REG - Spectra Systems Spectra Systems-SPSC - Audited results for 12 months ended 31 Dec 2023
27/03/2024 07:00
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RNS Number : 4155I Spectra Systems Corporation 27 March 2024
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
Audited results for the twelve months ended 31 December 2023
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 2023.
Financial highlights:
· Revenue of $20,288k (2022: $19,627k) up 3.4%
· Adjusted EBITDA(1) up 3.9% at $8,394k (2022:
$8,077k)
· Adjusted PBTA(1) up 6.0% to $8,231k (2022:
$7,765k)
· Adjusted earnings per share(2) down 4.1% to US 13.9
cents (2022: US 14.5 cents)
· Cash generated from operations of $7,524k (2022:
$8,040k)
· The Board are declaring an annual dividend of US $0.116
per share (2023: US
$0.115) to be paid in June 2024
· Cash(3) of $13,253k (2022: $17,496k) and debt(4) of
$5,583k (2022 $0k) at
31 December
· Acquisition of Cartor Security Printers for £ 5.5M in
cash and £3M in stock
at closing with an additional £2M of stock upon achieving milestone in 18
months
1 Before stock compensation expense and excludes non-controlling interest
2 Before amortization and stock compensation expense, excludes non-controlling
interest
3 Excludes $513,000 (2022: $1,099k) of restricted cash and investments
4 Cartor Holding Limited debt acquired on 21 December 2023
Operational highlights:
· Appointment of Edward Spies as Chief Financial
Officer in May 2023.
· On 21 December 2023, the Company acquired 100% of
the shares of
Cartor Holding Limited ("Cartor") in a cash and stock deal for a maximum of
£10.5
million in total consideration. Cartor's operations for the remaining 10
days of the
fiscal year have been incorporated in the financial statements.
· Sensor development project progressing towards
completion and manufacturing
contract being negotiated
· Largest order in the company's history for covert
materials from a central bank
received in October 2023
· Ongoing polymer substrate product refinement with
Middle Eastern central bank
to qualify as a supplier
· New K-cup customer trials successful with first
sales in February 2024
Commenting on the results, Nabil Lawandy, Chief Executive Officer, said:
"The Company has made further progress in 2023 with revenue, adjusted profit
before tax and amortization and adjusted EBITDA all ahead of the prior year.
EPS is slightly lower this year primarily due to a combination of the
issuance of additional shares to Cartor Security Printers as part of the
acquisition cost as well as increased taxation borne by the company due to the
expiration of Net Operating Loss tax credits. Our cash position remains
strong, even after the Cartor Security Printers ("CSP") acquisition. Cash
generation was driven by sensor development milestones and prepayments, record
sales of covert materials to a central bank and strong optical materials
sales.
The acquisition of CSP is transformative and brings security printing into the
core capabilities of the Company. CSP brings many optical materials
opportunities through their existing sales pipelines and provides Spectra with
a secure supply on a par with the two largest banknote polymer substrate
suppliers. Excess capacity at CSP will be critical to polymer substrate
manufacturing and the acquisition will increase Spectra margins and supply
chain stability.
The combination of the sensor revenues, expected to begin with the execution
of the manufacturing contract, as well as the increased opportunities for
optical materials and downstream polymer substrate sales are expected to
result in record revenues, cash generation, and continued long term growth.
The Board therefore believes that the Company is on track to achieve record
earnings in 2024."
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)
Fraser Marshall (Corporate Broking)
Allenby Capital Limited (Joint Broker) Tel: +44 (0)20 3328 5665
Nick Naylor/James Reeve (Corporate Finance)
Amrit Nahal/Guy McDougall (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 outperformed the 2022 earnings results with
revenue for the year up 3.4% at $20,288k (2022: $19,627k), primarily driven by
pre-production development contracts as well as strong demand for our
materials to meet production requirements of our long-standing central bank
customer.
As a result of the increased revenue, adjusted EBITDA (before stock
compensation expense) for the year increased 3.9% to $8,394k compared to the
prior year of $8,077k.
Having generated cash from operations of $7,524k (2022: $8,040k), cash at the
period end was $13,253k (2022: $17,496), excluding $513,000 of restricted cash
and investments (2022: $500k), after settling the acquisition, cash
consideration of $7 million. This also follows the $5,182k paid to
shareholders during June in the form of the Company's dividend of $0.115 per
share.
Review of Operations
Physical and Software Authentication Business
The Physical and Software Authentication Systems business generated revenue of
$18,411k (2022: $18,164k) and Adjusted EBITDA of $8,266k (2022: $8,005k).
Authentication Systems revenues were driven by the large sales of covert
materials including the 22% price increase for supply chain mitigation, strong
sales of optical materials and the continuing funding for sensor development,
which is entering its final phases in 2024.
