TIDMSPSY TIDMSPSC
RNS Number : 2153H
Spectra Systems Corporation
23 March 2020
Spectra Systems Corporation
Audited results for the twelve months ended 31 December 2019
Spectra Systems Corporation, a leading provider of advanced
technology solutions for banknote and product authentication and
gaming security, is pleased to announce its audited results for the
twelve months ended 31 December 2019.
This announcement contains inside information for the purposes
of Article 7 of Regulation 596/2014.
Financial highlights:
-- Revenue up 6% for the year at US$13,234k (2018: US$12,494k)
-- Adjusted EBITDA (1) up 8% at US$5,473k (2018: US$5,045k)
-- Adjusted PBTA (1) up 9% to US$5,235k (2018: US$4,782k)
-- Adjusted earnings(2) per share up 6% to US$10.4 cents (2018: US$9.8 cents)
-- Net income up 7% at US$4,335k (2018: US$4,055k)
-- Cash generated from operations of US$5,789k (2018: US$4,740k)
-- Strong, debt-free balance sheet, with cash (3) of US$14,250k (2018: US$12,662k)
-- Declaring special annual dividend up 28.5% to US$0.09 per
share to be paid in June to reflect freed-up cash
(1) Before stock compensation expense
(2) Before amortization and stock compensation expense
(3) Does not include US$1,344k (2018: US$1,099k) of restricted
cash and investments
Operational highlights:
-- Execution of a ten-year agreement with a multinational
supplier of polymer for our newly developed machine readable
polymer banknote substrates (MR-BOPP)
-- Market introduction of our TruBrand product in the Chinese
market (>6,000,000 packs) and scheduled machine tests for
larger-scale production
-- Covert technology submission to a major Asian central bank
tender has resulted in a semi-final selection of Spectra Systems
and one other company, with the decision pending
-- Execution of a five-year extension to a supply agreement with
one of the world's largest suppliers of security inks
-- G7 central bank order for three advanced quality control
units used in the manufacturing of banknotes with our materials
-- Accelerated research funding for future sensor technology
development for a G7 central bank with both phases of two approved
and extending through Q1 2021
-- New international jurisdiction contract win for the secure
transactions group increasing its customers to 17 USA states and
three international lotteries and the commencement of a product
upgrade effort which will result in downstream personnel
savings
-- Full qualification of our phosphors with a security thread
supplier to a major Asian central bank
-- Execution of a five-year service agreement with a major
banknote printer and existing licensee and renewal of a five-year
service agreement with a G7 central bank
Commenting on the results, Nabil Lawandy, Chief Executive
Officer, said:
"The Company's revenues have increased by 6% and PBTA is up 9%
over 2018 driven by significant early stage research funding for
future sensor technology development for a G7 central bank and
equipment sales to a major banknote printer."
"The delivery of two quality control devices to a tobacco
manufacturer and the adoption of TruBrand smartphone authentication
technology to protect a top cigarette brand in China has increased
our chances of expanding the use of this product to the billions of
packs in the market over time. In spite of expected delays due to
Covid 19, we expect these production trials with the QC devices to
take place in the second half of 2020, thereby shifting orders to
2021. In addition, we have testing underway with a polymer based
solution for cigarette packaging as another modality of using our
TruBrand technology."
"With the spread of the Covid 19 virus and the sporadic
implication of banknotes as a means of transmission, we have
received a significant number of enquiries from central banks and
banknote equipment suppliers representing retail operations such as
casinos regarding our Aeris banknote cleaning and disinfection
system. This is unlikely to result in immediate sales but could
create downstream, post coronavirus outbreak, interest to have
readiness for future viral or bacterial pandemics."
"The rapid development of our breakthrough, first in the
industry, machine-readable and highly transparent polymer banknote
substrate will allow us to highlight this new product at the
Banknote 2020 conference (re-scheduled to November 2-5, 2020 due to
Covid 19) where we hope to enlist several central banks into trials
which will allow us to be a viable supplier when they open their
next tenders."
"Our strong two decade long relationship with a G7 central bank
continues to drive the introduction of more advanced products and
an increasingly steady stream of hardware sales. These advances in
hardware are expected to result in even more advanced taggants,
with increased revenues and margins in the long term."
"In addition, with the Company's strong cash position and
ultra-stable banknote business, the Board is examining the
possibility of expanding the business beyond authentication in
areas where our core competence of optics, chemistry, and
engineering could be effectively leveraged to more rapidly increase
shareholder value."
