Audited results for 12 months ended 31 Dec 2023

Spectra Systems Corporation

27 March 2024

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF THE UK VERSION OF REGULATION (EU) NO 596/2014 WHICH IS PART OF UK LAW BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT 2018, AS AMENDED. UPON THE PUBLICATION OF THIS ANNOUNCEMENT VIA A REGULATORY INFORMATION SERVICE, THIS INSIDE INFORMATION IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN. 

Spectra Systems Corporation 

Audited results for the twelve months ended 31 December 2023 

Spectra Systems Corporation (the "Company"), a leader in machine-readable high speed banknote authentication, brand protection technologies, and gaming security software, is pleased to announce its results for the twelve months ended 31 December 2023. 

Financial highlights:  

·             Revenue of $20,288k (2022: $19,627k) up 3.4% 

·             Adjusted EBITDA¹ up 3.9% at $8,394k (2022: $8,077k) 

·             Adjusted PBTA¹ up 6.0% to $8,231k (2022: $7,765k) 

·             Adjusted earnings per share² down 4.1% to US 13.9 cents (2022: US 14.5 cents) 

·             Cash generated from operations of $7,524k (2022: $8,040k)

·            The Board are declaring an annual dividend of US $0.116 per share (2023: US

$0.115) to be paid in June 2024 

·            Cash³ of $13,253k (2022: $17,496k) and debt⁴ of $5,583k (2022 $0k) at

31 December 

·            Acquisition of Cartor Security Printers for £ 5.5M in cash and £3M in stock

at closing with an additional £2M of stock upon achieving milestone in 18 months 

1 Before stock compensation expense and excludes non-controlling interest  

2 Before amortization and stock compensation expense, excludes non-controlling interest  

3 Excludes $513,000 (2022: $1,099k) of restricted cash and investments 

4 Cartor Holding Limited debt acquired on 21 December 2023 

Operational highlights: 

·              Appointment of Edward Spies as Chief Financial Officer in May 2023. 

·             On 21 December 2023, the Company acquired 100% of the shares of

Cartor Holding Limited ("Cartor") in a cash and stock deal for a maximum of £10.5

million in total consideration.  Cartor's operations for the remaining 10 days of the

fiscal year have been incorporated in the financial statements.  

·             Sensor development project progressing towards completion and manufacturing

contract being negotiated 

·             Largest order in the company's history for covert materials from a central bank

received in October 2023  

·            Ongoing polymer substrate product refinement with Middle Eastern central bank

to qualify as a supplier 
 

·            New K-cup customer trials successful with first sales in February 2024 

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

"The Company has made further progress in 2023 with revenue, adjusted profit before tax and amortization and adjusted EBITDA all ahead of the prior year.  EPS is slightly lower this year primarily due to a combination of the issuance of additional shares to Cartor Security Printers as part of the acquisition cost as well as increased taxation borne by the company due to the expiration of Net Operating Loss tax credits. Our cash position remains strong, even after the Cartor Security Printers ("CSP") acquisition.  Cash generation was driven by sensor development milestones and prepayments, record sales of covert materials to a central bank and strong optical materials sales.  

The acquisition of CSP is transformative and brings security printing into the core capabilities of the Company.  CSP brings many optical materials opportunities through their existing sales pipelines and provides Spectra with a secure supply on a par with the two largest banknote polymer substrate suppliers.  Excess capacity at CSP will be critical to polymer substrate manufacturing and the acquisition will increase Spectra margins and supply chain stability. 

The combination of the sensor revenues, expected to begin with the execution of the manufacturing contract, as well as the increased opportunities for optical materials and downstream polymer substrate sales are expected to result in record revenues, cash generation, and continued long term growth. 

The Board therefore believes that the Company is on track to achieve record earnings in 2024."  

