Last checked at 30 Apr 2014 07:00
Spectra Systems Corporation
Preliminary results for the twelve months ended 31 December 2013
Spectra Systems Corporation, a leading provider of advanced technology solutions for banknote and product authentication, announces its preliminary results for the twelve months ended 31 December 2013.
Financial highlights - all figures in (000's):
- Revenue increased 23% to USD 11,572 (2012: USD 9,379)
- Adjusted EBITDA1 before taxation of USD (702), (2012: USD (727))
- Adjusted profit / (loss)1 before taxation of USD (992), (2012: USD (847))
- Adjusted earnings / (loss)1 per share of USD (0.02), (2012: USD (0.02))
- Basic earnings / (loss) per share of USD (0.03) (2012: USD (0.04))
- Strong ungeared balance sheet, with cash and investments of USD 13,435 (2012: USD 16,167) at 31 December
1 before stock compensation expense and exceptional items
Operational highlights:
- Large machine-readable banknote authentication material orders were fully fulfilled
- Shipping of sensors for $8MM contract commenced and continues through 2014
- New manufacturing facility cleared, and quality controls approved by corporate partner for shipping orders to all 18 central bank customers. Expected to be approved by a central bank customer in 2014
- Secure Transactions Group performed in line with expectations
- Inksure asset purchase executed and transaction closed in 2014. Integration of new products and customers on track
- Phosphour sales in Q4 2013 reverted to historical levels and continue to do so in Q1 2014
Commenting on the results, Nabil Lawandy, Chief Executive Officer, said:
"The Company's revenues have increased by 23% and losses have decreased by 25% over 2012, and we continue to have a strong, ungeared balance sheet. Sensors worth $8MM began shipping to the customer and continue throughout 2014, further supporting the continued sale of our machine-readable authentication materials to a G8 central bank for another decade. 50% of the machine-readable authentication material sales order from one central bank valued at $10MM was delivered in 2013 with the balance expected to be delivered by the end of Q2 2014. Phosphour orders in 2013 returned to the historical $1MM per annum levels and order patterns continue to support this in 2014. The combined rephasing of revenues from sensors, machine-readable materials, and phophours that was forecast is coming to fruition.
In Q1 of 2014 we were informed by one of our central bank customers that they decided to cancel the New Generation materials development program. Although this was a disappointment, it does not significantly affect revenues for 2014 and we will seek to use the developed materials and sensor for our commercial benefit. The technology, including sensors and materials, were developed under secure conditions and are ready to be marketed to central banks with only banknote trials being required by interested customers.
The alignment of physical materials driven revenues was further bolstered by the strong performance of the Secure Transactions Group (gaming security software). The first phase of the asset purchase of Inksure was completed in Q4 2013 and we have since finalized the transaction with the full product suite fully integrated during Q1 2014, providing us with the opportunity to synergistically combine the core capabilities of these units to offer expanded, higher value products to the newly acquired customers and to enhance our overall product capabilities in authentication.
In 2013 we also introduced a new technology for cleaning soiled banknotes which has the potential to expand our business within the banknote industry through products which reduce costs and environmental disposal issues facing central banks. The technology attracted considerable central bank interest at the Banknote 2014 conference in Washington, DC earlier this month.
Our permanent staff continues to be of a world class calibre in all of the critical disciplines required to meet the challenges posed by providing advanced cutting edge products.
The Board believes that the Company, notwithstanding the new gen contract, has made significant headway in 2013 by achieving key business milestones, that it continues to have excellent prospects, and that it will continue to improve its performance in 2014."
Enquiries:
Spectra Systems Corporation | |
Dr. Nabil Lawandy, Chief Executive Officer | Tel: +1 (0) 401 274 4700 |
WH Ireland Limited | Tel: +44 (0) 20 7220 1650 |
Chris Fielding (Head of Corporate Finance) |
Chief Executive Officer's statement
The Company has achieved key commercial milestones lowering losses and increasing revenues well above 2012.
· The successful delivery of a very large order to a central bank customer has demonstrated our ability to deliver larger volumes of consumables on time and with high quality.
· The commencement of the delivery of sensors to a G8 central bank has added strong support to the continued longevity of our consumable sales to customers once they adopt our technologies.
· The early evidence that phosphour sales are returning to historical levels is a strong indication that 2014 expectations will be met.
· These expectations are further bolstered by the strong performance of the Secure Transactions Group formed around the acquisitions made in 2012, together with the Inksure products in the beginning of 2014.
