Spirit Technology Solutions Ltd
Annual Report 2022

Plain-text annual report

Annual Report 2022 Do IT with Spirit ASX:ST1 Table of Contents A Letter From The Chairman A Letter From The Managing Director Board Members Executive Members SpiritONE™ Directors' Report Auditor’s Independence Declaration Statement of Profit or Loss and Other Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors' Declaration Independent Auditor’s Report Additional Shareholder Information Corporate Directory 5 6 8 10 14 19 45 47 49 51 55 57 111 113 119 122 2 Annual Report 2022 A Letter From The Chairman Dear Shareholders, I’m pleased to present our Annual Report for 2022 – a year that presented numerous challenges for Spirit and carried a theme of transforming the company toward its long-term ambition of being one of Australia’s leading providers of modern and secure digital workplaces. It is acknowledged upfront that the financial outcomes for the year ended 30 June 2022 (FY22) fell well short of our goals. As outlined below and within the Directors' Report, the Board has responded to those shortcomings and implemented restructuring measures to materially improve the forward financial performance of the Group. That noted, the Board remains firm that the vision and ambition are sound and the underlying foundation for success and growth is now in place. As part of the ongoing evolution of the operating structure, we matured to a more defined segment reporting framework comprising Collaboration and Communication, Cyber Security, and Managed Services. Noting the challenging operating environment in the first half of FY22 (impacted by state lockdowns) the Board is pleased with the ongoing performance of the Collaboration and Communication and Cyber Security divisions. Revenue and earnings growth remain solid reflecting the maturity and stability of the operating structures and teams in those businesses. The financial performance challenges have been constrained to the Managed Services segment, which is the product of numerous factors inclusive of inflationary labour and margin pressures. We also acknowledge that our recent acquisitive growth resulted in a complexity of product offerings, customer sizes, and systems, with these factors placing strain on backend support structures. Management is focused on rectifying these matters to streamline the operations and improve financial outcomes. Due to the matters facing the Managed Services segment, an impairment expense was booked in FY22 that contributed predominantly to the Net Loss After Tax recorded. It is important to highlight that significant progress was made on transitioning Spirit to its long-term strategic focus of being a technology solutions provider and with less focus on telecommunications. In this regard, the company divested non-core assets inclusive of its consumer broadband and fixed wireless broadband holdings. This strategy focuses Spirit on sales and an improved customer experience and less on capital intensive infrastructure. Importantly, these asset divestments released $18.5M capital to invest in growth products and transformation. Spirit is now well placed to help Australian businesses establish the technology required to facilitate remote and hybrid employment options, and unlock the freedom associated with working from anywhere. This positioning is typified by our new modular approach to service delivery that sees the presentation of Spirit's four distinct solution categories under the ‘SpiritONE’ guide – Workspace, Meet, Connect, and Guardian. This is business IT solutions made simple and we look forward to seeing our customers embrace this transparent and uncomplicated approach. This fits with Spirit’s vision of building long-term business partnerships based on trust and mutually beneficial outcomes. We enter the new financial year (FY23) a more streamlined and focused company, but also acknowledge we still have significant work to do in 'right-sizing' to realise our full capabilities. As part of our move to focus on solutions enabled by technology, we were very pleased to appoint Michelle Bendschneider as a Non-Executive Director to the Board. Michelle is an experienced Executive, with an expansive background in building growth businesses in technology and professional services. We were also pleased to welcome Julian Haber to the Board as an Executive Director. Julian is currently CEO of Spirit’s Cyber Security business and brings a lens of cyber strategy and growth experience to overlay on the Group. As Spirit moves to its next phase of strategic positioning and focus on organic growth, the Board was also very pleased to welcome Julian Challingsworth as CEO and Managing Director of the Company on 11 July 2022. Julian is a proven ASX listed CEO, with a strong professional services and corporate finance background and his experience will see a more targeted focus on organic earnings growth. Finally, I also wish to acknowledge Sol Lukatsky, who led the company through a significant growth phase in our transition from a wireless telco into a full range IT technology solutions provider. I would like to thank our shareholders for your continued support. There is much to be optimistic about as Spirit continues its drive to be a leading provider of modern and secure digital workplaces to Australian businesses. James Joughin Chairman 5 A Letter From The Managing Director Dear Shareholders, I would first like to acknowledge your support for Spirit during the Financial Year 2022. I began this role 11 July 2022 and am genuinely excited about the opportunity that lies ahead of us. The year presented unique challenges for companies within our sector. Facing these challenges, the Spirit team has worked with vigour to consolidate acquired brands, pivot toward emerging trends, and capitalise on opportunities presented by the current hybrid workplace movement. We were not immune to wider financial headwinds during this period, as evidenced by the presentation of our company accounts and addressed in the Chairman's letter. Behind the numbers, our team is extremely passionate about delivering our customers with market leading solutions across the three business units: Collaboration and Communication, Cyber Security and Managed Services. Spirit is becoming a modern workplace market leader, resilience within our team is strong, morale is strengthening, and we are determined to bring our ambitious vision to life. Moving forward, our long-term success is contingent upon enabling our customers to succeed in adopting new technologies that improve their business performance, making them more successful and resilient to change. This financial year saw Spirit make some redefining movements. We welcomed a significant volume of new talent into our ranks, with a strong focus on uplifting our capabilities and performance. An industry as dynamic as ours requires constant renewal, and I am driven to ensure that our success in collaboration and communication, and cyber security units will enable us to deliver a fruitful restructure to our managed services arm. This will provide the framework for improved group profitability and deliver a strong foundation that enables us to grow profitability in all our target sectors. The pandemic era forced many organisations to deeply consider the nature of human endeavour, and more specifically, the way we work. What does a professional role look like today? How will that change in the coming years? How does management keep a geographically dispersed team engaged, focussed, motivated, united, aligned, productive, connected, and secure? What will be the lasting implications to the way humans address their work-life balance? These are some of the questions we consider daily. In the short-term, we are committed to creating secure, modern digital workplaces that capitalise on cloud-based solutions, collaborative software products, all protected by robust cyber security which is at the core of everything we do. We are moving towards a fully integrated business technology company that can deliver holistic managed IT services to Australian businesses of sufficient growth potential. We are purposefully re-sizing over the next 12 months to focus on more profitable sectors and client groups that are aligned with our capabilities. We have expanded our national reach. We have bolstered the industry accreditations of our people to deliver at scale our key solutions. We have also reviewed and radically refined our vendor relationships, focusing on a streamlined offering that can ensure we deliver excellence. This was evident in our recent Cisco announcement where we were listed as their number one partner for communication in Asia pacific, China and Japan. We have sharpened our sales focus. We have simplified our service offerings to deliver simple, scalable, and modular modern workplace solutions. We have enhanced our marketing and communication strategy to drive transparency and accountability to our shareholders. With the combined impact of these improvements just beginning to manifest, I am confident we are now repositioned to reap the rewards of this hard and meaningful work. If we look forward, the coming workplace revolutions will focus on IoT, process automation, machine learning, and the increasing value of data accumulation and analysis. The business technology world is in a state of constant and necessary change. As a future-oriented company, we aim to be at the forefront of these exciting opportunities and developments. Our team is increasingly light, nimble, and poised to rapidly transition into emerging growth markets and products. In summary, 2022 path has been beset with rocky patches, but I am confident we have the tools, plan, strategy, skills, team, and vision to successfully navigate the next part of the journey. I look forward to continued collaboration with my fellow Board and team members as we head boldly into the future. Thanks again for your ongoing support, We craft our solutions by enabling Spirit customers to address these questions, redefine their organisations and deliver their ambitions in a complex and challenging environment. Julian Challingsworth Chief Executive Officer & Managing Director 6 The Spirit Group's Board Members James Joughin Chairman James Joughin brings over 30 years of general corporate experience, having been a senior partner of Ernst & Young until 2013. He was a partner of the firm for 17 years and headed the Mergers and Acquisitions division in Melbourne. James is an experienced company director and holds Non-Executive directorships of a number of private and public companies. For most of his career, James has been providing advice to boards in relation to growth strategies, improving shareholder value, mergers and acquisitions, funding (both debt and equity) and IPO's. Julian Challingsworth Chief Executive Officer & Managing Director Julian is a proven leader of ASX-listed companies, with a strong professional service and corporate finance background. He has extensive experience managing enterprise, government, and critical infrastructure clients. During his most recent appointment as Co-Chief Executive Officer of Tesserent, Julian oversaw a period of significant growth achieved via both acquisition and organic means. 8 Michelle Bendschneider Non-Executive Director Michelle is an experienced executive with an impressive technology and business leadership background that includes stints with IBM, Telstra, and CBA. She has held multiple senior positions across professional and managed services, consulting, technology innovation, cyber security solutions, cloud services, and digital transformation. Her impressive skill set is an instrumental asset as we transform from a telco into a full business technology solutions provider. Julian Haber Executive Director Julian is a highly regarded leader in cyber security and information technology, having built one of Australia’s most reputable cyber security companies, Intalock Technologies, which was acquired by Spirit in December 2020. Intalock provides mission critical services to Australia’s largest enterprises. Having a wealth of experience, Julian has been invited to sit on numerous Global and Regional Partner Advisory Boards for some of the world's largest technology companies. Greg Ridder Non-Executive Director Greg is currently the Chairman of Kogan.com. Formerly Asia Pacific Regional President at NYSE-listed Owens-Illinois, Greg led growth and diversification from its traditional Australian base through joint ventures and acquisitions in China and Southeast Asia. Recently he has focused on intensive business improvement, also serves on the board of Life Without Barriers and PNG Sustainable Development Program. Greg is experienced in leading businesses in multiple countries, cultures, economic circumstances and market conditions. 9 The Spirit Group's Executive Members Julian Challingsworth Chief Executive Officer & Managing Director Julian is a proven leader of ASX-listed companies, with a strong professional service and corporate finance background. He has extensive experience managing enterprise, government, and critical infrastructure clients. During his most recent appointment as Co-Chief Executive Officer of Tesserent, Julian oversaw a period of significant growth achieved via both acquisition and organic means. Elie Ayoub Co-CEO Nexgen Elie co-founded Nexgen in 2009 and has over 24 years’ experience in the communications industry across SMB, residential, corporate and government segments. 10 Julian Haber CEO Intalock As the founder of Intalock, Julian has over 20 years' experience in Data Information and is a highly respected cyber security leader. Paul Miller Chief Financial Officer Paul is a Chartered Accountant with more than 25 years of financial experience. Having commenced his career with PwC in Australia and London, Paul has specialised expertise working in high growth companies. James Harb Co-CEO Nexgen Along with Elie, James co-founded Nexgen in 2009 and has over 20 years’ experience in the communications industry. 11 Mark Dioguardi Chief Technology & Information Officer Mark is an experienced CTO and COO with over 25 years’ experience predominantly in Tier 1 and 2 Telco operators in Australia and Asia. A qualified engineer, Mark commenced his career in engineering and engineering construction management in Telstra before building his corporate career as CTO at Maxis, where he led 1,350 engineers and managed a USD600mil budget to grow their network. Zoe Rosenwax Head of People Zoe is an experienced people and culture leader, with over 10 years experience leading the HR function for some of Australia's leading businesses. Previously filling senior positions at BHP, VicTrack, Deloitte and Sportsbet, Zoe holds the reins for Spirit's cultural strategy and is an advocate for creating an inclusive, diverse and enjoyable environment for our staff and customers. 12 A single technology partner to enable Aussie businesses The Spirit difference SpiritONE TM Workspace Managed services, devices, Guardian Cyber security - At the Connect Fixed wireless, fibre, Meet Collaboration tools, voice software & more centre of everything ethernet & more platforms & more 14 Annual Report 2022 A single technology partner to enable Aussie businesses The Spirit difference FY22 has been a pivotal year for Spirit, We continue to innovate with our partners to deliver value to our customers Largest Varonis deal in Southern Hemisphere Secures largest Varonis deal in southern hemisphere to date Customer expansion with mid market and corporate wins (Healthcare, Banking and Financial Services, Mining) Spirit divests Spirit divests consumer consumer assets assets for $5.1M for $1.5M Spirit completes divestment of consumer assets 2021 Nov 2022 Oct Jan Spirit Wins in Spirit places in t the AFR Fast 100 the AFR Fast 100 chnology 16 Annual Report 2022 Gartner has projected a total Australian IT spend of AU$117.2 billion in 2022 in its latest forecast, increasing by 13.1% from 2021* https://www.crn.com.au/news/aussie-it-spend-to-grow-13-percent-to-117-billion-in-2022-578444 New MD and CEO Appointment of Julian Challingsworth Cisco deal Spirit subsidiary announces Cisco deal Sol Lukatsky steps down Julian Haber interim MD Apr Jun May Jul Spirit places at Spirit wins at Deloitte Technology Deloitte Technology Fast 50 Fast 50 Spirit divests fixed wireless network Implementation update Spirit Strategy - implementation update Annual Report 2022 17 Directors' Report Spirit Technology Solutions Ltd 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 Spirit Technology Solutions Ltd (referred to hereafter as the 'Company', 'parent entity' or 'Spirit') and the entities it controlled at the end of, or during, the year ended 30 June 2022. Directors The following persons were Directors of Spirit Technology Solutions Ltd during the whole of the financial year and up to the date of this report, unless otherwise stated: Mr James Joughin (Non-Executive Chairman) Mr Julian Challingsworth (Managing Director and Chief Executive Officer - appointed 11 July 2022) Mr Julian Haber (Executive Director - appointed 1 April 2022) & Interim Managing Director (16 May 2022 to 11 July 2022) Mr Sol Lukatsky (Managing Director - resigned 2 July 2022) Mr Gregory Ridder (Non-Executive Director) Mr Mark Dioguardi (Executive Director - resigned 1 April 2022) Ms Michelle Bendschneider – (Non-Executive Director - appointed 1 April 2022) Ms Inese Kingsmill (Non-Executive Director - resigned 30 September 2021) Principal activities During the financial year the principal activities of the Consolidated Entity consisted of the provision of Collaboration and Communication services, Cyber Security services and Managed IT services. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Operating and Financial Review Entity’s operations The Consolidated Entity continued its evolution to become one of Australia’s leading providers of modern and secure digital workplaces with a focus purely on the business-to-business market by providing a complete offering across Telecommunications, Internet, Cloud, IT Managed Services and Cyber Security, backed by service excellence. The Spirit business model offers the full solution for the modern-day business to communicate with its staff and customers whilst also protecting the business’ data and infrastructure. The Company remains positioned to capitalise on the ongoing structural changes occurring in the modern workplace in terms of cyber risk, remote worker needs, demand for data, cloud and shortage of IT skills being seen by all markets through its range of technology and IT offerings. The Company progressed its strategy to divest non-core assets inclusive of its consumer broadband and fixed wireless broadband assets. This strategy focuses Spirit on sales and service and less on capital intensive infrastructure. Importantly these asset divestments released capital back to invest in growth products and transformation. The financial year to 30 June 2022 (“FY22”) represented a very challenging period. The first half of FY22 was dominated by COVID-19 related lockdowns which stretched across Sydney, Melbourne and Brisbane and constrained the ability of the Consolidated Entity to fully execute on required installations across the three capital cities. This represented one of the most difficult markets seen in generations and the resilience of revenue in the first half reflected the strength of the business model in terms of product and geographic diversification. That resilience in revenues however, did not translate into earnings resilience. The Company overall continued to manage with supply chain disruptions and ongoing technology sector labour market challenges in the form of both retention and increased labour costs. The second half of FY22 saw revenues increase relative to the first half by 5% but well below the Company’s stated objective. Furthermore, underlying EBITDA* remained under significant pressure and did not recover and grow. These revenue and earnings pressures were largely attributable to the Managed Services (IT&T) business unit with the other two operating divisions exceeding internal expectations. 2 19 Spirit Technology Solutions Ltd Directors' report 30 June 2022 As a consequence of a change in strategic financial objectives, divestments, internal realignment of business accountabilities and profitability pressures, the Consolidated Entity moved to a more defined segment reporting framework that aligns to the following key operating businesses (as outlined in Note 4 to the Financial Statements):  Collaboration and Communication offering award-winning voice solutions, data and office technology for small business;  Cyber security offering specialist cyber managed services and industry leading solutions to corporate and enterprise customers delivered through a 24/7 Security Operations Centre and professional service teams. This capability also enables Spirit to put cyber security at the core of all key market solutions provided across our segments, improving the resilience and security of all our customers;  Managed Services (IT&T) offering a comprehensive range of managed IT and professional services including end-user, public cloud, infrastructure and networking, data and voice solutions to SMB and mid- market customers. Review of operations and financial position The loss for the Consolidated Entity after providing for income tax amounted to $53.166M (30 June 2021: profit $1.157M). Total revenue and other income for the Consolidated Entity for the financial year ended 30 June 2022 was $138.7M (30 June 2021: $104.5M). The following table summarises the key financial metrics for the period: 2022 $'000 2021 $'000 Change $'000 Revenue (refer Note 5 to the financial statements) Other income (refer Note 6 to the financial statements) 135,338 3,394 102,786 1,683 32,552 1,711 Revenue and other income 138,732 104,469 34,263 Earnings before interest, taxes, depreciation & amortisation (EBITDA*) Profit on divestment of consumer & fixed wireless assets (refer Note 6 & Note 35 to the financial statements) Acquisition, divestment and integration costs** Restructuring costs** Net fair value loss on remeasurement of contingent consideration on business combinations** Impairment of non-current assets** Share-based payments** (46,216) (1,823) 2,040 1,413 2,747 48,374 721 8,619 - 2,100 - 168 - 620 (54,835) (1,823) (60) 1,413 2,579 48,374 101 Underlying EBITDA* 7,256 11,507 (4,251) (Loss)/profit after income tax benefit/(expense) (53,166) 1,157 (54,323) * EBITDA is a financial measure which is not prescribed by Australian Accounting Standard (‘AAS’) and represents the profit under AAS adjusted for depreciation, amortisation, interest and tax. Underlying EBITDA is EBITDA adjusted to exclude acquisition, divestment & integration costs, net fair value loss on remeasurement of contingent consideration on business combinations, restructuring costs, impairment of non-current assets and share-based payments. Underlying EBITDA for the year ended 30 June 2022 also excludes gain/(loss) on divestment of consumer and fixed wireless assets. The Directors consider that these measures are useful in gaining an understanding of the performance of the entity, consistent with internal reporting. **Refer Statement of profit or loss and other comprehensive income. Despite growing sales revenue (up 32% on the full year ended 30 June 2021), underlying EBITDA* was down 37%. This was driven by a combination of ongoing scaling investment in the corporate functions combined with challenging cost pressures across the business through needing to maintain staff levels during lockdowns, supply chain delays and inflationary labour and margin pressures. Sales revenue and associated gross margins did not sufficiently compensate for the downside cost impacts. 