Announcement PDF 25 September 2015 ASX Market Announcements Office ASX Limited 20 Bridge Street SYDNEY NSW 2000 Dear Sir/Madam 2015 Annual Financial Report Please find attached the company's 2015 Annual Financial Report to Shareholders. Yours faithfully Brendan Case Company Secretary SENETAS CORPORATION LIMITED 2014/2015 ANNUAL FINANCIAL REPORT Contents to Financial Report Corporate Information 2 12 Intangible assets 44 Directors’ Report 3 13 Employee benefits reserve 45 Statement of Comprehensive Income 18 14 Trade and other payables 46 Statement of Financial Position 19 15 Provisions 46 Statement of Cash Flows 20 16 Contributed equity and reserves 47 Statement of Changes in Equity 21 17 Financial risk management objectives and policies 48 18 Commitments and contingencies 51 Notes to the Consolidated Financial Statements 1 Corporate information 22 19 Parent entity information 52 2 Summary of significant accounting policies 22 20 Related party disclosure 53 3 Revenues and expenses 34 21 Events after the balance date 54 4 Income tax 35 22 Auditors’ remuneration 54 5 Earnings per share 39 23 Key management personnel 54 6 Cash and cash equivalents 40 24 Revenue by geography 55 7 Trade and other receivables 41 8 Inventories 9 Directors’ Declaration 56 41 Independent Audit Report to the Members of Senetas Corporation Limited 57 Other assets 41 ASX Additional Information 59 10 Other financial assets 42 Corporate Governance Statement 61 11 Plant and equipment 43 Senetas Corporation Limited Annual Financial Report for the year ended 30 June 2015 ACN 006 067 607 Senetas Corporation Limited 2014/2015 Annual Financial Report 1 Corporate Information Non-Executive Directors Francis W. Galbally – Chair Lachlan P. Given Kenneth J. Gillespie Lawrence D. Hansen Executive Director Andrew R. Wilson Company Secretary Brendan Case Registered Office Share Register Senetas Corporation Limited Computershare Registry Services Pty Ltd 312 Kings Way South Melbourne VIC 3205 Yarra Falls, 452 Johnston Street, Abbotsford VIC 3061 Telephone: +61 3 9868 4555 Telephone: + 61 3 9415 5000 Toll Free 1300 13 83 25 Email: corporate@senetas.com www.senetas.com Investor Relations For all investor enquiries Telephone: 1300 787 795 Email: investor@senetas.com Auditors Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Annual General Meeting Date & Place Annual General Meeting of shareholders of Senetas Corporation Limited (Company) will be held at Bayview on the Park, Thursday 19 November 2015. 2 Senetas Corporation Limited 2014/2015 Annual Financial Report Directors' Report Your directors submit their report for the year ended 30 June 2015. Names, qualifications, experience and special responsibilities The following directors were in office for the entire financial year and until the date of this report unless otherwise noted: Francis W. Galbally Director (Non-Executive Chair) Andrew R. Wilson Director (Executive) Lachlan P. Given Director (Non-Executive) Kenneth J. Gillespie Director (Non-Executive) Lawrence D. Hansen Director (Non-Executive) (appointed 28 August 2015) Francis W. Galbally LLB (Hons) Non-Executive Chair Mr Francis Galbally has over 30 years’ experience in international business and commercial law. He is a graduate (first class honours) in Law at Melbourne University and worked in a professional legal practice for 15 years, specialising in business law. He was a partner in the leading law firm Galbally & O’Bryan during which time he successfully led a number of landmark commercial litigation cases. An investor and corporate advisor, Mr Galbally is the major shareholder in Southbank Capital Pty Ltd. (AFSL 343678). He specialises in technology, environment, food, mining and energy sectors. Mr Galbally is also chair of the Bayland Property Group and chair of Arunta Resources Ltd. Having been a director and chair of a number of Australian Stock Exchange (ASX) listed companies, Mr Galbally has first-hand operational experience in growing ‘small cap’ companies. Mr Galbally was the founder of Senetas and held the positions of CEO and chair. For family reasons Mr Galbally retired as an executive in February 2006 and as a director in May 2007. In 2012 Mr Galbally led Senetas’ significant capital and business restructure and re-joined the company as a significant shareholder and board member. He was appointed chair on 30 April, 2013. During his successful legal career, Mr Galbally was responsible for recovering more than $1 billion in investor funds ($1 for $1) lost as a result of the major corporate failures (Pyramid Building Societies and Estate Mortgage Trusts) during the 1990’s. Mr Galbally is the Victorian convenor of the Constitution Education Fund of Australia – a nonpolitical charity dedicated to advancing knowledge of the Australian constitution within the