Here is a look at many of the great opportunities SCG has in store as well as some of the misconceptions I’d like to add my opinion on:

- They will be the only major player with the largest reloadable network in Canada. This might be attractive to GDOT and Netspend one day but don’t for a minute think that either one of these companies would buy this company at this point when not a thing has been proven any value. I’ve worked in acquisitions, no one wants a “could be a good story” that’s not worth a premium to pay. They’ll wait and see how it looks and how profitable they can get and what kind of synergies would work. You might think they want SCG’s technology but management/insiders would never sell their company for just the value of their technology, they have much more value than this…..you’ll see in a minute.

- The bigger the network the greater the probability people use their cards, the more merchants they sign (thanks to their genius acquisition of a merchant processor) the bigger they become. Let’s not forget the iSign deal which attracts merchants with technology that isn’t available in any other terminals offered by Moneris, Chasepaymentech, TD Merch. Services, Global or any other player out there.

Simply put Merchant acquisitions + merchant signings (helped drastically by the iSign deal and the core of the SCG business of creating new revenue streams with no or minimal capital outlay) = larger physical distribution network and larger capabilities.

- The distribution network will be used for more than just selling prepaid mastercards. The real value here will come from tapping into unsecured lending revenue (a.k.a payday loans which I think and several industry players agree). Think about how much money these payday advance companies spend on all the overhead of having such a huge retail network across Canada….now what if SCG came along and asked certain merchants to offer this service in exchange for a finder’s fee much like a mortgage broker is paid for originating a mortgage for a lender. It doesn’t take a bean counter like me to figure out that just this alone would be enormous for SCG. They would have a much larger network than any of the current players for a unthinkable fraction of what it would costs the other players to operate their network, all of the overhead is already covered from their merchants! The size of the retail network alone is a competitive advantage, let alone the fact that they will have a much more profitable operation than the industry leaders. They can and probably will be offer the exact same products and services that both MoneyMart and other payday advance co’s can offer. Why pay a wire transfer when you can send funds electronically around the world for free (without Western Union), why be limited to MoneyMart when there are several thousand other locations that charge you cheaper and have much more superior technology that allows you to transfer money through text, online, and I think facebook soon.

In addition, merchants might also line up since they may be offered discounted merchant services as in order for Selectcore to build their branch network. So for merchants, potentially discounted merchant services, new revenue stream, increased foot traffic (which many companies follow are always complaining about how increasing foot-traffic through conventional methods are squeezing their margins (i.e. selling one item heavily discounted in order to lure you to the store in hopes of filling your basket with higher profit margin items), new advertising and marketing data gathering platform through iSign…what else is there to say. Maybe a chance for the smaller merchants to say up yours to the big bank owned merchant companies that gouge them with fees.

Let’s not forget that the bigger the network, the more potential antenna’s, the more antennas the more people see advertising….the more advertising the more ADVERTISING revenue. This is another HUGE potential stream of revenue.

- They will have a real competitive advantage for being the first to offer the iSign antenna in their terminals and the only merchant processor to offer then a new potential revenue stream for minimal costs. Even their merchant services business will be like no other player in the field.

- Don’t get blown away by all these industry stats you see about Mastercard saying that the prepaid market will grow exponentially to $400 billion plus in the next few years, the truth is MC is also touting their own business…as a rule of thumb don’t put faith in a market stat when its done by one of the biggest players in its own industry. Yes, no one argues that prepaid will grow but most of the growth will come from emerging markets like China, India, Middle East, and underdeveloped countries that still primary use cash. So don’t be dooped by this plug by MC and SCG about this stat…it is relevant but not as relevant as it seems for SCG until they tap this market (which I think they will, I’ll mention that later).

- The company will and probably already is trying to penetrate the payroll card market much the same way that MIT (Mint Tech.) has done in the Middle-East. If they really want to increase their Iridium card base this would be a great way to do it. The only opportunity I can see here in North America is welfare services. Any other banked customers would normally get paid through electronic transfers. A payroll card for government assisted funding would be huge…. city by city in the states many are switching away from

- The company has not completely aborted the legacy business of prepaid telecom but instead found a way to boost profit margins by cutting out the middle man much the same way the phone companies have cut them out by offering customers that buy prepaid directly their carrier a discount to what would be offered by buying these cards through the likes of a prepaid retailer like Selectcore retailers.

The creation of Socialtime which allows users to top-up and even transfer prepaid airtime via Facebook is a testament to the competence of management. With this type of industry leading innovation and distribution model, this definitely puts the brakes on tagging this as their “legacy” business. It will take a much needed marketing effort to start to see the effects of this pan out. Phone card revenue will deteriorate until this new distribution really takes off. I would imagine that this has caught the attention of some carriers or will at some point if it takes hold. A marketing budget and a bit of patience will tell.

- There are some tell tale signs that there is something big in the works. For a company like SCG to acquire a merchant services company in an all stock deal, something sizeable and significant must be known by the acquired…especially when the acquirer is on a going concern basis. That tells me that another private placement is on its way and something significant is in the works.

