Interim Results

Spectra Systems Corporation

30 September 2024

 

Spectra Systems Corporation

Interim Results for the Six Months Ended 30 June 2024

Spectra Systems Corporation ("Spectra Systems" or the "Company"), a leader in machine-readable high speed banknote authentication, security printing, brand protection technologies and gaming security software, is pleased to announce its interim results for the six months ended 30 June 2024.

Financial highlights (including the consolidation of a foreign subsidiary acquired in December 2023):

·    Revenue of $22,739k (2023: $11,621k) up 96%

·    Adjusted EBITDA¹ up 33% at $7,847k (2023: $5,903k)

·    Adjusted PBTA¹ up 6% to $6,225k (2023: $5,873k)

·    Adjusted earnings² per share up 4% to US $11.2 cents (2023: US $10.8 cents)

·    Cash provided from operations of $262k (2023: $4,418k) 

·    Cash³ of $4,444k (2023: $16,582k) and debt⁴ of $4,803k (2023 $0k) at

30 June 2024

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 $2,025,000 (2023: $500,000) of restricted cash (Central bank customer) and investments

4 Cartor Holding Limited debt acquired on 21 December 2023 

Operational highlights:

·    Executed sensor (July 26,2024) manufacturing contract with central bank worth $39.6M, enabling initial revenue recognition for purchases and work performed ahead of contract execution

·    Completed balance of fiscal year order with in-house manufacturing for supply chain mitigation with central bank customer

·    Successfully completed all printing and durability tests of our polymer substrate with Middle Eastern central bank

·    Received approval from large polymer banknote printer to incorporate their proprietary polymer banknote window security feature on our polymer substrate

·    Sales with new K-cup customer ongoing since December 2023

·    Developed new faster and easier to use smartphone technology and filed patents

·    A highly successful presence at the Banknote 2024 conference which has led to several new opportunities for our polymer substate and a significant increase in our visibility worldwide

Commenting on the results, Nabil Lawandy, Chief Executive Officer, said:

"The Company's first half revenues and earnings are up from the six months ended June 30, 2023, with increases of 96% and 6% for revenue and PBTA, respectively.  The increased revenues in the first half are derived from the additional Security Printing turnover, pre-production sensor development contracts, sales of covert materials, and cost accounting-based initial revenue recognition on the $39.6M manufacturing contract with a central bank customer.

"On the optical materials front, steady revenue from the new Canadian K-cup printers has come through as expected in the first half of this year, further increasing the high margin revenues from this product.  In addition, we have integrated our advanced phosphours into multiple tenders launched by our security printing arm as well as directly for several applications including passports and banknotes.

"We have taken our smartphone technology to a significantly higher level which allows for a larger palette of brands and models with faster response and a much easier user experience. Our target markets are tax stamps and postage stamps which have been successfully counterfeited even in more advanced countries.

"Our polymer substrate efforts have yielded important and tangible results with both state printers as well as corporate printers of banknotes.  We have successfully passed all of the print and durability testing with our middle eastern central bank partner and potential customer.  We currently expect to have three house notes produced by major polymer banknote printers in the 2024-2025 time frame using both our sustainable and our machine-readable polymer substrate.  In addition, we have been asked to advise a second middle eastern central bank on the development of their future polymer notes.

"The combination of the sensor contract award, the continued strong covert material sales, the boost in optical materials, and the significant advancements in our polymer substrate initiative including being asked to advise on a new series of polymer notes is all pointing towards an even more sustainable and growing profitability in the future.  While all of this business growth is underway, we continue to be the most innovative company in the authentication sector with machine readable sustainable polymer substrate using circular certified polymer and new breakthroughs in smartphone technology which we are confident has the potential to reenergize this part of our product offering

"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 Dr. Nabil Lawandy, Chief Executive Officer

Tel: [phone]

Zeus Capital Limited (Nominated Adviser and Joint Broker)                                     Tel: [phone]

Chris Fielding (Director, Investment Banking)

Fraser Marshall (Sales and Corporate Broking)

Allenby Capital Limited (Joint Broker)                                                                       Tel: [phone]

Nick Naylor/James Reeve (Corporate Finance)

Amrit Nahal (Sales and Corporate Broking)  

Chief Executive Officer's statement

Introduction

In H1 2024, we have already achieved a PBTA level which is 50% of the market expectations for the year.  We are therefore highly confident we will achieve market expectations for the full year. 