20 3 Spirit Technology Solutions Ltd Directors' report 30 June 2022 As detailed in Note 4 of the financial statements, the Managed Services (IT&T) segment struggled to achieve a positive profitability position at an underlying EBITDA* level. The earnings shortfall within this segment was the product of numerous factors over a challenging period. In addition to the cost pressures noted above, the complexity and breadth of product sets, range of customer sizes, vendors and systems (that flowed from a fast- paced acquisition strategy) placed strain on the delivery and backend support structures to enable a streamlined and efficient customer experience. As was highlighted in our interim report for the period to 31 December 2021, Spirit has a well-defined standard operating environment (“SOE”) and a history of integrating acquired operations into that SOE. The integration program in FY22 completed its core objective of moving acquired entities into the SOE with consistent platforms and processes to minimise risk and reduce cost. However, acceleration is now required to move from integration to transformation to realise further efficiencies, improve the customer experience and release ongoing synergy savings. In recognition of the financial performance shortfall in this segment, a strategic review was undertaken with the objective to uplift profitability and cashflow returns over the ensuing 6-12 months. The immediate outcome of that review was acknowledgement that the customer base, and associated supporting overhead structure, needed refinement to concentrate on a more defined target base being mid-market customers where the business can focus on providing secure and connected modern workplace solutions. Following this review, the Board implemented a restructuring plan that will likely result in an initial reduction in revenue for the Managed Services (IT&T) operating segment over the short to medium term. This revenue reduction will be accompanied by a reduction in operating costs within that operating segment and at the Corporate level. An initial restructuring provision of $1.1M was recognised as at 30 June 2022 to provide for estimated costs associated with employee restructuring costs at the Corporate level. Further once off costs are expected in the financial year to 30 June 2023 as the Managed Services (IT&T) restructuring is executed. That restructuring program carries both opportunity and risk. Given the historic financial performance, the ongoing medium term inflationary environment and restructuring risks, conservative assumptions were adopted in the value-in-use calculations to assess the recoverable amounts of assets within that cash generating unit (CGU). The outputs from that calculation for the Managed Services (IT&T) CGU resulted in the carrying amount of the underlying assets, which included goodwill, to exceed their recoverable amounts. Accordingly, a non- cash impairment expense of $48.4M was booked in the financial year ended 30 June 2022 (of which $43.1M was directly related to goodwill). The Board remains of the view that the forward opportunities within this segment to crystalise growth and medium-term earnings stability remains attainable and progress on that improvement will be communicated to all stakeholders through the Company’s forward ASX and Half Yearly reporting platforms. Noting the impact on profitability associated with the Managed Services (IT&T) segment and the Corporate division, the Board is pleased with the financial performance of the other two segments as outlined in Note 4 of the financial statements. The Collaboration and Communication division (Nexgen brand) achieved an underlying EBITDA* for FY22 of $9.9M on a full year sales revenue of $34.98M. Revenue in the first half of FY22 was constrained given the lockdowns at $15.57M relative to H2 FY22 of $19.41M (up 25%). The Cyber Security division (Intalock brand) achieved an underlying EBITDA* for FY22 of $2.4M on a full year sales revenue of $31.4M. Performance was steady throughout the year reflecting the stability of the demand for cyber security related products and services. Cash inflows from operating activities were $3.6M for the year ended 30 June 2022 (2021: $5.0M). This reflects the cash impact of the forementioned ongoing cost pressures and revenue shortfalls. Cash obligations associated with business acquisitions and capital investment were largely satisfied from the proceeds on divestment of the non-core consumer and fixed wireless assets. Net cash outflows from investing activities were $1.4M (2021: $52.9M). During the financial year the Company drew down net debt from its banking facility of $3M as part of its capital management. The basic and diluted earnings per share for the financial year ended 30 June 2022 was a loss of 8.08 cents (30 June 2021: profit of 0.21 cents). The net assets of the Consolidated Entity decreased by $50.3M to $59.4M as at 30 June 2022 (30 June 2021: $109.7M). This decrease primarily reflects the non-cash impairment of non-current assets. 4 21 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Prospects for future financial years and Business Risks The Consolidated Entity has evolved significantly over the last two years as it has progressed its transition into a Modern Technology service provider. That evolution has been accelerated through a period of acquisition and organic growth, and more recently through a divestment phase of non-core assets. Spirit is positioned to leverage the solution and product sets it has assembled to drive future organic growth and deliver a solution focused customer experience. The Company’s immediate strategic priorities are improved profitability performance, driving organic growth and increasing positive cash flows from its operations. As part of that focus, there will be ongoing business restructuring within the Managed Services (IT&T) business segment to accelerate that division’s more sharpened customer focus. In conjunction the Consolidated Entity needs to maintain its investment in human capital and technology platforms to build a sustainable and profitable business generating long-term shareholder returns. The evolutionary path of building a scalable and profitable company inherently involves risk. Those risk factors change over time in both nature and weighting. Management and the Board of the Company actively manage risk and apply mitigation strategies (where possible) to reduce the impact of the stated risk on the Company’s achievement of its goals. The key forward material business risks that the Company foresees that could impede the achievement of its future operational and financial success at the time of signing the Directors' Report are set out below. Ongoing Supply Chain Disruption As a continuing consequence of the COVID-19 pandemic, and other global disruption factors, there remains ongoing supply chain disruption which impacts the ability of the Company to secure product delivery on time and at guaranteed price levels. This remains largely outside the control of the Company and has impacts on revenue recognition alongside gross margin stability. Customer contracts are typically priced and ordered in advance and due to a competitive landscape, the Company may need to absorb any price fluctuations that cannot otherwise be passed through to the customer. Management of this risk involves active communication, planning and forecasting of customer requirements and supply chain management and leverage. Spirit has invested in establishing an experienced procurement team and supply chain systems enhancements. Labour Market Shortages and Inflationary Pressures Access to required human capital talent within the Australian employment pool remains a key business risk. The Company operates in a highly competitive industry and requires a mix of skilled professionals to execute its business plan. Spirit, like all companies, is not immune to the ongoing challenges in sourcing and retaining skilled staff in a wage inflationary environment. Mitigation of this risk is largely only possible through immigration and broader opening of international borders. Spirit has developed strategies to retain its workforce team and will continue to invest in not only employee retention programs but also the enhancement of initiatives to be an employer of choice. Funding Risk In recognition of the profitability outcomes in the financial year ended 30 June 2022, the Company is focused on earnings growth alongside managing residual acquisition contingent and deferred consideration obligations over the ensuing 12 months. The Consolidated Entity will continue to require access to external capital in addition to its own operational cash flow generation abilities. The funding strategy includes utilising and sourcing a mix of debt funding, non-core asset divestment funding and shareholder equity. During the year ended 30 June 2022, the Company divested its consumer broadband and fixed wireless broadband assets that collectively returned $18.5M to its balance sheet, net of divestment costs. As at 30 June 2022 the Company had a net debt position of $1.3M and net current liability position of $10M (30 June 2021 net current liability position: $14.8M) which is primarily associated with the residual business acquisition liabilities linked with the acquisitions of Intalock Technologies Pty Ltd (“Intalock”) and Nexgen Investment Group Pty Ltd (“Nexgen”). 22 5 Spirit Technology Solutions Ltd Directors' report 30 June 2022 As outlined in Note 34 Business Combinations to the financial statements, the forward contingent consideration payments primarily relate to Nexgen and are based on historic and forward earnings performance against baseline targets for Calendar 2022 and Calendar H1 2023. Any contingent consideration payable is not capped and out performance against those targets will result in additional consideration payable that may be over and above what the Company estimated as at the acquisition date. The earn-out consideration is settled 30% in shares of the Company and 70% in cash. Accordingly, there are funding obligations and funding risks associated with these payments. Cyber Risks Cyber related attacks are an inherent risk faced by every organisation and the financial and operational impact that this risk can have on an organisation is very high. Accordingly, as a material business risk it requires constant management and risk mitigation. In December 2020 Spirit acquired Intalock Technologies Pty Ltd. Intalock is one of Australia’s leading cyber security services companies and operates a Security Operations Centre providing 24/7 monitoring, technical services and support for enterprise size clients including banks and other similar high risk profile organisations. Intalock also provides internal support services for Spirit. The Consolidated Entity therefore has the internal capability of this division to provide proactive and reactive solutions management of any Cyber related events that present against Spirit and its customer base. Cyber Security services are now a fundamental risk management requirement for any organisation and is a critical defence mechanism for all companies across their IT infrastructure and software layers. Aspirational Risk The Consolidated Entity can still be classified as a small company as measured against other companies listed on the ASX. As the Company continues to achieve growth and scale, the potential complexity and degree of risk may also increase in the absence of mitigation strategies. The Company’s forward strategic goal is also to accelerate entry into the mid-market customer space. That strategy will increasingly focus on targeting more complex mid-market customers and transactions. To achieve these goals, this process will involve an ongoing investment in people, marketing/branding and systems enhancements. Spirit had pursued accelerated growth through an acquisition strategy. Acquisitions carry risk in terms of successful execution, integration and achieving pro-forma contributions of the acquired business. It also carries cultural integration risk. Pandemic and Global Stability Risk There remains ongoing risk associated with the COVID-19 global pandemic and other international stability risks. At the date of this Directors’ Report, local and international markets are in a delicate recovery mode, tempered by inflationary pressures. Given the fluid and unpredictable nature of these external factors there remains ongoing risk that further disruptions may occur that impact the ability of the Consolidated Entity to achieve its stated forward objectives. Significant changes in the state of affairs On 9 September 2021, the Consolidated Entity announced the results of earn-out incentives for performance of businesses acquired by the Consolidated Entity. The total incentive payments in respect of the period ended 30 June 2021 in relation to the acquisitions of Trident Technology Solutions, Altitude IT, Beachhead Group and Reliance IT was $1,940,041 in cash and equity in the amount of $675,721, issued in the Company’s fully paid ordinary shares, in accordance with the terms of the respective Share Purchase Agreements for each acquisition. Additionally, Beachhead Group and Intalock Technologies both had deferred consideration amounts payable which totalled $3,773,164 in cash and an additional $318,785 in shares, in accordance with the terms of the respective Share Purchase Agreements for each acquisition. All payments were factored into Spirit’s FY21 contingent and deferred consideration liabilities as recorded in the 30 June 2021 audited accounts. 6 23 Spirit Technology Solutions Limited Directors' report 30 June 2022 On 9 September 2021, the Consolidated Entity announced the issue of 4,059,173 fully paid ordinary shares for no cash consideration, of which: ● ● ● 1,024,218 fully paid ordinary shares, issued at a fair value price of $0.245 (24.5 cents) per fully paid ordinary share were issued in relation to Target 2 Incentive Shares associated with the Trident acquisition; 1,648,142 fully paid ordinary shares at a fair value issue price of $0.245 (24.5 cents) per fully paid ordinary share in relation to deferred consideration and incentive payments to Beachhead Group; and 1,386,813 fully paid ordinary shares at a fair value issue price of $0.245 (24.5 cents) per fully paid ordinary share in relation to Incentive payments for Reliance IT and Altitude IT. On 10 September 2021, the Consolidated Entity issued 49,338 fully paid ordinary shares to Mr Sol Lukatsky (or his nominee) in relation to the exercise of vested performance rights. On 29 October 2021, the Consolidated Entity announced the completion of the sale of its non-core consumer residential Internet business to Melbourne based broadband and telecommunications provider DGtek Pty Ltd (DGtek) for a cash transaction value of $5.1M. Under the agreement, DGtek acquired the consumer business including the customer base and relevant infrastructure assets. On 11 January 2022, the Consolidated Entity issued 103,844 fully paid ordinary shares to Mr Mark Dioguardi (or his nominee) in relation to the exercise of vested performance rights. On 31 January 2022, the Consolidated Entity announced that it was in an exclusive period of due diligence with the preferred buyer of its fixed wireless tower assets after receiving and considering multiple all cash offers. On 31 March 2022, the Consolidated Entity announced the issue of 8,219,178 fully paid ordinary shares for no cash consideration, issued at a fair value price of $0.145 (14.5 cents) per fully paid ordinary share, as part of the deferred consideration in relation to the Nexgen acquisition. The shares are subject to voluntary escrow until 9 April 2022. On 7 April 2022, the Consolidated Entity announced the issue of a total of 13,000,000 Performance Rights to Directors and Employees in relation to FY22, pursuant to the terms of the Spirit Employee Incentive Plan. The Performance Rights vest on satisfaction of performance hurdles over a three-year period (being 1 July 2021 to 30 June 2024), expiring 7 April 2025. The Director Performance Rights were approved by shareholders at the Annual General Meeting held on 29 November 2021, pursuant to Resolutions 8 and 9. On 9 May 2022, the Consolidated Entity announced it had entered into an agreement for the sale of its fixed wireless assets to Maret Infrastructure Pty Ltd for $15M upfront consideration, plus up to $6M in earn-out payments over two years, subject to revenue targets being achieved. On 16 May 2022, the Consolidated Entity announced that Managing Director, Mr Sol Lukatsky, was stepping down from his role with the agreement of the Board with effect from 2 July 2022. Mr Julian Haber assumed the role of interim Managing Director, whilst a search for a permanent replacement was found. On 1 June 2022, the Consolidated Entity announced the completion of the sale of its fixed wireless assets to Maret Infrastructure Pty Ltd. The sale had effect from 1 June 2022. On 30 June 2022, the Consolidated Entity provided an update on steps to progress an acceleration in its financial profitability and cash flow position. There were no other significant changes in the state of affairs of the Consolidated Entity during the financial year. 24 7 Spirit Technology Solutions Limited Directors' report 30 June 2022 Matters subsequent to the end of the financial year On 7 July 2022, the Consolidated Entity announced the appointment of Mr Julian Challingsworth as Managing Director and Chief Executive Officer of the Company, effective 11 July 2022. On 11 July 2022, the Company issued 6,250,000 Performance Rights to Mr Julian Challingsworth (or his nominee) as part of his employment agreement. The Performance Rights vest over a three-year period (1 July 2022 to 30 June 2025) subject to continued employment and satisfaction of a relative Total Shareholder Return (TSR) performance hurdle measured against a comparator group of companies, expiring 30 June 2026. No other 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 Refer ‘Entity’s operations’ and ‘Prospects for future financial years’. Environmental regulation The Consolidated Entity is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on Directors Name: Title: Qualifications: Experience and expertise: Other current Directorships: Former Directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Mr James Joughin Non-Executive Chairman Bachelor of Business, CPA, GAIDC James Joughin brings over 31 years of general corporate experience, having been a senior partner of Ernst & Young until 2013. He was a partner of that firm for 17 years and headed the Mergers and Acquisitions division in Melbourne. James is also an experienced company Director and holds Non- Executive Directorships of a number of private and public companies. He has wide business experience and has previously held the position of Chair of a private company and is currently Chair of a number of Risk and Audit Committees. For most of his career, James has been providing advice to Boards in relation to growth strategies, improving shareholder value, mergers and acquisitions, funding (both debt and equity) and IPO’s. MyDeal.com.au Ltd (ASX: MYD) Bio-Gene Technology Ltd (ASX:BGT) None Member, Audit and Risk Committee, Chair, Nomination and Remuneration Committee (Member up to 19 April 2022 and Chair from 20 April 2022) 4,764,936 fully paid ordinary shares Nil Nil 8 25 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Name: Title: Qualifications: Experience and expertise: Other current Directorships: Former Directorships (last 3 years): Interests in shares: Interests in options: Interests in rights: Mr Julian Challingsworth Managing Director and Chief Executive Officer (appointed 11 July 2022) Julian has a Masters of Organisational Consulting from Ashridge Business School (UK), a Graduate Diploma in IT, Swinburne University (Aust) and a Bachelor of Business, Accounting, RMIT (Aust). Julian is a member of Chartered Accountants (CAANZ), Fellow Australian CPA (FCPA) and a Graduate, Australian Institute of Company Directors (GAICD). Julian has been the Co-Chief Executive Officer of Tesserent, (ASX TNT) Tesserent provides cybersecurity to enterprise, government and critical infrastructure customers. Under Julian’s leadership the organisation grew significantly through both acquisitive and organic means. Julian spent 3 years in the role before he resigned and stepped down from his role as Co-Chief Executive in November 2021. Julian joined Tesserent after serving as Managing Director and a Partner of The Litmus Group for over ten years and a board member and Partner of PPB Advisory. In addition to advising over twenty organisations on growth acceleration strategies in Australia, Asia and Europe, Julian was a key driver in growing Litmus in Australia and internationally before it was acquired by PPB Advisory. Julian was a Director of Cordence Worldwide, a global consulting partnership with 2,800 consultants across 60+ locations. Julian worked with the international team to develop sales and growth strategies for the 8 member firms. Julian is a proven ASX listed CEO, with a strong professional services and corporate finance background. None Tesserent Limited (ASX: TNT) Nil Nil 6,250,000 Performance Rights 26 9 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Name: Title: Qualifications: Experience and expertise: Other current Directorships: Former Directorships (last 3 years): Interests in shares: Interests in options: Interests in rights: Name: Title: Qualifications: Experience and expertise: Other current Directorships: Former Directorships (last 3 years): Interests in shares: Interests in options: Interests in rights: Mr Julian Haber Executive Director (appointed 1 April 2022), Interim Managing Director (16 May 2022 to 11 July 2022) Nil Julian is a highly regarded leader in Cyber Security and Information Technology, having built one of Australia’s most reputable Cyber Security companies, Intalock Technologies over the last 11 years which was acquired by Spirit in December 2020. During that time Intalock evolved from being a small start-up to providing mission critical services to Australia’s largest enterprises and government departments across Australia, including Whole- of-Government cyber services protecting the G20 Brisbane summit. As CEO of Intalock (Spirit’s Cyber business), Julian oversees the strategy and growth of the company ensuring that it continues to innovate and deliver sophisticated cyber security solutions to its managed and professional services customers across varied industries. Previously at Symantec, the world’s largest Information Management and Cyber Security company at the time, Julian was responsible for the Public Sector - Queensland, Northern Territory and Pacific Islands. Under his five years of leadership, this region delivered annual revenue growth of over 300% and resulted in some of the largest and most loyal customers in the ANZ region. Having a wealth of experience, Julian has been invited to sit on numerous Global and Regional Partner Advisory Boards for some of the world’s largest technology companies. None None 5,693,092 fully paid ordinary shares Nil Nil Mr Sol Lukatsky Managing Director (resigned 2 July 2022) Masters of Marketing, Bachelor of Business (Marketing) Mr Lukatsky is a C-Suite Executive with multiple company transactions across: ASX and Private Equity backed companies. He has over 16 years in senior leadership roles covering: marketing, sales management, digital, customer experience, big data, capital markets, innovation and operations within blue chip organisations including: Dun & Bradstreet, Challenger Financial Services and NAB. In addition, as CEO he has led two Private Equity backed companies in the online services and digital technology markets (GLS & Workstar). This included, Global P&L responsibilities, +650 team members with offices across Australia, Asia and Europe. Educated at Harvard, Melbourne Business School, RMIT and awarded a Fellowship by Leadership Victoria. None None 3,354,421 fully paid ordinary shares 3,000,000 unlisted options, vesting on 1 July 2022, exercisable at $0.15 (15 cents) per option, expiring 1 July 2023; 3,000,000 unlisted options, vesting on 1 July 2022, exercisable at $0.18 (18 cents) per option, expiring 1 July 2023; 3,000,000 unlisted options, vesting on 1 July 2022, exercisable at $0.215 (21.5 cents) per option, expiring 1 July 2023. 