appendix 4d half-year report · appendix 4d half-year report droneshield limited ... revenue...

APPENDIX 4D HALF-YEAR REPORT

DroneShield Limited ACN 608 915 859

1. Reporting Period The financial information contained in the attached financial report is for the half-year ended 30 June 2016. The previous corresponding period was for the half-year ended 30 June 2015.

Results for announcement to the market A$

Revenue from continuing activities Down 66% to 23,397

Loss from continuing activities after tax attributable to members Up 128% to (2,442,725)

Net loss attributable to members Up 128% to (2,442,725)

Dividends: No dividends are being proposed or have been paid Nil Nil Nil

2. Commentary related to the above results Revenue reduced in the period as the Company transitions from the stage of distributor demo sales making a substantial part of sales in 2015, to end customer trials and permanent installations, which carry a longer sales cycle. The net loss incorporates expenses associated with the Initial Public Offering (“IPO”), establishment of the Australian office, and business development costs. 3. Net Tangible Asset (NTA) backing per share

30 June 2016 $

30 June 2015 $

Net tangible asset backing per ordinary share 4.1c N/A

4. Details of entities over which control has been gained or lost during the period. On 22 June 2016, DroneShield Limited completed through an IPO the remaining condition precedent for the complete acquisition of DroneShield LLC. Note 1(c) to the financial report contains details of how this transaction has been accounted for. The consolidated financial statements represent the continuation of the financial statements of DroneShield LLC from the date of the transaction. 5. There were no payments of dividends during the period. 6. There is no dividend reinvestment plan in operation. 7. There are no associates or joint venture entities. 8. This report is based on accounts that have been reviewed and are not subject to dispute or

qualification. The attached financial report is all the half-year information provided to the Australian Securities Exchange under Listing rule 4.2A.3. This report also satisfied the half-year reporting requirements of the Corporations Act 2001. James Walker Managing Director 30 August 2016

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DroneShield Limited ACN 608 915 859 Half-year Financial Report 30 June 2016 Contents Corporate Information ........................................................................................................................... 1 Directors’ Report ................................................................................................................................... 2 Auditor’s Independence Declaration ..................................................................................................... 6 Statement of Profit or Loss and Other Comprehensive Income ........................................................... 7 Statement of Financial Position............................................................................................................. 8 Statement of Changes in Equity ........................................................................................................... 9 Statement of Cash Flows .................................................................................................................... 10 Notes to the Financial Statements ...................................................................................................... 11 Directors’ Declaration .......................................................................................................................... 24 Independent Auditor’s Review Report ................................................................................................ 25

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CORPORATE INFORMATION FOR THE HALF-YEAR ENDED 30 JUNE 2016

Directors & Management Peter James (Non-Executive Chairman)

James Walker (Managing Director)

Winton Willesee (Non-Executive Director)

Dr Samantha Ravich (Non-Executive Director)

Oleg Vornik (Chief Financial Officer)

Erlyn Dale (Company Secretary) Registered Office Suite 25, 145 Stirling Highway Nedlands WA Australia 6009 Telephone: (08) 9389 3160 Facsimile: (08) 9389 3199 E-mail: [email protected] Website: www.droneshield.com Auditors HLB Mann Judd Assurance (NSW) Pty Ltd Level 19, 207 Kent Street Sydney NSW 2000 Bankers Commonwealth Bank of Australia Level 21, 201 Sussex Street Sydney NSW 2000

PNC Bank 1405 P Street, NW Washington DC 20005 United States of America

Solicitors Steinepreis Paganin 16 Milligan Street Perth WA 6000 Australia

K&L Gates 1601 K Street, NW Washington DC 20006 United States of America

Moses & Singer The Chrysler Building 405 Lexington Avenue New York NY 10174 United States of America

Share Registry Automic Pty Ltd t/a Automic Registry Services Suite 310, 50 Holt Street Surry Hills, NSW 2010 Enquiries (within Australia) 1300 288 664 Enquiries (outside Australia) 61 2 9698 5414 Stock Exchange Listing DroneShield Limited (ASX code DRO) shares and (ASX code DROO) options are quoted on the Australian Securities Exchange.

