Comments regarding the 15% revenue disclosure issue this morning and early afternoon. I will attempt to provide an update on the VISA issue early before the court case tomorrow.
This morning and into the early afternoon were spent with Collinson (QC – now KC?) for the defense responding to the 15% argument made by ASIC against ISX and JK. It was said that there will be more evidence provided in the ISX opening arguments starting next Monday.
Collinson spent some time "contextualizing" emails that ASIC read into court yesterday. Collinson stated “Everything in law is context. When your honour has explained to him the events preceding and following that email chain, its (i.e. the ISX emails produced and put forward to the court by ASIC) irrelevance becomes even larger in our submission.”He goes on to explain the context of the emails between internal ISX staff on the claiming of revenue on the CapEx vs OpEx. He states that this is the reoccurring theme in several emails around the claiming of the “nonrecurring revenue” As Collinson says “the argument that is demonstrated if the entire emails are exposed is that the whole point of putting these integrations together in this way, albeit with not a large margin, is to create a contract with a customer that yields greater revenue over a number of years.”Collinson also states there isn’t any doubt that this happened as revenue from some of the contracts created large revenue in later years.
Collinson goes on to say that “my friend (prosecutor for ASIC) just reads into it …. that concerns by Richards (ISX, who was querying the relevance of the integration income) must have to do with the earning of performance shares and that doesn’t in any way follow from what is being said. Recognising revenue appropriately is just something that a company needs to do. And I might say my friend said "there are criminal proceedings on foot against the Auditors here.”Collinson then goes on to say that these proceedings (i.e. the criminal case against the auditor) hasn’t started yet but that he will be taking the judge through the story of the audit for the recognition of revenue up to June 2018 in his opening next week and he adds, "for the life of me, it is not apparent to me how there can be any basis for leveling any critique against the auditors for the work they undertook”. Collinson further commented that every with email read by ASIC, that ASIC read into it concerns that each email must have to do with performance shares. Collinson additionally said that there are "NO documents that suggest they were carrying out any part of their business for the purpose of receiving performance shares".Collinson’s point is that ASIC is picking and choosing quotes and applying its own judgment on their meaning.
ASIC appears to believe that low margin means no prospect of benefit. ASIC supported the argument - that the purpose for the integration revenue was to achieve bonuses -by comparing the end June revenue with the revenue in the last half of 2018.
Collinson argues, as I do in Post #: 66532821 above that there were a number of technical issues in 2018,He goes on to list them as:
1. KAB – which was the tier 1 technical provider for ISX transactions. He noted that tier 1 obtain better margins. In Hart’s affidavit he states that KAB was taken over by the Danish state and the exposure was ~ $250k Euro which would impact ISX in the second half of the year.
2. Apple – Change was made to the privacy and cookie setting which affected client access to the ISX payments system.This had a negative impact on GPTV.
3. NAB issue – Nab took a different view of the risk profile of transactions it was processing and stopped processing this type .Nab as passing the transactions on to ISX but NAB was responsible for authenticating card AML transactions.
4. Worldline – Worldline cleared and settled card transactions and had a problem that took a long time to resolve.
Collinson noted that ISX decided to create its own tier 1 to resolve the above issues and completed it in late December 2018/ early January 2019, as I argue in the piece above. The difference between his and my argument is that Collinson states that ISX achieved a 419% increase in revenue in 2019 whereas I stated it was only 390%.
When discussing the 15% issue, Collinson states that it is unclear really what the 15% referred to. There is some evidence that the 15% in the written analyst notes was referencing that 15% of the revenue from a single client could be attributed to their one-off expense – ie installation and integration – not the % expected to the entire revenue earned end June 2018. This makes sense to me because this was a metrics my company used when quoting the sales and installations of large systems to a client. There was also a lot of discussion around the fact Mr. Jacob’s (?), an analyst, didn’t change his valuation from $.45 cents before the analyst brief up or down after the analyst brief.
Houston, an expert analyst, described the representation in his report.ISX’s internal document references the 15% as per agreement for the revenue composition. Mr Houston also notes that the 15% could denote that the installation and integration is 15% or less over the entire customer relationship.He then continues to state what JK says orally. Houston states that because JK in the analyst brief did not discuss the entire revenue for the period, it is confusing as to what the 15% referred to in his response.
Collinson said that when JK answered the question there could have been great confusion among listeners of JK during the oral analyst report when he is asked about the 15%.He answered the question in a way that could be interpreted as confirming the 15% referenced the revenue vs total revenue in the last period but then JK immediately referenced the written report regarding the 15% which contradicted JK’s answer and discusses the revenue with respect to each customer. Collinson says that the total answer would cause confusion to anyone who cross-referenced the written report. A decision of Justice Waldner (??) of this court states that an idea that confusion is transient and ephemeral may not give rise to false and deceptive conduct and therefore an attempt to hold JK accountable would fail..Collinson went on to say that the central idea we are talking about here doesn’t deal directly with the expectations of the market and whether past tense information is as important as future information. This is supported by the fact that Jacob (as above) did not change his valuation of ISX after the oral analyst report. Neither Sisson nor Houston (both expert analysts) support the fact that knowing about the breakup of the June 2018 revenue would have a material effect on the price of ISX.
Collinson also points out that ASIC states that information should have been released regarding ISX revenue (i.e. the break-up of the non-recurring revenue vs recurring revenue) yet there exists no accounting statement which states you have to break down revenue for the market. There is no precedence for this. Collinson goes on to ask the question “Why doesn’t all companies when reporting on revenue have to break down one-off and recurrent revenue?” I think this is a very relevant question.
Collinson stated that a final point is that ASIC pleads that JK bares liability because he knew all the elements of the 2018 disclosure and that it would have had a material effect on ISX’s share price whereas Mr Houston, an established expert, says he doesn’t think that there would have been a material effect on the market. Collinson points out - how would JK, a lay person know it would have a material effect if Mr Houston – a specialist in this area - doesn’t think it would? Collinson also points out a similar case was run by ASIC against a Mr Cookshank which failed by not meeting the Yorke and Lucus requirement (Yorke and Lucas: to go the extra yard by holding an officer liable, the officer must have actual knowledge of all the elements of the event).
