NUIX PTY LTD AND CONTROLLED ENTITIES ANNUAL REPORT 30 June 2020 ABN 80 117 140 235 PAGE 1 of 74 FINDING TRUTH IN A DIGITAL WORLD PAGE 2 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Contents Corporate Directory .................................................................................... 5 Chairman’s Report ..................................................................................... 6 CEO’s Message ......................................................................................... 8 Directors’ Report ...................................................................................... 10 Consolidated Statement of Comprehensive Income ................................ 15 Consolidated Statement of Financial Position .......................................... 16 Consolidated Statement of Changes In Equity ......................................... 17 Consolidated Statement of Cash Flows ................................................... 18 Notes to the Consolidated Financial Statements ...................................... 19 1. 2. 3. 4. 5. 6. 7. 8. 9. Statement of significant accounting policies ................................................. 19 Financial risk management ........................................................................... 40 Segment information ..................................................................................... 44 Profit for the year .......................................................................................... 45 Revenue........................................................................................................ 46 Other income ................................................................................................ 46 Income tax expense ...................................................................................... 47 Cash and cash equivalents........................................................................... 48 Trade and other receivables ......................................................................... 49 10. Other current assets ..................................................................................... 50 11. Property and equipment ............................................................................... 51 12. 13. Intangible assets ........................................................................................... 52 Leases .......................................................................................................... 53 14. Trade and other payables ............................................................................. 55 15. Deferred revenue .......................................................................................... 56 16. Provisions ..................................................................................................... 57 17. Borrowings .................................................................................................... 58 18. Issued capital ................................................................................................ 59 19. Equity ............................................................................................................ 59 20. Earnings per share ....................................................................................... 60 21. Dividends ...................................................................................................... 61 22. Auditors’ remuneration .................................................................................. 61 23. Related party disclosures ............................................................................. 62 24. Share-based payments ................................................................................. 63 PAGE 3 of 74 Nuix Pty Ltd and Controlled Entities Annual Report 25. Cash flow information ................................................................................... 66 26. Parent entity financial information ................................................................ 67 27. Events after the reporting date ..................................................................... 67 Director’s Declaration ............................................................................... 68 Auditor’s Independence Declaration ........................................................ 69 Independent Auditor’s Report ................................................................... 70 Shareholder Information ........................................................................... 72 PAGE 4 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Corporate Directory Directors Daniel Phillips – Non-Executive Director and Chairman, Non-Independent David Standen – Non-Executive Director, Non-Independent Roy Frank Grady – Non-Executive Director, Independent Mark Warren de Ambrosis – Non-Executive Director, Non-Independent Jeffrey Bleich – Non-Executive Director, Independent Rodney Graeme Vawdrey – Executive Director, Non-Independent Anthony Castagna – Non-Executive Director, Non-Independent Group Chief Executive Officer Rodney Graeme Vawdrey Chief Financial Officer Stephen Doyle Registered Office and Share Registry Company Secretaries Auditors Total year Legal Advisors Bankers Financiers Nuix Pty Ltd Level 27 1 Market Street SYDNEY, NSW 2000 Telephone: +61 2 9280 0699 Facsimile: +61 2 9212 6902 Stephen Doyle Brian Krupczak Michael Gerard Egan PricewaterhouseCoopers One International Towers Watermans Quay, Barangaroo SYDNEY NSW 2000 DLA Piper Australia 140 William Street Melbourne VIC 3000 PO Box 4301 Australia Commonwealth Bank of Australia Business Banking Level 8, 201 Sussex Street SYDNEY NSW 2000 Commonwealth Bank of Australia Business Banking Level 8, 201 Sussex Street SYDNEY NSW 2000 Website Address www.nuix.com PAGE 5 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Chairman’s Report Dear Shareholder, The Board of Nuix Pty Ltd (hereafter referred to as the ‘Company’) is pleased to present the Annual Report of the Company and its subsidiaries (hereafter referred to as ‘Nuix’ or ‘Group’) for the financial year ended 30 June 2020. This year, the Group earned total sales of $175,858,894 (2019 (Restated): $139,633,198), representing 26% year on year growth. The Group achieved a full-year profit after tax of $23,587,666 compared with $7,441,818 (Restated) in the previous year. OUR ASSETS AND CAPABILITIES Nuix's key assets are: ● ● its range of software applications that enable organisations to make fact-based decisions from structured, semi-structured and unstructured data; and the extensive knowledge of its global team of industry experts. Our software, built around the Nuix Engine, enables users to search, correlate, analyse and report on data at massive scale and in hundreds of formats. BUSINESS AND INDUSTRY OVERVIEW Organisations are finding themselves unprepared to investigate, manage, secure, de-risk and utilise the massive amounts of data they hold. This poses commercial, competitive and legal risks. Nuix technology is perfectly positioned to help organisations: ● manage the data; ● comply with legal and regulatory obligations; ● reduce losses that result from external and insider data breaches; and ● exploit the data to create value. OUR GROWTH STRATEGY We plan to make our software a ubiquitously available platform for solving global risk, compliance and security challenges. The key elements of our strategy are briefly outlined below: Extend our technological capabilities We intend to continue to invest heavily in our product development efforts to deliver additional features and solutions that address existing customer needs and new end-markets. We focus on attracting and retaining thought leaders and engineering talent who can expand the Nuix core engine into adjacent product and technology areas that enable organisations to further investigate, secure and unlock the value of their data. Drive incremental revenue from existing customers We will continue to cultivate incremental sales from our existing customers through increased use of our software. This will be achieved by additional deployments and new use cases in processing, investigation and analysis of data. PAGE 6 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Chairman’s Report (continued) Develop products that enable organisations in adjacent markets to use our software in different ways We believe there is a significant opportunity to leverage our core engine into new solutions that help organisations investigate, manage, secure and unlock the value of their data in specific markets and use cases. Training and certification services (across our range of solutions) and partner-led consulting services (notably in GRC [Governance, Risk and Compliance], cybersecurity and insider threat management) are growing opportunities. Grow our user and partner ecosystem to target new use cases, drive operational leverage and deliver additional targeted, higher value solutions Our user community includes advisory firms, litigation support vendors, corporations, government and law enforcement agencies. We believe this ecosystem can provide significant operating leverage to extend our software’s functionality to new use cases. We will continue to invest in Original Equipment Manufacturer (OEM) and strategic relationships that enable new channels to market and extend our integration with third-party products. In addition, we expect that OEM vendors and managed service providers will invest in and create customised application functionality based on our core engine. Acquire and productise knowledge to deliver repeat engagements Through our thought-leadership and partner ecosystem, we will deliver targeted solutions to early adopters who solve the most complex unstructured data problems and create products and solutions to be resold to industry verticals. Deliver world-class customer service We are determined to continue to delight our customers with our passionate can-do customer service culture. OUR PLANS Looking towards 2021 and beyond, we are focused on continuing to deliver strong year-on-year revenue growth. On behalf of the Board, I would like to thank the entire talented, passionate and committed Nuix team for their efforts during the year, as well as acknowledge and thank our shareholders for their ongoing support during the last financial year. We look forward to the exciting next chapter in Nuix’s history. SIGNED: __________________________________ Daniel Phillips Chairman Sydney, Australia 30 October 2020 PAGE 7 of 74 Nuix Pty Ltd and Controlled Entities Annual Report CEO’s Message Nuix was founded two decades ago in response to the increasing digital transformation of the way people live and work. Specifically, how we create, use, and extract meaning from the explosion of unstructured data. Or more simply, how we find truth in a digital world. Since then, Nuix has evolved as a leader in investigative analytics and intelligence at scale, for businesses, governments, and international agencies. We build forensic software that more than 1,000 customers in 79 countries use to solve many of the world’s most complex data challenges, at scale, at speed, and with precision. AN INHERENT ABILITY TO ADAPT Nuix has an instinctive appreciation for uncertainty that is poignantly relevant in 2020. Despite a year of sustained global tumult, Nuix has proven to be resilient, determined, and unwavering in our mission to empower our customers in their pursuit of data intelligence. Nuix’s revenue has increased 26% year-on-year and our Q4 results were the strongest in our history. We have continued to grow revenue without substantially increasing our cost base, delivering a 78% increase year-on-year in EBITDA. Our ethos of focusing on customers’ needs has delivered a powerful result. Once customers experience the capabilities of Nuix, they often extend their use of our software or find new ways to use it. This “land and expand” strategy has yielded significant growth in upsell revenue, demonstrating the stickiness of our product. CONNECTING WITH OUR CUSTOMERS In the past year, we held our first global sales conference, launched our go-to-market domain structure, and shifted gear on enterprise selling. With these changes we have enhanced our customer focus, pooled our industry expertise, and aligned more clearly to industry needs. We successfully expanded our customer base, adding 102 new customer logos in FY20 and also increased our renewals year on year. In addition, we began a strategic introduction of consumption-based pricing, converting two major advisory firm deals to consumption- based models, as the basis for shared success as these accounts grow. Our overall revenue position is strengthened by the diversity of our customer base both geographically and across our domains with 20% from government, 19% from corporations, 18% of revenue from advisory firms, 11% from law firms, and 15% from new geographic markets. By region, the majority of our revenue comes from the United States (55%) and we initiated structural changes and FedRAMP compliance processes to remove barriers to higher value government contracts there. We also nurtured new markets, with our first year of fully-fledged operations in the DACH (Germany, Austria and Switzerland) region and stronger focus on Asia with local teams coordinating new leads. We re-examined our overall commercial approach, strengthening routes to market such as Nuix Partner Connect, a successful revamp of our international partner program; and executed a Salesforce.com improvement project to increase sales productivity and commercial insight. PRODUCT AND INNOVATION LED The Nuix Engine remains the foundation of our platform and revenue, with our vertical solution stacks enabling us to capture further revenue from use cases in both our traditional eDiscovery and forensic investigations markets, together with new strategic markets such as governance, risk and compliance. We have completed the integration of Nuix Discover® (formerly Ringtail) and it is making a tangible impact on the market with 2000 active users across 70 customers and 203 TB of data under management. Nuix Discover software as a service (SaaS) is available in six regions worldwide. PAGE 8 of 74 Nuix Pty Ltd and Controlled Entities Annual Report CEO’s Message (continued) We listened to customer feedback, and our roadmap addresses key demands for features such as mobile data integration through our partnership with mobile forensic tool specialists MSAB; accessing password-protected and encrypted content through integration with Passware; platform integration with the promote-to-Nuix Discover feature; and soft licenses through our Cloud License Server. Under our new Head of Engineering, we fine-tuned our agile software development model and renewed our focus on enterprise grade quality, scalability, availability, and access improvements. CURRENT AND FUTURE TRENDS Nuix prudently monitors market trends that affect our business. We are encouraged by the growing need for our software driven by the proliferation of unstructured data volumes; a significant focus on governance, risk, compliance, and the consequences of data breaches; and increased levels of digitisation and automation throughout enterprises. Organisations face a responsibility to manage their ever-growing data, which can also be a valuable commodity and currency. Nuix provides a sustainable response to the problem and is strongly positioned to assist clients harness the opportunities. We have passion, commitment, and belief in what we do, whilst being alert to the shifting dynamics of our connected customer ecosystem. We expect further consolidation in the eDiscovery services market, which we intend to balance with new opportunities, such as helping our corporate customers bring more of the discovery process in-house and extending their use of Nuix to solve cross-functional use cases such as compliance, or insider threat detection. In addition, the competitive landscape remains fragmented and Nuix competes both in specific verticals such as eDiscovery and forensic investigations and as an integral part of enterprise data infrastructures to solve multiple use cases. It is this broader relevance of the Nuix platform that continues to help differentiate us. Despite unforeseen challenges, technology constitutes one of the few sectors that has turned adversity into opportunity. Our FY2020 revenue was not significantly affected by the COVID-19 pandemic. Nuix has deftly navigated the transition to remote working. Our people have demonstrated enormous dedication to our work, even in the face of headcount reductions that managed our risk against the longer-term impact of COVID-19 and its economic fallout. Nuix employees brought ideas and versatility that enabled us to implement new strategies such as the shift to virtual events and a reinvigorated training program that saw over 1,000 users achieve Nuix certification in the 50 days from May 1st to June 19th, 2020. I am proud of our Team Nuix achievements during this extraordinary period, which showed that our core values prevail even under extraordinary pressure. I am certain that we have shown ourselves and our stakeholders