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DIRECTORS’ REPORT FOR THE HALF-YEAR ENDED 30 JUNE 2016

Your directors submit their report for DroneShield Limited (the “Company”) and its controlled entities (the “consolidated entity” and/or “the Group”) for the half-year ended 30 June 2016. Directors The names of the Company’s directors in office during the half-year and until the date of this report are set out below. Directors were in office for this entire period unless otherwise stated. Peter James (Non-Executive Chairman) Appointed 1 April 2016 James Walker (Managing Director) Appointed 1 April 2016 Winton Willesee (Non-Executive Director) Appointed 4 November 2015 Dr. Samantha Ravich (Non-Executive Director) Appointed 1 April 2016 Oleg Vornik (Executive Director) Appointed 4 November 2015

Resigned 1 April 2016 Erlyn Dale (Non-Executive Director) Appointed 4 November 2015

Resigned 1 April 2016 Business Overview Based in Sydney and Virginia, DroneShield is a worldwide leader in drone detection technology. The Company has developed the pre-eminent drone detection solution that protects people, organisations and critical infrastructure from intrusion from drones. Its leadership brings world-class expertise in engineering and physics, combined with deep experience in defence, intelligence, and aerospace. DroneShield designs detection systems that use highly specialised technology to achieve levels of precision and sensitivity that are not possible with other methods. The Company’s unique technology uses proprietary software and hardware, to detect drones up to 1km away that would usually be invisible to radar, camera and radio frequency based systems and instantly alert users in real-time through multiple channels ensuring any potential threats can be addressed. DroneShield utilises audio/acoustic signatures (obtained at US Department of Defence approved anechoic chamber) to detect drones, which provides a superior level of accuracy as opposed to traditional radar, radio frequency, camera, LIDAR and laser methods that frequently fail due to an inability to distinguish between other airborne devices. DroneShield owns a number of current and pending patents for its technology. The Company is addressing a very real and prominent issue in today’s society. Affordable commercial and consumer-grade drones have become popular around the world, with over 1 million commercial drones sold last year and 12 million expected to be in operation by 2020. Not only do drones have the capability to deliver a package to a precise location, they are also extremely hard to detect and many come with highly advanced camera and filming equipment. These features mean that consumer and commercial drones present unique and frequent threats to privacy, physical security, and public safety in a wide variety of public and private sectors, which is expected to lead to a defence and security drone market worth over US$11 billion by 2024. Since DroneShield first commenced delivery of its products in February 2014, it has sold, piloted or trial-installed over 200 sensor units, and its products have been installed or trailed at a range of third party sites, including the Boston Marathon in 2015 and 2016. DroneShield’s business model is aimed at generating a recurring license revenue stream for the life of the installation, prepaid annually in advance by the users. Following the initial installation, DroneShield provides the customer with software updates as well as ongoing technical support.

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DIRECTORS’ REPORT (continued) FOR THE HALF-YEAR ENDED 30 JUNE 2016

Business Overview (continued) DroneShield’s distribution channels focus on third party security providers and hardware distributors. The ultimate actual and prospective end-users of its products are based around the world, range widely in nature, and include, among others: • power plants, electricity grids, gas pipelines, • ports and other critical infrastructure asset owners; • defence agencies; • intelligence and national security agencies; • airports and other civil defence users; • prisons; • stadiums and other public event venues and organisers; • media production sets; • real estate owners including hotels, commercial offices and manufacturing plants; and • VIPs, including ultra-high net worth individuals, executives and government officials. Review of Operations Successful Completion of Initial Public Offering The Company successfully listed its securities on the Australian Securities Exchange on 22 June 2016 in a substantially oversubscribed IPO, under which the Company raised $7 million through the issuance of 35,000,000 shares at an issue price of $0.20 per share. Each IPO investor also received listed options at $0.22 strike price and a 2-year exercise period, for on 1-for-1 basis for the number of subscribed shares. Listing on the ASX represented a significant milestone for the Company, with the proceeds being used to: • assist DroneShield’s existing global distributor network of over 40 distributors in more than 30

countries, and develop their local markets, • establish selected direct relationships within key segments of local markets identified by

DroneShield, • continue to scale existing DroneShield technology, • expand the manufacturing capability of DroneShield’s products, and • implement strategies to add complementary detection and certain countermeasure methods in

permitted locations. DroneShield is led by Managing Director James Walker, an experienced executive with a history of successfully leading early stage technology companies to commercialisation in global markets and previously with the London-listed Seeing Machines (AIM:SEE). The board, management team and advisory board consists of a number of high profile defence industry executives and small cap experts including: • Peter James, the current chairman of the boards of Nearmap Ltd (ASX:NEA) and Macquarie

Telecom Group (ASX:MAQ) (Independent Non-Executive Chairman), • Dr Samantha Ravich, the former Deputy National Security Advisor for Vice-President Cheney

(Independent Non-Executive Director), • Winton Willesee, an experienced professional company director (Independent Non-Executive

Director), • Hon. Jay M Cohen, Rear Admiral a former Chief of Naval Research (United States Navy) and

the U.S. Department of the Navy Chief Technology Officer (Advisory Board), • Carol. A Haave, former Assistant Secretary for International Affairs at the department for

Homeland Security and the former Deputy Undersecretary of Defence and Counter Intelligence Security (Advisory Board),

