Annual Report 2022 Our true purpose is to improve the oral health of ALL Australians to world’s best. Table of Contents 2 4 6 Chairperson’s Letter CEO’s Report Business Review 12 Centre Locations 28 Auditor’s Independence Declaration 29 Consolidated Financial Statements 33 Notes to the Consolidated Financial Statements 64 Directors’ Declaration 13 Environmental, Social and Governance 65 Independent Auditor’s Report 14 Consolidated Financial Report 2022 70 Shareholder Information 15 Directors’ Report 16 Board of Directors 72 Corporate Directory ANNUAL REPORT 2022 | PACIFIC SMILES 1 ANNUAL REPORT 2022 | PACIFIC SMILES Chairperson’s Letter FY22 was a difficult year for many customer facing businesses, particularly so for healthcare industry participants like Pacific Smiles. However, as difficult as this period has been, it has not altered our long-term goals, which are underpinned by a strategy centred on culture, operational excellence, same- centre growth, innovation and network growth. Nevertheless, we are a business that relies on face-to-face contact between dentists practicing in our centres and their patients. As such, the FY22 COVID-related lockdowns, restrictions and community illness had a significant impact on our ability to see patients and maximise revenue from the network and infrastructure that we have steadily built over many years. Notwithstanding this disruption, all our centres remained open during the pandemic, to support dentists who wanted to provide oral care services to their patients. However, the decision to keep our centres open impacted our ability to manage costs in proportion to the impact of the pandemic on our top line. There are now positive signs that the worst of the pandemic, as it affects our business, is behind us as the volume of patients booking appointments with us has started to improve. 2022 Performance1 Highlights 2 PATIENT FEES DOWN 6.0% $226.4m SAME CENTRE GROWTH (10.1%) DENTAL CENTRES2 UP 16.5% 127 UNDERLYING EBITDA DOWN 65.9% $11.3m UNDERLYING NPAT ($3.2m) ORDINARY DIVIDENDS DOWN 2.4CPS NIL 1. Comparison to FY2021. 2. Excludes HBF dental centres and is following the closure of our Lismore centre which sustained significant flood damage earlier this year. ANNUAL REPORT 2022 | PACIFIC SMILES We also continued to invest in FY22, establishing 19 new high quality centres. While these centres opened into a challenging operating environment, history demonstrates they will generate attractive long-term returns for our shareholders. Indeed, a number of these new centres opened with record pre-opening appointment numbers, underscoring the attractive locations that these centres were opened in. In February Andrew Knott joined as a Non- Executive Director as the newest addition to the Pacific Smiles Board. Andrew is a highly experienced marketing executive who has served in senior marketing roles in Australia, Asia and the United States. His experience is valuable to the Board as we continue to execute on our growth strategy and better communicate with our patients including via the use of digitalisation. COVID impacted underlying EBITDA, which was down 65.9% to $11.3 million, and the Company recorded an underlying net loss of $3.2 million. Of note, by comparison, our FY21 EBITDA included $3.1 million in net JobKeeper, which was not repeated in FY22. Patient fees for the year reached $226.4 million, down only 6.0% on the prior year driven by the decline in same-centre fees and the lag in growth of our new centres due to restrictions and illness that negatively impacted patient attendance. Given this result and the unique operating challenges, the Board felt it was prudent not to declare an interim or final dividend for FY22. The fall in our share price in FY22, reflecting the financial impacts that the challenging operating environment has had on our business, is disappointing. The Board and the management team are singularly focused on driving improved performance and growth, with the business very well positioned to benefit from the increased demand for dental services as Australia emerges from the worst of the pandemic. As noted, for the full year we added 19 new centres across our growing network and 72 new dental chairs. A solid balance sheet and financial flexibility underpin Pacific Smiles’ continued capital commitment to growth, underpinning our position as Australia’s fastest growing dental services organisation. Unfortunately, we made the difficult decision to permanently close our centre in Lismore, following the devasting floods in that region. Pursuant to that closure we were able to consolidate our Northern Rivers operations into our Ballina centre, such that our staff could remain employed and dentists are able to treat their patients. Staying connected with our valued partners remained a priority in FY22, including our ongoing relationships with the Australian Dental Association (ADA), HBF Health Fund and nib Health Fund. Our partnership with the ADA helped support practitioners throughout the year including resources, events and industry awareness. Our partnership with HBF saw four new dental centres successfully opened in Western Australia, despite ongoing COVID-related uncertainties throughout other States. We also continued our longstanding collaboration with nib, now in its eighteenth consecutive year of operation, with 11 centres now supported across four States by PSG. On behalf of PSG, I would like to thank the dentists who choose to use our service and facilities and provide such high quality care to patients during a difficult year of operations. Thank you to our dedicated employees, fellow Directors, and the members of the Executive Leadership Team for their focus and commitment this year through unprecedented conditions. Our CEO, Phil McKenzie, has built strong foundations within the business to help us successfully emerge from the worst of the pandemic with an optimistic future. On behalf of the Board, I would like to thank Phil for his steadfast leadership during this challenging period. Thank you to our shareholders for your continued support. Zita Peach Chairperson 3 ANNUAL REPORT 2022 | PACIFIC SMILES CEO’s Report In FY22, we faced unique challenges and disruptions, however these challenges have not wavered us in our goal of remaining Australia’s fastest growing dentist services organisation. Our ability to see patients and maximise revenue from our network this year was inevitably affected, yet we continued to make decisions based on our commitment to long-term value creation for our shareholders. We operated with a steady eye on our known success factors, our commitment to growth, the retention of our valued practitioners and staff, and continued investment in key infrastructure and technology projects. Part of our success during this difficult period has been made possible with recent appointments within the Executive Leadership Team at Pacific Smiles. The appointments reflect our investment in talent and culture as part of our long-term growth strategy. They included Paul Robertson appointed to the newly created role of Chief Commercial Officer, Ciara Rocks appointed to Chief Operating Officer, Louise Hayes appointed to Executive General Manager People and Culture, and Alice Telford appointed as Executive General Manager Marketing. In FY22, we proudly expanded our dental centre network to 127 locations. We opened 13 new centres in New South Wales, 4 new centres in Victoria, and 2 new centres in Queensland. The centres are placed in high quality locations and are well positioned within our broader network. The new centre openings were supported by our tried and tested pre-booking campaigns, and forward bookings were strong for each of the new openings including several all-time-high records for new patient acquisition. Despite the disruption caused to normal construction and fit-out timelines, our team was able to deliver these centres at a reduced capital construction cost relative to prior years. We also added to the volume of dental chairs in operation across our network in FY22, which gave us the capacity to service demand at a lower incremental cost. 2022 Operational Snapshot 4 NEW DENTAL CENTRES 19 DENTIST RETENTION >85% NUMBER OF DENTISTS2 >850 NEW DENTAL CHAIRS1 72 NET PROMOTER SCORE >85 EMPLOYEE RETENTION >75% 15 chairs in existing centres 1. Excluding HBF, and excluding the closure of our ETD Phillip and PSD Lismore centres. 2. Number of dentists as at the 30 June 2022 and includes 46 HBF Dentists. ANNUAL REPORT 2022 | PACIFIC SMILES For the full year we increased our available chairs within both new and existing centres, taking us to a total of 534 dental chairs commissioned across the network by the end of the year. the pandemic. We offer our employees a long- term vocation, advancement opportunities and career pathway that engenders loyalty and, in turn, positive patient experience. Alongside this increased capacity to service patients, we maintained ongoing focus in our technological capabilities. Investment in technology remains important in the attraction and retention of both dentists and patients alike within our centres. In FY22, we laid the groundwork for upgraded 3D scanners to be rolled out across the business, with completion in early FY23, which helps deliver on our promise to dentists to support them in their practice with the latest technology. Throughout the year, we also opened four new HBF Dental centres, taking the total number of these centres to six with 46 dentists practicing. HBF Dental provided over 10,000 appointments with high net promoter score of 80. The new centres performed strongly and were typically booked out six weeks in advance. All centres have state of the art facilities with top-of-the-line ergonomic and functional surgery chairs, 3D imaging and scanners. These are all important features for our dentists along with clinical autonomy and appointment book fulfilment. Growth throughout this challenging year could not have been made possible without our unified culture. For Pacific Smiles, this means ensuring our people share our purpose, enjoy what they do, and operate together as a seamless unit. A positive culture translates to strong dentist, patient and employee experiences and, ultimately, accretive shareholder returns. The patient experience at a PSG centre is a reflection of our culture and is a critical measure of our ability to retain our patients. In FY22, we received a net promoter score of more than 85 across the PSG network, which was a very pleasing result during a trying period. By the end of the year, supported by our team, we had more than 850 dentists practicing from Pacific Smiles centres, with a retention rate above 85%. This is a particularly pleasing result given the disruption we faced and is testament to the decision that was made by the Company to keep all centres open and provide the opportunity for our dentists to continue to practice. Our employee retention rate of just over 75%, just slightly down on the prior year, also supports the decision to keep all our centres open throughout In FY22, our business continued to reflect on our commitments to sound environmental management, social equity and quality governance. We committed that 25% of our energy purchased, via direct contracts with energy retailers, will be from renewable sources for three quarters of FY23, with the new contracts taking effect from 1 October 2022. We are also in the process of transitioning our main supply of dental consumables to FSC-certified packaging, which is more recyclable. A drive to paperless invoicing and patient forms will also reduce paper consumption. Inclusion and diversity remains an important part of our corporate responsibility. Alongside increased diversity in key leadership positions, we were pleased to introduce new AI technology to help eliminate bias from candidate screenings across the wider business. With all of these factors considered, and with a difficult year now behind us, I believe our business is in a robust position to be optimistic about our post-pandemic future. Our network is well positioned to benefit from the increased demand for dental services as Australia emerges from the worst of the pandemic. We have kept the market continually apprised of our trading during 2022 and it is evident that our patient volumes and enquiries are on a trajectory that is gradually returning. We do not forecast the same surge or pent-up levels of demand we have seen previously post hard lockdowns earlier in the pandemic; rather a steadier rate of growth and margin expansion. Our long-term growth target remains intact. We will continue to add new dental centres, positioning them in the right areas to maximise efficiencies and economies of scale, capitalising on market opportunities, at a rate that aligns with sensible management of our balance sheet and use of capital. To the dentists who practice at Pacific Smiles, our partners, our shareholders, and our employees, I would also like to say thank you. We value the trust you place in us by choosing to operate in our network and appreciate your contribution to delivering on our true purpose of improving the oral health of all Australians to world’s best. 5 ANNUAL REPORT 2022 | PACIFIC SMILES Business Review In FY22, Pacific Smiles delivered over 870,000 patient appointments with a patient net promoter score of greater than 85. We opened 19 new Pacific Smiles dental centres. In New South Wales we opened new centres in Cameron Park, Chatswood, Chullora, Corrimal, Dapto, Goulburn, Hornsby, Maroubra, Merrylands, Newcastle, Richmond, Rockdale and Sylvania. We also opened new centres in Coomera and Loganholme in Queensland, as well as in Craigieburn, Doncaster East, Frankston and Oakleigh in Victoria, taking the network total to 127 centres, excluding Lismore. The PSG dental centre located in Lismore was damaged in the major flood event on 28 February 2022. This centre was not able to be repaired and restored and the decision was made to close the centre. The 2022 financial year was challenging for Pacific Smiles, given the effects of the Delta and Omicron COVID-19 variants, which had a material impact on patient attendances and practitioner availability to see patients. Patient fees and underlying EBITDA declined by 6.0% and 65.9% in FY22, respectively. Notwithstanding the external forces that contributed to a difficult operating and financial environment, Pacific Smiles continued to focus on ensuring practitioners feel respected and enabled to treat their patients with the highest quality care, utilising the latest technology. No centres were closed due to the impacts of the pandemic, ensuring that patients who required care were able to visit a dentist. That patients feel they can trust Pacific Smiles to ensure they receive the highest quality care, and that our employees know that they matter to Pacific Smiles, is at the core of what we do. Number of Centres FY22 FY21 FY20 FY19 Patient Fees $m FY22 FY21 FY20 FY19 EBITDA (underlying) $m FY22 $11.3m2 FY22 marked the completion of a significant upgrade in Pacific Smiles’ systems and infrastructure, that has been progressing over the last two years. This investment included the establishment of a single patient record in the cloud, e-form technology, an internally managed data warehouse, an upgraded ERP and 3D scanners for dentists. This investment positions Pacific Smiles to simplify its systems and process and allow the business to efficiently scale its operations into the future. FY21 FY20 FY19 6 127 109 $226m2 $241m 94 89 $186m1 $187m $33.1m $23.5m1 $22.8m The 2022 financial year marked the second year of Pacific Smiles’ relationship with HBF to commission and operate dental centres on their behalf for at least the next nine years. Pacific Smiles now operates six HBF Dental centres in Western Australia, opening four new centres in FY22. Furthermore, HBF acquired 1. 