Brief History ofISX and what it does:
Nickolas John Karantzis invented the paymentinstrument verification method to solve an online fraud problem in 2010, lodgedpatents on the process in 2011 and patents are granted in the US, EU and Turkeyin years 2011-2013 See Announcement 4/9/2014 “Otis to acquire Online ID andPayment Verification Provider.” iSignThis”and 24/10/2019 Presentation “Goldman Sachs 3rd Annual Tech Day – ISX Timeline – 9 years in the making” ).
This verification method known as “know your customer”(KYC) , strong customerauthentication and which now includes “know your customer’s customer” (KYCC)looks at records that are transacting through their customer’s accounts todetermine if any are money laundering, paying for child pornography, supportingterrorist activities etc.ISX is considered a “REGTECH” company, but is not a regulator like ASIC; they use regulatory bodies as part of their process in determining the authenticity of companies and their own software to analysetransactions to determine if any contravene Anti Money Laundering (AML) and Counter Terrorism Funding (CTF) acts around the globe (see review, 10/9/2015 “Independent legal review confirms ISX services suitable for US institutions” in which it states that ISX’s KYC service satisfies US anti-money laundering requirements under the Bank Secrecy Act and the USA Patriot Act.ISX KYC services now confirmed to satisfy key legislation in all major markets: USA, France, Belgium, Italy, UK, Australia and others.)
Besides the KYC and KYCC services(Paydentity), the group is now a neobank and does deposit taking, payments,emoney issue, credit license (ISX eMoney (Europe)) and card paymentlicences(ISX eMoney (AU)).Request for ADI License and ASIC License has been submitted (see 24/10/2019 Presentation “Goldman Sachs 3rd Annual Tech Day – iSignthis Group – Governance & Compliance Obligations”)
ISX issues being investigated by the ASX.
# 1: Is ISX’s due diligence strong enough to detect companies that arecorrupt?
ISX’s policy is that it till provide services to any appropriately licensedAustralian Financial Services Licenced (AFSL) holder that meets its customerdue diligence requirements.ISX notes that ASIC still issues ASFL to Binary Option providers, who still service the general public (see ISX: Second Query Letter Response to ASX 25 October, 2019). This response also outlines their additional due diligence requirements.In other words, they research ASIC, UK Companies House, Cyprus Registrar of Companies, and the like, for their first level due diligence.If they are not “black listed” in any of these registrars, then they do will do business with the entity if it meets their own due diligence.ISX is NOT in itself a regulator.Until companies such as ISX existed, Money Laundering, Terrorism Funding and Child Pornography funding was impossible to trace – especially with transactions concerning crypto-currency.
While the ASX has pointed out where there havebeen warnings about some of the companies ISX has done business with around thetime ISX carried out business, because of the close timing, it is entirelypossible that ISX had already carried out due diligence.
But the real question is - should ISX provide surveillance on transactions of companies thatare corrupt? ISX is not providing the corrupt company with a platform to carry out their corruption, the telephone companies are (the corrupt companies' employees are calling people and scamming for money). Or, the IP providers responsible - bigpond or TPG ...– are they responsible? I happen to think that it is a good thing that ISX continues to monitor them for money laundering, terrorist funding and child pornography funding until ASIC or another regulator causes them to cease their business.
Another relevant question, is whether doingbusiness with these companies (FX, Equities, options, crypto-currency, CFDtraders) are a risk to the continued contribution to the revenues ofISX, and therefore shareholders are at risk. Therefore ISX shouldnotify shareholders of the risk?
Servicing these types of companies is exactly the type for which ISX wasdesigned.Most of these types of companies are not considered “high Risk”, so what kind of an announcement would we think is appropriate?“Caution, investing in ISX may mean that some of our customers are corrupt and therefore you should not assume there will be continued revenue from any of our customers."I don’t think so. It is the investors responsiblity to research what a company they invest in does.
There has been a magnitude of posters and news articles that are insinuatingthat ISX is corrupt because some of their customers turn out to be corrupt.
Would it be fair to consider that I am corrupt because I have done consulting work for NAB and CBA, who are currently being fined for corrupt activities?
#2: Is ISX corrupt because a bank (KAB) it was associated with may becorrupt?
When ISX set up it’s association with KAB ISX was a young start-upcompany.ISX notes that Moody’s credit rating for Danish banks was the second highest in Europe, after Switzerland and the KAB had no adverse or pending regulatory action on it per Lexis Nexis records at the time when ISX opened custodial accounts...(see 28/10/19 – Response to ASX Query Letter).
Are you corrupt if you hold your deposits in NAB, CBA, ANZ or Westpack who are currently being fined for AML/CTF breaches , bank bill interest rate rigging, failing to pass on discounts, or other “regulatory compliance investigations”?( see https://www.abc.net.au/news/2018-09-14/bank-royal-commission-how-much-will-misbehaviour-cost-the-banks/10246846)
#3: Is the ownership of ISX shares by directors is opaque?
Otis Energy outlined the purchase of iSignthis in an ASX release on 4September 2014.This release detailed the purchase of ISX transaction Terms and Conditions – Otis (i.e. ISX ) shares, and 3 issues of performance shares based on achievement of annualised revenue over a 6 month period.The Capital Structure of the purchase was updated in an announcement on 7 November to represent the ”indicative capital structure based on the revised consolidation ratio” - Consideration rights to acquire ISX – 298,999,999 and performance shares 336,666,667.Performance shares would expire, if unconverted, in 3 years (2018).The purchase and the corresponding share issues were voted on by the shareholders and on 22/12/2014 the results were released to the shareholders :Approval of issue of Vendor Securities 219,158,480 “For”, 220957 “Discretion”, 630 “Abstain” and 23940 “Against”.Approval of Performance shares:219,275,480 "FOR", 220957 "Discretion", 630 "Abstain" and 141,408 "Against".These shares were to be held in “escrow” for 2 years.Otis Energy’s share price before the purchase of ISX was max .004.I’ll leave it to you whether these original Otis Energy shareholders are unhappy.
