REG - Spectra Systems Spectra Systems-SPSC - Interim Results for Six Months Ended 30 June 2023
25/09/2023 07:00
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RNS Number : 4387N Spectra Systems Corporation 25 September 2023
Spectra Systems Corporation
Interim Results for the Six Months Ended 30 June 2023
Spectra Systems Corporation ("Spectra Systems" or the "Company"), a leader in
machine-readable high speed banknote authentication, brand protection
technologies and gaming security software, is pleased to announce its interim
results for the six months ended 30 June 2023.
Financial highlights:
· Revenue of $11,621k (2022: $9,265k) up 25%
· Adjusted EBITDA(1) up 55% at $5,903k (2022: $3,818k)
· Adjusted PBTA(1) up 59% to $5,837k (2022: $3,669k)
· Adjusted earnings(2) per share up 74% to US $10.8 cents (2022: US
$6.2 cents)
· Cash generated from operations of $4,418k (2022: $7,245k)
· Strong, debt-free balance sheet, with cash(3) of $16,582k (2022:
$17,961k) at 30 June 2023
(1 )Before stock compensation expense and excludes non-controlling interest
(2) Before amortization and stock compensation expense, excludes
noncontrolling interest and fewer remaining tax credits
(3) Does not include $500,000 (2022: $500,000) of restricted cash and
investments
Operational highlights:
· Achieved key development and payment milestones for sensor
development program positioning Spectra Systems for preproduction units in
2024 and production units in 2025
· Completed fiscal year order at 22% higher pricing with in-house
manufacturing for supply chain mitigation with a major central bank customer
· Ongoing large print trial of polymer substrate with Middle Eastern
central bank
· Successful tests with new K-cup printer completed
· Successful installation and staff training for our first Banknote
Disinfection System with an Asian central bank
· Hired new managing director for Canadian gaming software division
Commenting on the results, Nabil Lawandy, Chief Executive Officer, said:
"The Company's first half revenues and earnings are up substantially from the
six months ended June 30, 2022 with increases of 25% and 59% for revenue and
PBTA, respectively. Our cash position remains strong at $16,582k with a debt
free balance sheet. The increased revenues in the first half are derived
principally from pre-production development contracts as well as larger demand
for our materials to meet increased banknote demands of one of our existing
central bank customers.
We have achieved key milestones with our sensor development contract and are
moving into the final phase of the program with the delivery of preproduction
units in Q4 of 2024. The central bank customer expects to provide a first
draft of the manufacturing contract in H2 of this year.
Our anticipation of potential supply chain issues and proactive implementation
of a supply chain mitigation program with our largest central bank customer
has resulted in significantly enhanced revenues in H1 as we have been able to
complete that entire fiscal year order for 2022-2023 on time.
On the optical materials front, we have significantly grown revenue from K-cup
printers and have received approval from a third customer in Canada which we
expect to place a first order in Q1 of 2024.
With regards to our suite of smartphone-based authentication solutions, we
have initiated a testing program with a UK passport company and are awaiting
approval on the use of our combined smartphone and covert authentication
holographic labels for protection of physical versions of non-fungible token
("NFT") artwork
Finally, our gaming software operation has gone live with the New York State
lottery, and we have appointed a new managing director with a strong
background in software management, development and sales.
"The Board therefore believes that the Company is on track to achieve record
earnings and meet market expectations for the full year."
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 (Corporate Finance)
Fraser Marshall (Corporate Broking)
Tel: +44 (0)20 3328 5665
Allenby Capital Limited (Joint Broker)
Nick Naylor/James Reeve (Corporate Finance)
Amrit Nahal/Guy McDougall (Sales and Corporate Broking)
The information contained within this announcement is deemed to constitute
inside information as stipulated under the retained EU law version of the
Market Abuse Regulation (EU) No. 596/2014 (the "UK MAR") which is part of UK
law by virtue of the European Union (Withdrawal) Act 2018. The information is
disclosed in accordance with the Company's obligations under Article 17 of the
UK MAR. Upon the publication of this announcement, this inside information is
now considered to be in the public domain.
The person responsible for arranging the release of this announcement on
behalf of the Company is Dr. Nabil Lawandy, Chief Executive of the Company.
