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Covata Limited (CVT)

July 2015

Independent Investment Research

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ContentsCovert Data - Securing the Cloud ............................................................ 1

Key Points ............................................................................................... 1

Overview ................................................................................................. 2

CVT’s Product Offering ............................................................................ 3

Key Demand Drivers .............................................................................. 5

A New Paradigm? ................................................................................... 5

Competitive Environment ....................................................................... 6

Commercialisation Strategy .................................................................... 6

CVT’s Business Model ............................................................................ 8

Board & Management ............................................................................. 8

Investment Case ..................................................................................... 9

Risks ....................................................................................................... 9

Appendix A – Ratings Process ............................................................. 10

Appendix B – Managed Investments Coverage ....................................11

1Independent Investment Research

Rating

Rec

omme

nded

Not

S

peculative

Investment Grade

Recommended

Recommended

Highly

Key Investment InformationShare price as at 3 June 2015 $0.40Issue CapitalOrdinary Shares (M) 382.6Options (M) 78.0Performance Shares 38.2Fully Diluted (M) 498.9Market Capitalisation (M) (Basic) 153.012 month L/H ($) 0.01-0.68

Board and Management

DirectorsTrent Telford: Executive Director and CEO

Charles Archer: Executive Chairman

Phillip Dunkelberger: Non Executive Director

Joseph Miller: Non Executive Director

Phillip King: Non Executive Director

Michael Quinert: Non Executive Director

Key Management:

Trent Telford: CEO

Nick Chiarelli: CFO

Jim Taneyhill, CRO

Major Shareholders % InterestTPG Telecom Ltd 15.3%Raven Capital Nominees 5.6%Gaffwick Pty Ltd 5.3%Ilwella Pty Ltd 5.3%Europlay Capital Advisors LLC 3.0%Brispot Nominees Pty Ltd 2.8%UBS Nominees Pty Ltd 2.6%

Total 39.9%


COVERT DATA - SECURING THE CLOUDCVT offers a strong investment proposition. Its technology addresses a universally accepted weakness in the traditional paradigm of network security. Competitively it is in a strong position, with a unique and patented technology and potentially a first mover advantage should comparable solutions be developed. CVT has laid a strong foundation to its go-to-market strategy that it announced in November 2014, with a number of significant contract wins, including Cisco and Deutsche Telekom subsidiary T-Systems. Both show the company can secure contracts with industry heavy weights and, on the surface of it, augurs well for future wins. With a predominantly fixed cost business model, incremental net sales will largely hit the operating profit line. Nevertheless, CVT is a high risk, potentially high return investment proposition given it remains in the early stages of its commercialisation strategy. While the company has secured a number of impressive contract wins over the last six months, there is significant uncertainty regarding end user take up rates and perhaps the degree to which its channel partners will actively market the product. Greater clarity regarding customer adoption rates will become evident over the next 12 to 18 months through its T-Systems contract in particular. Until we get some clarity regarding adoption rates, investors should accept that the stock may exhibit a high degree of volatility. Further contract wins will clearly exert a positive re-rating influence, but the degree is also uncertain.

KEY POINTSStrong Product Offering – the CVT technology provides an effective solution to what is generally regarded as a failed security paradigm, namely the traditional reliance upon network perimeter security. CVT’s technology is complementary to network perimeter security and, in combination or as a standalone security product, can create an effective security solution for data/files identified as sensitive.

Attractive Target Market – CVT’s target market, specifically security solutions for cloud-based and on-premise networks, is substantial. There is strong demand from enterprise customers and service providers alike for security solutions that are secure, efficient, easy to implement, and affordable.

Unique Technology – CVT’s technology is a data-centric solution where security and access controls apply to the actual file/data itself. This contrasts with the traditional paradigm of securing data at the network perimeter level, an approach that has largely failed. CVT’s patented approach combines the three pillars of security: identity, policy, and key management.

Proven Technology – the CVT technology and its commercialised product, ‘Safe Share’, is technically complete, patent protected and there is the potential to continue to leverage the technology to develop further solutions to meet evolving market needs.

Competitive Strengths – CVT has a number of important competitive advantages, including a unique, patent protected technology, a first mover advantage, and commercial and technical credibility. Furthermore, due to potential ramifications of the US Patriot Act, being a non-US domiciled company may provide a strong competitive advantage outside the US market.