2. FY20 impacted by government mandated dental restrictions due to COVID-19. FY22 impacted by wide-spread outbreak of COVID-19 variant Omicron and government mandated lockdowns. ANNUAL REPORT 2022 | PACIFIC SMILES 10% of the issued shares in Pacific Smiles in FY22, building upon the newly established commercial relationship. The long-term plan remains simple and focused on growing the core business through our unique greenfield centre expansion program, and our goal of more than 250 centres and 800 chairs is unchanged. We will continue to make decisions with an eye to long-term value creation, consistent with our known success factors and capitalising on technology innovations. The dedication and discipline of the entire team, focused equally on execution today and tomorrow’s performance objectives, will ensure prosperity. Statutory Results Statutory net loss after tax for the year was $4.5 million. This result is down on the FY21 statutory net profit after tax of $12.9 million, a decrease of 134.9%. The statutory results for the year were impacted by COVID-19 via the impact of government mandated restrictions on dental services in the first half of the financial year amidst the Delta outbreak, and the further Omicron outbreak that predominantly impacted the second half of the financial year. However, improved performance was observed late in the second half of the financial year, as the broader community has started to adapt to living with COVID and government-imposed restrictions on movement were eased. There are several underlying adjustments for both FY22 and FY21, and these are detailed in the table on page 9. The business review will focus on the underlying results for FY22 and the comparative period, excluding the impacts of AASB 16. Removing these impacts enhances the year-on-year performance comparisons. Underlying Results Underlying EBITDA, exclusive of the impacts of AASB 16, decreased by 65.9% to $11.3 million compared with the previous financial year. Group revenue was $139.5 million, down by 8.9% over the previous financial year. This revenue consists mainly of the service fees charged to the dentists who practice from our centres. Pacific Smiles provides dentists with fully serviced and equipped facilities including support staff, materials, marketing, and administrative services. This enables dentists to focus on their patients and offer exceptional patient care. The decline in revenue can be directly attributed to the impacts of COVID-19 on the business in 2022. Notwithstanding, Pacific Smiles has enduring conviction in its business model, which is why investment in 19 new centres was undertaken in FY22. This will position Pacific Smiles to capitalise on a trading environment that is already showing signs of returning to normal. Patient fees decreased 6.0% over the previous year to $226.4 million, including a same centre fee decline of 10.1%, combined with the full year effect from new centres opened in FY21 and part-year impact of new centre openings in FY22. The new centres opened in both FY21 and FY22 are performing below the rate which new centres are generally expected to achieve in an uninterrupted operating environment. Pacific Smiles expects these centres to improve performance in FY23 and generate returns in line with ordinary course expectations. Underlying NPAT (excluding AASB 16) decreased by 122.6% to a $3.2 million loss compared to $14.0 million profit in the prior year. Depreciation and amortisation costs (excluding the impact of AASB 16) totalled $15.1 million; an increase of $3.1 million from the prior period. The net JobKeeper benefit received by the Group in FY21 was $3.1 million. There were no JobKeeper payments received during the financial year. 7 ANNUAL REPORT 2022 | PACIFIC SMILES Business Review Continued Group Financial Performance $ million Revenue Gross profit EBITDA EBIT Net profit after tax Operating metrics Number of Dental Centres Commissioned Dental Chairs Patient Fees ($ millions) Same Centre Patient Fees growth Financial metrics Earnings per share (cents) EBITDA margin EBITDA to Patient Fees margin EBIT margin * Excludes the impacts of AASB 16. Change (8.9%) (7.4%) (65.9%) (118.4%) (122.6%) 16.5% 14.3% (6.0%) Underlying 2022* Underlying 2021* 139.5 132.8 11.3 (3.9) (3.2) 127 534 226.4 (10.1%) (2.0) 8.1% 5.0% (2.8%) 153.2 143.5 33.1 21.0 14.0 109 467 240.8 26.0% 8.9 21.6% 13.7% 13.7% 8 ANNUAL REPORT 2022 | PACIFIC SMILES Adjustments to the consolidated statements of profit or loss and other comprehensive income Statutory net (loss)/profit after tax Severance and HR consultancy expense Executive LTI plan expense Asset impairment Flood damaged asset write-offs Income tax effect of adjustments Underlying net (loss)/profit after tax Net tax impacts of AASB 16 Underlying net (loss)/profit after tax excluding the impacts of AASB 16 2022 $ million 2021 $ million (4.5) 0.2 2.3 – 0.3 (0.8) (2.5) (0.6) (3.2) 12.9 0.6 – 0.9 – (0.4) 14.0 – 14.0 Amounts in the table have been rounded to the nearest $ million. Any discrepancies between the totals and sums of components are due to rounding. Financial Position The Market Pacific Smiles has a strong focus on cash management and fiscal discipline. Our year end net debt is $6.7 million. Debt facilities with CBA were refinanced in FY22 for a further three years on more favourable terms, via a $40.0 million Loan Facility Agreement. This facility is currently drawn to $18.5 million, Pacific Smiles continued to invest in new centre growth in FY22, building 19 new centres, funding for which was majority drawn from debt. Notwithstanding the increase in drawings in FY22, Pacific Smiles remains well inside its financial covenants under the Loan Facility Agreement. The Company will continually evaluate the appropriateness of the rate of opening new centres considering the current operating environment and the focus on prudent capital management. Capital expenditure for the year was lower at $22.8 million (FY21: $25.5 million). We invested in 19 new centres, 15 additional chairs in existing centres, as well as one expansion, two relocations, and $3.5 million in technology upgrades. The market for dental services in Australia is approximately at $10.6 billion per annum in 2022 and is forecast to improve over the next five years. Continued demand for dental services from older Australians, the need for improved oral health standards and increased demand for cosmetic and restorative dental procedures are projected to support industry revenue over the next five years. Industry revenue is forecast to rise at an annualised 1.1% over the five years through 2026-27, to $11.2 billion. According to the Australian Dental Association’s (ADA) Australia’s Adult Oral Health Tracker 2020, the prevalence of tooth decay and gum disease among adult Australians has increased since 2004-05. The ADA is also warning of a future spike in tooth decay and other oral health issues due to the disruption in dental services as a result of the COVID-19 pandemic. However, COVID-19 has also impacted on supply and demand for dental services with Government mandated lockdowns and ongoing illness and isolation requirements impacting both patients and dentists. 9 ANNUAL REPORT 2022 | PACIFIC SMILES Business Review Continued Other macroeconomic conditions are presenting headwinds to the market with inflation and rising interest rates impacting household disposable income. Given most patients pay for dental services using their own income, often subsidised by private health insurance extras cover, this has the potential to impact patient demand. generally open their own businesses, although some join existing operators. A growing number of new dentists have joined corporate dental groups over the past five years, making corporate dentistry more commonplace in the industry. Risk Management The market has also experienced a slight reduction in private health insurance membership numbers over the past five years. The prevailing macroeconomic conditions are also likely see this trend continue in the short to medium term. Pacific Smiles is subject to various risk factors, both business specific and of a general nature. Pacific Smiles has not identified any specific, material exposure to its economic, social or environmental sustainability over the long term. These variables have contributed to sluggish revenue growth at 0.6% annualised over the five years through 2021-22. The industry continues to be highly fragmented with most providers operating from small scale single locations, although corporate activity in the sector is increasing. There are more branded networks, including some owned and operated by private health insurance organisations, who market to their own members to encourage attendance. The market continues to see growth in the number of registered dentists. The increase in recent years has been the combined impact of overseas trained dentists and local graduates. New dentists Pacific Smiles has established policies and structures for oversight and management of material business risks. Further information regarding how Pacific Smiles recognises and manages risks can be sourced from our Corporate Governance Statement and related governance policies on our website. Phil McKenzie Chief Executive Officer and Managing Director 10 ANNUAL REPORT 2022 | PACIFIC SMILES The following risk areas and mitigating factors have been identified by Pacific Smiles: Risk Areas Mitigating Factors General economic conditions – downturns in general economic conditions could adversely impact demand for dental services, given the discretionary nature of some of those services. A higher inflationary environment may drive up costs that are unable to be fully passed on, creating pressure on operating margins. Dentists at Pacific Smiles’ dental centres provide a range of treatments to patients in several different geographic zones throughout the eastern States of Australia. Pacific Smiles’ operating efficiencies with increased scale provide the opportunity to offset increases in costs. Government regulations, legislation and tax risks – changes in government regulations and legislation applicable to Pacific Smiles that increase costs of compliance, minimum or award wage rates paid to employees and direct and indirect taxation. Pacific Smiles has a risk management framework that considers the risks of change in law. It is regularly reviewed by its Audit and Risk Committee and the Company takes advice from expert counsel regarding its contractual arrangements and regulatory compliance. Reduction in private health insurance coverage – changes to the nature or extent of private health insurance coverage could impact upon the attendance frequency of patients. Patients at Pacific Smiles’ dental centres are a mix of privately insured and non-insured individuals and there are various payment plans and treatment payment options available. Competition-induced fee pressure – an increase in the number of practicing dentists could increase competition for patients and the degree to which dentists compete based on fee levels. Pacific Smiles’ dental centres are usually differentiated from other local providers and compete based on convenience, value, access and overall patient experience. Termination of Service and Facility Agreements by dentists – under the Service and Facility Agreements between Pacific Smiles and dentists, the dentists may terminate without cause, on a few months’ notice. Reputational damage – actions by employees or dentists could give rise to reputational damage to Pacific Smiles and its brands. Pacific Smiles views the dentists as a key customer group and focuses resources accordingly. There is a close focus on internal procedures and clinical governance by management and the Board. This has been further enhanced by internal and external appointments to the Dental Advisory Committee. Infection risks – transfer of infection to individuals due to safety or sterilisation breaches in a dental centre may lead to harm to individuals and negative reputational impacts on Pacific Smiles as well negative economic consequences. Pacific Smiles has a clinical governance framework that governs infection control management procedures, including a training program. Clinical risks are coordinated and managed by a dedicated clinical specialist team. Supply of skilled dentists – should the availability of appropriately skilled and aligned dentists become restricted, then growth and expansion of Pacific Smiles could be slowed. Pandemic – should a pandemic restrict the dental services able to be performed in specific locations, States or nationally due to the risk of infection to staff, dentists and patients. Cyber Security – actions whereby the Company’s IT systems are accessed and result in the failure of or interruption to key IT systems or a material patient privacy breach. The focus on training and development of dentists, including a structured mentoring program for new graduate dentists, is building a platform of appropriately skilled and aligned dentists for the long term. Close monitoring and adherence to government or professional body recommendations. Ensuring adequate stock of appropriate personal protective equipment (PPE), and close focus on internal procedures and clinical governance by management and the Board. Pacific Smiles Group has industry best practice controls in place to minimise technology related business interruptions and to manage the end-to-end cyber lifecycle. Cyber and technology roadmaps are in place to continually uplift their maturity in both areas to meet compliance and operational expectations. 11 Key Supply Chain – should an event result in the closure, restriction or delay of key consumables or personal protective equipment (PPE) meaning our ability to meet the needs of patients or support dentists could be impacted. Long-term relationships with national suppliers and back-up suppliers identified. Close monitoring of inventory levels and ensuring adequate stock of appropriate personal protective equipment (PPE). Strategy for emergency store of critical PPE endures. ANNUAL REPORT 2022 | PACIFIC SMILES Centre Locations WA 6 WA Managed Services HBFD Bull Creek Cannington Joondalup Karrinyup Mandurah Morley ACT Belconnen Gungahlin Manuka Tuggeranong Woden nib Woden QLD Aspley Birtinya Bribie Island Brisbane CBD Browns Plains Buddina Burleigh Heads Capalaba Cleveland* Coomera** Deception Bay Helensvale Loganholme** Mitchelton Morayfield Mt Gravatt Mt Ommaney Newstead* North Lakes Redbank Plains Robina Runaway Bay Strathpine Victoria Point* 12 FY21 New Centres Notes: * ** FY22 New Centres ‡ Warilla merged with Shellharbour NSW Ashfield* Balgowlah Bateau Bay Ballina* Bass Hill* Baulkham Hills Belmont Belrose Bondi Junction* Blacktown Brookvale Cameron Park** Campbelltown Charlestown Chatswood** nib Chatswood Chullora** Corrimal** Dapto** Erina nib Erina Figtree Forster Gladesville Glendale* nib Glendale Goulburn** Greenhills Greenhills Ortho* Hornsby** Hurstville* Jesmond Kotara Lake Haven Lane Cove* Maroubra** Marrickville Merrylands** Morisset Mount Hutton Narellan Newcastle** nib Newcastle nib North Parramatta Nowra Parramatta Penrith Queanbeyan Raymond Terrace* Richmond** Rockdale** Rutherford Salamander Bay Shellharbour‡ Singleton Sylvania** nib Sydney Toronto Town Hall Tuggerah Tweed Heads Wagga Wagga Wollongong* nib Wollongong QLD 24 NSW 64 ACT 6 VIC 33 VIC Bairnsdale Bendigo Caroline Springs Chirnside Park Craigieburn** Cranbourne Park Doncaster East** Drysdale Epping Frankston** Glen Iris Glen Waverley Greensborough Keysborough Leopold Melbourne nib Melbourne Melton Mill Park Mulgrave Narre Warren Oakleigh** Ocean Grove Point Cook Preston Ringwood Sale Taylors Lake* Torquay Traralgon Warragul Waurn Ponds Werribee ANNUAL REPORT 2022 | PACIFIC SMILES Environmental, Social and Governance PSG makes a difference through strategic initiatives in the field, at our Dental Centre Support office and in our new centre build schedules. 25% of energy purchased via direct contracts with retailers will be from renewable sources, taking effect from 1 October 2022. Our major dental consumables supply is in the process of transitioning to FSC certified packaging – responsibly sourced and with a higher recycled content. Environmental We implemented paperless invoicing and patient eforms saving 96,000 sheets of paper. Our inclusion and diversity program in 2022 included the introduction of AI technology to reduce bias from candidate screenings in our recruitment process. Social We give back. We continue to engage in Dental Rescue and Adopt-a- Patient days and in 2023 we will host work experience programs for high school students through the Mindshop Excellence Program. We build transparency and trust through strong governance. Our policies and procedures guide our people on how to make the right decisions and demonstrate ethical behaviours. 