how much we can accomplish when challenged, and this gives me enormous excitement about the future successes that lay ahead. SIGNED: __________________________________ Rodney Graeme Vawdrey Group CEO Sydney, Australia 30 October 2020 PAGE 9 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Directors’ Report The directors present their report on the consolidated entity (hereafter referred to as ‘Nuix’ or ‘Group’) consisting of Nuix Pty Ltd and the entities it controlled at the end of, or during, the year ended 30 June 2020. Directors and company secretary The following persons were directors of Nuix Pty Ltd during the year and up to the date of this report unless otherwise stated: ● Daniel Phillips (Non-Executive Director and Chairman) ● David Standen (Non-Executive Director) ● Roy Frank Grady (Non-Executive Director) ● Mark Warren de Ambrosis (Non-Executive Director) ● Jeffrey Bleich (Non-Executive Director) ● Rodney Graeme Vawdrey (Executive Director) ● Anthony Castagna (Non-Executive Director) The company secretaries are Stephen Doyle and Brian Krupczak, who were appointed to the position of company secretary in 2011 and 2015, respectively. Michael Gerard Egan was recently appointed as company secretary last 9th of October 2020. Anthony Castagna was reappointed to the Board on 8th of August 2019. Operating results The profit of the Group for the financial year after providing for income tax amounted to $23,587,666 (2019: (Restated) $7,441,818), 2018 (Restated) $6,292,894. Review of operations A review of the operations of the Group during the financial year and the results of those operations follows: 2020 2019 Restated 2018 Restated 2019-2020 MOVEMENT 2018-2019 MOVEMENT Revenue EBITDA* NPAT** 175,858,894 139,633,198 113,615,564 62,643,893 35,196,071 21,102,641 23,587,666 7,441,818 6,292,894 Operating cash flow 58,558,639 25,151,464 23,674,406 26% 78% 217% 133% 23% 67% 18% 6% Working capital 21,348,060 *EBITDA - Earnings before Interest, Tax, Depreciation and Amortisation ** NPAT - Net Profit after Tax (81,091) 9,752,993 (100%) 119% A reconciliation of EBITDA against profit for the year is shown below: Profit for the year Income tax expense 2020 23,587,666 8,834,728 2019 Restated 7,441,818 3,981,574 Depreciation and amortization 28,399,817 22,132,585 Interest expense Interest income EBITDA 1,859,172 1,709,844 (37,490) (69,750) 62,643,893 35,196,071 21,102,641 PAGE 10 of 74 2018 Restated 6,292,894 991,303 12,789,093 1,031,375 (2,024) Nuix Pty Ltd and Controlled Entities Annual Report Directors’ Report (continued) The Group manages operating performance by reference to key operational metrics, a sample of which are disclosed above. Significant changes in state of affairs No significant changes in the Group’s state of affairs occurred during the financial year and up to date of this report. Principal activities The principal continuing activities of the Group during the financial year were the development and distribution of software. No significant change in the nature of these activities occurred during the year. Events since the end of the financial year On 29th September 2020, the Company held an Extraordinary General Meeting which passed the following resolution: (1) change the type of the Company from proprietary company to public company limited by shares; (2) change the name of the Company from Nuix Pty Ltd. to Nuix Limited; and (3) change the Company constitution due to these changes. These changes are expected to take effect from 6th November 2020. On 19th October 2020 a former contractor to the Company filed a general protections claim under the Fair Work Act 2009 in the Fair Work Commission against the Company. The claim and subsequent correspondence seeks compensation and pecuniary penalties. Damages in the jurisdiction are uncapped and legal fees in defending such matters can be significant. The Company rejects the foundation of the claim but continues to assess its position given that the claim is not yet fully particularised and accordingly it is not possible to reliably estimate the potential financial impact of the claim. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected the Group’s operations, results or state of affairs, or may do so in future years. Likely developments and expected results of operations Likely developments in the operations of the Group and the expected results of those operations in future financial years are not included in this report. Environmental regulation The Group’s operations are not regulated by any significant environmental regulations under a law of the Commonwealth or of a state or any other territories of Australia or territory in which it operates. PAGE 11 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Directors’ Report (continued) Meetings of directors The numbers of meetings of the company’s Board of Directors held during the fiscal year ended 30 June 2020, and the numbers of meetings attended by each director were: Daniel Phillips David Standen Roy Frank Grady Mark Warren de Ambrosis Jeffrey Bleich Anthony Castagna Rodney Graeme Vawdrey FULL MEETINGS OF DIRECTORS A 7 7 7 7 7 6 7 B 7 7 7 7 7 6 7 A = Number of meetings attended B = Number of meetings held during the time the director held office or was a member of the committee during the year Dividends paid or recommended There were no dividends paid or declared since the start of the financial year and up to the date of this report. Insurance of officers Nuix Pty Ltd insure the directors and secretaries of the company and its Australian-based controlled entities, and the general managers of each of the divisions of the Group. 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. During FY2020, the Company paid a premium under a contract insuring each of certain officers of the Group against liability incurred in that capacity. Disclosure of the nature of the liability and the amount of the premium is prohibited by the confidentiality clause of the contract of insurance. Indemnifying officers or auditor No indemnities have been given or insurance premiums paid, during or since the end of the financial year, for any person who is or has been an auditor of the Group. PAGE 12 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Directors’ Report (continued) Auditor PricewaterhouseCoopers, continues in office in accordance with section 327B of the Corporations Act 2001. Audit and Non-audit services Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers Australia) for audit and non- audit services during the year are disclosed in Note 22. The company may decide to employ the auditor on assignments additional to its statutory audit duties where the auditor’s expertise and experience with the company and/or the Group are important. The Board of Directors, in accordance with advice provided by 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 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, and ● none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. 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 69. This report is signed in accordance with a resolution of the Board of Directors. SIGNED: __________________________________ Daniel Phillips Chairman Sydney, Australia 30 October 2020 PAGE 13 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Financial Report Contents Consolidated Statement of Comprehensive Income ................................ 15 Consolidated Statement of Financial Position .......................................... 16 Consolidated Statement of Changes In Equity ......................................... 17 Consolidated Statement of Cash Flows ................................................... 18 Notes to the Consolidated Financial Statements ...................................... 19 PAGE 14 of 74 Nuix Pty Ltd and Controlled Entities Annual Report CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2020 Revenue Cost of goods sold Gross profit Sales and distribution Research and development General and administration Other income Other gains - net Operating profit Finance costs Share based payments expense Profit before income tax Income tax expense Profit for the year NOTES 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 5 175,858,894 139,633,198 113,615,564 (20,685,738) (15,624,068) (12,343,798) 155,173,156 124,009,130 101,271,766 (63,622,603) (57,822,137) (53,930,653) (32,805,070) (28,816,140) (16,940,359) (24,540,193) (26,071,321) (22,087,920) 1,011,232 960,035 (249,950) 1,023,487 763,149 407,340 34,966,572 13,283,054 9,483,323 (1,859,172) (1,709,844) (1,031,375) (685,006) (149,818) (1,167,751) 32,422,394 11,423,392 7,284,197 (8,834,728) (3,981,574) (991,303) 23,587,666 7,441,818 6,292,894 6 4 4 4 7 Other comprehensive income Items that may be reclassified to profit or loss Exchange differences on translation of foreign operations 19 1,808,958 1,800,108 Other comprehensive income, net of tax 1,808,958 1,800,108 375,955 375,955 Total comprehensive income for the year, net of tax 25,396,624 9,241,926 6,668,849 Earnings per share Basic Diluted 20 20 0.09 0.03 0.08 0.03 0.03 0.03 The financial statements should be read in conjunction with the accompanying notes. PAGE 15 of 74 Nuix Pty Ltd and Controlled Entities Annual Report CONSOLIDATED STATEMENT OF FINANCIAL POSITION For the year ended 30 June 2020 NOTES 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ Current assets Cash and cash equivalents Trade and other receivables Other current assets Total current assets Non-current assets Property and equipment Intangible assets Deferred tax asset Right of use assets Total non-current assets Total assets Current liabilities Trade and other payables Lease liabilities Deferred revenue Current tax liabilities Provisions Borrowings Other liability Total current liabilities Non-current liabilities Deferred tax liabilities Lease liabilities Provisions Borrowings Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 8 9 10 11 12 7 13 14 13 15 16 17 7 13 16 17 18 19 19 38,538,759 60,204,351 1,897,673 100,640,783 27,331,898 44,900,443 9,100,636 81,332,977 2,412,710 2,468,091 197,154,586 167,634,147 498,780 2,600,171 12,872,638 16,362,515 212,938,714 189,064,924 26,998,317 34,251,863 1,739,709 62,989,889 3,014,832 75,680,533 4,149,356 11,474,143 94,318,864 313,579,497 270,397,901 157,308,753 20,704,190 14,115,938 3,704,000 3,341,633 47,791,035 38,855,732 327,356 2,664,068 410,502 3,261,112 25,531,225 - - - 19,489,751 1,639,098 28,546,460 437,620 2,616,504 - 507,463 100,721,874 59,984,917 53,236,896 5,333,672 - 11,539,250 14,791,574 506,872 543,391 - 25,681,820 17,379,794 41,016,785 118,101,668 101,001,702 195,477,829 169,396,199 104,227,205 104,227,205 5,143,067 86,107,557 2,649,103 62,519,891 195,477,829 169,396,199 - 9,958,875 526,514 20,000,000 30,485,389 83,722,285 73,586,468 17,809,218 699,177 55,078,073 73,586,468 PAGE 16 of 74 The financial statements should be read in conjunction with the accompanying notes. Nuix Pty Ltd and Controlled Entities Annual Report CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2020 ISSUED CAPITAL $ SHARE OPTION RESERVE $ FOREIGN CURRENCY TRANSLATION RESERVE $ RETAINED EARNINGS $ TOTAL EQUITY $ Balance at 1 July 2017, as previously reported Net impact of restatement 8,801,888 3,511,320 1,811,947 55,875,278 70,000,433 - - - (7,090,099) (7,090,099) Balance at 1 July 2017 (restated*) 8,801,888 3,511,320 1,811,947 48,785,179 62,910,334 Profit for the year (restated) Other comprehensive income Total comprehensive income Contributions of equity Buy-back options Foreign currency exchange difference Employee share options - - - 9,007,330 - - - - - - - (6,176,255) 8,459 1,167,751 - 6,292,894 6,292,894 375,955 - 375,955 375,955 6,292,894 6,668,849 - - - - - - - - 9,007,330 (6,176,255) 8,459 1,167,751 Balance at 30 June 2018 (restated) 17,809,218 (1,488,725) 2,187,902 55,078,073 73,586,468 Profit for the year (restated) Other comprehensive income Total comprehensive income Contributions of equity Employee share options - - - 86,417,987 - - - - - 149,818 - 7,441,818 7,441,818 1,800,108 - 1,800,108 1,800,108 7,441,818 9,241,926 - - - - 86,417,987 149,818 Balance at 30 June 2019 (restated) 104,227,205 (1,338,907) 3,988,010 62,519,891 169,396,199 Profit for the year Other comprehensive income Total comprehensive income Contributions of equity Employee share options - - - - - - - - - 685,006 - 23,587,666 23,587,666 1,808,958 - 1,808,958 1,808,958 23,587,666 25,396,624 - - - - - 685,006 Balance at 30 June 2020 104,227,205 (653,901) 5,796,968 86,107,557 195,477,829 The financial statements should be read in conjunction with the accompanying notes. * See Notes 1(z) and 19 for details regarding the restatement PAGE 17 of 74 Nuix Pty Ltd and Controlled Entities Annual Report CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2020 NOTES 2020 $ (RESTATED) $ (RESTATED) $ 2019 2018 Cash flows from operating activities Receipts from customers (inclusive of GST and VAT) 176,507,257 140,702,587 114,508,255 Payments to employees and suppliers (115,744,005) (113,620,186) (89,551,692) Interest received Interest paid Income tax paid 37,490 69,750 2,024 (1,822,882) (1,675,894) (1,024,675) (419,221) (324,793) (259,506) Net cash provided from operating activities 25 58,558,639 25,151,464 23,674,406 Cash flows from investing activities Purchase of property and equipment 11 (1,355,029) (609,154) (2,183,972) Payments for software development costs (42,454,758) (37,930,294) (25,385,166) Acquisition of business - (75,947,376) - Purchase of intangible assets 12 (1,021,392) (511,492) (1,178,974) Net cash used in investing activities (44,831,179) (114,998,316) (28,748,112) Cash flows from financing activities Proceeds from issuance of shares Principal payments of lease Proceeds from borrowings - 86,417,987 9,007,330 (2,812,360) (2,072,948) (2,112,478) 17 - 5,681,820 5,000,000 Transaction costs on borrowings (150,595) - - Net cash provided by financing activities (2,962,955) 90,026,859 11,894,852 Net change in cash and cash equivalents 10,764,505 180,007 6,821,146 Cash and cash equivalents at beginning of financial year Exchange differences on cash and cash equivalents 8 27,331,898 26,998,317 20,341,298 442,356 153,574 (164,127) Cash and cash equivalents at end of financial year 38,538,759 27,331,898 26,998,317 The financial statements should be read in conjunction with the accompanying notes. PAGE 18 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements For the year ended 30 June 2020 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES For the financial year ending 30 June 2020, the Group has elected to prepare general purpose financial statements in accordance with Tier Australian 1 Accounting Standards and will no longer apply the disclosure available under special purpose financial reporting. Therefore the consolidated financial statements for the financial year ending 30 June 2020 are the first financial statements issued by the Group that comply with Australian Accounting Standards and Interpretations, including AASB 1 First-time Adoption Australian Accounting Standards (“AASB 1”), with a transition date of 1 July 2017. First time adoption has led to incremental disclosures being included throughout the financial report for comparative information. In addition, in order to comply with AASB 1, the Group has transitioned AASB 16 Leases on 1 July 2017 (the beginning of the comparative period presented). The Group’s adoption of AASB 1 did not have any other impact on the financial position, financial performance and cash flows of the Group. As such these financial statements do not include an opening balance sheet. These consolidated financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The financial statements are for the consolidated entity consisting of Nuix Pty Ltd and its subsidiaries. The financial report has been prepared in accordance with the accounting policies disclosed below. Such accounting policies are consistent with the previous period unless otherwise stated. The COVID-19 coronavirus outbreak was declared a pandemic by the World Health Organisation on 11 March 2020. The outbreak and the response of governments in dealing with the pandemic is interfering with general activity levels within the community and the economy. The scale and duration of these developments continue to remain uncertain as at the date of this report. However, the Group has not been materially or adversely impacted by COVID-19. Nuix Pty Ltd is a company limited by shares, incorporated and domiciled in Australia. The financial statements were authorised for issue by the Board of Directors on 30 October 2020. a. Basis of preparation The financial report has been prepared on an accrual basis and is based on historical costs. (i) Early adoption of standards The Group has not elected to apply any pronouncements before their operative date in the annual reporting period beginning 1 July 2019. (ii) Historical cost convention These financial statements have been prepared under the historical cost convention. (iii) Critical accounting estimates The preparation of 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 in Note 1(y). b. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Nuix Pty Ltd (‘Nuix’ or ‘Group’ or ‘Company’) as at 30 June 2020 and the results of all subsidiaries for the year then ended. Nuix Pty Ltd and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. PAGE 19 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Subsidiaries are all entities (including structured 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 deconsolidated from the date that control ceases. The acquisition method of accounting used to account for business combinations by the Group and is disclosed in Note 1(e). Intercompany balances on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, statement of changes in equity and balance sheet respectively. c. Segment report Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The Board of the Company has appointed a strategic steering committee which assesses the financial performance and position of the Group and makes strategic decisions. The steering committee, which has been identified as being the chief operating decision maker, consists of the Group chief executive officer and the chief financial officer. d. Income tax The income tax expense or benefit for the period is the tax payable or receivable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. (i) Current tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the company’s subsidiaries and associates operate and generate taxable income. (ii) Deferred tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 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. PAGE 20 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (iii) Uncertainty over income tax treatments The application of the tax law to a particular transaction or circumstance may be unclear and the acceptance of the treatment may not be known until the relevant taxation authority undertakes an examination of the tax treatment adopted or, in the event of a dispute, when a court makes a decision at a future time. Where there is uncertainty over income tax treatments the recognition and measurement of current or deferred tax assets or liabilities is determined applying Interpretation 23 - Uncertainty Over Income Tax Treatments. Each uncertain tax treatment is considered separately unless consideration together with one or more other uncertain tax treatments gives rise to a better prediction of the resolution of the uncertain treatments on examination by the relevant taxation authority. Where it is considered probable (more likely than not) that the relevant taxation authority will accept the tax treatment used or planned to be used in its income tax filings the tax treatment adopted is consistent with that used or planned treatment in the income tax filings. In assessing such probability and the recognition and measurement of uncertain tax treatments it is assumed that the relevant taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations and determining whether or not to accept the tax treatment in the relevant income tax filings. In the event that the relevant taxation authority will not accept the tax treatment, the uncertainty of each uncertain tax treatment is measured using either of the following methods: (a) the most likely amount – the single most likely amount in a range of possible outcomes, particularly where the outcome is binary or concentrated on one value; or (b) the expected value – the sum of the probability weighted amounts in a range of possible outcomes. In the event that an uncertain tax treatment affects both current and deferred tax the judgments made in relation to the uncertain tax treatment are made consistently for current and deferred tax. PAGE 21 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) e. Business combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the: fair values of the assets transferred liabilities incurred to the former owners of the acquired business ● ● ● equity interests issued by the Group ● ● fair value of any asset or liability resulting from a contingent consideration arrangement, and fair value of any pre-existing equity interest in the subsidiary. Identifiable assets acquired and liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non- controlling interest’s proportionate share of the acquired entity’s net identifiable assets. Acquisition-related costs are expensed as incurred. The excess of the: ● consideration transferred, ● amount of any non-controlling interest in the acquired entity, and ● acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of 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. f. Property and equipment Each class of property and equipment is carried at historical cost less accumulated depreciation and impairment losses. The depreciable amount of all fixed assets is depreciated on a straight-line basis over their useful lives commencing from the time the asset is held ready for use. Leased assets are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the assets. The depreciation rates used for each class of depreciable assets are: CLASS OF FIXED ASSET Property and computer equipment Furniture and fixture Leasehold improvement DEPRECIATION RATE 33% 20% 20% or lease term whichever is shorter The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting period date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses are included in the statement of comprehensive income. PAGE 22 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) g. Leases See Note 1(z) and Note 13 for the Group’s accounting policy for leases. h. Investments and other financial assets Classification The Group classifies its financial assets in the following measurement categories: ● those to be measured subsequently at fair value (either through other comprehensive income (OCI) or through profit or loss), and ● those to be measured at amortised cost. The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI). The Group reclassifies debt investments when and only when its business model for managing those assets changes. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade date, being the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest. Impairment The Group assesses on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Group applies the simplified approach permitted by AASB 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables (see Note 9(a) for further details). i. Impairment of non-financial assets At each reporting date, the Group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. PAGE 23 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of comprehensive income. Impairment testing is performed at each reporting date for intangible assets with indefinite lives and intangible assets not yet available for use. 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 (CGU) to which the asset belongs. Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. j. Intangible assets (i) Goodwill Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units (CGUs) for the purpose of impairment testing. The allocation is made to those CGUs or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segments. (ii) Customer contracts Customer contracts acquired as part of a business combination are recognised separately from goodwill. The customer contracts are carried at their fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on the timing of projected cash flows of the contracts over their estimated useful lives. At present, there are no customer contracts recorded within the financial statements. (iii) Software Software comprises computer software purchased from third parties which is capitalised on the basis of the costs incurred to acquire and bring into use the specific software. Costs associated with maintaining computer software programs are recognised as an expense when incurred. (iv) Intellectual property Development Costs Development costs are capitalised where future economic benefits from development of a chosen alternative for new or improved software products, processes, systems or services are considered probable, and expenditure in relation to such activities is capable of reliable measurement. Future economic benefits are considered probable where commercial benefit and technical feasibility have been PAGE 24 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) established. The expenditure capitalised comprises all directly attributable costs, including external direct costs of materials, services, direct labour and overheads. Other development expenditure that does not meet these criteria, which includes research activities and the expenditure on maintenance of computer software, is expensed as incurred. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill, is recognised in profit or loss as incurred. Amortisation Amortisation is calculated to write off the cost of intangible assets less their estimated residual values using the straight-line method over their estimated useful lives and is recognised in profit or loss. Goodwill and brand is not amortised. Intangible assets, other than goodwill and brand, have finite useful lives. Goodwill has an indefinite useful life. The estimated useful lives are as follows: CLASS OF FIXED ASSET Software Intellectual Property AMORTISATION RATE 33% 10% - 33% k. Foreign currency transactions and balances (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is Nuix Pty Ltd’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Foreign exchange gains and losses that relate to borrowings are presented in the income statement, within finance costs. All other foreign exchange gains and losses are presented in the income statement on a net basis within other income or other expenses. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. (iii) Group companies The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: PAGE 25 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) ▪ Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet, ▪ Income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and ▪ all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. l. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year, which are unpaid. The amounts are unsecured and are usually paid within 45 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. m. Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in consolidated statement of comprehensive income over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw-down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised and amortised over the period of the facility to which it relates. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. n. Provision Make good obligations are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are measured using the best estimate of amounts required to settle the obligation at the end of each reporting period. The fair value of financial guarantees is determined as the present value of the difference in net cash flows between the contractual payments under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligations. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. PAGE 26 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) o. Employee benefits (i) Short term obligations Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. (ii) Other long-term employee benefits obligations The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period 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 end of the reporting period on high-quality corporate bond rates with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (iii) Retirement benefit obligations Employees of the Group are entitled to benefits from the Group’s superannuation plan on retirement, health insurance plan and 401K. The Group’s superannuation plan has a defined contribution section. The defined contribution section receives fixed contributions from Group companies and the Group’s legal or constructive obligation is limited to these contributions. (iv) Share-based payments Share-based compensation benefits are provided to employees via the Nuix Employee Share Option Plans. The fair values of options granted under the Employee Share Option Plans are recognised as a share-based payments expense with a corresponding increase in equity reserves. The total amount to be expensed is determined by reference to the fair value of the options granted, which includes the impact of any non-vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Company revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. The Nuix Employee Option Plans are administered by the Nuix Compensation Committee. When the options are exercised, the Committee transfers the appropriate number of shares to the Option Holder. The proceeds received, net of any directly attributable transaction costs, are credited directly to equity. (v) Bonus plans The Group recognises a liability and an expense for bonuses by way of a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (vi) Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits as an expense. PAGE 27 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) p. Cash and cash equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. q. Trade receivables Trade receivables are recognised initially at the amount of consideration that is unconditional, unless they contain significant financing components when they are recognised at fair value. They are subsequently measured at amortised cost using the effective interest method, less loss allowance. They are generally due for settlement within 30 days and are therefore all classified as current. See Note 9 for further information about the Group’s accounting for trade receivables and for a description of the Group’s impairment policies. r. Revenue recognition AASB 15 Revenue from Contracts with Customers The Group discloses revenue within two categories, namely sale of goods and services. During 2018, 2019 and 2020 there has been no change to the nature of the revenue transactions. AASB 15 aligns revenue recognition with the pattern for transfer of control of the output from satisfying a performance obligation to a customer. In order to achieve this, the standard requires the application of a five-step model in recognising revenue from contracts with customers: 1. Identify the contract with the customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to performance obligations based on their relative standalone selling price; and 5. Recognise revenue when, or as, performance obligations are satisfied. Revenue is recognised upon transfer of control of promised products and services to customers in the amount that reflects the consideration expected to be received in exchange. The Group’s revenue primarily consists of license fees from customers’ right to use the software. Revenue recognition approach Revenue is recognised for the major business activities and delivery platforms as follows: (i) Software license fee and software usage revenue Revenue is recognised when a performance obligation is satisfied and when control of the promised goods or services is transferred to the customer. When considering the performance obligation in relation to the provision of software, it can be either a right to access (revenue recognised over time) or a right to use (revenue recognised when software transferred). Software will be recognised as a right to access when it meets the below three criteria: 1) There is an expectation (contracted or otherwise) that significant activities will be undertaken to affect the IP of the software; 2) The license holder is exposed to the positive or negative effects of the changes made under point 1; 3) The activities do not result in the transfer of a good or service to the license holder as the activities occur. PAGE 28 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) In Nuix’s case, the software is generally provided on-premise and is updated through updates and releases. However, these updates and releases are not critical to the continued utility of the software as is. The software could be held stable and still provide the same benefit to the customers who have purchased licenses. There is also no contractual obligation under the End User License Agreement (EULA) to update customers with the new substantial functionality of the software. As a result, it is appropriate that annual license revenue is considered a right to use license (upfront recognition). (ii) Maintenance and support revenue Maintenance and support services are either bundled into licensing arrangements or sold separately to customers. Where these services are bundled the Group allocates the transaction price to maintenance and support performance obligations based on their relative standalone selling price. We determine standalone selling price by considering multiple factors including but not limited to prices we charge for similar offerings, market conditions, competitive landscape and pricing practices. Priority is placed on market observable pricing where available. Maintenance and support services are provided over the contractual period and accordingly are recognised over time. Amounts that are billed and yet to be recognised as revenue are recognised as deferred revenue/contract liabilities. (iii) Professional services revenue Professional services revenue mainly consists of fees charged for consultancy and training service. Revenue from a contract to