Tesserent Limited
Annual Report 2022

Plain-text annual report

Tesserent Limited and Controlled Entities ABN: 13 605 672 928 Annual Report 2022 About Tesserent About this report Tesserent is Australia’s #1 ASX- listed cybersecurity provider offering full service cybersecurity solutions to our clients, helping them achieve full end-to-end protection for their digital assets. This annual report covers the operations, activities and financial performance of Tesserent Limited and its controlled entities for the year ended 30 June 2022 (FY22). Cyber 360 utilises a range of products from world-leading cybersecurity vendors, delivering a comprehensive solution to prevent, detect and mitigate potential cyber-attacks. This is delivered by more than 450 cybersecurity professionals across offices in Melbourne, Sydney, Brisbane, Canberra, Auckland, Wellington and Christchurch. In this report, references to ‘Tesserent’, ‘the Company’ and ‘the Group’ refer to Tesserent Limited (13 605 672 928) and its controlled entities. All dollar figures are expressed in Australian dollars (AUD) unless otherwise stated. The financial statements contained within this Annual Report are prepared in accordance with Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board. There are references to IFRS and non-IFRS financial information in this report. Non-IFRS financial measures are used to enhance the comparability of information between reporting periods. Non-IFRS financial information should be considered in addition to, and is not intended to be a substitute for, IFRS financial information and measures. Non- IFRS financial measures are not subject to audit or review. Appendix 4E Financial information for the financial year ended 30 June 2022 as required by ASX listing rule 4.3A. Reporting period: Financial year ended 30 June 2022 Results for announcement to the market (all comparisons to financial year ended 30 June 2021) Revenue from ordinary activities Loss after tax from ordinary activities Net Loss attributable to members $'000 Up/Down % Change 112,977 (8,783) (8,783) Up Up Up 68% 94% 94% Note 1 Under accounting standard AASB15 “Revenue from Contracts with Customer”, some of the Company’s product sales are deemed as Agency Sales. The standard requires these sale amounts to be netted down against cost of products, which results in a lower reported ‘Statutory’ revenue in the Company’s formal Financial Statements. The group’s Turnover (or Gross Revenue) for FY22 was $166m (a non-IFRS measure). This has no impact on Gross profit or Net profit. Note 2 Loss after tax from ordinary activities is presented in accordance with AASB 101 (para 87). It is noted that the reported statutory loss includes $1.2m of acquisition related expenses (incl. fair value expense on contingent consideration), $2.4m of share option expense, and $9.4m of non-cash costs associated with the debt refinancing during the financial year ended 30 June 2022. Dividends paid and proposed No dividend has been proposed to be paid or is payable for the financial year ended 30 June 2022, nor for the comparative period. ABN 13 605 672 928 Annual Report 2022 Tesserent LtdContents 1 2 4 11 12 14 Contents Chairman and CEO’s Letter Review of Operations About Tesserent Board of Directors Executive Team 52 Consolidated Statement of Profit or Loss and Other Comprehensive Loss 53 Consolidated Statement of Financial Position 55 Consolidated Statement of Changes in Equity 56 Consolidated Statement of Cash Flows 57 Notes to the Consolidated Financial Statements 20 Corporate Governance Statement 34 Directors’ Report 51 Auditors Independence Declaration 97 Directors’ Declaration 98 Independent Auditor’s Report 103 Shareholder Information 106 Corporate Directory Our mission is to be the sovereign cybersecurity provider of choice for the protection of Australia and New Zealand’s Digital Assets 1 Chairman and CEO’s Letter $166m Turnover1 up 71% YOY $18.6m Normalised EBITDA1 up 94% YOY $10.0m Normalised NPAT1 up 38% YOY Dear Fellow Shareholders, We are pleased to present the 2022 Annual Report for Tesserent Limited (ASX:TNT) (‘the Company’). During the year ended 30 June 2022, the Group reported total sales turnover of $166m (up 71% from FY21), and a normalised EBITDA1 result of $18.6m which represents significant further growth (+94%) on FY21 results. The Group achieved an underlying normalised net profit (NPAT) of $10.0m, excluding the impact of one-off costs incurred during the year, such as acquisition costs, share based payments and refinancing costs. Following the significant disruption and technological shifts brought about by COVID in 2020 and 2021, many organisations have been compelled to adapt their operating systems and IT security in order to protect supply chains and interconnected systems in the face of the increasingly sophisticated attacks. Global threat actors continue to exploit vulnerabilities across endpoints and cloud environments, and ramp up innovation on how they use identities and stolen credentials to bypass enterprise and government defences. Targeted intrusions are expected to continue to increase, leveraging trends in technology and the broader threat landscape throughout 2022 – such as a likely increase in the use of ransomware from ransomware-as-a-service. Following three years of targeted strategic acquisitions and continuing integration of these businesses and their cybersecurity service offerings into our Cyber360 framework – Tesserent, as Australia’s #1 ASX- listed cybersecurity provider, is extremely well placed to provide its existing and new customers full service cyber security assessment and protection solutions. The FY22 financial year marked a continuation of the strong growth experienced in FY21 accompanied by an ongoing integration and consolidation of the Group’s operations, plus initiatives in the areas of marketing and finance to consolidate the branding of the business and improve profitability. 1 Excludes one-off costs, such as acquisition costs, share-based costs and refinancing costs (see below for further analysis). 2 Annual Report 2022 Tesserent LtdConsistent with the earnings profile in FY21, the quarterly results for FY22 demonstrated strong seasonality and progressive improvement through the year – the second half of the year 72% of full year earnings (vs. 76% in FY21). The Group’s strong growth at the EBITDA level for FY22 was achieved both through the contribution from three acquisitions during the year, plus an underling organic growth of 25% in the existing business. During the year, the business completed the acquisitions and continues to integrate the three businesses into the Group – two in the Tesserent Federal Government advisory practice and one into the Tesserent enterprise/commercial division – complementing and expanding the Group’s existing cybersecurity offering. The re-organisation of the Group’s divisional structure and go-to-market strategy, which was announced in August 2021 is progressing well. This has improved the level of engagement and cross selling opportunities across the business. This re-organisation was also accompanied by a re-branding of the Group which has further reinforced the integration. On 23 June 2022, the Group announced a successful refinancing and upsizing of its debt facilities – with a new $59m Market Rate Loan provided by the Commonwealth Bank of Australia replacing previous facilities (of $35m). We expect FY23 to be another year of growth, with continued strong organic growth and focus on cross selling opportunities across market and between divisions. This may be supplemented with some strategic acquisitions, where they complement and add to the existing Cyber360 strategy. On behalf of the Board and Executive Team, we would like to thank and acknowledge the efforts of management and staff who have been committed to the execution and delivery of our business strategy. We would also like to thank our shareholders for their continued support as we expand on our position as Australia’s #1 ASX- listed cybersecurity firm. Geoff Lord Executive Chairman Kurt Hansen CEO and Managing Director 3 Review of Operations FY22 IN REVIEW Background Increasingly, organisations are coming under cyber- attack from sophisticated state-based actors, hacktivists and cyber-criminals. Threat actors continue to exploit vulnerabilities across endpoints and cloud environments, and ramp up innovation on how they use identities and stolen credentials to bypass legacy defences. Adversaries continue to adapt to security environments evolving with global market pressures and supply chain issues. Targeted intrusions are expected to continue to increase, leveraging trends in technology and the broader threat landscape throughout 2022 – such as a likely increase in the use of ransomware from ransomware-as-a-service. Increasingly reliance on mobile devices is enabling attackers to continue to diversify their exploitations to include mobile malware — either to make money or collect sensitive information. Cloud-related threats are particularly likely to become more prevalent and to evolve, given that targeted intrusion adversaries are expected to continue prioritizing targets that provide direct access to large consolidated stores of high- value data. Cybersecurity market Following the significant disruption and technological shifts brought about by COVID in 2020 and 2021, organisations have been compelled to continue to adapt their operating systems and IT security in order to protect supply chains and interconnected systems in the face of the increasingly sophisticated attacks. Evaluation of the market landscape identifies that enterprise risk is focusing around three critical areas: – endpoint vulnerabilities and cloud workloads – identity and – data The cybersecurity market is expected to continue showing strong growth, driven by the increasing number of retail and financial transactions processed online and through e-commerce platforms, plus the increasing integration and interconnection of business and government controlled systems and infrastructure. Cloud computing, edge computing and public cloud security are the fastest developing market sub- segments. 4 The impact of COVID-19 has accelerated cyberattacks faced by many organisations due to the security vulnerability of remote work and virtualised IT environments. There is also an ever- increasing awareness of data risks and threats among organisations with cybersecurity critical to the success of the digital transformation of operations. The Global cybersecurity market was valued at US$139.8 billion in 2021 and is forecast to grow at a 13.4% compound annual growth rate over 2022-2029. Global Industry Revenue (US$bn) 169 143 121 103 97 129 120 30 110 94 74 61 51 47 34 30 30 40 69 71 86 78 56 63 FY16 FY17 FY18 FY19 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 Security Services Cyber Solution Source: IBISWorld, Statista, Fortune Business Insights As Australia’s #1 ASX-listed cybersecurity provider, Tesserent has a broad Cybersecurity service offering through its Cyber360 framework and is extremely well placed to provide its existing and new customers full service cyber security assessment and protection solutions. Tesserent has a sovereign Aust/NZ workforce of over 450 skilled cybersecurity professionals. Combined with in-house software monitoring solutions and access to a range of products from world-leading cybersecurity vendors, Tesserent delivers a comprehensive solution to prevent, detect and mitigate cyber-attacks. Annual Report 2022 Tesserent LtdWith employees located across offices in Melbourne, Sydney, Brisbane, Canberra, Wellington, Auckland, and Christchurch, Tesserent continues to hold its place as Australia’s #1 ASX-listed cybersecurity provider. Tesserent now provides products and services to over 1,200 clients: GOVERNMENT – 53 Federal and State Departments and Agencies – 25 Local Councils FINANCIAL – 8 of the 12 Largest Banks in Aust/NZ – 6 Top Financial Services firms – 14 Foreign Banks CRITICAL INFRASTRUCTURE – 21 of the Top Energy firms in Aust/NZ, ENTERPRISE – Tesserent works with 51 of the S&P/ASX 100 – 50% of the Tier 1 Retail and logistics supply chain organisations Other market drivers Due to a rapidly evolving suite of technology platforms utilised by businesses and individuals and increased connectivity, the demand for IT security solutions is on the rise. Digital assets and data are becoming an increasingly important aspect of conducting business and as such, the need for security will continue to increase as cybercriminals become more advanced. With computer networks and systems becoming more complex, the need for security and monitoring services is increasing. Many businesses are selecting to outsource these services to specialist providers, with an increased focus on security software service offerings. There have been a number of highly publicised cyber security breaches over the past several years, highlighting the need for governments and businesses to proactively improve their digital security platforms. 5 Review of Operations continued The shortage of the required human skill sets needed for organisations to employ a suitable level of cyber resilience continues to be a challenge globally and in Aust/NZ. Tesserent has positioned itself as a destination employer for cyber skilled staff and will also contribute to developing skills across this industry wide problem. FY22 FINANCIAL PERFORMANCE The adjacent table, sets out the key financial metrics for the Group for the current year and the prior year. Tesserent continued its expansion through FY22 with growth (versus FY21) in Turnover of 71% and growth in Operating EBITDA of 91%. As reported in the most recent quarterly report, the overall growth in Operating EBITDA of 91%, comprised 25% organic growth, plus contribution from newly acquired business (acquisition growth) of 66%. During the full year FY22, the Group reported total Turnover of $165.6m and statutory revenue of $113.0m. As previously discussed, Turnover includes revenue from consulting and advisory services, plus turnover from product sales. The turnover or ‘Gross revenue’ is equivalent to the value invoiced to customers and drives the receivables balance reported in the Group balance sheet. Under accounting standard AASB15 “Revenue from Contracts with Customer”, some of the Company’s product sales are required to be netted down against cost of products, which results in a lower reported ‘Statutory’ revenue in the Company’s formal Financial Statements (this has no impact on Gross profit or Net profit). Key observations from the FY22 results (per the adjacent table) – The Group’s underlying earnings showed significant growth with FY22 Operating EBITDA (before addition of AASB16 adjustments) growing 116% from the prior year (FY21). – The improved Operating EBITDA reflects improved operating leverage through the business, plus the impact of the business reorganisation whereby the new operating divisions of the business have reviewed and addressed pricing and margin recovery on certain contracts. 6 – Interest expense is up 74% in FY22 as a result of the upsized facility of $35m for the full year (vs. partial year in FY21). As a result of the refinancing with CBA, which was completed on 23 June 2022, the cash interest cost of the refinanced $35m will be approximately $1.2m lower in FY23. The non-cash interest cost (amortisation of the warrants) will not be applicable in FY23. – Depreciation and amortisation costs have increased by 58% in FY22, driven primarily by the increase in required accounting treatment for amortisation of customer contracts associated with the acquisitions. During FY22, the depreciation and amortisation costs were spilt into; Depreciation of Property Plant and Equipment ($1.7m); Depreciation of AASB16 Right-of-use assets ($2.2m) and Amortisation of customer contracts associated with the acquisitions ($3.9m). – Share based payment and option expenses are down 46%, as the number of options issued in FY22 was lower that FY21 – when the Group’s ESOP plan was launched. – Acquisition costs were lower, down 76% as a result of fewer acquisitions in the current year vs. FY21. – There were a number of one-off costs associated with the refinancing and exit from the previous debt facility, which impacted profit in FY22 being; exit fee on the previous facility ($1.75m); write-off and amortisation of remaining unamortised costs on warrants attached to the previous facility ($7.5m). These costs will not reoccur in future periods. – In accordance with accounting standard AASB 128, the Group is required to assess the carrying value of its investments – taking into account any external market indicators. During FY22, there were external indicators that compelled a write-down of the TrustGrid and AttackBound minority investments, totalling $1.6m. There was also a write-down of the call option investments relating to TrustGrid and AttackBound of $2.5m. – The write-down of minority investment was partially offset by a market indicator supporting a write-up of the Daltrey investment held at fair value through profit or loss by $0.6m. Note that the carrying value impairments and write-up relate to the minority investments held by the Group. The business has also assessed the carrying value of all of the controlling acquisitions made by the Group in the core business (under the three CGU’s disclosed in the financial statements) and no impairment has been required (refer to Note 15 of the financial statements). Annual Report 2022 Tesserent Ltd cash v. non-cash expenses 30-Jun-22 $’000 30-Jun-21 $’000 Normalised EBITDA and NPAT Details Turnover Statutory revenue Operating EBITDA (as reported in 4C quarterly reporting) add Impact of AASB16 lease adjustments Normalised EBITDA Interest expense Depreciation and amortisation Tax credit Normalised NPAT Less: One-off costs/non-recurring expenses cash non-cash non-cash 165,567 112,977 16,312 2,241 18,553 (3,361) (7,841) 2,634 9,985 – 96,685 67,389 7,560 2,025 9,585 (1,929) (4,975) 4,578 7,259 – % change +71% +68% +116% +94% +38% Share based payment and option expenses non-cash (2,401) (4,462) Acquisition costs and fair value expense on contingent consideration Exit costs on refinancing Non-cash interest - amortisation of warrants and facility costs Loss on carrying value of innovation investments Statutory NPAT cash cash non-cash non-cash (1,192) (1,750) (9,398) (4,027) (8,783) (4,934) – (2,396) – (4,533) Sum of cash expenses below Normalised NPAT Sum of non-cash expenses below Normalised NPAT (2,492) (15,827) (4,934) (6,858) As noted in the TNT’s recent ASX quarterly performance announcement (on 28 July 2022), the earnings of the business are highly seasonal, with: – Turnover in H1/H2 of FY21 reported at 38% / 62% and H1/H2 of FY22 reported at 39% / 61% – Operating EBITDA in H1/H2 of FY21 reported at 23% / 77% and H1/H2 of FY22 reported at 28% / 72% as shown below. FY21/FY22 Turnover - quarter on quarter ($m) 58.6 39.2 41.5 34.7 28.2 21.4 21.0 15.1 Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21 Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22 7 60 50 40 30 20 10 0 8 7 6 5 4 3 2 1 0 Review of Operations continued FY21/FY22 Operating EBITDA – quarter on quarter ($m) 7.8 4.1 3.9 2.6 2.0 1.3 1.7 0.4 Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21 Q1 FY22 Q2 FY22 Q3 FY22 Q4 FY22 Cashflows The Group recorded a positive operating cash flow of $11.8m for the year, as a result of strong cash conversion and favourable movements in net working capital. Operating EBITDA to cash conversion was 72% for the full year FY22. We note that operating cashflow can fluctuate significantly over the year, driven by trading seasonality in the business coupled with large working capital and WIP movements which may move the outcome materially over quarter end reporting dates. Management monitors the working capital dynamics over the year to ensure that the group is optimising its cash position as the business grows organically. The new debt facilities with the CBA (see below) includes a revolving facility which provides the Company flexibility in managing its cash and debt position. FY22 ACQUISITIONS During the year, Tesserent completed controlling acquisitions of three separate businesses (Loop Secure, Claricent and Pearson) covering both public and private sector consulting services, managed services and specialised product expertise. Each of these acquisitions have exceeded their incoming FY22 revenue and earnings targets for the control period post acquisition and are well progressed on integration into the Group’s existing operations and Cyber360 model. 8 INTEGRATION AND OPERATIONAL RE-ORGANISATION The financial year FY22, represented a year of both growth and consolidation for the Group, as the business continued its plans to pursue a brand and business unit integration strategy following the acquisition of nine separate businesses in the two preceding financial years, in order to build out the Group’s Cyber360 capabilities. The re-organisation of the business units acquired over the last two years has aligned them with the go-to-market channels and form the basis in which the Group’s CEO and Board manage and assess business performance. A new brand strategy was adopted to accompany and accentuate the change in the Group’s go-to-market approach. CLIENT ACQUISITION AND EXPANSION The integration and reorganisation of these business acquisitions continues to strengthen the Group’s trading performance and its commercial position in the market – enabling the Group to enhance its value proposition to existing and new clients and improve gross margins and net margins reported across the business. As a result, the group has during FY21/22 developed eight major service lines, with promising cross- selling results to date, as follows: – 60 clients with 2 service lines – 30 clients with 3 services lines – 10 clients with 4 or more services lines – 120 new client “logos” were added in FY22 Annual Report 2022 Tesserent Ltd9 Review of Operations continued The growth opportunity presented now is to continue to market these service lines to more than 1,200 existing clients across commercial and government sectors, as well as using the offering to add net new clients. In September 2021 the Company refreshed its brand image and purpose with a new narrative. “Securing our digital future, together”. This narrative recognised that cybersecurity starts and ends with all of us. That we partner with our clients to create solutions that keeps their businesses and customers data safe. Collectively the more systems we secure the more secure our interconnected world becomes. This refreshed brand will be important as we continue to grow and develop our business to become known as the sovereign “go to business” for managing cyber risk. REFINANCING OF GROUP DEBT FACILITIES During the Q4 of FY22, Tesserent completed a refinancing and upsizing of its debt facilities – with a new $59m Market Rate Loan provided by the Commonwealth Bank of Australia replacing previous facilities (of $35m). As part of the refinancing, CBA is providing a Market Rate Loan of up to $20m to be used to fund cash consideration payments on existing and future acquisitions; plus ancillary facilities of $4m – to cover Bank Guarantees, FX and corporate cards for the Group. The implementation of the new financing arrangements will materially reduce the (cash) interest cost and eliminate the ongoing non-cash warrant expense on the previous debt facility and result in significant savings on drawn new debt facilities (based on current benchmark interest swap rates). FUTURE FOCUS A key focus of the Group is ensuring that each of our divisions has a strong management capability that is accountable for strategy development and execution, as well as day-to-day operational performance. The Board and Management Team continue to focus on creating shareholder value by building on Tesserent’s position as Australia’s #1 ASX-listed cybersecurity provider. Important goals for FY23 financial year include: – Fostering innovation across the Group and expanding proprietary intellectual property to drive high-margin product and service offerings. – Focusing on capturing further market share of clients in three key markets: Government (including Defence), Critical Infrastructure and Financial Services. – Driving growth through deeper and wider customer engagements and increasing our average number of services per customer. – Integrating acquisitions into “Capability Business Units” to maximise synergy efficiencies and drive organic revenue growth through cross-selling. – Building out high-value recurring annuity revenue streams via Managed Security Operations Centre (SOC) and Managed Detection and Response (MDR). – Investing in the Tesserent Academy strategy to deliver programs to help the industry shortage of cyber skills for Tesserent staff, our clients and industry wide. – Selectively evaluating acquisition opportunities that may expand on our Cyber 360 capabilities and market share, increasing shareholder value through incremental EPS growth. 10 Annual Report 2022 Tesserent LtdD efend v i c e r e Our P u b li c C l o u d Clients Private C l o u d t c Prote re as a S a w t f o S D e t e c t & R e s p o nd Cyber Strategy & Consulting Security Advisory (GRC) Tech. Assurance & Testing Identity & Access Management 24x7 Managed Detection Incident Response Network & Cloud Security Critical Controls Cyber Education Converged/ Physical Security 11 About Tesserent THE GROUP TODAY Tesserent is Australia’s #1 ASX-listed cybersecurity provider offering full service cybersecurity Solutions to our clients, helping them achieve full end-to-end protection for their digital assets. This is delivered by more than 450 cybersecurity professionals across offices in Melbourne, Sydney, Brisbane, Canberra, Auckland, Wellington and Christchurch. Cyber 360 utilises a range of products from world-leading cybersecurity vendors, delivering a comprehensive solution to prevent, detect and mitigate potential cyber-attacks. Tesserent’s Cyber 360 offering provides products, services and strategic advice to more than 1,200 Enterprise, Government and Critical Infrastructure clients. OUR STRATEGIC DIVISIONS CYBER360 STRATEGY Federal Cloud Defend & Protect Detect Academy Training Associates Innovation and IP development 12 Annual Report 2022 Tesserent LtdDEFEND PROTECT DETECT RISK IDENTIFICATION Assist clients to understand their risk profile, identify business critical assets and the appropriate level of protection required. TECHNICAL ASSESSMENTS Conduct assessments & gap analysis against best practice and regulatory requirements to assist clients with measuring their current security posture. GOVERNANCE & POLICIES Assess, align & uplift a client’s governance and risk management strategy to match their risk profile and/or regulatory requirements CONTROLS Design and implementation of appropriate controls to safeguard assets, through the adoption of secure architectures and frameworks. RISK MITIGATION Actively drive continuous security maturity in organisations and raise awareness of the current threat landscape. 