Announcement PDF 1 2022 Interim Report Xref Limited | Interim Report 2022 Contents For the Half Year Ended 31 December 2022 Financial Statements Directors’ Report  3 Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001  7 Statement of Profit or Loss and Other Comprehensive Income  8 Statement of Financial Position 9 Statement of Changes in Equity  11 Statement of Cash Flows  13 Notes to the Financial Statements  14 Directors’ Declaration  28 Independent Audit Report  29 Additional Information for Listed Public Companies  31  General information The financial statements cover Xref Limited as a consolidated entity consisting of Xref Limited and the entities it controlled at the end of, or during, the half-year. The financial statements are presented in Australian dollars, which is Xref Limited’s functional and presentation currency. Xref Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Suite 13, 13 Hickson Road, Dawes Point, New South Wales, Australia, 2000 ACN: 122 404 666 A description of the nature of the consolidated entity’s operations and its principal activities are included in the directors’ report, which is not part of the financial statements. 2 Xref Limited | Interim Report 2022 Directors’ Report 31 December 2022 The directors present their report, together with the financial statements, for the consolidated entity (referred to hereafter as ‘the Group’) consisting of Xref Limited (referred to hereafter as the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the half-year ended 31 December 2022 (H1 FY23). Directors The following persons were directors of Xref Limited during the whole of the financial half-year and up to the date of this report unless otherwise stated: Thomas Stianos, Non-Executive Chairman Nigel Heap, Non-Executive Director Lee-Martin Seymour, Executive Director Lija Wilson, Non-Executive Director Principal Activities During the financial half-year, the principal continuing activities of the Group consisted of software development and service for the HR industry. Review of Operations Key operating results for H1 FY23 included: • Revenue up 8% to $9.6 m • NPAT loss of $1.465m • Group Sales up by 4% to $10.2m • Cash Collections from customers up 10% to $11.3m • Cash Balance at 31 December 2022 was $11.4m • Cash Generated from operations $1.1m • Cash Investment into platform development $1m • Acquired Engagement Platform Voice Project for $4m (50% Cash + 50% script, finalised January 2023) • Launched the all-new subscription platform - Xref Enterprise, the new Xref.com website and the Trust Marketplace Revenue Growth Increasing client activity on the platform drove a 15% increase in revenues for Xref’s core referencing products in the first half to $8.1m. RapidID H1 revenue was, however, down 17% to $1.5m due to the decline in demand from cryptocurrency clients. Overall, this resulted in Group revenue growing by 8% to $9.6m. In H1FY23, Xref launched its new platform offering a subscription-based service. We have begun to migrate clients from pre-paid credits to an annual subscription on this platform generating $0.7m in subscription sales during the second quarter. Full migration of customers is expected to take more than a year to complete. We are particularly focused on this migration as it is expected to steadily increase revenue as well as the predictability of revenue. Revenue from clients using our channel integrations grew 24% to $3.3m in the half and represented 34% of overall Group revenue. Revenues from Canada, USA and Europe grew by 36% to $1.42m and represented 15% of overall Group revenue. RapidID revenue was down 17% compared to H1FY22 largely due to a 73% decline in revenue from the cryptocurrency sector. Revenue is, however, being replaced with new sector clients such as H&R Block, Coles and Etax. Rapid ID is now less dependent on revenues from the cryptocurrency sector which represented only 15% of revenue in H1FY23 compared to 49% in H1FY22. 3 Xref Limited | Interim Report 2022 Operating Results 31 December 2022 31 December 2021 % Change Total revenue 9,607,988 8,873,451 8% EBITDA (803,883) 468,476 -272% NPAT (1,465,111) (36,987) -3,862% 1,116,566 2,292,485 -51% 31 December 2022 31 December 2021 % Change Xref revenue 8,073,018 7,030,558 15% Rapid ID revenue 1,534,970 1,842,893 -17% Total revenue 9,607,988 8,873,451 8% Cost of sales (1,687,858) (2,207,836) -24% OPEX (7,945,594) (5,845,221) 36% (808,722) (448,386) 80% (10,442,174) (8,501,443) 23% 30,303 96,468 -69% Depreciation and amortisation (388,311) (212,623) 83% Operating profit/(loss) (1,192,194) 255,853 -566% Finance income 22,008 3,016 630% Finance expense (295,225) (295,856) 0% (1,465,411) (36,987) 3,862% (1,465,411) (36,987) 3,862% Add back: net interest income and expense 273,217 292,840 -7% Add back: net depreciation and amortisation 388,311 212,623 83% EBITDA (803,883) 468,476 -272% Financial Summary Net cash generated from operating activities Business Results Share based payments Total expenses Other income Net profit/loss after tax EBITDA Net profit/(loss) 4 Xref