intelligent systems corp: material undisclosed related party … · 2019-06-01 · please read our...

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IntelligentSystemsCorp:MaterialUndisclosedRelatedPartyTransactionsCastDoubtontheIntegrityofFinancial

Statements

• WebelievethatIntelligentSystemsCorp.(INS)hasitsemployeessetuportakecontrolofundisclosedshellcompaniesinAsia,whothenpartakeinundisclosedrelatedpartytransactionswithINSintendedtoeitherround-triprevenuebacktoINSorsiphonmoneyoutofthecompany.

• INSseemstomakeaconcentratedandconsciousefforttohidetherelatedpartynatureofthesetransactions.

• Forexample:INSinvestedintoanunnamedIndianstartup(whichourresearchhasuncoveredasFlexoptTechnologies),whichlaterboughtservicesfromINSusingINS’sowncontributedcapital.

• OneofINS’semployeeswasrecentlylistedasthefounderofFlexopt.Thisdesignationwaslaterremoved(webelievetocovertheirtracks).AnotherbusinesspartnerassociatedwithINSwasalsolistedontheincorporationdocumentsofFlexopt.Noneofthiswasdisclosedtoinvestors.

• WehaveidentifiedanetworkofAsiancompaniessetupbyINS’semployeesortheirbusinesspartnerswhocommonlytransactwitheachother,andsometimeswithINSaswell.Wequestionthenecessityandpurposeofthisnetwork.

• WehaveidentifiedatleasttwoothersmallerinstancesofundisclosedrelatedpartytransactionsbetweenINSandthisAsiannetwork.

• WebelievethatthesematerialundisclosedrelatedpartytransactionscastdoubtontheintegrityofINS’sfinancialstatements.Accordingly,weassignINSapricetargetof$5

Company Intelligent Systems Corp

Ticker

INS

Industry Software - Infrastructure

Exchange

NYSE

Price (as of 5/29/2019) $33.94

Shares Outstanding

8.95m

Daily Volume 161,891

Projected Downside

85%

Publication Date May 30, 2019

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Summary IntelligentSystemsisalow-qualitypaymentsprovidermasqueradingasthe“nextbigthing”.Whileitsfinancialstatementsandsharepricehaverecentlygoneparabolic,weseeevidencethatsomeofthisgrowthmayhavebeenachievedthroughundisclosedrelatedpartytransactionsbetweenINSandanetworkofIndianandAsiancompanies,ratherthanthroughtruebusinessprowess.

Specifically,wehavefounddefinitiveevidenceofINSlendingmoneytostartupscontrolledbyINSemployeesinIndia,thenslowlyfunnelingthatinitialinvestmentbacktoINSthroughanetworkofrelatedIndianandAsiancompanies,allowingINStobookitasrevenue.WallStreetappearstotakeINS’smanagementatitsword,mindlesslyextrapolatingcontinuedhyper-growthwithoutquestioningwherethisgrowthisactuallycomingfrom.ANoteonAurelius NotableshortpublishingoutfitAureliusValuehasrecentlypublishedadamningreportonINSthatweinvitereaderstoviewhere.OurreportincludesminimaloverlapwithAurelius’sresearch.WebelievethatourfindingsofundisclosedrelatedpartytransactionsfurthercorroboratethepresenceofsignificantwrongdoingonINS’spart.WenotethatnoneoftheundisclosedrelatedpartytransactionsthatwedetailinthisreportarealsodiscussedintheAureliusreport.

WebelieveAureliusdidagreatjobelaboratingonhowthesupposedrecentApple/Goldmanrelationshipismostlikelynotgoingtoresultinenormousprofits,asinvestorsseemtoexpect.WealsoconcurthatINShasinvestedwaytoolittleinthedevelopmentoftheirtechnologytogiveitanykindofdifferentiatedadvantageinthemarketplace.Forthesakeofnotboringthereader,wereferyoutoAurelius’reportandwillnotcommentontheseissuesfurtherinthisreport.

