SPECTRA PRODUCTS INC. Spectra Products Inc.
Management Discussion and Analysis
Third Quarter Ended September 30, 2021
October 25, 2021
Spectra Products Inc.
Management Discussion and Analysis
Third Quarter Ended September 30, 2021
The following Management Discussion and Analysis is supplementary to, and should be read in conjunction with the interim financial statements for the fiscal nine months ended September 30, 2021. The interim financial statements have been prepared on the basis of International Financial Reporting Standards ("IFRS"). In this Management Discussion and Analysis all amounts, unless otherwise indicated, are expressed in Canadian dollars. This MD&A is written as of October 25, 2021.
Description of Business
Spectra Products Inc., (the "Company"), supplies wheel end safety products to the transportation industry. The current product line includes a visual brake stroke indicator, Brake Safe®, that permits vehicle drivers and maintenance personnel to visually determine the brake adjustment condition of a truck, trailer or bus equipped with an air activated brake system. The Company's electronic version of Brake Safe® is an air brake diagnostic system called Brake Inspector®. This product provides an in-cab display of air brake status and permits diagnosis of various existing and potential brake problems with the foundation brakes of trucks and buses. The Company's Termin-8r® product is the number one product in the market for protecting Electrical Vehicle charging ports and charging stations which are prone to corrosion. Termin-8r® is also an extreme pressure lubricant and penetrant sold to the transportation industry. Zafety Lug Lock® a product that prevents wheel-end lug nuts from loosening leading to wheel damage or wheel loss. The Company's products also include Hub Alert® a heat sensitive label that is applied to each wheel hub of trucks, trailers, buses and off-road vehicles to provide an early warning of critical temperature threshold levels where safety and maintenance issues may be pending. The Company has secured the exclusive licensing rights to manufacture and sell the Anti-Seize Cotter Pin™. The Anti-Seize Cotter Pin™ is a unique product that keeps clevis pins from seizing in slack adjusters. A seized clevis pin can cause brake binding and loss of brake force.
The Company manufactures its Brake Safe® and Brake Inspector® products utilizing sub-contract suppliers and receives the product components for select subassembly and packaging. The Termin-8r® product line is blended, packaged and shipped to the Company's warehouse ready for shipping to customers or in the case of private label shipped direct to the customer from the packaging facility. The Company distributes Zafety Lug Lock® under a non-exclusive distribution arrangement and Hub Alert® is distributed on an exclusive basis for Canada and a non-exclusive basis for the U.S. The Company also signed an exclusive manufacturing and distribution contract on our newest wheel end safety product the Anti-Seize Cotter Pin™.
The Company's products are sold to the transportation industry directly to "house account" fleets; through traditional transportation distributors and truck/trailer dealerships; and to trailer manufacturers in Canada and the United States.
Financial Instruments and Financial Risk Management
The Company utilizes its risk management strategy to limit its exposure to financial risks resulting from its manufacturing and sales activities and its use of financial instruments including market risk, credit risk and liquidity risk. The Company's risk management policy has not changed during 2021.
Market Risk
Market risk is the risk that changes in market prices due to foreign exchange rates and interest rates will affect the Company's income of the value of its financial instruments. The objective of market risk management is to mitigate and control exposures within acceptable parameters.
Foreign currency risk
The Company realizes a portion of its revenue and expenses in foreign currencies. Consequently, some assets, revenue and expenses are exposed to foreign exchange fluctuations. The following assets, revenue and expenses originated in United States dollars and are subject to fluctuations:
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As at September 30, 2021 | |||
Net assets | $ | 1,049,348 | |
Revenue | $ | 692,782 | |
Expenses | $ | 0 |
Foreign currency sensitivity analysis
The Company is marginally exposed to foreign currency fluctuations as certain revenues and expenses derived from sales activities in the United States are denominated in U.S. dollars. As at September 30, 2021, the Company had US$658,858 of net current operating assets and US$167,400 of investment assets denominated in U.S. dollars. The Company's sensitivity to foreign currency fluctuations is such that a 10% strengthening or weakening of the U.S. dollar would result in a $65,886 decrease or increase to the Company's income before income taxes and to a $16,740 decrease or increase other comprehensive income before income taxes for the nine months ended September 30, 2021.
Interest rate risk
The Company is not exposed to any interest rate risk.
Credit Risk
Credit risk is the risk that one party to a financial instrument may be unable to discharge their obligation. The Company's main source of credit risk is outstanding accounts receivable and the Company's maximum exposure to credit risk is equal to the carrying value of the financial assets. In order to prevent losses, the Company manages credit risk by assessing the credit worthiness of potential customers and regularly monitoring outstanding accounts receivable. In determining impairment of financial assets, the Company reviews all receivable balances greater than 90 days and assesses customer payment history. At September 30, 2021, three customers accounted for 83% of the Company's total trade receivables (December 31, 2020 - three, 74%):
At Sept 30, 2021 | At Dec 31, 2020 | |
1-30 days | 178,999 | 82,292 |
31-60 days | 45,527 | 77,104 |
60+ days | 0 | 0 |
Total trade receivables | 224,526 | 159,396 |
Allowance for bad debts | 0 | 0 |
Net trade receivables | 224,526 | 159,396 |
Other receivables | 9,208 | 10,500 |
Total receivables | 233,734 | 169,896 |
For the period ended September 30, 2021, three customers accounted for 53% of the Company's revenue (September 30, 2020, three customers, 52% of revenue).
