DIGITALX LIMITED D IG IT A L C C L IM IT E D
A ND CO NT RO L L E D E NT I T I E S
CO NT E NT S
A B N 59 0 09 575 035
Page
CORPORATE DIRECTORY 1
LETTER FROM THE CHAIRMAN 2
LETTER FROM THE CEO 4
CORPORATE GOVERNANCE STATEMENT 6
DIRECTORS' REPORT 15
AUDITOR'S INDEPENDENCE DECLARATION 31
INDEPENDENT AUDITOR'S REPORT 32
DIRECTORS' DECLARATION 34
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 35
CONSOLIDATED STATEMENT OF FINANCIAL POSITION 36
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 37
CONSOLIDATED STATEMENT OF CASH FLOWS 38
NOTES TO THE FINANCIAL STATEMENTS 39
AUSTRALIAN SECURITIES EXCHANGE INFORMATION 72
D IG IT A L C C L IM IT E D
A ND CO NT RO L L E D E NT I T I E S
CO RP O RA T E DI R E C T O RY
A B N 59 0 09 575 035
Eugeni 'Zhenya' Tsvetnenko
Executive Chairman
Alex Karis
Managing Director Chief Executive Officer
William Brindise Executive Director Chief Trading Officer
Brett Mitchell
Non-Executive Director (appointed 5 September 2014)
Adeniyi 'Emmanuel' Olalekan Abiodun
Non-Executive Director (resigned 5 September 2014)
Brett Lawrence
Non-Executive Director (resigned 5 September 2014)
Rachel Kerr
59 009 575 035
Level 7, 1008 Hay Street
Perth WA 6000
Tel: +61(8) 9389 2000
Fax: +61(8) 9389 2099
Deloitte Touche Tohmatsu Woodside Plaza
Level 14, 240 St Georges Terrace
Perth WA 6000
Tel: (08) 9365 7000
Fax (08) 9365 7001
Digital CC Limited shares are listed on the Australian Securities Exchange.
ASX Code: DCC
Computershare Investor Services Pty Limited Level 11
172 St Georges Terrace Perth WA 6000
Enquiries (within Australia) 1300 850 505
(outside Australia) 61 3 9415 4000 www.investorcentre.com/contact
Website www.digitalbtc.com
Dear Shareholder,
On behalf of the board of Digital CC Limited I am pleased to provide this year's Annual Report for the year ended 30 June 2015.
This year represents our first full year as a publically listed business. It has been a transformational year for the Company as we made a strategic shift in our business toward the development of an innovative fintech product AirPocket, focused on the growing global remittance market.
AirPocket, is disrupting the remittance market with the innovative use of the blockchain technology, which is frequently being recognised within the financial payments sector as a secure and transparent system to facilitate and lodge transactions. AirPocket is aimed at offering consumers the ability to securely and cost- effectively send remittances in any currency, from anywhere around the world, anytime, regardless of the transaction size.
Amidst a challenging landscape in the Bitcoin market, Bitcoin liquidity operations continued to perform strongly during the year with digitalX Direct generating US$29.4 million of total revenue.
Total revenues for the period more than tripled on an annualised basis to US$36.6 million driven by an increased demand from retail investors for Bitcoin liquidity provided by the digitalX Direct product.
The Company recorded a net loss after tax of US$6.8 million, impacted a combination of the fair value adjustment to the value of bitcoins held and traded over the period (US$3.1m), depreciation of mining hardware (US$3.6m) as well as a write down of the investment in the Mintsy Joint Venture (US$1.1m).
This year marks a transformation in the Company's operations as we commenced the development of our innovative new remittance product AirPocket.
We have made substantial progress during the year having reached a number of key milestones in the development of the AirPocket app. We have signed a Memorandum of Understanding to establish a Joint Venture Company with American based partners to facilitate the distribution and roll out of the app through the U.S., Latin America and the Caribbean.
During the second half of this financial year we commenced internal beta testing of the application and post the period the first phase of security testing with an independent technology security firm was successfully completed. The second phase of testing was completed in September and the application has now launched in public beta as at the end of September 2015.
The remittance market represents a significant opportunity for the Company. In 2014 global remittance revenue totalled US$550 billion and this is estimated to grow to reach $610 billion by the end of 2016. (Source: World Bank)
Coupled with the growing mobile payments market, which reached volumes of US$325 billion in 2014 and is expected to reach US$721.4 billion by 2017, AirPocket is well positioned to gain a substantial share of two growing markets.
It is also becoming more evident that the Blockchain technology is now being recognised by leading financial institutions as having the potential to revolutionise the current global financial services and payments industry.
In May 2015 the Company successfully raised $3.5 million through an equity placement at 22 cents per share. As such, we remain well funded and strategically positioned to drive AirPocket's marketing and sales activities as we accelerate our path to market and build the presence of AirPocket.
In August 2015 we secured money transmitter services in the U.S., through a landmark agreement with CoinX, significantly accelerating the launch and commercialisation of AirPocket. We will continue to establish partnerships with remittance providers in other markets as we look to launch AirPocket into new markets and new remittance corridors. The technology behind the product is of key importance and this year we will focus on continually improving the technology and infrastructure behind AirPocket.
As the remittance market continues to grow with expected globally revenues of $610 billion in 2016, Digital CC is well positioned and well funded to drive penetration into this market in 2016. It is important to us that we can play a major role in aiding third world countries by providing affordable, secure and accessible money transfer services.
I would like to thank the management team and staff for all their hard work during the year and for reaching so many milestones within a short and limited timeframe. I would also like to thank each of our shareholders for their support and loyalty and I look forward to providing further updates on the business as we step into this next phase of development and growth.
Yours Sincerely
Zhenya Tsvetnenko Executive Chairman
Dear Fellow Shareholders,
This has been an exciting year for Digital CC as we began to leverage our digital currency expertise within the remittance sector and diversify our operations. During 2015, blockchain technology began to emerge as a viable option for use in digital payment systems, creating a pivotal moment for the use of blockchain outside the digital currency market. A blockchain is a globally distributed ledger that records digital currency transactions and provides an indisputable audit trail for all transactions on the blockchain. The technology's potential uses are limitless and could be used to record all kinds of information. For example, financial companies are exploring blockchain solutions to improve digital security and transparency, enhanced recordkeeping and reduced transaction costs.
Over the past year, digital currency continues to gain traction and global acceptance as a viable means of moving value online. In May 2015, New York became the first state to offer a BitLicense. In September, the Commodity Future Commission announced as part of a settlement that Bitcoins are a commodity and subject to the authority's regulations. While the enacted legislation may initially hamper the growth of digital currency, it is a sign that this new digital asset class is proving its relevance in the marketplace.
The highlight of 2015 is Digital CC's evolution into developing products utilising blockchain technology. With Digital CC's experience and in depth knowledge of digital currency and its underlying blockchain technology, we are poised to become a fintech software development and digital payments leader.
At Digital CC, we are focusing our efforts in the global remittance industry, which is ripe with opportunity to make improvements to the existing payment system. Global remittance options currently available in the market are a slow and laborious process, taking days to settle and with each transaction requiring physical receipt and what's more they're costly to the customer.
Looking to be the first to market, Digital CC began development of AirPocket, which is a disruptive global remittance product. AirPocket will provide users the ability to remit funds, initially from the U.S. to Latin America easily, quickly and most importantly, securely. Settlement is instantaneous and the cost is a fraction of today's remittance fees. We aim to complete development and testing by end of 2015 and begin marketing the product by April 2016. What sets AirPocket apart from our competitors and existing remittance products is our ability to offer a higher margin product at lower rates to customers while utilising the blockchain for circulating currencies.
This transition into the remittance market became even brighter when in August, we announced our relationship with CoinX, a US based fintech company specialising in domestic and international payment processing and transfer services. We signed a two year agreement with CoinX to provide AirPocket access to money transmitter services in up to forty US states. The agreement gives Digital CC the ability to leverage an already established and licensed banking relationship and reduces AirPocket's path to market by up to two years.