community. He is also a member of the Australian Institute of Company Directors. Andrew R. Wilson BEcon, CA, ACIS Chief Executive Officer Mr Andrew Wilson was appointed CEO of Senetas on 15 August, 2012. He was formerly Senetas’ Company Secretary and Chief Financial Officer. Throughout his 14 year career with Senetas, Mr Wilson has had a significant role in most of the important stages of the company’s development since it was first listed on the ASX. As CFO and previously as senior accountant, Mr Wilson developed a strong understanding of Senetas’ technology, products, manufacturing, customers, partner channel and financial drivers. He is also closely involved in the management of the company’s R&D and customers’ expectations. Mr Wilson has also developed crucial relationships in the information security industry including key government organisations, locally and overseas. He has a strong understanding of the markets and drivers of demand for the company’s products. Commencing his career with KPMG in the audit division, focusing on the banking and broking industries, Mr Wilson has also worked in the United Kingdom with Deutsche Bank and NatWest Bank Plc. As part of corporate restructure teams he has developed considerable financial and administrative skills. He is a member of the Institute of Chartered Accountants Australia and the Institute of Chartered Secretaries Australia. Importantly, Mr Wilson brings to the role of CEO skills in strategic planning, a customer-centric focus and an understanding of the dynamics of the markets for Senetas’ specialist products. Lachlan P. Given BBus Non-Executive Director Mr Lachlan Given is currently a consultant to Madison Park LLC, a global strategic and financial advisory business. Madison Park is Senetas’ largest single shareholder, after participating in a comprehensive capital reconstruction in June 2012. Prior to joining Madison Park in 2004, Mr Given spent five years working in the Investment Banking and Equity Capital Markets divisions of Merrill Lynch in Hong Kong and Sydney, Australia. He specialised in the origination and execution of a variety of M&A, equity, equity-linked and fixed income transactions. Mr Given is Executive Chair of Ezcorp Inc (NASDAQ:EZPW) a leading provider of easy cash solutions for consumers. He is also on the boards of The Farm Journal Corporation, a 134 year old pre-eminent US agricultural media company, Senetas Corporation Limited 2014/2015 Annual Financial Report 3 Directors' Report Continued CANSTAR Pty Ltd, the leading Australian financial services ratings and research firm; and of Cash Converters International Limited. Mr Given graduated from the Queensland University of Technology with a Bachelor of Business majoring in Banking and Finance (with distinction). Kenneth J. Gillespie AC DSC CSM Non-Executive Director Mr Ken Gillespie is an experienced and highly decorated national leader. Recently Chief of the Australian Army, Ken possesses a diverse range of practical experience, including military high command, diplomacy, and private and public sector leadership. He has an enviable and successful track record for strategic review, structural reform, team building and leadership across diverse and challenging work environments and workforces. Ken currently sits on several boards, both public and not for profit, and provides consulting services to government departments, corporations and small companies. He possesses a strong network of contacts in government, defence, security and commercial fields and has considerable experience communicating with, and building consensus among diverse stakeholder groups. Lawrence D. Hansen – Non-Executive Director (appointed 28 August 2015) Mr Hansen has had a successful career in leading international IT and data security organisations. He has a strong international M&A and business integration background, having directed worldwide teams since 2005. Until recently Mr Hansen was VP and general manager of Dell Software Group employing 3,000 staff in sales, marketing, channels and services, and oversaw its go to market strategy. Previously, Mr Hansen was President and CEO of SafeNet, Inc., Senetas' global distribution partner. At SafeNet, he led a significant recapitalisation of the company that saw strong growth in revenues and profits before its successful sale to Gemalto NV. Mr Hansen’s deep knowledge of Senetas’ existing and potential global customer base, sales function, product development and innovation program makes him an extremely valuable addition to the Senetas board. Mr Hansen also brings his wealth of global experience in services, products, marketing and business planning. Mr Hansen also held the role of president and CEO of Numara Software, a $100m business, where he oversaw the company's successful sale and integration into BMC Software. Mr Hansen served in several senior management roles in his over nine years at CA technologies. He held the role of CIO, GM Security Business Unit and GM Enterprise Products and Cloud Solutions. 