2,905,102 Performance Rights (relates to balance retained at cessation on 2 July 2022) 10 27 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Name: Title: Qualifications: Experience and expertise: Other current Directorships: Former Directorships (last 3 years): Interests in shares: Interests in options: Interests in rights: Name: Title: Qualifications: Experience and expertise: Mr Mark Dioguardi Executive Director (resigned 1 April 2022) Master of Business Administration, Bachelor of Engineering Hons Mr Dioguardi is an experienced CTO and COO with over 26 years’ experience predominantly in Tier 1 and 2 Telco operators in Australia and Asia. A qualified engineer, Mark commenced his career in engineering and engineering construction management in Telstra before building his corporate career as CTO at Maxis, where he led 1350 engineers and managed a USD600mil budget to grow their network. He then moved into a Chief Operating Officer role at Maxis before returning to Australia to join iiNet as Chief Technology Officer. Mark joined Spirit as Chief Operating Officer in November 2018 to develop and lead Spirit’s network growth and drive operational excellence across the business. He is also a Non-Executive Director of TimedotCom (a listed Malaysia telecommunications company). Time Dotcom Bhd (KLSE: TIMECOM) None 1,547,972 fully paid ordinary shares 3,000,000 unlisted options, vesting on 1 July 2022, exercisable at $0.15 (15 cents) per option, expiring 1 July 2023; 3,000,000 unlisted options, vesting on 1 July 2022, exercisable at $0.18 (18 cents) per option, expiring 1 July 2023; 3,000,000 unlisted options, vesting on 1 July 2022, exercisable at $0.215 (21.5 cents) per option, expiring 1 July 2023; 5,860,018 Performance Rights Mr Gregory Ridder Non-Executive Director BBus (Acc), Grad Dip (Mktg), GAICD, CPA Mr Ridder is an experienced Non-Executive Director currently serving on the boards of Kogan.com, Life Without Barriers, both of which he chairs, and PNG Sustainable Development Program. Formerly Asia Pacific Regional President at NYSE-listed Owens-Illinois, he led growth and diversification from its traditional Australian base through numerous joint ventures and acquisitions. Other current Directorships: Former Directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Chairman, Kogan.com (ASX: KGN) None Chair, Audit and Risk Committee from 15 July 2020 Member, Nomination and Remuneration Committee from 15 July 2020 1,750,000 fully paid ordinary shares Nil Nil 28 11 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Name: Title: Qualifications: Experience and expertise: Other current Directorships: Former Directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Name: Title: Qualifications: Experience and expertise: Other current Directorships: Former Directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Interests in rights: Ms Michelle Bendschneider Non-Executive Director (appointed 1 April 2022) Bachelor of Information Technology and GAICD Michelle is an experienced Executive, with an expansive background in building growth businesses in the Technology, Professional Services and Telecommunications sectors. During her career at IBM, Michelle held multiple including consulting, Senior Executive roles professional services, and managed services. in Technology services At Telstra, she successfully led the formation of a professional services business spanning cutting edge network services, cyber security solutions, collaboration solutions, Cloud services and IoT solutions, through a series of acquisitions and organic growth. Michelle went on to run the Product Group for Telstra Enterprise, where she led the strategy to transition and modernise legacy product portfolios to embrace Software Defined Networking, Cloud Services & Technologies, Cyber Security, IoT and Digital transformation capabilities. At CBA, Michelle led the delivery of technology enabled Security and Privacy solutions, addressing significant areas of risk for the organisation. Michelle is currently the Chief Operating Officer at PaperCut Software, an innovative Australian software company with global presence, with a remit to help steer the company towards growth and transformation. None None Member, Nomination and Remuneration Committee from 1 April 2022 Member, Audit and Risk Committee from 1 April 2022 Nil Nil Nil Ms Inese Kingsmill Non-Executive Director (resigned 30 September 2021) B. Bus in Marketing, MAICD Over the course of a career spanning 26 years, Inese has earned a reputation as a growth focussed and customer orientated business leader, with leadership experience across a broad spectrum of accountabilities at Microsoft, Telstra and Virgin Australia. Inese has been involved with and led major transformations across a range of scenarios including enterprise wide business restructuring, culture change, digital transformations, customer experience and design, brand re-launches and re-positioning as well as developing fit for purpose operating models. In addition to the Company Directorships detailed below, Inese is also a Director of WorkVentures Ltd and a member of the Advisory Board of Waltzing Matilda Aviation. Non-Executive Director, Rhipe Limited (ASX: RHP) Non-Executive Director, hipages Group Holdings Limited (ASX: HPG) Non-Executive Director, NobleOak Life Limited (ASX: NOL) None Chair, Nomination and Remuneration Committee from 15 July 2020 to 30 September 2021 Member, Audit and Risk Committee from 15 July 2020 to 30 September 2021 187,500 fully paid ordinary shares (as at date of cessation on 30 September 2021) Nil Nil 12 29 Spirit Technology Solutions Ltd Directors' report 30 June 2022 'Other current Directorships' quoted above are current Directorships for listed entities only and excludes Directorships of all other types of entities, unless otherwise stated. 'Former Directorships (last 3 years)' quoted above are Directorships held in the last 3 years for listed entities only and excludes Directorships of all other types of entities, unless otherwise stated. Company secretary Ms Melanie Leydin, BBus (Acc. Corp Law) CA FGIA Ms Leydin holds a Bachelor of Business majoring in Accounting and Corporate Law. She is a member of Chartered Accountants Australia New Zealand, Fellow of the Governance Institute of Australia and is a Registered Company Auditor. She graduated from Swinburne University in 1997, became a Chartered Accountant in 1999 and since February 2000 has been the principal of Leydin Freyer (now part of Vistra). The practice provides outsourced company secretarial and accounting services to public and private companies across a host of industries including but not limited to the resources, technology, bioscience, biotechnology and health sectors. Ms Leydin has over 26 years’ experience in the accounting profession and over 16 years as a Company Secretary. She has extensive experience in relation to public company responsibilities, including ASX and ASIC compliance, control and implementation of corporate governance, statutory financial reporting, reorganisation of companies and shareholder relations. 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 Board Remuneration Committee Audit and Risk Committee Attended Held Attended Held Attended Held Nomination and Mr James Joughin Mr Julian Haber* Mr Sol Lukatsky Mr Mark Dioguardi** Mr Gregory Ridder Ms Michelle Bendschneider*** Ms Inese Kingsmill**** 12 3 10 9 12 3 3 12 3 10 9 12 3 3 8 - - - 8 1 6 8 - - - 8 1 6 2 - - - 2 - 1 2 - - - 2 - 1 Held: represents the number of meetings held during the time the Director held office or was a member of the relevant committee. Mr Julian Haber was appointed to the Board effective 1 April 2022. Mr Mark Dioguardi resigned from the Board effective 1 April 2022. * ** *** Ms Michelle Bendschneider was appointed to the Board effective 1 April 2022. **** Ms Inese Kingsmill resigned from the Board effective 30 September 2021. 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. 30 13 Spirit Technology Solutions Limited Directors' report 30 June 2022 The Remuneration Report is set out under the following main headings: ● ● ● ● ● ● Principles used to determine the nature and amount of remuneration Details of remuneration Service agreements Share-based compensation Additional information 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 it is considered 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 Board 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, particularly growth in share price, and delivering ● constant or increasing return on capital as well as focusing the executive on key non-financial drivers of value 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 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 The annual Non-Executive Director Chairman fees are $120,000 per annum, which took effect from 1 July 2021. The annual Non-Executive Director member fees are $75,000 per annum, which took effect from 1 July 2021. The annual Chair Fee for the Chair of the Audit and Risk Committee and Nomination and Remuneration Committee are $10,000 per annum, which took effect from 1 July 2021. Committee members do not currently receive any additional fees. Under the Constitution the Directors decide the total amount paid to each Director as remuneration for their services. Under ASX Listing Rules, the total amount paid to all Non-Executive Directors must not exceed in total in any financial year the amount fixed at the annual general meeting of the Company held on 13 October 2020, which is presently $500,000. Remuneration must not include a commission on, or a percentage of, the profits or income of the Company. 14 31 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Non-Executive Directors' fees and payments are reviewed annually by the Board. The Board 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. No advice was sought during the course of the financial year. The Chairman's fees are determined independently of the fees of other Non-Executive Directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to the determination of his own remuneration. Directors may also be reimbursed for travel and other expenses incurred in attending to the Company's affairs. Non-Executive Directors may be paid such additional or special remuneration as the Directors decide is appropriate where a Director performs extra work or services which are not in the capacity as a Director of the Company. There are no proposed retirement benefit schemes for Directors other than statutory superannuation contributions. 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. The executive remuneration and reward framework has four components: ● ● ● ● base pay and non-monetary benefits short-term performance incentives long-term incentives in the form of share-based payments other remuneration such as superannuation and long service leave The combination of these comprises the executive's total remuneration. Fixed remuneration consisting of base salary, superannuation and non-monetary benefits, are 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. Use of remuneration consultants The Company engages the services of independent and specialist remuneration consultants from time to time to benchmark the remuneration of Directors and Key Management Personnel, and to assist the Company in ensuring that its remuneration arrangements remain competitive. During the year ended 30 June 2022, the Company engaged a specialist remuneration consultant, SLM Corporate for remuneration benchmarking purposes (2022: $31,350; 2021: $11,000). Consolidated Entity performance and link to remuneration Currently, the Consolidated Entity assesses its performance from achievement of operational goals and shareholder value. The performance measures for both the Company’s Short-term Incentive Plan (STI Plan) and Long Term Incentive Plan (LTI Plan) are tailored to align at-risk remuneration and performance hurdle thresholds to the delivery of the Consolidated Entity’s operational and financial objectives and sustained shareholder value growth. This is achieved through certain executives being entitled to both short-term and long-term incentives. The STI Plan primarily incorporates operational and financial performance objectives into its hurdles. The LTI Plan generally incorporates into its performance measures both a Relative Total Shareholder Return (Relative TSR) and Absolute Total Shareholder Return (Absolute TSR) hurdles. 32 15 Spirit Technology Solutions Ltd Directors' report 30 June 2022 The LTI Plan is part of the Company’s remuneration strategy and is designed to align the interests of management and shareholders (Total Shareholder Return measurement) and assist the Company to attract, motivate and retain executives. In particular, the LTI Plan is designed to provide relevant directors and key employees with an incentive to remain with Spirit and contribute to the future performance of the Group over the long term. Further details on the LTI Plan are presented in Share Based Compensation of this Directors’ report. Voting and comments made at the Company's 29 November 2021 Annual General Meeting ('AGM') At the 29 November 2021 AGM, 95.16% of the votes received supported the adoption of the remuneration report for the year ended 30 June 2021. The Company did not receive any specific feedback at the AGM regarding its remuneration practices. Details of remuneration The key management personnel of the Consolidated Entity consisted of the following Directors and the Chief Financial Officer of Spirit Technology Solutions Ltd: James Joughin, Non-Executive Chairman ● Sol Lukatsky, Managing Director (resigned 2 July 2022) ● Julian Haber, Executive Director (appointed 1 April 2022) & Interim Managing Director (16 May 2022 to 11 ● July 2022) Gregory Ridder, Non-Executive Director Michelle Bendschneider, Non-Executive Director (appointed 1 April 2022) Mark Dioguardi, Executive Director (resigned 1 April 2022) Inese Kingsmill, Non-Executive Director (resigned 30 September 2021) Paul Miller, Chief Financial Officer ● ● ● ● ● Amounts of remuneration Details of the remuneration of key management personnel of the Consolidated Entity are set out in the following tables. Short-term benefits Post- employment benefits Long-term benefits Share-based payments Cash Non- Super- Long service bonus monetary annuation leave $ $ $ $ Equity- settled $ Total $ 2022 Non-Executive Directors: James Joughin Gregory Ridder Michelle Bendschneider* Inese Kingsmill** Executive Directors: Julian Haber*** Sol Lukatsky****+ Mark Dioguardi#+ Other Key Management Personnel: Paul Miller+ Cash salary and fees $ 110,856 85,000 17,045 21,250 - - - - 172,532 378,461 330,000 - 35,000 55,989 291,250 1,406,394 37,500 128,489 - - - - - - - - - 11,085 - 1,705 - - - - - - - - - 121,941 85,000 18,750 21,250 17,253 57,821 47,844 3,929 26,942 15,051 - 272,239 336,812 193,714 770,463 785,696 39,688 175,396 6,407 52,329 54,017 428,862 663,068 2,425,676 * ** *** Ms Michelle Bendschneider was appointed to the Board effective 1 April 2022. Ms Inese Kingsmill resigned from the Board effective 30 September 2021. Mr Julian Haber was appointed to the Board effective 1 April 2022. The remuneration disclosed represents his remuneration for the period 1 July 2021 to 30 June 2022. The amounts he received pre-1 April 2022 in his capacity as CEO of Intalock Technologies Pty Ltd was $118,740 and post 1 April 2022 in his capacity as Executive Director was $74,974. **** Mr Sol Lukatsky resigned from the Board on 2 July 2022. # + Mr Mark Dioguardi resigned from the Board on 1 April 2022. The amounts he received pre-1 April 2022 in his capacity as Executive Director was $540,739 and post 1 April 2022 in his capacity as Chief Technology Officer was $244,957. Mr Lukatsky, Mr Dioguardi and Mr Miller were awarded cash bonuses in respect of their FY22 performance, determined and paid in FY23. In addition to statutory superannuation on base salary and the FY22 cash bonus, the superannuation for Mr Lukatsky, Mr Dioguardi and Mr Miller also includes statutory superannuation on the FY21 cash bonus. 16 33 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Short-term benefits Post- employment benefits Long-term benefits Share-based payments Cash salary and fees $ Cash Non- Super- Long service bonus monetary annuation leave $ $ $ $ Equity- settled $ Total $ 81,815 1,249 66,250 66,250 - - - - 381,538 330,000 163,000 89,650 241,667 1,168,769 66,250 318,900 - - - - - - - - 8,181 - - - - - - - - - - - 89,996 1,249 66,250 66,250 47,154 33,000 14,766 7,016 341,092 299,022 947,550 758,688 24,167 112,502 2,541 24,323 20,069 354,694 660,183 2,284,677 2021 Non-Executive Directors: James Joughin Terence Gray* Gregory Ridder Inese Kingsmill** Executive Directors: Sol Lukatsky*** Mark Dioguardi*** Other Key Management Personnel: Paul Miller*** Mr Terence Gray resigned from the Board on 7 July 2020. Ms Inese Kingsmill was appointed to the Board effective 1 July 2020. * ** *** Mr Lukatsky, Mr Dioguardi and Mr Miller were awarded cash bonuses in respect of their FY21 performance, determined and paid in FY22. The proportion of remuneration linked to performance and the fixed proportion are as follows: Name Non-Executive Directors: James Joughin Terence Gray Gregory Ridder Michelle Bendschneider* Inese Kingsmill** Executive Directors: Julian Haber *** Sol Lukatsky**** Mark Dioguardi# Other Key Management Personnel: Paul Miller Fixed remuneration At risk - STI At risk - LTI 2022 2021 2022 2021 2022 2021 100% - 100% 100% 100% 100% 60% 50% 100% 100% 100% - 100% - 47% 49% - - - - - - 5% 7% - - - - - - - - - - - - - - - - 17% 12% - 35% 43% - 36% 39% 78% 76% 9% 19% 13% 5% * ** *** **** # Ms Michelle Bendschneider was appointed to the Board effective 1 April 2022. Ms Inese Kingsmill resigned from the Board effective 30 September 2021. Mr Julian Haber was appointed to the Board effective 1 April 2022. Mr Sol Lukatsky resigned from the Board on 2 July 2022. Mr Mark Dioguardi resigned from the Board on 1 April 2022. 34 17 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Service agreements Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: Julian Challingsworth Managing Director (appointed 11 July 2022) 11 July 2022 No fixed term. Ongoing until terminated by either party with three months written notice. Effective 11 July 2022, fixed remuneration of $400,000 per annum, plus statutory superannuation. Mr Challingsworth will be entitled to a potential short-term incentive (STI) of up to $100,000 per annum, representing 25% of his base remuneration. The STI is subject to achievement of Key Performance Indicators (KPIs) to be determined from time to time by the Board. On commencement, Mr Challingsworth will receive an initial long-term incentive (LTI) grant of 6,250,000 Performance Rights, vesting over a three- year period (1 July 2022 to 30 June 2025) subject to continued employment and satisfaction of a relative Total Shareholder Return performance hurdles measured against a comparator group of companies. After the initial LTI detailed above for FY2023, from FY2024 Mr. Challingsworth will be entitled to an annual allocation of Performance Rights pursuant to the terms of the Company's Employee Incentive Plan (EIP). An LTI entitlement of 75% of Annual Base Salary can be paid to him from FY2024. Subject to shareholder approval, the LTI will be granted on an annual basis from FY2024, and vesting will be contingent on the achievement of specific performance hurdles. Mr. Challingsworth has agreed to purchase at least $75,000 each year of shares. He must ensure that he complies with the terms of the Securities Trading Policy before doing so. The Company also intends to offer to implement a Loan Share Plan and offer Mr. Challingsworth $380,000 each year to purchase shares on the terms to be finalised in good faith and subject to shareholder approval which is intended to be sought in November 2022. Julian Haber Executive Director (appointed 1 April 2022) Interim Managing Director (16 May 2022 to 11 July 2022) 16 May 2022 No fixed term. Ongoing until terminated by either party with three months written notice. As Chief Executive Officer of fixed remuneration of $137,662 per annum, plus statutory superannuation. Effective 16 May 2022, Mr. Haber was appointed as Interim Managing Director pending a permanent replacement. He held this position until 11 July 2022 when Mr. Julian Challingsworth was appointed in that role. During this period Mr. Haber’s fixed remuneration increased to $400,000 per annum, plus statutory superannuation. In the 2023 financial year, Mr. Haber will be entitled to a potential short-term incentive (STI) of up to $200,000 per annum (pro- rated from the commencement date of Mr. Haber’s Interim Managing Director role to its conclusion), representing 50% of his base remuneration. No long- term incentive (LTI) will be awarded given the interim nature of the role. Intalock Technologies Pty Ltd, 18 35 Name: Title: Agreement commenced: Term of agreement: Details: Spirit Technology Solutions Limited Directors' report 30 June 2022 Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Sol Lukatsky Managing Director (resigned 2 July 2022) 23 April 2018; terms revised on 27 July 2020 4 years and termination provisions will be a period of 12 weeks’ notice by the employee and 26 weeks’ notice by the Company or payment in lieu of notice. Effective 1 July 2020, fixed remuneration of $400,000 per annum, plus statutory superannuation. Mr Lukatsky will be entitled to a potential short-term incentive (STI) of up to $200,000, representing 50% of his base remuneration. Mr Lukatsky was also entitled to a long-term incentive (LTI) of up to $200,000, representing 50% of his base remuneration (excluding superannuation), which was approved by shareholders at the Annual General Meeting held on 13 October 2020. In the 2022 financial year, Mr Lukatsky was issued an LTI in the form of 6,000,000 Performance Rights, vesting on satisfaction of performance hurdles, over a three-year performance period commencing on 1 July 2021 and ending on 30 June 2024. Mr Mark Dioguardi Executive Director (resigned 1 April 2022) and Chief Technology Officer 7 November 2018, terms revised on 27 July 2020 No fixed term. Ongoing until terminated by either party with three months written notice. Effective 1 July 2020, fixed remuneration of $330,000 per annum, plus statutory superannuation. In the 2022 financial year, Mr Dioguardi will be entitled to a potential short-term incentive (STI) of up to $110,000, representing 33.3% of his base remuneration (excluding superannuation). Mr Dioguardi was also entitled to a long-term incentive (LTI) of up to $110,000, representing 33.3% of his base remuneration (excluding superannuation) which was approved by shareholders at the Annual General Meeting held on 13 October 2020. In the 2022 financial year, Mr Dioguardi was issued an LTI in the form of 5,000,000 Performance Rights, vesting on satisfaction of performance hurdles, over a three-year performance period commencing on 1 July 2021 and ending on 30 June 2024. Mr Paul Miller Chief Financial Officer 25 November 2019, terms revised on 1 October 2021 No fixed term. Ongoing until terminated by either party with three months written notice. Effective 1 October 2021, fixed remuneration of $300,000 per annum, plus statutory superannuation. In 2022 financial year Mr Miller is entitled to a potential short-term incentive (STI) of up to $75,000, representing 25% of his base remuneration (excluding superannuation). In the 2022 financial year, Mr Miller was issued an LTI in the form of 1,500,000 Performance Rights, vesting on satisfaction of performance hurdles, over a three-year performance period commencing on 1 July 2021 and ending on 30 June 2024. Key management personnel have no entitlement to termination payments in the event of removal for misconduct. Share-based compensation 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. 