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#LHC Capital & ISX
Added 15 hours ago

02-July-2020:  Thanks to @Pete2Peer for their straw on the Risks around Etherstack plc (ASX: ESK) this morning.  I found that AFR article on ESK very interesting and it certainly involves John Karantzis from ISX and the boys at LHC Capital:

Etherstack pump straight from iSignthis playbook

Joe Aston, AFR Columnist, Jul 1, 2020 – 11.25pm

Before Tuesday, professional investors hadn’t even heard of wireless radio technology developer Etherstack. Its market capitalisation was $15.9 million. A grand total of 6.5 million of its shares had changed hands in the nearly eight years since it listed on the Australian Securities Exchange.

On Tuesday alone, 19.6 million Etherstack shares were traded. Its share price opened at 18¢ and closed at $1.75, up 872 per cent. Who said Australia doesn’t have Robinhood traders?

This was all seemingly down to the company’s announcement half an hour before the market opened (and marked as “price sensitive”) that it had “entered a global teaming agreement with Samsung Electronics to deliver next generation Mission Critical Push To Talk (MCPTT) over LTE solutions to telecommunications carriers and governments across the globe.”

Which sounded vaguely lucrative. Yet the announcement contained no reference to the revenue this partnership is expected to generate – a fairly dependable indicator that it won’t be generating any.

Lending the whole performance a powerful sense of culmination was the bashful admission – almost an afterthought! – from chief executive David Deacon that “Etherstack has been quietly working with Samsung over the past 12 months…”

But nearly three hours later (after a pause in trading imposed by the bourse), Etherstack released “additional information”, elaborating that it “derives revenues from this global agreement in the future when Samsung and Etherstack together supply technology to Samsung’s customers”. So theirs is an agreement to develop a product both parties hope they might then sell – when and if it exists. An outright non-event.

The announcements – and the market’s ecstatic reaction to them – invited unhappy comparisons to GetSwift, which in November 2017 announced a “deal” with Amazon, had its shares frozen by the ASX on the basis the announcement was too vague, then saw its stock nearly double. Ten days later, GetSwift raised $75 million issuing new shares.

In fairness to Etherstack, its announcement at least quotes a junior Samsung executive, Wonil Roh, and was also released on Samsung’s own website. The Federal Court heard two weeks ago that GetSwift announced its Amazon trial despite Amazon explicitly asking it not to.

But does Etherstack now, with a heavy heart, turn to the market for fresh capital? Its balance at March 31? A mere US$474,000 ($687,000). Meanwhile, its share price closed at $1.04 on Wednesday, holding on to more than half of Tuesday's gains. So that would be a “yes” to the capital raising.

The moral of the story here is that good things happen to good people. By happy accident, Etherstack’s “news” came on the final day of fiscal 2020, meaning its institutional investors will mark the performance of their shareholding in the company to that $1.75 closing price (it started FY20 at 22¢). We should say Etherstack’s institutional investor (singular), being LHC Capital – the extremely lively hedge fund of Marcus Hughes and Stephen Aboud. Nobody can ever accuse them of index hugging.

In August, LHC paid $2 million for 6.7 million convertible notes (or 30¢ per unit). At June 30, they were worth $11.7 million. And on Tuesday, LHC converted half of them.

This stunning turn will at least partially obscure the epic value destruction Hughes and Aboud caused their fund investors by allocating more than 20 per cent of LHC’s total assets to shadowy fintech iSignthis, which we now know became an international money-laundering colony. Its shares have been suspended from the ASX since October and, in protest, the company is now seeking to delist.

Which perfectly explains how LHC ended up lending to this tadpole. Listed among Etherstack’s Top 20 shareholders is none other than iSignthis’ truly unique chief executive John Karantzis. Through one of his various entities in the British Virgin Islands, Karantzis controls 410,000 shares now worth $426,400.

Deacon and Karantzis were classmates in electrical engineering at the University of Western Australia. Etherstack and iSignthis share a common non-executive director, in Scott Minehane. And iSignthis even loaned Etherstack $1 million in 2018.

Etherstack’s is a most brazen exercise in calf-fattening on market day. Which makes Karantzis’ association so fitting – given the outlandish route he took to hit performance targets for 337 million new iSignthis shares in the first half of 2018.

As we said, good things happen to good people. Now for that capital raising…

--- ends ---

Bear77 note:  While recovering from my recent total hip replacement surgery I took a call from Martyn McCathie, Head of Operations at Wilson Asset Management, about some feedback I had given to FGX about them continuing to use LHC Capital as one of FGX's fund managers.  I have invested some of my children's money into FGX and I'm not comfortable with some of that money being managed by LHC Capital, and I don't think LHC Capital is a good fit as a capital manager for a fund like Future Generation Australia who have high ideals and a charitable focus (donating 1% of their FUM every year to children's charities, particularly supporting children at risk and disadvantaged children, while charging zero management or performance fees).  Martyn, like Louise Walsh, works out of the WAM head office, but spends a lot of time working for FGX and FGG - the two Future Generation Funds - FGG being the global fund and FGX being the Australian-focused fund.  Geoff Wilson was the founder of both FG funds and his company (WAM: Wilson Asset Management) supports them in many ways including by allowing their own staff to assist the FG Funds and also by providing FG staff with an office to work in and covering those expenses.  Martyn is very involved in the FG funds and said that they are aware of the concerns around LHC and are keeping a close eye on developments.  I got the feeling that I'm not the first person to have contacted them about similar concerns regarding FGX's relationship with LHC Capital.  While I received no clear indication about what action FGX might or might not take regarding LHC, I certainly got a sympathetic ear, and I do note that FGX have cut a couple of their fund managers loose in prior years and added a couple more.  The reason given at the relevant roadshow for dropping fund managers in the past was persistent underperformance, and while LHC have underperformed massively recently mostly due to their huge exposure to ISX, I don't think you could yet call them consistent underperformers.  Morally bankrupt perhaps, but not consistent underperformers - yet.  However, one of FGX's claims is that they use the "best" boutique fund managers to manage their money, and I certainly don't rate LHC as being one of Australia's "best" fund managers.  While there are no guarantees, I do look forward to hearing that FGX have quietly dropped LHC Capital from their list of FGX fund managers.  I don't think FGX should be associated with them from either a financial risk standpoint (risk of losing capital) or from a reputational risk standpoint (risk of losing credibility).  Watching closely.

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#ASX releases findings on ISX d
Added 2 months ago

Shareholders, I feel your pain.  I hope the perpetrators get wahts coming to them.......

Key takeaways:

"Having careful regard to the information ASX has received from ISX (including the 24 January Submissions 17), ASX remains of the view that ISX has committed a number of significant breaches of the Listing Rules and that ASX is obliged to refer those breaches to ASIC for consideration of enforcement 

"ASX understands that ASIC’s enquiries into ISX are ongoing"

"For completeness, during the course of its enquiries, ASX uncovered evidence to suggest that ISX may also have breached Listing Rules 3.19A, 3.19B, 4.3A, 4.3D, 4.10.3, 10.11, 12.5 and 19.11A. However, at this stage, ASX has concentrated its enquiries on whether ISX met its obligations under the Listing Rules in relation to the conversion of Performance Shares into the Milestone Shares, given the significance of that matter. "

 Unless the Federal Court orders otherwise,
ASX considers that it is appropriate for ISX’s shares to remain suspended pursuant to Listing Rule 17.3.4 and not reinstated to trading until
? the matters referred to in these statement of reasons are satisfactorily disclosed to the market; 
? acceptable measures are put in place so that the current holders of the Milestone Shares (other 
than those who were bona fide purchasers for value of those shares on-market) are not able to 
sell them
for a reasonable period while ASIC has an opportunity to pursue its investigations and 
to determine whether it wishes to take action against those involved in the issue of the 
Milestone Shares. 
On this last point, ASX would note that the Milestone Shares account for approximately 31% of the 
Ordinary Shares currently on issue and that if ASX were to reinstate ISX shares to trading now, it would 
allow the holders of the Milestone Shares to immediately sell them on-market and walk away with the 
proceeds in circumstances where there are serious questions to be answered about the legitimacy of 
their issue




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Last edited a month ago

28-May-2020:  iSignthis increases stake in NSX Limited via placement

Some tasty takeaways:  (1) ISX subsidiary Probanx Holdings Ltd has taken up the option to participate in the NSX Limited (ASX: NSX) capital raise.  The placement amount applied for by iSignthis was for $1.5m at $0.091/share for 16,483,517 shares.  ISX owns 59.0% of the ClearPay JV with the NSX.