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INS–SchemeorStar?IntelligentSystemsCorporation(INS)marketsandsellsCoreCard,apayments

processingtechnology.Threequartersago,INS’srevenuesandEBITDAsuddenlystartedskyrocketing.WhereaspreviouslyINSwasasolidlyunprofitablebusinesswithminimalgrowth,suddenlyrevenuesweregrowingovertriple-digitsYOYandprofitsswungfromnegativeto30%+EBITmargins.

Managementattributedthechangetosuddennewdemandfortheirproducts,somuchsothattheyhadtostartrejectingnewcustomerordersastoaccommodatethenewfounddemand.Thispick-upingrowthcausedINS’ssharepricetooverquintupleyear-to-date.

Amazingly,thelastthreequarters’growthimplynearly100%contributionmarginfromwhatevergreatnewcustomersINShaspickedup.

Anextraordinarybusinessindeed. We,however,seeadifferentnarrative.WebelievethatINShasachieveditsextraordinarygrowththroughnot-so-extraordinarymethods.Specifically,webelievethatINSisengaginginseveralundisclosedrelatedpartytransactionsbetweenitselfanditsemployeesinIndia.Thesetransactionsarematerialinnature,andsomeofthemstrangelycoincidewithINS’ssuddenjumpinfinancialperformancebeginning2018.

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CuriousInvestmentsinAnIndianFinTechCompany

INS’sextraordinaryfinancialandsharepriceperformancestartedatthebeginningof2018.Coincidentally,thiscoincidedwiththetimethatINSmadeacurious-soundinginvestmentintoanIndianFinTechstartup:

Source:INS201710-Kfiled3/15/18

Asyoucansee,INSloaned$235,000(withanoptionforanadditional$200,000)throughaconditionalconvertiblenotetoanIndianFinTechstartup,thenonemonthlatersignedaprocessingagreementwiththatsamestartupforCoreCardtoperformservicesforthem. Notethelackofanysignificantdetailregardingthecompanyinquestion.Forexample,whatisthestartup’sname?WhatdoesINShopetogetoutoftheinvestment(5%isanincrediblylowinterestratefortherisksassociatedwithastartup)?FindingFlexopt Ourresearchshowsthatthis“investment’s”nameisFlexoptTechnology,astartupwhichrunsthewebsitehttp://www.payopt.in,specializinginconsumercredit.InFlexopt’sfinancialstatementsfiledwiththeIndianMinistryofCorporateAffairs,weseeCoreCard’sinitial$235,000investmentclearly:

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Source:FlexoptFY2017(ended3/31/18)FinancialStatements.NoteUSD/INRexchangeratewas$0.016/INR1at3/31/18,makingtheaboveINR15,000,000loan~$240,000,whichmatchesINS’sdescriptioninitsFY1710-K.

FlexoptwasinitiallyregisteredinApril2017,just8monthsbeforetheaboveinvestmenttookplace.INS’snoteinits10-KalsostatesthatFlexoptsubsequentlyenteredintoaprocessingagreementwithCoreCard(remember,INSownsCoreCard),foranunspecifieddollarvalue.Flexopt’sfinancialstatementsgiveahintastothevalueoftheprocessingagreement.Inanappendix,Flexoptgivesalistofitsexistingaccountspayablescomposition:

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Source:FlexoptFY2017(ended3/31/18)FinancialStatements.

Focusontheredfornowbutwe’llcomebacktoNewVision(green)later. TheINR2,345,606balancetoCoreCardhererepresents~$35,000inpayablestoCoreCard-nottoomuchcomparedtoINS’s$10millioninrevenuesand$3millionexistingreceivablesbalance. However,wenotethatthisisjustFlexopt’spayablesbalancetoCoreCard,notitstotalpurchasesfromCoreCardfortheperiod.Totalpaymentsarethereforelikelyhigherthan$35,000.Further,thesetransactionsalloccurredinthelessthantwo-monthperiodbetweenwhenFlexoptsignedaprocessingagreementwithCoreCardon2/5/18andFlexopt’syear-endof3/31/18.Annualizingjustthe$35,000paymentthereforeyieldsalmost$250,000,evenlargerthanINS’sinitialloantoFlexopt,andfairlymaterialtoINS,whichatthetimewaslosing~$500,000peryear. Remember,noneofthiswasdisclosedbyINS.InINS’sfinancialstatementsitsimplystatesthatINSmadeaninvestmentintoanIndianFinTechstartup,andsubsequentlyenteredintoaprocessingagreementwiththestartup.DiggingIntotheFinancials

Flexopthardlyconstitutesabusiness,withbasically$0inrevenueandissimplyusingCoreCard’sownloantopayforCoreCard’sservices(seeFlexopt’syear-endincomestatementbelow):

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Source:FlexoptFY2017(ended3/31/18)FinancialStatements.

