Over the Wire Holdings Limited
Annual Report 2018

Plain-text annual report

Annual Report 2018 www.overthewire.com.au | 1300 689 689 Over the Wire Holdings Limited ACN 151 872 730 ANNUAL REPORT 2018 Over the Wire Holdings Limited ACN 151 872 730 Share Register Auditor Solicitors GENERAL This Annual Report is dated 29 October 2018. Currency Monetary amounts shown in this Annual Report are expressed in Australian dollars unless otherwise stated. Photographs and diagrams Photographs used in this report without descriptions are only for illustration. Diagrams used in this report may not be drawn to scale. The assets depicted in photographs in this report are not assets of the Company unless otherwise stated. TABLE OF CONTENTS Chairman's Letter Business Overview General Information Corporate Directory Directors’ Report Remuneration Report Auditor’s Independence Declaration Corporate Governance Statement Financial Statements Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Contact Details 5 6 9 10 11 20 25 27 37 42 84 86 93 CHAIRMAN'S LETTER On behalf of the Board of Over the Wire Holdings Limited, it is with great pleasure that we present to you the annual report for the 2018 financial year. Highlights of the year • Revenue increased by 57% to $53.6m • EBITDA increased by 66% to $12.3m • NPAT increased by 54% to $5.5m • Achieved customer retention of 97.3% • Successfully acquired VPN Solutions Pty Ltd • EPS increased by 53% to 12.63cps We would attribute the year’s success to effectively implementing our geographic expansion plans complemented by quality acquisitions. Our overall organic growth of 20% was once again pleasing. The integration of the businesses that we have acquired have progressed well with the VPN Solutions integration remaining ahead of schedule and the remainder of the businesses fully integrated. We would like to thank all of our staff for achieving another great result for our company. We would also like to thank our clients for their continued support, and we maintain our commitment to you of being the telecommunications provider that does focus on providing great service. Finally, we thank all shareholders for your continued and loyal support. We look forward to another successful and rewarding year ahead. John Puttick Chairman 5 ANNUAL REPORT 2018 BUSINESS OVERVIEW Our objective is to be the telecommunications, cloud and IT services provider of choice to businesses in Australia and New Zealand. We aim to do this through: • Our products - reliable, flexible and good value • Our people – knowledgeable, passionate and helpful • Our performance - superior service and highly recommended Providing a broad and integrated offering of products and services provides our customers with a complete solution from one supplier dedicated to customer service. Our suite of services to businesses include: • Data Networks and Internet; • Voice; • Cloud and Managed Services; and • Data Centre Colocation. Over the Wire Customer Retention Revenue Year-on-Year 96.7% 98.6% 97.1% 98.2% 97.3% 100% 80% 60% 40% 20% 0% 2014 2015 2016 2017 2018 Customer Service Our dedication to customer service remains uncompromising and we have a culture which consistently delivers high levels of customer service and retention. This is verified by our high levels of customer retention, shown in the graph above as year on year customer revenue retained. 6 ANNUAL REPORT 2018 SIGNIFICANT ORGANIC GROWTH AND STRONG FINANCIAL PERFORMANCE Total revenue from ordinary activities for the year was $53.6m (2017: $34.2m), representing an increase of 57% on the corresponding year. The result demonstrates demand from customers across all four product lines. 20% of the revenue growth was achieved organically. The group made a net profit after tax expense of $5.5m (2017: $3.6m), representing an increase of 54% on the corresponding year. Net profit after tax before amortisation (NPATA) was $6.8m, up from $4.1m in 2017, representing an increase of 68% on the corresponding year. Statutory EBITDA profit was $12.3m, up from $7.4m in 2017, representing an increase of 66% on the corresponding year. The group has delivered consistent growth in revenue and profitability since listing, as represented by the following graphs. Total Revenue EBITDA $M 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 - H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2015 2016 2017 2018 2015 2016 2017 2018 NPATA NPAT $M 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2015 2016 2017 2018 2015 2016 2017 2018 $M 35.0 30.0 25.0 20.0 15.0 10.0 5.0 - $M 5.0 4.0 3.0 2.0 1.0 - 7 ANNUAL REPORT 2018 SUCCESSFUL ACQUISITIONS On 1 November 2017, Over the Wire acquired 100% of the shares in VPN Solutions Pty Ltd (VPN Solutions). VPN Solutions was headquartered in New South Wales and delivers managed networks to approximately 150 business customers. The Company acquired VPN Solutions for: • Geographic expansion, as the VPN Solutions acquisition accelerates Over the Wire’s expansion into the New South Wales and South Australian markets; • A high quality customer base that offers cross sell and interstate expansion opportunities; • Synergies that are expected to be achieved in the 2018 financial year, with further cost savings to be delivered in the next financial year; • A quality team that will integrate well with Over the Wire; and • Attractive EBITDA and EPS accretion to Over the Wire. Over the Wire has developed a track record of acquiring and then integrating acquisitions, with timely realisation of synergies and cost savings. POSITIVE OUTLOOK Our commitment to being able to provide a complete telecommunications, cloud and IT Services offering to businesses, that is supported by an Australian based network operations centre dedicated to a positive customer experience, gives us confidence that our growth will continue in 2019. We remain focussed on achieving our vision and continuously improving the financial performance of the business and the returns for our shareholders through: GROW Grow organically by 20% annually and supplement our growth with strategic acquisitions that accelerate our growth and add long term value. IMPROVE Continuously improve our product offering to offer seamless solutions with no gaps. FOCUS Our customers remain at the epicentre of all that we do, receiving exceptional service and recommending us to others. ENGAGE Ensure our team is engaged and customer focussed, embodying our core values. EVOLVE Evolve our systems to support and enhance customer experience, our growth and our corporate performance. Continue investment in Sales and Marketing. Further develop our offering in: Intelligent Networks • • Cyber Security • Mobility Continue cross selling to existing customers. Selective future acquisitions. Realisation of synergies from VPN Solutions acquisition. Continuously focus on how we are improving the experience for our customers. Build on our performance culture. Be a great place to work. Strengthen our Leadership team Attract, develop and retain great talent. Continue integration of systems to ensure seamless customer and team experience Further enhance our customer portal for optimal customer experience 8 ANNUAL REPORT 2018GENERAL INFORMATION The annual report covers Over the Wire Holdings Limited as a consolidated entity consisting of Over the Wire Holdings Limited and the entities it controls. The report is presented in Australian dollars, which is Over the Wire Holdings Limited’s functional and presentational currency. Over the Wire Holdings Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business are: Registered Office & Principal Place of Business Level 21, 71 Eagle Street Brisbane Qld 4000 A description of the nature of the consolidated entity’s operations and its principal activities are included in the directors’ report. The financial statements were authorised for issue, in accordance with a resolution of directors on 22 August 2018. The directors have the power to amend and/or reissue the financial report. 9 ANNUAL REPORT 2018 CORPORATE DIRECTORY DIRECTORS JOHN PUTTICK DUNIV QUT, FACS, ACA Chair MICHAEL OMEROS MAICD, BE(ELECTRONICS), BINFOTECH Chief Executive Officer BRENT PADDON BINFOTECH, GRADDIPBUSADMIN Executive Director SUSAN FORRESTER BA, LLB (HONS), EMBA, FAICD Non-Executive Director SECRETARY MIKE STABB FCA, MAICD, BBUS(ACCY,BUSLAW), RTA Chief Financial Officer KEY MANAGEMENT BEN CORNISH Chief Operating Officer Registered Office and Principal Place of Business Level 21, 71 Eagle Street Brisbane QLD 4000 Share Register Link Market Services 10 Eagle St Brisbane QLD 4000 Auditor PKF Hacketts Audit Level 6, 10 Eagle Street Brisbane QLD 4000 Solicitors McCullough Robertson Lawyers Level 11, Central Plaza Two 66 Eagle Street Brisbane, QLD 4000 Bankers Westpac 260 Queen Street Brisbane QLD 4000 National Australia Bank 308-322 Queen Street Brisbane QLD 4000 Stock Exchange Listings Over the Wire Holdings Limited (OTW) shares are listed on the Australian Securities Exchange (ASX) Website Address www.overthewire.com.au 10 ANNUAL REPORT 2018 1.0 DIRECTORS’ REPORT 11 ANNUAL REPORT 2018DIRECTORS’ REPORT REVIEW OF OPERATIONS Your directors present their report on the consolidated entity consisting of Over the Wire Holdings Limited (“the Company”) and the entities it controlled (“the consolidated entity”, “Group”) for the year ended 30 June 2018. Total revenue from ordinary activities for the year was $53,561K (2017: $34,217K), representing an increase of 57% on the corresponding year. The result demonstrates demand from customers across all four product lines including: DIRECTORS AND COMPANY SECRETARY The name of the directors who held office during or since the end of the year. JOHN PUTTICK Non-Executive Chairman (appointed 1 December 2015) MICHAEL OMEROS Managing Director and Chief Executive Officer (appointed 1 July 2011) BRENT PADDON Executive Director (appointed 1 July 2011) SUSAN FORRESTER Non-Executive Director (appointed 1 December 2015) MIKE STABB Company Secretary and Chief Financial Officer (appointed 9 July 2012) PRINCIPAL ACTIVITIES The consolidated entity is a profitable, high growth provider of telecommunications, cloud and IT solutions. It has a national network presence with Points of Presence (POPs) in all major Australian capital cities and Auckland, New Zealand. During the year the principal continuing activities of the consolidated entity consisted of offering an integrated product suite of the following services to businesses in Australia and New Zealand: • Data Networks and Internet; • Voice; • Cloud and Managed Services; and • Data Centre Co-location There has been no significant change to the principal activities of the group during the year. VPN Solutions Pty Ltd was acquired on 1 November 2017, and its product suite predominantly includes Data Networks and Internet, along with a very small amount of Voice and Cloud, which is in line with the consolidated entity’s existing principal activities. • Data Networks revenue of $29,383K (2017: $15,915K), representing an increase of 85% on the corresponding year and delivered through organic growth and the successful acquisition of VPN Solutions on 1 November 2017; • Voice revenue of $14,060K (2017: $10,714K), representing an increase of 31% on the corresponding year and predominantly delivered through strong organic growth; • Cloud and Managed Services revenue of $7,258K (2017: $4,845K), representing an increase of 50% on the corresponding year and predominantly delivered through strong organic growth; • Data Centre co-location revenue of $2,860K (2017: $2,742K), representing an increase of 4% on the corresponding year and delivered through organic growth. The consolidated entity continued to build upon its geographic expansion strategy outlined in its Initial Public Offering (IPO). A primary focus was to deliver growth in the New South Wales and Victorian markets and this has been successfully achieved both organically and through acquisition. The below table shows comparative figures from 2017 to 2018: Revenue growth 2017 to 2018 (Organic) Revenue Growth 2017 to 2018 (Statutory) 6% 30% 153% 62% 23% 60% 133% 276% Geographic Area Queensland New South Wales Victoria Other 12 ANNUAL REPORT 2018 EARNINGS BEFORE INTEREST, TAX, DEPRECIATION AND AMORTISATION (EBITDA) EBITDA refers to earnings before interest, tax, depreciation and amortisation, and is an important metric to the consolidated entity because it shows the strong gross profit and expenditure management delivered by the consolidated entity and correlates well with operating cashflow. Set out below is a reconciliation of Profit before Income Tax Expense and EBITDA. Profit before Income Tax Expense Depreciation & Amortisation Finance Costs EBITDA Consolidated 2018 $ ,000 7,843 3,937 476 12,256 2017 $ ,000 4,857 2,330 182 7,369 Earnings before interest, tax, depreciation and amortisation (EBITDA) was $12,256K (2017: $7,369K), representing an increase of 66% on the corresponding year. Net Profit after Income Tax Expense (NPAT) was $5,531K (2017: $3,598K), representing an increase of 54% on the corresponding year. The increase in profitability has been achieved through maintaining gross margins whilst increasing revenue and the effective management of operating expenses whilst still investing for future growth. As at 30 June 2018, the consolidated entity had $7,013K in cash or cash equivalents. Net Cashflow from Operating Activities (before Interest and Tax) for the 2018 year was $12,203K ($7,930K in 2017) demonstrating an alignment with EBITDA. The consolidated entity’s continued sound management of overhead expenses in the underlying business, maintaining debtors days and creditors days metrics, recognising cost synergies in the acquired entities, and when combined with revenue growth of 57%, has generated the growth in EBITDA and positive Cash from Operating Activities outlined in the Consolidated Statement of Cash flows. DIVIDENDS PAID AND PROPOSED A final dividend for 30 June 2017 of 1.25 cents per share fully franked was paid in October 2017. An interim dividend of 1.00 cents per share fully franked, for the six months ended 31 December 2017, was paid in April 2018. Subsequent to year-end, on 22 August 2018, the Company declared a fully franked final dividend of 1.50 cents per share, for the year ended 30 June 2018. The dates of the dividend are as follows: Ex Date Record Date Payment Date 9 October 2018 17 September 2018 18 September 2018 As this final dividend was declared subsequent to year-end, no provision has been made in the accounts for the dividend. 13 ANNUAL REPORT 2018BUSINESS STRATEGIES AND PROSPECTS FOR FUTURE FINANCIAL YEARS The Group operates four product lines; Data Networks, Voice, Cloud and Managed Services, and Data Centre Co-location. Each product line is capable of being delivered stand-alone or bundled with one or more other product lines to deliver a complete solution. The Group will continue its business development and marketing initiatives, and leverage its investment in the four product lines to grow organically, both through the acquisition of new customers and selling more products and services to existing customers. The Group will leverage its investments in Telarus and VPN Solutions to deliver further synergies. It will also continue to look to grow through identifying and acquiring suitable businesses that deliver a strategic fit, readily achievable synergies and add shareholder value. SIGNIFICANT CHANGES IN STATE OF AFFAIRS ACQUISITION OF VPN SOLUTIONS VPN SOLUTIONS PTY LTD On 1 November 2017, the Company acquired 100% of the shares in VPN Solutions Pty Ltd (VPN Solutions) for a total upfront consideration of $15,615K less a subsequent working capital adjustment of $647K, for a total upfront consideration of $14,968K. The vendor is also entitled to receive further deferred consideration of up to $1,735K in cash, payable in November 2018, based on a number of performance measures being achieved, for a total potential consideration of $16,703K. VPN Solutions employed 21 staff and was headquartered in New South Wales, and delivers managed networks to approximately 150 business customers. The acquisition of VPN accelerates the Group’s expansion into the New South Wales and South Australian markets. The cash component of the acquisition was funded through a newly established $18,000K debt facility with Westpac. The facility has been used to fund the cash component of this acquisition, as well as refinance the remaining balance of the debt facility with NAB established for the acquisition of Telarus in 2017. The facility comes with customary lending covenants around Debt-to-EBITDA (<2.25 times) and Debt- Service-Coverage (>1.75 times), as well as periodic financial reporting requirements. The strategic rationale: • The acquisition of VPN Solutions accelerates the Group’s expansion into the New South Wales and South Australian markets; • Data Networks represents over 90% of VPN’s revenue and offers cross sell opportunities; • VPN Solution’s customer base is high quality and offers interstate expansion opportunities; • VPN Solutions has a quality team that will integrate well with the Group; • The acquisition is expected to offer attractive EBITDA and EPS accretion to the Group immediately; and • Synergies are expected to be achieved in this financial year with further cost savings to be delivered in the next financial year. 14 ANNUAL REPORT 2018EVENTS SINCE THE END OF THE FINANCIAL YEAR On 22 August 2018, the Company declared a fully franked final dividend of 1.50 cents per share, for the year ended 30 June 2018. The dates of the dividend are as follows: Ex Date Record Date Payment Date 9 October 2018 17 September 2018 18 September 2018 As this final dividend was declared subsequent to year-end, no provision has been made in the accounts for the dividend. No matter or circumstances have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial periods. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS The Consolidated entity will continue its focus on growing organically through geographic expansion, cross-selling of complementary products and new or enhanced product and service initiatives within its existing product lines. Acquisitions will continue to be targeted where they provide synergies, complement the current offering and add shareholder value. ENVIRONMENTAL REGULATION The consolidated entity's operations are not currently subject to significant environmental regulation under the law of the Commonwealth and State. 