(2) "This strategic initiative put us squarely in competition with the effective monopolist incumbent, the ASX."

(3) "the NSXA will, in time, present a more credible alternative to listing on the ASX for issuers..."


Oh yeahhhh.  It's ON baby!



P.S.  My money is still on the ASX in this bunfight.

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#LHC Capital & ISX
Added a month ago

May 7th, 2020:

Joe Aston, AFR - Rear Window, May 7, 2020:

The only institutional shareholder of shadowy fintech iSignthis, LHC Capital, wrote to its own investors on April 16 to provide them an update on the March 2020 quarter.

The Sydney hedge fund owns 8.2 per cent of iSignthis, which accounted for nearly 22 per cent of its approximately $440 million of assets under management at September 30. LHC marked down the valuation of its holding by 50 per cent at December 31, then to a paltry 7.7¢ per share in February.

LHC has now adopted a lower valuation again, of 5.1¢ per share, giving their 89.45 million shares a carrying value of $4.5 million – which is still $4.5 million more than LHC will ever get for them. In reaching its new valuation, the fund’s independent expert FTI Consulting weighed “the recent drop in equity markets globally, an increase in uncertainty resulting from the ongoing ASIC enquiry and the application of an additional discount due to a lack of marketability of ISX shares”. Imagine the discount had they considered that iSignthis became an international money-laundering colony!

The “performance” of iSignthis (which has just entered its eighth month of suspension from ASX trading) represented a negative 13.2 per cent return for LHC in the three months to March 31, contributing 56 per cent of the fund’s negative 23.3 per cent return in total. LHC is an absolute return fund, its “clear aim” is producing returns “uncorrelated to general market conditions”.

It is true that LHC rode a mammoth wave of capital appreciation to its last trading price of $1.07 (and higher, at $1.65 on September 10) having picked up three-quarters of its position at around 14.5¢ per share in an October 2018 placement. It later made back its initial outlay selling shares at higher prices.

Nevertheless, the fund’s principals Marcus Hughes and Stephen Aboud “decided to maintain outsized exposure … commensurate with our view of the future earnings capability of the business”. This was incommensurate – insanely so – with the risk to a fund manager whose guiding light is “capital preservation” of having greater than one-fifth of its clients’ money allocated to a business we now know was a payments platform for the criminal underworld.

Remember, iSignthis acquired Probanx the same month LHC became a shareholder. According to the Organized Crime and Corruption Reporting Project, Probanx had earlier set up (or at the very least advised) nine fake Gambian banks involved in defrauding hundreds of millions of dollars from real, state-owned banks. Which, after its extensive due diligence, iSignthis must’ve decided to take in its stride!

And the ASX’s Statement of Reasons for iSignthis’ suspension, made public last week, revealed that invoices of major iSignthis customer FCorp were paid in 2018 by Margeteks Project (a now defunct Scottish payment services provider established by a notorious Latvian shell-maker pretending to live in Milton Keynes) and “an unnamed entity” (to think iSignthis’ line of business is supposed to be Know Your Customer!) “via a payment services provider located in Azerbaijan”. The aforementioned OCCRP uncovered a $2.9 billion money-laundering ring in Azerbaijan in 2017, which included “a familiar scheme involving a Marshall Islands registered offshore company that also appeared to have a Latvian connection and address”. FCorp is incorporated in the Marshall Islands. No wonder iSignthis’ European clearing bank KAB put a sock in its money laundering alarm in 2018 before collapsing in disgrace.

Hughes and Aboud have declined, still, to express any remorse for – or identify any learnings from – their iSignthis misadventure, which calls into question either the integrity of LHC’s forensic, “bottom-up” stock selection process or the acumen of those running it. Nor has the pair even mentioned to their clients the small fact they were both co-investing in iSignthis, alongside LHC funds, through private vehicles. Again, we wonder, what is the autonomous purpose of sinking your spouses and children directly into your portfolio’s biggest stock? Perhaps we’ll never know.

--- ends ---

Joe Aston has helmed The Australian Financial Review's Rear Window column since 2012.  He is based in Los Angeles.

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Last edited a month ago

25-May-2020:  ASX query letter and ISX's responses

Just... Wow!  I did read all 28 pages too.  ISX's response to the ASX's "Statement of Reasons" (the one document that the ASX has not yet published) can be accessed via the iSignthis website or you can click here.

I also came across a competitor of ISX today.  See here: site

And there's this:

Have a scroll through that last webpage - how shady do those guys look?  They're nothing to do with ISX however.  They're a UK-based company.

Back to ISX...  They're getting their hackles up about ASX mentioning that Visa have suspended ISX's subsidiary IEL (iSignthis eMoney Ltd) from access to the Visa network - and sited the reason on their (Visa's) registry as "SUSPENDED BY AML". 

AML is either Anti-Money Laundering or acute myeloid leukemia. 

Methinks it be the former.  

I think that the biggest takeaway from this lot today is really the state of affairs now as the ASX see it - as explained near the end of their Thursday 21st May letter to ISX, which can be read on page 7 of the 28 pages released today, and goes a little like this:

ISX should note that where a listed entity breaches the ASX listing rules, ASX has three important powers it can exercise to secure compliance by the entity with the ASX listing rules – its power to suspend the entity’s securities from quotation under listing rule 17.3, its power to remove the entity from the official list under listing rule 17.12, and its power to censure the entity under listing rule 18.8A.

As ISX’s securities are already suspended from quotation under listing rule 17.3, and have been since 2 October 2019, the avenue of suspending ISX’s securities from quotation under listing rule 17.3 would not currently operate to secure compliance by ISX with the listing rules. Accordingly, if ISX does not provide a Compliant Response, ASX reserves its rights under the listing rules in relation to ISX’s breach of listing rule 18.7, including the right to remove ISX from the official list under listing rule 17.12, and/or to impose a censure against ISX under listing rule 18.8A. 

The chances of ISX ever trading again on the ASX are fading more now with every passing day, and the chances of this suspension turning into a list removal (as highlighted above) are looming large. 

If the ASX has finally had enough and removes ISX from the official list, that's a worst-case scenario outcome for existing ISX shareholders, but the ASX have certainly given ISX fair warning, so it should NOT come as a surprise to anybody when it does happen.

Further Reading:

From that last one:

iSignthis chief executive John Karantzis holds himself out as being, among other things, a “qualified patent attorney”.

He has been described as such in numerous investor presentations lodged with the Australian Securities Exchange.

His profile as an adjudicator for the Northern Territory Department of Justice describes him so, too.

“I'm actually also a qualified patent attorney, so I wear a number of hats and it gets quite confusing,” Karantzis told Eureka Report’s Alan Kohler on March 27.

He’s confused alright! Here and in New Zealand, patent and trademark attorneys are regulated by a statutory body, the Trans-Tasman IP Attorneys Board. It has confirmed to us that Karantzis is not, and never has been, a registered patent attorney.

Section 201 (2) of the Commonwealth’s Patents Act 1990 stipulates that “an individual commits an offence if the individual describes himself or herself, or holds himself or herself out, or permits himself or herself to be described or held out, as a patent attorney or agent for obtaining patents and the individual is not a registered patent attorney”.

