Tesserent Limited
Annual Report 2019

Plain-text annual report

Tesserent Limited Financial Report 2018 2019 ANNUAL REPORT TESSERENT LIMITED AND CONTROLLED ENTITIES ABN: 13 605 672 928 Page 0 Tesserent Limited Financial Report 2019 Contents DIRECTORS’ REPORT ............................................................................................................................ 1 REMUNERATION REPORT - AUDITED ................................................................................................. 8 AUDITOR’S INDEPENDENCE DECLARATION ................................................................................... 21 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 22 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ............................................................... 23 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ................................................................ 25 CONSOLIDATED STATEMENT OF CASH FLOWS ............................................................................. 26 NOTES TO THE FINANCIAL STATEMENTS ....................................................................................... 27 1. Introduction to the Report .......................................................................................................... 27 2. Business Result for the Year ..................................................................................................... 30 2.1 Segment information .......................................................................................................... 30 2.2 Revenue ............................................................................................................................... 32 2.3 Loss for the year .................................................................................................................. 33 2.4 Earnings per share .............................................................................................................. 34 2.5 Business combinations ...................................................................................................... 35 2.6 Taxation ................................................................................................................................ 36 3. Operating Assets and Liabilities ............................................................................................... 39 3.1 Trade and other receivables ............................................................................................... 39 3.2 Trade and other payables ................................................................................................... 40 3.3 Provisions ............................................................................................................................ 40 3.4 Contingent liabilities ........................................................................................................... 41 3.5 Plant and equipment ........................................................................................................... 41 3.6 Intangibles ........................................................................................................................... 43 3.7 Inventory .............................................................................................................................. 45 3.8 Other financial assets ......................................................................................................... 45 3.9 Other financial liabilities ..................................................................................................... 45 4. Capital Management ................................................................................................................... 46 4.1 Borrowings .......................................................................................................................... 46 4.2 Financial risk management ................................................................................................ 46 4.3 Cash and cash equivalents ................................................................................................ 49 4.4 Contributed equity .............................................................................................................. 49 4.5 Commitments ...................................................................................................................... 51 4.6 Dividends ............................................................................................................................. 51 5. Other ............................................................................................................................................ 51 5.1 Related party transactions ................................................................................................. 51 5.2 Reserves .............................................................................................................................. 56 5.3 Parent entity information .................................................................................................... 56 Tesserent Limited Financial Report 2019 5.4 Remuneration of auditors ..........................................................................................................57 5.5 Cash flow information.................................................................................................................57 5.6 Events occurring after the reporting period .............................................................................58 DIRECTORS’ DECLARATION...............................................................................................................60 INDEPENDENT AUDITOR’S REPORT .................................................................................................61 Page 2 FY19 COMPANY HIGHLIGHTS PIPELINE $7.5M Up 168% yoy AVERAGE CONTRACT VALUE INCREASED FROM $54K TO $125K PRODUCT PORTFOLIO 17 INCREASED FROM 3 TO 17 RECEIVED $288K R&D TAX CONCESSION CAPITAL RAISED $2.5M NEW AI CYBERSECURITY PARTNERSHIP DARKTRACE STRATEGIC ACQUISITION RIVIUM TOTAL CONTRACT VALUE $8M CATEGORY GROWTH SD-WAN $3.2M CONTRACT MANAGEMENT RESTRUCTURE COMPLETE Tesserent Limited Financial Report 2019 *Excluding Customer contracts sold to FZO in FY2017. CHAIRMAN’S LETTER TO SHAREHOLDERS Dear Fellow Shareholder, I am pleased to present the 2019 Annual Report for Tesserent Limited (ASX: TNT) as we reflect on a transformative year for our Company and the steps taken towards our goal of becoming Australia’s leading cyber security provider. Tesserent provides Security-as-a-Service to a wide range of Australian and international customers, including education providers, corporate enterprises, and government customers. Our services firewall, authentication, anti-virus, anti-malware/spyware, intrusion detection, and security event management, generally provided on a subscription basis. include The past year has seen Tesserent complete a period of restructure, led by our new Chief Executive Officer Julian Challingsworth and complemented by a largely new management team. This enabled us to deliver Tesserent’s end- to-end cyber security strategy and continue to drive our Company towards positive cash flow generation. We have made pleasing progress on this through FY19 and we expect to deliver it over the coming 12 months. In April, we announced the acquisition of experienced Melbourne-based enterprise security specialist Rivium Pty Ltd, which specialises in consulting, implementation and managed services for the enterprise security solution Splunk. This acquisition was integral to our ability to secure high quality customers spanning the government and private sectors and we were pleased to integrate the acquisition in July to position us more strongly for FY20. Rivium will be earnings accretive from day one, helping us to deliver on our strategy. We continue to pursue several other acquisition opportunities that we believe will help us round out our business offering, and we look forward to informing our Shareholders of any developments on these as they arise. Tesserent successfully raised $2.5 million from shareholders during the year, including an oversubscribed $1.1 million private placement in March. We have used these funds to complete due diligence on several acquisition opportunities, invest in resources to grow the business and complete a restructuring process which we expect to create positive cash flow for the business during FY2020. We thank our shareholders, both new and existing, for your support in these activities which has helped us deliver on our goals during the year and strengthened the foundations on which we expect to build a profitable business in the future. I would like to thank my fellow Directors for their support and guidance throughout the year, and our Management, particularly our new CEO Julian Challingsworth for his efforts in FY19, where he has demonstrated a superb capacity to lead our team despite being relatively new to the role. I also thank our staff for their dedication and hard work during the year, which hasn’t gone unnoticed. Tesserent is on track to achieve cashflow positivity and profitability in FY2020 and I know our team will be working hard to achieve that. I look forward to an exciting year ahead, and sharing that journey with you. ROBERT LANGFORD Chairman and Non-executive Director Tesserent Limited Tesserent Limited Financial Report 2019 CHIEF EXECUTIVE OFFICER’S LETTER TO SHAREHOLDERS Dear shareholders, While Tesserent has undergone a vast amount of change over the past 12 months, I believe we are now recalibrated and on track to achieve our goals. With restructuring complete and a well-rounded management team in place, we are moving towards a cash flow positive position in FY2020 and it’s been pleasing to see the progress we’ve made in executing our strategy since I came on board during the year. We achieved a great deal of growth in FY19, with a solid response to our expanded product portfolio which has grown from three products to now offer 17 products. We’ve now fully launched our Cyber360 offering which we expect to continue this momentum, aimed at mid-level businesses and offering an end-to-end “service as a security” offering. Our pipeline increased by 168 per cent to $7.5 million in the June quarter of FY19, compared to the corresponding quarter in FY18, and we look forward to building on this further in the coming 12 months. During the year, Tesserent successfully acquired, and just after year-end, integrated Melbourne-based enterprise security specialist Rivium Pty Ltd. This will add significant capability and additional revenue to Tesserent as well as enabling new services to be launched in FY2020. Rivium is a specialist in the Splunk solution – Splunk captures, indexes, and correlates real-time data in a format that is searchable and from there, it can generate graphs, reports, alerts, dashboards, and other types of visualisations. It helps customers achieve application management, security and compliance, as well as business and web analytics. Rivium recently placed in the top three from more than 198 teams in a Splunk Boss competition, highlighting the depth of capability and experience Rivium’s team brings to Tesserent’s cyber security team. Acquiring Rivium was the first step in our aggressive growth strategy to allow Tesserent to become Australia’s leading end-to-end cyber security business, and I am pleased with the successful integration. We are excited to have brought this into Tesserent early in FY20 and look forward to delivering it to our existing customers and our expanded offering helping us to attract new ones. We have developed world-class managed solutions around our partners’ technology solutions, enabling us to provide our customers with top coverage at all times. In addition to Splunk, these partners include Palo Alto Networks, a supplier of firewall, endpoint and cloud security solutions, and Darktrace, a leading provider of Artificial Intelligence (AI) solutions to manage risk. Other highlights of the year included the increase in our average total contract value from $54,000 in FY18 to $125,000 in FY19, which represents growth of more than 130 per cent in 12 months. This was boosted by our largest individual sale to transport company K&S Freighters with a total contract value of $3.2 million, validating our investment in proprietary SD-WAN capabilities. Part of our work in FY19 involved restructuring our business, which incurred one-off costs that totalled $350,000, but I am confident that this has been short-term financial pain to deliver long-term gain. We will benefit from the cost saving measures employed, which will deliver savings of about 15 per cent. With this work completed, we are able to focus on building a stable growing business that is cash flow positive on a month-by-month basis in FY20, has the capabilities to deliver end-to-end cyber security services to our customers, is able to recruit the best and brightest candidates in the industry and which delivers strong returns for our shareholders. We are already showing promising signs for FY20, having completed more firewall sales in the month of July 2019 than we did in the 12 months of FY19, demonstrating the traction we are making in a world that is increasingly in need of market-leading cyber security to protect businesses. With several other potential acquisitions on the table, I am confident of our future success and I look forward to reporting on our achievements during the coming year. JULIAN CHALLINGSWORTH Chief Executive Officer Tesserent Limited Tesserent Limited Financial Report 2018 ABOUT TESSERENT 1.1 ABOUT TESSERENT Page 6 Tesserent Limited Financial Report 2019 ABOUT TESSERENT CYBERSECURITY EXPERTS Tesserent is a specialist in managed cybersecurity and networking. Tesserent provides enterprise-grade managed cybersecurity and networking services to corporate customers in Australia and internationally. Delivered via the cloud or on premise, Tesserent provides a 24/7 Security-as-a-Service offer to small and large organisations’, giving customers peace of mind that their networks and critical data are protected. Tesserent also provides innovative cybersecurity solutions to small-medium businesses via the CyberBiz suite of services. PROVEN RETURN ON INVESTMENT Tesserent’s business is dedicated to offering customers a cost-effective, world-class managed security solution. While Tesserent is focused on optimising and securing customer network infrastructure, they’re free to focus on their business, knowing that their network is being expertly managed by qualified security engineers. Tesserent has a proven record of improving return on IT investment, driving efficiency and optimising network performance. Tesserent also bundles services including Security Information and Event Management (SIEM), internet connectivity and colocation to optimise customer network security and deliver a total solution at the most competitive price. PARTNERS • Cybersecurity technology partners: Palo Alto Networks, Cisco Systems, Dell, Sophos, AlienVault, Darktrace, Sandvine, and Cyren. • Network and data centre partners: Telstra, TPG, Vocus, NEXTDC, and Equinix TESSERENT’S PRODUCT AND SERVICES Tesserent utilises proprietary cybersecurity technology and leading OEM vendor software to deliver a comprehensive range of world-class managed cybersecurity services with 24/7/365 response from a team of security experts, including: • NETWORK PERIMETER SECURITY • Tesserent proprietary and Palo Alto Networks Managed Next-Generation Firewalls • Robust security at network boundary • CyberBiz Managed Next-Generation Firewall for small-medium business • INTERNAL NETWORK SECURITY • SIEMplicity – Managed Security Information and Event Management • Alert management to identify and halt internal threats in their infancy. • INTERNET CONNECTIVITY • Tesserent Secure Internet – Connects customer sites via high speed, secure internet and tailored SD- WAN solutions • Australia-wide network utilising all tier-one wholesale carriers, allowing for technology and carrier diversity and deep security integration • DATA CENTRE AND COLOCATION • Secure colocation facilities at Australia’s leading co-location data centres • CONSULTING • Penetration testing, cyber risk strategy and governance, security audit, risk assessment, and incident remediation. Tesserent Limited Financial Report 2019 TESSERENT BOARD OF DIRECTORS Tesserent is pleased to have a Board of Directors with diverse experience across a range of sectors in both the Australian and overseas markets. A brief summary of the Board and their current endeavours is provided below, however detailed information on the credentials and experience of the Board is incorporated within the Director’s Report on page 1 of this document. ROBERT LANGFORD Non-Executive Director and Chairman Robert has over 40 years of IT experience, starting his career as a Cobol programmer with Royal Insurance in Melbourne, through to roles as senior system architect and project director with Mobil Oil in the UK European mainland during the early 90’s. Since 2002 Robert has owned and run various business in Australia ranging from IT to cattle farming. Robert was a founding partner of Tesserent Australia Pty. Ltd. GREG BAXTER Non-Executive Director Current commercial role: Chief Digital Officer at MetLife. Previously Greg was Global Head of Digital at Citibank and a Partner and U.K. Board member at Booz & Company. Additionally, Greg is a council member of Chatham House, a leading international affairs think tank. STEVE BERTAMINI Non-Executive Director Current commercial role: Chief Executive Officer of Al Rajhi Bank. Steve has extensive finance experience. He is currently CEO of Al Rajhi Bank, a bank with total assets of over 70 billion USD. Steve was formerly CEO of GE Australia and New Zealand and CEO of Consumer Banking at Standard Chartered Bank. JULIAN CHALLINGSWORTH Chief Executive Officer Julian served as a Managing Director and Partner of The Litmus Group for over 10 years and a board member of PPB Advisory. Julian was a Director of Cordence World Wide a global consulting partnership with 2,800 consultants across 60+ locations. Julian worked with the international team to develop sales and growth strategies for the eight-member firms. Tesserent Limited Financial Report 2019 TESSERENT EXECUTIVE TEAM Tesserent’s executive team consist of a small, yet dynamic team of industry professionals. Tesserent’s executive team are focused on developing and executing a business plan focused on the delivery of significant growth and increased revenues. JULIAN CHALLINGSWORTH Chief Executive Officer Julian served as a Managing Director and Partner of The Litmus Group for over 10 years and a board member of PPB Advisory. Julian was a Director of Cordence World Wide a global consulting partnership with 2,800 consultants across 60+ locations. Julian worked with the international team to develop sales and growth strategies for the eight-member firms. STEPHAN SCHEFFER Chief Financial Officer Stephan Scheffer is a highly qualified individual with a Bachelor of Accounting & Commerce, and MBA, an Advanced Diploma in Tax & Company Law, a chartered accounting qualification and AICD membership. His professional profile includes in excess of 20 years global experience in various senior financial management and operations management positions, including experience as CFO for two mid-cap ASX Listed companies. He has spent the vast majority of his career with companies that deliver a premium service in a high growth environment. MATTHEW GLENNAN General Manager, Sales and Operations Matthew has more than 6 years’ experience at Tesserent, formerly known as Network-Box Australia, Matt started out as a Security Engineer with the company. His role soon developed into that of Account Executive after only a short period of time. In May 2019 Matt was promoted to the position of General Manager Sales & Marketing. Combining a history of technical expertise, security best practice, and customer experience, Matt’s role is to help clients get the most out of what Tesserent can offer, by protecting their information and enabling them to focus on their core business. ROSS MILLER Head of IT Security Operations Ross has more than 30 years of technology security/cyber/risk and continuous service improvement experience. Ross started out in a trainee position in IT operations and quickly moved through the ranks into leadership roles. Improvement is a key area of focus for Ross, along with, people, ‘ITIL' implementations/maturity, IT Security/Cyber/Risk, IT Operations, Service Delivery, (Lean) Six Sigma, Kaizen, problem solving, process/quality improvement, team leadership, turning negatives into positives and optimism. Tesserent Limited Financial Report 2019 CORPORATE GOVERNANCE The Company has adopted systems of control and accountability as the basis for the administration of corporate governance. The Board is committed to administering the policies and procedures with openness and integrity, pursuing to the spirit of corporate governance commensurate with the Company’s needs. To the extent applicable, the Company has adopted The Corporate Governance Principles and Recommendations (3rd Edition) as published by the ASX Corporate Governance Council. In light of Tesserent’s size and nature, the Board considers that the current board provides a cost effective and practical method of directing and managing the Company. As Tesserent’s activities develop in size, nature, and scope, the size of the Board and the implementation of additional corporate governance policies and structures will be reviewed. The Company’s corporate governance policies and practices are outlined below and the Company’s full Corporate Governance Plan is available in a dedicated corporate governance information section of the Company’s website www.tesserent.com. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Code of Conduct – This policy sets out a statement of the shared values of the Company and how the Company conducts itself and its business. Board Charter – This policy sets out the principles for the operation of the Board and describes the functions of the Board and those functions delegated to management of the Company. Selection and Appointment of New Directors Policy – This policy ensures that the procedure when selecting and appointing new Directors is formal and transparent. Board and Senior Executive Evaluation Policy – This policy sets out the process relating to performance and evaluation of the Board, senior executives and individual Directors. Appointment of External Auditor Policy – This policy summarises the conditions on which the Company will select an external auditor. Continuous Disclosure Policy – This policy sets out certain procedures and measures which are designed to ensure that the Company complies with its continuous disclosure obligations. Trading Policy – This policy is designed to maintain investor confidence in the integrity of the Company’s internal controls and procedures and to provide guidance on avoiding any breach of the insider trading laws. Shareholder Communications Policy – This policy sets out practices which the Company will implement to ensure effective communication with its Shareholders. Diversity Policy – This policy sets out the Company’s objectives for achieving diversity amongst its Board, management and employees. Audit and Risk Management Committee Charter – This policy sets out the objectives and procedures for the Audit and Risk Management Committee. Nominations and Remuneration Committee Charter - This policy sets out the objectives and procedures for the Nominations and Remuneration Committee. Tesserent Limited Financial Report 2019 Departures from Recommendations The Company’s compliance with and departures from the Recommendations during the reporting period are set out on the following pages. RECOMMENDATION COMPANY’S CURRENT PRACTICE 1.1 A listed entity should disclose: (a) (b) the respective roles and responsibilities of its board and management; and those matters expressly reserved to the board and those delegated to management. 1.2 A listed entity should: (a) undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re- elect a director. A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. 1.3 1.4 The respective roles and responsibilities of the Board and executives are defined in the Board Charter. There is a clear delineation between the Board’s responsibility for the Company’s strategy and activities, and the day-to-day management of operations conferred upon the Company’s officers. The procedure for the selection of new Directors is set out in the Selection and Appointment of New Directors Policy. Under this policy, Shareholders are required to be provided with all material information relevant to making an informed decision on whether or not to elect or re-elect a Director. The Company has entered into a written agreement with each Director and senior executive. The Company Secretary, Oliver Carton, reports directly to the Chairman of the Board. The role of the Company Secretary is outlined in the Board Charter. 1.5 A listed entity should: The Company has adopted a Diversity Policy. (a) have a diversity policy which includes requirements for the board or a relevant committee of to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them; the board (b) disclose that policy or a summary of it; and (c) disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the board or a relevant committee of the board in accordance with the entity’s diversity policy and its progress towards achieving them and either: i. the respective proportions of men and women on the board, The Company's Diversity Policy requires the Board to establish measurable objectives to assist the Company in achieving gender diversity. The Company does not believe it is appropriate to establish a quota system for measuring gender diversity, and indeed such a quota system could itself lead to discrimination. The Company has asked management to monitor gender diversity in line with the Corporate Governance Council Recommendations and intends to take appropriate action should it be of the view that there is insufficient gender diversity within the business. As at 30 June 2019, there were 4 females employed representing 23.5% of total employees. There were no women on the Board of Directors and no women as part of the executive team. RECOMMENDATION COMPANY’S CURRENT PRACTICE Tesserent Limited Financial Report 2019 across in senior executive positions and the whole organisation (including how the “senior entity has defined executive” for these purposes); or if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act. 1.6 A listed entity should: (a) have and disclose a process for periodically evaluating the performance its committees and of individual directors; and the board, disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. 1.7 A listed entity should: (a) have and disclose a process for periodically evaluating the performance of its senior executives; and disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. 2.1 The board of a listed entity should: (a) have a nomination committee which: i. ii. iii. iv. v. has at least three members, a majority are of independent directors; and whom is chaired by an independent director, and disclose: the charter of the committee; the members of the committee; and as at the end of each reporting period, the number of times the committee met throughout the period and individual attendances of the members at those meetings; or the The Company has adopted a Board and Senior Executive Evaluation Policy. A Non-Executive Director will be responsible for the performance evaluation of the Chairman. The process for evaluating the performance of the Board as a whole is the responsibility of the Board under the direction of the Chairman. The Chairman is in charge of conducting individual Director evaluations. No evaluation was carried out during the reporting period given there were changes to Board composition. The Company has adopted a Board and Senior Executive Evaluation Policy. The Managing Director is subject to annual performance evaluation by the Board. All senior executives of the Company are subject to annual performance evaluations by the Managing Director. As the Managing Director position changed during the period, no performance evaluation was undertaken. The Company had established a Nominations and Remuneration Committee. During the Period the Nominations and Remuneration Committee consisted of three members, all of whom were independent directors. The Chair of the Committee was not the Chair of the Board during the period. The names of the members of the Committee, details of their qualifications and experience and details of the number of meetings held during the period, are contained in the Directors’ Report section of this Annual Report. The Committee operated under a Charter which is available on the Company website within the Corporate Governance Section. During the period the Board suspended the operations of the Committee as it was determined that the Committee was unnecessary given the size of the Board and the Company’s operations. The Board as a whole RECOMMENDATION COMPANY’S CURRENT PRACTICE Tesserent Limited Financial Report 2019 if it does not have a nomination committee, disclose that fact and the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. 2.2 A listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership. 2.3 A listed entity should disclose: (a) (b) the names of the directors considered by the board to be independent directors; if a director has an interest, position, association or relationship of the type described above but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position, association or relationship in question and an explanation of why the board is of that opinion; and the length of service of each director. undertakes the role of the Committee as set out in its Charter. The Board has developed a skills matrix. Given the changes to Board composition during the period, the skills matrix has not been updated. The Board considers that Steve Bertamini and Greg Baxter are independent directors. The Board considers that Rob Langford is not an independent directors given he is a substantial shareholder. The date of appointment of each director is disclosed in details of each director in the Directors’ Report section of the Annual Report. 2.4 2.5 2.6 A majority of the board of a listed entity should be independent directors. The majority of the Board are not independent Directors for the ASX purposes. The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity. The roles of the Chairman and Managing Director are exercised by two separate individuals. The Chairman is not considered to be an independent Director for the ASX purposes. A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively. The Company does not have a formal program for inducting new Directors and providing appropriate professional development opportunities. Given the size and structure of the Board, this program will be adopted on an individual basis for each Director. 3.1 A listed entity should: (a) have a code of conduct for its directors, senior executives and employees; and disclose that code or a summary of it. 4.1 The board of a listed entity should: (a) have an audit committee which: The Company has adopted a Code of Conduct which applies to all Directors, officers, employees, contractors or consultants of the Company as well as a Trading Policy. Each of these has been prepared having regard to the Recommendations. The Company had established an Audit and Risk Management Committee. During the Period the Audit and Risk Management Committee consisted of three members, all of whom were independent directors. RECOMMENDATION COMPANY’S CURRENT PRACTICE Tesserent Limited Financial Report 2019 The Chair of the Committee was not the Chair of the Board during the period. The names of the members of the Committee, details of their qualifications and experience and details of the number of meetings held during the period, are contained in the Directors’ Report section of this Annual Report. The Committee operates under a Charter which is available on the Company website within the Corporate Governance Section. During the period the Board suspended the operations of the Committee as it was determined that the Committee was unnecessary given the size of the Board and the Company’s operations. The Board as a whole undertakes the role of the Committee as set out in its Charter. i. ii. has at least three members, all of whom are non-executive directors and a majority of whom independent are directors; and is chaired by an independent director, who is not the chair of the board, and disclose: iii. iv. v. the charter of the committee; the relevant qualifications and experience of the members of the committee; and in relation to each reporting period, the number of times the committee met throughout the individual period and attendances of the members at those meetings; or the 4.2 if it does not have an audit committee, disclose that fact and the processes it employs that independently verify and safeguard the integrity of its corporate reporting, including the processes for the appointment and removal of the external auditor and the rotation of the audit engagement partner. The board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. 4.3 A listed entity that has an AGM should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. 5.1 A listed entity should: (a) have a written policy for complying with its continuous disclosure obligations under the Listing Rules; and The Company complies with this Recommendation. The Company complies with this Recommendation. The Company is committed to providing timely and balanced disclosure to the market in accordance with its Continuous Disclosure Policy. RECOMMENDATION COMPANY’S CURRENT PRACTICE Tesserent Limited Financial Report 2019 6.1 6.2 6.3 6.4 disclose that policy or a summary of it. A listed entity should provide information about itself and its governance to investors via its website. A listed entity should design and implement an investor relations program to facilitate effective two-way communication with investors. A listed entity should disclose the policies and processes it has in place to facilitate and encourage participation at meetings of security holders. The Company has a dedicated corporate governance information section on its website. The Company has adopted a Shareholder Communications Policy for Shareholders wishing to communicate with the Board. All Shareholders are invited to attend the Company’s annual meeting, either in person or by representative. The Board regards the annual meeting as an excellent forum in which to discuss issues relevant to the Company and accordingly encourages full participation by Shareholders. Shareholders have an opportunity to submit questions to the Board and to the Company’s auditor. A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically. The Company seeks to recognise numerous modes of communication, including electronic communication, to ensure that its communication with Shareholders is frequent, clear and accessible. 7.1 The board of a listed entity should: (a) have a committee or committees to oversee risk, each of which: i. ii. iii. iv. v. has at least three members, a are of majority independent directors; and whom is chaired by an independent director, and disclose: the charter of the committee; the members of the committee; and as at the end of each reporting period, the number of times the committee met throughout the period and individual attendances of the members at those meetings; or the if it does not have a risk committee or committees that satisfy (a) above, disclose that fact and the processes it employs for overseeing the entity’s risk management framework. During the Period the Company established an Audit and Risk Management Committee. During the Period the Audit and Risk Management Committee consisted of three members, all of whom were independent directors. The Chair of the Committee was not the Chair of the Board during the period. The names of the members of the Committee, details of their qualifications and experience and details of the number of meetings held during the period, are contained in the Directors’ Report section of this Annual Report. The Committee operates under a Charter which is available on the Company website within the Corporate Governance Section. During the period the Board suspended the operations of the Committee as it was determined that the Committee was unnecessary given the size of the Board and the Company’s operations. The Board as a whole undertakes the role of the Committee as set out in its Charter. . 7.2 The board or a committee of the board should: This committee was suspended during the reporting period. RECOMMENDATION COMPANY’S CURRENT PRACTICE Tesserent Limited Financial Report 2019 (a) review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound; and disclose, in relation to each reporting period, whether such a review has taken place. 