ThissuggeststhatFlexoptisessentiallyjustround-trippingthecashfromINS’sloanrightbacktoINSthroughtheprocessingagreement.Iftrue,hiswouldobviouslymeanthattheloanandthesubsequentprocessingagreementbothlackeconomicsubstance. WebelievethatthisisFlexopt’sentirebusiness.Thecompany,optically,appearstobestartingtorampuprevenues(seetheINR67,699inrevenuesabove),buttheentiretyofthisrevenuewasfromarelatedpartyNewVisionSoftcomConsultancy(moreonNewVisionlater).

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BelowisNewVisiondescribingitsrelatedpartytransactions:

Source:NewVisionFY2017(ended3/31/18)FinancialStatements.

Asyoucansee,NewVisionsoldlargeamountsofservicestoFlexopt,withverylittlehappeningtheotherwayaround(thatbeingtheINR67,699thatrepresented100%ofFlexopt’srevenues).BecauseNewVisionisarelatedparty,wedonotbelievethattheserevenuestoFlexoptactuallyrepresenttrueeconomictransactions.ThismakesusbelievethatFlexoptisstillanon-viablestartupbusinessincapableofgeneratingrevenuesasastandaloneentity.

FlexoptwasFoundedbyanINSEmployee Andnowforthekicker–FlexoptwasfoundedbyanINSemployee:themanagingdirectoroftheirIndiasubsidiary,ISCSoftwarePrivateLimited,AnupamPathak. It’sveryclearthatPathakiscurrentlyinvolvedwithFlexopt,whilealsobeingmanagingdirectoratISCSoftware.HereisalistofIndiancompaniesthatPathakhasadisclosedrelationshipwith:

Source:zaubacorp.com

WebelieveINSmaytrytoexplainawaythisrelationshipbystatingthatPathakisonlycurrentlyadirectoratFlexoptbecauseINSmadetheinvestmentintoFlexopt.Thiswouldopticallyappeartrue,asPathakwasonlyappointedtobeadirectoratFlexoptinOctober2017,ascomparedtoFlexopt’sincorporationandregistrationofitstwofoundersinApril2017.

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Presumably,INSwouldhavebeenintalkswithFlexoptatthispointaboutapossibleloan.Further,PathakiscurrentlylistedonPayopt’swebsiteasaboardmember,andnotafounder:

However,webelievethatINS/Flexoptaresimplytryingtocovertheirtrackshere.AslateasApril28th,2018,theWaybackMachinehasrecordedadifferent“leadershipteam”pageonPayopt’swebsite,listingPathakasthe“founder”(notboardmember)ofPayopt:

Source:WaybackMachine,website:http://www.payopt.in:80/leadership/

Thispagenowdoesnotexist.Payopt’swebsitewasupdatedatsomepointbetweenApril2018andpresenttochangePathak’slistedrole.Conveniently,backthen,itwouldhavebeenimpossibletodrawarelationshipbetweenPayoptandINS,asFlexopt’sfinancialstatementshadnotyetbeenfiledwiththeIndianMinistryofCorporateAffairs. It’sevidenttousthatsomeoneistryingtocoverupPathak’strueroleatFlexopt/Payopt.Thereasonislikelythat,hadPathakactuallybeenafounderofFlexopt/Payopt,ratherthanjoiningthecompanyasadirectorduetoaninvestment,INS’sloantoFlexoptwouldhaveconstitutedanundisclosedrelatedpartytransaction.

