Spectra (di/ S) Regulatory News (SPSC)

Spectra Systems Corporation

("Spectra Systems" or the "Company")

Preliminary results for the twelve months ended 31 December 2014

Spectra Systems, a leading provider of advanced technology solutions for banknote and product authentication, announces its preliminary results for the twelve months ended 31 December 2014.

Financial highlights:

- Revenue increased 46% to USD 16,906k (2013: USD 11,572k)

- Adjusted EBITDA1 before taxation of USD 2,143k, compared to a prior year loss of USD (657k)

- Adjusted earnings1 per share of USD 0.05, compared to a prior year loss of USD (0.02)

- Strong balance sheet, with cash of USD 9,773k (2013: USD 13,435k) at 31 December

1 before stock compensation expense and exceptional items

Operational highlights:

· Large G8 banknote authentication materials order fully fulfilled

· Shipping of sensors for $8MM contract continued through 2014, and expected to be completed by Q3 2015

· Phosphour sales at record levels in 2014

· New manufacturing facility is security cleared by our corporate partner. First deliveries shipped for sale to corporate partner's 18 central bank customers. Final material qualification for a Spectra G8 central bank customer is underway and expected to conclude by Q3 2015

· AerisTM note cleaning testing on behalf of a G8 central bank progressing very well and testing on behalf of an Asian central bank commencing Q3 of 2015. USA patents for the technology were issued in Q1 2015

· Secure Transactions Group performed in line with expectations

· Inksure asset purchase transaction closed in 2014, generating sales in line with expectations, with growth forecasted in 2015

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

"I am delighted to present this set of results in which Spectra, on the back of a 46% increase in revenues, has turned an adjusted EBITDA of USD (657k) in 2013 into an Adjusted EBITDA of USD 2,143k in 2014, comfortably meeting market expectations.

This excellent set of results is built on a particularly strong performance from our authentication activities, combined with satisfactory performances in our other activities.

We are delighted that the overall business is on an upward trajectory. It should be noted that we benefited in 2014 from several significant contracts, the revenues from which are not expected to be replicated in 2015. The Board is however confident that new opportunities for consumables will compensate for these concluded revenues within several years.

The Board therefore believes that the Company continues to have excellent prospects.

Enquiries:

Chief Executive Officer's statement

Introduction

Through achieving key commercial milestones, as described in the Review of operations below, Spectra Systems has increased revenues substantially over those generated in 2013, which has resulted in a return to profits, with 2013 losses transformed into a meaningful profit in 2014.

Revenue exceeded prior year by 46% at USD 16,906k (2013: USD 11,572k). EBITDA for the year, adjusted primarily for stock compensation expense, amounted to USD 2,143k, compared to a prior year loss before exceptional items of USD (657k).

Revenue was driven by exceptionally large material orders from our G8 central bank customer. Although orders of this magnitude are unlikely in 2015, the customer is considering entering into a 10 year contract which will include materials as well as quality control equipment and services. Such a contract is expected to reimburse cost incurred in building the facility and would enhance the visibility of future revenues. Improved margins from both cost cutting initiatives as well as lower manufacturing costs from the in-house facility are long-lived initiatives which will contribute to profitability going forward.

Cash at the period end amounted to USD 9,773k (2013: USD 13,435k) which reflects the acquisition of Inksure assets for approximately USD 1.4M and the settlement of the lawsuit for approximately USD 2M. The company has no debt and therefore has sufficient resources to execute on its manufacturing plans with its cash reserves.

Review of operations

Authentication Systems

The Spectra Systems Authentication Systems activities delivered a particularly strong performance compared to 2013, generating revenue of USD 15,527k (2013: USD 9,982k) and EBITDA of USD 1,924k, compared to a prior year loss of USD (1,143k).

Particular achievements included:

· The successful completion of a very large order for a central bank customer, demonstrating our ability to deliver large volumes of machine readable authentication consumables on time and to a consistently high quality

· The delivery of over 115 upgraded sensors in 2014, with the remainder to be delivered in 2015, to a G8 central bank, demonstrating our capability to provide extremely sophisticated hardware systems. This order also serves to support the longevity of our future consumable sales to this customer

· Phosphour sales reaching record levels in 2014

· The qualification of our new manufacturing facility by our partner, a major worldwide supplier of banknote printing services and paper, and first shipments from our facility to that partner; and tangible traction towards final material qualification by a G8 central bank, which is anticipated later this year and

· The ongoing evaluation by a G8 central bank of a new covert security feature for polymer notes, which is a refinement of the second generation authentication work funded and abruptly cancelled by another G8 central bank last year. In addition, discussions with a major Asian central bank for a bank note security feature based on this technology expected to result in a development agreement in 2015.

Our Authentication Systems businesses delivered a particularly strong performance in 2014, a year in which they benefited from several significant contracts (for sensors and the very large consumables order); however the revenues from these contracts are not expected to be replicated in 2015. The Board is however confident that new opportunities for consumables will compensate for these concluded revenues within several years.

In the branded goods industry, the use of mobile phones to authenticate products has been regarded as the holy grail of the authentication industry for many years. Many have tried and produced security features that are easily subverted or simply only work in highly controlled environments. Spectra has solved this problem and has a label available for sale called TruBrandTM which is compatible with most, but not all, packaging. In parallel, it is continuing work on a version which will allow us to tap into the sportswear and footwear market which requires soft fabric based labels.

Secure Transactions Group technologies

The Secure Transactions Group, formed around the various gaming technology acquisitions made in 2012, performed in line with management expectations generating EBITDA of USD 569k (2013: USD 760k) on revenue of USD 1,379k (2013: USD 1,590k).The decrease in revenue was anticipated as a result of certain customers transitioning to in-house control systems, as well as expected delays in contract execution gap for new customers.