36 19 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Options The terms and conditions of each grant of options 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 14 May 2019 14 May 2019 14 May 2019 Vesting date and exercisable date 1 July 2022 1 July 2022 1 July 2022 Expiry date 1 July 2023 1 July 2023 1 July 2023 Name Number of Grant date Sol Lukatsky Sol Lukatsky Sol Lukatsky Mark Dioguardi Mark Dioguardi Mark Dioguardi options granted 3,000,000 14 May 2019 3,000,000 14 May 2019 3,000,000 14 May 2019 3,000,000 14 May 2019 3,000,000 14 May 2019 3,000,000 14 May 2019 Vesting date and exercisable date Expiry date 1 July 2022 1 July 2022 1 July 2022 1 July 2022 1 July 2022 1 July 2022 1 July 2023 1 July 2023 1 July 2023 1 July 2023 1 July 2023 1 July 2023 Options granted carry no dividend or voting rights. Exercise price Fair value per option at grant date $0.0780 $0.0690 $0.0600 $0.150 $0.180 $0.215 Exercise price Fair value per option at grant date $0.0780 $0.0690 $0.0600 $0.0780 $0.0690 $0.0600 $0.150 $0.180 $0.215 $0.150 $0.180 $0.215 There were no options over ordinary shares granted to or vested by Directors and other key management personnel as part of compensation during the year ended 30 June 2022. Performance Rights 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 22 April 2020 22 April 2020 13 October 2020 13 October 2020 13 October 2020 11 June 2021 11 June 2021 29 November 2021 29 November 2021 11 March 2022 11 March 2022 Vesting date and exercisable date Expiry date 1 July 2022 1 July 2022 30 June 2023 1 July 2023 30 June 2023 30 June 2023 30 June 2023 30 June 2024 30 June 2024 30 June 2024 30 June 2024 22 April 2023 22 April 2023 12 November 2023 12 November 2023 12 November 2023 11 June 2024 11 June 2024 7 April 2025 7 April 2025 7 April 2025 7 April 2025 Name Number of Grant date rights granted Vesting date and Expiry date exercisable date Paul Miller Paul Miller Sol Lukatsky Sol Lukatsky Sol Lukatsky Mark Dioguardi Mark Dioguardi Mark Dioguardi Paul Miller Paul Miller Sol Lukatsky Sol Lukatsky Mark Dioguardi Mark Dioguardi Paul Miller Paul Miller 164,634 22 April 2020 164,634 22 April 2020 457,457 13 October 2020 457,456 13 October 2020 457,456 13 October 2020 251,601 13 October 2020 356,816 13 October 2020 251,601 13 October 2020 154,391 11 June 2021 154,392 11 June 2021 1 July 2022 1 July 2022 30 June 2023 1 July 2023 30 June 2023 30 June 2023 1 July 2023 30 June 2023 30 June 2023 30 June 2023 3,000,000 29 November 2021 30 June 2024 3,000,000 29 November 2021 30 June 2024 2,500,000 29 November 2021 30 June 2024 2,500,000 29 November 2021 30 June 2024 30 June 2024 30 June 2024 750,000 11 March 2022 750,000 11 March 2022 22 April 2023 22 April 2023 12 November 2023 12 November 2023 12 November 2023 12 November 2023 12 November 2023 12 November 2023 11 June 2024 11 June 2024 7 April 2025 7 April 2025 7 April 2025 7 April 2025 7 April 2025 7 April 2025 vesting Share price Fair value hurdle for per right at grant date $0.1084 $0.1250 $0.3417 $0.3661 $0.3700 $0.1815 $0.2800 $0.0970 $0.0540 $0.0720 $0.0160 $0.00 $0.00 $0.00 $0.30 $0.00 $0.00 $0.00 $0.33 $0.00 $0.33 $0.00 vesting Share price Fair value hurdle for per right at grant date $0.1084 $0.1250 $0.3417 $0.3661 $0.3700 $0.3417 $0.3661 $0.3700 $0.1815 $0.2800 $0.0970 $0.0540 $0.0970 $0.0540 $0.0720 $0.0160 $0.00 $0.00 $0.00 $0.30 $0.00 $0.00 $0.30 $0.00 $0.00 $0.00 $0.33 $0.00 $0.33 $0.00 $0.33 $0.00 20 37 Spirit Technology Solutions Ltd Directors' report 30 June 2022 Performance Rights granted carry no dividend or voting rights. The Performance Rights were issued for $Nil consideration, and the vesting of the rights is contingent on the Company achieving certain hurdles over a three-year performance period, and in some cases share price performance hurdles. The performance hurdles for 2022 are based on the Company’s TSR performance. Relative TSR (a) 50% of the Performance Rights that are subject to the Relative TSR performance hurdle will be eligible to vest and become exercisable into Shares, assuming the relevant performance hurdles are met, at the end of year 2, and the balance at the end of year 3 (with the opportunity for a catch up at the end of year 3 if the milestones are not met at the end of the second year but are met at the end of the third year). The Relative TSR would only be achieved subject to a minimum share price of $0.33 (33 cents). The vesting schedule would be as set out below: • • • If the TSR is at the 50th percentile of the peer group, 65% of the rights will vest; If the TSR is at the 90th percentile of the peer group, 100% of the rights will vest; and If the TSR is between the 50th and 90th percentile, a pro rata number of rights will vest. Measurement The number of Performance Rights which vest is determined by assessing the performance of the Company, as measured by TSR relative to a comparator group of companies. The VWAP of the Shares in the one-month preceding the Performance Dates compared to the VWAP of the Shares in the one month preceding the commencement of the Performance Period, will be used in calculating TSR over the Performance Dates. The TSR incorporates capital returns as well as dividends notionally reinvested and is considered the most appropriate means of measuring the Company’s performance. Absolute TSR (b) 50% of the Performance Rights that are subject to the Absolute TSR performance hurdle will be eligible to vest and become exercisable into Shares, assuming the relevant performance hurdles are met, at the end of year 2, and the balance at the end of year 3 (with the opportunity for a catch up at the end of year 3 if the milestones are not met at the end of the second year but are met at the end of the third year). The portion of Performance Rights that are subject to the Absolute TSR will only vest and become exercisable into Shares as per the vesting schedule set out below: • 50% at 33 cents • 100% at 40 cents • The difference between 50% and 100% based on a sliding scale between 33 cents and 40 cents. Measurement The number of Performance Rights which vest is determined by assessing the Share price performance of the Company. The VWAP of the Shares in the one-month preceding the Performance Dates will be used in calculating Share price performance over the Performance Dates. The Nomination and Remuneration Committee will test performance against the Performance Hurdles to determine whether the Performance Rights are eligible to vest shortly after the end of Performance Dates. If the Performance Hurdles are not satisfied by the end of the Performance Period, the Performance Rights will lapse unless the Nomination and Remuneration Committee exercises its discretion to waive the Performance Hurdle in whole or in part. 38 21 Spirit Technology Solutions Ltd Directors' report 30 June 2022 For the Performance Rights granted during FY20 and FY21, 30% of the maximum amount of Performance Rights that may vest are at risk, if appropriate behaviors, as measured by a 360-degree feedback review are not met. An overall 75% of agreed or strongly agreed needs to be achieved in the 360-degree feedback result. At the Annual General Meeting held on 29 November 2021, the Board sought to change the terms of previously issued Performance Rights to remove the Return on Invested Capital (ROIC) vesting condition and replace it with the TSR performance hurdles as outlined above. The Board considered that the previous ROIC hurdle was no longer fit for purpose or relevant to the Company, as the cost of capital on which the ROIC was based has changed significantly over the years, and establishing the appropriate capital base for the determination of ROIC is challenging considering the business strategy has changed. The number of Performance Rights over ordinary shares granted to and vested by Directors and other key management personnel as part of compensation during the year ended 30 June 2022 are set out below: Name Sol Lukatsky* Mark Dioguardi Paul Miller Number of Number of Number of Number of rights granted rights granted rights vested rights vested during the during the during the during the year 2022 6,000,000 5,000,000 1,500,000 year 2021 1,372,369 860,018 308,783 year 2022 49,338 103,844 - year 2021 - - - * The balance of these performance rights that remain as at the date of this report is 2,009,124 as a result of the pro-rata lapse of Mr Lukatsky’s Performance Rights on his cessation on 2 July 2022. Additional information The earnings of the Consolidated Entity for the five years to 30 June 2022 are summarised below: Revenue and other income Net (loss)/profit before tax Net (loss)/profit after tax Share price 2022 $'000 138,732 (55,041) (53,166) $0.053 2021 $'000 104,469 1,345 1,157 $0.26 2020 $'000 2019 $'000 2018 $'000 34,874 (2,043) (1,515) $0.24 17,452 (1,009) (824) $0.26 16,300 1,031 571 $0.245 Additional disclosures relating to key management personnel Shareholding The number of shares in the Company held during the financial year by each Director of the Company and other members of key management personnel of the Consolidated Entity, including their personally related parties, is set out below: Ordinary shares James Joughin Julian Haber* Sol Lukatsky Mark Dioguardi** Gregory Ridder Michelle Bendschneider*** Inese Kingsmill**** Paul Miller Balance at Balance Additions the start of on the date of appointment the year Disposals/ Balance at the end of the year other 4,353,736 - 3,252,583 1,444,128 1,650,000 - 187,500 196,127 11,084,074 - 5,693,092 - - - - - - 5,693,092 411,200 - 101,838 103,844 100,000 - - - 716,882 - - - - - - (187,500) - (187,500) 4,764,936 5,693,092 3,354,421 1,547,972 1,750,000 - - 196,127 17,306,548 22 39 Spirit Technology Solutions Limited Directors' report 30 June 2022 * Mr Julian Haber was appointed to the Board effective 1 April 2022. Upon appointment, Mr Haber held 5,693,092 shares in the Company. Ms Michelle Bendschneider was appointed to the Board effective 1 April 2022. Upon appointment, Ms Bendschneider ** Mr Mark Dioguardi resigned from the Board on 1 April 2022. He remains a key management personnel. ** * ** ** Ms Inese Kingsmill resigned from the Board effective 30 September 2021. The balance disclosed in "Disposals/other" column represents her shareholding on the date of resignation. had no shareholding in the Company. Option holding The number of options 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: Options over ordinary shares Sol Lukatsky Mark Dioguardi the start of the year 9,000,000 9,000,000 18,000,000 Balance at Granted Exercised Expired/ forfeited/ other Balance at the end of the year - - - - - - - - - 9,000,000 9,000,000 18,000,000 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 Sol Lukatsky* Mark Dioguardi** Paul Miller Balance at Granted the start of the year Vested/ exercised Expired/ forfeited/ other Balance at the end of the year 1,619,428 1,380,018 638,051 3,637,497 6,000,000 5,000,000 1,500,000 12,500,000 (49,338) (103,844) - (153,182) (197,721) (416,156) - (613,877) 7,372,369 5,860,018 2,138,051 15,370,438 * Mr Sol Lukatsky resigned from the Board on 2 July 2022. Following his departure 4,467,267 performance rights were forfeited, leaving 2,905,102 retained subject to the terms of the applicable employee incentive plan. This was determined based on the proportion of the vesting period that Mr. Lukatsky was an employee up to his cessation date. ** Mr Mark Dioguardi resigned from the Board on 1 April 2022. He remains a key management personnel. This concludes the Remuneration Report, which has been audited. Shares under option Unissued ordinary shares of Spirit Technology Solutions Ltd under option at the date of this report are as follows: Description Unlisted options Unlisted options Unlisted options Expiry date 1 July 2023 1 July 2023 1 July 2023 Exercise price Number under option $0.150 $0.180 $0.215 6,000,000 6,000,000 6,000,000 18,000,000 No person entitled to exercise the options had or has any right by virtue of the option to participate in any share issue of the Company or of any other body corporate. 40 23 Spirit Technology Solutions Limited Directors' report 30 June 2022 Shares under Performance Rights Unissued ordinary shares of Spirit Technology Solutions Ltd under Performance Rights at the date of this report are as follows: Grant date 22 April 2020 13 October 2020 11 June 2021 29 November 2021 11 March 2022 11 July 2022 Expiry date 22 April 2023 12 November 2023 11 June 2024 7 April 2025 7 April 2025 30 June 2026 Number under rights 653,943 1,755,996 620,685 7,009,124 2,000,000 6,250,000 18,289,748 No person entitled to exercise the Performance Rights had or has any right by virtue of the performance right to participate in any share issue of the Company or of any other body corporate. Shares issued on the exercise of options There were no ordinary shares of Spirit Technology Solutions Ltd issued on the exercise of options during the year ended 30 June 2022 and up to the date of this report. Shares issued on the exercise of Performance Rights The following ordinary shares of Spirit Technology Solutions Ltd were issued during the year ended 30 June 2022 and up to the date of this report on the exercise of Performance Rights granted: Date Performance Rights granted 12 September 2018 18 February 2019 Conversion Number of price shares issued $0.00 $0.00 49,338 103,844 Indemnity and insurance of officers The Company has indemnified the Directors and executives of the Company for costs incurred in their capacity as a Director or executive, for which they may be held personally liable, except where there is a lack of good faith. 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. During the financial year the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in Note 30 to the financial statements. 24 41 Spirit Technology Solutions Limited Directors' report 30 June 2022 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 30 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. ● Officers of the Company who are former partners of PKF Melbourne Audit & Assurance Pty Ltd There are no officers of the Company who are former partners of PKF Melbourne Audit & Assurance Pty Ltd. 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 ‘000 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 PKF Melbourne Audit & Assurance Pty Ltd continues in office in accordance with section 327 of the Corporations Act 2001. 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 ___________________________ James Joughin Non-Executive Chairman 24 August 2022 42 25 Auditor's Independence Declaration  AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 TO THE DIRECTORS OF SPIRIT TECHNOLOGY SOLUTIONS LTD In relation to our audit of the financial report of Spirit Technology Solutions Ltd for the year ended 30 June 2022, I declare to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001; and (b) no contraventions of any applicable code of professional conduct. PKF Melbourne, 24 August 2022 Steven Bradby Partner 26 PKF Melbourne Audit & Assurance Pty Ltd ABN 75 600 749 184 Level 12, 440 Collins Street, Melbourne, Victoria 3000 T: +61 3 9679 2222 F: +61 3 9679 2288 www.pkf.com.au Liability limited by a scheme approved under Professional Standards Legislation PKF Melbourne Audit & Assurance Pty Ltd is a member firm of the PKF International Limited family of separately owned firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. 45 Statement of Profit or Loss and Other Comprehensive Income Spirit Technology Solutions Ltd Statement of profit or loss and other comprehensive income For the year ended 30 June 2022 Revenue Other income Cost of sales Expenses Employee benefits expense Share-based payments Administration and corporate expenses Acquisition, divestment and integration costs Restructuring costs Selling Marketing Net fair value loss on remeasurement of financial liabilities Impairment of non-current assets Depreciation and amortisation expense Finance costs (Loss)/profit before income tax benefit/(expense) Income tax benefit/(expense) (Loss)/profit after income tax benefit/(expense) for the year attributable to the owners of Spirit Technology Solutions Ltd Note Consolidated 2022 $'000 2021 $'000 5 6 135,338 102,786 3,394 (67,523) 1,683 (51,220) 40 7 7 7 8 (47,923) (721) (11,309) (2,040) (1,413) (1,199) (1,699) (2,747) (48,374) (7,655) (1,170) (31,550) (620) (7,498) (2,100) - (1,163) (1,531) (168) - (6,666) (608) (55,041) 1,345 1,875 (188) (53,166) 1,157 Other comprehensive income for the year, net of tax - - Total comprehensive (loss)/income for the year attributable to the owners of Spirit Technology Solutions Ltd (53,166) 1,157 Earnings per share for (loss)/profit attributable to the owners of Spirit Technology Solutions Ltd Basic earnings per share Diluted earnings per share 39 39 (8.08) (8.08) 0.21 0.21 Cents Cents The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 27 47 Statement of Financial Position Statement of Financial Position Spirit Technology Solutions Ltd Statement of financial position As at 30 June 2022 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Contract assets Other assets Total current assets Non-current assets Contract assets Property, plant and equipment Assets held for sale Right-of-use assets Intangible assets Deferred tax Other assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Lease liabilities Provisions Unearned revenue Deferred consideration Contingent consideration Total current liabilities Non-current liabilities Borrowings Lease liabilities Deferred tax Provisions Unearned revenue Contingent consideration Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated losses Total equity Note Consolidated 2022 $'000 2021 (Restated) $'000 9 10 11 13 12 13 14 15 16 17 12 18 19 20 24 21 34 22 19 23 20 24 34 25 26 11,733 11,575 4,281 1,222 4,342 33,153 2,893 1,415 - 2,577 78,859 4,086 528 90,358 123,511 16,705 1,661 4,510 6,028 2,611 11,660 43,175 13,000 1,369 5,544 583 422 - 20,918 64,093 59,418 8,493 12,784 2,577 143 4,130 28,127 1,544 13,895 1,301 3,891 124,561 2,619 1,375 149,186 177,313 16,142 2,004 3,444 3,655 15,327 2,399 42,971 10,000 2,016 5,870 352 2,823 3,603 24,664 67,635 109,678 114,874 1,826 (57,282) 59,418 112,689 1,187 (4,198) 109,678 The above statement of financial position should be read in conjunction with the accompanying notes 28 49 Statement of Changes in Equity Statement of Financial Position Spirit Technology Solutions Ltd Statement of changes in equity For the year ended 30 June 2022 Consolidated Balance at 1 July 2021 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 40) Transfers Issue of shares to the vendor as part of the earnout consideration in relation to the Trident acquisition Issue of shares to the vendor as part of the earnout consideration in relation to the Altitude IT acquisition Issue of shares to the vendor as part of the earnout consideration in relation to the Beachhead acquisition Issue of shares to the vendor as part of the earnout consideration in relation to the Reliance IT acquisition Issue of shares to vendor as part of deferred consideration in relation to the Nexgen acquisition Issued capital $'000 Reserves Accumulated Total equity $'000 losses $'000 $'000 112,689 1,187 (4,198) 109,678 - - - - - 251 77 404 262 1,191 - - - 721 (82) - - - - - (53,166) - (53,166) - (53,166) (53,166) - 82 - - - - - 721 - 251 77 404 262 1,191 Balance at 30 June 2022 114,874 1,826 (57,282) 59,418 The above statement of changes in equity should be read in conjunction with the accompanying notes 29 51 Spirit Technology Solutions Ltd Statement of changes in equity For the year ended 30 June 2022 Consolidated Balance at 1 July 2020 Issued capital $'000 Reserves Accumulated Total equity $'000 losses $'000 $'000 42,852 567 (5,355) 38,064 Profit after income tax expense 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: Contributions of equity, net of transaction costs (Note 25) Share-based payments (Note 40) Issue of shares to the vendor as part consideration in relation to the VPD Group acquisition Issue of shares to the vendor as part consideration in relation to the Ancore Pty Ltd acquisition Issue of shares to the vendor as part consideration in relation to the Beachhead acquisition Issue of shares to the vendor as part consideration in relation to the Reliance IT acquisition Issue of shares to the vendor as part consideration in relation to the Intalock acquisition Issue of shares to the vendor as part consideration in relation to the Nexgen acquisition Issue of shares to vendor on achievement of earnout milestone (Trident Group) - - - 44,835 - 7,250 573 624 1,660 2,457 12,164 274 - - - - 620 - - - - - - - 1,157 - 1,157 - 1,157 1,157 - - - - - - - - - 44,835 620 7,250 573 624 1,660 2,457 12,164 274 Balance at 30 June 2021 112,689 1,187 (4,198) 109,678 The above statement of changes in equity should be read in conjunction with the accompanying notes 30 52 Statement of Cash Flows Statement of Financial Position Spirit Technology Solutions Ltd Statement of cash flows For the year ended 30 June 2022 Cash flows from operating activities Receipts from customers (inclusive of GST) Government grants received Payments to suppliers and employees (inclusive of GST) Deposits refunded/(placed) Interest received Interest and other finance costs paid Income taxes paid Note Consolidated 2022 $'000 2021 $'000 151,085 1,184 (147,815) 136 - (980) - 110,058 83 (104,528) (100) 3 (471) - Net cash from operating activities 38 3,610 5,045 Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Cash payments to acquire businesses, net of cash acquired Acquired income tax liabilities paid Business acquisition, divestment and integration costs Proceeds from disposal of assets & right of use Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Share issue transaction costs Proceeds from borrowings Repayment of borrowings Repayment of lease liabilities Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 14 16 34 25 (3,004) (1,373) (14,128) (427) (967) 18,536 (3,482) (1,581) (45,798) (481) (2,100) 541 (1,363) (52,901) - - 21,000 (18,000) (2,007) 47,042 (2,207) 9,732 (3,000) (1,618) 993 49,949 3,240 8,493 2,093 6,400 Cash and cash equivalents at the end of the financial year 9 11,733 8,493 The above statement of cash flows should be read in conjunction with the accompanying notes 31 55 Notes to the Financial Statements Statement of Financial Position Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 1. General information The financial statements cover Spirit Technology Solutions Ltd as a Consolidated Entity consisting of Spirit Technology Solutions Ltd and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars which is Spirit Technology Solutions Ltd's functional and presentation currency. Spirit Technology Solutions Ltd is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business are: Registered office Principal place of business Level 4, 100 Albert Road South Melbourne Victoria 3205 Level 2, 19-25 Raglan Street South Melbourne Victoria 3205 A description of the nature of the Consolidated Entity's operations and its principal activities are 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 24 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 financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The Consolidated Entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. 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 under the historical cost convention. 32 57 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Consolidated Entity has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. The Consolidated Entity has a net current liability position as at 30 June 2022 of $10.022M (30 June 2021 net current liability position: $14.844M). This financial position needs to be considered noting the following key factors:  Current liabilities includes deferred and contingent consideration payable of $14.3M. The estimated cash component of this consideration totals $11.7M. The balance is to be settled in equity. The Consolidated Entity has available cash and debt facilities to settle these cash liabilities.  Current liabilities includes unearned revenue of $6M. This liability unwinds to revenue rather than being a cash settled liability.  The Consolidated Entity can access required capital within its banking facilities to meet it projected forward cash flow commitments.  The Consolidated Entity remains confident that it has the ability to request additional support from existing shareholders if financial assistance is required. Critical accounting estimates The preparation of the 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 are disclosed in Note 3. 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 Spirit Technology Solutions Ltd ('Company' or 'parent entity') as at 30 June 2022 and the results of all subsidiaries for the year then ended. Spirit Technology Solutions Ltd and its subsidiaries together are referred to in these financial statements as the 'Consolidated Entity'. Subsidiaries are all those entities over which the Consolidated Entity has 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. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODMs'). The CODMs are responsible for the allocation of resources to operating segments and assessing their performance. Refer Note 4 Operating segments. 58 33 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) Revenue recognition Revenue is recognised and measured in accordance with the principles of AASB 15 Revenue from contracts with customers at the fair value of the consideration received or receivable, after taking into account any trade discounts and volume rebates allowed, to the extent that it is probable that economic benefit will flow to the Consolidated Entity and the revenue can be reliably measured. Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which the Consolidated Entity is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the Consolidated Entity: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the 'expected value' or 'most likely amount' method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability. Recurring revenue Internet access, equipment rentals, line rentals, managed IT and security services are recognised in the period in which the service is provided. Where Income for services is invoiced in advance, the amount is recorded as Unearned Income and recognition in the income statement is delayed until the service has been provided. Non-recurring revenue Call charges, hardware and software sales and set-up charges are recognised in the period in which the services or goods are delivered. Grants Grants received on the condition that specified services are delivered, or conditions are fulfilled, are initially recognised as a liability, and revenue is recognised as services are performed or conditions fulfilled. Grants related to assets are presented in the statement of financial position either as deferred income or by deducting the relevant amount in determining the carrying amount of the asset. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. 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. 34 59 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) 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. Current and non-current classification Assets and liabilities are presented in the statement of financial position 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. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short- term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Trade and other receivables Trade receivables are initially recognised at fair value, less any provision for impairment. 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 which is applied at the operating segment level. 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. 60 35 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) Contract assets Contract assets are recognised when the Consolidated Entity has transferred goods or services to the customer but where the Consolidated Entity is yet to establish an unconditional right to consideration. Contract assets are treated as financial assets for impairment purposes. The contract assets relate to costs incurred to both obtain or fulfil a contract with a customer. Costs typically included sales commissions, customer contract buy-out costs and costs related directly to fulfilling a customer contract such as direct labour. The contract assets are amortised to cost of sales over the average contract life which is assessed to be in the range of 3 - 4 years. There are management judgements required in assessing both the types of costs capitalised and amortisation periods as outlined. Inventories Stock on hand is stated at the lower of cost and net realisable value. Cost comprises purchase and delivery costs, net of rebates and discounts received or receivable. 