Spectra (unres) Regulatory News (SPSY)

Spectra Systems Corporation

Audited results for the twelve months ended 31 December 2020

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 2020.

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

Financial highlights:

· Revenue up 11% for the year at US$14,675k (2019: US$13,234k)

· Adjusted EBITDA1 up 16% at US$6,357k (2019: US$5,473k)

· Adjusted PBTA1 up 15% to US$6,039k (2019: US$5,235k)

· Adjusted earnings2 per share up 14% to US$11.9 cents (2019: US$10.4 cents)

· Net income up 18% at US$5,124k (2019: US$4,335k)

· Cash generated from operations of US$5,574k (2019: US$5,789k)

· Strong, debt-free balance sheet, with cash3 of US$14,038k (2019: US$14,250k)

· Declaring annual dividend of US$0.095 per share to be paid in June

· Buy-back of 645,000 shares

· US$40,000 donated to US and UK charities supporting the fight against hunger during the Covid-19 pandemic

1 Before stock compensation expense

2 Before amortization and stock compensation expense

3 Does not include US$1,099k (2019: US$1,344k) of restricted cash and investments

Operational highlights:

· Execution of a contract for Phase 1 development work for sensor technology development for a central bank

· Completion of three quality control systems for a central bank print works

· Execution of a new contract with a central bank to enhance existing authentication sensors to detect a unique type of counterfeit notes

· Strong sales of optical materials for K-cups

· Launch of a new phosphor which outperforms existing leading materials and can be sold at a significant discount to incumbents

· Successful production of fully printed, machine-readable polymer banknotes with covert taggants

· Ongoing Covid-19 studies on Aeris banknote cleaning decontamination efficacy at a major University with Bio-Safety Level IV facilities

· Completed development of a Covid-19 decontamination system to disinfect 5,000,000 notes in one to two hours

· Six lottery contract renewals for the Secure Transactions Group

· Expansion of the patent estate with the granting of 11 new patents for authentication technology

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

"In spite of the Covid-19 pandemic, the Company has delivered excellent performance during 2020. The Company's revenues have increased by 11% and PBTA is up 15% over 2019 driven by larger demand for our materials to meet increased banknote demands of one of our existing central bank customers as well as equipment sales to this same customer."

"Our two decade long relationship with a major world central bank continues to drive the introduction of more advanced products and an increasingly steady stream of hardware sales which could result in the combined development and manufacture of sensors worth over $50MM from 2019-2025."

"These highly stable revenues underpin our growth and enable us to continuously innovate with products that could lead to more explosive growth in the coming years."

 "The Board therefore believes that the Company, by achieving key business milestones, will continue to perform well and has excellent prospects for maintaining strong earnings in 2021 and beyond."

 "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 2022, under the same terms as announced on April 10, 2019. A total of 846,000 common shares have already been purchased and retired under this authority."

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 2020 financial year, continuing its track record of year on year profit growth.

Revenue for the year was US$14,675k (2019: US$13,234k) due to larger demand for our materials to meet the increased banknote demands of one of our existing central bank customers as well as equipment sales to this same customer. Adjusted EBITDA (before stock compensation expense) for the year increased 16% to US$6,357k compared to the prior year of US$5,473k, which resulted in net income up 18% at US$5,124k (2019: US$4,335k).

Having generated cash from operations of US$5,574k (2019: US$5,789k), cash at the period end amounted to US$14,038k (2019: US$14,250k), excluding US$1,099k and US$1,344k of restricted cash and investments as of December 31, 2020 and 2019. This is notwithstanding US$4,123k paid to shareholders during June 2020 in the form of the Company's special dividend of US$0.09 per share and share buy-backs of US$992k.

The Company is therefore declaring an annual dividend of US$0.095 per share to be paid in June. The Company will continue to have sufficient cash resources thereafter to execute on its growth plans as well as support the required financial requirements of our customers placing large sensor orders.