I am proud of the progress Digital CC has made during 2015 in its digital currency operations. We ended the year with US$36M in trading and mining revenue, a 900% increase over 2014, and launched our digitalX Direct private liquidity platform product which provides online real time liquidity to institutional investors and large commercial operators. digitalX Direct's dynamic pricing protocol maximises Digital CC's inventory of digital currencies by creating a reliable supply to its customers. In other words, our technology ensures our supply of digital currency is based on the demand for the digital currency.
As we are in process of transitioning our efforts from mining to software development, Digital CC ended the year with a US$6.8M loss. The loss was mainly attributed to the US$3.1M devaluation of the Bitcoin price, US$3.6M depreciation of mining hardware and the US$1.1M write down of the Mintsy Joint Venture. Digital CC earned revenue from trading activities for the first time in 2015 and revenue from mining activities grew by 62% compared to the prior year. However, growth in trading and mining activities were more than offset by the declining Bitcoin value, which decreased by 59% during the year.
The changing landscape of the digital currency ecosystem remains uncertain. However, my vision at Digital CC is to remain at the forefront of development opportunities related to blockchain technology and as we enter 2016 we are focused on completing the development of AirPocket and bringing the product to market. We began with the public beta launch at the end of Q3 2015 where we will continue to refine and improve the application and its technology ahead of a wider launch.
I truly appreciate your trust and interest in Digital CC's efforts. Your continued confidence and involvement is essential in our success in the digital currency and remittance industry.
Sincerely,
Alex Karis
Managing Director and CEO
Introduction
The ASX Listing Rule 4.10.3 requires listed companies to disclose in their Annual Report the extent to which they have complied with the ASX Best Practice Recommendations of the ASX Corporate Governance Council during the reporting period. It is structured along the same lines as the March 2014 ASX Corporate Governance Principles and Recommendations (3rd Edition), with sections dealing in turn with each of the Council's 8 corporate governance principles. All these practices, unless otherwise stated, were in place for the entire year.
Digital CC Limited (the 'Company') and the Board are committed to achieving and demonstrating the highest standards of corporate governance. The Board is committed to administering the policies and procedures with openness and integrity, pursuing the true spirit of corporate governance commensurate with the Company's needs. The Board continues to review the framework and practices to ensure they meet the interests of shareholders, with reference to Amendments to the Corporate Governance Principles.
The Company's main corporate governance policies and practices as of the date of this Annual Report are outlined below. The Company's full Corporate Governance Plan, including the various codes, policies and charters referred to in this statement, is available in a dedicated corporate governance information section of the Company website www.digitalbtc.com.
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Lay solid foundations for management and oversight (Recommendation 1.1, 1.2, 1.3)
The ASX Corporate Governance Council states that a company should, 'Recognise and publish the respective roles and responsibilities of board and management.' In light of the Company's size and nature, the Board considers that the current board is a cost effective and practical method of directing and managing the Company. As the Company'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.
Specifically the Board is responsible for:
Oversight of the Company, including its control and accountability systems;
Appointing, monitoring, managing the performance of, and if necessary terminating (the employment of) the Chief Executive Officer, Chief Financial Officer, Chief Trading Officer, Chief Technical Officer and the Company Secretary;
Input, assessment, appraisal and final approval of management's development of corporate strategy and performance objectives;
Reviewing and ratifying systems of risk management and internal compliance and control, codes of conduct, and legal compliance;
Monitoring executives' performance and implementation of strategy, and ensuring appropriate resources are available to undertake those strategies;
Approving and monitoring the progress of major capital expenditure, capital management, and acquisitions and divestitures;
Approving and monitoring financial and other reporting (including audit matters);
Recruitment, remuneration, performance review and succession plans for the Company board;
Approving significant changes to the organisational structure;
Approving the issue of any shares, options, equity instruments or other securities in the Company, including a Company Share Purchase Plan (if any);
Ensuring a high standard of corporate governance practice, regulatory compliance and promoting ethical and responsible decision making, including maintaining a Corporate Code of Conduct;
Recommending to shareholders the appointment or re-appointment of the external auditor as required; and
Meeting with the external auditor, at their request, without management.
The Board delegated responsibilities and authorities to management to enable management to conduct the Company's day to day activities. Matters which exceed certain defined authority limits require board approval. The functions reserved to the Board and those delegated to executives is disclosed in the Board Charter which can be found in the Corporate Governance section on the Company website.
