512,788) (7,875,902) (558,061) (5,293,621) - - temporary differences comprises Deferred tax liabilities (e) The balance attributable to: Intangible assets Property, plant and equipment Prepayments Unrealised exchange loss on borrowings 262,779 224,874 401 24,734 328,885 186,851 143 42,182 Total deferred tax liabilities 512,788 558,061 Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax liabilities (512,788) (558,061) - - Unused losses which have not been recognised as an asset, will only be obtained if: (i) the group derives future assessable income of a nature and of an amount sufficient to enable the losses to be realised; the group continues to comply with the conditions for deductibility imposed by the law; and no changes in tax legislation adversely affect the group in realising the losses. (ii) (iii) Offsetting within tax consolidated entity NOVONIX Limited and its wholly-owned Australian subsidiaries have applied the tax consolidation legislation which means that these entities are taxed as a single entity. As a consequence, the deferred tax assets and deferred tax liabilities of these entities have been offset in the consolidated financial statements. 59 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 8 Key Management Personnel Compensation Refer to the remuneration report contained in the Directors’ report for details of the remuneration paid or payable to each member of the Group’s key management personnel (KMP) for the year ended 30 June 2020. The totals of remuneration paid to KMP of the Company and the Group during the year are as follows: Short-term employee benefits Post-employment benefits Share-based compensation Total KMP compensation Short-term employee benefits Consolidated 2020 $ 1,868,521 46,218 6,878,627 2019 $ 1,221,114 45,641 6,145,904 8,793,366 7,412,659 These amounts include fees and benefits paid to the non-executive Chairman as well as all salary, paid leave benefits and fringe benefits paid to Executive Directors. Post-employment benefits These amounts are the current-year’s superannuation contributions made during the year. Share-based compensation These amounts represent the expense related to the participation of KMP in equity-settled benefit schemes as measured by the fair value of the options and performance rights on grant date. Further information in relation to KMP remuneration can be found in the Directors report. Note 9 Auditor’s Remuneration Remuneration of the auditor for: - Auditing or reviewing the financial report Consolidated 2020 $ 175,855 175,855 2019 $ 148,200 148,200 60 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 10 Earnings per share ANNUAL FINANCIAL REPORT – 30 JUNE 2020 (a) Basic earnings per share Total basic earnings per share attributable to the ordinary equity holders of the Company (b) Diluted earnings per share Total diluted earnings per share attributable to the ordinary equity holders of the Company 2020 Cents 2019 Cents (14.7 cents) (21.2 cents) (14.7 cents) (21.2 cents) (c) Reconciliations of earnings used in calculating earnings per share Basic earnings per share Profit / (loss) attributable to the ordinary equity holders of the Company used in calculating basic earnings per share Diluted earnings per share Profit / (loss) attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share 2020 $ 2019 $ (20,028,526) (26,121,912) (20,028,526) (26,121,912) (d) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as in calculating basic and diluted the denominator earnings per share (e) Information concerning the classification of securities Options and rights 2020 Number 2019 Number 135,918,095 123,219,872 Options and rights on issue during the year are not included in the calculation of diluted earnings per share because they are antidilutive for the year ended 30 June 2020. These options and rights could potentially dilute basic earnings per share in the future. Details relating to options and rights are set out in note 28. 61 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 11 Capital raising During the financial year the Company completed a $63 million capital raising via an institutional placement, an accelerated non-renounceable rights issue and a strategic placement (“capital raising”). The capital raising has simplified the NOVONIX capital structure through the redemption of Convertible Notes and repayment of short-term loans, along with the cancellation of 40.5 million options held by Directors, employees and convertible note holders. Funds raised will provide capex and working capital to fulfil an initial SAMSUNG supply contract, facilitate development and commercialisation of the DPMG technology for cathode and other million-mile battery innovations, offer costs and provide general working capital. The components of the transaction are set out below: a) Institutional placement On 5 June 2020, 19,495,469 fully paid ordinary shares were issued to institutional investors at $0.29 per share, raising $5,653,686. b) Rights issue An accelerated 1 for 1 rights issue was completed on 25 June 2020. Under the rights issue, 130,721,435 fully paid ordinary shares were issued at $0.29 per share. The rights issue raised a total of $37,909,216 which consisted of $34,017,928 cash and $3,891,288 settlement of debt (see c) and d) below). c) Repayment of Director loans During the financial year, the Company’s directors entered into short term loan agreements collectively for $3,148,960. The loans were unsecured and accrued interest at 8% pa from the date of drawdown, calculated on a daily basis. These loans were used by Directors to fund their entitlements under the rights issue, with remaining balances being repaid to Directors from the proceeds of the rights issue as follows: Director Loan funds and interest accrued $ 263,377 1,799,682 107,117 101,973 954,831 3,266,980* * includes $78,020 of interest accrued on short-term loans Anthony Bellas Philip St Baker Greg Baynton Robert Cooper Andrew Liveris Loan settled though Rights issue entitlement taken up $ 263,377 1,799,682 107,117 75,059 599,255 2,844,490 Loan funds repaid from proceeds of the right issue $ - - - 26,914 355,576 382,490 62 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 11 Capital raising (continued) Convertible loan notes d) Prior to the capital raise a total of 11,416,667 loan notes (excluding loan notes held by the St Baker Energy Innovation Fund) were on issue with a face value of $6,400,000. These loan notes accrued interest at a coupon rate of 10% pa. These convertible loan notes were repaid as follows: Loan notes (Number) 2,250,000 9,166,667 11,416,667 Face Value $ 900,000 5,500,000 6,400,000 Interest accrued $ 117,123 1,038,219 1,155,342 Fair value of loan notes at settlement date $ 1,017,123 6,538,219 7,555,342 Carrying value of loan notes at settlement date $ 891,018 6,471,374 7,362,392 Loss on settlement $ 126,105 66,845 192,950 Amount settled through conversion to equity as part of rights issue $ 182,701 864,097 1,046,798* Amount settled in cash out of proceeds from the rights issue $ 834,422 5,674,122 6,508,544 * Repaid through the issue of 3,609,650 shares at $0.29 per share. Strategic Placement to St Baker Energy Innovation Fund e) At a General Meeting of Shareholders held on 30 June 2020, Shareholders approved the issue of 67,085,100 fully paid ordinary shares to the St Baker Energy Innovation Fund at an issue price of $0.29 per share raising $19,454,679. The consideration for the shares received consisted of cash and the settlement of both convertible loan notes and short-term loans owing. Details of the Strategic Placement are set out in the table below: Face value/Principal of loan notes and short- term loan $ Loan notes redeemed Short-term loan repaid Placement proceeds Total 10,000,000 3,400,000 - 13,400,000 Interest accrued $ 1,187,397 131,575 - 1,318,972 Placement proceeds $ - - 4,735,707 4,735,707 Total $ 11,187,397 3,531,575 4,735,707 19,454,679 Shares issued (Number) 38,577,232 12,177,845 16,330,023 67,085,100 63 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 11 Capital raising (continued) Prior to the capital raise a total of 25,000,000 loan notes were on issue to the St Baker Energy Innovation Fund with a face value of $10,000,000. These loan notes accrued interest at a coupon rate of 10% pa. These