Spectra Systems Corporation  Dr. Nabil Lawandy, Chief Executive Officer	Tel: [phone]
WH Ireland Limited (Nominated Adviser and Joint Broker)  Chris Fielding/James Bavister/Andrew de Andrade (Corporate Finance)  Fraser Marshall (Corporate Broking) Allenby Capital Limited (Joint Broker)  Nick Naylor/James Reeve (Corporate Finance)  Amrit Nahal/Guy McDougall (Sales and Corporate Broking)	Tel: [phone]  Tel: [phone]

The person responsible for arranging the release of this announcement on behalf of the Company is Dr. Nabil Lawandy, Chief Executive Officer of the Company. 

Chief Executive Officer's statement  

Introduction 

We are delighted to report that we outperformed the 2022 earnings results with revenue for the year up 3.4% at $20,288k (2022: $19,627k), primarily driven by pre-production development contracts as well as strong demand for our materials to meet production requirements of our long-standing central bank customer.  

As a result of the increased revenue, adjusted EBITDA (before stock compensation expense) for the year increased 3.9% to $8,394k compared to the prior year of $8,077k.   

Having generated cash from operations of $7,524k (2022: $8,040k), cash at the period end was $13,253k (2022: $17,496), excluding $513,000 of restricted cash and investments (2022: $500k), after settling the acquisition, cash consideration of $7 million. This also follows the $5,182k paid to shareholders during June in the form of the Company's dividend of $0.115 per share.   

Review of Operations 

Physical and Software Authentication Business 

The Physical and Software Authentication Systems business generated revenue of $18,411k (2022: $18,164k) and Adjusted EBITDA of $8,266k (2022: $8,005k). Authentication Systems revenues were driven by the large sales of covert materials including the 22% price increase for supply chain mitigation, strong sales of optical materials and the continuing funding for sensor development, which is entering its final phases in 2024.  

Our optical materials business won a new K-cup customer in 2023 which begun purchasing material in February 2024.  In addition, in 2023 we established a new relationship with a major banknote supplier in Indonesia, which has resulted in testing of several of our optical materials, particularly those used in security threads.  

On the software security side of the Company's business, the Secure Transactions Group generated an Adjusted EBITDA of $132k (2022: $72k) on revenue of $1,670k (2022: $1,463k).  The 2023 results are in line with expectations as we continue development of a new software platform. 

Security Printing Business (CSP) 

CSP generated revenue of $146k during the 10 day period ending 31 December 2023.  In its year ended 30 September 2022, based on audited financial statements prepared in accordance with UK GAAP (FRS102), CSP generated an EBITDA of £3,022,088 and profit before taxation of £1,010,026 on turnover of £16,022,532. Its net assets at that date were £4,441,120. In its year ended 30 September 2023, based on unaudited management accounts, Cartor generated an EBITDA of £2,525,100 and profit before taxation of £435,600 on turnover of £16,188,200.  The year ending 2023 was very active with the production of the new Royal Mail postage stamps with HM King Charles ongoing during the acquisition process.  The bulk of this revenue prior to acquisition related to postage stamps. CSP has been heavily focused on growing the more profitable new segment of postage, namely, hybrid stamps which carry serialized information to prevent reuse and counterfeiting. 

The period since the acquisition has seen a smooth and successful integration on all fronts, from accounting to strategic planning and particularly the ongoing polymer qualification process.  Key CSP staff on the polymer substrate program have daily calls with the Spectra materials team in Rhode Island.  Based on the post-acquisition plan at CSP, the focus of the core security printing business will be on hybrid serialized postage stamps, tax and revenue stamps and gaining market share in postage stamps, in addition to producing polymer substrate for Spectra. 

As well as driving Spectra's growth in the polymer substrate market, CSP will enable Spectra to introduce its advanced security technologies into CSP products which include postage stamps, tax and revenue stamps, brand authentication labels and ID documents. CSP has established an international presence in these products, which currently utilize various public features, and is expected to be able to both develop the necessary processes to integrate Spectra's technologies, as well as work with its customers to upsell Spectra products. 