Director’s direct interests have been fully disclosed in Appendix 3Y notices onan ongoing basis (see Appendix 3y on ASX Announcements on the followingdates:2015:19-Mar, 31-Aug, 10-Dec;2016:20-Jan, 2-Mar, 3-Mar, 16-Jun;2017:3-Feb, 4-Dec, 7-Dec, 13-Dec; 2018:6-Sep;2019: 29-Apr, 31-May, 2-Sep;3-1-2015: First20 Investors report (ORD + Escrowed 75%) – RedX not a substantial holder at the 3-1-2015 date;Becoming a substantial holder:2015: 18-Nov;2016: 22-11;20-Jun;2018: 1-May, 8-May, 6-Sept (ISX transfer to REDXof 130m performance shares to “angel investors”, 130m performance shares @ 12.07% voting rights), 9-Oct;Change of substantial holder 19/2/2019 (REDX reduced holding by 18.5m to 10.45% voting rights)
#4:“The Shareholders ofREDX , a substantial holder, have not been disclosed.”
No disclosure of the shareholders of any “substantial owner” company hasever been disclosed.REDX is not a related entity in itself according to Section 228 of the Corporations Act 2001.Andrew Karantzis, does not seem to be a“related party” , but the Act states that related parties are Directors of the entity or the controlling entity and their spouses/defacto spouses, parents and children. So if my interpretation is correct (If there is a corporate lawyer available, please advise),John’s mother might be - but as a shareholder of a non related entity? I don't think so.The application of performance shares to “early investors” were allocated and approved by the shareholders with the prospectus in 2014 and held in escrow until the performance shares’ rules for release were satisfied.My comment:“Thank you, John’sMom for having faith in your son.Youare an angel for being an earlyinvestor!”
#5:Questions around theearning of performance shares.
ISX’s revenue, calculated on an accrual basis (when the work is completeand can be invoiced) includes interest and Research & Development.This has historically been included in the revenue (See End of Year Financial results 2016, 2017, 2018).The rules around achievement of the A,B,C Class performance shares states revenue achievements, not revenue achievements minus R&D and Interest.It is not a valid argument to take out valid items from revenue that doesn’t suit an antagonist’s purpose.
This was discussed in detail by ISX in theirannouncement - See Response to OwnershipMatters(OM) Report 17/9/2019.
#6.Is ISX a trading platform?
ISX is NOT a tradingplatform.It does NOT provide a trading platform. ISX monitors transactions. Period. “ Electronic money is NOT a digital currency and should not be confused with crypto-currencies.” ISX has an European Economic Area electronic money license. (see Market Announcement 18 Nov, 2018)
#7. Why high revenue in the June quarter?ISX hadsignificant revenues in May and June relating to “Integration/Set up” servicesbecause the “customers lacked the necessary personnel an/or know how to deploythe third party “Trading platforms”. " ISX deployed a cloud-based environment, installed third-party trading platforms which were licenced to the individual customers and integrated the platforms to ISXPay and Paydentity owned and operated by ISX. Each contract was signed off as complete by each company and the revenue “booked” in accordance with applicable policies and standards.
#8.Why didn’tthis revenue recur?
Because thereis NO reason to install and integrate a company twice.
9. Why did we not see the revenue in the following quarters? Perhaps partially because they took the revenue in the JuneQuarter and didn't expect to have several significant issues occur inthe last half of 2018 that meant that they couldn't realise new revenue. These issues were:
·Worldine agreement was announced in 19/1/2019 as asignificant client. This client ended up having a significanttechnical issues that cause significant interruption of movement oftransactions that lasted into mid second half of 2018.
·OT Capital, which was announced as live in 3/1/2018 (OTCapitaltransacting via ISXPay Australia) and was an ASIC regulated company. Thecompany was not on ASIC's "bad company" list when ISX tookthem on as a customer. OT Capital'stransactions were processingthrough the NAB service. OT Capital were not Money Launderingor transferring funds to support Terrorism or child pornography and would nothave been detected by ISX's own proccess - OTCapital were ripping peopleoff and ASIC eventually found out. After ASIC found they were corrupt,the company stopped transacting and there was a loss of transaction fees toISX.
·As of 13/9/2019, KAB (Københavns Andelskasse) was placed under thecontrol of the Danish State administration company for banks. KABhad already impacted processing, clearing and settlement intermittently during Julyand August. (See market update - supply chain issues 25/9/2018)
·ISX decided to "fast track" their own core banking and Tier 1card processing system expected it to go live progressively through Octoberinto early December. ISX had intended to use KAB's infrastructurethrough the implementation of their new processing system In order to keepgood control over the new system.When KAB was not available to provide this service, to ensure the integrity of their data, ISX moved the transactions overin a slow and controlled manner completing in December 2018.
#10. Do I as a shareholder feel I have beenregularly and adequately informed?
YES
#11.Do I as a shareholder of ISX feel I was “wrongly done by”with the earning of performance shares in 2018 by ISX early investors?
ABSOLUTELY NOT
#12.If the ASX demanded ISXgive back the performance shares earned in 2018, would I as a shareholder voteto give them an equal amount now?
YES, as long as all shareholders that wouldbenefit were not allowed to vote.