Positive Contract Momentum – Since announcing its go-to-market strategy in November 2014 CVT has in a short space of time laid a strong foundation. Significant contract wins include Cisco and German telecommunications company T-Systems, globally the eighth largest telecommunications company by market capitalisation. These wins validate the company’s commercialization strategy.

Attractive Business Model – the CVT solution will be sold by its channel partners as an integral part of a broader cloud service offering and the pricing model will be based on a recurring per seat, per month structure. The model creates a recurring revenue stream for what is a ‘sticky’ service, limiting revenue uncertainty / volatility. Additionally, as a predominantly fixed operating cost business model incremental net sales should largely drop through to the operating profit line, equating to high operating margins.

The investment opinion in this report is current as at the date of publication. Investors and advisers should be aware that over time the circumstances of the issuer and/or product may change which may affect our investment opinion.

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Key Risks – In IIR’s view, customer penetration rates is the key uncertainty at this point in time. As we noted above, visibility on this front should become gradually evident over the next 12 to 18 months, particularly through its T-Systems contract. The number and timing of further contract wins is also an unknown, although CVT’s track-record over the past 6 months augurs well. CVT is reliant on resellers to generate its sales. With these relationships currently largely untested there can be no guarantee that resellers will actively promote or continue to preference CVT’s product over its competitors. More generally, the technology market is a rapidly evolving one. The risk of any technology being superceded is not insignificant, CVT’s included.

Investment View – IIR has issued a Recommended rating for CVT. In our view, CVT provides a strong technology offering that has the ability to partly address what is widely seen as a failed security model. It has this potential in a high growth market (cloud security) and where there is a pressing need for an effective security solution. Further, CVT is in a strong competitive position, with a unique, patented technology and a potentially important first mover advantage, amongst other advantages. Its success in securing contract wins since announcing its go-to-market strategy in November 2014 has been impressive and augurs well for further such wins. However, the risks, as outlined above, are significant, as is generally the case with technology companies in the early stages of commercialisation. Investors should carefully consider their risk appetite and the potential allocation to an overall portfolio.

OVERVIEWCocoon Data was founded in Australia in 2007 to develop a new approach to data protection. Since that time the company has invested $30 million to develop an enterprise specific solution that performs encryption at the data source and enables the separation of the data and associated access keys. In May 2014 Cocoon Data announced its intention to list on the ASX by way of a reverse takeover of Prime Minerals Limited (ASX: PIM) and undertook a capital raising in which it raised the maximum under the prospectus of $15 milllion. The acquisition was completed on 31 October 2014 and the new entity relisted on the ASX on 10 November 2014 as Covata Limited (ASX: CVT).

The CVT technology has been utilised to develop ‘Safe Share’, a cloud and enterprise focused secure file sharing solution that allows data/files to be securely shared across unsecure networks to unsecure devices (smart phones, cloud storage providers, internet connections, email, etc).

Safe Share works by the user selecting and dropping any file type into the Safe Share platform. The file is then immediately encrypted and a unique key assigned. The user specifies permitted recipients and assigns access control rules (date/time range, view only with disabled print, for example). Access is tied to positive authentication of the recipient. Importantly, the recipient does not require a Safe Share plug-in to access the file. Various other security and control features exist that add to the effectiveness of the solution, as discussed later.

The investment merit of CVT is based on a number of factors.

Firstly, its technology is unique, innovative, and potentially disruptive to some product markets. Uniquely, it is a data centric security solution where security and access controls apply to a particular file or data. This contrasts with traditional security technologies which are based on securing data at the network or perimeter level while leaving the actual data object unsecure. The industry readily concedes that the network perimeter solution alone has largely failed and what is required is a complementary solution. The CVT technology provides one such solution with regards to file specific security.

Secondly, the growth potential of its targeted market, cloud based security is significant and there is a pressing need for an effective security solution. This is being demanded by end-users and service providers alike.

Thirdly, CVT has a number of important competitive advantages. In addition to its technology, potential competitors face significant developmental and certification lead times, it has a potential first mover advantage and the credibility that comes with significant contract wins, and CVT is likely to benefit by not being a US domiciled company on account of the US Patriot Act.