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. A gain is recognised for any subsequent increases in fair value less costs of disposal of a 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 statement of financial position, in current assets. The liabilities of disposal groups classified as held for sale are presented separately on the face of the statement of financial position, in current liabilities. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. Such assets are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on both the business model within which such assets are held and the contractual cash flow characteristics of the financial asset unless an accounting mismatch is being avoided. Financial assets are derecognised when the rights to receive cash flows have expired or have been transferred and the Consolidated Entity has transferred substantially all the risks and rewards of ownership. When there is no reasonable expectation of recovering part or all of a financial asset, its carrying value is written off. Financial assets at amortised cost A financial asset is measured at amortised cost only if both of the following conditions are met: (i) it is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and (ii) the contractual terms of the financial asset represent contractual cash flows that are solely payments of principal and interest. 36 61 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) Impairment of financial assets The Consolidated Entity recognises a loss allowance for expected credit losses on financial assets which are either measured at amortised cost or fair value through other comprehensive income. The measurement of the loss allowance depends upon the Consolidated Entity's assessment at the end of each reporting period as to whether the financial instrument's credit risk has increased significantly since initial recognition, based on reasonable and supportable information that is available, without undue cost or effort to obtain. Where there has not been a significant increase in exposure to credit risk since initial recognition, a 12-month expected credit loss allowance is estimated. This represents a portion of the asset's lifetime expected credit losses that is attributable to a default event that is possible within the next 12 months. Where a financial asset has become credit impaired or where it is determined that credit risk has increased significantly, the loss allowance is based on the asset's lifetime expected credit losses. The amount of expected credit loss recognised is measured on the basis of the probability weighted present value of anticipated cash shortfalls over the life of the instrument discounted at the original effective interest rate. For financial assets mandatorily measured at fair value through other comprehensive income, the loss allowance is recognised in other comprehensive income with a corresponding expense through profit or loss. In all other cases, the loss allowance reduces the asset's carrying value with a corresponding expense through profit or loss. 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 commences from the time the asset is available for its intended use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. Depreciation is calculated on a straight-line basis to write off the net cost of each item of plant and equipment over their expected useful lives as follows: Leasehold improvements Plant and equipment* Motor vehicles Furniture and fixtures Right of use assets 3 – 5 years 2 – 7 years 4 – 5 years 3 – 7 years 1 – 5 years * Plant and equipment disclosed in the financial year ended 30 June 2021 included network and customer infrastructure. The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date to ensure it is not in excess of the assets recoverable amount. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have not been discounted in determining recoverable amounts. 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. Any revaluation surplus reserve relating to the item disposed of is transferred directly to retained profits. 62 37 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) 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. 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 de-recognition 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 is recorded at the amount by which the purchase price for a business combination exceeds the fair value attributed to the interest in the net fair value of identifiable assets, liabilities and contingent liabilities acquired at date of acquisition. Goodwill is subsequently measured at cost less any impairment losses. Goodwill is subject to impairment testing on an annual basis. Impairment losses are calculated based on the Directors’ assessment of the recoverable amount of the cash-generating unit (CGU). Recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. Gains and losses on the disposal of a business include the carrying amount of goodwill relating to the business sold. Intellectual property Significant costs associated with intellectual property are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 7 years. Brand names Acquired brand names are stated at cost less any impairment. Brand names are subject to impairment testing on an annual basis. Impairment losses are calculated based on the Directors’ assessment of the CGU’s. Recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. Gains and losses on the disposal of a CGU include the carrying amount of brand names relating to the business sold. Customer relationships Customer relationships acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being their finite life of 10 years. 38 63 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) Software Significant costs associated with software are deferred and amortised on a straight-line basis over the period of their expected benefit being their finite life of 3-5 years. Other intangible assets Other intangible assets that are acquired by the Consolidated Entity and have finite lives are stated at cost less accumulated amortisation and any accumulated impairment losses. 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 CGU to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a CGU. Trade and other payables These amounts represent liabilities for goods and services provided to the Consolidated Entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Lease liabilities A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Consolidated Entity's incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. 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. 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. 64 39 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Non-accumulating sick leave is expensed to profit or loss when incurred. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled and cash-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. Cash-settled transactions are awards of cash for the exchange of services, where the amount of cash is determined by reference to the share price. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Binomial or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Consolidated Entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore, any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Consolidated Entity or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Consolidated Entity or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. 40 65 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. 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. 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 is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non- controlling interest in the 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. 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. 66 41 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 2. Significant accounting policies (continued) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Spirit Technology Solutions Ltd, 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. Basic and diluted earnings per share from operations has been presented in the statement of profit or loss and other comprehensive income. Basic and diluted earnings is presented in Note 39 to the financial statements. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from or payable to the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from or payable to the tax authority are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from or payable to the tax authority. Disclosure of prior period errors In accounting for the acquisition of Nexgen Australia Group Pty Ltd (“Nexgen"), with effective control on 1 April 2021 (refer Note 34), brand names, customer relationships and other intangible assets were separately identified, however there was no related deferred tax liability recognised reflecting the assets’ recovery through use in the Consolidated Entity’s operations, generating taxable income or capital gain. Accordingly, adjustment has currently been made to the impacted comparative balances as summarised below, to reflect the corrections: Balance sheet (extract) Intangible assets (Note 16) Deferred tax liability (Note 23) 30 June 2021 $'000 119,403 Increase/ (Decrease) $'000 5,158 30 June 2021 (Restated) $'000 124,561 (712) (5,158) (5,870) Net Assets 109,678 - 109,678 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 ’000 dollars, or in certain cases, the nearest dollar. 42 67 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 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 various other 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. Revenue recognition The Consolidated Entity’s contracts are recognised as and when performance obligations are met. Identifying performance obligations, allocating the transaction price to performance obligations, and determining the timing of revenue recognition of these contracts at times requires the application of judgement due to the complexity and nature of the customer arrangements. The assumptions made in the estimates are based on the information available to Management at the reporting date. A change in the estimated stage of completion could have an impact on the timing of the revenue recognition. Refer to Note 2 for further information on revenue recognition. Allowance for expected credit losses The allowance for expected credit losses assessment requires a degree of estimation and judgement. It is based on the lifetime expected credit loss, grouped based on days overdue, and makes assumptions to allocate an overall expected credit loss rate for each customer. These assumptions include recent sales experience and historical collection rates. 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 other events. 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 impaired. 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 each CGU have been determined based on value-in-use calculations. 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. Impairment of property, plant and equipment The Consolidated Entity assesses impairment of property, plant and equipment 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. 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. 68 43 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 3. Critical accounting judgements, estimates and assumptions (continued) Deferred and contingent consideration The deferred and contingent consideration liabilities are the difference between the total purchase consideration, usually on an acquisition of a business combination, and the amounts paid or settled up to the reporting date, discounted to net present value. The Consolidated Entity applies provisional accounting for any business combination. Any reassessment of the liability during the earlier of the finalisation of the provisional accounting or 12 months from acquisition-date is adjusted for retrospectively as part of the provisional accounting rules in accordance with AASB 3 'Business Combinations'. Thereafter, at each reporting date, a deferred and contingent consideration liability is reassessed against revised estimates and any increase or decrease in the net present value of the liability will result in a corresponding gain or loss to profit or loss. The increase in the liability resulting from the passage of time is recognised as a finance cost. Business combinations As discussed in Note 2, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the Consolidated Entity taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. Allocation of goodwill to divested assets As detailed in Note 35, the Consolidated Entity divested a range of non-core assets during the financial year ended 30 June 2022. AASB 136 requires that the goodwill that has been allocated to the cash generating unit (CGU) is included in the determination of the associated gain or loss on disposal of those assets. For that purpose, the standard requires that the amount to be included is measured on the basis of the relative values of the assets disposed of and the portion of the CGU retained, unless the entity can demonstrate that some other method better reflects the goodwill associated with the assets disposed of. The standard refers to the ‘relative values’ of the parts without specifying how these are to be calculated. This therefore, requires the application of judgment and that judgment assessment is outlined in Note 35 for each of the divested asset groups. Note 4. Operating segments Identification of reportable operating segments The Consolidated Entity’s business model has evolved significantly over the last two years as a consequence of an aggressive acquisition path associated with a realignment of the strategic direction and vision for the Group. This strategic realignment has seen the divestment of assets no longer considered core to that forward strategic goal alongside the merger of individual business units into a more clearly defined go-to-market divisional structure. Up until June 2022 (following the fixed wireless divestment and change in Board composition), the Chief Operating Decision Makers (‘CODM’s’) were focused on revenue product line growth and allocating resources to those product lines. Reporting had been targeted at product sets, customer types (B2B & B2C) and revenue derived from the transfer of goods and services over time and at a point in time. Alongside this revenue focus, the Consolidated Entity was still managing through a series of acquisition earn-out arrangements and maintaining separation at an individual entity level to facilitate earn-out reporting. Consequently, the Consolidated Entity was organised into one operating segment, being the provision of IT&T services. During the course of the second half of financial year 2022, the CODM attention shifted from a revenue product growth focus to an earnings and profitability focus combined with a further refinement of the long-term strategic vision to be one of Australia’s leading providers of secure modern workplaces. That change, combined with the completion of a range of earnout structures, collapsing of historic standalone entities into a ‘standard operating environment’ and appointment of dedicated ‘segment Chief Executive Officers’ (responsible for financial performance), alongside the non-core divestments and restructuring initiatives focused on profitability, saw the CODM operating and reporting structure redefined into three operating segments being: 44 69 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 4. Operating segments (continued)  Collaboration and Communication offering award-winning voice solutions, data and office technology for small business;  Cyber security offering specialist cyber managed services and industry leading solutions to corporate and enterprise customers delivered through a 24/7 Security Operations Centre and professional service teams. This capability also enables Spirit to put cyber security at the core of all key market solutions provided across our segments, improving the resilience and security of all our customers;  Managed Services (IT&T) offering a comprehensive range of managed IT and professional services including end-user, public cloud, infrastructure and networking, data and voice solutions to SMB and mid- market customers. The CODMs review these segments on an underlying basis down to the underlying (loss)/profit before income tax expense level. Underlying adjustments are reported on a consolidated group basis but attributed to the segments for disclosure purposes. Revenue End customer revenue Intercompany revenue Underlying earnings before interest, taxes, depreciation & amortisation* Depreciation and amortisation expense Finance costs Underlying net (loss)/profit before income tax** Underlying Adjustments: Share based payments Profit on divestment of consumer & fixed wireless assets Acquisition, divestment & integration costs Restructuring costs Net fair value loss on remeasurement of contingent consideration on business combinations Impairment of non-current assets Collaboration & Communication Cyber Security $'000 $'000 Managed Services (IT&T) $'000 Corporate Total $'000 $'000 34,982 30,899 69,457 - 135,338 - 498 158 (656) - 34,982 31,397 69,615 (656) 135,338 9,885 (1,238) (61) 8,586 2,432 (447) (26) (2,154) (2,907) 7,256 (4,776) - (6,461) (103) (980) (1,170) 1,959 (7,033) (3,887) (375) - - - - - - - - - - - - - - (721) (721) 1,823 - 1,823 - (2,040) (2,040) (275) (1,138) (1,413) - (2,747) (2,747) (48,374) - - (48,374) - (1,194) Amortisation of customer relationships (1,194) (Loss)/profit before income tax benefit 7,392 1,959 (53,859) (10,533) (55,041) Income tax benefit (Loss) after income tax benefit 1,875 (53,166) * EBITDA is a financial measure which is not prescribed by Australian Accounting Standard (‘AAS’) and represents the profit under AAS adjusted for depreciation, amortisation, interest and tax. Underlying EBITDA is EBITDA adjusted to exclude acquisition, divestment & integration costs, net fair value loss on remeasurement of contingent consideration on business combinations, restructuring costs, impairment of non-current assets and share-based payments. Underlying EBITDA for the year ended 30 June 2022 also excludes gain/(loss) on divestment of consumer and fixed wireless assets. ** Underlying net (loss)/profit before tax adjusts Underlying EBITDA to deduct depreciation & amortisation (excluding amortisation of customer relationships) and finance costs. *** The Underlying EBITDA segment results include recharges for a range of costs (such as insurance, IT systems and Group cyber programmes) that the segments may not have incurred on a standalone basis. 70 45 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 4. Operating segments (continued) Total assets Total liabilities Net assets Collaboration & Communication Cyber Security $'000 $'000 Managed Services (IT&T) $'000 Corporate Total $'000 $'000 72,938 (11,316) 27,186 (7,541) 17,805 (19,549) 5,582 (25,687) 123,511 (64,093) 61,622 19,645 (1,744) (20,105) 59,418 Comparatives As outlined above, the CODMs historically managed the Company as a single operating segment. The provision of comparative information at the single operating segment for the year ended 30 June 2021 matches the reported comparatives contained within the financial statements. The disaggregation of these comparative numbers into the revised segments is not available and impractical to generate on a reliable basis. Major customers During the year ended 30 June 2022 there are no individual customers which accounted for 5% or more of sales. Note 5. Revenue Sales revenue Disaggregation of revenue The disaggregation of revenue from contracts with customers is as follows: Major product lines Managed services Internet and data services Security services Voice services Cloud services Other Geographical regions Australia Timing of revenue recognition Goods and services transferred at a point in time Services transferred over time Consolidated 2022 $'000 2021 $'000 135,338 102,786 Consolidated 2022 $'000 2021 $'000 39,906 22,538 33,207 32,817 5,921 949 49,959 17,586 13,369 14,300 4,428 3,144 135,338 102,786 135,338 102,786 74,038 61,300 55,127 47,659 135,338 102,786 46 71 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 6. Other income Government infrastructure grants Government subsidies Profit on divestment of consumer & fixed wireless assets* Profit on sale of other assets and right of use Miscellaneous income Interest income * Refer Note 35 Note 7. Expenses (Loss)/profit before income tax includes the following specific expenses: Depreciation Leasehold improvements Plant and equipment Motor vehicles Furniture and fixtures Total depreciation (refer Note 14) Amortisation Right-of-use assets Customer relationships Software and projects Intellectual property Total amortisation (refer Notes 15 and 16) Total depreciation and amortisation Finance costs Borrowings Finance leases Finance costs expensed Superannuation expense Defined contribution superannuation expense Employee benefits expense excluding superannuation Employee benefits expense excluding superannuation Impairment of receivables Bad and doubtful debts expense* Consolidated 2022 $'000 2021 $'000 394 1,078 1,823 39 60 - 665 305 - 529 181 3 3,394 1,683 Consolidated 2022 $'000 2021 $'000 179 2,832 113 85 47 3,928 62 69 3,209 4,106 1,983 1,194 1,128 141 1,527 299 690 44 4,446 2,560 7,655 6,666 980 190 1,170 471 137 608 3,883 2,613 44,040 28,937 669 321 *The Consolidated Entity has recognised a loss of $669,000 in profit or loss in respect of impairment of receivables for the year ended 30 June 2022 (2021: $321,000), including bad debts expense of $517,000 (2021: $221,000). 72 47 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 7. Expenses (continued) Impairment of non-current assets Property, plant and equipment (refer Note 14) Right-of-use assets (refer Note 15) Intangibles (refer Note 16) Note 8. Income tax (benefit)/expense Consolidated 2022 $'000 2021 $'000 2,214 357 45,803 48,374 - - - - Consolidated 2022 $'000 2021 $'000 Numerical reconciliation of income tax (benefit)/expense and tax at the statutory rate (Loss)/profit before income tax benefit/(expense) (55,041) 1,345 Tax at the statutory tax rate of 30.0% (30.0% at 30 June 2021) (16,512) 403 Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Acquisition related Share options and employee shares scheme Impairment of goodwill and other non-tax deductible assets Impact of change in corporate tax rate Other balances and permanent differences Income tax (benefit)/expense Note 9. Current assets - cash and cash equivalents Cash at bank 824 216 13,499 - 98 506 - - (99) (622) (1,875) 188 Consolidated 2022 $'000 2021 $'000 11,733 8,493 48 73 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 10. Current assets - trade and other receivables Trade receivables Less: Allowance for expected credit losses Other receivables Consolidated 2022 $'000 2021 $'000 11,870 (707) 11,163 412 13,270 (487) 12,783 1 11,575 12,784 Allowance for expected credit losses The Consolidated Entity retains a provision of $707,000 in respect of impairment of receivables for the year ended 30 June 2022 (2021: $487,000). The ageing of the receivables and allowance for expected credit losses provided for above are as follows: 1 to 3 months overdue 4 to 6 months overdue Over 6 months overdue Movements in the allowance for expected credit losses are as follows: Opening balance Additions and releases Closing balance Note 11. Current assets - inventories Stock on hand - at cost Less: Provision for impairment 74 49 Consolidated 2022 $'000 2021 $'000 140 463 104 707 - 412 75 487 Consolidated 2022 $'000 2021 $'000 487 220 707 176 311 487 Consolidated 2022 $'000 2021 $'000 4,670 (389) 2,801 (224) 4,281 2,577 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 12. Other assets Accrued revenue Prepayments Vendor loans Other assets The classification of other assets into current and non-current is set out below: Current Non-current Note 13. Contract assets Contract assets Accumulated release to profit and loss The classification of contract assets into current and non-current is set out below: Current Non-current Reconciliation of the written down values at the beginning and end of the current and previous financial year are set out below: Opening balance Additions Release to the profit and loss Closing balance Consolidated 2022 $'000 2021 $'000 2,988 1,475 150 257 3,164 1,079 532 730 4,870 5,505 Consolidated 2022 $'000 2021 $'000 4,342 528 4,130 1,375 4,870 5,505 Consolidated 2022 $'000 2021 $'000 5,168 (1,053) 1,881 (194) 4,115 1,687 Consolidated 2022 $'000 2021 $'000 1,222 2,893 143 1,544 4,115 1,687 Consolidated 2022 $'000 2021 $'000 1,687 3,287 (859) - 1,881 (194) 4,115 1,687 50 75 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 14. 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 Motor vehicles - at cost Less: Accumulated depreciation Furniture & Fixtures at Cost Less: Accumulated depreciation Work in progress Reconciliations Consolidated 2022 $'000 2021 $'000 813 (606) 207 6,936 (6,162) 774 671 (456) 215 848 (629) 219 599 (195) 404 22,010 (8,890) 13,120 854 (799) 55 820 (553) 267 - 49 1,415 13,895 Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Leasehold improvements Plant and equipment Motor vehicles Furniture & Fixtures Work in progress Total $'000 $'000 $'000 $'000 $'000 $'000 Balance at 1 July 2020 Additions through business combinations (Note 34) Transfers to held for sale Additions/transfers Disposals Depreciation expense Balance at 30 June 2021 Adjustments through business combinations (Note 34) Additions/transfers Transfers from held for sale Disposals on asset divestment (Note 35) Disposals - Other Depreciation expense Impairment expense 23 13,489 62 239 8 13,821 415 1,462 - (1,301) 13 3,410 (12) (3,928) - (47) 55 - - - (62) 79 - 18 - (69) 404 13,120 (105) 27 217 2,809 - 100 55 298 - - - - (179) (130) (19) (10,347) (2,832) (2,084) - (25) (113) - 267 10 27 - - - (85) - 219 - 2,011 - (1,301) 41 3,482 (12) (4,106) - - 49 13,895 - 230 (49) 3,004 - 100 - - - - (10,347) (44) (3,209) (2,214) - 1,415 Balance at 30 June 2022 207 774 215 76 51 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 15. Non-current assets - right-of-use assets Right-of-use assets Less: Accumulated amortisation and impairment Consolidated 2022 $'000 2021 $'000 6,379 (3,802) 6,473 (2,582) 2,577 3,891 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Opening balance Net additions through business combinations (Note 34) Additions Disposals on asset divestment (Note 35) Disposals - Other Amortisation expense Impairment expense Note 16. Non-current assets - intangibles Goodwill - at cost Intellectual property - at cost Less: Accumulated amortisation and impairment Software Less: Accumulated amortisation and impairment Brand names - at cost Customer relationships Less: Accumulated amortisation Consolidated 2022 $’000 2021 $'000 1,563 3,891 3,473 - 1,598 416 (325) - (247) (34) (1,983) (1,527) (357) - 2,577 3,891 Consolidated 2022 $'000 2021 (Restated) $'000 63,382 105,245 1,412 (1,412) - 5,635 (4,712) 923 561 (44) 517 5,305 (2,254) 3,051 4,105 4,105 11,942 (1,493) 10,449 11,942 (299) 11,643 78,859 124,561 52 77 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 16. Non-current assets – intangibles (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2020 Additions through business combinations (Note 34) Additions Amortisation expense Balance at 30 June 2021 Additions through business combinations (Note 34)* Additions Disposals on asset divestment (Note 35) Disposals - Other Amortisation expense Impairment expense Goodwill (Restated*) at cost $'000 Brand names Software & Customer at cost $'000 projects at cost $'000 relationships at cost $'000 Intellectual property at cost $'000 Total $'000 23,974 81,271 - - - 1,385 - - 25,359 4,105 - - 1,336 1,020 (690) 11,942 - (299) - 98,654 561 1,581 (44) (1,033) 105,245 4,105 3,051 11,643 517 124,561 6,286 - (5,093) - - (43,056) - - - - - - - 523 - (2) (1,128) (1,521) - - - 850 6,286 1,373 - - (1,194) - - - (141) (1,226) (5,093) (2) (2,463) (45,803) Balance at 30 June 2022 63,382 4,105 923 10,449 - 78,859 * Refer Note 2 Disclosure of Prior Period Error for a description of the restatement. Goodwill, Brand Names & Intangible Assets with Indefinite Lives The addition to goodwill during the financial year ended 30 June 2022 of $6.3M was related to measurement period adjustments in regard to the acquisition accounting for the Nexgen Australia Group Pty Ltd which was acquired 1 April 2021. As at 30 June 2021 the foundation calculation for the Net Debt Working Capital and baseline EBITDA calculations had not concluded sufficiently to form the basis of completing the calculations of deferred and contingent consideration on acquisition. These calculations were completed in the half-year to 31 December 2021. Following the change in segment reporting (as outlined in Note 4) goodwill and brand names, including those acquired during the year, are allocated to the segment cash-generating units (CGU). The recoverable amount of each CGU is determined based on a value-in-use model which uses cash flow projections based on the financial budget for the 12 months immediately following the reporting date, and cash flows beyond 12 months extrapolated through a 5-year outlook. The assumptions used for the current reporting period may differ from the assumptions in the past or next reporting period as internal and external circumstances and expectations change. The Consolidated Entity has applied the following assumptions in the 30 June 2022 calculation of value-in-use. Operating Segment Goodwill & Brand Names $’000 Years 1 – 3 Average Revenue Annual Growth Rate Years 4 & 5 Growth Rate Terminal Growth Rate Post Tax Discount Rate Collaboration and Communication $50,136 Managed Services (IT&T) Nil 9% 1% Cyber Security $17,351 11% 10% 10% 10% 3% 3% 3% 12% 12% 12% 78 53 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 16. Non-current assets – intangibles (continued) The assumption on the years 1-3 average revenue annual growth rate for the Managed Services (IT&T) operating segment reflects the short to medium term revenue decline expectation as a consequence of the restructuring of the customer base. It is then assumed to return to a longer-term normalised growth rate. Assumptions for gross margins, other operating costs and annual capital expenditure are based on management’s expectations for the future performance and forward strategic plans. Sensitivity analysis on the key assumptions employed in the value-in-use calculations has been performed by Management. The sensitivities applied were decreasing sales and associated cost of goods sold by 10% throughout the model period (whilst holding operating costs stable), increasing the post-tax discount rate by 2 percentage points and reducing the terminal value growth rate by half. Upon applying the value-in-use calculations and sensitivity tests across the asset bases, including goodwill, it was determined that the carrying amounts allocated to the Managed Services (IT&T) operating segment exceed their recoverable amount giving rise to an impairment expense as at 30 June 2022 of $48.4M (of which $43.1M was directly related to goodwill). Note 17. Non-current assets - deferred tax Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Employee benefits Expenses deductible in future periods Other provisions/accruals Tax credits from tax losses Deferred tax asset Note 18. Current liabilities - trade and other payables Trade payables GST payable Other payables Refer to Note 28 for further information on financial instruments. Note 19. Lease liabilities Lease liability Consolidated 2022 $'000 2021 $'000 1,136 545 2,334 71 675 775 1,169 - 4,086 2,619 Consolidated 2022 $'000 2021 $'000 9,450 562 6,693 9,431 706 6,005 16,705 16,142 Consolidated 2022 $'000 2021 $'000 3,030 4,020 54 79 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 19. Lease liabilities (continued) The classification of lease liabilities into current and non-current is set out below: Current Non-current Refer to Note 28 for further information on financial instruments. Note 20. Provisions Annual leave Long service leave Provision for income tax Restructuring Lease make good The classification of provisions into current and non-current is set out below: Current Non-current Note 21. Current liabilities - deferred consideration Deferred consideration Refer to Note 34 for further information on deferred consideration. 80 55 Consolidated 2022 $'000 2021 $'000 1,661 1,369 2,004 2,016 3,030 4,020 Consolidated 2022 $'000 2021 $'000 2,377 1,409 (31) 1,138 200 1,999 1,271 478 - 48 5,093 3,796 Consolidated 2022 $'000 2021 $'000 4,510 583 3,444 352 5,093 3,796 Consolidated 2022 $'000 2021 $'000 2,611 15,327 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 22. Non-current liabilities - borrowings Bank loans Refer to Note 28 for further information on financial instruments. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loans Assets pledged as security Consolidated 2022 $'000 2021 $'000 13,000 10,000 Consolidated 2022 $'000 2021 $'000 13,000 10,000 13,000 10,000 The bank loan of $13M (2021: $10M) has a first ranking security over the assets and undertakings of Spirit Technology Solutions Ltd and its wholly owned subsidiaries. Note 23. Non-current liabilities - deferred tax Deferred tax liability comprises temporary differences attributable to: Property, plant and equipment Identifiable intangible assets Deferred tax liability * Refer Note 2 Disclosure of Prior Period Error for a description of the restatement. Note 24. Unearned revenue Customer contract unearned revenue Government infrastructure grants Consolidated 2022 $'000 2021 (Restated*) $'000 386 5,158 712 5,158 5,544 5,870 Consolidated 2022 $'000 2021 $'000 6,450 - 4,964 1,514 6,450 6,478 The Government infrastructure grants primarily related to the Horsham and Morwell high speed internet projects. This unearned revenue was released to gain/(loss) on divestment of the fixed wireless assets to Maret Infrastructure Pty Ltd effective 1 June 2022. Refer Note 35. 56 81 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 24. Unearned revenue (continued) The classification of unearned revenue into current and non-current is set out below: Current Non-current Consolidated 2022 $'000 2021 $'000 6,028 422 3,655 2,823 6,450 6,478 Reconciliations Reconciliations of the movements at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2020 Additions through business combinations (Note 34) Net other movements Balance at 30 June 2021 Additions on asset divestment (Note 35) Disposals on asset divestment (Note 35) Net other movements Balance at 30 June 2022 Note 25. Equity - issued capital 2022 Shares Customer contract unearned revenue Government infrastructure grants Total $'000 $'000 $'000 1,236 4,059 (331) 4,964 720 - 766 6,450 2,096 3,332 - 4,059 (913) (582) 1,514 6,478 - 720 (1,189) (1,189) 441 (325) - 6,450 2021 $'000 Consolidated 2021 2022 $'000 Shares Ordinary shares - fully paid 664,723,579 652,292,046 114,874 112,689 82 57 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 25. Equity - issued capital (continued) Movements in ordinary share capital Details Date Shares Issue price $'000 Balance Issue of shares to the vendor as part consideration in relation to the VPD Group acquisition Issue of Tranche 1 Placement shares Issue of shares to the vendor as part consideration in relation to the Ancore acquisition Issue of shares to the vendor as part consideration in relation to the Beachhead acquisition Issue of shares to the vendor as part consideration in relation to the Reliance IT acquisition Issue of shares in accordance with Share Purchase Plan Issue of Tranche 2 Placement shares Conversion of vested Performance Rights Issue of shares to the vendor as part consideration in relation to the Intalock acquisition Issue of shares to the vendor as part of contingent consideration in relation to the Trident acquisition upon achievement of earnout target 1 Issue of placement shares Issue of shares to the vendor as part consideration in relation to the Nexgen acquisition Cost of capital raising Balance Issue of shares to the vendor as part of the earnout consideration in relation to the Trident acquisition Issue of shares to the vendor as part of the earnout consideration in relation to the Altitude IT acquisition Issue of shares to the vendor as part of the earnout consideration in relation to the Beachhead acquisition Issue of shares to the vendor as part of the earnout consideration in relation to the Reliance IT acquisition Conversion of vested performance rights Conversion of vested performance rights Issue of shares to vendor as part of deferred consideration in relation to the Nexgen acquisition 30 June 2020 430,909,320 1 July 2020 27 August 2020 29,000,000 55,881,401 $0.250 $0.320 1 September 2020 1,592,988 $0.360 1 September 2020 1,734,888 $0.360 1 September 2020 4,612,204 $0.360 18 September 2020 22 October 2020 22 October 2020 15,624,581 1,125,000 189,320 $0.320 $0.320 $0.000 3 December 2020 5,921,053 $0.415 27 January 2021 8 April 2021 8 April 2021 703,366 72,121,213 32,876,712 - $0.390 $0.330 $0.370 $0.000 30 June 2021 652,292,046 9 September 2021 1,024,218 $0.245 9 September 2021 315,773 $0.245 9 September 2021 1,648,142 $0.245 9 September 2021 10 September 2021 11 January 2022 1,071,040 49,338 103,844 $0.245 $0.000 $0.000 42,852 7,250 17,882 573 624 1,660 5,000 360 - 2,457 274 23,800 12,164 (2,207) 112,689 251 77 404 262 - - 31 March 2022 8,219,178 $0.145 1,191 Balance 30 June 2022 664,723,579 114,874 Movements in unquoted options Details Balance Balance Date Options $'000 30 June 2021 18,000,000 30 June 2022 18,000,000 - - 58 83 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 25. Equity - issued capital (continued) 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 and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. Capital risk management The Consolidated Entity's objectives when managing capital is to safeguard its ability to continue as a going concern so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the Consolidated Entity may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Consolidated Entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current Company's share price at the time of the investment. The Consolidated Entity is subject to certain financing arrangement covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. The capital risk management policy remains unchanged from the 30 June 2021 Annual Report. Note 26. Equity - reserves Share-based payments reserve Capital reserve Consolidated 2022 $'000 2021 $'000 1,820 6 1,181 6 1,826 1,187 Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and Directors as part of their remuneration, and other parties as part of their compensation for services. 84 59 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 26. Equity - reserves (continued) Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 July 2020 Share-based payments expense (Note 40) Balance at 30 June 2021 Share-based payments expense (Note 40) Transfers Balance at 30 June 2022 Note 27. Equity - dividends Share- based payments reserve $'000 Capital reserve $'000 Total $'000 567 620 1,187 721 (82) 561 620 1,181 721 (82) 1,820 1,826 6 - 6 - 6 There were no dividends paid, recommended or declared during the current or previous financial year. Note 28. Financial instruments Financial risk management objectives The Consolidated Entity's activities expose it to a variety of financial risks as set out below. Risk management is carried out by senior finance executives ('finance') under the guidance of the Board of Directors ('the Board'). These policies include identification and analysis of the risk exposure of the Consolidated Entity and appropriate procedures, controls and risk limits. Finance identifies, evaluates and if required, hedges financial risks within the Consolidated Entity's operating units. Finance reports to the Board on a monthly basis. Market risk Foreign currency risk The Consolidated Entity undertakes transactions denominated in foreign currencies and therefore has exposure to foreign currency risk. Offshore Customer Care, Service delivery and Finance teams are located in the Philippines and cost around $21,000 USD per week. The Consolidated Entity also sources security-based software products and spends approximately $3.5M USD per annum. Conversion is at the applicable exchange rate at the time the transaction is authorised. Price risk The Consolidated Entity is not exposed to any significant price risk. Interest rate risk The Consolidated Entity's main interest rate risk arises from long-term borrowings. Borrowings obtained at variable rates expose the Consolidated Entity to interest rate risk. Borrowings obtained at fixed rates expose the Consolidated Entity to fair value interest rate risk. The entire facility is exposed to variable interest rates. The Consolidated Entity paid $980,000 in interest during the 2022 financial year (2021: $471,000). 60 85 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 28. Financial instruments (continued) The facility is structured such that a line fee is payable on the facility limit ($32M), a usage fee payable on funds drawn and an interest charge based on BBSY plus a margin. As at the reporting date the Consolidated Entity had the following variable rate borrowings. The net weighted average interest rate detailed below is calculated on the aggregation of the usage fee and interest charge for the year ended 30 June 2022 of $449,000 (2021: $193,000) over the average balance drawn down during the year ended 30 June 2022 of $22.1M (2021: $6.1M). The line fee for the year ended 30 June 2022 was $531,000 (2021: $278,000). Consolidated Bank loan 2022 2021 Weighted average interest rate % Balance $'000 Weighted average interest rate % Balance $'000 2.03% 13,000 3.13% 10,000 Net exposure to cash flow interest rate risk 13,000 10,000 An analysis by remaining contractual maturities is shown in 'liquidity and interest rate risk management' below. For the Consolidated Entity the bank loans outstanding, totalling $13M (2021: $10M), are interest bearing loans. On 22 June 2022, the Consolidated Entity executed a facility renewal with its banker for a further term of 3 years expiring 1 July 2025. The market rate loan facility limit was permanently increased to $32M. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Consolidated Entity. The Consolidated Entity has a strict code of credit and follows a rigorous collection process. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The Consolidated Entity does not hold any collateral. The Consolidated Entity has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables through the use of a provisions matrix using fixed rates of credit loss provisioning. The credit loss model takes into consideration the industry dynamics and exposures of the customer base. With regards to Debtors, amounts older than 90 days owing are reviewed and where appropriate taken up as a provision for doubtful debts. This process is completed monthly. As at 30 June 2022 $707,000 was booked as an allowance for expected credit losses against the total amount owed by debtors. There are no guarantees against this receivable but management closely monitors the receivable balance on a monthly basis and is in regular contact with its customers to mitigate risk. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year. Liquidity risk Vigilant liquidity risk management requires the Consolidated Entity to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The Consolidated Entity manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. 86 61 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 28. Financial instruments (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 amount in the statement of financial position. Consolidated - 2022 Non-derivatives Non-interest bearing Trade and other payables Contingent consideration Deferred consideration Interest-bearing - variable Bank loan Lease liability Total non-derivatives Consolidated - 2021 Non-derivatives Non-interest bearing Trade and other payables Contingent consideration Deferred consideration Interest-bearing - variable Bank loan Lease liability Total non-derivatives Weighted average interest rate % 1 year or less Between 1 and 2 years Between 2 and 5 years Over 5 years $'000 $'000 $'000 $'000 - - - 16,705 11,660 2,611 - - - - - 2.03% 5.27% - 1,661 - 1,369 13,000 - 32,637 1,369 13,000 Weighted average interest rate % 1 year or less Between 1 and 2 years Between 2 and 5 years Over 5 years $'000 $'000 $'000 $'000 - - - 16,142 2,399 15,327 - 3,603 - 3.13% 5.27% - 2,004 10,000 368 35,872 13,971 - - - - 1,648 1,648 Remaining contractual maturities $'000 - - - - - - 16,705 11,660 2,611 13,000 3,030 47,006 Remaining contractual maturities $'000 - - - - - - 16,142 6,002 15,327 10,000 4,020 51,491 Fair value of financial instruments Unless otherwise stated the carrying amounts of financial instruments reflect their fair value. 62 87 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 29. Key management personnel disclosures Directors The following persons were Directors of Spirit Technology Solutions Ltd during the financial year and up to the date of the financial statements: Mr James Joughin (Non-Executive Chairman) Mr Julian Challingsworth (Managing Director and Chief Executive Officer - appointed 11 July 2022) Mr Julian Haber (Executive Director - appointed 1 April 2022) & Interim Managing Director (16 May 2022 to 11 July 2022) Mr Sol Lukatsky (Managing Director - resigned 2 July 2022) Mr Gregory Ridder (Non-Executive Director) Mr Mark Dioguardi (Executive Director - resigned 1 April 2022) Ms Michelle Bendschneider – (Non-Executive Director - appointed 1 April 2022) Ms Inese Kingsmill (Non-Executive Director - resigned on 30 September 2021) Other key management personnel The following person also had the authority and responsibility for planning, directing and controlling the major activities of the Consolidated Entity, directly or indirectly, during the financial year: Paul Miller (Chief Financial Officer) Compensation The aggregate compensation made to Directors and other members of key management personnel of the Consolidated Entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated 2022 $ 2021 $ 1,534,883 1,487,669 112,502 24,323 660,183 175,396 52,329 663,068 2,425,676 2,284,677 88 63 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 30. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by PKF Melbourne Audit & Assurance Pty Ltd, the auditor of the Company, and its related practices: Consolidated 2022 $ 2021 $ 172,000 - 125,000 68,225 25,000 38,250 45,350 24,000 31,500 215,416 280,600 464,141 Audit and assurance services - PKF Melbourne Audit & Assurance Pty Ltd Audit or review of the financial statements Assurance related services in respect of acquisition date accounting Other services – PKF Melbourne Tax compliance services Tax advisory and due diligence services Corporate advisory and due diligence services Note 31. Contingent liabilities There were no contingent liabilities at 30 June 2022 and 30 June 2021. Note 32. Related party transactions Parent entity Spirit Technology Solutions Ltd is the parent entity. Subsidiaries Interests in subsidiaries are set out in Note 36. Key management personnel Disclosures relating to key management personnel are set out in Note 29 and the remuneration report included in the Directors' report. Transactions with related parties Mr Julian Haber, Executive Director, is also the co-founder of Intalock Technologies Pty Ltd (“Intalock”). As outlined in Note 34, Intalock had an earnout structure as part of the acquisition consideration. Subsequent to the assessment date of 30 June 2022, the amount of contingent consideration payable where the FY22 EBITDA performance target has been exceeded has been estimated to be $3.25M. There were no other transactions with related parties during the current and previous financial year. Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. 64 89 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 33. Legal parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Loss after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Reserves (Note 26) Accumulated losses Total equity Parent 2022 $'000 2021 $'000 (61,830) (17,348) (61,830) (17,348) Parent 2022 $'000 2021 $'000 1,543 746 82,371 125,020 1,252 375 45,973 29,616 114,874 1,826 (80,302) 112,689 1,187 (18,472) 36,398 95,404 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The bank loan of $13M is secured first over the assets and undertakings of Spirit Technology Solutions Ltd and its wholly owned subsidiaries. The parent entity had no other guarantees in relation to the debts of its subsidiaries as at 30 June 2022 and 30 June 2021. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2022 and 30 June 2021. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2022 and 30 June 2021. 90 65 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 33. Legal parent entity information (continued) Significant accounting policies The accounting policies of the parent entity are consistent with those of the Consolidated Entity, as disclosed in Note 2, except for the following: ● ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. Note 34. Business combinations Acquisition of Voice Print Data Group during the previous financial year The Company acquired 100% of Voice Print Data Group ("VPD"), with effective control on 1 July 2020. The acquisition has been accounted for as a Business Combination under AASB 3. VPD became the new Wholesale Business arm for Spirit selling a range of Cloud, Internet and Voice services via its channel partners. The fair values of the identifiable net assets acquired are detailed below: Cash and cash equivalents Trade receivables Vendor loan Inventories Prepayments Property, plant and equipment Right-of-use assets GST payable Trade and other payables Provision for income tax Employee benefits Unearned revenue Finance lease liabilities Deferred tax liabilities Net liabilities acquired Goodwill Acquisition-date fair value of the total consideration transferred Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: shares issued by Company as part of consideration Net cash used Fair value $'000 1,302 1,216 600 103 143 1,252 934 (136) (2,007) (125) (480) (2,717) (934) (239) (1,088) 14,338 13,250 13,250 (7,250) 6,000 i. Consideration transferred Acquisition-related costs amounting to $226,000 are not included as part of the consideration for the acquisition and were recognised as transaction costs in the 30 June 2021 profit and loss statement. 