Limited | Interim Report 2022 First Half Result The Group result for the financial half-year after providing for income tax was a loss of $1,465,411 (H1 FY22: Loss $36,987). The result was due to a strategic increase in expenditure in the following key areas: • Non-cash share based payments of $0.8m, up from $0.4m in H1 FY22 associated with the issue of options to employees to lock in key talent • $0.2m of additional platform infrastructure costs associated with the implementation of the new Enterprise platform • Marketing spend grew by 100% to $0.9m to increase lead flow and to launch the new website • An increase in salaries of $1.1m compared to H1 FY22 which came as a result of an increase in headcount in the areas of sales, marketing and development in addition to salary adjustments such as annual reviews and a record number of promotions The increase in expenditure was inline with budget and part of Xref’s planned investment for future profitable growth. New Sales H1FY23 saw slower growth of new customer sales with sales up 4% on the corresponding period last year. Xref signed a number of significant new customers during the half-year including Department of Communities and Justice (NSW), Visy, Department of the Prime Minister, Department of Home Affairs and Ausgrid in Australia, Gallager group in New Zealand, MullenLowe Group in the UK and Depop and Coast Medical in the US. Our continual product development and the launch of our subscription service illustrate the scalability and flexibility of our platform. The new subscription model also provides an opportunity for further growth as it is expected to expand our customer base. Cash Flow Cash collected from customers during the half was up 10% to $11.3m and expenses were $10.2m resulting in an operating cash flow surplus of $1.1m. New Platform Launch - Xref Enterprise and The Trust Marketplace Xref has extended its pre-employment offering with the launch of a full-service, hire-to-retire enterprise SaaS platform for employers called “Xref Enterprise”. The Xref Enterprise platform extends Xref’s addressable market tenfold and will shift Xref’s global business model away from being solely usage-based to subscription, allowing Xref to decouple its revenue recognition from recruiting trends. In unison with our new platform launch, we have launched the Trust Marketplace that encompasses ID checks from RapidID, the new Graduate Verification Scheme and additional checks such as Criminal, Right to Work and Employment checks via our partner network. The Trust Marketplace brings together a range of Online Trust products in an agnostic API-only Marketplace. All Trust Marketplace products will be available via Xref Recruiter and the new Enterprise platform. “Recruit, Retain, and Remember your people” - this is how the all-new Xref.com website introduced the Exit Survey product. The Pulse Survey product will also be added in H2FY23. The site also showcases testimonials and Xref’s impeccable ratings from all around the world and celebrates our history and the people that have driven our success. Voice Project Acquisition Xref has established a global leadership position in automated applicant reference checking. Last year, Xref launched its Exit Survey product, and now with the acquisition of Voice Project, it accelerates the launch of our Pulse and Engagement Survey offering to complete the hire-to-retire product portfolio. The acquisition, completed in January 2023, creates opportunities for cross-selling by giving Voice Project’s 900 plus clients access to Xref’s complementary services and offering Voice Project’s services to Xref’s 1,300 enterprise clients and 15,000 users. Furthermore, the Voice Project acquisition bootstraps our launch into Pulse and Engagement and will add $4 million in revenue in a full year. Most importantly, the acquisition accelerates Xref’s product strategy and growth potential. Xref will integrate the Voice Project portal, containing its comprehensive suite of market-leading surveys, into Xref’s platform, so employers will be able to view every single piece of information about a candidate, employee, or ex-employee in one place, and identify actionable insights. 5 Xref Limited | Interim Report 2022 Product Development Xref will continue to invest in growth through data-driven digital marketing with the self-serve initiative continuing to bring inbound leads. Through digital marketing, product innovation and leading customer service, Xref aims to be a thought-leader and trusted partner to talent acquisition and HR teams globally. The Company plans to invest a further $1.0m in product development in the second half. Outlook As Xref continues to invest in product development and improving our offering, much of this work is aimed at generating profitable growth well beyond the current financial year. In the meantime, we aim to fund these developments from operating cash flow. During the first half we invested $1m in product development. We intend to invest a further $1m in the second half to fill out the features of