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Fourth, CVT is pursuing an attractive business model. CVT’s go-to-market strategy enables the company to rapidly build sales scale and to do so with a predominantly fixed cost business. This has the potential to generate high operating margins on incremental net sales. Furthermore, pricing is based on a recurring monthly charge for what tends to be a very ‘sticky’ service offering (IT security). This attribute serves to reduce the risk profile / variability of revenues and earnings over time.

CVT has an impressive management team and, for a company in such an early stage of its commercialization process, has established a very impressive Board of Directors with a high degree of relevant experience and complementary skill sets.

CVT has offices in the Washington DC area, Sydney and London and employs approximately 40 people across the three countries.

CVT’S PRODUCT OFFERINGAn overview of CVT’s technology and the Safe Share solution was provided above. CVT’s Prospectus issued in 2014 provides a useful overview as to the actual process in which Safe Share users secure and share data/files. We have summarized this below as it is described in layman terms.

Safe Share enables the securing and sharing of files via a simple process:

1. Users select, drag, and drop any file type on the Safe Share platform;

– The file is immediately encrypted at its source and a unique key assigned only to that file;

– The file is uploaded to the designated data store;

2. The user identifies the permitted recipient/s and assigns access control sharing rules;

– Access is tied to positive identification of the recipient/s;

– Control rules may include date/time range, view-only with print disabled, copy/paste disabled and the ability to automatically wipe file content;

– Once these rules are established the secured file can be shared over any network and to any device.

3. All access activity in relation to this file is monitored by the Safe Share platform enabling complete auditability and visibility. This information is accessible to Safe Share administrators who are able to, amongst other things:

– Grant/disable user access and change privileges of these users;

– Transfer ownership of files between users;

– Create specific groups and labels to refine access controls;

– Revoke access to any user at the file level;

From the recipient side, a Safe Share plug-in is not required, facilitating usability. Recipients simply receive a link via email or SMS which the recipient simply needs to click on.

The usability of the CVT platform is improved by a number of product features. The platform is operating system/software agnostic, it allows other technologies and applications to run on, or alongside it, and the solution can be made available for systems integrators to develop specific applications for their liking. The latter improves the usability and ease of integration of the CVT platform while allowing the use of the software without significant involvement by the CVT software team.

The CVT technology is applicable to both the Cloud and internal on-premise networks. The focus, however, is on the Cloud as it provides a significantly greater sales opportunity.

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Fig 1: Safe Share Product Overview

Source: CVT

PATENTED AND CERTIFIED

The CVT technology is both patented and certified. This generates value, both financially and, provides a potential important competitive advantage.

Versions of the Covata Platform have been formally awarded FIPS 140-2 and FIPS-197 certifications through the National Institute of Standards and Technology as well as also achieving the Common Criteria EAL 4 Plus and DSD Cryptographic Evaluation. These accreditations provide government and enterprise customers, including corporates, system integrators and resellers, with an assurance that the Covata Platform provides one of the highest levels of protection available and complies with strict government security regulations.

In August 2014 CVT’s US Patent application titled System and Method for Security Data was granted. The patent documents the core business processes of the Covata Platform and its approach to authentication, authorisation, encryption and rights management. This business process patent of combining authentication (who you are) with a centralised encryption service (one to one key to file relationship) with policy and audit is relatively broad and flexible in its coverage. If the technology world moves more towards a data centric view of security, as opposed to a straight network security focus, this patent may have substantial value.

CVT also had an Australian Innovation patent titled Secure Communication Method issued in September 2014. This patent relates to the unique way the technology allows external, ad hoc users to authenticate and access secure files whilst maintaining security, auditability and usability.

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KEY DEMAND DRIVERS It is expected that the internet security market will show significant growth in the coming years. The major forces driving this market include: the rapid adoption of cloud-based services; wireless communication along with strict government mandates; strict compliance and data disclosure mandates, and; increasing and high profile security breaches.

Gartner forecasts that the cloud security market will grow from US$3.2bn in 2015 to US$4.1bn in 2017. There are several key demand drivers for cloud-based security solutions, such as the CVT technology:

1. Bring-your-own-device (BYOD). The influx of computing devices, from laptops to smartphones and tablets, into the workplace has brought a range of security risks. BYOD lead to specific security risks, some of which can be addressed or mitigated through the CVT technology.

2. Migrating to the cloud. There is clearly an increasing number of large organisations utilising and moving business processes to the cloud. With security representing the single biggest concern regarding the cloud, these organisations are looking for assurance around security.