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Review of Operations (continued) • Robert Hill, a former Australian Minister for Defence (Advisory Board), • Joanna Riley, the founder and CEO of 1-Page (ASX:1PG) (Advisory Board), and • Lieutenant General Robert Brims, a former Commander of the British Field Army (Advisory

Board). Protecting Boston Marathon In April 2016, DroneShield worked in conjunction with the Boston Police Department to successfully provide drone security for the annual Boston Marathon event, for the second year in a row. New and Upgraded Products In second quarter of 2016, DroneShield commenced shipments of its Onsite Processor product. The product allows for the existing DroneShield system to be used in a closed loop, without a requirement to connect to a data cloud. This benefits users who are unable due to their internal policies or remote locations to connect to a cloud. The product is expected to be particularly relevant in prison, military, and mobile use environments. DroneShield’s engineering team has also released a new version of its core system (v1.5) available through both its cloud and Onsite Processor options. The new system contains increased number of drone signatures including latest popular models, a more intuitive user interface allowing for a simpler set up and calibration, and improved detection algorithms for reduced likelihood of false alarms. Principal Activities The principal activity of the consolidated entity was the development and commercialisation of hardware and software acoustic technology for drone detection. Significant Changes in the State of Affairs Other than discussed in the Review of Operations above, there have been no significant changes in the state of affairs of the consolidated entity during the half-year ended 30 June 2016. Significant Events after the Balance Date The consolidated entity is not aware of any matter or circumstance that has arisen since 30 June 2016 that has significantly affected, or may significantly affect: (a) the consolidated entity’s operations in future financial years, or (b) the results of those operations in future financial years, or (c) the consolidated entity’s state of affairs in future financial years.

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Auditor’s Independence Declaration A copy of the auditor’s independence declaration as required under the Section 307C of the Corporations Act 2001 is set out on page 6. Signed in accordance with a resolution of Directors. James Walker Managing Director Sydney, NSW 30 August 2016

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AUDITOR’S INDEPENDENCE DECLARATION FOR THE HALF-YEAR ENDED 30 JUNE 2016

As lead auditor for the review of the consolidated financial report of DroneShield Limited for the half-year ended 30 June 2016, I declare that, to the best of my knowledge and belief, there have been no contraventions of: (a) the auditor independence requirements of the Corporations Act 2001 in relation to the review;

and (b) any applicable code of professional conduct in relation to the review. This declaration is in respect of DroneShield Limited and the entities it controlled during the period. Sydney, NSW A G Smith 30 August 2016 Director

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CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE HALF-YEAR ENDED 30 JUNE 2016

Note 30 Jun 2016

$ 30 Jun 2015

$ Revenue 4 23,397 68,781 Cost of sales (21,007) (34,011)Product development expense (224,320) (15,910)Sales and customer service expense (43,697) (5,852)Corporate and support expense (1,143,831) (31,500)Corporate governance expense (160,492) - Share based payment expense 3 (870,597) - Depreciation and amortisation (2,058) (311)Other expenses (120) - Profit (loss)before income tax (2,442,725) (18,803) Income tax expense - - Profit (loss)after income tax (2,442,725) (18,803) Other comprehensive income: Items that may be reclassified to profit or loss Adjustments on translation of foreign controlled entity 45,320 427 Total comprehensive income (loss) for the period (2,397,405) (18,376) Basic earnings (loss) per share 8 (0.41) (18,803)Diluted earnings (loss) per share 8 (0.31) (18,803)

The above Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes.

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2016

Note 30 Jun 2016

$ 31 Dec 2015

$ ASSETS Current assets Cash and cash equivalents 5 6,068,595 378,448 Trade and other receivables 2,687 6,285 Inventories 26,596 16,739 Total current assets 6,097,878 401,472 Non-current assets Plant and equipment 6 22,534 13,642 Total non-current assets 22,534 13,642 Total assets 6,120,412 415,114 LIABILITIES Current liabilities Trade and other payables 317,980 87,004 Borrowings 7 175,712 840,511 Provisions 9,188 971 Other payables 112,548 19,682 Total current liabilities 615,428 948,168 Total liabilities 615,428 948,168 Net assets (deficiency) 5,504,984 (533,054) EQUITY Share capital 3,373,416 28,320 Reserves 5,123,882 (11,785) Accumulated losses (2,992,314) (549,589) Total equity (deficiency) 5,504,984 (533,054)

The above Statement of Financial Position should be read in conjunction with the accompanying notes. F

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE HALF-YEAR ENDED 30 JUNE 2016

The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.

