Structural Monitoring Systems
Annual Report 2021

Plain-text annual report

STRUCTURAL MONITORING SYSTEMS PLC COMPANY NUMBER 4834265 ANNUAL REPORT 2021 Corporate Directory Board of Directors Will Rouse Executive Chairman R. Michael Reveley Non Executive Director Stephen Forman Non Executive Director Sam Wright Non Executive Director Officers Toby Chandler Chief Executive Officer Sam Wright Company Secretary Coporate Office Suite 116, 1 Kyle Way Claremont WA 6010 +61 8 6161 7412 Tel: Fax: +61 8 9467 6111 Email: sms@smsystems.com.au United Kingdom Office & Registered Office The Old Court, 8 Tufton Street Ashford Kent TN23 1PF United Kingdom Canada Office 15/1925 Kirschner Road Kelowna BC. Canada V1Y 4N7 Tel: 250-763-588 Share Registry Computershare Investor Centre Pty Ltd GPO Box 2975 Melbourne VIC 3001 Enquiries (within Australia) 1300 850 505 Enquiries (from Overseas) +61 3 9415 4000 www.investorcentre.com/contact Stock Exchange Listing Australian Securities Exchange (Home Exchange: Perth, Western Australia) Code: SMN Structural Monitoring Systems Plc Website www.smsystems.com.au Structural Monitoring Systems Plc Mailing Address PO Box 661 Nedlands Western Australia 6909 Auditors Elderton Audit (UK) Level 2, 267 St George’s Terrace Perth WA 6000 Australia 2 Contents Strategic Report Directors’ Report Statement of Profit or Loss and Other Comprehensive Income Statement of Financial Position Statement of Cash Flows Statement of Changes In Equity Notes to the Financial Statements Independent Auditors' Report Shareholder Information Important Notice 4 9 19 20 21 22 24 62 67 Structural Monitoring Systems Plc (the Company) is incorporated in the United Kingdom under the laws of England and Wales. The Company is not subject to Chapters 6, 6A, 6B and 6C of the Australian Corporations Act 2001 dealing with the acquisition of shares (including substantial holdings and takeovers). CRACK DETECTION AND MONITORING 3 Strategic Report Review of operations Structural Monitoring Systems Plc Structural Monitoring Systems Plc (“SMS”, the “Group” or the “Company”), recorded a solid result for 2021 in spite of unprecedented economic conditions brought about by the Covid pandemic. Its Canadian-based wholly-owned subsidiary Anodyne Electronics Manufacturing Corp (“AEM”), logged total sales for the 2021 financial year of $15.340m (excluding intercompany sales), a decrease of 20% over the prior year. Cash generation through the year was strong with a total year-end Group cash balance of $2.381 million, net of borrowings (2020: $2.065 million), an increase of 15% year on year. For a second consecutive year the Group achieved a positive cashflow from operating activities. As a result, the Group has been able to devote resources to research and development, invest in new manufacturing equipment and will relocate to a new purpose-built manufacturing facility all of which will increase product lines, manufacturing efficiency, profit margins and enhance shareholder value in the years ahead. This has been achieved without resorting to capital markets and a dilution of shareholder value. Subsequent to the reporting date SMS has executed a key acquisition transaction purchasing Eagle Audio, via its wholly-owned subsidiary Anodyne Electronics Manufacturing Corp for a purchase price of C$4.118m. As a result of this milestone transaction Group annualised revenue and EBITDA are expected to increase by $3.500m and $2.200m respectively. The Eagle audio business is a simple ‘plug and play’ proposition. AEM’s existing platform scale, efficiency and production capabilities are expected to materially increase top line performance metrics with effectively zero increase in overheads. The Group is adequately funded to continue its current operations during these uncertain times and will continue to demonstrate appropriate financial restraint. The Company’s Board and CEO have carefully reviewed the Group’s cashflow outlook, in light of the timeframe remaining to the CVM™ commercialisation, and with due regard to the constantly evolving Covid pandemic. For the first half of the financial year all SMS Board and Executive/senior staff remained on an equity-only remuneration structure and an agreed material reduction in levels of remuneration. From January 2021 the same staff have reverted to normal cash-based levels of remuneration, and these were paid subsequent to the reporting date. During the year SMS appointed Sam Wright as a Non-Executive Director. Mr Wright brings significant experience and expertise in corporate governance, financial reporting and investor relations to the Group and will remain in the role of Company Secretary. Mr Wright replaces Terry Walsh who remains in the role of Head of Legal and Corporate Affairs. Anodyne Electronics Manufacturing Corporation (“AEM”) Wholly-owned SMS subsidiary, Anodyne Electronics Manufacturing Corp (“AEM”), recorded $15.619m in revenue and normalised EBITDA** for the year to 30 June 2021 of $3.363m (inc. intercompany sales on an arms-length basis). This was a particularly impressive result given the significant impact of the Covid pandemic that affected both sales and production at the platform level, while concurrent supply chain difficulties encountered at multiple times during the year compounded the overall business impact. This full year result, exceeding budget, is a tribute to the excellent team the Company has assembled in Kelowna, operating in extremely challenging conditions. Through tight expense control, and the higher margins achieved from stronger sales of AEM developed products, the Group was able to offset the effects of softer sales in contract manufactured products. Subsequent to the reporting date, as announced on 2 September 2021 AEM has acquired Eagle Audio (“Eagle”) a key acquisiton for AEM and the Group which will result in increased top line sales of $3.500m and EBITDA of $2.200m. The acquisition, which will be entirely debt funded will provide a number of significant benefits across financial performance, product offerings, customer and supplier relationships and staff development. 4 Strategic Report Structural Monitoring Systems Plc Anodyne Electronics Manufacturing Corporation (“AEM”) (continued) Looking ahead to the next financial year, SMS will continue to increase investment in R&D and sales team expansion which will result in a continuation of the transition to sales of higher margin, AEM developed products. The move to a new, vastly improved purpose-built facility in the December quarter, with the associated investment in the latest manufacturing equipment is expected to yield significant productivity improvements. Further, the new facility will provide the capacity to manufacture both the expected increased production volumes stemming directly from these R&D and sales investments, and also cater to the expected commercialisation and production ramp up of SMS’s CVM™ technology suite of products. Major equipment, inventory and staff transfer to the new facility will begin in October, and the facility is expected to be at, or close to, fully operational in late November/early December. CVM™ Commercialisation Update and Outlook 2ku Wi-Fi & APB Programmes The Federal Aviation Administration (“FAA”) has responded with questions to clarify some of the interpretive items in the data package for the Intelsat (GoGo) B737-800 2ku WiFi program and has established weekly conference calls with Delta Engineering (“DE”) to expedite the process. SMS has now received routine addressable questions and comments from the FAA via DE in regard to the Supplemental Type Certificate (“STC”) application, Alternative Methods of Compliance (“AMOC”) application and probability of detection (“POD”) test report. The majority of the comments were directed towards the NDT Manual that details how to perform the CVMTM inspection, as well as the Test Report. Revisions of these documents clarifying the points in question have now been submitted to the FAA. In turn, the FAA has asked the DE ODA to submit the Statement of Compliance. At the current juncture, SMS is not aware of any additional required information necessary for the FAA to formally issue the AMOC and STC. At time of writing, the Company expects the full STC approval to be granted well before the end of calendar year 2021. Such an outcome will enable all expected commercialisation activities related to the Company’s CVM™ technology suite to begin in earnest, with an immediate global focus on the civil and military aviation sectors – encompassing both fixed-wing aircraft and rotorcraft. Further, the Boeing Company (“Boeing”) continues to develop and proceed along the CVM™ certification process path for the B737 aft-pressure bulkhead (“APB”) application affecting a very large number of the world’s B737-NG fleet – this is fully independent to the process that has been underway for some time in relation to the Company’s STC approval steps under the authority of the FAA. Formative meetings with Boeing specialists and certification authorities, along with key FAA officials, have been held in the past month. Additionally, follow-up calls to discuss the test plan for supplementary POD data capture have been held, and the formal documentation is being drafted - following a similar process to the WiFi STC. Thus, progress to a final commercial outcome is now well advanced. FIGURE 1 TOP-DOWN VIEW OF SENSORS CVM™ Sensor connected to a vacuum source with an accurate flow meter 5 Strategic Report Structural Monitoring Systems Plc CVM™: Post-FAA Approval Marketing and Outreach The largest and most important marketing initiative to date has been to support the DE-led initiative to achieve the first FAA-approved application for CVM™. The formal approval to use CVM™ as an alternative means of inspection from the largest aerospace regulator in the world will provide the necessary “blue sky” for the rest of the industry to adopt CVM™ for use on their respective fleets. Upon formal approval, Rich Poutier, SMS Head of Global Business Development, will be in a position to: - - drive sales of CVM™ kits for those airlines that utilise all WiFi (not just GoGo) systems installed under STC and work with all major carriers to identify further use cases for CVM™ - more so given that the optimal path for regulatory approval process will be fully enacted and understood - by both SMS and the global civil aerospace industry. More than 2,594 aircraft currently in service globally are fitted with the GoGo WiFi system, 1,600 of which are based in the USA. Rich Poutier, along with key members of the SMS Board and Management team, have met on multiple occasions with executives from a significant number of the global airlines that have the GoGo system installed, and continue to keep their respective management teams up to speed on the timelines expected for formal CVM™ approval. In other activity, Delta Air Lines (“Delta”) continues to press Boeing and the FAA for additional use cases for CVM™ for the Delta fleet. The next sequential approval will very likely be for the APB structural inspection on Delta’s B737- NG fleet. To date, SMS and Delta have outfitted twenty (20) B737-NG individual aircraft with CVM™ kits and are now collecting data to support the current AMOC-approval process within Boeing. Further, Delta Tech Ops – Delta’s key technical and R&D arm – have now formally requested a quotation from SMS to outfit an additional seven (7) aircraft with APB CVM™ kits that will be included in Delta’s 2022 provisional budget. In summary, as noted on multiple occasions, the upcoming FAA approval marks the pivotal commercial inflection point whereby SMS can directly identify the global total addressable market for the CVM™ sensor technology. The next phase of marketing will be to fully engage with the largest global airlines to drive sales in 2021/22, and beyond. The priority will be for applications under the purview of the FAA and/or Boeing. However, given the extensive and ground- breaking work that has been completed to date with the world’s major regulators and OEMs – including EASA and Airbus, amongst others - SMS will be pursuing all commercial routes to fully open up multiple global markets for CVM™. 6 Strategic Report Structural Monitoring Systems Plc Analysis Using Key Financial Performance Indicators and Milestones As at 30 June 2021, the Group had approximately $2.381m cash at bank, net of non-lease liability borrowings (2020: $2.065m). In this third full year of operations since the acquisition of AEM was completed in December 2017, the Group recorded a loss for the financial year of $1.959m (2020: $2.549m). The decrease in loss was incurred due in part to lower share- based payment expenses of $1.116m (2020: $1.952m). The Group also recorded revenue during the year of $15.340m (2020: $19.095m), a decrease of 20% year on year. Other key expenses during the year were consumables and raw materials used of $8.258m (2020: $10.204m) and employee costs of $5.212m (2020: $5.277m). Revenue has reduced as a result of supply chain constraints in the second half of the year brought about by chip shortages and the Covid pandemic. In accordance with IAS 38 Intangible Assets the Group has capitalised development expenses of $0.901m (2020: $nil) incurred in the internal development of products at the commercialisation stage of development. The Group EBITDA* for the financial year was ($0.478m) (2020: ($0.991m)). Normalised EBITDA** for AEM for the year ended 30 June 2021 was $3.363m, inclusive of intercompany sales on an arms-length basis (2020: $4.178m). Loss per share for the financial year was 1.64 cents per share (2020: Loss per share 2.19 cents). Net tangible assets at the reporting date were 8.48 cents per ordinary security (2020: 8.62 cents). At the reporting date the Group had net assets of $14.013m (2020: $13.401m). The Group had trade and other receivables of $2.347m, inventory of $7.088m and intangible assets of $3.718m, including goodwill of $1.454m. The key movements during the year were a decrease in borrowings of $0.480m as cash balances net of borrowings increased by 15% during the year, ROU assets increased by $0.210m due to investment in new plant and equipment under lease. ROU lease liabilities similarly increased by $0.076m. Tax payable at year end decreased by $0.514m as a result of decreased gross profit and increased lease payments recorded by AEM for the year. Deferred tax liabilities decreased by $0.259m during the year. The only movements in equity during the year were due to Directors and senior management electing to receive compensation in the form of Performance Rights (PRs) for the first half of the year in order to preserve cash, other contractual share-based compensation and subscriptions to CDIs made by staff through the Company’s Employee Incentive Plan. *EBITDA, which is inclusive of FX gains/losses, is calculated by adding back interest costs, income tax, depreciation and amortisation expenses and deducting interest revenue from loss after tax for the year of $1.959m (2020: $2.549m). **Normalised EBITDA is calculated by adding back to EBITDA, SMS costs of $0.728m borne by AEM. 7 Strategic Report . Principal Risks and Uncertainties Structural Monitoring Systems Plc The principal risks and how they are managed are set out on page 18 of the Director’s Report. S172 Statement The Board has a duty under s172 of the Companies Act 2006 to promote the success of the Group of the benefit of its members as a whole. All decisions are made with this objective and the Board considers the long-term implications of its actions. The Group has a continuous stakeholder engagement programme in which both Executive and Non-Executive Directors participate to ensure the Board is aware of stakeholder interests. The Group believes its employees are its greatest asset and it seeks to establish policies that provide a working environment that is safe, enjoyable and rewarding. Critical to the success of the Group is its long term relationship with its suppliers and customers, as well as its shareholders. The Board believes the decisions it has made have been appropriated both to support these stakeholders and to foster stronger, long-term relationships with them. The Group is mindful of its role with its local communities and seeks to minimise the impact of its operatjons on the environment and to be a good neighbour. Overall in considering and taking decisions the Board seeks to act in the best interests of the business and all its stakeholders, treating all members fairly. The Strategic Report was signed on behalf of the Board. William Rouse Executive Chairman 30th September 2021 8 Directors’ Report Structural Monitoring Systems Plc Your directors submit their report for the year ended 30 June 2021. Directors and officers were in office for this entire period unless otherwise stated. Directors and Officers Will Rouse (Executive Chairman) Mr Rouse is an experienced businessman and finance executive focused on the acquisition and optimised growth of specialised manufacturing-related businesses. In his last