Spectra Systems Corporation

Audited results for the twelve months ended 31 December 2021

Spectra Systems Corporation, a leader in machine-readable high speed banknote authentication, brand protection technologies and gaming security software, is pleased to announce its audited results for the twelve months ended 31 December 2021.

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

Financial highlights:

·      Revenue up 13% for the year at US$16,592k (2020: US$14,675k)

·      Adjusted EBITDA¹ up 8% at US$6,896k (2020: US$6,357k)

·      Adjusted PBTA¹ up 10% to US$6,622k (2020: US$6,039k)

·      Adjusted earnings¹ per share at US$12.0 cents (2020: US$11.9 cents)

·      Net income at US$5,163k (2020: US$5,124k)

·      Cash generated from operations up 45% to US$8,084k (2020: US$5,574k)

·      Strong, debt-free balance sheet, with cash² of US$16,775k (2020: US$14,038k)

·      Declaring annual dividend of US$0.11 per share to be paid in June

·      Buy-back of 500,000 shares during the year

·      Donated US$35k to Leicester Royal Infirmary SACT Suite Extension project

¹ See Appendix - Reconciliation of Non-GAAP measures

² Does not include US$500k (2020: US$1,099k) of restricted cash and investments

Operational highlights:

·      Execution of a contract with our central bank customer relating to the second phase of the sensor development program followed by an amendment to include the capability to detect exotic counterfeit notes

·      Renewed the agreement for the supply of banknote security materials with our long-time central bank customer for another five years and received the first year's order which was 65% higher than a typical order

·      Received the first orders from a new customer using our materials in K-cups, more than doubling the sales of this product over 2020 levels

·      Obtained a new customer for our TruBrand^TM product in addition to current tobacco related sales in China

·      Established a complete vertical integration of polymer banknote substrate manufacturing to produce ready for printing substrates

·      Commenced a polymer print trial with a Middle Eastern central bank

·      Validated the efficacy of the Aeris^TM banknote cleaning process for deactivating Covid, with third party testing results showing the deactivation of Covid to below detectable limits

·      Patented our new Banknote Disinfection System and introduced the product to the market with one Asian central bank requesting a price quotation

·      Selected by one of the largest US lotteries to provide our internal control software, expanded the business into Canada with a new contract award and renewed a long-term US lottery customer contract

·      Converted to LED lighting at our R&D and manufacturing facilities to reduce our carbon footprint and reduce electric consumption by an estimated 59,000 kwh annually

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

"In spite of the Covid-19 pandemic, the Company never shut down operations during the pandemic and has delivered an excellent performance during 2021. The Company's revenues have increased by 13% and PBTA is up 10% over 2020, driven by: larger demand for our materials to meet the increased banknote demands of one of our existing central bank customers, customer funded sensor development efforts and increased sales of our specialty optical materials.

"Our two-decade long relationship with a major world central bank continues to provide new revenues from the introduction of more advanced products.  This central bank customer has invested US$8.8MM for the development of these new capabilities which are expected to result in sensor sales of approximately US$50MM from 2024-2026.  In addition, we expect a ten-year service agreement worth over US$8MM to line up with the delivery of the first advanced sensors in 2024.

"I believe that shareholders should view this spending by our long-standing customer as both a testament to our capabilities for producing cutting edge products, as well as the stability of banknote production by reserve central banks, where the "store of value" is as much a driver for banknote production as every day transactions.

"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 2022 and beyond."

Enquiries:

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 2021 financial year, continuing its track record of year-on-year profit growth.

Revenue for the year was US$16,592k (2020: US$14,675k) driven by: larger demand for our materials to meet the increased banknote demands of one of our existing central bank customers, customer funded sensor development efforts and increased sales of our specialty optical material used in K-cups. Adjusted EBITDA (before stock compensation expense) for the year increased 8% to US$6,896k compared to the prior year of US$6,357k, notwithstanding a US$494k provision for excess and obsolete inventory.

