READCLOUD LIMITED — Capital/Financing Update 2022

Oct 13, 2022

ASX Release

14 October 2022

Accelerating growth via the acquisition of Southern Solutions

Highlights

• ReadCloud has acquired 100% of Southern Solutions – Training Services Pty Ltd ("Southern Solutions") which is a leading national provider of training for certificates in Early Childhood Education & Care
• The acquisition provides a large growth opportunity for ReadCloud in a market that is adjacent to our core business and in an industry with skills shortages and high national government funding and focus
• The acquisition broadens ReadCloud's total addressable market beyond the school market as 3.9 million Australians take a Vocational Educational & Training course yearly
• The owners of the business were attracted to the ReadCloud platform which they will be adopting to deliver efficiencies and better scaling opportunities
• The transaction is EPS accretive

ReadCloud Limited ("ReadCloud" or "the Company"; ASX: RCL) is pleased to announce the acquisition of Southern Solutions Training Services Pty Ltd ("Southern Solutions").

Established in 2014, Southern Solutions is a Registered Training Organisation (RTO) that predominantly delivers training in Early Childhood Education and Care nationally. The business has developed strong partnerships with industry and earnt a reputation as a provider of innovative, quality and service focused training.

The acquisition positions ReadCloud in the broader VET market, which has a target audience of 3.9 million students annually and provides a large growth opportunity in an industry with skills shortages and government funding. The Australian childcare sector is estimated to be in need of an additional 16,000 educators.

The training provided by Southern Solutions is delivered under the same compliance oversight regulations as VET-in-Schools with four state government funding contracts. The owners of the business were attracted to the ReadCloud platform, which they will be adopting to deliver efficiencies and better scaling opportunities.

In FY22, Southern Solutions generated sales revenue of $2.0m and delivered EBIT of $364k.

The acquisition consideration is up to $3.15 million for 100% of the issued shares in Southern Solutions – Training Services Pty Ltd. The upfront payment of $1.35m includes $975,000 cash and $375,000 in equity (RCL shares) at 20 cents payable on completion.

Deferred payments of up to $1.8 million are based on FY23 and FY24 EBIT performance and paid with 75% cash and 25% shares at the higher of 20 cents or the share price at the time the earn-out targets are being met.

The acquisition will be funded through ReadCloud's existing cash reserves. The total acquisition cost represents between 3.6x and 4.5x times FY24 EBIT depending on achievement of performance hurdles. Post-acquisition ReadCloud continues to have a strong balance sheet and no debt.

The Share Purchase Agreement is subject to the satisfaction of customary conditions for completion, which are expected to be satisfied in the coming week.

ReadCloud has a track record of successfully acquiring and expanding businesses, having grown Ripponlea Institute (acquired in June 2021), COSAMP (acquired in October 2020) and Australian Institute of Education and Training (acquired in November 2018).

The owners of Southern Solutions, Jayne Marsh and Janina Puttick, will continue to work in the business post completion of the acquisition.

Jayne Marsh, the CEO of Southern Solutions said: "We are very excited to join ReadCloud and to combine our expertise in VET training with ReadCloud's platform to further accelerate our growth".

The CEO & Co-Founder of ReadCloud, Lars Lindstrom, said, "This acquisition represents a large growth opportunity for ReadCloud as we are utilising the ReadCloud technology to address the national skills shortage issue in the childcare sector. The industry has a high demand for training of new and existing teachers and strong government focus and funding, and we believe we can assist in solving this issue with the ReadCloud online training platform".

Accompanying this announcement is a presentation containing an overview of the Southern Solutions acquisition.

This announcement is authorised for release to the market by the Board of Directors of ReadCloud Limited.

-Ends-

CONTACTS:

Investors & Media: Luke Murphy, Chief Financial Officer +61 409 933 924

About ReadCloud Limited

ReadCloud is the leading provider of eLearning software solutions, including eBooks, to over 600 Schools and in the Vocational Education and Training (VET) sector in Australia. ReadCloud's proprietary eBook platform delivers digital content to students and teachers with extensive functionality, including the ability to make commentary in, and import third party content into eBooks.

