Announcement PDF 28 February 2024 The Manager Company Announcements Office ASX Limited Exchange Centre 20 Bridge Street Sydney NSW 2000 Dear Sir or Madam, Appendix 4E and Preliminary Final Report – Listing Rule 4.3A The Appendix 4E Preliminary Final Report and the Annual Financial Report for the Year ended 31 December 2023 is attached. This announcement has been authorised for release to the ASX by the Board of Directors. Yours faithfully Leanne Ralph Company Secretary Appendix 4E and Preliminary Final Report of Electro Optic Systems Holdings Limited for the Financial Year Ended 31 December 2023 ACN 092 708 364 This Preliminary Final Report is provided to the Australian Stock Exchange (ASX) under ASX Listing Rule 4.3A. Current Reporting Period: Financial Year ended 31 December 2023 Previous Corresponding Period: Financial Year ended 31 December 2022 1 ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED Appendix 4E 1. Details of the reporting period This preliminary financial report under ASX listing rule 4.3A covers Electro Optic Systems Holdings Limited and its controlled entities (“the Group”) and is based on the attached audited Financial Report for the year ended 31 December 2023. 2. Results for announcement to the market Percentage Change % Revenue from ordinary activities Up Amount ($’000s) 59.0% To 219,253 (Loss) from ordinary activities after tax attributable to members N/A (33,275) Net (Loss) attributable to members N/A (33,275) Amount per security Franked amount per security Final dividend Nil Nil Interim dividend Nil Nil 3. Dividends per security Record date for determining entitlements to the dividend: • final dividend • interim dividend N/A N/A No dividends have been declared or paid. 4. Net tangible assets per security Net tangible assets at 31 December 2023* $159,467,230 Number of ordinary shares outstanding at 31 December 2023 171,236,006 NTA per ordinary share at 31 December 2023 93.1 cents per share NTA per ordinary share at 31 December 2022 119.7 cents per share *including Right of use assets and lease liabilities recognised in accordance with AASB 16 Leases 2 ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED Appendix 4E 5. Further disclosures Refer to the table below for further disclosures required under ASX Listing Rule 4.3A: ASX 4E item: Requirement Cross reference 1 2 3 Details of the reporting period Results for announcement to the market Statement of financial performance and notes 4 Statement of financial position and notes 5 Statement of cash flows and notes 6 Statement of retained earnings 7 8 Dividends per security Dividend reinvestment plan 9 10 11 12 13 14 Net tangible assets per security Details of entities over which control was gained or lost during the year Details of associates and joint ventures Other significant information Foreign entities Commentary on results 15-17 Audit Refer to Section 1 above. Refer to Section 2 above. Refer to the Consolidated Statement of Profit or Loss and Other Comprehensive Income in the attached Financial Report. Refer to the Consolidated Balance Sheet in the attached Financial Report. Refer to the Consolidated Statement of Cash Flows in the attached Financial Report. Refer to the Consolidated Statement of Changes in Equity in the attached Financial Report. Refer to Section 3 above. There was no dividend reinvestment plan in operation during the financial year. Refer to Section 4 above. None - refer to Note 27 in the attached Financial Report. None. Refer Directors’ Report and Financial Report. Refer to Note 1 in the attached Financial Report. Refer to Review of Operations in the attached Directors’ Report. This report is based on the consolidated financial statements which have been audited by Ernst & Young with the Independent Auditor’s Report included in the attached Financial Report. 3 ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ACN 092 708 364 FINANCIAL REPORT FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2023 1 ELECTRO OPTIC SYSTEMS HOLDINGS LIMITED ACN 092 708 364 CORPORATE DIRECTORY Directors Mr Garry Hounsell (Chairman) Dr Andreas Schwer (Managing Director and CEO) Air Marshal Geoffrey Brown AO The Hon Kate Lundy Mr David Black Mr Robert Nicholson Chief Executive Officer Dr Andreas Schwer Company Secretary Ms Leanne Ralph Registered Office and Principal Place of Business 18 Wormald Street Symonston ACT 2609 Australia Telephone:- +61 2 6222 7900 Email: enquiry@eos-aus.com Website www.eos-aus.com Share Registry Computershare Investor Services Pty Limited Level 3 60 Carrington Street Sydney NSW 2000 Australia GPO Box 7045 Sydney NSW 1115 Telephone:- 1300 855 080 or 613 9611 5711 outside Australia Facsimile:- 1300 137 341 Auditors Ernst & Young 121 Marcus Clarke Street Canberra ACT 2600 Australia 2 REVIEW OF OPERATIONS 1. RESULTS FOR FULL YEAR ENDED 31 DECEMBER 2023 For Electro Optic Systems Holdings Limited (the “Company”) and its subsidiaries (collectively, the “Group” or “EOS”), Revenue from