Our optical materials business won a new K-cup customer in 2023 which begun
purchasing material in February 2024. In addition, in 2023 we established a
new relationship with a major banknote supplier in Indonesia, which has
resulted in testing of several of our optical materials, particularly those
used in security threads.
On the software security side of the Company's business, the Secure
Transactions Group generated an Adjusted EBITDA of $132k (2022: $72k) on
revenue of $1,670k (2022: $1,463k). The 2023 results are in line with
expectations as we continue development of a new software platform.
Security Printing Business (CSP)
CSP generated revenue of $146k during the 10 day period ending 31 December
2023. In its year ended 30 September 2022, based on audited financial
statements prepared in accordance with UK GAAP (FRS102), CSP generated an
EBITDA of £3,022,088 and profit before taxation of £1,010,026 on turnover of
£16,022,532. Its net assets at that date were £4,441,120. In its year ended
30 September 2023, based on unaudited management accounts, Cartor generated an
EBITDA of £2,525,100 and profit before taxation of £435,600 on turnover of
£16,188,200. The year ending 2023 was very active with the production of
the new Royal Mail postage stamps with HM King Charles ongoing during the
acquisition process. The bulk of this revenue prior to acquisition related
to postage stamps. CSP has been heavily focused on growing the more profitable
new segment of postage, namely, hybrid stamps which carry serialized
information to prevent reuse and counterfeiting.
The period since the acquisition has seen a smooth and successful integration
on all fronts, from accounting to strategic planning and particularly the
ongoing polymer qualification process. Key CSP staff on the polymer
substrate program have daily calls with the Spectra materials team in Rhode
Island. Based on the post-acquisition plan at CSP, the focus of the core
security printing business will be on hybrid serialized postage stamps, tax
and revenue stamps and gaining market share in postage stamps, in addition to
producing polymer substrate for Spectra.
As well as driving Spectra's growth in the polymer substrate market, CSP will
enable Spectra to introduce its advanced security technologies into CSP
products which include postage stamps, tax and revenue stamps, brand
authentication labels and ID documents. CSP has established an international
presence in these products, which currently utilize various public features,
and is expected to be able to both develop the necessary processes to
integrate Spectra's technologies, as well as work with its customers to upsell
Spectra products.
The international polymer substrate market currently has only two suppliers,
CCL Industries in Canada and De La Rue International in the UK. Spectra's
research and dialogues with central banks has clearly shown the desire of the
banks to have another supplier of ready to print bespoke polymer substrate.
Spectra has been working with CSP for over two years to achieve high quality
conventional and machine-readable, ready for printing polymer substrates that
include conductive layers, opacity layers and bespoke window designs as
required by central banks. Spectra has enhanced its competitive position in
the market by further integrating the production supply chain of FusionTM. The
CSP operation has also developed the technology and established the parameters
to produce high quality polymer banknote substrates on its machine-readable
polymer produced with Spectra covert taggants embedded within polypropylene
manufactured at Toray Plastics America.
During 2023 our testing program with a Middle Eastern central bank evolved
from a hopeful supplier to a strong collaborative customer relationship.
Through several trials in 2023, which are continuing in 2024, we have become
involved in assisting the central bank with other issues related to polymer
banknotes, while we rapidly close the remaining gaps to achieve
qualification
In addition to steadily converging on qualification and a tender invitation
with the central bank, we have many ongoing initiatives in 2024 with a large
polymer banknote printer, commemorative note printers and with another Middle
Eastern central bank.
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 and the implementation of a program with
our customer to deal with supply chain issues now and going forward. The
acquisition of the CSP security printing business will fuel the growth of
sales channels through insertion of Spectra materials into contract renewals
and new business proposals. Several such opportunities have already
materialized and are expected to resolve in 2024.
CSP will follow much the same approach with its traditional customers,
focusing on converting them from traditional to the more sophisticated hybrid
stamps currently utilized in the UK. As the exclusive supplier of
conventional and hybrid postage stamps in the UK, CSP is well positioned to
take advantage of a cascade of adoptions of this higher-level authentication
and anti-fraud technology. CSP is also aggressively pursuing growth in its
postage stamp business as more state printers decide to outsource the printing
of postage stamps.
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 for the technology in passports and secure documents,
including most recently, holograms. 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. Spectra has
developed both release layer and hot stamped holograms which carry covert
features for potential use in very high value documents and valuable artwork
and is searching for partners to deliver this technology. These new
cutting-edge security holograms will be shown at the Upcoming Digital and
Document Security conference in Lisbon this April.
