Announcement PDF ASX: ST1 Appendix 4D Half-year Report 31st December 2023 Secure. Sustainable. Scalable. Spirit Technology Solutions Ltd Appendix 4D Half-year report 1. Company details Name of entity: ABN: Reporting period: Previous period: Spirit Technology Solutions Ltd 73 089 224 402 For the half-year ended 31 December 2023 For the half-year ended 31 December 2022 2. Results for announcement to the market $'000 Revenue from ordinary activities down 15% to 57,032 Underlying EBITDA* down 96% to 160 Loss from ordinary activities after tax attributable to the owners of Spirit Technology Solutions Ltd down 33% to (5,200) Loss for the half-year attributable to the owners of Spirit Technology Solutions Ltd down 33% to (5,200) Dividends There were no dividends paid, recommended or declared during the current financial period. Comments The loss for the Consolidated Entity for the half-year ended 31 December 2023 after providing for income tax amounted to $(5,200,000) (31 December 2022: loss $(7,786,000)). Further details of the results for the half year can be found in the ‘Review of operations and financial position’ section of the Directors’ report in the attached Interim Report. * EBITDA is a financial measure which is not prescribed by Australian Accounting Standards (‘AAS’) and represents the profit/(loss) under AAS adjusted for depreciation, amortisation, interest and tax. Underlying EBITDA is EBITDA adjusted to exclude acquisition & divestment costs, restructuring & integration costs, other normalisation items, net fair value loss on remeasurement of contingent consideration on business combinations, impairment of non-current assets, loss/(profit) on divestment of non-core assets and share-based payments. 3. Net tangible assets Net tangible assets per ordinary security 4. Control gained over entities Not applicable. Reporting period Cents Previous period Cents (4.32) (4.27) Spirit Technology Solutions Ltd Appendix 4D Half-year report 5. Loss of control over entities Not applicable. 6. Dividends Current period There were no dividends paid, recommended or declared during the current financial period. Previous period There were no dividends paid, recommended or declared during the previous financial period. 7. Dividend reinvestment plans Not applicable. 8. Details of associates and joint venture entities Not applicable. 9. Foreign entities Details of origin of accounting standards used in compiling the report: Not applicable. 10. Audit qualification or review Details of audit/review dispute or qualification (if any): The financial statements were subject to a review by the auditors and the review report is attached as part of the Interim Report. 11. Attachments Details of attachments (if any): The Interim Report of Spirit Technology Solutions Ltd for the half-year ended 31 December 2023 is attached. Spirit Technology Solutions Ltd Appendix 4D Half-year report 12. Signed Signed ___________________________ James Joughin Non-Executive Chairman Date: 23 February 2024 Spirit Technology Solutions Ltd ABN 73 089 224 402 Interim Report - 31 December 2023 Spirit Technology Solutions Ltd Contents 31 December 2023 Corporate directory Directors' report Auditor's independence declaration Statement of profit or loss and other comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the financial statements Directors' declaration Independent auditor's review report to the members of Spirit Technology Solutions Ltd 1 2 3 12 13 14 15 16 17 30 31 Spirit Technology Solutions Ltd Corporate directory 31 December 2023 Directors Mr James Joughin (Non-Executive Chairman) Mr Julian Challingsworth (Managing Director and Chief Executive Officer) Mr Gregory Ridder (Non-Executive Director) Ms Lynn Warneke (Non-Executive Director – appointed 9 October 2023) Mr Elie Ayoub (Executive Director) Mr Shan Kanji (Non-Executive Director – appointed 31 January 2024) Mr Julian Haber (Non-Executive Director – resigned 31 August 2023) Ms Michelle Bendschneider (Non-Executive Director – resigned 31 August 2023) Company secretary Melanie Leydin Registered office Level 4, 100 Albert Road South Melbourne Victoria 3205 Principal place of business Level 2, 19-25 Raglan Street South Melbourne Victoria 3205 Share register Automic Group Level 5, 126 Phillip Street Sydney, New South Wales 2000 Auditor PKF Melbourne Audit & Assurance Pty Ltd Level 15, 500 Bourke Street Melbourne Victoria 3000 Stock exchange listing Spirit Technology Solutions Ltd shares are listed on the Australian Securities Exchange (ASX code: ST1) 2 Spirit Technology Solutions Ltd Directors' report 31 December 2023 The Directors present their report, together with the financial statements, on the Consolidated Entity (referred to hereafter as the 'Consolidated Entity') consisting of Spirit Technology Solutions Ltd (referred to hereafter as the 'Company', 'parent entity' or 'Spirit') and the entities it controlled at the end of, or during, the half-year