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INS’subsequentprocessingagreementwithFlexoptalsowouldhavebeenanundisclosedrelatedpartytransaction. ThistransactioncouldhavehadtheeffectofartificiallyboostingINS’srevenues,giventhatFlexoptissimplyround-trippingINS’sinvestmentintoFlexoptbacktoINSinthesubsequentprocessingagreement.ThiswouldallowINStobooktheprocessingagreementasrevenue,whilethecashoutflowfromtheinvestmentwouldbebookedasaninvestingoutflowonitscashflowstatement.Thistransactionwouldlackanyeconomicvalue. AnotherpossibilityisthatINS’semployeesareattemptingtosiphonmoneyfromINSthroughthesetransactions.INS’sinvestmentintoFlexoptwouldgiveFlexoptcapitaltothenredistributetoitsownersorotherrelatedparties.NotefortheReader

Forsakeofkeepinganoverviewoftheconvolutedrelationshipweb,wecreatedarelationshipmapforreaderswhichcanbefoundintheAppendixattheendofthisreport.

WhatisNewVision? FlexoptisalsorelatedtoINSinanotherway:acompanycalledNewVisionSoftcomandConsultancyPrivateLimited.ISCSoftware(INS’sIndiasub)hastwolisteddirectors:AnupamPathak(above)andNeetiPathak.NeetiisalsoadirectoratacompanycalledNewVisionSoftcomandConsultancy:

Source:zaubacorp.com AttentiveinvestorswillnotethatNewVisionwastheothermajorlistedaccountspayablesvendorforFlexopt(shownagainbelow).

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Source:FlexoptFY2017(ended3/31/18)FinancialStatements.

Letusbeclear–thismeansthatFlexopt(whichhaszerothird-partyrevenuestofund

itsexpenses)tookINS’sloanandthenusedtoitpayforservicesfromanothercompanyownedbyINS’semployee.ThisfurthersupportsthethesisthattheserelatedpartytransactionsarepossiblyallowingINSemployeestosiphonoutmoneyfromINSitself.

BelowisNewVision’sdirectorslist:

Source:zaubacorp.com

AnothernoteworthyplayerhereisKapilGodani,becauseheisalsoafounderandcurrentpartownerofFlexopt:

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Source:zaubacorp.com

GodaniislistedinFlexopt’sincorporationdocumentsandactuallyowns50%ofthebusiness.HisrelationshipwithNeetigoesbackatleasttoJuly2016,giventhat’swhenhewasappointedasadirectorofNewVision.So,uponfoundingFlexoptinApril2017,heshouldhavebeenconsideredveryclosetoINS-almostarelatedparty.

Conclusion

IntheendweseedefinitiveevidenceofanINSemployee(AnupamPathak)andanotherINSbusinesspartner(KapilGodani)foundingastartup,takinganundisclosedrelatedpartyloanfromINS,thenusingthatloantopayforservicesfromINS,thusround-trippingthecashbackandallowingINStobookitasrevenuewithlikelyfewtonocorrespondingexpenses-allwhileINSdoesn’tsayawordtoinvestorsaboutwhat’sgoingon.FlexoptfurthertookINS’sloanandusedittopayforservicesfromanothercompany(NewVision)ownedbyanINSemployee.

Itdoesn’tgetmoreincestuousthanthat. Further,INSfrequentlyentersintoinvestmentagreementsakintoFlexopt’sstructure:INSwillloanadecentamountofmoneytoanunnamed“startup”,andsubsequentlyenterintoprocessingagreementswiththesesame“startups”.BoththenameofthestartupandtheamountofINS’sprocessingagreementusuallyarenotdisclosed.BecausemostofthesestartupsareAmericancompanies,wehavenotbeenabletothusfaridentifyanyotherloaned-topartiesbesidesFlexopt.However,thefactthatFlexoptwasanundisclosedrelatedpartybegsthequestion–whoaretheothercounterpartiestoINS’sstartuploans,andwhatisthenatureofthesubsequentprocessingagreements?