The Company will ensure that appropriate checks as to character, experience, education, are undertaken before it appoints a person, or puts forward to security holders a new candidate for election, as a director.
The Company ensures that an agreement is in place for each Director and senior executive of the Company, which set out the roles and responsibilities of each director or executive.
Company Secretary Accountability (Recommendation 1.4)
The Company Secretary is accountable to the Board on all governance matters, through the Chairman. The role of the Company Secretary includes:
When requested by the Board, the Company Secretary will facilitate the flow of information between the Board and its Committees and between executives of the Company and Non-Executive Directors.
There will be a formal induction of each new Director; the Company Secretary is responsible for facilitating each induction.
The Company Secretary is to facilitate the implementation of Board policies and procedures and monitor the adherence by the Board to them.
The Company Secretary is to provide advice to the Board on corporate governance matters and law.
The Company Secretary shall in consultation with the Chairman set and maintain a 12 month rolling timetable for Board Meetings.
The Company Secretary is entitled to attend any meeting of Directors and is entitled to be heard of any matter dealt with at any of the meetings of Directors. All Directors have access to the advice and services provided by the Company Secretary. The appointment and removal of the Company Secretary is a matter for decision by the Board as a whole.
Diversity Policy (Recommendation 1.5)
The Board has adopted a diversity policy which provides a framework for the Company to achieve, amongst other things, a diverse and skilled workforce, a workplace culture characterised by inclusive practices and behaviours for the benefit of all staff, improved employment and career development opportunities for women and a work environment that values and utilises the contributions of employees with diverse backgrounds, experiences and perspectives. With the numerous changes involved with the acquisition of Digital CC, the Board recognizes the need to diversify the Company at all levels, and is committed to achieving an increase in the diversity of gender, age, disability, ethnicity, marital or family status, religious or cultural background, sexual orientation and gender identity. The Board will report on progress in achieving the Company's diversity goals annually.
Due to the numerous changes to the Board and Company associated with the transition to Digital CC, as well as the size of the entity, the Board has decided not to disclose any measurable diversity objectives at this time. However, as the Company grows, the Board will remain committed to increasing diversity across all levels of the Company.
DCC
Female
Male
Board
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4
Executives
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1
Group
6
5
The Board considers the Group's executives to consist of the Company's key management personnel.
The Company is not a 'relevant employer' under the Workplace Gender Equality Act, as it is not a non-public sector employer with 100 or more employees in Australia.
Performance Evaluation (Recommendation 1.6, 1.7)
As disclosed in the Nomination Committee section of this Corporate Governance Statement, the Board decided that the Company will not have a separate Nomination Committee until such time as the Board is of a sufficient size and structure, and the Company's operations are of a sufficient magnitude for a separate committee to be of benefit to the Company. In the meantime, the full Board will carry out the duties that would ordinarily be assigned to that committee under the written terms of reference for that committee. A full summary of these responsibilities is available on the Company website contained in the Nomination Committee Revision section. The Board anticipates the formation of a separate Nomination Committee within the next twelve months.
Due to the size of the Board and the nature of its business, it has not been deemed necessary to institute a formal documented performance review program of individuals. The Chairman conducts an informal review annually whereby he has discussed with individual directors and executives their attitude, performance and approach toward meeting the short and long term objectives of the Company. The Board considers that at this stage of the Company's development an informal process is appropriate.
At such a time when the Nomination Committee has been formed separately from the Board, the committee will arrange a performance evaluation of the Board, its Committees and its individual Directors on an annual basis. To assist in this process an independent advisor may be used.
When formed, the Nomination Committee will conduct an annual review of the role of the Board, assess the performance of the Board over the previous 12 months and examine ways of assisting the Board in performing its duties more effectively. The review will include:
comparing the performance of the Board with the requirements of its Charter;
examination of the Board's interaction with management;
the nature of information provided to the Board by management; and
management's performance in assisting the Board to meet its objectives.
A similar review will be conducted for each Committee by the Board with the aim of assessing the performance of each Committee and identifying areas where improvements can be made.
Due to the numerous changes of the Board and the Company, an evaluation of the Board in accordance with the process detailed above has not been undertaken in the past financial year.