Review of Operations

Physical and Software Authentication Business

The Authentication Systems business generated revenue of US$13,251k (2019: US$11,829k) and adjusted EBITDA of US$6,121k (2019: US$5,065k). Authentication Systems revenues are driven by sales of covert materials and their associated equipment and service, optical and security phosphor materials and licence royalties. We sell covert materials directly to one major world central bank and indirectly to 19 other central banks through our supply and licensing agreements with a major banknote supplier and printer which pays a licence royalty for the exclusive rights to our technology.

The increased revenue is due to larger demand for our covert materials to meet the increased banknote demands of one of our existing central bank customers as well as equipment sales to this same customer.

Orders for our covert consumables reached the highest level in the Company's history amounting to over three and half times the average order. This order was partially fulfilled in 2020 with the balance to be delivered in 2021. This was primarily driven by one central bank customer and additionally supported by larger than 2019 orders from our licensing partner which in turn sells our products to 19 other central banks globally.

Our long relationship with a major world central bank continues to drive the introduction of more advanced products and an increasingly steady stream of hardware sales. We have received significant funding from this customer to develop a new generation of sensors with manufacturing anticipated to begin in 2024. In addition, we have received development funding for the detection of "exotic counterfeits" from this same customer. While the number of sensors to be ordered is not yet specified, the sale of sensors is expected to result in $34MM-$42MM of revenue, depending on whether or not the newly developed "exotic counterfeit" detection capability is requested. In addition, we will have received between $7.5MM-$8.8MM of development funding from the central bank over the period from 2019-2023.

The production of fully printed banknotes with our breakthrough, first in the industry, machine-readable and highly transparent polymer banknote substrate has allowed us to engage potential licensees as well as potential central bank customers in spite of the postponement of the Banknote Conference from 2020 to 2022.

Leveraging our position as a supplier of authentication technology to central banks and in order to respond to the Covid-19 pandemic, we have developed a new system alongside Aeris, our banknote cleaning equipment. The new patent pending technology is capable of disinfecting to sterile levels up to 5,000,000 banknotes in one hour. This technology is expected to gain traction with the increased realization that Covid-19 is likely to become endemic. Marketing of this product is targeted at casinos and central banks worldwide.

Our TruBrand taggant-based smartphone technology continues to be used in 6-10 million units per annum by a major tobacco manufacturer in China. Testing required for larger volume sales per annum has been delayed by the Covid-19 situation in China. We are confident that once these production tests are completed, we will have the potential for sales in the billions of tobacco packs per year.

In addition, working with our polymer partner, Toray Industries, we have developed a new product family of smartphone-readable packaging films for use in the brand authentication market where print is not an option. This is being actively marketed to large brands such as Apple, BAT, Estee Lauder, JUUL and others.

On the software security side of the Company's business, the Secure Transactions Group, formed around the various gaming technology acquisitions made in 2012, generated an Adjusted EBITDA of US$236k (2019: US$408k) on revenue of US$1,424k (2019: US$1,405k). Our gaming security business has renewed several major contracts and has begun the development of a new software platform which has led to costs depressing the EBITDA from 2019 but which will in the long run result in higher margins, primarily driven by lower customer support costs.

Prospects

The Company continues to have numerous long-term and short-term prospects. The short-term opportunities are expected in the 2021-2023 period and the long-term opportunities are expected in the 2023-2027 time frame.

The important, near-term opportunities are:

· Fulfillment of very large orders for covert materials to a long-standing central bank customer during 2021;

· Additional development funding of US$1.2MM beyond the currently contracted research program with a long-standing central bank customer to include "exotic counterfeit" detection in the new sensor development program; 

· Approval by the customer of up to an additional US$8.0MM of sensor sales for the incorporation of "exotic counterfeit" detection in the new sensors with manufacturing anticipated to begin in 2024;

· 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 in 2021-2022;

· A new smaller scale TruBrand customer outside of tobacco;

· Expansion of the optical materials business with compostable K-cup customers;

· Sales of our newest patent pending phosphour product;

· Sale of our first banknote decontamination system to a casino; and

· Qualification with a central bank of our FusionTM machine-readable polymer substrate.

