REG - Spectra Systems Spectra Systems-SPSC - Audited results for year ended 31 December 2022
20/03/2023 07:00
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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 AMENDED. 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 Joint Broker) Tel: +44 (0)20 7220 1650
Chris Fielding/James Bavister/Andrew de Andrade (Corporate Finance)
Allenby Capital Limited (Joint Broker) Tel: +44 (0)20 3328 5665
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 $8,077k 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
8 (12)
Reclassification for realized (gain)loss in net income
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 2022 to 31 Dec 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 (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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