Subject: Smallcap Discoveries Private Placement Opportunity: Spectra (SS:TSX-V)

Smallcap Discoveries
Private Placement Opportunity
Spectra (SSA:TSX-V)

NOTICE: THIS COMPANY IS CURRENTLY CONDUCTING 
A PRIVATE PLACEMENT. WE ARE PARTICIPATING AND HAVE ARRANGED AN OPPORTUNITY FOR SCD SUBSCRIBERS TO PARTICIPATE AS WELL.
 
MINIMUM $5000
 
IF  YOU ARE AN ACCREDITED INVESTOR, AND INTERESTED IN  
PARTICIPATING, PLEASE CONTACT:
 
Andrew Malion 
andy@spectraproducts.ca
1-888-381-2355
 

Due to the time-sensitive nature of this placement, we are presenting a “one-pager” thesis today. A full report will follow in the coming weeks.
 
Introduction
 
Imagine an 18-wheeler speeding towards you on the highway, out of control. Sounds pretty terrifying, doesn’t it? 
 
It’s no surprise then that the brake conditions of trucks are heavily regulated. And you’d expect all sorts of innovative technology and equipment in use to keep our trucks safe and in the good graces of regulators, right?
 
Yet this is not the case at all. Out of adjustment brakes remain the#1 service violation in North America. Nearly 30% of all crashes are because of brake deficiency and sadly, 5,300 people are killed each year in heavy duty truck crashes. 
 
Fortunately, a little company out of Toronto, Spectra (SSA:TSX) is working to change that. 
 
Their flagship product, Brake Safe allows truck drivers to visually determine the adjustment condition of their brakes. Spectra’s products save customers big money and most importantly – save lives. 
 
Now after building a strong franchise in Canada, Spectra has its sights set on a lucrative and untapped market – the United States. With 10 times the market opportunity and regulatory tailwinds that now mandate Spectra’s solution, we believe the company is entering an exciting new growth phase.
 
And with a completely undiscovered stock trading at under 8x earnings, we believe we are positioned for multi-bagger returns if management continues to execute.
 
Key Points
 
We’ll start with some quicks facts on Spectra and the proposed transaction:
 
Financing:Spectra (SSA:TSXV) shares offered at $0.05, ½ warrant at $0.075 good for 2 years. Raising up to $825,000 CAD. 
 
Use of proceeds:Pay off $650,000 royalty debenture held by Spectra’s operating subsidiary Spectra Products (SPI). Accelerate growth in the lucrative US market. 
 
Financials (Trailing-twelve months, CAD): $2.0M revenue (+3% y/y), $452,000 operating income (+57% y/y). Note the company just released Q1 financials which showed revenues down 13% year-over-year. The decline was due to a large order last year which slipped from Q4 2017 to Q1 2018, creating a lumpy comparable quarter. 
 
Valuation:3.7X revenue, P/E = 14.6 (annualized)
 
Share Structure:
** Note: Spectra’s key operating subsidiary, Spectra Products, is only 66.8% owned by the parent company. The non-controlling interest is held by Mr. Glen Campbell, current Chairman and CFO of the company. Valuations reflected in this report are adjusted for the non-controlling interest. 

Business Overview

Spectra makes safety and maintenance products for the transportation industry. They’ve built their business around 4 key product lines:
  • Brake Safe – this is SSA’s flagship product. It’s an easy-to-install visual indicator of brake stoke that allows drivers to quickly determine if their brakes are in or out of adjustment. You can think of it like a goal post:
This affordable solution (~$180 investment per truck) saves drivers time, replacing a 20-minute manual “mark and measure” process with a 3-minute check of the Brake Safe indicator. Add to that maintenance savings and avoidance of hefty fines and this product pays back many times over for SSA’s customers. Brake Safe makes up 50% of SSA’s business and grew 37% in the most recent quarter.
  • Termin-8r – this is an anti-corrosion lubricant. When customers upgrade their lubricant to Termin-8r, they protect equipment from rust and extend parts life and reliability. Unlike Spectra’s other products, Termin-8r is a consumable and with that comes repeat and recurring revenue. This is SSA’s 2nd-fastest growing line – they note a private label arrangement with a leading supplier in the commercial transportation industry is proving to be an “excellent performer.” This line makes up 30% of SSA’s business and grew 17% in the most recent quarter.

  • Zafety Lug Lock – these products prevent wheel-end lug nuts from loosening which can lead to wheel damage or loss. This line makes up 10% of SSA’s business and declined 8% in the most recent quarter.

  • Brake Inspector – this is an electronic version of Specta’s flagship Brake Safe product. This line is not a major focus for SSA – despite 200% growth last quarter, it only makes up ~1% of SSA’s revenues. 
Spectra primarily sells through distributors, which allows them to operate lean and positions them well to scale with future growth. 
 
What we like
  • Untapped market. Spectra has a strong franchise in Canada but has only begun penetrating a lucrative US market that is 10X the opportunity in Canada. Per the MD&A, organizations like the Commercial Vehicle Safety Alliance (CVSA) are growing awareness of Spectra’s products and as a result, sales are accelerating in the US.
  • Regulatory tailwinds. Out of adjustment brakes are a BIG risk to drivers and as a result, they are the #1 service violation in North America. Spectra’s products have now become mandatory and as regulators crack down, Spectra’s brake business should continue to grow organically.  
  • Valuation. Shares currently trade under 15X earnings. We’ve seen much higher valuations for profitable businesses growing 25+% annually with repeat revenues. A combination of cheap valuations with strong growth is the fastest route we know to big investment returns.  
What to watch out for
  • Dependent on new business. Spectra’s flagship Brake Safe product is made to last – once you buy it, you’re set. This is great for customers – but means Spectra doesn’t have recurring revenues to count on and must find new customers to grow.  
  • Cyclical. The trucking industry is cyclical and tied to overall economic conditions. In a downturn, fleet operators will be less likely to invest in the aftermarket accessories Spectra offers.
  • Key man risk. Spectra is a lean operation with just 4 employees. One of them is CEO Andrew Malion who has been at the helm for almost 25 years. Andy leads everything from sales to product development – if he were to leave the business could face significant challenges. 
Bottom Line
 
Spectra checks all the boxes: it’s profitable, growing quickly and completely undiscovered by the markets. With regulatory tailwinds at their back, we think Spectra can build on recent US sales momentum – and with that could come expanding earnings and a higher share price. 
 
Disclosure: Paul, Brandon, and Keith are long SSA:TSXV and intend on participating in this financing.
86 East 23rd Ave, v5v 1w9, Vancouver, Canada
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