Students and teachers can share notes, questions, videos and weblinks directly inside the eBooks turning the eBook into a place for discussion, collaboration, and social learning, substantially improving learning outcomes.

ReadCloud sources content for its solutions from multiple publishers, delivering the full Australian school curriculum in digital form in all States, on one platform. In the Vocational Education and Training (VET) sector, ReadCloud provides over 60 digital VET courses and auspicing services to schools across Australia.

ReadCloud currently has over 131,000 users on its platform.

ReadCloud Limited

Accelerating growth via the acquisition of Southern Solutions 14 October 2022

EXPANDING GROWTH OPPORTUNITIES

The acquisition provides a large growth opportunity for ReadCloud in a market that is adjacent to its core business and in an industry with skills shortages and high national government funding and focus

ReadCloud has acquired 100% of Southern Solutions – Training Services Pty Ltd ("Southern Solutions") which is a leading national provider of training for certificates in Early Childhood Education & Care

The National Skills Commission predicts strong future demand for childcare workers, with more than 16,000 extra workers needed across Australia

The acquisition broadens ReadCloud's total addressable market beyond the school market, with 3.9 million Australians taking a Vocational Educational & Training course yearly

The owners of the business were attracted to the ReadCloud platform, which they will be adopting to deliver efficiencies and better scaling opportunities

Successfully expanding into the childcare sector using the ReadCloud technology may open up new opportunities in other markets where there are skills shortages, such as aged care and health

CONTINUING TO PURSUE OUR STRATEGY

• Acquiring Southern Solutions broadens ReadCloud total addressable market, beyond the school market, to 3.9 million Australians who yearly take a Vocational Educational & Training course
• We are pursuing industry alliances to provide improved alignment between market needs, quality training and job opportunities

VET-In-Schools

• Increased investment in the division to expand on the position of being the largest private provider in Australia by number of qualification on scope
• Capitalise on the trend of schools wanting to deal with only one RTO
• Positive feedback from customers using the new ReadCloud VETHub platform this year has built a strong cross-selling pipeline from schools leading into FY23

eBooks Solutions

• Continued investment in the ReadCloud platform to expand the footprint in Australian secondary schools
• Following the signing of King's InterHigh in London, UK we continue to pursue international opportunities
• Strong existing pipeline for FY23

READCLOUD'S MARKET OPPORTUNITY

1. National Centre for Vocational Education Research – VET in Schools 2020 report (up from 60,000 students in 1996)

2. Australian Curriculum, Assessment & Reporting Authority

ACQUISITION OVERVIEW

ReadCloud has acquired 100% of Southern Solutions – Training Services Pty Ltd

Southern Solutions Overview

Strategic Rationale

Acquisition Snapshot

• Registered Training Organisation established in 2014 delivering qualifications nationally
• Training is predominantly delivered in Early Childhood Education and Care
• State government funding contracts in four states
• $2.0m revenue and $364k EBIT in FY22, with high growth ambitions

• Opportunity in an industry with skills shortages and government funding
• Owners of the business were attracted to the ReadCloud VET platform
• Adds another revenue growth stream, provides a more regular cash flow and augments existing organic growth targets
• Purchase price is up to $3.15m
• $1.35m upfront payment $975k cash and $375k in RCL shares at 20 cents
• Deferred payments of up to $1.8 million based on FY23 and FY24 EBIT performance (75% cash and 25% shares)
• Acquisition is funded by existing cash reserves

SOUTHERN SOLUTIONS OVERVIEW

• An approved registered training organisation (RTO) that provides Nationally Accredited Training
• The business has developed strong partnerships with industry and earnt a reputation as a provider of innovative, quality and service focused training
• It has government funding contracts in four states
• Training is predominantly in Early Childhood Education and Care
• Southern also delivers courses in leadership, management and food processing with long-standing contracts
• Training revenue is through fee for service and statebased funding arrangements
• $2.0m revenue and $364k EBIT in FY22 with high growth ambitions
• 650 current student enrolments