Contributed Equity

$

Options reserve

$

Foreign Currency

Translation Reserve

$

Accumulated losses

$

Total Equity

$ Balance at 1 January 2015 78,389 - - (67,085) 11,304 Total comprehensive income for the period - - 427 (18,803) (18,376) Balance at 30 June 2015 78,389 - 427 (85,888) (7,072) Balance at 1 January 2016 28,320 - (11,785) (549,589) (533,054) Conversion of convertible notes and warrants into contributed equity 1,203,174 - - - 1,203,174 Options issued - 5,090,347 - - 5,090,347 Contributions of equity, net of transaction costs 2,141,922 - - - 2,141,922 Total comprehensive income (loss) for the period - - 45,320 (2,442,725) (2,397,405) Balance at 30 June 2016 3,373,416 5,090,347 33,535 (2,992,314) 5,504,984

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CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE HALF-YEAR ENDED 30 JUNE 2016

Note 30 Jun 2016

$ 30 Jun 2015

$ Cash flows from operating activities Receipts from customers 36,794 56,586 Payments to suppliers and employees (1,168,794) (129,930) Net cash flows from (used in) operating activities (1,132,000) (73,344) Cash flows from investing activities Purchase of plant and equipment (9,812) (12,446) Net cash flows from (used in) investing activities (9,812) (12,446) Cash flows from financing activities Proceeds from borrowings - 132,872 Repayment of borrowings (6,173) - Proceeds from share and option issue 7,522,398 - Share issue transaction costs (658,408) - Net cash flows from (used in) financing activities 6,857,817 132,872 Net increase (decrease) in cash and cash equivalents 5,716,005 47,082 Cash and cash equivalents at beginning of period 378,448 37,622 Exchange rate adjustments to balances held in foreign currencies (25,858) (1,925) Cash and cash equivalents at the end of the half-year 6,068,595 82,779

The above Statement of Cash Flows should be read in conjunction with the accompanying notes.

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NOTES TO THE FINANCIAL STATEMENTSFOR THE HALF-YEAR ENDED 30 JUNE 2016

1. CORPORATE INFORMATION

The financial report of DroneShield Limited (“the Company”) and its controlled entities (“the consolidated entity” or “the Group”) for the half-year ended 30 June 2016 was authorised for issue in accordance with a resolution of the directors on 30 August 2016. DroneShield Limited is a company limited by shares incorporated in Australia whose shares are traded on the Australian Securities Exchange (“ASX”). The principal activity of the consolidated entity during the period was the development and commercialisation of hardware and software acoustic technology for drone detection.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The half-year financial report does not include all notes of the type normally included within an annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as a full financial report. It is recommended that the half-year report be considered together with any public announcements made by DroneShield Limited in accordance with the continuous disclosure obligations of the ASX Listing Rules.

(a) Basis of preparation The half-year consolidated financial report is a general-purpose financial report, which has been prepared in accordance with AASB 134 Interim Financial Reporting and the Corporations Act 2001.

(b) Principles of consolidation Subsidiaries are all entities over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Intercompany transactions, balances and unrealised gains on transactions between group companies (if any) are eliminated. Accounting policies of all companies in the group are consistent.

(c) Business Combinations

On 22 June 2016, DroneShield Limited wholly acquired DroneShield LLC and listed on the ASX. The directors consider that the accounting standard applicable to business acquisitions, AASB 3 Business Combinations does not apply in relation to the acquisition of DroneShield LLC by DroneShield Limited as: • DroneShield Ltd did not meet the definition of a business under AASB 3 at the date of

acquisition; and

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NOTES TO THE FINANCIAL STATEMENTS (continued) FOR THE HALF-YEAR ENDED 30 JUNE 2016

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Business Combinations (continued)

• AASB does not apply to a business combination of entities or businesses under common control. A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. The directors consider that the nature of the transaction is such that control of the DroneShield business is with the same group of shareholders both before and after the acquisition of DroneShield LLC by DroneShield Limited.

The directors have therefore considered the best available options under Accounting Standards, including AASB 3 and AASB 2: Share Based Payments, and applied the following principle of consolidation: • The acquisition of DroneShield LLC by DroneShield Ltd is deemed to be a restructure,

and the financial statements are a continuation of the DroneShield LLC company. In relation to the Statement of Profit or Loss and Other Comprehensive Income, expenses incurred by DroneShield Ltd, prior to the acquisition of DroneShield LLC, have been treaded as an expense of the consolidated entity incurred as part of the listing process.

