writeup done for INS

1. INS write up (by Dennis)
Curr EV/Tot Revenue (LFI/LTM): 9.38
Curr EV/EBITDA (LFI/LTM): 25.13
Curr EV/EBIT (LFI/LTM): 27.24
Curr Ratio: 5.32
LT Debt/Tot Eqty: 2.39
LT Debt/Tot Assets: 1.97
Thesis:
INS is a fintech company that operates primarily through Corecard. CoreCard is an issuer-
processor. The main system’s capabilities are system of record for any type of account, and
transaction processing. A host of features goes along with these capabilities including ability
to process prepaid/debit/credit/loans and the market features that go along with those types of
card or account programs. The goal at CoreCard is to establish themselves as a world class
processor for all types of funding, including loans, debit, prepaid, and any kind of advanced
funds movement. Recently, it was chosen by Goldman Sachs to help handle payment for the
Apple Card which led the stock price to appreciate significantly. INS is now trading at EV/rev
of ~10x and EV/EBITDA of ~27x which isn’t exactly cheap. There is another notable risk
other than it’s high valuation, which is regarding the short’s allegations from 2 separate short
reports published recently which caused the stock to plummet from over $40/share to the mid
$20/share. Pomerantz Law Firm has began its Investigation on Intelligent Systems Corporation.
I will go into more details about the allegations later in the write up. However, given my
understanding of the company, I believe that INS is a good bet at current prices (thanks to the
allegations) as long as it is not fraudulent.
Date of publish: 12 June 2019

2. The transaction cycle and where does INS fit in (you can skip this if you’re aware of how
it works)
(source: BancardSales from youtube)
To understand where does Corecard fit in the transaction cycle, one must first understand the
transaction cycle. For more a more detailed explanation on the transaction cycle, you can click
here.
It is quite difficult to pin Corecard’s business model down as that it is categorized as a issuer-
processor rather a typical payment processor. To put it simply, Corecard sells account
management licenses but then also acts as a full-service processor if the acquirer wants to
outsource that. The company at it’s core, sells software. The CEO has also stated in multiple
occasions that their aim is to become a world class processor, thus it wants to devote less
resources to the licensing segment (however reality differs from them due to some special
circumstances).
The CEO gave a very good explanation of what they do during the 2018 Q3 Conference call
“CoreCard has developed a parameter driven, real time financial transaction processing
software that's very flexible and easily customizable into a variety of products. In simple terms,
it maintains the relationships between an account. An account can be a person, a company, a
vehicle or any number of things – and, with a currency. And the currency can be dollars,
rewards, gallons of gasoline or any number of things. So that software is generally productized
most often around what's commonly called a card management system or an account
management system that provides account personalization and lifecycle management of a
credit account. It is a robust, financial transaction engine that could be used in many ways and
for many purposes. And it can have very complex programs, which are sometimes called
schemes and complex terms. Ways to handle credit that have not even been dreamed up – or
some people would say dreamt up – can be parameterized on the system. We take this robust,
Realtime financial transaction processing software and productize it. A majority of our
revenue that was generated this quarter and also this year came from customers who have
licensed our issuer processor system that we call CoreIssue. So that's a product, an issuer
processor system. It's a software system that a bank or a program manager of a bank uses to
issue a prepaid or credit card to a consumer or to a business.”

3. Business overview
The company derives its revenue from a few sources, but can be broadly categorized into
product revenue and service revenue
1. Product revenue
Product revenue consists of fees from software licenses. This is a high margins segment,
however, it is not really scalable and management has stated that they are trying to
minimize on licensing activity. This is because licensed customers take a lot of resources,
even though they pay per hour for the resources. They also affect the company’s ability to
scale because they often ask the company to do things that are unique to their own corporate
goal. This is also not aligned with the company’s ultimate goal, which is to become a world
class processor. The Goldman deal comes under this segment, and the problem with
scalability is apparent because the CEO said they had to decline new business. It is obvious
that the business isn't easily scalable and that's why they outsource the professional services
overseas to reduce costs.
Regarding licensing, the CEO has this to say during the 2017 Q4 conference call “we don't
plan on using our resources to build up that side of the business. We’d rather focus on
processing where we can scale and not requires many personnel resources dedicated to one
customer’s custom software.”
2. Service revenue
Service revenue consists of fees for processing services; professional services for software
customization, consulting, and training; reimbursable expenses; and software
maintenance and customer support. The CEO explains it this way "We receive license
revenue primarily when our customers achieve new account tiers. We then charge annual
maintenance to our license customers, which is reflected in our processing and maintenance
revenue line, and maintenance revenue increases when new license tiers are achieved.”
Revenue could also broken down in this way
i. license fees à there's very little current cost, so these are very high margin. The
license fee, it varies with volume, meaning number of accounts.
ii. Maintenance and support for licensees à This is recurring and is based on the
amount of the license fee.
iii. Processing services à paid per account per month.
iv. Professional services à Not technically recurring, but is repeating, and it's a big
chunk of the business.
v. Managed services à sometimes they monitor or actually run other customer's
operations.
Unique offering
The most interesting thing about this company is that they spend close to nothing on sales and
marketing and yet Goldman chose them. The CEO has said multiple times that people come to
them and not the other way around. Here are his exact words. “Companies that can’t find us
are probably clueless, and we want to work with other smart, innovative, resourceful partners
that want the best, which is all we want to deliver. So if you can’t find us, you’re probably not
a good prospect and we don’t need to be knocking on your doors."