Revenue was up 96% at $22,739k (2023: $11,621k) for the first half of the year. The increased revenues in the first half are derived from the additional Security Printing turnover, pre-production sensor development contracts, sales of covert materials, and cost accounting-based initial revenue recognition on the $39.6M manufacturing contract with a central bank customer.  As a result of the increased revenue, adjusted EBITDA (before stock compensation expense) for the half year increased 32% to $7,847k compared to the prior year of $5,903k.  

Having generated cash from operations of $262k (2022: $4,418k), cash at the period end amounted to $4,444k (2022: $16,582k), excluding $2 million of restricted cash and investments (2023: $500k), reflecting (i) the $5,593k paid to shareholders during June (2023: $5,182k) in the form of the Company's annual dividend of $0.116, and (ii) significant pre-purchasing of sensor manufacturing components and equipment, as well as aggressive polymer substrate marketing efforts, including the Banknote conference.

The financial statements for the half-year ended 30 June reflect the results of operations for the combined entity resulting from the acquisition of Cartor Security Printers (CSP). As a result, the financial results for H1 2024 are not directly comparable to those of the prior mid- year, which represent the standalone operations of Spectra as a single entity.

This acquisition has resulted in changes to the financial structure, operations and administrative cost metrics. Shareholders are advised to consider this context when analyzing the financial results. The combined financial statements incorporate the assets, liabilities, revenues, and expenses of both entities, which affect comparisons of financial performance and position period-over-period.

Operating expenses have increased since the acquisition was integrated which includes increases of general and administrative expenses by 178%, selling and marketing expenses up 84% and research and development up 92%.

In addition, prior to the acquisition, Spectra carried no debt but now is reporting $4.8 million on 30 June at an average interest rate of 0.3%.

Review of Operations

Authentication and Security Printing Business

The Authentication Systems business generated revenue of $13,773k (2023: $10,589k) and Adjusted EBITDA of $7,005k (2023: $4,698k).

Authentication Systems revenues in H1 were largely fueled by a strong covert materials order, an ongoing sensor development contract, and initial revenue recognition of the $39.6 million sensor manufacturing contract executed in June of 2024.  Strong sales of optical materials, including a new K-cup revenue stream further bolstered the performance of this business segment.   Based on current customer project plans, we expect to begin booking revenue and cash from sensor sales in June of 2025.

Through our acquisition of Cartor Security Printers in Wolverhampton we have significantly advanced our position and prospects for a polymer substrate contract.  We have passed all print-based and durability tests with our middle eastern central bank partner and prospective customer.  We are still in contention for a slice of the business from the next tender from this central bank expected in January 2025.  Additional traction with private printers opening the path to a commemorative banknote produced on our substrate continues.

We have already changed the landscape of the polymer banknote world by introducing the first machine-readable substrate, Fusion^TM, and the first sustainably responsible polymer substrate made of circular certified biaxially oriented polypropylene.  Early discussions with a central bank as well as follow up from our highly successful Banknote conference presence have reinforced the importance of our breakthrough in polymer substrate sustainability efforts.

Our smartphone technology has been greatly enhanced to allow virtually all phones with a camera to be used and to provide a faster and easier user experience.  We have several initiatives underway with a major tax stamp supplier and with postal services where counterfeit stamps have been a major problem.  Through our CSP acquisition, we have direct inroads to major world postal organizations including the Royal Mail.

The security printing segment generated an EBITDA of $699k on a turnover of $7,879k in H1.  Late 2023 was very active with the production of the new Royal Mail postage stamps with HM King Charles ongoing during the acquisition and integration  process.  CSP has been heavily focused on growing the more profitable new segment of postage, namely, hybrid stamps which carry serialized information to combat reuse and counterfeiting as well as integrating our optical materials into their product offering and tender bids. 

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 $143k (2023:($40k)) on revenue of $1,087k (2023: $840k).  The H1 results are in line with expectations, and we expect an increase in H2 with several lottery wins from last year going live.  This is a significant improvement over last year results, and we believe is the beginning of continued increased profitability from this segment.

Strategy and Prospects

The Company's strategy for increasing revenue and earnings continues to be focused on selling more products to existing customers as well leveraging CSP's long relationships with tax stamp, passport and postage stamp customers and partners. 

Through the CSP pipeline and their longtime corporate partnerships, we have developed several new opportunities.  These include highly covert continuous inkjet inks and smartphone-based authentication of postage stamps and tax and revenue stamps. The recent issues with Royal Mail counterfeit stamps have become one of a focused set of targets for our new smartphone technology. 