The longer-term opportunities are:

· A licensing and supply agreement for polymer-based technology developed with a major central bank;

· Supply of further upgraded sensors worth up to US$42MM to a central bank customer;

· Licensing of secure FusionTM polymer substrate or a direct sale to central banks; and

· Sale of an Aeris banknote cleaning system to a central bank.

The combination of these prospects, both short and long term, has positioned the Company to continue its revenue and earnings growth through 2027. We continue to develop cutting edge technologies to remain the innovation leader in the authentication industry and to offer our shareholders the springboard to even bigger growth of their Company. We believe that we have a number of transformative opportunities ahead in several aspects of our business that will potentially further accelerate our earnings.

Solaris BioSciences Investment Asset

In December 2020, the Company made an investment in Solaris BioSciences, whose core technology is well understood by us and can be effectively developed by our in-house staff. In addition to the issuance of Company stock, the investment included cash of US$294,058 and a commitment by the Company to provide in-kind services at cost of US$100,000. To date, there remains approximately US$87,000 of in-kind services to be provided and Solaris BioSciences' cash balance is approximately US$240,000.

During the three months since the investment, Solaris BioSciences has made enormous advances towards the development of a low cost, pin-prick volume blood plasma viscosity device and associated consumables. A working laboratory prototype now exists which is being refined and will be evaluated with blood plasma over a range of disease conditions. Solaris BioSciences is optimistic that a demonstrable alpha phase production unit will be available by the end of Q3 2021. New intellectual property has been generated with this development and additional patents have been filed by Solaris BioSciences.

Dividend

With the Company having a sixth 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 again issue a 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 $0.095 per share on or about June 25, 2021 to shareholders of record as of June 4, 2021.

Nabil M. Lawandy

Chief Executive Officer

March 22, 2021

Consolidated statements of income

for the years ended 31 December:

All of the Group's operations are continuing

Consolidated statements of comprehensive income

for the years ended 31 December:

Consolidated balance sheets

as of 31 December:

Statements of cash flows

for the year ended 31 December:

Notes to financial information

1. Basis of preparation

This report was approved by the Directors on 18 March 2021.

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 2020 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2019.

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, 2020 were 8,656 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.

3.  Business Combinations

On December 10, 2020, the Company increased its equity interest in Solaris BioSciences (Solaris) from 4.79% to 48.65% on an as converted basis for total consideration of $702,000 consisting of $294,058 cash, the issuance of 126,252 shares of the Company's common stock valued at $305,942, the commitment to provide $100,000 of research and administration services at cost to Solaris over the ensuing 24 months and the conversion of a $2,000 receivable due from Solaris. In addition, the Company will provide nominal accounting support to Solaris and allow Solaris use of optical table space and facilities at Spectra.

The Company has concluded that Solaris is a variable interest entity (VIE) and the Company is the primary beneficiary. As such, the Company has consolidated the accounts of Solaris as of December 10, 2020. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities of a VIE that most significantly affect the VIE's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE, in either case that could potentially be significant to the VIE. The other party's equity interest in the VIE is accounted for as a non-controlling interest.

The aggregate carrying value of Solaris' assets and liabilities after elimination of any intercompany transactions and balances in the consolidated balance sheet as of December 31, 2020 were as follows:

The Company has accounted for the transaction as a business combination and recorded patents of $535,000 which will be amortized over 15 years, goodwill of $571,744 and a noncontrolling interest of $740,960 attributable to the 51.35% of Solaris not owned by the Company.

The Chief Executive Officer of Solaris is also the Chief Executive Officer of Spectra. Prior to the investment, the Chief Executive Officer of Spectra owned 84.54% of Solaris which declined to 46.01% after the transaction. In accordance with Delaware law, the transaction was (a) unanimously approved by all three of Spectra's non-executive Directors and (b) specially approved by a majority-in-interest of the disinterested stockholders of Solaris. In addition, going forward Spectra's shares in Solaris will be voted as directed by Spectra's non-executive Directors.

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 2020 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 2021.