7.3 A listed entity should disclose: (a) if it has an internal audit function, how the function is structured and what role it performs; or if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes. 7.4 A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks. 8.1 The board of a listed entity should: (a) have a remuneration committee which: i. ii. has at least three members, a are of majority independent directors; and whom is chaired by an independent director, and disclose: iii. iv. v. the charter of the committee; the members of the committee; and as at the end of each reporting period, the number of times the committee met throughout the period and individual attendances of the members at those meetings; or the if it does not have a remuneration committee, disclose that fact and the processes it employs for setting the level and composition of remuneration for directors and senior executives and ensuring that such remuneration is appropriate and not excessive. Management is required to design and implement risk management and internal control systems to manage the Company's material business risks and to report to the Board on whether those risks are being managed effectively. The Board is responsible for reviewing whether the Company has any material exposure to any economic, environmental and social sustainability risks, and if so, to develop strategies to manage such risks. the Period During Nominations and remuneration Committee. the Company established an During the Period the Committee consisted of three members, all of whom were independent directors. The Chair of the Committee was not the Chair of the Board during the period. The names of the members of the Committee, details of their qualifications and experience and details of the number of meetings held during the period, are contained in the Directors’ Report section of this Annual Report. The Committee operates under a Charter which is available on the Company website within the Corporate Governance Section. During the period the Board suspended the operations of the Committee as it was determined that the Committee was unnecessary given the size of the Board and the Company’s operations. The Board as a whole undertakes the role of the Committee as set out in its Charter. 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of non-executive directors and The policies and practices regarding remuneration of Directors is set out in the Selection and appointment of RECOMMENDATION COMPANY’S CURRENT PRACTICE the remuneration of executive directors and other senior executives. new Directors Policy. Full details of Director remuneration is included in annual reports. Tesserent Limited Financial Report 2019 8.3 A listed entity which has an equity-based remuneration scheme should: to enter (a) have a policy on whether participants are permitted transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and into disclose that policy or a summary of it. While the Company has issued options to Independent Directors and some senior executives, it does not have an equity-based remuneration scheme. The Company will consider implementation of such a scheme during the current financial year. Tesserent Limited Financial Report 2019 DIRECTORS’ REPORT Your directors present their report on the consolidated entity (referred to herein as “the Group” or “Tesserent”) consisting of Tesserent Limited and its controlled entities for the financial year ended 30 June 2019. 1. Directors The following persons were directors of Tesserent Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Robert Langford Keith Glennan Gregory Baxter Stefano (Steve) Bertamini Julian Challingsworth 2. Information on Directors Robert Langford Qualifications Experience Resigned 14 November 2018 Appointed 14 November 2018 – – – Non-Executive Chairman – appointed 8 February 2018 Bachelor of Applied Science in Computing Member of the Australian Computer Society Robert has over 40 years of IT experience, starting his career as a Cobol programmer with Royal Insurance in Melbourne, through to roles as senior systems architect and project director with Mobil Oil in the UK European mainland during the early 90’s. Since 2002 Robert has owned and run various businesses in Australia ranging from IT to cattle farming. Directorships held in other listed entities during the three years prior to the current year – None Keith Glennan Qualifications Experience – – – Special Responsibilities – Managing Director up to 1 August 2018, becoming Executive Director from that date. Resigned from the Board on 14 November 2018. B. Tech, MACS, MAICD Board member since 2015, Managing Director of Tesserent Australia Pty Ltd (a subsidiary of Tesserent Limited) since 2012. Keith has been working in the IT industry for three decades and has worked in Australia and the United States for companies such as Hewlett Packard and IBM. He has been involved in the managed security industry since 2002. In late 2012 Keith acquired control of and took the Managing Director role at Tesserent Australia Pty Ltd. In this position he formulated the strategy of developing the MSSP Platform and the current business strategy. Chief Executive Officer (CEO) up to 1 August 2018. Appointed to the role of Chief Technology Officer effective 1 August 2018 and resigned from the CEO role. Interim CEO appointed 1 August 2018. Directorships held in other listed entities during the three years prior to the current year – None Page | 1 Tesserent Limited Financial Report 2019 DIRECTORS’ REPORT Gregory Baxter Qualifications Experience – – – Non-Executive Director BSc MBA Board member since 2015. Gregory is currently Chief Digital Officer at MetLife. Previously he was Global Head of Digital at Citibank, leading Citi’s digital transformation across businesses and geographies. He specialises in the development and delivery of digital strategy, corporate innovation and business transformation. He has held senior business, consulting and technology roles across Asia, Europe and North America, with a track record of high-impact business results. Previously Gregory was a Partner and U.K. Board member at Booz & Company (formerly Booz Allen Hamilton), where he held leadership roles across the financial services, public sector and digital practices. Prior to this he was a senior project and product manager with IBM, delivering large scale systems integration projects in financial services and managing the product lifecycle of leading market solutions. He is a regular speaker on digital strategy and technology, and the impact of disruptive innovation on business. Gregory is a council (board) member of Chatham House (Royal Institute of International Affairs), a leading international affairs think tank. He holds a BSc from Monash University and an MBA from the University of Melbourne and has been a guest lecturer on strategy at the University of Oxford, New York University, and American University (Washington). Directorships held in other listed entities during the three years prior to the current year – None Stefano (Steve) Bertamini Qualifications Experience – – – Non-Executive Director BBA MBA Board member since 2015. Steve is currently Chief Executive Officer of Al Rajhi Bank, a bank with total assets in excess of US$90 billion. Steve previously held the position of Group Executive Director and CEO for Global Consumer Banking at Standard Chartered Bank. Prior to this Steve’s roles included:  Group Executive Director and CEO Consumer Banking at Standard Chartered Bank;  Chairman & Chief Executive Officer of GE North East Asia;  Chief Executive Officer and President of GE (China) Co. Ltd;  Chief Executive Officer of GE Australia and New Zealand;  President of GE Capital Asia; and  Managing Director of GE’s Consumer Finance business in Asia. Steve has a BBA, Finance and Management from The University of Texas at Austin and an MBA, Finance and International Banking from University of North Texas. Page | 2 Tesserent Limited Financial Report 2019 DIRECTORS’ REPORT Directorships held in other listed entities during the three years prior to the current year – None Julian Challingsworth Qualifications Experience – – Chief Executive Officer – Appointed 1 August 2018 Bachelor of Business , FCPA , GAICD – With a strong professional services and corporate finance background, Julian has a Masters of Organisational Consulting from Ashridge Business School (UK), a Graduate Diploma in IT, Swinburne University (Aust) and a Bachelor of Business, Accounting, RMIT (Aust). Julian is a Non-Executive Director of Online Power and Gas Pty Ltd, a member of Chartered Accountants (CAANZ), Fellow Australian Certified Practicing Accountants (FCPA) and a Graduate Australian Institute of Company Directors (GAICD) Julian joins Tesserent after serving as Managing Director and Partner of The Litmus Group for over 10 years and a board member of PPB Advisory. In addition to advising over 20 organisations on growth acceleration strategies in Australia, Asia and Europe, Julian was a key driver in growing Litmus multiple business units in Australia and internationally before it was acquired by PPB Advisory. Julian was a director or Cordence World Wide, a global consulting partnership with 2,800 consultants across 60+ locations. Julian worked with the international team to develop sales and growth strategies for the 8 member firms. Directorships held in other listed entities during the three years prior to the current year – None 3. Directors’ Shareholdings The table below sets out each Director’s relevant interest in shares or options of the Company at the date of this report: Number of ordinary shares Number of options Director Robert Langford Keith Glennan Julian Challingsworth Gregory Baxter Stefano (Steve) Bertamini Total 24,071,282 28,761,435 1,000,000 1,406,043 1,406,043 56,644,803 4. Company Secretary Oliver Carton BJuris LLB was appointed Company Secretary on 6 May 2015. 35,000,000 - 13,000,000 1,000,000 1,000,000 50,000,000 Page | 3 Tesserent Limited Financial Report 2019 DIRECTORS’ REPORT 5. Directors’ Meetings The table below sets out the number of meetings held during the 2019 financial year and the number of meetings attended by each Director, 7 Board meetings were held. No Board sub-committee meetings were held. Director Robert Langford Julian Challingsworth Keith Glennan Gregory Baxter Stefano (Steve) Bertamini 6. Review of Operations Principal activities Eligible to attend Attended 7 6 2 7 7 7 6 2 6 6 Tesserent provides Internet Security-as-a-Service to a wide range of Australian and international customers, including education providers, corporate enterprises, and government customers. Security-as-a-Service packages security services for a customer’s computer infrastructure, including firewall, authentication, anti-virus, anti- malware/spyware, intrusion detection, and security event management, amongst other services. These services are provided on the basis of a subscription fee, most commonly as monthly or annual fees. This revenue model delivers recurring revenues to Tesserent. Group financial performance The Group recorded a loss after tax of $4,372,821 for the year ended 30 June 2019 (2018: $3,095,670 loss). Research and Development tax concessions totalling $288,330 were received in FY19. The funds are a result of the on-going development into Tesserent’s security and networking technology, and future capabilities, which will continue to differentiate and drive the business. Subsequent to the end of the year the company secured a loan facility of 4 million dollars, details can be found in Note 5.6 on page 58. TECHNOLOGY Tesserent has developed world class managed solutions around our partners technology platforms. By combining the best technology platforms from the world’s leading cyber companies and our leading security operations center (SOC) capabilities our customers are provided end to end coverage at all times. Key technology partners include:  Palo Alto Networks is the world’s leading supplier of firewall, endpoint and cloud security products, Tesserent works closely with the team at Palo Alto Networks and manages over 80 solutions for our customers.  Splunk is a global leader in searching, monitoring and analyzing big data from an operations and security perspective. Tesserent plans to launch a Splunk managed security offer in FY2020 and will apply our leading security capability alongside the elite Splunk capabilities that the Rivium acquisition has brought to the group. Splunk is currently used by 92 out of the Fortune 100.  DarkTrace is a leading provider of Artificial Intelligence (AI) solutions to manage risk within a customer’s network, the platform is autonomous in learning the normal patterns of an organisation and includes an immune system that stops threats inside your network automatically.  Tesserent SD-WAN Tesserent continues to deploy and expand on its proprietary SD-WAN solutions, as a result we see strong business growth potential as organisations move towards this highly scalable cost- effective solution for their network management. Page | 4 Tesserent Limited Financial Report 2019 DIRECTOR’S REPORT ACCELERATING GROWTH As part of the growth strategy, Tesserent announced that it would be accelerating business growth through strategic acquisitions; the first acquisition under the new strategy was Rivium, an elite Splunk team with a strong business in supporting clients buy and deploy Splunk solutions. Rivium possesses an established team that adds a Security Information Event Management (SIEM) and insider threat capability to Tesserent’s suite of cybersecurity solutions. The company has offices across Victoria, New South Wales, Queensland and the ACT. Tesserent announced (in April 2019) that it would purchase 100% of the company for a consideration of $3.25m ($1.495m cash + 17.55m shares at $0.10 per share). It is estimated that an additional $760k will be paid as part of the earnout clause of the Share Purchase Agreement, giving rise to total Goodwill of $3.509m. Tesserent continues to actively pursue acquisition opportunities. 7. Business Strategies, Prospects and Risks for the Future Financial Years Tesserent’s strategy includes continued focus on the following areas:     expanding the number of Channel partners in Australia and internationally; increasing the number of direct sales to organisations, in Australian and internationally, through increased sales and marketing; assessing acquisition opportunities; and ongoing research and development. 8. Changes in State of Affairs There were no other significant changes in the state of affairs of the Group other than that referred to in the financial statements or notes thereto. 9. Matters Subsequent to the End of the Financial Year On 3 July 2019 the Company completed the acquisition of Rivium (Pty) Ltd for a total price of $3.25m, to be settled in $1.495m cash and 17.55m Shares at 10 cents per share. Subsequent to the end of the year the company secured a loan facility of 4 million dollars with Pure Asset Management. Further detail on both these events are included in Note 5.6 to the financial report. Apart from the matters noted above, the directors are not aware of any other significant events since the end of the reporting period. 10. Environmental Factors Tesserent is not subject to any significant environmental regulation under Australian Commonwealth or State law. Tesserent recognises its obligations to its stakeholders (customers, shareholders, employees and the community) to operate in a way that minimises the impact it has on the environment. 11. Dividends No dividends were declared or paid during the financial year. Page | 5 Tesserent Limited Financial Report 2019 DIRECTORS’ REPORT 12. Indemnification of Directors, Officers and Auditors The Directors and Officers of Tesserent Limited are indemnified against liabilities pursuant to agreements with Tesserent Limited. Tesserent Limited has entered into insurance contracts with a third-party insurance provider, in accordance with normal commercial practices. Under the terms of the insurance contract, the nature of the liabilities insured against and the amount of premiums paid are confidential. The Group are not aware of any liability that arose under these indemnities as at the date of this report. During or since the end of financial period, the company has not indemnified or made a relevant agreement to indemnify the auditor against a liability incurred as auditor. 13. Proceedings on Behalf of Company No person has applied for leave of court to bring proceedings on behalf of the company or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or any part of those proceedings. The company was not a party to any such proceedings during the year. 14. Non-audit services The Board of Directors, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed below did not compromise the external auditor’s independence, as the nature of the services provided does not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. The following fees were paid or payable to BDO East Coast Partnership for non-audit services provided during the year ended 30 June 2019: Corporate and indirect Tax services Due diligence services Total 2019 $ 63,515 146,050 209,565 2018 $ 45,025 - 45,025 15. Auditor’s Independence Declaration The lead auditor’s independence declaration for the year ended 30 June 2019 has been received and can be found on page 21 of the financial report. 