convertible loan notes were repaid as follows: ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Fair value of loan notes at settlement date $ 11,187,397 * Repaid through the issue of 38,577,232 shares at $0.29 per share. Face Value $ 25,000,000 10,000,000 Interest accrued $ 1,187,397 Loan notes (Number) Carrying value of loan notes at settlement date $ 9,614,996 Loss on settlement $ 1,572,401 Amount settled through conversion to equity as part of rights issue $ 11,187,397* Amount settled in cash out of proceeds from the rights issue $ - Cancellation of options f) As part of the capital raise, the Group obtained agreement from holders of a total of 40,500,000 options (approximately half of the options on issue at the time of the capital raise) to cancel the options for no consideration. The cancellation of the options has resulted in an acceleration of the share-based payment expense, with the unexpensed portion of the share option fair values being expensed in full at the date of cancellation. Details of the options cancelled are below: Directors KMP Loan note holders* Total *Loan note holders are not employees of the company and therefore there is no associated share based payment expense, hence no expense acceleration. Number of options cancelled 5,750,000 7,500,000 27,250,000 40,500,000 Expense accelerated $ 578,135 610,946 - 1,189,081 64 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 12 Impairment testing of goodwill For the purposes of impairment testing, the cash generating unit has been defined as the business to which the goodwill relates where individual cash flows can be ascertained for the purposes of discounting future cash flows. The carrying amount of goodwill allocated to the cash generating unit PUREgraphite LLC Total carrying amount of goodwill Consolidated 2020 $ 17,411,685 17,411,685 2019 $ 17,122,101 17,122,101 The recoverable amount of the PUREgraphite LLC cash generating unit (“PUREgraphite CGU”) has been determined on a ‘Fair Value Less Costs to Sell’ (“FVLCS”) basis. To determine the recoverable amount, FVLCS was calculated based on the capital raising outlined in Note 11 given that the capital raising was directly associated with the planned future expansion of the PUREgraphite CGU. The recoverable amount of the PUREgraphite CGU was deemed to be in excess of the carrying value of the CGU, and therefore no impairment has been recognise at 30 June 2020. Note 13 Cash and cash equivalents Cash at bank Reconciliation to cash flow statement Consolidated 2020 $ 38,807,662 38,807,662 2019 $ 6,054,664 6,054,664 The above figures reconcile to the amount of cash shown in the statement of cash flows at the end of the financial year as follows: Balances as above Bank overdrafts Balance per statement of cash flows 2020 $ 38,807,662 - 38,807,662 2019 $ 6,054,664 - 6,054,664 65 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 14 Trade and other receivables ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Trade debtors Other receivables Consolidated 2020 $ 952,881 274,911 2019 $ 556,937 126,166 Total current trade and other receivables 1,227,792 683,103 Credit risk The Group has no significant concentration of credit risk with respect to any counterparties or on a geographical basis. Amounts are considered as “past due” when the debt has not been settled, in line with the terms and conditions agreed between the Group and the customer to the transaction. The Group assess impairment on trade and other receivables using the simplified approach of the expected credit loss (ECL) model under AASB 9. Due to the minimal history of bad debt write-offs and strong credit approval processes, the Group have determined that the incorporation of the ECL model will not have a material effect on impairment as at 30 June 2020. The balance of receivables that remain within initial trade terms are considered to be of high credit quality. Note 15 Inventory Raw material Components and stores Finished goods – at cost Consolidated 2020 $ 759,693 584,090 23,202 2019 $ - 641,080 475,911 1,366,985 1,116,991 Amounts recognised in profit or loss Inventories recognised as an expense during the year ended 30 June 2020 amounts to $1,245,187 (2019: $741,280). These were included in cost of sales. 66 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 16 Property, plant and equipment ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Land $ Buildings $ Leasehold improvements $ Plant and equipment $ Total $ At 30 June 2018 Cost Accumulated depreciation 359,344 - 1,197,162 (22,963) Net book amount 359,344 1,174,199 Year ended 30 June 2019 Opening net book amount Additions Acquisition of subsidiary Exchange differences Assets written off Depreciation charge 359,344 - - 20,907 - - 1,174,199 495,206 - 66,695 - (61,380) Closing book amount 380,251 1,674,720 At 30 June 2019 Cost Accumulated depreciation 380,251 - 1,762,019 (87,299) Net book amount 380,251 1,674,720 - - - - - - - - - - - - - 1,036,480 (128,605) 2,592,986 (151,568) 907,875 2,441,418 907,875 2,241,257 913,821 218,466 (90,540) (261,333) 2,441,418 2,736,463 913,821 302,095 (90,540) (318,740) 3,929,546 5,984,517 4,437,493 (507,947) 6,579,763 (595,246) 3,929,546 5,984,517 Year ended 30 June 2020 Opening net book amount Additions Acquisition of subsidiary Exchange differences Assets written off Depreciation charge 380,251 - - (7,256) - - 1,674,720 93,127 - (29,018) - (72,028) - 195,082 - 796 - (31,320) 3,929,546 4,451,587 - 75,523 (210,773) (829,440) 5,984,517 4,739,796 - 40,045 (210,773) (932,788) Closing book amount 372,995 1,666,801 164,558 7,416,443 9,620,797 At 30 June 2020 Cost Accumulated depreciation 372,995 - 1,821,526 (154,725) 195,082 (30,524) 8,579,868 (1,163,425) 10,969,471 (1,348,674) Net book amount 372,995 1,666,801 164,558 7,416,443 9,620,797 67 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 17 Exploration and evaluation assets ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Consolidated 2020 $ 2019 $ Exploration and evaluation assets – at cost 2,988,921 2,838,749 The capitalised exploration and evaluation assets carried forward above have been determined as follows: Balance at the beginning of the year Expenditure incurred during the year Impairment losses 2,838,749 150,172 - 13,253,083 253,563 (10,667,897) Balance at the end of the year 2,988,921 2,838,749 In FY2019, the Company recognised an impairment loss of $10,667,897 relating to the Mt Dromedary graphite mining project. The Directors determined that it was appropriate for the carrying value of the Mt Dromedary asset to reflect the exploration and evaluation expenditure incurred since acquisition, and to write off all acquisition related costs which related to the minority interest acquired by the Group on 29 August 2016 in return for shares in the Company (i.e. scrip-based consideration). The future development of the Mt Dromedary mine will not occur in the short to medium term given the tonnages of natural graphite required by the PUREgraphite business are unlikely to be sufficient to warrant the development of the mine in that timeframe. As well, a significant portion of graphite used by PUREgraphite will be synthetic graphite, and the natural graphite required at this time can be more cost effectively sourced from other natural graphite producers. The Mt Dromedary asset remains a strategic asset for the Group. The Directors have assessed that for the exploration and evaluation assets remaining recognised at 30 June 2020, the facts and circumstances do not suggest that the carrying amount may exceed its recoverable amount. 