15 ANNUAL REPORT 2018OUR OBJECTIVE IS TO BE THE TELECOMMUNICATIONS, CLOUD AND IT SERVICES PROVIDER OF CHOICE FOR BUSINESSES IN AUSTRALIA AND NEW ZEALAND. Data Networks Managed Security Internet Voice Hosted PBX Private Cloud Infrastructure Managed Services Colocation 16 ANNUAL REPORT 2018JOHN PUTTICK DUNIV QUT, FACS, ACA Non-Executive Chairman John was appointed as Chairman of the company in December 2015. He was the founder and chairman of GBST Holdings Limited. John holds an Honorary Doctorate from The Queensland University of Technology and a Chartered Accounting qualification from Auckland University of Technology. John has over forty years of experience in building commercial systems with information technology, over thirty of which were in developing financial services solutions at GBST Holdings Limited. MICHAEL OMEROS MAICD, BE(ELECTRONICS)(HONS), BINFOTECH Managing Director Chief Executive Officer Michael is a co-founder and the Managing Director of the company. He has over twenty years of experience in the telecommunications and IT services sectors, and graduated from QUT in 1994 with a Bachelor of Engineering – Electronics (First Class Honours) and Bachelor of IT (with Distinction). Prior to Over the Wire, Michael held a Senior Management role at GBST, worked for Zurich Insurance in the UK and founded Celentia which has now been absorbed by Over the Wire. Other Current Directorships None Other Current Directorships None Former Directorships in last 3 years GBST Holdings Limited (ASX: GBT) Former Directorships in last 3 years None Special Responsibilities • Chair of the Board • Chair of nominations and remuneration committee • Member of audit and risk committee Direct and indirect interest in shares and options Ordinary Shares Over the Wire Holdings 80,000 Special Responsibilities • Member of audit and risk committee Direct and indirect interest in shares and options Ordinary Shares Over the Wire Holdings 13,616,115 INFORMATION ON DIRECTORS & COMPANY SECRETARY The following information is current as at the date of this report. 17 ANNUAL REPORT 2018 MIKE STABB FCA, MAICD, BBUS(ACCY,BUSLAW), RTA Chief Financial Officer & Company Secretary Mike was appointed CFO and Company Secretary in July 2012. He is a Fellow of the Institute of Chartered Accountants with over twenty years of experience, and graduated with Distinction from QUT in 1995 with a Bachelor of Business (Accy & BusLaw). Mike worked for Deutsche Bank in London and on Wall Street, and held CFO and senior finance roles in the property, radio communications and banking industries in Australia. Other Current Directorships None Former Directorships in last 3 years None Special Responsibilities • Chief Financial Officer / Company Secretary Direct and indirect interest in shares and options Ordinary Shares Over the Wire Holdings: 251,513 BRENT PADDON BINFOTECH, GRADDIPBUSADMIN Executive Director SUSAN FORRESTER BA, LLB (HONS), EMBA, FAICD Non-Executive Director Brent is a co-founder and Director of the Company. Susan was appointed as Non-Executive Director in December 2015. He has over twenty years of experience in telecommunications and IT services sectors and graduated from QUT in 1996 with a bachelor of IT. He also completed a Graduate Diploma in Business Administration from QUT in 2008. Brent held a senior management role at Web Central, worked for Pipe Networks and founded Brisbane Internet Technology, which was sold to Asia Online. Other Current Directorships None Former Directorships in last 3 years None Special Responsibilities • Member of nominations and remuneration committee Direct and indirect interest in shares and options Ordinary Shares Over the Wire Holdings 13,150,000 She is an accomplished company director, with significant experience as non-executive director across a range of listed and unlisted company boards, spanning the professional services, healthcare and childcare sectors. In particular, she has chaired, or being a member of various audit, risk management and remuneration committees. With a Bachelor of Laws (Honours) and a Bachelor of Arts (Japanese) from the University of Queensland, Susan completed an executive Masters of Business Administration (EMBA) from the Melbourne Business School. She is also a fellow of the Australian Institute of Company Directors (FAICD). Other Current Directorships Chair and Non-Executive Director of National Veterinary Care Ltd (ASX:NVL) (appointed February 2015) Non-Executive Director of G8 Education Limited (ASX:GEM) (appointed November 2011) Non-Executive Director of Xenith IP Group Limited (ASX:XIP) (appointed October 2015) Former Directorships in last 3 years None Special Responsibilities • Chair of audit and risk committee • Member of nominations and remuneration committee Direct and indirect interest in shares and options Ordinary Shares Over the Wire Holdings: 155,413 18 ANNUAL REPORT 2018 MEETINGS OF DIRECTORS The number of meetings of the company’s board of directors and of each board committee held during the year ended 30 June 2018, and the numbers attended by each director were: Full Meetings of directors Meetings of committees Held Attended Held Attended Held Attended Audit Nominations & Remuneration John Puttick Michael Omeros Brent Paddon Susan Forrester 12 12 12 12 12 12 9 12 5 5 NA 5 5 5 NA 5 2 NA 2 2 2 NA 2 2 INSURANCE OF OFFICERS AND INDEMNITIES During the financial year, Over the Wire Holdings Limited paid a premium of $54,500 to insure the directors and secretaries of the company and its Australian-based controlled entities, and the general managers of each of the divisions of the group. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied to the court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party, for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the company with leave of the Court under section 237 of the Corporations Act 2001. NON-AUDIT SERVICES The company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the company and/or the group are important. Details of the amounts paid or payable to the auditor (PKF Hacketts Audit) for audit and non-audit services provided during the year are set out below. The board of directors has considered the position and, in accordance with advice received from the audit committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • All non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor. • None of the services undermines the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. 19 ANNUAL REPORT 2018  During the year the following fees were paid or payable for non-audit services provided by the auditor of the parent entity, its related practices and non-related audit firms: Michael Omeros Managing Director and Chief Executive Officer (appointed 1 July 2011) Consolidated 2018 $ ,000 2017 $ ,000 30 30 30 39 39 39 Taxation Services Tax Compliance Services Total Remuneration for Taxation Services Total Remuneration for Non-Audit Services AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 26. ROUNDING OF AMOUNTS The consolidated entity is of a kind referred to in ASIC Corporations (Rounding in Financial / Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the directors’ report and financial report. Amounts in the directors’ report and financial report have been rounded off to the nearest thousand dollars in accordance with that Legislative Instrument. REMUNERATION REPORT The directors present the Over the Wire Holdings Limited 2018 remuneration report, outlining key aspects of our remuneration policy and framework as well as remuneration awarded this year. It has also been audited as required by section 308(3C) of the Corporations Act (2001). The Report is structured as follows: (a) Key management personnel (KMP) covered in this report (b) Remuneration policy and link to performance (c) Elements of remuneration (d) Remuneration expenses for executive KMP (e) Non-executive director arrangements (f) Other statutory information (g) Options & Performance Rights (A) KEY MANAGEMENT PERSONNEL (KMP) COVERED IN THIS REPORT John Puttick Non-Executive Chairman (appointed 1 December 2015) Brent Paddon Executive Director (appointed 1 July 2011) Susan Forrester Non-Executive Director (appointed 1 December 2015) Other key management personnel: Mike Stabb Chief Financial Officer and Company Secretary Ben Cornish Chief Operating Officer There have been no changes in KMP since the end of the reporting period. (B) REMUNERATION POLICY AND LINK TO PERFORMANCE Our remuneration committee is made up of two independent non-executive directors and one executive director. The committee will review and determine our remuneration policy and structure annually to ensure it remains aligned to business needs, and meets our remuneration principles. Executive KMP Remuneration Policy Statement Consistent with contemporary Corporate Governance standards Over the Wire Holdings’ remuneration policy aims to set employee and executive remuneration that is fair, competitive and appropriate for the markets in which it operates and is mindful of internal relativities. Over the Wire Holdings will aim to ensure that the mix and balance of remuneration is appropriate to reward fairly, attract, motivate and retain senior executives and other key employees. 20 ANNUAL REPORT 2018Specific objectives of this policy will include the following: • Provide a fair and competitive (internal and external) fixed annual remuneration for all positions under transparent policies and review procedures; • Link executive KMP rewards to shareholder value accretion by providing appropriate equity (or equivalent) incentives to selected senior executives and employees linked to long- term company performance and core values; • Provide competitive total rewards to attract and retain appropriately skilled employees and executives; • Have a meaningful portion of remuneration ‘at risk’, dependent upon meeting pre-determined performance benchmarks, both short (annual), medium (deferred STI) and long term (+ 3 years); and • Establish appropriate, demanding performance hurdles for any executive short or long term equity incentive remuneration. This broad remuneration policy will be delivered by Over the Wire Holdings under a Total Targeted Remuneration (TTR) or Total Annual Remuneration (TAR) framework. Appropriate remuneration policy settings will be achieved by consistently applying a clear remuneration strategy directed at supporting the Board approved business strategy with appropriate and flexible processes, policies and procedures established by the Board from time to time. Short-term Incentives – Operational Bonuses In 2018, elements of KMP remuneration were dependent on the satisfaction of operational performance conditions as follows: • A cash bonus of $12,500 for Mike Stabb linked to the achievement of operational KPIs. • A cash bonus of $12,500 for Ben Cornish linked to the achievement of operational KPIs. Long-term Incentives On 1 April 2018, the consolidated entity issued 99,732 performance rights to key management personnel and select senior staff as part of a Long Term Incentive (LTI scheme under an Employee Share Plan as a means of rewarding and incentivising key employees. Further details of the performance rights, including details of rights issued during the financial year, are set out in note 34. The Long term incentive (LTI) scheme contains features that meets contemporary general accepted market standards, and that: • Encourage the long term retention of selected key executives and aligns the interests of the key executives with shareholders; • Reward service and performance by these executives; • Meet contemporary governance and executive remuneration standards; and (C) ELEMENTS OF REMUNERATION • Satisfy all executive employment contract obligations and meet all regulatory requirements. Fixed Annual Remuneration (FR) Executives may receive their fixed remuneration as cash, superannuation and fringe benefits such as mobile phones, car allowances and in house fringe benefits. During 2018 there were fixed remuneration increases given to executive KMP as follows: • Michael Omeros: Base Salary increased from $250,000 to $300,000 • Mike Stabb: Car Allowance increased from $nil to $8,938 21 ANNUAL REPORT 2018(D) REMUNERATION EXPENSES FOR EXECUTIVE KMP The following table shows details of the remuneration expense recognised for the group’s executive key management personnel for the current and previous financial year measured in accordance with the requirements of the accounting standards. Remuneration paid to directors and executives is valued at the cost to the group. Key Management Personnel Remuneration Name Year Fixed remuneration Variable remuneration Total Perfor- mance Based Cash Salary* Non- monetary Benefits* Annual Leave* Long service Leave ** Post- employ- ment Benefits *** Cash Bonus* Share Based Payments **** $ $ $ $ $ $ $ $ % Executive Directors Michael Omeros 2018 257,306 48,234 23,077 Brent Paddon 2017 2018 2017 208,765 251,105 254,134 46,411 16,650 3,306 19,231 2,754 19,231 Other Management Personnel 229,407 195,000 - - 16,923 15,385 207,520 15,786 16,923 200,000 677 15,385 5,000 3,607 4,167 4,167 3,667 3,333 3,667 3,333 20,049 19,616 20,049 19,616 - - - - - - - - 353,666 295,049 297,858 299,902 24,049 12,500 194,337 480,883 26,375 25,000 1,222 266,315 20,049 12,500 194,337 470,782 21,451 25,000 1,222 267,068 945,338 67,326 76,154 16,501 84,196 25,000 388,674 1,603,189 857,899 49,842 66,651 14,440 87,058 50,000 2,444 1,128,334 145,000 135,000 - - - - - - - - - - - - 145,000 135,000 2018 2017 2018 2017 2018 2017 2018 2017 Mike Stabb Ben Cornish Total Executive Directors & Other KMPs Total NED Remuneration (see section (e) below) Total KMP remuneration Expensed 2018 1,090,338 67,326 76,154 16,501 84,196 25,000 388,674 1,748,189 2017 992,899 49,842 66,651 14,440 87,058 50,000 2,444 1,263,334 - - - - 43.0 9.8 43.9 9.8 25.8 4.6 - - 23.7 4.2 Short-term benefits as per Corporations Regulation 2M.3.03(1) Item 6 Other long-term benefits as per Corporations Regulation 2M.3.03(1) Item 8 * ** *** Post-employment benefits are provided through contributions to a superannuation fund. The amounts disclosed as remuneration represent the amount contributed by the employer at the statutory rate 9.5%, plus any salary sacrificed amounts if applicable, measured in accordance with AASB 119 Employee Benefits. **** Shares issued under an employee share scheme established by the group on 30 November 2015, as well as Performance Rights issued, as set out at Note 34. 22 ANNUAL REPORT 2018          Balance at 30/06/2018 104,920 104,920 19,946 19,946 OPTIONS AND RIGHTS GRANTED AS REMUNERATION Name Balance at 01/07/2017 Grant Details Exercised Lapsed Directors Issue Date No. Mike Stabb 100,000 1/04/2018 Ben Cornish 100,000 1/04/2018 Dennis Muscat Daniel Roates - - 1/04/2018 1/04/2018 Group Total 200,000 29,920 29,920 19,946 19,946 99,732 Value $* 86,361 86,361 57,572 57,572 No.** 25,000 25,000 - - Value $** 54,772 54,772 - - No.**  - - 287,866 50,000 109,544 - 249,732 * The fair value of performance rights granted as remuneration and as shown in the above table has been determined in accordance with Australian Accounting Standards and will be recognised as an expense over the relevant vesting period to the extent that conditions necessary to vesting are satisfied. ** Tranche 1 of the 2017 performance rights were eligible for conversion to shares as all criteria has been satisfied, and they did vest and were converted on 28 November 2017. Details of the performance rights granted as remuneration to those KMP in the above table are included in Note 34 to the financial statements. (E) NON-EXECUTIVE DIRECTOR ARRANGEMENTS Board fees are $75,000 ($70,000 in 2017) for John Puttick and $50,000 ($45,000 in 2017) for Susan Forrester. In addition, they are paid $10,000 for chairing their respective committees. There are no performance-based payments or retirement allowances. The table below represent the amounts paid for the periods in which their services were provided. Base fees Chair Other Non-executive Directors Total Consolidated 2018 $ 85,000 60,000 2017 $ 80,000 55,000 145,000 135,000 All non-executive directors enter into a service agreement with the company in the form of a letter of appointment. The letter summarises the board policies and terms, including remuneration, relevant to the office of director. 23 ANNUAL REPORT 2018                      (F) OTHER STATUTORY INFORMATION (i) Shareholdings The numbers of shares in the company held (directly, indirectly or beneficially) during the financial year by KMP, including their related parties, are set below Directors Michael Omeros Brent Paddon John Puttick Susan Forrester Total Directors Balance at 1/07/2017 Sold on Market Employee Share Scheme Bought on Market Balance at 30/06/2018 15,116,115 (1,500,000) - - 13,616,115 14,900,000 (1,750,000) - - 13,150,000 20,000 - - 60,000 80,000 155,413 - - - 155,413 30,191,528 (3,250,000) - 60,000 27,001,528 Other Key Management Personnel (OKMP) Mike Stabb Ben Cornish Total OKMP Group Total 179,441 - 25,360 46,712 21,400 - 25,360 - 200,841 - 30,392,369 (3,250,000) 50,720 50,720 46,712 106,712 251,513 46,760 298,273 27,299,801 (G) OPTIONS & PERFORMANCE RIGHTS (i) Options At the date of this report, there were no unissued shares of Over the Wire Holdings Limited under option. (2017: Nil) (i) Performance Rights At the date of this report, there were 249,732 performance Rights over Over the Wire Holdings Limited shares. (2017: 200,000) End of Remuneration Report This report, incorporating the Remuneration Report is signed in accordance with a resolution of Directors. Michael Omeros Managing Director Brisbane 22 August 2018 John Puttick Chair Person Brisbane 22 August 2018 24 ANNUAL REPORT 2018          2.0 AUDITOR’S INDEPENDENCE DECLARATION 25 ANNUAL REPORT 2018AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF OVER THE WIRE HOLDINGS LIMITED I declare that, to the best of my knowledge and belief, during the year ended 30 June 2018, there have been no contraventions of: (a) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) any applicable code of professional conduct in relation to the audit. PKF HACKETTS LIAM MURPHY PARTNER 22 AUGUST 2018 BRISBANE 26 ANNUAL REPORT 20183.0 CORPORATE GOVERNANCE STATEMENT 27 ANNUAL REPORT 2018CORPORATE GOVERNANCE STATEMENT Compliance with ASX Corporate Governance Principles and Recommendations Over the Wire Holdings Limited and the board are committed to achieving and demonstrating the highest standards of corporate governance. Over the Wire Holdings Limited has reviewed its corporate governance practices against the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council. The 2018 corporate governance statement is dated as at 30 June 2018 and reflects the corporate governance practices in place throughout the 2018 financial year. The 2018 corporate governance statement was approved by the board on 26 October 2018. A description of the group’s current corporate governance practices is set out in the group’s corporate governance statement which can be viewed at www.overthewire.com.au/investors/corporate-governance. Over the Wire’s corporate governance charter has been drafted in light of these Guidelines and the table below summarises the Company’s compliance, in accordance with ASX Listing Rule 4.10.3. Principles and Recommendations Compliance Principle 1 – Lay solid foundations for management and oversight 1.1 Establish the functions expressly reserved to the Board and those delegated to management, and disclose those functions. 1.2 Undertake appropriate checks before appointing a person as a director, and provide shareholders with all material information relevant to a decision on whether or not to elect or re-elect a director. 