16. Options At the date of this report, the unissued ordinary shares of Tesserent Limited under option are as follows: Grant Date Date of Expiry Exercise Price (Cents) Number under option 18 May 2018 31 August 2019 $0.200 18 May 2018 31 August 2019 $0.240 18 May 2018 31 August 2019 $0.288 18 May 2018 8 May 2020 $0.500 1,000,000 1,000,000 1,000,000 500,000 Page | 6 Tesserent Limited Financial Report 2019 DIRECTORS’ REPORT 14 December 2018 30 November 2021 $0.100 14 December 2018 30 November 2021 $0.125 14 December 2018 30 November 2021 $0.150 14 December 2018 1 July 2020 $0.000 12 February 2019 3 December 2020 $0.050 19 February 2019 19 March 2020 $0.050 29 March 2019 19 March 2020 $0.100 29 March 2019 1 March 2020 $0.100 29 March 2019 1 March 2020 $0.125 29 March 2019 1 March 2020 $0.150 18 April 2019 19 March 2021 $0.100 18 April 2019 29 March 2021 $0.100 18 April 2019 18 April 2021 $0.075 1,000,000 1,000,000 1,000,000 13,000,000 10,000,000 22,000,000 11,300,000 100,000 100,000 100,000 1,100,000 500,000 3,000,000 67,700,000 At the date of this report, there are no unissued ordinary shares of Tesserent Limited under deferred shares. Option and deferred shareholders do not have any rights to participate in any issues of shares or other interests of the company or any other entity. There have been no options granted or deferred shares issued over unissued shares or interests of any controlled entity within the Group during or since the end of the reporting period. For details of options issued and deferred shares granted to directors and executives as remuneration, refer to the remuneration report. No person entitled to exercise the option had or has any right by virtue of the option to participate in any share issue of any other body corporate. Page | 7 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED Remuneration Policy The directors present the consolidated entity’s 2019 audited remuneration report which details the remuneration information for Tesserent Limited’s executive director, non-executive directors and other key management personnel. For the purposes of this report, Key Management Personnel (KMP) are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the business, directly or indirectly, as an executive. The names and positions of KMP in the Group during the whole of the financial year unless otherwise stated are: Name Position Appointment Date Resignation Date Keith Glennan Managing Director 28 February 2018 Robert Langford Non-Executive Chairman Steve Bertamini Non-Executive Director Gregory Baxter Non-Executive Director David Buerckner Head of Security Operations Ross Miller Head of Security Operations Matthew Glennan General Manager Sales & Marketing Julian Challingsworth CEO 18 April 2019 29 April 2019 1 May 2019 1 August 2018 Justin Owen Chief Financial Officer 27 November 2018 Stephan Scheffer Chief Financial Officer 1 December 2018 Karen Negus Head of Marketing 2 July 2018 Principles used to determine nature and amount of remuneration The broad principles for determining the nature and amount of remuneration of KMP has historically been agreed by the Board. An annual review of the Board structure will be undertaken by the Board with changes made as deemed appropriate to the size, structure and needs of the Company. The Board can obtain professional advice where necessary to ensure that the Group attracts and retains talented and motivated directors and employees who can enhance performance through their contribution and leadership. No external advice regarding remuneration policy was obtained in the current year. The guiding principles for determining the nature and amount of remuneration for KMP of the Group is as follows:   remuneration should include an appropriate mix of fixed and performance-based components, components of remuneration should be understandable, transparent and easy to communicate; and  Remuneration Committee / Board to review KMP packages annually by reference to the Group’s performance, executive performance and comparable information from industry sectors. The Remuneration and Nominations Committee / Board sets out to link remuneration polices with the achievement of financial and personal objectives. Page | 8 Tesserent Limited Financial Report 2019 REMUNERATION REPORT – AUDITED Group financial performance The earnings of the Group for the three years ending 30 June 2019 are summarised as follows: Financial performance1 2019 2018 2017 Sales revenue – external customers 5,260,272 5,327,957 5,375,117 Earnings before interest, tax, depreciation, amortisation and impairment(EBITDA) Loss after income tax Basic loss per share (cents) Share price at year end (cents) (3,842,692) (1,529,345) (2,883,644) (4,372,821) (3,095,670) (3,464,036) (2.90) 5.00 (2.62) 6.00 (2.99) 9.00 1 Three years of financial information provided as company only listed in February 2016. No dividends were paid or declared during these financial years Components of remuneration Non-executive directors are remunerated with fees within the aggregate limit as approved by shareholders. Name Robert Langford Steve Bertamini Gregory Baxter Annual Approved Fee $90,000 $45,000 $45,000 The executive directors and other KMP are remunerated based upon market value of the position and the range of skills and experience they bring to the company and is split between fixed and performance linked remuneration. Fixed remuneration consists of base remuneration and employer contributions to superannuation funds. Performance linked remuneration includes short-term incentives and is designed to reward the Managing Director (MD) and other KMP’s for meeting and exceeding their financial and personal objectives. In February 2018 the Board established a Nominations and Remuneration Committee which was subsequently disbanded in FY2019 with responsibility transferring back to the Board. Previously the Nominations and Review Committee and now the Board has the responsibility of setting the Key Performance Indicators (KPI’s) for the CEO and have input to the KPI’s for the executives. KPI’s generally include measures relating to the Group, the relevant business unit and the individual. At the conclusion of the year the Board will assess the performance of the CEO, and the CEO assesses the performance of the individual executives against their targets. The CEO’s recommendations were presented to the Nominations and Remuneration Committee and now the Board for approval. The Board has implemented a Director Option Plan. The Option Plan is aimed at incentivising the Directors in retaining key strategic skills. The options have been granted to the Directors vesting over three years with exercising prices of $0.05, $0.10, $0.125, $0.15, $0.20, $0.24 and $0.288. Refer to tables on page 15 for options affecting remuneration in the current and future reporting period. At the 2018 Annual General Meeting (AGM), 90.2% of the votes received supported the adoption of the remuneration report for the year ended 30 June 2018. The Company did not receive any specific feedback at the AGM regarding its remuneration practices. Page | 9 Tesserent Limited Financial Report 2019 Consolidated entity performance and link to remuneration REMUNERATION REPORT - AUDITED 2019 Julian Challingsworth Performance measures for Julian Challingsworth were set by the Board to reflect key measures impacting the growth in revenue and market capitalisation. Mr Challingsworth is entitled to bonuses set as follows: No Definition Rights Date of Issue Vesting Conditions Options exercisable at nil consideration Options exercisable at nil consideration Right to acquire 2,000,000 Shares Right to acquire 1,000,000 Shares Within 1 month of shareholder approval Within 1 month of shareholder approval Options exercisable at nil consideration Right to acquire 3,000,000 Shares Within 1 month of shareholder approval Options exercisable at nil consideration Right to acquire 3,000,000 Shares Within 1 month of shareholder approval Options exercisable at nil consideration Right to acquire 4,000,000 Shares Within 1 month of shareholder approval Expiry Date 1 July 2020 Completion of acquisitions adding in excess of $10m in annual revenue Subject to Series 2 Options not vesting 1 July 2020 Completion of acquisitions adding between $1m and $10m in annual revenue The Company achieving a market capitalisation in excess of $50m for 5 consecutive trading days The Company achieving a market capitalisation in excess of $75m for 5 consecutive trading days The Company achieving a market capitalisation in excess of $100m for 5 consecutive trading days 1 2 3 4 5 6 Options exercisable at $0.015 per option The number that is 5% of amount of capital raised from investors during the period divided by $0.15 Within 1 month of shareholder approval Recipient to manage raising funds through issues of capital 1 July 2020 1 July 2020 1 July 2020 1 July 2020 Page | 10 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED Matthew Glennan  Performance measures were set by the CEO to assist with alignment of business growth objectives Incentive Item Value of incentive Sales: Commission on all sales other than those sales where an existing customer contract automatically rolls over without a new contract being signed Sales team effectiveness: team collectively hitting 80% of sales target Sales hygiene: team is complying with sales pipeline policies and key deliverables by July 1, 2019 (subject to completion of Ethan Glessich’s deliverable being available or other policies as mutually agreed) Tesserent Australia P/L cash break even on a normalised/proforma basis Signing of 6 customer contracts for the provision of products related to the ASD Essential Eight or key management products Signing of 6 customers onto three-year managed services contracts for the provision of Darktrace products Signing of 5 customer contracts for the provision of SIEM or Splunk products 2% of total contract value (TCV) $15,000 or the option of that amount in ASX:TNT shares at a 10% discount to the 5-day volume- weighted average price (“VWAP”) $15,000 or the option of that amount in ASX:TNT shares at a 10% discount to the 5-day VWAP $50,000 in ASX:TNT shares at a 10% discount to the 5-day VWAP $50,000 $25,000 $25,000 Matthew did not achieve any of the bonuses in the current financial year. There were no other performance-based remuneration measures. 2018 Keith Glennan (former KMP) Performance measures for Keith Glennan were set by the Board to reflect key measures impacting the growth in revenue, profitability and shareholder value. Mr Glennan was entitled to a bonus of 100% of his base salary and was set as follows:  Growth in Total Contract Value over the 12 month period ending 30 June 2019 – 50% weighting Most contracts sold and renewed are for period up to three years, with total contract value (TCV) representing the future revenue to be recognised over the three year period. For businesses based on annuity revenue, this represents a leading indicator for future revenue to be recognised.  Growth in TCV associated with new product CyberBiz – 30% weighting The Group launched CyberBiz as a new product in FY18, with growth in TCV recognised as the basis in success for the launch of the product.  Growth in share price – 20% weighting Growth in share price represents the underlying measure in growth in shareholder value. David Buerckner (former KMP)  Cash bonus up to $20,000 including superannuation based on the outcome of annual performance review with CEO – weighting 100%. Karen Negus (former KMP)  Cash bonus up to $30,000 including superannuation based on the outcome of annual performance review with CEO – weighting 100%.  Participation in the Tesserent sales commission plan with commission based on sales performance. There were no other performance-based remuneration measures. Page | 11 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED Details of Remuneration Details of remuneration of the Directors and KMP of the Group are set out in the following tables. 2019 Directors’ Remuneration Short Term Post- Employment Long Term Benefits Share Based Payments Total Total Performance Related Options as a % of Total Salary/Fees Bonus $ $ R Langford K Glennan1 G Baxter S Bertamini 109,747 181,912 45,000 45,000 J Challingsworth2 170,300 Total 551,959 - - - - - - Super- annuation Long Service Leave $ - 25,000 - - 15,403 40,403 $ - - - - - - Options/ Deferred Options $ 160,945 - - - 111,319 272,264 $ % % 270,692 206,912 45,000 45,000 297,022 864,626 - - - - - - 59.5 - - - 24.8 - 1 Resigned 28 February 2019 2 Appointed 1 August 2018. J Challingsworth was issued 1 million shares in the company as a sign on bonus, with a fair value of $50,000. This is included in Share Based Payments in the table above. There were no non-monetary benefits provided 2019 Executive Remuneration Short Term Employment Benefits Payments Total Related % of Total Post- Long Term Share Based Performance Shares as a Total Deferred Salary/Fees Bonus Super- annuation Long Service Leave Deferred Shares $ $ $ $ $ $ % % - - - - - - - 13,961 1,317 - - - - 10,122 256 - - - - 2,533 2,648 1,815 51,800 65 - 166,891 29,732 77,990 117,623 84,348 30,592 30,581 2,136 51,800 507,176 - - - - - - - - - - - 61.4 - - D Buerckner1 152,930 K Negus2 J Owen3 28,415 77,990 S Scheffer4 107,245 M Glennan5 R Miller6 Total 28,200 27,879 422,659 1 Resigned 18 April 2019 2 Resigned 27 July 2018 3 Resigned 28 November 20198 4 Appointed 1 December 2018 5 Appointed 1 May 2019 6 Appointed 18 April 2018 There were no non-monetary benefits provided Director and Executive Remuneration Total 974,618 - 70,984 2,136 324,064 1,371,802 Page | 12 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED 2018 Directors’ Remuneration Short Term Employment Benefits Payments Total Related % of Total Post- Long Term Share Based Performance Options as a Total Salary/Fees Bonus Super- annuation Long Service Leave Options $ R Yardley 60,000 $ - $ - $ - $ $ (19,459) 40,541 % - K Glennan 269,975 135,000 23,425 4,710 - 433,110 31.2 G Baxter R Langford S Bertamini P Brandling 45,000 37,500 45,000 10,274 - - - - - - - 976 - - - - 10,151 55,151 - 37,500 10,151 55,151 (12,290) (1,040) Total 467,749 135,000 24,401 4,710 (11,447) 620,413 - - - - - % (48.0) - 18.4 - 18.4 1,181.7 - There were no non monetary benefits provided 2018 Executive Remuneration Short Term Employment Benefits Payments Total Related % of Total Post- Long Term Share Based Performance Shares as a Total Deferred Salary/Fees Bonus Super- annuation Long Service Leave Deferred Shares $ $ $ $ % $ D Buerckner 183,000 J.Owen K Negus Total 175,617 205,831 564,448 $ - - - - 17,385 3,496 83,408 287,289 - - - 175,617 19,554 3,495 63,918 292,798 36,939 6,991 147,326 755,704 Director and executive remuneration Total 1,032,197 135,000 61,340 11,701 135,879 1,376,117 - - - - - % 29.0 - 21.8 - - Page | 13 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED The proportion of remuneration linked to performance and the fixed proportion are as follows: Fixed remuneration At risk- STI At risk - LTI Name 2019 2018 2019 2018 2019 2018 Non-Executive Directors: R Langford G Baxter S Bertamini Executive Director K Glennan J Challingsworth 100% 100% 100% 100% 100% Other Key Management Personnel D Buerckner K Negus J Owen S Scheffer M Glennan R Miller 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% n/a 91% 87% 100% n/a n/a n/a - - - - - - - - - - - - - - 50% n/a 9% 13% - n/a n/a n/a - - - - - - - - - - - - - - - n/a - - - n/a n/a n/a Cash bonuses are dependent on meeting defined performance measures or the outcome of annual performance reviews. The amount of the bonus is determined by having regard to the satisfaction of performance measures and weightings as described above in the section “Consolidated entity performance and link to remuneration”. The maximum bonus values are established by the Board and reviewed annually, payable by agreement between the employee and the Board. It is envisaged that all bonuses will become effective in the 2020 financial year. The proportion of the cash bonus paid/payable or forfeited is as follows: Name Cash bonus paid/payable Cash bonus forfeited 2019 2018 2019 2018 Executive Director K Glennan Other Key Management Personnel D Buerckner K Negus - - - 50% - - - - - 50% 100% 100% Page | 14 Tesserent Limited Financial Report 2019 REMUNERATION REPORT – AUDITED Details of Share Based Compensation Options The terms and conditions of each grant of options affecting remuneration in the current or future reporting periods are as follows: KMP Grant date No of options exercise date Expiry date Exercise price at grant date % Vested Vesting and Value per option Steve Bertamini 17 Nov 15 500,000 31 Aug 17 31 Aug 19 $0.240 Steve Bertamini 17 Nov 15 500,000 31 Aug 18 31 Aug 19 $0.288 Gregory Baxter 17 Nov 15 500,000 31 Aug 17 31 Aug 19 $0.240 Gregory Baxter 17 Nov 15 500,000 31 Aug 18 31 Aug 19 $0.288 R Langford 14 Dec 18 1,000,000 8 Feb 18 30 Nov 21 $0.100 R Langford 14 Dec 18 1,000,000 8 Feb 19 30 Nov 21 $0.125 R Langford 14 Dec 18 1,000,000 8 Feb 20 30 Nov 21 $0.150 R Langford 12 Feb 19 10,000,000 8 Feb 19 3 Dec 20 $0.050 R Langford 19 Feb 19 22,000,000 19 Mar 19 19 Mar 20 $0.050 J Ch’ingsworth 14 Dec 18 13,000,000 14 Dec 18 1 Jul 20 $0.000 $.0539 $.0423 $.0539 $.0423 $.0520 $.0520 $.0520 $.0480 $.0500 $.0520 100 - 100 - - - - - - - The number of options over ordinary shares in the company provided as remuneration to key management personnel is shown below. The options carry no dividends or voting rights. The options will vest if the option holder remains employed by the company at the relevant vesting date. The table below shows a reconciliation of options held by each KMP from the beginning to the end of FY 2019. 2019 Name and grant date S Bertamini Balance at 1 Jul 2018 Unvested Granted as compensation Vested Exercised Lapsed / forfeited during the year % forfeited during the year Balance at 30 June 2019 Unvested 17 Nov 15 500,000 G Baxter 17 Nov 15 500,000 - - 500,000 500,000 R Langford 14 Dec 18 14 Dec 18 14 Dec 18 12 Feb 19 19 Feb 19 J Ch’sworth 14 Dec 18 14 Dec 18 14 Dec 18 14 Dec 18 14 Dec 18 - - - - - - - - - - 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 10,000,000 22,000,000 2,000,000 1,000,000 3,000,000 3,000,000 4,000,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,000,000 10,000,000 22,000,000 2,000,000 1,000,000 3,000,000 3,000,000 4,000,000 Page | 15 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED Value of options granted as remuneration that have been granted, exercised or lapsed during the year. 2019 Balance Balance 1 July 2018 Value Granted Value Exercised Value Lapsed 30 Jun 2019 Steve Bertamini Gregory Baxter Paul Brandling $ 81,424 81,424 60,255 Russell Yardley 120,509 $ - - - - R Langford J Challingsworth - - 160,945 61,319 $ - - - - - - $ - - (60,255) (120,509) - - $ 81,424 81,424 - - 160,945 61,319 The fair value of options granted as remuneration and as shown in the above table has been determined in accordance with Australian Accounting Standards, using the Black-Scholes method of calculation and will be recognised as an expense over the relevant vesting period to the extent that conditions necessary for vesting are satisfied. Deferred Shares Rights to deferred shares are outlined in the respective employment agreements for each Executive KMP. The shares vest once the performance conditions are met. On vesting each right automatically converts into one ordinary share. The executives do not receive any dividend and are not entitled to vote in relation to the rights during the vesting period. If an executive ceases employment before the rights vest and is not deemed a good leaver the rights will be forfeited. The fair value of the rights is determined based on the market price of the company’s shares at the grant date. The terms and conditions of deferred shares affecting remuneration in the current or future reporting periods are as follows 2019 AASB 2 Expense Share price at Grant Date KMP Deferred Shares % Vested $ Grant Date 51,800 10 May 2019 $ 0.05 Vesting Date Exercise Price 1 July 2019 0.04 25,646 24 November 2016 0.14 3 October 2018 (58,691) 24 November 2016 0.14 3 October 2019 Nil Nil M Glennan 1,000,000 D Buerckner 450,000 D Buerckner 750,000 100 100 0 2018 AASB 2 Expense Share price at Grant Date KMP Deferred Shares % Vested $ Grant Date $ Vesting Date Exercise Price D Buerckner 300,000 100 12,748 24 November 2016 0.14 3 October 2017 D Buerckner 450,000 D Buerckner 750,000 K Negus 360,000 K Negus 600,000 - - 100 - 33,916 24 November 2016 0.14 3 October 2018 36,744 24 November 2016 0.14 3 October 2019 31,056 24 November 2016 0.14 15 June 2018 32,862 24 November 2016 0.14 15 June 2019 Nil Nil Nil Nil Nil Page | 16 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED Rights to deferred shares The table below shows a reconciliation of deferred shares held by each executive KMP from the beginning to the end of FY 2019. 2019 Rights to deferred shares Balance 1 Jul 18 Granted during year Vested Forfeited Balance 30 Jun 19 Unvested Maximum value yet to vest* Year granted No. No. N Conolly1 2016 700,000 D Buerckner2 2017 1,200,000 K Negus3 2017 600,000 - - - M Glennan 2019 - 1,000,000 No. - % - No. % No. 700,000 100.00 450,000 37.50 750,000 62.50 $ - - - - - - - - - - 600,000 100.00 - - 1,000,000 51,800 1 Nick Conolly resigned 30 November 2016. Rights to deferred shares have been forfeited due to expiry. 