Solei Systems: Either It's The Next Teladoc Or A Grey Sheet Dud
Aug. 29, 2019 9:32 PM ET | About: Solei Systems, Inc. (SOLI)
Kingdom Capital
Kingdom Capital
Long/short equity, Deep Value, special situations
(3 followers)
Summary
Investors looking for a boom or bust need go no further than Solei Systems.
Arguments can be made that fair value of the underlying business was $2m as of April 2019 and the thinly traded stock has run up 30,000%+ on investor hype.
Alternatively, bulls praise current levels as the opportunity for the investment of a lifetime, promising a looming increase over 10x current share price.
Delayed 10-Q has valid explanations provided, but darkens otherwise consistent management track record.
Editor's note: Seeking Alpha is proud to welcome Kingdom Capital as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Essential. Click here to find out more »
Editor's note: Seeking Alpha is proud to welcome Kingdom Capital as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Essential. Click here to find out more »
Background
Reading Solei Systems' (OTC:SOLI) most recent 10-Q, one would initially struggle to understand why a company with $55k in assets and $1.8m in liabilities on their balance sheet has a $30m market capitalization. The CEO, Charles Scott, holds about 60% of the outstanding shares (so strongly aligned with shareholders), but as of the last 10-Q he had only integrated a small supplement business into this holding company with $40k in inventories and minuscule sales.
The bull thesis rests in the Subsequent events section, as follows: “In April, 2019, the Company completed the acquisition of certain assets of KB Medical Systems, LLC, an unaffiliated company for a total of $2,000,000, of which $1,000,000 was paid in cash at closing and the balance of which will be paid in the future in shares of unregistered common stock of the Company based on the five day trailing average closing market price of the common stock on the date which is six months after closing.”
Among the certain assets acquired, CareClix (CareClix) is a telemedicine company that brought over two former owners, John Korangy and Simon Kim. Teladoc (TDOC) is the only other publicly traded telemedicine company, trading at a cool valuation of $4B, about 8x revenue. The telemedicine business model is using software to connect doctors with patients regardless of location, for services like health management, patient monitoring, and remote medical exams. Their business works with the likes of Verizon, Aetna, Anthem, MetLife, etc. per their website. A 2015 investor pitch can be found here: TechBUZZ Fall 2015. At the time, the business was doing about $1m in revenue, expecting growth to about $7m in 2017.
Good News
Points of optimism abound for this stock, but most come with grains of salt. Lending some credibility to the business is Greg Arms, a Senior Advisor who also happens to be a Strategic Advisor at Stony Brook Capital and his past includes role as the Global Head of Accident & Health at Chubb (Stonybrook Capital). CareClix also has many verifiable partnerships and business relationships:
CareFirst (BCBS) (Link)
Insurance Navy Brokers offers their services at a $25 co-pay to their 15m customers (Navy Brokers Introduces CareClix).
Isabel Healthcare: (Isabel Partners with CareClix)
RV Health (RV Health )
HealthLink (Link)
Health Portal Solutions (Telemedicine Partnership with CareClix)
eazyScripts (eazyScripts Partnership with CareClix)
CareClix is also consistently included with top telemedicine businesses, but most of these sites seems promotional in nature:
7 Successful Telemedicine Companies
Top 10 Connected Health Companies
10 Best Healthcare Companies 2019
The Top 5 Companies in Telemedicine
CIO Top 25
Aon Telemedicine Chart
A 15c-211 filing has been made for the stock (anyone can call FINRA to confirm) by a broker to resume quoting on OTC - DBStocks on Twitter (211 Background).
While revenue for the business remains a mystery since the 2015 presentation, “quality” sources like Zoominfo show the business doing $16.8m in annual revenue (CareClix - ZoomInfo). If this is close to accurate, a TDOC multiple would put the market cap around $130m, over 4x current levels.
