TIDMSPSY TIDMSPSC
RNS Number : 4418T
Spectra Systems Corporation
20 March 2023
Spectra Systems Corporation
Audited results for the twelve months ended 31 December 2022
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES
OF ARTICLE 7 OF THE UK VERSION OF REGULATION (EU) NO 596/2014 WHICH
IS PART OF UK LAW BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT
2018, AS AMED. UPON THE PUBLICATION OF THIS ANNOUNCEMENT VIA A
REGULATORY INFORMATION SERVICE, THIS INSIDE INFORMATION IS NOW
CONSIDERED TO BE IN THE PUBLIC DOMAIN.
Spectra Systems Corporation (the "Company"), a leader in
machine-readable high speed banknote authentication, brand
protection technologies, and gaming security software, is pleased
to announce its results for the twelve months ended 31 December
2022.
Financial highlights:
-- Revenue of $19,627k (2021: $16,592k) up 18%
-- Adjusted EBITDA (1) up 17% at $8,077k (2021: $6,896k)
-- Adjusted PBTA (1) up 17% to $7,765k (2021: 6,622k)
-- Adjusted earnings(2) per share up 21% to US 14.5 cents (2021: US 12.0 cents)
-- Cash generated from operations of $8,040k (2021: $8,084k)
-- The Board are declaring an increased annual dividend of
US$0.115 per share to be paid in June 2023
-- Strong, debt-free balance sheet, with cash (3) of $17,496k (2021: $16,775k) at 31 December
-- Buy-back of 500,000 shares during 2022 at a total cost of US$807k
(1) Before stock compensation expense and excludes
noncontrolling interest
(2) Before amortization and stock compensation expense, excludes
noncontrolling interest
(3) Does not include $500,000 (2021: $1,099k) of restricted cash
and investments
Operational highlights:
-- Continued momentum towards customer acceptance of latest pre-production sensor units.
-- Completed supply chain mitigation program with central bank
worth $1.3mm for preparation and given go ahead for production in
2022 at 21% price increase.
-- Increased sales efforts for polymer substrates with
appointment of Global Sales Director for Banknote Technology and
launch of enhanced website.
-- Central bank request to provide large quantities of Fusion
substrate for a large print trial ongoing in 2023.
-- Continued strong sales of K-cup optical materials through a second large customer.
-- Increased operational efficiency in software security group
by launching a new tool to significantly improve our ability to
manage customer support.
Commenting on the results, Nabil Lawandy, Chief Executive
Officer, said:
Company's earnings and revenues are up substantially over 2021
both due to strong sales which would in themselves had enabled the
company to exceed market expectations and which were further
increased due to over-manufacturing of covert materials for a
Central Bank. Improved financial planning has been put in place for
2023. Our cash position remains strong due to sensor development
milestones and prepayments as well as additional sales in optical
and covert materials. In addition, information from one of our
major licensees as well as improved visibility on current sensor
life have allowed us to write-off inventory which we anticipate
will not contribute to future sales.
Spectra Systems, with our proven track record of developing
solutions for our customers in record time, has capitalized on the
environment that was created by the Covid-19 pandemic. We have
successfully completed a supply chain mitigation program with a
central bank customer by manufacturing in-house a previously
commercially sourced chemical. This effort has resulted in payment
for the development as well as an approval to manufacture material
starting in Q4 of 2022 at a higher price.
On the materials front, our revenue from K-cup printers
continues to be strong and we began testing with a third printer in
Canada in 2022. Taggant material orders from a central bank
customer were again at high levels, further bolstering consumable
revenue.
"The Board therefore believes that the Company is on track to
achieve record earnings and meet market expectations for 2023."
Spectra Systems Corporation Tel: +1 (0)401 274 4700
Dr. Nabil Lawandy, Chief Executive Officer
WH Ireland Limited (Nominated Adviser and Tel: +44 (0)20 7220 1650
Joint Broker)
Chris Fielding/James Bavister/Andrew de Andrade
(Corporate Finance) Tel: +44 (0)20 3328 5665
Allenby Capital Limited (Joint Broker)
Nick Naylor/James Reeve (Corporate Finance)
Amrit Nahal (Sales and Corporate Broking)
The person responsible for arranging the release of this
announcement on behalf of the Company is Dr. Nabil Lawandy, Chief
Executive Officer of the Company.
Chief Executive Officer's statement
Introduction
We are delighted to report that we significantly outperformed
the 2021 results while our year end cash position is the highest in
the Company's history.
