Spectra (di/ S) Regulatory News (SPSC)

Spectra Systems Corporation

Interim results for the six months ended 30 June 2018

Spectra Systems Corporation, a leading provider of advanced technology solutions for banknote and product authentication, is pleased to announce its interim results for the six months ended 30 June 2018.

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

Financial highlights:

· Revenue up 11% in the first half at $7,953k (2017: $7,157k)

· Adjusted EBITDA1 up 30% at $3,930k (2017: $3,022k)

· Adjusted PBTA2 up 34% at $3,802k (2017: $2,834k),

· Adjusted earnings2 per share up 30% at US $7.8 cents (2017: US $6.0 cents)

· Cash generated from operations of $4,051k (2017: $2,668k)

· Strong, debt-free balance sheet, with cash3 of $12,295k (2017: $9,451k) at 30 June

· Annual dividend up 20% to US$0.06 per share ($2,728 in aggregate) paid in June

1 Before stock compensation expense and foreign currency effects

2 Before amortization and stock compensation expense

3 Does not include $1,099k (2017: $1,097k) of restricted cash and investments

Operational highlights:

· Executed an exclusive, worldwide, licensing agreement and supply agreement for one of our existing products, which is in use by 18 central banks through an existing licensee, a major supplier of banknotes worldwide

· Delivered large G7 customer order on time

· Operational expenses reduced due to termination of royalty payments

· Brand Authentication and Secure Transactions Group performing in line with expectations

· QC readers for TruBrand delivered to customer in preparation for production

· Engaged by a G20 central bank to commence Phase I of a four-phase funded sensor development for use with polymer banknotes

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

"The Company's revenues for the first half of 2018 are 11 % higher than 2017 and were driven by delivery of a large G7 customer order and royalty and license revenue from our agreement with a major banknote supplier. As a result of our operating gearing adjusted EBITDA for the first half of the year is markedly higher, 30%, than last year resulting in strong midyear profitability. The continued in line performance of the Secure Transactions Group as well as Brand Authentication puts the company in a strong position to meet market expectations for the full year.

The delivery of two quality control devices to a tobacco manufacturer has increased our chances of introducing our TruBrand smartphone authentication technology in China. This is in addition to the recent allowance by the United States Patent Office of our patents on this technology.

The Board therefore believes that the Company, by achieving key business milestones, will continue to perform well for the remainder of 2018 with excellent prospects for ongoing earnings growth thereafter."

Enquiries:

Chief Executive Officer's statement

Introduction

Through achieving key commercial milestones, as described in the Review of Operations below, Spectra Systems is on track to deliver an excellent performance for the full 2018 financial year.

Revenue for the half year was up 11% at $7,953k (2017: $7,157k) due to higher royalties and sales of covert materials. Revenue this year will be heavily biased towards the first half of 2018 with continued positive earnings anticipated throughout H2.

As a result of the above factors, Adjusted EBITDA (before stock compensation expense) for the half year was up 30% at $3,930k compared to the prior year of $3,022k. The termination of royalty payments during the first half of 2018 has led to a significant reduction in operating expenses.

Having generated cash from operations of $4,051k (2017: $2,668k), cash at the period end amounted to $12,295k (2017: $9,451k), excluding $1,099k of restricted cash and investments (2017: $1,097k). This is notwithstanding $2,728k paid to shareholders during June in the form of the Company's dividend of $0.06 per share.

Review of Operations

Authentication Systems

The Authentication Systems business, which includes the security phosphor materials, generated revenue of $7,326k (2017: $6,548k) and Adjusted EBITDA of $3,681k (2017: $2,808k). Authentication Systems revenues, primarily in the form of royalty and license payments by our licensee and direct sales to another G7 central bank, underpin these results.

We have successfully completed the first phase of a sensor development program with a G20 central bank for use of one of our technologies for polymer notes. The program was reviewed by the G20 bank staff in May of this year.

The TruBrand authentication product introduction effort is performing on track with the delivery of two off-line quality control devices to a tobacco factory in China and the notice of allowance of the underlying patents by the United States Patent and Trademark Office.

Secure Transactions Group

The Secure Transactions Group, formed around the various gaming technology acquisitions made in 2012, performed in line with management expectations, generating Adjusted EBITDA of $249k (2017: $214k) on revenue of $627k (2017: $609k).

The Secure Transactions Group has won new contracts with two US state lotteries and secured three new licenses as it continues to roll out the 64-bit Premier Integrity product package. The Secure Transaction Group will complete its ISO-27001 Certification in 2018 and continues to look for opportunities to sell its products in the emerging sports betting business in the USA.

Strategy

The Company's strategy for increasing revenue and earnings continues to be focused on brand authentication and specialty optical materials for security applications while maintaining a robust effort to commercialize our covert security technologies with an emphasis on polymer banknotes. The brand authentication sector offers short term growth and some very large opportunities for smartphone based technology while the covert banknote security area provides long term, multi-decade revenues once new contracts are executed.

We have developed and introduced a covert material technology for the polymer notes of a G20 central bank. This technology is in a four phase externally funded development and testing program which has successfully met the first phase milestones. In addition to this polymer note security technology, we have formed a partnership with one of the largest suppliers of polymer substrates as those used for banknotes with the goal of eventually being a supplier of polymer substrates with unique covert properties, a capability which has not been possible to date. Our effort in security features for polymer banknotes is based on the use of polymer notes beginning to outpace paper banknote production.

The Secure Transactions Group continues to innovate within the lottery ICS industry, reducing cost and increasing efficiency with the introduction of Virtualized Machines and its Premier Integrity package. This focus on software innovation has resulted in the recent contract awards from two US state lotteries.

Prospects

The important, near-term opportunities are:

· The manufacturing of market-trial product to be sold in China for use in conjunction with our TruBrand technology

· The continued polymer technology sensor development and testing phases with a G20 central bank

· The adoption of our phosphours for use by a supplier of products to a major Asian central bank

· The commencement of contracted, 36 month development of third generation sensors for direct sale to a G7 central bank customer

The longer term opportunities are:

· A licensing and supply agreement for polymer based technology developed through external funding with a major central bank

· The development and supply of further upgraded sensor capability to a G7 central bank following the contracted development phase

· The introduction of a secure polymer substrate to central banks, which combines high security and a durable substrate in one product

Nabil M. Lawandy

Chief Executive Officer

September 24, 2018 

Statements of income and other comprehensive income

for the half year ended 30 June 2018

All of the Group's operations are continuing

Balance sheets

as of 30 June 2018

Statements of cash flows

for the half year ended 30 June 2018

Notes to financial information

1. Basis of preparation

This report was approved by the Directors on 20 September 2018.

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 2018 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2017.

The results for the half year are unaudited. The financial information for the year ended 31 December 2017 does not constitute the full statutory accounts for that period. The Annual Report and financial statements for the year ended 31 December 2017 have been filed with the Registrar of Companies. The Independent Auditors' Report on the financial statements for the year ended 31 December 2017 was unmodified and did not draw attention to any matters by way of emphasis.

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. The following table shows the calculation of basic and diluted earnings per common share.

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