3. Compliance issues. Compliance represents a key issue and demand driver. When the cloud and mobility are brought into the equation, data location and segregation can present significant challenges for enterprises trying to ensure compliance with internal IT protocols. Management state that the CVT technology is able to mirror internal compliance requirements in the cloud.

4. Demand from Service Providers. For both Original Equipment Manufacturers (OEMs) and Software as a Service providers (SaaS), the ability to effectively address cloud security concerns is likely to spur demand from prospective customers as well as creating an important competitive advantage relative to other players in the market.

5. High profile security breaches. The prevalence of such and identity theft is ever increasing. There is a general view in the sector that the traditional paradigm has failed.

6. The Patriot Act. The Patriot Act (see below) may provide a significant advantage to CVT. It was believed to be a key aspect in the T-Systems European contract win and will likely continue to be important in non-US geographic markets.

A NEW PARADIGM?CVT’s data-centric security approach is innovative in that it secures individual data files. The traditional approach seeks to secure data at the network or perimeter level (by way of firewalls) while leaving the actual data file unsecure. The problem with this is that the data itself is not protected and is often compromised when using smart devices and cloud computing. Once the perimeter is breached all data can be accessed.

As evident from the significant number of high profile network breaches in recent years and as openly conceded by the industry itself, sole reliance upon the traditional approach of network perimeter security is inadequate. The issue then becomes what information requires additional protection and how to achieve this. The CVT technology is designed to achieve this and management state that there are very few companies in the industry taking this approach to augmenting the traditional perimeter security solution to provide an effective solution.

The CVT technology is, therefore, complimentary rather than disruptive to traditional network security approaches. Given the network perimeter approach is pervasive, any solution that is capable of augmenting the perimeter solution to provide an effective solution may have a significant market opportunity.

Where the CVT technology is disruptive is that it can potentially remove the need for the implementation, operation and maintenance of virtual private networks (VPN). The security principles embodied in the CVT technology are designed to allow transmission of sensitive data across untrusted networks or environments through encryption of the data upon creation. This simplifies the information transfer requirements by the user and eliminates the need to log on and establish a secure connection across the VPN to access relevant data when they are remotely accessing the information.

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COMPETITIVE ENVIRONMENTThe IT market is highly competitive. It is characterised by rapid product development, some of which is potentially disruptive rendering existing solutions redundant, and is comprised of many and varied companies.

Just as CVT’s technologies may be disruptive, conversely the company faces such a risk that future developments may supercede its technology. This is a risk that applies to the industry as a whole but one investors should be cognisant of.

At this point, however the CVT technology has a number of important competitive advantages in the IT security market place, including;

� Uniqueness – Management believe there is no other product that offers a similar solution and one that can be integrated as easily into existing infrastructure.

� Development lead times and costs – There is substantial software development and coding requirements to develop a similar, competiting technology. CVT has spent in excess of $30 million over six years to develop an enterprise ready solution.

� Accreditation lead times – Equivalent accreditation can take up to 24 months to obtain. Certification is seen as a pre-requisite to potential customer sales, providing assurances of a high level of security.

� First mover advantage – CVT has global contracts and strategic alliances in place. If it continues to secure further significant contracts it may establish a first mover advantage.

� Patriot act – The demand for non-US security solutions outside the US is high and all the more so after incidents such as the Edward Snowden event. Under the US Patriot Act, US intelligence agencies are permitted to access data owned by non-US enterprises if the service provider is a US domicilied company. CVT states this provides a significant competitive advantage globally over US security solutions providers.

COMMERCIALISATION STRATEGYCVT has a three-pronged go-to-market strategy. Specifically: 1) Managed Service Providers (MSPs), predominantly telecommunication and data centre companies providing IaaS/SaaS services; 2) Original Equipment Manufacturer (OEM) deals, and; 3) direct sales to government departments and agencies. Since affirming this strategy in the latter part of 2014 the company has laid a strong foundation through further contract agreements.

The strategy is designed to achieve a number of things: rapidly build revenue scale, establish a largely fixed cost business model (high EBITDA margins), and create a pricing model based on recurring monthly revenue streams, reducing earnings volatility/risk.

MSP’S & TELCO’S

CVT has developed a strategy of utilising a network of SaaS/IaaS service providers for specific regions / client groups. To date, it has reseller and product development agreements with six industry participants.