Continuing Operations activities was $219.3m, representing a $81.4m or 59% increase on the prior year (31 December 2022: $137.9m). For the year ended 31 December 2023, the Loss After Tax from Continuing Operations was $34.1m, compared to the 2022 loss from Continuing Operations of $53.6m (2022: operating Loss After Tax of $115.6m including the results from SpaceLink’s Discontinued Operations). Underlying EBITDA from Continuing Operations (prior to foreign exchange gains) was a Profit of $5.7m, representing an increase of $48.6m on the Underlying EBITDA Loss from Continuing Operations of $42.9m in the prior year. The Group reported Net cash inflows from Operations for the year totalling $113.1m (31 December 2022: $51.6m Net cash outflows from Operations, which included $15.3m outflows relating to Discontinued Operations in 2022). In addition, the Group reported $34.7m of Net cash outflows from Investing Activities (31 December 2022: $28.3m). The Net cash outflow from Financing Activities for the year was $29.1m, due primarily to the repayment of debt (31 December 2022: Net cash inflows $45.4m). At 31 December 2023, the Group held cash totalling $71.0m (31 December 2022: $21.7m). In addition, the Group had deposited $67.1m of Restricted Cash Security Deposits at 31 December 2023 (31 December 2022: $35.6m). Key elements of financial performance are summarised below. Revenue from Continuing Operations For the year ended 31 December 2023 the Group recorded revenue from Continuing Operations of $219.3m (31 December 2022: $137.9m), representing an increase of $81.4m or 59%. The increase in revenue was driven partly by higher Defence Systems segment revenue, up from $105.9m in 2022 to $155.4m in 2023, an increase of $49.5m. More detailed information is provided in Section 4 below. Revenue in the Space segment also increased on prior year to $63.9m (2022: $32.0m), driven by the growth in the EM Solutions business. More detailed information is provided in Section 4 below. The underlying cause of this 2023 revenue increase was higher activity levels, including on the delivery of a Defence Systems contract to a customer in the Middle East, delivery of a contract to a Western European Government and the commencement of a new EM Solutions contract with the Commonwealth of Australia. At 31 December 2023, the Group had a backlog of contracted future work of over $600m, including $181m of conditional contracts. The unconditional contracts represent work under customer contracts, mainly in Defence Systems and EM Solutions and work is currently expected to be undertaken principally between 2024 and 2026. The conditional contracts are detailed in section 4 below. 3 REVIEW OF OPERATIONS (continued) Expenses from Continuing Operations Expenses in Continuing Operations increased from $215.3m in the prior year to $262.9m in this year. This increase of $47.6m was partly driven by an increase in material costs of $40.6m due to higher activity and an increase in finance costs of $21.3m due to a full financial year of interest incurred for the facilities entered into September 2022. This is offset by reduced employee costs of $5.7m arising from cost savings implemented in Q4 2022. The increase of $6.7m in administration expenses in 2023 was driven by increased marketing costs associated with new product launches and increased travel costs associated with growing markets in Europe and the resumption of travel post COVID. The Group Gross Margin on Materials (including expenses of Cost of Goods Sold and Movements in Inventory) was 44% in 2023 (2022: 34%). This increase was driven by higher margin sales being achieved in 2023 in the Defence Systems business. Underlying EBITDA from Continuing Operations Underlying EBITDA from Continuing Operations (prior to foreign exchange gains) was a profit of $5.7m, compared to an EBITDA loss from Continuing Operations of $42.9m (prior to foreign exchange gains and impairment charges) in the prior year. Continuing Operations Year ended 31 December $m 2023 2022 (Loss) for the year (34.1) (53.6) Income tax (benefit) (6.1) (9.3) (Loss) before tax (40.2) (62.9) 35.6 14.3 - 7.3 Foreign exchange (gain) (0.9) (12.7) Underlying EBIT (loss) (before impairment and foreign exchange gains) (5.5) (54.0) Depreciation & amortization & other 12.4 11.1 Other one-off (gain) adjustments (1.2) - Underlying EBITDA profit/(loss) (before impairment and foreign exchange gains) 5.7 (42.9) Finance costs Impairment of assets Impairment There were no impairments recognised in the year ended 31 December 2023. During the prior year, the Group recognised an impairment charge of $54.5m, including a charge of $7.3m relating to Continued Operations and $47.2m relating to Discontinued Operations. Foreign Exchange The results included a foreign exchange gain in the year of $0.9m (2022: gain of $12.7m), which predominantly arose on the translation of US Dollar assets into Australian Dollars. 