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EvenMoreUndisclosedRelatedPartyTransactions

ThestorydoesnotstopwithFlexopt.WebelievethattheremaybeawholesystemofIndian(andpossiblyAmerican)companiesownedoroperatedbyINSrelatedparties.TheirexactpurposeisnotclearbutwebelievethattheymayalsobeworkingtoartificiallyinflateINS’srevenuesthroughnon-arm’slengthtransactions. WehaveidentifiedtwoadditionalundisclosedrelatedpartytransactionsofunknownsizebetweenINSandadditionalrelatedforeignentities,fromthepublicresumesofsomeofINS’sIndianemployees.GlobeTeleservices–UndisclosedRelatedPartyTransaction#1

ThebelowisfromtheresumeofVinodOjha,whoseLinkedInidentifieshimasaSeniorSoftwareEngineeratCoreCard.

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Source:LinkedInofVinodOjha

HeliststheaboveasoneofhisprojectswhileatCoreCard.Notetheclient,GlobalTeleservicesPvt.Ltd.WehaveevidencethatthisisanotherrelatedpartytoINS.TheproducthehelpedmakewastheGlobeDialer,below:

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Source:iTunesAppStore Again,notethesamecompany,GlobeTeleservicesLimited.Thebelowscreenshotshowsthattheappwasmadein2015,whileOjhajoinedCoreCardasanemployeeinSeptember2014.ThisimpliesthatmakingtheappwasacontractbetweenGlobeTeleservicesandCoreCard.

Source:iTunesAppStore

ThisisanissuebecauseGlobeTeleservicesLimitedshouldbeconsideredarelatedpartytoINS.AnupamPathakisafoundingmemberofGlobeTeleservices:

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Source:GlobeTeleservicesCertificateofIncorporationfiledwiththeHongKongCompaniesRegistry

AnotherCoreCardemployee,GeraldPereira,wasalsosimultaneouslyworkingatGlobeTeleservices,NewVision,andCoreCard,upuntil2016,accordingtohisLinkedInbelow:

Source:GeraldPereiraLinkedIn

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AshutoshAgrawal,afoundingmemberofFlexopt,wasalsoafoundingmemberofGlobeTeleservices. WebelievethereisabsolutelynowaytorefutethefactthatGlobeTeleservicesisarelatedpartytoINS.AlthoughwedonotknowthevalueofCoreCard’sworkwithGlobeTeleservices(itlikelywasn’tmeaningful,consideringitwasjustdevelopmentofoneapp),thisdoesserveasanobviousundisclosedrelatedpartytransaction,andthefactthatINSagainhasmultipleemployeessimultaneouslyworkingatCoreCardandGlobe/NewVisionfurthersupportsourthesisthatINShasawebofundisclosedrelatedforeigncompaniesthatarecontributingtoitsfinancials.

Further,theverynatureofundisclosedrelatedpartytransactionsisthattheyarenon-arm’slength.Therefore,justbecausetheserviceprovidedwasnotlarge,thatdoesnotmeanthatthemoneypaidwasnecessarilysmall.WearefurtherunabletoassumethatthiswastheonlyrelatedpartytransactionbetweenCoreCardandGlobe.UniversalTestSolutions–UndisclosedRelatedPartyTransaction#2

Second,thebelowresumeofAjayKanhereshowsthatINShasengagedintransactionswithanotherundisclosedrelatedparty,UniversalTestSolutions:

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Source:AjayKanhereLinkedIn

Notethelastlinewhichmakesclearthat“CoreCardSoftwareisaclientofUTS-Global”.UTSisrelatedtoINSinthatAshutoshAgrawaliscurrentlysimultaneouslyahigh-levelemployeeatFlexopt(akaPayopt),GlobeTeleservices,andUniversalTestSolutions(UTS).

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Source:AshutoshAgrawalLinkedIn

Again,wecontinuetoseeevidenceofabroadwebofforeignrelatedparties/businessassociates,allsupportedbythesamegroupofindividualsandtransactingbetweenoneother.Again,wecanonlyspeculateastothepurposeofthisnetworkandthesetransactions. InUTS’scase,wedonotknowtheexactsizeornatureofthetransactionsbetweenUTSandINS.However,thesimplefactthatthereareundisclosedtransactionsbetweenthesetworelatedcompaniesshouldworryinvestors,giventhat,again,relatedpartytransactionscanpotentiallybefornonsensicalamounts.