4 Senetas Corporation Limited 2014/2015 Annual Financial Report Mr Hansen, a Canadian born US citizen resides in Dallas, Texas, is a director of Covisint Inc. (Nasdaq: COVS). Covisint is a leading Cloud platform provider enabling the "Internet of Things" and identity management solutions. Brendan Case MCom Law, BEc, CPA Company Secretary Mr Brendan Case has more than 20 years of company secretarial, corporate governance and finance experience. He is a former Associate Company Secretary of National Australia Bank Limited (NAB), former secretary of NAB’s Audit and Risk Committees and has held senior management roles in risk management and regulatory affairs. Mr Case is a Chartered Secretary with a Masters of Commercial Law from the University of Melbourne and has degrees in both economics and finance. Barbara F. McMeekin Dip Arts (Psych), Grad. Dip. Business (Computing), MPAcc, CPA Chief Accountant Ms Barbara McMeekin is a member of the Certified Practicing Accountants Australia with over 30 years business experience. She was appointed to the position of Chief Accountant of Senetas in 2012. Ms McMeekin has worked in all areas of Senetas’ accounting and administration as Senior Accountant assisting the Chief Financial Officer. Ms McMeekin’s skills include financial and ERP systems, cost accounting and business processes. During her career at Senetas she has developed extensive knowledge of the company’s operations and financial matters. She had a key role in Senetas’ successful implementation of enhanced ERP and financial systems, which were important to achieving cost efficiencies. Dividends paid and proposed No dividends were proposed or declared for the financial year ended 30 June 2015. (2014: nil) Corporate information Senetas is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange. Corporate structure Senetas has a direct controlling interest in each of the entities listed in Note 20. No other entities are included in the consolidated entity. Nature of operations and principal activities The principal activity of the entities within the consolidated entity during the year was the sale of IT security products providing network data security solutions to businesses and governments around the world. Directors' Report Continued Employees The consolidated entity employed 28 employees as at 30 June 2015 (2014 : 25 employees). Significant changes in the state of affairs There are no significant changes in the state of affairs. Operating & financial review Highlights Senetas delivers strong full year profit growth and cash flow. Senetas Corporation Limited (ASX: SEN), a leading developer and manufacturer of certified, defencegrade data encryption solutions, is pleased to announce its results for the year ended 30 June 2015 (FY2015), delivering strong growth in revenue, profit and cash flow as the business successfully executes its growth strategy. FY2015 highlights: • Net profit before tax up 2.4 times to $6.02 million (FY2014: $2.46 million). • Net profit after tax up 36% to $4.02 million (FY2014: $2.96 million). • Operating revenue up 47% to $16.21 million (FY2014: $11.04 million) driven by: • 41% growth in product sales; and • 55% increase in maintenance services revenue. • Gross margin of 83% and pre-tax profit margin of 37%. • Continued positive cash flow, with net operating cash flow up over 200% to $9.58 million (FY2014: $2.88 million). • Strong balance sheet: • No debt; • Cash on hand at 30 June 2015 up over 100% to $15.90 million (FY2014: $6.81 million); and • Net assets up 45% to $13.09 million (net tangible assets $12.97 million). • Sustained realisation of the operational and financial benefits from the business transformation and growth plan executed since 2012. • Consolidation of the new master distribution relationship with SafeNet Inc. (now Gemalto NV since completion of its $US870m acquisition of SafeNet Inc. in January 2015). • Ongoing development of Senetas’ proprietary R&D and certified encryptor roadmap driving future growth opportunities. The benefits from the transformation and growth plan implemented since 2012 have been delivered through growth across all key business metrics. Operating revenue was up 47% to $16.21 million, while earnings grew much stronger generating a net profit before tax of $6.02 million. The strong revenue growth represents the first full year benefits of the improved master distributor agreement with Gemalto and includes good growth from both new product sales and maintenance services. Growth in new product sales is primarily the result of orders from new customers, particularly