In those same presentations and elsewhere (like iSignthis' annual report), Karantzis also claimed to hold an LLM, a graduate law degree whose entry requirement is an undergraduate degree in law (an LLB or equivalent), which Karantzis does not have.

Until yesterday, Karantzis’ LinkedIn profile claimed he gained an LLM at the University of Melbourne back in 2000, which – of course – he never did. He did receive a Master of Commercial Law (MCommrclLaw), a very different course available to non-law graduates, but in 2013.

His unfaithful resume was abruptly rectified online right after we queried his study history. We managed to verify our customer in the end! Hey, what’s the harm in a little CV fraud from a fraud detection company?

Joe Aston, AFR - Rear View, Feb 6, 2020.

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#Quarterly Report
Last edited 2 months ago

29-Apr-2020:  Appendix 4C - Quarterly Report (for Qtr ended 31 March 2020)

Points that I personally found interesting:  Straw 1 (of 3)

  1. 1Q20 (1st quarter of FY2020) receipts from customers were down -33% from 4Q19 to $10.5m - due to the impacts from COVID-19, combined with seasonality in some merchants’ volumes and other issues mentioned in their report, some of which I'll also mention below.  The ASX, ASIC and media investigations into ISX were partly sparked off by a report by "Ownership Matters" which questioned the governance and remuneration arrangements at ISX as well as the "opaque" ownership structure - particularly regarding the owners of ISX's 2nd largest shareholder, Red 5 Solutions, which owns more than 10% of ISX and is registered in the British Virgin Islands.  ISX's CEO & MD, John Karantzis (JK) had previously stated that his brother Andrew had no interest in Red 5; He said "no related parties" held shares.  However, in early October it was revealed in the AFR newspaper that Andrew Karantzis, ISX's "chief of sales" and brother of boss John Karantzis, was indeed a shareholder of Red 5 Solutions and that Irene Naumova, who is married to Andrew Karantzis, was Red 5's company secretary.  The governance and remuneration issues were covered well in this AFR article - which I've repeated here in a straw titled "#'Ownership Matters' report".  The crux of it was that the founders (but mostly JK) ended up "earning" around $500 million worth of ISX "performance" shares in 2018 which happened to coincide with an adjustment to their financial year and a huge revenue spike from a very small number of questionable clients (those clients being the subject of many questions to ISX from the ASX in recent times) that resulted in the performance hurdles (which had already been halved) being met, just.  ISX's revenue subsequently collapsed in the following half (down -83% from $5.51m to $1.1m).  It didn't smell good!
  2. In the March 2020 quarter, ISX completed the acquisition of UAB Baltic Banking Service for a total cost of €75k cash and 1,394,533 ordinary ISX shares.  It's interesting that during a period in which ISX shares have been suspended from trading (they last traded on October 1st, almost 7 months ago) they still managed to issue another 1,394,533 shares.  Those would have been worth $1,492,150.30 at their last traded price (on 1-Oct-19) of $1.07, but would now be worth less than $108 K if you use the 7.7 cents per share (cps) valuation that LHC Capital (who own 89.45 million ISX shares - or 8.2% of ISX in October) used when they told their LHC High Conviction Fund (HCF) investors in early March that they'd changed their minds and decided to massively write down the value of their ISX investment - which was around 22% of their FUM on 30-Sep-19.  If LHC hadn't done that, they would have lost even more money as their own investors withdrew cash from their fund (redeemed units).  Unlike a LIC or a LIT, their fund is open-ended, so their investors are free to withdraw money (redeem units) from the fund as and when they see fit.  Apart from exit fees and buy/sell spreads that might apply, LHC would have to pay out those redemptions at their NAV, and their NAV (net asset value) was previously based on 21.75% of their $440m fund being worth $95.7 million (89.45m ISX shares @ $1.07/share).  Even Blind Freddy knew that ISX was no longer worth anything like $1.07.  LHC were forced to write down the value of their ISX holding to a more realistic value, which they've decided is 7.7 cps, meaning that $95.7m is now worth less than $7m ($6.9m) and their fund value (their FUM - Funds Under Management) has now shrunk by $88.8m.  That's a write down of ~20% (the fund was valued at ~$440m on 30-Sep-19 and is now worth ~$88.8m less than that).  And that's on top of the money they would have lost in Feb & March on their other holdings - although those are only paper losses - until you sell.  If LHC had NOT written down the value of their 89.45m ISX shares, they would have been paying out redemptions based on an unrealistically high NAV, and would therefore have been losing money they didn't have to lose.  Some people have suggested that LHC may have written the value of their ISX shares down at the end of Feb to BELOW what they really think ISX are now worth - to try to DISCOURAGE their own investors from applying for redemptions, i.e. perhaps they think ISX is worth MORE than 7.7 cps but that people are less likely to redeem their units (cash out) if the LHC HCF NAV is a lot lower (which it now obviously is).  All speculation of course, with no proof, but I guess it's possible.  I wonder what LHC thinks about ISX issuing more shares (as part payment for another acquistion) while suspended.  It's always interesting to see what companies do when they're suspended from trading, as their shareholders can't vote with their feet (or their mouse) - they can't sell their shares.  There's not much they can do.

...continued in straw #2...

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#Quarterly Report
Last edited 2 months ago

29-Apr-2020:  Appendix 4C - Quarterly Report (for Qtr ended 31 March 2020)

Points that I personally found interesting:   Straw #3 (of 3):

I was up to #6 - "Processing to merchants across the Visa network was also suspended for parts of March pending response to Visa re queries on ASX “investigation”, concerns re “derogatory media” and the focus on high risk merchants. The Company is providing Visa with information regarding the ASX “investigation” and other matters. Visa has notified that their response times on this matter have been impacted by COVID-19."  

OK, Visa now has concerns.  ISX announced (on 8-Aug-19, see here) that they had entered into an Australian Principal Member licensing agreement with the Asia Pacific Singapore based regional subsidiary of Visa Inc (NYSE: V), that allowed iSignthis (ISX) to act as a merchant’s card acquiring institution, and process Card-Not-Present (online/remote) payments and make settlements on behalf of the merchant from cards issued anywhere globally by other Visa Principal or Associate member institutions.  At that time ISX were also a Principal Member of Mastercard, UnionPay, Diners and Discover in Australia, with similar memberships in the European Economic Area (EEA).  Now we learn that Visa has been denying ISX access to Visa's network pending responses from ISX to queries from Visa about ISX's issues with the ASX (and, clearly, the ASX's issues with ISX), bad press ("media") and ISX's "focus on high risk merchants" (/clients).  No surprises there.  The surprise is that it has taken this long.  What about Mastercard and the rest of them?

The next thing they say is:  "Other COVID-19 impacted matters include :

  • Our Tier 1 Australian processing rollout being delayed and will not meet the May 2020 anticipated timetable, due to unavailability of test slots from the major card schemes. This is as yet to be rescheduled but is anticipated to be later in the year. 
  • SWIFT rollout has also been deferred, until such time as test slots will become available. The Company does not at this stage have visibility on expected dates.
  • ASIC has advised that as a direct consequence of COVID-19, consideration of our application under Corporations Regulation 7.2.16 is taking longer than anticipated to assess. "

Yep, bloody COVID-19!  I think they are correct in that these are matters that are "impacted" by COVID-19, rather than caused by COVID-19.  The root causes of ALL of these issues lie elsewhere.  COVID-19 isn't making things easier, and it's a convenient scapegoat to trot out when you've got a heap of bad news to share, but ISX are going to have plenty of major issues long after COVID-19 is a distant memory, unless ISX is also a distant memory by then...