4 REVIEW OF OPERATIONS (continued) Discontinued Operations in prior year During the prior year, the Group ceased investment in SpaceLink and subsequently SpaceLink ceased normal operations and entered an orderly wind-up process in the United States, by way of an Assignment for the Benefit of Creditors (“ABC”). The Group no longer controls SpaceLink as it is controlled by an Assignee under the ABC process, who acts in the interest of the creditors. During the year ending 31 December 2023, the Group has not incurred any significant cash outflows related to SpaceLink and it does not expect to incur any future significant cash outflows relating to SpaceLink. The results of Discontinued Operations are disclosed in Note 6 to the financial statements. Contract Asset The Group recognises a contract asset, being revenue recognised on projects that has not yet been invoiced to customers. Revenue is recognised under Australian Accounting Standards. Amounts are invoiced to customers in accordance with legal arrangements specified in customer contracts. At 31 December 2023, the Group had a contract asset totalling $68.0m (31 December 2022: $164.4m), being revenue earned but not invoiced, mainly on a project with a significant overseas customer in the Middle East. The contract asset decreased by $96.4m during the year, due to invoices issued to customers during the year exceeding revenue recognised on customer contracts. The invoicing of the amounts in the contract asset balance and the realisation of cash has been a critical focus for the Group during 2023 and the reduction in the contract asset was in part due to a contract amendment agreed with our customer in the Middle East in H1 2023. Contract Liabilities – Amounts Received in Advance The Group recognises contract liabilities for amounts that have been received from customers as advance payments on projects. During the year, the amount of contract liabilities decreased from $22.2m at 31 December 2022 to $20.6m at 31 December 2023. Cash Balances The cash balance increased from $21.7m at the start of the year to $71.0m at the end of the year. The Group continues to closely monitor the cash flow of the Group and the outlook for the business, to ensure that adequate funding is in place and, if necessary, seek to amend the Group capital structure. The Group continues to focus on maximising cash inflows, including seeking contract amendments on existing contracts where appropriate, and securing and delivering on new sales contracts that are cash positive. Cash Flows from Operating Activities During the year, the Group had net cash inflows from operating activities of $113.1m. Net cash from operating activities was impacted by an increase in Receipts from Customers from $145.9m in the prior year to $325.4m in 2023. The increase was driven by new contracts and higher activity on the delivery on continuing projects, including the realisation of contract assets. Payments to Suppliers and employees of $215.9m, increased from $188.6m in the prior year, due to the increased supplier payments as the result of increased activity. Cashflows from other operating activities of $3.6m represent tax received and interest paid during the year. 5 REVIEW OF OPERATIONS (continued) Cash Flows from Investing Activities The Group had net cash outflows of $34.7m from investing activities during the year. This included cash outflows of $31.8m for Security Deposits for bonds required under contracts with Australian and overseas customers, and $2.9m in acquisitions of property, plant and equipment. Cash Flows from Financing Activities The Group repaid $26.9m to retire the Working Capital Facility which matured on 6 September 2023. For the purposes of presentation in the Statement of Cash Flows, this repayment has been split between interest paid ($4.4m) and principal repayment ($22.5m). The Group also repaid $1.9m of unsecured borrowings during the reporting year. As at 31 December 2023, the Group had the following secured borrowing facilities outstanding: • • Additional Working Capital Facility, with $15.0m principal drawn, maturing on 11 April 2024, with a debt repayment obligation of $20.5m. Term Loan Facility, with $35.0m principal drawn, maturing on 11 October 2025, with a debt repayment obligation of $52.1m. Under the borrowing facility agreements, during Q4 2023, EOS commenced the payment of monthly interest and line fees to Washington H. Soul Pattinson (“WHSP”). Interest and line fees had previously been capitalised into the outstanding loan facility balance, up to an agreed limit. Following a fee claim that was received on 9 October 2023 and disputed by EOS, the Group resolved a commercial dispute with its primary lender, WHSP on 22 December 2023. The commercial fee dispute was in relation to a consent to a waiver previously provided by WHSP for EOS to issue bank guarantees. This fee was subsequently agreed between the parties in a facility amendment executed between the parties on 22 December 2023, where EOS will pay