68 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 18 Intangible assets ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Goodwill Technology Consolidated 2020 $ 17,411,685 955,560 18,367,245 2019 $ 17,037,297 1,195,948 18,233,245 Balance at the beginning of the year Exchange differences Amortisation Goodwill $ 17,037,297 374,388 - Technology $ 1,195,948 33,231 (273,619) Total $ 18,233,245 407,619 (273,619) Balance at the end of the year 17,411,685 955,560 18,367,245 Intangible assets, other than goodwill have finite useful lives. The current amortisation charges for intangible assets are included under depreciation and amortisation expense in the statement of profit or loss and other comprehensive income. Goodwill has an indefinite useful life. 69 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 19 Trade and other payables ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Unsecured liabilities: Trade payables Sundry payables and accrued expenses Note 20 Contract liabilities Contract liabilities – Hardware sale contracts Note 21 Leases This note provides information for leases where the group is the lessee. (i) Amounts recognised in the balance sheet The balance sheet shows the following amounts relating to leases: Right-of-use assets - Buildings Lease liabilities Current Non-current Consolidated 2020 $ 2019 $ 847,724 2,646,503 3,494,227 1,307,707 96,659 1,404,366 Consolidated 2020 $ 98,783 98,783 2019 $ 580,845 580,845 30 June 2020 $ 2,853,427 141,124 2,778,979 2,920,103 30 June 2019 $ - - - - There were no additions to the right-of-use asset during the year ended 30 June 2020. (i) Amounts recognised in the statement of profit or loss and other comprehensive income The statement of profit or loss and other comprehensive income shows the following amounts relating to leases: Depreciation of right-of-use assets - Buildings Interest expense The total cash outflow for leases in the half year period was $254,271. 2020 $ 210,381 112,303 2018 $ - - 70 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 22 Borrowings ANNUAL FINANCIAL REPORT – 30 JUNE 2020 2020 Non- Current $ Current $ Total $ Current $ 2019 Non- Current $ Total $ 56,704 1,214,406 1,271,109 57,807 1,295,835 1,353,642 56,704 1,214,406 1,271,109 57,807 1,295,835 1,353,642 - 218,213 218,213 - 722,689 722,689 - - 10,905,530 10,905,530 940,902 4,087,262 4,902,738 940,902 4,087,262 11,721,006 15,808,268 815,476 274,917 1,937,095 2,212,011 4,145,069 13,016,841 17,161,910 Secured Bank loans (i) Total secured borrowings Unsecured Loan notes (ii) Other loans (iii) Total unsecured borrowings Total borrowings (i) Secured liabilities and assets pledged as security In December 2017, the group entered into a loan facility to purchase commercial land and buildings in Nova Scotia from which the Battery Testing Services business operates. The total available amount under the facility is CAD $1,330,000 and it has been fully drawn down as at 30 June 2020. The full facility is repayable in monthly instalments, commencing 15 December 2017 and ending 15 November 2042. The bank loan is secured by first mortgages over the group’s freehold land and buildings. The carrying amounts of non-financial assets pledged as security for current and non-current borrowings is $2,039,796 (2019: $2,054,971) (refer note 16). (ii) Loan notes During the financial year 10,000,000 convertible loan notes at $0.40 each were issued to the St Baker Energy Innovation Fund. The initial fair value of the convertible loan note portion of the bond was determined using a market interest rate for an equivalent non-convertible bond at the issue date. The liability is subsequently recognised on an amortised cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds are allocated to the conversion option and recognised in shareholders’ equity, net of income tax, and not subsequently remeasured. Loan notes converted during the year have been recognised at the carrying value for the proportion of the debt converted as at the date of conversion. 71 For personal use only Notes to the financial statements for the year ended 30 June 2020 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Note 22 Borrowings (continued) Key Loan Note Terms - $0.40 face value • Number of loan notes issued: 10,000,000 • Allowing for early conversion; • Unsecured loan note issued at AUD$0.40 per note; • Coupon 10% per annum capitalised over a term of 36 months; • Convertible at the option of the holder on 1 for 1 basis; • Redeemable by NOVONIX at any time (with 10 business days notice), subject to payment of interest on full term; • Maturity date of 36 months after the date of issue; and • The notes are not listed or tradeable. • 1 for 1 attaching option, exercisable at $0.80 per share with three years to expiry. During the financial year the Company undertook a capital raising which restructured the balance sheet of the Company and led to the redemption of all outstanding loan notes. Refer to note 11. At 30 June 2020 there are no Loan Notes outstanding. Reconciliation of movements in loan note liability: Balance at the beginning of the year Present value of liability component of loan notes issued during the year Loan note issue costs Interest accrued for the year Loan notes redeemed during the year (Note 11) 2020 $ 10,905,530 3,009,259 - 3,062,598 (16,977,387) 2019 $ - 9,582,684 (50,735) 1,373,581 - Balance at the end of the year - 10,905,530 (iii) Other loans ACOA Loans In December 2017, the group entered into a contribution agreement with Atlantic Canada Opportunities Agency (ACOA), for CAD$500,000. As at 30 June 2020, CAD$500,000 of the facility has been drawn down. The funding is to assist with expanding the market to reach new customers through marketing and product improvements. The facility is repayable in monthly instalments commencing 1 September 2019. In October 2018, the group entered into another contribution agreement with Atlantic Canada Opportunities Agency (ACOA), for CAD$500,000. As at 30 June 2020, CAD$500,000 of the facility has been drawn down. The funding is to assist in establishing a battery cell manufacturing facility. The facility is repayable in monthly instalments commencing 1 April 2020. 72 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 22 Borrowings (continued) CARES Act Loan During the financial year the Group secured a short-term loan under the CARES Act Paycheck Protection Program Loan scheme for USD$36,706. This is a COVID stimulus offered by the US Government. The loan is repayable in monthly instalments from 12 December 2020 and interest is charged at 1% fixed per annum. St Baker Energy Innovation Fund Short Term Loan In June 2019, the group entered into a short-term loan agreement with the St Baker Energy Innovation Fund for $4,000,000 at an interest rate of 10% per annum. The loan funds converted into 10,000,000 loan notes following shareholder approval, which was obtained on 31 July 2019. (iv) Fair value For all borrowings, other than the ACOA loan noted at (iii) above, the fair values are not materially different to their carrying amounts, since the interest payable on those borrowings is either close to current market rates or the borrowings are of a short-term nature. The ACOA loans are interest free. The initial fair value of the ACOA loans were determined using a market interest rate for equivalent borrowings at the issue date. This resulted in a day one gain of $100,152 in FY2018 (December 2017 loan) and a day 1 gain of $114,106 in FY2019 (October 2018 loan). 73 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 23 Contributed equity (a) Share capital Ordinary shares Fully paid (b) Ordinary share capital 2020 Shares 2019 Shares 2020 $ 2019 $ 348,206,772 128,137,680 99,851,510 38,163,405 Date 1 July 2018 24 June 2019 30 June 2019 17 January 2020 17 January 2020 15 June 2020 15 June 2020 5 June 2020 5-25 June 2020 30 June 2020 30 June 2020 Details Balance Exercise of options Balance Share purchase plan Placement to sophisticated investor Exercise of options Exercise of options Placement to institutional investors Rights issue entitlement offer Placement to SBEIF Share issue costs Balance Note (g) (d) (e) (g) (g) (f) (f) (f) Number of Shares 123,137,680 5,000,000 128,137,680 2,485,715 98,040 Issue Price - $0.51 $0.51 100,000 83,333 19,495,469 $0.785 $0.50 $0.29 $ 38,163,405 - 38,163,405 1,267,715 50,000 78,500 41,667 5,653,686 130,721,435 $0.29 37,909,216 67,085,100 $0.29 348,206,772 19,454,679 (2,767,358) 99,851,510 (c) Convertible loan notes Balance at the beginning of the reporting period 2020 Number 26,416,667 2019 Number - Issue of convertible loan notes - $0.40 each 10,000,000 17,250,000 Issue of convertible loan notes - $0.60 each - 9,166,667 Convertible loan notes redeemed Balance at the end of the year (36,416,667) - - 26,416,667 (d) Share Purchase Plan In January 2020 the Company undertook a Share Purchase Plan. The issue price under the Share Purchase Plan was $0.51 per share and provided an opportunity to existing shareholders to subscribe for up to $30,000 worth of new shares. (e) Placement to sophisticated investor In January 2020 the Company made a placement of 98,040 shares at $0.51 to a sophisticated investor. 