The Board will oversee the performance evaluation of the executive team. This evaluation is based on specific criteria, including the business performance of the Company and its subsidiaries, whether strategic objectives are being achieved and the development of management and personnel.
The Board as a whole conducts an informal performance evaluation of the individual Directors (excluding that Director) on an annual basis. To assist in this process an independent advisor may be used. This process for evaluating the Board and its individual Directors is contained in the Disclosure - Performance Evaluation section on the Company website.
Due to the numerous changes of the Board and the Company, an evaluation of executives in accordance with the process detailed above has not been undertaken in the past financial year.
- Structure the Board to add Value
The ASX Corporate Governance Council states that a company should, 'have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.' Digital CC's Board is so structured, and its Directors have adequately discharged their responsibilities and duties for the benefit of shareholders.
A fundamental requirement for the Digital CC Board is a deep understanding of investment, managing businesses and financial markets. All board members throughout the year met this requirement, and brought a diverse range of skills, and backgrounds to the Board. The experience and qualifications of each board member and their terms of office are set out in the Directors' Report.
Digital CC Directors may seek external professional advice at the expense of the Company on matters relating to their role as Directors of Digital CC. However, they must first request approval from the Chairman, which must not reasonably be withheld. If withheld then it becomes a matter for the whole Board.
Directors must keep the Board advised, on an ongoing basis, of any interests which could potentially conflict with any of those of the Company. Where the Board believes that a significant conflict exists for a Director on a board matter, the Director concerned is not present at the meeting while the matter is being considered.
Nomination Committee (Recommendation 2.1, 2.2)
During the current financial year, the Board decided that the Company will not have a separate Nomination Committee until such time as the Board is of a sufficient size and structure, and the Company's operations are of a sufficient magnitude for a separate committee to be of benefit to the Company. In the meantime, the full Board will carry out the duties that would ordinarily be assigned to that committee under the written terms of reference for that committee. A full summary of these responsibilities is available on the Company website contained in the Nomination Committee Revision section.
In the next twelve months, the Board anticipates the formation of a Nomination Committee separate from the Board, comprised of at least three Non-Executive Directors, the majority of whom shall be independent, one of whom will be appointed the Committee Chairman (it is preferable that the Chairman of the Board of Directors does not chair this committee). At such a time when a Nomination Committee is formed, the Board shall be able to appoint additional Non-Executive Directors to the Committee or remove and replace members of the Committee by resolution.
The primary purpose of the Nomination Committee will be to support and advise the Board on:
maintaining a board that has an appropriate mix of skills and experience to be an effective decision- making body; and
ensuring that the Board is comprised of Directors who contribute to the successful management of the Company and discharge their duties having regard to the law and the highest standards of corporate governance.
When a new Director is to be appointed, the Board will review the range of skills, experience and expertise on the Board, identify its needs and prepare a short-list of candidates with appropriate skills and experience. Where necessary, advice will be sought from independent consultants. The Board then may appoint the most suitable candidate who must stand for election at the next annual general meeting of the Company.
Digital CC has in place a process to educate new Directors about every aspect of its business. New Directors meet with management to gain a thorough understanding of the business, including background information vital to the business, corporate strategy, security policies and procedures, review of the competitive landscape, corporate opportunities (products and services) and the culture and values of the Company. In addition, Directors are educated regarding meeting arrangements, interaction among board members and expectations concerning their performance. Directors are also encouraged to visit corporate facilities to gain a deeper understanding of business operations.
Retirement and rotation of Directors shall be governed by the Corporations Act 2001 and the Constitution of the Company. Each year one third of the Directors must retire and offer themselves for re-election.
Independence and the Chairperson (Recommendations 2.3, 2.4 and 2.5)
ASX Corporate Governance Recommendation 2.4 states that a majority of Directors of a listed entity should be independent Directors. (An independent Director is one who is independent of management and free from any business or other relationship, which could, or could reasonably be perceived to materially interfere with, the exercise of their unfettered and independent judgement. Independent Directors should meet the definition of what constitutes independence as set out in the Australian Stock Exchange Limited (ASX) Corporate Governance Guidelines as explained in Annexure A). Materiality for these purposes is determined on both quantitative and qualitative bases. An amount of over 5% of annual turnover of the Company or 5% of the individual directors' net worth is considered material for these purposes. In addition, a transaction of any amount or a relationship is deemed material if knowledge of it may impact the shareholders' understanding of the Director's performance.