Chief Executive Officer's statement
Introduction
In H1 2023, we have already achieved a PBTA level which is 73% of the market
expectations for the year. We are therefore highly confident we will achieve
market expectations for the full year.
Revenue was up 25% at $11,621k (2022: $9,265k) for the first half of the year.
The increased revenues in the first half are derived principally from
pre-production development contracts, as well as strong demand for our
materials to meet the banknote requirements of one of our existing central
bank customers.
As a result of the increased revenue, adjusted EBITDA (before stock
compensation expense) for the half year increased 55% to $5,903k compared to
the prior year of $3,818k.
Having generated cash from operations of $4,418k (2022: $7,245k), cash at the
period end amounted to $16,582k (2022: $17,961k), excluding $500,000 of
restricted cash and investments (2022: $500k). This is notwithstanding $5,102k
paid to shareholders during June in the form of the Company's annual dividend
of $0.115.
Review of Operations
Physical and Software Authentication Business
The Authentication Systems business generated revenue of $10,589k (2022:
$8,565k) and Adjusted EBITDA of $4,698k (2022: $3,878k).
Authentication Systems revenues are driven by sales of covert materials and
their associated equipment and service, optical and security phosphor
materials, and the final license payments from our licensee. The increased
revenue is due to a combination of sizable materials orders and meeting
several key payment milestones relating to sensor development funding from our
long-standing central bank customer. We continue to move forward with this
central bank towards the delivery of the preproduction sensors in late 2024.
In addition, we have executed a $1.9mm contract with a central bank customer
for Quality control equipment in H1 which will impact our revenue and PBTA
primarily in 2024-2025.
Through our strong partnership with Cartor Security Printers in Wolverhampton
we have further refined our abilities and yields of high quality conducting
and opacified polymer substrates for evaluation by central banks, ink
suppliers and printing organizations. We have produced custom designed
sheets for a Middle Eastern central bank to be used in large scale print
trials which continue. Final decisions have been delayed as the central bank
has had to deal with local hyperinflation and has shifted temporarily to the
printing of paper substrate notes in other denominations.
In addition, the Company has formed a close working relationship with the
largest commercial printer of polymer banknotes and is near completion of a
house note which will incorporate both our FusionTM machine readable security
as well as their newest public security feature. The Directors anticipate
that the result of this joint development will be polymer banknotes of the
highest quality for a joint marketing effort.
During H1 and going forward, we are utilizing our increased profitability to
further support sales and marketing efforts. Since recruiting an experienced
sales director for banknote technology in December of 2022, we have forged
relationships with a number of central banks for our polymer product as well
as other related authentication technology. With this additional
recruitment, we have been able to free up time from our existing staff to
further increase our sales efforts in brand authentication as well as document
security, with a focus on passports.
The smartphone technology has been seeded in Asia for cigarettes and
stationery for some time and while this continues to percolate, we have opened
new opportunities in the NFT art and passport data page security areas. We
now have a revised target of $1mm of revenues for this technology by close
of 2024.
Our K-cup materials business has grown significantly since a new customer
began purchasing our products in H2 2021. We have recently successfully
completed trials with a Canadian printer of K-cups and are currently working
on assessing the additional revenue with this customer for 2024; we are
hopeful we may begin filling orders in H2.
On the software security side of the Company's business, the Secure
Transactions Group, formed around two gaming technology acquisitions made in
2012, generated an Adjusted EBITDA of $40k (2022:($60k)) on revenue of $840k
(2022: $700k). The H1 results are in line with expectations for this first
half of the year and we expect an increase in H2 with several lottery wins
from last year going live.
Banknote Cleaning and Disinfection Business
In 2022, we sold our first Banknote Disinfection System (BDS) for use by an
Asian central bank. During H1 2023, we have successfully installed the BDS
and trained the central bank staff. With this first unit now installed and
operational, we are able to provide a full reference for other central
banks.
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 offerings.
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 a 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 security features to incorporate public and
machine-readable security. The strategy behind this approach is based around
partnering with suppliers who can benefit from our technology and materials
to upsell their existing customers.
Finally, we continue to explore strategic as well as increased sales
channel-based mergers and acquisitions. The active search for such
opportunities is being accelerated as we expect to have significant cash
resources through the successful delivery of the major central bank sensor
contract.