Bad News
The 10-Q with the consolidated financials for this stock is late, which is one of the many red flags for this stock. Unusually for a grey sheet, management has filed explanations for the delay here: Delay #1 and here: Delay #2. Investors are currently left to evaluate this business based on limited information from public filings. Perusal of these items leads us to the following red flags:
Dramatic Drop in Transaction Price: This is the biggest red flag for me. Per the 8-K filing on January 7th, 2019 (Initial LOI), the offer price was $15.0m of stock issued based on the average closing price five days prior to close, and a $5.0m cash contribution into the CareClix business. After completing due diligence on February 20th (Revised LOI), the closing price dropped to $1.0m cash and $1.0m of equity to be issued six months after close. No further disclosure was made regarding what drove the 90% reduction in offer price. It is baffling why they would sell the business for 1/50th of what the market valued it at less than 6 months later. Perhaps there are additional terms that have been promised but not disclosed, but these would also likely have negative impacts on any current shareholders. Also, given that co-founder Sunil Budhrani (44.5% owner) (CEO Monthly) is not remaining with the business, it seems unlikely he would dispose of a stake in such a valuable business for under $1.0m. Given his departure for the new CEO roles, and the possibility that ties between CareClix and Solei go back further than the recent acquisition, it is possible that the deal was not completed close to fair market value. As an example, SOLI CFO Flood can be seen in the 2017 picture at NCCHC with Augusteen Cowan, now the VP of Sales for CareClix (both were working for Scott’s business Pay Yourself First (PYF) at the time): Josh Flood on Twitter. The fact that both were there representing CareClix at the time could explain how a favorable deal was struck earlier this year. This is the singular biggest mystery that I hope to understand after the filing of the consolidated 10-Q.
Stock Price Run-Up: The few retail holders of SOLI have done very well over the last few months. Price per share was less than $0.001 not very long ago. To get a taste of the core following’s rabid attachment to this stock see the top postings here - SOLI Board. Given the acquisition the run-up is understandable, but shows how very low the floor is if management fails to deliver.
Litigation: One of the bull cases for the stock is that a former trader that is currently jailed for previous pump and dump schemes (Gregg Mulholland (listed on Dec-10 10/A filed by Solei Mulholland's Holdings) - Money Laundering Conviction) is having 12.6m shares canceled (~12% of market cap). Some of the legal issues surrounding these shares may be part of what has been preventing the 211 from being filed previously moving this stock from the grey market to the pink sheets (Court Filing) The resulting 8-K here: Cancellation of Shares. Management’s efforts to get these shares canceled is admirable for stockholders, though their choice to use a stock with past legal issues like this is puzzling.
CareClix Financing Cost: To finance the acquisition, SOLI completed a private offering of convertible debt for up to $3m in April 2019 (SEC FORM D). As of May 20th, they had closed on a total of $1.7m convertible debt (SOLI 10-Q), and $1m of that total was used to acquire CareClix. The notes bear 6% interest and may be converted into common stock of SOLI at 50% of the closing price of the stock at the time of a conversion election. No conversions are permitted during the first 6 months and the notes have a term of one year after the date of issue, so conversions being possibly starting October 15th. The price of shares at that date will determine how dilutive these conversions will be to shareholders. When the 8-K was filed to finalize these terms, the stock was at $0.011 per share, or just over $1m market cap, so the cost of financing here was astronomical – potentially 6x dilutive to shareholders at the time at an annualized cost of capital north of 100%. One really has to wonder why this acquisition was done so cheaply and yet it was so costly to finance.
Future Acquisitions: Another bull case regarding this stock is SOLI’s intentions to do more acquisitions, including integration with PYF (SOLI 10-K), which offers 401(k) and telemedical assistance. Given the financing costs for the CareClix acquisition, shareholders would be right to be nervous regarding significant future dilution in any acquisitions. However, given this merger is likely to be on favorable terms with Scott owning both businesses, shareholders are forced to adopt a wait-and-see approach.
Failed Capital Raise: Based on the Vimeo pitch mentioned earlier, CareClix indicated they were earning about $2m revenue in 2016, and on track for $7m in 2017. They were pitching to raise an additional $1.5m of equity at the time to primarily invest in marketing. Based on the ownership listed in the acquisition 8-K, it does not appear any institutions were willing to invest in this business. No further detail is available at this time as to why.
SEC Filing Issues: As mentioned previously, Solei is late on their 10-Q filing. In addition, they appear to be delinquent under Rule 3-05 of Reg S-X. (Reg Background). Essentially, this was due 75 days after the CareClix acquisition closed. Either the acquisition closed late, hasn’t closed, or the filing is late. Take your pick, but any of these scenarios seems to be a deterrent to regaining OTC quoting under the 211 that has been filed. Management might be able to alleviate some of these concerns if they fired their accountants after these delays are finally explained.
Conclusion
There is very little information to go on regarding the CareClix business, but shareholders of SOLI stand to benefit tremendously from any upside in the business. Once financials are filed, investors will be able to evaluate this stock based on more than the conjecture above. Until then, investors are right to wonder if management can deliver on this promising acquisition.