The impact of the above on each of the primary statements is as follows: Consolidated Statement of Financial Position The 30 June 2016 and 31 December 2015 statements of financial position represent both DroneShield Limited and DroneShield LLC. Consolidated Statement of Profit or Loss and Other Comprehensive Income The 30 June 2016 statement of profit or loss and other comprehensive represent 6 months of activities of DroneShield LLC and DroneShield Limited. The 30 June 2015 statement of profit or loss and other comprehensive income represents 6 months of DroneShield LLC activity only as DroneShield Limited was not yet incorporated. Consolidated Statement of Changes in Equity The 30 June 2016 statement of changes in equity comprises of changes in equity for both DroneShield LLC and DroneShield Limited. The 30 June 2015 statement of changes in equity represents changes in equity for the 6-month period of DroneShield LLC only as DroneShield Limited was not yet incorporated. Consolidated Statement of Cash Flows The 30 June 2016 statement of cash flows represents the cash transactions of DroneShield LLC and DroneShield Limited. The 30 June 2015 statement of cash flows represents 6 months of DroneShield LLC cash transactions only as DroneShield Limited was not yet incorporated. F

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Foreign currency translation

The consolidated financial statements are presented in Australian dollars (“AUD”), which is also the functional currency of the consolidated entity. The functional currency of DroneShield LLC is United States dollars (“USD”). Foreign currency transactions are translated into the functional currency 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 the re-measurement of monetary items at year end exchange rates are recognised in profit or loss.

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 charged or credited to other comprehensive income and recognised in the foreign currency translation reserve in equity.

(e) Revenue recognition

Revenue arises from the sale of goods and the rendering of services it is measured by reference to the fair value of consideration received or receivable, excluding sales taxes, rebates, and trade discounts. The consolidated entity enters into sales transactions involving either an outright sale to the client or on a subscription basis. The consolidated entity applies the revenue recognition criteria set out below to each separately identifiable component of the sales transaction in order to reflect the substance of the transaction. Outright sale of goods Outright sale of goods is recognised when the consolidated entity has transferred to the buyer the significant risks and rewards of ownership, generally when the customer has taken undisputed delivery of the goods. Subscription sales The consolidated entity generates revenues from subscription sales which also includes transferring ownership of goods to the customer. The revenue from such transactions is recognised on a monthly basis, with equal amounts for each month recognised over the life of the subscription agreement. Interest and dividend income Interest income and expenses are reported on an accrual basis using the effective interest method.

(f) Income tax The income tax expense (income) for the year comprises current income tax expense (income) and deferred tax expense (income).

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Income tax (continued)

Current tax and deferred tax are recognised as an expense (income) except to the extent that they relate to a business combination or are recognised directly in equity or other comprehensive income. Current tax liabilities (assets) are therefore measured at the amounts expected to be paid to (received from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax assets and deferred tax liability balances during the year as well as unused tax losses. Current and deferred income tax expense (income) is recognised in equity instead of profit or loss when the tax relates to items that are credited or charged directly to equity. 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 liabilities (assets) are calculated at the tax rates that are expected to apply to the period when the liability is settled (asset is realised), and their measurement also reflects the manner in which management expects to settle the carrying amount of the related liability (recover the assets). Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probably that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Deferred tax assets and liabilities are offset only when the consolidated entity has a right and intention to set off current tax assets and liabilities from the same taxation authority.

(g) Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

(h) Trade and other receivables

Trade and other receivables are stated at their cost less an allowance for impairment of receivables. These receivables are unsecured and generally due for settlement within 30 days. Receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default.

(i) Trade and other payables Trade and other payables are liabilities for goods and services provided to the consolidated entity prior to the end of the financial period which are unpaid. These amounts are unsecured and generally payable within 30 days of recognition.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(j) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost includes all expenses directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. Costs of ordinarily interchangeable items are assigned using the average cost method. Net realisable value is the estimated selling price in the ordinary course of business less any applicable selling expenses.

(k) Leases Leases where the lessor retains substantially all of the risks and rewards of ownership of the net asset are classified as operating leases. Payments made under operating leases are recognised as an expense on a straight-line basis over the period of the lease. Associated costs, such as maintenance and insurance, are expenses as incurred.

(l) Employee benefits Wages, salaries and annual leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months are recognised in other payables. Retirement benefits The consolidated entity makes fixed percentage contributions for all Australian resident employees to complying third party superannuation fund and recognises the expenses as they become payable.

(m) Contributed equity Costs directly attributable to the issue of new shares are shown as a deduction from the equity proceeds net of any income tax benefit.

(n) Plant and equipment Plant and equipment (including fittings and furniture) are initially recognised at acquisition cost. Depreciation is recognised on a straight line basis to write down the cost less estimated residual value of plant and equipment. The following useful lives are applied: Office equipment 5 years R&D equipment 5 years Demo equipment 5 years Material residual value estimates and estimates of useful life are updated as required, but at least annually. Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets and are recognised in profit or loss within other income or other expenses.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (o) Earnings per share

Basic earnings per share is computed by dividing net earnings by the weighted average number of ordinary shares outstanding during each period. Preferred shares are considered to be anti-dilutive for the earnings per share calculation. Diluted earnings per share is computed by dividing net earnings adjusted for the share options cost, by the diluted weighted average number of ordinary shares (as if all options have been exercised).

