Preliminary Results

RNS Number : 4108V

Spectra Systems Corporation

18 April 2016

 

Spectra Systems Corporation

Preliminary results for the twelve months ended 31 December 2015

Spectra Systems Corporation, a leading provider of advanced technology solutions for banknote and product authentication, announces its preliminary results for the twelve months ended 31 December 2015.

Financial highlights:

- Revenue exceeded analyst expectations at USD 14,114k (2013: USD 16,906k)

- Adjusted EBITDA¹ at USD 1,067k (2014: USD 2,143k)

- Adjusted earnings¹ per share of USD 0.02 (2014: USD 0.05)

- Strong balance sheet and operating cash flow positive in 2015 with cash of USD 10,382k (2014: USD 9,773k) at 31 December

¹ before stock compensation expense and exceptional items

Operational highlights:

-  G7 Sensor contract completion resulted in the release of $2MM of restricted cash

-  Reduced operating expenses by $0.9MM on completion of G7 Sensor program

-  Phosphour sales exceeded last three years average by 20%

-  Brand Authentication sales exceeded management forecast by 50%

-  Secure Transactions Group performed in line with expectations

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

"I am pleased to present this set of results which highlights the Company's potential for sustainable profitability and prospects for continued growth. The results and the release of restricted cash put us in a position to continue expanding our profits through both organic and acquisition based growth.

We are delighted that the overall business continues to create profits and has developed a number of new revenue sources that will sustain growth in between lumpier central bank contract wins.  The Board therefore believes that the Company continues to have excellent prospects."

Enquiries:

Spectra Systems Corporation
Dr. Nabil Lawandy, Chief Executive Officer	Tel: [phone]
WH Ireland Limited	Tel: [phone]
Chris Fielding (Head of Corporate Finance)

Chief Executive Officer's statement

Introduction

Through achieving key commercial milestones, as described in the Review of Operations below, Spectra Systems has again out-performed market expectation in 2015.  For the second year running, Spectra has generated over USD 1,000k EBITDA and continues to gain traction with its organic and acquired business lines.

Revenue for the year was USD 14,114k (2014: USD 16,906k). EBITDA for the year, before stock compensation expense and exceptional items, amounted to USD 1,067k, compared to a prior year of USD 2,143k.   

Revenue was partially driven by the completion of a major hardware sensor program.  Although an order for hardware of this magnitude is unlikely in 2016, we are near the closure of a significant renewal contract with our major central bank customer which is in the process of evaluating a significant five year contract for materials.  The contract is expected to reimburse the costs incurred in building the manufacturing facility and would enhance the visibility of future revenues. Improved margins from both cost cutting initiatives as well as lower manufacturing costs from the in-house facility are long-lived and will contribute to profitability going forward.

Cash at the period end amounted to USD 10,382k (2014: USD 9,773k), The Company has sufficient resources to execute on its growth plans with its existing cash reserves.

Review of operations

Authentication Systems

The Authentication Systems business generated revenue of USD 12,792k (2014: USD 15,527k) and EBITDA of USD 1,071k (2014: USD 1,924k).  The drop-off, which was foreseen, is due to an exceptional year in 2014 of materials sales and of phosphour sales which had reached their highest ever levels.

Particular achievements included:

·      Renewed license agreement for covert materials and sensors to achieve minimum quantities and a 7% price increase

·      Commenced negotiations in 2015 concerning specialty phosphour assets which resulted in their acquisition by the Company in January 2016

·      Executed a new nine year USD 5.5M contract for authentication of an Asian government's documents commencing in June 2016

·      Continued strong momentum with the evaluation process by a G7 central bank of a new covert security feature for polymer notes

·      Reduced operating expenses by $0.9MM on completion of the G7 sensor program

·      Brand authentication sales of USD 1.5M (2014: USD $0.6M) exceeded management expectations by 50%

·      Initiated several trials of the TruBrand^TM smartphone based authentication technology, primarily in China

Although the hardware sales based earnings in 2015 are not expected to repeat at this level again in 2016, they should be compensated by the sale of contracted document authentication products which will begin in June of 2016.

Secure Transactions Group technologies

The Secure Transactions Group, formed around the various gaming technology acquisitions made in 2012, performed in line with management expectations, generating EBITDA of USD 496k (2014: USD 569k) on revenue of USD 1,322k (2014: USD 1,379k).

The Secure Transactions Group has won several new contracts and has succeeded in introducing new tablet products to facilitate the tracking and monitoring of gaming transaction flow by lottery officials.  This new "dashboard" product was recently adopted by Norway, which we hope will validate the benefits of the product and help promote additional sales of this and related support options.

Banknote cleaning

While there was no revenue contribution from the business line in 2015 or 2014, development expenses related to the product validation and marketing amounted to USD 500k (2014: USD 350k).  With the completion of the development phase, the program costs associated with this new technology will now contract to basic marketing expenses.