"The Board believes that the Company, by achieving key business
milestones, will continue to perform well and will exceed market
expectations for 2020."
Enquiries:
Spectra Systems Corporation
Dr. Nabil Lawandy, Chief Executive Officer Tel: +1 (0) 401 274
4700
WH Ireland Limited
Chris Fielding ( Managing Director, Corporate Finance ) Tel: +44
(0) 20 7220 1650
Chief Executive Officer's statement
Introduction
Through achieving key commercial milestones, as described in the
Review of Operations below, Spectra Systems has delivered an
excellent performance for the 2019 financial year, continuing its
track record of year to year profit growth.
Revenue for the year was US$13,234k (2018: US$12,494k) due to e
arly-stage research funding for future sensor technology
development for a G7 central bank and equipment sales to a major
banknote printer. In addition, sales of optical materials deferred
from 2018 further enhanced our revenue in 2019. Covert materials
revenue was down in comparison to the prior year which contained
higher than normal customer orders. Adjusted EBITDA (before stock
compensation expense) for the year increased 8% to US$5,473k
compared to the prior year of US$5,045k, which resulted in net
income up 7% at US$4,335k (2018: US$4,055k) despite a US$219K
increase in tax expense as the Company has fully utilized its state
net operating loss carryforwards and is now liable for payment of
Rhode Island state income taxes.
Having generated cash from operations of US$5,789k (2018:
US$4,740k), cash at the period end amounted to US$14,250k (2018:
US$12,662k), excluding US$1,344 of restricted cash and investments
as of December 31, 2019 (2018: US$1,099k). This is notwithstanding
US$3,213k paid to shareholders during June 2019 in the form of the
Company's dividend of US$0.07 per share.
With increased clarity on the terms of the Asian central bank
bond requirements if we are successful, the Company is therefore
declaring an annual dividend up 28.5% at $0.09 per share to be paid
in June 2020. This is a one-time special dividend to return capital
to shareholders as one of the key reasons for holding cash has been
resolved. The Company will continue to have sufficient cash
resources thereafter to execute on its growth plans.
Finally, the Board of Directors will be extending the share
buy-back authorization of up to 4,500,000 common shares through the
end of March 2021, under the same terms as announced on April 10,
2019. A total of 51,000 common shares have already been purchased
and cancelled under this authority.
Review of Operations
Authentication Systems
The Authentication Systems business, which includes security
phosphor materials, generated revenue of US$11,829k (2018:
US$11,204k) and adjusted EBITDA of US$5,065k (2018: US$4,584k).
Authentication Systems revenues are driven by sales of covert
materials and their associated equipment and service, optical
materials and license royalties. We sell covert materials directly
to one G7 central bank and indirectly to 19 other central banks
through our supply and licensing agreements with a major banknote
supplier and printer who pays a license royalty for the exclusive
rights to our technology.
The increased revenue is due to e arly stage research funding
for future sensor technology development for a G7 central bank ,
equipment sales to a major banknote printer and increased sales of
optical materials. Covert materials revenue was down in comparison
to the prior year which contained higher than normal customer
orders.
The TruBrand authentication business penetrated the Chinese
market with the introduction of our product on over 6 million packs
of cigarettes. However, a larger-scale trial on a different
printing process has suffered a temporary delay due to the Covid 19
pandemic and is expected to be back on track by the second half of
2020. Once the print trial with our current customer is completed,
we expect orders in the hundreds of millions of packs to follow.
Further, we have good traction with other opportunities for
TruBrand in areas ranging from sports memorabilia to tires which
are not as directly affected by Covid 19.
Our optical materials-based product which allows k-cups to be
compatible and functional with Keurig coffee makers continues to be
a success and we are currently in trials with a new and larger
supplier of fully compostable coffee pods for the Keurig
system.
We have executed a key exclusive supply agreement with a global
polymer producer to provide the industry's first and only
machine-readable polymer banknote substrate, our MR-BOPP product.
This is a key development that could increase authentication
revenues by an order of magnitude as we move up the banknote
production supply chain through the combination of substrate and
security in the polymer substrate. We are featuring our MR-BOPP at
the Banknote 2020 conference in Washington DC which has been
rescheduled to November 2-5 due to Covid 19 and hope to interest
central banks in validating the product performance for their
specifications and next tenders for polymer substrates.