74 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 23 Contributed equity (continued) (f) Capital raising transaction In June 2020 the Company completed a $63 million capital raising via an institutional placement, an accelerated non-renounceable rights issue and a strategic placement. Refer to Note 11. (g) Exercise of options On 24 June 2019, Philip St Baker exercised 5,000,000 options at an exercise price of $0.30 each. The Company provided a loan of $1,500,000 to Mr St Baker for the purpose of funding the exercise of 5,000,000 options (refer note 28). The loan is limited in recourse over the shares issued on exercise of the options, and the Company has placed a holding lock over the shares to secure repayment. These shares have been treated as treasury shares, and the limited recourse loan has been accounted for as a modification to a share-based payment, by way of extension of the expiry date of the options. Share capital will be increased when the loan is repaid. On 15 June 2020 183,333 options were exercised by employees (who are not KMP). 100,000 were exercisable at $0.785 and 83,333 were exercisable at $0.50. (h) Capital Management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The capital structure of the Group includes equity attributable to equity holders, comprising of issued capital, reserves and accumulated losses. In order to maintain or adjust the capital structure, the Company may issue new shares, sell assets to reduce debt or adjust the level of activities undertaken by the company. The Group monitors capital on the basis of cash flow requirements for operational, and exploration and evaluation expenditure. The Group will continue to use capital market issues to satisfy anticipated funding requirements. The Group has no externally imposed capital requirements. The Group’s strategy for capital risk management is unchanged from prior years. The Covid 19 pandemic has not impacted the Group’s ability to raise capital as evidenced by the $63 million capital raising completed in June 2020 and detailed in Note 11. Based on this, the Group’s strategy for capital risk management is unchanged from prior year. 75 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 24 Reserves ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Share-based payment reserve Foreign currency translation reserve Convertible loan note reserve (a) Share-based payment reserve Consolidated 2020 $ 2019 $ 22,817,908 1,500,247 6,219,812 30,537,967 15,258,956 950,004 5,229,071 21,438,031 Consolidated 2020 $ 2019 $ Share-based payment reserve 22,817,908 15,258,956 Movements: Balance 1 July 2019 Equity settled options cancelled Equity settled share-based payments Balance 30 June 2020 15,258,956 1,189,081 6,369,871 8,585,446 - 6,673,510 22,817,908 15,258,956 The share-based payment reserve records items recognised as expenses on valuation of director, employee and contractor options and performance rights. (b) Foreign currency translation reserve Consolidated 2020 $ 2019 $ Foreign currency translation reserve 1,504,430 950,004 Movements: Balance 1 July 2019 Exchange differences on operations Balance 30 June 2020 translation of foreign 950,004 140,608 550,243 809,396 1,500,247 950,004 The foreign currency translation reserve records exchange differences arising on translation of a foreign controlled subsidiary. 76 For personal use only Notes to the financial statements for the year ended 30 June 2020 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Note 24 Reserves (continued) (c) Convertible loan note reserve Consolidated 2020 $ 2019 $ Convertible loan note reserve 6,219,812 5,229,071 Movements: Balance 1 July 2019 Equity component of loan notes issued during the year Loan note issue costs Balance 30 June 2020 5,229,071 990,741 - 2,426,120 2,817,316 (14,365) 6,219,812 5,229,071 Convertible loan notes are compound financial instruments. The present value of the liability component of the loan notes issued in August 2019, at initial recognition, was $3,009,259. The balance of $990,741 was recognised in the convertible note reserve. In discounting the loan notes to present value to determine the equity proportion of the compound financial instrument, NOVONIX adopted an effective interest rate of 24.25% pa. The present value of the liability component of the loan notes issued in March 2019, at initial recognition, was $5,170,660. The balance of $1,702,340 was recognised in the convertible note reserve. In discounting the loan notes to present value to determine the equity proportion of the compound financial instrument, NOVONIX adopted an effective interest rate of 24.5% pa. The present value of the liability component of the loan notes issued in August 2018, at initial recognition, was $4,361,289. The balance of $1,100,611 was recognised in the convertible note reserve. In discounting the loan notes to present value to determine the equity proportion of the compound financial instrument, NOVONIX adopted an effective interest rate of 25.6% pa. 77 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 25 Operating segments The Group has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors (Chief Operating Decision Makers) in assessing performance and determining the allocation of resources. The Group is managed primarily on an operational basis. Operating segments are determined on the basis of financial information reported to the Board. The board has identified three operating segments being Graphite Exploration and Mining, Battery Technology and Battery Materials. The Battery Materials segment develops and manufactures battery anode materials and the Battery Technology segment develops battery cell testing equipment, performs consulting services and carried out research and development in battery development. Basis of accounting for purposes of reporting by operating segments a. Accounting policies adopted Unless stated otherwise, all amounts reported to the Board of Directors, being the chief operating decision makers with respect to operating segments, are determined in accordance with accounting policies that are consistent with those adopted in the annual financial statements of the Group. b. Segment assets Where an asset is used across multiple segments, the asset is allocated to the segment that receives the majority of the economic value from the asset. In most instances, segment assets are clearly identifiable on the basis of their nature and physical location. c. Segment liabilities Liabilities are allocated to segments where there is a direct nexus between the incurrence of the liability and the operations of the segment. Borrowings and tax liabilities are generally considered to relate to the Group as a whole and are not allocated. Segment liabilities include trade and other payables. d. Unallocated items The following items for revenue, expenses, assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment: Interest income - - Corporate administrative and other expenses - - Corporate share-based payments - Corporate marketing and project development expenses Income tax expense 78 For personal use only Notes to the financial statements for the year ended 30 June 2020 Note 25 Operating segments (continued) ANNUAL FINANCIAL REPORT – 30 JUNE 2020 e. Segment information Segment performance 2020 Segment revenue Other income Interest income Total income Segment net profit / (loss) from continuing operations before tax 2019 Segment revenue Other income Interest income Total income Segment net profit / (loss) from continuing operations before tax Segment assets Graphite Exploration and Mining $ - - - - - Battery Technology $ 4,253,435 785,154 - 5,038,589 Battery Materials $ - Unallocated $ - Total $ 4,253,435 - - - 59,000 844,154 723 723 59,723 5,098,312 (853,084) (7,426,978) (11,748,464) (20,028,526) Graphite Exploration and Mining $ - Battery Technology $ 1,817,049 Battery Materials $ - Unallocated $ - Total $ 1,817,049 - - - 443,679 2,576,131 341 3,020,151 - - 2,260,728 2,576,131 4,533 4,874 4,533 4,841,733 (10,667,897) (9,109,713) (470,476) (6,257,481) (26,505,567) Graphite Exploration and Mining $ 2,998,439 Battery Technology $ 5,872,307 Battery Materials $ 28,744,416 Unallocated $ 37,642,256 Total $ 75,257,418 2020 Segment assets 79 For personal use only Notes to the financial statements for the year ended 30 June 2019 Note 25 Operating segments (continued) ANNUAL FINANCIAL REPORT – 30 JUNE 2020 2019 Segment assets Segment liabilities 2020 Segment liabilities Graphite Exploration and Mining $ 2,850,794 Battery Technology $ 5,354,006 Battery Materials $ 21,386,941 Unallocated $ 5,328,158 Total $ 34,919,899 Graphite Exploration and Mining $ - Battery Technology $ 2,868,546 Battery Materials $ 3,604,836 Unallocated $ 2,252,043 Total $ 8,725,125 Graphite Exploration and Mining $ Battery Technology $ Battery Materials $ Unallocated $ Total $ 2019 Segment liabilities - 2,809,998 1,279,125 15,057,999 19,147,121 Geographical Segments For the purposes of segment reporting, all segment activities relating to Graphite Exploration and Mining are carried out in Australia and all segment activities relating to Battery Materials and Battery Technology are carried out in North America. 