Disclosure: I am/we are long SOLI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Like this article on Equity feed http://ssqt.co/m5bNoYo
Aug. 29, 2019 9:32 PM ET | About: Solei Systems, Inc. (SOLI)
Kingdom Capital
Kingdom Capital
Long/short equity, Deep Value, special situations
(3 followers)
Summary
Investors looking for a boom or bust need go no further than Solei Systems.
Arguments can be made that fair value of the underlying business was $2m as of April 2019 and the thinly traded stock has run up 30,000%+ on investor hype.
Alternatively, bulls praise current levels as the opportunity for the investment of a lifetime, promising a looming increase over 10x current share price.
Delayed 10-Q has valid explanations provided, but darkens otherwise consistent management track record.
Editor's note: Seeking Alpha is proud to welcome Kingdom Capital as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Essential. Click here to find out more »
Editor's note: Seeking Alpha is proud to welcome Kingdom Capital as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Essential. Click here to find out more »
Background
Reading Solei Systems' (OTC:SOLI) most recent 10-Q, one would initially struggle to understand why a company with $55k in assets and $1.8m in liabilities on their balance sheet has a $30m market capitalization. The CEO, Charles Scott, holds about 60% of the outstanding shares (so strongly aligned with shareholders), but as of the last 10-Q he had only integrated a small supplement business into this holding company with $40k in inventories and minuscule sales.
The bull thesis rests in the Subsequent events section, as follows: “In April, 2019, the Company completed the acquisition of certain assets of KB Medical Systems, LLC, an unaffiliated company for a total of $2,000,000, of which $1,000,000 was paid in cash at closing and the balance of which will be paid in the future in shares of unregistered common stock of the Company based on the five day trailing average closing market price of the common stock on the date which is six months after closing.”
Among the certain assets acquired, CareClix (CareClix) is a telemedicine company that brought over two former owners, John Korangy and Simon Kim. Teladoc (TDOC) is the only other publicly traded telemedicine company, trading at a cool valuation of $4B, about 8x revenue. The telemedicine business model is using software to connect doctors with patients regardless of location, for services like health management, patient monitoring, and remote medical exams. Their business works with the likes of Verizon, Aetna, Anthem, MetLife, etc. per their website. A 2015 investor pitch can be found here: TechBUZZ Fall 2015. At the time, the business was doing about $1m in revenue, expecting growth to about $7m in 2017.
Good News
Points of optimism abound for this stock, but most come with grains of salt. Lending some credibility to the business is Greg Arms, a Senior Advisor who also happens to be a Strategic Advisor at Stony Brook Capital and his past includes role as the Global Head of Accident & Health at Chubb (Stonybrook Capital). CareClix also has many verifiable partnerships and business relationships:
CareFirst (BCBS) (Link)
Insurance Navy Brokers offers their services at a $25 co-pay to their 15m customers (Navy Brokers Introduces CareClix).
Isabel Healthcare: (Isabel Partners with CareClix)
RV Health (RV Health )
HealthLink (Link)
Health Portal Solutions (Telemedicine Partnership with CareClix)
eazyScripts (eazyScripts Partnership with CareClix)
CareClix is also consistently included with top telemedicine businesses, but most of these sites seems promotional in nature:
7 Successful Telemedicine Companies
Top 10 Connected Health Companies
10 Best Healthcare Companies 2019
The Top 5 Companies in Telemedicine
CIO Top 25
Aon Telemedicine Chart
A 15c-211 filing has been made for the stock (anyone can call FINRA to confirm) by a broker to resume quoting on OTC - DBStocks on Twitter (211 Background).
While revenue for the business remains a mystery since the 2015 presentation, “quality” sources like Zoominfo show the business doing $16.8m in annual revenue (CareClix - ZoomInfo). If this is close to accurate, a TDOC multiple would put the market cap around $130m, over 4x current levels.