provide consulting and training services is recognised at the time the consulting and training are completed. (iv) Sale of goods The Group on occasion will provide 3rd Party Software and Hardware to a customer. Revenue from the sale of these goods is recognised at the point of delivery as this corresponds to the transfer of control of the goods to the customer. (v) Interest income Interest income is recognised using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. (vi) Recognition of government grant approach for the R&D incentive scheme The Group applies the Government Grant Approach to recognise incentives from R&D spending in excess of the income tax benefit received. This approach recognises the benefit relating to R&D costs capitalised into intangibles as Deferred Income in the balance sheet with this amount then unwound to Government Grant Income in line with the amortisation period of the intangible. (vii) Delivery Platforms – on Premise or Saas The Group provides customers with a choice of licensing and delivery platform. Delivery platforms can be either Saas or On premise. SaaS refers to cloud-based software which can be hosted on Nuix’s SaaS environment or hosted in Partners’ SaaS environments. For On-Demand licensing contracts, there are a series of distinct goods and services including access to software maintenance and support provided to customers that are treated as a single performance obligation because they are delivered in the same pattern over a period of time. (viii) Costs of obtaining a customer contract AASB 15 requires that incremental costs associated with acquiring a customer contract, such as sales commissions, be recognised as an asset and amortised over a period that corresponds with the period of benefit. An assessment of commissions paid by the Group was performed in connection with the sale of software products. As a practical expedient, Nuix generally recognises the commissions as an expense PAGE 29 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) when incurred given the amortisation period of any capitalised amount would be recognised in one year or less. This is a result of license revenue being recognised at a point in time and commensurate commission being paid upon renewal of a contract. Consequently, under current arrangements costs of obtaining a contract are expensed in the period incurred. (ix) Principal versus agent Where the Group uses resellers, the Group must assess whether its customer is the reseller or the end user. Where the end user is the customer, revenue is recognised for the consideration paid by the end user with any commission retained by the reseller recognised as commission expense within costs of goods sold. Where the reseller is the customer, revenue is recognised at the net amount received. Where Nuix considers that the end user is its customer it is on the basis that resellers are an extension of the salesforce. Under these Reseller Agreements, Nuix is primarily responsible to the end user for delivery and acceptability of the product and issues licences directly to the end user. Nuix bears significant risk in end user delivery. s. Government grants Grants from the government are recognised in Other Income 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. Deferral and presentation of government grants Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the intangible assets are included in noncurrent liabilities as deferred income and they are credited to profit or loss on a straight-line basis over the expected lives of the related assets. Allowances under the Research and Development Tax Incentive regime are accounted for as a tax credit, except for the incremental benefit above the statutory income tax rate which is accounted for as a government grant. t. Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. u. Goods and services tax Revenues, expenses and assets are recognised net of the associated goods and services tax (GST), unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of 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 taxation authority is included with other receivables or 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 taxation authority, are presented as operating cash flows. PAGE 30 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) v. Classification of expenses When required by Australian Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. See Note 1(z) for changes to comparative figures. Presentation of results The Group has presented the expense categories within the Consolidated statement of profit or loss on a functional basis. The categories used are cost of revenues, research and development, sales and distribution and general and administration. This presentation style provides insight into the Company’s business model and enables users to consider the results of the Group compared to other major software companies. The methodology and the nature of costs within each category are further described below. Cost of goods sold Cost of goods sold consists of expenses directly associated with securely hosting the Group’s services and providing support to customers. Costs include data centre costs, personnel and related costs directly associated with cloud infrastructure and customer consulting, implementation and customer support, contracted third party costs, reseller channel costs and allocated overheads. Research and development expenses Research and development expenses consist primarily of personnel and related costs directly associated with the Company’s research and development employees, as well as direct costs of research and development (including subscriptions) and allocated overheads. When future economic benefits from development of an intangible asset are determined probable and the development activities are capable of being reliably measured, the costs are capitalised as an intangible asset and then amortised to profit or loss over the estimated life of the asset created. The development activities comprise the interface design, coding, documentation and testing of a chosen alternative for new or improved software products, processes, systems and services. The amortisation of those costs capitalised is included as a research and development expense. Sales and distribution expenses Sales and distribution expenses consist of personnel costs directly associated with the sales and marketing team’s activities to acquire new customers and grow revenue from existing customers. Other costs included are external advertising, digital platforms, rent, marketing and promotional events as well as allocated overheads. General and administration expenses General and administration expenses consist of personnel and related costs for the Company’s executive, Board of Directors, finance, legal, human resources, corporate strategy, CISO, and IT employees. They also include legal, accounting and other professional services fees, insurance premiums, acquisition and integration costs associated with the Company’s ongoing acquisition strategy, other corporate expenses and allocated expenses. Overhead allocation The presentation of the Consolidated statement of profit or loss and other comprehensive income by function requires certain overhead costs to be allocated to functions. These allocations require management to apply judgement. The costs associated with the Group’s facilities, internal information technology and non-product related depreciation and amortisation are allocated to each function based on respective headcount. w. New accounting standards and interpretation In accordance with AASB 1, the Group has adopted new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for the current annual reporting period. These same accounting policies have been applied throughout all periods presented. PAGE 31 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) The adoption of the new and revised standards includes AASB 16 – Leases, as described in Note 1(z) and Note 13, and Interpretation 23 – Uncertainty over Income Tax Treatments as described below. (a) Interpretation 23 – Uncertainty over Income Tax Treatments The interpretation explains how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment. In particular, it discusses: ● ● ● how to determine the appropriate unit of account, and that each uncertain tax treatment should be considered separately or together as a group, depending on which approach better predicts the resolution of the uncertainty that the entity should assume a tax authority will examine the uncertain tax treatments and have full knowledge of all related information, ie that detection risk should be ignored that the entity should reflect the effect of the uncertainty in its income tax accounting when it is not probable that the tax authorities will accept the treatment that the impact of the uncertainty should be measured using either the most likely amount or the expected value method, depending on which method best predicts the resolution of the uncertainty, and that the judgements and estimates made must be reassessed whenever circumstances have changed or there is new information that affects the judgements. ● ● While there are no new disclosure requirements, the Group’s judgements and estimates made in preparing the financial statements are disclosed in Note 1(y). x. Parent entity financial information The financial information for the parent entity, Nuix Pty Ltd, disclosed in Note 26 has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of Nuix Pty Ltd. (ii) Financial guarantees Where the parent entity has provided financial guarantees in relation to loans and payables of subsidiaries for no compensation, the fair values of these guarantees are accounted for as contributions and recognised as part of the cost of the investment. There were no financial guarantees during the year (2019: Nil). (iii) Share-based payment expense The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as an inter-Group charge to that subsidiary undertaking. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an expense in the subsidiary undertakings, with a corresponding credit to equity. y. Critical accounting estimates and assumptions The Directors evaluate estimates and judgments incorporated into the financial statements based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the Group. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which PAGE 32 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. (i) Revenue recognition (a) Contracts with multiple performance obligations The Group enters into contracts with its customers that can include promises to transfer multiple performance obligations. A promised good or service must be distinct to be accounted for as a separate performance obligation. For software license contracts, there is a combination of goods and services that include software licensing, software maintenance and software support services which are generally treated as three (3) separate performance obligations on the basis that the customers benefit from the goods or services on their own and are separately identifiable in the contract. Customers substantially benefit from the software licencing immediately and have a right to use the software at the point software licence keys are provided. Consequently, revenue from software licencing is recognised at this point in time when control is transferred to customers. Software support and maintenance on the other hand are recognised over time given the customers derive benefits as provided and consequently revenue is recognised over the period of the agreement. Judgement has been exercised in estimating the standalone selling price for software licences with bundled support and maintenance. In order to estimate the stand-alone selling prices for the software licenses and bundled support and maintenance, Nuix considers available observable inputs, such as the support and maintenance charges where there is no bundling. (b) Recognition of revenue distributed by resellers Where the Group uses resellers, the Group must assess whether its customer is the reseller or the end user. Where the end user is the customer, revenue is recognised for the consideration paid by the end user with any commission retained by the reseller recognised as commission expense. Where the reseller is the customer, revenue is recognised at a net amount received. Nuix has exercised judgement in determining that in some cases the end user is its customer on the basis that under the Reseller Agreement, Nuix is primarily responsible to the end user for delivery and acceptability of the product and issues licences directly to the end user. Nuix bears significant risk in end user counter party delivery and brand equity. (ii) Share based payment expense Nuix accounts for share-based payments to employees, including grants of employee options, which requires that share-based payments be recognised in the consolidated statements of financial position based on their fair values. Nuix recognises share based compensation expense, net of an estimated forfeiture rate, on a straight-line basis over the service period of the award, which generally extends to a Corporate Transaction event. Nuix uses the Black-Scholes option pricing model to determine the grant date fair value of stock options. The determination of the grant date fair value of stock option awards using the Black-Scholes model is affected by assumptions regarding a number of complex and subjective variables. These variables include the estimated number of years that we expect employees to hold their options, risk-free interest rates and dividends to be paid on our stock over that term. If Nuix changes the terms of its employee share-based compensation programs, refines future assumptions or changes to other acceptable valuation models, the stock-based compensation expense recorded in future periods for future grants may differ significantly from historical trends and could materially affect the results of operations. Management judgment is applied in determining the fair value of options issued under the employee option plan. There are inherent difficulties in determining market volatility for an unlisted entity. PAGE 33 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Furthermore, the expected price volatility is based on the historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. Being a private company with constant and consistent growth finding a comparable cohort of companies to which we can benchmark is difficult. Nuix has assumed a constant volatility rate over the past 3 years in accordance with our own judgement and estimates. (iii) Capitalisation and useful life of intangible assets Management has made judgements in respect of intangible assets when assessing whether an internal project in the development phase meets the criteria to be capitalised, and on measuring the costs and economic life attributed to such projects. On acquisition, specific intangible assets are identified and recognised separately from goodwill and then amortised over their estimated useful lives. The capitalisation of these assets and the related amortisation charges are based on judgements about the value and economic life of such items. Management has also made judgements and assumptions when assessing the economic life of intangible assets and the pattern of consumption of the economic benefits embodied in the assets. The economic lives for intangible assets are estimated at between three and ten years for internal projects, which includes internal use software and internally generated software, and between three and ten years for acquired intangible assets. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted, if appropriate. As at 30 June 2020, the carrying amount of intangible assets was $197,154,586 (2019: $167,634,147; 2018: $75,680,533). (iv) Uncertain tax position The Group is subject to tax in numerous jurisdictions. Significant judgement is required in recognising and measuring current and deferred tax assets and liabilities as there are transactions in the ordinary course of business and calculations for which the ultimate tax treatment on examination by a relevant taxation authority or, in the event of dispute, decision by a court is uncertain. The Group recognises liabilities based on estimates of whether additional tax will be due. Where the final tax outcome of these matters is different from the amount that was initially recognised, such differences will impact on the results for the year and the respective income tax and deferred tax assets or provisions in the year in which such determination is made. The Group recognises tax assets based on forecasts of future profits against which those assets may be utilised. The Group recognises and measures uncertain tax treatments in accordance with the policy stated at Note 1 (d) (iii) above. In the current and prior years, the Group has exercised judgment in recognising and measuring the tax benefit of Research and Development tax offsets available under Australian tax legislation relating to eligible Research and Development expenditure incurred on eligible overseas development activities in excess of related eligible Australian activities. In respect of the Group's Endpoint project, the relevant overseas and Australian activities was the subject of an advance overseas finding for the years ended 30 June 2016 to 30 June 2018. These activities continued to be undertaken for the years ended 30 June 2019 and 2020. The relevant advance overseas finding continues to be in force. The advance overseas finding was made on the basis that the overseas expenditure on the eligible overseas development activities would not exceed the Australian portion of the total development expenditure on the eligible R&D activities as required by section 28C IR&D Act 1986. The finding was made on the basis of estimates of actual and anticipated expenditure on the activities provided by the Group in the course of the application for advance and overseas finding in September 2016. The Group has exercised judgment in assessing that it is probable that relevant taxation authority (the Australian Taxation Office) will accept the tax treatment for the Endpoint project. PAGE 34 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) As at 30 June 2020 there was a deferred tax asset of $7,276,037 (30 June 2019: $7,141,380; 30 June 2018: $6,818,657) recognised in respect of overseas expenditure in this project of which approximately $1,606,398 (2019: $1,576,668, 2018: $1,505,418) representing the excess overseas development expenditure would be de-recognised if the tax treatment for R&D tax offset purposes would not be accepted by the Australian Taxation Office (ATO) and the ATO was accepting the revenue characterisation of the excess overseas development expenditure as assessed to be probable in relation to the years ended 30 June 2019 and 2020. In relation to the years ended 30 June 2019 and 30 June 2020, despite the excess overseas development expenditure on the continuing activities being activities subject to the advance overseas finding continuing to be in force, the Group has exercised judgment in assessing that the tax treatment of the excess overseas development expenditure on the relevant activities in the filed tax position for the year ended 30 June 2019 and planned filed tax position for the year ended 30 June 2020 is an uncertain tax treatment. In the years ended 30 June 2019 and 30 June 2020, the Group adopted the most likely amount method in recognising and measuring this uncertain tax treatment which in the case of the R&D tax offset calculations has been to treat the excess overseas R&D expenditure as not subject to notional deductibility in determining the available R&D tax offsets available under section 355-210 of the Income Tax Assessment Act 1997 (ITAA) in the years ended 30 June 2019 and 2020. In having adopted that position in regard to the uncertain tax treatment of notional deductibility of the excess overseas R&D expenditure for years ended 30 June 2019 and 2020 the Group was required to exercise judgment in assessing the tax treatment of the excess overseas R&D expenditure on the relevant activities having a revenue characterisation and being tax deductible under section 8-1 of the ITAA in the year ended 30 June 2019 and 2020 as being probable of being accepted by the Australian Taxation Office on future examination with full knowledge of related information, allowing that such expenditure has been capitalised and amortised for accounting purposes. The Group proposes to proactively engage with the Australian Taxation Office to address the uncertain tax treatment and to resolve the uncertainty in advance of finalisation of the audited financial statements for the year ending 30 June 2021. As at 30 June 2020 the amount of R&D tax offset not recognised as a deferred tax asset was $2,835,152 (30 June 2019: $1,476,847; 30 June 2018: nil). z. Representation of comparative information (1) Change in accounting policy – lease accounting As indicated in note 1(w) above, the Group has adopted AASB 16 Leases retrospectively using the simplified transitional approach permitted under AASB 16. In accordance with AASB 1, AASB 16 has been reflected in the financial statements from 1 July 2017. 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 2017. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 July 2017 was 4.74%. (i) Practical expedients applied In applying AASB 16 for the first time, the Group has used the following practical expedients permitted by the standard: ● applying a single discount rate to a portfolio of leases with reasonably similar characteristics ● accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2017 as short-term leases PAGE 35 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) ● excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application, and ● using hindsight in determining the lease term where the contract contains options to extend or terminate the lease. (ii) Measurement of right-of-use assets The associated right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any accrued lease payments relating to that lease recognised in the balance sheet as at 1 July 2017. (2) Corrections to comparative period information In addition to the adoption of AASB 16, in preparation of the financial statements for the year ended 30 June 2020, the Company identified certain areas which required correction to prior period balances. These areas relate to: ● In the prior year, the Company used a cost-plus expected margin approach to determine the stand- alone selling price of support and maintenance services. In the current year, management considered it more appropriate that the stand-alone selling price be made with reference to adjusted market observable pricing for similar services. This has resulted in a higher allocation of consideration to support and maintenance services that is recognised over time as compared to the software license which is recognised at a point in time of inception of the contract. Deferred revenue has increased by $11,758,231, $12,838,001 and $20,809,164 at 1 July 2017, 30 June 2018 and 30 June 2019, respectively. ● The Company has re-assessed its accounting treatment involving resellers. Prior year revenue and commission expenses were decreased by $1,934,805 (year ended 30 June 2018: reduced by $126,255) to reflect changes where Nuix determined certain resellers as being its end customers, and for certain discounts provided by resellers to the end user. ● The Group has also re-assessed the timing of revenue recognition for a customer renewal which has resulted in an increase in deferred revenue and reduction in retained earnings of $6,073,200 as at 1 July 2018 and 30 June 2019. ● The deferred revenue assumed in the acquisition of Ringtail was adjusted to its fair value - resulting in a decrease in deferred revenue and goodwill of $581,733 at 30 June 2019. ● The tax impacts of the above matters have also been recognised. In addition, the Group also corrected the deferred tax recognised in respect of a number of temporary differences. ● Certain expense related profit and loss classifications and balance sheet accounts were adjusted for consistency to the presentation in the current year including reflecting amortisation of intellectual property as a research and development expense rather than as a general and administration expense, allocation of overheads to research and development expenses and sales and distribution expenses rather than general and administration expenses, integrated solution department expenses being reflected in research and development expenses rather than sales and distribution and technical operations department expenses being reflected in cost of goods sold rather than sales and distribution expense. The result of these adjustments is reflected in the presentation adjustment column below. ● The statement of cash flows has been restated to reflect amounts paid for software development costs, payments for business combinations and indirect taxes collected. The result of these adjustments is reflected in the presentation adjustment column below. The impact of the above on the Statement of Comprehensive Income, Statement of Financial Position, and Statement of Cash Flows - net of associated tax impacts - is as follows: PAGE 36 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Statement of Financial Position: 1 JULY 2017 AS REPORTED LEASE ADJUSTMENTS CORRECTION ADJUSTMENT 1 JULY 2017 ADJUSTED Right of use assets Deferred tax assets Total assets - 13,298,363 - 13,298,363 2,457,646 242,885 232,846 2,933,377 115,629,831 13,541,248 232,846 129,403,925 Trade and other payables 9,237,235 Lease liabilities – current - (123,830) 1,581,110 - - 9,113,405 1,581,110 Deferred revenue 13,206,694 - 12,534,383 25,741,077 Deferred tax liabilities 5,284,303 (170,943) (4,797,611) 315,749 Lease liabilities – non-current - 11,841,083 - 11,841,083 Total liabilities Retained earnings Total equity 45,629,398 13,127,420 7,736,772 66,493,590 55,875,278 70,000,433 413,828 (7,503,926) 48,785,180 413,828 (7,503,926) 62,910,335 30 JUNE 2018 AS REPORTED LEASE ADJUSTMENTS PRESENTATION ADJUSTMENT CORRECTION ADJUSTMENT 30 JUNE 2018 ADJUSTED Other current assets 1,769,109 - (29,400) - 1,739,709 Deferred tax assets 2,157,393 242,885 Right of use assets - 11,474,143 - - 1,749,078 4,149,356 - 11,474,143 Total assets 143,872,047 11,717,028 (29,400) 1,749,078 157,308,753 Trade and other payables Lease liabilities – current 19,642,982 (123,831) (29,400) - 19,489,751 - 1,639,098 Deferred revenue 9,635,257 - Deferred tax liabilities 5,132,522 (170,943) Lease liabilities – non- current - 9,958,875 - - - - 1,639,098 18,911,203 28,546,460 (4,961,579) - - 9,958,875 Total liabilities 58,498,862 11,303,199 (29,400) 13,949,624 83,722,285 Retained earnings 66,864,790 Total equity 85,373,185 413,828 413,828 - - (12,200,545) 55,078,073 (12,200,545) 73,586,468 PAGE 37 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 30 JUNE 2019 AS REPORTED LEASE ADJUSTMENTS PRESENTATION ADJUSTMENT CORRECTION ADJUSTMENT 30 JUNE 2019 ADJUSTED Other current assets 9,316,380 Property and equipment 3,117,793 Intangible assets 167,566,178 - - - (215,744) (649,702) - - 9,100,636 2,468,091 649,702 (581,733) 167,634,147 Deferred tax assets 665,732 242,885 Right of use assets - 16,362,515 - - 1,691,554 2,600,171 - 16,362,515 Total assets 252,898,424 16,605,400 (215,744) 1,109,821 270,397,901 Trade and other payables Lease liabilities – current 14,639,295 (479,202) (215,744) 171,589 14,115,938 - 3,341,633 Deferred revenue 11,973,369 Current tax liabilities 965,505 - - Deferred tax liabilities 7,430,965 (170,943) Lease liabilities – non- current - 14,791,574 - - - - - - 3,341,633 26,882,363 38,855,732 (555,003) 410,502 (7,260,022) - - 14,791,574 Total liabilities 64,495,457 17,483,062 (215,744) 19,238,927 101,001,702 Foreign currency translation reserve 3,963,949 24,061 Retained earnings 81,550,720 (901,726) Total equity 188,402,967 (877,665) - - - - 3,988,010 (18,129,103) 62,519,891 (18,129,103) 169,396,199 Statement of Comprehensive Income: 30 JUNE 2018 AS REPORTED LEASE ADJUSTMENTS PRESENTATION ADJUSTMENT CORRECTION ADJUSTMENT 30 JUNE 2018 ADJUSTED Revenue 120,118,636 - - (6,503,072) 113,615,564 Cost of goods sold (10,354,915) (2,115,138) 126,255 (12,343,798) Gross profit 109,763,721 - (2,115,138) (6,376,817) 101,271,766 Sales and distribution (53,575,892) 244,530 (599,291) - (53,930,653) Research and development General and administration (4,015,335) 41,912 (12,966,936) - (16,940,359) (37,771,103) 1,818 15,681,365 - (22,087,920) Operating profit 15,571,880 288,260 Finance costs (743,115) (288,260) Income tax expense (2,671,502) - Profit for the year 10,989,512 - - - - (6,376,817) 9,483,323 - (1,031,375) 1,680,199 (991,303) (4,696,618) 6,292,894 PAGE 38 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 30 JUNE 2019 AS REPORTED LEASE ADJUSTMENTS PRESENTATION ADJUSTMENT CORRECTION ADJUSTMENT 30 JUNE 2019 ADJUSTED Revenue 150,120,898 Cost of goods sold (13,607,584) Gross profit 136,513,314 - - - - (10,487,700) 139,633,198 (3,951,291) 1,934,807 (15,624,068) (3,951,291) (8,552,893) 124,009,130 Sales and distribution (57,801,522) (258,308) 237,693 Research and development General and administration Operating profit Finance costs Income tax expense (6,607,097) (243,784) (21,965,259) (51,751,642) 1,464 25,678,857 22,336,575 (894,918) (6,605,909) (500,628) (814,926) - Profit for the year 14,685,930 (1,315,554) Statement of Cash Flows: - - - (57,822,137) (28,816,140) (26,071,321) - - - - (8,552,893) 13,283,054 - (1,709,844) 2,624,335 (3,981,574) (5,928,558) 7,441,818 30 JUNE 2018 AS REPORTED LEASE ADJUSTMENTS PRESENTATION ADJUSTMENT 30 JUNE 2018 ADJUSTED Receipts from customers 111,138,416 - 3,369,839 114,508,255 Payment to employees and suppliers (88,582,591) 2,400,738 (3,369,839) (89,551,692) Interest paid (736,415) (288,260) Net cash provided by operating activities 21,561,928 2,112,478 Software development costs - Purchase of intangibles (26,564,140) Net cash used in investing activities (28,748,112) - - - Lease payments - (2,112,478) Net cash provided by financing activities 14,007,330 (2,112,478) - (1,024,675) - 23,674,406 (25,385,166) (25,385,166) 25,385,166 (1,178,974) - - (28,748,112) (2,112,478) - 11,894,852 PAGE 39 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 30 JUNE 2019 AS REPORTED LEASE ADJUSTMENTS PRESENTATION ADJUSTMENT 30 JUNE 2019 ADJUSTED Receipts from customers 135,920,234 - 4,782,353 140,702,587 Payment to employees and suppliers (116,329,933) 2,887,874 (178,127) (113,620,186) Interest paid (860,968) (814,926) - (1,675,894) Net cash provided by operating activities 18,474,290 2,072,948 4,604,226 25,151,464 Purchase of property and equipment (1,258,856) Software development costs Acquisition of assets Purchase of Intangibles - - (109,135,234) Net cash used in investing activities (110,394,090) - - - - - 649,702 (609,154) (37,930,294) (37,930,294) (75,947,376) (75,947,376) 108,623,742 (511,492) (4,604,226) (114,998,316) Lease payments - (2,072,948) Net cash provided by financing activities 92,099,807 (2,072,948) - - (2,072,948) 90,026,859 2. FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks including: ▪ market risk (including currency risk and price risk), ▪ ▪ credit risk, and liquidity risk The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and ageing analysis for credit risk to determine market risk. Risk management is carried out by the corporate finance department under policies approved by the Board of Directors. The Company has principles for overall risk management covering areas such as foreign exchange risk, credit risk and derivative financial instruments. a. Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the United States dollar, British Pound and European Euro. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. Management has set up a policy requiring Group companies to manage their foreign exchange risk against their functional currency. PAGE 40 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: 2020 2019 2018 USD EURO GBP USD EURO GBP USD EURO GBP Cash and cash equivalents Trade receivables 16,774,320 6,869,341 5,061,790 20,900,580 2,706,372 1,981,443 5,414,586 3,193,126 5,061,790 - - 4,265,924 614,415 404,601 2,562,412 872,134 2,169,769 2,530,800 604,371 Trade payables 148,325 210,117 7,708 156,849 146,971 41,745 309,510 198,962 The Group’s exposure to other foreign exchange movements is not considered material. Sensitivity As shown in the table above, the Group is primarily exposed to changes in USD exchange rates. The sensitivity of profit or loss to changes in the exchange rates arises mainly from US-dollar. Impact on profit after tax of +/- 10% change of USD against AUD will result to an increase / (decrease) of $2,089,192/ ($2,089,192) for the fiscal year ended 30 June 2020 (2019: $2,330,614 / ($2,330,614); 2018: $763,588 / ($763,588)). b. Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions and outstanding receivables, contract assets and committed transactions. For all customers in all instances the Group retains title over the software. A permanent licence key to use the software is not issued until full payment is received, thus reducing risk of impairment to accounts receivable. Compliance with credit limits for wholesale customers are regularly monitored by Corporate Finance. Sales to retail customers are required to be settled by using major credit cards, mitigating credit risk. There are no significant concentrations of credit risk, whether through exposure to individual customers, specific industry sectors and/or regions. Trade receivables and contract assets The Group applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled receivables and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. PAGE 41 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) The expected loss rates are based on the payment profiles of sales over a period of 24 months before 30 June 2019 or 30 July 2020 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward- looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Group has identified the consumer price index rate of the countries in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. On that basis, the loss allowance as at 30 June 2020, 30 June 2019 and 30 June 2018 was determined as follows for both trade receivables and contract assets: 2020 Balance Expected Loss Rate Loss Allowance Balance 2019 Expected Loss Rate 2018 Loss Allowance Balance Expected Loss Rate Loss Allowance Current 30 days 60 days 90 days Over 90 days Total 26,196,474 0.1% 30,962 27,275,145 1.0% 376,085 24,102,834 0.0% 3,237,575 1.5% 49,977 2,110,693 1.0% 26,327 1,161,984 0.0% 3,129,071 3.9% 122,719 603,024 2.0% 9,828 710,557 0.0% 988,985 6.9% 68,648 246,307 3.0% 6,256 230,762 0.0% 1,639,175 10.6% 173,596 1,484,593 3.0% 37,706 764,084 0.0% 35,191,280 445,902 31,719,762 456,202 26,970,220 Unbilled receivables 25,124,317 Total 25,124,317 Total loss allowance 0.1% 23,834 13,636,883 0.0% 23,834 13,636,883 - - 7,281,643 0.0% 34,251,863 469,736 456,202 - - - - - - - The loss allowances for trade receivables and contract assets as at 30 June reconcile to the opening loss allowances as follows: 2020 $ 2019 $ 2018 $ As at 1 July 456,202 - 71,643 Increase in loan loss allowance recognised in profit or loss during the year Receivables written off during the year as uncollectible Unused amount reversed Foreign exchange difference As at 30 June 1,081,746 1,168,022 493,061 (1,075,700) (711,820) (564,704) 7,277 211 - - 469,736 456,202 - - - Trade receivables and contract assets are written off where there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group, and a failure to make contractual payments for a period of greater than 120 days past due. PAGE 42 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Impairment losses on trade receivables and contract assets are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item. c. Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through adequate committed credit facilities to meet financial obligations as and when they fall due. At the end of the reporting period the Group held deposits at call of $38,538,759 (2019: $27,331,898; 2018: $26,998,317) that are expected to expeditiously generate cash inflows for managing liquidity risk. Management monitors rolling forecasts of the Group’s liquidity reserve as discussed above and cash and cash equivalents (Note 8) on the basis of forecasted cash flows. This is generally carried out at a Group level by Corporate Finance. In addition, the Group’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these and monitoring balance sheet liquidity ratios against internal requirements. The below page analyses the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities for all non-derivative financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not considered material. CONTRACTUAL MATURITIES OF FINANCIAL LIABILITIES At 30 June 2018 LESS THAN 6 MONTHS $ 6-12 MONTHS $ BETWEEN 1-3 YEARS $ MORE THAN 3 YEARS $ TOTAL $ CARRYING AMOUNT LIABILITIES Trade payables Lease liabilities Borrowings At 30 June 2019 Trade payables Lease liabilities Borrowings At 30 June 2020 Trade payables Lease liabilities 3,800,099 - - - 3,800,099 3,800,099 996,914 1,039,554 6,240,726 4,796,185 13,073,379 11,597,973 21,031,375 - 21,031,375 20,000,000 4,797,013 1,039,554 27,272,101 4,796,185 37,904,853 35,398,072 5,519,328 - - - 5,519,328 5,519,328 2,181,101 1,809,741 9,610,608 7,016,274 20,617,724 18,133,207 - - 26,576,738 - 26,576,738 25,681,820 7,700,429 1,809,741 36,187,346 7,016,274 52,713,790 49,334,355 6,769,750 - - - 6,769,750 6,769,750 2,351,406 1,947,181 7,971,005 4,965,943 17,235,535 15,243,250 Borrowings (Note 17) 26,555,011 - - - 26,555,011 25,531,225 35,676,167 1,947,181 7,971,005 4,965,943 50,560,296 47,544,225 d. Fair value measurements The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes in accordance with AASB 9 Financial Instruments. The carrying amounts of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not significant. PAGE 43 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 3. SEGMENT INFORMATION The Group manages its operations as a single business operation and there are no parts of the Group that qualify as operating segments under AASB 8 Operating Segments. The CEO (Chief Operating Decision Maker or “CODM”) assesses the financial performance of the Group on an integrated basis only and accordingly, the Group is managed on the basis of a single segment. Information presented to the CODM on a monthly basis is categorised by type of revenue as provided below. Further, earnings before interest, tax and depreciation and amortisation (EBITDA) is used to assess the performance of the business. Segment performance: Continuing operations Software Services Hardware Total revenue 2019 2018 2020 $ (RESTATED) $ (RESTATED) $ 168,969,376 130,875,803 106,268,505 5,890,893 8,274,963 6,391,613 998,625 482,432 955,446 175,858,894 139,633,198 113,615,564 In general, a large amount of revenue is generated by customers that are global, from transactions that cross multiple countries and where the source of revenue can be unrelated to the location of the users accessing the software. Accordingly, the Group is managed as a single segment. Reconciliation of segment EBITDA to the net profit after tax is as follows: EBITDA Interest income Interest expense 2019 2018 2020 $ (RESTATED) $ (RESTATED) $ 62,643,893 35,196,071 21,102,641 37,490 69,750 2,024 (1,859,172) (1,709,844) (1,031,375) Depreciation and amortisation (28,399,817) (22,132,585) (12,789,093) Income tax expense Net profit after tax Geographic Information (8,834,728) (3,981,574) (991,303) 23,587,666 7,441,818 6,292,894 The amounts for revenue by region in the following table are based on the invoicing location of the customer. PAGE 44 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Revenue generated by location of customer: Asia Pacific Americas 2019 2018 2020 $ (RESTATED) $ (RESTATED) $ 28,749,158 22,749,131 19,212,218 97,556,066 78,419,587 59,212,138 Europe, Middle East and Africa (EMEA) 49,553,670 38,464,480 35,191,208 175,858,894 139,633,198 113,615,564 Non-current assets by geographic location: Asia Pacific Americas 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 111,458,736 101,995,420 84,842,917 100,870,261 85,737,361 7,450,720 Europe, Middle East and Africa (EMEA) 609,717 1,332,143 2,025,227 212,938,714 189,064,924 94,318,864 4. PROFIT FOR THE YEAR The profit for the year has been arrived at after charging the following items: Employee benefits Wages and salaries Sales and distribution Research and development General and administration Employee option expense Finance costs Interest expense Other losses / (gains) – net 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 48,961,052 41,974,275 40,878,806 4,270,922 6,740,827 3,551,293 12,456,450 12,203,436 10,038,241 685,006 149,818 1,167,751 1,859,172 1,709,844 1,031,375 Realised and unrealised foreign exchange (gain) (249,950) (1,023,487) (407,340) Expenses (included in general and administration) Bad debts expense 1,708,639 1,168,022 493,061 Rental expense on operating leases 371,546 660,918 707,731 Depreciation and amortization Sales and distribution Research and development General and administration 2,887,030 2,879,077 1,103,887 24,626,131 18,970,699 11,274,704 886,656 282,809 410,502 PAGE 45 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 5. REVENUE Software Services Hardware 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 168,969,376 130,875,803 106,268,505 5,890,893 8,274,963 6,391,613 998,625 482,432 955,446 175,858,894 139,633,198 113,615,564 Disaggregation of revenue AASB 15 requires disclosure of revenue disaggregation that best depicts how the nature, amount, timing and uncertainty of the Group’s revenue and cash flows are affected by economic factors. The Group disaggregates revenue by categories shown in the table below. Timing of revenue recognition Point in time Overtime 6. OTHER INCOME Government grant income Bank interest a. Government grants 2020 $ 2019 (RESTATED) $ 2019 (RESTATED) $ 127,276,391 108,216,453 90,597,557 48,582,503 31,416,745 23,018,007 175,858,894 139,633,198 113,615,564 NOTES (a) 2020 $ 973,742 37,490 2019 (RESTATED) $ 2019 (RESTATED) $ 890,285 69,750 761,125 2,024 1,011,232 960,035 763,149 Government grants recognised as other income for the current financial year relates to benefits received under the Research and Development Tax Incentive regime in excess of the statutory income tax rate. PAGE 46 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 7. INCOME TAX EXPENSE (a) Income tax expense Current tax Current tax on profits for the year Total current tax expense Deferred income tax 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 4,724,292 4,724,292 2,432,389 2,523,030 2,432,389 2,523,030 (Increase) / decrease in deferred tax assets (1,223,235) 1,549,185 (1,531,727) Increase / (decrease) in deferred tax liabilities Total deferred tax expense Income tax expense 5,333,671 4,110,436 - - 1,549,185 (1,531,727) 8,834,728 3,981,574 991,303 (b) The numerical reconciliation of income tax expense to prima facie tax payable: Profit before income tax expense Tax at the Australian tax rate of 30% (2019: 30%; 2018: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Entertainment Share-based payments Interest expense Difference in overseas tax rates Write-off carried forward loss Research and development tax credit Others Income tax expense 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 32,422,394 11,423,392 7,284,197 9,726,718 3,427,018 2,185,259 48,132 149,902 - 80,839 40,671 15,331 80,143 350,325 184,264 (658,888) (765,955) (1,167,477) - 1,530,848 (41,898) (303,370) (127,766) (267,491) (79,687) (169,525) (429,788) 8,834,728 3,981,574 991,303 PAGE 47 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Deferred tax balances (i) Deferred tax assets The balance comprises temporary differences attributable to: Research and development tax credit to carry forward Employee benefits Deferred revenue Lease liabilities Tax losses Property and equipment Others Total deferred tax assets Set-off deferred tax liabilities pursuant to set- off provisions Net deferred tax assets (ii) Deferred tax liabilities 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 19,038,462 22,363,088 18,653,906 1,316,975 9,822,557 3,697,079 21,875 243,965 83,027 688,044 8,534,486 4,290,309 25,870 9,922 1,172,389 640,197 7,014,967 4,290,309 70,137 (219,333) 230,280 34,223,940 37,084,108 30,680,463 (33,725,160) (34,483,937) (26,531,107) 498,780 2,600,171 4,149,356 The balance comprises temporary differences attributable to: Intellectual property Right of use assets Others 2020 $ 35,373,921 3,127,293 557,618 2019 (RESTATED) $ 2018 (RESTATED) $ 29,534,998 22,640,833 3,876,591 1,072,348 3,876,591 13,683 Total deferred tax liabilities 39,058,832 34,483,937 26,531,107 Set-off deferred tax assets pursuant to set-off provisions (33,725,160) (34,483,937) (26,531,107) Net deferred tax liabilities 5,333,672 - - All movements in the deferred tax assets and deferred tax liabilities were recognised in profit and loss. 8. CASH AND CASH EQUIVALENTS This account consists of cash in bank amounting to $38,538,759 (2019: $27,331,898; 2018: $26,998,317). The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents aforementioned. PAGE 48 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 9. TRADE AND OTHER RECEIVABLES NOTE 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ Trade receivables 35,191,280 31,719,762 26,970,220 Provision for impairment of trade receivables and unbilled revenue Unbilled revenue Other debtors (a) (469,736) (456,202) - 25,124,317 13,636,883 7,281,643 358,490 - - Total trade and other receivables 60,204,351 44,900,443 34,251,863 The carrying value of trade receivables is considered a reasonable approximation of fair value due to the short-term nature of the balances. (a) Provision for impairment of receivables and unbilled receivables AASB 9 introduced a new impairment model which is the new expected credit loss (ECL) model which involves a three-stage approach whereby financial assets move through the three stages as their credit quality changes. The stage dictates how an entity measures impairment loss and applies the effective interest rate method. A simplified approach is permitted for financial assets that do not have a significant financing component (eg trade receivables). On initial recognition, entities will record a day-1 loss equal to the 12-month ECL (or lifetime ECL for trade receivables), unless the assets are considered credit impaired. The Group applied the simplified approach to measuring ECL which uses a lifetime expected loss allowance for all trade receivables as the assets do not contain significant financing component. A provision for impairment is recognised before the credit loss is incurred based on the relevant loss rates applied to outstanding balances of trade receivables. There was no material impact from the adoption of AASB 9. These amounts have been included in the general and administration expenses. The amount of the provision was $469,736 (2019: $456,202; 2018: nil). The individually impaired receivables mainly relate to smaller clients who experienced financial distress. During 30 June 2020, $1,075,700 (2019: $711,820; 2018: $564,704) was written off as bad debts. As a percentage of total Group revenue, the provision for impairment recognised during the year is negligible. PAGE 49 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) The ageing of overdue receivables is as follows: 1 – 3 months 4 – 6 months Over 6 months 2020 $ 2019 $ 2018 $ 7,339,720 2,269,879 2,103,302 737,989 630,180 917,097 1,544,558 521,004 243,080 8,994,806 4,444,617 2,867,386 The movements in receivables provision is disclosed in Note 2(b). Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. a. Foreign exchange and interest rate risk Information about the Group’s exposure to foreign currency risk and interest rate risk in relation to trade and other receivables is provided in Note 2(a)(i). b. Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of receivables outlined above. Refer to Note 2 for more information on the risk management policy of the Group and the credit quality of the entity’s trade and other receivables. 10. OTHER CURRENT ASSETS Prepayments Other receivables (a) 1,698,529 9,064,528 1,583,882 199,144 36,108 155,827 Total other current assets 1,897,673 9,100,636 1,739,709 2020 $ 2019 $ 2018 $ (a) FY2019 balance is inclusive of Ringtail data centre. PAGE 50 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 11. PROPERTY AND EQUIPMENT At 1 July 2017 At cost Accumulated depreciation Net book amount Year ended 30 June 2018 Opening net book amount Forex difference – cost Forex difference – accumulated depreciation Additions Disposals Depreciation Closing net book amount At 30 June 2018 At cost Accumulated depreciation Net book amount Year ended 30 June 2019 Opening net book amount Forex difference – cost Forex difference – accumulated depreciation Additions Disposals Depreciation Closing net book amount At 30 June 2019 At cost Accumulated depreciation Net book amount Year ended 30 June 2020 Opening net book amount Forex difference – cost Forex difference – accumulated depreciation Additions Disposals Depreciation Closing net book amount At 30 June 2020 At cost Accumulated depreciation Net book amount OFFICE & COMPUTER EQUIPMENT FURNITURE LEASEHOLD & FIXTURE IMPROVEMENT TOTAL 7,798,158 (5,595,689) 2,202,469 462,548 (233,059) 229,489 2,107,254 (1,498,933) 10,367,960 (7,327,681) 608,321 3,040,279 2,202,469 259,608 (250,106) 1,018,232 (1,626,990) 1,603,213 229,489 14,804 (12,392) 558,555 (4,746) (130,423) 655,287 608,321 46,466 (41,774) 607,185 - (463,866) 3,040,279 320,878 (304,272) 2,183,972 (4,746) (2,221,279) 756,332 3,014,832 9,075,998 (7,472,785) 1,603,213 1,020,088 (364,801) 655,287 2,757,374 (2,001,042) 756,332 12,853,460 (9,838,628) 3,014,832 1,603,213 355,715 (318,901) 373,437 - (1,123,730) 889,734 655,287 51,538 (19,175) 9,976 (2,579) (205,905) 489,142 756,332 75,261 (52,729) 518,410 - (208,059) 3,014,832 482,514 (390,805) 901,823 (2,579) (1,537,694) 1,089,215 2,468,091 9,805,150 (8,915,416) 889,734 1,079,023 (589,881) 489,142 3,351,045 (2,261,830) 14,235,218 (11,767,127) 1,089,215 2,468,091 889,734 161,975 (136,583) 895,056 (2,896) (760,069) 1,047,217 489,142 23,272 (7,708) 12,402 - (188,436) 1,089,215 46,594 (15,878) 447,571 - (530,681) 2,468,091 231,841 (160,169) 1,355,029 (2,896) (1,479,186) 328,672 1,036,821 2,412,710 10,859,285 (9,812,068) 1,047,217 1,114,697 (786,025) 3,845,210 (2,808,389) 15,819,192 (13,406,482) 328,672 1,036,821 2,412,710 PAGE 51 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 12. INTANGIBLE ASSETS At 1 July 2017 At cost Accumulated amortisation & impairment Net book amount Year ended 30 June 2018 Opening net book amount Forex difference – cost Forex difference – accumulated amortisation & impairment Additions Amortisation Closing net book amount At 30 June 2018 At cost Accumulated amortisation & impairment Net book amount Year ended 30 June 2019 Opening net book amount Forex difference – cost Forex difference – accumulated amortisation & impairment Additions Amortisation GOODWILL (RESTATED) SOFTWARE BRAND INTELLECTUAL PROPERTY TOTAL (RESTATED) - 1,703,207 - (1,092,122) - 611,085 - - - 69,083,944 70,787,151 (11,837,702) (12,929,824) 57,246,242 57,857,327 - - - - - - - - - - - - 611,085 32,759 (31,349) 12,662 (449,875) 175,282 1,748,628 (1,573,346) 