Preliminary Results

RNS Number : 9463A

Spectra Systems Corporation

30 March 2017

 

Spectra Systems Corporation

("Spectra" or the "Company")

Preliminary results for the twelve months ended 31 December 2016

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 2016.

This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014.

Financial highlights:

- Revenue of USD 11,122k (2015: USD 14,114k)

- Adjusted EBITDA up 123% at USD 2,383k¹ (2015: USD 1,067k¹)

- Adjusted PBTA up 184% at USD 1,999k¹ (2015: USD 705k¹)

- Adjusted EBITDA per share up over 100% at USD 0.05 (2015: USD 0.02)

- Adjusted PBTA per share up over 100% at USD 0.04 (2015: USD 0.2)

- USD 2,804k of cash generated from operations (2015: USD 529k consumed)

- Strong balance sheet with cash of USD 8,808k (2015: USD 9,808k) at 31 December²

- Inaugural annual dividend of USD 0.05 per share to be paid in June

¹ Before stock compensation expense and exceptional items

² Does not include USD 1,092k (2015: USD 1,074k) of restricted and investment cash

Operational highlights:

- In-house manufacturing for G7 central bank commenced in Q4 with a 35% uplift to gross profits going forward

- Completed the acquisition and full integration of specialty phosphour assets and customer relationships

- Phosphour sales exceeded 2015 by 211%, with 115% of the increase due to a new sales channel not associated with the acquisition

- Brand Authentication sales remained strong and at forecasted levels

- Secure Transactions Group performed in line with expectations

- Cost reductions through reduced R&D in 2016

- Cost reduction plan through staffing realignments and facility consolidation in 2017 with full impact in 2018

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

"I am pleased to present this set of results which highlights the Company's sustainable profitability and continued earnings growth. The key earnings drivers are increased gross profits from in-house manufacturing and phosphour materials sales to new customers. Both of these revenue streams are related to large central bank customers and are therefore expected to be long term contributors to our profitability.

We are delighted on the back of these results to be declaring Spectra's inaugural annual dividend of USD 0.05 per share, to be paid to shareholders in June this year."

 Enquiries:

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

Chief Executive Officer's statement

Introduction

Through achieving key commercial milestones, Spectra has substantially improved its performance in 2016. 

For the second year running, Spectra has generated significant EBITDA, up over 100% relative to 2015 (before stock compensation expense and exceptional items). This steep growth was driven by increased use of our in-house manufacturing for a contracted G7 central bank customer, as well as a new central bank end customer for our high margin phosphour materials. In-house manufacturing was in effect for the last quarter of 2016 and will continue for the duration of the contract to beyond 2026. Both of these revenue streams are sales of consumables to large central bank end customers, as opposed to more intermittent hardware revenue, and are therefore expected to continue to fuel profitability in the long term.

In addition to these high performing revenue streams, we had a solid performance from our brand authentication and gaming software business lines, and our newest authentication product for materials-based smartphone authentication won its first customer in 2016, which resulted in successful trials with other potentially very large customers in Asia.

Revenue for the year was USD 11,122k (2015: USD 14,114k). EBITDA for the year, before stock compensation expense and exceptional items, as a result of the above factors was up 123% at USD 2,383k, compared to a prior year of USD 1,067k.   

Having generated cash from operations of USD 2,804 (2015: USD 529k consumed) cash at the period end amounted to USD 8,808k (2015: USD 9,808k), excluding USD 1,092k of restricted and investment cash (2015: USD 1,074). This is notwithstanding USD 3,118k expended on the phosphour assets acquisition.

The Company therefore has sufficient resources to execute on its growth plans with its existing cash reserves.

With the Company having reached sustainable profits and having sufficient resources to execute on its growth plans with its existing cash reserves, the Board is delighted to start paying dividends. Its dividend policy will take account of the Group's profitability, underlying growth, and the maintenance of sufficient cash reserves.  The Board intends to distribute substantially all of the Company's profits until its year end unrestricted cash balances have fallen to approximately USD 5 million, whereupon it intends to pay dividends twice covered by earnings. It therefore intends to pay an inaugural annual dividend of USD 0.05 per share on or about June 30, 2017 to shareholders of record as of June 9, 2017 and thereafter to pay an annual dividend as described above in June after the audited close of each financial year.

Review of operations

Authentication Systems

The Authentication Systems business, which includes the security phosphour materials, generated revenue of USD 9,848k (2015: USD 12,792k) and Adjusted EBITDA of USD 1,928k (2015: USD 1,071k).  The fall-off in revenue relative to 2015 is associated with the final delivery of sensors to a G7 central bank in 2015. The increased earnings in 2016 reflect the success we have had in greatly increasing high margin materials sales of our security phosphour materials as well as the realization of a long-term increase in gross profit from the in-house manufacturing of our covert materials sold to a G7 central bank and another eighteen central banks through a licensing arrangement.