4. What makes Corecard special
What makes Corecard special is that its processing software is very versatile and the level of
complexity that it can operate at. It can be used for basically anything: credit cards, debit cards,
virtual cards, prepaid cards, loyalty cards, loans, stock trading, insurance, etc. You can find the
solutions that it provides below. To understand the full scope of complexity that Corecard could
operate at, I urge you to read the Bass Pro Shop analogy the CEO gave during the 2018 Q4 CC.
Prepaid card: https://www.corecard.com/PDFs/Prepaid%20Cards.pdf
Private label: https://www.corecard.com/PDFs/Private%20Label.pdf
Fleet cards label: https://www.corecard.com/PDFs/Fleet%20Cards.pdf
The Tech behind Corecard
From the 2018 Q1 Conference call, the CEO stated that: “If you look at some of our
competition, I consider TSYS, First Data, FiServe and FIS to be our primary competition in
the credit space. They each have spent hundreds of millions over many, many years on
mainframe software and they each help fine and mature software. But most of them have many
different internal platforms that operate around the world as a result of the legacy build up and
their acquisitions of platform. We have spent less than $50 million, although we did start from
a good base using the PaySYS international COBOL code, with permission, after we sold
PaySYS to First Data, approximately 15 years ago. So we have one platform that could work
anywhere in the world. This is a big deal for a company operating in many markets around the
world.”
One of the main reasons why Corecard is able to achieve this is due to it functioning on a single
code base. I asked 2 computer science friends of mine (one a PhD and another a degree holder)
about the benefits of a single code base vs multiple code base. I’ve included our discussion on
the last page of the write up.
Conversation with CFO
I also reached out to the CFO, Mr Matt White to understand what makes Corecard unique in
the industry. Below are the questions that I asked and his answers to them.
Question:
I did some research on my own but I find it hard to understand the technical aspects of
what make corecard superior to other payment processing companies. The features that
I found which might be the reason why Corecard is superior are :
i. Corecard was built on a single codebase which makes it easier for integration,
ii. it allows for real time authorisation & real time processing of transaction,
iii. lastly it allows for parameterisation which allows for quick configuration.
CFO’s Ans:
We believe all of those make the system unique together, but acknowledge that
other systems may have some of the same aspects. In addition the CoreENGINE
base platform was made to give application developers a fast (time to market) to
create new functionality and easily integrate with any type of front end systems.

5. Question:
Can you give me a list of potential competitors that could potentially compete with
corecard for business? If possible, can you also include what the pros and cons of their
payment processes in comparison to Corecard?
CFO’s Ans:
First Data – mainframe technology, slow to integrate new business or make
functional changes, very established/scaled systems
Total Systems - mainframe technology, slow to integrate new business or make
functional changes, won’t take new programs less than 500K accounts, very
established/scaled systems
I2C – newer processor, credit system is unproven and shaky.
Galileo – prepaid mostly, doesn’t have revolving credit system of record
Marqeta – Prepaid mostly, doesn’t have revolving credit system of record
Transitioning from licensing to processing & the Goldman deal
A central part of the thesis is whether INS is able to transition away from the labor intensive
licensing business to its processing business. Though I don’t agree with the shorts fully, they
probably got this part right.
“Our research leads us to believe that Goldman selected CoreCard because Goldman wanted
to build a customized system to conduct processing in-house and that large processors such as
First Data are less than eager to assist with this kind of work, creating an opportunity for
CoreCard. Strange wrote in his 2019 investor letter that “truth be told, we got ‘lucky’ when a
big opportunity arose that CoreCard was uniquely positioned to handle”. We note that Goldman
lifted out the team from Final, Inc. in 2018, this was a private card venture that INS owned a
minority stake in, a deal we speculate got CoreCard in the door at Goldman”
There is an obvious disconnect between what INS is trying to do in the long term and the
landing of the Goldman deal which would add to it’s licensing revenue. I do think that there is
a bit of misdirection going on here because the deal with Goldman has obscured what they are
trying to do with the processing segment which gave the shorts a chance to argue that they are
misleading the investors. This is a very strange and unique situation.
Honestly, my personal opinion is that Goldman is too big a fish to miss eventhough the
company wants to transit to processing. Landing the Goldman deal has several intangible
implications that might not be obvious at first (other than the obvious increase in revenue).
i. Credibility. Landing a big fish such as Goldman and Apple gives a small company
like INS lots of credibility and exposure internationally. Numerous business articles
have been written up on INS as a result. It is also a stamp of approval to the Corecard
technology.
ii. Building relationship. I believe that the CEO is intent on forming a good
relationship with Goldman on the basis that it could lead to new developments in
the future. From 2018 Q2 CC “We have had situations where we have worked with
someone and then it ended and then three years later, they come back, and we ended
up in a relationship” I believe that the CEO sees value in this relationship because
it could lead to other potential partnerships in the future