The Board continues to be particularly excited by this technology, which has the potential to substantially reduce central bank costs and environmental issues in disposing of soiled banknotes. It was therefore delighted that two US patents on the use of supercritical fluids for cleaning and decontaminating banknotes in circulation were issued to the Company in January 2015.

The nature of the banknote industry, with its risk averse nature, long sales cycle and the many special interests which would be negatively affected by the success of Aeris^TM banknote cleaning technology will impact the adoption cycle of the product.  The company is therefore looking to partner with a credible industry hardware supplier to advance the adoption of Aeris^TM. We also expect that with the costs of development behind us, we will be in a position to mount a cost effective and lean marketing effort to attract a central bank to evaluate the technology, either directly with us, or through a partner or licensee.

Strategy

The Company's strategy for increasing revenue and earnings is based on:

·      Focusing on larger central banks with existing technology and penetrating the polymer banknote authentication market

·      Attracting additional customers for our phosphour product offerings which have been significantly increased with the acquisition of related specialty assets in January this year.

·      Concentrating our marketing efforts for smartphone authentication on Asia in all sectors from linens to tobacco and electronics

·      Expanding our Secure Transactions Group contributions by introducing new hardware options, as well as anticipating new opportunities in monitoring internet based gaming and new betting formats currently in conflict with regulators, such as daily fantasy sports enterprises.

·      Controlling operating costs while maintaining strong capabilities for delivery of products with a reduced emphasis on research and development.

Prospects

The Company's prospects have dramatically increased with the growth of the authentication business outside of banknotes.  This growth is evidenced by the nearly 50% growth in sales of the brand, document, and tax stamp authentication products since the acquisition of that business in 2014. In addition to continued growth of this business line, we have initiated a number of customer trials, primarily in China, for our TruBrand^TM smartphone based authentication technology which we are confident will lead to sales in 2016. The opportunities for TruBrand^TM are in the tens of billions of units in China and have the potential to create a high margin revenue stream in the very near future.

We are targeting four specific opportunities in the banknote security area, two of which are relatively near term and two of which are somewhat longer term. 

The near term opportunities are:

1)   The rapidly advancing Reserve Bank of India tender in which we are partnered with our long-time licensee using a new modification of our current product; and

2)   The potential selection of our new covert technology for polymer notes by an existing G7 central bank customer introducing  a new denomination in the next two years

The longer term opportunities are:

3)   The joint development and licensing  of a multi-code polymer technology by a major printer of banknotes

4)   The sale of our latest smartphone technology, TruNote^TM for the authentication of banknotes with a particular focus on its use by the visually impaired.

.

We are pleased that we are able to supplement our sustained and growing profitability with a number of near term and longer-term prospects.  We are particularly delighted that the authentication business outside of banknotes is increasing ahead of expectations and that it can provide a smoothing of our less predictable but long term banknote business with its characteristically extended sales cycles and delays.  Furthermore, we believe that we have a number of transformative opportunities ahead in all aspects of our business and are in a position to reduce our research efforts once these opportunities have been fully resolved, replacing them with a less costly applications support team.

The Board is optimistic about the future of the company and its growth through both increased sales, as well as continued prudent and properly timed cost cutting initiatives.

Nabil M. Lawandy

Chief Executive Officer

April 18, 2015

Statement of Income

for the year ended 31 December 2015

		2015	2014
		Unaudited	Audited
	Note	USD'000	USD'000
Revenue		14,114	16,906
	--------	------------------	------------------
Cost of sales		(7,402)	(8,209)
Gross profit		6,712	8,697
Adjusted operating expenses		(5,645)	(6,554)
	--------	------------------	------------------
Adjusted EBITDA		1,067	2,143
	--------	------------------	------------------
Depreciation		(449)	(433)
	--------	------------------	------------------
Adjusted EBITA		618	1,710
Interest income		87	70
	--------	------------------	------------------
Pre-tax profit		705	1,780
Amortisation		(417)	(369)
Stock compensation expense		(23)	(58)
Recognized gain/(loss) on Fx		(34)	2
Acquisition fees		(120)	(55)
Income tax expense		-	(257)
Exceptional items1		(76)	-
	--------	------------------	------------------
Profit for the year		35	1,043
Adjusted EBITDA per share	2	0.02	0.05
Basic and diluted earnings per share	2	0.00	0.02
	--------	------------------	------------------
Other comprehensive income (loss): Unrealized gain / (loss) on currency   exchange Reclassification for realized amounts  included in basic profit		(60) 34	(53) (2)
	--------	------------------	------------------
Other comprehensive income (loss)		(26)	(55)
	--------	------------------	------------------
Comprehensive income		9	988

All of the Group's operations are continuing.

