Final Results

RNS Number : 2299B

Spectra Systems Corporation.

02 April 2013

 



Spectra Systems Corporation

Preliminary results for the twelve months ended 31 December 2012

Spectra Systems Corporation, a leading provider of advanced technology solutions for banknote and product authentication, is pleased to announce its preliminary results for the twelve months ended 31 of December 2012.

Financial highlights - all figures in (000's):

- Revenue increased 26% to USD 9,379 (2011: USD 7,416)

- Adjusted EBITDA¹ before taxation of USD (727), (2011: 352 USD)

- Adjusted profit / (loss)¹ before taxation of USD (847), (2011: 271 USD)

- Adjusted earnings / (loss)¹ per share of USD (0.02), (2011: USD 0.01)

- Basic earnings / (loss) per share of USD (0.03) (2011: USD 0.00)

- Strong ungeared balance sheet, with cash and investments of USD 16,167 (2011: USD 23,767) at December 31

¹ before stock compensation expense and exceptional items

Operational highlights:

- Authentication material revenues 75% above expected amount

- Executed new generation materials development contract with a G8 central bank

- Completed sensor development milestones in-line with central bank timetable

- New manufacturing facility completed and ready for certification

- ESI and Lapis acquisitions integrated in a new Secure Transactions Group targeting internal control systems for the gaming industry

- Revenues from the Secure Transactions Group were on plan with Lapis customers handled by employees from ESI acquisition

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

"The Company's revenues have increased by 26% over 2011 and we continue to have a strong, ungeared balance sheet.  With the execution of the new generation materials contract with a G8 central bank, the timely delivery of milestones on our customer's timetable, and record materials sales, we are in a position to achieve a re-phrasing of revenues to produce the earnings the market expects of us.

The acquisitions we made now form the infrastructure of our Secure Transactions Group and this new business unit has met plan.  Our expectations for profitability of this new business line, which are based on a combination of expense consolidation, retention of existing business, as well as gaining new customers, are coming to fruition.

Our search for acquisitions in the public level physical security areas has continued with our revisiting several of the companies we had opened a dialogue with.  We continue to be optimistic that a suitable transaction will come in time and will not make acquisitions that do not meet our criteria and strategic direction.

The Board believes that the Company has made significant headway in 2012 in achieving key business milestones, that it continues to have excellent prospects and that it will perform strongly in 2013."

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

The Company has achieved some key commercial milestones and revenues grew well above 2011.  Execution of a key materials development contract, although later than originally anticipated, has further bolstered the underpinnings of the Company's long term growth expectations.  The delivery of the sensor contract milestones on the G8 customer's timeline, has positioned us to do pre-production testing in 2013 and fulfil the entirety of the contract which in turn will support the use of our products for at least another decade.

The successful acquisition of two of the three major companies supplying secure transaction software to the gaming industry has diversified our security products and is well on track to deliver solid profits and growth.

We continue to work with our licensing partner to validate the use of the current generation technology in polymer notes with additional testing expected in Q2 of 2013.  Our development of a new authentication technology for use in note acceptors, by commercial banks and for travel documents, has been completed and is under test with a G8 central bank.

Finally, the summons we received in February of 2013 is being effectively handled by our attorneys and we remain confident that we will prevail should we prove unsuccessful at a resolution between parties.

Financial overview (000's)

Revenue exceeded expectations for the year with USD 9,379 (2011: USD 7,416). In addition, orders placed in the second half of the year were above expectations.  The adjusted EBITDA before and after taxation for the year amounted to USD (727) (2011: USD 352) - adjusted for stock compensation expense and exceptional items.

Cash and investments at the period end amounted to USD 16,167 (2011: USD 23,767).  The company has no debt and therefore has the ability to execute on its acquisition and manufacturing plans with its cash reserves.

Strategy

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

1)   Expanding partnerships with existing suppliers of public security features (Level I) for banknotes and tax stamps in order to sell our commercial bank and bill acceptor (Level II) and covert central bank (Level III) products

2)   Focusing our R&D efforts on products that can result in significant savings for central banks with regards to note processing and replacement volumes

3)   Expanding our Secure Transactions Group software sales by;

a.   continuing to adapt our products for mobile gaming

b.   penetrating the Chinese lottery market

c.   bundling our software transaction capabilities with our machine readable features to offer authorities complete solutions for tax stamps, IDs and other  government documents

4)   Applying our expertise in lock and key, material/sensor technology for consumer and industrial applications where there is a need for both quality control and protection against low cost, lower quality consumables

We expanded our strategy on the use of public features as vehicles for our covert technologies to include Level II machine readable security features.  Success with this approach will allow us to penetrate the lower denominations which may not carry the highest level covert features, but should increase our materials sales while maintaining the long term revenue of the banknote security business.

Our continued development efforts to create important and game changing advances in banknote fitness we believe will enable us to take advantage of every present and increasing effort to save money by governments.  A few percent changes in note production volumes can generate significant cost savings. 

Strategic direction for our ICS business is focused on being prepared to take advantage of the expansion of mobile and internet based gaming in the USA, as well as opening the door to the Chinese market where there are over 30 welfare and sports lotteries.  We also want to leapfrog our competition in physical security features by offering customers not only cutting edge machine readable security but also the ability to offload their data handling and secure audit needs to us.

Finally, we are continuing to try to open a market for our products with large first adopters in the consumer and industrial applications area.  This is an area where our potential customer is not as interested in security but rather in controlling the quality of their customer experience by ensuring that the consumable component of their sales is locked to products they manufacture.  Our potential customer hopes to both increase market share as well as ensure that their consumer has the best experience because they are using their consumable and not a low cost inferior product.  We believe that if our technology is adopted by a major consumer product manufacturer, not only will they consider applying it to other products they sell but that other manufacturers in different product sectors may adopt variants of the technology we have been developing for our target customer for the past two years.

The Company is pleased to report that we have retained all our employees prior to the acquisitions, grown our staff by six employees in our primarily Canadian based Secure Transactions Group, and have now increased our permanent staff to 31.  The retention of our key employees is an indication of the strength of the Company and will make the delivery of sensors and increased levels of materials possible.  We are fortunate to have employees that are challenged by the tasks ahead and that take great pride in the products we provide and the benefits they bring to society.

Prospects

The long awaited execution of a development contract with a G8 central bank for new generation technology has proceeded on or ahead of schedule and is expected to lead to significant multi-decade revenue streams once adopted.  We expect to realize significant additional development revenues next year as well as gain more insight as to the adoption timetable as we and the customer successfully progress through large scale tests.

2012 materials volumes were significantly higher than previous years and we expect this growth trend to continue in 2013, aided by a central bank issuing a new denomination during that period. We expect this increased demand to allow us to leverage improved margins from our in-house manufacturing facility which is now available to our customers and is expected to be inspected by our principal G8 customer in Q2 of 2013.

Our partnerships with suppliers of public features have led to new opportunities.  The Reserve Bank of India tender remains unresolved, although continues to be a live prospect for the company. Other new significant opportunities include tax stamps as well as a Level II feature for a G8 passport, both of which we expect to have a decision for in 2013.

In addition to our core banknote business, we have made significant advances towards adoption of our lock and key technology by a major consumer appliance manufacturer.  During 2012 we delivered prototype sensors integrated into their consumer appliance and developed customized inks for all their suppliers in the USA, China, and Korea which do not use the same types of printing processes.  We are optimistic that we will arrive at a business arrangement in 2013 which will create a new materials business line with the potential for many additional adoption scenarios by the current target customer as well as by other customers that will follow suit.

The Board therefore believes that the Company continues to have excellent prospects and will perform strongly in 2013.

Nabil M. Lawandy

Chief Executive Officer

April 2, 2013

Statement of Income

for the year ended 31 December 2012

		2012	2011
		Audited	Audited
	Note	USD'000	USD'000
Revenue		9,379	7,416
	--------	------------------	------------------
Cost of sales		(4,814)	(2,897)
Gross profit		4,565	4,519
Adjusted operating expenses		(5,292)	(4,167)
	--------	------------------	------------------
Adjusted EBITDA		(727)	352
	--------	------------------	------------------
Depreciation		(169)	(141)
	--------	------------------	------------------
EBITA		(896)	211
Net interest		228	129
	--------	------------------	------------------
Pre-tax profit		(668)	340
Amortization		(179)	(69)
Stock compensation expense		(127)	(411)
Exceptional items		(271)	-
	--------	------------------	------------------
Basic profit / (loss) for the period		(1,245)	(140)
Adjusted earnings per share	2	(0.02)	0.01
Basic earnings per share	2	(0.03)	(0.00)
--------------------------------------	--------	------------------	------------------
Diluted earnings per share	2	(0.02)	(0.00)
--------------------------------------	--------	------------------	------------------

All of the Group's operations are continuing.

Balance Sheet

as at 31 December 2012

		As at	As at
		31/12/12	31/12/11
		Audited	Audited
		USD'000	USD'000
Current assets
Inventories		1,075	813
Trade and other receivables		2,822	586
Cash and cash equivalents		9,617	17,861
Investments		6,550	5,906
Unbilled revenue on contracts in progress		355	-
Deferred contract costs		344	64
Deferred tax asset		344	344
Other current assets		90	81
Prepaid expenses		128	80
--------------------------------------	--------	------------------	------------------
Total current assets		21,325	25,735
--------------------------------------	--------	------------------	------------------
Non-current assets
Intangible assets		3,123	174
Property, plant and equipment		2,285	241
Restricted cash		1,050	1,050
Other assets		97	17
Deferred tax asset		902	902
--------------------------------------	--------	------------------	------------------
Total non-current assets		7,457	2,384
--------------------------------------	--------	------------------	------------------
Total assets		28,782	28,119
--------------------------------------	--------	------------------	------------------
Current liabilities
Trade and other payables		1,384	1,145
Accrued expenses and other liabilities		933	658
Deferred revenue		2,190	1,780
--------------------------------------	--------	------------------	------------------
Total current liabilities		4,507	3,583
--------------------------------------	--------	------------------	------------------
Long term liabilities Deferred revenue		162	-
Contingent liability	4	271	-
--------------------------------------	--------	------------------	------------------
Total long term liabilities		433	-
---------------------------------------	--------	------------------	------------------
Total liabilities		4,940	3,583
--------------------------------------	--------	------------------	------------------
Shareholders' equity
Common stock		453	453
Additional paid in capital		54,739	54,613
Accumulated other comprehensive (loss)		(497)	(922)
Accumulated deficit	--------	(30,853) ------------------	(29,608) ------------------
Shareholders' equity		23,842	24,536
--------------------------------------	--------	------------------	------------------
Total liabilities & shareholders' equity		28,782	28,119
--------------------------------------	--------	------------------	------------------

Statement of Cash Flows

for the year ended 31 December 2012

		Year to	Year to
		to 31/12/12	31/12/11
		Audited	Audited
		USD'000	USD'000
Operating activities
Profit / (loss) before taxation		(1,245)	(140)
Depreciation and amortisation		348	210
Stock compensation expense		127	411
Trade and other receivables		(2,236)	(428)
Deferred contract costs		(280)	(64)
Unbilled revenue on contracts in progress		(355)	-
Inventories		(262)	26
Other assets		(17)	-
Prepaid expenses		(48)	(32)
Trade and other payables		(97)	744
Contingent liability		271	-
Accrued expenses and other		191	8
Deferred revenue		(191)	309
Net cash provided by / (used in) operating  activities	-------	------------------ (3,794)	------------------ 1,044
--------------------------------------	--------	------------------	------------------
Investing activities
Purchases of property, plant
and equipment		(1,822)	(84)
Asset acquisition		(2,151)	-
Payment of patent costs		(221)	(105)
Purchases of investments		(644)	(5,906)
Advance payments to suppliers		(37)	-
Increase in restricted cash		-	(50)
	--------	------------------	------------------
Net cash used in investing activities		(4,875)	(6,145)
--------------------------------------	--------	------------------	------------------
Financing activities
Proceeds from initial public offering - net		-	20,514
	--------	------------------	------------------
Net cash provided by financing activities		-	20,514
	--------	------------------	------------------
Effect of exchange rate changes on cash
and cash equivalents		425	(922)
Net increase / (decrease) in cash
and cash equivalents		(8,244)	14,491
Cash and cash equivalents at
start of period		17,861	3,370
Cash and cash equivalents at	--------	------------------	------------------
end of period		9,617	17,861
--------------------------------------	--------	------------------	------------------

Notes to financial information

1. Basis of preparation

This report was approved by the Directors on 29 March 2013.

The results for the year ended 31 December 2012 have been prepared in accordance with the AIM Rules for Companies. 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 ending 31 December 2012 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2011.

2. Earnings per share

The calculation of basic earnings per share figures for the year ended 31 December 2012 is based on the profit / (loss) attributable to ordinary shareholders of USD (1,245) (2011: USD (140)) divided by the basic and diluted weighted average number of shares in issue, shown in the table below.

	Year to 31/12/12		Year to 31/12/11
	Number of shares	Weighted average	Number of shares	Weighted average
Basic-
shares in issue	45,251,370	45,251,370	45,251,370	34,763,130
Share options	6,586,803	6,361,236	6,908,317	6,376,665
Diluted no. of shares		51,612,606		41,139,795

3. Asset acquisitions

On 14 September 2012, the Company acquired certain assets of Lapis Software Associates including, importantly their proprietary source codes, multi-year and long-standing customer relationships. USD 750 was paid in consideration for the assets.

On 6 June 2012, the Company acquired, with effect from 1 June, all of the assets of the ESI Business, including importantly its proprietary source codes, multi-year contracts, and long-standing customer relationships. USD 1,425 was paid consideration for the assets.

4. Subsequent event 

In February 2013, the Company received a summons from a shareholder claiming USD 2,100 in respect of a dispute under a license agreement relating to the years 2004 to 2010. Having taken legal advice, the Board continues to believe that there is no basis for the USD 2,100 claim and is working to resolve the dispute. The Company is prepared to defend its position in the courts if a resolution cannot be reached.  Accordingly, the Company has accrued approximately USD 271 as a contingent liability at 31 December 2012.

5. Copies of this statement will be sent to shareholders and are available to the public from the Registered Office at: 321 South Main Street, Suite 102, Providence, RI  02903 USA.

6. 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 ending 31 December 2012 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 in June.

 

END

 

 

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