04 Data and Analytics 08 01 02 03 Strategy and Advisory Assurance and Testing Architecture and Engineering 05 Incident Response 06 07 Critical Technology Controls Detect – Secure Digital Eye Secure Cloud Migration 13 Board of Directors GEOFF LORD Executive Chairman KURT HANSEN Chief Executive Officer and Managing Director Geoff is the Founder and CEO of the Belgravia Group, a privately held investment group which since being established in 1990 has grown to employ more than 10,000 people in businesses spanning sports and sports technologies, fitness, leisure, sports camps, clothing and more. In addition, Geoff is the former Founder and Chairman of UXC Limited, one of Australia’s largest IT services businesses. After being founded in 2002 as a $5m business, UXC grew under Geoff’s leadership to be acquired in 2016 by NYSE-listed Computer Sciences Corporation (now DXC Technology) in a deal valued at A$427.6m. Other board positions held by Geoff include Director Melbourne Business School, founding Director of SME finance business Judo Bank and Chairman of Salvest. He has also shown a significant passion for sports and clubs, having served as Chairman of Hawthorn Football Club and Melbourne Victory. Geoff is a Life Member of both clubs. Geoff’s formal qualifications include an MBA (Distinction) (Melbourne), BEc (Hons) (Monash), FIDA, ASIA. Geoff is the largest shareholder in Tesserent. Kurt has over 30 years of IT industry experience driving sales and delivery transformation and impressive business growth across many IT and Cybersecurity organisations in Australia and New Zealand. Kurt was the CEO at Pure Security where, as part of the PS&C Group he integrated four Security businesses following their acquisition and listing onto the ASX. Previous roles include executive, senior management and operational positions at Check Point Software Technologies, F5 Networks, AirData, Symbol Technologies, Telstra Wholesale, Cisco Systems, and Ericsson. Prior to commencing his corporate career, Kurt joined the Australian Army as an electronic trainee, later becoming a commission officer and finishing his military career in Royal Australian Signal Corp with the rank of Captain. He holds a Diploma of Engineering from Swinburne Institute of Technology. See pages 34 to 35 for further information. 14 Annual Report 2022 Tesserent LtdGREGORY BAXTER MEGAN HAAS Non-Executive Director (NED) Non-Executive Director (NED) Board member since 2015. Greg is currently Chief Transformation Officer Hewlett Packard, leading HP’s IT, Cyber, Software, Data & AI, and Transformation Management organizations. Greg was previously Chief Digital Officer at MetLife and Global Head of Digital at Citibank, leading Citi’s digital transformation across businesses and geographies. Greg specialises in the development and delivery of digital strategy, corporate innovation and business transformation. He has held senior business, consulting and technology roles across Asia, Europe and North America, with a track record of high- impact business results. Greg has extensive board and advisory experience in technology, financial services and research institutions. He holds a BSc from Monash University and an MBA from the University of Melbourne and has been a guest lecturer on strategy at the University of Oxford, New York University, and Columbia University. Megan’s core competencies are centered around cyber risk, governance, technology and operational processes developed over 30+ years both in Australia and internationally. Formerly a PwC Cyber Security & Forensic Services Partner, Megan has worked with organisations across international borders and industries including pharmaceutical, gaming, retail, manufacturing, government, media, financial services and communications. Megan has a BBUS Accountancy & Information Systems (RMIT), GAICD. Megan’s other Directorships include: Development Victoria (Chairperson), RMIT University (Council member) and Note Printing Australia (audit committee). 15 Executive Team KURT HANSEN JAMES JONES SAMANTHA RIDDLE Chief Executive Officer Group CFO Director – People & Culture Samantha has extensive commercial and human resources experience spanning 30 years both in Australia, and overseas. The last 18 years, she has held senior people leadership roles across the IT Sector. She is passionate about leading a Human Resources function that attracts, develops and retains high performing leaders and teams. With her depth of knowledge and experience across the IT sector and Human resources alike, she is able to bring alignment between business and people strategies. She is both passionate and committed to making a positive impact to the business, through maximising and developing peoples’ potential and capability. Samantha, holds a Bachelor’s degree in Commerce and Political Science, Honours Degree in Organisational Development and a Masters Of Business Administration. Kurt has over 30 years of IT industry experience driving sales and delivery transformation and impressive business growth across many IT and cybersecurity organisations in Australia and New Zealand. Kurt was the CEO at Pure Security where, as part of the PS&C Group he integrated four security businesses following their acquisition and listing on the ASX. Previous roles include executive, senior management and operational positions at Check Point Software Technologies, F5 Networks, AirData, Symbol Technologies, Telstra Wholesale, Cisco Systems, and Ericsson. Prior to commencing his corporate career, Kurt joined the Australian Army as an electronic trainee, later becoming a commission officer and finishing his military career in Royal Australian Signal Corp with the rank of Captain. He holds a Diploma of Engineering from Swinburne Institute of Technology. James joined Tesserent after serving as CFO of the Australian FMCG business, Bellamy’s Organic Group which was formerly an ASX listed business (sold in a public to private transaction in 2019). In his role at Bellamy’s, James was responsible for leading the Finance team across multiple jurisdictions in the delivery of technical accounting, reporting, audit and tax requirements plus statutory reporting and board reporting for Bellamy’s Group. Prior to his role at Bellamy’s, James was a Director at Deloitte and then EY (in the United Kingdom) working in an advisory capacity on restructuring, distressed assets and M&A transactions. James has extensive experience in financial modelling and scenario analysis, plus providing advice on bid tactics, sale and purchase contract structuring and purchase price mechanics through execution of M&A deals. James has worked on the ground on both sell side and buy side mandates, as well as fund raisings and Stock Exchange listings on both ASX and LSE. James hold Bachelor of Commerce and Bachelor of Science degrees from the University of Melbourne and is a member of Chartered Accountants (CA ANZ). 16 Annual Report 2022 Tesserent LtdPAUL TAYLOR General Counsel and Company Secretary CHRIS HAGIOS Managing Partner, Defend & Protect Paul has extensive experience across the financial services, e-commerce and legal industries and is a member of Tesserent’s Senior Leadership Team. Paul previously held leadership roles in the insurance and financial services sector with the Cover-More Group Limited and Insurance Australia Group Limited, and most recently acted as General Counsel & Company Secretary at Simonds Group Limited, an ASX listed business focused on residential building and construction. At Tesserent, Paul brings his strong partnership building approach & commercial acumen to drive profitable and pragmatic business transformations. Paul holds a Master of Laws, Bachelor of Commerce (Hons) and is a Member of the Australian Institute of Company Directors. Paul is qualified to practice law in Australia and New York, USA. Chris was the founder and Managing Director of airloom. Chris has over 20 years of start- up and high growth technology company experience leading consulting, product, software development, marketing and sales teams. He brings innovation and success in mobile, cloud and the cybersecurity industries with his unique business sense, technical acumen and vision for the future protecting enterprise data. Chris leads the Tesserent Defend BU and has oversight to develop and grow our Assurance, Advisory/GRC, Products & Technology and Data & Analytics segments, all of which are focussing on services and solutions designed to defend and protect our client’s digital assets. 17 Executive Team continued CRAIG HUMPHREYS GEORGE KATAVIC DEEPAK SINGH Managing Partner, Cloud Managing Partner, Federal Managing Partner, Detect Craig is an IT veteran having held leadership positions in both Australian and multi-national organisations over the past 25 years. He founded iQ3 in Sydney in 2010 with a strong vision to address the dynamic landscape of IT and the growing appetite for consuming IT as a Service. Building a team of professionals and establishing a significant position delivering Secure Cloud services to a large number of Government organisations, as well as Australian and multi- national corporate clients, saw iQ3 ranked 28th in BRW’s fast 100 in 2015. Craig leads the Tesserent Cloud BU providing clients with highly secure services lines involving public cloud, private cloud/ IaaS and hybrid managed cloud offerings. George has more than 25 years of experience with consulting organisations in the Federal Government market. George founded BCT, a specialist in Defence and National Security consulting which later became part of UXC in 2006. From that time George was responsible for building UXC Consulting in the ACT, combining 6 disparate and small brands which evolved into the largest Australian owned Consulting organisation in the ACT. With over 200 staff including over 100 cybersecurity staff, UXC was largest cyber consulting organisation in the Federal Market. Prior to his current role with north, George was the Managing Partner of DXC Consulting in the ACT. He co- founded north in 2018 which has cemented itself as a leader in the cyber field in the ACT. Deepak is a seasoned Information Security professional with over 20 years of experience in the information security domain. He has held leadership roles in local and international information security organisations of various scale. He was instrumental in the growth and success of Secure Logic, which provided end to end information and cybersecurity solutions and services in various sectors. His customer focused view enables the right balance of security investment against business objectives, which is driven through his expertise in the field. Deepak leads the Tesserent Detect business unit which provides secure monitoring and detection services designed to protect our client sensitive assets and information against global cyber threats. 18 Annual Report 2022 Tesserent LtdHAMISH SOPER PATRICK BUTLER Managing Partner, New Zealand CEO, Loop Secure With over 15 years’ experience transforming IT businesses, this role will see Hamish taking the Tesserent Defend and Detect & Cloud offerings to the NZ Market and assisting the Tesserent Lateral Security team to expand the existing Advisory/GRC and Assurance business. Previously, Hamish was Country Manager with Check Point Software Technologies where he built the business from $2M to $16M over a 10-year period. In 2017 he established the AppDynamics (a Cisco Company) business in New Zealand and then returned to Check Point in 2018 as ANZ Channel Director. Earlier roles include running the M2M (IoT) sector at Vodafone. Patrick has been at Loop Secure for more than 15 years, building up both the cybersecurity service and technology arms of the business. Patrick was formerly the General Manager of Sales & Marketing overseeing the national team from the Sydney office. Patrick was appointed CEO in 2016. During his time at Loop, Patrick has engaged with hundreds of clients, and understands the unique challenges posed to organisations in Australia by cybersecurity threat actors. In his role as both a shareholder and CEO of Loop, Patrick was able to understand the challenges that come with running a business securely. Patrick has extensive experience in presenting and training boards and executives on cybersecurity challenges and how to be prepared and resilient today and into the future. Patrick commenced in August 2021. 19 Corporate Governance Statement The Board of Directors of Tesserent Limited (Board) is committed to ensuring that its Corporate Governance framework meets the requirements set out in the ASX Corporate Governance Council’s Principles and Recommendations (Fourth Edition) (Governance Principles). Strong corporate governance is critical to the delivery of value to our shareholders and acting with transparency and integrity in the conduct of our business. Consistent with prior years, the Board does not consider that all of the ASX Recommendations are applicable for the Company, and where Tesserent has not fully adhered with an ASX Recommendation, this has been discussed in the Corporate Governance Statement, together with the reasons why it has not been followed. As Tesserent’s activities develop in size, nature, and scope, the size of the Board and the implementation of additional corporate governance policies and structures will be reassessed. The Company’s corporate governance policies and practices are outlined below and are in the corporate governance information section of the Company’s website: www.tesserent.com. a. Code of Conduct – This policy sets out a statement of the shared values of the Company and how the Company conducts itself and its business. b. Board Charter – This policy sets out the principles for the operation of the Board and describes the functions of the Board and those functions delegated to management of the Company. c. Selection and Appointment of New Directors Policy – This policy ensures that the procedure when selecting and appointing new Directors is formal and transparent. d. Board and Senior Executive Evaluation Policy – This policy sets out the process relating to performance and evaluation of the Board, senior executives, and individual Directors. e. Appointment of External Auditor Policy – This policy summarises the conditions on which the Company will select an external auditor. f. Continuous Disclosure Policy – This policy sets out certain procedures and measures which are designed to ensure that the Company complies with its continuous disclosure obligations. g. Trading Policy – This policy is designed to maintain investor confidence in the integrity of the Company’s internal controls and procedures and to provide guidance on avoiding any breach of the insider trading laws. h. Anti-Bribery Policy – This policy sets out the practices which the Company follows to ensure compliance by the Company, its Directors, Senior Executives and employees with the anti-bribery or anti-corruption laws in the jurisdictions that the Company operates. i. Shareholder Communications Policy – This policy sets out practices which the Company will implement to ensure effective communication with its Shareholders. j. Diversity Policy – This policy sets out the Company’s objectives for achieving diversity amongst its Board, management and employees. k. Audit and Risk Management Committee Charter – This policy sets out the objectives and procedures for the Audit and Risk Management Committee when it is in operation. l. Nominations and Remuneration Committee Charter – This policy sets out the objectives and procedures for the Nominations and Remuneration Committee when it is in operation. 20 Annual Report 2022 Tesserent LtdADHERENCE WITH AND DEPARTURES FROM RECOMMENDATIONS The Company’s compliance with and departures from the Recommendations during the reporting period are set out on the following pages. RECOMMENDATION COMPANY’S CURRENT PRACTICE 1.1 A listed entity should have and disclose a board charter setting out: a. the respective roles and responsibilities of its The respective roles and responsibilities of the Board and executives are defined in the Board Charter. board and management; and The Board Charter outlines: b. those matters expressly reserved to the board and those delegated to management. – The roles of the Board, the Chairman, the Chief Executive Officer(s) (CEO(s)) and the Company Secretary. – The guidelines for Board composition, including the processes around Director appointments and Board nominations. – The general and specific responsibilities of the Board. – Responsibility for the operation and administration of the Group is delegated by the Board to the CEO(s) and the Senior Leadership Team (SLT). The Board ensures that the CEO and SLT are appropriately qualified and experienced to discharge their responsibilities. Some key functions reserved for the Board are: – Approval of the budget; – Approval of the strategic plan; – Approval of annual, half-yearly and quarterly financial reports; – Approving and monitoring the progress of major acquisition and divestments; – Ensuring the Company’s Code of Conduct and other policies are adhered to, to promote ethical and responsible decision making and compliance with applicable laws; – Ensuring any significant risks that arise are identified, assessed and appropriately managed and monitored; and – Reporting to shareholders. While the Board retains full responsibility for guiding and monitoring the Company, to assist in discharging its responsibilities, it makes use of sub-committees. To this end the Board had in place an Audit & Risk Management Committee for FY22. A Nomination & Remuneration Committee was not in place in FY22, and these functions were managed by the Board. Reestablishment of the Nomination & Remuneration Committee in FY23 has been tabled for consideration by the Board. The Company complies with this Recommendation. 21 Corporate Governance Statement RECOMMENDATION COMPANY’S CURRENT PRACTICE 1.2 A listed entity should: a. undertake appropriate checks before appointing a director or senior executive or putting someone forward for election as a director; and b. provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director. 1.3 A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. The procedure for the selection of new Directors is set out in the Selection and Appointment of New Directors Policy. Under this policy, Shareholders are required to be provided with all material information relevant to making an informed decision on whether or not to elect or re-elect a Director, including experience, qualifications, relevant memberships, and details of other material directorships held, or other interest, position or relationship that might influence on their ability to bear on issues before the Board and to act in the best interests of the Company as a whole rather than in the interests of an individual shareholder or other party. The notice of meeting also states whether the Board considers the Director to be independent, and the term of office currently served by the Director. The Company complies with this Recommendation. The Company has entered into a written agreement with each Director and senior executive setting out the terms of their appointment, including role, responsibilities and remuneration. A director must advise the Board in relation to any new role that could impact upon the time commitment expected of the director or give rise to a conflict of interest. The Company complies with this Recommendation. 1.4 The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. The Board Charter provides that the Company Secretary’s role is: – advising the Board and its committees on governance matters; – monitoring that board and committee policies and procedures are followed; – coordinating the timely completion and despatch of board and committee papers; – ensuring that the business at board and committee meetings is accurately captured in the minutes; and – helping to organise and facilitate the induction and professional development of Directors. As stated in the Board Charter, each director can communicate directly with the Company Secretary and vice versa. The Company Secretary is accountable directly to the Board, through the Chairman, on all matters to do with the proper functioning of the Board and its committees. The Company complies with this Recommendation. 22 Annual Report 2022 Tesserent LtdcontinuedRECOMMENDATION COMPANY’S CURRENT PRACTICE 1.5 A listed entity should: a. have and disclose a diversity policy; b. through its board or a committee of the board set measurable objectives for achieving gender diversity in the composition of its board, senior executives and workforce generally; and c. disclose in relation to each reporting period: i. the measurable objectives set for that period to achieve gender diversity; ii. the entity’s progress towards achieving those objectives; and iii. either: a. the respective proportions of men and women on the board, in senior executive positions and across the whole workforce (including how the entity has defined “senior executive” for these purposes); or b. if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act. The Company recognises that a diverse and talented workforce at all levels is a competitive advantage and that the Company’s success is the result of the quality and skills of its people. The Company has established and implemented a Diversity Policy which is overseen by the Board and may be viewed in full at: https://investors.tesserent.com/site/about/ corporate-governance. The Company’s Diversity Policy requires the Board to establish measurable objectives to assist the Company in achieving gender diversity. The Company did not set Measurable Objectives for achieving gender diversity for the 2022 financial year due the level of acquisition and integration activities required across the Group. Measurable Objectives for FY23 are in the process of being finalised and tabled for Board approval and adoption in Q2 FY23. The following activities were undertaken by the Company in FY22 in support of the Company’s broader diversity objectives: – Partnered with the not-for-profit organisation UNIQ YOU to encourage more high school aged young women to consider careers in Cybersecurity. This partnership with UNIQ YOU aims to address the gender imbalance in the industry as a key step toward meeting that demand. – Tesserent was an Executive sponsor for the AWSN – 2021 Australian Women in Security Awards. – Adopted a Parental Leave Policy to expand parental leave provisions above the current standard, statutory requirements for consideration (12 weeks paid primary carer and 2 weeks paid secondary carer. – Adopted a Domestic & Family Violence Leave Policy. – Adopted a Group Code of Conduct and Workplace Harassment, Discrimination and Bullying Policy. – Adopted a Flexible Working Arrangement framework across the Group. The Company is a ‘relevant employer’ under the Workplace Gender Equality Act and lodged its report on 26 July 2022. This report contains the most recent ‘Gender Equality Indicators’ and the public version of this report can be found in the Media section of the company’s website at: https://investors.tesserent. com/site/about/corporate-governance. As at 30 June 2022, there were 77 females employed representing 24% of total employees. The Tesserent board has a female Director, following the appointment of Megan Haas in January 2021. The Company partially complies with this Recommendation. 23 Corporate Governance Statement RECOMMENDATION COMPANY’S CURRENT PRACTICE 1.6 A listed entity should: a. have and disclose a process for periodically evaluating the performance of the board, its committees and individual directors; and b. disclose for each reporting period whether a performance evaluation has been undertaken in accordance with that process during or in respect of that period. 1.7 A listed entity should: a. have and disclose a process for evaluating the performance of its senior executives at least once every reporting period; and b. disclose for each reporting period whether a performance evaluation has been undertaken in accordance with that process during or in respect of that period. 2.1 The board of a listed entity should: a. have a nomination committee which: i. has at least three members, a majority of whom are independent directors; and ii. is chaired by an independent director, and disclose: iii. the charter of the committee; iv. the members of the committee; and v. as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or b. if it does not have a nomination committee, disclose that fact and the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. 24 The Company has adopted a Board and Senior Executive Evaluation Policy. The process for evaluating the performance of the Board as a whole is the responsibility of the Board under the direction of the Chairman. The Chairman oversees conducting individual Director evaluations. A Non-Executive Director will be responsible for the performance evaluation of the Chairman. A review of the: performance of the Board, its role, the adequacy and effectiveness of the Boards’ practices and procedures and the behaviours of the Board was initiated during the fourth quarter of 2022, in respect of the period ending 30 June 2022. The Board takes this evaluation into consideration when recommending directors for (re-election). Julian Challingsworth, Joint CEO & Director, resigned from the Company and the Board effective from 23 November 2021. The Company complies with this Recommendation. The Company has adopted a Board and Senior Executive Evaluation Policy. The Chief Executive Officer is subject to annual performance evaluation by the Board. All senior executives of the Company are subject to annual performance evaluations by the CEO. A performance evaluation was undertaken for the CEO during the reporting period. The Company complies with this Recommendation. The Board has adopted a written Nomination & Remuneration Charter that sets out the role and objectives, responsibilities and functions of the Committee and may be viewed in full at: https:// investors.tesserent.com/site/about/corporate- governance. During the year ended 30 June 2020, the Board suspended the operations of the Committee as it was determined that the Committee was unnecessary given the size of the Board and the Company’s operations. The Board as a whole undertakes the role of the Committee as set out in its Charter. Accordingly, a Nomination & Remuneration Committee was not in place in FY22, and these functions were managed by the Board. Reestablishment of the Nomination & Remuneration Committee in FY23 has been tabled for consideration by the Board. The Company does not comply with this Recommendation. Annual Report 2022 Tesserent LtdcontinuedRECOMMENDATION COMPANY’S CURRENT PRACTICE 2.2 A listed entity should have and disclose a board skills matrix setting out the mix of skills that the board currently has or is looking to achieve in its membership. 