66 91 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) ii. Identifiable net assets The fair value of the trade receivables acquired as part of the business combination amounted to $1,216,000. As of the acquisition date, the Company’s best estimate was that this asset would be fully realised. iii. Goodwill Goodwill of $14,338,000 was primarily related to the Company’s growth expectations through customer expansion. As outlined in Note 4, following a reassessment of the Consolidated Entity’s operating and reporting structure, the goodwill was reallocated to the Managed Services (IT&T) cash generating unit and was subsequently impaired as part of a review of the carrying value of assets in this segment as at 30 June 2022. iv. Contingent consideration The acquisition of VPD included a contingent consideration element by way of an earn-out structure in equal proportion based upon EBITDA performance over the 12-month periods ended 30 June 2021 (FY21) and 30 June 2022 (FY22). The earnout consideration was split in the proportion of cash (50%) and equity (50%). The earn-out structure facilitated a scaled achievement against targets for FY21 and FY22 and the contingent consideration was payable in a range exceeding 100% against the FY21 target and in a range exceeding 110% of the FY22 target. At the date of acquisition, the Board and management assessed the probability of achieving the relevant EBITDA performance targets and assessed the likelihood to be at or below the minimum hurdles and accordingly no contingent consideration was recognised. Subsequent to acquisition date, the Company and the vendors of VPD signed a variation to the Share Purchase Agreement dated 21 June 2021, agreeing that there would be no contingent consideration payable for FY21 or FY22. v. Contribution to the Consolidated Entity’s results VPD contributed revenues of $16,714,000 to the Consolidated Entity from the date of the acquisition to 30 June 2021. In FY21, VPD did not receive any allocations of acquisition costs, corporate overhead, listing or finance costs, which were all absorbed by the Consolidated Entity’s core operations and accordingly it is impractical to disclose VPD’s contribution to the Consolidated Entity's profit. In FY22, VPD has been merged into the Managed Services (IT&T) reporting segment and accordingly it is impractical to disclose VPD’s contribution to the Consolidated Entity's FY22 revenue and profit. 92 67 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) Acquisition of Altitude IT during the previous financial year The Company acquired 100% of Ancore Pty Ltd (trading as Altitude IT), with effective control on 1 September 2020. The acquisition has been accounted for as a Business Combination under AASB 3. Altitude IT was a Sydney based Managed IT Services Provider with a diverse base of recurring revenue across the commercial & industrial sectors. The fair values of the identifiable net assets acquired are detailed below: Cash and cash equivalents Trade receivables Deposits Inventories Vendor loan Property, plant and equipment Trade and other payables GST payable Provision for income tax Employee entitlements Net assets acquired Goodwill Net fair value loss on remeasurement of financial liabilities Acquisition-date fair value of the total consideration transferred Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: contingent consideration Less: shares issued by Company as part of consideration Net cash used Fair value $'000 230 257 6 6 141 41 (140) (50) 11 (93) 409 1,711 275 2,395 2,395 (275) (573) 1,547 i. Consideration transferred Acquisition-related costs amounting to $37,000 are not included as part of the consideration for the acquisition and were recognised as transaction costs in the 30 June 2021 profit and loss statement. ii. Identifiable net assets The fair value of the trade receivables acquired as part of the business combination amounted to $257,000. As of the acquisition date, the Company’s best estimate was that this asset would be fully realised. iii. Goodwill Goodwill of $1,711,000 was primarily related to the Company’s growth expectations through customer expansion. As outlined in Note 4, following a reassessment of the Consolidated Entity’s operating and reporting structure, the goodwill was reallocated to the Managed Services (IT&T) cash generating unit and was subsequently impaired as part of a review of the carrying value of assets in this segment as at 30 June 2022. 68 93 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) iv. Contingent consideration The acquisition of Altitude IT included a contingent consideration element by way of an earn-out structure based upon EBITDA performance over a 12-month period ended 30 June 2021 (FY21). The earnout consideration is to be split in the same proportion of cash (70%) and equity (30%) as the upfront consideration. The earn-out structure facilitated a scaled achievement of the FY21 targets whereby the contingent consideration is payable where FY21 EBITDA exceeds 110% of the agreed target EBITDA. At the date of acquisition, the Board and management assessed the probability of achieving the relevant EBITDA performance target and assessed the likelihood to be at or below the minimum hurdle and accordingly no FY21 contingent consideration had been recognised. Subsequent to the assessment date of 30 June 2021, the amount of contingent consideration paid in FY22 where the FY21 EBITDA performance target was exceeded was $276,301 comprising $198,937 in cash and $77,364 in ST1 equity. v. Contribution to the Consolidated Entity’s results Altitude IT contributed revenues of $2,354,000 to the Consolidated Entity from the date of acquisition to 30 June 2021. In FY21, Altitude IT’s employees had been transferred to Spirit Telecom (Australia) Pty Ltd and the Company did not receive any allocations of acquisition costs, corporate overhead, listing or finance costs which were all absorbed by the Consolidated Entity’s core operations and accordingly it was considered impractical to disclose Altitude IT's contribution to the Consolidated Entity's profit. In FY22, Altitude IT has been merged into the Managed Services (IT&T) reporting segment and accordingly it is impractical to disclose Altitude IT's contribution to the Consolidated Entity's FY22 revenue and profit. 94 69 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) Acquisition of Beachhead Group during the previous financial year The Company acquired 100% of Beachhead Group Pty Ltd, with effective control on 1 September 2020. The acquisition has been accounted for as a Business Combination under AASB 3. Beachhead Group was a Sydney based Managed IT Services Provider, specialising in Cloud and Infrastructure deployment to businesses and private schools. The fair values of the identifiable net assets acquired are detailed below: Cash and cash equivalents Trade receivables Deposit Vendor loan Prepayments Right-of-use assets Deferred tax asset Trade payables GST payables Deferred revenue Provision for income tax Deferred tax liability Employee entitlements Make good provision Lease liabilities Net assets acquired Goodwill Net fair value gain on remeasurement of financial liabilities Acquisition-date fair value of the total consideration transferred Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: deferred consideration Less: contingent consideration Less: shares issued by Company as consideration Net cash used Fair value $'000 414 670 15 2 8 97 26 (247) (20) (142) (173) (2) (99) (1) (98) 450 3,025 (267) 3,208 3,208 (1,190) (64) (624) 1,330 i. Consideration transferred Acquisition-related costs amounting to $44,000 are not included as part of the consideration for the acquisition and were recognised as transaction costs in the 30 June 2021 profit and loss statement. ii. Identifiable net assets The fair value of the trade receivables acquired as part of the business combination amounted to $670,000. As of the acquisition date, the Company’s best estimate was that this asset would be fully realised. 70 95 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) iii. Goodwill Goodwill of $3,025,000 was primarily related to the Company’s growth expectations through customer expansion. As outlined in Note 4, following a reassessment of the Consolidated Entity’s operating and reporting structure, the goodwill was reallocated to the Managed Services (IT&T) cash generating unit and was subsequently impaired as part of a review of the carrying value of assets in this segment as at 30 June 2022. iv. Deferred consideration The acquisition of Beachhead Group included a deferred consideration element of $1,091,949 payable by 31 August 2021.The deferred consideration was settled in the same proportion of cash (65% being $773,164) and equity (35% being $318,785) as the upfront consideration. v. Contingent consideration The acquisition of Beachhead Group included a contingent consideration element by way of an earn-out structure based upon EBITDA performance over a 12-month period ended 30 June 2021 (FY21). The earnout consideration is to be split in the same proportion of cash (65%) and equity (35%) as the upfront consideration. The earn-out structure facilitated a scaled achievement of the FY21 target whereby the contingent consideration is payable in a range of 80% - 120% achievement against the FY21 target. At the date of acquisition, the Board and management assessed the likelihood of achieving the relevant EBITDA performance targets at the 100% level with $331,000 of contingent consideration recognised. Subsequent to assessment date of 30 June 2021, the amount of contingent consideration paid in FY22 where the FY21 EBITDA performance target was exceeded was $291,214 comprising $206,204 in cash and $85,010 in ST1 equity. vi. Contribution to the Consolidated Entity’s results Beachhead Group contributed revenues of $3,931,000 to the Consolidated Entity from the date of the acquisition to 30 June 2021. In FY21, the Beachhead Group’s employees had been transferred to Spirit Telecom (Australia) Pty Ltd and the Company did not receive any allocations of acquisition costs, corporate overhead, listing or finance costs which were all absorbed by the Consolidated Entity’s core operations and accordingly it was considered impractical to disclose Beachhead Group’s contribution to the Consolidated Entity's profit. In FY22, the Beachhead Group was merged into the Managed Services (IT&T) reporting segment and accordingly it is impractical to disclose Beachhead Group’s contribution to the Consolidated Entity's FY22 revenue and profit. 96 71 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) Acquisition of Reliance Technology during the previous financial year The Company acquired 100% of Reliance Technology Pty Ltd (“Reliance IT”), with effective control on 1 September 2020. The acquisition has been accounted for as a Business Combination under AASB 3. Reliance IT was a Cloud Managed Services Provider based in Central NSW and one of the largest providers of IT services in regional NSW. The fair values of the identifiable net assets acquired are detailed below: Cash and cash equivalents Trade and other receivables Inventories Right-of-use assets Trade payables GST payables Provision for income tax Employee entitlements Lease liabilities Net assets acquired Goodwill Net fair value loss on remeasurement of financial liabilities Acquisition-date fair value of the total consideration transferred Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: contingent consideration Less: shares issued by Company as part of consideration Net cash used Fair value $'000 412 212 11 142 (42) (67) (146) (134) (142) 246 5,609 188 6,043 6,043 (913) (1,660) 3,470 i. Consideration transferred Acquisition-related costs amounting to $44,000 are not included as part of the consideration for the acquisition and were recognised as transaction costs in the 30 June 2021 profit and loss statement. ii. Identifiable net assets The fair value of the trade receivables acquired as part of the business combination amounted to $212,000. As of the acquisition date, the Company’s best estimate was that this asset would be fully realised. iii. Goodwill Goodwill of $5,609,000 was primarily related to the Company’s growth expectations through customer expansion. As outlined in Note 4, following a reassessment of the Consolidated Entity’s operating and reporting structure, the goodwill was reallocated to the Managed Services (IT&T) cash generating unit and was subsequently impaired as part of a review of the carrying value of assets in this segment as at 30 June 2022. 72 97 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) iv. Contingent consideration The acquisition of Reliance IT included a contingent consideration element by way of an earn-out structure based upon EBITDA performance over a 12-month period ended 30 June 2021 (FY21). The earnout consideration is split in the same proportion of cash (70%) and equity (30%) as the upfront consideration. The earn-out structure facilitated a scaled achievement of the FY21 target whereby the contingent consideration is payable in a range exceeding 80% of the FY21 target. At the date of acquisition, the Board and management assessed the likelihood of achieving the relevant EBITDA performance targets at the 111% level with $725,000 of contingent consideration recognised. Subsequent to assessment date of 30 June 2021, the amount of contingent consideration paid in FY22 where the FY21 EBITDA performance target was exceeded was $937,161 comprising $674,756 in cash and $262,405 in ST1 equity. v. Contribution to the Consolidated Entity’s results Reliance IT contributed revenues of $3,963,000 to the Consolidated Entity from the date of the acquisition to 30 June 2021. In FY21, the Reliance IT’s employees had been transferred to Spirit Telecom (Australia) Pty Ltd and the Company did not receive any allocations of acquisition costs, corporate overhead, listing or finance costs which were all absorbed by the Consolidated Entity’s core operations and accordingly it was considered impractical to disclose Reliance IT's contribution to the Consolidated Entity's profit. In FY22, Reliance IT was merged into the Managed Services (IT&T) reporting segment and accordingly it is impractical to disclose Reliance IT's contribution to the Consolidated Entity's FY22 revenue and profit. 98 73 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) Acquisition of Intalock Technologies during the previous financial year The Company acquired 100% of Intalock Technologies Pty Ltd (“Intalock”), with effective control on 1 December 2020. The acquisition has been accounted for as a Business Combination under AASB 3. Intalock is one of Australia’s leading cyber security services businesses with a market leading and sophisticated full Security Operations Centre. This acquisition allows Spirit to cross sell and deliver highly secure bundled Cyber Security Services with Data, Cloud and Voice. The fair values of the identifiable net assets acquired are detailed below: Cash and cash equivalents Trade and other receivables Prepayments Deposits Plant and equipment Right-of-use assets Intangible assets Trade payables GST payables Unearned revenue Provision for income tax Employee entitlements Make good provision Lease liabilities Net assets acquired Goodwill Net fair value gain on remeasurement of financial liabilities Acquisition-date fair value of the total consideration transferred Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: deferred consideration Less: contingent consideration Less: shares issued by Company as part of consideration Net cash used Fair value $'000 2,575 2,237 143 235 150 733 191 (2,194) (56) (1,200) (279) (275) (45) (755) 1,460 17,351 2,450 21,261 21,261 (3,000) (3,250) (2,457) 12,554 i. Consideration transferred Acquisition-related costs amounting to $190,000 are not included as part of the consideration for the acquisition and were recognised as transaction costs in the profit and loss statement. ii. Identifiable net assets The fair value of the trade receivables acquired as part of the business combination amounted to $2,237,000. As of the acquisition date, the Company’s best estimate was that this asset would be fully realised. 74 99 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) iii. Goodwill Goodwill of $17,351,000 was primarily related to the Company’s growth expectations through customer expansion. As outlined in Note 4, following a reassessment of the Consolidated Entity’s operating and reporting structure, Intalock was separated into its own operating segment (Cyber Security) and goodwill on acquisition has been allocated to that segment. iv. Deferred consideration The acquisition of Intalock included a deferred consideration element to be settled by 31 August 2021. The deferred consideration is to be settled 100% in cash capped at $3,000,000. This amount was settled in full in FY22. v. Contingent consideration The acquisition of Intalock included a contingent consideration element by way of an earn-out structure based upon EBITDA performance over a 12-month period ended 30 June 2022 (FY22). The earnout consideration is to be settled 100% in cash. The FY22 earnout structure facilitates a scaled achievement of the FY22 target whereby the contingent consideration is payable in a range exceeding 105% of the FY22 Target. At the date of acquisition, the Board and management assessed the likelihood of achieving the relevant EBITDA performance targets at the 105% level with $800,000 of contingent consideration recognised. Subsequent to the assessment date of 30 June 2021, the amount of contingent consideration payable where the FY22 EBITDA is likely to exceed the performance target was estimated to be $623,000. The revised estimated amount of contingent consideration due and payable where the FY22 target has been exceeded is $3.25M in cash (classified as current). Any contingent consideration payable where the performance targets for FY22 are exceeded is capped to an amount whereby the total purchase price including the upfront consideration, the deferred consideration and the contingent consideration cannot exceed $22.5M. vi. Contribution to the Consolidated Entity’s results Intalock contributed revenues of $13,369,000 to the Consolidated Entity from the date of the acquisition to 30 June 2021. In FY21, Intalock did not receive any allocations of acquisition costs, corporate overhead, listing or finance costs which were all absorbed by the Consolidated Entity’s core operations and accordingly it was considered impractical to disclose Intalock's contribution to the Consolidated Entity's profit. In FY22, Intalock has been allocated to its own reporting segment (Cyber Security) and accordingly its contribution to the Consolidated Entity’s results as disclosed in Note 4 Operating segments are as follows: Revenue Underlying earnings before interest, taxes, depreciation & amortisation* Underlying net profit before income Tax* * Refer Note 4 for definitions. $’000 31,397 2,432 1,959 100 75 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) Acquisition of Nexgen during the previous financial year The Company acquired 100% of Nexgen Australia Group Pty Ltd (“Nexgen"), with effective control on 1 April 2021. Nexgen sells a range of high growth Data, Security & Voice products. The acquisition brings over 5,000 new B2B clients and some one hundred new sales people to Spirit to drive organic growth, complementary products and scale. As disclosed in last year's Annual Report for the financial year ended 30 June 2021 (“FY21”), the value of the identifiable net assets of Nexgen had been determined on a provisional basis with the assessment on certain assets and the deferred and contingent consideration amounts not being finalised when the FY21 financial statements were issued. Had the assessment been finalised, the FY21 financial statements would have differed to those previously reported as follows: The fair values of the identifiable net assets acquired are detailed below: Cash and cash equivalents Trade and other receivables Inventories Accrued revenue Deposits Property, plant and equipment Deferred tax assets Right-of-use assets Brand names Customer Relationships Other intangible assets Trade and other payables GST payables Provision for income tax Deferred tax liability Employee benefits Lease liability Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: deferred consideration Less: contingent consideration Less: shares issued by Company as part of consideration Net cash used Fair value $'000 20 271 681 1,713 148 797 382 1,567 4,105 11,942 1,145 (2,969) (106) (167) (5,158) (886) (1,567) 11,918 46,031 57,949 57,949 (12,216) (8,610) (12,164) 24,959 i. Consideration transferred Acquisition-related costs amounting to $517,000 are not included as part of the consideration for the acquisition and were recognised as transaction costs in the 30 June 2021 ($423,000) and 30 June 2022 ($94,000) profit and loss statement. 76 101 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 34. Business combinations (continued) ii. Identifiable net assets The fair value of the trade receivables acquired as part of the business combination amounted to $271,000. As of the acquisition date, the Company’s best estimate was that this asset would be fully realised. iii. Goodwill Goodwill of $46,031,000 was primarily related to the Company’s growth expectations through customer expansion. As outlined in Note 4, following a reassessment of the Consolidated Entity’s operating and reporting structure, Nexgen was separated into its own operating segment (Collaboration & Communication) and goodwill on acquisition has been allocated to that segment. iv. Deferred consideration The acquisition of Nexgen included an initial deferred consideration of $11,137,000 which was revised to $12,216,000 as part of the measurement period adjustments outlined in Note 16. The equity component of the deferred consideration was settled in shares of the Company issued on 31 March 2022 (at a fair value of $1,191,000) and the remaining component settled (or to be settled) in cash (being $11,025,000). As at 30 June 2022, $2,611,000 remains as a current liability. v. Contingent consideration The acquisition of Nexgen included a contingent consideration element by way of an earn-out structure based upon Milestone Incentives available based on performance targets for FY22 and FY23. The earnout consideration is to be settled 30% in shares of the Company and 70% in cash. The earnout structure facilitates a scaled achievement of the FY22 and FY23 targets whereby the contingent consideration is payable based on the achievement of the relevant EBTDA performance targets. At the date of acquisition, the Board and management assessed the likelihood of achieving the relevant EBITDA performance targets and accordingly recognised total contingent consideration of $2,980,000, all of which was classified as non-current. Subsequent to the assessment date of 1 April 2021, the amount of contingent consideration payable where the FY22 and HY23 EBITDA is likely to exceed the performance target has been amended to reflect new information obtained about facts and circumstances at the acquisition date that, if known, would have affected the measurement of the contingent consideration. Accordingly, the amended contingent consideration totalling $8,610,000 has been recorded and classified as a current liability at the reporting date. As a consequence of the ongoing impact of Covid lockdowns during the early part of FY22, it was agreed with the Nexgen founders to amend the earnout measurement periods from the 12 months ended 30 June 2022 (FY22) and 6 months ended 31 December 2022 (HY23) respectively to the twelve months ended 31 December 2022 (CY22) and 6 months ended 30 June 2023 (H223). There was no impact on deferred consideration amounts noted above. Any contingent consideration payable is not capped. vi. Contribution to the Consolidated Entity’s results Nexgen contributed revenues of $10,386,000 to the Consolidated Entity from the date of the acquisition to 30 June 2021. In FY21 Nexgen did not receive any allocations of acquisition costs, corporate overhead, listing or finance costs which were all absorbed by the Consolidated Entity’s core operations and accordingly it was considered impractical to disclose Nexgen’s contribution to the Consolidated Entity's profit. In FY22 Nexgen has been allocated to its own reporting segment and accordingly its contribution to the Consolidated Entity’s results as disclosed in Note 4 Operating segments are as follows: Revenue Underlying earnings before interest, taxes, depreciation & amortisation* Underlying net profit before income Tax* * Refer Note 4 for definitions. 