Revenue for the year was up 18% at $19,627k (2021: $16,592k),
primarily driven by pre-production development contracts as well as
ongoing demand for our materials to meet production for our
long-standing central bank customer.
The adjusted EBITDA (before stock compensation expense) for the
year increased 17%, to $8,077 k compared to the prior year of
$6,896k.
Having generated cash from operations of $8,040k (2021: $8,084k)
, cash at the period end was $17,496k (2021: $16,775k) , excluding
$500,000 of restricted cash and investments (2021: $1,099k). This
is notwithstanding $5,004k paid to shareholders during June in the
form of the Company's dividend of $0.11 per share and $807k used
for buying back 500,000 shares.
Review of Operations
Physical and Software Authentication Business
The Authentication Systems business generated revenue of
$18,164k (2021: $14,718k) and Adjusted EBITDA of $8,005k (2021:
$6,556k). Authentication Systems revenues were driven by sales of
covert materials and the funding of a new in-house capability and
facility to combat supply chain issues relating to one of our
central bank customers. Authentication Systems revenue was further
increased by milestone payments which are part of the sensor
development program with one of our long-standing central bank
customers. We continue to advance through the acceptance process
with this central bank with the delivery of preproduction units of
our latest sensor in late 2024. In addition, revenue from optical
and security phosphour materials remained strong while licence
payments from our licensee continued with on time payments and at
the contracted value.
Through our vertically integrated manufacturing we have been
able to produce high quality conducting and opacified polymer
substrate for evaluation by central banks, ink suppliers and
printing organizations. We have produced a large number of print
ready sheets for a Middle Eastern central bank print trial which
has resulted in an additional large scale print trial scheduled for
Q2 2023. The Company has formed a close working relationship with
the largest commercial printer of polymer banknotes and is
developing a house note which will incorporate both our Fusion(TM)
machine readable security as well as their newest public security
feature. The objective of this joint development will produce
polymer banknotes of the highest quality for a joint marketing
effort.
We are increasing our sales and marketing efforts for Fusion(TM)
as well as our full suite of banknote products having introduced
Fusion at the Banknote Conference and appointed a UK based Global
Director of Sales for Banknote Technology.
With the TruBrand(TM) authentication product having been
successfully introduced into the Chinese tobacco market in 2019
annually and for use in stationary products in 2021, we have
completed two successful gravure tests with another large supplier
of cigarettes in China and plan to additional print tests in Q1 of
2023 with two additional tobacco companies in China. We continue to
expand our search for new TruBrand(TM) customers outside of China,
including with a major Japanese printer and a partnership with a
company in India bidding on authentication of both dairy products,
as well as transit certificates, and with our multinational Fusion
polymer partner for labels. We have also developed smartphone
readable security threads to further expand the palette of target
applications and potential partners. In addition, we continue to
work with a printer for a well-respected French luxury brand to
help protect their products sold in China using authentication
technology we acquired several years ago.
Our K-cup materials business has grown significantly after a new
customer began purchasing our products during 2021. In 2022, we
began a new testing program with a Canada based K-cup lid printer
which we expect will produce revenues in Q2 2023.
On the software security side of the Company's business, the
Secure Transactions Group generated an Adjusted EBITDA of $72k
(2021: $340k) on revenue of $1,463k (2021: $1,874k). The 2022
results are in line with expectations as we continue development of
a new software platform. While this development
continues, we are focusing on the online lottery sector which
grew during the pandemic through a partnership with NextGen
Lotteries.
Finally, the Company has received several additional patents on
authentication technology in Africa, China, and EU which protects
our position in covert authentication as well as polymer substrates
technology and machine readability
Banknote Cleaning and Disinfection Business
We have sold our first Banknote Disinfection System (BDS) for
use by an Asian central bank. The unit will be installed in the Q1
2023 and the terms included a 30% up-front payment as well as a
follow-on service agreement. As this system is scalable from
250,000 notes to over five million notes in a single cycle of one
hour, we have the ability to accommodate a large spread of
potential customer requirements. With this first unit sold, we are
ramping up our sales and marketing process to other central banks
as well as the casino industry. We do not expect this product to
significantly contribute to revenue until another Covid outbreak or
the emergence of another rapidly spreading pathogen.