2.3 A listed entity should disclose: a. the names of the directors considered by the board to be independent directors; b. if a director has an interest, position or relationship of the type described above but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position or relationship in question and an explanation of why the board is of that opinion; and b. the length of service of each director 2.4 A majority of the board of a listed entity should be independent directors. The experience and expertise relevant to the position of Director held by each Director in office at the date of the Annual Report is The Board skills matrix is set out in the following Board Experience/ Matrix Skill section. In accordance with the Board Charter and the ASX CGPRs, the Board regularly assesses the independence of each of the Non-Executive Directors based on the interests and associations disclosed by them. The Board considers that Megan Haas and Greg Baxter are independent directors. The Board considers that Geoff Lord does not meet the ASX Corporate Governance Council definition of Independent Director given his significant holding of Tesserent securities. The Board considers that Kurt Hansen is not an independent director given he is an employee of the Company. The date of appointment of each director is disclosed in details of each director in the Directors’ Report section of the Annual Report. A Director must advise the Board if there is any change in the Director’s interests, positions, associations or relationships that could bear upon his or her independence at the earliest opportunity. There are procedures in place, agreed by the Board, to enable Directors in furtherance of their duties to seek independent professional advice at the Company’s expense. The Company complies with this Recommendation. During the reporting period, the Board did not comply with Recommendation 2.4, as the majority of the Board are not independent Directors for the ASX purposes. The Board comprises a blend of experienced, independent directors and strong, hands-on directors with deep industry knowledge and expertise. Notwithstanding the current majority non-independence of the Board, the Board has carefully considered and documented the roles and responsibilities of its Chair and nominated chairs of its Committees to ensure strong governance. Directors are not involved in decisions where they have, or could be perceived to have, a conflict of interest or material personal interest. Any Director who considers that there may be a conflict of interest or a material personal interest in any matter concerning the Company must declare it immediately. The Company does not comply with this Recommendation. 25 Corporate Governance Statement RECOMMENDATION COMPANY’S CURRENT PRACTICE 2.5 The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity. The roles of the Chairman and CEO are exercised by separate individuals. The Chairman is not considered to be an independent Director for ASX purposes. The Company does not comply with this Recommendation. 2.6 A listed entity should have a program for inducting new directors and for periodically reviewing whether there is a need for existing directors to undertake professional development to maintain the skills and knowledge needed to perform their role as directors effectively. The Company does not have a formal program for inducting new Directors and providing appropriate professional development opportunities. The induction process for each Director is tailored based on the background and needs of that incoming director. During the reporting period the Directors are informed about developments within the Company, the cyber security industry more generally and material developments in law, regulations and accounting standards, in order to maintain the currency of knowledge, skills and experience necessary to perform their roles. The Company does not comply with this Recommendation. The Company’s values are disclosed in detail within the Board Charter which is published on the Company’s website. The Company complies with this Recommendation. The Company has adopted a Code of Conduct which applies to all Directors, officers, employees, contractors or consultants of the Company as well as a Trading Policy. Each of these has been prepared having regard to the Recommendations. This may be viewed in full at: https://investors. tesserent.com/site/about/corporate-governance. The Company complies with this Recommendation. The Company has adopted a written Whistleblower Policy which applies to all staff members of the Company, including directors, executives and employees. The Company complies with this Recommendation. The Company has adopted a written Anti-Bribery Policy which applies to all staff members of the Company, including directors, executives and employees. The Anti-bribery Policy may be viewed in full at: https://investors.tesserent.com/site/ about/corporate-governance. The Company complies with this Recommendation. 3.1 A listed entity should articulate and disclose its values. 3.2 A listed entity should: a. have and disclose a code of conduct for its directors, senior executives and employees; and b. ensure that the board or a committee of the board is informed of any material breaches of that code. 3.3 A listed entity should: a. have and disclose a whistle-blower policy; and b. ensure that the board or a committee of the board is informed of any material incidents reported under that policy. 3.4 A listed entity should: a. have and disclose an anti-bribery and corruption policy; and b. ensure that the board or a committee of the board is informed of any material breaches of that policy. 26 Annual Report 2022 Tesserent LtdcontinuedRECOMMENDATION COMPANY’S CURRENT PRACTICE 4.1 The board of a listed entity should: a. have an audit committee which: i. has at least three members, all of whom are non-executive directors and a majority of whom are independent directors; and ii. is chaired by an independent director, who is not the chair of the board, and disclose: iii. the charter of the committee; iv. the relevant qualifications and experience of the members of the committee; and v. in relation to each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or b. if it does not have an audit committee, disclose that fact and the processes it employs that independently verify and safeguard the integrity of its corporate reporting, including the processes for the appointment and removal of the external auditor and the rotation of the audit engagement partner. The Board has an Audit and Risk Management Committee (ARC) and adopted a written Audit & Risk Management Charter that sets out the role and objectives, responsibilities and functions of the Audit & Risk Committee. The Audit & Risk Management Charter may be viewed in full at: https://investors.tesserent.com/site/about/ corporate-governance. The committee comprises the two non-executive directors and is chaired by independent director Megan Haas. The ARC met two times in FY22. The Chair of the ARC also met separately with the external Auditor of the Group. The Company does not comply with this Recommendation. 4.2 The board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. In accordance with Recommendation 4.2, before the Board approved of the Company’s financial statements for the financial period ending 30 June 2022, the Board received a declaration from the CEO and Chief Financial officer (CFO) in accordance with section 295A of the Corporations Act 2001 (Cth) (Corporations Act) as well as assurance from those officers that the declaration was founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects. 4.3 A listed entity should disclose its process to verify the integrity of any periodic corporate report it releases to the market that is not audited or reviewed by an external auditor. 5.1 A listed entity should have and disclose a written policy for complying with its continuous disclosure obligations under listing rule 3.1. The Company complies with this Recommendation. The Company has established a Disclosure Team, which reviews all periodical corporate reports and announcements before they are disclosed to the market. The composition of the Disclosure Team and the verification and approval process for market release is outlined in the Company’s Continuous Disclosure Policy, which is available at: https://investors.tesserent.com/site/about/ corporate-governance. The Company complies with this Recommendation. The Company is committed to providing timely and balanced disclosure to the market in accordance with its Continuous Disclosure Policy. which is available at: https://investors.tesserent.com/site/ about/corporate-governance. The Company complies with this Recommendation. 27 Corporate Governance Statement RECOMMENDATION COMPANY’S CURRENT PRACTICE 5.2 5.3 6.1 A listed entity should ensure that its board receives copies of all material market announcements promptly after they have been made. A listed entity that gives a new and substantive investor or analyst presentation should release a copy of the presentation materials on the ASX Market Announcements Platform ahead of the presentation. A listed entity should provide information about itself and its governance to investors via its website. 6.2 A listed entity should have an investor relations program that facilitates effective two-way communication with investors. 6.3 A listed entity should disclose how it facilitates and encourages participation at meetings of security holders. 28 The Company complies with this Recommendation. The Company complies with this Recommendation. The Company has a website, https://investors. tesserent.com, which includes a ‘Board of Directors’, ‘Annual Reports’ and ‘Corporate Governance’ section where information about the Company, including its financial and corporate governance information can be accessed. The Company complies with this Recommendation. The Company has adopted a Shareholder Communications Policy for Shareholders wishing to communicate with the Board which is available at: https://investors.tesserent.com/site/about/ corporate-governance. The Company conducts regular briefings in order to facilitate effective two-way communication with investors and other market participants. The Company provides a copy of the annual report to all shareholders who have requested to receive a hard copy and encourages investors to access the annual report online. The annual report contains relevant information about the Company’s operations during the year, changes in the state of affairs and other disclosures required by the Corporations Act. The half year report contains summarised financial information and a review of Tesserent Group’s operations during the period. The Company’s corporate website provides all shareholders and the public access to our announcements to the ASX, and general information about the Company and our business. The Company complies with this Recommendation. All Shareholders are invited to attend the Company’s annual meeting, either in person or by representative. The Board regards the annual meeting as an excellent forum in which to discuss issues relevant to the Company and accordingly encourages full participation by Shareholders. Shareholders have an opportunity to submit questions to the Board and to the Company’s auditor. The Company complies with this Recommendation. Annual Report 2022 Tesserent LtdcontinuedRECOMMENDATION COMPANY’S CURRENT PRACTICE 6.4 6.5 A listed entity should ensure that all substantive resolutions at a meeting of security holders are decided by a poll rather than by a show of hands. A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically. 7.1 The board of a listed entity should: a. have a committee or committees to oversee risk, each of which: i. has at least three members, a majority of whom are independent directors; and ii. is chaired by an independent director, and disclose: iii. the charter of the committee; iv. the members of the committee; and v. as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or b. if it does not have a risk committee or committees that satisfy (a) above, disclose that fact and the processes it employs for overseeing the entity’s risk management framework. 7.2 The board or a committee of the board should: a. review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound and that the entity is operating with due regard to the risk appetite set by the board; and b. disclose, in relation to each reporting period, whether such a review has taken place. The Company complies with this Recommendation. The Company seeks to recognise numerous modes of communication, including electronic communication, to ensure that its communication with Shareholders is frequent, clear and accessible. The Company provides (and encourages) shareholders with the option to receive communications from, and send communications to, the Company and the Share Registry electronically, for reasons of speed, convenience, cost and environmental considerations. The Company complies with this Recommendation. The Company views effective risk management as a key component to achieving and maintaining its operational and strategic objectives. The identification and management of the Tesserent Group’s risks are an important priority of the Board. The Company’s risk management is assessed and managed by the Audit and Risk Management Committee (ARC) and governed by the Audit and Risk Management Charter, which may be viewed at: https://investors.tesserent.com/site/ about/corporate-governance. Refer also to Recommendation 4.1. The ARC comprises two non-executive directors and one executive director and is chaired by independent director Megan Haas. The ARC met two times in FY22. The Chair of the ARC also met separately with the external Auditor of the Group. The Company complies with this Recommendation. The Company has risk processes across the business that are reviewed at least annually, continue to be sound and are operating in line with the risk appetite set by the Board. The Company complies with this Recommendation. 29 Corporate Governance Statement RECOMMENDATION COMPANY’S CURRENT PRACTICE 7.3 A listed entity should disclose: a. if it has an internal audit function, how the function is structured and what role it performs; or b. if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its governance, risk management and internal control processes. The Company does not have an internal audit function established. Management designs and implement risk management and internal control systems to manage the Company’s material business risks and to report to the Board on whether those risks are being managed effectively. The Company does not comply with this Recommendation. 7.4 A listed entity should disclose whether it has any material exposure to environmental or social risks and, if it does, how it manages or intends to manage those risks. For the reporting period, the Company has not identified any material exposures to environmental or social risks, other than COVID – for which the Company has documented a COVID-safe plan. The Company complies with this Recommendation. A Nomination & Remuneration Committee was not in place in FY22, and these functions were managed by the Board. Reestablishment of the Nomination & Remuneration Committee in FY23 has been tabled for consideration by the Board. The Company does not comply with this Recommendation. 8.1 The board of a listed entity should: a. have a remuneration committee which: i. has at least three members, a majority of whom are independent directors; and ii. is chaired by an independent director, and disclose: iii. the charter of the committee; iv. the members of the committee; and v. as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or b. if it does not have a remuneration committee, disclose that fact and the processes it employs for setting the level and composition of remuneration for directors and senior executives and ensuring that such remuneration is appropriate and not excessive. 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of non-executive directors and the remuneration of executive directors and other senior executives. The policies and practices regarding remuneration of Directors is set out in the Selection and Appointment of New Directors Policy. Full details of Director remuneration is included in annual reports. The Company complies with this Recommendation. 30 Annual Report 2022 Tesserent LtdcontinuedRECOMMENDATION COMPANY’S CURRENT PRACTICE 8.3 A listed entity which has an equity-based remuneration scheme should: a. have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and b. disclose that policy or a summary of it. 9.1 9.2 9.3 A listed entity with a director who does not speak the language in which board or security holder meetings are held or key corporate documents are written should disclose the processes it has in place to ensure the director understands and can contribute to the discussions at those meetings and understands and can discharge their obligations in relation to those documents. A listed entity established outside Australia should ensure that meetings of security holders are held at a reasonable place and time. A listed entity established outside Australia, and an externally managed listed entity that has an AGM, should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. Tesserent Group has an employee equity plan in place, which includes equity incentives. The rules of the plan prohibit participants from entering into transactions or arrangements, including by way of derivatives or similar financial products, which limit the economic risk of holding unvested awards under that plan. Similar restrictions are contained in the Company’s Securities Trading Policy and apply to Officers of the Company, Key Management Personnel and direct reports of the CEO and the finance team. These parties are prohibited from trading in any securities of the company (or engaging in other specified behaviour) at any time when they are in possession of un-published sensitive information in relation to those securities. The Securities Trading Policy may be viewed in full at https://investors.tesserent.com/site/about/ corporate-governance. As required by the ASX Listing Rules, the company notifies ASX of any transaction conducted by Directors in securities of the Company. The Company complies with this Recommendation. This recommendation is not applicable to the Company given the current composition of the Board of Directors. This recommendation is not applicable to the Company. This recommendation is not applicable to the Company. 31 Corporate Governance Statement BOARD SKILLS/EXPERIENCE MATRIX KEY SKILL DEMONSTRATED BY ATTRIBUTES BOARD EXPERIENCE Cyber industry experience Sound knowledge of the structure, operations and opportunities in the Cyber Security industry. Technology and digital innovation Experience in developing setting and implementing digital innovation and technology strategies. Risk management Knowledge, background and experience in balancing commercial imperatives with agreed risk appetites, building organisational risk culture Financial acumen Proficiency in finance, including in financial accounting and reporting and capital management, including an ability to probe the adequacy of financial and risk controls Strategy Demonstrated experience in developing and implementing strategic opportunities to create long term value for shareholders. M&A experience Experience in identifying executing and integrating mergers and acquisitions to create long term value for shareholders. ASX board and other relevant board experience Exposure to relevant disclosure regimes, understanding of contemporary corporate governance practices. Executive leadership Experience in appointing and evaluating senior management, executive planning and monitoring corporate performance International markets and trade Experience in working in an organisation with global operations and understanding of political and regulatory requirements plus appreciation of market opportunities Sustainability Experience related to environmental, social and community responsibility 32 Annual Report 2022 Tesserent LtdcontinuedThe Directors of Tesserent Limited (the “Company”) submit the Directors’ Report on the Company for the financial year ended 30 June 2022 33 Directors’ Report The Directors of Tesserent Limited (the “Company”) submit the Directors’ Report on the Company for the financial year ended 30 June 2022. In order to comply with the provisions of the Corporations Act 2001, the Directors report as follows: DIRECTORS Details of the Directors of the Company in office at any time during or since the end of the financial year and at the date of this report are: Geoff Lord Qualifications: Experience: Executive Chairman (Appointed 10 January 2020) MBA (Distinction) (Melbourne), BEc (Hons) (Monash), FIDA, ASIA Geoff is the Founder and CEO of the Belgravia Group, a privately held investment group which since being established in 1990 has grown to employ more than 10,000 people in businesses spanning sports, fitness, leisure, clothing and more. In addition, Geoff is the former Founder and Chairman of UXC Limited, one of Australia’s largest IT services businesses. After being founded in 2002 as a $5m business, UXC grew under Geoff’s leadership to be acquired in 2016 by NYSE-listed Computer Sciences Corporation (now DXC Technology) in a deal valued at A$427.6m. Other board positions held by Geoff include Director Melbourne Business School, founding Director of SME finance business Judo Bank and Chairman of Salvest. He has also shown a significant passion for sports and clubs, having served as Chairman of Hawthorn Football Club and Melbourne Victory. Geoff is the largest shareholder in Tesserent. Other Directorships in listed entities: Former Directorships in listed entities in last 3 years: None None Interests in Shares and options: 99,258,956 ordinary shares Kurt Hansen Qualifications: Experience: 8,882,500 share options exercisable at $0.10 expiring 1 October 2022 6,000,000 5 year call options exercisable at $0.248 expiring 21 September 2025 Chief Executive Officer (Appointed 12 December 2019) Grad. Dip. Engineering Kurt has over 20 years of IT industry experience driving sales and delivery transformation and impressive business growth across many IT and Security organisations in Australia and New Zealand. Kurt was CEO at Pure Security at acquisition date. Previous roles include executive, senior management and operational positions at Check Point Software Technologies, F5 Networks, AirData, Symbol Technologies, Telstra Wholesale, Cisco Systems, and Ericsson. Prior to commencing his corporate career, Kurt was a general service officer in the Royal Australian Signal Corps. Other Directorships in listed entities: Former Directorships in listed entities in last 3 years: None None Interests in Shares and options: 13,398,000 ordinary shares 34 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdDirectors’ Report DIRECTORS (CONTINUED) Gregory Baxter Qualifications: Experience: Non-Executive Director (Appointed 16 November 2016) BSc MBA Board member since 2015. Greg is currently Chief Transformation Officer Hewlett Packard, leading HP’s IT, Cyber, Software, Data & AI, and Transformation Management organizations. Greg was previously Chief Digital Officer at MetLife and Global Head of Digital at Citibank, leading Citi’s digital transformation across businesses and geographies. Greg specialises in the development and delivery of digital strategy, corporate innovation and business transformation. He has held senior business, consulting and technology roles across Asia, Europe and North America, with a track record of high- impact business results. Previously Gregory was a Partner and U.K. Board member at Booz & Company (formerly Booz Allen Hamilton), where he held leadership roles across the financial services, public sector and digital practices. Greg has extensive board and advisory experience in technology, financial services and research institutions. He holds a BSc from Monash University and an MBA from the University of Melbourne and has been a guest lecturer on strategy at the University of Oxford, New York University, and Columbia University. Other Directorships in listed entities: Former Directorships in listed entities in last 3 years: None None Interests in Shares and options: 5,620,327 ordinary shares Megan Haas Qualifications: Experience: 3,000,000 unlisted share options Non-Executive Director (Appointed 19 January 2021) BBUS Accountancy & Information Systems (RMIT), GAICD. Megan’s core competencies are centered around cyber risk, governance, technology and operational processes developed over 30+ years both in Australia and internationally. Formerly a PwC Cyber Security & Forensic Services Partner, Megan has worked with organisations across international borders and industries including pharmaceutical, gaming, retail, manufacturing, government, media, financial services and communications. Megan has a BBUS Accountancy & Information Systems (RMIT), GAICD. Megan’s other Directorships include: Development Victoria (Chairperson), RMIT University (Council member) and Note Printing Australia (audit committee). Interests in Shares and options: 281,636 ordinary shares 3,000,000 unlisted share options Julian Challingsworth Co-Chief Executive Officer (Appointed 1 August 2018, resigned 23 November 2021) Qualifications: Bachelor of Business, MSc, CA, FCPA, GAICD Interests in Shares and options: 14,000,000 ordinary shares 35 for the year ended 30 June 2022Directors’ Report COMPANY SECRETARY Paul Taylor Qualifications: Experience: Oliver Carton Qualifications: Experience: General Counsel and Company Secretary (Appointed as Company Secretary on 29 July 2022) Master of Laws, Bachelor of Commerce (Hons), GAICD Paul has extensive experience across the financial services, e-commerce and legal industries and previously held leadership