1.3 Have a written agreement with each director and senior executive setting out the terms of their appointment. The Board is responsible for the overall corporate governance of the Company. The Board has adopted a Board charter that formalises its roles and responsibilities and defines the matters that are reserved for the Board and specific matters that are delegated to management. The Company will conduct police checks, solvency and banned director searches in relation to all appointed and future nominated directors. The Company will publish Director profiles on the Company’s website outlining biographical details, other directorships held, commencement date of office and level of independence. The Company has written agreements with each director and senior executive. On appointment of directors and senior executives the Company will issue necessary written agreements outlining the terms of their appointment. 1.4 The company secretary should be accountable directly to the Board on all matters to do with the proper functioning of the Board. This is consistent with the Charter and corporate structure of the Company. The company secretary has a direct relationship with the Board in relation to these matters. Comply Complies Complies Complies Complies Partially Complies 1.5 Establish a diversity policy and disclose the policy or a summary of that policy. The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity and for the Board to assess annually both the objectives and progress in achieving them, for reporting against in each reporting period. The Board has adopted a diversity policy that outlines objectives to ensure that the Company has as diverse a workforce as practicable. The Board determined that given the Company’s size and structure, it is not appropriate or possible to mandate a fixed number of women at any given level within the organisation, so no measurable objectives are included. As a measurement of gender diversity, the proportion of women working within Over the Wire as at 30 June 2018 is as follows: • Women on the Board – 25% • Women in Senior Executive positions – 17% • Women in the organisation – 24% 28 ANNUAL REPORT 20181.6 Have a process for periodically evaluating the performance of the Board, its committees and individual directors, and disclose that process and, at the end of each reporting period, whether such performance evaluation was undertaken in that period. The Company conducts the process for evaluating the performance of the Board, its committee and individual directors as outlined in the Board Charter. Performance evaluation was conducted in this period. Complies 1.7 Have a process for periodically evaluating the performance of the company’s senior executives, and disclose that process and, at the end of each reporting period, whether such performance evaluation was undertaken in that period. A summary of the processes for performance evaluation of key executives, directors and the Board is available on the Company’s website. The Chief Executive Officer (CEO) reviews the performance of the senior executives. The Board reviews the CEO’s performance. These reviews were conducted in this period. Complies Principles and Recommendations Compliance Principle 2 – Structure the Board to add value 2.1 The Company should have a nomination committee, which has at least three members, a majority of independent directors and is chaired by an independent director. The functions and operations of the nomination committee should be disclosed. 2.2 Have and disclose a board skills matrix, setting out what the board is looking to achieve in its membership. 2.3 Disclose the names of the directors that the Board considers to be independent directors, and an explanation of why the Board is of that opinion if a factor that impacts on independence applies to a director, and disclose the length of service of each director. Comply Complies A combined Nominations and Remuneration Committee has been established with its own charter and consists of: • John Puttick (committee chair); • Susan Forrester; and • Brent Paddon. The Company has established charter rules for the Nominations and Remuneration Committee as a guide for Board deliberations. Together, the Directors have a broad range of experience, expertise, skills, qualifications and contacts relevant to the Company and its business. The Board considers John Puttick (appointed in December 2015) to be an independent director. The Board also considers Susan Forrester (appointed in December 2015) to be an independent director. Partially Complies Complies The Board notes the following directors are deemed not independent for the purposes of the Guidelines: • Michael Omeros (appointed in July 2011) – Michael is a founding shareholder of Over the Wire and is an executive director of the Company. • Brent Paddon (appointed in July 2011) – Brent is also a founding shareholder of Over the Wire and is an executive director of the Company. 2.4 A majority of the Board should be independent directors. The Board currently comprises four Directors, of which two are independent non-executive Directors. 2.5 The chair of the Board should be an independent director and should not be the CEO. The chairman, John Puttick, is a non-executive and independent director. 29 Partially Complies. The Board is equally weighted between independent and executive Directors. The size of the Company does not justify the cost of appointing additional independent Directors at this stage. Complies ANNUAL REPORT 2018 2.6 There should be a program for inducting new directors and providing appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as a director effectively. This is consistent with the Board Charter. Complies Principles and Recommendations Compliance Principle 3 – Act ethically and responsibly 3.1 Have a code of conduct for the Board, senior executives and employees, and disclose that code or a summary of that code. The Company has adopted a code of conduct, which sets out a framework to enable Directors to achieve the highest possible standards in the discharge of their duties and to give a clear understanding of best practise in Corporate Governance. Principles and Recommendations Compliance Principle 4 – Safeguard integrity in corporate reporting 4.1 The Company should have an audit committee, which consists of only non-executive directors, a majority of independent directors, is chaired by an independent chairman who is not chairman of the Board, and has at least three members. The functions and operations of the audit committee should be disclosed. The Board has established an Audit and Risk Committee which operates under an audit and risk committee charter. The Audit and Risk Committee members are: • John Puttick; • Susan Forrester; and • Michael Omeros. Comply Complies Comply Partially Complies The committee includes two independent directors and is chaired by an independent director. This is consistent with the approach to be adopted by the Audit and Risk Committee and the Board. Complies 4.2 The Board should, before approving financial statements for a financial period, receive a declaration from the CEO and CFO that, in their opinion, the financial records have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the Company, formed on the basis of a sound system of risk management and internal controls, operating effectively. 4.3 The Company’s auditor should attend the AGM and be available to answer questions from security holders relevant to the audit. Over the Wire’s auditors will be requested to attend the AGM and shareholders will be entitled to ask questions in accordance with the Corporations Act and these guidelines. Complies Principles and Recommendations Compliance Principle 5 – Make timely and balanced disclosures 5.1 Have a written policy for complying with continuous disclosure obligations under the Listing Rules, and disclose that policy or a summary of it. The Company has a written continuous disclosure policy which is designed to ensure that all material matters are appropriately disclosed in a balanced and timely manner and in accordance with the requirements of the ASX Listing Rules. Comply Complies 30 ANNUAL REPORT 2018 Principles and Recommendations Compliance Comply Principle 6 – Respect the rights of security holders 6.1 Provide information about the Company and its governance to investors via its website. 6.2 Design and implement an investor relations program to facilitate effective two- way communication with investors. 6.3 Disclose the policies and processes in place to facilitate and encourage participation at meetings of security holders. The Board Charter and other applicable policies are available on the Company’s website. Complies The Company has adopted a shareholder communications policy. The Company will use its website, half year and annual reports, market announcements and media disclosures to communicate with its shareholders, as well as encourage participation at general meetings. The Company intends to facilitate effective participation in the AGM, as well as the ability to submit written questions ahead of the AGM. The Company intends to adopt appropriate technologies to facilitate the effective communication and conduct of general meetings. Complies The Company has not disclosed a formal policy or process, but it has engaged a recognised and reputable share registry service provider to further these objectives. 6.4 Give security holders the option to receive communications from, and send communications to, the Company and its share registry electronically. The company has instructed its share registry to facilitate this option for shareholders. Complies Principles and Recommendations Compliance Comply The Company has a combined Audit and Risk Committee. See 4.1 above. Partially Complies The charter establishes the role of the committee. Risk review was conducted in this period. Complies Due to the Company’s limited number of employees and relative nature and scale of its operations, the costs of an independent internal audit function would be disproportionate. The Company has an external auditor and the Audit and Risk Committee will monitor and evaluate material or systemic issues. Does not comply due to the nature and scale of operations, however the Board believes it and the Audit and Risk Committee have adequate oversight of the existing operations. The Board does not believe that the Company has any such material risks. Complies Principle 7 – Recognise and manage risk 7.1 The Board should have a risk committee which is structured so that it consists of a majority of independent directors, is chaired by an independent director, and has at least three members. The functions and operations of the risk committee should be disclosed. 7.2 The Board or a committee of the Board should review the entity’s risk management framework with management at least annually to satisfy itself that it continues to be sound, and disclose, in relation to each reporting period, whether such a review has taken place. 7.3 Disclose if the Company has an internal audit function, how the function is structured and what role it performs, or if it does not have an internal audit function, that fact and the processes the Company employs for evaluating and continually improving the effectiveness of its risk management and internal control processes. 7.4 Disclose whether the Company has any material exposure to economic, environmental and social sustainability risks and, if so, how it manages those risks. 31 ANNUAL REPORT 2018Principles and Recommendations Compliance Comply Principle 8 – Remunerate fairly and responsibly 8.1 The Board should have a remuneration committee which is structured so that it consists of a majority of independent directors, is chaired by an independent director, and has at least three members. The functions and operations of the remuneration committee should be disclosed. 8.2 The policies and practices regarding the remuneration of non-executive directors, and the remuneration of executive directors and other senior executives, should be separately disclosed. The Company has a combined Nominations and Remuneration Committee. See 2.1 above. Partially Complies The Nominations and Remuneration Committee charter is available on the Company’s website. Complies 8.3 If the Company has an equity-based remuneration scheme, it should have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme, and disclose that policy or a summary of it. The Company operates an exempt share plan and has approved a performance rights plan for the potential issue of rights in the future. In accordance with the Company’s Securities Trading Policy participants are not permitted to enter into transactions which limit economic risk without written clearance. Complies RESPONSIBILITY OF THE BOARD The Board is responsible for the Company’s proper corporate governance. To carry out this obligation, the Board must act: • Honestly, conscientiously and fairly; • In accordance with the law; • In the interests of the Shareholders (with a view to building sustainable value for them); and • In the interests of employees and other stakeholders. The Board’s broad function is to: • Represent, serve and protect the interests of shareholders; • Develop, implement, oversee, and review the strategies and performance of the Company; • Optimise Company performance and build sustainable shareholder value within an effective corporate governance framework of internal controls and risk management; • Ensure shareholders and stakeholders are regularly and effectively informed of developments affecting the Company, as well as the ongoing performance of the Company; and • Ensure that no decision or action is taken that has the effect of prioritising their personal interests over the Company’s interests. Power and authority in certain areas is specifically reserved to the Board – consistent with its function described above. These areas include: • Providing leadership and setting the strategic objectives of the Company; • Composition of the Board itself including the appointment and removal of the Chairman or deputy chairman (if applicable); • Oversight of the Company including its control and accountability system; • Appointment and removal of senior management (including the CEO or equivalent) and the Company Secretary; • Reviewing, ratifying and monitoring the risk management framework and setting the risk appetite within which the Board expects management to operate; • Approving and formulating company strategy and policy; • Approving and monitoring operating budgets and major capital expenditure; • Overseeing the integrity of the Company’s accounting and corporate reporting systems, including the external audit; • Overseeing corporate strategy and performance objectives developed by management; • Overseeing the Company’s compliance with its continuous disclosure obligations; • Approving the Company’s remuneration framework; • Monitoring the overall corporate governance of the Company (including its strategic direction and goals for management, and the achievement of these goals); and • Oversight of the Board’s various committees. 32 ANNUAL REPORT 2018 The committee performs functions relevant to risk management and internal and external reporting and reports to the Board following each meeting. The committee’s responsibilities include: • Setting Board and committee structures to facilitate a proper review function by the Board; • Internal control framework including management information systems; • Corporate risk assessment (including economic, environmental and social sustainability risks) and compliance with internal controls; • Management processes supporting external reporting practices; • Review of financial statements and other financial information distributed externally; • Review of the effectiveness of the audit function; • Review of management corporate reporting processes supporting external reporting, including the appropriateness of the accounting judgements; • Review of the performance and independence of the external auditors; • Review of the external audit function to ensure prompt remedial action by management, where appropriate, in relation to any deficiency in or breakdown of controls; and • Reviewing any proposal for the external auditor to provide non-audit services and whether it might compromise the independence of the external auditor. Meetings will be held at least four times each financial year. A broad agenda is laid down for each regular meeting according to an annual cycle. The committee invites the external auditors to attend each of its meetings. The Audit and Risk Committee information is available on the Company’s website at www.overthewire.com.au/investors/ corporate-governance. COMPOSITION OF BOARD The Board is comprised of four directors. Half of the Board are non-executive directors independent from management. The Chairman of the Board is an independent non-executive director. BOARD CHARTER AND POLICY The Board has adopted a charter which formally recognises its responsibilities, functions, power and authority and composition. This charter sets out other things which are important for effective corporate governance including: • A detailed definition of ‘independence’; • A framework for the identification of candidates for appointment to the Board and their selection (including undertaking appropriate background checks); • A framework for individual performance review and evaluation; • Proper training to be made available to Directors both at the time of their appointment and on an on-going basis; • Basic procedures for meetings of the Board and its committees including frequency, agenda, minutes and private discussion of management issues among nonexecutive Directors; • Ethical standards and values (in a detailed code of ethics and values); • Dealings in securities (in a detailed code for securities transactions designed to ensure fair and transparent trading by Directors and senior management and their associates); and • Communications with Shareholders and the market. The purpose of the charter is to ‘institutionalise’ good corporate governance and to build a culture of best practice both in Over the Wire’s internal practices and its dealings with others. This information is available on the Company’s website at www.overthewire.com.au/investors/corporate-governance. AUDIT AND RISK COMMITTEE The purpose of this committee is to advise on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the Company. Its current members are: • Susan Forrester (committee chair); • John Puttick; and • Michael Omeros. 