role, Will acquired Simcro Ltd (“Simcro”) in 2007, a New Zealand-based export-manufacturer. Will sold his majority stake in Simcro in 2013 to The Riverside Company, a New York private equity group, retaining a 20% shareholding. Simcro then acquired two further operating businesses in NZ and Australia in 2015, with Will leading these acquisitions. Simcro was sold in 2018 to a global multinational. Mr Rouse is a Chartered Accountant. He joined the Board of SMS primarily to oversee the acquisition and management of AEM. His role expanded in 2019 to include chairing the Board and overseeing finance and audit. R. Michael Reveley (Non-Executive Director) Mr Reveley served as a managing partner, chief executive and co-CIO of SEAL Capital Ltd, a Los Angeles-based hedge fund specialising in global macro strategies designed to provide risk-adjusted absolute returns investing in an array of global markets, under all market conditions. Before forming SEAL Capital, he was a founding partner and deputy CIO at Seagate Global Advisors in Los Angeles, having earlier been director of the syndicate and derivatives group at SBC Warburg in London and New York, vice-president of global derivatives for Swiss Bank Corporation and vice-president of the global derivatives group at First Interstate Bank, where he co-managed a US$20bn derivatives portfolio. Stephen Forman (Non-Executive Director, appointed 1 November 2019) Mr Forman has over 25 years of demonstrated high-level equity capital markets experience in Australia and North America, through roles in institutional equity sales and trading, investor relations and corporate advisory with major top- tier global investment groups, including UBS and JP Morgan, the latter where Mr Forman worked for 15 years in various senior positions. Mr Forman’s current role as Managing Director with New York-based investment advisory and consulting firm, Union Square Capital Advisors saw him successfully utilise his global network to assist companies with business development and corporate communication strategies, and to diversify their share register with Australian and North American investors. Mr Forman holds a B.Comm – Hons (Accounting & Finance) from UWA and is a CFA Charterholder. Sam Wright (Non-Executive Director, appointed 14 October 2020 & Company Secretary) Mr Wright has over 15 years experience in corporate governance, statutory financial reporting and investor relations with both retail and institutional investors. He is a member of the Australian Institute of Company Directors, the Financial Services Institute of Australasia and the Chartered Secretaries of Australia. Mr Wright currently serves as a Non-Executive Director of PharmAust Limited (Oct 2008 - Present). 9 Directors' Report Structural Monitoring Systems Plc Terry Walsh (Non-Executive Director, Resigned 14 October 2020) Mr. Walsh is a highly experienced corporate counsel having led legal teams at such firms as Hancock Prospecting Pty Ltd and Rio Tinto Limited (Perth). Mr. Walsh runs a private consultancy company, providing Board, commercial, business development and corporate advisory services. He provides a key oversight role for the Company’s corporate legal affairs including contract negotiations, IP enforcement and maintenance, regulatory oversight and corporate compliance, and any future civil interactions. Admission: Supreme Court of Western Australia in February 1995. Mr Walsh currently serves as a Non-Executive Director of Nanollose Limited. During the last 3 years Mr Walsh has also served as a Non-Executive Director of Hazer Group Limited. Toby Chandler (Chief Executive Officer) Mr Chandler is Co-Founder and Chief Investment Officer of SEAL Capital Ltd, a global macro hedge fund investing in diverse global markets and financial instruments. Before forming SEAL Capital, Mr Chandler was a Partner and Portfolio Manager with private equity and macro hedge fund, Seagate Global Advisors, Inc. In prior roles, Mr Chandler was a Managing Director with Morgan Stanley Inc, New York, where he ran the Bank's Specialist Hedge Fund Desk servicing key institutional counterparties in an array of financial products, and global markets. Mr Chandler has also held several other senior bank positions including Managing Director and Head of Global Fixed Income Distribution with HSBC Securities (USA) NA, New York; other previous Executive Director positions with Morgan Stanley Inc and Morgan Stanley International Plc, London, as Head of Emerging Markets and Global Fixed Income Distribution; and Vice President with Citigroup NA, New York and Citigroup Australia. He received his B.Comm in Finance from the University of Western Australia and his Masters in Applied Finance and Investment from the Securities Institute of Australia. Principal Activities During the financial year the principal continuing activities of the Group consisted of the design and manufacture of electronic products and the provision of manufacturing services to the aviation industry. Shareholder Meetings Structural Monitoring Systems Plc held its Annual General Meeting of Shareholders as a virtual meeting on 21st January 2021 at 12.00pm ADST. All resolutions that were put were passed by a poll. Statement of Directors’ Responsibilities The directors are responsible for preparing the Strategic Report and Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare group and company financial statements for each financial year. The directors are required under the rules of the Australian Securities Exchange to prepare group and company financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”). The financial statements are required by law and IFRS adopted by the EU to present fairly the financial position of the group and the company and the financial performance of the group. The Companies Act 2006 provides in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and the company and of the profit or loss of the group and the company for that period. 10 Directors' Report Structural Monitoring Systems Plc Statement of Directors’ Responsibilities (continued) In preparing the Group and Company financial statements, the directors are required to: a. b. c. d. select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs adopted by the EU; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group’s and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the group and the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the www.smsystems.com.au website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurasdictions. 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. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Events subsequent to the reporting date Subsequent to the reporting date the Company has completed the acquisition of Canadian business, Eagle Audio via its wholly-owned subsidiary Anodyne Electronics Corporation Inc (“AEM”). The consideration for the acquisition is C$4.118m (with C$360,000 of the purchase price to be held in escrow for 12 months). As a result of the acquisition the Company expects an increase in annualised gross revenues of $3.500m per annum and an increase in normalised EBITDA of $2.200m per annum. The acquisition was funded using cash and existing line of credit facilities with HSBC Canada. A condition precendent to the facility with HSBC Canda is a deposit of US $800,000 which is to be provided by Stephen Forman, a director of the Company for a term of 12 months. Interest of 6% per annum will be paid on the deposit. The key customer segments of Eagle Audio are rotary and fixed wing aircraft (OEMs, law enforcement, EMS, CoastGuard, military, forestry and firefighting). The purchase price includes approx C$0.800m in inventory plus IP/Supplemental type certifications (“STCs”) and related process manufacturing/engineering documentation. Management is still in the process of identifying the fair value of the assets and liabilities acquired. The Group has experienced supply chain constraints and had to implement social distancing measures and a spilt shift system during the first half of the year. The impact of the Coronavirus pandemic is ongoing and has had financial impact for the Group to 30 June 2021, it is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is rapidly developing and is dependent on measures imposed by the Canadian government and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided. Other than the above no matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. Results and Dividend The operating loss, after income tax, for the year was $1.959m (2020: $2.549m). No dividends were proposed or paid during the financial year. Share Capital The impact on share capital and share premium account of the share issues during the year, is disclosed in note 23 in the notes to the financial statements. 11 Directors' Report Financial Position Structural Monitoring Systems Plc The Group reported a net loss after tax of $1.959m (2020: loss $2.549m) and an operating cash inflow of $1.698m (2020: inflow $0.342m) before tax for the year ended 30 June 2021 and reported working capital of $10.088m including cash of $2.381m as at that date. Subsequent to the reporting date the Group purchased Eagle Audio for C$4.118m funded through cash and a partial drawdown of AEM’s loan facility. A condition precedent of the loan facility is the deposit of US$800K as security, which has been provided by a director of the Company on commercial terms. The financial statements have been prepared on the going concern basis, which contemplates continuity of normal business activities, the continued financial performance of AEM, the contribution of the newly acquired business, Eagle Audio and the realisation of assets and discharge of liabilities in the normal course of business as well as the continued availability of an established operating loan facility of up to C$5 million of which C$4.3m had been drawn down as at the date of this report. The facility, which is provided by AEM’s bankers, while repayable on demand, is long standing and is secured on receivables and inventory and is subject to loan covenants. The Directors expect compliance with the covenants to continue to be met. The Directors have prepared forecasts in respect of future trading. Achievement of such forecasts would allow the entity to manage well within its current funding facilities for the foreseeable future. In developing these forecasts, the Directors have made assumptions and performed sensitivity analysis on variables such as revenues and employee costs based upon their view of the current and future economic conditions that will prevail over the forecast period of 12 months from the date of signing these financial statements. The Directors have not made any assumptions regarding generation of new revenue streams in the year ahead. The Directors and senior management will formally consider all measures which would favourably reduce/defer operational expenses should actual cash flows be less than budgeted, as they have done in previous years. The director, who has provided a deposit of US$800K as security for the AEM loan facility, has confirmed to the Board that he will not seek part or full repayment of this deposit for a period of at least 12 months from the date of this report, or until the Company elects to repay the deposit, whichever is earlier. The Directors therefore continue to adopt the going concern basis of accounting in preparing the financial statements. Directors Meetings The numbers of director’s meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Group during the financial year. Director W Rouse R M Reveley S Forman S Wright (1) T Walsh (2) Board meetings Audit committee Remuneration committee A 3 3 3 2 1 B 3 3 3 2 1 A 1 - 1 1 - B 1 - 1 1 - A 2 - 2 2 - B 2 - 2 2 - (1) Appointed 14 October 2020. Also attended 1 board meeting as a guest. (2) Resigned 14 October 2020. Also attended 2 board meetings as a guest. A – Number of meetings attended B – Number of meetings held during the time which the director held office during the year In addition to formal directors’ meetings held during the year regular executive meetings were held on a monthly basis throughout the year. 12 Directors' Report Structural Monitoring Systems Plc Research and Development The Group actively reviews technical developments in its markets with a view to taking advantage of the opportunities available to maintain and improve it’s competitive position. This action involves the design and development of structural health monitoring systems applicable to the aviation industry. Remuneration Report This report, which forms part of the Directors’ Report, outlines the remuneration arrangements in place for the key management personnel of Structural Monitoring Systems Plc for the financial year ended 30 June 2021. The remuneration report details the remuneration arrangements for key management personnel who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any Director (whether executive or otherwise) of the Group. Remuneration Policy The Remuneration Committee of the Board of Directors of Structural Monitoring Systems Plc is responsible for determining and reviewing compensation arrangements for the directors and executives. The Remuneration Committee (or the Board of directors) assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. Such officers are given the opportunity to receive their base emoluments in a variety of forms including cash and fringe benefits such as motor vehicles and expense payment plans. It is intended that the manner of payment chosen will be optimal for the recipient without creating undue cost for the company. Research and Development The Group actively reviews technical developments in its markets with a view to taking advantage of the opportunities available to maintain and improve it’s competitive position. This action involves the design and development of structural health monitoring systems applicable to the aviation industry. To assist in achieving these objectives, the Remuneration Committee links the nature and amount of executive directors’ and senior executives’ emoluments to the Company’s financial and operational performance. Executive directors and employees have the opportunity to qualify for participation in the Company Employee Incentive Plan. It is the Remuneration Committee’s policy that employment agreements shall be entered into with the Managing Director and all other executives. The current employment agreement is consistent for all executives. The agreement has 3 months’ notice period and provides for payment of an amount of three months’ salary at the end of the three month notice period. Any options or performance rights held lapse when the service period is completed. 13 Directors' Report Structural Monitoring Systems Plc Remuneration of Directors and Executives Details of the nature and amount of each major element of remuneration of each director of the Group and each of the Group executives who receive the highest remuneration are: Salary & Fees Post Employment Share-based payments Total Performance rights in lieu of fees Superannuation Performance* rights Shares** $ $ $ $ $ Cash $ 30 June 2021 Directors Will Rouse R Michael Reveley Stephen Forman Sam Wright (1) Terry Walsh (2) Executive Toby Chandler Total 100,000 121,826 57,500 70,000 70,000 - 81,892 20,219 70,324 67,461 68,750 178,262 366,250 539,984 Salary & Fees Post Employment 30 June 2020 Cash Performance rights in lieu of fees Superannuation $ $ $ Directors Will Rouse R. Michael Reveley Stephen Forman (3) Terry Walsh Executive Toby Chandler Total (1) Appointed 14 October 2020 - - 20,369 26,256 - 46,625 142,588 217,053 57,823 102,486 218,662 738,612 - - - - - - - - - - 138,258 107,774 67,439 - 66,834 - - - 34,848 11,603 426,918 247,166 157,658 140,324 113,912 223,269 89,250 559,531 571,588 167,687 1,645,509 Share-based payments Total Performance rights Shares $ $ $ 22,250 - - - 33,375 55,625 - - - - - - 164,838 217,053 78,192 131,236 252,037 843,356 2,494 - 2,494 (2) Resigned 14 October 2020. Mr Walsh receives a salary of $115,000 per annum including superannuation as legal counsel. (3) Appointed 1 November 2019 *$446,394 in Performance Rights (PRs) Share-based payment remuneration relates to PRs granted between December 2017 subject to share price hurdles which lapsed during the year ended 30 June 2021. A further $34,848 in PRs remuneration lapsed subsequent to the reporting date. No benefit was received by any director or executive for PRs which lapsed during the year. **Two directors and an executive participated in the Company’s Employee Incentive Plan to subscribe for shares during the year. The discount to market price paid for those shares is disclosed in the table above. Details of the transactions are included in note 22 Share-based payments. 