Secure Transactions Group
The Secure Transactions Group generated revenue of US$1,405k
(2018: US$1,290k) and adjusted EBITDA of US$408k (2018: US$461k).
The delays relating to the release of new lottery industry
regulations which stalled additional revenue during 2018 from the
usual software development related to the introduction of new games
continued into 2019. Despite this, revenue increased 9% due to the
effect of new contracts from 2018 and system conversions to our
64-bit Premier Integrity product. The Group has also won a new
contract with a major European lottery taking its international
customer base to three lotteries, and increasing its profile on the
international stage as more jurisdictions consider outsourcing the
internal control function. The lower EBITDA in 2019 is due to ISO
27001 certification costs and recruiting fees and salaries which
are an investment in future lower operating costs, particularly on
the software development side of the business. These increased
salary costs are expected to last for approximately 18 months and
will be recovered in reduced operational costs by 2022.
Strategy
The Company's strategy for increasing revenue and earnings
continues to be focused on both brand authentication and a robust
effort to commercialize our covert security technologies with an
emphasis on polymer banknotes and technology driven existing
central bank customers. The brand authentication sector offers
short-term growth potential and some very large opportunities for
smartphone-based technology, while the covert banknote security
sector provides stable long-term, multi-decade revenues once new
contracts are executed.
We have formed a partnership with one of the largest suppliers
of polymer substrates with the goal of eventually being a supplier
of polymer substrates with unique covert properties, a capability
which has not been possible to date until the introduction of our
MR-BOPP product. Our effort in security features for polymer
banknotes has been driven by the polymer banknote beginning to
outpace paper banknote production; the CAGR of polymer substrate
banknotes is estimated to be 18%, far outpacing paper substrates
(a) . Our newest machine-readable substrate, MR-BOPP, will allow
central banks to use polymer for all denominations, without
sacrificing the inherent substrate security previously only
obtainable with paper substrates. We believe that once adopted by a
central bank, we will not only have effectively expanded the
available market beyond its current size, but will do so on an
exclusive basis.
Through our close, multi-decade relationship with our direct G7
customer, we have become a trusted supplier of technology and hence
have already begun funded hardware work related to our existing
sensors as well as new efforts to further improve their
anti-counterfeit detection capabilities. We are strategically
enabling our long-term G7 customer to use more advanced taggants
which will result in higher revenue and increased profitability for
many decades to come once implemented.
With a strong and sticky customer base in the banknote sector
providing stability and growth, the Company is examining the
possibilities of diversifying the business beyond authentication.
Other business areas where our core competencies in optics,
engineering, physics and chemistry are at the world class level
include biotechnology assays, energy conversion, and medical
devices. Over the next quarter, we will have concluded this study
and will report to shareholders on our findings.
(a) Global Polymer Banknotes Market: Industry Analysis &
Outlook, Koncept Analytics (2019)
Prospects
The Company continues to have numerous long-term and
shorter-term prospects. The shorter-term opportunities are expected
in the 2020-2022 period and the longer-term opportunities are
expected in the 2023-2025 time frame.
The important, near-term opportunities are:
-- The increased number of tobacco packs sold in China with our
TruBrand materials and smartphone App. Management is confident that
TruBrand will reach several hundred million packs once the Covid 19
situation resolves itself and we successfully complete the new
print trial with our existing customer;
-- The adoption of one of our covert security products by a
major Asian central bank which has moved forward and has narrowed
the field to Spectra Systems and one other company;
-- The adoption of our phosphors for use by a supplier of
products to a major Asian central bank;
-- Additional funding beyond the currently contracted research program with a G7 central bank;
-- The execution of a multi-million dollar sensor development
contract with a G7 central bank; and
-- The expansion of the optical materials business with compostable K-cup customers.
The longer-term opportunities are:
-- A licensing and supply agreement for polymer-based technology
developed with a major central bank;
-- The supply of further upgraded sensor capability to a G7
central bank following the contracted development phase; and
-- The introduction of a secure polymer substrate to central
banks, which combines high security and a durable substrate in one
product.
We are pleased that we were able to supplement our sustained and
growing profitability with a number of near-term and longer-term
prospects of a significant scale. We believe that we have a number
of transformative opportunities ahead in several aspects of our
business that will sustain and potentially accelerate our earnings
for our shareholders.
