Earlier in the year I spoke very highly of Sparta Capital (OTC:SCAXF) (SAY.V):
Since then, the stock has had a rough several months. It drifted downwards from $0.20 to $0.05 as a lack of news and a surprisingly poor Q2 (ended March) killed any momentum that it had. I put it on the backburner to focus on other opportunities and enjoy my summer while continuing to hold my position. However, recent events have caused it to become my favorite stock trading below the $1.00 price and $100 million market cap threshold.
John O’Bireck, President & Chief Technology Officer recently gave me a phone call out of nowhere with a second follow up call soon after. While he's not the CEO, he essentially fills that role from a retail shareholder perspective as the "face" of the company. Based on my experience, CEOs or other members of management don't call retail shareholders out of the blue unless they have good news to share or are otherwise bullish about the near term prospects of the company. Mr. O’Bireck is very well aware of the performance of the stock since March. He knows that many retail shareholders are in a losing position and calling them up may solicit complaints. He didn't call me to risk getting an earful for nothing. Management teams in that position generally go into hiding (for those who have followed my picks over the years, I'm sure you can think of a couple of examples of this). Sparta did not. Instead Mr. O’Bireck decided to seek me out.
As for the actual content of the calls, he couldn't share much as he can't give me any non-public insider information. But as the Q3 results ended June were coming up, he did ask for some general advice as to what type of information Sparta should include in a press release. The previous quarter's press release went as follows:
I told him that Sparta needs some kind of summary of its results as very few people will actually look at SEDAR filings. While the company is not in a position to release financial guidance as of yet (something I always push for ASAP), I mentioned that providing some insight into contract backlog may help with investors assessing near-term growth prospects. As a result, this was Sparta's Q3 press release:
I give a lot of credit to a company's management team that actually listens to me when I give advice. When it comes to start up penny stocks, an investor has to put a high amount of faith in management as there is not much else to go on. A management team of a company that is willing to listen to an investor is one that is smart and humble enough to make good decisions instead of letting egos get in their way. That leads to flexibility and nimble business decisions.
There has been one other company that has behaved like this in the past in terms of unsolicited calls to me and the seeking of and implementation of advice. That's Peak Fintech Group Inc. (OTCPK:PKKFF)(PKK.C). And we all know how that one turned out. Peak had to pivot several times to navigate the difficult regulatory environment of the Chinese financial industry. While the business always had a fintech framework, I would never have guessed in 2018 that supply chain services would be the dominant source of revenue in 2021, with those seeds being planted through an acquisition and birth of the ASSC division. That flexibility in taking opportunities while they were there and trusting other capable business people in China is what led to PKK's success in 2021.
There is one other reason why I am willing to put a lot of money down on Sparta despite its precarious position in terms of being a going concern. The company refuses to finance and dilute at the corporate level and Mr. O’Bireck remains adamant about that, even as he talks to me knowing that I'm an accredited investor who would be open to a private placement. As in other words, he's not calling me to beg me for money. Taking one look at this balance sheet, it seems that Sparta would be in need of financing or risk going insolvent:
Sparta has negative working capital and a little over $800,000 in cash to work with in order to fund the operations of its four prospective subsidiaries.
It would seem that the company would raise cash in any way that it can get it, but Sparta wishes to pursue alternative sources of financing. My guess would a possible direct investment into one of the subsidiaries. This would dilute Sparta's interest in it, but would keep the float of the stock unchanged. While dilution of the subsidiary wouldn't be ideal either, a large financing may immediately accelerate that division's growth potential so that Sparta's revenue from that division increases despite holding a smaller stake. It's Mark Cuban's smaller piece of a larger pie argument he always sells when driving a hard bargain on Shark Tank.
While Sparta is small, it's not actually a young company. Incorporation goes back to 1988, though under different management. It's always been an undercapitalized company with a messy balance sheet, but has found a way to survive until now.
Sparta's existence since 1988 can be seen as a negative too. It has been wandering the desert for 33 years and still hasn't managed to grow a profitable business. I have certainly called out other companies listed on the TSX Venture for being listed before Facebook and Google were a thing and doing nothing but wasting shareholder's money during that time.
However, I'm willing to overlook the desert wandering past as things might finally be ready to change. This may be part of the reason why Sparta management is so anxious to contact me, a reasonably well-known name in the small cap Canadian space with bullish sympathy for the stock. Sparta is in the ESG business, specifically in the recycling of electronics and conversion of waste plastic into biofuel. It also has a health and TruckSuite division. I've spoken about these divisions as well as Sparta's media coverage over its technology in the post linked above. Paying specific attention to the two I have circled below from Sparta's website.