33 ANNUAL REPORT 2018 NOMINATIONS AND REMUNERATION COMMITTEE The purpose of this committee is to assist the Board and report to it on remuneration and related policies and practices (including remuneration of senior management and non- executive Directors). Its current members are: Diversity Policy Over the Wire is committed to complying with the diversity recommendations published by ASX and promoting diversity among employees, Directors and senior management, and has adopted a policy in relation to diversity (Diversity Policy). Over the Wire defines diversity to include, but not be limited to, gender, age, disability, ethnicity, marital or family status, religious or cultural background, sexual orientation and gender identity. The Diversity Policy adopted by the Board outlines Over the Wire’s commitment to fostering a corporate culture that embraces diversity and provides a process for the Board to determine measurable objectives and procedures to implement and report against to achieve its diversity goals. The Company’s Nominations and Remuneration Committee is responsible for implementing the Diversity Policy, setting the Company’s measurable objectives and benchmarks for achieving diversity and reporting to the Board on compliance with the Diversity Policy. As part of its role, the Company’s Nominations and Remuneration Committee is responsible for formulating and implementing a Company remuneration policy. Under the Diversity Policy, a facet of this role will include reporting to the Board annually on the proportion of men and women in Over the Wire’s workforce and their relative levels of remuneration. The Board will assess and report annually to Shareholders on progress towards achieving its diversity goals. The Diversity Policy is available on the Company’s website at www. overthewire.com.au/investors/corporate-governance. • John Puttick (committee chair); • Susan Forrester; and • Brent Paddon. The committee’s functions include: • Recommendations to the Board about the Company’s remuneration policies and procedures; • Oversight of the performance of senior management and non-executive Directors; • Recommendations to the Board about remuneration of senior management and non-executive Directors; and • Reviewing the Company’s reporting and disclosure practices in relation to the remuneration of Directors and senior executives. Meetings will be held at least four times each financial year and more often as required. The Nominations and Remuneration Committee information is available on the Company’s website at www.overthewire. com.au/investors/corporate-governance. POLICIES Securities Trading Policy A securities trading policy (Trading Policy) has been adopted by the Board to provide guidance to Directors, identified employees including senior management, and other employees of Over the Wire, where they are contemplating dealing in the Company’s securities or the securities of entities with whom Over the Wire may have dealings. The Trading Policy is designed to ensure that any trading in the Company’s securities is in accordance with the law and minimises the possibility of misperceptions arising in relation to Directors’ and employees’ dealings in the Company’s securities or securities of other entities. The Trading Policy is directed at dealing in the Company’s securities by the Directors and employees, dealings through entities or trusts controlled by a relevant person, or in which they have an interest, and encouraging family or friends to so deal. It also extends to addressing dealings in the securities of other entities that may be transacting with or be counterparties of Over the Wire. Any non-compliance with the Trading Policy will be regarded as an act of serious misconduct. The Trading Policy is available on the Company’s website at www.overthewire.com.au/ investors/corporate-governance. 34 ANNUAL REPORT 2018 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 18 October 2018. Over The Wire Holdings Limited Issued capital ordinary shares: 44,048,441 as at 18 October 2018. Substantial Shareholders Substantial shareholders in the company are set out below: Michael Omeros (Including Related Entities and Indirect Holdings) Brent Paddon (Including Related Entities and Indirect Holdings) National Nominees Limited Total Substantial Shareholders Ordinary Shares Number Held % of Total Shares Issued 13,616,115 13,150,000 3,222,722 29,988,837 30.91% 29.85% 7.32% 68.08% Number Of Holders Of Each Class Of Equity Securities And Distribution Schedule Of The Number Of Holders The number of holders of each class, and distribution schedule of the number of holders of equity securities, is set below: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and Over Total Unmarketable Parcels VOTING RIGHTS Ordinary Shares Number Held 195,949 1,460,352 1,832,089 4,497,605 36,062,446 44,048,441 0 Number of Holders 375 496 220 170 18 1279 0 The voting rights attached to each class of equity securities are set out below: ORDINARY SHARES On a show of hands every member present at a meeting in person, or by proxy, shall have one vote, and upon a poll each share shall have one vote. 35 ANNUAL REPORT 2018        THE NUMBER AND CLASS OF RESTRICTED SECURITIES SUBJECT TO VOLUNTARY ESCROW THAT ARE ON ISSUE Voluntary Escrow The number and class of securities subject to Voluntary Escrow are set out below: Date that Voluntary Escrow Period Ends: One year anniversary of acquisition of VPN (Escrow Release Date - 31 October 2018) Total The 20 Largest Holders of Each Class of Quoted Equity Securities Michael Omeros (Including Related Entities and Indirect Holdings) Brent Paddon (Including Related Entities and Indirect Holdings) National Nominees Limited Jay Heddon Binks Pershing Australia Nominees Pty Ltd J P Morgan Nominees Australia Limited Dynamic Supplies Investments Pty Ltd Aust Executor Trustees Ltd Hsbc Custody Nominees (Australia) Limited Hampel Computer Pty Ltd Carter Haywood Pty Ltd Bnp Paribas Nominees Pty Ltd Bnp Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd Drp Birkdale Holdings (Qld) Pty Ltd Ms Susan Margaret Forrester & Mr Bruce Forrester Equitas Nominees Pty Limited Mr David Noel Groth & Mrs Kathryn Renae Taylor-Groth Est Nominees Pty Ltd Bcitf (Qld) Bm Jag Pty Ltd Total Ordinary Shares Number Held % of Total Shares Issued 382,721 382,721 Ordinary Shares 13,616,115 13,150,000 3,222,722 1,360,743 1,060,000 1,235,865 860,000 569,721 474,571 382,721 269,753 214,240 204,619 200,000 155,413 135,000 110,000 105,000 100,000 100,000 0.87% 0.87% 30.91% 29.85% 7.32% 3.09% 2.41% 2.81% 1.95% 1.29% 1.08% 0.87% 0.61% 0.49% 0.46% 0.45% 0.35% 0.31% 0.25% 0.24% 0.23% 0.23% 37,526,483 85.19% 36 ANNUAL REPORT 2018      4.0 FINANCIAL STATEMENTS 37 ANNUAL REPORT 2018CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For Year Ended 30 June 2018 Revenue from Continuing Operations Other Income Expenses Data Centre & Co-Location Expense Calls & Communications Expense Other Cost of Goods Sold Employee Benefits Expense Depreciation & Amortisation Expense Finance Costs Other Expenses Profit Before Income Tax Expense Income Tax Expense Profit After Income Tax Expense for the Year Attributable to members Other Comprehensive Income Other Comprehensive Income for the Year, Net of Tax Total Comprehensive Income for the Year Attributable to members Basic Earnings per Share Diluted Earnings per Share Note 3 4 5 5 5 5 5 5 5 6 7 7 Consolidated 2018 $ ,000 53,561 116 (3,624) (19,061) (3,054) (13,247) (3,937) (476) (2,432) 7,843 (2,312) 5,531 - - 5,531 Cents 12.625 12.566 2017 $ ,000 34,217 293 (2,595) (11,851) (1,815) (8,744) (2,330) (182) (2,136) 4,857 (1,259) 3,598 - - 3,598 Cents 8.270 8.270 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 38 ANNUAL REPORT 2018CONSOLIDATED STATEMENT OF FINANCIAL POSITION As At 30 June 2018 Assets Current Assets Cash & Cash Equivalents Trade & Other Receivables Inventories Other Current Assets Total Current Assets Non-Current Assets Property, Plant & Equipment Intangibles Total Non-Current Assets Total Assets Liabilities Current Liabilities Trade & Other Payables Borrowings Current Tax Liability Employee Benefits Deferred Consideration Total Current Liabilities Non-Current Liabilities Borrowings Employee Benefits Deferred Consideration Deferred Tax Total Non-Current Liabilities Total Liabilities Net Assets Equity Issued Capital Reserves Retained Profits Total Equity Note Consolidated 2017 $ ,000 2017 $ ,000 8 9 10 11 12 13 15 16 17 18 20 21 14 22 34 23 7,013 4,357 263 899 12,532 5,061 36,649 41,710 54,242 7,298 4,027 977 1,293 1,968 5,484 3,242 189 643 9,558 4,830 17,737 22,567 32,125 4,867 2,240 437 772 353 15,563 8,669 9,205 186 - 4,421 13,812 29,375 24,867 12,246 361 12,260 24,867 1,662 89 234 2,448 4,433 13,102 19,023 11,308 2 7,713 19,023 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 39 ANNUAL REPORT 2018CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For Year Ended 30 June 2018 Consolidated Balance at 1 July 2016 Profit after Income Tax for the Year Other Comprehensive Income Total Comprehensive Income for the Year Transactions with Owners, in their Capacity as Owners: Dividends Paid Performance Rights Issued Shares Issued Net of Capital Raising Costs Tax Effect of Capitalised Costs of IPO Balance at 30 June 2017 Consolidated Balance at 1 July 2017 Profit after Income Tax for the Year Other Comprehensive Income Total Comprehensive Income for the Year Transactions with Owners, in their Capacity as Owners: Dividends Paid Performance Rights Issued Movements as a result of existing performance rights Employee Share Plan Shares Issued Net of Capital Raising Costs Tax Effect of Capitalised Costs of IPO Balance at 30 June 2018 Note 34 22 Note 34 34 22 22 Issued Capital $ ,000 11,280 - - - - - 77 (49) 11,308 Issued Capital $ ,000 11,308 - - - - - 109 97 781 (49) 12,246 Share Based Payment Reserve $ ,000 - - - - - 2 - - 2 Share Based Payment Reserve $ ,000 2 - - - - 29 260 70 - - 361 Retained Profits $ ,000 4,876 3,598 - 3,598 (761) - - - Total Equity $ ,000 16,156 3,598 - 3,598 (761) 2 77 (49) 7,713 19,023 Retained Profits $ ,000 7,713 5,531 - 5,531 (984) - - - - - Total Equity $ ,000 19,023 5,531 - 5,531 (984) 29 369 167 781 (49) 12,260 24,867 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 40 ANNUAL REPORT 2018CONSOLIDATED STATEMENT OF CASH FLOWS For Year Ended 30 June 2018 Consolidated Note 2018 $ ,000 2017 $ ,000 Cash Flows from Operating Activities Receipts from Customers Payments to Suppliers & Employees Interest Received Interest Paid & Other Finance Costs Paid Income Taxes Paid Net Cash From / (Used) in Operating Activities 29 Cash Flows from Investing Activities Payments for Business Combinations (net of cash acquired) Payments for Property, Plant & Equipment Payments for Intangible Assets Proceeds from Sale of Property, Plant & Equipment Net Cash From / (Used) Investing Activities Cash Flows from Financing Activities Proceeds from Borrowings Repayment of Borrowings Dividends Paid Net Cash From / (Used) Financing Activities Net Increase (Decrease) in Cash & Cash Equivalents Cash & Cash Equivalents at the Beginning of the Year Cash & Cash Equivalents at the End of the Year 8 Non-Cash Financing Activities 57,858 (44,835) 13,023 37 (476) (2,240) 10,344 (14,532) (2,074) (555) - 37,489 (29,559) 7,930 67 (182) (2,719) 5,096 (7,057) (1,775) (379) 68 (17,161) (9,143) 17,724 (8,394) (984) 8,346 1,529 5,484 7,013 7,318 (4,068) (761) 2,489 (1,558) 7,042 5,484 Shares Issued as Consideration for Business Acquisitions 781 - The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes 41 ANNUAL REPORT 20185.0 NOTES TO THE FINANCIAL STATEMENTS 42 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For Year Ended 30 June 2018 These consolidated financial statements and notes represent those of Over the Wire Holdings Limited (the “Company”) and controlled entities (the “consolidated group” or “Group”). The separate financial statements of the parent entity Over the Wire Holdings Limited have not been presented within the financial report as permitted by the Corporations Act 2001. The financial statements were authorised for issue on 22 August 2018 by the directors of the company. NOTE 1: SIGNIFICANT ACCOUNTING POLICIES BASIS OF PREPARATION These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the revaluation of available for sale financial assets, financial assets and liabilities at fair value through profit & loss, investment properties, certain classes of property, plant & equipment, and derivative financial instruments. NET CURRENT ASSET DEFICIENCY The consolidated entity recorded a net current liability position of $3.03m (June 2017: net current asset position of $0.89m) as at 30 June 2018. Given the consolidated entity’s net current liability position, the ability of the consolidated entity to continue as a going concern, including its ability to pay its debts as and when they fall due, needs to be considered. The net current liability position is due to the acquisition of VPN Solutions, which was predominately funded through external borrowings (Refer to notes 19 and 20). The continuation of the consolidated entity as a going concern is dependent upon the continuation of generating future profits by the underlying businesses. It is on the basis of the consolidated entity's ability to maintain future profits and cash inflows from operations that the Directors have prepared the financial report on a going concern basis. 43 A. NEW ACCOUNTING STANDARDS ADOPTED IN THE CURRENT FINANCIAL PERIOD The consolidated entity has considered the implications of new or amended Accounting Standards, but determined that their application to the financial statements is either not relevant or not material. B. NEW ACCOUNTING STANDARDS FOR APPLICATION IN FUTURE PERIODS Accounting Standards issued by the AASB that are not yet mandatorily applicable to the Group, together with an assessment of the potential impact of such pronouncements on the Group when adopted in future periods, are discussed below: AASB 9: Financial Instruments and associated Amending Standards (applicable to annual reporting periods beginning on or after 1 January 2018). The Standard will be applicable retrospectively and includes revised requirements for the classification and measurement of financial instruments, revised recognition and recognition requirements for financial instruments and simplified requirements for hedge accounting. The directors do not anticipate that the adoption of AASB 9 will have a material impact on the Group’s financial instruments. AASB 15: Revenue from Contracts with Customers (applicable to annual reporting periods beginning on or after 1 January 2018, as deferred by AASB 2015-8: Amendments to Australian Accounting Standards – Effective Date of AASB 15). When effective, this Standard will replace the current accounting requirements applicable to revenue with a single, principles-based model. Except for a limited number of exceptions, including leases, the new revenue model in AASB 15 will apply to all contracts with customers as well as non-monetary exchanges between entities in the same line of business to facilitate sales to customers and potential customers. The core principle of the Standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. To achieve this objective, AASB 15 provides the following five-step process: • Identify the contract(s) with a customer; • Identify the performance obligations in the contract(s); • Determine the transaction price; • Allocate the transaction price to the performance obligations in the contract(s); and • Recognise revenue when (or as) the performance obligations are satisfied. ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The transitional provisions of this Standard permit an entity to either: elect not to separate non-lease components and instead account for all components as a lease; and Restate the contracts that existed in each prior period presented per AASB 108: Accounting Policies, Changes in Accounting Estimates and Errors (subject to certain practical expedients in AASB 15); or recognise the cumulative effect of retrospective application to incomplete contracts on the date of initial application. There are also enhanced disclosure requirements regarding revenue. The directors anticipate that the adoption of AASB 15 will have an immaterial impact on the Group's financial statements, for the following reasons: • The Group already accounts for revenue from contracts with customers materially in line with the performance obligations of the contract, and in a manner similar to the outcomes the new standard seeks to achieve; • The Group already accounts for the expenses corresponding to the contracts with customers materially in line with the performance obligations of the contract, and in a manner similar to the outcomes the new standard seeks to achieve; • Where installation or set up fees are charged at the commencement of a contract with customers, they are reflective of the up-front costs and efforts involved in preparing and installing the service ready for use, as well as the economic benefits that pass to the customer, and are therefore already accounted for by the Group in accordance with the performance obligations of the contract, and in a manner similar to the outcomes the new standard seeks to achieve. Management have begun their assessment of the financial impact of AASB 15 as at 30 June 2018, and, it is estimated that, for the reasons outlined above, the financial impact of these changes will be immaterial. AASB 16: Leases (applicable to annual reporting periods beginning on or after 1 January 2019). When effective, this Standard will replace the current accounting requirements applicable to leases in AASB 117: Leases and related Interpretations. AASB 16 introduces a single lessee accounting model that eliminates the requirement for leases to be classified as operating or finance leases. The main changes introduced by the new Standard include: • Recognition of a right-to-use asset and liability for all leases (excluding short-term leases with less than 12 months of tenure and leases relating to low-value assets); • Depreciation of right-to-use assets in line with AASB 116: Property, Plant and Equipment in profit or loss and unwinding of the liability in principal and interest components; • Variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability using the index or rate at the commencement date; • By applying a practical expedient, a lessee is permitted to • Additional disclosure requirements. The transitional provisions of AASB 16 allow a lessee to either retrospectively apply the Standard to comparatives in line with AASB 108 or recognise the cumulative effect of retrospective application as an adjustment to opening equity on the date of initial application. The standard will primarily affect the accounting for the Group’s operating leases. As at the reporting date, the Group has noncancellable operating lease commitments of $2,994K (see note 28) primarily associated with the rental of office premises. Although the directors anticipate that the adoption of AASB 16 will affect the Group's financial statements by altering the ratio of net current assets to net non- current assets, as the operating leases are all arms-length commercial leases at fair market value, they do not anticipate any material impact on profit. Also, as the majority of operating leases in place at present will have expired before the adoption of AASB 16 (see note 28), it is impracticable at this stage to provide a reasonable estimate of the impacts on the financial statements. Management will consider the financial impacts of the new standard leading up to its adoption from 1 July 2019, when in a better position to do so once the operating leases discussed above are considered for renewal. C. PRINCIPLES OF CONSOLIDATION The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the consolidated entity (‘Company’ or ‘Parent Entity’) as at 30 June 2018 and the results of all subsidiaries for the year then ended. The consolidated entity and its subsidiaries together are referred to in these financial statements as ‘the consolidated entity’. Subsidiaries are all those entities over which the consolidated entity has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The effects of potential exercisable voting rights are considered when assessing whether control exists. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. Refer to the ‘Business Combinations’ accounting policy for further details. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is 44 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED recognised directly inequity attributable to the parent. Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and noncontrolling interest in the subsidiary together with any cumulative translation differences recognised in equity. The consolidated entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. D. BUSINESS COMBINATIONS The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition- date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquire and the amount of any non-controlling interest in the acquire. For each business combination, the non- controlling interest in the acquire is measured at either fair value or at the proportionate share of the acquirer’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the consolidated entity assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the consolidated entity’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the consolidated entity remeasures its previously held equity interest in the acquire at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquire and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquire is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition- date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquire, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts 45 E. FOREIGN CURRENCY TRANSLATION The financial statements are presented in Australian dollars, which is the consolidated entity’s functional and presentation currency. Foreign Currency Transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. F. REVENUE RECOGNITION Revenue is recognised when it is probable that the economic benefit will flow to the consolidated entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Sale of Goods Sale of goods revenue is recognised at the point of sale, which is where the customer has taken delivery of the goods, the risks and rewards are transferred to the customer, and where there is a valid sales contract. Amounts disclosed as revenue are net of sales returns and discounts. Rendering of Services Rendering of services revenue is recognised by reference to when the service has been provided. In the case of voice revenue, this is the timing of the phone calls made, whilst for the Data Networks, Data Centre Co-Location and Cloud Services divisions, it is generally the monthly provision of, or access to, the service. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is the method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other Revenue Other revenue is recognised when it is received or when the right to receive payment is established. ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED INCOME TAX G. The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. H. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the statement of cash flows presentation purposes, cash and cash equivalents also includes bank overdrafts, which are shown within borrowings of current liabilities on the statement of financial position. I. TRADE AND OTHER RECEIVABLES Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 30 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Other receivables are recognised at amortised cost, less any provision for impairment. INVENTORIES J. Finished goods are stated at the lower of cost or net realisable value, on a first-in-first-out basis. Costs of purchased inventory are determined after deducting rebates and discounts received or receivable. Stock in transit is stated at the lower of cost and net realisable value. Cost comprises purchase and delivery costs, net of rebates and discounts received or receivable. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 46 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. N. LEASES The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the consolidated entity will obtain ownership at the end of the lease. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. O. INTANGIBLE ASSETS Brand Value Brands are acquired in a business combination. Some brands are not amortised, given the Board has assessed them to have indefinite useful lives due to the strength of the brand in the market. These are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Some brands are amortised where the Board has identified the Brand as likely to be transitioned to an Over the Wire Brand in the future. K. INVESTMENTS AND OTHER FINANCIAL ASSETS Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. The fair values of quoted investments are based on current bid prices. For unlisted investments, the consolidated entity establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership. L. LOANS AND RECEIVABLES Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortised cost using the effective interest rate method. Gains and losses are recognised in profit or loss when the asset is derecognised or impaired. M. PROPERTY, PLANT AND EQUIPMENT Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on both a straight-line and diminishing value basis, depending on the asset. The depreciation method chosen is based on what is deemed the most reliable to write off the net cost of each item of property, plant and equipment over their expected useful lives. The depreciation rates used for each class of depreciable assets are: Straight Line Diminishing Value 13 - 33% 15 – 67% 2½ - 33% 20 – 40% 15% N/A Computer, Network & IT Plant & Equipment Furniture and Fixtures Motor Vehicles 47 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Right-to-Use Assets Right-to-Use assets are acquired in a business combination, whereby a right to access a specified asset is conveyed, for a period of time, in exchange for consideration. Right-to-Use assets are amortised on a straight-line basis over the period of their expected benefit, generally being the expected finite life of the underlying lease which grants the access, including the period of any options where the option is considered likely to be exercised. Right-to-Use assets are carried at cost less any accumulated amortisation and impairment losses. Goodwill Goodwill arises on the acquisition of a business combination. Goodwill is calculated as the excess sum of: • the consideration transferred; • any non-controlling interest; and • the acquisition date fair value of any previously held equity interest; over the acquisition date fair value of net identifiable assets acquired. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Goodwill is allocated to the Group's cash-generating units or groups of cash-generating units, representing the lowest level at which goodwill is monitored. Customer Contracts Customer contracts and relationships acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being their expected finite life of approximately 10 years, based upon the consolidated entity’s historical levels of customer retention. Customer contracts are carried at cost less any accumulated amortisation and impairment losses. Internally Generated Computer Software Costs associated with developing computer software programmes are generally expensed as incurred. Costs that are clearly associated with an identifiable and unique product, which will be controlled by the Group and have a profitable benefit exceeding the cost beyond one year, are recognised as intangible assets. The following criteria are required to be met before the related expenses can be capitalised as an intangible asset. • The technical feasibility of completing the intangible asset so that it will be available for use or sale. • The intention to complete the intangible asset and use or sell it. • The Group’s ability to use or sell the intangible asset. • How the intangible asset will generate probable future economic benefits. Among other things, the Group can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. • The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, and • Its ability to measure reliably the expenditure attributable to the intangible asset during its development. Computer software development costs recognised as assets are amortised over their useful lives, not exceeding a period of five years. IMPAIRMENT OF NON-FINANCIAL ASSETS P. Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Q. TRADE AND OTHER PAYABLES These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. R. BORROWINGS Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Where there is an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, the loans or borrowings are classified as non-current. S. FINANCE COSTS Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred, including: • Interest on short-term and long-term borrowings • Interest on finance leases 48 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED U. PROVISIONS Provisions are recognised when the consolidated entity has a present (legal or constructive) obligation as a result of a past event, it is probable the consolidated entity will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. V. EMPLOYEE BENEFITS Wages and Salaries and Annual Leave Liabilities for wages and salaries, including non-monetary benefits, and annual leave expected to be settled within12 months of the reporting date are recognised in current liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Long Service Leave The liability for long service leave is recognised in current and non-current liabilities, depending on the unconditional right to defer settlement of the liability for at least 12 months after the reporting date. The liability is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on Australian corporate bonds (the Milliman G100 Australian Corporate bonds discount rate at the end of June) with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. W. ISSUED CAPITAL Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. X. DIVIDENDS Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. T. FINANCIAL INSTRUMENTS Initial Recognition and Measurement Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the company commits itself to either purchase or sale of the asset (i e trade date accounting is adopted). Financial instruments are initially measured at fair value plus transactions costs except where the instrument is classified as ‘at fair value through profit or loss in which case the transaction costs are expensed to profit or loss immediately. Classification and Subsequent Measurement The effective interest method is used to allocate interest income or interest expense over the relevant period and is equivalent to the rate that exactly discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) through the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying value with a consequential recognition of an income or expense in profit or loss. The Group does not designate any interests in subsidiaries, associates or joint venture entities as being subject to the requirements of accounting standards specifically applicable to financial instruments. • Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Loans and receivables are included in current assets, except for those which are not expected to mature within 12 months after the end of the reporting period. (All other loans and receivables are classified as non-current assets.) • Financial liabilities Non-derivative financial liabilities (excluding financial guarantees) are subsequently measured at amortised cost. De-recognition Financial assets are derecognised where the contractual rights to receipt of cash flows expires or the asset is transferred to another party whereby the entity no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are derecognised where the related obligations are either discharged, cancelled or expire. The difference between the carrying value of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of non-cash assets or liabilities assumed, is recognised in profit or loss. 49 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Y. EARNINGS PER SHARE Basic Earnings Per Share Basic earnings per share is calculated by dividing the profit attributable to the owners of the consolidated entity, by the weighted average number of ordinary shares outstanding during the financial year. Diluted Earnings Per Share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Z. GOODS AND SERVICES TAX (‘GST’) AND OTHER SIMILAR TAXES Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. AA. ROUNDING OF AMOUNTS The Company is of a kind referred to in ASIC Corporations (Rounding in Financial / Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Legislative Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. BB. COMPARATIVE FIGURES When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. NOTE 2: CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. PROVISION FOR IMPAIRMENT OF RECEIVABLES The provision for impairment of receivables assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivables, historical collection rates and specific knowledge of the individual debtor’s financial position. PROVISION FOR IMPAIRMENT OF INVENTORY The provision for impairment of inventory assessment requires a degree of estimation and judgement. The level of provision is assessed by taking into account the recent sales experience, the ageing of inventory, and other factors that affect inventory obsolescence. ESTIMATION OF USEFUL LIVES OF ASSETS The consolidated entity determines the estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated. Technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. GOODWILL AND OTHER INDEFINITE LIFE INTANGIBLE ASSETS The consolidated entity tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 1. 50 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED LONG SERVICE LEAVE PROVISION As discussed in note 1, the liability for long service leave is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at the reporting date. In determining the present values of the liability, estimates of attrition rates and pay increases through promotion and inflation have been taken into account. LEASE MAKE GOOD PROVISION A provision has been made for the present value of anticipated costs for future restoration of leased premises. The provision includes future cost estimates associated with closure of the premises. The calculation of this provision requires assumptions such as application of closure dates and cost estimates. The provision recognised for each site is periodically reviewed and updated based on the facts and circumstances available at the time. Changes to the estimated future costs for sites are recognised in the statement of financial position by adjusting the asset and the provision. Reductions in the provision that exceed the carrying amount of the asset will be recognised in profit or loss. BUSINESS COMBINATIONS Business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the consolidated entity taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. IMPAIRMENT OF NON-FINANCIAL ASSETS OTHER THAN GOODWILL AND OTHER INDEFINITE LIFE INTANGIBLE ASSETS The consolidated entity assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the consolidated entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. INCOME TAX The consolidated entity is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The consolidated entity recognises liabilities based on the consolidated entity’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. RECOVERY OF DEFERRED TAX ASSETS Deferred tax assets are recognised for deductible temporary differences only if the consolidated entity considers it is probable that future taxable amounts will be available to utilise those temporary differences and losses. UNEARNED REVENUE Customers of Netsip and Faktortel are invoiced for telephone calls monthly in arrears on the anniversary date of the establishment of their account. Unearned Revenue is recorded for telephone calls made between the invoice date which occurs mid-month, and the last day of the month in order to match the period of revenue recognition with the period in which the service (telephone calls) was provided. VALUATION OF DEFERRED CONSIDERATION PAYABLE As the value of deferred consideration payable for business combinations is dependent upon vendors achieving revenue targets in future years, management is required to make judgements that affect the reported amounts in the financial statements. Management has used their best judgement in determining the fair value of the reported liabilities, including estimating the likelihood of achieving the revenue targets and in turn the likelihood of having to make the future payments. 