in the commercial sector. FY2015 has seen the company continue its significant investment in research and development (R&D) and building stronger relationships with its master distributor, technology partners and end customers. These are critical factors to ensure Senetas builds both the capability and relationships necessary to drive future revenue growth. Senetas completed the half in a strong financial position off the back of growing operating cash flows and strong working capital management. With no debt, and $15.90 million of cash at 30 June 2015, the Company is uniquely placed to continue its growth. Senetas’ experienced leadership team, together with the skilled team of product development engineers and marketing and partner development activities have played key roles in supporting the Company’s international master distributor and other partners. The growth over the past three years, and in particular over the past twelve months, would not have been possible without the dedication and commitment of the Company’s talented team. International distribution – Safenet’s acquisition by gemalto The acquisition of SafeNet by Gemalto was completed in January 2015. Gemalto ownership of SafeNet provides Senetas products with increased access to global markets. Gemalto has a large global ‘footprint’ and a sales force located across 44 countries which service their global customer base. The relationship with Gemalto remains strong and mutually beneficial and Gemalto has confirmed its commitment to the SafeNet product suite, including Senetas’ High-Speed Encryption (HSE) products and ranks HSE among its most important product groups. Senetas Corporation Limited 2014/2015 Annual Financial Report 5 Directors' Report Continued The Senetas master distributor agreement continues unchanged after the acquisition and Senetas supports this relationship with training in product capabilities and support for Gemalto staff on engagement with strategic customer accounts. Research and development R&D remains the Company’s core activity and the major driver of long-term growth prospects. Historically Senetas has invested approximately 35% of revenue annually to these activities. Senetas is building significant new capabilities that will drive revenue growth in FY2017 and beyond. In this regard, FY2016 R&D is expected to increase above historic reinvestment rates as a large pipeline of new products are developed, including: • 100Gbps encryptor – with customers already indicating a need for increased data throughput and the economies of scale 100Gbps will bring; • ‘High-density’ encryptors – through a ‘multi-port’ design providing customers with their need for cost-per-port economies and other benefits; • A custom encryption algorithm capability following enquiries from customers in Asia, Europe and the Middle East; and • Virtualisation of encryption – developing new technologies for changing networking protocols and ways of managing networking. Senetas therefore expects FY2016 R&D expenditure will be approximately 30% higher than it was in FY2015. Business strategy Looking forward, in order to maximise Senetas’ profitable revenue growth, the Company is focusing on a business strategy with five key growth drivers: 1. Key Senetas HSE markets: • Accelerate (and protect) growth by working with Gemalto to increase the sales, marketing and customer footprint in traditional markets. 2. Low HSE penetration markets: • Develop markets where Senetas products have low market penetration by working closely with Gemalto. These include: India, Japan, Singapore, South America, Eastern Europe, France, Germany and Italy. 3. New faster and ‘high-density’ products: • Release new market-leading encryptors that reflect emerging customer security needs. These include faster, 100Gbps, and ‘highdensity’ (multi-port) platform. 6 Senetas Corporation Limited 2014/2015 Annual Financial Report 4. New customer centric custom algorithm projects: • Leveraging Senetas’ unique and proprietary electronics engineering capabilities and products. Senetas expects to commence work in 2015 on a large custom algorithm project for a major European customer. • In order to build other custom algorithm opportunities, Senetas will complete a custom software toolkit to address unique requirements for customers in Asia, Europe and the Middle East. 5. New technology partnerships: • Senetas completed a technology partner agreement with major international data networks provider, Avaya, in January 2015. It will provide Senetas/Gemalto access to the rapidly growing Avaya ‘Fabric Connect’ network technology and its large customers around the world. • Senetas has identified two other technology partnership opportunities with major technology companies which are expected to extend the company’s technology and market. These five key growth drivers are expected to drive strong revenue and profit growth from FY2016. The Company’s strategic growth plan is being supported by product marketing, brand recognition and data security thought leadership focused on the commercial, government and networks service providers in targeted geographic markets. Well positioned for future growth Senetas continues to see significant opportunities as it increases focus on the demand for HSE in the commercial sector. To date there have been significant sales to large-scale commercial enterprises that recognise the critical need to encrypt large volumes of data in motion and is expected to continue to drive growth as it has throughout FY2015. Having built a sustainable foundation to support future growth it is now critical that Senetas continues to reinvest in the business to meet customer needs and drive new revenue opportunities in FY2017 and beyond. The increased R&D investment rate and the increase in international sales resource in FY2016 is a necessary ongoing step to continue to develop technology capability and build closer relationships with its master distributor, technology partners and end customers. Senetas expects that strong industry fundamentals and increased focus on driving sales execution together with key partners will continue to drive Directors' Report Continued good profit growth and cash flow in FY2016. However, with the benefits of the new master distributor agreement now fully realised and an increase in business reinvestment rates over the next 12 months, profit growth in FY2016 may moderate from that achieved in FY2015. Medium term profit growth should be strong as the company starts to deliver new technologies into the market. officer contained in the Corporations Act for a period of 7 years. The group also has Professional Risk Insurance (including cover for cyber attack) and Public Liability Risk Insurance. Indemnification of auditors There were no significant events after balance date. To the extent permitted by law, the company has agreed to indemnify its auditors, Ernst & Young Australia, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. Share options Rounding Unissued Shares The amounts contained in the financial report have been rounded to the nearest $1 (where rounding is applicable). Significant events after the balance date As at the date of this report, there were 1,500,000 unissued ordinary shares under options and performance rights. Refer to the remuneration report for directors and executive options and performance rights and Note 13 for full details of the options outstanding. Option holders do not have any right, by virtue of the option, to participate in any share issue of the company or any related body corporate. Shares issued as a result of the exercise of performance rights During the year employees exercised performance rights to acquire 4,000,000 shares in Senetas Corporation Ltd. The performance rights had an exercise price of zero. Indemnification and insurance of directors and officers Senetas has Director’s & Officer’s Liability Insurance covering the directors and officers against liability in addition to Employment Practices Insurance. The terms of the insurance and the insurer are subject to a confidentiality clause and are therefore not disclosed. The group also indemnifies all directors, the chief executive officer and the company secretary for any liability incurred by the officer as officers of the group to the full extent permitted by law. In accordance with the group’s constitution in consideration of the officer agreeing to continue to act as an officer of the group, the group has agreed to: • indemnify the officer against liabilities incurred while acting as an officer of the company; • provide the officer with insurance cover; and • provide the officer access to company documents which relate to the obligations of the Remuneration report – (audited) This remuneration report for the year ended 30 June 2015 outlines the remuneration arrangements in accordance with the requirements of the Corporations Act 2001 for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the company and the group, directly or indirectly, including any director (whether executive or otherwise) of the parent company. For the purposes of this report, the term “executive” includes the Chief Executive Officer (CEO) and other senior executives of the parent and the Group. Non-executive directors (NEDs) F. Galbally Chair (Non-Executive) L. Given Director (Non-Executive) K. Gillespie Director (Non-Executive) Executive directors A. Wilson Chief Executive Officer Other key management personnel J. Weston Engineering Manager J. Fay Chief Technology Officer Current year performance and short term remuneration As the company met performance targets set by the board, short term incentives will be paid to executives of the company for the 2015 financial year. Details of the bonuses are outlined below: Senetas Corporation Limited 2014/2015 Annual Financial Report 7 Directors' Report Continued Remuneration Report (continued) – The remuneration report has been audited Remuneration philosophy The performance of the company depends upon the quality of its directors and executives. To prosper, the company must attract, motivate and retain highly skilled directors and executives. To this end, the company embodies the following principles in its remuneration framework: • provide competitive rewards to attract high calibre executives; • link executive rewards to shareholder value; • have a significant portion of executive remuneration ‘at risk’, dependent upon meeting pre-determined performance benchmarks; • establish appropriate and stretched performance hurdles in relation to at risk executive remuneration; and • strongly encourage directors to sacrifice a portion of their fees to acquire shares in the company at market price. Remuneration Policy Remuneration policies are determined by the board which makes specific recommendations of remuneration packages and other terms of employment for executive directors and nonexecutive directors. Executive remuneration and other terms of employment are reviewed annually by the CEO with regard to performance. Remuneration packages include superannuation, performance related bonuses and an entitlement to participate in the Senetas directors and Employees Share Option Plan. Details of the nature and amount of each element of the remuneration of each director and executive of Senetas and the consolidated entity are included in this report. Remuneration and nomination committee The Remuneration and Nomination Committee comprises three independent non-executive directors. The Remuneration and Nomination Committee of the board of directors of the company is responsible for determining and reviewing compensation arrangements for the directors and the CEO. The Remuneration and Nomination Committee has delegated decision making authority to the CEO for some matters related to the remuneration arrangements of KMP and other staff. The Remuneration and Nomination Committee assesses the appropriateness of the nature and amount of remuneration of directors and the CEO on a periodic basis by reference to relevant 8 Senetas Corporation Limited 2014/2015 Annual Financial Report employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. The Remuneration and Nomination Committee did not use the services of a remuneration consultant during the year. The Remuneration and Nomination Committee meets regularly throughout the year. The CEO attends certain Remuneration and Nomination Committee meetings by invitation, where management input is required. The CEO is not present during any discussions related to his own remuneration arrangements. Remuneration structure Non-executive director remuneration The board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. The latest determination was at the Annual General Meeting held on 26 October 2007 when shareholders approved an aggregate remuneration of $550,000 per year. The combined payment to all non-executive directors does not exceed this aggregate amount. The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst directors is reviewed annually. The board considers advice from external consultants as well as the fees paid to non-executive directors of comparable companies when undertaking the annual review process. Each director receives a fee for being a director of the company. Non-executive directors have long been encouraged by the board to hold shares in the company (purchased by the director on market). It is considered good governance for directors to have a stake in the company on whose board he or she sits. The non-executive directors of the company can participate in the Employee Share Incentive Plan which provides incentives where specified criteria are met. The remuneration of directors for the years ending 30 June 2015 and 30 June 2014 is detailed on page 12 of this report. Directors' Report Continued Remuneration Report (continued) – The remuneration report has been audited Executive remuneration Objective The company aims to reward executives, including the CEO, with a level and mix of remuneration commensurate with their position and responsibilities within the company that: • rewards executives for company and individual performance against targets set by reference to appropriate benchmarks; • align the interests of executives and shareholders; • links executive rewards with the strategic goals and performance of the company; and • ensures total remuneration for executives is comp