Further Reading:

On LHC Capital:  Happier Times:

Yep, the "Best Performing Hedge Fund".  LHC were killing it (in a good way) back in September...  They had even been picked by Geoff Wilson and the rest of the FGX Investment Committee as one of the Australian boutique fund managers to manage some of the Future Generation Australia Fund's (FGX's) money for them.  In fact, they still do!  LHC Capital's High Conviction Fund (their only fund I believe) is now closed to new investors, so their performance numbers and their fee structure is only available to their existing investors, and FGX is one of those (poor buggers)...

Then in late October:

March 8th 2020:

That last one is worth quoting, but I don't have room in this straw, so I'll put it in another one.

Two weeks ago, ISX released this:

15th April 2020, Melbourne: iSignthis Ltd (“the Company”) (ISX) provides the following update on the change of date for the General Meeting.

The Company was scheduled to hold a General meeting on 15th May 2020. Due to the current restrictions in place due to COVID-19, the Company has elected to reschedule the General Meeting until 17th July 2020, per ASIC 20-068MR “Guidelines for meeting upcoming AGM and financial reporting requirements”.

Closer to the date, and in light of the COVID-19 restrictions in place at the time, the Company will provide further details about the General Meeting. 


Love to be a fly on the wall for that one.  Of course we don't even know where they are planning to hold it yet...

Also, tomorrow's (Friday's) Federal Court judgement when it is announced will also be very interesting.  This is the Federal Court injunction application that ISX has made to try to force the ASX to end the ISX trading suspension.  If they are successful, ISX could be trading again tomorrow.  But at what price??


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#LHC Capital & ISX
Added 2 months ago

Feb 17, 2020:  AFR: Rear Window: LHC's baggy iSignthis side hustle

Joe Aston, Columnist

iSignthis' suspension from trading is now well into its fifth month. The last we heard from the company's largest institutional shareholder, LHC Capital, was in the fund's first quarter (September 30) letter to its own investors.

"As we reconsider and challenge our investment thesis, and in light of the presently known facts, we remain comfortable with our holding in the business," wrote LHC principals Marcus Hughes and Stephen "Sheikh" Aboud in October, by which time the ASX had already rendered their level of comfort entirely academic.

"When the facts change, I change my mind" goes the impenitent exculpation of John Maynard Keynes. And according to multiple fund clients, LHC has too, marking down its iSignthis holding – 8.3 per cent of all the suspended shares and around 22 per cent of the fund's portfolio – by 50 per cent at December 31, one keystroke vaporising approximately 11 per cent of LHC's funds under management.

The markdown might be prudent but certainly isn't determinative of value. Three times we asked LHC how their seemingly arbitrary devaluation was arrived at, and how it will affect redemptions by its unitholders, yet Hughes and Aboud maintain a deafening silence. Six months is a lifetime in funds management.

Aggravating their hot, Cypriot mess, both men keep significant iSignthis shareholdings in personal accounts alongside their exposure via LHC funds. Through entities he fully owns (including, fittingly, one called Baggy Red Pty Ltd – this foray as bagalicious as they come), Hughes owns 5.5 million  iSignthis shares.

In a company jointly owned with Aboud, they have two million shares. And Aboud – in his own name, in the names of his two children and in a self-managed super fund with his wife – speaks for 1,983,334 shares. Indeed, Sheikh's name first appeared on the register (with 1.25 million shares) on April 3, 2019, the day before LHC advised the market it had just soaked up another 11.6 million shares in iSignthis, and both roughly coinciding with the obtuse disposal of 17.5 million shares (at 20¢ per share) by Red 5, the enigmatic holding company for iSignthis' staff and family, including its chief sales officer Andrew Karantzis.

Hughes' and Aboud's side hustle is a precarious practice, but the dirty little secret of Australia's funds management industry. Where it does occur, the disinfectant of transparency and proper oversight is demanded. Hughes, remember, learned at the feet of Will Vicars, a maestro of the PA (personal account), Caledonia being one big player in this market whose principals dabble personally in its portfolio stocks.

So how do Hughes and Aboud manage their buying of iSignthis stock contiguous to their fund's own buying of it, the timing of which they know but their clients, presumably, do not? We asked them about this too but, again, they're saying nothing.

We're all for alignment, but perfect alignment is achieved by LHC's principals investing their personal wealth in LHC funds. What is the discrete purpose of sinking your kids into your portfolio's largest stock?

LHC bought into iSignthis in October 2018, taking up a large swathe of 68.9 million shares available in iSignthis' $10 million placement at 14.5¢ per share, a fortnight after it plugged seamlessly into the European banking system with its acquisition of software platform Probanx.

An investigation by the non-profit Organized Crime and Corruption Reporting Project subsequently uncovered nine fake Gambian banks (registered to phantom addresses, yet which somehow obtained SWIFT codes) that were either shelf entities pre-packaged by Probanx or, at the very least, were Probanx clients. One of them, Axios Credit Bank, used its bogus credentials to defraud a Bangladeshi state bank of US$163 million ($243 million). All of which was presumably discovered by iSignthis in its extensive due diligence.

And having paid just €400,000 (plus near-term commissions) for Probanx, iSignthis claimed on December 16, 2019 it was charging clients a “setup/establishment fee in the range of €150,000 to €5 million plus monthly Software-as-a-Service fees”. Moonshot bullseye! If it seems too good to be true, it usually is.

So what now? iSignthis' December 31 cash flow statement was extraordinary – but with that Probanx magic in their arsenal almost anything must be possible. And with the company's downright wild claim against the ASX now progressing towards Federal Court trial, LHC's largest investment has been whittled down to a single action litigation funder. No wonder Hughes and Aboud, once the chirpiest duo in their profession, have – again, fittingly – a sum total of zero to say.


Joe Aston has helmed The Australian Financial Review's Rear Window column since 2012. He is based in Los Angeles.


[That Federal Court judgement referred to above - to try to force the ASX to relist ISX - is due tomorrow, Friday 30th April 2020.]

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#LHC Capital & ISX
Added 2 months ago

March 8, 2020: Rear Window: LHC values its iSignThis shares at 8c (well, 7.7c)

LHC values its iSignthis shares at 8¢

Joe Aston, 8-Mar-2020

As we enter iSignthis' sixth month of suspension from the ASX boards, the shadowy fintech's only institutional shareholder has framed the latest instalment in its excruciating sorta mea culpa.

LHC Capital wrote to its own investors on Thursday revealing a write-down in the holding value of its 89.45 million iSignthis shares to just 7.7¢ each (they last traded at $1.07).

The 8.2 per cent stake in iSignthis was at September 30 worth nearly 22 per cent of LHC's entire portfolio, then around 10 per cent after an initial 50 per cent write-down at December 31. LHC didn't tell its investors last week what portion of its funds under management iSignthis now represents, but the shares are now in its books at just $6.9 million. So not much.

The new valuation was reached independently by FTI Consulting and caused two-thirds of the nasty 18.5 per cent decline in LHC's net asset value over the month of February. It is also a much-needed stake in the ground for redemptions, which LHC could hardly honour based on the previous holding value – it couldn't afford to, nor would it be fair to those investors sticking around.

The more realistic assessment – and given what we now know about iSignthis' dubious business affairs – makes a mockery of LHC's position atop Mercer's hedge fund returns table for FY19, and indeed its stated performance figures at every subsequent quarter.

It's a ghastly situation, and "there but for the Grace of God go I" will be the refrain of equities managers up and down Macquarie Street. Yet empathy with LHC's principals Marcus Hughes and Stephen "Sheikh" Aboud is scarce.

In these confidential notes to LHC's clients, the pair has expressed no regret for the inherently dicey allocation of their money (in direct contradiction of the firm's own catchline "capital preservation"). Hughes and Aboud have not confided any 'learnings' from their colossal mistake; they cannot, as they do not concede a mistake has even been made! The iSignthis implosion "has been incredibly disappointing for us" was the totality of their self-reflection on the matter.