The Secure Transactions Group has been particularly successful in upselling existing customers to its "Premier Integrity" package, which includes bundled licensing, integration of new games, and service. This bundling approach with higher overall margins, allows us to maintain our revenue base as we continue to compete for new lottery and gaming customers worldwide.

Banknote cleaning

The area of banknote fitness and cleaning continues to provide the Company with a potentially much larger target market within the banknote industry than our security activities, and will enable us to provide central banks with products which generate an immediate return on investment.

While there was no revenue contribution from the business line in 2014 or 2013, development expenses related to the product validation and marketing were USD 350k (2013: USD 274k)

Notwithstanding the decision of the Banco de Mexico, which is heavily invested in polymer notes, that Spectra System's AerisTM banknote cleaning technology was not appropriate for its needs, testing of the technology continues with a G8 central bank, with very positive results, and is scheduled to commence with an Asian central bank in Q3 of 2015.

The Board continues to be particularly excited by this technology, which has the potential to substantially reduce central bank costs and environmental issues in disposing of soiled banknotes. It was therefore delighted that two US patents on the use of supercritical fluids for cleaning and decontaminating banknotes in circulation was issued to the Company in January 2015.

Our progress with testing AerisTM has demonstrated a strong business case which we believe will prove compelling but will require patience and continued efforts to create a level of comfort through increasingly larger volume testing.

Strategy

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

· Integrating new machine-readable technologies into public security features for banknotes, tax stamps and brand product packaging with a particular focus on Asia

· Expanding our Secure Transactions Group contributions by providing higher value product upgrades to existing customers

· Continuing to develop a smartphone-based physical authentication technology to allow consumers to authenticate branded products in real time using mobile phone platforms

· Validating our products that result in significant savings for central banks with regards to note processing and replacement volumes and

· Controlling operating costs while maintaining strong capabilities for delivery of products as well as development of technology

This strategy will allow the Company to further exploit its largely developed expertise and technology. In the same way that machine-readable features are added to holograms in our tax stamp and brand authentication products, we are attempting to introduce high-level, covert features into banknotes within existing public features such as inks, security threads and phosphours. By doing so, we hope to overcome the long cycle note redesign process. We believe we will be able to tap into the Asian market with this approach, in both the banknote and product authentication sides of the technology.

Prospects

The Company's prospects have continued to grow through the combination of the Company's organic banknote and product authentication development efforts and the Inksure acquisition, as well as our demonstration of a breakthrough technology for cleaning banknotes.

Particularly important avenues for revenue growth are:

· Increased sales of taggants and readers to primarily Asian customers in the brand authentication sector

· Smartphone based product authentication which is gaining customers in Asia

· The eventual adoption of our new generation covert security feature in the polymer notes of a G8 central bank and a newly developed covert feature for a major Asian central bank by 2017

The combination of our new manufacturing facility shipping product for use by 18 central banks and the expected material qualification and contract renewal with a G8 central bank in 2014 will have a significant impact on our machine-readable materials margins. With more aggressive marketing efforts by our licensing partner, we anticipate increasing earnings from such successes.

We are delighted that the overall business is on an upward trajectory. However, as stated above, we benefited in 2014 from several significant contracts, the revenues from which are not expected to be replicated in 2015. The Board is however confident that new opportunities for consumables will compensate for these concluded revenues within several years.The Board therefore believes that the Company continues to have excellent prospects.

Nabil M. Lawandy

Chief Executive Officer

April 17, 2014

Statement of Income

for the year ended 31 December 2014

All of the Group's operations are continuing.

 Balance Sheet

as at 31 December 2014

Statement of Cash Flows

for the year ended 31 December 2014

Notes to financial information - all figures in (000's) except shares in issue

1. Basis of preparation

This report was approved by the Directors on 17 April 2015.

The results for the year ended 31 December 2014 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 ended 31 December 2014 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2013.

2. Earnings per share

The calculation of earnings / (loss) per share figures for the year ended 31 December 2014 and 2013 is based on the profit / (loss) attributable to ordinary shareholders of USD 1,043k (2013: USD (3,002k)), respectively, divided by the weighted average number of shares in issue, shown in the table below. Since the year ended 31 December 2013 reflect a loss, including the potential conversion of warrants and options in the diluted EPS calculation would decrease the loss per share. Accordingly, they are considered anti-dilutive and are not included in the 2013 calculation of loss per share. For 2014, the exercise price of all options exceeded the average market price of the shares in issue and therefore are not considered in the EPS calculation.

3. Asset Acquisition

On 3 March 2014, the Company completed the acquisition of certain assets of Inksure Technologies as first announced on 1 October 2013. The final consideration amounted to USD 1,360k which was paid in cash on completion, together with deferred consideration of up to USD 35k, dependent upon achieving a commercial milestone.

4. In December 2011, the Company was notified by a corporate shareholder regarding a license agreement between the Company and the shareholder dated March 8, 1999. The shareholder had stated that the Company owed the shareholder approximately USD 2,100k in total for the years 2004 through 2010 based on its interpretation of the licence agreement. The Company disagreed with the shareholder's interpretation of the licence agreement.

In 2014, the Company and the shareholder reached a settlement which terminated the agreement and settled liabilities that would otherwise have continued through the remainder of the agreement. To settle the dispute for all past amounts due and all future amounts that may be due, the Company agreed to pay USD 2,000k and to forgive a receivable owed to the Company from the shareholder in the amount of approximately USD 129k.

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 ended 31 December 2014 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.