ended 31 December 2023. Directors The following persons were Directors of Spirit Technology Solutions Ltd during the whole of the financial half-year and up to the date of this report, unless otherwise stated: Mr James Joughin (Non-Executive Chairman) Mr Julian Challingsworth (Managing Director and Chief Executive Officer) Mr Gregory Ridder (Non-Executive Director) Ms Lynn Warneke (Non-Executive Director – appointed 9 October 2023) Mr Elie Ayoub (Executive Director) Mr Shan Kanji (Non-Executive Director – appointed 31 January 2024) Mr Julian Haber (Non-Executive Director – resigned 31 August 2023) Ms Michelle Bendschneider (Non-Executive Director – resigned 31 August 2023) Principal activities During the financial year the principal activities of the Consolidated Entity consisted of the provision of Cyber Security services, Collaboration and Communication services and Managed IT services. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Operating and Financial Review Entity’s operations The Consolidated Entity remains focused on becoming one of Australia’s leading providers of modern and secure digital workplaces with a focus purely on the business-to-business market by providing a complete offering across Cyber Security, Telecommunications, Internet, Cloud and IT Managed Services. The Spirit business model offers the full solution for the modern-day business to communicate with its staff and customers whilst also protecting businesses’ data and cloud infrastructure. The changing landscape of cloud and hybrid work models has profoundly transformed the cyber landscape, reshaping the way organisations approach cybersecurity, data management, collaboration and remote access. Spirit is aiming to be a leader in the Australian cloud and cyber industry through provision of ‘Secure and Modern’ solutions for our customers to work from anywhere safely and effectively. The leading mitigation strategies that companies are recommended to adopt to ensure their cyber security posture and resilience capability is effective is the Australian Signals Directorate (“ASD”) “Essential 8”. This model is promoted by the Australian Government as a key protective baseline to measure and improve the security posture of organisation’s and prevent cyber attacks. The model requires organisations to measure and implement key activities that require skills in cyber security and IT operations, an area that remains under serviced in the Australian market. There are very few technology providers that can provide both services at the required maturity, and to achieve compliance with the ASD recommendations customers need to do both well. Spirit is well positioned to leverage its cyber security and managed services internal capabilities to assist our existing and prospective customers to adopt these protective baseline strategies. 3 Spirit Technology Solutions Ltd Directors' report 31 December 2023 During the financial half-year the Company progressed the tailoring of its mid-market Modern Workplace Solutions to enable our small business customers, whom are likewise looking for cost-effective ways to adopt to the cloud. Our Collaboration & Communication division launched this solution to provide their customers with access to simplified onboarding, expert IT support, cost savings, cybersecurity enhancements, and the ability to leverage cutting-edge technologies. As a technology services company, our core requirements of any solution are Secure, Sustainable and Scalable to allow for optimised Managed Solutions. The centre of our mission is our customer not the technology. Spirit is dedicated to building and bundling technology solutions that are aligned to each customer’s journey. This encompasses for instance ‘Internet of Things’ technology to drive data points tailored to customer business driver needs or delivering sustainability solutions to assist our customers on their respective individual journeys to achieve energy efficiencies. Spirit has a vision to be known within the market for solving a customer’s problem and securely enabling their employees. The Consolidated Entity’s reporting framework aligns to the following key operating segments (as outlined in Note 3: Operating Segments of the financial statements):  Collaboration and Communication  Cyber security  Managed Services Review of operations and financial position The loss for the Consolidated Entity for the financial half-year ended 31 December 2023 (“H1 FY24”) after providing for income tax amounted to $5.2M (31 December 2022 (“H1 FY23”): loss $7.786M). Total revenue and other income for the Consolidated Entity for H1 FY24 was $57.2M (H1 FY23: $67.3). The following table summarises the key financial metrics for the financial year: 31 December 2023 $'000 31 December 2022 $'000 Change Revenue (refer Note 4 to the financial statements) Other income (refer Note 5 to the financial statements) 57,032 172 67,289 38 (10,257) 134 Revenue and other