the new subscription platform. Many existing clients have indicated their preparedness to migrate to the new platform once these features are available. There are also significant revenue opportunities in FY2024 and beyond resulting from the new platform. The product development investments scheduled in H2FY23 are necessary to fully capture this opportunity. Again, the cost of these investments will be funded from operating cash flow. As part of increasing the scale of the business, we are focused on the following priorities in the year ahead: • Product Innovation. Completing the development of the newly launched enterprise platform with the addition of Pulse Surveys and self-service, completing the build of Trust Marketplace API’s as well as integrating the newly acquired Voice Project into Xref’s platform • Internal processes, incentives and reporting. These need to be updated as a result of the changing business model from credit based sales to subscriptions and the newly acquired Voice Project business • Marketing. Executing go-to-market strategies to align with the newly launched Enterprise Platform and to cross sell Voice Project services. This includes new brand assets such as the new explainer videos, online help guides We are confident of continued revenue growth for the remainder of the financial year as well as positive operating cash flow. We expect this will be achieved despite the disruption from migrating to the new operating model and subscription platform and the integration of Voice Project. Notwithstanding the planned ongoing investment in product development during H2 FY23, with the second half of the financial year traditionally being Xref’s strongest, the business forecasts a return to a small NPAT profit in the second half. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors’ report. This report is made in accordance with a resolution of directors, pursuant to section 306 (3) (a) of the Corporations Act 2001. On behalf of the board of directors Lee-Martin Seymour CEO, Founder, Director 23 February 2023 6 Xref Limited | Interim Report 2022 Crowe Sydney ABN 97 895 683 573 Level 24, 1 O’Connell Street Sydney NSW 2000 Main +61 (02) 9262 2155 Fax +61 (02) 9262 2190 www.crowe.com.au 23 February 2023 The Board of Directors Xref Limited Suite 13, 13 Hickson Road Dawes Point NSW 2000 Dear Board Members Xref Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the Directors of Xref Limited. As lead audit partner for the review of the financial report of Xref Limited for the financial half-year ended 31 December 2022, I declare that to the best of my knowledge and belief, that there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the review; and (ii) any applicable code of professional conduct in relation to the review. Yours sincerely, Crowe Sydney Ash Pather Partner Liability limited by a scheme approved under Professional Standards Legislation. The title ‘Partner’ conveys that the person is a senior member within their respective division, and is among the group of persons who hold an equity interest (shareholder) in its parent entity, Findex Group Limited. The only professional service offering which is conducted by a partnership is external audit, conducted via the Crowe Australasia external audit division and Unison SMSF Audit. All other professional services offered by Findex Group Limited are conducted by a privately owned organisation and/or its subsidiaries. Findex (Aust) Pty Ltd, trading as Crowe Australasia is a member of Crowe Global, a Swiss verein. Each member firm of Crowe Global is a separate and independent legal entity. Findex (Aust) Pty Ltd and its affiliates are not responsible or liable for any acts or omissions of Crowe Global or any other member of Crowe Global. Crowe Global does not render any professional services and does not have an ownership or partnership interest in Findex (Aust) Pty Ltd. Services are provided by Crowe Sydney, an affiliate of Findex (Aust) Pty Ltd. © 2023 Findex (Aust) Pty Ltd 7 7 Xref Limited | Interim Report 2022 Financial Statements Statement of Profit or Loss and Other Comprehensive Income For the half year ended 31 December 2022 Consolidated Note 31 December 2022 $ 31 December 2021 $ 3 9,607,988 8,873,451 Cost of sales (1,687,858) (2,207,836) Gross profit 7,920,130 6,665,615 Finance costs (295,225) (295,856) (5,146,407) (4,076,401) (2,799,187) (1,768,820) Share based payments (808,722) (448,386) Depreciation (150,606) (121,668) Impairment and amortisation (237,705) (90,955) Total expenses (9,437,852) (6,802,086) Operating loss (1,517,722) (136,471) 52,311 99,484 (1,465,411) (36,987) - - (1,465,411) (36,987) Exchange differences on translating foreign controlled entities 167,105 (107,542) Other comprehensive income / (loss) for the half-year, net of tax 167,105 (107,542) (1,298,306) (144,529) $ $ Basic earnings per share (0.0079) (0.0002) Diluted earnings per share (0.0079) (0.0002) Revenue Employee expenses Overhead and administration expenses Other income Loss before income tax expense Income tax expense