· The qualification of our manufacturing facility by our partner, a major worldwide supplier of banknote printing services and paper, as well as subsequent orders, will set the stage for increased margins once the remaining customers served directly by us complete their evaluation of the facility's products and enter into a contract renewal.
In addition, the 2013 judgement reducing the lawsuit filed against the Company by 40% has reduced the exposure we have. We continue to vigorously defend our position while maintaining a channel of communication towards a satisfactory settlement.
The cancelation of the New Generation materials program by a central bank has left us with a fully developed technology we are free to commercialize on either a non-exclusive or exclusive basis. We are highly optimistic that given the calibre of the technology and its level of validation, we will be able to commercialize this new covert machine-readable product.
Finally, the Company continues to develop and patent protect new products which can significantly expand our business opportunities. Of particular note is the demonstration of a new technology for cleaning soiled banknotes which could potentially save central banks over a billion dollars annually. The potential market has a large potential customer base which includes most of the world's central banks and is not limited to the more sophisticated customers with advanced counterfeiting threats prevented by our existing technologies.
Financial overview (000's)
Revenue exceeded prior year by 23% with USD 11,572 (2012: USD 9,379). The adjusted EBITDA before and after taxation for the year amounted to USD (702) (2012: USD (727)) - adjusted for stock compensation expense and exceptional items.
Cash and investments at the period end amounted to USD 13,435 (2012: USD 16,167). The company has no debt and therefore has more than sufficient resources to execute on its manufacturing plans with its cash reserves and to pursue carefully selected complimentary acquisitions.
Strategy
The company's strategy for increasing revenue and earnings is based on:
1) Continuing efforts to integrate new machine-readable technologies into public security features for banknotes, tax stamps and brand product packaging with a focus on Asia.
2) Expanding our Secure Transactions Group contribution by:
a. providing higher value product upgrades to existing customers; and
b. bundling our software transaction capabilities with our machine readable features to offer authorities complete solutions for tax stamps, IDs and other government documents.
3) Applying our expertise in lock and key, material/sensor technology for consumer and industrial applications where there is a need for protection against low cost, lower quality consumables by leveraging previous Inksure development efforts and relationships with such customers.
4) Continuing to make advances on a smartphone-based physical authentication technology to allow consumers to authenticate brand products in real time using smartphone platforms.
5) Continuing the development efforts on products that can result in significant savings for central banks with regards to note processing and replacement volumes.
The five pronged strategy summarized above will allow the Company to exploit largely developed expertise and technology along several parallel growth directions. The continued use and demonstration of embedding covert security within public features allows for implementation without banknote design mandates and is also the basis of current and future Inksure technology whereby the features have previously been primarily holograms. 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.
The Secure Transactions Group has shown that our existing gaming customers have an appetite for upgraded product offerings. There is a parallel situation in the brand authentication and tax stamp arenas where track and trace capabilities proved a bundled higher value approach.
The area of lock and key technology linking the operation of a machine to a specific tagged consumable for the consumer product industries from plastic freezer bags to coffee cups is untapped and continues to present opportunities with large numbers of units. We have successfully developed such systems which yet to be adopted, but new opportunities continue to materialize with some already in development by Inksure.
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 products that are easily subverted or simply only work in highly controlled environments. Solving this problem will open a new internet based market for us and further link our software database capabilities with our world class physical authentication technology developments.
The area of banknote fitness and cleaning will allow us to have a commercial dialogue with a larger swathe of the banknote industry and will enable us to provide them with products which have an immediate return on investment. Cleaning banknotes will lower replacement costs for central banks and also open the door to partnerships with suppliers that may be affected. If the suppliers see that this is a viable technology, then some will adopt it as part of an expanded service to the central banks they currently serve.
Prospects
The Company's prospects have dramatically grown through the combination of the Inksure acquisition and the Company's organic banknote and product authentication development efforts, as well as our demonstration of a breakthrough technology for cleaning banknotes. Inksure customers include tax stamp authorities and brand owners who we feel will eventually be ready for upgraded, higher performance products built around our core technologies. Particularly important prospects for growth are:
1) The mobile phone based product authentication which will draw on both our expertise in optical materials and physics, as well as the database competence of the Secure Transactions Group.
2) The ongoing development effort initiated with Inksure by a large consumer brand supplier interested in a lock and key solution for their machines and consumables.
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 the continued marketing efforts of our licensing partner, we will be able to increase earnings from this facility.