roles in the insurance and financial services sector with the Cover-More Group Limited and Insurance Australia Group Limited. Prior to his role at Tesserent, Paul was General Counsel & Company Secretary at Simonds Group Limited, an ASX listed business focused on residential building and construction. Company Secretary (Appointed as Company Secretary on 6 May 2015, resigned on 29 July 2022) BJurisLLB. Oliver Carton is a lawyer with over 30 years’ experience in a variety of corporate roles. He is currently a director or company secretary of a number of listed, unlisted and not for profit entities such as the Melbourne Symphony Orchestra and Australian Mines Ltd (ASX: AUZ). He currently runs his own consulting business and was previously a Director of the Chartered Accounting firm KPMG. Prior to that, he was a senior legal officer with ASIC. MEETINGS OF DIRECTORS The following table sets out the number of meetings of the Company’s Directors during the year ended 30 June 2022 and the number of meetings attended by each Director. Director Geoff Lord Kurt Hansen Gregory Baxter Megan Haas Julian Challingsworth (resigned 23 November 2021) Board Meetings Audit and Risk Committee Meetings Entitled to attend Attended Entitled to attend Attended 15 15 15 15 7 15 (by invitation) 15 (by invitation) 14 15 2 2 7 (by invitation) 1 2 2 2 1 PRINCIPAL ACTIVITIES Tesserent provides Cyber Security consulting, cloud and managed services to a wide range of Australian and international customers, including education providers, corporate enterprises, and government customers. These services are provided on the basis of consulting contracts, software implementation contracts and a subscription fees, either as one off engagements, longer term projects or as monthly or annual fees. OPERATING RESULTS AND FINANCIAL POSITION The Group recorded a loss after tax of $8.8m for the year ended 30 June 2022 (2021: $4.5m loss). The Group incurred significant one-off expenses (cash and non- cash costs) in respect of the refinancing, predominantly in exiting the previous facility, plus non-operating acquisition costs in completing controlling acquisitions of three companies during the year. The acquisitions resulted in an increase in total assets to $248.5m including Goodwill of $129.6m and Intangible assets (including acquired Customer contracts and relationships) of $38.2m. 36 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdDirectors’ Report OPERATING RESULTS AND FINANCIAL POSITION (CONTINUED) During the year the Group issued equity of $35.7m after costs, including a $25m capital raise to provide working capital and capital for the acquisitions. The Group also refinanced its existing debt of $35m and secured additional financing facilities of $24 million (additional facilities being undrawn at 30 June 2022), to provide working capital and cash reserves to complete acquisitions. Interest is charged based on a line fee of 2.0%, plus a usage fee of 1.25%, plus BBSY. As a result of the acquisitions and the equity, the Group’s net assets at 30 June 2022 were $117.0m. More detailed discussion of the Group’s results are provided in the Review of Operations preceding the Directors Report. CLOSING SHARE PRICE 30 June 2017 30 June 2018 30 June 2019 30 June 2020 30 June 2021 30 June 2022 A high of $0.44 was reached on 8 January 2021. NET TANGIBLE ASSETS PER SHARE Net tangible assets per ordinary share ($) Net tangible assets per share Closing share price $ 0.092 0.060 0.045 0.080 0.235 0.105 30-Jun-22 30-Jun-21 (0.05) (0.03) DIVIDENDS No dividend has been proposed to be paid or is payable for the financial year ended 30 June 2022, nor for the comparative period. CONTROL GAINED OVER ENTITES DURING THE FINANCIAL YEAR Name of business Loop Secure Pty Ltd Claricent Pty Ltd Pearson Corporation Pty Ltd % holding Profit contribution ($’000) for period under TNT control Completion date 1 Oct-21 15 Dec-21 23 Dec-21 30-Jun-22 30-Jun-21 30-Jun-22 30-Jun-21 100% 100% 100% – – – 2,047 600 2,777 – – – 37 for the year ended 30 June 2022Directors’ Report SIGNIFICANT CHANGE IN STATE OF AFFAIRS On 8 July 2021, the Group entered into an investment agreement to take a minority stake (7% initially) in Daltrey Pty Ltd, a leading sovereign biometric company. The investment was made through Tesserent’s innovation arm which invests in globally applicable proprietary cyber-IP with the potential to support a go-to-market partnership opportunity and future distributions to Tesserent shareholders. The Sydney- based biometric technology enables an organisation’s users to prove who they are quickly and securely in both digital and physical scenarios without the need for passwords or swipe cards improving trust and accountability across the enterprise On 11 August 2021, Tesserent announced a Brand and Business unit integration strategy to drive the consolidation of businesses acquired over the course of FY20 and FY21. The reorganisation resulted in an integration of existing service offerings with current and prospective customers into new Defend, Detect, Cloud and Federal divisions and identified cross sell opportunities to both enhance the number of services by customer, but also identify and address potentially critical security deficiencies in customer infrastructure and networks. A rebranding of the Group was also undertaken as an accompaniment to the reorganisation, this rebranding included a new logo, colour palette and logo to accentuate the consolidation of Tesserent’s service capabilities under a unified strategy. As a result of the integration, the Group is seeing promising results in driving cross-selling initiatives with the sales teams proficient in identifying security risks in client environments which can be mitigated with Tesserent’s offering of Consulting Services & Critical Controls. On 28 September 2021, the Group completed a capital raise (via an equity placement with a number of institutional investors) raising $25m to fund future identified acquisitions. The capital raise was undertaken primarily for the purpose of a further three strategic acquisitions (Loop Secure, Claricent and Pearson) and to fund deferred consideration and earn-out payments on previous acquisitions. On 1 October 2021, the Group completed the acquisition of Loop Secure Pty Ltd. Loop Secure is headquartered in Sydney with offices in Melbourne and Brisbane, providing Managed Security Services, GRC and Offensive Security services primarily to mid-market corporate clients. The firm also operates a Security Operations Centre located in Melbourne, working predominantly with a range of international and domestic enterprises. Tesserent acquired 100% of the ordinary shares of Loop Secure Pty Ltd for consideration of $17,426,161, with $7,000,000 cash and $3,508,150 in issued share capital, being 15,946,135 shares issued at a fair value of $0.220 per share. A further deferred consideration cash payment of $1,000,000 was made on 30 June 2022 and additional cash payment of $1,000,000 is payable in Q2 FY23. A completion accounts payment $490,780, plus estimated earnout payments of $4,427,236, make up the balance of the total acquisition cost. On 23 November 2021, Tesserent announced the appointment of Kurt Hansen as the CEO, and resignation of Julian Challingsworth as Co-CEO Tesserent (and resignation from the Board of Tesserent). The change in leadership structure from Co-CEO to single CEO, reflects the change in Group focus from highly acquisitive to organic growth via successful customer acquisition and retention though delivery of quality services which is the expertise and focus of Kurt Hansen. On 15 December 2021, the Group completed the acquisition of Claricent Pty Ltd. Tesserent acquired 100% of the ordinary shares of Claricent Pty Ltd for consideration of $6,463,995, with $1,239,000 cash and $791,958 in issued share capital, being 4,728,105 shares issued at a fair value of $0.1675 per share. Further cash payments of $1,512,820 in deferred consideration and deferred issued capital of $862,534, plus cash payments of $1,028,842 and earnout share consideration of $1,028,842 (contingent on the Claricent business meeting agreed earnings targets), make up the balance of the total acquisition cost. On 23 December 2021, the Group completed the acquisition of Pearson Corporation Pty Ltd. Tesserent acquired 100% of the ordinary shares of Pearson Corporation Pty Ltd for consideration of $31,401,477, with $8,640,000 cash and $5,591,299 in issued share capital, being 33,886,663 shares issued at a fair value of $0.1650 per share. Further cash payments of $8,743,381 in deferred consideration and deferred issued capital of $4,999,709 are contingent on the Pearson business meeting agreed earnings targets. Also contingent on Pearson meeting earnings targets, are estimated earnout cash payments of $2,056,253 and earnout share consideration of $1,370,835, which make up the balance of the total acquisition cost. 38 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdDirectors’ Report SIGNIFICANT CHANGE IN STATE OF AFFAIRS (CONTINUED) Both Claricent Pty Ltd and Pearson Corporation Pty Ltd have leading positions in the Federal Government marketplace and enable Tesserent to further strengthen its position and deliver large multi-year projects that support the Federal Government to achieve their cybersecurity goals. On 23 June 2022, Tesserent announced the successful completion of a refinancing and upsizing of its debt facilities – replacing its core debt facilities of $35m provided by Pure Asset Management, with a new Market Rate Loan provided by the Commonwealth Bank of Australia. In addition to the refinancing of existing debt, CBA is providing a further Market Rate Loan of up to $20m to be used to fund cash consideration payments on existing and future acquisitions; plus ancillary facilities of $4m – to cover Bank Guarantees, FX and corporate cards for the Group. The implementation of the new financing arrangements will materially reduce the (cash) interest cost and eliminate the ongoing non-cash warrant expense on the previous debt facility and result in significant savings on drawn new debt facilities (based on current benchmark interest swap rates) AFTER BALANCE DATE EVENTS The Company notes the following subsequent event, following 30 June 2022 reporting date. On 24 August 2022, the Company remitted payment of $2.86m and issued 10,926,052 shares to the Loop Secure vendors in accordance with the terms of the Share Purchase Agreement for Loop Secure Pty Ltd. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS The Board and Management Team continue to focus on the following areas: – Fostering innovation across the Group and expanding proprietary intellectual property to drive high-margin product and service offerings – Focusing on capturing further market share in three key markets: Government (including Defence), Critical Infrastructure and Financial Services – Driving growth through deeper and wider customer engagements and increasing our average number of services per customer – Integrating acquisitions into “Capability Business Units” to maximise synergy efficiencies and drive organic revenue growth through cross-selling – Building out high-value recurring annuity revenue streams via Managed Security Operations Centre (SOC) and Managed Detection and Response (MDR). – Investing in the Tesserent Academy strategy to deliver programs to help the industry shortage of cyber skills for Tesserent staff, our clients and industry wide. – Selectively evaluating acquisition opportunities that may expand on our Cyber 360 capabilities and market share, increasing shareholder value through incremental EPS growth. INDEMNITY AND INSURANCE OF OFFICERS In accordance with its Constitution, and where permitted under relevant legislation or regulation, the Company indemnifies the Directors and Officers against all liabilities to another person that may arise from their position as Directors or Officers of the Company and its subsidiaries, except if, in the Board’s reasonable opinion, the liability arises out of conduct which is fraudulent, criminal, dishonest or a willful default of the Directors’ or Officers’ duties. In accordance with the provisions of the Corporations Act 2001, the Company has insured the Directors and Officers against liabilities incurred in their role as Directors and Officers of the Company. The terms of the insurance policy, including the premium, are subject to confidentiality clauses and therefore the Company is prohibited from disclosing the nature of the liabilities covered and the premium paid. INDEMNITY AND INSURANCE OF AUDITOR The Company has not, during or since the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. 39 for the year ended 30 June 2022Directors’ Report ENVIRONMENTAL ISSUES Tesserent is not subject to any significant environmental regulation under Australian Commonwealth or State law. Tesserent recognises its obligations to its stakeholders (customers, shareholders, employees and the community) to operate in a way that minimises the impact it has on the environment. SHARES UNDER OPTION At the date of this report the Company had shares under option and warrants as follows: Description Converting Note Options Converting Note Options Converting Note Options Employee Options Date of Expiry Exercise Price Number on issue Number escrowed 1 Oct 2022 1 Oct 2022 1 Oct 2022 $0.10 2,400,000 $0.10 3,832,500 $0.10 26,470,000 29 Nov 2022 $0.13 1,000,000 Warrants issued to Pure Asset Management Pty Ltd 6 Dec 2022 $0.08 7,500,000 Employee Options Employee Options Employee Options Employee Options Acquisition Warrants 2 Nov 2023 2 Nov 2023 1 Jul 2024 1 Jul 2024 $0.28 17,963,632 $0.35 16,963,632 $0.28 1,000,000 $0.35 1,000,000 18 Sep 2024 $0.12 18,083,334 Warrants issued to Pure Asset Management Pty Ltd 18 Sep 2024 $0.12 17,500,000 Employee Options Acquisition Warrants 31 Jan 2025 $0.28 7,400,000 12 Apr 2025 $0.45 30,555,556 Warrants issued to Pure Asset Management Pty Ltd 12 Apr 2025 $0.45 13,888,889 Call Options NED Options NED Options 9 Jun 2025 $0.240 1,000,000 21 Sep 2025 $0.248 9,000,000 5 Jul 2026 $0.21 3,000,000 178,557,543 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Share options do not provide the holder with the same rights as shareholders. Share options do not provide the rights to participate in rights issues, dividends, or enable the holder to vote at General Meetings. PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied for leave of the Court under Section 327 of the Corporations Act 2001 to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any proceedings during the year. 40 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Directors’ Report REMUNERATION REPORT (AUDITED) The remuneration report, which has been audited, outlines the directors’ and executive remuneration arrangements for the Company, in accordance with the requirements of the Corporations Act 2001 and its Regulations. A. Principles Used to Determine the Nature and Amount of Remuneration The broad principles for determining the nature and amount of remuneration of KMP has historically been agreed by the Board. An annual review of the Board structure is undertaken by the Board with changes made as deemed appropriate to the size, structure and needs of the Company. ASX listing rules require the aggregate non-executive directors’ remuneration be determined periodically by a general meeting. The maximum annual aggregate remuneration is $250,000, not including various payments such as out of pocket expenses and share based payments, and this was set prior to listing via the IPO in 2016. The Board can obtain professional advice where necessary to ensure that the Group attracts and retains talented and motivated directors and employees who can enhance performance through their contribution and leadership. The guiding principles for determining the nature and amount of remuneration for KMP of the Group is as follows: – Remuneration should include an appropriate mix of fixed and performance-based components, – Components of remuneration should be understandable, transparent and easy to communicate; and – Remuneration Committee/Board to review KMP packages annually by reference to the Group’s performance, executive performance and comparable information from industry sectors. The Board sets out to link remuneration polices with the achievement of financial and personal objectives. KMP Remuneration Framework The KMP remuneration framework comprises three principal elements: – a total fixed remuneration (TFR) comprising a fixed component, consisting of a base salary, superannuation contributions and other related allowances; • – a performance based, variable ‘at risk’ component, comprising cash and/or equity settled short-term incentives (STI); and • – a performance and service based, variable ‘at risk’ component, comprising of options and/or performance rights and/or cash equivalents referred to as long-term incentives (LTI). Components of remuneration Directors The Non-Executive directors in place during the year agreed to take no cash salary, instead agreeing to take shares and/or options in lieu of director fees. All equity issued to Directors during the year was subject to shareholder approval. The Board has implemented a Director Option Plan. The Option Plan is aimed at incentivising the Directors in retaining key strategic skills. The Director Option Plan currently covers Executive Directors and Non-executive Directors. TFR overview TFR consists of base remuneration and employer contributions to superannuation funds. While comparative levels of remuneration are monitored on a periodic basis, there is no contractual requirement or expectation that any adjustments will be made. STI overview Performance linked remuneration includes short-term incentives (STI) and is designed to reward the Chief Executive Officer & Managing Director, Chief Financial Officer and other Executive KMP’s for meeting and exceeding their financial and key performance objectives. The STI’s ensure that a proportion of remuneration is tied to Group performance measured annually in line with the financial year. Executives can only realise their STI at-risk component if challenging pre-determined objectives are achieved. The achievement of the Group’s budgeted Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is an initial gateway to realise a STI amount. 41 for the year ended 30 June 2022Directors’ Report REMUNERATION REPORT (AUDITED) (CONTINUED) As in the prior year, all STI’s are subject to the achievement of clear performance measures. This aligns executive interests with shareholder interests and focuses executive performance on those areas aligned to the achievement of the Group’s operational strategy. The Board has the responsibility of setting the Key Performance Indicators (KPI’s) for the CEO and have input to the KPI’s for the executives. KPI’s generally include measures relating to the Group, the relevant business unit and the individual. At the conclusion of the year the Board will assess the performance of the CEO, and the CEO assesses the performance of the individual executives against their targets. The CEO’s recommendations are presented to the Board for approval. LTI overview The Group’s LTIs ensure that a proportion of remuneration is linked to Group performance over the long term. Executives can only realise their LTI at-risk component if challenging pre-determined objectives are achieved. This aligns executive interests with shareholder interests and focuses executive performance on sustainable shareholder wealth. LTI consists of the granting of Performance Rights and/or options and/or cash equivalents that vest after a defined period. Vesting conditions may be waived at the absolute discretion of the Board. Engagement of remuneration consultants During the year, the Company did not engage any remuneration consultants. Voting and comments made at the Company’s 19 November 2021 Annual General Meeting (‘AGM’) At the 19 November 2021 AGM, 86.81% of the votes received supported the adoption of the remuneration report for the year ended 30 June 2021. The Company did not receive any specific feedback at the AGM regarding its remuneration practices. B. Details of Remuneration Details of the remuneration of the Directors, other key management personnel (defined as those who have the authority and responsibility for planning, directing and controlling the major activities of the Company) are set out in the tables on the following pages. Key Management Personnel - Directors and Executives The key management personnel (“KMP”) of the Company consisted of the following Directors and executives during the year: Directors Geoff Lord Position Executive Chairman Gregory Baxter Non-Executive Director Megan Haas Kurt Hansen1 Non-Executive Director Chief Executive Officer and Director Julian Challingsworth2 Co-Chief Executive Officer and Director (resigned 23 November 2021) Other Key Management Personnel Position James Jones George Katavic Chris Hagios Chief Financial Officer Managing Partner, Tesserent Federal Managing Partner, Tesserent Defend Craig Humphreys Managing Partner, Tesserent Cloud Deepak Singh Patrick Butler Managing Partner, Tesserent Detect Managing Director, Loop Secure (Appointed on acquisition 1 October 2021) 1 On 19 November 2021, the Company announced the appointment of Kurt Hansen as sole CEO. 2 On 19 November 2021, the Company announced the retirement of Julian Challingsworth as joint CEO and Director effective 23 November 2021. 42 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdDirectors’ Report REMUNERATION REPORT (AUDITED) (CONTINUED) Key terms of Executive Services Agreement – Chief Executive Officer (CEO) The material terms of the Executive Services Agreement between Kurt Hansen and the Company for the role of CEO are as follows: Term: No fixed term. Ongoing until terminated by either party in accordance with the Agreement Total Fixed Remuneration (TFR): $500,000 per annum (including superannuation) from 1 December 2021 Short Term Incentive (STI) for FY22: Short term incentive of up to $125,000 per annum based on agreed KPI’s and subject to performance Long Term Incentive (LTI): Performance rights as issued shares – refer to Share Based Compensation section in remuneration report Notice period: Six months if notice is provided by Mr Hansen to the Company Nine months if notice is provided by the Company to Mr Hansen Employment may be ended immediately in certain circumstances, including misconduct or by mutual agreement Post-employment restraint: A 12 month post-employment restraint provision applies to Mr Hansen Executive Service Agreements – other key terms Name K Hansen J Jones G Katavic C Hagios C Humphreys D Singh P Butler Contract Length Termination by KMP Termination by Company Minimum Notice Period No fixed term No fixed term No fixed term No fixed term No fixed term No fixed term No fixed term 6 months 3 months 1 week 6 months 1 month 4 weeks 16 weeks 9 months 6 months 1 week 6 months 1 month 4 weeks 16 weeks STI payments to KMPs All STIs are subject to the achievement of Key Performance Indicators agreed between each KMP and the Company, however the Board may exercise its discretion in approving short-term incentive payments to the KMPs based on other factors. 43 for the year ended 30 June 2022Directors’ Report REMUNERATION REPORT (AUDITED) (CONTINUED) Details of Remuneration for the year ended 30 June 2022 The individual remuneration for key management personnel of the Company during the year was as follows: Short term employment benefits Other benefits Post employment Equity based payments Salary and Fees $ Bonus $ Leave Entitlements $ Superannua- tion $ Shares $ Options $ Total $ Year ended 30 June 2022 Directors G Lord G Baxter1 M Haas Subtotal Executive Directors K Hansen – – – – – – – – – – – – 434,765 125,000 39,003 J Challingsworth2 215,503 – – Subtotal 650,268 125,000 39,003 Other KMPs J Jones G Katavic C Hagios3 355,599 80,000 30,525 366,398 240,000 7,722 379,216 380,000 109,919 C Humphreys 238,216 200,000 250,000 125,000 232,324 – 76,196 18,733 3,259 D Singh P Butler4 Subtotal Total 1,821,753 1,025,000 246,354 144,085 2,472,021 1,150,000 285,357 180,979 – – – – 23,568 13,326 36,894 23,568 28,602 23,568 23,568 23,516 21,263 – – – – – – – – – – – – – – – 220,764 220,764 142,952 142,952 – – 363,716 363,716 – – – 622,336 228,829 851,165 82,797 572,489 – – – – – 642,722 892,703 537,980 417,249 256,846 82,797 3,319,989 446,513 4,534,870 Includes NED options of $32,570 granted in 2018. 1 2 Resigned on 23 November 2021. Salary and fees includes a termination payment of $43,236. 3. 4. Appointed on acquisition 1 October 2021. Includes $2,500 being for fully maintained company vehicle. Includes car allowance of $42,000. 44 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdDirectors’ Report REMUNERATION REPORT (AUDITED) (CONTINUED) Details of Remuneration for the year ended 30 June 2021 The individual remuneration for key management personnel of the Company during the year was as follows: Short term employment benefits Long term benefits Post employment Equity based payments Salary and Fees $ Bonus $ Long-Service Leave $ Superannua- tion $ Shares $ Options $ Total $ Year ended 30 June 2021 Directors G Lord G Baxter P Flannigan1 M Haas2 Subtotal Executive Directors J Challingsworth K Hansen Subtotal Other KMPs S Scheffer3 P Fearns4 J Jones5 G Katavic C Hagios6 – – – – – 320,969 335,616 656,586 113,288 104,737 47,438 270,848 268,333 – – – – – – – – – – – 197,373 – – – – – 1,661 21,721 23,382 – – – – – C Humphreys7 66,668 255,610 19,100 D Singh8 Subtotal Total 41,668 – – 912,981 452,983 1,569,566 452,983 19,100 42,481 – – – – – 29,818 31,834 61,651 8,986 9,215 3,698 25,000 18,349 17,412 3,616 86,275 147,926 – – – – – – – – 172,177 86,089 172,177 86,089 – – 380,000 380,000 638,266 638,266 87,019 87,019 439,467 476,190 174,038 915,657 28,738 – – – – – – – – 41,399 – – – 151,012 113,952 92,535 295,848 484,055 358,789 193,688 238,972 28,738 235,087 1,735,163 28,738 1,047,391 3,289,086 1 In August 2020, 3m options were awarded as part of the shareholder approved non-executive director remuneration package. These options lapsed when P Flannigan retired on 19 January 2021. 2 Appointed on 19 January 2021. 3 Resigned on 30 October 2020. 4 Commenced 9 November 2020, finished 23 April 2021. 5 Commenced 30 April 2021. 6 Appointed on acquisition 11 September 2020. 7 Appointed on acquisition 11 November 2020. 8 Appointed on acquisition 1 May 2021. 