14 Directors' Report Share-based compensation Structural Monitoring Systems Plc At the 2020 AGM, 91% of the votes received supported the issue of the performance rights. The Company did not receive any feedback at the AGM regarding its remuneration practices. The value of performance rights (PRs) granted, converted and lapsed for directors and executive as part of compensation during the year ended 30 June 2021 are set below: Name Directors Will Rouse R. Michael Reveley Stephen Forman Sam Wright Terry Walsh Executive Toby Chandler Value of PRs granted Value of PRs converted $ $ Value of PRs lapsed $ 121,826 81,892 46,919 70,324 67,461 178,262 293,815 - 118,364 - - - 790,875 1,032,725 - - - 1,919,050 The terms and conditions of performance rights are set out in Note 22: Share-based payments. The number of PRs granted was determinded in lieu of reduced fees for the period July to December 2020 to preserve cash. Fees for the period January to June 2021 reverted to a cash basis and were paid subsequent to the reporting date. Service Agreements Remuneration and other terms of employment for Directors and executives are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Agreement commenced: Term of agreement: Details: Will Rouse Executive Chairman 1 January 2021 no fixed term Base salary of AU$200,000, to be reviewed annually by the Remuneration Committee. R. Michael Reveley Non-Executive Director 1 January 2021 no fixed term Base salary of AU$115,000 to be reviewed annually by the Remuneration Committee. Stephen Forman Non-Executive Director 1 January 2021 no fixed term Base salary AU$140,000 to be reviewed annually by the Remuneration Committee. Sam Wright Non-Executive Director & Company Secretary 1 January 2021 no fixed term Base salary AU$140,000 to be reviewed annually by the Remuneration Committee. 15 Directors' Report Structural Monitoring Systems Plc Name: Title: Agreement commenced: Term of agreement: Details: Toby Chandler Chief Executive Officer 1 January 2021 no fixed term Base salary of AU$275,000 to be reviewed annually by the Remuneration Committee. Directors and executives have no entitlement to termination payments in the event of removal for misconduct. Shareholdings of Directors Shares held in Structural Monitoring Systems Plc: 30 June 2021 Directors Will Rouse R. Michael Reveley Stephen Forman Sam Wright (1) Terry Walsh (2) Total 30 June 2020 Directors Will Rouse R. Michael Reveley Terry Walsh Stephen Forman (3) Balance at beg of year Shares held on appointment/ resignation date Granted as Remuneration Exercise of PRs Net Change Other Balance at end of year No. No. No. No. No. No. 270,588 2,654,351 1,900,000 - - - - 1,620,000 64,500 (64,500) 4,889,439 1,555,500 Balance at beg of year Shares held on appointment/ resignation date - - - - - - 435,428 450,000 1,156,016 - (182,907) 2,471,444 117,308 (277,330) 1,739,978 - - - - 1,620,000 - 552,736 (10,237) 6,987,438 Granted as Remuneration Exercise of PRs Net Change Other Balance at end of year No. No. No. No. No. No. 150,000 2,964,352 64,500 - - - - 1,900,000 - - - - - 120,588 - 270,588 - - - (310,001) 2,654,351 - - 64,500 1,900,000 120,588 (310,001) 4,889,439 Total 3,178,852 1,900,000 (1) Appointed 14 October 2020 (2) Resigned 14 October 2020 (3) Appointed 1 November 2019 Performance Rights Holdings of Directors Performance rights held over shares in Structural Monitoring Systems Plc: 30 June 2021 Directors Will Rouse R. Michael Reveley Stephen Forman Sam Wright (1) Terry Walsh (2) Total Balance at beg of year Granted during the year Exercised during the year Held on appointment/ resignation date Balance at end of year No. No. No. No. No. 795,588 814,904 267,308 - 251,471 2,129,271 264,840 178,025 103,954 155,813 - (435,428) - (117,308) - - (625,000) (600,000) - - (251,471) - 392,929 253,954 155,813 - 702,632 (552,736) (1,476,471) (802,696) 16 Directors’ Report Structural Monitoring Systems Plc Performance Rights Holdings of Directors (continued) Balance at beg of year Granted during the year Exercised during the year Held on appointment/ resignation date Balance at end of the year No. No. No. No. No. 625,000 600,000 150,000 - 291,176 (120,588) 214,904 101,471 267,308 - - - 1,375,000 874,859 (120,588) - - - - - 795,588 814,904 251,471 267,308 2,129,271 30 June 2020 Directors Will Rouse R. Michael Reveley Terry Walsh Stephen Forman (3) (1) Appointed 14 October 2020 (2) Resigned 14 October 2020 (3) Appointed 1 November 2019 Additional information The earnings of the Group for the 5 years to 30 June 2021 are summarised below: Sales revenue EBITDA EBIT Loss after income tax 2021 $000’ 2020 $000’ 2019 $000’ 2018 $000’ 2017 $000’ 15,340 (478) (1,445) (1,959) 19,095 (991) (2,043) (2,549) 16,380 (2,827) (3,488) (3,626) 7,437 (3,651) (3,966) 309 (1,380) (1,444) (3,895) (1,380) The factors that are considered to affect total shareholders return (“TSR”) are summarised below: Share price at financial year end ($) Total dividends declared ($) Basic earnings per share (cents) 2021 $000’ 2020 $000’ 2019 $000’ 2018 $000’ 2017 $000’ 0.36 - (1.64) 0.43 - (2.19) 0.65 - (3.51) 0.88 1.45 - - (3.55) (1.35) This concludes the Remuneration Report Information Given to Auditors Each of the directors has confirmed that so far as he is aware, there is no relevant audit information of which the Group's auditors are unaware, and that he has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Group's auditors are aware of that information. Creditor Payment Policy The Group’s policy during the year was to pay suppliers in accordance with agreed terms and this policy will continue for the year ended 30 June 2021. The Group does not follow a specific code or standard in respect of such creditors. As at 30 June 2021, the Group’s trade creditors represented 66 days’ purchases (2020: 42 days). 17 Directors' Report Financial instruments and risks Structural Monitoring Systems Plc The Board has overall responsibility for the determination of the Group's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the CEO. The Board receives monthly reports from the finance function through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below: The Group is exposed through its operations to the following financial risks: - credit risk; - liquidity risk; - foreign exchange risk The Group is exposed to the usual credit risk associated with selling on credit and manages this through credit control procedures. AEM receivables are reviewed each month as part of the routine monthly operating review conducted by the Board. Further information is provided in note 24 in the notes to the financial statements. As a result of operations in Canada, USA, Australia and United Kingdom the Group’s assets and liabilities can be affected by movements in the C$/A$, US$/A$ and UK£/A$ exchange rates. The Group also has transactional currency exposures. Such exposure arises from sales or purchases by an operating unit in currencies other than the unit’s functional currency. The Group is exposed to foreign currency risk following the acquisition of a Canadian-based subsidiary and the risk could increase in the future as international commercialisation of the Group’s technologies increase. There is currently no form of currency hedging or risk strategy in place, but this policy will be reviewed and strategies implemented once the review is complete. Liquidity risk arises from the Group's management of working capital. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group monitors forecast cash inflows and outflows on a monthly basis. The Group has an established operating loan facility for up to C$5 million to assist with day to day operating requirements. Business risks and uncertainties The Group has a reliance on a key customer at the present time. The customer accounts for $7.076 million of revenues totalling $15.340 million. The relationship with the customer is secured by a licence agreement and the Group is diversifying its customer base. The ongoing impact of the Coronavirus (COVID-19) pandemic is uncertain and the Group was impacted by supply chain constraints, demand uncertainty within the industry, social distancing measures and the move to a spilt shift system during the year ended 30 June 2021. It is not practicable to estimate the potential impact, positive or negative, after the reporting date. The pandemic may affect future travel, movement of labour and enforce supply chain constraints. The Company continues to make progress towards the commercialisation of its comparitive vacuum monitoring technology (CVM™). Further details can be found in the Strategic Report. Future developments The Directors have discussed the future developments for the AEM business and CVM™ technology within the Strategic Report on pages 4 to 5, in accordance with Section 414C of the Companies Act 2016. By order of the Board Will Rouse Executive Chairman 30th September 2021 18 Statement of Profit or Loss and Other Comprehensive Income For the Year Ended 30 June 2021 Note Continuing operations Revenue Sales Cost of sales Gross profit Other income Loss on debt for equity swap Depreciation and amortisation Employee expenses Impairment charges Occupancy expenses 4 4 5 Research and development expenses Sales and marketing Share-based payment expense 22 Administrative expenses Operating loss before finance costs and tax Finance income Finance costs Foreign exchange (losses)/gains Income tax expense Loss after finance costs and tax from continuing operations 6 Structural Monitoring Systems Plc Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 15,340 19,095 (8,258) (10,204) 7,082 664 (52) (967) (5,212) - (61) (181) (284) (1,116) (1,114) 8,891 73 (127) (1,052) (5,277) - (62) (345) (738) (1,952) (1,604) - - - 337 (52) (2) 12 - 12 73 (127) (39) (1,070) (1,075) (387) (61) (41) (340) (446) (62) - (585) (1,116) (1,952) (382) (472) (1,241) (2,193) (3,114) (4,673) 1 (19) (204) (496) 3 (32) 150 (477) - (3) - - - (9) (1) - (1,959) (2,549) (3,117) (4,683) Loss attributable to members of the parent (1,959) (2,549) (3,117) (4,683) Other comprehensive income/(loss) Items that may be reclassified subsequently to profit or loss: Foreign currency translation Total comprehensive income/(loss) for the year Loss for the year attributable to owners of Structural Monitoring Systems Plc Earnings per share (cents per share) Basic for loss from continuing operations Diluted for loss from continuing operations 100 100 (273) (273) - - - - (1,859) (2,822) (3,117) (4,683) 7 7 (1.64) (1.64) (2.19) (2.19) The accompanying notes form an integral part of the financial statements. 19 Statement of Financial Position As at 30 June 2021 Structural Monitoring Systems Plc Company number: 4834265 Assets Non-current assets Loans to subsidiaries Plant and equipment Right-of-use assets Intangible assets and goodwill Total non-current assets Current assets Trade receivables Other receivables Inventory Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Deposits Lease liabilities Provisions Total current liabilities Non-current liabilities Loans from subsidiaries Lease liabilities Deferred tax Total non-current liabilities Total liabilities Net assets Equity attributable to equity holders of the parent Issued capital Share premium reserve Accumulated losses Other reserves Total equity Consolidated Parent Note 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 14 11 12 13 8 9 10 15 16 17 18 19 14 18 6 23 23 23 - 444 373 3,718 4,535 2,347 511 7,088 2,381 12,327 16,862 - 342 163 3,201 3,706 2991 363 7,122 2,545 13,021 16,727 9,944 11,397 3 - - 5 - 9,947 11,402 86 22 136 - 244 3 116 184 - 303 10,191 11,705 1,845 1,504 434 245 - - 268 126 480 43 208 640 - - - - - 43 75 - 2,239 2,875 434 363 - 70 539 609 - 54 397 451 - - - - 921 19 - 940 2,848 14,014 3,326 13,401 434 1,303 9,757 10,402 31,949 36,492 31,946 35,967 31,949 36,492 31,946 35,967 (53,194) (56,028) (57,056) (58,732) (1,233) 14,014 1,516 (1,628) 1,221 13,401 9,757 10,402 The accompanying notes form an integral part of the financial statements. Approved by the Board and authorised for issue on 30th September 2021 ………………………………………. W. Rouse, Executive Chairman 20 Statement of Cash Flows For the Year Ended 30 June 2021 Structural Monitoring Systems Plc Consolidated Parent Note 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 16,569 19,499 254 82 (14,853) (19,041) (880) (1,507) 1 (19) 3 (119) - (3) - (10) 20(a) 1,698 342 (629) (1,435) (407) (119) - - 1,291 223 (629) (1,435) Cashflows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Net cash provided by/(used in) operating activities before tax paid Income tax paid Net cash provided by/(used in) operating activities Cashflows from investing activities Payments for development expenses capitalised Payments for plant and equipment Net cash used in investing activities Cashflows from financing activities Loan from subsidiaries Proceeds from issue of shares Proceeds pending issue of shares Issue costs Repayment of lease liabilities Net cash provided by financing activities Net increase in cash held Cash and cash equivalents at beginning of year Effect of foreign exchange on balances Net cash and cash equivalents at end of year 20(b) Cash and cash equivalents Borrowings Net cash and cash equivalents at end of year The accompanying notes form an integral part of the financial statements. (877) (287) (1,164) - 503 - (18) (458) 27 154 - (78) (78) - 887 43 (12) (386) 532 677 2,065 1,562 162 2,381 2,381 - 2,381 (174) 2,065 2,545 (480) 2,065 - - - 144 144 503 - (18) - - - - 592 887 43 (12) (75) 629 1,435 - - - - - - - - - - - - - - 21 Statement of Changes in Equity For the Year Ended 30 June 2021 Structural Monitoring Systems Plc Consolidated At 1 July 2019 Loss for the year Foreign currency translation Total comprehensive loss for the year Transactions with owners: Issue of performance rights to directors and staff/consultants Issue of shares to directors and staff/ consultants Conversion of performance rights to shares Share issue costs Total transactions with owners Issued capital Accumulated losses Share premium reserve Share- based payments reserve Foreign currency translation reserve Total $000’ $000’ $000’ $000’ $000’ $000’ 31,932 (54,543) 35,106 1,586 (1,703) 12,378 - - - - 10 4 - 14 (2,549) - (2,549) - 515 549 - 1,064 - - - - - - - - (2,549) (273) (273) (273) (2,822) 2,459 873 - - (553) (12) 861 - 1,906 3,492 - - - - - 2,459 1,398 - (12) 3,845 (1,976) 13,401 At 30 June 2020 31,946 (56,028) 35,967 At 1 July 2020 Loss for the year Foreign currency translation Total comprehensive loss for the year Transactions with owners: Issue of performance rights to directors and staff/consultants Issue of shares to directors and staff/ consultants Conversion of performance rights to shares Expiry of performance rights Share issue costs Total transactions with owners 31,946 - - - - 2 1 - - 3 (56,028) (1,959) - (1,959) - - 815 3,978 - 4,793 35,967 3,492 (1,976) - - - - - - - 1,467 543 478 - - (18) 525 (816) (3,978) - (2,849) - 100 100 - - - - - - 13,401 (1,959) 100 (1,859) 1,467 1,023 - - (18) 2,472 At 30 June 2021 31,949 (53,194) 36,492 643 (1,876) 14,014 22 Statement of Changes in Equity For the Year Ended 30 June 2021 Structural Monitoring Systems Plc Issued capital Accumulated losses Share premium reserve Share- based payments reserve Foreign currency translation reserve Total Parent At 1 July 2019 Loss for the year Total comprehensive loss for the year Transactions with owners: Issue of performance rights to directors and staff Issue of shares to directors and staff Conversion of performance rights to shares Share issue costs Total transactions with owners $ 31,932 - - - 10 4 - 14 $ (55,113) (4,683) (4,683) - 515 549 - 1,064 $ $ $ 35,106 1,586 (2,271) - - - - - 2,459 873 - - (553) (12) 861 - 1,906 - - - - - - - $ 11,240 (4,683) (4,683) 2,459 1,398 - (12) 3,845 At 30 June 2020 31,946 (58,732) 35,967 3,492 (2,271) 10,402 At 1 July 2020 Loss for the year Total comprehensive loss for the year Transactions with owners: Issue of performance rights to directors and staff Issue of shares to directors and staff Conversion of performance rights to shares Expiry of performance rights Share issue costs Total transactions with owners 31,946 (58,732) 35,967 3,492 (2,271) - - - 2 1 - - 3 (3,117) (3,117) - - 815 3,978 - 4,793 - - - - - 1,467 543 478 - - (18) 525 (816) (3,978) - (2,849) - - - - - - - - At 30 June 2021 31,949 (57,056) 36,492 643 (2,271) The accompanying notes form an integral part of the financial statements. 10,402 (3,117) (3,117) 1,467 1,023 - - (18) 2,472 9,757 23 Notes to the Financial Statements For the Year Ended 30 June 2021 1. Corporate information and authorisation of financial statements Structural Monitoring Systems Plc The financial statements of Structural Monitoring Systems Plc for the year ended 30 June 2021 were authorised for issue in accordance with a resolution of the directors on 30 September 2021 and the statements of financial position were signed on the Board’s behalf by Will Rouse. Structural Monitoring Systems Plc is a public limited company incorporated and domiciled in the United Kingdom. The Company’s ordinary shares, when held as a Chess Depository Interest (CDI) and registered on the CDI register, are tradable on the Australian Securities Exchange (ASX). Ordinary shares on the UK register cannot be traded on the Australian Securities Exchange. 2. (a) Summary of significant accounting policies Basis of preparation The consolidated financial statements and those of the parent entity are presented in Australian dollars which is the Company’s functional currency and are rounded to the nearest Australian dollar. The average AUD:GBP rate for the year was 0.5546 (2020: 0.5328) and the reporting date AUD:GBP spot rate was 0.5429 (2020: 0.5586). The average AUD:CAD rate for the year was 0.9572 (2020: 0.9003) and the reporting date AUD:CAD spot rate was 0.9318 (2020: 0.9387). CAD is the functional currency of Anodyne Electronics Manufacturing Corp (AEM), a wholly-owned subsidiary of the Company. (b) Financial Position The Group reported a net loss after tax of $1.959m (2020: loss $2.549m) and an operating cash inflow of $1.698m (2020: inflow $0.342m) before tax for the year ended 30 June 2021 and reported working capital of $10.088m including cash of $2.381m as at that date. Subsequent to the reporting date the Group purchased Eagle Audio for C$4.118m funded through cash and a partial drawdown of AEM’s loan facility. A condition precedent of the loan facility is the deposit of US$800K as security, which has been provided by a director of the Company on commercial terms. The financial statements have been prepared on the going concern basis, which contemplates continuity of normal business activities, the continued financial performance of AEM, the contribution of the newly acquired business, Eagle Audio and the realisation of assets and discharge of liabilities in the normal course of business as well as the continued availability of an established operating loan facility of up to C$5 million of which C$4.3m had been drawn down as at the date of this report. The facility, which is provided by AEM’s bankers, while repayable on demand, is long standing and is secured on receivables and inventory and is subject to loan covenants. The Directors expect compliance with the covenants to continue to be met. The Directors have prepared forecasts in respect of future trading. Achievement of such forecasts would allow the entity to manage well within its current funding facilities for the foreseeable future. In developing these forecasts, the Directors have made assumptions and performed sensitivity analysis on variables such as revenues and employee costs based upon their view of the current and future economic conditions that will prevail over the forecast period of 12 months from the date of signing these financial statements. The Directors have not made any assumptions regarding generation of new revenue streams in the year ahead. The Directors and senior management will formally consider all measures which would favourably reduce/defer operational expenses should actual cash flows be less than budgeted, as they have done in previous years. The director, who has provided a deposit of US$800K as security for the AEM loan facility, has confirmed to the Board that he will not seek part or full repayment of this deposit for a period of at least 12 months from the date of this report, or until the Company elects to repay the deposit, whichever is earlier. The Directors therefore continue to adopt the going concern basis of accounting in preparing the financial statements. (c) Statement of compliance The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union as they apply to the financial statements of the Group for the year ended 30 June 2021 and are applied in accordance with the Companies Act 2006. The Group and the Company have not adopted any standards or interpretations in advance of the required implementation dates. It is not expected that adoption of standards or interpretations which have been issued by the International Accounting Standards Board but have not been adopted will have a material impact on the financial statements for the year ended 30 June 2021. See note 2(d) for further consideration. 24 Notes to the Financial Statements For the Year Ended 30 June 2021 2. Summary of significant accounting policies (continued) (d) Accounting standards and Interpretations Structural Monitoring Systems Plc New Accounting Standards and Interpretations not yet mandatory or early adopted The Directors have also reviewed all of the new and revised Standards and Interpretations in issue not yet adopted for the year ended 30 June 2021. As a result of this review the Directors have determined that there is no material impact of the Standards and Interpretations in issue not yet adopted on the Group and, therefore, no change is necessary to Group accounting policies. (e) Basis of consolidation The consolidated financial statements incorporate the assets, liabilities and results of entities controlled by Structural Monitoring Systems Plc at the end of the reporting period. A controlled entity is any entity over which Structural Monitoring Systems Plc 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. Where controlled entities have entered or left the Group during the year, the financial performance of those entities is included only for the period of the year that they were controlled. In preparing the consolidated financial statements, all inter-group balances and transactions between entities in the consolidated group have been eliminated in full on consolidation. Non-controlling interests, being the equity in a subsidiary not attributable, directly or indirectly, to a parent, are reported separately within the equity section of the consolidated statement of financial position and statement of comprehensive income. The non-controlling interests in the net assets comprise their interests at the date of the original business combination and their share of changes in equity since that date. Business Combinations Business combinations occur where an acquirer obtains control over one or more businesses. A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The business combination will be accounted for from the date that control is attained, whereby the fair value of the identifiable assets acquired and liabilities (including contingent liabilities) assumed is recognised (subject to certain limited exemptions). When measuring the consideration transferred in the business combination, any asset or liability resulting from a contingent consideration arrangement is also included. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability is remeasured at the end of each reporting period to fair value, recognising any change to fair value in profit or loss, unless the change in value can be identified as existing at acquisition date. All transaction costs incurred in relation to the business combination are expensed to the statement of profit or loss and other comprehensive income. The acquisition of a business may result in the recognition of goodwill or a gain from a bargain purchase. (f) Foreign currency translation (i) Functional currency Items included in the financial statements of each of the companies in the Group are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The functional currency of Structural Monitoring Systems Plc is Australian dollars and its presentation currency is Australian dollars. The functional currency of its overseas subsidiary, Structural Monitoring Systems Limited, is Australian dollars and the functional currency of its overseas subsidiary, Anodyne Electronics Manufacturing Corp is Canadian dollars. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. 25 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 2. Summary of significant accounting policies (continued) (f) Foreign currency translation (continued) (iii) Group entities The results and financial position of all the Company entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • • Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; Income and expenses for each statement of profit and loss and other comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the rates prevailing on the transaction dates, in which case income and expenses aretranslated at the dates of the transactions); and All resulting exchange differences are recognised as a separate component of equity and in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities are taken to foreign currency translation reserve. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences are recognised in the statement of comprehensive income, as part of the gain or loss on sale where applicable. g) Impairment of property, plant and equipment At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (h) Financial instruments Financial assets and financial liabilities are recognised when the Group becomes party to the contractual provisions of the instrument. Financial assets Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and other short-term deposits held by the Group with maturities of less than three months. For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Trade, Group and other receivables Trade, Group and other receivables are recorded initially at fair value and subsequently measured at amortised cost. This results in their recognition at nominal value less an allowance for any doubtful debts. The allowance for doubtful debts was recognised under an “incurred loss” model until 1 July 2018 and therefore it was dependent upon the existence of an impairment event. From 1 July 2018, the allowance for doubtful debts is recognised based on management’s expectation of losses without regard to whether an impairment trigger happened or not (an “expected credit loss” model). 26 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 2. Summary of significant accounting policies (continued) (h) Financial instruments (continued) Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Trade, Group and other payables Trade, Group and other payables are initially measured at fair value net of direct transaction costs and subsequently measured at amortised cost. Equity instruments Equity instruments issued by the Group are recorded at fair value on initial recognition net of transaction costs. Derecognition of financial assets (including write-offs) and financial liabilities A financial asset (or part thereof) is derecognised when the contractual rights to cash flows expire or are settled, or when the contractual rights to receive the cash flows of the financial asset and substantially all the risks and rewards of ownership are transferred to another party. When there is no reasonable expectation of recovering a financial asset it is derecognised (“written off”). The gain or loss on derecognition of financial assets measured at amortised cost is recognised in profit or loss. A financial liability (or part thereof) is derecognised when the obligation specified in the contract is discharged, cancelled or expires. Any difference between the carrying amount of a financial liability (or part thereof) that is derecognised and the consideration paid is recognised in profit or loss. Impairment of financial assets An impairment loss is recognised for the expected credit losses on financial assets when there is an increased probability that the counterparty will be unable to settle an instrument’s contractual cash flows on the contractual due dates, a reduction in the amounts expected to be recovered, or both. The probability of default and expected amounts recoverable are assessed using reasonable and supportable past and forward-looking information that is available without undue cost or effort. The expected credit loss is a probability-weighted amount determined from a range of outcomes and takes into account the time value of money. For trade receivables, material expected credit losses are measured by applying an expected loss rate to the gross carrying amount. The expected loss rate comprises the risk of a default occurring and the expected cash flows on default based on the ageing of the receivable. The risk of a default occurring always takes into consideration all possible default events over the expected life of those receivables (“the lifetime expected credit losses”). Different provision rates and periods are used based on groupings of historic credit loss experience by product type, customer type and location. For intercompany loans that are repayable on demand, expected credit losses are based on the assumption that repayment of the loan is demanded at the reporting date. If the subsidiary does not have sufficient accessible highly liquid assets in order to repay the loan if demanded at the reporting date, an expected credit loss is calculated. This is calculated based on the expected cash flows arising from the subsidiary, and weighted for probability likelihood of variations in cash flows. Definition of default The loss allowance on all financial assets is measured by considering the probability of default. Receivables are considered to be in default when the principal or any interest is significantly more than the associated credit terms past due, based on an assessment of past payment practices and the likelihood of such overdue amounts being recovered. 27 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 2. Summary of significant accounting policies (continued) (h) Financial instruments (continued) Write-off policy Receivables are written off by the Group when there is no reasonable expectation of recovery, such as when the counterparty is known to be going bankrupt, or into liquidation or administration. Receivables will also be written off when the amount is more than materially past due. (i) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (j) Share-based payment transactions The Group provides benefits to employees (including directors) in the form of share-based payment transactions, whereby employees render services in exchange for rights over shares (‘equity-settled transactions’). The fair value of options is determined using the Black-Scholes pricing model or using the trinomial option pricing model. There is currently one plan in place to provide these benefits, the Employee Incentive Plan (EIP), which provides benefits to directors and employees. The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Structural Monitoring Systems Plc (‘market conditions’). The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects the extent to which the vesting period has expired. This opinion is formed based on the best available information at the reporting date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. (k) Revenue Revenue recognition – Repair services Repairs meet the definition of a distinct service whereby the associated revenue is to be recognised at a point in time, evidenced by the completion of the agreed upon service and delivery of the repaired parts/components to the customer. The point in time criteria are met as the following transfers of control exist: (a) The entity has the present right to payment for the asset; (b) the customer has the legal right to the asset; (c) the entity has transferred physical possession of the asset; (d) the customer has the significant risks and rewards of ownership of the asset; and (e) the customer has accepted the asset. Pricing is fixed and determinable pursuant to agreed upon pricing lists that establish stand-alone selling prices. 28 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 2. Summary of significant accounting policies (continued) (k) Revenue (continued) Revenue recognition – Product sales (stock or customised parts) Product sales meet the definition of a distinct service whereby the associated revenue is to be recognised at a point in time, evidenced by the delivery of the products to the customer. The point in time criteria are met as the following transfers of control exist: (a) The entity has the present right to payment for the asset; (b) the customer has the legal right to the asset; (c) the entity has transferred physical possession of the asset; (d) the customer has the significant risks and rewards of ownership of the asset; (e) the customer has accepted the asset. Pricing is fixed and determinable pursuant to agreed upon pricing lists that establish stand-alone selling prices. There are no further performance obligations associated with these sales. At times, multiple services or goods are sold to customers, however, contracts detail out separate prices for each different good or service purchased. As each service or good purchased has a standalone selling price in the negotiated contract there is no need to allocate a purchase price across multiple deliverables. In addition, each contract includes payment terms. The Group recognises revenue on shipping for stock parts, customised product and customer product. When the Group provides a service (prototyping) it generally recognises revenue when the prototype is shipped or as the service is provided if there is no item to be shipped. The Group recognises revenue when it satisfies its performance obligation under the contract (when the Group ships the product which is also when the customer obtains control over the product or service). (l) Inventories Raw materials, work in progress and finished goods are stated at the lower of cost and net realisable value on‘a ‘first in first out’ basis. Cost comprises of direct materials and delivery costs, direct labour, import duties and other taxes, an appropriate proportion of variable and fixed overhead expenditure based on normal operating capacity, and, where applicable, transfers from cash flow hedging reserves in equity. Costs of purchased inventory are determined after deducting rebates and discounts received or receivable. Stock in transit is stated at the lower of cost and net realisable value. Cost comprises of purchase and delivery costs, net of rebates and discounts received or receivable. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (m) Property, plant and equipment Plant and equipment and leasehold improvements are stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Plant and equipment Leasehold improvements 3 - 5 years 5 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. 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. 29 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 2. Summary of significant accounting policies (continued) (n) Right-of-use assets A right-of-use asset is recognised at the commencement date of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability, adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred, and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset, and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the consolidated entity expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The Group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit or loss as incurred. (o) 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. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in the statement of profit and loss and other comprehensive income arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Research and development Research costs are expensed in the period in which they are incurred. Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility; the consolidated entity is able to use or sell the asset; the consolidated entity has sufficient resources; and intent to complete the development and its costs can be measured reliably. Capitalised development costs are amortised on a straight-line basis over the period of their expected benefit, being their finite life of 10 years. Certifications Significant costs associated with certifications are amortised on a straight line basis over the period of their expected benefit, being the finite life of 5 years. Licence agreement Significant costs associated with a licence agreement are amortised on a straight line basis over the period of their expected benefit, being their finite life of 5 years. Technology Significant costs associated with technological intellectual property are amortised on a straight line basis over the period of their expected benefit, being their finite life of 10 years. 30 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 2. Summary of significant accounting policies (continued) (p) Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. (q) Income tax The charge for taxation for the year is the tax payable on the profit or loss for the year based on the applicable income tax rate for each jurisdiction and takes into account deferred tax. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit or loss, and is accounted for using the balance sheet method. Deferred tax assets are only recognised to the extent that it is probable that future taxable profit will be available in the foreseeable future against which the temporary differences can be utilised. (r) Other taxes Revenues, expenses and assets are recognised net of the amount of VAT/GST except: Where the VAT/GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the VAT/GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of VAT/GST included. The net amount of VAT/GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the VAT/GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of VAT/GST recoverable from, or payable to, the taxation authority. (s) 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. 31 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 2. Summary of significant accounting policies (continued) (t) 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 Group’s incremental borrowing rate. Lease payments comprise of fixed repayments 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. (u) Employee entitlements 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. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. (v) Investments in subsidiary undertakings Investments in subsidiary undertakings are accounted for at cost less, where appropriate, allowances for impairment. (w) Critical accounting estimates and judgements The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions concerning the future which impact the application of accounting policies and reported amounts of assets, liabilities, income and expenses. The accounting estimates resulting from these judgements and assumptions seldom equal the actual results but are based on historical experiences and future expectations. i) Share-based payment transaction: The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined using either a Black-Scholes or binomial pricing models, using the assumptions detailed in note 22 Share-based payments in the notes to the financial statements. ii) Impairment resulting from acquisition of Anodyne Electronics Manufacturing (AEM) Impairment of goodwill and intangible assets An annual review is carried out (as set out in note 13) as to whether the current carrying value of goodwill is impaired. Detailed calculations are performed based on (i) discounting expected pre-tax cash flows of the relevant cash generating units and discounting these at an appropriate discount rate; and/or (ii) the comparison of carrying value to the net selling price of the cash generating unit; the determination of these factors require the exercise of judgement. 32 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 2. Summary of significant accounting policies (continued) (w) Critical accounting estimates and judgements (continued) iii) Impairment of inter-company receivables The Company has intercompany loans to its subsidiary companies which are repayable on demand. As the subsidiaries did not have sufficient highly liquid resources to repay the loans at 30 June 2021, an expected credit loss provision is calculated under IFRS 9. For Structural Monitoring Systems Canada Corporation, the calculation is based upon the expectation that AEM will continue to trade profitably in the future and that this will allow it to repay the loans over time. Further details on the impairment provision are set out in note 14 in the notes to the financial statememts. (iv) 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 Group entity based on known information. The consideration extends to the nature of the products and services offered, customers, supply chain, staffing and geographic regions in which the Group operates. Other than as addressed in specific notes, there does not currently appear to be either any significant impact upon the financial statements or any significant uncertainties with respect to events or conditions which may impact the consolidated entity unfavourably as at the reporting date or subsequently as a result of the Coronavirus (COVID-19) pandemic. As at 30 June 2021, there are no other critical accounting estimates and judgements contained in the financial report. 33 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 3. Segment information The Group has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors (chief operating decision makers) in assessing performance and determining the allocation of resources. The Group operates predominantly in two industries, being structural health monitoring (CVM™) and the design and manufacture of avionics and audio systems. A third segment refers to the intellectual property (IP) held in another subsidiary of the Parent (CVM™ IP). Company overheads are recorded in the Parent enity operating in the structural health monitoring segment (CVM™). Revenue to third parties by origin is Canada (for Avionics/audio) segment and Australia for (CVM™ segment). The Parent Company is registered in the UK. The following tables present revenue, expenditure and certain asset information regarding geographical segments for the years ended 30 June 2021 and 30 June 2020: CVMTM IP Avionics/ audio CVMTM Total $000’ $000’ $000’ $000’ Year ended 30 June 2021 Revenue Sale of goods Rendering of services Total sales revenue Other income Interest revenue FX gains/(losses) Total segment revenue Sales revenue by customer location Australasia Africa Europe Asia/Middle East Americas Total sales revenue Result EBITDA* Depreciation and amortisation Interest revenue Finance costs Profit/(loss) before income tax expense Income tax expense Profit/(loss) for the year Assets and liabilities Segment assets - current Segment assets - non current - - - - 1 (21) (20) - - - - - - (388) - 1 - (387) - (387) 587 - 587 14,337 1,003 15,340 608 - (183) 15,765 32 11 1,741 722 12,834 15,340 3,084 (965) - (16) 2,103 (496) 1,607 11,576 4,533 16,109 - - - 56 - - 14,337 1,003 15,340 664 1 (204) 56 15,801 - - - - - - (3,174) (2) - (3) 32 11 1,741 722 12,834 15,340 (478) (967) 1 (19) (3,179) (1,463) - (496) (3,179) (1,959) 164 2 166 12,327 4,535 16,862 34 Notes to the Financial Statements For the Year Ended 30 June 2021 3. Segment information (continued) Structural Monitoring Systems Plc CVMTM IP Avionics/audio CVMTM $000’ $000’ $000’ Total $000’ Segment liabilities - current Segment liabilities - non current Other segment information Capital expenditure Depreciation Amortisation Year ended 30 June 2020 Revenue Sale of goods Rendering of services Total sales revenue Other income Interest revenue FX gains/losses Total segment revenue Sales revenue by customer location: Australasia Africa Europe Americas Total sales revenue Result EBITDA* Depreciation and amortisation Interest revenue Finance costs Profit/(loss) before income tax expense Income tax expense Profit/(loss) for the year Assets and liabilities Segment assets - current Segment assets - non current Segment liabilities - current Segment liabilities - non current Other segment information Capital expenditure Depreciation 79 - 79 - - - - - - 73 3 (13) 63 - - - - - (444) - 3 (6) (447) - (447) 821 - 821 78 - 78 - - 1,726 609 2,335 287 555 410 17,183 1,900 19,083 - - 164 19,247 42 57 1,892 17,092 19,083 4,178 (1,013) - (17) 3,148 (477) 2,671 10,909 3,702 14,611 2,434 433 2,866 78 591 434 - 434 - 2 - 12 - 12 - - (1) 11 - - - 12 12 (4,725) (39) - (9) (4,773) - (4,773) 1,291 4 1,295 363 18 382 - 39 Amortisation *EBITDA is profit before income tax expense, depreciation, amortisation, finance income and finance costs 422 - - 2,239 609 2,848 287 557 410 17,195 1,900 19,095 73 3 150 19,321 42 57 1,892 17,104 19,095 (991) (1,052) 3 (32) (2,072) (477) (2,549) 13,021 3,706 16,727 2,875 451 3,326 78 630 422 35 Notes to the Financial Statements For the Year Ended 30 June 2021 3. Segment information (continued) Major customers Structural Monitoring Systems Plc During the year ended 30 June 2021 approximately $7.076m (2020: $9.390m) of the Group’s sales revenue was derived from sales to a single US aircraft and parts company. Revenue In accordance with IFRS 15, the Group’s revenue of $15.340m (2020: $19.095m) is made up of revenue from customers only and does not include any other revenue. Goods and services are transferred at a point in time, not over time, as detailed in the group’s revenue recognition policy. The Group does not have any contract assets or contract liabilities at 30 June 2021 ($nil at 30 June 2020) as the Group does not fulfil any of its performance obligations in advance of invoicing to its customer or bill in advance for work performed. The Group however does have contractual balances in the form of trade receivables. The Group also does not have any contractual costs capitalised at 30 June 2021 ($nil at 30 June 2020) or have any outstanding performance obligations at 30 June 2021 ($nil at 30 June 2020). 4. Income and expenses Income Other income SRED Recovery Mangement fees Sub-lease income Finance income/(costs) Foreign exchange gains/(losses) Bank interest Interest and finance charges payable on borrowings Interest and finance charges payable on lease liabilities Analysis of expenses by nature Employee renumeration (see note 5) Intangible assets Amortisation of other intangible assets Property, plant and equipment Depreciation of plant and equipment Depreciation of ROU assets Total depreciation and amortisation Operating leases Consumables and raw materials used Provision for obsolescence Freight Auditor’s remuneration (see note 28) Impairment charges Share-based payments expense (see note 22) Research and develpment Other costs of sales, distribution and administration Consolidated Parent 2021 2020 2021 2020 $000’ $000’ $000’ $000’ 608 - 56 664 (204) 1 (7) (12) (222) - - 73 73 150 3 (2) (30) 121 - 281 56 337 - - (3) - (3) - - 73 73 (1) - (2) (7) (10) 5,212 5,277 1,070 1,075 410 255 302 557 967 - 7,438 63 183 155 - 1,116 181 1,304 422 272 358 630 1,052 - 9,169 45 249 232 - 1,952 345 3,040 - 2 - 2 2 - - - - 78 387 1,116 41 705 2,327 - 2 37 39 39 - - - - 105 446 1,952 - 1,013 4,630 36 Total income and expenses 10,442 21,361 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 4. Income and expenses (continued) Impairment charges relate to loans to subsidiary undertakings which are written down to the net asset values of those entities excluding the loans at the reporting date. 5. Employees and directors The average number of employees and directors employed by the Group during the year was: Consolidated Parent 2021 2020 2021 2020 $000’ $000’ $000’ $000’ Employee and directors’ numbers Production Research Selling and distribution Administration (including directors) Employee remuneration Wages and salaries Social security costs Defined contribution costs Total employee costs Share-based payments Consolidated Parent 2021 No. 2020 No. 2021 No. 2020 No. 52 22 18 15 107 72 19 14 17 122 - - 2 7 9 - - 4 7 11 Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 4,602 4,624 1,070 1,075 355 255 5,212 1,116 6,328 404 249 5,277 1,952 7,229 - - 1,070 1,116 2,186 - - 1,075 1,952 3,027 Wages and salaries, include Directors’ fees and other employee costs amounting to $0.712m, were settled via the issue of Performance Rights. Directors remuneration Directors’ fees, including superannuation, of $0.298m (2020: $0.569m) are included in employee expenses in the Statement of Profit and Loss and Other Comprehensive Income. Directors’ share-based payments of $0.788m (2020: $0.757m) are included in share-based payments in the Statement of Profit or Loss and other comprehensive income. Refer to the Remuneration report in the Director’s report for further details. This also includes details of the highest paid director. 37 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 6. Income tax The major components of income tax expense for the years ended 30 June 2021 and 30 June 2020 are: a) Income tax expense reported in Statement of Profit or Loss and Other Comprehensive Income Current tax expense Deferred tax Income tax expense reported in statement of comprehensive income A reconciliation of income tax expense/(benefit) applicable to accounting loss before income tax at the statutory income tax rate to income tax expense at the effective income tax rate for the years ended 30 June 2021 and 30 June 2020 is as follows: Accounting loss before tax from continuing operations at the statutory income tax rate of 27.00% (2020: 27.50%) Expenses not assessable for income tax purposes Deferred tax not recognised Income tax expense reported in Statement of Profit or Loss and Other Comprehensive Income Deferred tax assets/(liabilities) Deferred tax assets and liabilities are attributable to the following: Costs deductible over 5 years Accrued expenses Tax losses Tax assets/(liabilties) Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 361 135 496 530 (53) 477 - - - - - - (1,463) (2,072) (3,117) (4,683) (395) (570) (842) (1,288) 509 (610) (496) 3 124 12,904 13,031 644 477 3,951 (551) (477) 365 (2,663) - - - 3 - 63 11,525 11,588 (113) 3,106 3,222 (25) 2,626 2,601 Deferred tax not recognised (13,031) (11,588) (3,222) (2,601) Potential deferred tax assets attributable to tax losses have not been brought to account at 30 June 2021 because the directors do not believe it is appropriate to regard realisation of the deferred tax assets as probable at this point in time. These benefits will only be obtained if: i. the Group derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the loss to be realised; ii. the Group continues to comply with conditions for deductibility imposed by law; and iii. no changes in legislation adversely affect the Group in realising the benefit from the deductions for the loss. 38 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 6. Income tax (continued) 2021 Recognised deferred tax liabilities Movement in deferred tax liabilities during the year: Brought forward Charge to Statement of Profit or Loss and Other Comprehensive Income Effect of fx on balances Carried forward 2020 Recognised deferred tax liabilities Movement in deferred tax liabilities during the year: Brought forward Charge/(credit) to Statement of Profit or Loss and Other Comprehensive Income Carried forward 7. Earnings per share Business combination Tax losses Other timing difference $000’ $000’ $000’ Total $000’ 553 (108) - 445 - 6 - 6 (156) 237 7 88 397 135 7 539 Business combination Tax losses Other timing difference $000’ $000’ $000’ Total $000’ 597 (44) 553 - - - (147) (9) (156) 450 (53) 397 Basic earnings per share amounts are calculated by dividing net loss for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. The number of performance rights at 30 June 2021 was 1,692,264 (2020: 4,082,270). Of those performance rights 1,392,264 were exercisable at 30 June 2021 but have been excluded from the diluted earnings per share calculation on the basis they are anti-dilutive. The following reflects the income and share data used in the total operations basic loss per share computations: Net loss attributable to equity holders from continuing operations Consolidated 2021 $000’ 2020 $000’ (1,959) (2,549) Weighted average number of ordinary shares for basic loss per share Weighted average number of ordinary shares for diluted loss per share Number of shares Number of shares 119,578,443 116,500,559 119,578,443 116,500,559 39 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 8. Current assets – Trade receivables Trade receivables 9. Current assets – Prepayments and other receivables Prepayments Bank guarantee * Other receivable GST receivable Deposits *Bank guarantee held in security for a premises lease. 