I felt this way well before the M&A advisor was hired. Somehow this M&A deal involves a big boost to their balance sheet which is desperately needed at this stage of the game. My thought is that the acquisition hasn’t closed yet because other (I think possibly another ISO merchant service provider) players want in on the deal which would now have to be approved by the merchant that was acquired as well…since the agreement was only binding with certain conditions attached. My hunch is that a potential deal may include smaller players like MIT, who is gaining traction in the Middle-East payroll game is looking to bolster a bigger footprint in North America while SCG would be interested in bolstering their footprint in the Middle-East where they have sent their COO according to a news release this summer. My other suspicion would be that SCG may have developed a stronger bond with iSign (ISD) than we think. If iSign was willing to forgo an 80-20% split of revenue with Selectcore, they may as well be acquired and operate as a separate division. iSign has already hinted in one of there recent press releases that they see an overwhelming interest in their antennas that are integrated with Selectcores POS terminals. At the very least the 80-20% split of revenue tells me that iSign sees significant volume coming for Selectcore’s POS terminals.

So you have all these companies interested in a going concern? What going concern? Cash is coming and so to is a list of potential companies looking to get in on the action.

When management or any other insiders don’t sell one stock when it hits a 52 week high, acquired companies want an all stock deal, private placement money is never an issue, and more companies want to merge or be acquired you know something sizable and significant is in the works. You can bet that the next private placement will also be done at a much higher convertible debt strike price than before….which will be yet anther sign that something big is brewing. No one takes a higher strike price that is out of the money unless they feel confident the strike price will be attained. You can count on management to not dilute their and our shares during the next placement given all the interest and worthiness.

Now for the somewhat negative stuff that should (hopefully) correct itself once cash and the infrastructure are in place and cards are being sold:

- The company clearly lacks a competent Investor Relations area and CFO to help steer their financial reporting. I might be over critical as an accountant and someone that is used to fielding analyst’s calls and providing them with insightful messaging, but the company has certainly lost investor credibility with some of the investors that I once know held significant positions. Like most venture stocks, press releases are endlessly issued to get attention, although I’m fine with this, I can’t reason with why the company pre-releases “watch out for us” NR’s such as the one issued to announce the acquisition of a merchant processor or announcing the iSign deal well before the deal has been inked. These press releases may have been used to pump the stock up prior to the close of a private placement (even though the convertible debt strike prices are normally based on some sort of periodic average share price) or to bolster attention but they also hamper the credibility of management. The acquisition press release went as far as issuing a date of when the deal is expected to close. This puts unrealistic expectations, fear of a deal collapsing, and trust in management’s practices.

I am also concerned with how management “cherry picks” details to discuss. I am very used to this practice coming from a big bank, we tend to steer our focus to what investors and analysts want to hear. Disclosing the increased percentage of cards in circulation, balances, etc. is really discouraging. Percentage increases always look extraordinary when you’re working off a base of nothing, hard value reporting should be used. It also worries me that management selectively releases this information. When was the last time we saw this information released…even if it is only base percentage increases? You can’t release it one quarter and hold back the next, or when you choose, really discouraging.

Companies like MIT, NetSpend, and GDOT all disclose their number of cardholders. I can only assume Selectcore’s customer base is nothing to write home about at the moment, so they never should have disclosed any statistics regarding their Iridium Mastercard in the first place. Much of the sales growth is yet to come, why start off on the wrong foot and lose credibility?

- When I buy a stock I normally like to take the Warren Buffett approach and actually get personally familiar with the product or services being offered, most of the time the reason I’m looking at a stock is because I already liked their products or services. Even though I wouldn’t need an Iridium Mastercard of prepaid phone card, I wanted to test one out. Unfortunately, the web site still doesn’t have a listing of retail locations where I can buy the card. Odds are if I’m buying a card I don’t have a bank or credit card to pay for this card online so I need a retail location to get one. I asked their customer support and they couldn’t get me one. I’m assuming the iphone and blackberry apps will hopefully have this integrated. It’s really mind blowing to me that they don’t have a listing of retailers; again it might be because they are in infancy mode so I’ll give them the benefit of the doubt but this should definitely be fixed.

The future looks promising and SCG looks to be the stock to watch in 2012. For all the posters trying to drive home a $1 or even $3 share price, I’m not sure how you come up with these valuations when so many facts are missing. You’re obviously putting a glorified price on what you hope the companies stock will trade at. Don’t get me wrong, I hope you’re right but we’ll have to see. If you’re expecting that in the next few quarters the stock will have some blow out numbers you’re deeply confused. I work with executives at a big bank all day, advising them how their strategic moves have yet to take hold on a constant basis. Moves like this are like turning a huge cruise ship, it takes a long time before you get to where you want to go. Unless some major customer agreements that drastically and sizably increase their Iridium cards are signed, it will be a long steady climb.

Go long SCG.

MM