13 Governance ANNUAL REPORT 2022 | PACIFIC SMILES Consolidated Financial Report 2022 15 Directors’ Report 16 Board of Directors 28 Auditor’s Independence Declaration 29 Consolidated Statement of Profit or Loss and Other Comprehensive Income 30 Consolidated Balance Sheet 31 Consolidated Statement of Changes in Equity 32 Consolidated Statement of Cash Flows 33 Notes to the Consolidated Financial Statements 64 Directors’ Declaration 65 Independent Auditor’s Report 14 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report 30 June 2022 The Directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘consolidated entity’) consisting of Pacific Smiles Group Limited (referred to hereafter as the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2022. Directors The following persons were Directors of Pacific Smiles Group Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Ms Zita Peach Mr Phil McKenzie Dr Scott Kalniz Mr Mark Bloom Mr Hilton Brett Mr Simon Rutherford Mr Ben Gisz (resigned 23 November 2021) Mr Andrew Knott (appointed 6 February 2022) Principal activities The consolidated entity principally operates dental centres at which independent dentists practice and provide clinical treatments and services to patients. Revenues and profits are primarily derived from fees charged to dentists for the provision of these fully serviced dental facilities. Dividends Dividends paid during the financial year were as follows: No dividend has been declared or paid for the year ended 30 June 2022 (2021: 2.40 cents per ordinary share, fully franked) 2022 $’000 – 2021 $’000 3,830 Pacific Smiles recorded a net loss for the year ended 30 June 2022 and continues to face an uncertain fiscal and environmental outlook in the next financial year. Therefore, the Company has not declared a final dividend. The Company plans to resume dividend distributions in the next financial year should trading conditions improve as expected. Review of operations Information on the operations and financial position of the consolidated entity and its business strategies and prospects is set out in the Operating and Financial Review accompanying this report. Matters subsequent to the end of the financial year No matter or circumstance has arisen since 30 June 2022 that has significantly affected, or may significantly affect, the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Likely developments and expected results of operations The consolidated entity will continue to pursue opportunities to enhance the growth and prosperity of its business. Refer to the Operating and Financial Review accompanying this report for further detail. 15 Environmental regulation The consolidated entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. ANNUAL REPORT 2022 | PACIFIC SMILES Board of Directors Mr Phil McKenzie Chief Executive Officer and Managing Director, appointed October 2018 B.Bus (Auckland University of Technology) Prior to joining Pacific Smiles, Phil was Chief Executive Officer for Audiology Management Group (AMG), a leading audiology services business with a network of more than 200 clinic locations across the USA. During his time at AMG, Phil balanced and transitioned the model from acquisition driven to greenfield expansion and delivered strong financial performance for the group. Prior to his role as CEO of AMG, Phil was CEO of Widex Australia, New Zealand, Singapore, Hong Kong and India retail where he successfully turned around and grew those operations. Phil has also held leadership positions at Apple Retail as Australian Market Director and was a driver of Apple’s retail entry into the Australian market from 2008 to 2011, and Luxottica as National Operations Manager from 2005 to 2007. Other current directorships: Nil Former directorships (last three years): Nil Interests in shares: 10,600 Mr Mark Bloom Non-Executive Director, appointed October 2019 Member of the Audit and Risk Management Committee B.Comm, B.Acc, CA ANZ Up until April 2019, Mark held the position of Chief Financial Officer at ASX 20 listed Scentre Group Limited (owner and operator of Westfield in Australia and New Zealand). Mark’s executive career as a Finance Executive has spanned 36 years as Chief Financial Officer and an Executive Director at three top 20 listed entities in Real Estate (Westfield and Scentre Group – 16 years) and Insurance and diversified Financial Services (Liberty Life, South Africa and Manulife Financial, Toronto – 20 years). He has had extensive experience in running global and local Finance and IT teams encompassing Treasury, Tax, Operations, Finance, Compliance, Risk Management, Financial Reporting, Legal and Information Technology. Mark has extensive experience in corporate transactions and restructuring. Mark is a Non-Executive Director at AGL Energy Limited and Abacus Property Group. Other current directorships: AGL Energy Limited Abacus Property Group Former directorships (last three years): Nil Interests in shares: 277,952 Ms Zita Peach Non-Executive Chairperson, appointed February 2020 Non-Executive Director, appointed August 2017 Member of the Nomination and Remuneration Committee BSc, FAICD, FAMI Zita has more than 25 years of commercial experience in the pharmaceutical, biotechnology, medical devices and health services industries. She has extensive sales and marketing experience across a broad range of sectors in healthcare, locally and internationally, as well as leading international expansions and conducting major business transactions. At leading global healthcare company Fresenius Kabi, Zita was Executive Vice President for South Asia Pacific, Managing Director for Australia and New Zealand and Chair of the Boards for Malaysia, Australia and New Zealand. Zita was Vice President of Business Development at CSL Limited and has an extensive track record in mergers and acquisitions deals, licensing and commercialising products and technologies on a global scale. Zita is a Non-Executive Director of Monash IVF Group Limited and Starpharma Holdings Limited. Zita is also a member of the Hudson Institute of Medical Research Board. Zita is a Fellow of the Australian Institute of Company Directors and a Fellow of the Australian Marketing Institute. Other current directorships: Monash IVF Group Limited Starpharma Holdings Limited. Former directorships (last three years): Nil. Interests in shares: 50,087 16 ANNUAL REPORT 2022 | PACIFIC SMILES Mr Hilton Brett Non-Executive Director, appointed August 2018 Dr Scott Kalniz Non-Executive Director, appointed in 2021 Mr Simon Rutherford Non-Executive Director, appointed in 2003 Mr Andrew Knott Non-Executive Director, appointed in 2022 Chairman of the Nomination and Remuneration Committee Member of the Audit and Risk Management Committee Chairman of the Audit and Risk Management Committee Member of the Nomination and Remuneration Committee DDS and BS in Business Administration, Economics (The Ohio State University) Dr Kalniz has over 20 years of dental industry experience in the United States. He started his career as a practicing dentist with a single location practice and purchased a number of other dental practices, eventually selling his group to North American Dental. At North American Dental, he helped grow the business to over 50 locations. Dr Kalniz then partnered with a private equity firm, as CEO and Chief Dental Officer, to create a new Chicago headquartered Dental Services Organisation (DSO), Elite Dental Partners. In under five years, the business grew to over 110 locations in 12 States. Dr Kalniz retired from the Board of Elite Dental Partners in September 2020. Other current directorships: Signature Dental Partners Former directorships (last three years): Elite Dental Partners Heartland Veterinary Partners Interests in shares: 20,000 B.Comm, CA, FAICD B Bus, Marketing and Finance Simon is a chartered accountant and partner with PKF in business advisory services. He has been with the firm for over 35 years. He works with corporate and family owned groups as an advisory board member and lead advisor on strategy, governance, structuring, business sales, mergers and acquisitions. He is also a Director of PKF Wealth. In his role Simon has assisted various companies with capital raising and listing requirements. Simon was a Director of the Trustee of Canyon Property Trust and is involved with other syndicated investments. He has also served on a number of boards including National Brokers Group and Vow Financial Group. Other current directorships: Nil Former directorships (last three years): Nil Interests in shares: 1,744,863 Up until January 2022, Andrew held the role of President – Verizon within the Advertising Agency, the Publicis Groupe. Leading over 850 staff delivering across media, customer experience, data and analytics, marketing optimisation and creative for Verizon Consumer, Business and Media Groups, Andrew was accountable for accelerating change for marketing, channel development, sales effectiveness, customer analytics and operations, overseeing $1.5 billion in client spend and delivering over $200 million in group revenue. On the operating business side, Andrew has held Chief Marketing roles at JPMorgan Chase & Co, National Australia Bank (NAB) and as Vice President Digital Transformation and Marketing at McDonald’s. Andrew has extensive experience as a senior executive in Australia, Asia Pacific and the United States. Other current directorships: Nil Former directorships (last three years): Nil Interests in shares: Nil 17 B.Comm, PGDA Hilton is an Operating Advisor at TDM Growth Partners (TDM), a private global investment firm founded in 2004, with offices in Sydney and New York which invests in fast growing companies run by passionate management teams. Hilton is a Non-Executive Director of Guzman Y Gomez Mexican Taqueria (GYG), and Somnomed Ltd (SOM: ASX). Prior to joining TDM, Hilton was the Co-CEO of Accent Group Limited (AX1), formerly RCG Corporation Ltd, which is the regional leader in the retail and distribution of performance and lifestyle footwear Australia and New Zealand. Hilton joined RCG in 2006 when the business had a market capitalisation of $8 million. Over the 12 years from 2006 to 2018, the team grew the business to $800 million market capitalisation and delivered total shareholder returns in excess of 25% CAGR. Hilton has over 25 years’ experience as CEO of multiple consumer businesses with proven skills in growing the businesses and delivering outstanding returns for shareholders. Other current directorships: Somnomed Ltd Former directorships (last three years): Nil Interests in shares: 100,000 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued ‘Other current directorships’ quoted above are current directorships for listed entities only and exclude directorships of all other types of entities, unless otherwise stated. ‘Former directorships (last three years)’ quoted above are directorships held in the last three years for listed entities only and exclude directorships of all other types of entities, unless otherwise stated. Company Secretary Belinda Cleminson of the Automic Group is the Company Secretary. Meetings of Directors The number of meetings of the Company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 30 June 2022, and the number of meetings attended by each Director, were: Full Meetings of Directors Nomination and Remuneration Committee Audit and Risk Committee Attended Held Attended Held Attended Held 10 10 5 10 10 10 10 3 10 10 5 10 10 10 10 4 3 – 1 – 1 3 – 1 3 – 1 – 1 3 – 1 – – – 4 4 – 3 – – – – 4 4 – 3 – Ms Zita Peach Mr Phil McKenzie Mr Ben Gisz (resigned on 23 November 2021) Mr Simon Rutherford Mr Mark Bloom Mr Hilton Brett Dr Scott Kalniz Mr Andrew Knott (appointed on 6 February 2022) Held: represents the number of meetings held during the time the Director held office or was a member of the relevant committee. Pacific Smiles also has a Property Sub-Committee (‘PSC’). The purpose of the sub-committee is to review new dental centre development proposals, as well as refurbishment and relocation of existing dental centres. It has the delegated authority to approve the expenditure of capital for these purposes. The PSC met eight times during the financial year and is comprised of Mr Simon Rutherford, Mr Mark Bloom, Mr Hilton Brett and Mr Andrew Knott. 18 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued Remuneration report (audited) The remuneration report details the key management personnel remuneration arrangements for the consolidated entity, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all Directors. The remuneration report is set out under the following main headings: • Principles used to determine the nature and amount of remuneration • Details of remuneration • Share-based compensation • Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration The objective of the consolidated entity’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and the Directors consider this to conform to the market best practice for the delivery of reward. The Board of Directors (‘the Board’) ensures that executive reward satisfies the following key criteria for good reward governance practices: • competitiveness and reasonableness • acceptability to shareholders • performance linkage/alignment of executive compensation • transparency The Nomination and Remuneration Committee is responsible for determining and reviewing remuneration arrangements for its Directors and Executives. The performance of the consolidated entity depends on the quality of its Directors and Executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The reward framework is designed to align executive reward to shareholders’ interests. The Board has considered that it should seek to enhance shareholders’ interests by: • having economic profit as a core component of plan design; • focusing on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on assets as well as focusing the executive on key non-financial drivers of value; and • attracting and retaining high calibre executives. Additionally, the reward framework should seek to enhance executives’ interests by: • rewarding capability and experience; • reflecting competitive reward for contribution to growth in shareholder wealth; and • providing a clear structure for earning rewards. In accordance with best practice corporate governance, the structure of Non-Executive Director and Executive Director remuneration is separate. Non-Executive Directors remuneration Fees and payments to Non-Executive Directors reflect the demands and responsibilities of their role. Non-Executive Directors’ fees and payments are reviewed annually by the Nomination and Remuneration Committee. The Nomination and Remuneration Committee may, from time to time, receive advice from independent remuneration consultants to ensure Non-Executive Directors’ fees and payments are appropriate and in line with the market. During FY22, Pacific Smiles commissioned such a benchmarking study, which concluded that the fees currently paid to Pacific Smiles Non-Executive Directors were at the low end of remuneration levels for comparable companies. The Chairperson’s fees are determined independently to the fees of other Non-Executive Directors based on comparative roles in the external market. The Chairperson is not present at any discussions relating to the determination of her own remuneration. Non-Executive Directors do not receive share options or other incentives. 19 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued The Non-Executive Director fees are reviewed annually to ensure that the fees reflect market rates. There are no guaranteed annual increases in any Directors’ fees. No increase was paid in FY22 due to the impacts of COVID-19 on the performance of the business. Non-Executive Directors are entitled to be reimbursed for their reasonable expenses incurred in connection with the affairs of the consolidated entity. The consolidated entity’s constitution provides that Non-Executive Directors are entitled to receive compensation for their services as determined by approval at a general meeting. As at 30 June 2022, the current Directors’ fees pool is an aggregate sum of $800,000. The base fee payable to the Chairperson is $125,000 per annum, and the base fee payable to other Non-Executive Directors is $75,000 per annum. Any change to this aggregate annual amount is required to be approved by shareholders. The Board may approve additional remuneration for special exertions and additional services performed by a Director outside of the aggregated pool. Remuneration paid to Directors in their capacity as employees also falls outside of the aggregated pool. Executive remuneration The consolidated entity aims to reward Executives based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. In determining Executive remuneration, the Board aims to ensure that remuneration practices are: • competitive and reasonable, enabling the consolidated entity to attract and retain key talent; • aligned to the consolidated entity’s strategic and business objectives and the creation of shareholder value; • transparent; • acceptable to shareholders; and • rewarding for performance. The executive remuneration and reward framework has four components: • base pay and non-monetary benefits; • short-term performance incentive (STI) plan; • long-term equity incentive (LTI) plan; and • other remuneration such as superannuation and long service leave. The combination of these comprises the Executive’s total remuneration. Base pay and non-monetary benefits Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, is reviewed annually by the Nomination and Remuneration Committee based on individual and business unit performance, the overall performance of the consolidated entity and comparable market remunerations. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the consolidated entity and provides additional value to the Executive. Short-term performance incentive (STI) plan The short-term incentives (STI) program is designed to provide Executives the opportunity to earn an annual incentive linked to the achievement of performance hurdles. The actual level of STI paid to each Executive is determined at the end of the financial year based on the consolidated entity’s financial performance and non-financial key performance indicators (KPIs). Financial performance is assessed based on consolidated underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) meeting or exceeding Board approved targets. Non-financial KPIs are Group KPIs, rather than individual KPIs and relate to Net Promoter Score (NPS) for patients, dentists and employees for the consolidated entity exceeding specific NPS targets. Targets are reviewed annually. In response to the impact of COVID-19 to the operations and financial performance, the consolidated entity changed the structure of its STI plan for the current financial year by decreasing the maximum STI opportunity to 60% of the normal level. 20 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued The Executive STI plan performance criteria are summarised below, representing the maximum STI opportunity: 2022 % of base salary Chief Executive Officer 2022 % of base salary Other Executive Officers 2021 % of base salary Chief Executive Officer 2021 % of base salary Other Executive Officers Underlying EBITDA targets Up to 21.0% Up to 14.7% Up to 35.0% Up to 24.5% Non-financial performance metrics Up to 9.0% Up to 6.3% Up to 15.0% Up to 10.5% Total maximum STI Up to 30.0% Up to 21.0% Up to 50.0% Up to 35.0% Ongoing participation by executives in the STI plan is at the discretion of the Board. With reference to recommendations from the Nomination and Remuneration Committee, the Board will approve all executive STI payments, and may use its discretion to adjust STI remuneration up or down, to prevent any inappropriate reward outcomes. The STI amounts are paid in cash, and are those earned during the financial year and provided for in the annual financial statements. STI paid in equity take the form of performance rights which cannot be exercised or sold for a period of 24 months after issue. STI cash bonuses are generally payable in September following the end of the financial year, and once the financial results of the year have been subject to independent external audit. Long-term equity incentive (LTI) plan The consolidated entity has a LTI plan to assist in the motivation, retention and reward of Executives. The LTI plan is designed to align the interests of Executives more closely with the interests of shareholders by providing an opportunity for Executives to receive an equity interest in the consolidated entity through the granting of performance rights based on the achievement of long-term financial performance. Initially, the LTI plan was introduced at the time of the Initial Public Offering (IPO) in late 2014 with Earnings Per Share (EPS) as the main performance measurement for the achievement of the long-term financial performance. In addition, there was also a Total Shareholder Return (TSR) hurdle where the TSR growth was required to be more than 10% for the performance rights to vest, regardless of EPS growth. Whilst in the long term, TSR and EPS measures should converge, the EPS measure had the following shortcomings: • EPS is adversely impacted by a key strategic goal of the consolidated entity, which is to accelerate new centre openings. New centre openings have significant positive Net Present Value for shareholders. • EPS can be materially impacted by one-off events, which are difficult to quantify and make appropriate ‘normalisation’ adjustments for. The EPS impacts of COVID-19 disruptions are a good example of this. • EPS can be volatile year to year for growth companies like Pacific Smiles and often does not provide the best barometer of shareholder value creation, even over multi-year periods of time. The LTIP was designed with deliberately high performance hurdles. Therefore, whilst Pacific Smiles has performed well since IPO, no Performance Rights have vested since the initiation of the LTIP. Given the above consideration, through the annual general meeting 2021, the consolidated entity has replaced the LTI Plan’s EPS based conditions with a TSR condition to provide closer alignment between shareholder value creation and executive remuneration. 21 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued Therefore, from the current financial year, the long-term financial performance is measured against the Total Shareholders Return (TSR) growth as the key performance indicator with the performance rights vesting determined by TSR growth for the four years from grant date. The details of the vesting conditions are as follows: • satisfaction of total shareholder return (TSR) growth performance hurdles for a four-year performance period. The number of performance rights vesting will be determined on a sliding scale from nil vesting for a TSR compound annual growth rate (CAGR) of 10% per annum or less and 100% vesting for a TSR CAGR of 25% per annum or more; and • the participant remaining employed by the Pacific Smiles Group (or its subsidiaries) over a four-year or more period through to the vesting date, subject to certain ‘good leaver’ exemptions. For the purposes of calculating TSR, share price will be measured as the 60 trading day Volume Weighted Average Price (VWAP) up to 30 November of the relevant year. Effective grant and vesting dates will be 30 November for all Performance Rights. Performance rights that do not vest on the relevant vesting date will lapse. Performance rights will also lapse if total shareholder return (TSR) does not reach a minimum threshold per annum over the relevant performance period. In the event of serious misconduct or a material misstatement in the consolidated entity’s financial statements, the Board may determine that certain performance-based remuneration (including STIs and/or LTIs) should not have been paid and may claw back performance-based remuneration paid in the preceding three financial years. Consolidated entity performance and link to remuneration The following table shows key performance indicators (KPIs) for the consolidated entity over the last four years. Dividends per share – ordinary (cents) Share price ($) – 60 days VWAP up to 30 November of relevant year 2022* – 1.87 2021 2.40 2.79 Total Shareholder Return (TSR) ($) (0.92) 0.96 2020 2.40 1.85 0.23 2019 5.80 1.65 0.29 Annual Total Shareholder Return (%) (32.95%) 51.96% 13.87% 20.79% * 2022 share price is calculated based on 60 days average VWAP up to 30 June 2022. Details of remuneration Amounts of remuneration Details of the remuneration of key management personnel of the consolidated entity are set out in the following tables. The key management personnel of the consolidated entity consisted of the following Directors of Pacific Smiles Group Limited: • Ms Zita Peach • Mr Phil McKenzie • Dr Scott Kalniz • Mr Mark Bloom • Mr Hilton Brett • Mr Simon Rutherford • Mr Ben Gisz (resigned 23 November 2021) • Mr Andrew Knott (appointed 6 February 2022) And the following persons: • Mr Paul Robertson (Chief Operating Officer) • Mr Matthew Cordingley (Chief Financial Officer) 22 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued Short-term benefits Post- employment benefits Long-term benefits Share- based payments Cash salary and fees $ Cash bonus $ Other $ Super- annuation $ Long service leave $ Rights $ Total $ 2022 Non-Executive Directors: Ms Zita Peach 114,155 Mr Mark Bloom Mr Hilton Brett Mr Ben Gisz Dr Scott Kalniz Mr Simon Rutherford Mr Andrew Knott Executive Directors: 68,493 68,493 30,375 76,977 75,000 24,388 – – – – – – – Mr Phil McKenzie 590,268 56,567 Other Key Management Personnel: Mr Paul Robertson 315,828 21,925 Mr Matthew Cordingley 398,475 29,471 1,762,452 107,963 – – – – – – – – – – – 11,416 6,849 6,849 – – – 2,439 – – – – – – – – – – – – – – 125,571 75,342 75,342 30,375 76,977 75,000 26,827 27,500 17,278 376,211 1,067,824 27,500 27,500 70,448 240,933 676,634 2,710 163,344 621,500 110,053 90,436 780,488 2,851,392 Short-term benefits Post- employment benefits Long-term benefits Share- based payments Cash salary and fees $ Cash bonus $ Other* $ Super- annuation $ Long service leave $ Rights $ Total $ 2021 Non-Executive Directors: Ms Zita Peach 113,147 Mr Mark Bloom Mr Hilton Brett Mr Ben Gisz Dr Scott Kalniz Mr Simon Rutherford Executive Directors: 67,510 67,510 75,000 48,657 75,000 – – – – – – Mr Phil McKenzie 625,316 365,900 Other Key Management Personnel: Mr Paul Robertson 342,867 172,512 – – – – – – – – 251,999 64,571 237,215 10,749 6,413 6,413 – – – – – – – – – – – – – – – 123,896 73,923 73,923 75,000 48,657 75,000 25,000 25,704 429,413 1,471,333 25,000 25,000 59,877 24,682 100,583 700,839 – 603,467 23 78,911 – – 4,172 1,334 11,550 95,967 Ms Allanna Ryan (until 8 April 2021) Mr Matthew Cordingley (appointed 15 April 2021) 1,745,917 602,983 237,215 102,747 111,597 541,546 3,342,005 * Other benefits include termination benefits paid to Ms Allana Ryan in 2021. There were no termination benefits paid or payable to key management personnel during 2022. Termination benefits paid were in accordance with employment contracts. ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued STI awarded For each STI bonus included in the 2022 remuneration table above, the percentage of the available bonus that was earned in the financial year and the percentage that was forfeited because the person did not meet the target performance criteria are set out below: Mr Phil McKenzie Mr Paul Robertson Mr Matthew Cordingley % of maximum STI awarded % % of STI forfeited % 31.9% 35.2% 33.1% 68.1% 64.8% 66.9% The percentages of the STI awarded and forfeited were calculated based on the STI plan awarded for the current financial year, which was 60% of the normal level. Employment contracts Remuneration and other terms of employment for the Executives are formalised in employment contracts. The employment contracts specify the remuneration arrangements, benefits, notice periods and other terms and conditions. Participation in the STI and LTI plans is subject to the Board’s discretion. The current Executive contracts do not have fixed terms. Contracts may be terminated by the Executive with notice, or by the Company with notice or by payment in lieu of notice, or with immediate effect in circumstances involving serious or wilful misconduct. Executive Key Management Personnel (EKMP) Mr Phil McKenzie Mr Paul Robertson Mr Matthew Cordingley Share-based compensation Termination notice by EKMP Termination notice by Company 6 months 6 months 3 months 3 months 6 months 6 months Issue of shares There were no shares issued to Directors and other key management personnel as part of compensation during the year ended 30 June 2022. Options There were no options over ordinary shares issued to Directors and other key management personnel as part of compensation that were outstanding as at 30 June 2022. Performance rights Under the LTI plan, performance rights have been granted to the Chief Executive Officer and selected Executives, at the absolute discretion of the Board. These performance rights will vest after four years (the performance period), and are conditional on the achievement of relevant performance and service conditions. 24 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued The terms and conditions of each grant of performance rights over ordinary shares affecting remuneration of Directors and other key management personnel in this financial year or future reporting years are as follows: Grant date 30 November 2017 30 November 2018 30 November 2019 30 November 2020 30 November 2021 Number of rights granted 2,100,000* 3,026,000** 3,500,000*** 2,902,430**** 2,500,000***** Vesting date 30 November 2021 30 November 2022 30 November 2023 30 November 2024 30 November 2025 Fair value per right at grant date $0.620 $0.470 $0.610 $0.880 $1.640 * ** 500,000 rights were forfeited on 28 October 2018, 325,000 rights were forfeited on 30 November 2019, 400,000 rights were forfeited on 8 April 2021 and 875,000 rights were expired on 30 November 2021. 282,000 rights were forfeited on 8 April 2021, 187,500 rights were issued to one of the Executives on 30 November 2021 and 1,336,000 rights were forfeited on 30 November 2021. *** 838,000 rights were forfeited on 8 April 2021 and 271,000 rights were forfeited on 4 March 2022. **** 271,000 rights were forfeited on 4 March 2022. ***** 246,092 rights were forfeited on 4 March 2022. As a result of the change in the performance rights conditions, and in order to achieve a fair outcome for Executives and Shareholders, the consolidated entity has cancelled a total of 1,336,000 Performance Rights on 30 November 2021. These are being 57% of Performance Rights awarded to Mr Phil McKenzie and 25% of Performance Rights awarded to eligible Executives under the tranche LTI Plan granted in 2018. The cancellation of performance rights would ensure the Executives will not receive an undue benefit from the changes to the LTI Plan, which applies to both Performance Rights already on issue and Performance Rights issued in the future. Performance rights granted carry no dividend or voting rights. Additional disclosures relating to key management personnel Shareholding The number of shares in the Company held during the financial year by each Director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Balance at the start of the year Received as part of remuneration Additions Disposals/ other Balance at the end of the year Ordinary shares Ms Zita Peach Mr Hilton Brett Mr Mark Bloom Mr Ben Gisz Dr Scott Kalniz Mr Simon Rutherford Mr Phil McKenzie Mr Paul Robertson 22,095 424,020 277,952 23,074,485 20,000 1,744,863 10,600 300,000 25,874,015 – – – – – – – – – 27,992 – (324,020) – (23,074,485) – – – – – – – – – – 50,087 100,000 277,952 – 20,000 1,744,863 10,600 (100,000) 200,000 25 27,992 (23,498,505) 2,403,502 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued Performance rights holding The number of performance rights over ordinary shares in the Company held during the financial year by each Director and other members of key management personnel of the consolidated entity, including their personally related parties, is set out below: Performance rights over ordinary shares Mr Phil McKenzie Mr Paul Robertson Mr Matthew Cordingley Balance at the start of the year Granted Vested Expired/ forfeited/ other Balance at the end of the year 4,200,000 1,331,000 350,000 500,000 322,371 317,831 5,881,000 1,140,202 – – – – (1,150,000) 3,550,000 (399,000) 1,254,371 – 667,831 (1,549,000) 5,472,202 Loans to key management personnel and their related parties There were no loans to key management personnel during the year. Other transactions with key management personnel and their related parties Transactions with key management personnel and/or related parties are detailed below. These transactions were conducted on terms no more favourable than those reasonably expected under arm’s length dealings with unrelated parties. Key management personnel or their related parties held shares in the consolidated entity during 2022 and 2021 and, as such, participated in dividends. Exandal Investments, an entity related to Alison Hughes, leased business premises to the consolidated entity during 2022 and 2021 on normal commercial terms and conditions. The consolidated entity paid fees for consultancy services to PKF during 2021. The entity is related to Simon Rutherford. The fees paid were based on normal commercial terms and conditions. Refer to Note 32 for further information on related party transactions. This concludes the remuneration report, which has been audited. Indemnity and insurance of officers During the financial year, the Company paid a premium in respect of a contract to insure the Directors and Executives of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. Non-audit services 26 During the financial year the following fees were paid or payable for services provided to KPMG, the auditor of the Company: Audit services – audit or review of the financial statements Other services – tax compliance and advisory services 2022 2021 180,000 150,000 26,900 26,400 206,900 176,400 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Report Continued The Directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services as disclosed in Note 29 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Rounding of amounts The Company is of a kind referred to in Corporations 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 Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. 