Prospects
The Company has several new sales opportunities which mirror the
broad-spectrum of products we have developed. The inventiveness which we
have demonstrated repeatedly is a key component of our growth strategy and
drives our profit generation process strategy. This approach has led to a
high margin, intellectually driven, patent protected suite of products from
products from smartphone authentication, to viral disinfection of banknotes to
cutting-edge covert technologies.
Opportunities within the next 24 months or less include:
· Completion of sensor development and revenue recognition of the
remaining
sensor development payments
· Completion, delivery, and payment for a new online Quality Control
system contract received this year
· First sensor shipments to a central bank commencing in Q2 2025
· Sale of additional Banknote Disinfection Systems
· Increased sales of our optical materials for K-cups and phosphor
applications
· Expansion of our gaming software business in Canada and in the online
lottery market
Opportunities within the next 3-5 years:
· TruBrandTM for use in art protection and passport data pages
· A commemorative note series using our Fusion polymer substrate
· Supply of upgraded sensors worth up to $50mm in hardware to a central
bank customer
· Supply of FusionTM polymer substrate and sensors to a central bank
for one or more banknote denominations
· Significantly increased adoption 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.
Nabil M. Lawandy
Chief Executive Officer
September 25, 2023
Consolidated statements of income
for the half year ended 30 June 2023
Half Year Half Year Full Year
to 30 Jun 2023 to 30 Jun 2022 to 31 Dec 2022
Unaudited Unaudited Audited
USD '000 USD '000 USD '000
Revenues
Product $ 7,242 $ 5,488 $ 11,208
Service 3,945 2,907 6,681
License and royalty 434 870 1,738
Total revenues 11,621 9,265 19,627
Cost of sales 3,581 3,145 7,351
Gross profit 8,040 6,120 12,276
Operating expenses
Research and development 702 837 1,507
General and administrative 1,577 1,481 3,023
Sales and marketing 415 478 753
Total operating expenses 2,694 2,796 5,283
Operating profit 5,346 3,324 6,993
Interest and other income 172 8 17
Loss on sale of equipment - - -
Foreign currency gain(loss) (35) 3 (8)
Profit before taxes 5,483 3,335 7,002
Income tax expense 784 707 901
Net income 4,699 2,628 6,101
Net income (loss) attributable to noncontrolling interest
14 22 46
Net income attributable to Spectra Systems Corporation
$ 4,713 $ 2,650 $ 6,147
Earnings per share
Basic $ 0.10 $ 0.06 $ 0.14
Diluted $ 0.10 $ 0.06 $ 0.13
Consolidated statements of comprehensive income
for the half year ended 30 June 2023
Half Year Half Year Full Year
to 30 Jun 2023 to 30 Jun 2022 to 31 Dec 2022
Unaudited Unaudited Audited
USD '000 USD '000 USD '000
Net income $ 4,713 $ 2,628 $ 6,101
Other comprehensive income (loss)
Unrealized gain (loss) on currency exchange
(45) 1 (45)
Reclassification for realized (gain) loss in net income
35 (3) 8
Total other comprehensive
loss (10) (2) (37)
Comprehensive income 4,703 2,626 6,064
Net gain (loss) attributable to noncontrolling interest
14 22 (46)
Comprehensive income attributable to Spectra Systems Corporation $ 4,717 $ 2,648 $ 6,018
Consolidated balance sheets
as of 30 June 2023
As of As of As of
30 Jun 2023 30 Jun 2022 31 Dec 2022
Unaudited Unaudited Audited
USD '000 USD '000 USD '000
Current assets
Cash and cash equivalents $ 16,582 $ 17,961 $ 17,496
Trade receivables, net of allowance 3,095 1,384 3,677
Unbilled and other receivables 1,002 527 1,133
Inventory 2,368 2,192 1,599
Prepaid expenses 795 1,272 760
Total current assets 23,842 23,336 24,665
Non-current assets
Property, plant and equipment, net 1,910 1,617 2,102
Operating lease right of use assets, net 1,659 828 1,217
Intangible assets, net 6,970 7,057 7,055
Restricted cash and investments 500 500 500
Deferred tax assets 1,848 530 1,881
Other assets 595 105 597
Total non-current assets 13,482 10,637 13,352