Due to the size of the business, as well as an overhaul of the Board and Directors, the current Board of Digital CC has only one Independent Director.
The Directors consider that the current structure of the Board is appropriate. The Board is committed to considering the structure of the Board at regular intervals to determine what is appropriate for the Company at that time, and the Board remains committed to fulfilling ASX Recommendation 2.4 in the near future. The Board holds a similar approach to ASX Recommendation 2.3, which requires the Board to disclose the names, interests, and length of service of any Directors that the Board considers to be independent. At such a time when the Board appoints an Independent Director, the Company shall disclose the necessary information, and
those Directors who are considered to be independent shall complete a checklist to document their independence.
In compliance with ASX Recommendation 2.5, the Chairman of the Board is not the same person as the CEO of the Company. Mr Alex Karis is the Managing Director and CEO of the Company. Mr Zhenya Tsvetnenko is the Executive Chairman. However, Mr Tsvetnenko is also a substantial holder of the Company and is not considered to be independent, as Recommendation 2.5 requires in order to be fulfilled entirely. As stated above, due to the new business acquired by the Company, the Directors consider that the current structure of the Board is appropriate. To this end, the Company considers that the appointment of Mr Tsvetnenko as Executive Chairman to the Company is appropriate, given the skills and expertise of Mr Tsvetnenko and his importance to the ongoing development and growth of the business of the Company.
The length of service of each director is as follows:
Director | Title | Appointment Date | Length of Service |
Zhenya Tsvetnenko | Executive Chairman | 5 June 2014 | 1 year and 3 months |
Alexander Karis | CEO/Managing Director | 5 June 2014 | 1 year and 3 months |
William Brindise | Executive Director and Chief Trading Officer | 5 June 2014 | 1 year and 3 months |
Brett Mitchell | Non-Executive Director | 5 September 2014 | 1 year |
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Promote ethical and responsible decision making
The ASX Corporate Governance Council states that a company should, 'actively promote ethical and responsible decision making'. The Company has a formally adopted Code of Conduct. The Code of Conduct was based on respect for the law and acting accordingly, dealing with conflicts of interest appropriately, and ethical matters such as acting with integrity, exercising due care and diligence in fulfilling duties, acting in the best interests of the Company and respecting the confidentiality of all confidential information.
Digital CC also has a documented Share Trading Policy for Directors and employees. The policy prohibits short term trading in the Company's securities, and Directors and employees are prohibited from dealing in the Company's securities whilst in possession of price sensitive information. In addition, Directors and executives are at all times prohibited from dealing in DCC securities for:
each period of 1 week before and one business day after each date upon which DCC gives to the ASX its quarterly, half yearly or annual report.
two weeks before lodgement and during the period that a disclosure document including a prospectus is open for applications, except to the extent that a Director or employee is applying for securities pursuant to that disclosure document.
All employees must observe the Company's Share Trading Policy. In conjunction with the legal prohibition on dealing in the Company's securities when in possession of unpublished price sensitive information, the Company has established specific time periods when Directors, executives and employees are permitted to buy and sell the Company's securities.
The Code of Conduct and Share Trading Policy are available on the Company website.
- Safeguard integrity in financial reporting
The ASX Corporate Governance Council states that a company should, 'have a structure to independently verify and safeguard the integrity of the Company's financial reporting.' Digital CC believes that it has appropriate measures in place which includes the Managing Director (or Chairman in lieu of the position being vacated), Company Secretary and Chief Financial Officer providing letters of assurance to the Board for the accounts, engagement of an external auditor, rotation of the engagement audit partner, and a risk management plan in place.
Audit and Risk Committee (Recommendation 4.1)
The Company is not one of the S&P All Ordinaries Top 300 Companies and as such is exempt under ASX Listing Rule 12.7 from maintaining an Audit Committee and thus compliance with Recommendation 4.1.
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