The international polymer substrate market currently has only two suppliers, CCL Industries in Canada and De La Rue International in the UK. Spectra's research and dialogues with central banks has clearly shown the desire of the banks to have another supplier of ready to print bespoke polymer substrate. Spectra has been working with CSP for over two years to achieve high quality conventional and machine-readable, ready for printing polymer substrates that include conductive layers, opacity layers and bespoke window designs as required by central banks. Spectra has enhanced its competitive position in the market by further integrating the production supply chain of FusionTM. The CSP operation has also developed the technology and established the parameters to produce high quality polymer banknote substrates on its machine-readable polymer produced with Spectra covert taggants embedded within polypropylene manufactured at Toray Plastics America.   

During 2023 our testing program with a Middle Eastern central bank evolved from a hopeful supplier to a strong collaborative customer relationship. Through several trials in 2023, which are continuing in 2024, we have become involved in assisting the central bank with other issues related to polymer banknotes, while we rapidly close the remaining gaps to achieve qualification 

In addition to steadily converging on qualification and a tender invitation with the central bank, we have many ongoing initiatives in 2024 with a large polymer banknote printer, commemorative note printers and with another Middle Eastern central bank. 

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 offering.  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 and the implementation of a program with our customer to deal with supply chain issues now and going forward. The acquisition of the CSP security printing business will fuel the growth of sales channels through insertion of Spectra materials into contract renewals and new business proposals.  Several such opportunities have already materialized and are expected to resolve in 2024. 

CSP will follow much the same approach with its traditional customers, focusing on converting them from traditional to the more sophisticated hybrid stamps currently utilized in the UK.  As the exclusive supplier of conventional and hybrid postage stamps in the UK, CSP is well positioned to take advantage of a cascade of adoptions of this higher-level authentication and anti-fraud technology. CSP is also aggressively pursuing growth in its postage stamp business as more state printers decide to outsource the printing of postage stamps.   

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 such features to incorporate public and machine-readable security. Our recent development of smartphone readable security threads will expand the opportunities for the technology in passports and secure documents, including most recently, holograms.  The strategy behind this approach is based around partnering with current contract holders who can benefit from our technology and materials to upsell their existing customers.  Spectra has developed both release layer and hot stamped holograms which carry covert features for potential use in very high value documents and valuable artwork and is searching for partners to deliver this technology.  These new cutting-edge security holograms will be shown at the Upcoming Digital and Document Security conference in Lisbon this April. 

Finally, with our strong cash generation and the upcoming expected windfall from the sensor program, we continue to explore judiciously possible mergers and acquisitions which can cost effectively solve manufacturing needs, provide synergistic expertise in high value areas of authentication, open doors to implement our upselling strategy, and expand our customer base or strengthen our supply chain.  We have evaluated several targets throughout 2023 to this point in 2024 and have passed on all but the CSP acquisition which was a great fit on many levels, particularly the expertise and available machine time for the polymer substrate initiative. The acquisition was timely and eliminated perceived supply chain risks from the vantage point of risk averse central banks. 

CSP Acquisition 

They acquisition of CSP resulted in increases in the following items in the consolidated balance sheet: 

·      Inventory - $3,371k 

·      Property, plant and equipment - $9,353k 

·      Operating lease - $4,257k 

·      Goodwill - $3,557k 

·      Intangible assets - $3,145k 

·      Operating lease liabilities - $4,282k 

·      Third party loans - $5,583k 

Prospects 

The Company continues to have a multitude of new short-term and long-term prospects. The short-term opportunities are expected in the 2024-2026 period and the long-term opportunities are expected in the 2027-2030 time frame.   

The short-term opportunities include: 

·      Execution of sensor manufacturing and service contracts with payments 

·      First sensor shipments to a central bank and additional payments  

·      Security thread optical materials sales with Indonesian partner 

·      Sales of Fusion polymer substrate to Middle Eastern central bank 

·      Indian Passport current format  

·      Swiss Post postage stamp contract 

·      Temporary license plates in Ghana 

·      Yemen tax stamps  

 Long-term opportunities include: 

·      Delivery of Sensors to a central bank  

·     

·      Further increase of covert authentication materials by a current or new central bank

customer 

·      Covert materials for UK and other countries passports 

·      Increased polymer substrate uptake with new public security feature by a major

polymer banknote printer 

·      Mozambique spirits tracking with two-level continuous ink jet materials developed for major

player in tax and revenue stamps

·      Multi-factor holograms for very high value products including art 

·      New Indian passport format 

·      Ethiopian tax stamps

The combination of these prospects generated directly by Spectra Systems Rhode Island and CSP independently and collaboratively, has positioned the Company to accelerate its revenue and earnings growth over the coming years. We continue to develop cutting edge technologies with our expanded security printing capabilities and expertise to remain a technology leader in the authentication industry and to offer our shareholders growth through innovation serving both new and existing customers.    