With the Company having a fourth year of sustainable profits,
reaching their highest levels since listing, and having sufficient
resources to execute on its growth plans with its existing cash
reserves, the Board is delighted to provide shareholders with a
significantly larger annual dividend this year as one of the major
reasons for holding cash has been resolved, allowing for this one
time, much larger dividend. The Company's dividend policy takes
account of the Group's profitability, underlying growth, and the
maintenance of sufficient cash reserves for current and in the
pipeline requirements. The Board therefore intends to pay an annual
dividend of US $0.09 per share on or about June 26, 2020 to
shareholders of record as of June 5, 2020.
Nabil M. Lawandy
Chief Executive Officer
March 23, 2020
Statements of income and other comprehensive income
for the years ended 31 December:
2019 2018
Audited Audited
USD '000 USD '000
Revenue $ 13,234 $ 12,494
Cost of sales 3,847 3,527
-------------------------- --------------------------
Gross profit 9,387 8,967
Operating expenses
Research and development 1,741 1,830
General and administrative 2,852 2,571
Sales and marketing 445 677
-------------------------- --------------------------
Total operating expenses 5,038 5,078
-------------------------- --------------------------
Operating profit 4,349 3,889
Interest and other income 197 158
Foreign currency gain
(loss) (11) (11)
-------------------------- --------------------------
Profit before taxes 4,535 4,036
Income tax expense (benefit) 200 (19)
-------------------------- --------------------------
Net income $ 4,335 $ 4,055
-------------------------- --------------------------
Earnings per share
Basic $ 0.09 $ 0.09
Diluted $ 0.09 $ 0.08
Other comprehensive income
(loss)
Unrealized loss on currency
exchange (16) (19)
Reclassification for
realized gain in net
income 11 11
-------------------------- --------------------------
Total other comprehensive
loss (5) (8)
Comprehensive income $ 4,330 $ 4,047
========================== ==========================
All of the Group's operations are continuing
Balance sheets
as of 31 December:
2019 2018
Audited Audited
USD '000 USD '000
Current assets
Cash and cash equivalents $ 14,250 $ 12,662
Trade receivables, net of allowance 1,497 1,075
Unbilled and other receivables 295 139
Inventory 3,081 3,269
Prepaid expenses 189 141
Total current assets 19,312 17,286
Non-current assets
Property, plant and equipment, net 1,684 1,587
Operating lease right of use assets, net 1,104 -
Intangible assets, net 6,347 6,697
Restricted cash and investments 1,344 1,099
Deferred tax assets 1,400 1,400
Other assets 138 150
------------------------ ------------------------
Total non-current assets 12,017 10,933
------------------------ ------------------------
Total assets $ 31,329 $ 28,219
======================== ========================
Current liabilities
Accounts payable $ 357 $ 269
Accrued expenses and other liabilities 636 827
Operating lease liabilities, short term 191 -
Taxes payable 203 3
Deferred revenue 1,219 703
------------------------ ------------------------
Total current liabilities 2,606 1,802
Non-current liabilities
Operating lease liabilities, long term 945 -
Deferred revenue 667 540
------------------------ ------------------------
Total non-current liabilities 1,612 540
Total liabilities 4,218 2,342
------------------------ ------------------------
Stockholders' equity
Common stock 459 455
Additional paid in capital - common stock 55,505 55,390
Accumulated other comprehensive loss (119) (114)
Accumulated deficit (28,732) (29,854)
Less: Common stock held in treasury (2) -
------------------------ ------------------------
Total stockholders' equity 27,111 25,877
------------------------ ------------------------
Total liabilities and stockholders' equity $ 31,329 $ 28,219
======================== ========================
Statements of cash flows
for the years ended 31 December:
2019 2018
Audited Audited
USD '000 USD '000
Cash flows from operating
activities
Net income $ 4,335 $ 4,055
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 1,037 1,005
Stock based compensation expense 87 156
Lease amortization expense 256
Allowance for doubtful accounts (1) 6
Deferred taxes - (175)
Provision for excess and obsolete
inventory - 250
Loss on disposal of assets - 1
Changes in operating assets
and liabilities
Accounts receivables (420) 148
Unbilled and other receivables (156) 57
Inventory 189 235
Prepaid expenses (47) (27)
Other assets - 1
Accounts payable 88 69
Operating leases (223)
Accrued expenses and other
liabilities 7 (696)
Deferred revenue 637 (345)
--------------------------- ---------------------------
Net cash provided by operating
activities 5,789 4,740
Cash flows from investing activities
Restricted cash and investments (245) -
Payment of patent and trademark
costs (249) (325)
Purchases of property, plant
and equipment (522) (206)
--------------------------- ---------------------------
Net cash used in investing
activities (1,016) (531)
Cash flows from financing activities
Dividends paid (3,213) (2,728)
Acquisition of treasury stock (2) -
Proceeds from exercise of stock
options 32 11
--------------------------- ---------------------------
Net cash used in financing
activities (3,183) (2,717)
Effect of exchange rate on
cash and cash equivalents (2) (11)
--------------------------- ---------------------------
Net increase in cash and cash
equivalents 1,588 1,481
Cash and cash equivalents
, beginning of period 12,662 11,181
--------------------------- ---------------------------
Cash and cash equivalents
, end of period $ 14,250 $ 12,662
=========================== ===========================
Notes to financial information
1. Basis of preparation
This report was approved by the Directors on 19 March 2020.