WHSP a $4.5m fee in full and final settlement of the previous disputed fee claim, and WHSP has agreed to relax certain restrictions included in the borrowing facility agreements. The flexibility afforded by this relaxation is expected to allow EOS to take advantage of future business growth opportunities as they arise. The agreement was conditional on the approval of another finance provider, EFA, which was received subsequent to year-end, resulting in the facility amendment becoming unconditional and the $4.5m fee being paid to the lender. At 31 December 2023, all borrowing facilities were fully drawn. Total secured borrowings under these facilities, including capitalised initial fees and interest were $72.6m (31 December 2022: $83.6m). The Group has $0.3m of undrawn bond facilities at 31 December 2023. The facilities are secured on certain Group assets, and terms of these facilities include financial covenants, and minimum earn amounts. These are disclosed in Note 18 to the Financial Statements. No new shares were issued during the year to 31 December 2023, however share options and share rights were issued to staff, which are expected to be settled from existing shares already on issue. During the reporting year, the Group executed agreements which required the provision of new guarantees of $22.2m to an Australian Customer. The guarantees were issued on the Group’s behalf by funding providers and are secured by cash Security Deposits of $21.1m as at 31 December 2023. These guarantees and cash deposits are expected to be returned to the Group during 2024 as obligations are fulfilled. 6 REVIEW OF OPERATIONS (continued) Pursuant to the terms of the new EM Solutions contract with the Royal Australian Navy, a further $6m of bonds were entered into by the Group during the year which is fully secured by cash. 2. CHANGES IN DIRECTORS AND MANAGEMENT During the year, the following changes to Board membership occurred: • • • • • Ms Deena Shiff stepped down from her role as an Independent Non-executive Director of the Company on 31 January 2023; Mr Robert Kaye SC resigned from his role as an Independent Non-Executive Director of the Company on 20 March 2023; Dr Ben Greene resigned as an Executive Director of the Company on 27 March 2023; Mr Robert Nicholson was appointed as an Independent Non-Executive Director of the Company on 24 May 2023; and Dr Andreas Schwer was appointed as an Executive Director of the Company on 11 December 2023. In the management team, during the year: • Mr Matt Jones was Acting Executive Vice President of Defence Systems until 2 November 2023; and • Mr Ian Cook was appointed Executive Vice President of Defence Systems (Australia) on 2 November 2023. 3. COMPREHENSIVE PROGRAM OF CHANGE The Group continued with the implementation of its change program during the year. The Board has further strengthened the globalisation of EOS as an Australian-headquartered international company. This expansion requires a move to a more global operating structure with greater focus on sales in Europe, the United States of America, the Middle East and Asia – all of which are markets offering significant growth potential for EOS. To realize this growth, a greater operational focus is required in Australia, including on engineering, supply chain and manufacturing as well as industrial and commercial competencies. Management is developing opportunities to further improve these two focus areas. Further work is continuing in a number of other areas, aimed at improving cash flow, profitability, funding and returns, including: • diversifying the range of products, markets and customers, including initiatives to secure new customer contracts, including improving sales and marketing effectiveness; • continued focus on realising cash from the Group’s customer contracts. This includes seeking contract amendments with customers where possible, optimising the achievement of relevant milestones and seeking more favourable terms on new contracts; • careful management of costs, in line with the revenue and activity levels of the business; and • rationing and prioritising capital expenditure, including R&D spending, towards core Defence and Space businesses, using commercial investment criteria, and seeking third party product development funding where appropriate. 