2 David Beurckner resigned 29 April 2019 and therefore has forfeited rights to unvested deferred shares at the date of resignation * The maximum value of the deferred shares yet to vest has been determined as the amount of the grant date fair value of the rights that is yet to be expensed. The minimum value of the deferred shares yet to vest is nil as the shares will be forfeited if the vesting conditions are not met. 3 3 Karen Negus has resigned 2 July 2018 and therefore has forfeited rights to unvested deferred shares at the date of resignation * The maximum value of the deferred shares yet to vest has been determined as the amount of the grant date fair value of the rights that is yet to be expensed. The minimum value of the deferred shares yet to vest is nil as the shares will be forfeited if the vesting conditions are not met. 2018 Rights to deferred shares Balance 1 Jul 17 Granted during year Vested Forfeited Balance 30 Jun 18 Unvested Maximum value yet to vest* Year granted No. No. No. % No. N Conolly4 2016 1,400,000 D Buerckner 2017 1,500,000 K Negus 2017 960,000 - - - 700,000 50.00 300,000 20.00 360,000 37.50 - - - % - - - No. $ 700,000 31,941 1,200,000 55,136 600,000 31,511 4 Nick Conolly resigned 30 November 2016 and was deemed a good leaver as per the terms of his employment contract. On this basis his rights are not forfeited, however as per the requirements of AASB 2 all performance criteria have been met and therefore the cost of his deferred shares was recognised in the prior year profit or loss. The vesting date of the deferred shares has not changed. Service Agreements The contracts for service between the Group and specified executives are formalised in service agreements. The major provisions in the agreements relating to remuneration are set out below: Keith Glennan, former Chief Executive Officer  Permanent employment contract commencing 1 July 2015  Fixed remuneration of $270,000 including superannuation and director fees along with allowances of $23,400  Resigned 14 November 2019  Termination by provision of two months’ notice by either the Executive or the Company Page | 17 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED David Buerckner, Head of Security Operations  Permanent employment contract commencing 3 October 2016  Fixed remuneration of $200,385 including superannuation  Opportunity to receive an annual bonus up to $20,000 inclusive of superannuation based on outcome of annual review undertaken by CEO. No bonus was paid or accrued for the current year.  Resigned 18 April 2019  Termination by provision of two months’ notice by either the Executive or the Company Justin Owen, former Chief Financial Officer  Permanent part time contract with CFO Effect Pty Ltd commencing 1 July 2018.  Monthly retainer-based remuneration of $9,650, plus additional fee for other projects undertaken.  Resigned 27 November 2018  Termination by provision of one months’ notice by either CFO Effect Pty Ltd or the Company. Julian Challingsworth, Chief Executive Officer  Permanent employment contract commencing 1 August 2018.  Fixed remuneration of $200,000 inclusive of superannuation.  Sales commission per table on page 10.  Issuance of 1,000,000 sign on bonus shares.  Short term bonus of $75,000 payable in shares at $0.05 each at the discretion of the Board  Termination by provision of twelve months’ notice by either the Executive or the Company. Stephen Scheffer, Chief Financial Officer      Termination by provision of one months’ notice by either the Executive or the Company. Full-time employment contract commencing 1 December 2018, terminating after 12 months unless extended by mutual consent. Fixed remuneration of $200,000 inclusive of compulsory superannuation and packaged benefits. Issuance of $25,000 shares on 1 July 2019 subject to a 180day escrow period after allocation. The Employee’s Employment may be terminated without cause by either the Employer or the Employee with the provision of one month’s notice in writing or, in the case of the Employer, the period of notice required to be given under the FW Act (whichever is greater). Matthew Glennan, General Manager, Sales and Operations  Permanent contract commencing 7 January 2013 and updated subsequently on 10 May 2019 when appointed to General Manager, Sales and Operations.   Fixed annual remuneration of $160,000 plus superannuation, plus allowances, plus incentives The Employee’s Employment may be terminated without cause by either the Employer or the Employee with the provision of one month’s notice in writing or for a period agreed to by both parties in writing. Ross Miller, Head of Security Operations  Permanent employment contract commencing 29 April 2019.   Fixed annual remuneration of $175,200 inclusive of compulsory superannuation and packaged benefits. The Employee’s Employment may be terminated without cause by either the Employer or the Employee with the provision of one month’s notice in writing or, in the case of the Employer, the period of notice required to be given under the FW Act (whichever is greater) Page | 18 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED KMP Shareholding 2019 Deferred shares Issued on Balance at vested as exercise of Beginning of remuneration options during Balance at end year during year year Other changes during year of year On Market Other1 R Langford K Glennan G Baxter S Bertamini 24,071,2821 28,761,435 1,406,043 1,406,043 - - - - D Buerckner 300,000 450,000 K Negus J Owen J Challingsworth M Glennan 600,000 110,000 - - - - 1,000,000 - - - - - - - - - - - - - - - - - - - - 24,071,282 (28,761,435) - - - 1,406,043 1,406,043 (750,000) (600,000) (110,000) - - - - 1,000,000 740,740 740,740 1) Represents former KMP’s who resigned during the year or KMP’s appointed during the year. KMP Shareholding 2018 Deferred shares Issued on Balance at vested as exercise of Beginning of remuneration options during year during year year Other changes during year Balance at end of year On Market Other - - - - - - - - 24,071,282 (639,114) (2,552)2 - 50,000 (3,000,000)3 28,761,435 R Langford 24,071,2821 R Yardley K Glennan G Baxter S Bertamini P Brandling D Buerckner K Negus J.Owen 641,666 31,711,435 1,200,000 1,200,000 1,200,000 - - - - 300,000 240,000 360,000 - - 2) shares held at appointment date 3) shares held at resignation date 4) shares sold off market 5) shares received as share-ased payment for Director fee remuneration - - - - - - - - 206,0434 1,406,043 206,0434 1,406,043 (183,196) (1,016,804)2 - - - 110,000 - - - 300,000 600,000 110,000 Page | 19 Tesserent Limited Financial Report 2019 REMUNERATION REPORT - AUDITED Transactions with KMP and/or their related party There were no transactions conducted between the Group and KMP or their related parties, apart from those in the below table and disclosed above relating to equity compensation, that were conducted other than in accordance with normal employee, customer or supplier relationships on terms no more favourable than those reasonably expected under arm’s length dealings with unrelated persons. Related Party Loan balances due to the entity Loan balances payable by the entity Greg Baxter Stefano Bertamini Robert Langford - - - 48,750 48,750 7,500 Loan balances payable above relate to unpaid directors fees End Remuneration Report This directors’ report, incorporating the remuneration report, is signed in accordance with a resolution of the Board of Directors: Julian Challingsworth, Managing Director 30 September 2019 Page | 20 Tel: +61 3 9603 1700 Fax: +61 3 9602 3870 www.bdo.com.au Collins Square, Tower Four Level 18, 727 Collins Street Melbourne VIC 3008 GPO Box 5099 Melbourne VIC 3001 Australia DECLARATION OF INDEPENDENCE BY DAVID GARVEY TO THE DIRECTORS OF TESSERENT LIMITED As lead auditor of Tesserent Limited for the year ended 30 June 2019, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Tesserent Limited and the entities it controlled during the period. David Garvey Partner BDO East Coast Partnership Melbourne, 30 September 2019 BDO East Coast Partnership ABN 83 236 985 726 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO East Coast Partnership and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. Tesserent Limited Financial Report 2019 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2019 Revenue from continuing operations Other income Software licence and connectivity fees Employee benefits expense Depreciation and amortisation expense Goodwill impaired Intellectual property assets impaired Finance costs Occupancy costs Communication costs Consulting and legal costs Travel Bad and doubtful debts Call Option Investment impairment Other expenses Loss before income tax Tax Benefit/(Expense) Net loss for the year Other comprehensive income Total comprehensive income for the year Basic loss per share (cents) Diluted loss per share (cents) Consolidated 2019 $ 5,260,272 107,266 (2,279,416) (3,140,727) (316,993) - - (57,326) (442,872) (445,735) (1,463,141) (77,032) (39,183) (165,809) (1,322,124) (9,750,358) (4,382,820) 9,999 (4,372,821) - (4,372,821) 2018 $ 5,327,957 1,103,803 (2,372,554) (2,662,491) (277,594) (777,375) (67,736) (68,777) (458,351) (595,152) (568,993) (78,135) (51,185) - (1,174,244) (9,152,587) (2,720,827) (374,843) (3,095,670) - (3,095,670) (2.90) (2.90) (2.62) (2.62) Note 2.2 2.2 3.5,3.6 3.6 3.6 2.3 3.8 2.6 2.4 2.4 The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes Page | 22 Tesserent Limited Financial Report 2019 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019 ASSETS CURRENT ASSETS Cash and cash equivalents Trade and other receivables Prepayments Inventories Current tax asset Other financial assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Other financial assets Plant and equipment Intangible assets Deferred tax asset Other non-current assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Other financial liabilities Contract liabilities Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Other financial liabilities Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS Consolidated Note 2019 $ 2018 $ 4.3 3.1 3.7 2.6 3.8 3.8 3.5 3.6 2.6 999,660 218,767 292,263 276,620 137,335 1 1,717,221 344,194 260,065 55,693 361,256 - 1,924,646 2,738,429 - 510,309 977,510 149,618 257,229 165,810 623,882 733,848 139,619 257,229 1,894,667 1,920,388 3,819,313 4,658,817 3.2 1,765,342 1,210,577 3.9 2.2 3.3 137,991 614,691 228,315 61,212 678,792 269,266 2,746,339 2,219,847 3.9 3.3 281,714 430,299 712,013 352,157 365,117 717,274 3,458,352 360,960 2,937,121 1,721,696 Page | 23 Tesserent Limited Financial Report 2019 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019 EQUITY Issued capital Reserves Accumulated losses TOTAL EQUITY Note 4.4 5.2 Consolidated 2019 $ 2018 $ 13,754,507 10,875,937 772,900 639,385 (14,166,447) 360,960 (9,793,626) 1,721,696 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. Page | 24 Tesserent Limited Financial Report 2019 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2019 Balance at 1 July 2017 Comprehensive income Loss for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners, in their capacity as owners, and other transfers Shares issued during the year Capital raising costs Shares and options granted during the year Total transactions with owners and other transfers Balance at 30 June 2018 Balance at 1 July 2018 Comprehensive income Loss for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners, in their capacity as owners, and other transfers Shares issued during the year Capital raising costs Shares and options granted during the year Total transactions with owners and other transfers Balance at 30 June 2019 Issued capital $ 10,140,892 Reserves Accumulated losses Total equity $ 705,347 $ (6,697,956) $ 4,148,283 - - - - - - (3,095,670) (3,095,670) - - (3,095,670) (3,095,670) 768,300 (33,255) (204,400) - - 138,438 - - - 563,900 (33,255) 138,438 735,045 10,875,937 (65,962) 639,385 - (9,793,626) 669,083 1,721,696 10,875,937 639,385 (9,793,626) 1,721,696 - - - - - - (4,372,821) - (4,372,821) - (4,372,821) (4,372,821) 2,975,933 (97,363) (153,633) - - 287,148 - - - 2,822,300 (97,363) 287,148 2,878,570 13,754,507 133,515 772,900 - (14,166,447) 3,012,085 360,960 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. Page | 25 Tesserent Limited Financial Report 2019 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2019 Consolidated Note 2019 $ 2018 $ Cash flows from operations Receipts from customers (inclusive of GST) 5,415,067 5,922,560 Payments to suppliers and employees (inclusive of GST) (8,266,862) (8,219,859) Other Income Interest received Interest and other finance costs paid Research & development tax concession Proceeds from transaction restructure (2,851,795) (2,297,299) 26,382 15,989 - 288,330 - - 27,804 (6,439) 844,010 150,000 Net cash outflow from operating activities 5.5 (2,521,094) (1,281,924) Cash flows from investing activities Purchase of plant and equipment Proceeds on disposal of plant and equipment (27,776) - (84,633) 199,779 Purchase of intangibles – development costs capitalised (418,453) (370,516) Payment of deferred settlement liability for software additions (133,874) (215,428) Proceeds from deferred consideration on sale of software - 250,000 Net cash outflow from investing activities (580,103) (220,798) Cash flows from financing activities Proceeds from issuing of shares Payments for issuing of shares Net cash inflow from financing activities Net decrease in cash and cash equivalents 2,481,000 (97,364) 392,550 (33,255) 2,383,636 359,295 (717,561) (1,143,427) Cash and cash equivalents at the beginning of the financial year 1,717,221 2,860,648 Cash and cash equivalents at the end of the financial year 4.3 999,660 1,717,221 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes Page | 26 Tesserent Limited Financial Report 2019 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019 1. Introduction to the Report Statement of Compliance for profit entity These general purpose financial statements of Tesserent Limited and its controlled entities (together the ‘Company’, ‘Group’, or ‘Consolidated Entity’) have been prepared in accordance with the Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated financial statements comply with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The financial statements were authorised for issue by the Board of Directors on 30 September 2019. Basis of Preparation Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. General Information Tesserent Limited is a for-profit listed public company limited by shares and domiciled in Australia. Its registered office and place of business are: Registered office Level 5 990 Whitehorse Road Box Hill VIC 3128 Going concern Principal place of business Level 5 990 Whitehorse Road Box Hill VIC 3128 For the year ended 30 June 2019 the consolidated entity has recorded a loss before income tax of $4,382,820 (2018: loss $2,720,827) and has a net asset position of $360,960 (2018: $1,721,696). Cash outflows from operating activities for the period ended 30 June 2019 were $2,521,094 (2018: $1,281,924). The financial statements have been prepared on the basis that the consolidated entity is a going concern, which contemplates the continuity of normal business activity, realisation of assets and settlement of liabilities in the normal course of business. On 27/09/2019 the consolidated entity entered into 36 month term working capital facility agreement with PURE Asset Management Pty Ltd with an interest rate of 11.5% per annum. On 28/09/2019 the consolidated entity received $1,912,000 as a drawdown on the facility. In addition, the consolidated entity is expecting to fund its ongoing operations as follows:     The consolidated entity has cash reserves at 30 June 2019 of $999,660 and trade receivables of $218,767. The consolidated entity is expecting to shortly receive a research & development receivable of $137,335. The consolidated entity is expecting an improvement in financial performed in the 30 June 2020 financial year and the directors have approved a budget reflecting an improved financial performance. The consolidated entity acquired Rivium Pty Ltd on 3 July 2019 and the directors have approved a budget for FY20 that includes a positive contribution of cash flows from operating activities associated with Rivium Pty Ltd. Based on the above, the directors have prepared a cash flow forecasts for the next 12 months from the date of signing the financial report that indicates the consolidated entity will have sufficient cash assets to be able to meets its debts as and when they are due. Therefore, the directors are of the opinion that the basis upon which the financial statements are prepared is appropriate in the circumstances. Page | 27 Tesserent Limited Financial Report 2019 Critical accounting estimates and assumptions The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. Accounting estimates and judgments Note Page Judgements on accounting for intangible assets Income Taxation Share-based payments Impairment of non-financial assets other than Goodwill and other indefinite life intangible assets Contract Liabilities Significant accounting policies 3.6 2.6 5.1 3.6 2.2 43 36 53 43 32 The significant accounting policies adopted in the preparation of the financial statements are set out below. Other significant policies are contained in the notes to the financial statements to which they relate. The financial statements are for the Group consisting of Tesserent Limited (company) and its controlled entities. New or amended Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB') that are mandatory for the current reporting period. The following Accounting Standards and Interpretations are most relevant to the consolidated entity: AASB 9 Financial Instruments The consolidated entity has adopted AASB 9 from 1 July 2018. The standard introduced new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows which arise on specified dates and that are solely principal and interest. A debt investment shall be measured at fair value through other comprehensive income if it is held within a business model whose objective is to both hold assets in order to collect contractual cash flows which arise on specified dates that are solely principal and interest as well as selling the asset on the basis of its fair value. All other financial assets are classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading or contingent consideration recognised in a business combination) in other comprehensive income ('OCI'). Despite these requirements, a financial asset may be irrevocably designated as measured at fair value through profit or loss to reduce the effect of, or eliminate, an accounting mismatch. For financial liabilities designated at fair value through profit or loss, the standard requires the portion of the change in fair value that relates to the entity's own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment is measured using a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available. AASB 15 Revenue from Contracts with Customers The consolidated entity has adopted AASB 15 from 1 July 2018. The standard provides a single comprehensive model for revenue recognition. The core principle of the standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduced a new contract-based revenue recognition model with a measurement approach that is based on an allocation of the transaction price. This is described further in the accounting policies below. Credit risk is presented separately as an expense rather than adjusted against revenue. Contracts with customers are presented in an entity's statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity's performance Page | 28 Tesserent Limited Financial Report 2019 and the customer's payment. Customer acquisition costs and costs to fulfil a contract can, subject to certain criteria, be capitalised as an asset and amortised over the contract period. The directors have assessed the impact of AASB 9 and AASB 15 and determined that it does not have a material impact on the financial statements. i. Principles of Consolidation The consolidated financial statements incorporate all of the assets, liabilities and results of the parent Tesserent Limited and all of the subsidiaries. Subsidiaries are entities the parent controls. A list of the subsidiaries is provided in Note 5.1. The assets, liabilities and results of all subsidiaries are fully consolidated into the financial statements of the Group from the date on which control is obtained by the Group. Intercompany transactions, balances and unrealised gains or losses on transactions between group entities are fully eliminated on consolidation. Accounting policies of subsidiaries have been changed and adjustments made where necessary to ensure uniformity of the accounting policies adopted by the Group. ii. Foreign currency translation Functional and presentation currency The consolidated financial statements are presented in Australian dollars (AUD), which is also the functional currency of the Company. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from re-measurement of monetary items at year end exchange rates are recognised in profit or loss. Foreign operations In the Group’s financial statements, all assets, liabilities and transactions of Group entities with a functional currency other than the AUD are translated into AUD upon consolidation. The functional currency of the entities in the Group has remained unchanged during the reporting period. On consolidation, assets and liabilities have been translated into AUD at the closing rate at the reporting date. Income and expenses have been translated into AUD at the average rate over the reporting period. Exchange differences are changed or credited to other comprehensive income and recognised in the currency translation reserve in equity. iii. New Accounting Standards and Interpretations not yet adopted by the Group Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the consolidated entity for the reporting period ended 30 June 2019. Accounting Standards issued by the AASB that are not yet mandatorily applicable to the Group, together with an assessment of the potential impact of such pronouncements on the Group when adopted in future periods, are discussed below: AASB 16: Leases (applicable to annual reporting periods beginning on or after 1 January 2019). When effective, this Standard will replace the current accounting requirements applicable to leases in AASB 117: Leases and related Interpretations. AASB 16 introduces a single lessee accounting model that eliminates the requirement for leases to be classified as operating or finance leases. The main changes introduced by the new Standard include: Page | 29 Tesserent Limited Financial Report 2019 i. Recognition of a right to use asset and liability for leases (excluding short term leases with less than 12 months tenure and lease relating to low value assets) ii. Depreciation of right to use assets in line with AASB 116 Property , Plant and Equipment in profit or loss and unwinding of the liability in principal and interest components iii. Variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability using the index or rate at the commencement date; and iv. Additional disclosure requirements. The transitional provisions of AASB 16 allow a lessee to either retrospectively apply the Standard to comparatives in line with AASB 108 or recognise the cumulative effect of retrospective application as an adjustment to opening equity on the date of initial application. The standard will affect primarily the accounting for the Group’s operating leases. As at reporting date the Group has non-cancellable operating lease commitments of $1,815,959, see Note 4.5. However, the Group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the Group’s result and classification of cash flows. Some of the commitments maybe covered by the exemption for short-term and low value leases and some commitments may relate to arrangements that will not qualify as leases under AASB16. 2. Business Result for the Year This section provides the information that is most relevant to understanding the financial performance of the Group during the financial year and, where relevant, the accounting policies applied and the critical judgements and estimates made. 2.1 Segment information Identification of reportable segments An operating segment is a component of an entity that engages in business activities from which it may earn revenue and incur expenses, whose operating results are regularly reviewed by the Group’s Chief Operating Decision Maker (CODM) in order to effectively allocate Group resources and assess performance. The Group has identified its operating segments based on the internal reports that are reviewed and used by the Chief Executive Officer (CEO) in the capacity of CODM. Two operating segments have been identified: IT Security Managed Services and Software Licensing. The CEO reviews Profit after tax. The accounting policies adopted for internal reporting to the CEO are consistent with those adopted in the financial statements. Page | 30 Tesserent Limited Financial Report 2019 2019 Revenues Sales to external customers Inter segment sales Total sales revenue Research & development tax concession Other revenue Total revenue and other income IT Security Managed Services $ Software Licensing $ Inter Segment Eliminations $ Totals $ 4,935,657 - 4,935,657 137,335 (30,554) 5,042,438 324,615 343,630 668,245 - 485 - 5,260,272 (343,630) (343,630) - - - 5,260,272 137,335 (30,069) 668,730 (343,630) 5,367,538 Profit/(loss) after income tax expense (4,467,898) 95,077 Total segment assets 3,016,688 802,625 Total segment liabilities 3,294,416 163,936 - - - (4,372,821) 3,819,313 3,458,352 2018 Revenues Sales to external customers Inter segment sales Total sales revenue Onerous Provision write-back Transaction Restructure Fee Research & development tax concession Other revenue IT Security Managed Services $ Software Licensing $ Inter Segment Eliminations $ Totals $ 5,033,889 33,820 5,067,709 - 150,000 457,741 96,783 294,068 384,030 678,098 399,279 - - - (417,850) (417,850) - - - - - 5,327,957 - 5,327,957 399,279 150,000 457,741 96,783 Total revenue and other income 5,772,233 1,077,377 (417,850) 6,431,760 Profit/(loss) after income tax expense (2,858,959) 138,132 - (2,720,827) Total segment assets 11,356,346 686,832 (7,384,361) 4,658,817 Total segment liabilities 2,793,901 143,220 - 2,937,121 Intersegment transactions An internally determined transfer price is set for all intersegment sales. This price is reset quarterly and is based on what would be realised in the event the sale was made to an external party at arm’s length. All such transactions are eliminated on consolidation of the Group’s financial statements. Corporate charges are allocated to reporting segments based on the segments’ overall proportion of revenue generation within the Group. The Board of Directors believes this is representative of likely consumption of head office expenditure that should be used in assessing segment performance and cost recoveries. Intersegment loans payable and receivable are initially recognised at the consideration received/to be received net of transaction costs. If intersegment loans receivable and payable are not on commercial terms, these are not adjusted to fair value based on market interest rates. This policy represents a departure from that applied to the statutory financial statements. Page | 31 Tesserent Limited Financial Report 2019 2.2 Revenue Recognition and measurement The consolidated entity recognises revenue as follows: Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which the consolidated entity is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the consolidated entity: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand- alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the 'expected value' or 'most likely amount' method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability. Contract liabilities represent the consolidated entity's obligation to transfer goods or services to a customer and are recognised when a customer pays consideration, or when the consolidated entity recognises a receivable to reflect its unconditional right to consideration (whichever is earlier) before the consolidated entity has transferred the goods or services to the customer. Sale of goods Revenue from the sale of goods is recognised at the point in time when the customer obtains control of the goods, which is generally at the time of delivery. Amounts disclosed as revenue are net of sales returns and trade discounts. Rendering of services Revenue derived through licensing arrangements for customers who subscribe to Tesserent’s security infrastructure platform (for the provision of Security-as-a-Service) is recognised as the services are provided over the licensing period. The company has determined that these services are provided evenly over the term of the contract. Revenue derived from the rental of hardware by customers is recognised consistently over the licensing period, in line with service delivery. Revenue derived from the connectivity and related support services (including installation and setup of hardware) is recognised at the time the service is provided. On the basis that monthly unused support services do not accumulate, the company recognises revenue evenly over the term of the contract, in line with service delivery. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Interest Revenue Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Page | 32 Tesserent Limited Financial Report 2019 Revenue from continuing operations Sales revenue Other income Transaction restructure fee1 Onerous provision writeback Research and development tax concession Interest Reversal of R&D over accrual in prior year Other Consolidated 2019 $ 2018 $ 5,260,272 5,327,957 5,260,272 5,327,957 - - 137,335 15,989 (72,925) 26,867 150,000 399,279 457,741 27,803 - 68,980 107,266 1,103,803 1) The Company entered into a transaction restructure agreement with Family Zone Cyber Security Limited (ASX:FZO) agreeing to a variation of the existing Asset Sale Agreement. The restructure fee was recognised over the term of the restructured payment plan and has been recognised as cash received in operating activities within the statement of cash flows. Revenue from external customers attributable to: Australia International Total Consolidated 2019 $ 2018 $ 5,032,171 228,101 5,033,889 294,068 5,260,272 5,327,957 2.3 Loss for the year Loss before income tax from continuing operations includes the following specific expenses Employee benefits expense Defined contribution superannuation expense Research and development costs Bad and doubtful debts expense Trade receivables Occupancy costs Minimum lease payments Consolidated 2019 $ 192,003 315,714 2018 $ 200,119 614,149 39,183 51,185 411,733 359,847 Page | 33 Tesserent Limited Financial Report 2019 2.4 Losses per share Basic losses per share Basic losses per share is calculated by dividing the loss attributable to the owners of Tesserent Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. From continuing operations attributable to the ordinary equity holders of the company Total basic losses per share attributable to the ordinary equity holders of the company Consolidated 2019 Cents 2018 Cents (2.90) (2.90) (2.62) (2.62) Diluted losses per share Diluted losses per share adjusts the figures used in the determination of basic losses per share to take into account the after-income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. From continuing operations attributable to the ordinary equity holders of the company1 Total diluted losses per share attributable to the ordinary equity holders of the company1 1There are 67,700,000 options that have not been taken into account in determining diluted EPS because their effect is anti-dilutive. Reconciliation of losses used in calculating earnings per share Consolidated 2019 Cents 2018 Cents (2.90) (2.90) (2.62) (2.62) Basic earnings per share Loss attributable to the ordinary equity holders of the company used in calculating basic earnings per share: From continuing operations Diluted earnings per share Loss attributable to the ordinary equity holders of the company used in calculating basic earnings per share: From continuing operations Weighted average number of shares used as the denominator Consolidated 2019 $ 2018 $ (4,372,821) (3,095,670) (4,372,821) (3,095,670) Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Weighted average number of ordinary shares used as the denominator in calculating diluted earnings per share Consolidated 2019 Number 2018 Number 150,950,488 118,368,498 150,950,488 118,368,498 Page | 34 Tesserent Limited Financial Report 2019 2.5 Business combinations Business combinations occur where an acquirer obtains control over one or more businesses. A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The business combination will be accounted for from the date that control is obtained, whereby the fair value of the identifiable assets acquired and liabilities (including contingent liabilities) assumed is recognised (subject to certain limited exemptions). When measuring the consideration transferred in the business combination, any asset or liability resulting from a contingent consideration arrangement is also included. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability is remeasured in each reporting period to fair value, recognising any change to fair value in profit or loss, unless the change in value can be identified as existing at acquisition date. All transaction costs incurred in relation to business combinations, other than those associated with the issue of a financial instrument, are recognised as expenses in profit or loss when incurred. The acquisition of a business may result in the recognition of goodwill or a gain from a bargain purchase. 2019 There were no business combination transactions impacting Tesserent Limited for the year ended 30 June 2019 or in the prior year. Page | 35 Tesserent Limited Financial Report 2019 2.6 Taxation The income tax income for the year comprises current tax income and deferred tax income. Current tax Current tax assets are measured at the amounts expected to be paid to be recovered from the relevant taxation authority. Deferred tax Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses. Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. With respect to non-depreciable items of property, plant and equipment measured at fair value and items of investment property measured at fair value, the related deferred tax liability or deferred tax asset is measured on the basis that the carrying amount of the asset will be recovered entirely through sale. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Tax losses have not been recognised in the current year. Offsetting balances Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (i) a legally enforceable right of set-off exists; and (ii) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Tesserent Limited and its Australian subsidiaries have applied the tax consolidation legislation, which means that these entities are taxed as a single entity. As a consequence, the deferred tax assets and deferred tax liabilities of these entities have been offset in the consolidated financial statements. i. Reconciliation of income tax expense to prima facie tax payable Consolidated 2019 $ Loss from continuing operations before income tax benefit/(expense) (4,382,820) Prima facie tax rate of 27.5% (2018: 27.5%) 1,205,275 Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Share based payments not deductible (157,313) Impairment of goodwill Amortisation of intellectual property not deductible Current year tax losses not recognised Other (non-deductible) / assessable Prior year adjustments Tax offset for R&D claim Income tax benefit/(expense) - - (937,009) (113,333) 81,488 (69,109) 9,999 2018 $ (2,720,827) 748,227 (2,444) (213,778) (18,628) (680,437) (195,222) (11,911) (650) (374,843) Page | 36 Tesserent Limited Financial Report 2019 Income Tax comprises of; Current Tax Loss Deferred Tax Movements Adjustments to current tax for Unrecognised temporary differences in prior periods Current year tax losses not recognised Income tax benefit/(expense) ii. Deferred tax balances Deferred tax comprises of temporary differences attributable to: Share issue costs Provisions Intangible assets Other 937,009 71,489 (81,488) (937,009) 9,999 165,945 168,589 (176,813) (8,103) 149,618 680,437 362,932 11,911 (680,437) (374,843) 155,994 160,481 (104,803) (72,053) 139,619 Movement in balances Tax losses Share issue costs Provisions Intangible Other Total assets As at 1 July 2017 85,776 233,991 224,908 - (30,213) 514,462 Charged to - profit or loss (85,776) (77,997) (64,427) (104,803) (41,840) (374,843) As at 30 June 2018 Charged to - profit or loss As at 30 June 2019 - - - 155,994 160,481 (104,803) (72,053) 139,619 9,951 8,108 (72,010) 165,945 168,589 (176,813) 63,950 (8,103) 9,999 149,618 Carried forward tax losses of $8,709,637 have not brought to account as a deferred tax asset of $2,395,150. Based on the value of tax losses incurred, the directors’ have formed an opinion that the business was not in a position to satisfy the criteria for recognising these losses as a deferred tax asset. The directors are of the opinion that these losses remain available for the Group to use in the future. Under normal circumstances, the benefits of deferred tax losses not brought to account can only be realised in the future if:    assessable income is derived of a nature, and of an amount sufficient to enable the benefit from the deductions to be realised conditions for deductibility imposed by law are complied with; and no changes in tax legislation adversely affect the realisation of the benefit from the deductions. The directors on a regular basis will assess the recognition of the deferred tax assets. Page | 37 Tesserent Limited Financial Report 2019 iii. Franking Credits Franked dividends Franking credits available for subsequent financial years based on a tax rate of 27.5% iv. Research and development Current tax asset 2019 $ - 25,673 25,673 2019 $ 137,335 137,335 2018 $ - 25,673 25,673 2018 $ 361,256 361,256 The Group undertakes eligible research and development (R&D) activities and is therefore entitled to claim an R&D offset under the R&D tax incentive as administered by The Australian Taxation Office and the Department of Industry, Innovation and Science Key estimate and judgment: Taxation The Group is subject to income taxes in Australia. Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Diversity in practice exists around the accounting treatment of refundable R&D incentives, because the Australian Accounting Standards do not specifically address R&D incentives. The Group has decided to record R&D refundable tax incentives as other income. Page | 38 Tesserent Limited Financial Report 2019 3. Operating Assets and Liabilities 3.1 Trade and other receivables Recognition and measurement Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinary course of business. Receivables expected to be collected within 12 months of the end of the reporting period are classified as current assets. All other receivables are classified as non-current assets. Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. The consolidated entity has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. CURRENT Trade receivables Allowance for expected credit losses Other receivables Total current trade and other receivables Unimpaired past due loans and receivables Past due under 30 days Past due 30 days to under 60 days Past due 60 days to under 90 days Past due 90 days and over Total unimpaired past due loans and receivables Total unimpaired loans and receivables Unimpaired past due as a percentage of total unimpaired loans and receivables Unimpaired past due 30 days and over as a percentage of total unimpaired loans and receivables Reconciliation of allowance for expected credit losses Opening allowance Additional allowance Write back of allowance Receivables written off as uncollectible Closing allowance Consolidated 2019 $ 279,135 (60,368) 218,767 - - 218,767 107,128 21,934 5,815 68,027 202,904 218,767 93% 44% 21,185 127,767 (88,584) - 60,368 2018 $ 253,779 (21,185) 232,594 111,600 111,600 344,194 59,628 97,547 4,916 21,467 183,558 344,194 53% 36% 33,000 21,185 - (33,000) 21,185 Page | 39 Tesserent Limited Financial Report 2019 3.2 Trade and other payables Recognition and measurement These amounts represent liabilities for goods and services provided to the Group prior to the end of the year which are unpaid. The carrying amounts of trade and other payables are assumed to be the same fair values due to their short-term nature. CURRENT Trade payables Sundry payables and accrued expenses Consolidation 2019 2018 $ $ 908,794 856,548 609,146 601,431 1,765,342 1,210,577 3.3 Provisions Recognition and measurements Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period. Employee Benefits The current portion of this liability includes all of the accrued annual leave and the unconditional entitlements to long service leave where employees have completed the required period of service. Long service leave The liability for long service leave is 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 to their net present value at the end of the reporting period using corporate bond rates. Retirement benefit obligations The Group makes payments to employees’ superannuation funds in line with the relevant superannuation legislation. Contributions made are recognised as expenses when they arise. Bonus schemes The Group recognises a liability and an expense for bonuses on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. Page | 40 Tesserent Limited Financial Report 2019 Consolidated 2019 $ 197,384 30,931 228,315 32,053 75,000 323,246 430,299 2018 $ 269,266 - 269,266 74,420 75,000 215,697 365,117 CURRENT Employee Benefits Other Provisions NON-CURRENT Employee Benefits Make good – premises Lease Incentive Movement in Provisions Employee Benefits Other Provisions Make Good Premises Lease Incentive $ $ $ $ Opening Balance Recognised in profit or loss during period Closing Balance 343,686 (114,249) 229,437 - 30,931 30,931 75,000 - 75,000 215,697 107,549 323,246 3.4 Contingent liabilities As at the reporting date, there were no material claims or disputes of a contingent nature against the Company and its subsidiaries. 3.5 Plant and equipment Recognition and measurement Plant and equipment are measured on the cost basis and therefore carried at cost less accumulated depreciation and any accumulated impairment. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised either in profit or loss. A formal assessment of recoverable amount is made when impairment indicators are present. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised as expenses in profit or loss during the financial period in which they are incurred. Page | 41 Tesserent Limited Financial Report 2019 Depreciation The depreciable amount of all fixed assets is depreciated on a straight-line basis over the asset’s useful life to the consolidated group commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The depreciation rates used for each class of depreciable assets are: Class of Fixed Asset Furniture & Fixtures Leasehold improvements Hardware employed Plant & equipment Depreciation Rate 10% to 100% 14.3% 66.67% 7.5% to 66.67% Equipment leased to external parties 40% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. 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. Consolidated Fixtures employed improvement for lease Equipment Furniture & Hardware Leasehold Equipment Plant & Total 2019 Opening net book value 71,110 Additions Disposals 635 - 10,182 18,063 - 434,544 - - Depreciation charge (13,324) (15,294) (65,435) Net book amount 58,421 12,951 369,109 - - - - - 108,046 9,078 - 623,882 27,776 - (47,296) (141,349) 69,828 510,309 2019 Cost 113,935 370,335 512,033 16,177 442,062 1,454,542 Accumulated depreciation (55,514) (357,384) (142,924) (16,177) (372,234) (944,233) Net book amount 58,421 12,951 369,109 - 69,828 510,309 Furniture & Fixtures Hardware employed Leasehold improvement Equipment for lease Plant & Equipment Total Consolidated 2018 Opening net book value 85,836 20,370 475,886 Additions Disposals 2,535 (783) 6,321 24,067 - - Depreciation charge (16,478) (16,509) (65,409) Net book amount 71,110 10,182 434,544 - - - - - 112,635 51,710 - 694,727 84,633 (783) (56,299) (154,695) 108,046 623,882 2018 Cost 113,300 352,272 512,033 16,177 432,984 1,426,766 Accumulated depreciation (42,190) (342,090) (77,489) (16,177) (324,938) (802,884) Net book amount 71,110 10,182 434,544 - 108,046 623,882 Page | 42 Tesserent Limited Financial Report 2019 3.6 Intangibles Recognition and measurement Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the de-recognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Impairment of non-financial assets 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 non-financial assets are reviewed 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. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Software Significant costs associated with software development are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 5 years. Page | 43 Tesserent Limited Financial Report 2019 Reconciliation Reconciliations of the written down values at the beginning and end of the current financial period are set out below: Consolidated Goodwill 2019 Opening net book value Additions – capitalised development costs Amortisation charges Impairment Balance 30 June 2019 2019 Cost Accumulated amortisation Net book amount $ - - - - - - - - Intellectual property $ 22,607 - - - Software Total $ 711,241 418,453 $ 733,848 418,453 (174,791) (174,791) - - 22,607 954,903 977,510 22,607 1,252,592 1,275,199 - (297,689) (297,689) 22,607 954,903 977,510 Consolidated Goodwill Intellectual property Software Total 2018 Opening net book value Additions Additions – acquisitions1 Additions – capitalised development costs Amortisation charges Impairment2 Balance 30 June 2018 2018 Cost Accumulated amortisation Net book amount $ 777,375 - - - - $ $ 90,197 146 - - - - - 463,769 370,370 $ 867,572 146 463,769 370,370 (122,898) (122,898) (777,375) (67,736) - (845,111) - - - - 22,607 711,241 733,848 22,607 834,139 856,746 - (122,898) (122,898) 22,607 711,241 733,848 (1) (2) On 5th July 2018 Tesserent IP Pty Ltd acquired a perpetual licence deed for Software IP. Terms were provided by the vendor whereby payments totalling USD675,000 are to be paid over a 5-year period. In recognising the intangible asset value, the Company has completed a present value of the payments using a discount rate of 15.08%. A corresponding liability has also been recognised and disclosed as current and non-current other financial liabilities. The recognised intangible is being amortised over 5 years. The company has undertaken a detailed review of all intangible assets at the CGU level. In conjunction with this review, the restructure of various OEM supplier arrangements and the recently announced acquisition the goodwill capitalised on previous acquisitions has been written off. Page | 44 Tesserent Limited Financial Report 2019 3.7 Inventory Inventory is stated at the lower of cost and net realisable value. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. As at 30 June 2019 there had been no write downs and all inventories are stated at cost. (2018:$nil) 3.8 Other financial assets Call option investment Recognition and measurement The call option represents an investment whereby the company has the right but not obligation to acquire the underlying asset. Where this option is exercised by providing notice, the option investment is offset against the predeterminable purchase price of the underlying asset. Where the option is exercised via notice, the counterparty has the right to cancel the option upon notice however must refund the full cost of the option. The call option has initially been recognised at cost less any impairment but has been written down to an impaired value of $1. The Group has impaired the call option investment by $165,809 (2018:nil). Where the intention of the company is to exercise the option within 12 months of the balance date, the investment will be recorded as a current asset. If the intention is to exercise after 12 months, the investment will be recorded as a non-current asset. Consolidated 2019 $ 165,810 (165,809) 1 2018 $ - - - - - 165,810 165,810 Call Option Investment Impairment Provision Current Assets Call Option Investment Non-Current Assets 3.9 Other financial liabilities Deferred settlement liability Recognition and measurement Deferred settlement liability is recognised when the company has a legal or constructive obligation, as a result of a past event, for which an outflow of economic benefits will result and that outflow can be reliably measured. Future payments are discounted to their net present value at contract commencement using a discount rate of 15.08%. The difference between actual payments and the discounted amount is recognised as a finance cost. Where the discounted payment is due within 12 months of the balance date, the deferred settlement liability will be recorded as a current liability. The balance is represented as non-current. Current Non-current Total Consolidated 2019 $ 137,991 281,714 419,705 2018 $ 61,212 352,157 413,369 Page | 45 Tesserent Limited Financial Report 2019 4. Capital Management The Group’s objective when managing capital is to:  Safeguard their ability to continue as a going concern, so that they can provide returns to shareholders; and  Maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. For the purpose of analysis, the Group defines capital as fully paid ordinary shares. 4.1 Borrowings Recognition and measurement 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 profit or loss over the period of the borrowings using the effective interest method. 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 end of the reporting period. The Group has no borrowings for the current year (2018:$nil) 4.2 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk and interest rate 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, ageing analysis for credit risk. Market risk Foreign currency risk The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity’s functional currency. The risk is measure using sensitivity analysis and cash flow forecasting. The risk is not significant as the Group has an immaterial amount of transactions denominated in foreign currency. Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. The table below outlines the variance interest rate on cash at bank. 2018 2019 Cash at bank Weighted average interest rate % 1.47 Net exposure to cash flow interest rate risk Balance Weighted average Balance interest rate % 1.47 $ 999,980 999,980 $ 1,717,221 1,717,221 Page | 46 Tesserent Limited Financial Report 2019 Sensitivity analysis A change of 100 basis points in interest rates at the reporting date would have increased/decreased equity and profit/loss for the period by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for the comparative period. Impact on profit/loss for the period Increase in interest rates Decrease in interest rates Credit risk 2019 10,851 2018 18,863 (10,851) (18,863) Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date of recognised financial assets is the carrying amount of those assets, net of any provisions for impairment of those assets, as disclosed in consolidated statement of financial position and notes to the consolidated financial statements. Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers including receivables and committed transactions. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisations, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Refer to Note 3.1 for schedule of unimpaired past due receivables. The Group does not have any significant credit risk to any single counterparty given the large number of customers. Liquidity risk Prudent liquidity risk management requires the Group to maintain sufficient liquid assets and available borrowing facilities to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves and by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Amounts presented below represent the future undiscounted principal and interest cash flows. Page | 47 Tesserent Limited Financial Report 2019 1 year or less Between 1 and 2 years Between 2 and 5 years Over 5 years Remaining contractual maturities Maturity analysis Consolidated – 2019 Non-interest bearing Trade payables Other payables Accrued expenses $ 908,794 103,224 753,325 $ - - - $ - - - $ - $ 908,794 - 103,224 - - - 753,325 419,720 2,185,063 Deferred settlement liability 137,991 70,443 211,286 1,903,334 70,443 211,286 Consolidated – 2018 1 year or less Between 1 and 2 years Between 2 and 5 years Over 5 years Remaining contractual maturities Non-interest bearing Trade payables Other payables Accrued expenses $ 609,146 60,827 540,604 $ - - - $ - - - Deferred settlement liability 61,212 70,443 281,714 1,271,789 70,443 281,714 $ $ - - - - - 609,146 60,827 540,604 413,369 1,623,946 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. Page | 48 Tesserent Limited Financial Report 2019 4.3 Cash and cash equivalents Recognition and measurement For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturity dates of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Cash at bank Term deposits 4.4 Contributed equity Recognition and measurement Consolidated 2019 $ 999,660 - 2018 $ 867,221 850,000 999,660 1,717,221 Ordinary fully paid shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are show in equity as a deduction, net of tax, from the proceeds. All issued ordinary shares are fully paid. Holders of these shares are entitled to dividends as declared from time to time and are entitled to one vote per share at General meetings of the Company. All ordinary shares rank equally with regard to the Company’s residual assets. Ordinary shares – fully paid 183,043,123 126,041,546 13,754,507 10,875,937 2019 Shares 2018 Shares 2019 $ 2018 $ Consolidated Movements in ordinary share capital 2018 Details Balance Shares issued to employees Shares issued to employees Shares issued to directors Equity settled expense Date Shares Issue Price $ $ 1 Jul 2017 116,774,600 10,140,892 23 Oct 2017 16 May 2018 18 May 2018 18 May 2018 300,000 700,000 412,086 352,000 Shares issued pursuant to capital raising 4 Jun 2018 7,142,860 Capital raise costs Shares issued to employees 21 Jun 2018 Balance 360,000 126,041,546 0.140 0.160 0.910 0.075 0.070 0.140 42,000 112,000 37,500 26,400 500,000 (33,255) 50,400 10,875,937 Page | 49 Tesserent Limited Financial Report 2019 2019 Details Date Shares Shares issued pursuant to capital raising 14 Aug 2018 Shares issued to employees Shares issued to employees Equity settled expense Shares issued pursuant to capital raising Capital raise costs Equity settled expense 31 Dec 2018 12 Feb 2019 19 Feb 2019 28 Feb 2019 18 Mar 2019 4,342,837 2,950,000 300,000 1,128,000 10,000,000 18 Mar 2019 1,452,000 Shares issued pursuant to capital raising 18 Mar 2019 20,548,000 Shares issued pursuant to capital raising 22 Mar 2019 Shares issued pursuant to capital raising 25 Mar 2019 Shares issued pursuant to capital raising 28 Mar 2019 5,700,000 5,100,000 500,000 Issue Price $ 0.070 0.056 0.047 0.050 0.050 0.050 0.050 0.050 0.050 0.050 Capital raise costs Exercise of Share Options Capital raise costs Shares issued to employees 28 Mar 2019 2 Apr 2019 1 May 2019 1 May 2019 Shares issued pursuant to capital raising 1 May 2019 3,600,000 Shares issued pursuant to capital raising 16 May 2019 700,000 183,043,123 240,000 0.050 440,740 0.056 0.055 0.050 $ 304,000 166,500 14,130 56,400 500,000 (66,000) 72,600 1,027,400 285,000 255,000 25,000 (16,363) 12,000 (15,000) 24,902 198,000 35,000 13,754,507 Page | 50 Tesserent Limited Financial Report 2019 4.5 Commitments Information Technology and Communication (ITC) service commitments The Group enters into contracts for the provision of ITC services with suppliers for which there are minimum spend requirements. Service commitments contracted at the end of the reporting period but which are not recognised as liabilities, are as follows: Within one year Later than one year but not later than five years Consolidated 2019 $ 493,909 251,255 745,164 2018 $ 580,234 823,333 1,403,567 Lease commitments The Group leases its offices under a non-cancellable operating lease. Commitments in relation to this lease contracted for at the end of each reporting period but not recognised as liabilities, are as follows: Consolidated 2019 $ 371,427 1,444,532 - 1,815,959 2018 $ 237,051 1,700,090 115,869 2,053,010 Within one year Later than one year but not later than five years Greater than five years 4.6 Dividends No dividends were paid or declared for the current or prior period. 