Our demonstration of a technology which can remove soiling substances (primarily human oils) without damaging the costly security features or compromising print has created a new paradigm in the banknote industry. Based on the continued growth in banknote production to the level of nearly 150 billion banknotes per year at a cost approaching $10 billion annually, we believe that we will have strong prospects for revenue growth in a segment of the industry where we expect to have controlling intellectual property.
The Board therefore believes that the Company continues to have excellent prospects and will perform strongly in 2014.
Nabil M. Lawandy
Chief Executive Officer
April 24, 2014
Statement of Income
for the year ended 31 December 2013
Restated | |||
2013 | 2012 | ||
Audited | Audited | ||
Note | USD'000 | USD'000 | |
Revenue | 11,572 | 9,379 | |
-------- | ------------------ | ------------------ | |
Cost of sales | (6,007) | (4,814) | |
Gross profit | 5,565 | 4,565 | |
Adjusted operating expenses | (6,267) | (5,292) | |
-------- | ------------------ | ------------------ | |
Adjusted EBITDA | (702) | (727) | |
-------- | ------------------ | ------------------ | |
Depreciation | (154) | (169) | |
-------- | ------------------ | ------------------ | |
EBITA | (856) | (896) | |
Net interest | 139 | 228 | |
-------- | ------------------ | ------------------ | |
Pre-tax profit | (717) | (668) | |
Amortization | (274) | (179) | |
Stock compensation expense | (117) | (127) | |
Recognized gain / (loss) on Fx | 13 | (430) | |
Acquisition fees | (163) | - | |
Exceptional items | - | (271) | |
-------- | ------------------ | ------------------ | |
Basic profit / (loss) for the period | (1,258) | (1,675) | |
-------- | ------------------ | ------------------ | |
Adjusted earnings per share | 2 | (0.02) | (0.02) |
-------- | ------------------ | ------------------ | |
Basic earnings per share | 2 | (0.03) | (0.04) |
-------- | ------------------ | ------------------ | |
Other comprehensive income (loss): Unrealized gain on currency exchange Reclassification for realized amounts included in basic profit (loss) | 11 (13) | 425 430 | |
-------- | ------------------ | ------------------ | |
Other comprehensive income (loss) | (2) | 855 | |
-------- | ------------------ | ------------------ | |
Comprehensive income (loss) | (1,260) | (820) | |
-------- | ------------------ | ------------------ |
All of the Group's operations are continuing.
Balance Sheet
as at 31 December 2013
Restated
As at | As at | |||
31/12/13 | 31/12/12 | |||
Audited | Audited | |||
USD'000 | USD'000 | |||
Current assets | ||||
Inventories | 2,969 | 1,075 | ||
Trade and other receivables | 2,402 | 2,822 | ||
Cash and cash equivalents | 13,435 | 9,617 | ||
Investments | - | 6,550 | ||
Unbilled revenue on contracts in progress | - | 355 | ||
Deferred contract costs | 10 | 344 | ||
Deferred tax asset | 344 | 344 | ||
Other current assets | 69 | 90 | ||
Prepaid expenses | 157 | 128 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Total current assets | 19,386 | 21,325 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Non-current assets | ||||
Intangible assets | 3,075 | 3,123 | ||
Property, plant and equipment | 2,903 | 2,285 | ||
Restricted cash and investments | 2,500 | 1,050 | ||
Other assets | 4 | 97 | ||
Deferred tax asset | 902 | 902 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Total non-current assets | 9,384 | 7,457 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Total assets | 28,770 | 28,782 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Current liabilities | ||||
Trade and other payables | 1,633 | 1,384 | ||
Accrued expenses and other liabilities | 1,024 | 933 | ||
Deferred revenue | 3,040 | 2,190 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Total current liabilities | 5,697 | 4,507 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Long term liabilities Deferred revenue | 103 | 162 | ||
Contingent liability | 4 | 271 | 271 | |
-------------------------------------- | ------- | ------------------ | ------------------ | |
Total long term liabilities | 374 | 433 | ||
--------------------------------------- | ------- | ------------------ | ------------------ | |
Total liabilities | 6,071 | 4,940 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Shareholders' equity | ||||
Common stock | 453 | 453 | ||
Additional paid in capital | 54,856 | 54,739 | ||
Accumulated other comprehensive (loss) | (5) | (3) | ||
Accumulated deficit | ------- | (32,605) ------------------ | (31,347) ------------------ | |
Shareholders' equity | 22,699 | 23,842 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Total liabilities & shareholders' equity | 28,770 | 28,782 | ||
-------------------------------------- | ------- | ------------------ | ------------------ | |
Statement of Cash Flows
for the year ended 31 December 2013
Restated
Year to | Year to | ||
to 31/12/13 | 31/12/12 | ||
Audited | Audited | ||
USD'000 | USD'000 | ||
Operating activities | |||