Having generated cash from operations of US$8,084k (2020: US$5,574k), cash at the period end amounted to US$16,775k (2020: US$14,038k), excluding US$500k and US$1,099k of restricted cash and investments as of December 31, 2021 and 2020. This is notwithstanding US$4,302k paid to shareholders during June 2021 in the form of the Company's dividend of US$0.095 per share and share buy-backs of US$1,170k.

The Company is therefore declaring an increased annual dividend of US$0.11 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 expected from our sensor development customer during the sensor delivery phase.

Review of Operations

Physical and Software Authentication Business

The Authentication Systems business generated revenue of US$14,718k (2020: US$13,251k) and adjusted EBITDA of US$6,556k (2020: US$6,121k). Authentication Systems revenues are driven by sales of covert materials and their associated equipment and service, optical and security phosphour materials and licence royalties. We sell covert materials directly to one major world central bank and indirectly to numerous other central banks through a major banknote supplier and printer with which we have existing licence and supply agreements for the exclusive rights to our technology.

The increased revenue is due to: larger demand for our materials to meet the increased banknote demands of one of our existing central bank customers, customer funded sensor development efforts and increased sales of our product used in K-cups.

The 2020/2021 central bank order for our covert consumables reached the highest level in the Company's history amounting to over three and a half times the average historical order. This order was partially fulfilled in 2020 with the balance delivered in 2021. This exceptional order was followed by the 2021/2022 order from the same central bank which was in turn 75% of the largest order. 

Our long established relationship with this major world central bank continues to drive the introduction of more advanced products and an increasingly steady stream of hardware sales to authenticate our covert materials which reached record sales this year. We have received US$8.8MM of funding from this customer to develop a new generation of sensors with sensor deliveries anticipated to begin in 2024 and continue through 2026.  The sensors will be the most advanced authentication sensors in the world with unmatched capabilities and will provide anticipated hardware revenues of approximately US$50MM and service contracts worth in excess of US$8MM over a ten-year period.

We have advanced Fusion^TM, our machine-readable covert polymer substrate as well as our ability to supply standard polymer substrate by developing a fully integrated and highly secure operation which allows us to sell fully ready for printing substrates with full opacification and conducting layers in all print format requirements.  This is a major advancement which allows us to directly compete with the other suppliers in the industry, even at the level of standard polymer substrates without machine readability. In Q4 of 2021 we produced a large number of custom designed polymer substrate sheets with full conductive and opacity layers for a Middle Eastern central bank print trial which is currently in progress. Following the Banknote Conference, we have created early traction with three major central banks including a G7 central bank.

Leveraging our position as a trusted supplier of advanced authentication technology to central banks and in order to respond to the Covid-19 pandemic, we have developed a new system alongside Aeris^TM, our banknote cleaning equipment.  The new patented technology, our Banknote Disinfection System, 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 realisation that Covid-19 is likely to become endemic. Marketing of this product is being undertaken jointly with Royal Dutch Kusters Engineering, the world's leading supplier of banknote destruction systems and advanced engineering solutions for unfit currency. We continue to be optimistic that we will sell a first unit(s) in 2022.

With our TruBrand^TM smartphone authentication product having been successfully introduced into the Chinese tobacco market on over 6 million packs in retail stores in 2019, we have obtained a new long-term customer in the stationery industry who is suffering from counterfeiting losses in China and have begun another set of trials with a second tobacco company. We have greatly expanded our search for new customers for TruBrand^TM and are working with partner companies to secure business for motor vehicle registrations.  In addition, we have continued to move forward with an opportunity for milk products in Asia and expect to be in a testing phase in Q2 of 2022.

During H1 of 2021, our K-cup material was accepted for production by a new K-cup lid printer with exceptionally large orders commencing in H2 of 2021. This customer is expected to be approximately 20% larger in sales volume than the current customer and we are confident that this business line will reach a million dollars of high margin materials sales in aggregate in 2022.  The new business will not require additional staffing and hence will be accretive to our earnings.

Finally, several of our phosphours with white, red and yellow emissions are under evaluation by several potential customers including a large specialty chemical supplier.