Dividend 

With the Company having a ninth year of sustainable profits, reaching their highest levels ever, and having sufficient resources to execute on its growth plans with its existing cash reserves post its acquisition of CSP, the Board is delighted to again issue an increased dividend. Our dividend policy takes account of the Group's profitability, underlying growth, and maintenance of sufficient cash reserves. The Board therefore intends to pay an annual dividend of US$0.116 per share on or about June 23, 2024 to shareholders of record as of June 5, 2024. 

Nabil M. Lawandy 

Chief Executive Officer 

March 21, 2023   

Consolidated statements of income

for the years ended 31 December:

		2023			2022
		Audited			Audited
		USD '000			USD '000
Revenue
Product		$         13,401			$           11,208
Service		6,453			6,681
License and royalty		434			1,738
Total revenues		20,288			19,627
Cost of sales		6,664			7,351
Gross profit		13,624			12,276
Operating expenses
Research and development		1,450			1,507
General and administrative		4,198			3,023
Sales and marketing		824			753
Total operating expenses		6,472			5,283
Operating profit		7,152			6,993
Interest income		376			17
Foreign currency income (loss)		(73)			(8)
Profit before taxes		7,455			7,002
Income tax expense		1,430			901
Net income		6,025			6,101
Net loss attributable to noncontrolling interest		(23)			(46)
Net income attributable to Spectra Systems Corporation		$             6,048			$             6,147
Earnings per share
Basic		$               0.13			$               0.14
Diluted		$               0.12			$               0.13

All of the Group's operations are continuing

Consolidated statements of comprehensive income

for the years ended 31 December:

		2023			2022
		Audited			Audited
		USD '000			USD '000
Net income		$            6,025			$            6,101
Other comprehensive income (loss)
Unrealized loss on currency exchange		(110)			(45)
Reclassification for realized (gain)loss in net income		73			8
Total other comprehensive loss		(37)			(37)
Comprehensive income		5,988			6,064
Net loss attributable to non-controlling interest		(23)			(46)
Comprehensive income attributable to Spectra Systems Corporation		$             6,011			$             6,110

Consolidated balance sheets

as of 31 December:

		2023			2022
		Audited			Audited
		USD '000			USD '000
Current assets
Cash and cash equivalents		$        13,253			$        17,496
Trade receivables, net of allowance		3,777			3,677
Unbilled and other receivables		1,394			1,133
Inventory		6,507			1,599
Prepaid expenses		1,207			760
Total current assets		26,138			24,665
Non-current assets
Property, plant and equipment, net		11,098			2,102
Operating lease right of use assets, net		6,308			1,217
Intangible assets, net		13,514			7,055
Investments		95			-
Restricted cash		513			500
Deferred tax assets, net		1,844			1,881
Other assets		586			597
Total non-current assets		33,958			13,352
Total assets		$        60,096			$        38,017
Current liabilities
Accounts payable		$          2,753			$             929
Accrued expenses and other liabilities		813			504
Line of credit		561
Operating lease liabilities, short term		1,107			298
Taxes payable		514			684
Deferred revenue		6,058			4,626
Total current liabilities		11,806			7,041
Non-current liabilities
Operating lease liabilities, long term		5,275			975
Third party loans		5,583			-
Contingent consideration		3,819			-
Deferred revenue		1,500			1,679
Total non-current liabilities		16,177			2,654
Total liabilities		27,983			9,695
Stockholders' equity
Common stock		460			450
Additional paid in capital - common stock		56,152			53,178
Accumulated other comprehensive loss		(211)			(174)
Accumulated deficit		(24,861)			(25,727)
Total Spectra Systems stockholders' equity		31,540			27,727
Non-controlling interest		573			595
Total liabilities and stockholders' equity		$       60,096			$       38,017

Statements of cash flows

for the year ended 31 December:

		2023			2022
		Audited			Audited
		USD '000			USD '000
Cash flows from operating activities
Net income		$            6,025			$            6,101
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,055			917
Stock based compensation expense		180			142
Lease amortization expense		195			287
Deferred taxes		(886)			(801)
Allowance for doubtful accounts		-			(4)
Provision for excess and obsolete inventory		-			694
Changes in operating assets and liabilities
Accounts receivables		2,092			(1,428)
Unbilled and other receivables		245			(503)
Inventory		(1,470)			(349)
Prepaid expenses		(437)			(463)
Other assets		(13)			(500)
Accounts payable		(345)			441
Operating leases		(177)			(285)
Accrued expenses and other liabilities		(190)			417
Deferred revenue		1,250			3,374
Net cash provided by operating activities		7,524			8,040
Cash flows from investing activities
Restricted cash and investments		-			-
Payment of patent and trademark costs		(332)			(476)
Proceeds from sale of equipment		9			-
Acquisition of Cartor Holdings Limited, net of Acquired Cash		(6,201)			-
Purchases of property, plant and equipment		(151)			(988)
Net cash used in investing activities		(6,675)			(1,464)
Cash flows from financing activities
Dividends paid		(5,182)			(5,004)
Repurchase of shares		-			(807)
Finance payments		(31)			(807)
Line of credit		113
Proceeds from exercise of stock options		-			6
Net cash used in financing activities		(5,100)			(5,805)
Effect of exchange rate on cash and cash equivalents		8			(50)
Net decrease in cash and cash equivalents		(4,243)			721
Cash and cash equivalents, beginning of year		17,496			16,775
Cash and cash equivalents, end of year		$          13,253			$          17,496

Non-cash investing activities

Contingent consideration                                                                         3,819                         -

Equity used for investment on CPS                                                         2,805                         -

Notes to financial information

1. Basis of preparation

This report was approved by the Directors on the 26th day of March 2024.

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

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 years ended 31 December 2023 and 2022 were 132,000 and 186,773 shares, respectively, related to stock options because their exercise prices would render them anti-dilutive. The following table shows the calculation of basic and diluted earnings per common share.

	Full Year			Full Year
	to 31 Dec 2023			to 31 Dec 2022
Numerator:
Net income	$      6,047,921			$      6,147,374
Denominator:
Weighted average common shares	45,074,264			45,189,208
Effect of dilutive securities:
Stock Options	3,687,690			2,132,610
Diluted weighted average common shares	48,761,954			47,321,818
Earnings per common share:
Basic:	$               0.13			$               0.14
Diluted:	$               0.12			$               0.13

3. Copies of this statement are available to the public on the Company's website at http://www.spsy.com.

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 2023 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 April 2024.

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:

		2023		2022
		USD '000		USD '000

Adjusted earnings before interest, taxes,

depreciation and amortization (EBITDA):

Operating profit		$            7,152		$             6,993
Depreciation		466		321
Amortization		584		594
Stock compensation		180		142
Operating loss - noncontrolling interest		23		46
Stock compensation - noncontrolling interest		(11)		(19)
Adjusted EBITDA		$             8,394		$              8,077

Adjusted profit before taxes and

amortization (PBTA):

Profit before taxes		$            7,455		$             7,002
Amortization		584		594
Stock compensation		180		142
Operating loss - noncontrolling interest		23		46
Stock compensation - noncontrolling interest		(11)		(19)
Adjusted PBTA		$             8,231		$              7,765

Adjusted earnings per share:

Adjusted PBTA		$             8,231		$             7,765
Income tax expense		(1,430)		(901)
Adjusted earnings		$             6,801		$             6,864
Diluted weighted average common shares		48,761,954		47,321,818
Adjusted earnings per share		$             0.139		$             0.145

 

END