10. Current assets - Inventory Raw materials Work in progress Finished goods Provision for obsolescence Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 2,347 2,991 2,991 3,334 86 3 3 - Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 346 134 66 21 47 31 66 90 30 43 511 363 14 - - - 8 22 19 - 89 - 8 116 Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 4,373 906 1,828 (19) 7,088 3,988 1,089 2,204 (159) 7,122 - - 136 - 136 - - 184 - 184 40 Notes to the Financial Statements For the Year Ended 30 June 2021 11. Non-current assets – Property, plant and equipment Consolidated Balance at 1 July 2020 Additions Depreciation expense Effect of FX movement on balances Balance at 30 June 2021 Balance at 1 July 2019 Additions Depreciation expense Effect of FX movement on balances Balance at 30 June 2020 12. Non-current assets – Right-of-use assets Consolidated Land and buildings – right-of-use Less: Accumulated depreciation IT equipment Less: Accumulated depreciation Motor vehicle – right-of-use Less: Accumulated depreciation Structural Monitoring Systems Plc Leasehold improvements Plant and equipment $000’ $000’ Total $000’ 73 - (25) - 48 92 12 (30) (1) 73 269 287 (165) 5 396 448 75 (272) 18 269 342 287 (190) 5 444 540 87 (302) 17 342 Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 903 (655) 248 151 (33) 118 19 (12) 7 373 454 (303) 151 - - - 17 (5) 12 163 - - - - - - - - - - - - - - - - - - - - The Group leases land and buildings for its offices and a manufacturing facility under a 12 month agreement. The Group also leases IT equipment and a motor vehicle under 3 year agreements. 13. Non-current assets – Intangible assets and goodwill Consolidated Balance at 1 July 2020 Development expenses capitalised Amortisation expense Effect of FX on balances Balance at 30 June 2021 Goodwill Certifications License agreement Technology Total $000’ $000’ $000’ $000’ $000’ 1,444 - - 10 1,454 586 - (230) (2) 354 53 - (21) - 32 1,118 901 (146) 5 3,201 901 (397) 13 1,878 3,718 41 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 13. Non-current assets – Intangible assets and goodwill (continued) Goodwill Certifications Licence agreement Technology Total $000’ $000’ $000’ $000’ $000’ 1,475 - (31) 1,444 838 (244) (8) 586 76 (22) (1) 53 1,295 (156) (21) 1,118 3,684 (422) (61) 3,201 Consolidated Balance at 30 June 2019 Amortisation expense Effect of FX on balances Balance at 30 June 2020 Intangible assets Certifications AEM possesses distinct aircraft manufacturing and maintenance certifications, which are requisite to the sale and maintenance of their products in key markets. Licence agreement AEM has a licence agreement in place with one of their key customers to be the producer and seller of certain aircraft instruments. This has identifiable cash flows in the form of future sales to aircraft manufacturing and maintenance providers who require these instruments. Technology AEM has developed proprietary aircraft parts and manufacturing technology which are expected to continue to yield future sales. This intellectual property is seperable and identifiable to the extent that it could be licensed or acquired. In addition, there are identifiable future benefits in the form of cash flows from the sale of the resulting products to AEM customers. Amortisation The amortisation period applied to the intangible assets are as follows: Certifications – 5 years, remaining amortisation period is 3.5 years Licence agreement – 5 years, remaining amortisation period is 3.5 years Technology – 10 years, remaining amortisation period is 8.5 years Impairment testing Goodwill of $1.454m acquired through business combinations has been allocated to the AEM cash generating unit (2020: $1.444m). The impairment test has been carried out using a discounted cash flow model covering a 5 year period. Cash flow projections are based on a budget for 2021/2022 approved by management and extrapolated for a further 4 years using a steady rate, together with a terminal value, approved by management. The principal assumptions made in determining the recoverable amount of goodwill as at 30 June 2020 include revenue growth of 2% per annum from 2023, EBITDA margin of 19% (2020: 14%) and a discount rate of 12.5% (2020: 14.1%). If the revised estimated pre-tax discount rate applied to the discounted cash flows had been 10% less favourable in management’s estimate the Group would need to reduce the carrying value of goodwill by $nil (2020: $nil). If the EBITDA margin applied to the discounted cash flows had been 10% less favourable in management’s estimate the effect on the Group would have been to reduce the carrying value of goodwill by $nil (2020: $nil). The same reduction of $nil (2020: $nil) applies if revenues had been 10% less favourable. Management believes that other reasonable changes in the key assumptions on which the recoverable amount of AEM’s division’s goodwill is based would not cause the cash generating unit’s carrying amount to exceed its recoverable amount. 42 Notes to the Financial Statements For the Year Ended 30 June 2021 14. Non-current assets/(liabilities) - Loans Company Year ended 30 June 2021 Cost At 1 July 2020 Arising during the year At 30 June 2021 Impairment At 1 July 2020 Impairment charge Net carrying amount at 30 June 2021 Year ended 30 June 2020 Cost At 1 July 2019 Arising during the year At 30 June 2020 Impairment At 1 July 2019 Impairment charge Net carrying amount at 30 June 2020 Company Year ended 30 June 2021 Cost At 1 July 2020 Received during the year Assigned during the year Net carrying amount at 30 June 2021 Year ended 30 June 2020 Cost At 1 July 2019 Received during the year Net carrying amount at 30 June 2020 Structural Monitoring Systems Plc Loans to subsidiary undertakings $000’ Total $000’ 23,014 (1,066) 21,948 11,617 387 12,004 9,944 22,990 24 23,014 (11,171) (446) (11,617) 11,397 23,014 (1,066) 21,948 11,617 387 12,004 9,944 22,990 24 23,014 (11,171) (446) (11,617) 11,397 Loans from subsidiary undertakings Total $000’ $000’ 921 278 921 278 (1,199) (1,199) - - 305 616 921 305 616 921 Loans to/from subsidiaries are unsecured, have no fixed date for repayment and attract no interest charge. As the parent does not intend to call in the loans within the next 12 months the loans to subsidiaries are classified as non-current assets. 43 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 14. Non-current assets/liabilities - Loans (continued) See Note 24 for further details on impairment of intercompany receivables. The consolidated financial statements include the financial statements of the Company and the subsidiaries listed in the following table: Structural Monitoring Systems Limited Registered office: Suite 116, 1 Kyle Way Claremont WA 6010 Australia Structural Health Monitoring Systems Canada Corp (SMSCC) Registered office: Unit 15, 1925 Kirschner Road Kelowna BC Canada Anodyne Electronics Manufacturing Corp (AEM) Registered office: Unit 15, 1925 Kirschner Road Kelowna BC Canada 15. Current liabilities – Trade and other payables Trade payables Other payables Taxes payable – HST, payroll tax Country of Incorporation Type of equity % Equity Interest 2021 2020 Australia Ordinary share 100 100 Canada Ordinary share 100 100 Canada Ordinary share 100 100 Consolidated Parent 2021 $000’ 2020 $000’ 2021 2020 $000’ $000’ 897 940 8 602 888 14 1,845 1,504 8 426 - 434 18 227 - 245 Trade payables are non-interest bearing and are normally settled within 30 day terms. Other payables are non-interest bearing and have an average term of 66 days (2020: 42 days). 44 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 16. Current liabilities - Borrowings Credit card Overdraft - secured Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ - - - 39 441 480 - - - - - - AEM has a secured overdraft facility with a banking institution. The facility has a limit of C$5m (2020:C$3m)secured on trade receivables and inventory. The variable interest rate on the facility is 3.45%. 17. Current liabilities - Deposits Deposit held pending issue of shares 18. Lease liabilities Opening balance Interest charged Lease assigned during the year Repayments during the year Lease finance purchases during the year Effect of foreign exchange on balances Closing balance Spilt between Current Non-current 19. Current liabilities – Provisions Income tax Warranties Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ - 43 - 43 Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 262 12 (94) (458) 610 6 338 268 70 338 618 35 - (414) - 23 262 208 54 262 94 - (94) - - - - - - - 168 7 - (81) - - 94 75 19 94 Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ - 126 126 640 - 640 - - - - - - 45 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 20 (a). Reconciliation of the net loss before tax to the net cash flows from operations Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ Loss before tax for the year (1,463) (2,072) (3,117) (4,683) Adjustments for: Loss on debt for equity swap Share based payments Directors fees and other employee costs settled via performance rights Depreciation and amortisation Impairment of investments in subsidiaries Changes in assets and liabilities Trade receivables Prepayments and other receivables Inventory Trade and other payables Provisions Net cash provided by/(used in) operating activities 20 (b). Cash and cash equivalents Cash at bank Cash on hand Credit card Overdraft 52 1,116 - 967 - 640 (120) 33 347 126 1,698 127 1,952 936 1,052 - 343 (2) (962) (1,032) - 342 52 1,116 776 2 387 (88) 5 49 189 - 127 1,952 936 39 446 (3) (9) (184) (56) - (629) (1,435) 2,428 2,544 1 (48) - 2,381 1 (39) (441) 2,065 - - - - - - - - - - 46 20 (a). Reconciliation of the net loss before tax to the net cash flows from operations 21. Employee benefits (a) Employees incentive plan Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc On 11 December 2018 shareholders approved the Employee Incentive Plan (EIP) for the granting of non-transferable shares or performance rights (PRs) to directors, employees and relevant contractors with more than six months’ service at the grant date. The shares vest immediately and the PRs vest upon the satisfaction of the relevant performance hurdles within 3 years of issue. Under the plan shares will be offered at a 12.5% discount to the lowest 5 day VWAP (calculated by taking the lowest 5 daily share price VWAPs for that quarter – and taking the average). 1,843,081 shares were issued to employees under the plan during the reporting period. Full details of issues during the year can be found in note 22 Share-based payments. (b) Pensions and other post-employment benefit plans AEM maintains a defined contribution pension plan for its’ employees. AEM contributes 5% of salary to the Plan. Employees must be employed with the company for 12 months before they are entitled to the benefit. There are currently 88 employees participating in the plan. Contributions are paid monthly and recognised in the Statement of comprehensive income totalling $0.355m (2020: $0.404m). Contributions of $nil (2020: $0.044m) are outstanding at 30 June 2021. 22. Share-based payments The share-based payment expense for the year is as follows: Issue of performance rights to directors and executives Issue of shares to directors and executives under EIP Issue of performance rights to other consultants Issue of shares to eligible staff under EIP Performance Rights - Directors Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 545 78 93 400 1,116 1,275 545 1,275 - 162 515 1,952 78 93 400 1,116 - 162 515 1,952 On 21 January 2021 shareholders approved the issue of 60,000 Performance Rights (PRs) as remuneration to Stephen Forman, a Director of the Company, under the Company Employee Incentive Plan (EIP) as an annual award. All Director PRs are subject to continued services with the Company and the issue is an annual award of 60,000 PRs to Steven Forman in accordance with his contract of employment. 47 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 22. Share-based payments (continued) Also on 21 January 2021 shareholders approved the issue of 856,933 PRs to directors in lieu of fees for the period to 31 December 2020. The fair value of the PRs granted to directors, executives and staff in lieu of fees was $0.362m. The loss on swap of equity for debt of $0.044m was recorded through the statement of profit or loss and other comprehensive income. Performance Rights – Executive An executive of the Company was granted 393,796 PRs in lieu of fees for the period to 31 March 2021. The fair value of $0.178m was determined by the closing share price on grant date. 108,553 PRs with a fair value of $0.062m were granted in lieu of fees previously accrued for the June 2020 quarter. Performance Rights - Consultants On 18 February 2021 The Board granted the issue of 30,000 PRs to a consultant under the EIP. The PRs have a fair value of $0.013m determined by the closing share price on grant date. In addition to directors and executives, three other consultants elected to receive PRs in lieu of fees during the year. A total of 288,526 PRs were issued and the fair value of $0.132m was determined by the closing share price on grant date. The number of performance rights that were outstanding, their weighted average exercise price and their movement during the year is as follows: At 1 July Granted Exercised Expired At 30 June Exercisable at 30 June Weighted ave ex price 2021 No. 2020 No. 2021 $ 2020 $ 4,082,270 3,075,000 2.07 2.75 1,788,325 1,722,447 (1,253,331) (715,177) (2,925,000) - - - - - - - 1,692,264 4,082,270 0.51 2.07 1,392,264 1,007,270 - - The contractual term remaining on performance rights outstanding at 30 June 2021 is 24 months (2020: 12 months). 48 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 22. Share-based payments (continued) The outstanding number of performance rights at 30 June 2021 and 30 June 2020 was as follows: Exercise price Grant date Expiry date 2021 No. 2020 No. $0.001 $0.001 $0.001 $0.001 $2.00 $2.75 $3.50 $0.001 $0.001 $0.001 $0.001 $2.00 $2.50 $3.00 $3.25 $3.50 $3.75 $2.00 $2.50 $3.00 $3.25 $3.50 $3.75 $2.00 $2.20 $2.50 $2.75 $3.00 $3.15 $3.25 $3.50 $3.75 $4.00 18 February 2021 21 January 2021 11 December 2020 12 December 2019 12 December 2019 12 December 2019 12 December 2019 7 April 2020 18 November 2019 12 December 2019 3 October 2019 15 August 2018 15 August 2018 15 August 2018 15 August 2018 15 August 2018 15 August 2018 15 April 2018 15 April 2018 15 April 2018 15 April 2018 15 April 2018 15 April 2018 7 December 2017 7 December 2017 7 December 2017 7 December 2017 7 December 2017 7 December 2017 7 December 2017 7 December 2017 7 December 2017 7 December 2017 18 February 2024 21 January 2024 11 December 2023 12 December 2022 12 December 2022 12 December 2022 12 December 2022 7 April 2023 18 November 2022 12 December 2022 3 October 2022 15 August 2021 15 August 2021 15 August 2021 15 August 2021 15 August 2021 15 August 2021 15 April 2021 15 April 2021 15 April 2021 15 April 2021 15 April 2021 15 April 2021 7 December 2020 7 December 2020 7 December 2020 7 December 2020 7 December 2020 7 December 2020 7 December 2020 7 December 2020 7 December 2020 7 December 2020 259,412 584,446 232,031 316,375 50,000 50,000 50,000 - - - - 25,000 25,000 25,000 25,000 25,000 25,000 - - - - - - - - - - - - - - - - - - - - - - - 143,055 78,296 754,271 31,648 25,000 25,000 25,000 25,000 25,000 25,000 50,000 50,000 50,000 50,000 50,000 50,000 600,000 450,000 250,000 400,000 150,000 150,000 100,000 175,000 225,000 125,000 1,392,264 performance rights were issued during the year and are exercisable at 30 June at no cost. 1,692,264 4,082,270 49 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 22. Share-based payments (continued) Terms of Performance Rights 1. The Performance Rights are non-transferable. 