(p) Research and development Research is the original and planned investigation undertaken with the prospect of gaining new knowledge and understanding. Development is the application of research findings to a plan or design for the production of new or substantially improved processes or products prior to the commencement of commercial production. Research costs are expensed as they are incurred. Development expenditure that satisfy the criteria for recognition as an intangible asset is expensed as incurred.

(q) Share-based payments Share based compensation benefits are provided to employees via an employee option plan. Information in relation to this plan is set out in note 3 below. The fair value of options granted is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options granted, which includes any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision or original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

(r) Impairment of assets Assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As impairment loss is recognised for the amount by which the asset’s carrying value exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely dependent of the cash inflows from other assets or other groups of assets (cash generating units). F

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(s) Segment reporting

The directors have considered the requirements of AASB 8 Operating Segments and the internal reports that are reviewed by the Chief Executive Officer in allocating resources and have concluded at this time that there are no separately identifiable segments. The Group operates solely in providing acoustic drone detection technology to customers globally.

(t) Significant accounting judgments, estimates and assumptions In the process of applying the group’s accounting policies, management has not made any significant judgments, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the reporting process.

(u) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for the half-year reporting period. The Group’s assessment of the impact of these new standards and interpretations as they will result in no significant changes to the amounts recognised or matters disclosed in the half-year report. AASB 15 Revenue from Contracts with Customers is not operative until 1st January 2019, and the potential impacts have not yet been determined. The directors anticipate that the impact of AASB 15 will be determined prior to the release of the Company’s financial statements for the year ending 31 December 2016.

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3. OPTIONS ISSUED

During the year, a number of options were issued to directors, management and other employees of the entity as well as to the Company’s corporate advisors and investors who subscribed shares under the Company’s initial public offering. Using the Black Scholes Model, the fair value of each option is as set our below and based on the following criteria/assumptions. Note that the issue date for all options was 22 June 2016.

Class A Options

Class B Options

Class C Options

Class D Options

Class E Options

Class F Options

Class G Options

Class H Options

Other Options

No of options 10,000,000 9,050,000 2,500,000 3,300,000 2,500,000 800,000 2,500,000 800,000 35,000,000

Expiry (years) 3 3 3.75 4 4.75 5 5.75 6 2

Exercise price ($) 0.22 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.22

Vesting period (days) Immediately Immediately 280 1,460 645 730 1,010 1,095 Immediately

Underlying volatility 87.7% 87.7% 87.7% 87.7% 87.7% 87.7% 87.7% 87.7% 87.7%

Risk free interest rate 1.62% 1.58% 1.58% 1.72% 1.72% 1.72% 1.72% 1.72% 1.62%

Calculated fair value of each option ($)

0.1084 0.0942 0.1068 0.1107 0.1208 0.1238 0.1321 0.1346 0.0896

Total expense recorded for the period ended 30 June 2016 ($)

* 852,733 7,628 2,002 3,746 1,086 2,615 787 *

Total expense recorded in the profit or loss for the period ended 30 June 2016 $870,597

* Class A options were issued to the brokers as part of the IPO and included as part of share

transaction costs and treated as a deduction from equity rather than being expensed. Other Options were issued to all shareholders who subscribed for shares under the Initial Public Offering for $nil consideration. Accordingly, the value of these options has been assigned to the option reserve, with a corresponding decrease in contributed equity.

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30 Jun 2016

$ 30 Jun 2015

$ 4. REVENUE

Subscription sales 7,155 -Hardware sales 12,947 65,227Shipping income 3,295 3,554 Total revenue 23,397 68,781

30 Jun 2016

$ 31 Dec 2015

$

5. CASH AND CASH EQUIVALENTS Cash at bank and in hand 3,068,595 378,448Short-term deposits 3,000,000 -

6,068,595 378,448

6. PROPERTY AND EQUIPMENT

R&D equipment

$

Demo equipment

$

Office equipment

$ Total

$

At cost Balance 1 January 2016 12,131 3,179 - 15,310 Additions 7,650 - 3,549 11,199 Balance 30 June 2016 19,781 3,179 3,549 26,509 Accumulated depreciation Balance 1 January 2016 1,270 398 - 1,668 Depreciation 1,560 304 194 2,058 Balance 30 June 2016 2,830 702 194 3,726 Currency Fluctuation (193) (56) - (249) Carrying amount 30 June 2016 16,758 2,421 3,355 22,534

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30 Jun 2016

$ 31 Dec 2015

$

7. BORROWINGS

Convertible note and warrants - 714,655 Other borrowings 175,712 125,856 175,712 840,511

During the year ended 31 December 2015, DroneShield LLC entered into an agreement for an interest-free Senior Secured Convertible Promissory Note for $714,655 (converted into AUD at the 31 December 2015 exchange rate), with Long Hill Capital, LLC, maturing on 29 September 2017. In March 2016, the promissory note was converted into ordinary shares in DroneShield LLC. In addition, warrants on issue at 31 December 2015 held by Long Hill Capital, LLC, were converted into ordinary shares of DroneShield LLC on 31 March 2016 for $548,396. Other borrowings are unsecured.