StrangePresencesofCoreCardEmployees

AnupamiscertainlyveryactiveintheIndianFinTechspace.TherearetwocompaniesbesidesISCSoftwarethatusetheemailapathak@corecard.comastheirregisteredemailaddresses:GTSTelecomServicesandNamoMediaandCommunication.NeitherisdisclosedbyINS.Bothcompaniesappeartosimplybeshells,with<$1000inrevenueseachand~$40-50kindebt.Wequestionthepurposeofbothofthesecompanies. Evenfurther–GTSTelecomServicessporadicallylistsanothercorecard.comemailonitsfilings,lbattu@corecard.com:

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*Source:GTSTelecomServices(fkaAimTopCareerandEducation)FormADT-1dated2/9/15

ThiserasesanydoubtthatGTSisrelatedtoINS/CoreCard,seeingastwoCoreCardemployeeshaveregisteredemailaddressesatGTS.Althoughit’snot100%clearwho“lbattu”is,webelieveitisLokendraBattu(aCoreCardfinancemanager)below,obviouslyadifferentpersonthanAnupamPathak:

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OnecanonlywonderwhyINSwouldletthemanagingdirectoroftheirIndiansubsidiaryandafinancemanagerstartseveralshellcompaniesinIndia. Anditdoesn’tstopthere.GTSTelecomcurrentlyhasdeminimisfinancialoperations,sotherecan’tbetoomanyfaultytransactions(previously,before2015,GTShadfairlysubstantialrevenuesandearnings,butweareconcernedwithwhat’sgoingonnow). WeareconcernedthatGTS’sconnectionswithCoreCardarereplicatedbyamuchmoresubstantialoperation–NewVisionSoftcomConsultancy.

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Source:NewVisionFormADT-1filedwiththeIndianMinistryofCorporateAffairs Itseemslike“lbattu”ispresentatNewVisionaswell.RecallthatAnupam’swife,NeetiPathak,isadirectoratNewVision,andNewVisionhasbothsoldandboughtfromINS’undisclosedrelatedpartyinvestee,Flexopt. Thisisahugeinternalcontrolissue,allowingemployeestousecompanyemailaddressestostartthreeothercompanies.Incombinationwithwhatwesawbefore,withbothNeetiandGondaniworkingatNewVision,andNewVisiontransactingwithFlexopt,thisstartstopaintthepictureofabroadwebofinterrelatedpartiestransactingtogetherwithoutadequatedisclosure.Theopportunitytoround-tripcashbacktoINS,oreventosiphonoffcashforthemselves,becomesverypronounced. Further,alloftheseinterrelatedIndiancompaniesareauditedbythesameauditorandauditpartner:S.L.Chhajed&Co.withauditpartnerAbhayChhajed. Belowisachartoftherelationshipsbetweenalloftheabovecompaniesandpersons.

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Theserelationshipsandround-triptransactionswithundisclosedrelatedpartiesmakeusquestiontheaforementionedrapidYTDgrowthofINS’sbusiness.Forexample,itseemspeculiarthatINS’sfinancialresultsspikedimmediatelyaftermakinganinvestmentintoanundisclosedrelatedparty:

InvestmentinFlexopt

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Wecan’thelpbutthinksomethingfishyisgoingonhere,especiallygiventhelastthreequartersofrevenuegrowthsince2018hashadanearly100%contributionmargin.WethereforebelievethatthereisapossibilitythatallrevenuegrowthsinceJanuary2018hasbeenaresultofundisclosedround-triptransactionswithIndianrelatedparties.

FurtherRedFlags

INS’sauditorisatelltalegiveawayofpotentialmisdoing.Theirauditor’snameisNichols,Cauley&Associates,LLC.INSswitchedtoNicholsasanauditorin2015,aftertheirpreviousauditor,HabifArogeti&Wynne,LLP,resigned,citingthatINSwasits“onlyremainingpubliccompanyclient”.Nichols,similarly,alsodoesnotauditanyotherpubliccompanies(zeroformAPsbesidesINS’sfiledwiththePCAOB):

Wehaverarelyifeverseena>$200millionpubliccompanythatconsistentlyusessuchsmallauditors.INSalsopays<$100kperyeartoNichols. Further,INShasaveryquestionablefigureonitsboardofdirectors:ParkerH.Petit.