Solaris BioSciences Investment Asset
In December 2020, the Company made an investment in Solaris
BioSciences, whose results are consolidated by the Company. The
technology is entirely optical and has evolved rapidly over the
last months of 2022 and Q1 2023. The technology is now capable of
point of care measurement of plasma viscosity, cancer markers,
lipid content, and LDL in microliters of blood. During H1 2022,
Solaris BioSciences Holdings was formed as a UK company and has
obtained EIS status with HMRC to expand the base of investment
opportunities to the UK.
Corporate Governance
Spectra Systems is an AIM listed company and has always worked
to abide by best practices as advised by both our bankers as well
as our shareholders. Recently ISS has issued certain
recommendations regarding board composition, committee assignments,
and option grants.
Our board has comprised the same Directors since our listing
except for the addition of Mr. Jeremy Fry (UK based) who replaced
Mr. Martin Jaskel after his untimely passing away. In order to add
a new dimension to the board, Dr. Barbara Paldus joined the board
in H2 2022 as an Independent Non-Executive Director. She has
extensive entrepreneurial experience, particularly in technology
solutions, which will be of immense value to Spectra.
With the addition of this new board member, Dr. Nabil Lawandy
exited the Audit Committee assignment as there is now a suitable
replacement to share the burden of committee assignments.
With regards to Director option grants, the Company has adopted
a new policy which will allow new Directors to receive a one-time
option grant upon joining the board of directors. Going forward, no
Directors will be issued new options beyond the ones received at
joining the board. This is a compromise position relative to USA
standards and UK guidance that Non-Executive Directors hold no
options.
Strategy
The Company's strategy for increasing revenue and earnings
continues to be focused on selling more products to existing
customers as well as opening new sales channels for the full
spectrum of our product offering. We have had very good success in
upselling existing central bank customers and commercially
exploiting supply chain and pandemic related issues as part of our
strategy. Examples of these successes are the expansion of sensor
capabilities for exotic counterfeits, the development and first
sale of a banknote disinfection machine, and the commencement of a
program with our customer to deal with supply chain issues now and
going forward.
Our strategy for growing our newest and potentially
transformative technology for polymer banknotes is based on
validation, followed by commemorative banknote contract and then a
full banknote denomination contract. The validation is focused on
three major stakeholders in the polymer banknote industry: the ink
manufacturers, the commercial printers, and the state printworks.
Our primary targets are central banks which are currently using
paper substrates and are contemplating a transition to polymer as
well as central banks who have decided not to use polymer for
higher denominations due to security concerns.
With regards to our optical materials and brand authentication
products, we continue to propose to both central banks and overt
security suppliers the concept of upgrading such features to
incorporate public and machine-readable security. Our recent
development of smartphone readable security threads will expand the
opportunities of the technology to passports and secure documents.
The strategy behind this approach is based around partnering with
current contract holders who can benefit from our technology and
materials to upsell their existing customers.
Finally, with our strong cash position, we do explore possible
mergers and acquisitions which can immediately open doors to
implement our upselling strategy, expand our customer base or
strengthen our supply chain for Fusion polymer substrate. The
exploration of such opportunities is now becoming more viable at
larger scales as we expect to have even more significant cash
resources through the successful delivery of the major central bank
sensor contract.
Prospects
The Company continues to have a multitude of new short-term and
long-term prospects. The short-term opportunities are expected in
the 2023-2025 period and the long-term opportunities are expected
in the 2025-2030-time frame.
The near-term opportunities are:
o Completion of sensor development and revenue recognition of
development payments
o New online Quality Control system contract
o First sensor shipments to a central bank
o TruBrand(TM) revenue reaching $1m per annum levels
o Increased sales of our newest phosphour products
o Expansion of our gaming software business in Canada and other
non-USA customers and in the online lottery market
o Opportunity to bid in a polymer banknote tender
o A commemorative note series using our Fusion polymer
substrate
The longer-term opportunities are:
o Supply of upgraded sensors worth up to $50MM in hardware to a
central bank customer
o Supply of Fusion(TM) polymer substrate and sensors to a
central bank for one or more banknote denominations
o Further increase of covert authentication materials by a
current or new central bank customer
The combination of these prospects, both short and long-term,
has positioned the Company to continue its revenue and earnings
growth over the coming years. We continue to develop cutting edge
technologies to remain the technology leader in the authentication
industry and to offer our shareholders growth through innovation
for both new and existing customers.
Dividend
With the Company having an eighth year of sustainable profits,
reaching their highest levels since its admission to trading on
AIM, and having sufficient resources to execute on its growth plans
with its existing cash reserves, the Board is delighted to again
issue an increased dividend. Our dividend policy takes account of
the Group's profitability, underlying growth, and maintenance of
sufficient cash reserves. The Board therefore intends to pay an
annual dividend of US$0.115 per share on or about June 23, 2023 to
shareholders of record as of June 5, 2023.