5. Other 5.1 Related party transactions Controlled entities The consolidated financial statements include the financial statements of Tesserent Limited and its controlled entities. The 100% controlled entities are as follows: Tesserent Australia Pty Ltd – acquired 15 July 2015 Tesserent Wholesale Pty Ltd – acquired 15 July 2015 Tesserent IP Pty Ltd (Previously 443 IP Pty Ltd) – acquired 15 July 2015 Tesserent UK Ltd – incorporated in the UK 20 May 2015 (dormant) TNT Cyber Services Pty Ltd – incorporated 27 March 2019 Apart from Tesserent UK Ltd all companies operate in Australia. Page | 51 Tesserent Limited Financial Report 2019 Options Details of options held by Key Management Personnel at 30 June 2019 are set out below 2019 Options KMP No of options Vesting and exercise date Exercise price Steve Bertamini Steve Bertamini Gregory Baxter Gregory Baxter Robert Langford Robert Langford Robert Langford Robert Langford Robert Langford Julian Challingsworth Julian Challingsworth Julian Challingsworth Julian Challingsworth Julian Challingsworth 2018 Options 500,000 500,000 500,000 500,000 1,000,000 1,000,000 1,000,000 10,000,000 22,000,000 2,000,000 1,000,000 3,000,000 3,000,000 4,000,000 31 Aug 17 31 Aug 18 31 Aug 17 31 Aug 18 8 Feb 18 8 Feb 19 8 Feb 20 8 Feb 19 19 Mar 19 14 Dec 18 14 Dec 18 14 Dec 18 14 Dec 18 14 Dec 18 $0.240 $0.288 $0.240 $0.288 $0.100 $0.125 $0.150 $0.050 $0.050 $0.000 $0.000 $0.000 $0.000 $0.000 KMP No of options Vesting and exercise date Exercise price Steve Bertamini Steve Bertamini Gregory Baxter Gregory Baxter 500,000 500,000 500,000 500,000 31 Aug 17 31 Aug 18 31 Aug 17 31 Aug 18 $0.240 $0.288 $0.240 $0.288 The options have been valued and accounted for in accordance with the requirements of AASB 2 Share-based Payments. Shares During the current period, directors or parties related to the directors subscribed for shares in the company as follows: 2019 Date Name 31/12/18 Julian Challingsworth1 2018 Date Name 24/05/18 24/05/18 Steve Bertamini2 Greg Baxter2 1) Issued as part of sign bonus 2) Issued as part of director fee remuneration Number of Shares 1,000,000 Number of Shares 206,043 206,043 Amount Paid - Amount Paid 18,750 18,750 Page | 52 Tesserent Limited Financial Report 2019 Payables – Loans from related parties The Group has loans from related parties in the current year (2018:$nil) as follows; Related Party Greg Baxter Stefano Bertamini Robert Langford Loan balances due to the entity Loan balances payable by the entity - - - 48,750 48,750 7,500 Loan balances payable above relate to unpaid directors fees Key management personnel remuneration Short-term salary/fees Short-term-bonus Post-employment benefits Long term benefits Share based payments Share based payments Consolidated 2019 $ 974,618 - 70,984 2,136 324,064 2018 $ 1,032,197 135,000 61,340 11,701 135,879 1,371,802 1,376,117 Equity-settled share-based compensation benefits are provided to employees and directors. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees and directors in exchange for the rendering of services. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using the Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non- vesting conditions that do not determine whether the consolidated entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. To determine the value of options issued in 2019, an independent valuation was prepared using the Black- Scholes model. In valuing the options, a risk-free rate of 1.40-1.97%, a volatility rate of 80%, dividend yield of 0%, share price of $0.048-0.06 and time to expiry of four years were used. The 80% volatility rate was determined by reference to a broad set of ASX- listed comparable companies. The value as determined was amortised over the vesting period of the option. Set out below are summaries of options movements during the year Page | 53 Tesserent Limited Financial Report 2019 Set out below are summaries of options movements during the year; 2019 Grant date Expiry date Exercise price Balance at the start of Expired/ Balance at forfeited/ the end of $ the year Granted Exercised other the year 17 Nov 15 31 Aug 19 0.20 2,500,000 17 Nov 15 31 Aug 19 0.24 2,500,000 17 Nov 15 31 Aug 19 0.288 1,000,000 9 May 16 8 May 19 9 May 16 8 May 20 0.40 0.50 500,000 500,000 - - - - - 14 Dec 18 30 Nov 21 0.10 - 1,000,000 14 Dec 18 30 Nov 21 0.125 - 1,000,000 14 Dec 18 30 Nov 21 0.15 - 1,000,000 12 Feb 19 3 Dec 20 19 Feb 19 19 Mar 20 14 Dec 18 1 July 20 0.05 0.05 0.00 Total - 10,000,000 - 22,000,000 - 13,000,000 7,000,000 48,000,000 - - - 2,500,000 - 1,500,000 1,000,000 - 1,000,000 - 500,000 - - 500,000 - - - - - - - - - 1,000,000 - - - - - 1,000,000 1,000,000 10,000,000 22,000,000 13,000,000 5,000,000 50,000,000 Weighted average exercise price $0.263 $0.1000 $0.0000 $0.0000 $0.1400 2018 Grant date Expiry date 17 Nov 15 31 Aug 19 17 Nov 15 31 Aug 19 $ 0.20 0.24 2,500,000 2,500,000 17 Nov 15 31 Aug 19 0.288 2,500,000 9 May 16 8 May 18 9 May 16 8 May 19 9 May 16 8 May 20 0.30 0.40 0.50 Total 500,000 500,000 500,000 9,000,000 Exercise price Balance at the start of Expired/ Balance at forfeited/ the end of the year Granted Exercised other the year - - - - - - - - - - - - - - - - 2,500,000 2,500,000 1,500,000 1,000,000 500,000 - - - 500,000 500,000 2,000,000 7,000,000 Weighted average exercise price $0.2690 $0.0000 $0.0000 $0.2910 $0.2630 Page | 54 Tesserent Limited Financial Report 2019 Set out below are summaries of deferred share rights movements during the year 2019 Grant Date Vesting Date Share Price at grant date $ Balance at the start of the year Granted Shares Issued Expired/ forfeited/ other Balance at the end of the year 9 May 16 8 May 18 9 May 16 8 May 19 24 Nov 16 3 Oct 17 24 Nov 16 3 Oct 18 24 Nov 16 3 Oct 19 24 Nov 16 15 Jun 18 24 Nov 16 15 Jun 19 0.16 0.16 0.14 0.14 0.14 0.14 0.14 - 700,000 - 450,000 750,000 - 600,000 - - - - - - - - 450,000 - 700,000 - - - 750,000 - - - - - 600,000 - - - 450,000 - - - Total 2,500,000 - (450,000) 2,050,000 450,000 2018 Grant Date Vesting Date Share Price at grant date $ Balance at the start of the year Granted Shares Issued Expired/ forfeited/ other Balance at the end of the year 9 May 16 8 May 18 9 May 16 8 May 19 24 Nov 16 3 Oct 17 24 Nov 16 3 Oct 18 24 Nov 16 3 Oct 19 24 Nov 16 15 Jun 18 24 Nov 16 15 Jun 19 0.16 0.16 0.14 0.14 0.14 0.14 0.14 700,000 700,000 300,000 450,000 750,000 360,000 600,000 - - - - - 700,000 - 300,000 - - - - 360,000 - Total 3,860,000 - (1,360,000) - - - - - - - - - 700,000 - 450,000 750,000 - 600,000 2,500,000 Page | 55 Tesserent Limited Financial Report 2019 5.2 Reserves Recognition and measurement The share-based payment reserve is used to recognise:    the fair value of options issued to Directors and employees which have not been exercised; the fair value of shares issued to Directors and employees; and other share-based payment transactions. The cost of shares and options over shares issued to Directors and employees are measured as set out in the related parties note in section 5.1. Share based payment reserve Opening balance Share based compensation recognised during the year Shares issued to employees Closing balance Consolidated 2019 $ 639,385 287,148 (153,633) 772,900 2018 $ 705,347 138,438 (204,400) 639,385 5.3 Parent entity information The individual financial statements for the parent entity show the following aggregate amounts: Statement of financial position Current assets Non-current assets Total assets Current liabilities Total liabilities Issued share capital Reserves Accumulated loss Total equity 2019 $ 2018 $ 1,013,679 1,297,219 2,310,898 (124,059) (124,059) 13,268,555 330,304 (11,163,902) 2,434,957 1,951,554 305,429 2,256,983 378,245 378,245 9,266,691 639,385 (8,027,338) 1,878,738 Included with non-current assets is a net intercompany receivable of $12,408,143 that the directors have impaired in the current year. Loss for the year 14,382,458 5,764,689 Page | 56 Tesserent Limited Financial Report 2019 Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2019 or 2018. Guarantees entered into by the parent entity The parent entity did not have any guarantees as at 30 June 2019 or 2018. 5.4 Remuneration of auditors During the financial year the following fees were paid or payable for services provided by BDO ECP, the auditor of the company Audit services Corporate and indirect tax services Due diligence services Total 5.5 Cash flow information a) Reconciliation of cash flow from operating activities Loss after tax for the year Depreciation and amortisation Goodwill written off Intellectual property assets written off Share based payments Bad Debts Call Option impairment Decrease in trade and other receivables Increase in prepayments Increase in inventory Decrease in current tax asset Decrease in other assets Decrease in deferred tax assets Increase/(decrease) in trade and other liabilities Decrease in contract liabilities Decrease in current provisions Increase in non-current provision Net cash outflow from operating activities Consolidated 2019 $ 93,000 63,515 146,050 302,565 2018 $ 89,000 42,025 - 131,025 Consolidated 2019 $ (4,372,821) 316,993 - - 572,047 39,183 165,809 125,427 (32,198) (220,927) 223,921 165,810 (9,999) 545,531 (64,101) (40,951) 65,182 (2,521,094) 2018 $ (3,095,670) 277,594 777,375 67,736 175,938 51,185 - 88,260 (98,533) (29,711) 404,174 41,370 374,843 (67,192) (30,671) (377,198) 158,576 (1,281,924) Page | 57 Tesserent Limited Financial Report 2019 5.6 Events occurring after the reporting period On 3 July 2019 the Company completed the acquisition of Rivium (Pty) Ltd for a total price of $3.250m, to be settled in $1.495m cash and 17.550m Shares at 10 cents per share. Details are as per table below: Acquisition of Rivium Pty Ltd Net assets acquired Goodwill Acquisition-date fair value of the total consideration Representing: Cash paid to vendor Issued share capital Earnout estimate in shares $ 500,392 2,526,808 3,027,200 1,495,000 772,200 760,000 3,027,200 Accounting for the Rivium Pty Ltd acquisition and any purchase price allocation will be finalised for release of the 31 December 2019 interim financial report. Pure Asset Management Pty Ltd Financing Facility Subsequent to the end of the year the company secured a loan facility of 4 million dollars with Pure Asset Management. The loan facility will be split evenly in two separate tranches of $2 million, with the first available for general working capital and the second available for lender approved acquisition opportunities from 1 November 2019 onwards. The Tranche One Working Capital Facility will be available for draw down upon financial close of the facility, with an interest rate of 11.5% per annum. The Tranche Two Acquisition Facility will enable Tesserent to draw up to $2 million on 45 days’ notice at any time after November 2019 upon lender approval of the acquisition. An interest rate of 9.90% per annum will apply to the Acquisition Facility. Finance Facility Terms are as follows: Amount Term Warrants A$4.0m in two tranches: Working Capital Facility: A$2.0m Acquisition Facility: A$2.0m. Drawable from 1 November 2019, subject to Lender approval of any target acquisition. Working Capital Facility: 36 months from utilisation. Acquisition Facility: 36 months from utilisation. Associated with the Working Capital Facility, the Lender will be issued with Warrants to acquire 15,000,000 Tesserent shares upon utilisation of the Working Capital Facility, A further 10,000,000 Warrants may be issued subject to shareholder approval. Warrants associated with the Working Capital Facility will have an exercise price which is the lower of:  A$0.08; and  The Theoretical Ex Rights Price (TERP) of any future capital raise requiring shareholder approval to increase shares on issue in Tesserent by greater than 15%. Page | 58 Tesserent Limited Financial Report 2019 Warrants In the instance the Company elects to draw the Acquisition Facility, the Company will seek shareholder approval to entitle the Lender to be issued with Warrants equal to the dollar amount divided by an amount equal to 125% of the VWAP for the 30-day period ending on the Utilisation Date of the Acquisition Facility Loan. Warrants associated with the Acquisition Facility have an exercise price which is the lower of:   125% of the VWAP for the 30-day period preceding the first utilization date under the Acquisition Facility Loan; or The TERP of any future capital raise requiring shareholder approval to increase shares on issue in Tesserent by greater than 15%. Covenants and representations The Company is required to provide certain standard representations, undertakings and covenants in favour of the Lender. Apart from the matters noted above, the directors are not aware of any other significant events since the end of the reporting period. Page | 59 Tesserent Limited Financial Report 2019 In the opinion of the Directors’ of Tesserent Limited DIRECTORS’ DECLARATION a) the financial statements and notes, as set out on pages 22 to 59, are in accordance with the Corporations Act 2001, including: (i) (ii) (iii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2019 and of its performance for the year ended on that date; and complying with Accounting Standards and the Corporations Regulations 2001 and other mandatory professional reporting requirements; and as stated in note 1, the consolidated financial statements also comply with International Financial Reporting Standards there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and the Directors’ have been given the declarations required by s 295A of the Corporations Act 2001 for the financial year ended 30 June 2019. the remuneration disclosures included at pages 8 to 21 of the Directors Report (Audited Remuneration Report) for the year ended 30 June 2019 comply with section 300A of the Corporations Act 2001 b) c) d) Signed in accordance with a resolution of the Directors’ made pursuant to section 295(5) of the Corporations Act 2001. On behalf of the Directors, Julian Challingsworth Director Melbourne, 30 September 2019 Page | 60 Tel: +61 3 9603 1700 Fax: +61 3 9602 3870 www.bdo.com.au Collins Square, Tower Four Level 18, 727 Collins Street Melbourne VIC 3008 GPO Box 5099 Melbourne VIC 3001 Australia INDEPENDENT AUDITOR'S REPORT To the members of Tesserent Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Tesserent Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2019, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial report, including a summary of significant accounting policies and the directors’ declaration. In our opinion the accompanying financial report of Tesserent Limited, is in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the Group’s financial position as at 30 June 2019 and of its financial performance for the year ended on that date; and (ii) Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. BDO East Coast Partnership ABN 83 236 985 726 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO East Coast Partnership and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. Going Concern Key audit matter How the matter was addressed in our audit Refer to Note 1 “Going Concern” of the accompanying Our audit procedures included, amongst others: financial report. • Reviewing cash-flow forecasts and challenging The Group’s use of the going concern basis of management’s assumptions around future preparation and the associated extent of uncertainty is revenue, operating costs, and associated cash important to understanding the financial statements as flows. whole. Frequent discussions were held with management about the going concern assessment and, for these reasons, we consider it a key audit matter. • Analysing the impact of reasonable possible changes in cash flow forecasts and their timing by applying sensitivities to key inputs including In Note 1 “Going Concern” of the financial report, the future revenue and operating costs. Directors have documented their considerations and have determined that the going concern basis of preparation is the appropriate basis of accounting. • Assessing management’s accuracy to forecast based on previous years’ actual results and our knowledge of the Group. The Group’s assessment of going concern was based on future cash flow forecasts. The preparation of these forecasts incorporated a number of assumptions and judgements. The Directors have concluded that the range of possible outcomes considered in arriving at this judgment does not give rise to a material • • Sensitising cash flow forecasts based on actual results compared to budget. Assessing the validity of cash inflows from financing activities, including receipt of funds from financing facility disclosed in note 5.6 of uncertainty casting significant doubt on the Group’s the financial report. ability to continue as a going concern. We assessed the Group’s forecasts, including the • Reviewing subsequent events as they pertain to actual financial performance and cash levels of Directors’ assumptions regarding the timing of future the Group. cash flows and operating results which are uncertain by nature. This assessment required significant audit attention in determining the appropriate conclusion surrounding going concern. • Assessing the adequacy of the Group’s disclosures within the financial statements. Revenue recognition Key audit matter How the matter was addressed in our audit Refer to Note 2.2 of the accompanying financial Our audit procedures included, amongst others: report. • Understanding and documenting the processes For the year ended 30 June 2019 the Group recognised and controls used by the Group in recording $5,260,272 (2018: $5,327,957) of revenue from revenue. contracts with customers. The Group has various • Assessing the Group's accounting policy for revenue streams which are a key driver of revenue to ensure it complies with the performance. Australian Accounting Standards. • Performing analytical procedures to understand movements and trends in revenue for comparisons against expectations. Revenue recognition was identified as a key audit matter due to the significance of revenue to the financial report, first time adoption of AASB 15 • • Tracing a sample of revenue transactions to supporting documentation. Assessing the value of contract liabilities Revenue from Contracts with Customers. The Group recognised at the year end. has contract liability arrangements with customers that • Assessing the adequacy of the Group's require management estimate and judgements. disclosures within the financial statements. Other information The directors are responsible for the other information. The other information comprises the information in the Group’s annual report for the year ended 30 June 2019, but does not include the financial report and the auditor’s report thereon, which we obtained prior to the date of this auditor’s report, and the additional Shareholders Information, which is expected to be made available to us after that date. 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 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. When we read the additional Shareholder information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and will request that it is corrected. If it is not corrected, we will seek to have the matter appropriately brought to the attention of users for whom our report is prepared. 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 has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at: http://www.auasb.gov.au/auditors_responsibilities/ar3.pdf This description forms part of our auditor’s report. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 8 to 20 of the directors’ report for the year ended 30 June 2019. In our opinion, the Remuneration Report of Tesserent Limited, for the year ended 30 June 2019, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. BDO East Coast Partnership David Garvey Partner Melbourne, 30 September 2019 Tesserent Limited Financial Report 2018 INVESTOR ENQUIRIES Oliver Carton Company Secretary Phone: +61 3 9880 5559 Email: investor@tesserent.com MEDIA ENQUIRIES Alex Belcher Marketing Manager Phone: +61 3 9880 5507 Email: alex.belcher@tesserent.com WEB tesserent.com/investor-center linkedin.com/company/tesserent Page 80 twitter.com/tesserent 

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