AUSTRALIAN CHILDCARE INDUSTRY

Positive supply/demand trends in the childcare sector

Favourable government funding initiatives, which should continue to support growth in demand

Staff shortages continue to impact the conversion of rising demand

Jobs and Skills Summit – key outcomes with respect to Early Childhood Education and Care

• Government to identify priority areas where it can help tackle ECEC workforce shortages
• National Cabinet to work on a long-term vision for early childhood education and care reform (with a focus on increasing workforce participation for parents)

National Skills Commission

• Identified childcare workers as an occupation experiencing national skill shortages and predicts strong future demand
• More than 16,000 extra workers are needed across Australia
• Childcare was Labor's biggest election commitment (in terms of cost), with a $5.4 billion plan to increase subsidies and raise the maximum family income threshold to get more parents using childcare

Overview of key VET statistics in Australia

TRANSACTION RATIONALE

Takes ReadCloud into the broader VET market, which has a target audience of 3.9 million students annually

Entering an industry with state government funding and skills shortages – childcare sector estimated to be in need of an additional 16,000 educators

Owners of the business were attracted to the ReadCloud VET platform, which the business will be adopting to deliver efficiencies and better scaling opportunities

ReadCloud already has access to premium course materials in the sector through its eBook distribution partnerships

Training provided by Southern Solutions is delivered under the same compliance oversight regulations as VET-in-Schools, which the ReadCloud organisation is highly experienced in

Annual Revenue Per User ("ARPU") for VET-In-Schools is between $250-300, whereas for a Diploma in Early Childhood Education and Care, the state funding provided is in excess of $8,000 per student (although it varies by state)

ACQUISITION TERMS

• ReadCloud to acquire 100% of the issued shares in Southern Solutions Training Services Pty Ltd
• The upfront payment of $1.35m includes $975,000 cash payable on completion and $375,000 in equity (RCL shares) at the higher of 20 cents or the share price at the time of completion
• Deferred payments of up to $1.8 million are based on FY23 and FY24 EBIT performance
• RCL shares to be issued as deferred consideration are to be valued at the 30-day volume-weighted average price (VWAP) of RCL shares traded on the ASX in the 30 days immediately prior to the deferred consideration payment date, with a minimum price of 20 cents regardless of market conditions at the time
• 50% of shares issued as equity consideration are to be escrowed for 12 months from the date of their issue, with the remaining 50% escrowed for 24 months from the date of their issue.
• Total acquisition cost represents between 3.7x and 4.5x times FY24 EBIT depending on achievement of performance hurdles
• Joint vendors, Jayne Marsh and Janina Puttick, to continue to work in the business to drive growth going forward

ACQUISITION SUMMARY

The new market acquisition broadens ReadCloud's total addressable market beyond the school market as 3.9 million Australians take a Vocational Educational & Training course yearly

The provision of training in the childcare sector will leverage the existing ReadCloud SaaS platform and improve the delivery of training to assist with closing the gap in an important skills shortages area

The compliance and governance strengths of ReadCloud provides a strong base to integrate the business and accelerate its growth

The acquisition adds another revenue growth stream, provides a more regular cash flow and augments existing organic growth targets

Pursuing industry alliances is currently underway to provide improved alignment between market needs, quality training and job opportunities

Successfully expanding into the childcare sector using the ReadCloud technology may open up new opportunities in other markets where there are also skills shortages such as aged care and health

KEY INVESTMENT HIGHLIGHTS

Acquisition of Southern Solutions launches ReadCloud into a large market in Broader VET training

Investment in platform, compliance and support systems can be scaled and leveraged into new opportunities such as this acquisition

Major brand and marketing launch aimed at cross-selling for the VETin-schools segment to drive growth late 2022 and 2023

After signing an agreement with King's InterHigh in London, ReadCloud is now delivering publisher content in overseas markets via the ReadCloud platform, with additional plans to expand

Following the acquisition, ReadCloud maintains a strong balance sheet with a solid cash position and no debt