Nabil M. Lawandy
Chief Executive Officer
March 21, 2023
Consolidated statements of income
for the years ended 31 December:
2022 2021
Audited Audited
USD '000 USD '000
Revenue
Product $ 11,208 $ 9,281
Service 6,681 5,524
Licence and royalty 1,738 1,787
------------- --------------------------
Total revenues 19,627 16,592
Cost of sales 7,351 6,069
------------- --------------------------
Gross profit 12,276 10,523
Operating expenses
Research and development 1,507 1,399
General and administrative 3,023 2,743
Sales and marketing 753 471
------------- --------------------------
Total operating expenses 5,283 4,613
------------- --------------------------
Operating profit 6,993 5,910
Interest income 17 40
Loss on sale of equipment -- (19)
Foreign currency income (loss) (8) 12
------------- --------------------------
Profit before taxes 7,002 5,943
Income tax expense 901 878
------------- --------------------------
Net income 6,101 5,065
Net loss attributable to noncontrolling
interest (46) (98)
------------- --------------------------
Net income attributable to
Spectra Systems Corporation $ 6,147 $ 5,163
============= ==========================
Earnings per share
Basic $ 0.14 $ 0.11
Diluted $ 0.13 $ 0.11
All of the Group's operations are continuing
Consolidated statements of comprehensive income
for the years ended 31 December:
2022 2021
Audited Audited
USD '000 USD '000
Net income $ 6,101 $ 5,065
Other comprehensive income
(loss)
Unrealized gain(loss) on currency
exchange (45) 10
Reclassification for realized
(gain)loss in net income 8 (12)
------------- -------------
Total other comprehensive
loss (37) (2)
Comprehensive income 6,064 5,063
Net loss attributable to noncontrolling
interest (46) (98)
------------- -------------
Comprehensive income attributable
to Spectra Systems Corporation $ 6,110 $ 5,161
============= =============
Consolidated balance sheets
as of 31 December:
2022 2021
Audited Audited
USD '000 USD '000
Current assets
Cash and cash equivalents $ 17,496 $ 16,775
Trade receivables, net of allowance 3,677 2,242
Unbilled and other receivables 1,133 630
Inventory 1,599 1,944
Prepaid expenses 760 298
Total current assets 24,665 21,889
Non-current assets
Property, plant and equipment,
net 2,102 1,439
Operating lease right of use
assets, net 1,217 972
Intangible assets, net 7,055 7,161
Restricted cash and investments 500 500
Deferred tax assets 1,881 1,080
Other assets 597 111
--------------------- ----------------------
Total non-current assets 13,352 11,263
Total assets $ 38,017 $ 33,152
===================== ======================
Current liabilities
Accounts payable $ 929 $ 490
Accrued expenses and other liabilities 504 512
Operating lease liabilities,
short term 298 286
Taxes payable 684 262
Deferred revenue 4,626 2,184
--------------------- ----------------------
Total current liabilities 7,041 3,734
Non-current liabilities
Operating lease liabilities,
long term 975 739
Deferred revenue 1,679 758
--------------------- ----------------------
Total non-current liabilities 2,654 1,497
Total liabilities 9,695 5,231
--------------------- ----------------------
Stockholders' equity
Common stock 450 453
Additional paid in capital -
common stock 53,178 53,833
Accumulated other comprehensive
loss (174) (137)
Accumulated deficit (25,727) (26,870)
Total Spectra Systems stockholders'
equity 27,727 27,279
Noncontrolling interest 595 642
--------------------- ----------------------
Total liabilities and stockholders'
equity $ 38,017 $ 33,152
===================== ======================
Statements of cash flows
for the year ended 31 December:
2022 2021
Audited Audited
USD '000 USD '000
Cash flows from operating activities
Net income $ 6,101 $ 5,065
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 917 831
Stock based compensation expense 142 71
Lease amortization expense 287 274
Deferred taxes (801) 320
Allowance for doubtful accounts (4) -
Provision for excess and obsolete
inventory 694 494
Loss on sale of equipment - 19
Changes in operating assets
and liabilities
Accounts receivables (1,428) 346
Unbilled and other receivables (503) (153)
Inventory (349) 356
Prepaid expenses (463) (25)
Other assets (500) -
Accounts payable 441 (44)
Operating leases (285) (265)
Accrued expenses and other liabilities 417 71
Deferred revenue 3,374 72
------------- -------------
Net cash provided by operating
activities 8,040 8,084
Cash flows from investing activities
Restricted cash and investments - 599
Payment of patent and trademark
costs (476) (471)
Proceeds from sale of equipment - 36
Purchases of property, plant
and equipment (988) (76)
------------- -------------
Net cash provided (used) in
investing activities (1,464) 88
Cash flows from financing activities
Dividends paid (5,004) (4,302)
Repurchase of shares (807) (1,170)
Proceeds from exercise of stock
options 6 38
------------- -------------
Net cash used in financing activities (5,805) (5,434)
Effect of exchange rate on cash
and cash equivalents (50) (1)
------------- -------------
Net increase in cash and cash
equivalents 721 2,737
Cash and cash equivalents ,
beginning of year 16,775 14,038
------------- -------------
Cash and cash equivalents ,
end of year $ 17,496 $ 16,775
============= =============
Notes to financial information
1. Basis of preparation
This report was approved by the Directors on the 16(th) day of
March 2023.
