Earlier this year, Peak Positioning Technologies Inc. (CSE: C.PKK, PKKFF, Forum) announced an adjustment to its business model, to which the market seemed to have reacted negatively, evidenced by the steady decline of the company’s market cap since the announcement was made. Stockhouse recently sat down for a discussion with Peak Positioning Technologies CEO, Johnson Joseph, to get his take on what has taken place since that announcement was made and what the company plans to do to get back on track. The result of that discussion is presented below in the form of a Q&A interview.
Let’s start with the obvious question. Your company lost about 75% of its market cap in a span of just a few months. Why do you think that is?
There’s no question we’ve taken a major hit from the $0.20 high, however, when you look at the market cap at the beginning of the year compared to what it is today, there is virtually no difference. So something must have gotten the market excited for the stock to reach a 52-week high before coming back down. I think that our decision to bring the Cubeler fintech platform to China was largely responsible for the run up.
Things began to go south for the stock when we later announced that we would be adjusting our business model to transition to more of a financial services company. I don’t think the market disapproved the adjustment per say, but rather the idea that it would lead to delays in achieving the revenues and profits that were anticipated for the year. We made it clear that we would have to put several things in place, including creating a financial services subsidiary requiring a substantial investment, in order to complete the transition. I think that some investors either think it’s going to take us too long to achieve our goals, or simply don’t believe that we’ll be able to achieve them at all and started selling the stock as a result.
Speaking of adjustments to your business plan, investors familiar with the company have expressed a certain amount of frustration with the fact that the company has changed its business model several times over the past few years. Why should investors believe that this latest model will succeed whereas the previous ones didn’t and had to be changed?
It’s true we’ve had to alter our business plan on a couple of occasions, but never without providing shareholders with a logical explanation as to why the change was needed. It’s no different this time around. Last year we presented a plan whereby we would process raw material purchase orders and get a referral fee on the financing of the orders. We always said that we would eventually provide the financing related to those orders ourselves. So when the opportunity came up to be able to do that and to expand the scope of our financing activities with Cubeler, we decided to go for it.
What’s different this time around is that investors can already see the benefits of the change in the form of the better margin revenue-generating services that were promised with the change. With the recently announced start of the matching service between lenders and borrowers on the Cubeler platform, we’ve now demonstrated three recurring revenue service offerings on Cubeler with double-digit profit margins and considerable long-term potential. All that’s left to do is bring more lenders to the platform to help fuel all of those opportunities.
I believe GoldLegal™ is one of the three service offerings you mentioned that are now available on Cubeler. Some investors say that the company could actually lose money on that service. Is that true?
The monthly fee we charge lenders for the GoldLegal™ service can be compared to a monthly car insurance premium charged by an insurance company. Theoretically, the insurance company could lose money if all of a sudden, everyone began to have accidents annually. If that was to happen, the insurance company would obviously re-adjust the premiums charged for its policies, making them much more expensive.
The GoldLegal™ service operates under a similar concept. The fees charged for the service are based on each lender’s historical and projected loan default rate to ensure that the service is profitable. Yes, theoretically, the service could lose money in a given year, but that’s highly unlikely. And any lender whose loan default rate exceeds the prescribed range on which its service rates were based, will immediately see an increase of its cost to use the service to ensure that providing the service remains profitable for the company. By the way, I just want to point out that in case of a loan default, the GoldLegal™ service only covers the legal cost of about $1,600 associated with the recovery of the amount of the loan. So, we’re not on the hook for the amount of the loan itself.
You recently went on a cross country roadshow where you presented your revised business model to retail and institutional investors, yet the stock continues to struggle to gain any traction. Are you at all disappointed with results of that roadshow?
Not at all. The purpose of the roadshow wasn’t to have an immediate impact on the stock price. We met with existing investors as well as prospective investors simply to make sure they understood our revised business plan and revenue model and to keep an eye on the company as we execute our plan. A lot of those investors base their investment decisions on analysing financial statements, so we aren’t expecting them to get into the stock until there is clear evidence that we are executing our plan. We’re just planting seeds right now for which we hope to reap the rewards later.
Along the same line of questioning, you’ve put out a few news releases recently, which by all accounts, appear to be very positive news for the company’s prospects. Yet again, the market seems to either be ignoring or discounting the releases as there’s been no impact on the company’s stock price. Do you think that the market simply doesn’t care anymore?
No, I don’t think that at all. I believe we have a very strong base of investors who still care and believe in what we’re doing. It’s important to let them and other stakeholders know that we’re making progress in the execution of our plan. So that’s really all we want to do right now with the news releases. We presented a business model which we believe has the potential to create a lot of value for our shareholders. But at the same time, it’s clear that Asia Synergy Financial Capital will play an important role in our ability to realize that potential.
Without it, we’re almost like someone trying to get from Montreal to Vancouver on a bicycle. The bicycle would get us there eventually, but we’d obviously get there a lot faster on a plane. Yes, we’ve put out news releases about the start of the various service offerings related to our new model, but until we’re able to show that there will be plenty of cash around to finance orders and extend loans on our platforms, I can’t blame the market for taking a wait-and-see approach. I do believe that things will change, or at least begin to, once we announce the creation of ASFC.
