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.
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Financial highlights:
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· 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
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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:
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"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."
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Spectra Systems Corporation Dr. Nabil Lawandy, Chief Executive Officer ? | Tel: +1 (0)401 274 4700 ? |
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: +44 (0)20 7220 1650
? ? Tel: +44 (0)20 3328 5665 ? |
| |
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
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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.
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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
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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 |
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