175,282 175,282 61,008 (59,248) - - - - - - - - - - - - 57,246,242 57,857,327 1,963 34,722 (711) (32,060) 26,551,478 26,564,140 (8,293,721) (8,743,596) 75,505,251 75,680,533 95,637,385 97,386,013 (20,132,134) (21,705,480) 75,505,251 75,680,533 75,505,251 75,680,533 2,880 63,888 (113,511) (172,759) 4,422,365 301,067 712,276 103,767,495 109,203,203 - (251,160) - (16,889,558) (17,140,718) Closing net book amount 4,422,365 226,949 712,276 162,272,557 167,634,147 At 30 June 2019 At cost 4,422,365 2,110,703 712,276 199,407,760 206,653,104 Accumulated amortisation & impairment - (1,883,754) - (37,135,203) (39,018,957) Net book amount Year ended 30 June 2020 Opening net book amount Forex difference – cost Forex difference – accumulated amortisation & impairment Additions Disposals Amortisation 4,422,365 226,949 712,276 162,272,557 167,634,147 4,422,365 226,949 712,276 162,272,557 167,634,147 121,014 35,612 17,225 1,791,566 1,965,417 - - - (27,975) 24,349 (18,029) (113,284) - - - - 66,077 38,102 51,038,451 51,062,800 (176,355) (194,384) (23,238,212) (23,351,496) Closing net book amount 4,543,379 127,622 729,501 191,754,084 197,154,586 At 30 June 2020 At cost 4,543,379 2,152,635 729,501 252,061,422 259,486,937 Accumulated amortisation & impairment - (2,025,013) - (60,307,338) (62,332,351) Net book amount 4,543,379 127,622 729,501 191,754,084 197,154,586 Impairment test for Goodwill and Brand (intangible assets with indefinite useful life) The Group acquired goodwill as part of the acquisition of Ringtail in September 2018. The Group tests whether goodwill has suffered any impairment this fiscal year ended June 30, 2020. The recoverable amount of the CGU (the Group only has one CGU and that is Nuix operations as a whole) was determined based on value-in-use calculations which require the use of assumptions. PAGE 52 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) The calculations use cash flow projections based on financial budget approved by the Board and extrapolated using the estimated growth rates stated below covering a five-year period. These growth rates are a combination of historical data and forecast of the CGU. The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industries and have been based on historical data from both external and internal sources. Post-tax discount rate per annum Pre-tax discount rate per annum Long-term perpetuity growth rate 2020 9.2% 13.1% 2.5% 2019 9.2% 13.1% 2.5% 2018 - - - Assumption Approach used in determining values Revenue growth rate Operating expenditures rate EBITDA margin Net profit before tax Depreciation and amortisation Average annual growth rate over the five-year forecast period; based on past performance and management’s expectations of market development. Average percentage based on revenue over the five-year forecast period; based on past performance and management’s expectation of market development. Working capital Average historical rates based on revenue and operating expenses Capital expenditures Expected cash costs in the CGU. This is based on the historical experience of management, and the planned refurbishment expenditure. No incremental cost savings are assumed in the value-in-use model as a result of this expenditure. The cash flow projections included specific estimates for five years and a terminal growth rate thereafter. Management has performed sensitivity analysis and assessed reasonable changes for key assumptions and has not identified any instances that could cause the carrying amount of the group of CGUs, over which goodwill is monitored, to exceed its recoverable amount. 13. LEASES a. Amounts recognised in the balance sheet The balance sheet shows the following amounts relating to leases: Right of use assets, net of depreciation 2020 $ 12,872,638 2019 $ 16,362,515 2018 $ 11,474,143 Lease liabilities Current Non-current 3,704,000 11,539,250 15,243,250 3,341,633 14,791,574 18,133,207 1,639,098 9,958,875 11,597,973 PAGE 53 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Additions to the right-of-use assets during FY2020 were Nil (FY2019: $2,336,281). There are no lease commitments. b. Amounts recognised in profit or loss The profit or loss shows the following amounts relating to leases: Depreciation charge of right-of-use assets Interest expense (included in finance cost) Expenses relating to short-term leases Expenses relating to leases of low-value assets that are not shown above as short- term leases 2020 $ 3,569,135 726,705 349,609 2019 $ 3,454,174 814,926 186,453 2018 $ 1,824,218 288,260 238,146 14,608 4,660,057 5,776 4,461,329 11,252 2,361,876 c. The Group’s leasing activities and how these are accounted for The Group leases various offices and equipment. Rental contracts are typically made for fixed periods of 3 months to 5 years but may have extension options as described in (d) below. 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. From 1 July 2017, leases are recognised as a right-of-use asset with a corresponding liability recognised 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 ● 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; and ● makes adjustments specific to the lease, e.g., term, country, currency and security. PAGE 54 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Right-of-use assets are measured at cost comprising the 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. 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. d. Extension and termination options Extension and termination options are included in a number of 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 majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. 14. TRADE AND OTHER PAYABLES 2020 $ 2019 $ 2018 $ Sundry payables and accrued expenses 9,498,410 5,232,797 4,833,190 Trade payables Customer deposits 6,769,750 5,519,328 3,800,099 452,559 146,939 103,790 Payroll tax and other statutory liabilities 1,822,353 1,813,862 9,805,798 Indirect taxes payable 2,161,118 1,403,012 946,874 Total trade and other payables 20,704,190 14,115,938 19,489,751 All amounts are short term and the carrying values are considered to be a reasonable approximation of fair value. Information about the Group’s exposure to foreign exchange risk is provided in Note 2(a)(i). PAGE 55 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 15. DEFERRED REVENUE Deferred revenue is recognised over the period during which the service is provided. Customer-related Annual license and maintenance 24,396,365 19,252,758 15,838,665 2020 $ 2019 $ 2018 $ Maintenance income Perpetual licence Processing income Professional service income Tax incentive related Reseach and development Total deferred revenue 14,911,704 13,286,796 6,565,930 6,296 16,143 - 1,442,793 1,194,691 460,849 419,206 - - 41,951,849 33,016,546 22,823,800 5,839,186 5,839,186 5,722,660 47,791,035 38,855,732 28,546,460 Deferred revenue reflects the value of advance payments made by customers who have been invoiced for services that will be provided in the future. Movements during the year of customer-related deferred revenue are as under: 2020 $ 2019 $ 2018 $ Opening balance 33,016,546 22,823,800 20,157,357 Revenue recognised in the current year (61,252,620) (56,384,080) (61,154,860) Invoiced during the period Exchange differences Closing balance 70,181,826 66,506,171 63,760,353 6,095 70,655 60,950 41,951,849 33,016,546 22,823,800 Movements during the year of tax incentive - related deferred revenue are as under: Opening balance Other income recognised in the current year Additional research and development incentive Closing balance 2020 $ 2019 $ 2018 $ 5,839,186 (973,742) 5,722,660 (890,285) 4,807,568 (761,125) 973,742 1,006,811 5,839,186 5,839,186 1,676,217 5,722,660 Applying the practical expedient of AASB 15, paragraph 121, the Group does not disclose further qualitative information related to remaining performance obligations, as they are part of a contract that has an original expected duration of one year or less. PAGE 56 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 16. PROVISIONS Current Annual leave Long service leave Non-current Long service leave Make good obligation Movements during the year: Annual leave Opening balance Charged to profit or loss Closing balance Long service leave - current Opening balance Charged to profit or loss Closing balance Total - current Long service leave – non-current Opening balance Charged to profit or loss Closing balance Make good obligation Opening balance Charged to profit or loss Closing balance Total – non-current 2020 $ 2019 $ 2018 $ 2,329,961 3,093,508 2,476,241 334,107 167,604 140,263 2,664,068 3,261,112 2,616,504 203,866 303,006 506,872 241,525 230,255 301,866 296,259 543,391 526,514 2020 $ 2019 $ 2018 $ 3,093,508 2,476,241 1,893,687 (763,547) 617,267 582,554 2,329,961 3,093,508 2,476,241 167,604 166,503 334,107 140,263 27,341 90,213 50,050 167,604 140,263 2,664,068 3,261,112 2,616,504 241,525 (37,659) 230,255 11,270 203,866 241,525 301,866 1,140 303,006 506,872 296,259 5,607 301,866 296,259 543,391 526,514 160,670 69,585 230,255 292,955 3,304 The current portion of these liabilities represents the Group’s obligations to which the employee has a current legal entitlement. These liabilities arise mainly from accrued annual leave entitlements at the reporting date. A provision has been recognised for employee benefits relating to long service leave for employees. In calculating the present value of future cash outflows in respect of long service leave, the probability of long service leave being taken is based upon historical data. The measurement and recognition criteria for employee benefits have been included in Note 1(o). PAGE 57 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Nuix is required to restore the leased office at 1 Market Street in Sydney and Unit 17C in Cork Airport Business Park in Cork to the original condition at the end of the respective leases. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as an interest expense. 17. BORROWINGS Current Bank Loans Non-current Bank Loans (a) Secured liabilities NOTE (b) (a) 2020 $ 2019 $ 2018 $ 25,531,225 - - - 25,681,820 20,000,000 Nuix Pty Ltd utilised the cash facility of $25,531,225 out of $50,942,515 ($40M AUD and $7.5M USD). The financing is provided by Commonwealth Bank of Australia (CBA) with interest repayable on a quarterly basis over the term of the loan. The facility is secured over the Group’s assets. Drawdown made during 2020 was nil (2019: $4,000,000 USD; 2018: $5,000,000 AUD). (b) Loan covenants Under the terms of the loan facilities with the bank, the Group is required to comply with the following financial covenants every testing date: • Gross leverage ratio (GLR) does not exceed 1.75:1; • Interest cover ratio (ICR) is equal to or greater than 3.00:1; • Obligors own at least 95% of total assets of the Group and are responsible for at least 95% of EBITDA of the Group during the relevant period; and • Minimum cash balance of $10M over the period. The Group has complied with these covenants throughout the reporting periods. For the year ended FY2019 the Company did not furnish audited financial statements to CBA within the 120 day borrowing requirements stipulated within the borrowing agreement. In September 2020, notification was received from CBA formalising their position regarding the late submission of audited financial statements for FY2019 outlining that CBA would not be asserting its rights, including its right to terminate borrowing facilities in this scenario. Given notification was received post 30 June 2020 balance date then as at 30 June 2020 CBA still possessed the right to terminate borrowing facilities. Accordingly, the Company has classified borrowings for the year ended 30 June 2020 as a current liability. PAGE 58 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 18. ISSUED CAPITAL 265,400,633 (2019: 265,400,633; 2018: 217,390,649) fully paid ordinary shares The issued shares do not carry a par value. NOTE 2020 $ 2019 $ 2018 $ (a) 104,227,205 104,227,205 17,809,218 Movements in issued capital Balance as at 30 June 2017 Shares issued during 2018 Balance as at 30 June 2018 Shares issued during 2019 Balance as at 30 June 2019 Shares issued during 2020 Balance as at 30 June 2020 *weighted average price NUMBER # ISSUE PRICE* $ AMOUNT $ 212,389,650 5,000,999 217,390,649 48,009,984 265,400,633 - 265,400,633 1.80 1.80 - 8,801,888 9,007,330 17,809,218 86,417,987 104,227,205 - 104,227,205 Ordinary shares participate in dividends and the proceeds upon winding up of the Company, proportionately to the shareholding. At the shareholders’ meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. a. Capital risk management Management controls the capital of the Group in order to maintain an appropriate debt to equity ratio, provide the shareholders with returns and ensure that the Group can fund its operations and continue as a going concern. The Group’s debt and capital includes ordinary share capital and financial liabilities, supported by financial assets. There are no externally imposed capital requirements aside from debt covenants. Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and share issues. 19. EQUITY a. Share-based payments The share-based payments reserve is used to recognise: • • • the grant date fair value of options issued to employees but not exercised, the grant date fair value of shares issued to employees, and the grant date fair value of shares issued to shareholders. PAGE 59 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) b. Movement in reserves Share option reserve (net of buy-back) As at 1 July Share based payment costs Buy-back options As at 30 June Foreign currency translation reserve As at 1 July Foreign currency translation reserve As at 30 June Total Reserves c. Retained earnings Retained earnings Prior period adjustment Retained earnings, restated Net profit for the year Total retained earnings 20. EARNINGS PER SHARE Profit for the year Basic weighted average number of ordinary shares Basic earnings per share 2020 $ 2019 $ 2018 $ (1,338,907) 685,006 - (653,901) (1,488,725) 149,818 - (1,338,907) 3,511,320 1,176,210 (6,176,255) (1,488,725) 3,988,010 1,808,958 5,796,968 5,143,067 2,187,902 1,800,108 3,988,010 2,649,103 1,811,947 375,955 2,187,902 699,177 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 62,519,891 55,078,073 55,875,278 - - (7,090,099) 62,519,891 55,078,073 48,785,179 23,587,666 7,441,818 6,292,894 86,107,557 62,519,891 55,078,073 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ 23,587,666 7,441,818 6,292,894 265,400,633 265,400,633 217,390,649 0.09 0.03 0.03 Profit for the year 23,587,666 7,441,818 6,292,894 Basic weighted average number of ordinary shares Shares issuable in relation to equity- based compensation scheme Diluted weighted average number of ordinary shares 265,400,633 265,400,633 217,390,649 36,499,547 15,368,900 15,368,900 301,900,180 280,769,533 232,759,549 Diluted earnings per share 0.08 0.03 0.03 PAGE 60 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 21. DIVIDENDS During the year the Directors did not declare an interim dividend (2019: Nil) and have not recommended a final dividend be paid after 30 June 2020 (2019: Nil). Franking credits arising from the payment of income tax, by the parent entity, Nuix Pty Ltd, during the years ended 30 June 2020 and 30 June 2019 are represented below. Franking credits Parent Entity Franking Credits Attributable To Parent Entity Franking credits available for subsequent financial years based on a tax rate of 30% (2019: 30%; 2018: 30%) 2020 $ 2019 $ 2018 $ 668,772 668,772 668,772 The amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: • • • franking credits that will arise from the payment of the amount of the provision for income tax, franking debits that will arise from the payment of dividends recognised as a liability at the reporting date (2019: Nil), and, franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date (2019: Nil). Franking credits attributable to the parent entity only are represented above. If the distributable profits of the subsidiaries were paid as dividends the consolidated amounts would include franking credits. The jurisdictional income tax paid by the subsidiaries is set out below: Nuix North America Inc. Nuix Technology UK Ltd Nuix Philippines Regional Operating Headquarters Nuix Ireland Ltd 22. AUDITORS’ REMUNERATION PricewaterhouseCoopers Australia Audit and other assurance Other assurance Total for audit and other assurance Taxation services Total for taxation services 2020 $ 2019 $ 188,036 15,902 12,920 202,364 228,584 87,363 8,846 - 419,222 324,793 2018 $ 245,032 - 3,790 10,684 259,506 2020 $ 2019 $ 2018 $ 300,000 42,785 342,785 28,281 28,281 279,800 405,200 685,000 14,000 14,000 225,000 27,000 252,000 14,000 14,000 266,000 PAGE 61 of 74 Total for PricewaterhouseCoopers Australia 371,066 699,000 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) It is the Group’s policy to engage PricewaterhouseCoopers Australia on assignments in addition to their statutory audit duties where their expertise and experience with the Group are important. These assignments are principally tax advice. It is the Group’s policy to seek competitive tenders for all major consulting projects. 