E Pacific Safety Products’ Unknown Turnaround Offers Huge Upside

Q2 2015: positive $1.6 million

Q3 2015: positive $2.4 million

Long-term debt stands at $723k, mostly compromised of a debt-based capital raise (private placement) last February. These debentures will mature on February 18, 2018 and are convertible at the holder's option into common shares at any time prior to the maturity date at a $0.15 conversion price. So there is a potential overhang above $0.15, but I don't know whether they will exercise that option, and if so at what level. If they do, it could provide a sizeable supply of cheap shares savvy individual investors might be willing to gobble up.

The company also has a big NOL asset and federal investment tax credits it can use to reduce taxes on future profits until 2026.

Overall, the balance sheet is pretty clean, and management has stressed not to dilute shareholders. They haven't done so in the past year, and given the ample financial improvements, I regard dilution risk as improbable.

Share structure

Currently outstanding are:

  • 65 million common shares
  • No warrants
  • 5 million convertible debentures with strike price at $0.15, mostly held by insiders
  • 4.76 million options with an average strike price of $0.11 and expiry date in 2018

This share structure stands out among many micro-caps; the total shares outstanding did not increase, and it's completely warrant-free.

The options holders could theoretically exercise at current levels causing selling pressure to occur, but when the share price hit $0.20 a few months back only 50k options got exercised, so I only expect them exercising in the near future if shares really take off.

As stated in the previous paragraph, the debentures also could potentially cap the stock price >$0.15 for the time being. Most of them are held by insiders, so I assume they won't readily act as arbitrageurs.

Significant insider buys

Both the CEO and the Chairman of the Board of Directors bought sizeable blocks of shares in the open market:

The CEO was recently interviewed, I recommend watching the video. He clearly put his money where his mouth is, which unfortunately is an uncommon phenomenon among micro-cap CEO's.

Safety products for law enforcement is a hot market

Due to unfortunate civil unrest in some cities, law enforcement agencies have decided to upgrade their equipment. Both federal as municipal governments are funneling more of their budgets to defense and police departments. Visiongain, a business intelligence provider, envisions the market to expand globally, with specifically strong growth in the Northern American territories. MarketsandMarkets has voiced the same opinion. This is a very hot sector to be invested in.

Body armor is a vital part of a police officer or soldier his or her protective gear. In my opinion, Pacific Safety Products offers an ideal and unique product portfolio to those agencies seeking the best protective gear for their employees.

Currently, the addressable market in Canada totals about $15 million and in the US about $200 million on an annual basis. This is a conservative estimate though, if you add the military in the mix, the figures go much higher. But you can see why the company is focused on the US. This market is simply much bigger, and the company's 3% market share is poised to only increase (whilst in Canada it already is 70%).

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Disclosure: The author is long PSP.V.

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