Achievements included:

· Acquisition and integration of a security phosphour company in 2/2016 without new hires

· Record sales of security phosphours with a new large central bank as the end customer

· In-house manufacturing of covert materials for G7 central bank  

· Continued strong brand authentication sales of USD $1.5M (2015: USD $1.5M)   

· Successful trials of the TruBrand^TM smartphone-based authentication technology leading to decisive larger scale production tests in 2017

Although we cannot be assured of the continued sales levels of the phosphour materials, we are confident that our proven ability to deliver large quantities of material in 2016 to a new customer will have lasting value which will translate into sustainable increases in our sales of these materials.

Secure Transactions Group

The Secure Transactions Group, formed around the various gaming technology acquisitions made in 2012, performed in line with management expectations, generating Adjusted EBITDA of USD 505k (2015: USD 496k) on revenue of USD 1,274k (2015: USD 1,322k).

The Secure Transactions Group has won three new contracts, four new licences and has succeeded in introducing a new 64 bit Premier Integrity package which has been integrated with the software systems of the three major lottery providers. Norway has adopted this new offering and the state of Virginia has adopted our products for two online/mobile products. We are confident that we will see growth of the business in 2017. 

In addition, we have integrated our TruBrand^TM cloud-based authentication services into the Secure Transactions Group to create an increasingly important division for the Group as the smartphone authentication technology gains traction.

Aeris^TM Banknote Cleaning Technology

While there was no revenue contribution from this business line in 2016, development and marketing related expenses for the Aeris^TM product were restricted to approximately USD $50k.  With the completion of a significant number of central bank tests as well as internal banknote cleaning studies behind us, the program costs associated with this new technology will now contract to very basic collateral marketing materials and travel to potential customers and strategic partners.

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.

 Strategy

The Company's strategy for increasing revenue and earnings is evolving significantly relative to the central bank focused efforts of the last several years. 

We have developed and introduced an impressive suite of covert authentication products which are currently under consideration by central banks and potential corporate licensing partners. With multiple developed technologies for both paper and polymer substrates already in front of potential customers, we no longer need to fund internally the development of covert banknote technologies.

We will focus our efforts going forward on reaping the benefits of these developed covert materials products, while also supporting and innovating, as required, for our existing central bank customers. All additional work on covert materials and sensors will be entirely externally funded and a restructuring of our staffing requirements is already underway to cut costs, while bolstering expertise in phosphours and smartphone applications software development.

The Company has made a significant and deliberate strategic decision to aggressively grow its revenue and earnings through the sale of secure materials beyond the covert central bank products. This approach focuses on generating high margins from our unique security materials, which include phosphours and taggants for brand authentication. Taggant sales for brand authentication using our TruBrand^TM smartphone technology will create new revenue streams for both materials as well as for the Secure Transactions Group through cloud-based server authentication, bringing a fully synergistic benefit to the entire business.

Mirroring the shift towards secure materials beyond covert technologies is an effort to further reduce and restructure our staffing as well as our infrastructure needs. The shift in emphasis will accelerate revenue growth, reduce costs, and further increase and smooth out our earnings as we go forward.

Prospects

The Company's shorter term prospects have increased with the growth of the authentication business beyond covert materials and hardware. In addition, while we are transitioning to a mode of capitalizing on our already developed covert technologies and customers, we have several significant opportunities ahead for this side of the business going forward.

We are targeting six specific opportunities, three of which are relatively near term and three of which are somewhat longer term. 

The important, near term, and significant opportunities are:

1) The continued sale of our specialty phosphour materials to a security thread manufacturer providing product to what we believe is a large Asian central bank

2)  The successful production-scale testing and consummation of our TruBrand^TM taggants by a large tobacco supplier in Asia, leading to sales in late 2018

3) Increased revenue for the Secure Transactions Group from both online gaming and cloud-based authentication service for our TruBrand^TM customers

The longer term (2-4 years) opportunities are:

4)  The joint development and licensing of a polymer banknote technology by a major printer of banknotes

5)  The development and supply of further upgraded sensor capability to a G7 central bank in response to a standardization requirement

6)  The sale of our smartphone technology TruNote^TM for the authentication of banknotes

We are pleased that we are able to supplement our sustained and growing profitability with a number of near term and longer-term prospects of a significant scale.  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 long term banknote business with its characteristically extended sales cycles and delays.  We believe that we have a number of transformative opportunities ahead in several aspects of our business that will drive near and long term earnings growth for the Company and its shareholders.

With the Company having reached sustainable profits and having sufficient resources to execute on its growth plans with its existing cash reserves, the Board is delighted to start paying dividends. It intends to pay an inaugural annual dividend of USD 0.05 per share in June of 2017 and thereafter to pay the dividend in June after the audited close of each fiscal year.