Profit / (loss) before taxation | (1,258) | (1,675) | |
Depreciation and amortisation | 428 | 351 | |
Stock compensation expense | 117 | 127 | |
Allowance for Solaris note | 94 | - | |
Trade and other receivables | 422 | (2,245) | |
Deferred contract costs | 333 | (280) | |
Unbilled revenue on contracts in progress | 355 | (355) | |
Inventories | (1,894) | (262) | |
Other current assets | 20 | (80) | |
Other assets | (3) | - | |
Prepaid expenses | (31) | 4 | |
Trade and other payables | 250 | (80) | |
Contingent liability | - | 271 | |
Accrued expenses and other | 93 | 191 | |
Deferred revenue | 783 | (191) | |
Net cash used in operating activities | ------- | ------------------ (291) | ------------------ (4,224) |
-------------------------------------- | -------- | ------------------ | ------------------ |
Investing activities | |||
Purchases of property, plant | |||
and equipment | (770) | (1,823) | |
Asset acquisition | - | (2,151) | |
Payment of patent costs | (226) | (221) | |
Purchases of investments | - | (2,781) | |
Sales of investments | 6,550 | 2,355 | |
Advance payments to suppliers | - | (37) | |
Increase in restricted cash and investments | (1,450) | - | |
-------- | ------------------ | ------------------ | |
Net cash provided by (used in) investing activities | 4,104 | (4,658) | |
-------------------------------------- | -------- | ------------------ | ------------------ |
Effect of exchange rate changes on cash | |||
and cash equivalents | 5 | 638 | |
Net increase / (decrease) in cash | |||
and cash equivalents | 3,818 | (8,244) | |
Cash and cash equivalents at | |||
start of period | 9,617 | 17,861 | |
Cash and cash equivalents at | -------- | ------------------ | ------------------ |
end of period | 13,435 | 9,617 | |
-------------------------------------- | -------- | ------------------ | ------------------ |
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 24 April 2014.
The results for the year ended 31 December 2013 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 ending 31 December 2013 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2012.
2. Earnings per share
The calculation of loss per share figures for the year ended 31 December 2013 and 2012 is based on the profit / (loss) attributable to ordinary shareholders of USD (1,258) (2012: USD (1,675)), respectively, divided by the weighted average number of shares in issue, shown in the table below. Since the years ended 31 December 2013 and 2012 reflect losses, 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 calculation of loss per share.
Year to 31/12/13 | Year to 31/12/12 | |||
Number of shares | Weighted average | Number of shares | Weighted average | |
Basic- | ||||
shares in issue | 45,251,370 | 45,251,370 | 45,251,370 | 45,251,370 |
3. Subsequent event
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 1,360 which was paid in cash on completion, together with deferred consideration of up to USD 35, dependent upon achieving a commercial milestone.
4. Shareholder lawsuit
In February 2013, the Company received a summons from a corporate shareholder claiming approximately USD 2,100 in respect of a dispute regarding a license agreement between the Company and the shareholder dated 8 March 1999. The lawsuit, which was filed on 13 February 2013 for damages totalling USD 2,136, was reduced to USD 1,272 in November 2013 due to enforcement of the statute of limitations, which bars claims that accrued more than six years prior to the filing of the lawsuit.
The Company continues to believe that there is no basis for the claim and continues to attempt to resolve the dispute with the shareholder. As of 31 December 2013, approximately USD 271 has been accrued for the liability and is undisputed.
5. Prior year restatement
During the yearend financial close process for 2013, the Company discovered an error related to accounting for foreign currency exchange transactions during 2012 and 2011. The Company had accounted for realized gain and losses on such transactions as a charge to Other Comprehensive Income (Loss) which is a component of Total Stockholders Equity. These realized gains and losses should have been included as part of Net Income (Loss) on the Statement of Operations. The result of this error had no effect on Total Stockholders Equity. The Company is restating its financial statements as of and for the year ended 31 December 2012 as follows:
As of 31 December 2011 accumulated deficit was increased by USD (64) and other comprehensive income (loss) decreased by USD 64 resulting in no change to Total Stockholders Equity. For the year ended 31 December 2012, basic profit (loss) for the period was increased by USD (430) with a corresponding decrease to other comprehensive income (loss) of USD 430 resulting in no change to Total Stockholders Equity.
6. 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.
7. 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 ending 31 December 2013 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.