income 57,204 67,327 (10,123) Earnings before interest, taxes, depreciation & amortisation (EBITDA*) Share-based payments Loss/(profit) on divestment of non-core assets Acquisition & divestment costs Restructuring & integration costs*** Other normalisation items**** (3,609) 668 492 535 679 (5,757) 350 412 133 454 - 2,148 318 (412) 359 81 679 Net fair value loss on remeasurement of contingent consideration on business combinations Impairment of non-current assets 1,395 8,385 - (8,385) 1,395 Underlying EBITDA* 160 3,977 (3,817) (5,200) (7,786) 2,586 (Loss)/profit after income tax benefit/(expense) $'000 * EBITDA is a financial measure which is not prescribed by Australian Accounting Standards (‘AAS’) and represents the profit/(loss) under AAS adjusted for depreciation, amortisation, interest and tax. Underlying EBITDA is EBITDA adjusted to exclude acquisition & divestment costs, restructuring & integration costs, other normalisation items, net fair value loss on remeasurement of contingent consideration on business combinations, impairment of non-current assets, loss/(profit) on divestment of non-core assets and sharebased payments. 4 Spirit Technology Solutions Ltd Directors' report 31 December 2023 *** Restructuring & integration costs encompasses system reengineering costs **** Other normalisation items covers:  a notional addback for professional services margin loss supporting customers to move from an acquired end of life product to Spirit’s modern workplace solution (“MWS”) (-$0.6M).  Investments in trialling and development of new initiatives within the Collaboration & Communication segment (-$0.4M).  Net corporate one-off benefits (+$0.2M) The Company is aiming to be known within the market for solving complex customer business problems and building and delivering products that are tailored to our customers business drivers underpinned by security at the core. A key ongoing focus is to embed our cyber security capability into our customer base through direct engagement of our Cyber Security division or through new cyber security enabled products. That focus is to be delivered through accelerating people collaboration between the business segments. Below is a review of H1 FY24 performance by segment. The Board continues to acknowledge that the financial performance at a group and individual segment level requires a significant uplift to meet expectations. The restructuring work undertaken by management in the financial year ended 30 June 2023 (“FY23”) within the Managed Services business was targeted at returning this segment to an outward growth focus in the financial year ended 30 June 2024 (“FY24”) and specifically to getting the operation to a cashflow breakeven exit run rate by 30 June 2024. Performance within this segment has remained challenging in H1 FY24 with ongoing restructuring activities and downsizing needed to counter regrettable customer churn and a slower than expected sales pipeline rebuild. The Company remains focused on taking all necessary steps to move all operations back into sustainable profitability. Collaboration and Communication In the Collaboration and Communications market segment (Nexgen brand), Spirit primarily delivers small and mid-sized businesses an integrated solution comprising hardware, software, installation and configuration, bundled with data and voice connectivity. These products and services are targeted at small and medium sized businesses with ‘frontline’ staff who need sophisticated call management applications combined with meeting (video-conferencing) solutions. The segment achieved an uEBITDA* for H1 FY24 of $3.48M (H1 FY23 uEBITDA*: $6.38M) on half-year sales revenue of $19.78M (H1 FY23: $22.58M). The drop in segment performance YoY at both a revenue and uEBITDA basis reflects product-based revenue constraints (associated with economic inflationary market factors dampening SME business confidence and hence demand) that started to present in H2 FY23. Acknowledging the uncertainty of recovery in the macro-economic environment and hence the timing of a sustained rebound in hardware sales is difficult to forecast, the Company has seen a positive start to H2 FY24 with customers showing improved levels of confidence and sales. The segment has progressed a range of initiatives in the half-year period to support forward organic growth. These initiatives included:  Execution of a new multi-year contract extension with Cisco which underscores Nexgen's commitment to providing advanced voice, messaging, and video solutions for small-to-medium businesses.  The inauguration of the "Spirit Business Centre" aimed at driving the expansion of a national dealer network, with the overarching ambition to substantially broaden the segments sales channel and footprint.  Launch of a Managed IT Service Offering, tailored to Nexgen’s target market (average 10 seats). This initiative started with a soft launch in October / November 2023 and will be trialed over the next six (6) months to test market acceptance and penetration success within Nexgen’s ~6,100+ active business customers.  