Bad News
The 10-Q with the consolidated financials for this stock is late, which is one of the many red flags for this stock. Unusually for a grey sheet, management has filed explanations for the delay here: Delay #1 and here: Delay #2. Investors are currently left to evaluate this business based on limited information from public filings. Perusal of these items leads us to the following red flags:
Dramatic Drop in Transaction Price: This is the biggest red flag for me. Per the 8-K filing on January 7th, 2019 (Initial LOI), the offer price was $15.0m of stock issued based on the average closing price five days prior to close, and a $5.0m cash contribution into the CareClix business. After completing due diligence on February 20th (Revised LOI), the closing price dropped to $1.0m cash and $1.0m of equity to be issued six months after close. No further disclosure was made regarding what drove the 90% reduction in offer price. It is baffling why they would sell the business for 1/50th of what the market valued it at less than 6 months later. Perhaps there are additional terms that have been promised but not disclosed, but these would also likely have negative impacts on any current shareholders. Also, given that co-founder Sunil Budhrani (44.5% owner) (CEO Monthly) is not remaining with the business, it seems unlikely he would dispose of a stake in such a valuable business for under $1.0m. Given his departure for the new CEO roles, and the possibility that ties between CareClix and Solei go back further than the recent acquisition, it is possible that the deal was not completed close to fair market value. As an example, SOLI CFO Flood can be seen in the 2017 picture at NCCHC with Augusteen Cowan, now the VP of Sales for CareClix (both were working for Scott’s business Pay Yourself First (PYF) at the time): Josh Flood on Twitter. The fact that both were there representing CareClix at the time could explain how a favorable deal was struck earlier this year. This is the singular biggest mystery that I hope to understand after the filing of the consolidated 10-Q.
Stock Price Run-Up: The few retail holders of SOLI have done very well over the last few months. Price per share was less than $0.001 not very long ago. To get a taste of the core following’s rabid attachment to this stock see the top postings here - SOLI Board. Given the acquisition the run-up is understandable, but shows how very low the floor is if management fails to deliver.
Litigation: One of the bull cases for the stock is that a former trader that is currently jailed for previous pump and dump schemes (Gregg Mulholland (listed on Dec-10 10/A filed by Solei Mulholland's Holdings) - Money Laundering Conviction) is having 12.6m shares canceled (~12% of market cap). Some of the legal issues surrounding these shares may be part of what has been preventing the 211 from being filed previously moving this stock from the grey market to the pink sheets (Court Filing) The resulting 8-K here: Cancellation of Shares. Management’s efforts to get these shares canceled is admirable for stockholders, though their choice to use a stock with past legal issues like this is puzzling.
CareClix Financing Cost: To finance the acquisition, SOLI completed a private offering of convertible debt for up to $3m in April 2019 (SEC FORM D). As of May 20th, they had closed on a total of $1.7m convertible debt (SOLI 10-Q), and $1m of that total was used to acquire CareClix. The notes bear 6% interest and may be converted into common stock of SOLI at 50% of the closing price of the stock at the time of a conversion election. No conversions are permitted during the first 6 months and the notes have a term of one year after the date of issue, so conversions being possibly starting October 15th. The price of shares at that date will determine how dilutive these conversions will be to shareholders. When the 8-K was filed to finalize these terms, the stock was at $0.011 per share, or just over $1m market cap, so the cost of financing here was astronomical – potentially 6x dilutive to shareholders at the time at an annualized cost of capital north of 100%. One really has to wonder why this acquisition was done so cheaply and yet it was so costly to finance.
Future Acquisitions: Another bull case regarding this stock is SOLI’s intentions to do more acquisitions, including integration with PYF (SOLI 10-K), which offers 401(k) and telemedical assistance. Given the financing costs for the CareClix acquisition, shareholders would be right to be nervous regarding significant future dilution in any acquisitions. However, given this merger is likely to be on favorable terms with Scott owning both businesses, shareholders are forced to adopt a wait-and-see approach.
Failed Capital Raise: Based on the Vimeo pitch mentioned earlier, CareClix indicated they were earning about $2m revenue in 2016, and on track for $7m in 2017. They were pitching to raise an additional $1.5m of equity at the time to primarily invest in marketing. Based on the ownership listed in the acquisition 8-K, it does not appear any institutions were willing to invest in this business. No further detail is available at this time as to why.
SEC Filing Issues: As mentioned previously, Solei is late on their 10-Q filing. In addition, they appear to be delinquent under Rule 3-05 of Reg S-X. (Reg Background). Essentially, this was due 75 days after the CareClix acquisition closed. Either the acquisition closed late, hasn’t closed, or the filing is late. Take your pick, but any of these scenarios seems to be a deterrent to regaining OTC quoting under the 211 that has been filed. Management might be able to alleviate some of these concerns if they fired their accountants after these delays are finally explained.
Conclusion
There is very little information to go on regarding the CareClix business, but shareholders of SOLI stand to benefit tremendously from any upside in the business. Once financials are filed, investors will be able to evaluate this stock based on more than the conjecture above. Until then, investors are right to wonder if management can deliver on this promising acquisition.
Disclosure: I am/we are long SOLI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Like this article on Equity feed http://ssqt.co/m5bNoYo
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