With the expected cash build-up when sensor sales are underway, we continue to evaluate synergistic and strategic profitable businesses for possible acquisition.

Nabil M. Lawandy

Chief Executive Officer

September 30, 2024

Consolidated statements of income for the half year ended 30 June 2024

		Half Year		Half Year		Full Year
		to 30 Jun 2024		to 30 Jun 2023		to 31 Dec 2023
		Unaudited		Unaudited		Audited
		USD '000		USD '000		USD '000
Revenues
Product		$       19,252		$        7,242		$      13,401
Service		3,487		3,945		6,453
License and royalty		-		434		434
Total revenues		22,739		11,621		20,288
Cost of sales		10,036		3,581		6,664
Gross profit		12,703		8,040		13,624
Operating expenses
Research and development		1,348		702		1,450
General and administrative		4,385		1,577		4,198
Sales and marketing		767		415		824
Total operating expenses		6,500		2,694		6,472
Operating profit		6,203		5,346		7,152
Interest income (expense)		(308)		172		376
Foreign currency gain(loss)		(3)		(35)		(73)
Profit before taxes		5,892		5,483		7,455
Income tax expense		650		784		1,430
Net income		5,242		4,699		6,025
Net income (loss) attributable to noncontrolling interest		(8)		(14)		(23)
Net income attributable to Spectra Systems Corporation		$         5,250		$         4,713		$         6,048
Earnings per share
Basic		$            0.11		$           0.10		$           0.13
Diluted		$            0.11		$           0.10		$           0.12

Consolidated statements of comprehensive income for the half year ended 30 June 2024

		Half Year		Half Year		Full Year
		to 30 Jun 2024		to 30 Jun 2023		to 31 Dec 2023
		Unaudited		Unaudited		Audited
		USD '000		USD '000		USD '000
Net income		$         5,242		$        4,713		$         6,025
Other comprehensive income (loss)
Unrealized gain (loss) on currency exchange		(52)		(45)		(110)
Reclassification for realized (gain) loss in net income		3		35		73
Total other comprehensive    loss		(49)		(10)		(37)
Comprehensive income		5,193		4,703		5,988
Net gain (loss) attributable to noncontrolling interest		(7)		14		(23)
Comprehensive income attributable to Spectra Systems Corporation		$         5,200		$         4,717		$         6,011

Consolidated balance sheets as of 30 June 2024

	As of		As of		As of
	30 Jun 2024		30 Jun 2023		31 Dec 2023
	Unaudited		Unaudited		Audited
	USD '000		USD '000		USD '000
Current assets
Cash and cash equivalents	$        4,444		$      16,582		$       13,253
Trade receivables, net of allowance	8,653		3,095		3,777
Unbilled and other receivables	1,461		1,002		1,394
Inventory	11,168		2,368		6,507
Prepaid expenses	1,401		795		1,207
Total current assets	27,128		23,842		26,138
Non-current assets
Property, plant and equipment, net	10,311		1,910		11,098
Operating lease right of use assets, net	6,063		1,659		6,308
Intangible assets, net	13,331		6,970		13,514
Restricted cash and investments	2,026		500		95
Investments	95		-		513
Deferred tax assets	1,844		1,848		1,844
Other assets	577		595		586
Total non-current assets	34,247		13,482		33,958
Total assets	$       61,375		$      37,324		$       60,096
Current liabilities
Accounts payable	$         3,150		$           796		$         2,753
Accrued expenses and other liabilities	2,488		476		813
Line of credit			-		561
Operating lease liabilities, short term	569		392		1,107
Taxes payable	78		194		514
Deferred revenue	7,786		4,601		6,058
Total current liabilities	14,071		6,459		11,806
Non-current liabilities
Operating lease liabilities, long term	5,568		1,319		5,275
Third party loans	4,803		-		5,583
Contingent consideration	2,528		-		3,819
Deferred revenue	1,329		1,590		1,500
Total non-current liabilities	14,228		2,909		16,177
Total liabilities	28,299		8,928		27,983
Stockholders' equity
Common stock	482		450		460
Additional paid in capital - common stock	57,495		53,270		56,152
Accumulated other comprehensive loss	(260)		(186)		(211)
Accumulated deficit	(25,206)		(26,319)		(24,861)
Total Spectra Systems Corporation stockholders' equity	32,511		27,215		31,540
Noncontrolling interest	565		741		573
Total stockholders' equity	`        33,076		`        27,956		32,113
Total liabilities and stockholders' equity	$       61,375		$      37,324		$       60,096