45 for the year ended 30 June 2022Directors’ Report REMUNERATION REPORT (AUDITED) (CONTINUED) Bonuses included in remuneration The proportion of remuneration linked to performance and the fixed proportions are as follows: 2022 2021 Fixed remuneration Weighting (% of total REM) - STI Weighting (% of total REM) - LTI Fixed remuneration Weighting (% of total REM) - STI Weighting (% of total REM) - LTI Directors G Lord G Baxter M Haas Executive Directors K Hansen J Challingsworth Other KMPs J Jones G Katavic C Hagios C Humphreys D Singh P Butler – – – 80% 100% 72% 63% 57% 63% 70% 100% – – – 20% – 14% 37% 43% 37% 30% – 100% 100% – – – 14% – – – – – – – – 82% 80% 55% 100% 59% 29% 19% n/a – – – – – – – 41% 71% – n/a 100% 100% 100% 18% 20% 45% – – – 81% n/a C. Share Based Compensation Options and performance rights The terms and conditions of each grant of options affecting remuneration in the current or future reporting periods are as follows: KMP G Lord G Baxter G Baxter G Baxter G Baxter J Jones Grant date options Vesting date Expiry date No of Exercise price Value per option at grant date % vested 16 Sep-20 6,000,000 16 Sep-25 16 Sep-25 16 Sep-20 3,000,000 16 Sep-25 16 Sep-25 21-Dec-18 500,000 21-Dec-18 30-Nov-21 21-Dec-18 500,000 21-Dec-19 30-Nov-21 21-Dec-18 500,000 21-Dec-20 30-Nov-21 30 Apr-21 1,000,000 30 Oct-21 9 Jun-25 $0.25 $0.25 $0.10 $0.13 $0.15 $0.24 $0.107 $0.107 $0.022 $0.021 $0.022 $0.124 – – 100% 100% 100% 100% No performance rights were contracted during the year ended 30 June 2022. The options carry no dividends or voting rights. The options will vest if the option holder remains employed by the company at the relevant vesting date. 46 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Directors’ Report REMUNERATION REPORT (AUDITED) (CONTINUED) The table below shows a reconciliation of options and rights held by each KMP from the beginning to the end of FY2022. Granted during the year Other change Exercised Lapsed/ forfeited during the year Balance at 30 June 2022 Year ended 30 June 2022 G Lord G Lord G Lord G Baxter G Baxter1 M Haas J Jones D Singh Balance at 1 July 2021 6,250,000 2,632,500 6,000,000 3,000,000 – – – – 1,500,000 3,000,000 1,000,000 2,000,000 – – – – – – – – – – – – (1,500,000) – – – – – – – – – 6,250,000 2,632,500 6,000,000 3,000,000 – 3,000,000 1,000,000 2,000,000 1 Options granted in December 2018 but not issued until current financial year The total value of options and performance rights that were granted during the year ended 30 June 2022 is as follows: KMP G Baxter1 G Baxter1 G Baxter1 No of options Value per option at grant date 500,000 500,000 500,000 $0.022 $0.021 $0.022 Total value of options granted during the year $ 10,764 10,686 11,120 1 Options granted in December 2018 but not issued until current financial year The fair value of these options granted as remuneration as shown in the above table has been determined in accordance with Australian Accounting Standards, using the Black-Scholes method of calculation and will be recognised over the relevant vesting period to the extent that the conditions necessary for vesting are satisfied. 47 for the year ended 30 June 2022Directors’ Report REMUNERATION REPORT (AUDITED) (CONTINUED) D. Additional Information Relationship between remuneration policy and Company performance The remuneration policy has been tailored to increase goal congruence between shareholders, directors and executives. The chosen method to achieve this aim is providing shares and share options to link future benefits to the performance of the Company’s share price. The Company believes this policy will be effective in increasing shareholder’s wealth. The earnings of the Company for the reporting periods to 30 June 2022 are summarised below, along with details that are considered to be factors in shareholder returns: $’000 (unless otherwise stated) 30-Jun-18 30-Jun-19 30-Jun-20 30-Jun-21 30-Jun-22 Statutory revenue - external customer sales 5,328 5,260 20,223 67,389 112,977 Earnings before interest, tax, depreciation and amortisation (EBITDA) Loss after income tax (1,529) (3,096) (3,843) (4,373) (5,020) 189 9,183 (7,312) (4,533) (8,783) Basic loss per share ($) Share price at financial year end (cents) (2.62) 6.0 (2.90) 4.5 (2.02) 8.0 (0.52) 23.5 (0.73) 10.5 E. Additional Information in relation to key management personnel shareholdings Ordinary shares held in Tesserent Limited (number) as at 30 June 2022 Issued on exercise of options during the year Balance 1 July 2021 On-market changes Balance 30 June 2022 99,258,956 – 4,120,327 1,500,000 – – 99,258,956 5,620,327 – 14,000,000 12,939,574 7,945,800 9,426,577 20,410,431 – – – – – 281,636 281,636 14,000,000 458,426 13,398,000 – – – 7,945,800 9,426,577 20,410,431 168,101,665 1,500,000 740,062 170,341,727 Directors G Lord G Baxter M Haas Executive Directors J Challingsworth K Hansen Other KMPs G Katavic C Hagios C Humphreys Total 48 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Directors’ Report REMUNERATION REPORT (AUDITED) (CONTINUED) Share Options and performance rights held in Tesserent Limited (number) as at 30 June 2022 Directors G Lord G Baxter M Haas Other KMPs J Jones D Singh Total Balance 1 July 2021 Options/ rights converted Balance 30 June 2022 Vested and exercisable 14,882,500 – 14,882,500 8,882,500 4,500,000 (1,500,000) 3,000,000 – 3,000,000 – 3,000,000 3,000,000 1,000,000 2,000,000 – – 1,000,000 1,000,000 2,000,000 2,000,000 25,382,500 (1,500,000) 23,882,500 23,882,500 F. Loans from/to KMP There were no loan balances with Key Management Personnel as at 30 June 2022. G. Other Transactions with KMP The Company undertook business with Belgravia Group and associated companies in which Mr G Lord is a director of and owns an interest. Products purchased totalled $nil. Products and services sold to Belgravia totalled $124,368 being professional services and software subscriptions and support to Belgravia Group Pty Ltd. There were no other transactions with Key Management Personnel for the year ended 30 June 2022. This concludes the Remuneration Report which was approved by the Board on 29 August 2022 and has been signed in accordance with a resolution of the Directors made pursuant to section 298(2) of the Corporations Act 2001 (Cth). NON-AUDIT SERVICES During the year, BDO Audit Pty Ltd, the Company’s auditor, performed certain other services in addition to their statutory duties. The Directors are satisfied that the provision of these non-audit services by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. Details of amounts paid or payable for non-audit services is outlined in Note 27 of the financial statements: Corporate and indirect tax services Due diligence services Total 2022 $ 103,900 35,000 138,900 2021 $ 26,538 575,041 601,579 49 for the year ended 30 June 2022Directors’ Report NON-AUDIT SERVICES (CONTINUED) The Directors are of the opinion that the services outlined in Note 27 to the financial statements do not compromise the external auditor’s independence for the following reasons: – All non-audit services have been reviewed and approved by the Board to ensure that they do not impact the integrity and objectivity of the auditor, and – None of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Profession and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as an advocate for the Company or jointly sharing economic risks and rewards. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is included at page 51 of the Annual Report. CORPORATE GOVERNANCE In recognising the need for the highest standards of corporate behaviour and accountability, the Directors support the principles of Corporate Governance. The Company continued to follow best practice recommendations as set out by the ASX Corporate Governance Council. Where the Company has not followed best practice for any recommendation, explanation is given in the Corporate Governance Statement within this Annual Report. The Company’s Corporate Governance statement, can be found earlier in this report and is available on the Company’s website at https://investors.tesserent.com/. ROUNDING OF AMOUNTS The company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Signed in accordance with a resolution of the Directors made pursuant to s.298 (2) of the Corporations Act 2001. On behalf of the Directors Kurt Hansen Chief Executive Officer 30 August 2022 50 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdAuditors Independence Declaration for the year ended 30 June 2022 Tel: +61 3 9603 1700 Fax: +61 3 9602 3870 www.bdo.com.au Collins Square, Tower Four Level 18, 727 Collins Street Melbourne VIC 3008 GPO Box 5099 Melbourne VIC 3001 Australia DECLARATION OF INDEPENDENCE BY SALIM BISKRI TO THE DIRECTORS OF TESSERENT LIMITED As lead auditor of Tesserent Limited for the year ended 30 June 2022, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Tesserent Limited and the entities it controlled during the period. Salim Biskri Director BDO Audit Pty Ltd Melbourne, 30 August 2022 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation. 51 for the year ended 30 June 2022 Consolidated Statement of Profit or Loss and Other Comprehensive Loss Revenue Other income Fair value gain on investment held at fair value through profit or loss Expenses Software licence and connectivity fees Employee benefits expense Operating expenses Impairment of receivables Business acquisition costs Fair value loss on contingent consideration Share option expense Depreciation and amortisation expense Finance costs Impairment of financial instruments Share of loss of equity accounted associates Debt facility unamortised warrants write-off expense Debt facility exit fee Loss before income tax benefit Income tax benefit Loss after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive loss for the year Basic loss per share Diluted loss per share Note 4 5 2022 $’000 2021 $’000 112,977 67,389 526 597 964 – (13,526) (9,654) (59,884) (35,567) 6 (21,358) (13,206) – (592) (600) (2,401) (7,841) (5,439) (4,303) (322) (7,501) (1,750) (11,417) 2,634 (8,783) – (235) (4,934) – (4,462) (4,975) (4,431) – – – – (9,111) 4,578 (4,533) – (8,783) (4,533) $ (0.73) (0.73) $ (0.52) (0.52) 6 6 6 6 6 7 35 35 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 52 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdConsolidated Statement of Financial Position as at 30 June 2022 Assets Current assets Cash and cash equivalents Trade and other receivables Contract assets Prepayments Inventories Lease asset receivables Financial assets at fair value through profit or loss Current tax asset Total current assets Non-current assets Contract assets Property, plant and equipment Intangibles Goodwill Right-of-use assets Lease asset receivables Investments in equity accounted associates Financial assets at fair value through profit or loss Other assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Contract liabilities Lease liabilities Provisions Income tax payable Deferred settlement liabilities Total current liabilities Note 2022 $’000 2021 $’000 9 10 11 10 13 14 15 12 16 11 17 18 19 20 21 14,339 32,082 13,190 1,751 104 265 500 – 14,860 24,799 9,293 1,906 85 254 3,000 215 62,231 54,412 3,041 3,317 39,854 129,635 6,129 296 941 2,298 790 159 2,700 29,652 83,259 6,812 534 2,867 – 735 186,301 126,718 248,532 181,130 35,853 28,973 11,313 3,110 4,119 233 7,335 2,390 2,831 172 23,600 11,699 78,228 53,400 53 Consolidated Statement of Financial Position as at 30 June 2022 Non-current liabilities Contract liabilities Lease liabilities Borrowings Provisions Deferred settlement liabilities Deferred tax liability Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity Note 2022 $’000 2021 $’000 18 19 22 20 21 7 23 24 2,285 3,516 1,179 5,078 34,473 25,603 1,027 5,485 6,524 675 1,652 5,910 53,310 40,097 131,538 116,994 93,497 87,633 138,666 102,992 13,145 11,200 (34,817) (26,558) 116,994 87,633 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 54 Annual Report 2022 Tesserent LtdConsolidated Statement of Changes in Equity Contributed equity $’000 Converting notes $’000 Share based payment reserve $’000 Foreign currency translation reserve $’000 Balance at 1 July 2020 29,485 6,531 1,841 Loss after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive loss for the year Capital raising costs Share based payments Share options issued Shares issued or accrued as part of business combinations Shares issued or accrued to employees or consultants Shares issued on conversion of convertible notes Distribution to convertible note holders Options exercised Options forfeited Warrants exercised Deferred tax Translation of foreign operations Balance at 30 June 2021 Balance at 1 July 2021 Total comprehensive loss for the year Issue of shares Capital raise Capital raising costs Shares issued as part of business combinations Options issued Options exercised Options forfeited Warrants exercised Deferred tax Translation of foreign currencies Balance at 30 June 2022 – – – (216) – – 50,480 4,744 – – – – – – – – 7,172 (6,721) – 4,114 – 7,213 – – 102,992 102,992 – 738 25,000 (1,372) 10,669 – 99 – 128 412 – 138,666 190 – – – – – – – – – – – – – – – – – – – – – – – 8,050 4,213 – – – – (169) (365) – (2,400) – 11,170 11,170 – – – – – 2,401 (99) (164) (128) – – 13,180 – – – – – – – – – – – – – – – 30 30 13 – – – – – – – – – – (48) (35) Accumulated losses $’000 Total equity $’000 (21,349) 16,507 (4,533) (4,533) – – (4,533) – – – – – (4,533) (216) 8,050 4,213 50,480 4,744 (451) – (190) (90) 365 – (310) – (26,558) – 3,855 – 7,213 (2,710) 30 87,633 (26,198) 87,977 (8,783) – – – – – – 164 – – – (34,817) (8,783) 738 25,000 (1,372) 10,669 2,401 – – – 412 (48) 116,994 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 55 for the year ended 30 June 2022Consolidated Statement of Cash Flows Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Other revenue Interest received Interest and other finance costs paid Income taxes paid Net cash from operating activities Cash flows from investing activities Payment for purchase of business combinations, net of cash acquired Final payments for prior period's business acquisition Payments for investments Payments for property, plant and equipment Payments for intangibles Proceeds from release of security deposits Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from borrowings Transaction costs on borrowings Repayment of lease liabilities Payments for share issue transaction costs Proceeds (distributions to)/from convertible notes Refinancing exit costs paid Repayment of borrowings Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year Note 2022 $’000 2021 $’000 167,984 90,933 (151,659) (86,148) 495 31 (3,543) (1,520) 11,790 158 9 (1,177) (881) 2,893 (13,990) (18,629) (11,433) (5,778) (3,200) (3,000) (2,518) (1,461) (924) 63 (25) – (32,002) (28,893) 8 32 32 13 14 23 25,738 9,485 35,000 30,000 (527) (2,398) (1,372) – (1,750) (35,000) – (1,772) (216) (190) (799) – 19,691 36,509 (521) 14,860 14,339 10,510 4,350 14,860 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 56 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES The financial statements were authorised for issue by the Directors on 30 August 2022. The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). The financial statements cover Tesserent Limited (“the Company”) and its controlled entities as a consolidated entity (“the Group”) for the year ended 30 June 2022. The Company is a company limited by shares that are publicly traded on the Australian Stock Exchange, incorporated and domiciled in Australia. Rounding of amounts The company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, investments in financial assets which have been measured at fair value. Comparatives Where necessary, comparative information has been reclassified and repositioned for consistency with current year disclosures. Going Concern The consolidated financial statements have been prepared on a going concern basis, which contemplates the continuity of normal business activities and the realisation of assets and discharge of liabilities in the normal course of business. For the year ended 30 June 2022 the Group made a net loss of $8.8 m (2021: $4.5m) and had cash inflows from operating activities of $11.8m (2021: $2.9m inflow). As at the date the consolidated entity had net current liabilities of $16.0m (2021: Net current assets of $1.0m). The directors believe there are reasonable grounds to conclude that the Group will continue as going concern based on the following: – The Group has $14.3m of cash and cash equivalents at 30 June 2022 (2021: $14.9m) – The Group has access to $24m of unused facilities at 30 June 2022 New or amended Accounting Standards and Interpretations adopted The group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The group anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement. New Standards, amendments and Interpretations not adopted in the current year have not been disclosed as they are not expected to have a material impact on the Group’s financial statements. 57 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New accounting standards and interpretations not yet mandatory or early adopted include: – AASB 2014-10 Amendments to Australian Accounting Standards: Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture – AASB 2015-10 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 – AASB 2017-5 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 and Editorial Corrections – AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-Current – AASB 2020-6 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-Current – AASB 2020-3 Amendments to Australian Accounting Standards – Annual Improvements 2018-2020 and Other Amendments – AASB 2021-2 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies and Definition of Accounting Estimates – AASB 2021-5 Amendments to Australian Accounting Standards – Deferred Tax related to Assets and Liabilities arising from a Single Transaction – AASB 2022-1 Amendments to Australian Accounting Standards – Initial Application of AASB 17 and AASB 9 – Comparative Information Consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Tesserent Limited (‘company’ or ‘parent entity’) as at 30 June 2022 and the results of all subsidiaries for the year then ended. Tesserent Limited and its subsidiaries together are referred to in these financial statements as the ‘Group’ or the ‘Company’. The consolidated financial statements include the financial statements of the Company, and the information and results of each subsidiary from the date on which the Company obtains control and until such time as the Company ceases to control such entity. An entity is controlled when Tesserent is exposed to, or has rights to, variable returns from involvement with the entity and has the ability to affect those returns through power over the entity. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. In reporting the consolidated financial statements, all intercompany balances and transactions, and unrealised profits or losses within the Group are eliminated in full. Foreign currency translation Functional and presentation currency The consolidated financial statements are presented in Australian dollars (AUD), which is also the functional currency of the Company. Foreign currency transactions All foreign currency transactions during the financial year are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at the reporting date. Exchange differences are recognised in profit or loss in the period in which they arise except that exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned or likely to occur, which form part of the net investment in a foreign operation are recognised in the foreign currency translation reserve in the consolidated financial statements and are recognised in profit or loss on disposal of the net investment. 58 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreign operations Assets and liabilities of foreign operations are translated using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Any exchange differences are recognised in equity. On the disposal of a foreign operation, all of the exchange differences accumulated in equity in respect of that operation are reclassified to profit or loss. Financial instruments Financial assets and financial liabilities are recognised in the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. When the transaction price differs from fair value at initial recognition, the Group will account for such difference if: – fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets, then the difference is recognised as a gain or loss on initial recognition (ie day 1 profit or loss) – (in all other cases), the fair value will be adjusted to bring it in line with the transaction price (ie day-1 profit or loss will be deferred by including it in the initial carrying amount of the asset or liability) Classification and subsequent measurement of financial assets Financial assets that meet the following conditions and are subsequently measured at amortised cost include: – the financial asset is held within a business model whose objective is to collect contractual cash flows – the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All other financial assets are subsequently measured at fair value Amortised cost and interest income Interest income is recognised using the effective interest method for financial assets measured subsequently at amortised cost. Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently become credit impaired. Impairment of financial assets The Group performs impairment assessment under the expected credit losses model on financial assets (including trade and other receivables) which are subject to impairment under AASB 9 Financial Instruments. The amount of expected credit losses is updated at the end of each reporting period to reflect changes in credit risk since initial recognition. Refer to Note 9. Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or, when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset measured at amortised cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognised in profit or loss. Cash and cash equivalents Cash and cash equivalents include cash in hand and on-demand deposits, and other short-term highly liquid investments, readily convertible into a known amount of cash and are subject to an insignificant risk of changes in value. 59 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES (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 Company after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Share capital represents the nominal value of equity shares issued. Share premium represents the excess over nominal value of the fair value of the consideration received for equity shares, net of direct issue costs. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the fair value of proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the statement of comprehensive income using the effective interest rate method. They are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Trade payables Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method. Share-based payment Employees (including senior executives) of the Group receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (equity-settled transactions). The grant date fair value of equity settled share-based payment awards granted to employees is recognised as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to meet. Therefore, the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. 2. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities. The judgements, estimates and assumptions that are material to the financial reports are discussed below. Revenue from contracts with customers involving sale of goods When recognising revenue in relation to the sale of goods to customers, the key performance obligation of the group is considered to be the point of delivery of the goods to the customer, as this is deemed to be the time that the customer obtains control of the promised goods and therefore the benefits of unimpeded access. A portion of the Group’s revenue is derived from selling third party Cyber Security products and monitoring software to clients. In the instances where the Group makes these sales to customers with limited or no associated implementation or customisation work, the requirements under the AASB15 Revenue from Contracts with Customers, deem Tesserent to be selling those products as an ‘agent’ and require the sales turnover (invoiced amount) to be netted off against the cost of acquiring that software. The Group’s revenue is derived from the provision of software licences, hardware equipment, managed services, consulting services and support and maintenance renewals over multiple periods. In applying the requirements of AASB 15 Revenue from Contracts with Customers the Group has had to make assumptions around future billing and completion of future performed obligations. 60 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 2. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED) Provision for expected credit losses The Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. Expected credit losses are measured by grouping trade receivables and contract assets, based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. A provision matrix is then determined based on the historic credit loss rate for each group of customers, adjusted for any material expected changes to the future credit risk for that customer group. Goodwill and other indefinite life intangible assets Significant judgement is required in the assumptions used in the value-in-use models used in impairment testing. Refer to Notes 14 and 15 for more detailed information. Fair value measurement on financial instruments When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques. A degree of judgement is required in establishing fair values when inputs used are not derived from observable markets. Recovery of deferred tax assets Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies. Leases – estimating the incremental borrowing rate Where the interest rate implicit in a lease cannot be readily determined, an incremental borrowing rate is estimated to discount future lease payments to measure the present value of the lease liability at the lease commencement date. Such a rate is based on what the Group estimates it would have to pay a third party to borrow the funds necessary to obtain an asset of a similar value to the right-of-use asset, with similar terms, security and economic environment. Share-based payment transactions Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. 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 by using either the Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 24. 61 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 3. SEGMENT INFORMATION Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. Identification of reportable operating segments The Group operates predominantly in Australia and New Zealand. The Group’s internal reporting and management comprises three primary operating segments, being: 1. 2. Tesserent Commercial segment – comprising the Group’s core customer offerings Defend, Cloud and Detect customer service offerings, including the Loop Secure Pty Ltd business acquired during the current financial year ended 30 June 2022. Tesserent Federal segment – comprising the Group’s services primarily to the Federal and State Governments, including the Pearson Corporation Pty Ltd and Claricent Pty Ltd businesses acquired during the financial year ended 30 June 2022. 3. Tesserent New Zealand segment – comprising the Group’s services to New Zealand customers. The CODMs review these segments down to the EBIDAC level (Earnings before interest, tax, depreciation, amortisation and corporate overhead costs), with reporting of corporate overhead costs and non-cash costs done on a consolidated group basis. Year ended 30 June 2022 Net sales to external customers Other income Total revenue Tesserent Commercial $000 Tesserent Federal $000 Tesserent New Zealand $000 Other/ Corporate $000 61,932 46,334 517 – 62,449 46,336 4,711 9 4,720 – – – Total $000 112,977 526 113,505 EBITDA (before other non-operating costs) 10,270 10,357 Other non-operating costs (see breakdown below*) EBITDA Depreciation and amortisation Amortisation of remaining warrants on refinancing Interest expense and PAM facility amortisation – – 10,270 10,357 – – – – – – Loss before income tax expense 10,270 10,357 Income tax benefit – – Profit/(loss) after income tax expense 10,270 10,357 474 – 474 – – – 474 – 474 (2) 21,099 (11,911) (11,912) (7,841) (11,911) 9,189 (7,841) (9,397) (9,397) (3,366) (32,516) 2,634 (3,366) (11,417) 2,634 (29,882) (8,783) Material items include: * Corporate costs * Share based payments * Acquisition costs and fair value expense on contingent consideration * Exit costs on refinancing * Share of loss in equity accounted associates, fair value gain on investments and impairment of investments * Impact of AASB16 accounting adjustments (5,019) (2,401) (1,152) (1,750) (3,829) 2,241 Total segment assets Total segment liabilities 98,132 84,518 (30,395) (12,496) 7,912 (820) 57,970 248,532 (87,827) (131,538) 62 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 3. SEGMENT INFORMATION (CONTINUED) Year ended 30 June 2021 Tesserent Commercial $000 Tesserent Federal $000 Tesserent New Zealand $000 Other/ Corporate $000 Total $000 Net Sales to external customers 40,572 24,976 Other income Total revenue EBITDAC Other non-operating costs* EBITDA Depreciation and amortisation Interest expense and PAM facility amortisation 171 23 40,743 24,999 7,262 – 7,262 – – 5,595 – 5,595 – – Profit/(loss) before income tax benefit 7,262 5,595 Income tax benefit - - Profit/(loss) after income tax benefit 7,262 5,595 1,846 – 1,846 661 – 661 – – 661 - 661 (5) 67,389 770 765 964 68,353 (31) 13,487 (13,298) (13,298) (13,329) 189 (4,975) (4,975) (4,325) (4,325) (22,629) 4,578 (9,111) 4,578 (18,051) (4,533) Material items include: * Share based payments * Acquisition costs Total segment assets Total segment liabilities 4. REVENUE Managed services Consulting services Software licences Hardware equipment Support and maintenance renewals Other sales revenue Revenue Significant Accounting Policy 89,597 42,330 36,946 6,600 6,996 193 47,591 44,374 2022 $’000 13,907 84,715 11,426 1,138 1,697 94 4,462 (4,934) 181,130 93,497 2021 $’000 7,217 50,964 7,844 642 687 35 112,977 67,389 Revenue from contracts with customers – General principles Revenue is recognised at an amount that reflects the consideration to which the Company is expected to be entitled in exchange for transferring goods and services to a customer. For each contract with a customer, the Company identifies the contract with a customer, identifies the performance obligations in the contract, determines the transaction price which takes into account estimates of variable consideration and the time value of money, allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered, and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. 63 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 4. REVENUE (CONTINUED) Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the ‘expected value’ or ‘most likely amount’ method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a liability. Contract liabilities represent the Company’s obligation to transfer goods or services to a customer and are recognised when a customer pays consideration, or when the Company recognises a receivable to reflect its unconditional right to consideration before the Company has transferred the goods or services. Revenue from contracts - Managed services Revenue derived through licensing arrangements for customers who subscribe to Tesserent’s security infrastructure platform (for the provision of Security-as-a-Service) is recognised based on performance obligations identified in the sales contracts. The revenue is recognised over time depending on the circumstances. Revenue derived from the connectivity and related support services (including installation and setup of hardware) is recognised over time as services are delivered. Revenue is calculated based on time and materials used. For fixed-price contracts, revenue is recognised based on the actual service provided to the end of the reporting period. If contracts include the installation of hardware, revenue for the hardware is recognised at a point in time when the hardware is delivered, the legal title has passed, and the customer has accepted the hardware. Revenue from contracts - Consulting services Revenue from the sale of consulting services is recognised over time as services are delivered. Revenue from providing services is recognised in the accounting period in which the services are rendered. Revenue is calculated based on time and materials used. Revenue from contracts - Sale of software licences Software licences income is recognised on an agency basis as Tesserent acts as a reseller in the transaction. Tesserent recognises the transaction on a net basis which represents its commission earned. Revenue from contracts - Hardware equipment Revenue derived from the sale of hardware equipment is recognised on an agency basis as Tesserent acts as a reseller in the transaction. Tesserent recognises the transaction on a net basis which represents its commission earned. Revenue from contracts - Maintenance and support renewals Revenue from the sale of maintenance and support renewals is recognised based on the performance obligations identified in the sales contracts. The revenue is recognised overtime depending on circumstances. 5. OTHER INCOME Government grants Sublease income Interest income Other income 64 2022 $’000 2021 $’000 – 495 31 526 113 842 9 964 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 6. EXPENSES Loss before income tax includes the following specific expenses: Depreciation Leasehold improvements Plant and equipment Fixtures and fittings Office equipment Computer software Hardware employed Right-of-use assets Total depreciation Amortisation Customer contracts and relationships Intellectual property Total amortisation Total depreciation and amortisation Impairment of financial instruments Call options write-off expense Impairment of equity accounted associates Impairment of receivables Impairment of financial instruments Exit costs and costs of refinancing debt facilities Unamortised warrants write-off expense on Pure Asset Management loan Exit fee on Pure Asset Management loan Total exit refinancing costs on refinancing of debt facilities Finance costs Interest and finance charges paid/payable on borrowings (cash) Interest and finance charges paid/payable on borrowings (warrant amortisation) Interest and finance charges paid/payable on lease liabilities Other finance costs Total Finance costs Operating expenses Contractor expenses Consulting and legal expenses Advertising and promotion Administration expenses Other expenses Total operating expenses 2022 $’000 2021 $’000 131 844 29 588 59 26 2,241 3,918 3,919 4 3,923 7,841 2,500 1,604 199 4,303 7,501 1,750 9,251 3,088 1,897 273 181 5,439 141 559 25 768 33 5 1,235 2,766 2,206 3 2,209 4,975 – – – – – – – 1,630 2,396 280 125 4,431 15,849 8,679 1,284 606 1,568 2,051 962 404 1,475 1,686 21,358 13,206 65 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 7. INCOME TAX BENEFIT (a) Income tax benefit Deferred tax movements (current year) Deferred tax movements (prior year) (b) Reconciliation of income tax benefit to prima facie tax on accounting loss Numerical reconciliation of income tax benefit and tax at the statutory rate Loss before income tax benefit Tax at the statutory tax rate of 30% Prior year tax losses recognised Share based payments Other (non-deductible)/assessable items Income tax benefit (c) Movement in deferred tax balances Deferred tax assets/(liabilities) Share issue costs Provisions Intangible assets Right-of-use assets and liabilities Tax losses recognised/(utilised) (current year) Tax losses recognised/(utilised) (prior year) Other 2022 $’000 2021 $’000 (2,634) – (4,101) (477) (2,634) (4,578) (11,417) (3,425) – 720 71 (9,111) (2,733) (4,101) 1,296 – (2,634) (4,578) 472 729 (11,241) (28) (3,491) 5,371 1,664 (6,524) (2,160) 300 (8,416) (65) 1,270 4,101 (940) (5,910) Share issue costs $’000 Provisions $’000 Intangible assets $’000 Right of use assets and liabilities $’000 Tax losses recognised $’000 Other $’000 Total $’000 As at 1 July 2021 (2,160) 300 (8,416) (65) 5,371 (940) (5,910) – (254) (3,598) (3,960) 1,135 – – (5) 42 – – (3,491) 2,980 – – – – (11,241) (28) 1,880 1,664 2,773 411 (200) (6,524) Acquired upon business combination – Charged to profit and loss 2,314 Charged through equity Overprovision in previous years 411 (93) 472 621 (207) – 15 729 66 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 7. INCOME TAX BENEFIT (CONTINUED) (d) Tax losses Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 30% 2022 $’000 2021 $’000 – – – – Carried forward tax losses have been brought to account as a deferred tax asset. Based on the value of tax losses incurred, the directors’ have formed an opinion that the business is in a position to satisfy the criteria for recognising these losses as a deferred tax asset. The benefits of deferred tax losses not brought to account can only be realised in the future if: – assessable income is derived of a nature, and of an amount sufficient to enable the benefit from the deductions to be realised – conditions for deductibility imposed by law are complied with; and – no changes in tax legislation adversely affect the realisation of the benefit from the deductions. The directors on a regular basis will assess the recognition of the deferred tax assets. (e) Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% 2022 $’000 2021 $’000 – 28 Significant Accounting Policy Total income tax benefit comprises current and deferred tax recognised in the statement of profit or loss in the year. Current and deferred tax is also recognised directly in equity, and not in the Statement of Profit or Loss, to the extent it is attributable to amounts and movements which have also been recognised directly in equity. Current tax comprises expected tax payable/receivable on business taxable income/loss which is recognised in the statement of profit or loss in the current year. Any adjustments to tax payable/receivable are recognised in the current year that relate to taxable income/ loss recognised in the statement of profit or loss in prior years. Current tax is measured using the applicable enacted (or substantively enacted) income tax rates, at the reporting date in the countries where the company’s subsidiaries and associates operate. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: – When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or – When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. 67 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 7. INCOME TAX BENEFIT (CONTINUED) Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Tesserent Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these entities are set off in the consolidated financial statements. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. 8. RECONCILIATION OF LOSS AFTER INCOME TAX TO NET CASH FROM OPERATING ACTIVITIES 2022 $’000 2021 $’000 (8,783) (4,533) 7,841 1,006 2,401 397 – – – 1,183 9,397 (48) (3,545) (5,934) (19) 215 237 3,199 5,299 2,725 (1,797) (2,571) 585 – 4,975 – 4,462 – 3,238 (4,578) 235 (80) 2,396 – (12,688) (8,141) (21) – 467 (120) 14,331 4,105 74 (1,384) – 155 11,790 2,893 Loss after income tax benefit for the year Adjustments for: Depreciation and amortisation Impairment Share-based payments Write off of assets Acquisition costs settled in shares Tax credit Bad debt provision Other expenses - non-cash Finance costs - non-cash Foreign currency differences Change in operating assets and liabilities: Increase in trade and other receivables Increase in contract assets Increase in inventories Decrease in income tax refund due Decrease in prepayments Decrease/(increase) in other operating assets Increase in trade and other payables Increase in contract liabilities Increase/(decrease) in provision for income tax Decrease in deferred tax liabilities Increase in employee benefits Increase in other provisions Net cash from operating activities 68 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Notes to the Consolidated Financial Statements 9. TRADE AND OTHER RECEIVABLES Trade receivables Less: Allowance for expected credit losses Other receivables 2022 $’000 2021 $’000 29,940 23,385 (186) (248) 29,754 23,137 2,328 32,082 1,662 24,799 Trade and other receivables include amounts due from customers for goods sold and services performed in the ordinary course of business. Receivables expected to be collected within 12 months of the end of the reporting period are classified as current assets. All other receivables are classified as non-current assets. Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowances for expected credit losses. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Tesserent’ credit terms are generally 30 days from the date of invoice. Therefore, the carrying amount of receivables approximates their fair value. Allowance for expected credit losses The consolidated entity has recognised a loss of $185,964 (2021: $247,878) in profit or loss in respect of the expected credit losses for the year ended 30 June 2022. The ageing of the receivables and allowance for expected credit losses provided for above are as follows: Not overdue Past due 30 to 60 days Past due 60 to 90 days Past due 90 to 120 days Past due over 120 days Expected credit loss rate Carrying amount 2022 % – 2% 13% 26% 42% 2021 % – 1% 9% 29% 29% 2022 $’000 30,697 864 341 194 172 2021 $’000 20,019 4,134 280 368 247 32,268 25,048 Allowance for expected credit losses 2022 $’000 2021 $’000 – 18 45 51 72 186 – 45 26 106 71 248 Movements in the allowance for expected credit losses are as follows: Opening balance Additional provisions recognised Receivables written off during the year as uncollectable Write back of allowance Closing balance 2022 $’000 2021 $’000 247 7 – (68) 186 81 246 (42) (37) 248 Credit Risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the consolidated entity. The maximum exposure to credit risk for trade and other receivables is the carrying amount, net of any provisions for impairment of those assets, as discussed in the statement of financial position and notes to the financial statements. The consolidated entity does not hold any collateral. The entity considers a receivable as impaired once all efforts to recover an amount have been exhausted, including referring to debt collection or statutory action. The Group has no significant concentrations of credit risk in any one customer. 69 for the year ended 30 June 2022 Notes to the Consolidated Financial Statements 10. CONTRACT ASSETS Current assets Contract assets Non-current assets Contract assets Reconciliation Reconciliation of the written down values at the beginning and end of the current and previous financial year are set out below: Opening balance Additions Additions through business combinations (Note 32) Transfer to trade receivables Write off of assets Closing balance 2022 $’000 2021 $’000 13,190 9,293 3,041 159 9,452 26,405 845 938 19,048 372 (20,431) (10,898) (40) 16,231 (8) 9,452 Contract assets are recognised when the group has transferred goods or services to the customer but where the group is yet to establish an unconditional right to consideration. Contract assets are treated as financial assets for impairment purposes. 11. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Current assets Fair value of call options held Opening balance Additions Impairment of fair value Closing balance 2022 $’000 2021 $’000 500 3,000 3,000 – – 3,000 (2,500) 500 – 3,000 The balance as at 30 June 2022 relates to the fair value of the call option in AttackBound Holdings Pty Ltd which is exercisable by 30 June 2023. In 2022, the Group impaired half of the call option investment in AttackBound Holdings Pty Ltd ($0.5m) and the full value of the call option in TrustGrid Holdings Pty Ltd ($2.0m). Non-current assets Investment in Daltrey Pty Ltd 2022 $’000 2021 $’000 2,298 – At 30 June 2022, the Group held a 5.48% interest in Daltrey Pty Ltd, a leading sovereign biometric security company. The investment was acquired in July 2021. 12. RIGHT-OF-USE ASSETS Building Leases - right-of-use Less: Accumulated depreciation 70 2022 $’000 13,824 (7,695) 6,129 2021 $’000 12,367 (5,555) 6,812 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 12. RIGHT-OF-USE ASSETS (CONTINUED) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2020 Additions through business combinations Disposals from early termination Depreciation expense Balance at 30 June 2021 New leases entered into during the year Disposals from early termination Depreciation expense Balance at 30 June 2022 Group as a lessee Building Leases $’000 3,920 5,007 (880) (1,235) 6,812 2,072 (515) (2,241) 6,129 Right-of-use asset The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right- of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset – or to restore the underlying asset or the site on which it is located—less any lease incentives received. The right-of-use asset is separately disclosed in the Consolidated Statement of Financial Position. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to either the earlier of the end of the useful life of the right-of-use asset, or the end of the lease term. The estimated useful lives of right-of- use assets are determined on the same basis as those of plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. Short-term leases and leases of low-value assets The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases of office and information technology equipment with a lease term of 12 months or less, or for leases of low- value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis, over the lease term. Group as a lessor When the Group acts as a lessor—generally when it subleases property on which it has entered a head lease as a lessee–it determines at the sublease inception whether each sublease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease. If not, then it is accounted for as an operating lease. As part of this assessment, the Group considers certain indicators, such as whether the lease is for the major part of the economic life of the asset. When the Group is an intermediate lessor, it accounts for its interests in the headlease and the sublease separately. The Group assesses the lease classification of a sublease with reference to the right-of-use asset arising from the headlease, not with reference to the underlying asset. If a headlease is a short-term lease to which the Group applies the exemption described above, then it classifies the sublease as an operating lease. If an arrangement contains a lease and non-lease component, the Group applies AASB 15 Revenue from Contracts with Customers to allocate the consideration in the contract. The Group recognises lease payments received under operating leases as income on a straight-line basis over the lease term as part of non-operating income. 71 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 13. PROPERTY, PLANT AND EQUIPMENT Leasehold improvements - at cost Less: Accumulated depreciation Plant and equipment - at cost Less: Accumulated depreciation Fixtures and fittings - at cost Less: Accumulated depreciation Motor vehicles - at cost Less: Accumulated depreciation Computer equipment - at cost Less: Accumulated depreciation Office equipment - at cost Less: Accumulated depreciation Hardware employed - at cost Less: Accumulated depreciation Computer software - at cost Less: Accumulated depreciation 2022 $’000 1,354 (515) 839 5,456 (4,108) 1,348 347 (265) 82 10 (10) – 6,460 (5,834) 626 1,318 (1,156) 162 459 (393) 66 1,435 (1,241) 194 3,317 2021 $’000 1,025 (390) 635 4,082 (3,320) 762 319 (219) 100 52 (52) – 5,881 (5,228) 653 1,286 (1,074) 212 394 (372) 22 1,378 (1,062) 316 2,700 Property, plant and equipment are carried at cost, less accumulated depreciation, and any impairment losses. The estimated useful lives, residual values, and depreciation method are reviewed at the end of each annual reporting period. The depreciation charge for each period is recognised in profit or loss. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Furniture & fittings Hardware employed Office equipment Computer Software 10 years 3 years 10 years 5 years Leasehold improvement 40 years Plant & equipment Computer equipment 3 years 4 years 72 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Notes to the Consolidated Financial Statements 13. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Furniture & Fittings $’000 Hardware Employed $’000 Office Equipment $’000 Software $’000 Leasehold Improvement $’000 Plant & Equipment $’000 87 10 28 – (25) 100 6 5 – (29) 82 7 20 – – (5) 22 70 – – (26) 66 64 638 962 (31) (768) 865 366 158 (14) (588) 788 – 235 117 – (36) 316 43 6 (112) (59) 194 641 104 31 – (141) 635 349 2 (16) (131) 839 Balance at 1 July 2020 Additions Additions through business combinations Disposals Depreciation expense Balance at 30 June 2021 Additions Additions through business combinations Disposals Depreciation expense Balance at 30 June 2022 14. INTANGIBLES Customer contracts - at cost Less: Accumulated amortisation Intellectual property - at cost Less: Accumulated amortisation There were no intangibles whose title is restricted or pledged as security for liabilities. Total $’000 863 1,458 1,950 (37) 64 451 812 (6) (559) (1,534) 762 1,429 2,700 2,263 – – 171 (142) (844) (1,677) 1,348 3,317 2022 $’000 44,811 (6,565) 2021 $’000 31,611 (2,647) 38,246 28,964 1,683 (75) 1,608 759 (71) 688 39,854 29,652 73 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 14. INTANGIBLES (CONTINUED) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2020 Capitalised development costs Additions through business combinations (Note 32) Amortisation expense Balance at 30 June 2021 Capitalised development costs Additions through business combinations (Note 32) Amortisation expense Balance at 30 June 2022 Customer contracts and relationships $’000 Intellectual property $’000 7,596 – 23,574 (2,206) 28,964 – 13,200 (3,919) 38,246 23 100 569 (3) 689 924 – (4) 1,608 Total $’000 7,619 100 24,143 (2,209) 29,653 924 13,200 (3,923) 39,854 Intangible assets with finite lives are carried at cost, less accumulated amortisation, and accumulated impairment losses. Customer relationships and intellectual property were acquired as part of business combinations. These intangible assets are initially recognised at their fair value at the acquisition date. Subsequent to initial recognition, customer relationships are amortised over a 10 year expected useful life. 15. GOODWILL Goodwill balances and goodwill acquired during the year through business acquisitions is as follows: Goodwill 2022 $’000 2021 $’000 129,635 83,259 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2020 Additions through business combinations (Note 32) Additional amount recognised from prior year business combination Balance at 30 June 2021 Additions through business combinations (Note 32) Additional amount recognised from prior year business combination Balance at 30 June 2022 $’000 15,965 66,737 557 83,259 45,292 1,084 129,635 74 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 15. GOODWILL (CONTINUED) Goodwill acquired through business combinations has been allocated to the following cash–generating units: Tesserent Commercial Tesserent Federal Tesserent New Zealand 2022 $’000 2021 $’000 71,737 56,022 52,633 5,265 21,972 5,265 129,635 83,259 Goodwill recognised arose from business combinations where the fair value of the consideration paid exceeded the fair value of the assets acquired. Goodwill is considered to have an indefinite life and is not amortised as it represents the synergistic benefits of bringing the businesses together. Goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arises, identified according to operating segments (refer to segment information Note 3). Goodwill is monitored by management at the operating segment level. The recoverable amount of the cash generating unit is determined by a value–in–use calculation using a discounted cash flow model, based on a 12 month budget approved by the Board and management and extrapolated for a further 4 years using steady growth rates, risk based discount rates and a terminal value. The following are the key assumptions applied in calculating the recoverable amount: Input Revenue growth rate - post year 1 EBITDA as a % of revenue Discount rate (post-tax, nominal) Terminal growth rate Tesserent Commercial Tesserent Federal Tesserent New Zealand 11.4% 12.9% 13.0% 2.8% 27.7% 18% 13.0% 2.8% 17.0% 15% 13.0% 2.8% The discount rates reflect management’s estimate of the time value of money and weighted average cost of capital adjusted for the Group, the risk free rate and the volatility of the share price relative to market movements. Management believes the projected revenue growth rates in each CGU are appropriate based on experience and forecasts of the growth of the market for cyber security services and the Group’s share of the market. Based on the impairment testing performed, it was concluded that no impairment was required to be booked in the year to 30 June 2022. 75 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 15. GOODWILL (CONTINUED) Sensitivities As noted above, the directors have made judgements and estimates in respect of impairment testing of goodwill. Should these judgements and estimates not occur the resulting goodwill carrying amount may decrease. The CGU whose impairment testing headroom is most sensitive to assumptions around future revenue growth and increasing margin is Tesserent Commercial: – Revenue would need to decrease by more than 2% CAGR over the forecast period before goodwill in the Tesserent Commercial CGU would need to be impaired, with all other assumptions remaining constant. – The discount rate (post-tax) would be required to increase to over 14% before goodwill in the Tesserent Commercial CGU would need to be impaired, with all other assumptions remaining constant. Management believes that other reasonable changes in the key assumptions on which the recoverable amount of Tesserent Commercial CGU’s goodwill is based would not cause the CGU’s carrying amount to exceed its recoverable amount. The value in use estimates for the Tesserent Federal and Tesserent New Zealand CGU’s exceeds the carrying value of the CGUs by a significant amount. It is therefore not considered particularly sensitive to the variances in inputs in these CGU’s. 16. INVESTMENTS IN EQUITY ACCOUNTED ASSOCIATES Investment in TrustGrid Holdings Pty Ltd Investment in AttackBound Holdings Pty Ltd Opening balance Consideration paid for investments - cash Consideration paid for investments - shares Equity accounting - share of profit/(loss) in associates Write up/(down) on carrying value of investment based on impairment review Closing balance 2022 $’000 831 110 941 2,867 – – (322) (1,604) 941 2021 $’000 2,676 191 2,867 – 1,500 1,367 – – 2,867 The Group has 20.95% (2021: 25%) interest in TrustGrid Holdings Pty Ltd and a 25% interest in AttackBound Holdings Pty Ltd. AttackBound is a cyber threat intelligence platform that provides insights to predict online threat exposure. TrustGrid offers a confidential computing platform for identity-based transactions. Tesserent’s interest in those companies is accounted for using the equity method. The following table illustrates the summarised financial information of the Group’s investments in AttackBound and TrustGrid: Total Assets Total Liabilities Net assets Group's share of equity (%) Group's share of equity Goodwill Group's carrying amount of the investment Revenue of associate entity Net loss of associate entity TrustGrid 2022 $’000 TrustGrid 2021 $’000 AttackBound 2022 $’000 AttackBound 2021 $’000 2,089 (903) 1,186 21 248 583 831 568 (1,150) 1,020 (84) 936 25 234 2,442 2,676 137 (64) 970 (372) 598 25 150 – 110 384 (326) 529 (103) 426 25 106 85 191 27 (74) The associates had no contingent liabilities or capital commitments as at 30 June 2021 and 2022. 76 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 17. TRADE AND OTHER PAYABLES Trade payables Other payables 2022 $’000 21,771 14,082 35,853 2021 $’000 17,534 11,438 28,972 Trade payables are non-interest bearing and are normally settled on 30-day terms. Other payables are non- interest bearing and have an average term of 38 days. 18. CONTRACT LIABILITIES Current liabilities Contract liabilities Non-current liabilities Contract liabilities Reconciliation 2022 $’000 2021 $’000 11,313 7,335 2,285 1,179 Reconciliation of the written down values at the beginning and end of the current and previous financial year are set out below: Opening balance Additions Acquired through business combinations Decrease due to revenue recognised from performance obligations satisfied Closing balance 8,514 18,794 2,359 (16,069) 13,598 2,780 15,420 579 (10,265) 8,514 Contract liabilities relate to cash received in advance of services provided to the customers. 19. LEASE LIABILITIES Current liabilities Lease liability Non-current liabilities Lease liability Movement in Lease Liability Balance as at 1 July Acquired in a business combination Additions Cash Payments Accretion of interest Balance as at 30 June 2022 $’000 2021 $’000 3,110 2,390 3,516 5,078 2022 $’000 7,468 – 1,557 (2,669) 271 6,627 2021 $’000 4,536 4,506 – (1,755) 181 7,468 77 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 19. LEASE LIABILITIES (CONTINUED) The lease liability is initially measured at the present value of the lease payments not paid at the commencement date, discounted using the interest rate implicit in the lease, or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. The Group’s average incremental borrowing rate used is 4.0% (2021: 4.0%). Lease payments included in the measurement of the lease liability include: – fixed payments, including in-substance fixed payments less any lease incentives receivable – variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date – amounts expected to be payable under a residual value guarantee – the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option – payment of penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is separately disclosed in the consolidated statement of financial position. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the expected payable amount under a residual value guarantee, or, if the Group changes its assessment of whether it will exercise a purchase, extension, or termination option. When the lease liability is remeasured in this way, either a corresponding adjustment is made to the carrying amount of the right-of-use asset, or, it is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero 20. PROVISIONS Current liabilities Annual leave Long service leave Non-current liabilities Long service leave Lease make good 2022 $’000 2021 $’000 3,569 550 4,119 877 150 1,027 2,368 463 2,831 525 150 675 Lease make good The provision represents the present value of the estimated costs to make good the premises leased by the group at the end of the respective lease terms. Provisions are recognised when the Group has a legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period. Employee Benefits The current portion of this liability includes all of the accrued annual leave and the unconditional entitlements to long service leave where employees have completed the required period of service Long service leave The liability for long service leave is measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted to their net present value at the end of the reporting period using corporate bond rates. 78 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 21. DEFERRED SETTLEMENT LIABILITIES Current liabilities Deferred settlement liability Non-current liabilities Deferred settlement liability Reconciliation Reconciliation of the fair values at the beginning and end of the current and previous financial year are set out below: Opening balance Deferred and contingent consideration from business acquisitions (refer to Note 32) Change in completion adjustments Cash paid on prior period acquisitions Issued capital from prior period acquisitions Closing balance 2022 $’000 2021 $’000 23,600 11,699 5,485 1,652 13,351 28,521 1,924 (13,933) (778) 29,085 5,400 18,955 (3,119) (5,778) (2,108) 13,351 Deferred settlement liabilities represent purchase consideration payable for acquisitions once certain conditions are met as stipulated in the contracts. These are measured at the discounted value of the best estimate of the cash payable based on conditions existing at the balance date. The measurement of deferred consideration at fair value at each reporting date requires estimates to be made about expected revenue and expenses over the measurement period to which the deferred consideration relates. 22. BORROWINGS Non-current liabilities Borrowings Loan facility - Pure Asset Management Fair value of attaching warrants Transaction costs Amortisation of finance component (warrants and transaction costs) Proceeds from drawdown on CBA loan Transaction costs 2022 $’000 2021 $’000 34,473 25,603 2022 $’000 – – – – 35,000 (527) 2021 $’000 35,000 (9,498) (797) 898 – – 34,473 25,603 Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any gains or losses are recognised in the Statement of Profit or Loss in the event the borrowings are derecognised. 79 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 22. BORROWINGS (CONTINUED) On 23 June 2022, Tesserent entered into agreements with Commonwealth Bank of Australia (CBA) to refinance its existing debt facilities with Pure Asset Management (PAM). The refinancing resulted with the following new borrowings at 30 June 2022: – Full extinguishment of the PAM facilities through a CBA Market Rate Loan Facility of $35.0m, expiring in June 2025 – $20.0,Market Rate Loan Facility to finance deferred consideration payments related to past and future business acquisitions. The facility expires in June 2025. – $1.5m Contingent Liability Facility – $2.0m Asset Finance Facility – $0.5m Corporate Card Facility In addition, Tesserent is required to comply with quarterly covenants requirements from 30 September 2022 (Leverage ratio, minimum EBITDA and Minimum Net Worth). The refinancing of the debt facilities resulted in exit fees paid ($1.75m) and the accelerated amortisation of warrants interest ($7.5m) as disclosed in Note 6. The table below summarises the facilities available, used and unused at balance date: 2022 $’000 35,000 20,000 500 2,000 1,500 59,000 35,000 – – – – 35,000 – 20,000 500 2,000 1,500 24,000 Total facilities Bank loan - facility A Bank loan - facility B Credit card facility Asset finance facility Bank guarantee facility Used at the reporting date Bank loan - facility A Bank loan - facility B Credit card facility Asset finance facility Bank guarantee facility Unused at the reporting date Bank loan - facility A Bank loan - facility B Credit card facility Asset finance facility Bank guarantee facility 80 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Notes to the Consolidated Financial Statements 23. CONTRIBUTED EQUITY 2022 Shares 2021 Shares 2022 $’000 2021 $’000 Ordinary shares - fully paid 1,258,183,427 1,063,018,657 138,666 102,992 Movements in ordinary share capital Details Balance Date Shares Issue price $’000 1 July 2021 1,063,018,657 102,992 Issued to consultant (share issue deferred) 5 July 2021 5,988,665 Shares issued on conversion of options 10 August 2021 250,000 Shares issued on conversion of options 10 August 2021 1,000,000 Shares issued on conversion of options 8 September 2021 500,000 Shares issued on conversion of options 8 September 2021 600,000 $0.00 $0.28 $0.13 $0.10 $0.10 Shares issued as consideration in business combination Shares issued as consideration in business combination Shares issued as consideration on raising of capital 1 November 2021 674,633 $0.22 4 October 2021 15,946,137 $0.22 3,508 4 October 2021 119,047,619 $0.21 25,000 Costs of issuing equity 4 October 2021 – Shares issued on conversion of warrants 1 November 2021 1,166,667 Shares issued as consideration in business combination 1 November 2021 2,764,264 Shares issued on conversion of options 10 December 2021 1,000,000 Shares issued on conversion of options 10 December 2021 500,000 Shares issued on conversion of options 10 December 2021 500,000 Shares issued on conversion of options 10 December 2021 500,000 $0.00 $0.12 $0.22 $0.08 $0.10 $0.13 $0.15 (960) 140 625 75 50 63 75 – 70 125 50 60 153 24 December 2021 33,886,663 $0.17 5,591 Shares issued as consideration in business combination Shares issued as consideration in business combination Shares issued on conversion of options 31 January 2022 300,000 24 December 2021 4,728,105 $0.17 $0.10 Shares issued as consideration in business combination (share issue deferred) Shares issued on conversion of options (options expense) 11 February 2022 5,812,017 $0.00 30 June 2022 – $0.00 792 30 – 227 Balance 30 June 2022 1,258,183,427 138,666 81 for the year ended 30 June 2022 Notes to the Consolidated Financial Statements 23. CONTRIBUTED EQUITY (CONTINUED) Movements in ordinary share capital - during the year ended 30 June 2021 Details Balance Issued to Employees Date Shares Issue price $’000 1 Jul-20 511,834,114 10 Jul-20 343,750 Shares issued on conversion of convertible notes 28 Jul-20 2,000,000 Shares issued on conversion of options 28 Jul-20 11,100,000 Shares issued as consideration in business combination 31 Jul-20 70,000,000 Shares issued on conversion of convertible notes 3 Aug-20 2,000,000 Shares issued on conversion of options 6 Aug-20 300,000 Shares issued on conversion of convertible notes 6 Aug-20 4,231,200 Shares issued on conversion of options 7 Aug-20 9,000,000 Shares issued on conversion of convertible notes 14 Aug-20 13,189,300 Shares issued on conversion of options 14 Aug-20 1,800,000 Shares issued on conversion of options 20 Aug-20 1,200,000 Shares issued on conversion of performance rights 2 Sep-20 2,000,000 Shares issued on conversion of warrants Shares issued on conversion of options Shares issued on conversion of warrants 2 Sep-20 25,000,000 2 Sep-20 750,000 8 Sep-20 24,586,777 Shares issued on conversion of convertible notes 18 Sep-20 10,000,000 Shares issued on conversion of convertible notes 21 Sep-20 2,071,720 $0.084 $0.050 $0.100 $0.208 $0.050 $0.050 $0.050 $0.100 $0.050 $0.100 $0.100 – $0.100 $0.100 $0.079 $0.050 $0.050 29,485 29 100 1,110* 14,562 100 15 212 900 659* 180 120 – 2,510* 75* 1,938* 500 104 Shares issued as consideration in business combination Shares issued as consideration in business combination Shares issued as consideration in business combination 21 Sep-20 6,923,077 $0.208 1,440 21 Sep-20 4,333,333 $0.215 21 Sep-20 4,333,333 $0.215 Shares issued on conversion of performance rights 21 Sep-20 2,000,000 – Equity Settled expense 21 Sep-20 8,000,000 $0.050 Shares issued as consideration in business combination 23 Sep-20 39,701,333 $0.194 7,694 Shares issued on conversion of convertible notes 24 Sep-20 3,100,493 $0.050 Shares issued on conversion of warrants 24 Sep-20 1,458,334 $0.120 Shares issued on conversion of performance rights 24 Sep-20 4,000,000 – Shares issued as consideration in business combination 30 Sep-20 4,440,410 $0.224 Shares issued on conversion of performance rights 5 Oct-20 4,000,000 – Shares issued as consideration in business combination Shares issued as consideration in business combination 5 Oct-20 1,000,000 $0.220 5 Oct-20 1,000,000 $0.220 $0.050 Shares issued on conversion of convertible notes 5 Oct-20 5,401,639 82 932 932 – 400 155 175* – 995 – 220 220 270 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 23. CONTRIBUTED EQUITY (CONTINUED) Details Date Shares Issue price $’000 Shares issued as consideration in business combination 23 Oct-20 248,888 Shares issued on conversion of convertible notes 23 Oct-20 10,852,504 Shares issued on conversion of options Equity Settled expense 26 Oct-20 300,000 27 Oct-20 11,001,600 Shares issued on conversion of convertible notes 5 Nov-20 2,177,049 Shares issued on conversion of options 5 Nov-20 600,000 Shares issued as consideration in business combination Shares issued on conversion of options Shares issued on conversion of options 11 Nov-20 34,593,950 11 Nov-20 500,000 11 Nov-20 500,000 Shares issued on conversion of warrants 27 Nov-20 12,000,000 Shares issued on conversion of warrants 30 Nov-20 9,583,334 Shares issued on conversion of options Shares issued on conversion of convertible notes 30 Nov-20 30 Nov-20 178,500 193,989 $0.194 $0.050 $0.100 $0.050 $0.050 $0.100 $0.250 $0.050 $0.280 $0.120 $0.120 $0.280 $0.050 Shares issued as consideration in business combination Shares issued as consideration in business combination 30 Nov-20 1,466,000 $0.355 30 Nov-20 1,466,000 Shares issued on conversion of options 3 Dec-20 10,000,000 Shares issued on conversion of performance rights 4 Dec-20 4,000,000 Equity Settled expense Shares issued on conversion of options Shares issued as consideration in business combination Shares issued on conversion of options Shares issued as consideration in business combination Shares issued on conversion of warrants 4 Dec-20 4,309,298 4 Dec-20 150,000 10 Dec-20 20,071,652 10 Dec-20 71,500 10 Dec-20 10 Dec-20 1,334 729,167 Shares issued on conversion of convertible notes 14 Dec-20 61,825,622 Shares issued on conversion of convertible notes 16 Dec-20 26,400,000 Shares issued on conversion of performance rights 16 Dec-20 4,000,000 Shares issued on conversion of options Shares issued on conversion of options Shares issued on conversion of options Shares issued on conversion of options 15 Jan-21 1,000,000 8 Feb-21 300,000 12 Feb-21 1,000,000 12 Feb-21 1,000,000 $0.355 $0.050 – $0.175 $0.100 $0.069 $0.280 $0.355 $0.120 $0.050 $0.050 – $0.100 $0.100 $0.075 $0.100 48 543 30* 550 109 60* 8,635 25* 140* 1,440* 1,150* 50* 10 520 520 500 – 752 15* 1,379 20* 0 88* 3,091 1,320 – 100 30 75 100 0 Shares issued on conversion of convertible notes 16 Feb-21 3,255,738 $0.000 Shares issued as consideration in business combination Equity Settled expense Shares issued on conversion of warrants 18 Mar-21 5,871,990 $0.350 2,055 16 Apr-21 3,000,000 16 Apr-21 729,167 $0.075 $0.120 225 88 83 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 23. CONTRIBUTED EQUITY (CONTINUED) Details Date Shares Issue price $’000 Shares issued as consideration in business combination Equity Settled expense (accrued - shares issue deferred) Shares issued as consideration in business combination Shares issued as consideration in business combination Equity Settled expense (accrued - shares issue deferred) Cost of issuing equity Balance 28 Apr-21 42,145,974 $0.223 9,377 30 Apr-21 – – 1,228 15 Jun-21 5,970,149 $0.214 1,276 15 Jun-21 426,439 $0.214 91 30 Jun-21 – – 30 Jun-21 1,063,018,657 1,535 (216) 102,992 * indicates issued capital that has a corresponding cash inflow during FY21 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. Capital risk management The group’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current company’s share price at the time of the investment. The group is not actively pursuing additional investments in the short term as it continues to integrate and grow its existing businesses in order to maximise synergies. The group is subject to certain financing arrangements covenants and meeting these is given priority in all capital risk management decisions. There have been no events of default on the financing arrangements during the financial year. 84 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 24. RESERVES The Group has issued options during the year. The options were values using a Black-Scholes Pricing model. During the year, the following options were issued with the following inputs: Share Options No. issued Grant Date Expiry Date Terms (days) Exercise price (cents) Share price at grant date (cents) Volatility Risk free rate Dividend yield Early exercise multiple Value per option Total cost Cost recognised Value forfeited Future costs ESOP Series 1 ESOP Series 2 ESOP Series 1 ESOP Series 2 ESOP Series 3 1,000,000 1,000,000 4,704,936 4,454,936 7,400,000 2-Jun-21 2-Jun-21 30-Aug-21 30-Aug-21 31-Jan-22 1-Jul-24 1-Jul-24 16-Sep-23 16-Sep-23 31-Jan-25 1,125 $0.28 $0.21 100% 0.10% 0% 2 1,125 $0.35 $0.21 100% 0.10% 0% 2 $0.09 $0.09 747 $0.28 $0.27 108% 747 $0.35 $0.27 108% 0.20% 0.20% 0% 2 $0.11 0% 2 $0.12 1,096 $0.28 $0.17 100% 1.20% 0% 2 $0.07 $88,090 $88,090 $0 $0 $91,413 $528,798 $539,031 $479,281 $91,413 $528,798 $437,688 $479,281 $0 $0 $0 $0 $27,158 $74,186 $0 $0 85 for the year ended 30 June 2022– – – – – – – – – – – – – – – Notes to the Consolidated Financial Statements 24. RESERVES (CONTINUED) Options, Warrants and Convertible Note movements Set out below are summaries of options, warrants and convertible note movements during the year: Description Expiry date Exercise price $ Balance 1-Jul-21 Granted Exercised Expired/ Forfeited/ other Balance 30-Jun-22 Options NED Options NED Options NED Options Call Options 30/11/2021 30/11/2021 30/11/2021 16/12/2021 0.10 0.13 0.15 500,000 500,000 500,000 0.08 1,000,000 Employee Options 01/03/2022 0.10 300,000 Converting Note Options Converting Note Options Converting Note Options 01/10/2022 0.10 26,770,000 01/10/2022 0.10 3,832,500 Employee Options 29/11/2022 01/10/2022 0.10 0.13 3,000,000 1,000,000 Employee Options 02/11/2023 0.35 12,771,500 4,968,632 (500,000) (500,000) (500,000) (1,000,000) – – – – – (300,000) – – – – – (300,000) – 26,470,000 – (600,000) – – – – – 3,832,500 2,400,000 1,000,000 (776,500) 16,963,632 Employee Options 02/11/2023 0.28 12,200,000 4,968,632 (250,000) 1,045,000 17,963,632 Employee Options 01/01/2024 0.35 3,000,000 – (3,000,000) Employee Options 01/01/2024 Employee Options 06/04/2024 Employee Options 06/04/2024 Employee Options 20/04/2024 Employee Options 20/04/2024 Employee Options 01/07/2024 Employee Options 01/07/2014 Employee Options 31/01/2025 Call Options 09/06/2025 NED Options NED Options Total Options 21/09/2025 06/07/2026 0.28 0.35 0.28 0.35 0.28 0.35 0.28 0.28 0.24 0.25 0.21 3,750,000 1,250,000 1,500,000 1,670,000 1,670,000 – – – – 1,000,000 1,000,000 7,400,000 1,000,000 9,000,000 – – 3,000,000 (3,750,000) (1,250,000) (1,500,000) (1,670,000) (1,670,000) – – – – – – – – – – – – 1,000,000 1,000,000 7,400,000 1,000,000 9,000,000 3,000,000 – – – – – – – – – – – 84,214,000 23,337,264 (3,650,000) (12,871,500) 91,029,764 Weighted average exercise price $0.21 $0.29 $0.12 $0.31 $0.22 25. DIVIDENDS There were no dividends paid, recommended or declared during the current or previous financial year. 26. FINANCIAL RISK MANAGEMENT The Company considers all financial assets for recoverability and impairment. Where there are indicators of impairment the Company will review the carrying amount of the financial asset and estimate its recoverable amount. The Company will take all available action to recover the full amount of financial assets, and once all efforts are exhausted the Company will record an impairment. Any impairment is recorded in a separate allowance account. Any amounts subsequently written off are offset against the impairment allowance. Financial Risk Management The company manages its exposure to key financial risks, including interest rate and currency risk in accordance with the Company’s financial risk management policy. The object of the policy is to support the delivery of the Company’s financial targets whilst protecting future financial security. 86 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 26. FINANCIAL RISK MANAGEMENT (CONTINUED) The main risk arising from the Company’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The Company manages its risk at Board level. The Board monitors levels of exposure to interest rate, foreign currency and credit risk by banking with reputable banks. Liquidity risk is monitored through the development of future rolling cash flow forecasts. The Board reviews and agrees policies for managing each of these risks informally. Primary responsibility for identification and control of financial risks rests with the Board of Directors. The Board reviews and agrees policies for managing each of the risks identified below. Market risk Foreign currency risk The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the Group’s functional currency. The Group incurs foreign currency predominantly in USD and NZD. In order to protect against foreign exchange rate movements, the Group has entered into forward exchange contracts. These forward contracts are buying forward foreign currency for contracted cash outflows for payments to vendors from the ensuing financial year. The maturity, settlement amounts and the average contractual exchange rates of the group’s outstanding forward foreign exchange contracts at the reporting date were as follows: Buy US dollars Maturity: 0 - 3 months 6 - 9 months Sell Australian dollars Average exchange rates 2022 $’000 2021 $’000 2022 2021 9,898 6,488 0.7005 – 77 – 0.7669 0.7389 The holdings of cash and cash equivalents, trade receivables, contract assets, trade payables and contract liabilities analysed by nominated currency at 30 June 2022, along with prior year comparatives, were as follows: 30 June 2022 Financial Assets Cash and cash equivalents Trade and other receivables Contract assets Financial Liabilities Trade and other payables Contract liabilities Denominated in AUD $’000 Denominated in USD $’000 Denominated in NZD $’000 Total in SGD $’000 Total in AUD $’000 13,469 31,100 7,677 52,246 25,250 7,434 32,684 1 72 8,554 8,627 10,362 6,165 16,527 252 888 – 1,140 217 – 217 616 23 – 639 23 – 23 14,339 32,083 16,231 62,652 35,853 13,598 49,451 A hypothetical 10% strengthening in the exchange rate of the Australian dollar (A$) against the New Zealand dollar (NZ$) of the Parents’ overseas subsidiaries, Lateral Security Pty Ltd and Tesserent Cyber Services NZ Pty Ltd, with all other variables held constant, would have an unfavourable effect of $24,293 (2021:$50,330 unfavourable) on the profit and equity for the 2021 financial year. 87 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 26. FINANCIAL RISK MANAGEMENT (CONTINUED) 30 June 2021 Financial Assets Cash and cash equivalents Trade and other receivables Contract assets Financial Liabilities Trade and other payables Contract liabilities Denominated in AUD $’000 Denominated in USD $’000 Denominated in NZD $’000 Total in AUD $’000 14,467 21,590 8,774 44,831 20,093 5,236 25,329 4 2,571 678 3,253 8,730 3,278 12,008 389 638 – 1,027 151 – 151 14,860 24,799 9,452 49,111 28,974 8,514 37,488 Interest rate risk Exposure to interest rate risk arises on financial instruments whereby a future change in interest rate will affect future cash flows or the fair value of the fixed rate financial instruments. The Company is also exposes to earnings volatility on floating rate instruments. At reporting date, the Company’s exposure to interest rate risk related to cash and cash equivalents and borrowings. As at the reporting date, the group had the following variable rate borrowings outstanding: Borrowings Net exposure to cash flow interest rate risk 2022 Weighted average interest rate % 4.70% Balance $’000 34,473 34,473 An analysis by remaining contractual maturities is shown in ‘liquidity and interest rate risk management’ below. In 2022, the interest paid on the debt facilities was $3,353,664. The majority of the interest paid was related to the PAM facility which extinguished on 23 June 2022 as part of the refinancing process undertaken with CBA. The weighted average interest rate with the CBA facility is 4.70% in comparison to 8.70% cash rate under the PAM facility. Liquidity risk The Group manages liquidity risk by maintaining adequate reserves and banking facilities continuously monitoring the forecast and actual cashflows and matching the maturity profile of financial assets and liabilities. On 23 June 2022, the Group refinanced its borrowings with CBA. The Group had access to the following undrawn facilities at the end of the reporting period: Bank loan - facility B Credit card facility Asset finance facility Bank guarantee facility 88 2022 $’000 20,000 500 2,000 1,500 24,000 2021 $’000 – – – – – for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Notes to the Consolidated Financial Statements 26. FINANCIAL RISK MANAGEMENT (CONTINUED) Bank facilities are subject to the continuance of satisfactory covenant reporting, and have an average maturity of 3 years. The bank loan - facility B, can be used to finance current payable or deferred cash considerations in relation to past acquisitions of future permitted acquisitions. The other bank facilities may be drawn at any time. Maturities of financial liabilities The following tables detail the Group’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 2022 Non-derivatives liabilities Non-interest bearing Trade payables Other financial liabilities Other liabilities Interest-bearing - variable Borrowings Lease liability – – – 35,853 23,600 11,313 – 5,485 2,285 3.25% 4.00% 1,138 3,110 1,138 1,969 – – – 36,138 1,635 37,773 – – – – 333 333 35,853 29,085 13,598 38,414 7,047 123,996 Total non-derivatives 75,014 10,877 2021 Non-derivatives liabilities Non-interest bearing Trade payables Other financial liabilities Other liabilities Interest-bearing - variable Borrowings Borrowings Lease liability Total non-derivatives Weighted average interest rate % 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 – – – 8.90% 8.50% 4.00% 28,972 11,699 7,335 – – 2,390 50,396 – 1,652 1,179 – – 1,949 4,780 – – – 15,000 20,000 2,362 37,362 – – – – – 767 767 28,972 13,351 8,514 15,000 20,000 7,468 93,305 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. 