Liquidity Risk
Liquidity risk encompasses the risk that a company cannot meet its financial obligations as they become due. The Company's approach in managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking harm to the Company's reputation. The Company manages its liquidity risk by continuously monitoring its actual cash flows and its forecasted cash flows. In the event the Company's current cash and cash equivalents become insufficient to meet the anticipated need for ongoing expenses, working capital and capital expenditures, the Company will seek additional funds in the form of equity or debt to provide working capital, inventory and capital equipment necessary to implement its business plan.
Fair Value
The Company's financial assets and liabilities are classified and measured as follows:
Cash is classified as financial asset measured at fair value through profit and loss. Accounts receivable are classified as financial assets measured at amortized cost. Investments in equity and convertible debentures are classified at fair value through other comprehensive income. Accounts payable and accrued charges are classified as financial liabilities measured at amortized cost. Financial liabilities at amortized cost are recognized initially at fair value plus any directly attributable transaction costs and are subsequently recorded at amortized cost.
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The carrying amount of cash, term deposits, accounts receivable and accounts payable and accrued charges approximates fair value due to the short-term nature of these financial instruments.
Capital Disclosures
The Company's capital structure is comprised of shareholders' equity. There are no restrictions on the Company's capital. In order to maintain and adjust its capital structure, the Company may issue share capital, issue new debt and refinance existing debt.
The Company's objectives when managing capital are to ensure operation as a going concern in order to manufacture and sell its products to its customers while providing an adequate return to its shareholders and other stakeholders.
The Company meets its objectives for managing capital through preparation of detailed, annual budgets and the monitoring of financial performance. The Company reviews ongoing cash flow and monitors very closely its receivables and payables. Capital management objectives remain unchanged during 2021.
Financial Results
Selected Financial Information
The accompanying interim financial statements of the Company and all information in this report have been prepared by management and approved by the Board of Directors of the Company. The interim financial statements were prepared on the basis of "IFRS" and, where appropriate, reflect management's best estimates and judgments. Management is responsible for the accuracy, integrity and objectivity of the financial statements within reasonable limits of materiality. Financial and operating data elsewhere in this report are consistent with the information contained in the financial statements.
Internal Controls
To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls designed to provide reasonable assurance that its assets are safeguarded, that only valid and authorized transactions are executed, and that accurate, timely and comprehensive financial information is prepared.
The Board of Directors carries out its responsibility for the financial statements in this annual and quarterly report principally through its Audit Committee. A majority of the members of the Audit Committee are independent, non-management directors and all members of the Audit Committee are appointed by the Board of Directors. The Audit Committee meets with management and, where necessary, the external auditors to discuss the results of the annual audit examinations with respect to the adequacy of internal accounting controls and to review and discuss the consolidated financial statements and financial reporting matters.
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SUMMARY OF QUARTERLY RESULTS
The table below sets forth certain information for each of the eight most recent quarters, the most recent quarter being September 30, 2021.
QUARTERLY DATA
Canadian | Three month period ending: | |||||||
Dollars | ||||||||
30.09.21 | 30.06.21 | 31.03.21 | 31.12.20 | 30.09.20 | 30.06.20 | 31.03.20 | 31.12.19 | |
Revenue | 421,848 | 391,237 | 489,704 | 408,867 | 343,882 | 305,351 | 535,926 | 380,944 |
Gross Profit | 234,858 | 225,331 | 294,844 | 231,160 | 202,328 | 173,969 | 311,792 | 217,539 |
SG&A | ||||||||
Expenses | 110,217 | 105,767 | 218,005 | 116,354 | 78,811 | 97,459 | 127,067 | 255,603 |
Income taxes | (32,657) | (29,561) | (20,853) | (32,132) | (32,306) | (19,838) | (46,776) | 508,407 |
Net income | ||||||||
(loss) for the | ||||||||
period | 90,558 | 82,010 | 57,836 | 81,111 | 89,604 | 55,024 | 129,737 | 437,098 |
Other | ||||||||
comprehensive | ||||||||
income | (36,896) | (99,002) | (83,187) | 247,986 | ||||
Total | ||||||||
comprehensive | ||||||||
income | 53,662 | (16,992) | (25,351) | 329,097 | 89,604 | 55,024 | 129,737 | 437,098 |
Income (loss) | ||||||||
per share | ||||||||
basic | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.01 |
diluted | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.01 |
Results of Operations
Revenue:
Three months ended September 30, 2021
Revenue for the three months ended September 30, 2021 increased by 23 percent to $421,848 compared to revenue of $343,882 for the three-month period ended September 30, 2020.
Nine months ended September 30, 2021
Revenue for the nine months ended September 30, 2021 increased by 10 percent to $1,302,789 compared to revenue of $1,185,159 for the nine-month period ended September 30, 2020.
Gross Profit
Three months ended September 30, 2021
Gross profit increased by 16% for the three months ended September 30, 2021 to $234,858 or 56 percent of revenue from a comparable $202,328 or 59 percent of revenue for the three months ended September 30, 2020.
Nine months ended September 30, 2021
Gross profit increased by 13% for the nine months ended September 30, 2021 to $755,033 or 58 percent of revenue from a comparable $668,089 or 56 percent of revenue for the nine months ended September 30, 2020.
Expenses:
Three months ended September 30, 2021
The Company has elected to present its statement of earnings utilizing a functional basis of classification in accordance with IAS 1. Under the functional classification of presentation, the expenses are classified based on their functions within the Company under specific headings.
Selling costs
Selling costs are comprised of the following categories:
Commissions
Travel and courier
Trade shows
Advertising and promotion
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Spectra Products Inc. published this content on 30 September 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 26 October 2021 22:47:03 UTC.