7 REVIEW OF OPERATIONS (continued) 4. DETAILED SEGMENT UPDATE a) EOS DEFENCE SYSTEMS Defence Systems had a positive year ended 31 December 2023, with revenue increasing from $105.9m in the prior year to $155.4m in the year to 31 December 2023. This $49.5m increase was predominantly due to the impact of the continued focus on the contract for a large customer in the Middle East and a new contract with a Western European Government. The main activity during the year was the manufacture and delivery of Remote Weapon Systems (“RWS”) for several different customers. Market Overview and Sales Activity – Defence Systems The global market for EOS products continued to develop positively during 2023. This was partly due to the conflict in Ukraine, conflicts in the Middle East and rising tensions in other locations. This positively impacted on customer demand in NATO countries and other markets, resulting in increased overall customer enquiry levels and continuing discussions. Typically, EOS operates in an industry where it can take an extended period of time (including up to, and beyond, twelve months) for new market opportunities to be converted into signed sales contracts. EOS continues to pursue a number of material opportunities in different markets, including Europe, the Middle East, North America and other international markets. The global market outlook strengthened as the 2023 year progressed, as many nations announced planned increases in defence spending. This may lead to increased opportunities in future. In Australia, the Commonwealth of Australia published the outcome of its Defence Strategic Review in April 2023. This review clarified the Australian Defence Force’s (“ADF”) future plans on key projects. During the year, EOS took part in discussions with Hanwha in relation to the Land 400 Phase 3 Project in Australia. Under this project, Hanwha has been selected to deliver 129 vehicles to the ADF in 2027 and 2028. EOS expects that it may receive the opportunity to provide RWS to Hanwha as part of this project. In addition, EOS may also have the opportunity for a share of work in support of the manufacture of turrets for Hanwha. EOS expects discussions to continue during 2024. Work continued during the year on sales opportunities, including significant projects in Australia and internationally. In the year to 31 December 2023, the Group executed contracts with customers for the following new business: • a conditional contract to supply RWS to Ukraine, valued at approximately $120m; • a further conditional contract to supply RWS to Ukraine, valued at approximately $61m; • a contract with a Western European government to supply RWS, valued at $52m; • a contract to supply R600 RWS unit spares to a customer in Southeast Asia, valued at approximately $28m; and • a further contract with a Western European government to supply additional RWS, valued at approximately $25m. In addition, in January 2024, a contract was signed to supply EUR 9m (approximately A$15m) of Slinger Counter-Drone Systems to Diehl Defence in Germany. 8 REVIEW OF OPERATIONS (continued) Following demonstration testing in August 2023, EOS products have been approved by the Ukrainian authorities for purchase as required. EOS is now working with the Ukrainian end-users and customers to allow committed orders to be placed under the conditional contracts. Further demonstration testing is planned to occur in Ukraine during 2024. These contracts are also subject to early termination rights in favour of the customer. There is no certainty or guarantee that committed orders will be received by EOS under these conditional contracts. In July 2023, the Group delivered RWS to a Western European Government customer, under a contract valued at EUR 32m (A$52m). An amendment to this contract was executed in late December 2023 to supply this customer with further RWS, valued at approximately A$25m. The delivery of these additional units is expected in early 2024. The Group continues to be in active discussions and contract negotiations for the provision of RWS and related components with other potential customers. There is no certainty that any particular outcome or transaction will result from these discussions and negotiations. Product Development – Defence Systems Product development work continues on a range of opportunities. Where development costs are significant, the Group is focused on obtaining third party funding, to speed delivery to the market and manage costs and returns on capital. Defence Systems continued work during the year to widen its RWS product range from its longstanding successful R400 RWS product, and to develop its intellectual property and commercialise its product range: • • • • • Slinger Counter Drone System. Defence Systems launched its new “Slinger” counter-drone (or “CUAS”, Counter Unmanned Aerial System) product during May 2023, and conducted demonstrations. This new product draws upon the Group’s deep expertise in accurate pointing technology and applies it to the growing threat of drones. During 2023, initial orders for nine systems were received from a customer in the United States. These are expected to be sent to Ukraine as part of a USA security assistance package. In addition, after the end of the year, a further $15m of Slinger systems were ordered by a customer in Germany in January 2024. R150 RWS. Defence Systems worked to secure an initial order for the new lightweight R150 RWS product. This new product has been completed and is now entering the marketplace. An order of 14 R150 gimbals was received in January 2023, as part of the L3 Harris Vampire portable rocket