51 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Voice The consolidated entity provides Session Initiation Protocol (SIP) based internet voice solutions that offer high quality, high availability, voice calls at a lower cost to traditional telephony. Over the Wire’s voice platform supports a range of client usage scenarios, from Private Branch exchanges (PBX) to call centre diallers, for both inbound and outbound calling. Cloud and Managed Services The consolidated entity provides a range of private cloud- based services to its customers consisting of: Infrastructure as a Service (IaaS): Forming the base of a fully outsourced infrastructure solution. The consolidated entity offers its customers a range of IaaS platforms with cloud-based server, storage and network services. Hosted PBX: The consolidated entity provides a business-grade hosted telephony solution, eliminating the need for high capital expenditure and costly upgrade cycles to gain access to new features. Amazon Web Services Direct Connect and Microsoft Azure Express Route: Being the two major public cloud service providers in Australia. The consolidated entity provides a dedicated connection, directly into a customer’s public cloud service provider’s hosted environment. Managed Services: The consolidated entity offers a range of Managed Services from basic maintenance through to complete outsourced IT support and administration. This division also includes one-off project work and equipment sales where requested by the customer. Data Centre Co-location Data Centre Co-Location allows customers to house their equipment, such as servers and network equipment, in the consolidated entity’s secure, highly stable and monitored data centres reducing the risk of downtime and saving on environmental infrastructure costs (such as power and air- conditioning). NOTE 3: OPERATING SEGMENTS & PRODUCT LINES The consolidated entity has identified its operating segments based on the internal reports that are reviewed and used by the Chief Operating Decision Makers (‘CODM’) in assessing performance and determining the allocation of resources. The CODM considers that the business has one reportable segment, being IT and Telecommunications. Therefore, all segment assets and liabilities, and the segment result, relate to one business segment and consequently no detailed segment analysis has been prepared. Product Lines are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM is responsible for the allocation of resources to product lines and assessing their performance. This is also the basis on which the board receive internal management results. A. DESCRIPTION OF PRODUCT LINES The consolidated entity is a profitable, high growth provider of telecommunications, cloud and IT solutions. It has a national network presence with Points of Presence (POPs) in all major Australian capital cities and Auckland, New Zealand. The consolidated entity utilises more than 20 wholesale infrastructure providers to deliver services into these POPs for delivery of a complete data and voice solution to meet each customer’s specific requirements. The Chief Operating Decision Makers (‘CODM’) consider the business from both a product and a geographic perspective and have identified four reportable Product Lines. Data Networks and Internet The consolidated entity typically enters into an initial three year contract with a customer for the establishment, provision and maintenance of its WAN. Customers include small to large businesses with single to multiple sites. The Data Networks Product Line includes the provision of internet products and services. Access to affordable, high speed and reliable connectivity is a prerequisite for consuming cloud based applications and services, facilitating transactions, and utilising IP-based communications. The consolidated entity provides high bandwidth, dependable, business grade internet connectivity to enable Internet services, video conferencing, Software as a Service applications and online collaboration for businesses of any size. The consolidated entity supplies internet connections matching the most appropriate technology to location and/or price requirements of its customers. 52 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED B. PRODUCT LINE INFORMATION PROVIDED TO THE CHIEF OPERATING DECISION MAKERS (‘CODM’). The breakdown of revenue has been shown below geographically and by Product Line. Consolidated 2018 $ ,000 29,383 14,060 7,258 2,860 53,561 53,561 53,561 2017 $ ,000 15,915 10,714 4,845 2,742 34,217 34,217 34,217 Consolidated 2018 $ ,000 2017 $ ,000 37 - 79 116 67 200 26 293 Revenue by Product Line Data Networks and Internet Voice Cloud and Managed Services Data Centre Co-location Total Revenue by Product Line Revenue by Geographic Area Australasia Total Revenue by Geographic Area NOTE 4: OTHER INCOME Other Income Interest Income Data Retention Industry Grant Other Sundry Income Total Other Income 53 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 5: EXPENSES Profit before income tax includes the following expenses: Cost of Sales & Services Data Centre & Co-Location Expense Calls & Communications Expense Other cost of goods sold Total Cost of Sales & Services Employee Benefits Salaries and Wages Superannuation Annual and Long Service Leave Other Employee Expenses Total Employee Benefits Depreciation Computer, Network & IT Plant & Equipment Furniture & Fittings Motor Vehicles Total Depreciation Amortisation Amortisation of Intangibles Total Amortisation Total Depreciation & Amortisation Finance Costs Interest and Finance Charges Paid/Payable Total Finance Costs Other Expenses Legal, Accounting & Business Acquisition Costs Rent Licenses & Subscriptions Travel & Marketing Data Centre & Communications General Expenses Total Other Expenses Total Expenses Consolidated 2018 $ ,000 2017 $ ,000 1,705 18,965 3,057 23,727 11,027 935 190 1,095 13,247 1,408 11,796 1,815 15,019 7,068 646 199 831 8,744 2,001 1,405 71 3 82 26 2,075 1,513 1,862 1,862 3,937 476 476 150 655 407 382 2,015 838 4,447 817 817 2,330 182 182 240 675 243 318 1,242 660 3,378 45,834 29,653 Expenses increased largely due to the growth in revenue, and in turn a corresponding increase in cost of goods sold, as well as the acquisition of Telarus in prior year, for which a full year of results was included in 2018 financial year, as well as the acquisition of VPN Solutions on 1 November 2017 (refer to note 19 for more information). 54 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 6: INCOME TAX EXPENSE Income Tax Expense Current Tax Deferred Tax – origination and reversal of temporary differences Deferred Tax – adjustment recognised for prior periods Adjustment recognised for prior periods Aggregate Income Tax Expense Deferred tax included in income tax expense comprises: (Increase) / Decrease in Deferred Tax Assets Increase / (Decrease) in Deferred Tax Liabilities Deferred Tax – origination and reversal of temporary differences Numerical Reconciliation of Income Tax Expense and Tax at Statutory Rate Profit before income tax expense Tax at the statutory rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Entertainment Amortisation of Intangibles Accounting & Legal & Business Acquisition Costs IPO Costs Research & Development Other Sundry Items Adjustment recognised for prior periods Movement in Timing Differences Income Tax Expense The applicable weighted average effective tax rates are as follows: Consolidated 2018 $ ,000 2017 $ ,000 3,035 (723) - - 2,312 (210) (513) (723) 7,843 2,353 20 - 11 (49) - (23) (41) - - 1,666 (314) - (93) 1,259 (23) (291) (314) 4,857 1,457 17 6 24 (49) (29) 23 (8) (93) (97) 2,312 29% 1,259 26% 55 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 7: EARNINGS PER SHARE Reconciliation of Earnings to Profit or Loss Earnings Used to Calculate Basic Earnings Per Share Earnings Used to Calculate Diluted Earnings Per Share Weighted Average Number of Ordinary Shares Weighted Average Number of Ordinary Shares Outstanding During the Year Used in Calculating Basic Earnings Per Share Adjustments for calculation of diluted earnings per share: Weighted Average Number of Ordinary Shares Outstanding During the Year Used in Calculating Dilutive Earnings Per Share Weighted Average Number of Ordinary Shares Outstanding During the Year Used in Calculating Dilutive Earnings Per Share Basic Earnings Per Share (Cents Per Share) Diluted Earnings Per Share (Cents Per Share) Consolidated 2018 $,000 5,531 5,531 ,000 43,809 2017 $,000 3,598 3,598 ,000 43,505 208 1 44,061 43,506 Cents 12.625 12.566 Cents 8.270 8.270 NOTE 8: CURRENT ASSETS – CASH & CASH EQUIVALENTS Cash & Cash Equivalents Cash on Hand Cash at Bank Total Cash & Cash Equivalents Reconciliation to Cash and Cash Equivalents at the End of the Financial Year The above figures are reconciled to cash and cash equivalents at the end of the financial year as shown in the statement of cash flows as follows: Balance as Above Balance as per Statement of Cash Flows Consolidated 2018 $ ,000 2017 $ ,000 1 7,012 7,013 1 5,483 5,484 7,013 7,013 5,484 5,484 Cash and cash equivalents increased during the year primarily due to the strong cashflows from operations. Cash reserves were used for principal reductions in debt, capital expenditure, and payment of dividends. The Consolidated Statement of Cashflows provides greater detail on the sources and uses of cash during the year. 56 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 9: CURRENT ASSETS – TRADE & OTHER RECEIVABLES The following table details the Group’s trade and other receivables exposed to credit risk with aging analysis and impairment provided for thereon. Amounts are considered ‘past due’ when the debt has not been settled with the terms and conditions agreed between the Group and the customer or counterparty to the transaction. Receivables that are past due are assessed for impairment by ascertaining the debtors and are provided for where there are specific circumstances indicating that the debt may not be fully repaid to the Group. Trade & Other Receivables Trade Receivables Less: Provision for Impairment of Receivables Term Deposits Deposits Paid Other Receivables Consolidated 2018 $ ,000 2017 $ ,000 3,053 (303) 2,750 653 128 826 2,325 (80) 2,245 500 128 369 Total Trade & Other Receivables 4,357 3,242 Impairment of Receivables The consolidated entity has recognised a loss of $ 249,000 (2017 $79,000) in profit and loss in respect of impairment of receivables for the year ended 30 June 2018. The aging of the impaired receivables provided for above are as follows: 0 – 3 months overdue 4 – 6 months overdue More than 6 months overdue Total Provision for Impairment of Receivables Movements in the Provision for Impairment of Receivables are as Follows: Opening Balance Additional Provision Recognised through Business Combinations Additional Provision Recognised Receivables Written off During the Year as Uncollectable Closing Balance 231 67 5 303 80 - 249 (26) 303 58 3 19 80 109 40 39 (108) 80 57 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Past Due But Not Impaired: Customers with balances past due but without provision for impairment of receivables amount to $484,000 as at 30 June 2018 ($227,000 as at 30 June 2017). The consolidated entity did not consider a credit risk on the aggregate balances after reviewing credit terms of customers based on collection practices. The aging of the past due but not impaired receivables are as follows: 0 – 3 months overdue 4 – 6 months overdue More than 6 months overdue Total Receivables past due but not impaired Consolidated 2018 $ ,000 2017 $ ,000 432 52 - 484 215 12 - 227 Trade and Other Receivables increased largely due to the acquisition of Telarus, and the overall growth in revenue of the business. NOTE 10: CURRENT ASSETS – INVENTORIES Inventories Finished Goods – at Net Realisable Value Total Inventories NOTE 11: OTHER ASSETS Other Assets Prepayments Total Other Assets Consolidated 2018 $ ,000 2017 $ ,000 263 263 189 189 Consolidated 2018 $ ,000 2017 $ ,000 899 899 643 643 58 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 12: NON-CURRENT ASSETS –PLANT & EQUIPMENT Computer, Network & IT Plant & Equipment Computer, Network & IT Plant & Equipment – at cost* Less: Accumulated Depreciation Furniture & Fixtures Furniture & Fixtures – at cost Less: Accumulated Depreciation Motor Vehicles Motor Vehicles – at cost Less: Accumulated Depreciation Consolidated 2018 $ ,000 14,724 (9,846) 4,878 454 (275) 179 23 (19) 4 2017 $ ,000 11,062 (6,480) 4,582 308 (67) 241 23 (16) 7 Total Plant & Equipment at written Down Value 5,061 4,830 Reconciliations Reconciliations of the written down value at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2016 Additions through Business Combinations Additions Disposals Depreciation Expense Balance at 30 June 2017 Additions Through Business Combinations Additions Transfer between classes* Disposals Depreciation Expense Balance at 30 June 2018 Computer, Network, IT Plant & Equipment Furniture & Fixtures Motor Vehicles $,000 3,235 1,134 1,618 - (1,405) 4,582 174 2,123 - - (2,001) 4,878 $,000 142 24 157 - (82) 241 9 - - - (71) 179 $,000 101 - - (68) (26) 7 - - - - (3) 4 Total $,000 3,478 1,158 1,775 (68) (1,513) 4,830 183 2,123 - - (2,075) 5,061 * A transfer between classes occurred, but as the written down value of the assets was nil, no value appears in the reconciliation above. 59 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 13: NON-CURRENT ASSETS – INTANGIBLES Intangibles Goodwill – at Cost Brand Value Less: Accumulated Amortisation Location and Right-to-Use Less: Accumulated Amortisation Customer Lists Less: Accumulated Amortisation Internally Generated Software Less: Accumulated Amortisation Consolidated 2018 $ ,000 16,300 16,300 3,460 (214) 3,246 1,817 (543) 1,274 17,250 (2,252) 14,998 971 (140) 831 2017 $ ,000 5,331 5,331 3,210 (65) 3,145 1,817 (378) 1,439 8,290 (867) 7,423 850 (451) 399 Total Intangibles 36,649 17,737 60 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Reconciliations Reconciliations of the written down value at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2016 Additions - Business Combinations Additions Disposals Amortisation Expense Balance at 30 June 2017 Additions - Business Combinations Additions Disposals* Amortisation Expense Balance at 30 June 2018 Internally Generated Software $,000 - 23 379 - (3) 399 - 555 - (123) 831 Goodwill $,000 2,344 2,987 - - 5,331 Brand Value $,000 2,750 460 - - (65) 3,145 10,969 250 - - 16,330 - - (149) 3,246 Location & Right to Use $,000 1,605 - - - (166) 1,439 - - - Customer List $,000 3,506 4,500 - - (583) 7,423 Total $,000 10,205 7,970 379 - (817) 17,737 9,000 20,219 - - 555 - (1,862) 36,649 (165) 1,274 (1,425) 14,998 *During the year $434K of assets with a written down value of nil was scrapped during the year. Finite Life Intangible Assets Outlined below are the carrying amounts and remaining amortisation periods of the individual intangible assets that are material to the consolidated entity’s financial statements at 30 June 2018. Remaining Amortisation Period Carrying Amount Location & Right to Use – Sanity Right to Use – WebCentral Location & Right to Use Customer List – Faktortel Customer List – Sanity Customer List – Telarus Customer List – SpiderBox Customer List – VPN Solutions Customer List Brand – Sanity Brand – Telarus Brand – VPN Solutions Brand Internally Generated Computer Software - 2017 Internally Generated Computer Software - 2018 Internally Generated Computer Software 61 Years 9 2 7 7 9 7 9 4 4 4 4 5 $,000 1,168 106 1,274 1,417 1,114 3,862 205 8,400 14,998 200 330 216 746 277 554 831 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Impairment Disclosures Both goodwill and a select number of brand values are allocated to cash generating units, which are based on the Group’s reporting segments. As per Note 3, the Group has one reportable segment, being IT and Telecommunications. Brand Value has been previously recorded in relation to the acquisition of Faktortel and these costs are not amortised, given the Board has assessed them to have indefinite useful lives due to the strength of the brand in the market, and the intention of the Board to continue to trade under this brand indefinitely. Instead, this Brand is tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other acquired Brand values are being amortised, where the Board has assessed that the Brands will eventually be replaced in the market by the Over the Wire brand after an appropriate period of co-branding. Impairment Testing of Goodwill All Goodwill is allocated to the consolidated entity’s one cash generating unit (CGU) being IT & telecommunications. The recoverable amount of the cash-generating unit is determined based on value-in-use calculations. These calculations use the present value of cash flow projections over a 5 year period, with growth rates based on historical growth rates achieved in the past and budgets approved by management. Cash flows are not extrapolated beyond 5 years. Key assumptions used for value-in-use calculations: CGU – IT & Telecommunications: EBITDA & Net Cashflow from Operations (growth rate) Discount Rate 2018 2017 20% 10% 20% 10% As the consolidated entity runs a business structure that is light on capital expenditure requirements and utilises back-to-back purchasing arrangements aligned with the contractual terms of customers contracts, revenue, cost of goods sold and overhead have not been assessed in isolation, but instead EBITDA has been used for future cashflow projections, based on the entity’s historical accuracy on forecasting EBITDA growth and its ability to manage expenses in line with revenue growth. The Discount rate has been based upon an estimate of the entity’s weighted average cost of capital, and is similar to that used in the valuation of other intangible assets such as customer lists. Impairment Charge for Goodwill As a result of the impairment testing and evaluation, the consolidated entity has determined that the carrying value of Goodwill does not exceed their value-in-use, and no impairment charge is required. Impact of possible changes in key assumptions If the growth rate for EBITDA and Net Cashflow from Operations was reduced by 50% to 10%, there would still be no impairment charge required. If the discount rate, based on an estimate of the entity’s weighted average cost of capital was increased by 25% to 12.5%, there would still be no impairment charge required. 62 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 14: NON-CURRENT ASSETS – DEFERRED TAX Deferred Tax Consist Of: Deferred Tax Assets (a) Deferred Tax Liabilities (b) Net Deferred Tax Asset / (Liability) a) Deferred Tax Assets: The Balance Comprises Temporary Differences Attributable to: Accrued Expenses Provision for Doubtful Debts Employee Benefits Claimable IPO Costs Other Deferred Tax Asset Movement in Deferred Tax Assets Consolidated 2018 $ ,000 779 (5,200) (4,421) 2017 $ ,000 490 (2,938) (2,448) 144 91 444 100 - 779 57 25 259 149 - 490 Balance at 1 July 2016 (Charged) / Credited to Profit or Loss (Charged) / Credited through Equity Additions Through Business Combinations (Over) / Under Provision of Prior Year Balance at 30 June 2017 (Charged) / Credited to Profit or Loss (Charged) / Credited through Equity Additions Through Business Combinations (Over) / Under Provision of Prior Year Balance at 30 June 2018 Accrued Expenses $,000 51 5 - 1 - 57 87 - - - 144 Prov. for Doubtful Debts $,000 33 (20) - 12 - 25 66 - - - 91 Employee Benefits Claimable IPO Costs Other Total $,000 147 47 - 65 - 259 57 - 128 - 444 $,000 $,000 $,000 199 - (50) - - 149 - (49) - - 100 9 (9) - - - - - - - - - 439 23 (50) 78 - 490 210 (49) 128 - 779 63 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED b) Deferred Tax Liabilities: The Balance Comprises Temporary Differences Attributable to: Accrued Revenue Provision for Change in Contingent Liability Provision for Doubtful Creditors Intangibles on Acquisitions – Right to Use Intangibles on Acquisitions – Brand Intangibles on Acquisitions – Customer List Property Plant & Equipment Deferred Tax Liability Movement in Deferred Tax Liability Consolidated 2018 $ ,000 2017 $ ,000 (202) - (46) (350) (164) (4,438) - (5,200) (110) (17) (59) (387) (119) (2,227) (19) (2,938) Accrued Revenue Prov. for Change in Contingent Liability Prov. For Doubtful Creditors Intangibles on Acquisitions Other Total Balance at 1 July 2016 (Charged) / Credited to Profit or Loss Additions Through Business Combinations (Over) / Under Provision of Prior Year Balance at 30 June 2017 (Charged) / Credited to Profit or Loss Additions Through Business Combinations (Over) / Under Provision of Prior Year Balance at 30 June 2018 $,000 (117) 8 - - (109) (93) - - (202) $,000 (22) 5 - - (17) 17 - - - $,000 (4) (55) - - (59) 13 - - $,000 (1,577) 332 (1,488) - $,000 - 1 (1,720) 291 (21) (1,509) - - (2,733) (20) (2,938) 556 (2,775) - 20 513 - - - (2,775) - (5,200) (46) (4,952) NOTE 15: CURRENT LIABILITIES – TRADE & OTHER PAYABLES Trade & Other Payables Trade Payables GST Payable Accrued Expenses Prepaid Revenue Other payables Total Trade & Other Payables Consolidated 2018 $ ,000 2017 $ ,000 3,520 596 1,904 1,015 263 7,298 1,938 316 1,472 943 198 4,867 Trade and Other Payables increased largely due to the inclusion of the Trade Payables, Prepaid Revenue, and Accrued Expenses of VPN Solutions. 