This strategy has two primary benefits. Firstly, as a ‘one-to-one-to-many’ strategy it presents the opportunity to rapidly build sales scale by opening up the client’s existing customer base. Secondly, it is conducive to increasing the operating leverage of the company’s business model. Specifically, by utilizing the client’s sales and marketing resources it alleviates the need for CVT to establish these resources. With a predominantly fixed cost business model incremental sales should largely drop through to the operating profit level facilitating high EBITDA margins.

Of the three prongs, the MSP and telco component will be the primary focus over the next few years. CVT views the landscape with respect to winning contracts with telecommunication companies as something of a land grab at the moment. Security solutions tend to be very ‘sticky’, not only with customers but also the service providers. Once a security provider is contracted with these service providers it is likely to remain the incumbent over the longer term.

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Geographically, CVT will have a global focus ex-US given the important competitive advantage it has in not being a US domiciled company. Geographically its focus will be Europe, Latin/South America, the Subcontinent/East Asia, and the Middle East. In terms of targeting particular telecommunication companies, CVT has segmented the top 30 telecommunication companies in the world (ex US) and will focus on these. We understand CVT is already engaged in discussions with several of these telecommunication companies.

CVT has signed contract agreements with the following six participants:

� T-Systems. In March 2015 CVT in conjunction with its European partner NSC Global entered into a contract with top-tier telecommunications company T-Systems to distribute Safe Share and to Deutsche Telekom’s customers more broadly. This was a very significant contract win both in terms of potential revenue and validation of CVT’s comercialisation strategy. The launch of Safe Share is targeted at T-System’s clients, including 400 enterprise companies and a further 7,000 medium-to-large sized companies (and 6 million staff) that sit within Deutsche Telekom’s customer base. The specifics of the pricing model are detailed below in the Business Model section. Safe Share is anticipated to be available by mid 2015. Safe Share will be on the T-Systems Digital Division Portfolio, which means it will be owned by account managers and have sales targets and incentives tied to the product success.

� Cisco. In April 2015, CVT announced a 10-year contract (minimum of four) for Cisco to license CVT technologies on a SaaS basis, and/or incorporate CVT technologies into Cisco products on a non-exclusive basis (see below). License revenues will be shared between the two companies.

� Macquarie Telecom. In February 2015, CVT signed a reseller agreement with Macquarie Telecom to distribute Safe Share across Australian Government bodies. The agreement has an initial term of three years, with options for renewal. The agreement is structured around a subscription model, where the reseller will be charged per user, per month for licensing CVT’s Safe Share product. This is not expected to be a large revenue opportunity contract but, nevertheless, it has the potential to represent an excellent proof point and case study given the high degree of concern government boides have about security.

� NSC Global Services. In April 2014, CVT entered into an exclusive reseller agreement for CVT products in Europe, the Middle East and Africa. The agreement is for a five-year period and is subject to NSC Global Services meeting specific sales targets. NSC Global Services is an international systems integration and consultancy company based in the UK. These geographic areas – Europe and the Middle East are part of CVT’s broader regional focus which also includes East Asia, India and Latin/South America.

� Verizon Australia. The agreement covers sales in Australia on a non-exclusive basis. To date, the sales have been targeted to the Australian Federal Government.

� TPG Telecom. The agreement is to develop four products for use or commercialisation for TPG in consideration for TPG’s initial investment in CVT. TPG Telecom is an Australian telecommunications and IT company that specialises in consumer and business internet services as well as mobile telephone services. TPG is the second largest ISP in Australia.

ORIGINAL EQUIPMENT MANUFACTURERS (OEMS)

Under an OEM agreement, the client would embed the CVT technologies within their existing products to sell bundled with the client product. The client then pays a revenue share for every license sold. The aim for CVT is to execute OEM deals with clients that achieve large volume sales to increase distribution beyond what could be achieved through reseller and direct sales agreements. OEM deals are highly prized as they provide scale and potentially attractive margins. Given the scale of Cisco, CVT will focus on building the contract out over the next 12-month period.

DIRECT SALES

The direct sales will be limited to certain customer segments, specifically government and defence agencies which require, or look for, a higher degree of customer care from the service provider. Given their focus on security, direct sales to government and defence is particularly important in building credibility and reference sites. CVT notes that it has a strong reputation in the intelligence community.