2. The Performance Rights do not confer any entitlement to attend or vote at meetings of the Company, to dividends, to participation in new issues of securities or entitlement to participate in any return of capital. 3. The Performance Rights vest upon the satisfaction of the relevant performance hurdle within 3 years of the issue of the Performance Rights and at the election of the holder. 4. The Performance Rights lapse if the performance hurdle is not satisfied or the election to convert is not given by the holder within 3 years of the issue of the Performance Rights except as otherwise provided for in the terms and condi- tions of the Plan. 5. Upon vesting, 1 ordinary share will be issued for every 1 Performance Right on the payment of the par value of the ordinary share, being £0.0005 pence per Share by the holder. The Shares will rank equally in all respects with the ex- isting Shares on issue. 6. In the event of any reconstruction (including consolidation, sub-division, reduction or return) of the issued capital of the Company prior to the vesting date, the number of Performance Rights, the share prices relevant to the performance hurdle and any exercise price may be reconstructed in accordance with the terms and conditions of the Plan. Shares issued to directors, eligible staff and consultants under EIP No. issued Grant date Issue price Share price at grant date Share-based payment charge $ $ $000’ 996,636 171,320 147,000 528,125 1,843,081 3/12/2019 4/8/2020 21/1/2021 9/2/2021 0.32 0.36 nil 0.32 0.575 0.425 0.915 0.460 254 11 135 78 478 Details of the EIP are included in Note 21 Employee Benefits. On 21 January 2021 shareholders approved the issue of 528,125 shares to two directors of the company on the same terms and conditions as other eligible staff and consultants under the EIP. 50 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 23. Issued capital and reserves Ordinary Shares On issue 121,479,031, (2020: 118,382,619) par value £0.005 Issued and fully paid Total issued and fully paid Movement in ordinary shares in issue At 30 June 2019 Issued on 26 August 2019 – CDIs issued * Issued on 20 Dec 2019 – CDIs issued * Issued on 21 April 2020 – CDIs issued * Issued on 17 April 2020 – conversion of PRs At 30 June 2020 Issued on 26 August 2019 – CDIs issued * Issued on 20 Dec 2019 – conversion of PRs Issued on 21 April 2020 – CDIs issued * Issued on 17 April 2020 – conversion of PRs Issued on 21 January 2021 – CDIs issued * Issued on 28 January 2021 – conversion of PRs Issued on 26 February 2021 – conversion of PRs Issued on 20 May 2021 – conversion of PRs Issued on 11 June 2021 – conversion of PRs Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 31,949 31,949 31,946 31,946 31,949 31,949 31,946 31,946 Shares on issue No. $000’ 115,562,285 31,932 291,347 597,499 1,216,311 715,177 1 3 6 4 118,382,619 31,946 996,636 154,342 147,000 156,683 699,445 17,676 264,840 170,588 489,202 1 - - - 1 - - - 1 At 30 June 2021 121,479,031 31,949 *Chess depositary interests (CDIs) issued to employees at below market price. 51 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 23. Issued capital and reserves (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. Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 36,492 35,967 36,492 35,967 Shares on issue No. $000’ 115,562,285 35,106 Share Premium Reserve Share Premium Reserve Movement in ordinary shares in issue At 1 July 2019 Issued on 26 August 2019 – CDIs issued * Issued on 20 December 2019 – CDIs issued * Issued on 21 April 2020 – CDIs issued * Issued on 17 April 2020 – conversion of PRs Share issue - costs At 30 June 2020 Issued on 4 August 2020 – CDIs issued * Issued on4 August 2020 – conversion of PRs Issued on 11 December 2020 – CDIs issued * Issued on 8 January 2021 – conversion of PRs Issued on 28 January 2021 – CDIs issued * Issued on 28 January 2021 – conversion of PRs Issued on 26 February 2021 – conversion of PRs Issued on 20 May 2021 – conversion of PRs Issued on 11 June 2021 – conversion of PRs Share issue - costs At 30 June 2021 *Chess depositary interests (CDIs) issued to employees at below market price. 291,347 597,499 1,216,311 715,177 - 118,382,619 996,636 154,342 147,000 156,683 699,445 17,676 264,840 170,588 489,202 - 121,479,031 175 351 347 - (12) 35,967 318 - - - 225 - - - - (18) 36,492 52 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 23. Issued capital and reserves (continued) Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ Other Reserves Foreign currency translation reserve (1,876) (1,976) (2,271) (2,271) Share-based payment reserve 643 3,492 643 3,492 Share-based payment reserve Outstanding at 30 June 2019 Granted during prior years Granted during the year Converted during the year Outstanding at 30 June 2020 PRs Granted during prior years PRs Granted during the year in lieu of fees PRs Converted during the year PRs Expired during the year CDIs Issued under Employee Incentive Plan Outstanding at 30 June 2021 Performance rights on issue No. $000’ 3,075,000 - 1,722,447 (715,177) 4,082,270 - 1,788,325 (1,253,331) (2,925,000) - 1,692,264 1,586 1,065 1,394 (553) 3,492 624 842 (815) (3,978) 478 643 53 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 23. Issued capital and reserves (continued) Nature and purpose of reserves Share premium reserve The share premium reserve is used to record increments in the value of share issues when the issue price per share is greater than the par value. The par value of shares is currently £0.005 (2020: £0.005). Costs of the issues are written off against the reserve. Share-based payment reserve The share-based payment reserve is used to record the value of equity benefits provided to employees and directors as part of their remuneration, or to other parties in lieu of cash compensation. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of the company. Reserves classified on the face of the consolidated statement of financial position as retained earnings represent accumulated earnings and are distributable. All the other reserves are non-distributable. 24. Financial risk management objective and policies Financial risk management Overview The Company and Group have exposure to the following risks from their use of financial instruments: Market risk, including foreign currency risk, price risk and interest rate risk Credit and cashflow risk Liquidity risk This note presents information about the Company’s and Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. Risk management policies are established to identify and analyse the risks faced by the Company and Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s and Group’s activities. The Board of Directors oversees how management monitors compliance with the Company’s and Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company and Group. The Company and the Group’s principal financial instruments are cash, receivables, borrowings and payables. The financial assets are categorised as loans and receivables measured at amortised cost and the financial liabilities are categorised as other financial liabilities measured at amortised cost. 54 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 24. Financial risk management objective and policies (continued) Interest rate risk Interest rate risk is the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Interest rate risk arises from fluctuations in interest bearing financial assets and liabilities that the group uses. Interest bearing assets comprise cash and cash equivalents which are considered to be short-term liquid assets. It is the Group's policy to settle trade payables within the credit terms allowed and therefore not incur interest on overdue balances. Interest bearing liabilities include a bank overdraft facility secured on trade receivables. At the date of issue of this report the facility has been repaid. Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased/(decreased) equity and profit or loss by the amounts shown below. The analysis is performed on the same basis as 2020. Profit or loss Equity Carrying value at year end 100bp increase 100bp decrease 100bp increase 100bp decrease $000’ 2,381 2,545 (480) $000’ $000’ $000’ $000’ 24 24 26 (5) 21 (24) (24) (26) 5 (21) 24 24 26 (5) 21 (24) (24) (26) 5 (21) Consolidated - 30 June 2021 Cash and cash equivalents Consolidated – 30 June 2020 Cash and cash equivalents Borrowings Credit and cash flow risk Credit and cash flow risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. The Group trades only with recognised, creditworthy third parties. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. With respect to credit and cash flow risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, the Group’s exposure to credit and cash flow risk arises from default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. This risk is minimised by reviewing term deposit accounts from time to time with approved banks of a sufficient Fitch Ratings credit rating of at least A-, Moody’s credit rating of at least A2, and Standard & Poor’s credit rating of at least A-. The Group does not place funds on terms longer than 30 days and has the facility to place the deposit funds with more than one bank. The Group does not hold collateral as security for any of its’ receivables. 55 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 24. Financial risk management objective and policies (continued) The Company has exposure to credit and cash flow risk arising from the making of loans to subsidiaries. The loans carry no interest rate or date for repayment. Loans are impaired to the carrying value of the subsidiarys’ assets. The Group and Company undertake the following procedures to determine whether there has been a significant increase in the credit risk of its other receivables, including group balances, since their initial recognition. Where these procedures identify a significant increase in credit risk, the loss allowance is measured based on the risk of a default occurring over the expected life of the instrument rather than considering only the default events expected within 12 months of the year-end. The Group and Company have not determined that credit risk has increased during the year in respect of the Group’s trade receivables. Exposure to credit and cash flow risk The carrying amount of the Group’s financial assets and liabilities represents the maximum credit exposure. The Group’s maximum exposure to credit and cash flow risk at the reporting date was: Cash and cash equivalents Trade receivables Loans to subsidiaries Consolidated Parent Carrying amount Carrying amount 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 2,381 2,347 - 2,545 2,991 - 86 - 3 11,397 - 9,944 4,728 5,536 10,030 11,400 The Group’s maximum exposure to credit and cash flow risk for trade receivables and cash and cash equivalents at the reporting date by geographic region was: Europe Americas Australasia Other Consolidated Parent Carrying amount Carrying amount 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 1 502 - - 4,226 4,259 10,030 11,397 501 - 720 55 - - 3 - 4,728 5,536 10,030 11,400 Trade receivables at 30 June 2021 represent 56 debtors days (2020: 57 debtor days). There were no trade receivables impairment losses at 30 June 2021 (2020: $nil). No expected credit loss provision in respect of trade receivables has been recognised on the basis this is immaterial. The expected credit loss rate applied has been calculated based on historical recovery rates of low bad debt write offs. This is also supported by strong post year end collection of cash. 56 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 24. Financial risk management objective and policies (continued) Impairment of company receivables from subsidiaries The Company’s group receivables represent trading balances and loan amounts advanced to other group companies with no fixed repayment dates. Under IFRS 9 the fair value of this intercompany receivable is repayable on demand to the Company. The Company was due the following amounts as at 30 June 2021 before the recognition of any impairment loss provisions: Gross Impairment Carrying value at 30 June 2021 SMS Ltd SMSCC $000’ $000’ Total $000’ 12,512 (12,004) 508 9,436 - 9,436 21,948 (12,004) 9,944 In respect of the balance due from Structural Monitoring Systems Limited (SMS Ltd), the Company did not have sufficient liquid resources at 30 June 2021 to repay the loan in full. An impairment loss provision has been recognised to the extent the carrying value at 30 June 2021 is covered by the recovery of net assets in the balance sheet of SMS Ltd. This has been measured based on lifetime expected credit losses on the basis that credit risk has increased since initial recognition. In respect of the balance due from Structural Monitoring Systems Canada Corporation (SMSCC), the Company did not have sufficient liquid resources at 30 June 2021 to repay the loan in full. However, on the basis that there has been no significant increase in credit risk and the balance is expected to be recovered by the subsidiary’s trading, no impairment loss provision has been recognised recognised on the basis that any impairment loss provision would be immaterial (2020: $nil). This has been measured based on 12 month expected credit losses. Credit risk The measurement of impairment losses depends on whether the financial asset is ‘performing’, ‘underperforming’ or ‘non-performing’ based on the company’s assessment of increases in the credit risk of the financial asset since its initial recognition and any events that have occurred before the year-end which have a detrimental impact on cash flows. The financial asset moves from ‘performing’ to ‘underperforming’ when the increase in credit risk since initial recognition becomes significant. In assessing whether credit risk has increased significantly, the company compares the risk of default at the year-end with the risk of a default when the investment was originally recognised using reasonable and supportable past and forward-looking information that is available without undue cost. The risk of a default occurring takes into consideration default events that are possible within 12 months of the year- end (“the 12-month expected credit losses”) for ‘performing’ financial assets, and all possible default events over the expected life of those receivables (“the lifetime expected credit losses”) for ‘underperforming’ financial assets. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The following are the contractual maturities of financial liabilities: Consolidated 30 June 2021 Trade and other payables Lease liabilities Carrying amount Contractual cash flows 1 year or less More than 1 year $000’ $000’ $000’ $000’ (1,845) (338) (2,183) (1,845) (338) (2,183) (1,845) (268) (2,113) - (70) (70) 57 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 24. Financial risk management objective and policies (continued) Consolidated 30 June 2020 Trade and other payables Borrowings lease liabilities Carrying Contractual 1 year or More than 1 amount cash flows less year $000’ $000’ $000’ $000’ (1,490) (480) (305) (2,275) (1,490) (1,490) (480) (305) (480) (249) (2,275) (2,219) - - (56) (56) The carrying amount of financial assets and financial liabilities at amortised cost recorded by category is as follows: Financial assets measured at amortised cost Cash and cash equivalents Trade receivables Loans to subsidiary undertakings Financial liabilities measured at amortised costs Borrowings Trade and other payables Lease liabiities Loans from subsidiary undertakings Foreign currency risk Consolidated Parent Carrying amount Carrying amount 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 2,381 2,347 - 2,545 2,991 - 4,728 5,536 - 1,845 338 - 480 1,504 262 - - 86 9,963 10,049 - 434 - - - 3 11,397 11,400 - 245 94 921 2,183 2,246 434 1,260 The Group undertakes sales and purchases that are denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations in the US dollar, Canadian dollar, the Euro and the British pound. The fair value of the Group and Parent Company financial assets and liabilties are not materially different to their book values. Exposure to currency risk The Group’s exposure to foreign currency risk at reporting date was as follows, based on notional amounts: 30 June 2021 In AUD Cash Trade receivables Trade and other payables 30 June 2020 In AUD Cash Trade receivables Trade and other payables AUD000’ 189 5 (511) (317) CAD000’ 643 USD000’ 1,549 GBP000’ 189 (982) (150) 2,153 (352) 3,350 Total 000’ 2,381 2,347 (1,845) 2,883 - - - - AUD000’ CAD000’ USD000’ GBP000’ Total 000’ 255 3 (199) 59 243 236 (544) (65) 2,047 2,752 (685) 4,114 - - (62) (62) 2,545 2,991 (1,490) 4,046 58 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 24. Financial risk management objective and policies (continued) The Group had net assets denominated in foreign currencies of $3.207m as at 30 June 2021 (2020: net assets of $3.987m). Based on this exposure, had the Australian dollar weakened by 10%/strengthened by 5% (2020: weakened by 10%/strengthened by 5%) against these foreign currencies with all other variables held constant, the Group’s loss before tax for the year would have been $0.321m higher/$0.321m lower (2020: $0.170m higher/$0.085m lower). The Board regularly monitors the Group’s exposure to foreign exchange fluctuations. The following significant exchange rates applied during the year: AUD:CAD AUD:USD Capital risk management Average rate Reporting date spot rate 2021 2020 2021 2020 0.957 0.747 0.900 0.671 0.932 0.752 0.939 0.686 The Company and the Group’s objectives when managing capital are to safeguard the Company and the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The management of the Company and the Group’s capital is performed by the Board. Given the level of operations of the Group, the Board has a secured overdaft facility available with a credit limit of C$5 million. It has not made use of long term debt financing, but has instead chosen to raise additional capital by issuing shares. The Board regularly monitors, liquidity, exchange rates, cash flow and financial assets and liabilities balances by means of financial reports and cashflow forecasting. None of the Group’s entities are subject to externally imposed capital requirements. 