30 Jun 2016

$ 30 Jun 2015

$ 8. EARNINGS (LOSS) PER SHARE

(a) Basic earnings (loss) per share

Total basic earnings (loss) per share attributable to the ordinary equity holders of the company (0.41) (18,803)

(b) Diluted earnings per share Total diluted earnings (loss) per share attributable to the ordinary equity holders of the company (0.31) (18,803)

(c) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 5,966,852 1 Adjustments for calculating diluted earnings per share:

Options 7,955,802 -

Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 13,922,654 1 F

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8. EARNINGS (LOSS) PER SHARE (continued)

Options and Performance Shares Class A and Other Options (note 3) are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share. All other options (being Class B to Class H options set out in note 3 and Performance Shares set out in note 12) are not included in the calculation of diluted earnings per share because they are considered to be antidilutive for the period ended 30 June 2016. These options could potentially dilute basic earnings per share in future periods.

9. CONTRIBUTED EQUITY

No. of shares (note e)

30 June 2016

$ Balance at beginning of period 1 28,320

Shares issued on conversion of warrants and convertible notes (note d) - 1,203,174

Shares issued during period (note a) 35,000,000 3,864,147

Transaction costs in relation to share issue (note c) - (1,722,225)

Shares issued to the LLC owners (note b) 100,000,000 -

Balance at end of period 135,000,001 3,373,416

Note (a): During the half-year, the Company issued 35,000,000 shares and 35,000,000 options under the Initial Public Offering to raise $7,000,000. In relation to Other Options (note 3) issued under the Initial Public Offering, the value of the options has been assigned to the option reserve (with the value being $3,135,853), with a corresponding decrease in contributed equity. The assumptions used to value these options are set out at note 3.

Note (b): As part of the acquisition of DroneShield LLC by DroneShield Limited, the previous owners of DroneShield LLC transferred their shareholdings in DroneShield LLC to DroneShield Limited in exchange for these parties being issued 100,000,000 shares in DroneShield Limited. In addition, these parties may be issued up to 45,000,000 additional shares in the Company upon the achievement of certain milestones (refer note 12).

Note (c): Included in transaction costs are the value of options issued to the brokers of $1,083,897.

The assumptions used to value these options are set out at note 3.

Note (d): In March 2016, shares in DroneShield LLC were issued on conversation of warrants and convertible notes (note 7).

Note (e): Note, the number of shares disclosed is the number of shares in DroneShield Limited,

while the carrying value of shares ($) discloses the opening share capital of DroneShield LLC on 1 January 2016, adjusted for movements in DroneShield LLC share capital, prior to the Initial Public Offering, and all movements in DroneShield Ltd’s share capital subsequent to the Initial Public Offering.

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10. SEGMENT INFORMATION

The Company operates in only one segment, being development and sales of drone security systems.

11. EVENTS AFTER THE REPORTING DATE

No significant events have occurred after the reporting date.

12. CHANGES IN COMPOSITION OF ENTITY On 22 June 2016, the Company’s securities were listed on the Australian Securities Exchange following the completion of its initial public offering under which it raised $7m through the issuance of 35,000,000 shares together with 35,000,000 attaching listed options at $0.20 per share/option. A further 100,000,000 shares were issued to the members of DroneShield LLC in consideration for their interests in that business and DroneShield LLC became a wholly owned subsidiary of the Company.

Existing shareholders of DroneShield LLC were also granted 45,000,000 Performance Shares with vesting conditions summarised in the IPO Prospectus. A summary of the current capital structure of the Company is set out in the table below:

Shareholders Shares Performance

Shares1 Listed DROO

options2 Unlisted Options3

Existing Shareholders 100,000,001 45,000,000 - - IPO Shareholders 35,000,000 - 35,000,000 - Options issued to Directors, Management and Advisory Board - - - 21,450,000 Broker Options - - - 10,000,000

Total 135,000,001 45,000,000 35,000,000 31,450,000

1 Performance Shares: • Tranche 1 of 15 million performance shares will vest upon the Company achieving a 30-day volume

weighted average price (VWAP) exceeding $0.30 and securing twenty (20) individual installations of the DroneShield technology and infrastructure by paying customers within 24 months of the listing date.

• Tranche 2 of 15 million performance shares will vest upon the achievement of $7 million of cumulative revenue or $2.5 million of annual revenue in any given twelve-month period within 36 months of the listing date.