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CVT’S BUSINESS MODELThe pricing model CVT has agreed with T-Systems is diagrammatically presented below and is representative of what CVT intends to roll out with future contract wins. The revenue share model will be based on an ongoing per month, per user/seat fee. The base level will be EUR 20 per month, per seat with a sliding scale based on volumes of seats dropping down to EUR 14 per month, per seat for organisations with 2,500 plus seats.

Under the agreement, T-Systems will take 30% of gross sales. Infrastructure costs incurred by T-Systems, estimated to be in the vicinity of 20% of gross sales, will then be deducted to provide a net sales figure, which is expected to equate to approximately 50% of gross sales. CVT and NSC Global will share net sales 55%/45%. In effect then, CVT will be entitled to 27.5% of gross sales.

As the first such contract, adoption and take up rates are highly uncertain at this point. How these evolve over the course of the remainder of this year and thereafter will provide extremely important visibility.

BOARD & MANAGEMENTCVT has established an impressive team for an early stage commercialization company:

� Trent Telford (Founder, CEO and Executive Director): Founded CVT in 2007. Experienced company Director and CEO and founder of one of Australia’s first mobile marketing technology companies with STW Group.

� Charles Archer (Executive Chairman): Over 28 years of federal government experience including as Assistant Director of the FBI as head of the Criminal Justice Information Services Division.

� Phillip Dunkelberger (Non Executive Director): President and CEO of Nok Nok Labs Inc. a leader in strong authentication solutions as well as co-founder and CEO of PGP Corporation (acquired by Symantec in 2010).

� Joseph Miller (Non Executive Director): Managing Director of Europlay Capital Advisors, a Los Angeles based boutique merchant bank and financial advisory firm .

� Phillip King (Non Executive Director); Over 20 years experience in financial services, payments and IT. Co-founded Asia Principal Capital Limited in Brunei and Singapore.

� Michael Quinert (Non Executive Director); Over 28 years’ experience as a commercial lawyer, including three years with the Australian Securities Exchange (ASX) and more than 20 years as a partner in Melbourne law firms.

� Nick Chiarelli (Chief Financial Officer): 15 years financial experience in Sydney and London. Industry experience includes hedge funds, investment banking, private equity and software development. Managed CVT’s finance function for four years and has a good understanding of the Australia start up and tech environment. Nick is a member of Australian and New Zealand Institute of Chartered Accountants.

9



� Vic Winkler (Chief Technology Officer): Over 30 years’ experience in information and cyber security, cloud security and systems and application development. He has a proven track record in developing business and marketing strategies in the broad area of information and cyber security. Previously security architect for Booz Allen Hamilton and Lead Cloud technologist at Sun Microsystems. Vic has a Computer Science degree from the University of Maryland.

� James Taneyhill (Chief Revenue Officer): Responsible for overseeing global sales operations across Europe, North America and emerging markets. He is also in charge of driving sales through key partnerships with large telcos and MSPs. Mr. Taneyhill has over 30 years experience in sales and management, and previously held CEO positions in Fortune 500 companies.

INVESTMENT CASE�This report has not undertaken an analysis of CVT’s earnings and cash flow generating

capabilities and thus does not include an indicative fair value estimate. However, based on the qualitative factors outlined in this report, we conclude that CVT has a number of requisite characteristics to create value for its shareholders. We note:

�CVT is targeting a high growth market (cloud security) and one in which there is a pressing need to provide a more effective security solution than the sole reliance upon network perimeter security.

�CVT may benefit from high barriers to entry on account of long developmental and certification lead times, its patent protection, and potential first mover advantage with MSPs, telcos and OEMs.

�CVT has laid a strong foundation to its go-to-market strategy. This provides validation, credibility and augurs well for further contract wins.

�By potentially addressing cloud security concerns and providing a point of difference, the CVT solution may present an attractive value proposition for resellers and customers alike.

�CVT has established a strong board and management team, particularly for a company in the early stages of commercialisation.

RISKS � Penetration risks: CVT’s contract wins augur well for future commercial success.

However, the degree of uptake from its channel partners’ customers is currently unknown. Consequently, there is little to no revenue visibility at the date of this report.

� Reliance on third-parties: CVT is reliant on resellers to generate its sales. With these relationships currently largely untested there can be no guarantee that resellers will actively promote or continue to preference CVT’s product over its competitors.