This financial information has been prepared using the
recognition and measurement principles of US Generally Accepted
Accounting Principles. The Group has not elected to apply IAS 34
Interim Financial Reporting.
The principal accounting policies used in preparing the interim
results are those the Company expects to apply in its financial
statements for the year ending 31 December 2022 and are unchanged
from those disclosed in the Company's Annual Report for the year
ended 31 December 2021.
2. Earnings per share
The calculation of basic earnings per share is based on the net
income divided by the weighted average number of common shares
outstanding. Diluted earnings per share is calculated by
considering the dilutive impact of common stock equivalents under
the treasury stock method as if they were converted into common
stock as of the beginning of the period or as of the date of grant,
if later. Excluded from the calculation of diluted earnings per
common share for the years ended 31 December 2022 and 2021 were
186,773 and 125,425 shares, respectively, related to stock options
because their exercise prices would render them anti-dilutive. The
following table shows the calculation of basic and diluted earnings
per common share.
Full Year Full Year
to 31 Dec to 31 Dec
2022 2021
Numerator:
Net income $ 6,147,374 $ 5,162,830
Denominator:
Weighted average common shares 45,189,208 45,353,550
Effect of dilutive securities:
Stock Options 2,132,610 2,385,480
--------------------- ----------------
Diluted weighted average common
shares 47,321,818 47,739,030
===================== ================
Earnings per common share:
Basic: $ 0.14 $ 0.11
===================== ================
Diluted: $ 0.13 $ 0.11
===================== ================
3. Copies of this statement are available to the public on the
Company's website at http://www.spsy.com .
4. Nature of financial information
The Preliminary Announcement set out above is an extract from
the forthcoming Annual Report and Accounts and does not represent
statutory accounts for Spectra Systems Corporation. The statutory
accounts of Spectra Systems Corporation in respect of the period
ended 31 December 2022 will be delivered to the Registrars of
Companies before the Company's Annual General Meeting.
It is anticipated that the Annual Report and Accounts will be
circulated to shareholders of Spectra Systems Corporation by April
2023.
Appendix - Reconciliation of Non-GAAP measures
The Company publishes certain additional information in a
non-statutory format in order to provide readers with an increased
insight into the underlying performance of the business.
Reconciliations to the GAAP measures are shown in the following
tables:
2022 2021
USD '000 USD '000
Adjusted earnings before interest, taxes,
depreciation and amortization (EBITDA):
Operating profit $ 6,993 $ 5,910
Depreciation 321 307
Amortization 594 524
Stock compensation 142 71
Operating loss - noncontrolling
interest 46 101
Stock compensation - noncontrolling
interest (19) (17)
Adjusted EBITDA $ 8,077 $ 6,896
Adjusted profit before taxes and
amortization (PBTA):
Profit before taxes $ 7,002 $ 5,943
Amortization 594 524
Stock compensation 142 71
Operating loss - noncontrolling
interest 46 101
Stock compensation - noncontrolling
interest (19) (17)
Adjusted PBTA $ 7,765 $ 6,622
Adjusted earnings per share:
Adjusted PBTA $ 7,765 $ 6,622
Income tax expense (901) (878)
Adjusted earnings $ 6,864 $ 5,744
Diluted weighted average common
shares 47,321,818 47,739,030
Adjusted earnings per share $ 0.145 $ 0.120
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END
FR SFUFDUEDSESD
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