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 immediately after this Directors’ report. Auditor KPMG continues in office in accordance with section 327 of the Corporations Act 2001. Voting of shareholders at last year’s annual general meeting The Group received more than 94% of ‘yes’ votes on its remuneration report for the 2021 financial year. The Group did not receive any specific feedback at the annual general meeting or throughout the year on its remuneration practices. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors upport. Zita Peach Chairperson 16 August 2022 27 ANNUAL REPORT 2022 | PACIFIC SMILES Auditor’s Independence Declaration 28 KPMG, an Australian partnership, and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. 20 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Pacific Smiles Group Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Pacific Smiles Group Limited for the financial year ended 30 June 2022 there have been: i.no contraventions of the auditor independence requirements as set out in theCorporations Act 2001 in relation to the audit; andii.no contraventions of any applicable code of professional conduct in relation to the audit.KPM_INI_01 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG Kevin Leighton Partner Newcastle 16 August 2022 ANNUAL REPORT 2022 | PACIFIC SMILES Consolidated Statement of Profit or Loss and Other Comprehensive Income FOR THE YEAR ENDED 30 JUNE 2022 Revenue Other income Expenses Direct expenses Consumable supplies expenses Employee expenses Impairment of assets Occupancy expenses Marketing expenses Administration and other expenses Depreciation and amortisation expense Net finance costs Profit/(loss) before income tax (expense)/benefit Income tax (expense)/benefit Note 5 6 7 7 7 8 2022 $’000 2021 $’000 139,467 153,175 1,293 9,385 (6,618) (12,321) (72,812) – (3,798) (3,427) (18,176) (26,324) (3,821) (9,752) (13,070) (72,921) (761) (3,114) (2,656) (15,526) (22,445) (3,374) (6,537) 18,941 2,006 (5,988) Profit/(loss) after income tax (expense)/benefit for the year (4,531) 12,953 Other comprehensive income for the year, net of tax Total comprehensive income for the year Basic earnings per share Diluted earnings per share – – (4,531) 12,953 Cents Cents (2.8) (2.7) 8.3 8.2 36 36 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying Notes. 29 ANNUAL REPORT 2022 | PACIFIC SMILES Consolidated Balance Sheet AS AT 30 JUNE 2022 ASSETS Current assets Cash and cash equivalents Receivables Inventories Income tax credit Other Assets of disposal groups classified as held for sale Total current assets Non-current assets Receivables Property, plant and equipment Right-of-use assets Intangibles Deferred tax Total non-current assets Total assets LIABILITIES Current liabilities Payables Lease liabilities Income tax payables Provisions Total current liabilities Non-current liabilities Borrowings Lease liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity Note 2022 $’000 2021 $’000 9 10 11 8 12 13 14 15 16 17 8 18 19 8 20 21 22 23 24 25 11,805 10,947 3,478 5,795 2,378 928 1,803 5,756 – 797 24,384 19,303 – 21 24,384 19,324 477 68,866 71,021 13,463 12,241 29 65,088 55,607 10,145 11,077 166,068 141,946 190,452 161,270 16,937 12,865 – 5,061 34,863 18,500 74,510 3,657 96,667 18,699 10,754 2,922 4,573 36,948 1,000 58,625 3,515 63,140 131,530 100,088 58,922 61,182 51,917 15,346 (8,341) 58,922 51,917 13,075 (3,810) 61,182 The above consolidated balance sheet should be read in conjunction with the accompanying Notes. 30 ANNUAL REPORT 2022 | PACIFIC SMILES Consolidated Balance Sheet AS AT 30 JUNE 2022 Consolidated Statement of Changes in Equity FOR THE YEAR ENDED 30 JUNE 2022 Balance at 1 July 2020 36,769 3,934 (3,810) 36,893 Contributed equity $’000 Reserves $’000 Retained profits $’000 Total equity $’000 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transfer from accumulated losses to reserves Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (Note 24) Share-based payments – performance rights Dividends paid (Note 27) Balance at 30 June 2021 – – – – – – – 12,953 12,953 – – 12,953 12,953 12,953 (12,953) – 15,148 – – 51,917 – 18 (3,830) 13,075 – – – (3,810) 15,148 18 (3,830) 61,182 Contributed equity $’000 Reserves $’000 Retained profits $’000 Total equity $’000 Balance at 1 July 2021 51,917 13,075 (3,810) 61,182 Loss after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Share-based payments (Note 37) Balance at 30 June 2022 – – – – 51,917 – – – (4,531) (4,531) – – (4,531) (4,531) 2,271 15,346 – (8,341) 2,271 58,922 The above consolidated statement of changes in equity should be read in conjunction with the accompanying Notes. 31 ANNUAL REPORT 2022 | PACIFIC SMILES Consolidated Statement of Cash Flows FOR THE YEAR ENDED 30 JUNE 2022 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Government grant received Interest and finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payments for property, plant and equipment Proceeds from disposal of property, plant and equipment Lease payments received from finance leases Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Dividends paid Proceeds/(repayment) of borrowings Repayment of lease liabilities Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Note 2022 $’000 2021 $’000 138,372 172,259 (112,643) (131,284) 25,729 40,975 29 – (3,850) (4,011) 17,897 34 8,023 (3,408) (6,697) 38,927 (23,380) (25,589) 623 625 52 362 (22,132) (25,175) – – 17,500 (12,407) 5,093 858 10,947 15,148 (3,830) (21,000) (8,402) (18,084) (4,332) 15,279 35 15 24 26 Cash and cash equivalents at the end of the financial year 9 11,805 10,947 The above consolidated statement of cash flows should be read in conjunction with the accompanying Notes. 32 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 30 JUNE 2022 Contents 34 Note 1. Corporate information 34 Note 2. Significant accounting policies 43 Note 3. Critical accounting judgements, estimates and assumptions 44 Note 4. Operating segments 44 Note 5. Revenue 45 Note 6. Other income 45 Note 7. Expenses 46 Note 8. Income tax 47 Note 9. Current assets – cash and cash equivalents 48 Note 10. Current assets – receivables 48 Note 11. Current assets – inventories 48 Note 12. Current assets – other 48 Note 13. Current assets – assets of disposal groups classified as held for sale 49 Note 14. Non-current assets – receivables 49 Note 15. Non-current assets – property, plant and equipment 50 Note 16. Non-current assets – right-of-use assets 50 Note 17. Non-current assets – intangibles 52 Note 18. Current liabilities – payables 52 Note 19. Current liabilities – lease liabilities 52 Note 20. Current liabilities – provisions 53 Note 21. Non-current liabilities – borrowings 54 Note 22. Non-current liabilities – lease liabilities 54 Note 23. Non-current liabilities – provisions 55 Note 24. Equity – contributed equity 55 Note 25. Equity – reserves 56 Note 26. Equity – dividends 56 Note 27. Financial instruments 58 Note 28. Key management personnel disclosures 59 Note 29. Remuneration of auditors 59 Note 30. Contingent liabilities 59 Note 31. Commitments 60 Note 32. Related party transactions 60 Note 33. Parent entity information 61 Note 34. Events after the reporting period 61 Note 35. Cash flow information 62 Note 36. Earnings per share 62 Note 37. Share-based payments 33 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 1. Corporate information The consolidated financial statements cover Pacific Smiles Group Limited as a consolidated entity consisting of Pacific Smiles Group Limited (the ‘Company’) and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars, which is Pacific Smiles Group Limited’s functional and presentation currency. Pacific Smiles Group Limited is a listed public company limited by shares, incorporated and domiciled in Australia. On 21 November 2014 Pacific Smiles Group Limited was listed on the ASX. Its registered office and principal place of business is: 6 Molly Morgan Drive, Greenhills, New South Wales A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 16 August 2022. The Directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 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’). Historical cost convention The financial statements have been prepared on an accruals basis and are based on historical costs, modified where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities, and assets and liabilities held for sale. Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, include non-financial asset impairment testing (Note 17) and valuation of share-based payments (Note 37). New or amended Accounting Standards and Interpretations adopted The consolidated entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period, including AASB 2021-3 Amendments to Australian Accounting Standards – COVID-19 – Related Rent Concessions beyond 30 June 2021. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the consolidated entity. 34 Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the consolidated entity only. Supplementary information about the parent entity is disclosed in Note 33. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Pacific Smiles Group Limited (‘Company’ or ‘parent entity’) as at 30 June 2022 and the results of all subsidiaries for the year then ended. Pacific Smiles Group Limited and its subsidiaries together are referred to in these financial statements as the ‘consolidated entity’. ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Subsidiaries are all those entities over which the consolidated entity has control. The consolidated entity controls an entity when the consolidated entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. 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. 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 recognised directly in equity attributable to the parent. Where the consolidated entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling 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. Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the consolidated entity’s Chief Executive Officer (the chief operating decision maker). The chief operating decision maker is responsible for allocating resources and assessing performance of the operating segments. Revenue recognition The consolidated entity recognises revenue as follows: Service and facility fees The consolidated entity provides services and facilities to dentists practicing out of consolidated entity owned dental centres. Services and facilities include the use of fully equipped surgeries, staff, marketing and other support infrastructure. The monthly fee the consolidated entity invoices the dentists is a percentage of patient receipts net of direct costs, which are costs directly incurred by the dentists. The percentage is determined based on monthly patient receipts and the hours worked in accordance with a Services and Facilities Agreement. Revenue is recognised over time as the service is provided to the dentists. The Services and Facilities Agreement with the dentists allows the dentists the right to cancel the arrangement with one to three months of notice without penalty. Professional dental fees Employed and contracted dentists provide a range of dental services to patients. Revenue is recognised once the service is provided for the amount charged to the patient, based on standard list price. Prosthetist fees Prosthetist fees include revenue for the manufacture and fitting of custom made dental prosthesis such as dentures. Upon completion and receipt of the product, control is passed to the customer and invoicing occurs. Revenue is recognised when the prosthesis is provided to the customer as although a denture is produced to a customer’s specification, if the contract is terminated by the customer the consolidated entity is not entitled to payment for services performed to date. Sale of dental products The consolidated entity sells a range of dental products. Revenue is recognised when the product is provided to and paid for by the customer as this is when the performance obligation is satisfied. Management services fees The consolidated entity provides comprehensive operational support to HBF Dental (HBFD) clinics across Western Australia. Revenue is recognised as the performance obligation is performed and service is provided to HBFD. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. 35 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Income tax 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 the 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 be applied 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 at 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. Pacific Smiles Group Limited (the ‘head entity’) and its wholly owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Current and non-current classification Assets and liabilities are presented in the balance sheet based on current and non-current classification. An asset is classified as current when it is either expected to be realised or intended to be sold or consumed in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when it is either expected to be settled in the consolidated entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. 36 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, and 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. 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 allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. The consolidated entity has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Inventories Finished goods are stated at the lower of cost and net realisable value on a ‘first in first out’ basis. 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. Non-current assets or disposal groups classified as held for sale Non-current assets and assets of disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continued use. They are measured at the lower of their carrying amount and fair value less costs of disposal. For non-current assets or assets of disposal groups to be classified as held for sale, they must be available for immediate sale in their present condition and their sale must be highly probable. An impairment loss is recognised for any initial or subsequent write-down of the non-current assets and assets of disposal groups to fair value less costs of disposal. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets or employee benefit assets, which continue to be measured in accordance with the consolidated entity’s other accounting policies. A gain is recognised for any subsequent increases in fair value less costs of disposal of non-current assets and assets of disposal groups, but not in excess of any cumulative impairment loss previously recognised. Non-current assets are not depreciated or amortised while they are classified as held for sale. Interest and other expenses attributable to the liabilities of assets held for sale continue to be recognised. Non-current assets classified as held for sale and the assets of disposal groups classified as held for sale are presented separately on the face of the balance sheet, in current assets. The liabilities of disposal groups classified as held for sale are presented separately on the face of the balance sheet, in current liabilities. 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 a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Leasehold improvements 10-20 years Plant and equipment 3-10 years 37 The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued 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. Right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the consolidated entity expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of-use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The consolidated entity has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit or loss as incurred. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. 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 relevant cash-generating units (CGUs) for the purpose of impairment testing. Software Costs associated with software development and implementation, as well as perpetual licences costs, are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of three to four years. Rights and licences Contractual rights and licences have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of the rights and licences over their estimated useful lives, being 15 years. Impairment of non-financial assets 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. 