The Company continued to trial a new telemarketing team in the Philippines to grow lead generation and in turn conversion success. 5 Spirit Technology Solutions Ltd Directors' report 31 December 2023 Cyber Security In the cyber security market segment, Spirit manages and optimises cyber intelligence systems, analyses and reports on threats and vulnerabilities and advises on governance, risk and compliance. Spirit sells software solutions, provides professional services and managed services to the mid market and large organisations, with key strategic global vendor partners. Cyber-security continues to be front of mind for organisations and government, with steady growth in the overall market. The strongest growth areas include cloud security, application security, data privacy and security and integrated risk management. The two key legislative agenda items in Australia that are relevant to the Company’s operations relate to the Government’s response to the Privacy Act Review, and the updated 2023-2030 Australian Cyber Security Strategy and ASIC’s recent position to enforce directors’ responsibility/liability around cyber preparedness and response. These reforms (once released) are expected to place a greater emphasis on the broader Australian business community to uplift their internal systems and IT security posture. This is seen as a significant positive for Spirit as our existing and target customers are likely to be required to meet new legislative obligations and will potentially demand services that are sold by the Cyber Security and Managed Services business units. The Cyber Security division achieved an uEBITDA* for H1 FY24 of $0.62M (H1 FY23 uEBITDA*: $0.26M) on halfyear sales revenue of $19.22M (H1 FY23: $14.85M). The recovery in segment performance builds on the initiatives and investments made in FY23 centred around sales and delivery capabilities. The Security Operations Centre (“SOC”) in Brisbane, remains a key differentiator against generic SOC capabilities provided by other Australian managed service providers and is now supporting a growing number of leading Australian organisations. The facility will continue to support our SOC services and enable the cyber team to scale and underpins the sale of security services into the Managed Services customer base. During the half-year the Cyber Security segment and the Managed Services segment started the progress of greater alignment from both a functional and operational perspective. A Chief Customer & Revenue Officer manages both sales teams and this is an important step to accelerate internal collaboration to drive customer outcomes. There are a number of key drivers planned for H2 FY24 for supporting further growth of the combined Cyber Security and Managed Services team through the sale of Security Operations to enable ASD “Essential 8” compliance as outlined above. Managed Services In the managed (IT) services segment, Spirit focuses on mid-market businesses, delivering a suite of IT solutions which include software, hardware and services that support key business applications including productivity suites, WiFi, data backup, firewall protection and cloud services. Spirit’s services include the design, configuration, installation and support of such applications and the associated customer networks. Key strategic partners for Spirit in this segment include Microsoft and Cisco. The Managed Services division has been a very challenging operation that has weighed heavily on the Groups financial performance. The segment has been a complex operation having a mix of legacy Telco operations and services combined with a number of acquisitions that delivered varying capabilities, products and vendors. As outlined in the FY23 Directors Report, the Board and management have been focused on right sizing this operation and the Company acknowledges the disappointment that those investments and restructuring efforts have not reflected in the results for H1 FY24. 6 Spirit Technology Solutions Ltd Directors' report 31 December 2023 The Managed Services division achieved an uEBITDA* loss for H1 FY24 of $(2.46M) (H1 FY23 uEBITDA* loss: $1.28M) on half-year sales revenue of $18.16M (H1 FY23: $30.06M). The revenue reduction YoY reflects the segments divestment programs and associated customer novation impacts. The revenue outcomes also reflect the loss of customers due to regrettable churn alongside a lack of new ‘logo’ recurring revenue. That lack of new revenue is primarily considered to be the residual impact of the sales team’s ‘inward’ customer retention focus over the last 18 months. The development of our MWS offering enabled the transition of a range of key customers off historic proprietary legacy platforms that were no longer fit for purpose and were creating