Total assets $ 37,324 $ 33,973 $ 38,017
Current liabilities
Accounts payable $ 796 $ 664 $ 929
Accrued expenses and other liabilities 476 465 504
Operating lease liabilities, short term 392 289 298
Taxes payable 194 49 684
Deferred revenue 4,601 1,898 4,626
Total current liabilities 6,459 3,365 7,041
Non-current liabilities
Operating lease liabilities, long term 1,319 595 975
Deferred revenue 1,590 4,968 1,679
Total non-current liabilities 2,909 5,563 2,654
Total liabilities 9,368 8,928 9,695
Stockholders' equity
Common stock 450 451 450
Additional paid in capital - common stock 53,270 53,336 53,178
Accumulated other comprehensive loss (186) (138) (174)
Accumulated deficit (26,319) (29,224) (25,727)
Total Spectra Systems Corporation stockholders' equity
27,215 24,425 27,727
Noncontrolling interest 741 620 595
Total stockholders' equity ` 27,956 25,045 27,921
Total liabilities and stockholders' equity $ 37,324 $ 33,973 $ 38,017
Consolidated statements of cash flows
for the half year ended 30 June 2023
Half Year Half Year Full Year
to 30 Jun 2023 to 30 Jun 2022 to 31 Dec 2022
Unaudited Unaudited Audited
USD '000 USD '000 USD '000
Cash flows from operating activities
Net income $ 4,699 $ 2,628 $ 6,101
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization 459 418 917
Stock based compensation expense 92 65 142
Lease amortization expense 89 142 287
Deferred taxes 32 550 (801)
Allowance for doubtful accounts - - (4)
Provision for excess and obsolete inventory - - 694
Loss on sale of equipment - - -
Changes in operating assets and liabilities
Accounts receivables 581 861 (1,428)
Unbilled and other receivables 131 102 (503)
Inventory (770) (248) (349)
Prepaid expenses (34) (974) (463)
Other assets - - (500)
Accounts payable (133) 175 441
Operating leases (92) (140) (285)
Accrued expenses and other liabilities (518) (262) 417
Deferred revenue (118) 3,928 3,374
Net cash provided by operating activities 4,418 7,245 8,040
Cash flows from investing activities
Restricted cash and investments (3) - -
Payment of patent and trademark costs (129) (147) (476)
Proceeds from sale of equipment - - -
Purchases of property, plant and equipment (8) (338) (988)
Net cash provided by (used in) investing activities (140) (485) (1,464)
Cash flows from financing activities
Dividends paid (5,182) (5,004) (5,004)
Repurchase of shares - (570) (807)
Proceeds from exercise of stock options - 6 6
Net cash used in financing activities (5,182) (5,568) (5,805)
Effect of exchange rate on cash and cash equivalents
(10) (6) (50)
Net increase(decrease) in cash and cash equivalents (914) (1,186) 721
Cash and cash equivalents, beginning of period
17,496 16,775 16,775
Cash and cash equivalents, end of period $ 16,582 $ 17,961 $ 17,496
Notes to financial information
1. Basis of preparation
This report was approved by the Directors on the 18 September 2023.
This financial information has been prepared using the recognition and
measurement principles of US Generally Accepted Accounting Principles (GAAP).
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.
The results for the half year are unaudited. The financial information for the
year ended 31 December 2022 does not constitute the full statutory accounts
for that period. The Annual Report and financial statements for the year ended
31 December 2022 have been filed with the Registrar of Companies. The
Independent Auditors' Report on the financial statements for the year ended 31
December 2022 was unmodified and did not draw attention to any matters by way
of emphasis.
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 six months ended June 30, 2023, and the year ended December 31, 2022, were
189,000 and 186,773 shares related to stock options, respectively, because
their exercise prices would render them anti-dilutive. For the six months
ended June 30, 2022,159,845 were excluded from the calculation of diluted
earnings per common share. The following table shows the calculation of basic
and diluted earnings per common share.