Loss after income tax expense for the half-year attributable to the owners of Xref Limited 4 3 Other comprehensive income / (loss), net of income tax Total comprehensive loss for the half-year attributable to the owners of Xref Limited Earnings per share The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 8 Xref Limited | Interim Report 2022 Financial Statements Statement of Financial Position As at 31 December 2022 Consolidated 31 December 2022 $ 30 June 2022 $ Cash and cash equivalents 11,445,533 11,673,989 Trade and other receivables 1,870,590 1,892,011 1,156,805 1,211,830 507,444 715,716 14,980,372 15,493,546 Financial Assets 423,877 55,070 Property, plant and equipment 219,489 229,991 Right-of-use assets 339,307 321,282 4,834,196 4,073,676 Total non-current assets 5,816,869 4,680,019 Total assets 20,797,241 20,173,565 1,907,816 1,816,991 611,501 554,749 577,270 634,218 11,688,519 11,064,908 14,785,106 14,070,866 Note Assets Current assets Capitalised commission 5 Prepayments Total current assets Non-current assets Intangibles 6 Liabilities Current liabilities Trade and other payables Financial liabilities 7 Employee entitlements Unearned revenue Total current liabilities 8 The above statement of financial position should be read in conjunction with the accompanying notes 9 Xref Limited | Interim Report 2022 Financial Statements Statement of Financial Position continued As at 31 December 2022 Consolidated Note 31 December 2022 $ 30 June 2022 $ 7 4,434,144 4,405,732 Employee entitlements 225,793 224,785 Total non-current liabilities 4,659,937 4,630,517 Total liabilities 19,445,043 18,701,383 Net assets 1,352,198 1,472,182 55,470,213 55,100,613 (20,935,439) (21,492,803) (33,182,576) (32,135,628) 1,352,198 1,472,182 Non-current liabilities Financial liabilities Equity Issued capital Reserves Retained earnings 9 Total equity The above statement of financial position should be read in conjunction with the accompanying notes 10 Xref Limited | Interim Report 2022 Financial Statements Statement of Changes in Equity For the half year ended 31 December 2022 Issued capital $ Warrants $ Share option reserves $ Foreign currency translation reserve $ 55,100,613 308,571 1,596,643 (552,196) (22,845,821) - - - - - (1,465,411) (1,465,411) Other comprehensive income for the half-year - - - 167,105 - - Total comprehensive income/(loss) for the half-year - - - 167,105 - (1,465,411) (1,298,306) 369,600 - - - - - 369,600 Options issued - - 808,722 - - - 808,722 Options lapsed - - (17,652) - - 17,652 - Options expired - - (400,811) - - 400,811 - Balance at 31 December 2022 55,470,213 308,571 1,986,902 (385,091) (22,845,821) (33,182,576) 1,352,198 Consolidated Balance at 1 July 2022 Loss after income tax for the half-year Consolidation reserve $ Retained profits $ Total $ (32,135,628) 1,472,182 167,105 Transactions with owners in their capacity as owners Shares issued during the half-year The above statement of changes in equity should be read in conjunction with the accompanying notes 11 Xref Limited | Interim Report 2022 Financial Statements Statement of Changes in Equity continued For the half year ended 31 December 2021 Issued capital $ Warrants $ Share option reserves $ Foreign currency translation reserve $ 53,948,230 385,714 1,982,030 (461,745) (22,845,821) - - - - - (36,987) (36,987) Other comprehensive income for the half-year - - - (107,542) - - (107,542) Total comprehensive income for the half-year - - - (107,542) - (36,987) (144,529) Shares issued during the half-year 60,000 - - - - - 60,000 Options exercised 15,240 - (1,240) - - - 14,000 Options issued - - 448,386 - - - 448,386 Options lapsed - - (2,583) - - 2,583 - Options expired - - (861,356) - - 861,356 - Warrants issued / exercised - - - - - - - 1,077,143 (77,143) - - - - 1,000,000 Balance at 31 December 2021 55,100,613 308,571 1,565,237 (569,287) (22,845,821) (33,190,283) 369,030 Consolidated Balance at 1 July 2021 Loss after income tax for the half-year Consolidation reserve $ Retained profits $ Total $ (34,017,235) (1,008,827) Transactions with owners in their capacity as owners Warrants exercised The above statement of changes in equity should be read in conjunction with the accompanying notes 12 Xref Limited | Interim Report 2022 Financial Statements Statement of Cash Flows For the half year ended 31 December 2022 Consolidated 31 December 2022 $ 31 December 2021 $ 11,311,655 10,268,776 (10,217,097) (7,979,307) 22,008 3,016 1,116,566 2,292,485 (998,224) (717,927) (21,178) (15,195) (1,019,402) (733,122) Proceeds from issue of shares - 1,014,000 Repayments of lease liabilities (111,193) (37,176) Repayment of financial liabilities (214,427) (226,273) Net cash provided by/(used in) financing activities (325,620) 750,551 Net increase/(decrease) in cash and cash equivalents (228,456) 2,309,914 Cash and cash equivalents at the beginning of the financial half-year 11,673,989 8,131,072 Cash and cash equivalents at the end of the financial half-year 11,445,533 10,440,986 13 Xref Limited | Interim Report 2022 