89 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 26. FINANCIAL RISK MANAGEMENT (CONTINUED) Fair value of financial instrument Fair value hierarchy The following tables detail the consolidated entity’s assets and liabilities, measured or disclosed at fair value, using a three-level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Fair value measurement Fair value hierarchy The following tables detail the consolidated entity’s assets and liabilities, measured or disclosed at fair value, using a three-level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Consolidated - 2022 Assets Call option investments Investment in Daltrey Pty Ltd Total assets Liabilities Deferred settlement liabilities Total liabilities Consolidated - 2022 Assets Call option investments Total assets Liabilities Deferred settlement liabilities Total liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – – – – – – – Level 1 $’000 Level 2 $’000 – – – – – – – – 500 2,298 2,798 29,085 29,085 Level 3 $’000 3,000 3,000 13,351 13,351 500 2,298 2,798 29,085 29,085 Total $’000 3,000 3,000 13,351 13,351 The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. Valuation techniques for fair value measurements categorised within level 3 Call option investments have been valued using a weighted average probability assessment of the likelihood of the instrument being exercised before the expiry date. The basis of the valuation of investment in Daltrey Pty Ltd is based on the current share price in an active market. The basis of the valuation of deferred settlement liabilities is the use of observable market data where it is available and relies as little as possible on entity specific estimates. Level 3 assets and liabilities Refer to Note 11 and 21 for movements in Level 3 assets and liabilities. The level 3 assets and liabilities unobservable inputs are not subject to materiality sensitivities. 90 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdNotes to the Consolidated Financial Statements 27. REMUNERATION OF AUDITORS During the financial year the following fees were paid or payable for services provided by BDO Audit Pty Ltd, the auditor of the company: Audit services - BDO Audit Pty Ltd Audit or review of the financial statements Other services - BDO Tax compliance and advisory services - BDO Services Pty Ltd Other non-audit services - BDO Corporate Finance Pty Ltd 2022 $ 2021 $ 510,000 726,654 103,900 35,000 138,900 26,538 575,041 601,579 648,900 1,328,233 It is the company’s policy to engage BDO on assignments additional to their statutory audit duties where BDO’s expertise and experience with the Company are important. During the year, the Company engaged BDO in providing services in relation to tax compliance services and due diligence work. 28. CONTINGENT LIABILITIES There are no other contingent assets or liabilities requiring disclosure as at the date of this report. 29. COMMITMENTS The Group has no commitments at 30 June 2022. (30 June 2021: nil). 30. RELATED PARTY TRANSACTIONS Parent entity Tesserent Limited is the parent entity. Key management personnel Compensation The aggregate compensation of the key management personnel (KMPs) of the Company is set out below: Short term employment benefits Post-employment benefits Long term benefits Share based payments 2022 $’000 2021 $’000 3,622 2,023 181 285 447 4,535 148 42 1,076 3,289 Transactions with related parties The Company undertook business with Belgravia Group and associated companies in which Mr G Lord is a director of and owns an interest. There were no products purchased from Belgravia Group in 2021 or 2022. Products and services sold to Belgravia totalled $124,368 being professional services and software subscriptions and support to Belgravia Group Pty Ltd. There were no other transactions with related parties at the current and previous reporting date. Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. Controlled entities Details of the percentage of ordinary shares held in controlled entities are disclosed in Note 33 of this report. 91 for the year ended 30 June 2022 Notes to the Consolidated Financial Statements 31. PARENT ENTITY INFORMATION The financial information for the parent entity has been prepared on the same basis as the consolidated financial statements. The accounting policies adopted by the parent entity are the same as the consolidated group except for the following: – Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity – Investments in associates are accounted for at cost, less any impairment, in the parent entity – Tesserent Limited is the ultimate parent entity of the consolidated group Tesserent Limited is the ultimate parent entity of the consolidated group. Statement of profit or loss and other comprehensive income Loss after income tax Total comprehensive income 2022 $’000 (18,196) (18,196) 2021 $’000 (10,778) (10,778) The parent entity loss after income tax in 2022 includes the costs incurred as a result of the exit from the Pure Asset Management debt facility. Refer to Note 6. Statement of financial position Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Share-based payments reserve Options reserve Accumulated losses Total equity 2022 $’000 2021 $’000 148,867 120,047 7,145 7,145 156,012 127,192 509 1,027 34,693 35,202 25,823 26,850 120,810 100,342 143,120 106,630 9,437 6,453 9,565 4,315 (38,200) (20,166) 120,810 100,344 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries. The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2022 and 30 June 2021. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2022 and 30 June 2021. Capital commitments The parent entity had no capital commitments for purchase of property, plant and equipment as at 30 June 2022 and 30 June 2021. 92 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Notes to the Consolidated Financial Statements 32. BUSINESS COMBINATIONS The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. Any deferred contingent consideration is measured at fair value at the date of acquisition. If any obligation to pay contingent consideration meets the definition of a financial instrument it is classified as equity, and not remeasured, with settlement accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. In FY22, the Group completed the acquisitions of Loop Secure Pty Ltd, Claricent Pty Ltd, and Pearson Corporation Pty Ltd. Details of the acquisitions were as follows: Loop Secure Pty Ltd On 1 October 2021, TNT Cyber Services Pty Ltd, a subsidiary of Tesserent Limited, acquired 100% of the ordinary shares of Loop Secure Pty Ltd for consideration of $17,426,161, with $7,000,000 cash and $3,508,150 in issued share capital, being 15,946,135 shares issued at a fair value of $0.220 per share. A further deferred consideration cash payment of $1,000,000 was made on 30 June 2022 and additional cash payment of $1,000,000 is payable in Q2 FY23. A completion accounts payment $490,780, plus estimated earnout payments of $4,427,236, make up the balance of the total acquisition cost. Loop Secure’s Offensive Security, GRC and Managed Security Services strengthens TNT’s Cyber 360 capabilities with significant synergy benefits and cross-sell opportunities Claricent Pty Ltd On 15 December 2021, TNT Cyber Services Pty Ltd, a subsidiary of Tesserent Limited, acquired 100% of the ordinary shares of Claricent Pty Ltd for consideration of $6,463,995, with $1,239,000 cash and $791,958 in issued share capital, being 4,728,105 shares issued at a fair value of $0.1675 per share. Further cash payments of $1,512,820 in deferred consideration and deferred issued capital of $862,534, plus estimated earnout payments of $2,057,683 (contingent on the Claricent business meeting agreed earnings targets), make up the balance of the total acquisition cost. Pearson Corporation Pty Ltd On 23 December 2021, TNT Cyber Services Pty Ltd, a subsidiary of Tesserent Limited, acquired 100% of the ordinary shares of Pearson Corporation Pty Ltd for consideration of $31,401,477, with $8,640,000 cash and $5,591,230 in issued share capital, being 33,886,663 shares issued at a fair value of $0.1650 per share. Further cash payments of $8,743,381 in deferred consideration and deferred issued capital of $4,999,708 are contingent on the Pearson business meeting agreed earnings targets. Also contingent on Pearson meeting earnings targets, are estimated earnout payments of $3,427,088, which make up the balance of the total acquisition cost. Both Claricent Pty Ltd and Pearson Corporation Pty Ltd have leading positions in the Federal Government marketplace and enable Tesserent to further strengthen its position and deliver large multi-year projects that support the Federal Government to achieve their cybersecurity goals. 93 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 32. BUSINESS COMBINATIONS (CONTINUED) Details of the acquisition are as follows: Cash and cash equivalents Trade and other receivables Deposits Contract assets Prepayments Plant and equipment Trade and other payables Contract liabilities Provision for income tax Employee benefits Fair value of contracts and relationships acquired Deferred tax liability arising from acquisition Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor Tesserent Limited shares issued to vendor Deferred consideration Total Consideration Acquisition-date fair value of the total consideration transferred Less: cash and cash equivalents acquired Net cash used Loop Secure Fair value $’000 Claricent Fair value $’000 Pearson Fair value $’000 2,958 1,364 112 67 237 171 (1,406) (2,352) (534) (705) 3,900 (1,018) 2,794 280 128 215 112 – – 651 2,031 – 666 – – (426) (1,491) – (74) (227) 1,400 (431) 977 (7) (1,251) (122) 7,900 (2,149) 6,228 25,173 Total $’000 3,889 3,523 327 845 237 171 (3,323) (2,359) (1,859) (1,054) 13,200 (3,598) 9,999 45,292 14,632 5,487 17,426 6,464 31,401 55,291 7,000 3,508 6,918 17,426 7,000 (2,958) 4,042 1,239 792 4,433 6,464 1,239 (280) 959 8,640 5,591 17,170 31,401 8,640 (651) 7,989 16,879 9,891 28,521 55,291 16,879 (3,889) 12,990 The fair value of the trade receivables acquired for those business acquisitions amounts to $3.3m. The gross amount of trade receivables is $3.3m and it is expected that the full contractual amounts can be collected. Given the seasonality of the acquirees performance, it is impractical to disclose the revenue and profit contributions if the entities had been acquired on 1 July 2021. Since their respective acquisition dates, the acquirees contributed as follows to the consolidated revenue and loss of the Group: Revenue contribution Profit contribution Loop Secure $’000 9,833 2,047 Claricent $’000 Pearson $’000 2,043 600 11,922 2,777 The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. 94 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Notes to the Consolidated Financial Statements 33. INTERESTS IN SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiary in accordance with the accounting policy described in Note 1: Ownership interest Name Pure Security Managed Services Pty Ltd Tesserent Wholesale Pty Ltd Tesserent IP Pty Ltd Tesserent Cyber Services Pty Ltd Rivium Pty Ltd Pure Security Pty Ltd Certitude Pty Ltd Hacklabs Pty Ltd Securus Global Pty Ltd Pure Hacking Pty Ltd north BDT Seer Security Pty Ltd Airloom Holdings Pty Ltd Ludus Information Security Pty Ltd iQ3 Pty Ltd Lateral Security (IT) Services Limited Secure Logic Pty Ltd Tesserent Cyber Services Limited Loop Secure Pty Ltd1 Claricent Pty Ltd2 Pearson Corporation Pty Ltd3 1 Acquired 1 October 2021 2 Acquired 15 December 2021 3 Acquired 23 December 2021 Principal place of business/ Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Australia New Zealand Australia Australia Australia 2022 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2021 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – – – 34. EVENTS AFTER THE REPORTING PERIOD The Company notes the following subsequent event since the 30 June 2022 reporting date: On 24 August 2022, the Company remitted payment of $2.86m and issued 10,926,052 shares to the Loop Secure vendors in accordance with the terms of the Share Purchase Agreement for Loop Secure Pty Ltd. 95 for the year ended 30 June 2022Notes to the Consolidated Financial Statements 35. LOSS PER SHARE Loss after income tax 2022 $’000 2021 $’000 (8,783) (4,533) Number Number Weighted average number of ordinary shares outstanding during the year used in calculating basic loss per share 1,197,938,015 875,632,954 Weighted average number of ordinary shares and convertible redeemable cumulative preference shares outstanding and performance rights during the year used in calculating diluted loss per share 1,197,938,015 875,632,954 Basic loss per share Diluted loss per share Cents Cents (0.73) (0.73) (0.52) (0.52) Weighted average number of ordinary shares disclosed above exclude options and rights granted to employees which are anti-dilutive. 96 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Directors’ Declaration In the Directors’ opinion: (a) the financial statements and notes set out on pages 52 to 96 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its performance for the year-ended on that date, and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. Note 1 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the chief executive officer and chief financial officer required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors Mr Kurt Hansen CEO 30 August 2022 97 for the year ended 30 June 2022 Independent Auditor’s Report Tel: +61 3 9603 1700 Fax: +61 3 9602 3870 www.bdo.com.au Collins Square, Tower Four Level 18, 727 Collins Street Melbourne VIC 3008 GPO Box 5099 Melbourne VIC 3001 Australia INDEPENDENT AUDITOR'S REPORT To the members of Tesserent Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Tesserent Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2022, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial report, including a summary of significant accounting policies and the directors’ declaration. In our opinion the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the Group’s financial position as at 30 June 2022 and of its financial performance for the year ended on that date; and (ii) Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation. 98 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Independent Auditor’s Report Business combinations Key audit matter How the matter was addressed in our audit As disclosed in Note 32, the Group acquired 100% of the shares of Loop Secure Pty Ltd, Pearson Corporation Pty Ltd and Claricent Pty Ltd during the year ended 30 June 2022. The accounting for business combinations was a key audit matter given each acquisition was material to the Group and involved significant judgements made by the Group, including: • Estimating the fair value of assets and liabilities acquired, in particular the valuation of identified finite life intangible assets acquired. • Determining the fair value of the purchase Our procedures included, but were not limited to: • Reading the signed Share Purchase Agreements to understand the entities being acquired and the considerations payable for the acquisitions; • Obtaining a copy of the external valuation reports to assess the determination of the fair values of the intangible assets associated with the acquisitions; • Testing on a sample basis of the fair value of the assets and liabilities acquired; and • Assessing management’s calculations in determining the deferred considerations payable. consideration for each acquisition, including estimating the fair value of shares issued by the Company and the fair value of contingent consideration dependent upon future performance hurdles. In conjunction with our valuation specialists, we: • Assessed the identification of intangible assets acquired, including customer contracts and relationships along with the valuation methodologies used to value those assets; • Assessed the reasonableness of the discount rates used; and • Tested on a sample basis, the mathematical accuracy of the models. We have also assessed the appropriateness of the disclosures included in Note 32 to the financial statements. 99 for the year ended 30 June 2022 Independent Auditor’s Report Carrying value of goodwill and intangible assets Key audit matter How the matter was addressed in our audit As disclosed in Notes 14 and 15, at 30 June 2022 the Our procedures included, but were not limited to: Group has intangible assets related to customers contracts and relationships, intellectual property and goodwill. Goodwill and other intangible assets are required to be assessed for impairment annually or where there is an indicator of impairment. This is a key audit matter because the impairment assessment process is complex and is required to be carried out at the level of the lowest identifiable cash generating units (‘CGUs’). The assessment requires significant judgement and includes assumptions that are based on future operating results, discount rates and the broader market conditions in which the Group operates. • Obtaining an understanding of the process that management undertook to perform their impairment assessment; and • Evaluating the level at which goodwill is monitored, including the identification of CGUs. In conjunction with our valuation specialists, we: • Evaluated the value in use models prepared by management and validated the reasonableness of the assumptions used to calculate the discount rate, growth rates, terminal values, working capital values and allocation of corporate costs compared to historical performance and industry benchmark to ensure compliance with the relevant accounting standards; • Agreed the forecasted cashflows for FY23 to the latest Board approved budget; • Assessed historical forecasting accuracy; • Compared the market capitalisation of the Company to the Group’s net assets; • Confirming the integrity and mathematical accuracy of the value-in-use discounted cash flow models; • Subjected the key assumptions to sensitivity analyses on growth and discount rates to understand the change that would be required for the goodwill and intangibles assets to be impaired and assessed the likelihood of such movement in those key assumptions arising; and • Assessed the appropriateness of the disclosures included in Notes 14 and 15 to the financial statements. 100 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Independent Auditor’s Report Revenue recognition Key audit matter How the matter was addressed in our audit As disclosed in Note 4, at 30 June 2022 the Group generates revenue from five distinct streams (managed services, consulting services, software licenses, hardware equipment and support and maintenance renewals). Each revenue stream has unique contracts with performance obligations and recognition criteria that require assessment under the relevant accounting standards. This is a key audit matter because the Group has complex customer contracts, including multiple and bundled performance obligations and agency arrangements. Revenue recognition was significant to our audit due to its complexity and amount of audit attention required. Our procedures included, but were not limited to: • Obtaining an understanding of the process undertaken by management to account for the recognition of revenue for each revenue stream, including factors influencing whether the revenue is recognised on a principal or agency basis; • Testing, on a sample basis, to validate the accuracy and occurrence of revenue related transactions to underlying evidence; and • Assessing the appropriateness of the disclosures in Note 4 to the financial statements. Other information The directors are responsible for the other information. The other information comprises the information in the Group’s annual report for the year ended 30 June 2022, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. 101 for the year ended 30 June 2022 Independent Auditor’s Report Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards 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 this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf This description forms part of our auditor’s report. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 41 to 49 of the directors’ report for the year ended 30 June 2022. In our opinion, the Remuneration Report of Tesserent Limited, for the year ended 30 June 2022, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. BDO Audit Pty Ltd Salim Biskri Director Melbourne, 30 August 2022 102 for the year ended 30 June 2022Annual Report 2022 Tesserent Ltd Shareholder Information The shareholder information set out below was applicable as at 25 August 2022. A. DISTRIBUTION OF EQUITABLE SECURITIES Analysis of number of equitable security holders by size of holding: Range 1 - 1,000 1001 - 5,000 5001 - 10,000 10,001 - 100,000 100,001 and over Total holders Units % Units 428 140,585 3,325 10,067,092 2,197 17,292,420 5,157 181,519,325 0.01% 0.79% 1.36% 14.3% 1,184 1,060,090,056 83.54% 12,291 1,269,109,478 Based on the price per security, the number of holders with an unmarketable holding: 3,176 with total 7,424,960 units, amounting to 0.6% of Issued Capital. B. DISTRIBUTION OF EQUITY SECURITIES – SHARE OPTIONS Analysis of numbers of equity holders by size of holding: SPREAD OF HOLDINGS 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,000 - 100,000 100,001 and over Number of Holders Number of Units % of Total Issued Capital – – – 11 – – – – – – 453,792 0.25% 137 178,103,751 99.75% 148 178,557,543 103 for the year ended 30 June 2022Shareholder Information C. EQUITY SECURITY HOLDERS Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: NAME BELGRAVIA STRATEGIC EQUITIES PTY LTD SCOTT CEELY G & N LORD SUPERANNUATION PTY LTD PEARSON HOLDINGS (AUST) PTY LTD ACN 127 656 NATIONAL NOMINEES LIMITED CS THIRD NOMINEES PTY LIMITED BNP PARIBAS NOMS PTY LTD CITICORP NOMINEES PTY LIMITED C14N PTY LTD CRAIG OWEN HUMPHREYS HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 SHAYNE MARCIA DAVENPORT BNP PARIBAS NOMINEES PTY LTD XERT SERVICES PTY LIMITED FLANNIGAN HOLDINGS PTY LTD MR JOHN GEORGOPOULOS UBS NOMINEES PTY LTD SANBRU PTE LTD J P MORGAN NOMINEES AUSTRALIA PTY LIMITED COLONIAL FIRST STATE INV LTD <9015040 KAGE A/C> Ordinary Shares Held % of Issued Shares 56,825,622 47,312,405 37,433,334 33,886,663 33,312,419 27,557,561 26,917,985 24,448,539 20,718,709 20,410,431 17,388,681 17,338,909 16,126,289 12,998,583 12,625,000 12,300,534 11,504,600 10,573,838 10,331,900 8,721,608 4.48 3.73 2.95 2.67 2.62 2.17 2.12 1.93 1.63 1.61 1.37 1.37 1.27 1.02 0.99 0.97 0.91 0.83 0.81 0.69 Totals: Top 20 holders of ORDINARY FULLY PAID SHARES (Total) 458,733,610 36.15 As at 25 August 2022, the 20 largest shareholders held ordinary shares representing 36.15% of the issued share capital. Unquoted equity securities There are no unquoted equity securities. D. SUBSTANTIAL HOLDERS G Lord holds 7.82% of the ordinary shares on issue through BELGRAVIA STRATEGIC EQUITIES PTY LTD - totaling 61,825,622 shares, and G & N LORD SUPERANNUATION PTY LTD GNR S/F A/C - 37,433,334 shares. E. VOTING RIGHTS The voting rights attached to ordinary shares are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. 104 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdShareholder Information F. SHARE BUY BACKS There is no current on-market share buy-back. There are no other classes of equity securities. G. ESCROWED SHARES Class Ordinary Shares Ordinary Shares Ordinary Shares Expiry date Number of shares 8 September 2022 500,000 4 October 2022 15,538,625 23 December 2022 38,614,768 54,653,393 H. USE OF CASH Cash and assets readily convertible to cash held by the Company at the time of admission to the Australian Stock Exchange are being used in a way consistent with its business objectives as set out in the listing prospectus. 105 for the year ended 30 June 2022Corporate Directory DIRECTORS Geoff Lord Kurt Hansen Executive Chairman Chief Executive Officer and Managing Director Gregory Baxter Non-Executive Director Megan Haas Non-Executive Director COMPANY SECRETARY Paul Taylor Email: investor@tesserent.com REGISTERED OFFICE Level 5, 990 Whitehorse Road Box Hill VIC 3128 Australia PRINCIPAL PLACE OF BUSINESS Level 5, 990 Whitehorse Road Box Hill VIC 3128, Australia SHARE REGISTER Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street, Abbotsford VIC 3067 AUDITOR BDO Audit Pty Ltd Collins Square, Tower Four Level 18, 727 Collins Street, Melbourne VIC 3000 STOCK EXCHANGE LISTING Tesserent Limited shares are listed on the Australian Securities Exchange (ASX code: TNT) WEBSITE www.tesserent.com 106 for the year ended 30 June 2022Annual Report 2022 Tesserent LtdT E S S E R E N T L I M I T E D INVESTOR ENQUIRIES B e n M oye s I n ve s to r R e l a t i o n s P h o n e: + 61 4 9 9 1 1 8 8 5 7 E m a i l : i n ve s to r@ te s s e r e n t .c o m MEDIA ENQUIRIES S h a r y n K i n w e l M a r ke t i n g P h o n e: + 61 3 9 8 8 0 5 5 1 3 E m a i l : s h a r y n . k i n w e l @ te s s e r e n t .c o m WEB i n ve s to r s .te s s e r e n t .c o m l i n ke d i n .c o m /c o m p a ny/ te s s e r e n t t w i t te r.c o m / te s s e r e n t 

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