ManyinvestorshavelikelyheardofthemassivefraudallegationsatMiMedx(MDXG),acompanywhereParkerPetitwasformerlyCEO.Webelievethatthepresence(especiallythecontinuedpresence)ofPetitonINS’sboardofdirectorsisindicativeofpotentiallackofoversight/accountabilityfortop-management,andthatINS’sboardmaynotbeworkinginthebestinterestsofshareholders.PetithasbeenadirectorofINSsince1996.

MiMedxrecentlyfoundthroughanAuditCommittee’sinvestigationofallegedfraudthatPetit“madematerialmisstatementsandomissionstokeystakeholders,suchastheBoard,theCompany'sexternalauditors,andtheSecuritiesandExchangeCommission("SEC")”andthat“Atonepoint,Mr.PetitfalselytestifiedunderoathduringadepositionwhendiscussingtheCompany'slargestdistributor”.

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AureliusValue’sreportdiscussesINS’srelationshipwithitsauditorinmuchmoredetail,includingpersonaltiesbetweenINSCEOLelandStrangeandauditpartnerIanWaller.ItalsotouchesuponanotherundisclosedrelatedpartytransactionbetweenINS,Strange,andastartupLumense.Again,weencouragereaderstopersonallyreadtheentiretyofAurelius’sreport.

Conclusion

WehavelaidoutinthisreportwhywebelievethatINSispartakinginsignificantundisclosedrelatedpartytransactions.ThesetransactionscouldservetoartificiallyinflateINS’srevenuesbyround-trippingcashfromINSthroughshellsbacktoitself.Thereisalsopossibilitythatinthemiddle,INS’semployeessiphonoutmoneyfromINSforthemselves.

ThefactthatINSseemstohavemadeaconsciousefforttohidethattheinvestmentinFlexoptisarelatedpartytransactionworriesusdeeply.Two-waytransactions,wherethecompanyinvestsorlendstoabuyerofservicesareoftencomplicatedandleaveroomformanipulation.Two-waytransactionswithundisclosedrelatedpartiesarethebiggestredflagwecanthinkof. WebelievethatINS’scommonstockisuninvestable,giventhatthesesignificantandmaterialrelatedpartytransactionsinourviewcastdoubtontotheintegrityofINS’sfinancialstatements.

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Appendix:INSRelationshipMap

Legend: Individual

Company

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Explanationonrelationships:1)AnupamPathakismanagingdirectorofINS’Indiasubsidiary,ISCSoftwarePvt.Ltd.

2)NeetiPathakisAnupam’swifeandalsoadirectoratISCSoftware

3)LokendraBattuisaFinance&AccountingManageratINS’ssubsidiaryCoreCard

4)AnupamPathakisadirectorandfounderofFlexoptTechnologyPrivateLtd.,whichalso

operatesunderthenamePayopt.INSseemstohavemadeaconcentratedefforttohidethe

factthatPathakisalsoafounderofFlexopt.

5)INSfundedFlexoptthroughaconvertiblenote.ConsequentiallyFlexoptboughtservices

fromINS.WhileINSmakesmentionofthistransactionitfailstomentiontherelatedparty

natureofthetransaction.

6)NeetiPathakisalsoadirectorNewVisionSoftcomandConsultancyPrivateLtd.

7)GlobeTeleservicesboughtservicesfromCoreCard

8)UTSboughtservicesfromCoreCard

9)LokendraBattushowsupwithhisCoreCardemailaddressasarepresentativeofUniversal

TestSolutionsLLC(UTS).

10)AnupamPathakisadirectoratGlobeTeleservices.

11)AshutoshAgrawalisafounderofFlexopt.

12)KapilGodaniisafounderandcurrentpartneratFlexopt.

13)FlexoptboughtservicesfromNewVision,andperformedminorservicesforNewVision.

14)KapilGodaniisadirectorofNewVision

15)AshutoshAgrawalisafounderofGlobeTeleservices.

16)AshutoshAgrawalisapartneratUTS.