Remember, up to now, clients had been told "we remain comfortable with our holding in the business" and been quoted a laundry list of iSignthis' investable attributes (liquidity not being one of them). As recently as January 30, LHC analyst Louis Aboud-Hogben was spruiking its fourth-quarter result, marvelling at John Karantzis' performance "with one arm tied behind his back". Already 2020's most frameable.

What's more, Hughes and Aboud chose simply to ignore the recent revelation of their personal trading in iSignthis shares, parallel to the investment of LHC funds, which had never been disclosed to their clients.

Between them, and in addition to their exposure through LHC funds, Hughes and Aboud own 7.5 million iSignthis shares, family pets being about the only members of their households not to appear on the company's (frozen in time) shareholder register. Again, adjacent to their iSignthis exposure via LHC, how is this buying and selling managed and what is its autonomous purpose?

We can hardly overlook the applicability here of Warren Buffett's twelfth of 13 owner-related business principles: "We will be candid in our reporting to you … Our guideline is to tell you the business facts that we would want to know if our positions were reversed. We owe you no less. We also believe candour benefits us as managers: the CEO who misleads others in public may eventually mislead himself in private."

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09-Feb-2020:  Update:  On 22-Jan-2020, ISX published a "Letter To Shareholders" which outlined an overview of the court action they have initiated against the ASX over (in part) their continued suspension from trading.  They explained that as the matter was now before the court, all further information would have to be accessed via the court's website's "List of Orders" page for that case.  

As the first hearing was held on Friday (7-Feb-2020), the first orders have now been published.  Basically, (1) ISX have to provide further details (by Feb 14) to the ASX, as requested by them (ASX), presumably regarding ISX's claims against the ASX, (2) the ASX have to file and serve their defence (by Feb 28) of the claims made by ISX, and (3) a further case management hearing is currently scheduled to take place on March 13.

On 30-Jan-2020, the ASX released this "Update on Suspension from Official Quotation" regarding ISX, in which they explained that:

  • Since suspending trading in ISX shares, the ASX has issued four formal query letters to ISX using its power under Listing Rule 18.7 to request information, documents and explanations to enable ASX to be satisfied that ISX, as a listed entity, is and has been complying with the Listing Rules.
  • Having carefully reviewed ISX’s responses to these query letters, on 6 December 2019, ASX sent to ISX a draft of ASX’s proposed findings and proposed actions.  ASX gave ISX until the close of trading on Friday 10 January 2020 to provide any representations it wished to make on the draft findings.  On 8 January 2020, at ISX’s request, ASX granted ISX an extension to the close of business on Friday 24 January 2020 to provide its representations.
  • ISX responded to ASX’s draft findings on Friday 24 January 2020. ASX is currently considering ISX’s response.
  • Given this matter is now before the Court and the first case management hearing in the Proceedings is scheduled for Friday 7 February 2020, ASX has agreed not to publish any findings prior to that hearing.
  • Further, since this matter is now before the Court, ASX will not be responding individually to any further communications concerning the Suspension.  If the need arises to update the market on any material developments regarding the Suspension, ASX will do so via a market announcement. 

It's interesting.  One could come to the conclusion that ISX may have shot itself in the foot, metaphorically speaking, in that if the ASX were now in a position to state that they were satisifed with ISX's formal response to the ASX's proposed findings and proposed actions concerning their investigation into the matters outlined (and there clearly isn't any evidence for or against that hypothetical eventuality it must be noted, we're just spitballing and hypothesising here), then the ASX may now find themselves in a position where they have to defer any further action (such as the potential reinstatement of trading in ISX's shares) until the natural completion of the court action that the ISX has initiated against them (specifically concerning the trading suspension).

What I mean by that is that it looked like the ASX investigation into ISX was either complete or very near completion, and they had presented their proposed findings and proposed actions to ISX and requested ISX respond to those findings and proposed actions - and ISX have now done so, and neither the ASX or ISX can comment on any of the details of that now, because the matter is before the court.

Interesting...  As we know, court cases can drag out for a Loooooooooong time...

Meanwhile ISX has plenty of time on its hands to respond to "unfair" media targeting - via further letters to their shareholders:

23-Jan-2020:  Letter to Shareholders re SMH and the Age

06-Feb-2020:  Letter to Shareholders

This may be a bit of oversimplification, but it seems to me that Karantzis wants on the one hand to say that ISX's KYC tech (and systems) are critical tools to allow AFSL-holders (licenced financial services providers) to avoid money laundering and the funding of terrorism (etc.), but on the other hand to say that while they provide those tools to their customers (AFSL holders), they rely on ASIC to vet those customers (if they hold an AFSL, they're good to go, from ISX's perspective) and ISX have no visability or interest in what the end users are buying or paying for when transactions take place.  ISX are just there to assist with establishing whether the end-user is entitled to use the credit card that they are attempting to use at that point in time.

KYC = Know Your Customer, and KYCC=Know Your Customer's Customer, but ISX claim to possibly not know their own customers much beyond the point of knowing that they hold an AFSL, and their KYCC doesn't extend to purchase details - but rather just trying to ascertain if the person attempting to make the transaction is (a) who they say they are, and (b) is entitled to use that card.

It's easy to understand why ASIC and the ASX have had concerns with ISX.

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23-June-2020:  iSignthis Ltd vs ASX Ltd s1041H alleged breach by ASX and associated damages

Recently:  18-June-2020:  Correction of Statements in ISX Letter to Shareholders

Sorry kids, they're not getting back together...

Further Reading:

AFR:  To ASX questions, iSignthis tries vaudeville

by Joe Aston, Columnist. [May 28, 2020]

The latest correspondence between the Australian Securities Exchange and suspended iSignthis – released on Monday – needs to be seen to be believed. Though that could be said about iSignthis full stop.

Remember, the ASX’s reasons for suspending iSignthis shares from trading back in October (as they remain) were made public on April 30 and strongly suggested that iSignthis had become an international money-laundering colony. This is something altogether new.

It comes down to when and why global payments giant Visa suspended the processing of its cards by iSignthis. The company had disclosed in its quarterly accounts lodged on April 29 that “processing to merchants across the Visa network was also suspended for parts of March pending response to Visa re: queries on ASX ‘investigation’, concerns re: ‘derogatory media’ and the focus on high risk merchants.”

But according to Visa’s own website, iSignthis' European operations had been suspended by Visa’s anti-money laundering division, and its PCI DSS certification – the global payment system’s anti-fraud security standard – had expired on March 31.

When presented with this evidence on Twitter on May 1, iSignthis’ chief executive John Karantzis tweeted that “we forgot to send our PCI DSS certificate by 30 March 2020” but that he was “fixing it”.

Which flatly contradicted another line in iSignthis’ April 29 disclosure, which said the company’s PCI DSS certification had been “successfully audited and submitted to the relevant scheme on time”.

Thus the ASX wrote to iSignthis on May 7 politely asking how it could reconcile the April 29 statement that its PCI DSS certification was “successfully audited and submitted to the relevant scheme on time” with Karantzis’ May 1 tweet that the PCI DSS certification was not submitted on time. The ASX also wondered how Visa could suspend iSignthis for "parts of March" over issues with renewing a certification that didn’t even expire until March 31. Great question! Though we’re still wondering what happened to Visa suspending iSignthis over derogatory media.

Karantzis wrote to the ASX on May 13, in the ASX’s words, “purporting to respond”.

On May 14, the ASX demanded a compliant response.

On May 20, Karantzis responded again, his letter to the ASX’s compliance team beginning “Your email is not acceptable”. This guy is the real deal!

Another highlight was “ASX would not be issuing a query letter to Westpac ...”. So was “Consequently, you have no power under Listing Rule 18.7…”. Karantzis spent one whole year (FTE) at law school and he’s lecturing the Australian market operator on the application of its own listing rules. His is cognitive dissonance at a level heretofore unseen.