102 $’000 34,982 9,885 8,586 77 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 35. Asset Divestments Divestment of Consumer Assets On 29 October 2021, the Company completed the sale of its non-core consumer residential Internet business to Melbourne based broadband and telecommunications provider DGtek Pty Ltd (DGtek) for a transaction value of $5.1M. Under the sale agreement, DGtek acquired the consumer business including the customer base and relevant infrastructure assets. The divestment is in line with the Company’s strategy to focus on being a leading and fully integrated technology provider of modern digital workplaces to the business market, from SMB to corporates. The consumer internet business was not critical to future operations and represented less than 2% of the Consolidated Entity’s revenue. Cash proceeds on completion Contingent consideration Gross proceeds on sale The fair values of the identifiable net assets disposed: Assets held for sale Intangible assets Plus: divestment related costs Profit on divestment i. Allocation basis of goodwill on disposal Fair value $'000 4,900 200 5,100 (1,120) (1,200) (2,320) (411) (2,731) 2,369 The goodwill disposed originally arose from the acquisition of the LinkOne Group of companies on 1 April 2019. The goodwill allocated to the divested CGU assets of $1.2M represented the proportion of the consumer assets acquired relative to the total fair value of the assets on that acquisition. ii. Contingent consideration The sale included contingent consideration of $200,000 which is released based on customer migration milestones being achieved. 78 103 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 35. Asset Divestments (continued) Divestment of Fixed Wireless Wholesale Assets On 1 June 2022, the Company completed the sale of its fixed wireless infrastructure assets to Melbourne based Maret Infrastructure Pty Ltd (“Maret Group”) for $15M upfront consideration. Under the sale agreement, Maret Group acquired the infrastructure assets with Spirit retaining the business customer relationships and revenues. The Maret Group will charge Spirit wholesale services fees for connected services under a wholesale services agreement between the parties. The two companies will partner to develop and market fixed wireless products using Maret Group’s spectrum assets, its new expanded network and Spirit’s salesforce. This new partnership aims to create market-leading fixed wireless solutions. Cash proceeds on completion Network and NOC “as a service” fee Gross proceeds on sale The fair values of the identifiable net assets disposed: Inventories Other assets Plant and equipment Right-of-use assets Intangible assets Unearned revenue Employee benefits Plus: divestment related costs Loss on divestment i. Allocation basis of goodwill on disposal Fair value $'000 14,989 (720) 14,269 (475) (87) (10,347) (325) (3,893) 1,189 95 (13,843) (972) (14,815) (546) The goodwill disposed originally arose from the acquisition accounting associated with Anttel Communications Group Pty Ltd, Building Connect Pty Ltd, Wells Research Pty Ltd and World Without Wires Pty Ltd. The total goodwill booked on those acquisitions totalled $7.8M. As outlined in Note 3 (Critical accounting judgements, estimates and assumptions) the allocation of goodwill on divested asset groups requires the application of judgement. On the basis that the sale structure involved Spirit retaining the business customer relationships and revenues it was determined that 50% of the goodwill was related to the infrastructure assets (representing $3.9M) and the residual to the forward customer cash flows retained. ii. Network and NOC “as a service” fee As part of the associated Spirit Wholesale Services Agreement with the Maret Group, there is provision for a Network and Network Operations Centre (“NOC”) “as a service” fee which commences in month 13 after the completion date. This fee was provided at a 100% discount for the first 12 months as part of the agreed upfront sale price and equates to approximately $60,000 per month. Under AASB 3 Business Combinations this component of the transaction price is to be accounted for under AASB 15 Revenue from Contracts with Customers and according was allocated to unearned revenue. 104 79 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 35. Asset Divestments (continued) iii. Contingent consideration The sale agreement includes up to $6M in earn-out payments over two years, subject to revenue targets being achieved. The variable consideration is accounted for in accordance with AASB 15 Revenue from Contracts with Customers which dictates that the amount can only be recognised to the extent that it is highly probable of being earned. As at the reporting date of 30 June 2022, the Company was not in a position to determine the amount with the level or certainty required under the accounting standard. Note 36. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 2: Name Spirit Telecom (Australia) Pty Ltd Phone Name Marketing Australia Pty Ltd World Without Wires Pty Ltd Anttel Communications Group Pty Ltd Ignite Broadband Pty Ltd LinkOne Pty Ltd Wells Research Pty Ltd Building Connect Pty Ltd Bigscreensound Pty Ltd, trading as Arinda IT Phoenix Austec Group Pty Ltd Trident Computer Services Pty Ltd Neptune Managed Services Pty Ltd VPDA Group Holdings Limited Voice Print and Data Australia Pty Ltd Live Call Pty Ltd Now IT Solutions Pty Ltd Ancore Pty Ltd, trading as Altitude IT Beachhead Group Pty Ltd Reliance Technology Pty Ltd Intalock Technologies Pty Ltd Nexgen Capital Pty Ltd Nexgen Investment Group Pty Ltd Business Telecom Australia Pty Ltd Principal place of business / Country of incorporation Ownership interest 2021 % 2022 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% For the purposes of this note the parent entity has been deemed as the legal parent entity Spirit Technology Solutions Ltd. Note 37. Events after the reporting period No other 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. 80 105 Spirit Technology Solutions Limited Notes to the financial statements 30 June 2022 Note 38. Reconciliation of (loss)/profit after income tax to net cash from operating activities (Loss)/profit after income tax benefit/(expense) for the year (53,166) 1,157 Consolidated 2022 $'000 2021 $'000 Adjustments for: Depreciation and amortisation expense Impairment of non-current assets Net gain on disposal of property, plant and equipment Share-based payments Acquisition, divestment and integration costs Net fair value loss on remeasurement of financial liabilities Interest and other finance costs paid Change in operating assets and liabilities: Decrease/(Increase) in trade and other receivables (Increase) in inventories Decrease/(Increase) in other assets (Increase) in contract assets (Increase) in deferred tax assets (net) Increase in trade and other payables Increase in provisions Increase/(Decrease) in unearned revenue 7,655 48,374 (1,862) 721 967 2,747 190 1,089 (2,179) 667 (2,428) (1,793) 891 1,236 501 6,666 - (529) 620 2,100 168 137 (3,481) (827) (732) (1,687) (138) 1,213 1,291 (913) Net cash from operating activities 3,610 5,045 106 81 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 39. Earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share 657,644,431 554,674,861 Weighted average number of ordinary shares used in calculating diluted earnings per share 657,644,431 554,674,861 Number Number (Loss)/profit attributable to the owners of Spirit Technology Solutions Ltd Basic earnings per share Diluted earnings per share Note 40. Share-based payments 2022 Total $'000 2021 Total $'000 (53,166) 1,157 2022 Total Cents (8.08) (8.08) 2021 Total Cents 0.21 0.21 During the financial year ended 30 June 2022, 13,000,000 Performance Rights were granted by the Company to key management personnel and certain employees with a vesting period ending 30 June 2024, of which 6,500,000 Performance Rights have a Relative Total Shareholder Return ("Relative TSR") performance hurdle measured against a peer group, and 6,500,000 Performance Rights have an Absolute Total Shareholder Return (“Absolute TSR") performance hurdle, based on performance of the Company. During the financial year ended 30 June 2022, the AGM approved the modification of the performance hurdle for certain performance rights to incorporate an Absolute Total Shareholder Return (TSR) in place of Return on Invested Capital (ROIC). As the Absolute TSR is a market-based performance hurdle, the fair value of which is lower than determined on the basis of ROIC, in accordance with AASB 2, no amendment to the fair value of share-based payments expense is required. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Binomial or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Consolidated Entity receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. 82 107 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 40. Share-based payments (continued) Set out below are summaries of options granted under the Spirit Technology Solutions Ltd Long Term Incentive Plan: 2022 Grant date Expiry date Exercise Balance at Granted the start of the year price Exercised Expired/ Balance at forfeited/ the end of other the year 14/05/2019 14/05/2019 14/05/2019 01/07/2023 01/07/2023 01/07/2023 $0.150 6,000,000 $0.180 6,000,000 $0.215 6,000,000 18,000,000 - - - - - - - - - 6,000,000 - 6,000,000 - 6,000,000 - 18,000,000 2021 Grant date Expiry date Exercise Balance at Granted the start of the year price Exercised Expired/ Balance at forfeited/ the end of other the year 14/05/2019 14/05/2019 14/05/2019 01/07/2023 01/07/2023 01/07/2023 $0.150 6,000,000 $0.180 6,000,000 $0.215 6,000,000 18,000,000 Weighted average exercise price $0.182 - - - - - - - - - - - 6,000,000 - 6,000,000 - 6,000,000 - 18,000,000 - $0.182 The weighted average remaining contractual life of options outstanding at the end of the financial year was 1 year (2021: 2 years). 108 83 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 40. Share-based payments (continued) Set out below are summaries of Performance Rights granted under the plan: 2022 Grant date Expiry date 12/09/2018 18/02/2019 22/04/2020 13/10/2020 11/06/2021 29/11/2021 11/03/2022 12/09/2021 18/02/2023 22/04/2023 12/11/2023 11/06/2024 07/04/2025 07/04/2025 2021 Grant date Expiry date 12/09/2018 20/11/2018 18/02/2019 22/04/2020 13/10/2020 11/06/2021 12/09/2021 20/11/2020 18/02/2023 22/04/2023 12/11/2023 11/06/2024 Balance at Granted the start of the year Exercised Forfeited Balance at the end of the year 247,059 520,000 653,943 2,232,387 620,685 - - - - - - 11,000,000 - 2,000,000 4,274,074 13,000,000 (49,338) (103,844) - - - - - (153,182) (197,721) - (416,156) - - 653,943 - 2,232,387 - 620,685 - 11,000,000 - 2,000,000 (613,877) 16,507,015 Balance at Granted the start of the year Exercised Forfeited Balance at the end of the year 247,059 512,820 520,000 653,943 - - - - - 2,232,387 620,685 - 1,933,822 2,853,072 - (189,320) - - - - (189,320) - 247,059 (323,500) - - 520,000 - 653,943 - 2,232,387 - 620,685 (323,500) 4,274,074 The weighted average remaining contractual life of Performance Rights outstanding at the end of the financial year was 2.47 years (2021: 1.98 years). For the Performance Rights granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price Expected Dividend at grant date volatility yield Risk-free Fair value interest rate at grant date 29/11/2021 29/11/2021 11/03/2022 11/03/2022 07/04/2025 07/04/2025 07/04/2025 07/04/2025 $0.225 $0.225 $0.145 $0.145 60% 60% 60% 60% - - - - 0.92% 0.92% 1.77% 1.77% $0.0970 $0.0540 $0.0720 $0.0160 84 109 Spirit Technology Solutions Ltd Notes to the financial statements 30 June 2022 Note 40. Share-based payments (continued) Share-based payments expense reconciliation Issue of share options to Directors and employees under incentive option scheme Issue of Performance Rights to Directors and employees under Performance Rights plan Total share-based payments expense reconciliation Consolidated 2022 $ 2021 $ 396 325 721 396 224 620 110 85 Spirit Technology Solutions Ltd Directors' declaration 30 June 2022 In the Directors' opinion: ● ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the 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 ___________________________ James Joughin Non-Executive Chairman 24 August 2022 86 111 Independent Auditor's Report INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SPIRIT TECHNOLOGY SOLUTIONS LTD Report on the Financial Report Auditor’s Opinion We have audited the accompanying financial report of Spirit Technology Solutions Ltd (the Company) and its controlled entities (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2022, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity, and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the Directors’ Declaration of the Company and of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. In our opinion, the financial report of Spirit Technology Solutions Ltd is in accordance with the Corporations Act 2001, including: (a) 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 (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. 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 auditor independence requirements of 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 also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. Key audit matter – Impairment of goodwill and indefinite life intangibles As at 30 June 2022, the carrying value of goodwill and indefinite life intangibles totalled $67,487,000 (2021: $109,350,000), as disclosed in note 16 of the financial report. The accounting policy in respect of these assets is outlined in note 2 Intangible Assets. An annual impairment test for goodwill and other indefinite life intangibles is required under AASB 136 Impairment of Assets. Management’s testing has been flow model performed using a discounted cash (Impairment Model) to estimate the value-in-use of each Cash-Generating Unit (CGU) to which these intangible assets have been allocated. The evaluation of the recoverable amount requires the Group to exercise significant judgement in determining key assumptions in respect of each CGU, which include: • • • 5-year cash flow forecast; growth rate and terminal growth factor; and discount rate. How our audit addressed this matter Our procedures included, but were not limited to, assessing and challenging: • • • • • the appropriateness of Management’s determination of each CGU to which goodwill and indefinite life intangibles are allocated; the application of an indefinite useful life to these intangible assets; the arithmetic accuracy of the Impairment Model including the calculation of the impairment expense prepared by Management in relation to the Managed Services (IT&T) CGU; the reasonableness of the financial year 2023 budget by CGU approved by the Directors, comparing to current actual results, and considering trends, strategies and outlooks; the testing of inputs used in the Impairment Model, including the approved budget; continued… PKF Melbourne Audit & Assurance Pty Ltd ABN 75 600 749 184 Level 12, 440 Collins Street, Melbourne, Victoria 3000 T: +61 3 9679 2222 F: +61 3 9679 2288 www.pkf.com.au Liability limited by a scheme approved under Professional Standards Legislation PKF Melbourne Audit & Assurance Pty Ltd is a member firm of the PKF International Limited family of separately owned firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. 87 113 Key audit matter – Impairment of goodwill and indefinite life intangibles (continued) The outcome of the impairment assessment could vary if different assumptions were applied. Current testing led to the impairment of $43,056,000 of the goodwill of the Managed Services (IT&T) CGU. The evaluation of the recoverable amount of goodwill and is an area of significant indefinite Management estimation and judgement, and a Key Audit Matter. intangibles life How our audit addressed this matter (continued) • • the determination of the discount rate applied in the Impairment Model, comparing to available industry data; the short to medium term growth rates applied in the forecast cash flow, considering historical results and available industry data; • Management’s sensitivity analysis around the key drivers of the cash flow projections, to consider the likelihood of such movements occurring sufficient to give rise to impairment beyond the level recognised; and • the appropriateness of the disclosures including those relating to sensitivities in assumptions used in note 16. Key audit matter – Revenue recognition How our audit addressed this matter The Group’s sales revenue amounted to $135,338,000 during the year (2021: $102,786,000). Note 2 Revenue Recognition describes the accounting policies applicable to distinct revenue streams in accordance with AASB 15 Revenue from Contracts with Customers. The recognition of revenue and associated unearned revenue is considered a Key Audit Matter due to the varied timing of revenue recognition relative to the different revenue streams, consideration of business combinations, and the relative complexity of processes supporting the accounting for each. Our procedures included, but were not limited to, the following: • • • assessing Management’s alignment of the Group accounting policy with the requirements of AASB 15 and application of the policy to the revenue recognition processes, focusing on key areas of risk in respect of Management’s determination of: - performance obligations; - - - recognition at point of time or over time; significant judgements and estimates; and the impacts of business combinations. reconfirming and assessing the design of controls; testing the consistent operation of the processes designed to account for the recognition of revenue and related costs of sale, against the design of the Group’s accounting policies, using the following techniques: - for a sample of contracts across each revenue stream, evaluating the contracts and agreeing recognised revenue to the records accumulated as inputs to the financial statements, while also assessing the timing of revenue recognition against the satisfaction of performance obligations, whether related to product delivery or period of service provision; - assessing the accuracy of revenue and related costs cut off, the accuracy of accrued revenue, and completeness of deferred revenue; and • utilising analytical review to assess the reasonableness of tested revenue streams. Other Information The Directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2022 but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report. 114 88 In connection with our audit of the financial report, our responsibility is to read the other information and 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. If based on the work we have performed, we conclude that there is a material misstatement of this information, we are required to report that fact. We have nothing to report in this regard. Directors’ Responsibilities for the Financial Report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individual or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher intentional omissions, than for one resulting from error, as fraud may misrepresentations, or the override of internal control. involve collusion, forgery,  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.    Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and other related disclosures made by the Directors. Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the Group financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. 89 115 From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Auditor’s Opinion We have audited the Remuneration Report included in the Directors’ report for the year ended 30 June 2022. In our opinion, the Remuneration Report of the Company for the year ended 30 June 2022, complies with section 300A of the Corporations Act 2001. 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 responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PKF Melbourne, 24 August 2022 Steven Bradby Partner 116 90 Additional Shareholder Information The shareholder information set out below was applicable as at 12 September 2022. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Number Number of holders of % of Number Number of holders of % of Number Number of holders of % of of ordinary shares ordinary shares ordinary shares of unquoted options unquoted options unquoted options of performance rights performance rights Performance rights 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over 188 942 612 26,389 2,805,139 4,847,071 1,158 43,203,759 361 613,841,221 3,261 664,723,579 0.00% 0.42% 0.73% 6.50% 92.35% 100.00% - - - - - - - - 2 18,000,000 100.00% 2 18,000,000 100.00% - - - - - - - - - - - - 5 18,289,748 5 18,289,748 Holding less than a marketable parcel 1,358 4,195,687 0.63% - - - - - - - - - 100.00% 100.00% - Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Ordinary shares % of total shares issued Number held 79,244,922 UBS NOMINEES PTY LTD MR PETER DIAMOND & MRS DIANA DIAMOND

68,000,000 CITICORP NOMINEES PTY LIMITED 55,054,464 CRAZY DIAMOND PTY LTD 39,000,000 J P MORGAN NOMINEES AUSTRALIA PTY LIMITED 24,287,211 HARB HOLDINGS PTY LTD 20,547,945 MARQUEE HOLDINGS PTY LTD 20,547,945 HURACAN HOLDINGS PTY LTD 17,996,664 BRIGGS GROUP CONSULTING PTY LTD 12,606,789 WADE TECHNOLOGIES PTY LTD 12,578,750 QUANTUM 777 PTY LTD 10,508,095 CS FOURTH NOMINEES PTY LIMITED 8,769,927 NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> 8,235,469 THE BENTLEY GROUP (AUST) PTY LTD 7,546,334 NIKALA HABER 5,693,092 SEABIRD INVESTMENTS (WA) PTY LTD 5,500,000 BRISPOT NOMINEES PTY LTD 5,439,253 PENBURY GRANGE PTY LTD 5,039,936 MDJD PTY LTD 5,000,000 5,000,000 CHEMBANK PTY LIMITED B & R JAMES INVESTMENTS PTY LIMITED 5,000,000 11.92 10.23 8.28 5.87 3.65 3.09 3.09 2.71 1.90 1.89 1.58 1.32 1.24 1.14 0.86 0.83 0.82 0.76 0.75 0.75 0.75 Unquoted equity securities Unquoted options over ordinary shares on issue Performance rights over ordinary shares on issue 421,596,796 63.43 Number on issue Number of holders 18,000,000 18,289,748 18,289,748 2 5 119 Substantial holders Substantial holders in the Company, as disclosed in substantial holding notices given to the Company, are set out below: Ordinary shares % of total shares issued Number held CRAZY DIAMOND PTY LTD / PETER + DIANA DIAMOND ATF (PETER + DIANA DIAMOND SUPER FUND) REGAL FUNDS MANAGEMENT PTY LTD TIGA TRADING PTY LTD THORNEY OPPORTUNITIES LTD THORNEY TECHNOLOGIES LTD ELIE AYOUB 107,000,000 79,604,094 52,141,281 52,141,281 52,141,281 38,456,945 16.10 11.98 7.84 7.84 7.84 5.79 Voting rights The voting rights attached to each class of equity security are set out below: Ordinary shares All issued shares carrying voting rights on a one-for-one basis. Unquoted options There are no voting rights attached to unquoted options. Performance rights There are no voting rights attached to performance rights. There are no other classes of equity securities. Corporate Governance Statement The Company’s 2022 Corporate Governance Statement is available on the Company’s website at: https://www.spirit.com.au/investor-centre/ Annual General Meeting Spirit Technology Solutions Ltd advises that its Annual General Meeting will be held on Thursday, 17 November 2022. The time and other details relating to the meeting will be advised in the Notice of Meeting to be sent to all shareholders and released to ASX in due course. In accordance with ASX Listing Rules and the Company’s Constitution, the closing date for receipt of nominations for the position of Director are required to be lodged at the registered office of the Company by 5.00pm (AEDT) on 6 October 2022. 120 Corporate Directory Auditor PKF Melbourne Audit & Assurance Pty Ltd Level 12, 440 Collins Street Melbourne, Victoria 3000 Stock exchange listing Spirit Telecom Limited securities are listed on the Australian Securities Exchange (ASX code: ST1) ACN 089 224 402 Website spirit.com.au Directors James Joughin (Non-Executive Chairman) James Joughin (Non-Executive Chairman) Julian Challingsworth (CEO & Managing Director) Julian Challingsworth (CEO & Managing Director) Julian Haber (Executive Director) Julian Haber (Executive Director) Gregory Ridder (Non-Executive Director) Gregory Ridder (Non-Executive Director) Michelle Bendschneider (Non-Executive Director) Michelle Bendschneider (Non-Executive Director) Company secretary Melanie Leydin Registered office Level 4, 100 Albert Road South Melbourne, Victoria 3205 Phone: 03 9692 7222 Principal place of business Level 2, 19-25 Raglan Street South Melbourne, Victoria 3205 Phone: 1300 007 001 Share register Automic Group Level 5, 126 Phillip Street Sydney, New South Wales 2000 Phone: 1300 288 664 (within Australia) +61 (0) 2 9698 5414 (International) 122 Annual Report 2022 Thanks for reading. Annual Report 2022 123 Locations Victoria 19-25 Raglan Street, South Melbourne VIC 3025 Level 11, 14 - 16 Mason Street, Dandenong VIC 3175 Western Australia 1st Floor, 27 Teddington Road, Burswood WA 6100 New South Wales Level 14, 130 Pitt Street, Sydney NSW 2000 Level 6, 379 Kent Street, Sydney NSW 2000 46A Bultje Street, Dubbo NSW 2830 Level 4, 460 Church Street, Parramatta NSW 2150 Queensland Level 7, 60 Edward Street, Brisbane City QLD 4000 5 Cribb Street, Milton QLD 4064 5 Commercial Dr, Ashmore QLD 4214 P 1800 007 001 E Investor@Spirit.com.au W Spirit.com.au/Investor-Centre 

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