All of the service offerings you’ve talked about so far relate to the Cubeler platform. What about Gold River? There hasn’t been any news on that for a while now. What’s happening with your Gold River platform?
I know at times it seems like we’ve all but forgotten about Gold River, but that’s not the case at all. Gold River is still a very important asset for us that we expect will make a significant contribution to the company’s bottom line. When Gold River was first launched last year, we spent a lot of time and energy on it before it could generate the revenues that it did. Likewise, we’ve had to do a lot of work on Cubeler this year to get it to the point where it too would be generating revenues for us. We just need a source of funds to finance Gold River’s purchase orders. So its activities will pick up again once we get ASFC going.
You’ve brought up ASFC a couple of times now. It’s been about six months since the company announced its plans to create it. It’s obviously expected to be a very important component for the company. Yet, here we are six months later and there’s no indication that you are any closer to having it done. What’s taking so long? Are there any issues keeping you from creating it?
For ASFC to be granted that coveted lending license in China, the Chinese government requires that it has a registration capital of at least $20M. No part of the $20M can come in the form of a loan that ASFC would have to pay back. All of it has to be invested as equity in ASFC. We obviously can’t do an equity private placement in Peak to raise the $20M to invest in ASFC, nor would we want to. So part of the challenge in creating ASFC is to find partners who would invest along with Peak to make up the $20M minimum required, while Peak would remain the controlling shareholder in ASFC regardless of the percentage of the $20M invested by Peak.
This is not a simple puzzle to solve. We’ve been working at it for a while now, meeting with potential investors and getting advice from legal, tax and other international business professionals. The good news is that now that we’ve demonstrated that our revenue model works, I think we finally have the right investment partners around the table and a few potential ownership and investment structures that would work for everyone. It’s just going to take a little bit more negotiating and a few more frequent flyer miles to come to an agreement, but we’ll get there soon enough.
So the magic number for ASFC is $20M. But will that be enough to provide all the funds your platforms will need to be effective? One of the news releases you put out earlier this year mentioned that collectively Cubeler and Gold River would need to be able to finance $200M+ worth of transactions per year. If you only have $20M in ASFC, where will the rest of the funds come from?
Even more valuable than the $20M in registration capital that ASFC will have once it’s created will be that lending license. Having that license will allow ASFC to borrow funds at low interest rates from a number of banks in China, so meeting the financing demands of the platforms shouldn’t be an issue. Also, keep in mind that Cubeler will not depend solely on ASFC to finance transactions. ASFC is expected to be just one of many lenders on the platform, so the bulk of the capital that will be loaned on Cubeler is expected to come from other lenders, not ASFC. ASFC will eventually be used primarily for the “Lend with Me” program on Cubeler and of course, to finance purchase orders on Gold River.
So what’s next for PKK, how do you get the company back on track and back in favor with the market to reflect what you believe to be its true value?
Honestly, I don’t think we’ve been off track at all. We may have fallen out of favor with some shareholders and the market, but I think we’ve been pretty good at staying the course with the execution of the plan we presented earlier this year. As for winning back some of our shareholders’ and the market’s favor, we know what they’re looking for. They want to see us deliver revenues and positive earnings per share. The single most important thing remaining right now for us to do that is to finalize the deal to get ASFC going. I think once we do that, everything else will start to fall into place.
Let’s talk about earnings per share for a second since you brought it up. You already have quite a few shares outstanding and have recently done a series of private placements, putting even more shares out there. Some shareholders are concerned that this creates unnecessary dilution and will hurt the company’s future earnings per share. Do you not share those concerns?
I do to a certain extent. But at the same time, we need to make time sensitive investments in our operations in China if we’re going to deliver value for our shareholders. So the private placements were necessary and I think we’ve been responsible in terms of the size and the prices at which they were done. I know that some investors point to the warrants outstanding and suggest that we wait until they are exercised for cash to come in to the company, but we can’t manage the company on the expectations that warrants will be exercised.
What about the financial projections you presented back in April? Given your first and second quarter statements, I would imagine that they would need to be revised and updated. Are updated financial projections something that investors can expect to see soon?
Although we now have a pretty good handle on how revenues will be generated on both Gold River and Cubeler, we’ll wait to get a few more transactions under our belts before we put out revised projections. Besides, as the timing of the creation of ASFC is expected to have a major impact on the company’s revenues, it’s better to also wait until we get it going before putting new numbers out there.
Finally, is there anything you would like to say in closing to PKK shareholders who are concerned about what has happened to the stock price since it hit a high of $0.20 earlier this year?
From my perspective as the company’s CEO, I would simply tell our shareholders that the company has never been in a better position from a financial, technological, partnership and overall business operations standpoint. We’re actually much closer today to achieving the things that the market was so excited about earlier this year then back when the stock traded at $0.20.
Thank you for your time and best of luck for the future Johnson.
My pleasure and thank you for the opportunity.
Full Disclosure: Peak Positioning Technologies Inc. is a paid client of Stockhouse Publishing.