Given one last chance by the bourse on May 21, Karantzis wrote again on May 25. That final correspondence, the ASX said, “avoids answering a number of direct queries and gives incomplete or confusing responses to a number of others”.

The ASX has now even cited iSignthis’ potential non-compliance with Listing Rule 12.5, that “an entity’s structure and operations must be appropriate for a listed entity”. You don’t need an honorary juris doctorate from NFI University to tell you that’s almost the end of the road.


iSignthis' John Karantzis in CV fraud

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I think the term is, "Irreconcilable differences".

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05-May-2020:  Appendix 4C with ASX Direction Included

04-May-2020:  Letter to Shareholders   and   http://Release of Correspondence by ASX with ISX

Firstly, the revised/updated quarterly report (4C) with this section attached:

Update to Appendix 4C

In accordance with Listing Rules 18.8(a) and (b), ASX directs ISX to include in each quarterly activity report it gives to ASX under Listing Rule 4.7C, commencing with its quarterly activity report for the quarter ended 31 March 2020, a breakdown by sector of the revenue ISX has derived from customers during the applicable quarter, divided into the following sectors: 

  • Options/CFDs/FX
  • Crypto/digital currency
  • Online gambling
  • Online video gaming
  • Credit providers
  • Travel services
  • Other 

1Q20 unaudited revenue was for the Group was $10.6m. The percentage of revenue derived from industry segments during the quarter is detailed below:

  • Options/CFDs/FX  - 11%
  • Crypto/digital currency - 2%
  • Online gambling - 1%
  • Online video gaming - 60%
  • Credit providers - 0%
  • Travel services - 4%
  • Other - 22% 

 No single customer was deemed as being ‘material’. 


Regarding the other two links - the "he said, she said" saga between the ASX and ISX, I have no further comment at this time...




Except to say that I am VERY glad that I don't hold any ISX shares...

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30-Apr-2020:  ISX were seeking two things via their federal court action against the ASX.  The first was to have their shares removed from suspension, i.e. to be trading again.  That case is ongoing, but it doesn't look hopeful without full disclosure as well as full voluntary escrow of all remaining performance shares (that hadn't already been sold before they were suspended).  The second goal was to have the court impose orders to prevent the ASX from releasing this announcement:

ASX Update on Suspension

...which contains the ASX's "Statement of Reasons", i.e, the outcome of their investigation and the details of the main listing rules that they believe iSignthis (ISX) have breached as well as all sorts of other incriminating evidence.

On that score, the federal court dismissed ISX’s application for an injunction and ordered ISX to pay ASX’s costs.  The ASX then published the document.  @Rapstar has already posted a good straw which draws attention to the main critical points, however I would also recommend reading "ANNEXURE B: Information Concerning the Customers under the Key Contracts" which are the final 4 pages, beginning on page 39

The Key Contracts are the four contracts that together provided 60% of the revenue in the period in which the performance shares were "earned" (the 6 months ending 30-Jun-18).  Without the revenue from those 4 contracts, the 336,666,667 performance shares (yep, 336.7 million shares) would have instead been converted to just 3 shares. 

Firstly, the "revenue" from those 4 key contracts were for services that ISX simply subcontracted to two other external companies who charged ISX roughly the same amount to provide those services as ISX received from those 4 clients, i.e. there was stuff-all earnings (profits) for ISX from any of those 4 contracts, which amounted to 60% of their revenue during that period. 

Secondly, much of the invoicing for the work performed occurred after June 30th, 2018, i.e. after the close of the period, despite ISX supposedly obtaining very dodgy certificates of completion from their clients, one of which was not signed, and all of which had inconsistencies.  Also, the work was for websites, only one of which, for only one of the clients, was actually working (online) at the time the certificates were apparently completed.  It is unclear whether any of the other websites ever went "live" despite ISX having been paid to get them all up and running, and passing all of that money on to third parties to provide that service.

Thirdly, none of the revenue from those clients was recurring, it was all one-off set-up costs, and ISX repeatedly lied about that, saying such revenue was less than 15% of the revenue earned during the period.  That lie has never been corrected by ISX to the market, even though they were forced to admit the true numbers to the ASX in response to all of their query letters.  This is important because the type of work that they did for those 4 clients (that enabled them to meet those revenue hurdles to allow the performance shares to fully vest) was not done in the periods either before or after that period - for any other clients.  Why would they?  There was no money made out of those contracts.  No profits.  It was all revenue, which was all passed on to third parties to provide the services.  That type of work has no financial merit, unless you are just trying to inflate your revenue numbers for a particular period.  I won't go on.  However, in "Annexure B" the ASX provide some pretty juicy info about those 4 clients and their associates.  No wonder the ASIC investigation is still ongoing!  

Here is ISX's response today:  Letter to Shareholders - Federal Court Action

What a Greek tragedy...

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29-Apr-2020:  Appendix 4C - Quarterly Report (for Qtr ended 31 March 2020)

Points that I personally found interesting:  Straw #2 (of 3):

  1. 1Q20 (1st quarter of FY2020) receipts from customers were down -33% from 4Q19 to $10.5m - due to the impacts from COVID-19, combined with seasonality in some merchants’ volumes and other issues mentioned in their report, and some of which I've mentioned in straw #1, and some below.
  2. ISX completed the acquisition of UAB Baltic Banking Service during the quarter for a total cost of €75k cash and 1,394,533 ordinary ISX shares. I commented on that in straw 1 and the fact that they are able to issue new shares during a period in which they have been suspended from trading now for almost 7 months.  I also got distracted with the LHC Capital saga, and LHC's massive write-down of the value of their ISX investment - LHC are now valuing their ISX shares at 7.7 cents each, as communicated to their own investors in early March.  I also commented on their possible motivations for that move.  LHC Capital were the third largest shareholders in ISX - with 8.2%, with iSignThis' CEO & MD John Karantzis' "Select All Enterprise Ltd" being the largest - with 41% of the shares on issue, and a company called Red 5 Solutions Ltd being the second largest shareholder - with 10.29%.  Red 5 Solutions and Select All Enterprises are private companies that are both registered in the British Virgin Islands, a known tax haven.  John Karantzis claimed that the owners of Red 5 Solutions could not be determined, saying, “We are also not privy to ownership of entities on our register, unless it is in an individual’s name.”  However in early October ISX finally clarified its relationship with Red 5 Solutions of the British Virgin Islands, describing it as “the entity that holds Performance Rights on behalf of a number of early-stage staff” and confirmed that one of its owners was Andrew Karantzis, iSignthis’ chief sales officer and the brother of chief executive John Karantzis. What’s more, Red 5’s company secretary is Irene Naumova, Andrew’s wife.  For nearly four weeks before that, iSignthis had maintained – bizarrely, given what we now know – that it was “not privy to ownership of entities on our register”. That’s right, an internationally esteemed Know Your Customer platform claimed for almost a month not to know the identity of its second-largest shareholder (to which it had already issued 130 million performance shares), then abruptly disclosed its ownership by a member of both the company's executive management and the CEO’s family.  Remember that this was all in response to official questioning from the ASX.  You might forget your brother’s birthday, but forgetting he owns a slab of your company while sharing an office with him?  Regardless, you could never forget his wife. When not administering the affairs of Red 5 or cavorting around Cyprus, Irina (as she goes by on social media) is a passionate advocate for breastfeeding older children. On her Facebook page, Moo Moo Time (no kidding!), she is shown heavily pregnant and suckling her three-year-old daughter while also embracing her six-year-old son. In another photo, Naumova tandem feeds the young girl and the newborn.  Naumova was a Miss Universe Western Australia finalist in 2014.  At her pageant, the aspiring beauty queen identified lifelong lactation, not world peace, as her cause célèbre.  So perhaps Red 5 isn't a family warehouse through which to tunnel cash out of iSignthis, but instead the seed fund for a global campaign of a breastfeeding princess.  Source:   But I digress...
  3. "Administration and corporate costs were up circa $430k in the quarter, due mainly to the ASX related legal proceedings."  Only $430k?  Time to get serious Johnny!
  4. "Injunctive relief was sought against the Australian Securities Exchange (ASX), with the Federal Court hearing the matter on the 16th April 2020. Judgment is scheduled for 30th April 2020."  Bugger me!  That's tomorrow!  Should be a corker!
  5. "COVID-19 impacted March revenues indirectly, with almost 3 weeks of processing time being lost. The Company failed to process transactions across a number of card schemes as a consequence of either the scheme itself being technically or commercially un-responsive, arrangements with the schemes being subject to further commercial or due diligence requirements, or the Company itself changing its systems without taking into consideration the impact on the scheme." ...a fully online payments business so affected by the pandemic.  PayPal, Visa, Mastercard, Alibaba's AliPay and Tencent's WeChat Pay all operated seamlessly through March.
  6. "Processing to merchants across the Visa network was also suspended for parts of March pending response to Visa re queries on ASX “investigation”, concerns re “derogatory media” and the focus on high risk merchants."  Wow!