significant customer and reputational damage. In FY23 those issues reflected in significant customer disruption, financial credits being provided to compensate customers for outages and a lack of attention to build forward pipeline. Those issues lingered into H1 FY24 and, while accepting the financial performance issues that created, the positive outcome to report is that those proprietary products have finally been closed down, back-end decommissioning is well progressed and all customers are now off legacy products and onto Azure cloud MWP environments. A restructuring provision of $1M had been recognised as at 30 June 2023 to provide for estimated costs associated with further restructuring initiatives to be implemented in the six months to 31 December 2023. Those additional measures were largely implemented in the October to December 2023 timeframe and the annualised impact of these additional ‘cost outs’ measures will be more fully reflected in H2 FY24. The segment will implement additional ‘cost out’ measures in H2 FY24 to achieve its EBITDA breakeven objective. Key segment initiatives progressed in the half-year period to 31 December 2023 covered:  Implementation of ServiceNow a modern ITSM used by many mid-market and enterprise customers and is seen a key advantage when tendering for work to enable a seamless customer experience.  CRM enhancements to align the Managed Services and Cyber Security sales process.  Appointment of a Chief Customer & Revenue Officer (“CCRO”) with a dual focus on customer satisfaction to minimize forward customer churn alongside driving the sales team on new customer acquisition. The focus on sales execution by the CCRO, whilst still a key risk for the Company, will likely drive an increase in revenue over time and quality of customers. Management is targeting that the segment will reach an underlying EBITDA breakeven point by June 2024. Group disclosures Cash outflows from operating activities were $5.4M for the half-year ended 31 December 2023 (2022: cash outflows $3.6M). This included cash outflows associated with employee redundancy and other restructuring costs of $1.21M (2022: $(1.46M). Net cash outflows from investing activities (principally related to obligations associated with business combination payments and business acquisition and divestment costs) were $2.5M (2022 outflows: $3.6M). During the financial period, the Company drew down net debt from its banking facility of $3M in conjunction with a convertible note raise totaling $5.5M (after costs). The basic and diluted earnings per share loss for the financial half-year ended 31 December 2023 was 0.71 cents (2022: loss of 1.17 cents). The net assets of the Consolidated Entity decreased by $4.3M to $48.841M as at 31 December 2023 (30 June 2023: $53.133M). This decrease primarily reflects the impact of the continued under-performance of the Managed Services segment. 7 Spirit Technology Solutions Ltd Directors' report 31 December 2023 Prospects for future financial years and Business Risks The Consolidated Entity continues to evolve as it progresses its transition into a Modern Technology service provider that is known for delivering secure customer outcomes. As part of this transition (and as outlined below in Matters subsequent to the end of the financial half-year) the Company announced on 7th February 2024 the fully funded acquisition of Sydney-based cyber security company, InfoSurety Holdings Pty Ltd (InfoTrust). The acquisition expands Spirit’s presence in the growing cyber security market and strengthens the Company’s position in the major geographic markets of Sydney and Melbourne. The Company’s immediate strategic priorities are focused on extracting the revenue and gross margin synergies that this acquisition presents and accelerating cross-sell opportunities from Spirit’s other segments into InfoTust’s customer base. Alongside this there will be ongoing acceleration of initiatives within the Managed Services business segment to move that division’s uEBITDA* to a positive position. The evolutionary path of building a scalable and profitable company inherently involves risk. Those risk factors change over time in both nature and weighting. Management and the Board of the Company actively manage risk and apply mitigation strategies (where possible) to reduce the impact of the stated risk on the Company’s achievement of its goals. The key material business risks that the Company foresees that could impede the achievement of its future operational and financial success at the time of signing the Directors Report are set out below. Funding Risk In recognition of the profitability outcomes in recent financial years, the Company is focused on getting to an operational cashflow positive position alongside managing residual acquisition fixed consideration obligations. The Company's aim is to manage settlement of these obligations from its future operating cash flows. That