38 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Cash inflows considered for the purposes of impairment testing are discounted to present value. Significant judgement has been used in testing assets for impairment and in determining the amounts recognised as impairment losses at reporting date. Further details of the key judgements and estimates along with any impairment loss recognised in the financial statements are provided in the Notes dealing with the relevant asset categories. 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. Borrowings Borrowings are measured at amortised cost. Borrowing costs are expensed as incurred. Borrowings are classified as current liabilities unless the consolidated entity has an unconditional right to defer settlement of the liabilities for at least 12 months after the reporting period. Lease liabilities As a lessee: Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option, and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of-use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. Rent concessions: The consolidated entity has applied the practical expedient to not assess rent concessions affecting payments due before 30 June 2022 that have occurred as a direct consequence of the COVID-19 pandemic as a lease modification. The consolidated entity has recognised the amount as ‘other income’ in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient. When the consolidated entity acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the consolidated entity makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the consolidated entity considers certain indicators such as whether the lease is for the major part of the economic life of the asset. As a lessor: When the consolidated entity acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the consolidated entity makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the consolidated entity considers certain indicators such as whether the lease is for the major part of the economic life of the asset. When the consolidated entity is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the consolidated entity applies the exemption described above, then it classifies the sub-lease as an operating lease. If an arrangement contains lease and non-lease components, then the consolidated entity applies AASB 15 to allocate the consideration in the contract. 39 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued The consolidated entity applies the derecognition and impairment requirements in AASB 9 to the net investment in the lease. The consolidated entity further regularly reviews estimated unguaranteed residual values used in calculating the gross investment in the lease. The consolidated entity recognises lease payments received under operating leases as income on a straight-line basis over the lease term as part of ‘other revenue’. Generally, the accounting policies applicable to the consolidated entity as a lessor in the comparative period were not different from AASB 16 except for the classification of the sub-lease entered into during the current reporting period that resulted in a finance lease classification. 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. 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. Make good provision The consolidated entity is required to restore most leased premises to their original condition at the end of their respective lease terms. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements and repair any associated damage. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets. Employee benefits Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. The liabilities are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short- term employee benefit obligations are presented as payables. Other long-term employee benefits The consolidated entity’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. The benefit is discounted to determine its present value. Re-measurements are recognised in profit or loss in the period in which they arise. The obligations are presented as a current liability in the balance sheet if the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. 40 Share-based payments Share-based compensation benefits are provided to selected employees via a long-term incentive plan (LTI plan). The fair value of performance rights granted under the LTI plan is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the performance rights granted, which includes any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are satisfied. At the end of each period, the consolidated entity revises its estimates of the number of performance rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. 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. Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Company, on or before the end of the financial year but not distributed at the reporting date. 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 acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’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 acquiree 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 the contingent consideration classified as an asset or liability are 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 acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree 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 acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. 41 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts 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. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Pacific Smiles Group Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. 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. 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 balance sheet. 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. Government grants Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. The consolidated entity recognises a government grant relating to JobKeeper payment as other income when the grant becomes receivable and when the consolidated entity has complied with the conditions associated with the grant. Changes to significant accounting policy Software-as-a-Service (SaaS) arrangements The International Financial Reporting Standards Interpretations Committee (IFRIC) has issued two final agenda decisions which impact SaaS arrangements: • Customer’s right to receive access to the supplier’s software hosted on the cloud – this decision considers whether a customer receives a software asset at the contract commencement date or a service over the contract term. • Configuration or customisation costs in a cloud computing arrangement – this decision discusses whether configuration or customisation expenditure relating to SaaS arrangements can be recognised as an intangible asset and, if not, over what time period the expenditure is expensed. The consolidated entity has adopted these IFRIC agenda decisions. As at 30 June 2022, there were no intangible assets relating to cloud computing arrangements that have been expensed to the statement of profit or loss and comprehensive income as a result of adoption. 42 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Rounding of amounts The Company is of a kind referred to in Corporations 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 Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended, but are not yet mandatory, have not been early adopted by the consolidated entity for the annual reporting period ended 30 June 2022. The consolidated entity has not yet assessed the impact of these new or amended Accounting Standards and Interpretations. Note 3. 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 (refer to the respective Notes) within the next financial year are discussed below. Coronavirus (COVID-19) pandemic Judgement has been exercised in considering the impacts that the Coronavirus (COVID-19) pandemic has had, or may have, on the consolidated entity based on known information. This consideration extends to the nature of the products and services offered, customers, supply chain, staffing and geographic regions in which the consolidated entity operates. Other than as addressed in specific Notes, there does not currently appear to be either any significant impact upon the financial statements or any significant uncertainties with respect to events or conditions which may impact the consolidated entity unfavourably as at the reporting date as a result of the Coronavirus (COVID-19) pandemic. Share-based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share- based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. 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 lives, or 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 2. The recoverable amounts of cash-generating units have been determined based on fair value less cost of disposal, estimated using discounted cash flows. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. 43 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued 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 for anticipated tax audit issues 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. Employee benefits provision As discussed in Note 2, the liability for employee benefits expected to be settled more than 12 months from the reporting date are 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 value 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 balance sheet 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. Note 4. Operating segments The consolidated entity is organised into one operating segment, being activities within the dental sector throughout Eastern Australia. This operating segment is based on the internal reports that are reviewed and used by the consolidated entity’s Chief Executive Officer, who is identified as the chief operating decision maker, in assessing performance and in determining the allocation of resources. The consolidated entity’s operation inherently has one profile and performance assessment criteria. The financial results from this segment are consistent with the financial statements for the consolidated entity as a whole. Note 5. Revenue 44 Revenue from contracts with customers Dental service fees Dental product sales Other revenue Management fees Revenue 2022 $’000 2021 $’000 138,056 150,540 498 530 138,554 151,070 913 2,105 139,467 153,175 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 6. Other income Government grants Rents Sundry income Other income 2022 $’000 – 481 812 2021 $’000 8,023 630 732 1,293 9,385 Government grants Government grant income relates to JobKeeper payments received or receivable from the Federal Government. The consolidated entity became eligible for the JobKeeper scheme from its inception in March 2020 and continued receiving payments under the Scheme until September 2020. There were no JobKeeper payments received during the financial year. Note 7. Expenses Profit/(loss) before income tax includes the following specific expenses: Depreciation Leasehold improvements Plant and equipment Right-of-use assets Total depreciation Amortisation Software Rights and licences Total amortisation Total depreciation and amortisation Impairment Plant and equipment Goodwill Total impairment Finance costs Interest and finance charges paid/payable on borrowings Interest and finance charges paid/payable on lease liabilities Interest received/receivable Finance costs expensed Superannuation expense 2022 $’000 2021 $’000 6,693 6,989 11,401 25,083 1,176 65 1,241 26,324 – – – 708 3,141 (28) 3,821 5,914 5,887 10,578 22,379 – 66 66 22,445 98 663 761 596 2,812 (34) 3,374 Defined contribution superannuation expense 5,628 5,788 Share-based payments expense Share-based payments expense Direct expenses Direct expenses 2,270 18 6,618 9,752 Direct expenses relate to the cost of the sale of dental products and dental practitioner employment costs. 45 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 8. Income tax Income tax expense/(benefit) Current tax Deferred tax Adjustment recognised for prior periods 2022 $’000 – (1,164) (842) 2021 $’000 7,966 (1,976) (2) Aggregate income tax expense/(benefit) (2,006) 5,988 Deferred tax included in income tax expense/(benefit) comprises: Increase in deferred tax assets (1,164) (1,976) Numerical reconciliation of income tax expense/(benefit) and tax at the statutory rate Profit/(loss) before income tax (expense)/benefit Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Entertainment expenses Impairment of goodwill Share-based payments Building write-off deduction Adjustment recognised for prior periods Income tax expense/(benefit) (6,537) 18,941 (1,961) 5,682 116 – 681 – (1,164) (842) (2,006) 74 199 5 30 5,990 (2) 5,988 46 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Deferred tax asset Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Tax losses Allowance for expected credit losses Property, plant and equipment Employee benefits Lease liabilities Accrued expenses Intangibles Lease receivables Right-of-use assets Prepayments and others Deferred tax asset Movements: Opening balance Credited to profit or loss Closing balance Income tax credit Provision for income tax Note 9. Current assets – cash and cash equivalents Cash at bank and in hand 2022 $’000 2021 $’000 3,250 60 1,509 1,826 26,212 1,114 (137) (255) – 143 3,847 1,697 20,813 868 (157) (68) (21,306) (16,075) (32) 9 12,241 11,077 11,077 1,164 12,241 2022 $’000 2,378 2022 $’000 – 9,101 1,976 11,077 2021 $’000 – 2021 $’000 2,922 2022 $’000 2021 $’000 11,805 10,947 47 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 10. Current assets – receivables Trade receivables Less: Allowance for expected credit losses Finance lease receivables Other receivables Note 11. Current assets – inventories Inventories – at cost Note 12. Current assets – other Prepayments Other Note 13. Current assets – assets of disposal groups classified as held for sale Assets held for sale 2022 $’000 2,987 (200) 2,787 375 316 2021 $’000 1,385 (477) 908 610 285 3,478 1,803 2022 $’000 5,795 2021 $’000 5,756 2022 $’000 781 147 928 2021 $’000 667 130 797 2022 $’000 – 2021 $’000 21 In January 2021, the consolidated entity discontinued the operation of Everything Dentures Pty Limited. The associated assets were consequently presented as held for sale. As at 30 June 2022, there were no remaining assets held in Everything Dentures Pty Limited. 