...continued in straw #3...

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#"Ownership Matters" Report
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iSignthis plunges on governance concerns

Vesna Poljak, Yolanda Redrup and Jonathan Shapiro,  Sep 12, 2019 – 6.23pm

The key architects behind $1 billion ASX payments darling iSignthis were the recipients of a stock windfall worth more than $500 million at this week's prices, but the difference between collecting this award and missing out came down to just $1,347 in revenue.

Once the award was claimed, iSignthis' top-line subsequently crashed the next half - a fact pointed out in a widely discussed governance report amid huge interest in the stock.

On Tuesday, the stock hit a high of $1.76, but only two days later it had suffered a 43 per cent fall to 93¢. An Ownership Matters report, sighted by AFR, examined the origins of the performance shares and the firm's early compensation arrangements.

iSignthis' payments network is similar in principle to that of PayPal, but is targeted at companies that need to comply with anti-money laundering regulations. It also offers electronic money deposit taking and is an issuer of electronic money in the European Union.

On Monday it declared that annualised gross processing turnover volume reached $1.1 billion in August. iSignthis' spectacular ascent means it will be promoted to the S&P/ASX 300 Index on September 23.

The payments technology company has been backed by some of the smartest hedge funds in Australia, including Marcus Hughes and Stephen Aboud's LHC Capital, which was the best long-short strategy over 2018-19, and Regal Funds Management.

On August 29, 2018, 336.6 million shares were issued after the company struck performance hurdles referred to as classes A, B and C. These date back to when the business was trading as Otis Energy, the company which acquired iSignthis BV and subsequently transformed itself into a digital identity phenomenon.

Performance hurdles were required to be met within three years of completing the transaction, based on annualised revenue over a six-month reporting period, or the shares would expire worthless.

The hurdles were broken down as class A: 112.2 million shares if it hit $5 million; class B: 112.2 million shares if it hit $7.5 million; and class C: 112.2 million shares if it hit $10 million. It was later clarified in the 2015 annual report that half-year revenue of $2.5m will be sufficient to satisfy milestone A; $3.75m for milestone B; and $5m for milestone C.

For the first-half of 2017-18 it reported revenue of only $826,912. On the same day, it announced plans to change the end of financial year to December 31. That had the effect of changing its first-half balance date to June 30. At this point, none of the milestones had been met.

But on June 22, 2018, iSignthis told the market it had blitzed through the A and B hurdles:  cash receipts for "half 2" were above $3.75m. Hurdle C - the $5m - was still unclear - dependent upon "end of financial year June 2018 invoicing".

The next accounts showed revenue for the six months from January to June 2018 was in excess of $5.5m - all three milestones had now been met.

More specifically it was $5,512,057 based on 12-month revenue of $6,338,969, including interest (implied as $32,191 for the half) and an R&D tax concession ($478,519 disclosed only for the 12 months). Removing the benefit of the R&D grant would mean only clearing the $5m mark by $33,538 and excluding interest income the hurdle was only cleared by $1,347.

In the next reporting period, now the 2018 full-year (reported in February) revenue was $6,623,413. That implies a half-on-half plunge to $1.1m.

But CEO & MD John Karantzis told the AFR that changing the reporting timeline of the company had not helped the vendors to meet their performance hurdles and its fall in revenue had been because one of its service providers fell over. Subsequently the company invested in building its own payments network.

“We contracted parties, started servicing clients, but we were reliant on third party networks (other banks). Think of us as a ‘virtual’ provider at that point in time, just like Virgin mobile was on the Optus network back in the day,” he said.

Supporters of ISX underscored that such information was already in the public domain.

LHC's Hughes, which invested in the company early, said that he was prepared to take the good with the bad when buying into ISX and was unperturbed by the issues recently raised.

“All the information was publicly discoverable and we were aware of it when we did our due diligence prior to making our investment.”

He said he was extremely happy with the performance of the business which he said was highly cash generative, and the forthcoming 4C quarterly statement to be released in October would provide an important validation of the company’s progress.

[In early March 2020, LHC Capital told their investors that they had now written down the value of their 89.4 million ISX shares to just 7.7 cents each]

[full article]

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Latest news from ISX:  

13-03-2020:  Letter to Shareholders - Joint CEO ISX and NSX

John Karantzis, CEO of iSignthis Ltd [ISX] and now also Interim CEO, NSX Limited - announces that the ISX and the NSX - who are - ironically - listed on the ASX [ASX:NSX] - are getting together to take on the ASX as a direct competitor, particularly in relation to forming a joint venture (JV) they are calling "ClearPay" to compete with the ASX’s monopoly clearing and settlement operation ‘Austraclear’, by means of a block chain enabled Delivery versus Payment (DvP) platform.  Click on the link above for more.

[NSX Limited (NSX) is an owner and operator of Australian Stock Exchanges in Australia. The Company operates two distinct businesses: National Stock Exchange of Australia Ltd (NSXA) and IR Plus Securities Exchange Limited.]

And news from the ASX about ISX:

16-Mar-2020:  ASX update on suspension of ISX securities

The gist of that announcement is that the ASX has now finalised and issued its concluded "Statement of Reasons" [concerning their determinations in relation to ISX’s compliance - or lack thereof - with the ASX Listing Rules] to ISX after the close of trading on 13 March 2020, advising ISX of ASX’s determinations in relation to its compliance with the Listing Rules and the reasons for those determinations.  ASX also intends to provide this document to ASIC.  However, in the meantime, on 12 March 2020 (the day before the ISX+NSX JV announcement was made), ISX applied to the Federal Court for an injunction to prevent ASX from providing its Statement of Reasons to the market.  The matter was before the Court on 13 March 2020 and the Court has made orders for the hearing of ISX’s application for an injunction to be held on Thursday 9 April 2020.  In view of this, and until ISX’s injunction application has been determined, ASX is not in a position to provide its Statement of Reasons to the market.

Interesting.  On the face of it, one could be forgiven for thinking that if ISX had nothing to hide, and truly believe they have done nothing wrong, there might be little point and needless costs in delaying the inevitable release of the ASX's determination via a court injunction.  Further, ISX did this when they were only in posession of the draft determination.  They hadn't even seen the final determination, which they received after trading closed on Friday 13th, the day after ISX made the application to the court for the injunction. 

One could further be also forgiven for jumping to certain possible consclusions, those being that the evidence against ISX is pretty damming, that the proposed penalty would be/is pretty severe (possibly including being delisted from the ASX), and that the release of the document will only do further harm to ISX's already heavily tarnished reputation, at a time during which they were/are trying to launch a new business venture, their old one clearly being in serious trouble.  