noted, the risk with respect to such preferred funding is contingent on the Company's performance improvements to generate positive cashflows sufficient to:    manage working capital obligations; fund the fixed residual acquisition obligations; and fund agreed Bank debt redemption payments. To the extent that the Company is unable to make the necessary performance improvements, it may require additional equity funding, which may have a dilutionary effect on the Company's shareholders. The Company has material debt funding in place with its banker which is subject to various covenants. During the financial half-year the Company renegotiated its funding facility terms in conjunction with the Company executing the acquisition of InfoSurety Holdings Pty Ltd as detailed in the subsequent event note. The renegotiation of the facility included changes to the financial covenants (as outlined in note 12 of the financial statements) and other conditions and undertakings by the Company. As part of the undertakings provided, the Company is required to make a repayment of $85,000 per month (commencing 1 July 2024) to pay down the facility. The duration of the monthly amortisation requirement will be reassessed at facility renewal on 1 July 2025. To the extent that the Company's performance does not meet these revised covenants, there is a risk that the Company will need to: (i) (ii) (iii) renegotiate the terms of debt with its banker, which may be on less advantageous terms, refinance with another lender, which may be on less advantageous terms, or undertake a capital raising to repay all or part of the debt finance. 8 Spirit Technology Solutions Ltd Directors' report 31 December 2023 The Company completed a Convertible Note Placement as set out in its ASX announcements dated 6 October 2023 and 24 October 2023 with the funds raised used for acquisition due diligence and evaluation and legal costs and providing working capital for the Company. The Company has an optional right of conversion if at any time prior to 21 September 2026, the Company's shares have traded above $0.09 per share for a period of at least 21 consecutive trading days. If the note holders do not exercise their right of conversion, the Company may be at risk of funding the convertible note redemptions at a future point in time that may require additional equity funding, which may have a dilutionary effect on the Company's shareholders. Cyber Risks and data breaches Cyber related attacks are an inherent risk faced by every organisation and the financial and operational impact that this risk can have on an organisation is very disruptive and could have a material adverse effect on the Company and its prospects. This is exacerbated in the context of the Company given that it sells cyber protection solutions. An impactful cyber attack on the Company could result in the Company's reputation being damaged and associated loss of customers, leading to a reduction in revenue and profit and damage to the Company's prospects. Accordingly, as a material business risk it requires constant management and risk mitigation. The Consolidated Entity has the internal capability of its Cyber Security division to provide proactive and reactive solutions management of any Cyber related events that present against Spirit and its customer base. Cyber Security services are now a fundamental risk management requirement for any organisation and is a critical defence mechanism for all companies across their IT infrastructure and software layers. Sales Execution Risk Achievement of the Company's growth strategy is contingent on consistent building and execution of its sales strategy within the segment target markets. That execution is reliant, amongst other things, on attracting and retaining the right mix of sales talent. Failure to attract and retain suitable staff is disruptive to the Company's business, with resultant inability to grow its revenue, increased costs and reduced profits arising, as well as having an adverse impact on the Company's prospects. Labour Market and Inflationary Pressures Access to required human capital talent within the Australian employment pool remains a key business risk. The Company operates in a highly competitive industry and requires a mix of skilled professionals to execute its business plan. Spirit is not immune to the ongoing challenges in sourcing and retaining skilled staff in a competitive and at times wage inflationary environment. Failure to attract and retain suitable staff is disruptive to the Company's business, with resultant increased costs and reduced profits arising, as well as having an adverse impact on the Company's prospects. Spirit has, and continues to, develop strategies to retain its workforce team and will continue to invest in not only employee retention programs but also the enhancement of initiatives to be an employer of choice. Impact of competitive landscape The Company competes