25. Commitments and contingencies A claim for royalties amounting to $561,865 including interest (2020: claim received $435,064 inc GST/interest) has not been provided for based on the current status of the case where a verdict is expected later this year. At the reporting date there are no other changes to commitments or contingent liabilities. 59 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 26. Related party disclosure The consolidated financial statements include the financial statements of Structural Monitoring Systems Plc and the subsidiaries listed in the following table. Structural Monitoring Systems Ltd Structural Monitoring Systems Canada Corp (SMSCC) Anodyne Electronics Manufacturing Corp (AEM) Country of incorporation % Equity interest 2021 2020 Australia Canada Canada 100 100 100 100 100 100 Structural Monitoring Systems Plc is the ultimate parent entity and is incorporated in the United Kingdom. The Company carries on the business of developing the Group’s structural health monitoring technology. Structural Monitoring Systems Limited is a subsidiary of the Group and is incorporated in Australia. It is the owner of the intellectual property pertaining to the structural health monitoring technology. SMSCC was incorporated on 24 October 2017. Anodyne Electronics Manufacturing Corporation (AEM), was acquired by SMSCC on 8 December 2017 for a consideration of $10,998,750. Remuneration paid to the directors and executives, who are considered key management personnel, for the year is disclosed in the remuneration report in the Directors’ Report. The share-based payments charge for directors and executives for the year was $0.713m (2020: $1.275m). The following are the amounts due to key management personnel at reporting date: Due to executive – Toby Chandler Due to director – Will Rouse Due to director – Michael Reveley Due to director – Stephen Forman Due to director – Sam Wright * Due to director – Terry Walsh ** * Appointed 14 October 2020 (2020: comprises Company Secretarial Fees due) ** Resigned 14 October 2020 (2021: comprises Legal Counsel fees due) 2021 $000’ 2020 $000’ 69 100 58 40 40 29 69 - - - 20 - 60 Notes to the Financial Statements For the Year Ended 30 June 2021 Structural Monitoring Systems Plc 27. Events after the balance sheet date Subsequent to the reporting date the Company has completed the acquisition of Canadian business, Eagle Audio via its wholly-owned subsidiary Anodyne Electronics Corporation Inc (“AEM”). The consideration for the acquisition is C$4.118m (with C$360,000 of the purchase price to be held in escrow for 12 months). As a result of the acquisition the Company expects an increase in annualised gross revenues of $3.500m per annum and an increase in EBITDA of $2.200m per annum. The acquisition was funded using cash and existing line of credit facilities with HSBC Canada. A condition precendent to the facility with HSBC Canda is a deposit of US $800,000 which is to be provided by Stephen Forman, a director of the Company for a term of 12 months. Interest of 6% per annum will be paid on the deposit. The key customer segments of Eagle Audio are rotary and fixed wing aircraft (OEMs, law enforcement, EMS, CoastGuard, military, forestry and firefighting). The purchase price includes approx. C$0.800m in inventory plus IP/Supplemental type certifications (“STCs”) and related process manufacturing/engineering documentation. Management is still in the process of identifying the fair value of the assets and liabilities acquired. The impact of the Coronavirus pandemic is ongoing and has had financial impact for the Group to 30 June 2021. The Group has experienced supply chain constraints and had to implement social distancing measures and a spilt shift system earlier in the year, it is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is ongoing and is dependent on measures imposed by the Canadian government and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided. Other than the above no matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. 28. Auditors’ remuneration Details of the amounts paid to the auditor of the Company, RSM UK Audit LLP, and other auditors for audit and non- audit services provided during the year are set out below. Fees payable to Elderton Audit (UK) (2020: RSM UK Audit LLP) and its associates in respect of both audit and non- audit services are as follows: Audit services – statutory audit of parent and consolidated accounts fees payable to the company’s auditor for the audit of the companies annual accounts. Audit of the accounts of subsidiaries Other services Audit-related assurance services Taxation advisory services Consolidated Parent 2021 $000’ 2020 $000’ 2021 $000’ 2020 $000’ 78 77 - - 155 80 108 38 6 232 78 - - - 78 80 - 25 - 105 61 REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF STRUCTURAL MONITORING SYSTEMS PLC Opinion We have audited the financial statements of Structural Monitoring Systems PLC (“the Company” or “Parent Company”) and its subsidiaries (collectively referred to as “the Group”) for the year ended 30 June 2021 which comprise Consolidated and Parent Company Statements of Financial Position as at 30 June 2021; the Consolidated and Parent Company Statements of Profit and Loss and other comprehensive Income, the Consolidated and Parent Company Statements of Cash Flows and the Consolidated and Parent Company Statements of Changes in Equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. In our opinion: - - - the financial statements give a true and fair view of the state of the Parent Company and the Group’s affairs as at 30 June 2021 and of the Parent Company and the Group’s loss for the year then ended; the financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the matters described below to be key audit matters to be communicated in our report. Key audit matter Going concern The Group reported a net loss after tax of $1.959m (2020: loss $2.549m) for the year ended 30 June 2021. Under IAS 1: Presentation of Financial Statements, the directors of the Group are required to assess the appropriateness of the preparation of the financial report on a going concern basis. it be This area is a key audit matter due to the nature of the business and the current financial position. financial Should statements to be prepared on the going concern basis, the values of certain assets and liabilities as set out in the financial statements would be materially misstated. inappropriate the for How our audit addressed the key audit matter Our audit work included, but was not restricted to, the following: • Obtaining management's assessment or the going concern basis of preparation by reviewing future plans and tested cash now projections prepared by the Group for consistency with our understanding of planned activities; • Held discussions with management as to any future capital raisings and tested the forecasted cashflows for the twelve-month period from the date of signing the financial statements for mathematical accuracy; • Obtained management's cash flow forecast for the 15 months period from July 2021 to September 2022 and assessed reasonableness of management's the assumptions; considered to subsequent determine whether any additional facts or information have become available since the date on which management made its assessment; and events • Valuation of inventory Inventory balance is the most significant asset on the Statement of Financial Position of the Group. As note in Note 2(l) of the financial report, inventories comprise raw materials, work in progress and finished goods which are stated at the lower of cost and net realisable value. Cost comprises of direct materials and delivery costs, direct labour, import duties and other taxes including an appropriate portion of the variable and fixed overhead expenditure based on normal operating capacity. As a result, judgement is applied in determining the level of provisions required for obsolete inventories and an appropriate apportionment of labour and overhead. We therefore considered this to be a key audit matter. • assessing the appropriateness of the related disclosures. Our audit work included, but was not restricted to, the following: listing and assessed inventory by the accuracy of • Performing specific analysis on slow- reviewing and moving the aged verifying inventory the completeness of the provision for inventory including that was significantly aged; physical observation of inventory was undertaken at the count and no issues noted with to condition of inventory. respect • reviewed the reasonability of the standard overhead rate based on standard operations in recent years and the current year; and • performed NRV testing by selecting samples of products in inventories holding and obtaining evidence of post year-end value. Our Application of Materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. We determined materiality for the Group financial statements as a whole to be AUD 320,115, which represents 2% of the Group’s turnover for the year ended 30 June 2021. This benchmark is considered the most appropriate because this is a key performance measure used by the Board of Directors to report to investors on the financial performance of the Group. Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the Group’s overall control environment and to drive the extent of our testing, performance materiality was 75% of our planning materiality for the audit of the Group financial statements. Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Board that we would report all audit differences in excess of AUD 16,006, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. Other Information The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our Auditors' Report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken by the course of the audit: • • the information given in the Strategic Report and the Director’s report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the Strategic Report and the Director’s Report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Director’s Report. We have nothing to report in respect of following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of director’s remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Overview of the Scope of Our Audit A description of the generic scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeprivate. We conducted our audit in accordance with International Standards on Auditing (ISAs) (UK). Our responsibilities under those standards are further described in the ‘Responsibilities for the financial statements and the audit’ section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Group in accordance with the Auditing Practices Board’s Ethical Standards for auditors, and we have fulfilled our other ethical responsibilities in accordance with those Ethical Standards. The Group solely operates in Canada with head office activities carried out by Parent Company in Australia. The Group audit team performed all the work necessary to issue the Group and parent company audit opinion, including undertaking all of the audit work on the risks of material misstatement. Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. Based on the output of our risk assessment, along with our understanding of the Group structure, full scope audit was performed over all companies in the Group. Full scope audit for the component in Canada was undertaken by component auditors. Responsibilities of directors The directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company’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 company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are 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 ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Other matters The financial statements of the Group for the year ended 30 June 2020 were audited by another auditor who expressed unmodified opinion on 30 September 2020. Use of our report The report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. NICHOLAS HOLLENS Senior Statutory Auditor for and on behalf of Elderton Audit UK Statutory Auditor, Chartered Accountants Perth, Australia 30 September 2021 Shareholder information Structural Monitoring Systems Plc Annual Report Disclosure on Corporate Governance The Company has established, and continues to refine and improve procedures to ensure a culture of good corporate governance exists and is respected across the consolidated entity. The Company has a written policy designed to ensure compliance with ASX Listing Rules and all other regulatory requirements for disclosures. Additionally the Company has adopted a policy designed to ensure procedures to implement the policy are suitable and effective. The Board wishes to acknowledge that nothing has come to its attention that would lead it to conclude that its current practices and procedures are not appropriate for an organisation of the size and maturity of the Company. The Corporate Governance Policy and the Company’s corporate governance practices is set out on the Company’s web site at www.smsystems.com.au. Additional information required by the Australian Stock Exchange and not shown elsewhere in this report is as follows. The information is current as at 20 September 2021. (a) Distribution of CDI securities Structural Monitoring Systems Plc Range of Units As Of 20/09/2021 Range 1 -1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,000 Over Rounding Total Chess Depository Interest (Total) Composition: CDI Total holders Units % Units 546 825 388 784 178 296,242 2,304,472 3,040,612 26,126,321 90,036,138 2,721 121,803,785 0.24 1.89 2.50 21.45 73.92 0.00 100.00 Unmarketable Parcels Minimum $ 500.00 parcel at $ 0.6600 per unit 758 350 107,981 Minimum Parcel Size Holders Units (b) Substantial shareholders The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Holder Drake Special Situations LLC Number of Shares 23,862,500 67 Shareholder information (continued) Structural Monitoring Systems Plc Structural Monitoring Systems Plc Chess Depository Interest (Total) Top Holders (Grouped) As Of 20/09/2021 Composition: CDI Rank Name HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED Units % Units 26,110,752 21.44 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 MR PAUL COZZI 4,210,392 BNP PARIBAS NOMINEES PTY PTD 3,709,417 CITICORP NOMINEES PTY LIMITED MR ROBERT GREGORY LOOBY STRAIGHT LINES CONSULTANCY PTY LTD MR STEPHEN CAMPBELL FORMAN MR BRYANT JAMES MCLARTY BNP PARIBAS NOMS PTY LTD ANODYNE ELECTRONICS HOLDING CORP ROSHERVILLE PTY LTD STONY ROSES PTY LTD LANDMARK CONSTRUCTION PTY LTD MR ROSS MALCOM SPENCER + MR CLINTON LEON SPENCER PETER FRANCIS BOYLE NOMINESS PTY LTD MR DAVID MICHAEL BROWN MR ROSS MALCOM SPENCER + MR CLINTON LEON SPENCER LOOBY HOLDINGS PTY LTD MR ROBERT GREGORY LOOBY AVANTEOS INVESTMENTS LIMITED <4358776 DEBRA A/C> 2,551,031 2,500,000 1,775,813 1,739,978 1,525,871 1,507,622 1,320,000 1,160,000 1,121,500 1,166,679 1,040,000 982,000 900,000 862,520 800,000 800,000 780,000 3.46 3.05 2.09 2.05 1.46 1.43 1.25 1.24 1.08 0.95 0.92 0.88 0.85 0.81 0.74 0.71 0.66 0.66 0.64 Totals: Top 20 holders of CHESS DEPOSITORY INTEREST (Total) Total Remaining Holders Balance 56,563,575 65,340,210 46.35 53.65 68 

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