Finally, with our strong cash generation and the upcoming expected windfall
from the sensor program, we continue to explore judiciously possible mergers
and acquisitions which can cost effectively solve manufacturing needs, provide
synergistic expertise in high value areas of authentication, open doors to
implement our upselling strategy, and expand our customer base or strengthen
our supply chain. We have evaluated several targets throughout 2023 to this
point in 2024 and have passed on all but the CSP acquisition which was a great
fit on many levels, particularly the expertise and available machine time for
the polymer substrate initiative. The acquisition was timely and eliminated
perceived supply chain risks from the vantage point of risk averse central
banks.
CSP Acquisition
They acquisition of CSP resulted in increases in the following items in the
consolidated balance sheet:
· Inventory - $3,371k
· Property, plant and equipment - $9,353k
· Operating lease - $4,257k
· Goodwill - $3,557k
· Intangible assets - $3,145k
· Operating lease liabilities - $4,282k
· Third party loans - $5,583k
Prospects
The Company continues to have a multitude of new short-term and long-term
prospects. The short-term opportunities are expected in the 2024-2026 period
and the long-term opportunities are expected in the 2027-2030 time
frame.
The short-term opportunities include:
· Execution of sensor manufacturing and service contracts with
payments
· First sensor shipments to a central bank and additional
payments
· Security thread optical materials sales with Indonesian partner
· Sales of Fusion polymer substrate to Middle Eastern central
bank
· Indian Passport current format
· Swiss Post postage stamp contract
· Temporary license plates in Ghana
· Yemen tax stamps
Long-term opportunities include:
· Delivery of Sensors to a central bank
·
· Further increase of covert authentication materials by a current
or new central bank
customer
· Covert materials for UK and other countries passports
· Increased polymer substrate uptake with new public security
feature by a major
polymer banknote printer
· Mozambique spirits tracking with two-level continuous ink jet
materials developed for major
player in tax and revenue stamps
· Multi-factor holograms for very high value products including
art
· New Indian passport format
· Ethiopian tax stamps
The combination of these prospects generated directly by Spectra Systems Rhode
Island and CSP independently and collaboratively, has positioned the Company
to accelerate its revenue and earnings growth over the coming years. We
continue to develop cutting edge technologies with our expanded security
printing capabilities and expertise to remain a technology leader in the
authentication industry and to offer our shareholders growth through
innovation serving both new and existing customers.
Dividend
With the Company having a ninth year of sustainable profits, reaching their
highest levels ever, and having sufficient resources to execute on its growth
plans with its existing cash reserves post its acquisition of CSP, 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$0.116 per share on or about June 23, 2024 to shareholders of
record as of June 5, 2024.
Nabil M. Lawandy
Chief Executive Officer
March 21, 2023
Consolidated statements of income
for the years ended 31 December:
2023 2022
Audited Audited
USD '000 USD '000
Revenue
Product $ 13,401 $ 11,208
Service 6,453 6,681
License and royalty 434 1,738
Total revenues 20,288 19,627
Cost of sales 6,664 7,351
Gross profit 13,624 12,276
Operating expenses
Research and development 1,450 1,507
General and administrative 4,198 3,023
Sales and marketing 824 753
Total operating expenses 6,472 5,283
Operating profit 7,152 6,993
Interest income 376 17
Foreign currency income (loss) (73) (8)
Profit before taxes 7,455 7,002
Income tax expense 1,430 901
Net income 6,025 6,101
Net loss attributable to noncontrolling interest (23) (46)
Net income attributable to Spectra Systems Corporation
$ 6,048 $ 6,147
Earnings per share
Basic $ 0.13 $ 0.14
Diluted $ 0.12 $ 0.13
All of the Group's operations are continuing
Consolidated statements of comprehensive income
for the years ended 31 December:
2023 2022
Audited Audited
USD '000 USD '000
Net income $ 6,025 $ 6,101
Other comprehensive income (loss)
Unrealized loss on currency exchange (110) (45)
Reclassification for realized (gain)loss in net income 73 8
Total other comprehensive loss (37) (37)
Comprehensive income 5,988 6,064
Net loss attributable to non-controlling interest (23) (46)
Comprehensive income attributable to Spectra Systems Corporation
$ 6,011 $ 6,110
Consolidated balance sheets
as of 31 December:
2023 2022
Audited Audited
USD '000 USD '000
Current assets
Cash and cash equivalents $ 13,253 $ 17,496
Trade receivables, net of allowance 3,777 3,677