48 Assets of disposal group held for sale Property, plant and equipment 2022 $’000 2021 $’000 – 21 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 14. Non-current assets – receivables Finance lease receivables 2022 $’000 477 2021 $’000 29 Note 15. Non-current assets – property, plant and equipment Leasehold improvements – at cost Less: Accumulated depreciation and impairment Plant and equipment – at cost Less: Accumulated depreciation and impairment 2022 $’000 82,243 (37,434) 44,809 63,930 (39,873) 24,057 68,866 2021 $’000 71,375 (31,225) 40,150 61,987 (37,049) 24,938 65,088 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2020 Additions Classified as held for sale Disposals Impairment of assets Depreciation expense Balance at 30 June 2021 Additions Disposals Transfer out to intangible assets Depreciation expense Balance at 30 June 2022 Leasehold improve- ments $’000 31,877 11,408 39 (5) (27) Plant and equipment $’000 19,322 14,181 232 (67) (71) Total $’000 51,199 25,589 271 (72) (98) (5,914) (5,887) (11,801) 37,378 15,155 (1,031) – (6,693) 44,809 27,710 4,592 (284) (972) (6,989) 24,057 65,088 19,747 (1,315) (972) (13,682) 68,866 Impairment of assets The consolidated entity has discontinued the operation of Everything Dentures Pty Limited in January 2021. Therefore, impairment losses of the associated assets were recognised in the prior year. 49 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 16. Non-current assets – right-of-use assets Leases – right-of-use Less: Accumulated depreciation 2022 $’000 99,197 (28,176) 71,021 2021 $’000 74,504 (18,897) 55,607 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2020 Adjustment on carrying value from lease variations Additions Transfers in/(out) Depreciation expense Balance at 30 June 2021 Adjustment on carrying value from lease variations Disposals Additions Depreciation expense Balance at 30 June 2022 Note 17. Non-current assets – intangibles Goodwill Less: Impairment Software – at cost Less: Accumulated amortisation Rights and licences Less: Accumulated amortisation $’000 51,805 (33) 14,827 (414) (10,578) 55,607 (655) (1,528) 28,998 (11,401) 71,021 2021 $’000 12,517 (2,894) 9,623 – – – 985 (463) 522 2022 $’000 12,517 (2,894) 9,623 8,280 (4,897) 3,383 985 (528) 457 50 13,463 10,145 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2020 Impairment of assets Transfers in/(out) Amortisation expense Balance at 30 June 2021 Additions Disposals Transfers in from property, plant and equipment Amortisation expense Balance at 30 June 2022 Goodwill $’000 10,021 (663) 265 – 9,623 – – – – 9,623 Software $’000 Rights and licences $’000 – – – – – 3,634 (47) 972 (1,176) 3,383 587 – – (65) 522 – – – (65) 457 Total $’000 10,608 (663) 265 (65) 10,145 3,634 (47) 972 (1,241) 13,463 Impairment testing for cash-generating units (CGUs) The impairment assessments for each CGU are made on the basis of fair value less cost of disposal, estimated using discounted cash flow. The fair value measurement was categorised as a Level 3 fair value. Based on the inputs in the valuation technique used, recoverable amounts of the CGUs exceeded their carrying values, therefore no impairment losses were recorded in the financial year. For the purpose of impairment testing, the carrying amount of goodwill has been allocated to each CGU. The CGU is defined on a regional basis which includes multiple centres in geographical proximity. The CGUs within the same State are grouped together as groups of CGUs. The carrying amounts of goodwill allocated to groups of CGUs are set out below: New South Wales Victoria Queensland Total goodwill 2022 % 4,546 2,631 2,446 9,623 2021 % 4,546 2,631 2,446 9,623 The key assumptions used in the estimation of the recoverable amount are set out below. Discount rate Terminal value growth rate Budgeted EBITDA growth rate (average of next five years) 2022 $’000 2021 $’000 12.50% 10.00% 2.50% 10.00% 2.50% 5.00% 51 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued The calculations use discounted cash flow projections covering a five-year period that matches the average growth profile of our dental centres. The cash flows for years one to five are based on detailed management projections, which consider historical financial results and trends, the Board-approved financial budget for the next financial year and reasonable expectations regarding future business and market circumstances. The cash flow projections for years one to five are based on key assumptions including dentist numbers, number of operating chairs, practitioner hours, patient demand and associated costs. A long-term growth rate of 2.5% is used beyond year five in determining the terminal values, which is considered reasonable in the context of the long-term growth rates for the markets in which each CGU operates. Future cash flows are discounted using a post-tax measure based on the consolidated entity’s weighted average cost of capital of 12.50% (2021: 10.00%). The pre-tax measure of the consolidated entity’s weighted average cost of capital is 13.00% (2021: 10.50%). Management has performed sensitivity analysis to the key assumptions, by increasing the discount rate up to 17.5% and decreasing the growth rate down to 5%. The analysis assumes that all other variables remain constant. The analysis resulted in the estimated recoverable amount of the CGU still exceeding its carrying amount. On this basis the Group considers that a reasonably possible change in the two key assumptions, being discount rate and growth rate, will not lead to the carrying amount of the CGUs exceeding their recoverable amount. Rights and licences As part of the consolidated entity’s acquisition of the three former AHM dental centres, the consolidated entity received preferential provider support from AHM. These rights and licenses relate to AHM marketing rights at each Pacific Smiles dental centre with a further nine years of amortisation remaining. Note 18. Current liabilities – payables Trade payables Note 19. Current liabilities – lease liabilities Lease liability Refer to Note 27 for further information on financial instruments. Note 20. Current liabilities – provisions Employee benefits 52 Refer to Note 23 for further information on movements in provisions. 2022 $’000 2021 $’000 16,937 18,699 2022 $’000 2021 $’000 12,865 10,754 2022 $’000 5,061 2021 $’000 4,573 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 21. Non-current liabilities – borrowings Bank loans Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans 2022 $’000 18,500 2021 $’000 1,000 2022 $’000 18,500 2021 $’000 1,000 Assets pledged as security The bank loans are secured by a registered equitable mortgage over the whole of the assets and undertakings of the consolidated entity, including uncalled capital and inter-entity guarantees. Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank overdraft Bank loans Bank guarantees Used at the reporting date Bank overdraft Bank loans Bank guarantees Unused at the reporting date Bank overdraft Bank loans Bank guarantees 2022 $’000 2021 $’000 500 40,000 5,000 45,500 – 18,500 3,823 22,323 500 21,500 1,177 23,177 500 40,000 4,000 44,500 – 1,000 3,610 4,610 500 39,000 390 39,890 Covenants attached to bank borrowings were complied with during the financial year. 53 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 22. Non-current liabilities – lease liabilities Lease liability Refer to Note 27 for further information on financial instruments. Note 23. Non-current liabilities – provisions Employee benefits Lease make good 2022 $’000 2021 $’000 74,510 58,625 2022 $’000 1,027 2,630 3,657 2021 $’000 1,085 2,430 3,515 Movements in provisions Movements in each class of provision (current and non-current) during the current financial year, other than employee benefits, are set out below: 2022 Carrying amount at the start of the year Additional provisions recognised Payments Carrying amount at the end of the year Make good provision $’000 2,430 356 (156) 2,630 54 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 24. Equity – contributed equity Ordinary shares – fully paid 159,581,938 159,581,938 51,917 51,917 2022 Shares 2021 Shares 2022 $’000 2021 $’000 Movements in ordinary share capital Details Balance New shares placement Share purchase plan Balance Balance Date Shares Issue price 1 July 2020 153,515,550 3 March 2021 5,769,231 23 March 2021 297,157 30 June 2021 159,581,938 30 June 2022 159,581,938 $2.60 $2.60 $’000 36,769 14,437 711 51,917 51,917 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of shares held. At shareholders’ meetings, each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. 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 continue to provide returns for shareholders and benefits for other stakeholders, maintain sufficient financial flexibility to pursue its growth objectives, and maintain an optimum capital structure to reduce the cost of capital. The consolidated entity monitors its working capital continually and manages it within a Board approved finance facility. Debt covenants have been consistently achieved and monitored monthly. Capital is regarded as total equity, as recognised in the balance sheet, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. Note 25. Equity – reserves Profits reserve Share-based payments reserve 2022 $’000 12,387 2,959 15,346 2021 $’000 12,387 688 13,075 Profits reserve The profits reserve represents current year profits transferred to a reserve to preserve the characteristic as a profit so as to quarantine from being appropriated against accumulated losses arising from the adoption of AASB 16. Such profits are available to enable payment of franked dividends in the future should the Directors declare so by resolution. 55 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 26. Equity – dividends Dividends Dividends paid during the financial year were as follows: No dividend has been declared or paid for the year ended 30 June 2022 (2021: 2.40 cents per ordinary share, fully franked) There were no dividends declared but not recognised at the end of the financial year. Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% 2022 $’000 – 2021 $’000 3,830 2022 $’000 2021 $’000 13,429 15,301 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for franking credits that will arise from the payment of the amount of income tax payable or collection of income tax receivable. The consolidated amount includes franking credits that would be available to the parent entity if distributed profits of subsidiaries were paid as dividends. Note 27. Financial instruments Financial risk management objectives The consolidated entity’s activities expose it to a variety of financial risks: market risk (interest rate risk), credit risk and liquidity risk. The Board has overall responsibility for the establishment and oversight of the risk management framework, and is supported by the Board Audit and Risk Management Committee. Senior management develops and monitors risk management policy, and reports regularly to the Directors on issues and compliance matters. Risk management principles and systems are reviewed regularly to reflect changes in market conditions and the consolidated entity’s activities. The consolidated entity’s principal financial instruments during the 2022 and 2021 financial years comprised bank and other loans, and cash. The main purpose of these instruments has been to raise finance for the consolidated entity’s operations and investments. The consolidated entity has various other financial instruments such as trade and other debtors and creditors, which arise directly from its operations. The consolidated entity does not trade in financial instruments. 56 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Market risk Interest rate risk The consolidated entity’s exposure to market risk for changes in interest rates at the end of the year was minimal, with bank debt partially offset by cash balances at 30 June 2022. Cash balances are held in a combination of short-term fixed interest deposit accounts and other cheque and on-call accounts which attract variable interest rates. The weighted average interest rate on cash balances at the end of the year was 0.10% (2021: 0.13%). Variable rate bank loans drawn of $18,500,000 (2021: $1,000,000) form part of an ongoing loan facility which was updated during the 2022 financial year. The overall facility term expires on 30 September 2025. The loans are subject to interest charged at the prevailing variable rate payable on each reset date. The weighted average interest rate on borrowings at the end of the year was 4.75% (2021: 4.11%). Basis points increase Basis points decrease Basis points change Effect on profit before tax Effect on equity Basis points change Effect on profit before tax Effect on equity 100 (75) (75) (100) 75 75 Basis points increase Basis points decrease Basis points change Effect on profit before tax Effect on equity Basis points change Effect on profit before tax Effect on equity 100 (40) (40) (100) 40 40 2022 Variable rate bank loans 2021 Variable rate bank loans Credit risk The consolidated entity has no significant concentrations of credit risk. The consolidated entity does not have significant credit exposure to any one financial institution or customer. The consolidated entity only transacts with reputable Australian banks and its credit risk on trade receivables is not considered significant. Liquidity risk The consolidated entity’s objective is to maintain a balance between continuity of funding and flexibility through the use of working capital and bank borrowings. The consolidated entity aims to achieve this flexibility by keeping committed credit lines available. Opportunities to raise additional capital from shareholders are also considered where appropriate. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows to ensure sufficient liquidity is always available to meet liability obligations as they fall due. The Group’s balance sheet shows an excess of current liabilities over current assets at balance date. Liabilities have been classified as current where it is probable that they will be settled within 12 months or if there is a contractual obligation that may require settlement within 12 months, regardless of how likely settlement under contractual arrangements is judged to be. The Group’s current assets, available financing facilities, and ongoing positive operating cash flows continue to be sufficient to satisfy all payment obligations within the time-frames required. 57 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Remaining contractual maturities The following tables detail the consolidated entity’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amounts in the balance sheet. 2022 Non-derivatives Non-interest bearing Trade payables Interest-bearing – variable Bank loans Total non-derivatives 2021 Non-derivatives Non-interest bearing Trade payables Interest-bearing – variable Bank loans Total non-derivatives Less than 6 months $’000 Between 6 and 12 months $’000 Between 1 and 5 years $’000 Remaining contractual maturities $’000 16,685 – 16,685 – – – – 16,685 21,581 21,581 21,581 38,266 Less than 6 months $’000 Between 6 and 12 months $’000 Between 1 and 5 years $’000 Remaining contractual maturities $’000 18,699 1,000 19,699 – – – – – – 18,699 1,000 19,699 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Fair value Unless otherwise stated, the carrying amounts of financial instruments reflect their fair values. Note 28. Key management personnel disclosures Compensation The aggregate compensation made to Directors and other members of key management personnel of the consolidated entity is set out below: 58 Short-term employee benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments 2022 $ 2021 $ 1,870,415 2,358,950 110,053 92,697 90,436 111,597 – 237,215 780,488 541,546 2,851,392 3,342,005 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 29. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by KPMG, the auditor of the Company: Audit services Audit or review of the financial statements 180,000 150,000 2022 $ 2021 $ Other services Tax compliance and advisory services Note 30. Contingent liabilities Bank guarantees 26,900 26,400 206,900 176,400 2022 $’000 3,823 2021 $’000 3,610 The consolidated entity has given bank guarantees as at 30 June 2022 of $3,823,493 (2021: $3,609,736) to various landlords as security for leased premises. Note 31. Commitments Capital commitments Committed at the reporting date but not recognised as liabilities: Property, plant and equipment Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years Lease commitments – finance Committed at the reporting date and recognised as liabilities, payable: Within one year One to five years More than five years Total commitment Less: Future finance charges Net commitment recognised as liabilities 2022 $’000 2021 $’000 2,959 2,055 185 130 315 37 3 40 15,923 57,765 40,180 113,868 (26,493) 87,375 11,719 45,552 22,351 79,622 (10,224) 69,398 59 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 32. Related party transactions Parent entity Pacific Smiles Group Limited is the parent entity. Key management personnel Disclosures relating to key management personnel are set out in Note 28 and the remuneration report included in the Directors’ report. Transactions with related parties Other than remuneration for their positions as Directors and executives of the consolidated entity, key management personnel or entities related to them entered into a number of transactions with the consolidated entity. Information on these transactions is set out below. Key management personnel or their related parties held shares in the consolidated entity during 2022 and 2021 and, as such, participated in dividends. Exandal Investments, an entity related to Alison Hughes, leased business premises to the consolidated entity during 2022 and 2021 on normal commercial terms and conditions. The consolidated entity paid fees for consultancy services to PKF during 2021. The entity is related to Simon Rutherford, fees were based on normal commercial terms and conditions. The following transactions occurred with related parties: Dividends paid Rental expenses Consulting fees paid Note 33. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income Balance sheet Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Profits reserve Share-based payments reserve Accumulated losses Total equity 60 2022 $ 2021 $ – 1,408,392 345,115 444,333 – 30,000 2022 $’000 (4,354) (4,354) 2021 $’000 13,533 13,533 2022 $’000 2021 $’000 24,179 19,213 190,199 160,825 33,390 130,048 35,454 98,591 51,917 12,953 2,959 (7,678) 60,151 51,917 12,953 688 (3,324) 62,234 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Contingent liabilities The parent entity had no contingent liabilities, other than bank guarantees as at 30 June 2022 totalling $3,823,493 (30 June 2021: $3,609,736). Note 34. Events after the reporting period No matter or circumstance has arisen since 30 June 2022 that has significantly affected, or may significantly affect, the consolidated entity’s operations, the results of those operations, or the consolidated entity’s state of affairs in future financial years. Note 35. Cash flow information Reconciliation of profit/(loss) after income tax to net cash from operating activities Profit/(loss) after income tax (expense)/benefit for the year Adjustments for: Depreciation and amortisation Impairment of property, plant and equipment Impairment of intangibles Net loss on disposal of property, plant and equipment Share-based payments Change in operating assets and liabilities: Decrease/(increase) in receivables Increase in inventories Decrease/(increase) in deferred tax assets Increase in other operating assets Increase/(decrease) in payables Increase in other provisions Increase/(decrease) in income tax Net cash from operating activities 2022 $’000 (4,531) 2021 $’000 12,953 26,326 22,446 – – 767 2,271 (2,123) (39) 1,758 (100) (1,762) 630 (5,300) 17,897 98 663 23 18 2,709 (1,634) (1,976) (334) 2,405 288 1,268 38,927 61 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Note 36. Earnings per share Profit/(loss) after income tax Basic earnings per share Diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Performance rights Weighted average number of ordinary shares used in calculating diluted earnings per share 2022 $’000 (4,531) 2021 $’000 12,953 Cents Cents (2.8) (2.7) 8.3 8.2 Number Number 159,581,938 155,492,882 8,871,838 2,108,224 168,453,776 157,601,106 Performance rights Performance rights granted to employees under the consolidated entity’s long-term incentive plan are considered to be potential ordinary shares and are only included in the determination of diluted earnings per share to the extent to which they are dilutive. From 8,871,838 (FY21: 9,183,430) performance rights on issue, a total of 8,871,838 (FY21: 5,406,000) performance rights are included in the calculation of diluted earnings per share because they are contingently issuable ordinary shares and the conditions for these rights to be satisfied are probable as at 30 June 2022. Note 37. Share-based payments Long-term incentive plan overview The consolidated entity has established a long-term incentive plan (LTI) to assist in the motivation, retention and reward of senior management. The LTI plan is designed to align the interests of senior management more closely with the interests of shareholders by providing an opportunity for senior management to receive an equity interest in the consolidated entity through the granting of performance rights. Performance rights have been issued to the Chief Executive Officer and selected senior managers, at the absolute discretion of the Board, pursuant to the LTI plan in financial years 2022, 2021, 2020, 2019 and 2018. The performance rights will vest after a set term (the performance period), and are conditional on the achievement of relevant performance and service conditions. During the financial year, the consolidated entities amended the conditions under the LTI plan to provide closer alignment between shareholder value creation and executive remuneration. The key changes are: • Moving from an EPS measure to a TSR measure for the reasons given above. • Increase the threshold for maximum vesting from 20% per annum to 25% per annum. • Ensure there is a consistent vesting date each year, which is every 30th November. 62 ANNUAL REPORT 2022 | PACIFIC SMILES Notes to the Consolidated Financial Statements Continued Performance rights that do not vest on the relevant vesting date will lapse. Performance rights will also lapse if total shareholder return does not reach a minimum threshold over the relevant performance period. Set out below are summaries of options granted under the plan: 2022 Grant date Expiry date 30/11/2017 30/11/2021 30/11/2018 30/11/2022 30/11/2019 30/11/2023 30/11/2020 30/11/2024 30/11/2021 30/11/2025 Balance at the start of the year 875,000 2,744,000 2,662,000 2,902,430 – 9,183,430 Granted – – – – 2,500,000 2,500,000 Expired/ forfeited/ other (875,000) (1,148,500) (271,000) (271,000) (246,092) (2,811,592) Balance at the end of the year – 1,595,500 2,391,000 2,631,430 2,253,908 8,871,838 The weighted average remaining contractual life of options outstanding at the end of the financial year was 2.05 years (2021: 2.51 years). The fair values at grant dates have been determined via pricing models which use a Monte Carlo simulation, and take into account the following inputs: Grant date Fair value of right Share price at grant date Exercise price Term Expected price volatility Expected dividend yield Risk free interest rate 2022 2021 30 November 2021 30 November 2020 1.32 $2.90 Nil 4 years 51.0% 0.0% 0.5% 0.88 $2.64 Nil 4 years 30.0% 4.0% 1.2% 63 ANNUAL REPORT 2022 | PACIFIC SMILES Directors’ Declaration In the Directors’ opinion: • the attached financial statements and Notes comply with the Corporations Act 2001, the Australian Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; • the attached financial statements and Notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in Note 2 to the financial statements; • the attached financial statements and Notes give a true and fair view of the consolidated entity’s financial position as at 30 June 2022 and of its performance for the financial year ended on that date; and • there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors Zita Peach Chairperson 16 August 2022 64 ANNUAL REPORT 2022 | PACIFIC SMILES Independent Auditor’s Report Independent Auditor’s Report To the shareholders of Pacific Smiles Group Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Pacific Smiles Group Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises: • Consolidated balance sheet as at 30 June 2022; • Consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended; • Notes including a summary of significant accounting policies; and • Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. 56 65 ANNUAL REPORT 2022 | PACIFIC SMILES Independent Auditor’s Report Independent Auditor’s Report Continued Key Audit Matters The Key Audit Matters we identified are: • Carrying value of intangible assets • Revenue recognition 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. Carrying value of intangible assets ($13,463,000) Refer to Note 17 to the Financial Report The key audit matter How the matter was addressed in our audit The carrying value of intangible assets, including the Group’s annual testing of goodwill for impairment was identified as a key audit matter due to the: • Size of the balance; and • Significant level of judgement required to assess the Group’s forecasts and discounted future cashflows. We focused on the significant forward-looking assumptions the Group applied in its fair value less cost of disposal model, including: • Forecast operating cash flows, growth rates and terminal growth rates • Discount rates applied - these are complicated in nature and vary according to the conditions and environment the Cash Generating Units (CGUs) are subject to from time to time, • Complex modelling, particularly those containing highly judgemental allocations of corporate assets and costs to CGUs, using forward-looking assumptions, tend to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us. • The Group has a large number of individual dental centre locations, which includes new centres opened during the financial year, necessitating our consideration of the Group’s determination of Cash Generating Units (CGUs), based on the smallest group of assets to generate largely independent cash inflows. Our procedures included: • We considered the appropriateness of the Fair Value Less Cost of Disposal (FVLCOD) method applied by the Group to perform the annual impairment testing of intangible assets against the requirements of the relevant accounting standards. We: - - - - Assessed the Group’s underlying methodology and documentation for the allocation of corporate costs to the forecast cash flows contained in the value in use model, for consistency with our understanding of the business and the criteria in the accounting standards; Compared forecast cash flows contained in the model to Board approved forecasts reflecting current COVID-19 expected recovery rate; Assessed the accuracy of previous Group forecasts to inform our evaluation of forecasts incorporated in the model; Considered the sensitivity of the model by varying key assumptions, such as forecast growth rates and discount rates, within a reasonably possible range, to identify those CGUs at higher risk of impairment and to focus our further procedures; - Developed a discount rate range using publicly available market data for comparable entities, adjusted by risk factors based on the size and location of the Group’s CGUs; and 57 66 ANNUAL REPORT 2022 | PACIFIC SMILES Independent Auditor’s Report Continued 67 58 - We assessed the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the relevant accounting standards. Revenue recognition ($139,467,000) Refer to Note 5 to the Financial Report. The key audit matter How the matter was addressed in our audit A substantial amount of the Group’s revenue relates to revenue from the rendering of services, being service fees charged to dentists who practice from the Group’s fully serviced dental surgeries as well as revenue from the HBF Managed services Agreement. We focused on revenue recognition of service fees as a key audit matter due to the significant audit effort to test the: • High volume of transactions recorded as revenue and significant value of revenue recognised; • Largely manual nature of the Group’s calculation of dentist payments and therefore service fee revenue. In addition to the above, auditing standards drive a presumed risk in all for-profit organisations (particularly listed entities) regarding the fraudulent recognition of revenue to meet earnings targets and market expectations. Our procedures included: • Evaluating the appropriateness of the Group’s revenue recognition policies and their application to revenue streams against the requirements of AASB15 Revenue from Contracts with Customers; • Testing the operation of key controls in the service revenue recognition process. • Substantive vouching procedures including: - Checking total patient billings and dentist payments throughout the year to the Group’s bank statements. We compared total patient billings less dentist payments to the amount recorded as revenue by the Group; - Agreeing the underlying inputs to supporting documents including contracts for a sample of service fees recognised throughout the financial year; - Recalculating service fees recognised in the last month of the financial year by multiplying the average dentist fee percentages by the total patient billings per the Group’s bank statements for the month; and - Evaluating and testing the recognition of HBFD revenue to determine if the relevant performance obligations had been met and revenue has been recorded in accordance with AASB 15. ANNUAL REPORT 2022 | PACIFIC SMILES Independent Auditor’s Report Continued 68 59 Other Information is financial and non-financial information in Pacific Smiles Group Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Operational overview and insights, Directors’ Report, the Remuneration Report, the Shareholder Information, and the Corporate Directory. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we 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. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. The Directors are responsible for: •preparing the Financial Report that gives a true and fair view in accordance with AustralianAccounting Standards and the Corporations Act 2001;•implementing necessary internal control to enable the preparation of a Financial Report that givesa true and fair view and is free from material misstatement, whether due to fraud or error; and•assessing Group and Company’s ability to continue as a going concern and whether the use ofthe going concern basis of accounting is appropriate. This includes disclosing, as applicable,matters related to going concern and using the going concern basis of accounting unless theyeither intend to liquidate the Group and Company or to cease operations, or have no realisticalternative but to do so.Other Information Responsibilities of the Directors for the Financial Report ANNUAL REPORT 2022 | PACIFIC SMILES Independent Auditor’s Report Continued 69 60 Our objective is: •to obtain reasonable assurance about whether the Financial Report as a whole is free frommaterial 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. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our Auditor’s Report. Opinion In our opinion, the Remuneration Report of Pacific Smiles Group Limited for the year ended 30 June 2022, complies with Section 300A of the Corporations Act 2001. Directors’ responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 11 to 18 of the Directors’ report for the year ended 30 June 2022. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Kevin Leighton Partner Newcastle 16 August 2022 Auditor’s responsibilities for the audit of the Financial Report Report on the Remuneration Report ANNUAL REPORT 2022 | PACIFIC SMILES Shareholder Information The shareholder information set out below was applicable as at 30 June 2022. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the 20 largest security holders of quoted equity securities are listed below: HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Pty Limited Alison J Hughes National Nominees Limited Dr Alexander J Abrahams Citicorp Nominees Pty Limited UBS Nominees Pty Limited Just Paddling Pty Limited Susan L Abrahams Robert G Cameron and Paula S Cameron Channings Holdings Pty Limited Karen Wright Sudemo Pty Limited Citicorp Nominees Pty Limited Lodka Pty Limited Sterling Surgical Pty Limited Trevor Collins and Dianne E Collins Sandhurst Trustees Limited Dianne A Wheeldon Dr David Roessler 70 Number held 31,472,575 27,568,610 15,797,850 14,511,586 12,836,547 7,779,579 6,220,866 3,454,646 2,774,314 2,108,480 2,090,150 2,022,000 1,744,863 1,560,000 1,377,854 1,200,000 1,128,480 810,437 789,132 766,200 Ordinary shares Number of holders 380 379 197 238 66 1,260 255 Ordinary shares % of total shares issued 19.72 17.28 9.90 9.09 8.04 4.87 3.90 2.16 1.74 1.32 1.31 1.27 1.09 0.98 0.86 0.75 0.71 0.51 0.49 0.48 138,014,169 86.47 ANNUAL REPORT 2022 | PACIFIC SMILES Shareholder Information Continued Unquoted equity securities Performance rights issued under the consolidated entity’s LTI plan 8,871,838 9 Number on issue Number of holders Substantial holders Substantial holders in the Company are set out below: Mr Alexander J Abrahams HBF Health Ms Alison J Hughes QVG Capital MA Asset Mgt Celeste Funds Mgt ICE Investors Voting rights Number held 19,256,660 16,000,000 15,797,850 11,451,850 10,264,985 9,748,728 8,644,576 Ordinary shares % of total shares issued 12.07 10.03 9.90 7.18 6.43 6.11 5.42 Each ordinary share carries the right to one vote. No voting rights are attached to performance rights. There are no other classes of equity securities. 71 ANNUAL REPORT 2022 | PACIFIC SMILES Corporate Directory Directors Ms Zita Peach Non-Executive Chairperson and Non-Executive Director Mr Phil McKenzie Managing Director and Chief Executive Officer Mr Mark Bloom Non-Executive Director Mr Hilton Brett Non-Executive Director Mr Simon Rutherford Non-Executive Director Dr Scott Kalniz Non-Executive Director Mr Andrew Knott (appointed 6 February 2022) Non-Executive Director Company Secretary Belinda Cleminson Registered office Level 1, 6 Molly Morgan Drive Greenhills NSW 2323 T: 02 4930 2000 F: 02 4930 2099 W: www.pacificsmiles.com.au Share register Automic Level 5, 126 Philip Street Sydney NSW 2000 GPO Box 5193, Sydney NSW 2001 T: 1300 288 664 (within Australia) or +61 2 9698 5451 (outside Australia) E: hello@automicgroup.com.au Auditor KPMG Level 6, 18 Honeysuckle Drive Newcastle NSW 2300 Stock exchange listing Pacific Smiles Group Limited shares are listed on the Australian Securities Exchange (ASX code: PSQ) Corporate Governance Statement The corporate governance statement is dated 30 June 2022 and reflects the corporate governance practices in place for the 2022 financial year. The corporate governance statement was approved by the Board on 16 August 2022; a copy can be found on the Pacific Smiles website. 72 ANNUAL REPORT 2022 | PACIFIC SMILES The 2022 Pacific Smiles Group Limited annual report is printed using ecoStar+ 100% Recycled Silk. ecoStar+ is a FSC® certified paper. ecoStar+ is an environmentally responsible paper made Carbon Neutral and the fibre source is FSC (CoC) Recycled certified. ecoStar+ is manufactured from 100% post-consumer recycled paper in a process chlorine free environment under the ISO 14001 environmental management system.