Consolidated statements of cash flows for the half year ended 30 June 2024

	Half Year		Half Year		Full Year
	to 30 Jun 2024		to 30 Jun 2023		to 31 Dec 2023
	Unaudited		Unaudited		Audited
	USD '000		USD '000		USD '000
Cash flows from operating activities
Net income	$            5,242		$         4,699		$         6,025
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,562		459		1,055
Stock based compensation expense	75		92		180
Lease amortization expense	215		89		195
Deferred taxes	10		32		(886)
Changes in operating assets and liabilities
Accounts receivables	(4,889)		581		2,092
Unbilled and other receivables	(68)		131		245
Inventory	(4,689)		(770)		(1,470)
Prepaid expenses	(199)		(34)		(437)
Other assets	-		-		(13)
Accounts payable	413		(133)		(345)
Operating leases	(215)		(92)		(177)
Accrued expenses and other liabilities	1,242		(518)		(190)
Deferred revenue	1,563		(118)		1,250
Net cash provided by operating activities	262		4,418		7,524
Cash flows from investing activities
Restricted cash and investments	(1,513)		(3)		-
Payment of patent and trademark costs	(150)		(129)		(476)
Proceeds from sale of equipment	-		-		-
Acquisition of Cartor Holdings Limited, net of Acquired Cash Purchases of property, plant and equipment	(508)		(8)		(6,201)                (151)
Net cash provided by (used in) investing activities	(2,171)		(140)		(6,675)
Cash flows from financing activities
Dividends paid	(5,594)		(5,182)		(5,182)
Finance payments	(1,303)				(31)
Line of credit					113
Proceeds from exercise of stock options	11		-		-
Net cash used in financing activities	(6,886)		(5,182)		(5,100)
Effect of exchange rate on cash and cash equivalents	(14)		(10)		8
Net increase(decrease) in cash and cash equivalents	(8,809)		(914)		(4,243)
Cash and cash equivalents, beginning of period	13,253		17,496		17,496
Cash and cash equivalents, end of period	$             4,444		$       16,582		$       13,253

Notes to financial information

1. Basis of preparation

This report was approved by the Directors on the 27 September 2024.

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 2024 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2023.

The results for the half year are unaudited. The financial information for the year ended 31 December 2023 does not constitute the full statutory accounts for that period. The Annual Report and financial statements for the year ended 31 December 2023 have been filed with the Registrar of Companies. The Independent Auditors' Report on the financial statements for the year ended 31 December 2023 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, 2024, and the year ended December 31, 2023, were 60,000 and 132,000 shares related to stock options, respectively, because their exercise prices would render them anti-dilutive. For the six months ended June 30, 2023,180,000 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 2024		to 30 Jun 2023		to 31 Dec 2023
Numerator:
Net income	$      5,249,439		$      4,712,975		$      6,047,921
Denominator:
Weighted average common shares	48,228,972		45,143,754		45,074,264
Effect of dilutive securities:
Stock Options	1,430,604		1,957,249		3,687,690
Diluted weighted average common shares	49,659,576		47,101,003		48,761,954
Earnings per common share:
Basic:	$           0.11		$           0.10		$            0.13
Diluted:	$           0.11		$           0.10		$            0.12

3. 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 2024		to 30 Jun 2023		to 31 Dec 2023
	Unaudited		Unaudited		Unaudited
	USD '000		USD '000		USD '000

Adjusted earnings before interest, taxes,

depreciation and amortization (EBITDA)

Operating profit	$            6,203		$            5,346		$            7,152
Depreciation	1,311		203		466
Amortization	251		254		584
Stock compensation	75		92		180
Operating loss - noncontrolling interest	8		13		23
Stock compensation - noncontrolling interest	(1)		(5)		(11)
Adjusted EBITDA	$            7,847		$            5,903		$            8,394

Adjusted profit before taxes and

amortization (PBTA)

Profit before taxes	$           5,892		$            5,483		$            7,455
Amortization	251		254		584
Stock compensation	75		92		180
Operating loss - noncontrolling interest	8		13		23
Stock compensation - noncontrolling interest	(1)		(5)		(11)
Adjusted PBTA	$           6,225		$            5,837		$            8,231

Adjusted earnings per share

Adjusted PBTA	$           6,225		$             5,837		$           8,231
Income tax expense	(650)		(784)		(1,430)
Adjusted earnings	$           5,575		$            5,053		$            6,801
Diluted weighted average common shares	49,659,576		47,101,003		48,761,954
Adjusted earnings per share	$            0.112		$             0.108		$            0.139

 

END