On the software security side of our business, the Secure Transactions Group, formed around the various gaming technology acquisitions made in 2012, generated an Adjusted EBITDA of US$340k (2020: US$236k) on revenue of US$1,874k (2020: US$1,424k). Revenue increased due to software development related to the introduction of new games by our lottery customers. During 2021, we were selected by one of the largest US lotteries to provide our internal control software, renewed a long-term US lottery customer contract and expanded the business into Canada with a new contract award. This new customer we believe will open the door to the other four additional lotteries in Canada where we hope to win contracts based on successful performance with this new Canadian customer. We continue development of a new software platform which has led to costs depressing EBITDA, but which will result in lower support costs in the long run.

Solaris BioSciences Investment Asset

In December 2020, the Company made an investment in Solaris BioSciences, whose core technology is well understood by us. The results of Solaris BioSciences are consolidated by the Company. As Solaris BioSciences is a development stage company, it does not generate revenue and generated an EBITDA loss of US$80k attributable to the Company's ownership share. This loss is included in the Authentication Systems EBITDA of US$6,556k.

Solaris BioSciences is in the early stages of a financing round and currently has approximately US$130,000 of cash to fund its operations.  Solaris BioSciences has applied to the UK tax authorities to obtain VCT/EIS status which if granted, will allow Solaris BioSciences to focus its financing in the UK.

Strategy

The Company's strategy for increasing revenue and earnings continues to be focused on both brand authentication and a robust effort to commercialise our covert security technologies with an emphasis on polymer banknotes and technology driven existing central bank customers.

The brand authentication sector offers short-term growth potential and some very large opportunities for smartphone-based technology and advanced optical materials, while the covert banknote security sector provides stable long-term, multi-decade revenues once new contracts are executed. 

In addition, we have deliberately and successfully positioned the Company to be the world's only provider of technology for disinfecting banknotes from Covid-19 on a large scale and on a time scale which meets supply challenges for both central banks and casinos. We believe that this is of particular importance for polymer notes where numerous studies, including our own data obtained at Boston University's National Emerging Infections Disease Laboratories, indicate that Covid-19 survives for the longest periods on this type of banknote substrate.

Prospects

The Company continues to have numerous long-term and short-term prospects. The short-term opportunities are expected in the 2022-2024 period and the long-term opportunities are expected in the 2024-2028 time frame.

The important, near-term opportunities include:

·   Fulfillment of new, larger than typical pre-Covid-19 orders for covert materials to a long-standing central bank customer during 2022;

·   Additional sensor development funding;

·   Completion of the development of the new generation of sensors for a long-standing central bank customer with US$6.2MM of revenue still to be recognized through 2023;

·   Increased sales of TruBrand^TM related products to reach the level of several million dollars per annum in both tobacco and other opportunities such as tax stamps and government documents;

·   Increase the K-cup business to the US$1MM per annum level and beyond;

·   First sales of our newest patent pending phosphour product;

·   Sale of our first banknote cleaning or decontamination system to central banks;

·   Qualification with a central bank of our Fusion^TM machine-readable polymer substrate;

·   Expand our gaming software business in Canada and other non-USA customers; and

·   Supply of quality control equipment to a central bank.

The longer-term opportunities include:

·   A supply agreement for our polymer substrate technology (Fusion^TM) with a major central bank; and

·   Supply of upgraded sensors worth up to US$50MM to a central bank customer.

The combination of these prospects, both short and long term, has positioned the Company to maintain its excellent progress for the foreseeable future. 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.

Dividend

With the Company having a seventh year of sustainable profits, reaching their highest levels since its admission to trading on AIM, and having sufficient resources to execute on its growth plans with its existing cash reserves, 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$0.11 per share on or about June 24, 2022 to shareholders of record as of June 6, 2022.

Nabil M. Lawandy

Chief Executive Officer

March 21, 2022 

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 2022.

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 2021 and are unchanged from those disclosed in the Company's Annual Report for the year ended 31 December 2020.

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 2021 and 2020 were 125,425 and 8,656 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.

3. 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 2021 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 2022.

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:

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA)

Adjusted profit before taxes and amortization (PBTA)

Adjusted earnings per share