Half Year Half Year Full Year
to 30 Jun 2023 to 30 Jun 2022 to 31 Dec 2022
Numerator:
Net income $ 4,712,975 $ 2,650,000 $ 6,147,374
Denominator:
Weighted average common shares 45,143,754 45,569,258 45,189,208
Effect of dilutive securities:
Stock Options 1,957,249 2,233,298 2,132,610
Diluted weighted average common shares
47,101,003 47,802,556 47,321,818
Earnings per common share:
Basic: $ 0.10 $ 0.06 $ 0.14
Diluted: $ 0.10 $ 0.06 $ 0.13
3. Investment in affiliates and other entities
During the course of business, the Company enters into various types of
investment arrangements. The Company determines whether such investments
involve variable interest entities (VIEs). If the entity is determined to be a
VIE, then management determines if the Company is the primary beneficiary of
the entity and whether or not consolidation of the VIE is required. The
primary beneficiary consolidating the VIE must normally have both (i) the
power to direct the activities of a VIE that most significantly affect the
VIE's economic performance and (ii) the obligation to absorb losses of the VIE
or the right to receive benefits from the VIE, in either case that could
potentially be significant to the VIE. When the Company is deemed to be the
primary beneficiary, the VIE is consolidated and the other party's equity
interest in the VIE is accounted for as a noncontrolling interest.
On December 10, 2020, the Company invested $702,000 in Solaris BioSciences
("Solaris") and increased its equity interest from 4.79% to 48.65% on an as
converted basis. A noncontrolling interest is attributable to the 51.35% of
Solaris not owned by the Company. Prior to the investment, the Chief Executive
Officer of Spectra owned 84.54% of Solaris which declined to 46.01% after the
transaction. As part of the transaction, the Company committed to provide
$100,000 of services at cost to Solaris, of which $93,558 were provided during
the six months ended June 30, 2021. In addition, the Company will provide
nominal accounting support to Solaris and allow Solaris use of optical table
space and facilities at Spectra. In accordance with Delaware law, the
transaction was (a) unanimously approved by all three of Spectra's
non-executive Directors and (b) specially approved by a majority-in-interest
of the disinterested stockholders of Solaris. In addition, going forward
Spectra's shares in Solaris will be voted as directed by Spectra's
non-executive Directors. The Chief Executive Officer of Solaris is also the
Chief Executive Officer of Spectra.
The Company has concluded that Solaris is a VIE and the Company is the primary
beneficiary. The Company has consolidated the accounts of Solaris as of
December 10, 2020. The aggregate carrying value of Solaris' assets and
liabilities after elimination of any intercompany transactions and balances in
the consolidated balance sheets were as follows:
As of As of As of
30 Jun 2023 30 Jun 2022 31 Dec 2022
Unaudited Unaudited Audited
USD '000 USD '000 USD '000
Assets
Cash $ 14 $ 101 $ 150
Property, plant and equipment, net 8
7 7
Intangible assets, net 110 56 40
Total Assets 131 164 197
Liabilities
Accounts payable 22 - 21
Accrued expenses and other liabilities - - -
Total liabilities $ 22 $ - $ 21
4. Copies of this statement are available to the public on the Company's
website at http://www.spsy.com.
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:
Half Year Half Year Full Year
to 30 Jun 2023 to 30 Jun 2022 to 31 Dec 2022
Unaudited Unaudited Unaudited
USD '000 USD '000 USD '000
Adjusted earnings before interest, taxes,
depreciation and amortization (EBITDA)
Operating profit $ 5,346 $ 3,324 $ 6,993
Depreciation 203 159 321
Amortization 254 257 594
Stock compensation 92 65 142
Operating loss - noncontrolling interest 13 22 46
Stock compensation - noncontrolling interest (5) (10) (19)
Adjusted EBITDA $ 5,903 $ 3,817 $ 8,077
Adjusted profit before taxes and
amortization (PBTA)
Profit before taxes $ 5,483 $ 3,335 $ 7,002
Amortization 254 257 594
Stock compensation 92 65 142
Operating loss - noncontrolling interest 13 22 46
Stock compensation - noncontrolling interest (5) (10) (19)
Adjusted PBTA $ 5,837 $ 3,669 $ 7,765
Adjusted earnings per share
Adjusted PBTA $ 5,837 $ 3,669 $ 7,765
Income tax expense (784) (707) (901)
Adjusted earnings $ 5,053 $ 2,962 $ 6,864
Diluted weighted average common shares 47,101,003 47,802,556 47,321,818
Adjusted earnings per share $ 0.108 $ 0.062 $ 0.145
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