 1.  Exceptional items relate to one-time obsolete acquired inventory write-off reduction

Balance Sheet

as at 31 December 2015

		As at	As at
		31/12/15	31/12/14
		Unaudited	Audited
		USD'000	USD'000
Current assets
Inventories		2,824	4,195
Trade and other receivables		4,251	1,753
Cash and cash equivalents		10,382	9,773
Deferred tax asset		215	215
Prepaid expenses		125	111
--------------------------------------	-------	------------------	------------------
Total current assets		17,797	16,047
--------------------------------------	-------	------------------	------------------
Non-current assets
Intangible assets		4,627	4,092
Property, plant and equipment		2,868	2,824
Restricted cash and investments		500	2,500
Other assets		19	185
Deferred tax asset		774	774
--------------------------------------	-------	------------------	------------------
Total non-current assets		8,788	10,375
--------------------------------------	-------	------------------	------------------
Total assets		26,585	26,422
--------------------------------------	-------	------------------	------------------
Current liabilities
Trade and other payables		1,464	739
Accrued expenses and other liabilities		1,563	1,224
Deferred revenue		1,247	2,166
--------------------------------------	-------	------------------	------------------
Total current liabilities		4,274	4,129
--------------------------------------	-------	------------------	------------------
Long term liabilities Deferred revenue		277	292
--------------------------------------	-------	------------------	------------------
Total long term liabilities		277	292
---------------------------------------	-------	------------------	------------------
Total liabilities		4,551	4,421
--------------------------------------	-------	------------------	------------------
Shareholders' equity
Common stock		453	453
Additional paid in capital		54,937	54,913
Accumulated other comprehensive (loss)		(86)	(60)
Accumulated deficit	-------	(33,270) ------------------	(33,305) ------------------
Shareholders' equity		22,034	22,001
--------------------------------------	-------	------------------	------------------
Total liabilities & shareholders' equity		26,585	26,422
--------------------------------------	-------	------------------	------------------

Statement of Cash Flows

for the year ended 31 December 2015

		Year to	Year to
		to 31/12/15	31/12/14
		Unaudited	Audited
		USD'000	USD'000
Operating activities
Profit before taxation		35	1,043
Depreciation and amortisation		855	802
Allowance for doubtful accounts		-	20
Stock compensation expense		23	58
Income tax expense		-	257
Inventory obsolescence		76	-
Trade and other receivables		(2,501)	493
Deferred contract costs		-	10
Inventories		1,295	(1,226)
Other assets		2	49
Prepaid expenses		(18)	46
Trade and other payables		454	(895)
Contingent liability		-	(2,000)
Accrued expenses and other liabilities		161	265
Deferred revenue		(922)	(668)
Net cash used in operating  activities	-------	------------------ (540)	------------------ (1,746)
--------------------------------------	--------	------------------	------------------
Investing activities
Purchases of property, plant
and equipment		(277)	(355)
Deposits for property, plant, and equipment		-	(162)
Asset acquisition		(214)	(1,042)
Payment of patent costs		(326)	(309)
Decrease in restricted cash and  investments		2,000	-
	--------	------------------	------------------
Net cash provided by (used in) investing activities		1,183	(1,868)
--------------------------------------	--------	------------------	------------------
Effect of exchange rate changes on cash
and cash equivalents		(34)	(48)
Net increase / (decrease) in cash
and cash equivalents		609	(3,662)
Cash and cash equivalents at
start of period		9,773	13,435
Cash and cash equivalents at	--------	------------------	------------------
end of period		10,382	9,773
--------------------------------------	--------	------------------	------------------

Notes to financial information - all figures in (000's) except shares in issue

1. Basis of preparation

This report was approved by the Directors on 15 April 2016.

This financial information has been prepared using the recognition and measurement principles of US Generally Accepted Accounting Principles.

These principal accounting policies were used in preparing its financial statements for the year ended 31 December 2015 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2014.

2. Earnings per share

The calculation of earnings per share figures for the year ended 31 December 2015 and 2014 is based on the profit attributable to ordinary shareholders of USD 35k (2014: USD 1,043k), respectively, divided by the weighted average number of shares in issue, shown in the table below.  For 2015, the exercise price of all options exceeded the average market price of the shares in issue and therefore are not considered in the EPS calculation.

	Year to 31/12/15		Year To 31/12/14
	Number of shares	Weighted average	Number of shares	Weighted average
Basic-
shares in issue	45,251,370	45,251,370	45,251,370	45,251,370

3. Subsequent Events

On 28 January 2016, the Company completed the acquisition of certain specialty phosphour assets primarily used in the authentication of world banknotes.  The total consideration amounted to USD 3,120k, of which USD 2,805k was paid in cash on closing with USD 315k held in escrow for 12 months.

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 2015 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 June.

 

END

 

 

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