Note Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers (inclusive of GST) Interest received Net cash provided by operating activities Cash flows from investing activities Purchase of intangible assets Payments for property, plant and equipment Net cash used in investing activities Cash flows from financing activities Notes to Financial Statements For the Half Year Ended 31 December 2022 Note 1. Summary of Significant Accounting Policies These general purpose financial statements for the interim half-year reporting period ended 31 December 2022 have been prepared in accordance with Australian Accounting Standards AASB 134 Interim Financial Reporting and the Corporations Act 2001 as appropriate for the for profit orientated entities. Compliance with AASB 134 ensures compliance with International Financial Reporting Standards IAS 34 ‘ Interim Financial Reporting’. These general purpose financial statements do not include all the notes of the type normally included in annual financial statements. Accordingly, these financial statements are to be read in conjunction with the annual report for the half-year ended 31 December 2022 and any public announcements made by the company during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001. The principal account 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. Revenue recognition Revenue is recognised as follows. Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which the Group is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the Group: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the ‘expected value’ or ‘most likely amount’ method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are initially recognised as deferred revenue in the form of a separate refund liability. Group Sales The Group has two main sources of Sales. The sale of candidate referencing credits through Xref and the sale of ID verification checks through RapidID. For Xref sales, when customers use a credit the service has been performed. Revenue is recognised at the point in time when the customer uses the service. For RapidID sales, when customers take an ID Check the service has been performed. Revenue is recognised at the point in time when the customer uses the service. Rendering of services Revenue from a contract to provide services is recognised over time as the services are rendered based on agreed rates. 14 Xref Limited | Interim Report 2022 Notes to the Financial Statements Note 1. Summary of Significant Accounting Policies continued Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other income Other income is recognised when it is received or when the right to receive payment is established. Contract assets - capitalised commission Contract assets are recognised when the Group has transferred 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. Contract assets include commissions paid and are amortised as performance obligations are met and an unconditional right to consideration is established. Cost to obtain a contract that would have been incurred regardless of whether the contract was obtained or which are not otherwise recoverable from a customer are expenses as incurred to profit or loss. Incremental costs of obtaining a contract where the contract term is less than one year is immediately expensed to profit or loss. Contract liabilities - unearned revenue Contract liabilities represent the Group’s obligation to transfer goods or services to a customer and are recognised when a customer pays consideration, or when the Group recognises a receivable to reflect its unconditional right to consideration (whichever is earlier) before the Group has transferred the goods or services to the customer. Intangible assets Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Internally developed intangible assets Expenditure on research activities, undertaken with the prospect of gaining new technical knowledge and understanding, is recognised in the reported profit or loss when incurred. Development activities include a plan or design for the production of new or substantially improved products. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised in the reported surplus and deficit when incurred. Capitalised development expenditure is measured at cost less accumulated amortisation and any impairment losses. 15 Xref Limited | Interim Report 2022 Notes to the Financial Statements Note 1. Summary of Significant Accounting Policies continued Software Significant costs associated with software are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 4 years. Website Significant costs associated with website development are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 3 years. Domain Significant costs associated with domains are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 10 years. Patents and trademarks Significant costs associated with patents and trademarks are deferred and amortised on a straight line basis over the period of their expected benefit, being their finite life of 10 years. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances