Announcement PDF Appendix 4E Senetas Corporation Limited Results for announcement to the market ACN 006 067 607 1 Details of the reporting period and the previous corresponding period Reporting Period Previous Corresponding Period Financial Year ended 30 June 2023 Financial Year ended 30 June 2022 2 Results for announcement to the market 30-Jun-23 30-Jun-22 $ $ Change $ % 2.1 Revenues from ordinary activities 29,346,644 25,108,515 4,238,129 16.88% 2.2 Net loss before tax attributable to members (7,089,531) (5,982,234) (1,107,297) 18.51% 2.3 Net loss after tax attributable to members (7,313,585) (5,892,400) (1,421,185) 24.12% 2.4 Other comprehensive income for the year attributable to members (foreign currency translation reserve) 420,923 652,902 (231,979) 35.53% (6,892,662) (5,239,498) (1,653,164) 31.55% 3 Net comprehensive loss after tax attributable to members Brief Explanation of Figures 2.1 to 2.4 Commentary on the results for the period can be found in the attached 30 June 2023 full year Directors' Report. The ASX Appendix 4E (Listing Rule 4.3A) should be read in conjunction with the 30 June 2023 Financial Report which has been audited by Grant Thornton Audit Pty Ltd, with an unmodified audit opinion and any public announcements made in the period by Senetas Corporation Limited in accordance with the continuous disclosure requirements of the Corporations Act 2001 and the ASX Listing Rules. 4 Statement of Comprehensive Income Please refer to attached 30 June 2023 Financial Report 5 Statement of Financial Position Please refer to attached 30 June 2023 Financial Report 6 Statement of Cash Flows Please refer to attached 30 June 2023 Financial Report 7 Statement of Changes in Equity Please refer to attached 30 June 2023 Financial Report 8 Dividends and distribution payments Interim dividend None Final dividend No final dividend proposed 9 Details of Dividend Reinvestment Plan 10 Net tangible asset Backing Net tangible asset backing per ordinary security N/A 30-Jun-23 30-Jun-22 (Cents Per Share) (Cents Per Share) (0.51) (0.13) 11 Details of Entities Over Which Control Has Been Gained or Lost During The Period None 12 Details of Associates / Joint Venture Holdings None 13 Other Information on Financial Statements None 14 Foreign Entities – accounting standards used to prepare report None 15 Other Information None Appendix 4E (continued) Compliance Statement 1 This report has been prepared in accordance with AASB Standards, other AASB authoritative pronouncements and other standards acceptable to the ASX. 2 This report, and the accounts upon which the report is based (if separate), use the same accounting policies. 3 This report does give a true and fair view of the matters disclosed. 4 This report is based on accounts which have been audited and an unmodified audit report has been issued on these financial statements. 5 The entity has a formally constituted audit committee. Francis W. Galbally Chairman Date: 31 August 2023 Consolidated Financial Report for the year ended 30 June 2023 CONTENTS Corporate Information ….............................................................................................................................. 1 Directors' Report and Remuneration Report.............................................................................................. 2 Auditor's Independence Declaration.......................................................................................................... 20 Statement of Comprehensive Income ....................................................................................................... 21 Statement of Financial Position..................................................................................................................... 22 Statement of Cash Flows................................................................................................................................ 23 Statement of Changes in Equity................................................................................................................... 24 Notes to the Consolidated Financial Statements .................................................................................... 25 Directors' Declaration .................................................................................................................................... 72 Independent Auditor's Report……………………………………………………...…………………………… 73 ASX Additional Information …...................................................................................................................... 76 CORPORATE INFORMATION Non-Executive Directors Francis W. Galbally - Chairman Lachlan P. Given Kenneth J. Gillespie Lawrence D. Hansen Philip Schofield Executive Director and Chief Executive Officer Andrew R. Wilson Company Secretary Brendan Case Registered Office Senetas Corporation Limited 312 Kings Way South Melbourne VIC 3205 Phone: +61 3 9868 4555 Web: www.senetas.com Email: corporate@senetas.com Share Register Computershare Registry Services Pty Ltd Yarra Falls, 452 Johnston Street, Abbotsford VIC 3061 Phone: + 61 3 9415 5000 Toll Free 1300 13 83 25 Investor Relations For all investor enquiries Phone: 1300 787 795 Email: investor@senetas.com Auditors Grant Thornton Audit Pty Ltd Collins Square, Tower 5 727 Collins Street Melbourne VIC 3008 Annual General Meeting Date and Place Annual General Meeting (AGM) of shareholders of Senetas Corporation Limited (Company) will be held on Thursday 30 November 2023. Further details as to how this meeting will be conducted will be provided in the AGM Notice of Meeting. 1 DIRECTORS' REPORT Senetas Corporation Ltd Senetas Corporation Ltd (ASX: SEN) (Senetas / the Company) is a leading developer and manufacturer of certified, high-assurance encryption hardware; virtualised (software based) network encryption; and advanced encrypted file sharing application. Your directors are pleased to submit their report for the year ended 30 June 2023 (FY23). 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 Chairman) Andrew R. Wilson Director (Executive) Lachlan P. Given Director (Non-Executive) Kenneth J. Gillespie Director (Non-Executive) Lawrence D. Hansen Director (Non-Executive) Philip Schofield Director (Non-Executive) Francis W. Galbally LLB (Hons) - Non-Executive Chairman Mr Francis Galbally is the founder and non-executive Chairman of Senetas. He held the positions of CEO and Chairman of the company from its commencement in 1999 until, 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’s significant capital and business restructure and re-joined the company as a significant shareholder and board member. He was re-appointed chairman on 30 April 2013. Mr Galbally has over 35 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 has been a director, chairman and significant investor in a number of Australian Stock Exchange (ASX) listed companies over the past 25 years. As a result, Mr Galbally has developed an extensive network of international business partners. 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. Francis Galbally is Director of the Cabrini Foundation. The Cabrini Foundation oversees and guides all fundraising activities on behalf of Cabrini, a not-for-profit, private, Catholic healthcare provider. Francis is also the Victorian convenor of the Constitution Education Fund of Australia – a non-political charity dedicated to advancing knowledge of the Australian constitution within the community. He is also a member of the Australian Institute of Company Directors. 2 DIRECTORS' REPORT Andrew R. Wilson BEcon, CA, ACIS - Chief Executive Officer Mr Andrew Wilson was appointed CEO on 15 August 2012. Previously he was Senetas’s Chief Financial Officer (CFO) and Company Secretary. Throughout his career with Senetas, Mr Wilson has had a significant role in the important stages of the company’s development since it was first listed on the ASX in 1999. Mr Wilson has developed a strong understanding of Senetas’s technologies and product applications, including customers’ requirements and their distribution channels. His focus included product development, manufacturing and the business’s financial drivers. Mr Wilson has significant expertise in the global cyber-security market and the data networking and encryption segments in particular. Through his extensive engagement with cyber-security communities – government, commercial and regulatory – Mr Wilson has been closely involved in the management of the company’s R&D and customers’ security solution needs and expectations. Mr Wilson’s strong relationships in the international cyber-security sector, including solutions vendors and service providers, has contributed to his strong understanding of the markets and demand drivers for Senetas security products. Commencing his career with KPMG working with the banking and broking financial sectors, Mr Wilson has also worked in the United Kingdom with Deutsche Bank and NatWest Bank Plc. His experience in corporate restructure has added to Mr Wilson’s considerable financial and administrative skills. Importantly, Mr Wilson brings to his CEO role strategic planning skills, a customer-centric focus and an understanding of the cyber-security markets’ dynamics. Mr Wilson is a member of the Institute of Chartered Accountants Australia and the Institute of Chartered Secretaries Australia. Lachlan P. Given BBus - Non-Executive Director Mr Lachlan Given is currently Interim Co-CEO at EXCORP, a Nasdaq listed specialty financial services firm with over 1,150 stores across the United States and Latin America. Prior to this role, Mr Given was a consultant to Madison Park LLC, a global strategic and financial advisory business. Madison Park is Senetas’s largest single shareholder, after participating in a comprehensive capital restructure 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 a board member of The Farm Journal Corporation, a 134 year old pre-eminent US agricultural media company. He is also on the board of CANSTAR Pty Ltd, the leading Australian financial services ratings and research firm; and RateCity.com Pty Ltd, one of Australia's largest internet-based financial services comparison organisations. 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 a retired senior military officer who has conducted a successful commercial career in the decade since his retirement from the Army. His Army career saw him rise to the rank of Lieutenant General and command of the Australian Army. He has a track record of success in high-order strategic planning, strategic engagement and strategy implementation. He is a Companion in the Military Division of the Order of Australia and carries prestigious awards from the United States of America and the Republic of Singapore. 3 DIRECTORS' REPORT Mr Gillespie currently serves on government, public company and not-for-profit sector organisations’ boards. He is the Chair of the Australian Strategic Policy Institute Council and a board member of Naval Group Australia, VeryNext Pty Ltd and the Three Stables Pty Ltd. He is also a board member of Aerospace Maritime and Defence Australia where he is the convenor of the very large Land Forces series of expositions across Australia. Mr Gillespie is a successful corporate speaker and a strong supporter of ex-service organisations, particularly Sydney Legacy. He is an ambassador for national bowel and prostate cancer organisations. Lawrence D. Hansen - Non-Executive Director Mr Lawrence 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 world-wide teams since 2005. Mr Hansen is Chair of Trackunit, the leading operating platform connecting people, machines and processes in construction to eliminate downtime. Mr Hansen currently sits on the board of Acre, a global leader in Access Control systems. He also chairs their Board Technology Committee. Mr Hansen is also Chair of TextHelp, a leader in assisted tools to support diversity and inclusion. Mr Hansen spent over 6 years as an Operating Executive for Marlin Operations Group, Inc. Mr Hansen joined Marlin in September 2015 and retired on 31 December 2021. Prior to joining Marlin, 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. 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. Gemalto NV has since been acquired by Thales and is Senetas’ global distribution partner. 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 $100 million business, where he oversaw the company’s successful sale and integration into BMC Software. From 2002 to 2011, Mr Hansen held several executive positions with CA Technologies including CIO, GM, Security and GM, Enterprise Products and Solutions. Mr Hansen, a Canadian born US citizen, resides in Naples, Florida. Philip Schofield BEc - Non-Executive Director Appointed to the Senetas board in December 2017, Mr Philip Schofield is Managing Director at Pengana Capital Group. Pengana is listed on the Australian Stock Exchange and is a large Australian fund manager. Mr Schofield has over 30 years of international experience in the banking and finance sectors, including senior management and director roles. These positions include major investment banking groups Canaccord, Goldman Sachs and Citi Group. Mr Schofield’s experience in capital markets around the world’s financial centres include his working in London, New York, Melbourne and Sydney. He obtained a Bachelor of Economics degree from Monash University, Melbourne. As Senetas reviews and implements the Group's capital management and market facing strategies, Mr Schofield’s expertise provides local and international perspectives. 4 DIRECTORS' REPORT Company Secretary Brendan Case MCom Law, BEc, CPA 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 worked for the NAB for almost 15 years and prior to joining NAB, he worked at UniSuper Limited for 8 years. He is a Chartered Secretary with a Masters of Commercial Law from the University of Melbourne and has degrees in both economics and finance. DISTRIBUTIONS PAID AND PROPOSED Distributions paid during the year: Cents $ Nil 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 25. No other entities are included in the consolidated entity. NATURE OF OPERATIONS AND PRINCIPAL ACTIVITIES The principal activity of the entities within the consolidated group during the year was the sale of IT security products which provide network data security solutions to businesses and governments around the world. EMPLOYEES The consolidated group employed 83 employees as at 30 June 2023 (2022: 74 employees). SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There are no significant changes in the state of affairs. 5 DIRECTORS' REPORT OPERATING & FINANCIAL REVIEW FY2023 Financial Highlights: Full year ended 30 June 2023 ($000’s) FY2023 FY2022 Revenue from ordinary activities 29,347 25,109 Gross profit 23,990 20,276 Other income 437 208 Profit (loss) before tax (14,173) (10,762) Tax benefit/(expense) (15) 277 Net profit (loss) after tax (14,187) (10,484) Net profit (loss) after tax attributable to members (7,314) (5,892) The following table shows a reconcilation of reported Net profit (loss) After Tax to Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) by operating segment. Year ended 30 June 2023 Senetas Votiro Total $ $ $ 3,175 (17,362) (14,187) 545 (530) 15 Net interest expense / (income) (572) 532 (40) Depreciation and Amortisation 732 2,455 3,187 3,880 (14,905) (11,025) Senetas Votiro Total $ $ $ 1,684 (12,168) (10,484) 223 (500) (277) Net interest expense / (income) (207) 260 53 Depreciation and Amortisation 873 2,250 3,123 2,573 (10,158) (7,585) Reported Net profit (loss) after tax Tax expense/(benefit) EBITDA Year ended 30 June 2022 Reported Net profit (loss) after tax Tax benefit/(expense) EBITDA • Group operating revenue of $29.3 million was up 17% over the prior period (FY2022: $25.1 million) • Higher group revenue was driven by contributions from both the Senetas and Votiro business segments, with Senetas revenue up 12% and Votiro revenue up 33%. • Gross margin for the Group was 82% - up from 81% in the prior period • Senetas segment EBITDA was up 51% to $3.9 million • The operating profit before tax for the Senetas operating segment in FY2023 was $3.7 million (FY2022: $1.9 million) • The Group net loss after tax of $14.2 million for FY2023 includes a $17.4 million operating loss after tax for Votiro - $6.9 million of the Votiro loss is attributable to minority interests - Votiro’s loss before tax includes non-cash items such as share based payments expense and amortisation totaling $3.5 million • The Group net loss after tax attributable to members was $7.3 million • Senetas retains a strong balance sheet with no debt and $9.8 million of cash on hand at 30 June 2023 6 DIRECTORS' REPORT Both the Senetas and Votiro businesses saw strong revenue growth in FY2023, with consolidated group revenue up 17%. Supporting that revenue growth has been significant growth in the sales pipelines for Senetas and Votiro, with both businesses growing their pipelines by over 100% during the year, which provides a positive sales outlook for FY2024. Whilst the Senetas business continued to be impacted by the global electronic component shortages that have impacted the industry over the past few years, we saw positive signs of those shortages easing as the year progressed. We expect the shortages will continue to abate through the next 12 months and that customer ordering patterns will normalise through that period. Senetas’s hardware business experienced revenue growth in all 3 of its key sales regions during the year. The largest contributor to revenue growth was Europe reflecting growth in inventory shipments to Senetas’s global distribution partner, Thales, in that region. Senetas expect good growth in sales to third party customers during FY2024 off the back of Senetas’s significant growth in its sales pipeline in FY23. The Votiro business continues on the path towards its target of US$10 million of annual recurring revenue by the end of the 2023 calendar year. FY2023 saw Votiro more than double its sales pipeline to over US$30 million by the end of the year, with growth across all key regions. The Asia Pacific region, where Votiro has had good success with large scale commercial and government contracts, remains Votiro’s largest driver of annual recurring revenue, however, new clients have been added in all of Votiro’s regions. Votiro has continued to develop its product offering and route to market strategies through the year. Technology and managed security service provider partnerships are leading to technology integrations, broader use cases for Votiro’s products and joint marketing and go to market execution with security industry leaders. Votiro is now well positioned to deliver the industry’s first unified content security platform. Votiro’s zero trust content security platform has now processed over 7 billion documents with no breaches for almost 400 customers globally. With the scale of the Votiro pipeline and the additional sales and marketing capability that has been added to the business in recent months since the capital raising earlier in the year, we expect that Votiro is on track to deliver strong growth in annual recurring revenue and cash flow in the near term. Group overview Group revenue was 17% higher in FY2023 with good growth in the Senetas and Votiro business segments. Senetas revenue grew 12% to $21.6 million, and Votiro revenue grew 33% to $7.7 million. Both Senetas and Votiro gross margins were similar to the prior period at 78% and 92% respectively. Senetas segment EBITDA was $3.9 million, up 51% on the prior period. Group EBITDA was a loss of $11.0 million, including a $14.9 million EBITDA loss from Votiro. The consolidated group net loss before tax was $14.2 million which included the Votiro net loss before tax of $17.9 million. Votiro’s net loss before tax included non-cash items of $3.5 million relating to amortisation and share based payments. Balance sheet remained strong with $9.8 million of cash at 30 June 2023 and no debt. 7 DIRECTORS' REPORT Senetas Operational review The Senetas business segment produced double digit revenue growth in FY2023 with revenue up 12%. Revenue growth was driven by higher third-party sales and increased inventory shipments to Senetas’s global distribution partner, Thales. Thales continues to maintain higher than normal levels of hardware inventory to mitigate against risks of longer order lead times and component unavailability. Sales revenue in FY2023 was higher for all of Senetas’s largest product categories. Maintenance revenue was in line with the prior period and was 43% of Senetas’s total segment revenue. There were some emerging signs through FY2023 that end user sales are beginning grow again, and that lead times for component orders have started reducing. Product revenue from Thales sales to third party customers was up 14% in FY2023. The sales pipeline continued to build throughout FY2023 with the Thales pipeline of sales for Senetas products growing over 110% during that period. Senetas continues to expect that customers will return to more normal ordering patterns over the next 12 months as the component shortages continue to abate, driving higher third-party hardware sales in FY2024. Senetas shipments of hardware units increased 4% during the year with the mid-sized 10Gbps to 40Gbps encryptors being the largest contributors. Shipments of Senetas’s larger 100Gbps encryptors were in line with the prior period. Units sold by Thales to third party customers were up 12% during the year, however, there was a shift to lower value / smaller capacity encryptors. Thales inventory of Senetas hardware increased by over 250 units during the year. Senetas segment profit before tax was up 95% to $3.7 million, with the strong rebound from FY2022 profit before tax driven primarily by the increased sales revenue, with overhead costs slightly below the prior year. Net profit after tax for the Senetas segment was up 90% to $3.2 million. The major R&D focus during the period has been on an upgraded version of Senetas’s 10Gbps hardware encryptor, and software updates. Votiro Operational review Votiro’s revenue grew 33% to $7.7 million in FY2023 driven by new client wins and the full period impact of clients won part way through the prior period. The Asia Pacific region is the largest revenue contributor and was the key driver of FY2023 revenue growth. Votiro’s subscription (SaaS) product is responsible for all of the recent revenue growth. Votiro’s total sales pipeline grew strongly and more than doubled from US$13 million in July 2022 and currently sits at over US$33 million. Pipeline growth has occurred strongly across all of Votiro’s key sales regions and industry groups. Votiro’s ARR reached US$7.0 million by August 2023 and was in line with the forecast provided to the market by Senetas in late June 2023, and is on track to meet its target of US$10 million ARR by the end of calendar 2023. Growth in ARR is being driven by a combination of new customer accounts and upselling additional features/products to existing customers. The total contract value for Votiro in August 2023 was US$21.9 million. Votiro’s customer renewal rate remained at >90%, however, it was slightly lower than the prior period due to Votiro discontinuing support for some low margin end of life products in the Japanese market. Votiro’s FY2023 loss after tax was $17.4 million, including $3.5 million of non-cash items, up from $12.2 million in FY2022. Votiro’s after tax loss attributable to members was $10.5 million. The key driver of Votiro’s higher loss in FY2023 was increased people costs as Votiro expanded its sales and marketing capability in order to maximise capture of the sales pipeline that grew so significantly through the year. The successful capital raise for US$5 million in February 2023 and conversion of Senetas’s loan into equity has provided the financial capacity for Votiro to fund the additional sales and marketing resources in the near term, and we anticipate that it will assist in driving an acceleration of pipeline capture and a shortening of the current sales cycle. 8 DIRECTORS' REPORT New channel and technology partnerships have been established during the year, including integrations with Microsoft Office 365, Sumo Logic and Box Content Cloud. These technology and managed security service provider (MSSP) partnerships are leading to technology integrations, broader use cases for Votiro’s products and joint marketing and go to market execution with security industry leaders, and Votiro is now well positioned to deliver the industry’s first unified content security platform. Votiro capital raise and loan conversion In December 2022, Senetas announced that it was reviewing the capital raising needs of and investment opportunities for Votiro, and that it had been involved in discussions with other Votiro shareholders and investors regarding a capital raising. As part of the capital raising Senetas announced on 23 January 2023 that agreement had been reached with Harvest Lane Asset Management Pty Ltd to participate in the Votiro capital raising as a cornerstone investor. Additional subscriptions were also received from other existing and new investors and the total of the funds received by Votiro was US$5.0 million. In addition to the Votiro capital raising, Senetas’s loan to Votiro of US$6.4 million was also converted into equity in February 2023 on the same terms and conditions as the capital raising. After adjusting for the new shares issued to date by Votiro under the capital raising and the conversion of Senetas’s loan to Votiro into equity, Senetas’s fully diluted shareholding in Votiro stood at just over 59% at the end of June 2023. Balance sheet and cash flow Consolidated net assets at 30 June 2023 were $6.3 million with no debt and cash on hand of $9.8 million. The lower net assets at 30 June 2023 reflect the consolidation of the current period loss from Votiro, partly offset by the capital raised by Votiro in February 2023. The slightly lower cash on hand at 30 June 2023 reflects the impact of the Votiro losses partly offset by the Votiro capital raising and Senetas segment cash inflows. Both receipts from customers and payments to suppliers were ahead of the prior period reflecting the inventory build-up and increased inventory transfers to Thales during the period. Group net cash outflows from operating activities was $7.4 million, comprising $1.5 million of operating cash inflows for the Senetas business segment and $8.9 million of operating cash outflows for the Votiro business segment. Outlook The significant build-up of sales pipelines for both the Senetas and Votiro businesses through FY2023 leaves the business well placed for growth in FY2024. In relation to the Senetas business, as previously reported, both Senetas and Thales have significantly increased inventory holdings over the past two years in order to manage risks associated with component shortages and extended order lead times. As the global supply chain