Last weekend I had a chance to sit with Mohammad Abuleil, CEO and President of Selectcore LTD. (OTC:SLXXF)(SCG.V) in order to ask him a few questions. SCG was a very quiet stock sitting near 52-week lows with little visibility up until a deal was signed with First Global Data (OTC:FGBDF)(FGD.V) which promises to be a disruptive force in the Canadian Fintech space. With this new business comes a much-needed effort on SCG's part to raise its profile in the investment community. My interview will be one step of many that SCG must take so current and prospective investors know that this is a company on the verge of thriving. SCG is aggressively pivoting towards Fintech and away from the low-margin legacy business which has left nothing more than a messy balance sheet.
The company took two steps towards greater market visibility and viability this week with a corporate update outlining recent business activity as well as plans for the future and the appointment of Naveed Ul-Hassan, Assistant Vice President of Habib Canadian Bank, to the board.
Before getting into the questions, there are a few qualitative observations I would like to say about the CEO. First, Mr. Abuleil is very aware and respectful of laws surrounding insider information and investor fairness, as well as respectful of the privacy of the companies SCG engages with in business. This respect is to the point where I think he was overly conservative with some of his answers to my questions. While some of his answers might be short or vague, I believe that has much more to do with his conservative nature than him not having a solid plan.
While that might be frustrating to me as the author of this piece, I think his personality is imperative to constructing a successful relationship with FGD. As CEO of FGD, Andre Itwaru had to go through a rigorous vetting process in order to maintain and grow the 22 U.S. State money services licenses that FGD owns and he has to be very particular over whom he chooses to do business. Someone who is conservative and pragmatic with respect to operating a business and who wishes to operate well within laws like Mr. Abuleil does makes a good partner for FGD.
In addition to that, Mr. Abuleil was very proud of his four children in their 20's who have attained success in their fields at an early stage. Three of those children are in technology or medical fields and the fourth has published a book. Their success is indicative of an upbringing by parents of strong work ethic with a mind for business and technology. I think SCG shareholders would like Mr. Abuleil if they ever have a chance to meet him.
As with my other interviews, I am paraphrasing based on my notes taken during my time with him. In many cases these statements aren't word-for-word, but the capture the essence of what Mr. Abuleil was trying to say.
Q1: I will start off with the elephant in the room - the balance sheet that has historically scared a lot of shareholders away. Going back as far as 2008, SCG has had negative working capital and shareholder's equity. As the company has pivoted away from the dying prepaid phone card business which has led to net losses, that working capital deficit has risen to over $11 million nine years later. And yet the creditors who own the trade payables continue to let SCG operate. My guess is that they are either unwilling or unable to force SCG through restructuring. Can you explain to us what exactly those liabilities entail and how you've been able to operate with a working capital deficit for so long? How do you plan to eventually pay them back or otherwise extinguish them?
A1: Historically Selectcore has made heavy investments in its IT systems. Systems that are still in use to this day. The working capital deficit grew as the thin margins on the prepaid phone card business couldn't cover off that substantial investment over several years. Now that Selectcore is pivoting towards the financial services sector, the company is working towards solving the majority of the legacy business issues so it can move forward as a full suite Fintech play.
For the last 1.5 years the trade payables balance has been at a standstill as Selectcore is working towards a resolution with its creditors. Negotiations are taking place and updates will be forthcoming.
Q2: There is a loan outstanding for a little over $2M that currently accrues a 24% interest rate which is eating a large chunk of SCG's operating profits. This loan is coming due at the end of January. Given the new strengthened position of the company, are you able to refinance this loan at more favourable terms?
A2: Selectcore is working on a solution to remove this debt from its balance sheet.
(E. Even though his answer was very short, I can tell that Mr. Abuleil is very anxious to have this debt extinguished. I get a feeling that there is a plan in place that we will see very shortly.)
Q3: Q3 saw a 2.8 cent EPS which was due to $1.4M in prior period revenue from February 2015 to June 2016 being recorded in the quarter. How much of that is from February to December 2015? EBITDA was $1M for the first nine months of the year so if the 2015 amount is less than a million, SCG has been EBITDA positive for 2016.
A3: It is reasonable to assume that revenue is approximately equally distributed between the 17 months.
(E. Assuming about $80,000 in revenue per month, that means about $900,000 of that revenue belonged in 2015 and $500,000 of it in 2016. Subtracting that $900,000 from $1 million in EBITDA means that Selectcore is EBITDA positive by around $100,000 for 2016. The company is negative on cash flow mainly because of the interest charges generated on the loan discussed in Question #2.)
Q4: Gross margin doubled for Q3 - going from 21% to 42%. Is this a result of the low margin prepaid phone card business simply taking up less of the pie? Or is the financial services division increasing in margin? For future quarters, would you be able to split revenue and gross margins between prepaid card and financial services?
A4: The increase in margins is due to the reduction in the legacy business. Financial services margins are consistent year-over-year. Selectcore will continue to report one line item. As time goes on, the Fintech side of the business will be the dominant source of revenue.
Q5: Given that the prepaid phone card division is on its last legs, are there plans to close this division entirely in the near future? Would there be savings on the opex side that could immediately impact the bottom line and result in SCG attaining consistent profits?
A5: There are plans to close two small business units that are not key to operations going forward and are unprofitable. This will help decrease costs a little bit. But there are no plans to close the whole prepaid phone card division because of the deal with First Global. Selectcore can now take full advantage of the Telecom sector by converting users to the full suite Fintech model offered by the JV.
Q6: The market reacted very positively to the news that SCG is teaming up with FGD to form a JV of a full service Fintech suite in Canada. How do you expect this deal to impact SCG's operations going forward?
A6: The joint venture with FGD allows each company to utilize the platforms of each partner within the JV. That includes the e-wallet and remittance functionality along with Selectcore's prepaid card platform. The opportunity for Selectcore in the Canadian Fintech space is many multiples greater with the JV than if the company proceeded by itself.
Q7: In the press release with FGD, it is stated that FGD will provide $600,000 as part of its 50% stake in the joint venture. What is Selectcore providing into the partnership to justify ownership of the other 50%?
A7: Selectcore is contributing its platforms and its contacts. The company has substantial relationships in the Canadian Fintech space that adds a higher value proposition to the joint venture.
Some examples of Selectcore's business and contacts include the City of Toronto Benefits Card program which has been running for four years (see link here) as well as helping various provinces with their disaster relief programs.
Penny stocks are risky and there's no guarantee for success. No one knows that better than long-time SCG shareholders who have been essentially wiped out with a history of reverse splits. What I hope this interview article has shown is that Mr. Abuleil is someone who will do his best to make SCG a success and has a clear plan with objectives and internal milestones to help get it there through key relationships and the right technology.
Disclosure: I am/we are long SLXXF, FGBDF.