� Contract wins: While CVT has progressed well to date, the number and timing of potential further contract wins is unknown. It is possible some telecommunication companies may take a wait-and-see approach with respect to customer uptake with existing distributors.

� Investor sentiment risks: In an absence of penetration and revenue visibility, CVT’s share price performance may be highly subject to investor sentiment. We would expect this risk to diminish with increasing penetration rate and revenue clarity.

� Dilution risks: If earnings are not sufficient, it is likely CVT will have to tap the equities markets for additional capital through the issue of new shares. This may prove dilutionary to existing share holders, with potentially a negative impact on the share price. Similarly, issuance of performance shares may dilute existing share holders.

� Technology Risk: Technology markets are typically characterized by being dynamic and highly innovative. There will always be a risk that CVT’s technology will be superseded and potentially rendered redundant.

� Foreign exchange risks: While CVT is domiciled in Australia, revenues will largely flow from overseas markets and be subject to foreign exchange risk.

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APPENDIX A – RATINGS PROCESS

INDEPENDENT INVESTMENT RESEARCH PTY LTD “IIR” RATING SYSTEM.

IIR has developed a framework for rating investment product offerings in Australia. Our review process gives consideration to a broad number of qualitative and quantitative factors. Essentially, the evaluation process includes the following key factors: product management and underlying portfolio construction; investment management, product structure, risk management, experience and performance; fees, risks and likely outcomes.

GRAPHS SCORE

Highly Recommended 83 and above R

ecom

mend

ed

Not

S

peculative

Investment Grade

Recommended

Recommended

Highly

This is the highest rating provided by IIR, indicating this is a best of breed product that has exceeded the requirements of our review process across a number of key evaluation parameters and achieved exceptionally high scores in a number of categories. The product provides a highly attractive risk/return trade-off. The Fund is likely effectively to apply industry best practice to manage endogenous risk factors, and, to the extent that it can, exogenous risk factors.

Recommended 75-82

Rec

omme

nded

Not

S

peculative

Investment Grade

Recommended

Recommended

Highly

This rating indicates that IIR believes this is a superior grade product that has exceeded the requirements of our review process across a number of key evaluation parameters and achieved exceptionally high scores in a number of categories. In addition, the product rates highly on one or two attributes in our key criteria. It has an above-average risk/return trade-off and should be able consistently to generate above average risk-adjusted returns in line with stated investment objectives. The Fund should be in a position effectively to manage endogenous risk factors, and, to the extent that it can, exogenous risk factors. This should result in returns that reflect the expected level of risk.

Investment Grade 60-74

Rec

omme

nded

Not

S

peculative

I

nvestment Grade

Recommended

Recommended

Highly

This rating indicates that IIR believes this is an above-average grade product that has exceeded the minimum requirements of our review process across a number of key evaluation parameters. It has an above-average risk/return trade-off and should be able to consistently generate above-average risk adjusted returns in line with stated investment objectives.

Speculative 40-59

Rec

omme

nded

Not

Speculative

Investment Grade

Recommended

Recommended

Highly

This rating indicates that IIR believes this is a suitable product that has met the aggregate requirements of our review process across a number of key evaluation criteria. The product provides some unique diversification opportunities, but may not stand apart from its peers. It has an acceptable risk/return trade-off and should generate risk adjusted returns in line with stated investment objectives. However, concerns over one or more features mean that it may not be suitable for most investors.

Not recommended 39 and below

Rec

omme

nded

Not

S

peculative

Investment Grade

Recommended

Recommended

Highly

This rating indicates that IIR believes that despite the product’s merits and attributes, it has failed to meet the minimum aggregate requirements of our review process across a number of key evaluation parameters. While this is a product below the minimum rating to be considered Investment Grade, this does not mean the product is without merit. Funds in this category are considered to be susceptible to high risks that are not reflected by the projected return. Performance volatility, particularly on the down-side, is likely.

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APPENDIX B – MANAGED INVESTMENTS COVERAGE The below graphic details the spread of ratings for managed investments rated by Independent Investment Research (IIR). The managed investments represented below include listed and unlisted managed funds, fund of funds, exchange traded funds and model portfolios.

Spread of Managed Investment Ratings

1.8%0.0%

3.6%

55.4%

30.4%

8.9%

0%

10%

20%

30%

40%

50%

60%

Not Recommended Speculative Investment Grade Recommended Recommended Plus HighlyRecommended

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