• Tranche 3 of 15 million performance shares will vest upon the achievement of $3 million of cumulative earnings before interest and taxes (EBIT) or $1 million of annual EBIT in any given financial year, within 36 months of the listing date.

• The Revenue and EBIT targets are in relation to the DroneShield System (the acoustic drone detection system).

2 Listed DROO Options: Exercisable at 22 cents on or before 22 Jun 2018. 3 Unlisted Options: • 19,700,000 Unlisted Options issued to Directors and Management are exercisable at 30 cents each

with various expiry dates ranging between 22 June 2019 and 22 June 2022. These Options are subject to various escrow and vesting conditions relating to length of employment with the Company. See note 3 for further details.

• 1,750,000 Unlisted Options issued to the Company’s Advisory Committee are exercisable at 30 cents each on or before 22 June 2019. These options have fully vested and are not subject to any escrow restrictions.

• 10,000,000 Unlisted Options issued to the Broker of the IPO are exercisable at 22 cents on or before 22 June 2019, and are subject to escrow restrictions until 22 June 2018.

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13. CAPITAL STRUCTURE AND ESCROW PERIODS

Security Escrowed Vesting Conditions Number

Fully Paid Ordinary Shares

- - 35,000,000

22-Jun-18 - 100,000,001

DROO Listed Options ($0.22, 14 June 2018) - - 35,000,000

Class A Unlisted Options ($0.22, 14 June 2019) 22-Jun-18 - 10,000,000

Class B Unlisted Option ($0.30, 14 June 2019)

- - 1,750,000

22-Jun-18 - 7,300,000

Class C Unlisted Option ($0.30, 29 March 2020) 22-Jun-18 Continuous employment to 29

Mar 2017 2,500,000

Class D Unlisted Options ($0.30, 22 June 2020) 22-Jun-18 Continuous employment for 12

months from IPO 3,300,000

Class E Unlisted Options ($0.30, 29 March 2021) 22-Jun-18 Continuous employment to 29

Mar 2018 2,500,000

Class F Unlisted Options ($0.30, 22 June 2021) 22-Jun-18 Continuous employment for 24

months from IPO 800,000

Class G Unlisted Options ($0.30, 29 March 2022) 22-Jun-18 Continuous employment to 29

Mar 2019 2,500,000

Class H Unlisted Options ($0.30, 22 June 2022) 22-Jun-18 Continuous employment for 36

months from IPO 800,000

Class A Performance Shares 22-Jun-18 30 day VWAP >$0.30 + 20 paid system installations w/in 24 months IPO

15,000,000

Class B Performance Shares 22-Jun-18 Revenue: $2.5M in any 12 month period or $7M cumulative w/in 36 months of IPO

15,000,000

Class C Performance Shares 22-Jun-18 EBIT: $1M annual (financial year) or $3M cumulative w/in 36 months of IPO

15,000,000

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DroneShield Limited

ACN 608 915 859

24

DIRECTORS’ DECLARATION FOR THE HALF-YEAR ENDED 30 JUNE 2016

In accordance with a resolution of the directors of DroneShield Limited, I state that: In the opinion of the directors: (a) the financial statements and notes are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and of its performance for the half-year ended on that date; and

(ii) complying with Australian Accounting Standards (including AASB 134 Interim Financial

Reporting) and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and

when they become due and payable. On behalf of the Board James Walker Director Sydney, NSW 30 August 2016

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INDEPENDENT AUDITOR’S REVIEW REPORT FOR THE HALF-YEAR ENDED 30 JUNE 2016

To the members of DroneShield Limited:

We have reviewed the accompanying half-year financial report of DroneShield Limited (“the company”) which comprises the statement of financial position as at 30 June 2016, the statement of profit or loss and other comprehensive income, the statement of changes in equity and the statement of cash flows for the half-year ended on that date, notes comprising a summary of significant accounting policies and other explanatory notes, and the directors’ declaration, for the consolidated entity comprising the company and the entities it controlled at the half-year end or from time to time during the half-year.

Directors’ Responsibility for the Half-Year Financial Report

The directors of the company are responsible for the preparation of the half-year 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 half-year financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001. As the auditor of the company, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001.

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INDEPENDENT AUDITOR’S REPORT (continued) FOR THE HALF-YEAR ENDED 30 JUNE 2016

Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of DroneShield Limited is not in accordance with the Corporations Act 2001 including:

(a) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and of its performance for the half-year ended on that date; and

(b) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

HLB Mann Judd Assurance (NSW) Pty Ltd A G Smith Chartered Accountants Director Sydney, NSW 30 August 2016

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appendix 4d half-year report · appendix 4d half-year report droneshield limited ... revenue...

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