Sparta may have been wandering the desert for 33 years as an ESG company, but that was likely a sign of it being ahead of its time rather than being a struggling, poorly run business. The time for environmental solutions is now as both the business world and penny stock investor world seem open to accepting the necessity of these type of businesses. That has been made apparent by the recent run of Cielo Waste Solutions Corp. (OTCQB:CWSFF) (CMC.V).
Sparta Capital versus Cielo Waste Solutions. Spoiler: Sparta clearly wins
Cielo has been one of the TSX Venture's greatest success stories in 2021 - in terms of stock price performance at least. Its waste-to-energy business has been a darling for penny stock chasers this year. Despite its recent pullback and production setbacks, it has a market cap of $320 million and topped out at double that. I wish Cielo great success in getting its renewable diesel process to commercial scale so I'll never call it a pump but it does appear that it is up more on hype than on actual accomplishments. A review and comparison of financials between Sparta and Cielo make that clear:
Sparta is trading at a market cap that is 25 times lower than Cielo despite having an actual revenue generating business that is reasonably close to generating profits. Sparta has generated a $240,000 operating loss on $3.5 million in revenue for the first nine months of its fiscal year. That is compared to a $4.8 million loss on essentially no revenue for Cielo. Cielo exploded in price after announcing a $1.5 million fuel sale that has come under scrutiny.
One obvious issue when comparing Sparta to Cielo is that Sparta has multiple divisions and it doesn't split out revenue by segment (segmented results is another thing I mentioned to Mr. O’Bireck as something to consider providing in the future). We don't know how much revenue is currently being generated from the conversion of waste materials into biofuel versus its electronics recycling/upcycling and health initiatives. Or how long the process will take to get to commercial scale. The thing is, at least Sparta has multiple operating businesses in the environmental sector. That's evidence that it can bring its technology to production, which is more than what we can say about Cielo right now.
Another point of contention with Cielo comes directly from its website where it makes the following claim:
Cielo has an exclusive global license from a related party for a game-changing refining process (“the technology”) that can convert multiple different waste streams into renewable diesel at a considerably lower cost than biodiesel companies.
Cielo hasn't actually SOLD much of anything. It's pulling in nearly $2 million in losses per quarter. So how can it claim that it's producing something at a considerably lower cost than other biodiesel companies? The company needs to process something, sell it below biodiesel competitor prices, then provide the market with the financial statements that prove it can run at profit before making such a claim. The honest way to portray its business is to say it has the POTENTIAL to be produced at a considerably lower cost once up and running. Nothing has been proven or is guaranteed and the recent setback shows us this.
Contrast this to what Sparta writes on its website, as I screenshot above:
More than 100 million lbs/year of unsortable waste plastic and 250 million lbs/year of biomass, currently under management.
Sparta has provided the market with factual numbers of the amount of waste under management. Given the revenue numbers currently being reported, this waste likely results in less than a penny per pound in revenue, but at least Sparta is being forthright with what it is doing. As for the biomass, that may be what the company is currently trying to convert into energy. I recommend that Sparta be as transparent as possible in terms of its financial performance, business updates for each of its subsidiaries and technology and the market will reward it with a market cap that is more Cielo-like.
This is why I am so bullish on Sparta right now. The company has a management team that appears to be a business-focused set of non-promoters with multiple revenue-generating ESG lines of business that is just on the cusp of profitability. It just so happens to be listed on the TSXV. I believe that Sparta is in the right place at the right time to provide risk-tolerant investors with a growing ESG business that could perform so well in the capital markets that its market cap overextends itself similar to what CMC has done.
My price target on SAY: I have none. I'm just bullish.
People ask what is my price target on SAY. I have none. I am just super bullish. Until Sparta shows consistent profits or provides financial guidance from which to derive a price target, there is insufficient data to come up with a responsible price target. I do have personal SELL targets, of which there are many dozens as I split my sell orders into many small pieces. But those are all substantially higher than $0.07.
I will say this. Just to come in line with CMC's market cap, SAY would have to trade at around $1.75. To me, SAY is currently worth more as a business than CMC. It's up to the market to decide if SAY is just ridiculously undervalued or CMC ridiculously overvalued.