80 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 26 Cash flow information Reconciliation of profit / (loss) after income tax to net cash outflow from operating activities Profit / (loss) for the period Adjustments for Share based payments Borrowing costs Fixed assets written off Foreign exchange (gain) loss Gain on acquisition of subsidiary Share of net loss of joint venture Fair value gain on borrowings Impairment losses Amortisation & depreciation expense Income tax expense Change in operating assets and liabilities: (Increase)/decrease in other operating assets Increase in trade creditors Increase in other operating liabilities Net cash outflow from operating activities Consolidated 2020 $ (20,028,526) 2019 $ (26,121,912) 7,558,953 5,098,906 210,773 387,371 - - - - 1,380,303 - (976,969) 387,198 388,474 (5,593,517) 6,673,510 1,405,456 90,477 (174,990) (2,576,131) 751,981 (114,106) 15,918,925 494,948 (273,939) (672,354) 288,424 309,624 (4,000,087) 81 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 26 Cash flow information (continued) (a) Net debt reconciliation This section sets out an analysis of net debt and the movements in net debt for each period presented. Net debt Cash and cash equivalents Lease liability - repayable within one year Borrowings – repayable within one year (including overdraft) Lease liability - repayable after one year Borrowings – repayable after one year Net cash (debt) Cash and cash equivalents Gross debt – fixed interest rates Gross debt – variable interest rates Net cash (debt) 2020 $ 2019 $ 38,807,662 (141,124) (274,917) (2,778,979) (1,937,095) 33,675,547 38,807,662 (887,532) (4,244,583) 33,675,547 6,054,664 - (4,145,069) - (13,016,841) (11,107,246) 6,054,664 (15,808,268) (1,353,642) (11,107,246) Liabilities from financing activities Borrowings due within 1 year $ (56,254) (3,964,813) - Borrowings due after 1 year $ (1,645,776) (574,917) (10,905,530) Total $ (1,336,438) 1,149,342 (10,905,530) (124,002) (4,145,069) (6,118,751) 4,000,000 - 5,847,779 (416,041) 109,382 (13,016,841) 6,508,544 (4,000,000) (14,620) (11,107,246) 33,142,791 - 10,468,843 (4,676,620) (4,716,074) 10,468,843 1,171,159 33,675,547 Cash $ 365,592 5,689,072 - - 6,054,664 32,752,998 - - 38,807,662 Net debt as at 1 July 2018 Cashflows Conversion/proceeds of loan notes Other non-cash movements Net debt as at 30 June 2019 Cashflows Conversion of short-term loan to loan notes Redemption of loan notes Other non-cash movements Net cash as at 30 June 2020 82 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 27 Interests in subsidiaries Information about Principal Subsidiaries The Group’s material subsidiaries at 30 June 2020 are set out in the following table. Unless otherwise stated, each entity has share capital consisting solely of ordinary shares that are held by the Group, and the proportion of ownership interest held equals the voting rights held by the Group. The country of incorporation or registration is also their principal place of business. Name of entity MD South Tenements Pty Ltd Novonix Battery Testing Services Inc Place of business / country of incorporation Australia Ownership interest held of the group 2019 2020 % % 100% 100% Canada 100% 100% Principal activities Graphite exploration Battery technology services. Novonix Corp PUREgraphite LLC USA USA 100% 100% 100% 100% Investment Battery materials development Note 28 Share-based payments OPTIONS A summary of movements of all options issued is as follows: Options outstanding as at 1 July 2018 Granted Granted – Subject to shareholder approval Forfeited Exercised Options outstanding as at 30 June 2019 Granted to employees Granted to loan note holders (refer Note 22) Cancelled Expired Exercised Options outstanding as at 30 June 2020 Number Weighted Average Exercise Price 21,175,000 33,710,000 17,500,000 (365,000) (5,000,000) 67,020,000 4,500,000 10,000,000 (40,500,000) (970,000) (183,333) 39,866,667 $0.64 $0.69 $0.50 $0.65 $0.30 $0.65 $0.50 $0.80 $0.77 $0.60 $0.66 $0.55 The weighted average remaining contractual life of options outstanding at year end was 5.8 years (2019: 5.5 years). 83 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 28 Share-based payments (continued) Details of options awarded during the financial year are as follows: a. On 8 July 2019, 2,500,000 share options were awarded to an employee of the group (who is not KMP). The terms of the options are set out in the table below. The options hold no voting or dividend rights and are not transferable. The options vest in 10 tranches on achievement of progressive PUREgraphite sales milestones. The vesting dates in the table below represent the current estimate of when the vesting conditions will be met. The fair value of these options was $804,375. This value was calculated using a binomial option pricing model applying the following inputs: Number of options Exercise price Award date Expiry date Vesting date Volatility Dividend yield Risk-free rate Fair value at grant date interest Tranche 1 250,000 $0.50 Tranche 3 250,000 $0.50 Tranche 4 250,000 $0.50 Tranche 2 250,000 $0.50 Tranche 10 250,000 $0.50 08/07/2019 08/07/2019 08/07/2019 08/07/2019 08/07/2019 08/07/2019 08/07/2019 08/07/2019 08/07/2019 08/07/2019 08/07/2029 08/07/2029 08/07/2029 08/07/2029 08/07/2029 08/07/2029 08/07/2029 08/07/2029 08/07/2029 08/07/2029 31/05/2022 31/03/2023 30/06/2023 30/11/2023 31/12/2023 28/02/2024 31/03/2024 30/04/2024 31/05/2024 30/06/2024 85.08% 0% 1.32% Tranche 7 250,000 $0.50 Tranche 9 250,000 $0.50 Tranche 8 250,000 $0.50 Tranche 6 250,000 $0.50 Tranche 5 250,000 $0.50 85.08% 0% 1.32% 85.08% 0% 1.32% 85.08% 0% 1.32% 85.08% 0% 1.32% 85.08% 0% 1.32% 85.08% 0% 1.32% 85.08% 0% 1.32% 85.08% 0% 1.32% 85.08% 0% 1.32% $0.3026 $0.3115 $0.3179 $0.3201 $0.3248 $0.3255 $0.3264 $0.3270 $0.3307 $0.3310 84 For personal use only Note 28 Share-based payments (continued) Details of options awarded during the financial year are as follows: b. On 7 December 2019, 1,000,000 share options were awarded to an employee of the group (who is not KMP). The terms of the options are set out in the table below. The options hold no voting or dividend rights and are not transferable. The options vest in 10 tranches on achievement of progressive PUREgraphite sales milestones. The vesting dates in the table below represent the current estimate of when the vesting conditions will be met. The fair value of these options was $456,580. This value was calculated using a binomial option pricing model applying the following inputs: ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Number of options Exercise price Award date Expiry date Vesting date Volatility Dividend yield Risk-free rate Fair value at grant date interest Tranche 1 100,000 $0.50 7/12/2019 7/12/2029 Tranche 3 100,000 $0.50 7/12/2019 7/12/2029 Tranche 2 100,000 $0.50 7/12/2019 7/12/2029 Tranche 10 100,000 $0.50 7/12/2019 7/12/2029 31/05/2022 31/03/2023 30/06/2023 30/11/2023 31/12/2023 28/02/2024 31/03/2024 30/04/2024 31/05/2024 30/06/2024 84.89% 0% 1.14% Tranche 9 100,000 $0.50 7/12/2019 7/12/2029 Tranche 4 100,000 $0.50 7/12/2019 7/12/2029 Tranche 8 100,000 $0.50 7/12/2019 7/12/2029 Tranche 7 100,000 $0.50 7/12/2019 7/12/2029 