64 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 16: CURRENT LIABILITIES – BORROWINGS Borrowings (Current) Cisco Finance Lease NAB Term Loan Westpac Term Loan IBM Equipment Finance Total Current Borrowings Note 28 28 Consolidated 2018 $ ,000 2017 $ ,000 64 - 3,925 38 4,027 64 2,000 - 176 2,240 Borrowings increased due to the Term Loan taken out as funding for the acquisition of Telarus, as well as the inclusion of the IBM equipment financing which Telarus was already utilising. NOTE 17: CURRENT LIABILITIES – CURRENT TAX LIABILITY Current Tax Liability Provision For Income Tax Payable Total Current Tax Liability Consolidated 2018 $ ,000 2017 $ ,000 977 977 437 437 NOTE 18: CURRENT LIABILITIES – EMPLOYEE BENEFITS Consolidated 2018 $ ,000 2017 $ ,000 341 952 - 1,293 191 581 - 772 Employee Benefits Provision for Long Service Leave Provision for Annual Leave Other employee benefits payable Total Employee Benefits Payable 65 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Movement in Provisions Provision for Long Service Leave Balance at 1 July Additional Provisions Additions Through Business Combinations Amounts Used Balance at 30 June Provision for Annual Leave Balance at 1 July Additional Provisions Additions Through Business Combinations Amounts Used Balance at 30 June Analysis of Total Employee Provisions Current Non-Current (Note 21) Total Provisions Consolidated 2018 $ ,000 2017 $ ,000 191 (4) 154 - 341 581 682 274 (585) 952 1,293 186 1,479 60 131 - - 191 352 628 - (399) 581 772 89 861 Amounts Not Expected to be Settled Within the Next 12 Months: The current provision for long service leave includes all unconditional entitlements where employees have completed the required period of service and also where employees are entitled to pro-rata payments in certain circumstances. Based on past experience the consolidated entity does not expect all employees to take the full amount of accrued long service leave or require payment within the next 12 months. NOTE 19: BUSINESS COMBINATIONS (a) Acquisition of VPN Solutions Pty Ltd (Trading as VPN Solutions) On 1 November 2017, the company acquired 100% of the shares in VPN Solutions Pty Ltd. Established in 2002, VPN is based in New South Wales and delivers business grade telecommunications solutions to the Australian SME and Corporate markets. VPN Solutions has approximately 150 business customers, has experienced high levels of customer retention and specialises in delivering complex managed network solutions. Revenue of VPN Solutions included in the consolidated revenue of the group since acquisition amounted to $7,739K. Profit before tax of VPN Solutions included in consolidated profit before tax of the group since acquisition amounted to $86K. Had the results of VPN Solutions been consolidated from 1 July 2017, using a simple pro-rata calculation and ignoring any seasonality, if any, revenue of the consolidated group would have been $57,403 and consolidated profit before tax would have been $8,910K for the year ended 30 June 2018. 66 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (b) Details on acquisitions Company Primary Business Division Acquisition Purchase Price Intangibles Acquired Shares Issued to Settle Units  382,721 Shares Issued to Settle $,000 781 Cash to Settle Deferred Consideration $,000 14,834 $,000 1,735 $,000 17,350 $,000 20,219 Data Networks 100% of shares VPN Solutions (finalised) Total 17,350 20,219 382,721 781 14,834 1,735 The company engaged the services of independent consultants to provide the economic valuation of the acquisition of VPN Solutions, including purchase price, net assets acquired and intangibles (both identifiable and goodwill). Under the agreement, the vendor and its affiliates are restrained for five years from engaging in business similar to or in competition with the business of VPN Solutions, including being restrained from inducing an employee of VPN Solutions to terminate their employment or soliciting any clients of VPN Solutions. The vendor has provided customary warranties (including those relating to the share capital of VPN Solutions) that there are no liabilities or encumbrances, as well as the information relating to the accounts and records of VPN Solutions and tax related matters. 67 ANNUAL REPORT 2018      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The assets and liabilities recognised as a result of the acquisitions are as follows: Assets Current Assets Cash & Cash Equivalents Trade & Other Receivables Income Tax Receivable Other Assets Total Current Assets Non-Current Assets Property, Plant & Equipment Deferred Tax Other Non-Current Assets Total Non-Current Assets Total Assets Liabilities Current Liabilities Trade & Other Payables Borrowings (Related Party) Unearned Income Employee Benefits Total Current Liabilities Non-Current Liabilities Deferred Tax Liabilities Borrowings Employee Benefits Total Non-Current Assets Total Liabilities Net Assets Nov 2017 $ ,000 302 748 204 218 1,472 183 128 1 312 1,784 406 759 932 350 2,447 - - 78 78 2,525 (741) 68 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Acquired Intangibles Description Brand Value Location / Right-to- Use Customer List / Relationships Goodwill Total Class: Limited Life Limited Life Limited Life Treatment: Rate: Amortised and Impaired Forecast Use of Brand Amortised and Impaired Length of Lease Amortised and Impaired Churn/ Customer Retention Indefinite Life Impaired $,000 $,000 $,000 $,000 $,000 $,000 VPN Solutions Purchase Price: Less: Identifiable Net Assets Add: Deferred tax liability recognised on limited life intangibles 17,350 (647) 2,775 Intangible Assets upon Acquisition 20,219 Allocation of Intangibles: Estimate Useful Life of Limited Life Assets: Annual Forecast Amortisation 250 - 9,000 10,969 20,219 5 Years 10 Years 50 900 950 NOTE 20: NON-CURRENT LIABILITIES – BORROWINGS Borrowings IBM Equipment Finance Cisco Finance Lease NAB Term Loan Westpac Term Loan* Total Borrowings Note 28 28 Consolidated 2018 $ ,000 2017 $ ,000 - 77 - 9,128 9,205 38 139 1,485 - 1,662 Borrowings increased due to the Term Loan taken out as funding for the acquisition of VPN Solutions (which also refinanced the previous NAB Term Loan). 69 ANNUAL REPORT 2018               NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Westpac has approved the following facilities, with the balance of the facilities as at 30 June 2018 being as follows: Facility Bank Bill Business Loan Limit Used $,000  18,000 $,000 13,053 This facility is secured by an interlocking guarantee and indemnity given by all entities in the Group supported by a first registered general security agreement over all present and subsequently-acquired property over each of the entities in the consolidated group. Loan Covenants Under the terms of the Group’s major borrowing facility, the Group is required to comply with the following financial covenants: • Debt Service Coverage Ratio must at all times exceed 1.75 times • Financial debt / EBITDA Ratio must at all times be less than 2.25x As at 30 June 2018, the Group had complied with these covenants. NOTE 21: NON-CURRENT LIABILITIES – EMPLOYEE BENEFITS Employee Benefits Provision for Long Service Leave Total Employee Benefits Payable Consolidated 2018 $ ,000 2017 $ ,000 186 186 89 89 70 ANNUAL REPORT 2018    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 22: EQUITY – ISSUED CAPITAL Consolidated 2018 $ ,000 12,246 12,246 2017 $ ,000 11,308 11,308 Paid up Amount $,000 11,280 77 (49) 11,308 Paid up Amount $,000 11,308 781 109 97 (49) 12,246 Issued Capital Ordinary Shares – Fully Paid Total Issued Capital Movements in ordinary share capital Balance Employee Share Plan Tax Effect of Capitalised Costs of IPO Date No. of Shares Issue Price 30 June 2016 28 Apr 2017 30 Jun 2017 ,000 43,500 31 - $ 2,50 - Balance 30 June 2017 43,531 Balance Shares Issued on Acquisitions ESOP Shares Vested from Performance Rights Employee Share Plan Tax Effect of Capitalised Costs of IPO Date No. of Shares Issue Price 1 Jul 2017 1 Nov 2017 26 Feb 2018 18 Apr 2018 30 Jun 2018 ,000 43,531 382 50 35 - $ 2.04 - 2.77 - Balance 30 June 2018 43,998 ORDINARY SHARES Ordinary shares entitle the holder to participate in dividends and the proceeds of winding up the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. SHARE BASED PAYMENTS - EMPLOYEE SHARES On 18 April 2018, 34,920 ordinary shares were issued to employees under an Employee Share Plan with an issue price of $2.77 per share and for nil consideration. Shares acquired under this plan carry all of the same rights and obligations of other shares, except for any rights attaching to shares by reference to a record date prior to the date of issue or transfer. SHARE BASED PAYMENTS – PERFORMANCE RIGHTS On 26 February 2018, 50,000 performance rights (2017 Tranche 1) vested and were converted to Ordinary Shares. On 1 April 2018, the consolidated entity issued 99,732 performance rights to key management personnel and select senior staff under an Employee Share Plan as a means of rewarding and incentivising key employees. Further details of the performance rights, including details of rights issued during the financial year, are set out in note 34. 71 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED CAPITAL RISK MANAGEMENT The consolidated entity’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits to other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the consolidated entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt. The consolidated entity is subject to certain financing arrangement covenants and meeting these are given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. NOTE 23: EQUITY – RETAINED PROFITS Retained Profits Retained Profits at the Beginning of the Financial Year Profits After Income Tax Expense for the Financial Year Dividends Paid Retained Profits at the End of the Financial Year NOTE 24: EQUITY – DIVIDENDS Dividends Interim fully franked ordinary dividend of 1.00 cents per share franked at the tax rate of 30% for the 30 June 2018 Financial Year Final fully franked ordinary dividend of 1.25 cents per share franked at the tax rate of 30% for the 30 June 2017 Financial Year Total Dividends for the Financial Year Consolidated 2018 $ ,000 2017 $ ,000 7.713 5,531 (984) 12,260 4,876 3,598 (761) 7,713 Consolidated 2018 $,000 2017 $,000 439 545 984 326 435 761 Subsequent to year-end, on 22 August 2018, the Company declared a fully franked final dividend of 1.50 cents per share, for the year ended 30 June 2018. The dates of the dividend are as follows: Ex date Record Date Payment Date 9 October 2018 17 September 2018 18 September 2018 As this final dividend was declared subsequent to year-end, no provision has been made in the accounts for the dividend. 72 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Franking Credits Franking Credits Available at the Reporting Date Based on a Tax Rate of 30% Franking Credits that Will Arise From the Payment of the Amount of the Provision for Income Tax at the Reporting Date Based on a Tax Rate of 30% Franking Credits Available for Subsequent Financial Years Based on a Tax Rate of 30% NOTE 25: FINANCIAL RISK MANAGEMENT Consolidated 2018 $,000 5,138 977 2017 $,000 4,455 379 6,115 4,834 FINANCIAL RISK MANAGEMENT OBJECTIVES The group’s financial instruments consist mainly of deposits with banks, local money market instruments, accounts receivable and payable, loans to and from subsidiaries, and leases. The main purpose of non-derivative financial instruments is to raise finance for group operations. The group does not have any derivative instruments at 30 June 2018 or 30 June 2017. The totals for each category of financial instruments, measured in accordance with AASB 139 as detailed in the accounting policies to these financial statements, are as follows. Financial Assets Cash & Cash Equivalents (Note 8) Trade & Other Receivables (Note 9) Total Financial Assets Financial Liabilities Trade & Other Payables (Note 15) Borrowings (Note 16,20) Total Financial Liabilities Consolidated 2018 $ ,000 7,013 4,357 11,370 7,298 13,232 20,530 2017 $ ,000 5,484 3,242 8,726 4,867 3,902 8,769 TREASURY RISK MANAGEMENT The Boards overall risk management strategy seeks to assist the consolidated group in meeting its financial targets, whilst minimising potential adverse effects on financial performance. FINANCIAL RISK EXPOSURES AND MANAGEMENT The main risks the group is exposed to through its financial instruments are interest rate risk, liquidity risk and credit risk. FOREIGN CURRENCY RISK The group has no material exposure to fluctuations in foreign currencies. LIQUIDITY RISK The group manages liquidity risk by monitoring forecast cash flows and ensuring that adequate unutilised borrowing facilities are maintained. Cash flows realised from financial assets in the table below reflect management’s expectation as to the timing of realisation. Actual timing may therefore defer from that disclosed. 73 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Contracted maturities at 30 June 2017 Cash & Cash Equivalents Trade & Other Receivables TOTAL Contracted maturities at 30 June 2018 Cash & Cash Equivalents Trade and Other Receivables Total 0 – 12 Months $ ,000 5,484 3,242 8,726 0 – 12 Months $ ,000 7,013 4,357 11,370 1 – 2 Years $ ,000 - - - 1 – 2 Years $ ,000 - - - 2 – 5 Years $ ,000 - - - 2 – 5 Years $ ,000 - - - > 5 Years Total Cash Flows Carrying Amount $ ,000 $ ,000 $ ,000 - - - 5,484 3,242 8,726 5,484 3,242 8,726 > 5 Years Total Cash Flows Carrying Amount $ ,000 - - - $ ,000 7,013 4,357 $ ,000 7,013 4,357 11,370 11,370 The consolidated entity has recognised a loss of $249K (2017 $79K) in profit and loss in respect of impairment of receivables for the year ended 30 June 2018. The movements in the provision for impairment of receivables were outlined in Note 9. The table below sets out the maturity periods of the financial liabilities of the consolidated group as at 30 June 2018 and 30 June 2017. All carrying amounts of equipment finance are discounted contractual cash flows. Contracted maturities at 30 June 2017 Trade & Other Payables Borrowings Total Contracted maturities at 30 June 2018 Trade & Other Payables Borrowings Total < 6 Months 6 – 12 Months 1 – 2 Years 2 – 5 Years > 5 Years Total Cash Flows Carrying Amount $ ,000s $ ,000s $ ,000s $ ,000s $ ,000s $ ,000s $ ,000s - - 4,867 1,217 6,084 1,145 1,145 - 92 92 - - - 4,867 4,867 4,069 8,936 3,902 8,769 2 – 5 Years > 5 Years Total Cash Flows Carrying Amount 1,615 1,615 1 – 2 Years < 6 Months 6 – 12 Months $ ,000s $ ,000s $ ,000s $ ,000s $ ,000s $ ,000s $ ,000s 7,298 2,016 9,314 - - 2,017 2,017 9,195 9,195 - 13 13 - - - 7,298 7,298 13,241 20,539 13,232 20,529 74 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED CREDIT RISK The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets, is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the balance sheet and notes to the financial statements. There are no material amounts of collateral held as security at 30 June 2018 or 30 June 2017. Credit risk is managed on a group basis and reviewed regularly by the Board. It arises from exposures to customers as well as through deposits with financial institutions. The Board monitors credit risk by actively assessing the rating quality and liquidity of counter parties: • only major Australian banks and financial institutions are utilised; • potential customers with a monthly spend in excess of $1,000 are often rated for credit worthiness taking into account their size, market position and financial standing; and • customers that do not meet the group’s strict credit policies may only purchase in cash or using recognised credit cards. The following table provides information regarding the credit risk relating to cash and money market securities based on Moody’s counterparty credit ratings. Cash & Cash Equivalents Aa2 Rated Aa3 Rated A1 Rated Total Cash & Cash Equivalents Consolidated 2018 $ ,000 2017 $ ,000 - 7,009 4 7,013 - 5,480 4 5,484 The consolidated group does not have any material credit risk exposure to any single receivable or group of receivables under financial instruments entered into by the consolidated group. INTEREST RATE AND MARKET RISK Market risk is the risk that changes in market prices, such as interest rates will affect the Company’s income or the value o f its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising returns. All of the Group’s equipment finance leases are at a fixed interest rate, and while the Group has term debt, the pricing is a fixedmargin above BBSY, the Group has significant cash and cash equivalents, and generally maintains a Debt-to-EBITDA ratio of less than 1:1, and accordingly the Directors consider interest rate and market risk to be low. 75 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SENSITIVITY ANALYSIS As the Group’s equipment finance leases are not material to the Group and at a fixed interest rate, no sensitivity analysis has been performed, as any +/- variation in interest rates would not have a material impact on the post-tax profit for the remaining period of the loans. A change in interest rates on the Westpac Term Loan would have the following impact on the post-tax profit over the remainder of the expected term of the loan: 2% Decrease in Interest Rates 1% Decrease in Interest Rates 1% Increase in Interest Rates 2% Increase in Interest Rates 3% Increase in Interest Rates Consolidated 2019 $ ,000 225 113 (114) (230) (346) 2020 $ ,000 61 31 (32) (64) (98) DEBT MATURITY AND REFINANCING RISK Refinancing risk is the risk that the Company is not able to refinance the full amount of its ongoing debt requirements on appropriate terms and pricing. To reduce this risk, Group maintains significant cash and cash equivalents, generally maintains a Debt-to-EBITDA ratio of less than 1:1 making the company an attractive lending proposition, and maintains regular contact and good relationships with a variety of debt and equity funding institutions. NOTE 26: REMUNERATION OF AUDITORS During the financial year the following fees were paid or payable for services provided by PKF Hacketts Audit, the auditor of the consolidated entity PKF Hacketts Audit Audit Services PKF Hacketts Pty Ltd Other Services – Tax compliance services Total NOTE 27: CONTINGENT ASSETS & LIABILITIES CONTINGENT ASSETS The consolidated entity had no contingent assets as at 30 June 2018 or 30 June 2017. Consolidated 2018 $ ,000 2017 $ ,000 85 31 116 66 39 105 CONTINGENT LIABILITIES The consolidated entity had bank guarantees in place totalling $269,174 as at 30 June 2018 and $119,174 as at 30 June 2017. 