23. RELATED PARTY DISCLOSURES a. Parent entity The ultimate and parent entity within the Group is Nuix Pty Ltd. b. Interests in other entities Name of entity Place of business/ country of incorporation Ownership interest held by the Group Ownership interest held by non-controlling interests Principal activities 2020 2019 2018 2020 2019 2018 Nuix North America, Inc USA 100% 100% 100% 0% Nuix Ireland Ltd Ireland 100% 100% 100% 0% Nuix Pte Ltd Singapore 100% 100% 100% 0% Nuix Holding Pty Ltd Australia 100% 100% 100% 0% Nuix USG Inc. Nuix Technology UK Ltd USA UK 100% 100% 100% 0% 100% 100% 100% 0% Nuix Philippines ROHQ Philippines 100% 100% 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Sale of Software Sale of Software Sale of Software Holding Company Sale of Software Sale of Software Business Support c. Key Management Personnel compensation Short-term employee benefits Post-employment benefits Long-term benefits Share-based payment expense Total Short-term employee benefits 2020 $ 2019 $ 2018 $ 1,883,202 1,504,329 1,691,115 76,505 84,699 238,803 45,531 72,532 45,049 72,532 307,722 482,896 2,283,209 1,930,114 2,291,592 These amounts include salaries, fees, cash bonuses and fringe benefits paid to Key Management Personnel including executive and non-executive Directors. Post-employment benefits These amounts include the cost of superannuation contributions made during the year. PAGE 62 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Other long-term benefits These amounts represent long service leave and long-term annual leave benefits accruing during the year. d. Transactions with other related parties The parent entity enters into commercial arm’s length distribution and reseller agreements between the Group subsidiaries and other Macquarie Group Limited related parties. These agreements are entered into on normal and commercial terms. 2020 $ 2019 $ 2018 $ TRANSACTION OUTSTANDING BALANCE TRANSACTION OUTSTANDING BALANCE TRANSACTION OUTSTANDING BALANCE Sale and purchases of goods and services Sale of goods to other related parties Purchase of service from other related party 46,296 3,225 2,150,744 - 760,006 404,670 697 - - - - - 24. SHARE-BASED PAYMENTS a. Employee Share Option Plan (ESOP) The establishment of the Nuix Pty Limited ESOP was approved by the Board of Directors on or around fiscal year 2012. The ESOP is designed to align the interests of eligible employees more closely with shareholders and provide greater motivation and incentive for them to focus on the Company's longer- term goals. Under the plan, participants are granted Options which may only be exercised if the Relevant Requirement has been met. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. To be eligible to receive an Option Invitation, an Employee must have at least six months continuous employment with the Company at the time invitations are issued, not be on a Performance Improvement Plan and not be employed as an Intern. Options are granted under the plan for no consideration and carry no dividend or voting rights and are Non-statutory Stock Options. Option holders cannot assign, transfer, sell or otherwise deal with the Options granted under the Plan without Board of Directors’ approval. The amount of Options that vest depends upon the vesting rules of the respective Plan rules (generally three to five years). The Options vest in a series of successive equal monthly instalments beginning on the first anniversary of the Vesting Commencement Date, subject to the Option holder’s continued employment with the Company through a Corporate Transaction event. Once vested, the Options become exercisable following the consummation of a Corporate Transaction / Liquidity Event (as defined in the Plan rules) or a date determined by the Board. However, under some earlier Plan rules, Options are exercisable for a period of three years once they become fully vested. Following the exercise of the Options, a vested Option is converted into one ordinary share within a certain number of business days as determined by the Plan rules (generally ten to fifteen business days). The exercise price of options is determined by a combination of internal and external valuation methodologies and presided over by the Board of Directors. PAGE 63 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Set out below are summaries of options granted under the plan: 2020 2019 (RESTATED)* 2018 (RESTATED) Average Exercise Price Per Number of Share Options As at 1 July Granted during the year Exercised during the year Sold Forfeited during the year As at 30 June $ 0.84 2.40 - - 1.40 0.71 # $ # $ # 41,154,823 0.83 43,050,373 0.72 53,044,523 349,800 2.40 20,886,900 2.30 1,530,000 - - - - - - 0.12 (3,959,150) - - (1,850,000) 2.24 (22,782,450) 0.80 (7,565,000) 39,654,623 0.84 41,154,823 0.83 43,050,373 Exercisable at 30 June 36,046,274 *Prior year amounts restated to include forfeitures 0.70 0.71 36,383,278 0.01 15,368,900 Share Options outstanding at the end of the year have the following expiry date and exercise prices Last Exercise Date Weighted Average Exercise Price Share Options Share Options Share Options (Post Split) (Post Split) (Post Split) 30 June 2020 30 June 2019 30 June 2018 $0.0002 15,000,000 15,000,000 15,000,000 Grant Date FYE 2006 FYE 2009 FYE 2010 FYE 2011 FYE 2012 FYE 2012 FYE 2013 FYE 2014 FYE 2015 FYE 2016 FYE 2017 FYE 2018 FYE 2019 FYE 2020 Total CE OT CT CT CT CE CT CT CT CT CT CT CT CT $2.00 $0.06 $0.10 $0.31 $0.26 $0.61 $0.86 $1.42 $1.77 $2.02 $2.27 $2.40 $2.40 $0.71 453,273** - - 1,854,000 1,854,000 1,935,850 1,259,450 1,259,450 1,709,700 869,550 1,091,000 1,372,800 147,450 147,450 - 1,007,500 1,337,500 1,677,500 2,967,500 3,173,750 3,682,500 6,755,000 7,210,000 7,867,500 1,681,250 1,926,250 2,623,750 5,172,500 5,345,000 5,625,000 1,242,150 1,344,650 1,555,773 1,182,500 1,465,773 62,500 - - - 39,654,623 41,154,823 43,050,373 2.0 years 2.0 years 2.0 years Weighted average remaining contractual life of options outstanding at end of period CT – Corporate Transaction and/or Liquidity Event (LE) OT – Other Trigger than a CT or LE or CE CE – Currently Exercisable **In 2019, Nuix settled a claim and formal proceedings brought by a former member of key management personnel on terms requested by him, in relation to options issued during the financial year ended 30 June 2009. Pursuant to that settlement, the Supreme Court of NSW made a declaration that 453,273 options granted over unissued shares of Nuix that the former employee holds are exercisable on the occurrence of a sale of Nuix's business in accordance with an options agreement between the parties. Nuix's options register records that the former employee holds 453,273 options, each over one share at an exercise price of $2.00 per option and without an expiry date. PAGE 64 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) Notwithstanding the settlement in 2019, on 23 October 2020 the former employee commenced proceedings against Nuix in the Federal Court of Australia alleging that Nuix has acted in an unfairly prejudicial or unfairly discriminatory way against him and seeks orders to amend Nuix’s options register. The substance of his claim is that, as a result of a share split of one existing share into 50 shares completed by Nuix in March 2017, his options should now represent an entitlement to call for 22,663,650 unissued shares on a sale of Nuix’s business. Nuix rejects the claim in its entirety and is defending those proceedings. If the new claim were successful it would result in an additional 22,210,377 shares issuable in relation to equity-based compensation schemes. This would have the impact of reducing diluted earnings per share for the year ended 30 June 2020 to $0.07 (2019: $0.02; 2018: $0.02). b. Fair value of Options granted The assessed fair value at grant date of Options granted during the year ended 30 June 2020 was $1.80 per Option (2019 – $1.80; 2018 - $2.00). The fair value at grant date is independently determined using an adjusted form of the Black Scholes Model that takes into account the exercise price, the term of the Option, the impact of dilution (where material), the share price at grant date and expected price volatility of the underlying share, the expected dividend yield, the risk-free interest rate for the term of the Option and the correlations and volatilities of the peer group companies. Options are granted for no consideration and vest over a five-year period subject to remaining employed at the date of a Corporate Transaction. Vested Options are exercisable following the consummation of a Corporate Transaction or a date determined by the Board. The model inputs for Options granted during the year ended 30 June 2020 included: ● exercise price: $2.40 (2019 – $2.40; 2018 - $2.00-$2.40) ● grant date: generally tied to an employee’s hire date ● expiry date: 7 years after grant date for Australian employees and 10 years after grant date for non-Australian employees (2019 and 2018 – same conditions as 2020) ● share price fair value: $2.40 (2019 – $1.80; 2018 - $2.40) ● expected price volatility of the company’s shares: 19.55% (2019 – 19.55%; 2018 – 19.45%) ● expected dividend yield: 0% (2019 – 0%; 2018 – 0%) ● risk-free interest rate: 1.65% (2019 – 1.65%; 2018 – 2.70%) The expected price volatility is based on the historic volatility (based on the remaining life of the Options), adjusted for any expected changes to future volatility due to publicly available information. c. Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Equity Compensation Cost Sales and Marketing Research and Development General and Administration 2020 $ 2019 $ 2018 $ 451,980 98,853 97,916 21,415 135,110 29,550 770,504 166,920 230,327 685,006 149,818 1,167,751 PAGE 65 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 25. CASH FLOW INFORMATION 2020 $ 2019 (RESTATED) $ 2018 (RESTATED) $ Reconciliation of Cash Flow from Operating Activities with Profit for the Year Profit for the year (before income tax) 32,422,394 11,423,392 7,284,197 Non-cash flows in profit: Depreciation 5,048,321 4,991,867 2,221,279 Amortisation of intangible assets 23,351,496 17,140,718 8,743,596 Bad debts expense 1,708,639 1,168,022 493,061 Share based payment expense 685,006 149,818 1,167,751 Net exchange rate differences 746,061 86,708 525,056 Fixed assets write-off 197,280 2,579 4,746 Changes in Assets and liabilities: Increase in trade and other receivables (16,404,907) (9,061,339) (5,034,505) Decrease / (Increase) in deferred tax asset 2,101,391 1,930,507 - (Increase) / Decrease in other current assets (383,687) 415,567 125,861 Increase in trade and other payables 1,458,442 705,340 4,372,039 Increase in deferred revenue 8,308,410 5,541,968 1,129,166 Increase / (Decrease) in employee benefits 2,902,854 (8,334,317) 2,642,719 Decrease in current tax liabilities (10,015,213) (212,394) (234,297) Increase in deferred tax liabilities 6,431,011 (295,115) - Decrease in other liability - (507,463) 230,433 Increase in provision for make good 1,141 5,606 3,304 Balance as 30 June 58,558,639 25,151,464 23,674,406 PAGE 66 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Notes to the Consolidated Financial Statements (continued) 26. PARENT ENTITY FINANCIAL INFORMATION Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Equity Issued capital Retained earnings Reserves Total equity 2019 2018 2020 $ (RESTATED) $ (RESTATED $ 43,521,378 36,495,445 33,213,562 197,306,471 188,078,316 84,557,882 240,827,849 224,573,761 117,771,444 44,276,670 27,275,742 20,372,350 10,641,712 31,935,046 26,835,925 54,918,382 59,210,788 47,208,275 185,909,467 165,362,973 70,563,170 104,227,205 104,227,205 17,809,218 82,327,356 62,465,868 54,233,870 (645,094) (1,330,100) (1,479,918) 185,909,467 165,362,973 70,563,170 Profit for the year 19,861,789 11,415,612 31,666,695 Determining the parent entity financial information The financial information for the parent entity has been prepared on the same basis as the consolidated financial statements, except as set out in investment in subsidiaries, associates and joint venture entities (Note 1 (b)) and share-based payments (Note 1(o)). 27. EVENTS AFTER THE REPORTING DATE On 29th September 2020, the Company held an Extraordinary General Meeting which passed the following resolution: (1) change the type of the Company from proprietary company to public company limited by shares; (2) change the name of the Company from Nuix Pty Ltd. to Nuix Limited; and (3) change the Company constitution due to these changes. These changes are expected to take effect from 6th November 2020. On 19th October 2020 a former contractor to the Company filed a general protections claim under the Fair Work Act 2009 in the Fair Work Commission against the Company. The claim and subsequent correspondence seeks compensation and pecuniary penalties. Damages in the jurisdiction are uncapped and legal fees in defending such matters can be significant. The Company rejects the foundation of the claim but continues to assess its position given that the claim is not yet fully particularised and accordingly it is not possible to reliably estimate the potential financial impact of the claim. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. PAGE 67 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Director’s Declaration The Directors have determined that the Company is a reporting entity and that this general purpose financial report should be prepared in accordance with the accounting policies described in Note 1 to the financial statements. The Directors of the Company declare that: a. The financial statements and notes as set out on pages 16 to 67 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 Company’s financial position as at 30 June 2020 and of its performance for the financial year ended on that date, and b. At the date of this declaration, 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 the International Financial Reporting Standards as issued by the International Accounting Standards Board. This declaration is made in accordance with a resolution of the Directors. SIGNED: ______________________________________ Daniel Phillips Chairman Sydney, Australia 30 October 2020 PAGE 68 of 74 Auditor’s Independence Declaration As lead auditor for the audit of Nuix Pty 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 Nuix Pty Limited and the entities it controlled during the period. Scott Walsh Partner PricewaterhouseCoopers Sydney 30 October 2020 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Independent auditor’s report To the members of Nuix Pty Limited Our opinion In our opinion: The accompanying financial report of Nuix Pty 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 statement of financial position as at 30 June 2020 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended 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. 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. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 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: http://www.auasb.gov.au/auditors_responsibilities/ar3.pdf. This description forms part of our auditor's report. PricewaterhouseCoopers Scott Walsh Partner Sydney 30 October 2020 Nuix Pty Ltd and Controlled Entities Annual Report Shareholder Information The shareholder information set out below was applicable as at 30 June 2020. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Largest 20 shareholders Number of holders Number of shares % of issued capital - - - 2 27 29 - 150,000 265,250,633 265,400,633 0.06% 99.94% 100.00% Name Number of shares 1 Macquarie Corporate Holdings Pty Ltd Cavill Armitage Services Pty Ltd 2 Blackall Limited 3 4 Killorgan Investments Pty Ltd 5 Morgan Sheehy RPG Management Pty Ltd 6 David Sitsky 7 Ross Doyle 8 9 Stephen Stewart 10 Philip Jaime Florence 11 Daniel Noll 12 Rob Feigenbaum James Kent 13 14 Eddie Sheehy 15 Luke Quinane 16 Alex Vasiliev 17 Keith Player John Bargiel 18 19 Jill Brown 20 Other current and ex-employee shareholders TOTAL 202,186,139 17,939,783 13,345,750 7,653,350 4,064,700 3,564,211 3,500,000 2,000,000 1,500,000 1,355,000 1,300,000 750,000 700,000 681,700 650,000 600,000 600,000 600,000 400,000 2,010,000 265,400,633 % of issued capital 76.18% 6.76% 5.03% 2.88% 1.53% 1.34% 1.32% 0.75% 0.57% 0.51% 0.49% 0.28% 0.26% 0.26% 0.24% 0.23% 0.23% 0.23% 0.15% 0.76% 100.00% Unquoted equity securities Ordinary shares Number on issue Number of holders 265,400,633 29 PAGE 72 of 74 Nuix Pty Ltd and Controlled Entities Annual Report Substantial shareholders Substantial holders in the Company are set out below: Macquarie Corporate Holdings Pty Ltd Cavill Armitage Services Pty Ltd Blackall Limited Number of ordinary shares held Percentage of ordinary shares issued 202,186,139 17,939,783 13,345,750 76.18% 6.76% 5.03% Voting rights The voting rights attached to ordinary shares are set out below. Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. PAGE 73 of 74 Nuix Pty Ltd and Controlled Entities Annual Report CUSTOMERS FOCUS, DELIVER, DELIGHT TEAMWORK STRONGER TOGETHER INNOVATION UNLEASH COLLECTIVE GENIUS PASSION COMMITTED TO THE MISSION INTEGRITY AUTHENTIC AND ACCOUNTABLE PEOPLE RESPECT, ENCOURAGE, REWARD PAGE 74 of 74
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