My question is:  Seeing as ISX is already suspended from trading, and increasingly looking like they might never trade again on the ASX (although they could list on the NSX instead, especially now that Karantzis is the NSX's new Interim CEO), what's the point in an injunction to prevent the ASX from releasing their final determination concerning whether ISX have or have not breached the ASX Listing Rules?  Unless it really is just about trying to delay or limit further reputational damage.  Doesn't smell good...

Also, while not YET being in a position to share their determination with the market, the ASX did manage to mention that they intend to send a copy of their determination over to ASIC.  Indeed, they may well have already done so.  I assume they would do this because there are elements of it that might interest ASIC?  And if so, would ASIC have some concerns over ISX forming a JV with the NSX to go head-to-head with the ASX in the clearing and settlements space?  Many questions.  Not enough answers.  But it certainly doesn't smell good...

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18-Nov-19:  The ASX has this morning released ISX's response to the latest round of questions from the ASX, and say that ISX's response is dated Friday 15-Nov-19, which is when it was due to be received by.  Either the ASX did not receive it until today (Monday 18th November), or else received it earlier but chose not to release it on their announcement platform until today.  Considering that the ASX had issues with the most recent announcement that ISX made about their suspension from trading on the ASX not being at the request of ASIC - and laying the blame sqaurely at the feet of the ASX, it is possible that the ASX took the weekend to consider this latest response before releasing it to the market.

Here's the link:

There seems to be a preoccupation by the ASX with the massive revenue drop that occurred directly after June 30th 2018 when the CEO just barely "earned" his massive $500 million bonus (which was paid in shares and the value I've used is based on the last traded share price; there were three hurdles, but they only beat one - the revenue growth hurdle - by a very thin margin, apparently beating the other two hurdles comfortably).  This was the main issue raised in the Ownership Matters report that really turned the spotlight onto ISX this year.

Revenue derived by ISX in the September 2018 quarter compared to the June 2018 quarter was down 88% (or by $3,092,858) from $3,504,671 in the June 2018 quarter to just $411,813 in the September 2018 quarter.  Revenue for the December 2018 half year compared to the June 2018 half year was down 78% (or by $3,912,964) from $5,002,479 in the June 2018 half year to $1,089,515 in the December 2018 half year.  That is a very large decline in revenue in the quarter and half year immediately following the CEO being paid such a huge bonus which was in part based on revenue growth achieved.

Previous questions, although not in this current round of questions from the ASX, have centred around the opaque ownership structure with certain "seed investors" being based in the British Virgin Islands and one of those being Karantzis' brother.  If the holding associated with Karantzis' brother and Karantzis' own HUGE shareholding are combined, they together control over 50% of the company and therefore control the company, so can pretty much do what they want in terms of executive remuneration and bonuses.  This is another part of the Ownership Matters report - the poor corporate governance.

It appears that much of the revenue "growth" in the June 2018 quarter was delivered by a couple of clients, who are/were either FX or cryptocurrency service providers, and who didn't have the money to deploy their own trading platforms and so ISX purchased "off-the-shelf" trading platforms for them, modified them to include ISX's own KYC and payment processing tech, and deployed them in a cloud environment, all in the June 2018 quarter - and booked the corresponding revenue in that quarter, despite those clients delivering between zero and very little revenue during the next (September 2018) quarter.  Further, ISX have now agreed that they had mistakenly booked that revenue as "Identity as a Service KYC/Payment Gateway" category revenue, and those same revenues have since been allocated to “Integration/Set up”.  Considering the amounts in question, which were a large part of their total June 2018 quarter revenue, the revised chart now certainly changes the look of their revenue mix for the quarter.  ISX have also now agreed that their previous response to questions about that revenue (in previous rounds of questions, this round being round 3) was "mistaken".

There's very little in this latest series of questions or responses that give me further confidence in ISX or Karantzis (their MD + CEO), and I didn't have much before.   I just wish the ASX were a little more zealous with some other companies who clearly need the increased scrutiny.  Both the ASX and ASIC are to be commended for getting stuck into ISX as they have, as there is clearly a bit of a "house of cards" aspect to this company, and a number of questions that did need to be answered here.  I just wish they were as vigilant with the rest of the market.

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#Bear Case
Last edited 8 months ago

26-Oct-2019:  Obviously there's the current regulatory scrutiny from the ASX and ASIC.  However there's also their "moat" - their competitive advantage.  They have patents, and they see themselves as a wholesale version of Paypal.  Paypal authenticate (verify the identity of) their customers by making a small deposit into one or more of their bank accounts (including credit card accounts if the customers wish to link credit cards to their paypal account) and then asking the customer to tell them (Paypal) how much money had been deposited.  This proves that the customer has access to and control of that account.  What do ISX do that is so much better and faster?  Well, they have patents over two methods.  One is to split an amount and ask the customer how the amount was split.  For instance, a customer wants to deposit $100 into a new account.  ISX will deposit the $100 as two transactions, which could be $70 and $30, or $55 and $45, or any other combination - and then ask the customer to describe the two amounts.  The second method that they have patented is that they will place a question (or riddle or equation) into the description field of the transaction, so for instance, "ISXPay 1plus4x6" might be the transaction description, and the customer would be asked to solve that equation to prove that they have access to that account.  It seems to me that ISX don't have a very strong moat. 

They have just been in the right place at the right time.  However, it would NOT be hard to develop a similar method of proving that people have access to their own bank account.  ISX's method relies entirely on customers already having proven their identity to an existing reputable financial institution, and already having a working bank account, and then piggy-backing off that.  In other words, ISX's business model relies on the assumption that if someone has control of a bank account, that person must be the person whose name and address that bank account is registered to.  It doesn't work unless the person already has a working bank account with a reputable financial institution.  It also doesn't allow for a variety of situations where people may have gained access to other people's bank account details (including transaction details, as displayed on a bank account statement or online).  What ISX do is almost exactly the same as what Paypal do of course, in terms of KYC (know your customer), however - in the future - perhaps that will not be enough.  New regulations may be introduced that won't make it so easy to open new accounts online purely by proving you already have control of an existing account.  Remember that what Paypal do is take on the risk themselves - as in they are allowing people to open up a Paypal account by proving that they already have control of an existing bank account.  What ISX are doing is offering a service to a variety of financial services companies that allow them to use ISX's patented technology (as described above) to open new accounts for new customers based on ISX proving that the customer already has control of one existing bank account; the wholesale model of Paypal.

ISX have also been in the right place at the right time with large banks like NAB pulling out of the space due to money-laundering concerns raised by the banking Royal Commission.  ISX were prepared to embrace the risk there that the big banks are getting very wary of.  They see it as an opportunity.  I see it as a regulatory minefield.  Of course the ASX and ASIC are going to have serious concerns about a new entrant in the space that could unwittingly facilitate money laundering by allowing people or companies to leverage one bank account into a number of accounts.  The more accounts you have, the easier it is to launder money.  It's the big amounts that get people's attention.  Lots of smaller amounts are far more likely to stay under the radar.  ISX have a LOT of clients in gaming and gambling.  In fact they attend gaming and gambling industry conventions to promote their services to the industry.  There is obviously going to be concerns that ISX are enabling money laundering whether they are aware of it or not.  If other people use ISX's services to facilitate their own crimes - such as money laundering - or funding terrorism - then regulators should and will take action.  In fact the regulators will be concerned that the potential exists for such crimes to occur, whether they can prove that such crimes have occurred or not.  It's a minefield, and one that larger and more experienced financial services companies are happy to stay well away from at this point in time.  ISX are "all in" of course, but that was ALWAYS going to attract very close scrutiny from the regulators, and for that reason alone, they are a risky place to be (from an investor's POV).  If you overlay the questionable governance issues that the recent "Ownership Matters" report has raised, the risks just increase.  Not a stock that I would go near.

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