Tranche 6 100,000 $0.50 7/12/2019 7/12/2029 Tranche 5 100,000 $0.50 7/12/2019 7/12/2029 84.89% 0% 1.14% 84.89% 0% 1.14% 84.89% 0% 1.14% 84.89% 0% 1.14% 84.89% 0% 1.14% 84.89% 0% 1.14% 84.89% 0% 1.14% 84.89% 0% 1.14% 84.89% 0% 1.14% $0.4274 $0.4415 $0.4513 $0.4543 $0.4611 $0.4623 $0.4636 $0.4644 $0.4696 $0.4703 85 For personal use only Note 28 Share-based payments (continued) Details of options awarded during the financial year are as follows: c. On 16 January 2020, 1,000,000 share options were awarded to an employee of the group (who is not KMP). The terms of the options are set out in the table below. The options hold no voting or dividend rights and are not transferable. The options vest in 10 tranches on achievement of progressive PUREgraphite sales milestones. The vesting dates in the table below represent the current estimate of when the vesting conditions will be met. The fair value of these options was $377,390. This value was calculated using a binomial option pricing model applying the following inputs: ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Number of options Exercise price Award date Expiry date Vesting date Volatility Dividend yield Risk-free rate Fair value at grant date interest Tranche 3 100,000 $0.50 Tranche 4 100,000 $0.50 Tranche 2 100,000 $0.50 Tranche 1 100,000 $0.50 Tranche 10 100,000 $0.50 16/01/2020 16/01/2020 16/01/2020 16/01/2020 16/01/2020 16/01/2020 16/01/2020 16/01/2020 16/01/2020 16/01/2020 16/01/2030 16/01/2030 16/01/2030 16/01/2030 16/01/2030 16/01/2030 16/01/2030 16/01/2030 16/01/2030 16/01/2030 31/05/2022 31/03/2023 30/06/2023 30/11/2023 31/12/2023 28/02/2024 31/03/2024 30/04/2024 31/05/2024 30/06/2024 82.80% 0% 1.18% Tranche 9 100,000 $0.50 Tranche 7 100,000 $0.50 Tranche 8 100,000 $0.50 Tranche 6 100,000 $0.50 Tranche 5 100,000 $0.50 82.80% 0% 1.18% 82.80% 0% 1.18% 82.80% 0% 1.18% 82.80% 0% 1.18% 82.80% 0% 1.18% 82.80% 0% 1.18% 82.80% 0% 1.18% 82.80% 0% 1.18% 82.80% 0% 1.18% $0.3541 $0.3648 $0.3726 $0.3753 $0.3809 $0.3819 $0.3832 $0.3839 $0.3883 $0.3889 86 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 28 Share-based payments (continued) PERFORMANCE RIGHTS A summary of movements of all performance rights issued is as follows: Number on issue Number Vested Performance rights outstanding as at 1 July 2018 Granted Exercised Expired 1,645,833 1,750,000 - - Performance rights outstanding as at 30 June 2019 3,395,833 Vested - Performance rights outstanding as at 30 June 2020 3,395,833 895,833 - - - 895,833 1,500,000 2,395,833 In FY2018, a total of 2,500,000 performance rights were awarded to KMP (1,750,000 were subject to shareholder approval and were formally granted in FY2019). Although not all vesting conditions were met by the vesting date of 1 January 2020, the overall performance of the Company and the Executives has been high, and therefore the board approved the vesting of 60% (1,500,000) of the performance rights on a discretionary basis. The associated expense for FY2020 for these performance rights is $78,362. Note 29 Events after the reporting date No matters or circumstances have arisen since the end of the financial year which significantly affected or could significantly affect the operations of the Company, the results of those operations or the state of affairs of the Company in future financial years. 87 For personal use only Notes to the financial statements for the year ended 30 June 2020 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Note 30 Related party transactions During the financial year: (a) Philip St Baker was paid rent totalling $77,579 (USD$52,000), for the use of property owned by Mr St Baker in Colorado, USA. Mr St Baker’s salary has been adjusted to reflect the additional benefit Mr St Baker is receiving. (b) 10,000,000 unsecured loan notes with a face value of $0.40 were issued to the St Baker Energy Innovation Fund, a related party of Mr St Baker, on the terms set out in note 22. Prior to the issue of the loan notes, the St Baker Energy Innovation Fund provided the Company with a $4,000,000 short-term unsecured loan bearing interest at a rate of 10%. Following shareholder approval on 31 July 2019 for the loan notes, the short-term loan was converted to loan notes. (c) In March 2020 the Company entered into a short-term loan agreement with the St Baker Energy Innovation Fund for $3,400,000. The loan is unsecured, interest bearing at a rate of 12.5% pa from the date of drawdown calculated on a daily basis and is repayable upon the earlier of the Company raising sufficient funds and 6 months. This loan was settled as part of the June 2020 Capital Raising, refer note 11. (d) At a General Meeting of Shareholders held on 30 June 2020, Shareholders approved the issue of 67,085,100 fully paid ordinary shares to the St Baker Energy Innovation Fund at an issue price of $0.29 per share raising $19,454,679. The consideration for the shares received consisted of cash and the retirement of both convertible loan notes and short-term loans owing. Details of the Strategic Placement are set out in the table below: Face value of loan notes and balance Interest of short-term accrued loan $ $ 10,000,000 1,187,397 131,575 3,400,000 - - 13,400,000 1,318,972 Placement Total proceeds $ $ - 11,187,397 3,531,575 - 4,735,707 4,735,707 4,735,707 19,454,679 Shares issued (Number) 38,577,232 12,177,845 16,330,023 67,085,100 Loan notes redeemed Short-term loan repaid Placement proceeds Total (e) The Group entered into short-term loan agreements with directors totaling $3,148,960. These loans were unsecured, interest bearing at a rate of 8% pa from the date of drawdown calculated on a daily basis, and were repayable upon the earlier of the Company raising sufficient funds and 6 months. These loans were settled as part of the Capital Raising (refer to note 11). There were no other related party transactions during the financial year. For details of disclosures relating to key management personnel, refer to Note 8. 88 For personal use only Notes to the financial statements for the year ended 30 June 2020 ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Note 31 Commitments (a) Exploration commitments Commitments for payments under exploration permits in existence at the reporting date but not recognised as liabilities payable Consolidated 2020 $ 2019 $ 6,000 5,000 So as to maintain current rights to tenure of various exploration tenements, the Group will be required to outlay amounts in respect of tenement exploration expenditure commitments. These outlays, which arise in relation to granted tenements are noted above. The outlays may be varied from time to time, subject to approval of the relevant government departments, and may be relieved if a tenement is relinquished. Exploration commitments are calculated on the assumption that each of these tenements will be held for its full term. But, in fact, commitments will decrease materially as exploration advances and ground that is shown to be unprospective is progressively surrendered. Expenditure commitments on prospective ground will be met out of existing funds, farm-outs, and new capital raisings. (b) Non-cancellable operating leases The Group entered into a commercial lease for the rental of a property in Tennessee, USA. The lease has a remaining life of 14 years (after factoring in extension options). There are no restrictions placed upon the lessee by entering into these leases. From 1 July 2019, the Group has recognised a right-of- use asset for this lease, see note 2 ‘Changes in accounting policies’ for further information. Within one year Later than one year but not later than five years Later than five years 2019 $ 242,481 1,043,910 - 1,286,391 89 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 32 Financial risk management This note explains the group’s exposure to financial risks and how these risks could affect the group’s future financial performance. Current year profit and loss information has been included where relevant to add further context. The Group’s financial instruments consist mainly of deposits with banks and accounts receivable and payable. The totals for each category of financial instruments, measured in accordance with AASB 139: Financial Instruments: Recognition and Measurement as detailed in the accounting policies to these financial statements, are as follows: Financial assets Cash and cash equivalents Trade and other receivables Total financial assets Financial liabilities Trade payables Lease liabilities Borrowings Total financial liabilities Consolidated 2020 $ 2019 $ Notes 38,807,662 1,075,357 39,883,019 847,724 2,920,103 2,212,012 5,979,839 6,054,664 601,778 6,656,442 1,307,707 - 17,161,910 18,469,617 The Board has overall responsibility for the determination of the Group’s risk management objectives and policies. 