Unbilled and other receivables 1,394 1,133
Inventory 6,507 1,599
Prepaid expenses 1,207 760
Total current assets 26,138 24,665
Non-current assets
Property, plant and equipment, net 11,098 2,102
Operating lease right of use assets, net 6,308 1,217
Intangible assets, net 13,514 7,055
Investments 95 -
Restricted cash 513 500
Deferred tax assets, net 1,844 1,881
Other assets 586 597
Total non-current assets 33,958 13,352
Total assets $ 60,096 $ 38,017
Current liabilities
Accounts payable $ 2,753 $ 929
Accrued expenses and other liabilities 813 504
Line of credit 561
Operating lease liabilities, short term 1,107 298
Taxes payable 514 684
Deferred revenue 6,058 4,626
Total current liabilities 11,806 7,041
Non-current liabilities
Operating lease liabilities, long term 5,275 975
Third party loans 5,583 -
Contingent consideration 3,819 -
Deferred revenue 1,500 1,679
Total non-current liabilities 16,177 2,654
Total liabilities 27,983 9,695
Stockholders' equity
Common stock 460 450
Additional paid in capital - common stock 56,152 53,178
Accumulated other comprehensive loss (211) (174)
Accumulated deficit (24,861) (25,727)
Total Spectra Systems stockholders' equity 31,540 27,727
Non-controlling interest 573 595
Total liabilities and stockholders' equity $ 60,096 $ 38,017
Statements of cash flows
for the year ended 31 December:
2023 2022
Audited Audited
USD '000 USD '000
Cash flows from operating activities
Net income $ 6,025 $ 6,101
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,055 917
Stock based compensation expense 180 142
Lease amortization expense 195 287
Deferred taxes (886) (801)
Allowance for doubtful accounts - (4)
Provision for excess and obsolete inventory - 694
Changes in operating assets and liabilities
Accounts receivables 2,092 (1,428)
Unbilled and other receivables 245 (503)
Inventory (1,470) (349)
Prepaid expenses (437) (463)
Other assets (13) (500)
Accounts payable (345) 441
Operating leases (177) (285)
Accrued expenses and other liabilities (190) 417
Deferred revenue 1,250 3,374
Net cash provided by operating activities 7,524 8,040
Cash flows from investing activities
Restricted cash and investments - -
Payment of patent and trademark costs (332) (476)
Proceeds from sale of equipment 9 -
Acquisition of Cartor Holdings Limited, net of Acquired Cash (6,201) -
Purchases of property, plant and equipment (151) (988)
Net cash used in investing activities (6,675) (1,464)
Cash flows from financing activities
Dividends paid (5,182) (5,004)
Repurchase of shares - (807)
Finance payments (31) (807)
Line of credit 113
Proceeds from exercise of stock options - 6
Net cash used in financing activities (5,100) (5,805)
Effect of exchange rate on cash and cash equivalents
8 (50)
Net decrease in cash and cash equivalents (4,243) 721
Cash and cash equivalents, beginning of year 17,496 16,775
Cash and cash equivalents, end of year $ 13,253 $ 17,496
Non-cash investing activities
Contingent consideration
3,819
-
Equity used for investment on
CPS
2,805 -
Notes to financial information
1. Basis of preparation
This report was approved by the Directors on the 26th day of March 2024.
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 2023 and are unchanged from those disclosed in the
Company's Annual Report for the year ended 31 December 2022.
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 2023 and 2022 were 132,000 and 186,773 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 2023 to 31 Dec 2022
Numerator:
Net income $ 6,047,921 $ 6,147,374
Denominator:
Weighted average common shares 45,074,264 45,189,208
Effect of dilutive securities:
Stock Options 3,687,690 2,132,610
Diluted weighted average common shares 48,761,954 47,321,818
Earnings per common share:
Basic: $ 0.13 $ 0.14
Diluted: $ 0.12 $ 0.13
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 2023 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 2024.
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:
2023 2022
USD '000 USD '000
Adjusted earnings before interest, taxes,
depreciation and amortization (EBITDA):
Operating profit $ 7,152 $ 6,993
Depreciation 466 321
Amortization 584 594
Stock compensation 180 142
Operating loss - noncontrolling interest 23 46
Stock compensation - noncontrolling interest (11) (19)
Adjusted EBITDA $ 8,394 $ 8,077
Adjusted profit before taxes and
amortization (PBTA):
Profit before taxes $ 7,455 $ 7,002
Amortization 584 594
Stock compensation 180 142
Operating loss - noncontrolling interest 23 46
Stock compensation - noncontrolling interest (11) (19)
Adjusted PBTA $ 8,231 $ 7,765
Adjusted earnings per share:
Adjusted PBTA $ 8,231 $ 7,765
Income tax expense (1,430) (901)
Adjusted earnings $ 6,801 $ 6,864
Diluted weighted average common shares 48,761,954 47,321,818
Adjusted earnings per share $ 0.139 $ 0.145
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