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 2019 and are
unchanged from those disclosed in the Company's Annual Report for
the year ended 31 December 2018 except that the Company adopted ASU
No. 2016-02, "Leases (Topic 842)" on January 1, 2019 using the
modified retrospective method, which allows entities to not restate
the comparative prior periods in the period of adoption when
transitioning to Topic 842. Therefore, the consolidated condensed
financial statements for 2019 are presented under the new standard,
while the comparative periods presented are not adjusted and
continue to be reported in accordance with the Company's historical
accounting policy.
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 year ended December 31, 2018 were 95,063
shares related to stock options because their exercise prices would
render them anti-dilutive. For the year ended December 31, 2019, no
shares 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 .
Full Year Full Year
to 31 Dec 2019 to 31 Dec
2018
Numerator:
Net income $ 4,335,233 $ 4,054,949
Denominator:
Weighted average common
shares 45,868,615 45,463,480
Effect of dilutive securities:
Stock Options 2,701,377 3,472,948
--------------------- ---------------------
Diluted weighted average
common shares 48,569,992 48,936,428
===================== =====================
Earnings per common share:
Basic: $ 0.09 $ 0.09
===================== =====================
Diluted: $ 0.09 $ 0.08
===================== =====================
3. Leases
On January 1, 2019, the Company adopted ASU No. 2016-02, "Leases
(Topic 842)" utilizing the modified retrospective adoption method
which allows entities to not restate the comparative prior periods
in the period of adoption when transitioning to Topic 842. Under
Topic 842, the Company elected the package of transition practical
expedients to not reassess (1) any expired or existing contracts
that are leases or contain leases, (2) the classification of any
expired or existing leases and (3) initial direct costs for any
existing leases. Therefore, the consolidated condensed financial
statements for 2019 are presented under the new standard, while the
comparative periods presented are not adjusted and continue to be
reported in accordance with the Company's historical accounting
policy. This standard requires all lessees to recognize a
right-of-use ("ROU") asset and a lease liability, initially
measured at the present value of the lease payments, for all leases
with a term greater than 12 months. The adoption of the new lease
standard had a significant impact on the Company's consolidated
condensed balance sheets due to the recognition of right-of-use
assets for operating leases and a corresponding lease obligation.
The adoption of Topic 842 did not have a material impact on the
Company's lease classification or on its statements of operations
and liquidity.
The Company leases office space, manufacturing plants,
warehouses and laboratory space. Certain real estate leases include
one or more options to renew, with renewal terms that can extend
the lease term for up to five years. The exercise of lease renewal
options are at the Company's sole discretion. When deemed
reasonably certain of exercise, the renewal options are included in
the determination of the lease term and lease payment obligation,
respectively.
ROU assets represent the right to use an underlying asset for
the lease term and lease liabilities represent the obligation to
make lease payments arising from the lease. Operating lease ROU
assets and liabilities are recognized at the commencement date of
the lease based on the present value of lease payments over the
lease term. When readily determinable, the Company uses the rate
implicit in the lease contract in determining the present value of
lease payments. If the implicit rate is not provided, the Company
uses its incremental borrowing rate based on information available
at the lease commencement date, including the lease term. The
operating lease ROU asset also includes any lease payments made and
excludes lease incentives. Lease expense for lease payments is
recognized on a straight-line basis over the lease term. The
Company has lease agreements with lease and non-lease components
and has elected to account for the lease and non-lease components
as a single lease component.
4. Nature of financial information
The statutory accounts of Spectra Systems Corporation in respect
of the period ended 31 December 2019 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
2020.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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