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. Market risk Market risk is the risk that the change in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The Group is not exposed to market risks other than interest rate risk. Foreign currency risk Exposure to foreign currency risk may result in the fair value or future cash flows of a financial instrument fluctuating due to movement in foreign exchange rates of currencies in which the Group holds financial instruments which are other than the AUD functional currency of the Group. With instruments being held by overseas operations, fluctuations in the US dollar and the Canadian dollar may impact on the Group’s financial results. 90 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 32 Financial risk management (continued) The following table shows the foreign currency risk as on the financial assets and liabilities of the Group’s operations denominated in currencies other than the functional currency of the operations. The group’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: Cash at bank Trade receivables Borrowings Trade payables 2020 CAD $ 377,909 50,321 2,025,562 154,305 2019 CAD $ 196,014 23,244 2,076,876 25,454 2020 USD $ 16,591,686 616,494 36,706 349,475 2019 USD $ 559,305 232,417 - 919,415 Cash flow and fair value interest rate risk The group’s main interest rate risk arises from long-term borrowings with variable rates, which expose the group to cash flow interest rate risk. During 2020, the group’s borrowings at variable rates were denominated in Canadian dollars. As the Group has interest-bearing cash assets, the Company’s income and operating cash flows are exposed to changes in market interest rates. The Company manages its exposure to changes in interest rates by using fixed term deposits. At 30 June 2020, if interest rates had changed by -/+ 100 basis points from the year-end rates with all other variables held constant, post-tax profit / (loss) for the year would have been $397,091 (2019: $60,547) lower/higher, as a result of higher/lower interest income from cash and cash equivalents. Credit risk Credit risk is managed on a Group basis. Credit risk arises primarily from cash and cash equivalents and deposits with banks and financial institutions. For bank and financial institutions, only independently rated parties with a minimum rating of ‘AAA’ are accepted. The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available). Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities to meet obligations when due. 91 For personal use only ANNUAL FINANCIAL REPORT – 30 JUNE 2020 Notes to the financial statements for the year ended 30 June 2020 Note 32 Financial risk management (continued) The Group manages liquidity risk by continuously monitoring forecast and actual cash flows. No finance facilities were available to the Group at the end of the reporting period. All financial assets mature within one year. The maturity of all financial liabilities is set out in the table below. Financing arrangements The group has no undrawn borrowing facilities as at 30 June 2020. Maturities of financial liabilities As at 30 June 2020, the contractual maturities of the group’s non-derivative financial liabilities were as follows: Contractual maturities of financial liabilities At 30 June 2020 Trade payables Lease liabilities Borrowings Total non- derivatives Less than 6 months 6 - 12 months Between 1 and 2 years Between 2 and 5 years Over 5 years Total contractual cash flows Carrying amount 847,724 127,370 102,143 - 128,000 116,424 - 262,931 227,631 - - 826,551 2,478,877 566,086 1,544,740 847,724 847,724 3,823,729 2,920,103 2,557,024 2,212,011 1,077,237 244,424 490,562 1,392,637 4,023,617 7,228,477 5,979,838 END OF ANNUAL FINANCIAL REPORT – 30 JUNE 2020 92 For personal use only DIRECTORS’ DECLARATION DIRECTORS’ DECLARATION In the Directors’ opinion: (a) the financial statements and notes set out on pages 33 to 92 are in accordance with the Corporations Act 2001, including: (I) (ii) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and giving 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 (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. Note 1 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Managing Director and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. A Bellas Director Brisbane, 21 September 2020 93 For personal use only Independent auditor’s report To the members of Novonix Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Novonix Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2020 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: the consolidated balance sheet as at 30 June 2020 the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the consolidated statement of profit or loss and other comprehensive income for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & 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. PricewaterhouseCoopers, ABN 52 780 433 757 480 Queen Street, BRISBANE QLD 4000, GPO Box 150, BRISBANE QLD 4001 T: +61 7 3257 5000, F: +61 7 3257 5999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 94 For personal use only Material uncertainty related to going concern We draw attention to Note 1 in the financial report, which indicates that the Group incurred a net loss of $20.0m and net operating cash outflows of $5.6m during the year ended 30 June 2020. The ability of the Group to continue as a going concern depends upon the ability of the Group to raise capital as and when necessary, and the successful and profitable growth of the battery materials and battery technology businesses. These conditions, along with other matters set forth in Note 1, indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. The Group is an integrated developer and supplier of materials, equipment and services for the global lithium-ion battery industry with operations in the USA and Canada. The Group also owns a natural graphite deposit in Queensland, Australia. The regional finance functions report to the Group finance function in Brisbane, Australia, where consolidation is performed. Materiality For the purpose of our audit we used overall Group materiality of $0.75 million, which represents approximately 1% of the Group’s total assets. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose total assets as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured whilst not in the commercialisation phase. We utilised a 1% threshold based on our professional judgement, noting it is within the range of commonly acceptable asset related thresholds. Audit Scope Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. The accounting processes are structured around the Group finance function located in Brisbane. 95 For personal use only 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 for the current period. The key audit 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. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit Committee. In addition to the matter described in the Material uncertainty related to going concern section, we have determined the matter(s) described below to be the key audit matters to be communicated in our report. Key audit matter How our audit addressed the key audit matter Accounting for the capital raising (Refer to note 11) Our procedures in relation to accounting for the capital raising included, amongst others: In June 2020, the Group completed a $63m capital raising via an institutional placement, an accelerated non-renouncable rights issue, and a strategic placement. The capital raising resulted in the simplification of the Group’s capital structure through the redemption of convertible loan notes and the settlement of short term loans, as well as the cancellation of 40.5m options held by Directors, management and loan note holders. Due to the multiple elements of the capital raising, a number of areas of the financial statements were impacted, including borrowings, equity, finance costs and share based payment expenses. Accounting for the capital raising was a key audit matter due to its financial significance and its impact on the financial statements. Obtaining ASX filings detailing the number of shares issued as part of the capital raising Agreeing cash proceeds raised to bank statements Obtaining underwriting agreements and convertible loan note redemption notices Recalculating both the fair value and the carrying value of convertible loan note liabilities at redemption date, with reference to the convertible loan note agreements Agreeing that the difference between the fair value and the carrying value of convertible loan notes at redemption date was recognised appropriately as a loss within borrowing costs Recalculating the value of short term loans at settlement date, with reference to the loan agreements Agreeing cash settlements to bank statements, for the portion of convertible loan notes and short term loans settled in cash Obtaining share option cancellation agreements and the relevant ASX filings detailing the number of options being cancelled Recalculating the accelerated expense for each of the tranches of cancelled options Assessing the accuracy and completeness of the related disclosures in the financial statements, in light of the requirements of Australian Accounting Standards 96 For personal use only Key audit matter How our audit addressed the key audit matter Assessing the recoverability of the Group’s goodwill (Refer to note 12) At 30 June 2020, the Group recognised $17.4m of goodwill, which is allocated fully to the PUREgraphite cash generating unit (“CGU”). As required by Australian Accounting Standards, at 30 June 2020, the Group performed an impairment assessment over the goodwill balance by calculating a recoverable amount of the PUREgraphite CGU. The recoverable amount of the PUREgraphite CGU was determined by the Group on a ‘Fair Value less Costs to Sell’ basis. Assessing the recoverability of the Group’s goodwill was considered a key audit matter due to the financial significance of the goodwill, as well as the judgement involved in assessing its recoverability. Our procedures in relation to assessing the recoverability of the Group’s goodwill included, amongst others: Assessing the appropriateness of the Group’s determination of its CGUs Assessing whether the allocation of assets, including goodwill, to CGUs was consistent with our knowledge of the Group’s operations and internal reporting Testing the mathematical accuracy of the Group’s underlying calculation of the recoverable amount of the CGU Assessing the methodology adopted by management in determining the recoverable amount, with the assistance of PwC Valuation experts Evaluating the adequacy of the related disclosures in the financial statements, in light of the requirements of Australian Accounting Standards We also compared the Group’s net assets as at 30 June 2020 of $66.5m to its market capitalisation of $302.9m at 30 June 2020, and noted the $236.4m of implied headroom in the comparison. Measurement and recognition of share based payment transactions (Refer to note 28) Our procedures in relation to assessing the measurement and recognition of share based payment transactions included, amongst others: For the year ended 30 June 2020, the Group recognised share based payment expenses totalling $7.6m. Accounting for share based payment transactions requires judgement in determining the fair value of the equity instruments on grant date and assessing the vesting period over which the share based payment expense should be recognised. There is also judgement in assessing the likelihood and timing of specific performance hurdles being met. The measurement and recognition of share based payment transactions was deemed to be a key audit matter due to the level of judgement involved, the magnitude of the share based payment expenses and the contribution of share based payment expenses to For grants of new options during the year: o Obtaining formal documents detailing the relevant terms and conditions of the grants o o Assessing the calculation of the fair value of the options on grant date Assessing whether the assumption that any applicable performance conditions will be met is consistent with management forecasts Recalculating the expense for the year ended 30 June 2020 based on the grant date fair value, the Group’s assumptions for the expected number of options or performance rights to 97 For personal use only Key audit matter How our audit addressed the key audit matter the overall remuneration received by key management personnel. vest, and the vesting period, with reference to the terms and conditions stated in the relevant documentation, and management forecasts Assessing the accuracy and completeness of the related disclosures in the financial statements, in light of the requirements of Australian Accounting Standards Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2020, but does not include the financial report and our 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 on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the 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 have 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 the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor's report. 98 For personal use only Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 16 to 27 of the directors’ report for the year ended 30 June 2020. In our opinion, the remuneration report of Novonix 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. PricewaterhouseCoopers Michael Shewan Partner Brisbane 21 September 2020 99 For personal use only SHAREHOLDER INFORMATION SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 14 September 2020. A Distribution of equity securities Analysis of numbers of equity security holders by size of holding: 1 - 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Class of equity security Ordinary shares 6,214 5,814 1,513 1,719 240 15,500 There were 333 holders of less than a marketable parcel of ordinary shares. B Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities are listed below: Ordinary shares Name St Baker Energy Holdings Pty Ltd Allegro Capital Nominees Pty Ltd Washington H Soul Pattinson and Company Limited Philip St Baker & Peta St Baker Argo Investments Limited Citicorp Nominees Pty Ltd Carpe Diem Asset Management Pty Ltd HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Merrill Lynch (Australia) Nominees Pty Limited George Chapman Mutual Trust Pty Ltd HSBC Custody Nominees (Australia) Limited – A/c 2 CS Third Nominees Pty Ltd David Andrew Stevens Apollan Pty Ltd Mrs Mingmin Lu BNP Paribas Nominees Pty Ltd John Christopher Burns Maria Bellas Total Number held 60,901,581 24,336,337 14,729,466 14,094,740 13,296,969 10,594,713 9,047,622 6,036,655 4,404,053 4,309,329 4,166,670 4,132,794 4,099,409 3,890,411 3,843,627 3,323,173 3,246,412 2,503,247 2,331,936 2,300,000 195,589,144 % of issued shares 17.73 7.09 4.29 4.10 3.87 3.08 2.63 1.76 1.28 1.25 1.21 1.20 1.19 1.13 1.12 0.97 0.95 0.73 0.68 0.67 56.93 100 For personal use only Unquoted equity securities Performance rights Share options SHAREHOLDER INFORMATION Number on issue 3,395,833 39,116,667 Number of holders 5 21 Holders of more than 20% of unquoted share options on issue Andrew Liveris Christopher Burns Number held 14,000,000 9,500,000 % of total on issue 35.8% 24.3% Holders of more than 20% of unquoted performance rights on issue Philip St Baker C Substantial holders Substantial holders in the company are set out below: Number held 1,895,833 % of total on issue 55.8% Ordinary shares Greg Baynton and Allegro Capital Nominees Pty Ltd St Baker Energy Holdings Pty Ltd Number held Percentage 24,990,019 63,076,145 7.2% 18.1% D Voting rights The voting rights attaching to each class of equity securities are set out below: (a) (b) (c) (d) 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. Performance rights: No voting rights Share options: No voting rights Loan notes: No voting rights END OF SHAREHOLDER INFORMATION 101 For personal use only
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