Nabil M. Lawandy

Chief Executive Officer

March 29, 2017

Statement of Income

for the year ended 31 December 2016

		2016	2015
		Unaudited	Unaudited
	Note	USD'000	USD'000
Revenue		11,122	14,114
	--------	------------------	------------------
Cost of sales		(3,524)	(7,402)
Gross profit		7,598	6,712
Adjusted operating expenses		(5,215)	(5,645)
	--------	------------------	------------------
Adjusted EBITDA		2,383	1,067
	--------	------------------	------------------
Depreciation		(437)	(449)
	--------	------------------	------------------
Adjusted EBITA		1,946	618
Interest income		53	87
	--------	------------------	------------------
Adjusted PBTA		1,999	705
Amortisation		(661)	(417)
Stock compensation expense		(124)	(23)
Recognized loss on Fx		(6)	(34)
Acquisition fees		(69)	(120)
Income tax expense		-	-
Exceptional items1		-	(76)
	--------	------------------	------------------
Profit for the year		1,139	35
Adjusted EBITDA  per share	2	0.05	0.02
Basic and diluted earnings per share	2	0.03	0.00
	--------	------------------	------------------
Other comprehensive income (loss): Unrealized loss on currency   exchange Reclassification for realized amounts  included in basic profit		(33) 6	(60) 34
	--------	------------------	------------------
Other comprehensive income (loss)		(27)	(26)
	--------	------------------	------------------
Comprehensive income		1,112	9

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 2016

		As at	As at
		31/12/16	31/12/15
		Unaudited	Unaudited
Current assets
Inventories		2,915	2,824
Trade and other receivables		2,706	4,251
Cash and cash equivalents		8,808	9,808
Deferred tax asset		619	170
Prepaid expenses and other		103	126
--------------------------------------	-------	------------------	------------------
Total current assets		15,151	17,179
--------------------------------------	-------	------------------	------------------
Non-current assets
Intangible assets, net		7,304	4,627
Property, plant and equipment, net		2,561	2,867
Restricted cash and investments		1,092	1,074
Other assets		146	19
Deferred tax asset		370	819
--------------------------------------	-------	------------------	------------------
Total non-current assets		11,473	9,406
--------------------------------------	-------	------------------	------------------
Total assets		26,624	26,585
--------------------------------------	-------	------------------	------------------
Current liabilities
Accounts payable		402	1,464
Accrued expenses and other liabilities		1,437	1,563
Deferred revenue		1,260	1,247
--------------------------------------	-------	------------------	------------------
Total current liabilities		3,099	4,274
--------------------------------------	-------	------------------	------------------
Long term liabilities Deferred revenue		256	277
--------------------------------------	-------	------------------	------------------
Total long term liabilities		256	277
---------------------------------------	-------	------------------	------------------
Total liabilities		3,355	4,551
--------------------------------------	-------	------------------	------------------
Shareholders' equity
Common stock		453	453
Additional paid in capital		55,061	54,937
Accumulated other comprehensive (loss)		(113)	(86)
Accumulated deficit	-------	(32,132) ------------------	(33,270) ------------------
Shareholders' equity		23,269	22,034
--------------------------------------	-------	------------------	------------------
Total liabilities & shareholders' equity		26,624	26,585
--------------------------------------	-------	------------------	------------------

Statement of Cash Flows

for the year ended 31 December 2016

		Year to	Year to
		to 31/12/16	to 31/12/15
		Unaudited	Unaudited
		USD'000	USD'000
Operating activities
Profit before taxation		1,139	35
Depreciation and amortisation		1,098	867
Allowance for doubtful accounts		22	-
Stock compensation expense		124	23
Inventory obsolescence		-	76
Trade and other receivables		1,523	(2,502)
Inventories		143	1,295
Other assets		(3)	2
Prepaid expenses		21	(18)
Accounts payable		(1,127)	454
Accrued expenses and other liabilities		(128)	161
Deferred revenue		(8)	(922)
Net cash provided by (used in) operating  activities	-------	------------------ 2,804	------------------ (529)
--------------------------------------	--------	------------------	------------------
Investing activities
Purchases of property, plant
and equipment		(130)	(288)
Payment of software costs		(124)	-
Asset acquisition		(3,118)	(214)
Payment of patent costs		(390)	(326)
(Increase) decrease in restricted cash and  investments		(18)	1,426
	--------	------------------	------------------
Net cash provided by (used in) investing activities		(3,780)	598
--------------------------------------	--------	------------------	------------------
Effect of exchange rate changes on cash
and cash equivalents		(24)	(34)
Net increase / (decrease) in cash
and cash equivalents		(1,000)	35
Cash and cash equivalents at
start of period		9,808	9,773
Cash and cash equivalents at	--------	------------------	------------------
end of period		8,808	9,808
--------------------------------------	--------	------------------	------------------

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 28 March 2017.

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 2016 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2015.

2. Earnings per share

The calculation of basic earnings per share figures for the year ended 31 December 2016 and 2015 is based on the profit attributable to ordinary shareholders of USD 1,139k (2015: USD 35k), respectively, divided by the weighted average number of shares in issue.  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. 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 diluted earnings per share calculation. The following table shows the calculation of the diluted weighted average number of shares in issue.

3. 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 2016 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 2017.

 

END

 

 

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