76 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 28: CAPITAL & LEASING COMMITMENTS Lease commitments - Operating Committed at the reporting date but not recognised as liabilities payable: Within one year One to five years More than five years Total Lease commitments - Operating Consolidated 2018 $ ,000 2017 $ ,000 1,134 1,791 69 2,994 1,110 1,542 - 2,652 Operating lease commitments include contracted amounts for various offices under non-cancellable operating leases expiring within one to ten years with, in some cases, options to extend. On renewal, the terms of the leases will be renegotiated. Commitments in relation to non-cancellable finance leases are as follows: Not Later Than 1 Year Later Than 1 Year But Not Later Than 5 Years Minimum Lease Payments Less Future Finance Charges Representing Finance Lease Commitments Current (Note 16) Non-Current (Note 20) Total Lease Commitments - Financing Consolidated 2018 $ ,000 2017 $ ,000 105 83 188 (9) 179 102 77 179 258 187 445 (28) 417 240 177 417 77 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 29: CASH FLOW INFORMATION Reconciliation of Cash Flows from Operations with Profit After Income Tax Profit After Income Tax Non cash flows in profit/(loss): Depreciation Amortisation Provision for Doubtful Debts (Write-down) / Increase of Earn-out Payments Other Non Cash Movements Changes in Assets and Liabilities (Increase) / Decrease in Trade and Other Receivables (Increase)/ Decrease in Inventories (Increase)/ Decrease in Other Assets (Decrease)/ Increase in Deferred Tax Liabilities (Decrease)/ Increase in Payables (Decrease)/ Increase in Provisions (Decrease)/ Increase in Current Tax Liabilities Net Cash Flows from Operating Activities Consolidated 2018 $ ,000 2017 $ ,000 5,531 3,598 2,075 1,862 156 5 105 (238) (74) (617) (672) 1,277 191 744 10,345 1,513 817 (69) 18 (20) (318) (33) (7) (269) 906 151 (1,191) 5,096 RECONCILIATION OF CASH FLOWS FROM FINANCE ACTIVITIES Balance at 1 July 2017 Dividends declared Net cash (used in) financing activities Other changes Balance at 30 June 2018 Cisco Lease Financing $ ,000 203 - (62) - 141 NAB Term Loan Westpac Term Loan IBM Equip Finance Dividends Payable $ ,000 3,485 - (3,485) - - $ ,000 $ ,000 - - 13,053 - 13,053 214 - (176) - 38 $ ,000 - 984 (984) - - 78 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 30: PARENT INFORMATION The following information has been extracted from the books and records of the parent and has been prepared in accordance with Australian Accounting Standards. PARENT ENTITY STATEMENT OF FINANCIAL POSITION As At 30 June 2018 2018 $ ,000 2017 $ ,000 Assets Current Assets Non-Current Assets Total Assets Liabilities Current Liabilities Non-Current Liabilities Total Liabilities Net Assets Equity Issued Capital Retained Profits Total Equity PARENT ENTITY STATEMENT OF COMPREHENSIVE INCOME For Year Ended 30 June 2018 Total Profit Total Comprehensive Income 2,747 33,856 36,593 15,577 9,128 24,705 11,888 12,246 (358) 11,888 2018 $ ,000 1,170 1,170 1,692 17,146 18,838 3,065 5,009 8,074 10,764 11,308 (544) 10,764 2017 $ ,000 16 16 GUARANTEES AND CONTRACTUAL COMMITMENTS During the reporting period, Over the Wire Holdings Limited has a parent entity guarantee in place over the credit card facilities with NAB operated by two of its subsidiaries (OTW Corp Pty Ltd and Over the Wire Pty Ltd) totalling $150,000, as well as a bank guarantee facility with ANZ for $119,174. CONTINGENT LIABILITIES Other than the bank guarantees above, the parent entity did not have any contingent liabilities as at 30 June 2018 or 30 June 2017. 79 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 31: RELATED PARTY TRANSACTIONS Over the Wire Holdings Limited is the ultimate parent entity in the wholly owned group comprising the Company and its wholly owned controlled entities. Transactions between the Company and its controlled entities have been eliminated in the consolidated financial statements. The aggregate amounts of transactions between the Company and its controlled entities are in the respective classification categories in the financial statements. The nature, terms and conditions of each different type of transaction area are as follows: • Fees charged by OTW Corp Pty Ltd to the members of the group are in respect of the company acting as a central provider of corporate services to the group, including employing all staff, providing office and administration services. • Management fees charged by Over the Wire Holdings Limited to cover the costs of being listed on the Australian Stock Exchange. • A limited number of re-charged costs between Over the Wire Pty Ltd, Netsip Pty Ltd, Faktortel Pty Ltd and Telarus Pty Ltd, for discretionary operational reasons such as ease of reconciliations, facilitating a customer to receive a single invoice despite ordering services from multiple companies, etc. • Operational Loans for day-to-day working capital between the Company and its controlled entities are unsecured and advanced on an interest free basis. During the year, the Group has conducted the following related party transactions: • Management fees paid to Over the Wire Holdings by its controlled entities for 2018: $2.4m (2017: $0.3m) • Fees charged by OTW Corp to the members of the group for 2018: $12.99m (2017: $9.35m) • Operational recharged costs between group companies for 2018: $1.2m (2017: $1.2m) KEY MANAGEMENT PERSONNEL (KMP) COMPENSATION Short –Term Employee Benefits Long-Term Employee Benefits Post-Employment Benefits Termination Payments Share based Payments Key Management Personnel Consolidated 2018 $ ,000 1,259 17 84 - 388 1,748 2017 $ ,000 1,160 14 87 - 4 1,265 Detailed remuneration disclosures are provided in the remuneration report on pages 20 to 24. 80 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 32: SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policies described in Note1: Consolidated 2018 2017 Name of Entity Over the Wire Pty Ltd Netsip Pty Ltd Faktortel Pty Ltd (Acquired 28 July 2015) Faktortel Holdings Pty Ltd (Acquired 28 July 2015) Aero Telecom Pty Ltd (Acquired 28 July 2015) Sanity Holdings Pty Ltd ( Acquired 30 November 2015) OTW Corp Pty Ltd ( Registered 25 September 2015) Telarus ( Acquired 16 January 2017) VPN Solutions (Acquired 1 November 2017) Country of Incorporation Equity Holding Equity Holding Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 0 % NOTE 33: SUBSEQUENT EVENTS On 22 August 2018, the Company declared a fully franked final dividend of 1.50 cents per share, for the year ended 30 June 2018. The dates of the dividend are as follows: Ex date Record Date Payment Date 9 October 2018 17 September 2018 18 September 2018 As this final dividend was declared subsequent to year-end, no provision has been made in the accounts for the dividend. No other matter or circumstances have arisen since the end of the financial period which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial periods. 81 ANNUAL REPORT 2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED NOTE 34: SHARE-BASED PAYMENTS - PERFORMANCE RIGHTS In line with its remuneration policy, the Board approved the issue of performance rights under the OTW Performance Rights Plan during the 2017 and 2018 financial years to key management personnel. The Performance Rights will not give the holder a legal or beneficial interest in ordinary fully paid shares in Over the Wire until those Performance Rights vest. Prior to vesting, Performance Rights do not carry a right to vote or receive dividends. When the Performance Rights have vested, ordinary fully paid shares will be allocated, and these shares will rank equally with existing Over the Wire Shares. The Performance Rights over Ordinary Shares have been issued in tranches as set out below. 2017 Tranche 1 (2017-1) 2017 Tranche 2 (2017-2) 2017 Tranche 3 (2017-3) 2018 Issue Date 29 June 2017 29 June 2017 29 June 2017 1 April 2018 Vesting Date & Test Date 31 January 2018 1 July 2018 3 December 2018 30 September 2020 Expiry Date Exercise Price Amount Payable on Grant Performance Hurdles 28 February 2018 1 August 2018 3 January 2019 31 October 2020 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Service tenure from Grant to Vesting. Issued in recognition of the FYE2016 short term incentive achievement and represent an STI deferral benefit. Service tenure from Grant to Vesting. Issued in recognition of the FYE2016 short term incentive achievement and represent an STI deferral benefit. Service Tenure and TSR absolute Compound Annual Growth Rate from IPO date to vesting: <10% p.a. 0% 10%-15% 50-100% pro-rata >15% p.a. 100% Service Tenure & EPS absolute Compound Annual Growth Rate hurdle from FY2017 to FY2020: <10% pa 0% 10%-15% 50-100% pro-rata >15% pa 100% Performance Rights Granted to: Mike Stabb Ben Cornish Dennis Muscat Daniel Roates 25,000 25,000 - - 25,000 25,000 - - 50,000 50,000 - - 29,920 29,920 19,946 19,946 Fair Value of Performance Rights Issued 30 June 2017 Mike Stabb Ben Cornish TOTAL Opening Balance Qty - - - Granted Vested Qty 100,000 100,000 200,000 Qty - - - Closing Balance Qty 100,000 100,000 200,000 Fair Value $ 218,292 218,292 436,584 82 ANNUAL REPORT 2018 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 30 June 2018 Mike Stabb Ben Cornish Dennis Muscat Daniel Roates TOTAL Opening Balance Granted Vested Closing Balance Weighted Average Fair Value Qty 100,000 100,000 200,000 - $ 249,882 Qty Qty Qty 19,946 29,920 29,920 104,920 (25,000) (25,000) 6.0 DIRECTORS’ DECLARATION (50,000) 249,732 104,920 99,732 19,946 19,946 19,946 614,908 249,882 57,572 57,572 - - - The weighted average fair value of the performance rights granted to employees has been calculated by an independent valuer at the date the performance rights were granted. The weighted average fair value of performance rights granted is set out below. This value was calculated using the Black-Scholes pricing model applying the following inputs: Weighted average fair value Weighted average life of the rights Expected share price volatility Risk-free interest rate Consolidated 2018 2017 $2.8864 $2.1829 2.5 Years 1.11 Years 40.6% 2.04% 50% 1.75% Historical share price volatility has been the basis for determining expected share price volatility as it is assumed that this is indicative of future volatility. 83 ANNUAL REPORT 20186.0 DIRECTORS’ DECLARATION 84 ANNUAL REPORT 2018DIRECTORS’ DECLARATION In the directors’ opinion: i The financial statements and notes set out on pages 37 to 83 are in accordance with the Corporations Act 2001, including: a complying with Accounting Standards, which, as stated in accounting policy Note 1 to the financial statements, constitutes explicit and unreserved compliance with International Financial Reporting Standards (IFRS) and the Corporations Regulations 2001; and b giving a true and fair view of the financial position as at 30 June 2018 and of the performance for the year ended on that date of the company and consolidated group; ii There are reasonable grounds to believe that the consolidated group will be able to pay its debts as and when they become due and payable. The directors have been given the declarations by the Chief Executive Officer and the Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Board of Directors. Michael Omeros Managing Director Brisbane 22 August 2018 John Puttick Chair Person Brisbane 22 August 2018 85 ANNUAL REPORT 2018 7.0 INDEPENDENT AUDITOR’S REPORT 86 ANNUAL REPORT 2018 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF OVER THE WIRE HOLDINGS LIMITED Report on the Financial Report Opinion We have audited the accompanying financial report of Over the Wire Holdings Limited (the company), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the company and the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. In our opinion the financial report of Over the Wire Holdings Limited is in accordance with the Corporations Act 2001, including: a) b) Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of its performance for the year ended on that date; and Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. Our responsibilities under those standards are further described in the Auditor’s Responsibility section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the consolidated entity in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. 87 ANNUAL REPORT 2018 1. Impairment testing of intangible assets Why significant As at 30 June 2018 the carrying value of intangible assets was $36.6m (2017: $17.7m), as disclosed in Note 13. The Group’s accounting policy in respect of intangible assets is outlined in Note 1. This represents 68% of total assets. An annual impairment test for goodwill and other indefinite life intangible assets is required under Australian Accounting Standard (AASB) 136 Impairment of Assets. The evaluation of the recoverable amount requires the Group to exercise significant judgement in determining the key assumptions, which include:     5 year cash flow forecast Terminal growth factor Discount rate The determination that the Group has one CGU, being the whole Group The outcome of the impairment assessment could vary if different assumptions were applied. As a result, the evaluation of the recoverable amount of intangible assets including goodwill is an area of significant estimation and judgement How our audit addressed the key audit matter Our work included, but was not limited to, the following procedures:  assessing and challenging: o o o o the FY19 budget by comparing the budget to FY18 and FY 17 actuals the assumptions used for the growth rate by comparing normalised average growth rate from FY17 to FY18 to the growth rate adopted in the impairment model the key assumptions for long term growth in the forecast cash flows by comparing them to historical results and industry forecasts; and the discount rate applied by comparing the WACC to industry benchmarks    testing, on a sample basis, the mathematical accuracy of the cash flow models; agreeing inputs in the cash flow models to relevant data including approved budgets and latest forecasts performing sensitivity analysis in relation to key assumptions including discount rate, growth rate and terminal value Additionally, as part of our procedures:-  we assessed the Group’s determination of Cash Generating Units (CGUs); and  we assessed the disclosures to sensitivities in the assumptions used, included in Note 13. the appropriateness of relating those including 88 ANNUAL REPORT 2018 2. Business Combinations, including valuation of acquired identifiable intangible assets and allocation of goodwill Why significant How our audit addressed the key audit matter During the year, the Group acquired the shares of VPN Solutions Pty Ltd. As disclosed in Note 19, as part of the transaction, goodwill of $11.0m, brand names of $0.3m, and customer contracts $9m were recognised. Significant judgement is required in valuing the acquired identifiable intangible assets and allocation of goodwill. The Group engaged an independent expert to assist in the valuation of identifiable intangible assets. Our work included, but was not limited to, the following procedures:  Obtaining a detailed understanding of the acquired business  Assessing the competency and objectivity of the independent expert and the scope of their work  Analysing the independent expert’s report to understand the valuation methodology and key judgements made in determining the fair values such as: EBIT multiples o o Growth rates o Customer retention rates Estimated useful lives Internal rate of return o o  Assessing the appropriateness of the valuation methodology of the intangible assets employed by the external expert and evaluating the key assumptions used in determining the fair values In addition, we assessed the appropriateness of the disclosures in relation to both the business combination and intangible assets acquired included in note 19. 89 ANNUAL REPORT 2018 3. Recognition of Revenue Why significant How our audit addressed the key audit matter The recognition of revenue, totalling $53.6m and associated unearned revenue liabilities of $1.0m is considered a key audit matter due to the number of different revenue streams and the complexity in the nature and timing of revenue generated by the Group through each stream. Note 3 to the financial statements details the revenue streams of the Group and associated accounting policies. Revenue amounts are disclosed in the Consolidated Statement of Comprehensive Income, and associated unearned revenue liabilities are disclosed in Note 15 and the Consolidated Statement of Financial Position. Our work included, but was not limited to, the following procedures: We performed procedures on the significant revenue streams as noted below and as disclosed in Note 3 to the financial statements:  Data networks and internet  Voice  Cloud and managed services  Data centre co-location For a sample of contracts across each of the revenue streams, we evaluated the individual contract and agreed revenue amounts to the financial statements and other records such as bank statements. As part of these procedures we assessed the values recorded and the timing of recognition over the service period. We considered the adequacy of the Group’s revenue recognition accounting policies and assessed compliance with the policies in terms of applicable Australian Accounting Standards. Other Information The Directors are responsible for the other information. The other information comprises the information included in the consolidated entity’s Annual Report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Directors’ Responsibilities for the Financial Report The Directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the Directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report complies with International Financial Reporting Standards. 90 ANNUAL REPORT 2018 In preparing the financial report, the Directors are responsible for assessing the consolidated entity’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using a going concern basis of accounting unless the Directors either intend to liquidate the consolidated entity or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our responsibility is to express an opinion on the financial report based on our audit. Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individual or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report. We conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the consolidated entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the consolidated entity to cease to continue as a going concern. We evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. We obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the consolidated entity to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion. 91 ANNUAL REPORT 2018 We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. The Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2018. The Directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Over the Wire Holdings Limited for the year ended 30 June 2018 complies with section 300A of the Corporations Act 2001. PKF HACKETTS AUDIT LIAM MURPHY PARTNER 22 AUGUST 2018 BRISBANE 92 ANNUAL REPORT 2018 CONTACT DETAILS WEBSITE www.overthewire.com.au EMAIL info@overthewire.com.au PHONE 1300 689 689 +61 7 3847 9292 BRISBANE Level 21, 71 Eagle Street Brisbane, Queensland, 4000 +61 7 3847 9292 SYDNEY Level 9, 33 York Street Sydney, New South Wales, 2000 +61 2 9191 9333 MELBOURNE Level 8, 473 Bourke Street Melbourne, Victoria, 3000 +61 3 9938 8222 93 ANNUAL REPORT 2018www.overthewire.com.au | 1300 689 689 

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