program, under which the US is providing support to Ukraine. The order is for less than $10m and was largely complete as at the end of 2023. Uncrewed R400 RWS. Defence Systems also supported the integration and subsequent deployment of four R400 RWS equipped uncrewed ground vehicles (UGV) for a NATO customer. This deployment represents the first NATO operational deployment for a UGV equipped with lethality systems. R600 RWS. Following supply in previous years, a follow-on order was secured in Q4 2022 for 14 new heavy calibre R600 RWS, plus spares, for a customer in Southeast Asia. The R600 RWS order is being manufactured in the Groups US facilities in Huntsville, Alabama. The total order is for up to $15m and is expected to be delivered in 2023 and 2024. In November 2023, a further follow-on contract was secured to supply approximately $28m of R600 RWS unit spares to the same customer. R800 RWS. This new product was unveiled at the AUSA Trade Show in the United States during the year. This product is a heavy-duty Remote Weapon Station that delivers the 9 REVIEW OF OPERATIONS (continued) • lethality of a full-sized medium calibre turret at a significantly lower weight and cost than a turret. 1kW Laser Dazzler. This product was developed to blind the optical cameras in all classes of unmanned aerial systems (drones) and anti-tank guided missiles. This is a new technology for countering air and seaborne threats and is a silent, non-ballistic countermeasure which can be integrated with the R800 RWS. The Laser Dazzler provides operators a flexible range of kinetic and non-kinetic response options against uncrewed aerial and surface vessel threats. Discussions with a number of potential future customers are continuing in relation to these new products. Typically, new product launches in the defence industry can take one to three years or more to achieve sales and develop commercial maturity. Prototype High Energy Laser Weapons During the year, the Group demonstrated a prototype 34-kilowatt High Energy laser Weapon system engaging drones. Discussions are underway with potential customers with a view to agreeing customer-funded product development programs for this product. This could lead to development agreements being signed in 2024 or 2025, and commercial sales occurring in the period thereafter. It is expected to take some time for Directed Energy products to achieve significant commercial scale. There is no certainty that this will occur. Supply Chain, Operations and Facilities – Defence Systems Delivery against customer contracts in 2023 continued to face supply chain risks. The normalisation of global supply chains has improved in some areas, however this area continues to be a risk that is closely monitored and managed by the Group. b) EOS SPACE SYSTEMS For the year to 31 December 2023, revenue in the EOS Space Systems segment increased to $63.9m from the prior year (2022: $32.0m). EOS Space Systems comprises two business units, Space Technologies and EM Solutions. Space Technologies Space Technologies delivers space domain services (providing information on objects in space) and advanced manufacturing, (which includes the design, building and deployment of telescope and observatory equipment). Space Technologies also develops technologies that support Optical Communications (using lasers) and Space Control activities. During 2023, Space Technologies continued to grow and commercialise its technology. This included delivering satellite laser ranging services to longstanding customers, and the successful completion of a beam director assembly for a foreign customer. Space Technologies continued to secure small contracts with international customers for Space Domain Awareness services and have successfully delivered on contract requirements. Our Kiwistar Optics business based in New Zealand continues to win contracts and deliver to customers. During the year, discussions were held with various potential partners to develop opportunities for Space Technologies in the market for Space Control and Space Warfare solutions. This is an emerging market opportunity in both the United States and several other markets. Discussions to date have 10 REVIEW OF OPERATIONS (continued) focussed on the Group’s unique capabilities and potential opportunities for the Group to secure product development funding. These discussions are expected to continue in 2024. Space Technologies continues to develop sales opportunities on a range of potentially significant future projects for Australian and overseas customers. These will help underpin future strategic growth initiatives, including in Space Control and Space Warfare solutions. Typically, it can take a year or more for opportunities to be developed and converted to signed sales agreements. EM Solutions EM Solutions designs, builds, deploys and maintains on-the-move satellite communication equipment systems for defence forces. EM Solutions’ main products include satel