6. What I want to see going forward from now on is how is the management team going to execute
on it’s promise of moving to processing instead of licensing. I believe that the CEO saw a huge
potential in the Goldman deal which is why they accepted it despite it not being part of their
long term goal. As he stated “We are in this business for longterm, and we'll sacrifice shortterm
revenue if necessary to protect the enterprise for the long term, as we build economies to
compete with the big four processors.”
Red flag with the goldman deal
I feel that one thing that hasn’t been discussed enough is how much revenue is the Goldman
deal is actually going to add to their top line and bottom line. While nobody knows the precise
answer, the CEO gave a good idea of what we could expect during the 2018 Q2 CC:
“If you’re talking about the bigger one – contracts in this business are very misleading, meaning
that, they can forever, forever add additional license tiers, meaning, increase the number of
licenses that they want. They’re buying a perpetual license. So there is no end date to that, but
there’s also no recurring revenue from licensing unless they do add tiers. In terms of
maintenance and support, typically those contracts are for five years. That’s the maintenance
and support. During that time, there’s also typically a large amount of professional services as
they want to change their programs.”

7. Short thesis and fraud risks
I spent the most amount of time researching on the short allegations to find out how credible
the sources are my conclusion is that they are not too credible, but be sure to read the content
below before drawing your own conclusion.
1. Aurelius Value
Aurelius value made several assertions regarding INS. To summarise some of the points
that Aurelius made:
i. INS is connected to Parker Petit, who orchestrated a giant fraud at MiMedx that has
cost investors over $1.5 Billion in losses. The filing on the investigation is here.
ii. Scalability of the company is doubtful
iii. Nobody knows how much the Goldman deal is likely to add to INS’s top line
Aurelius Value’s short thesis:
http://aureliusvalue.com/research/ins-a-wolf-in-petes-clothing/
Why Aurelius value’s short thesis is likely not credible
i. Curious intentions
From Aurelius value’s website, the first thing that jumps out at you is their terms of service
which made it clear that Aurelius value stands to profit from this if the short thesis managed
to cause mass panic (which it did).
Aurelius value’s terms of service:
“You should assume that as of the publication date of his reports and research,
Aurelius and possibly any companies affiliated with him and their members, partners,
employees, consultants, clients and/or investors (the “Aurelius Affiliates”) have a
short position in all stocks (and/or options, swaps, and other derivatives related to the
stock) and bonds of companies covered in such reports and research. They therefore
stand to realize significant gains in the event that the prices of either equity or debt
securities of the subject companies decline.”
ii. Facts vs fiction
The Calculated Investor on seeking alpha made a detailed list of rebuttals to the short
allegations that Aurelius made, unfortunately, it is too long to include in this write up. You
can download it here if you are interested. All credits go to him.
iii. History of stock price manipulation
I’ve also asked around my investor friends who have invested in companies affected by the
same shorts that made those claims on INS. I’ve included his reply below when I asked
about the credibility of Aurelius Value. I believe that he gave a good explanation of how
these shorts function. However, as he is also long on INS, he might be biased in his
assessment.

8. 2. Grizzly research
For Grizzly research, most of their allegations involved suspicious related party
transactions and round tripping, and since I am not an accounting expert, I believe that I
am not qualified to comment. Below is Grizzly research’s main allegation:
“In the end we see definitive evidence of an INS employee (Anupam Pathak) and another
INS business partner (Kapil Godani) founding a startup, taking an undisclosed related party
loan from INS, then using that loan to pay for services from INS, thus round-tripping the
cash back and allowing INS to book it as revenue with likely few to no corresponding
expenses – all while INS doesn’t say a word to investors about what’s going on. Flexopt
further took INS’s loan and used it to pay for services from another company (New Vision)
owned by an INS employee.”
Grizzly Research’s short thesis:
https://grizzlyreports.com/wp-content/uploads/2019/05/INS.pdf
Why Grizzly research’s short thesis is likely not credible:
i. Lack of credibility
Note that this is Grizzly research’s first ever report, so from that standpoint, it does not
have much credibility in spotting. However, I believe that one should at least read the report
once before deciding for yourself.

9. ii. Lack of factual accuracy (according to INS management)
INS has also responded to the allegations stating that there were factual errors, incomplete
information and erroneous conclusions that are rebutted by their public filings and other
publicly available information.
To the allegation that one of INS’ employee set up undisclosed shell companies in asia and
partake in undisclosed related party transactions and round tripping it back to INS or siphon
money out of the company, INS responded by saying that it has never had an employee set
up undisclosed companies on behalf of INS.
Click here to read INS’s response to both Aurelius and grizzly.
My final take on this
The recently initiated investigation by Pomerantz Law Firm is likely to dispel a lot of suspicion
that the market has regarding the stock right now. Of course, this will be a binary event given
that it’s either a fraudulent company or is isn’t. On the same note, It is either going to 0, or is
likely to be a multi-bagger sometime in the near future. Regarding this, I don’t believe that I
can give a qualified opinion on the subject as an outsider who do not have all the information.
However, personally I am leaning towards the company as I believe that the CEO is a straight
shooter and a person of integrity. If you read the conference call transcripts, you will see that
many long term shareholders would agree with me on that.
Interestingly, both short reports did not attack the CEO, and Aurelius value even praised him
for not taking part in the stock promotion. Another point that I find interesting is that both
shorts did not mention much about the technology behind Corecard, instead alleging that just
because it spent less R&D than other processor, it must be bad. Coincidentally, the CEO
already addressed this point during the 2018 Q1 conference call: “If you look at some of our
competition, I consider TSYS, First Data, FiServe and FIS to be our primary competition in
the credit space. They each have spent hundreds of millions over many, many years on
mainframe software and they each help fine and mature software… We have spent less than
$50 million, although we did start from a good base using the PaySYS international COBOL
code, with permission” This goes to show how easily facts like this could be easily manipulated
or misrepresented depending on which side of the fence you’re on.
Also, it is clear to me that INS is likely to distance themselves from Mr Park Petit in the near
future because when I asked the CFO about any plans to distance themselves from the him. He
quoted the recent Conference call.
“With the Intelligent Systems now much higher valuation and our decision to concentrate
on Fintech with the CoreCard business, we are highly likely to both increase the board
size and restructure board personnel to focus on directors who can bring that type of
expertise and relationships to the company.”
My final point is that, given that the Goldman is involved (and we all know that those guys
don’t like to take chances) and that the apple card is a big deal even for Goldman, I am pretty
sure that they have done their due diligence (at least on the tech side) to make sure that INS is
able to live up to what it says it does. Goldman’s bet on INS is a pretty risky one given that
they could have gone to other more established films, but they chose INS, which is really saying
something.

10. Valuation (price target)
Given the growth profile of this company, adding that to the CEO’s reluctance to give
projections and the lumpy nature of it’s licensing business. Any form of projections that I give
are likely to be highly inaccurate. Nonetheless, it is still a useful exercise to at least try valuing
the company.
Base case:
For the base case, I am using the comment that the CEO gave during the 2018 Q4 CC “I believe
I said in mid 2018 that the company should be able to grow top and operating profit lines by at
least an average of 25% per year over a four to five year period. I am still pretty comfortable
with that statement.” Given the conservative nature of the CEO, we can almost be sure that 25%
growth is likely an understatement, but it is the only proxy that we have for the moment.
Assumptions:
Revenue growth at 25% per year
EBIT margin increases at 2% per year
Cash stays constant at $18,919,000
Multiples stay constant. EV/Tot Revenue at 10 and EV/EBIT at 29.
No dilution occurs
FY2022E FY2021E FY2020E FY2019E
FY2018
(historical)
total net
revenue 49072 39258 31406 25125 20100
EBIT margin 38.6% 36.6% 34.6% 32.6% 30.6%
EBIT 18921 14352 10853 8180 6142
EV/EBIT 29.22 29.22 29.22 29.22 29.22
cash 18919 18919 18919 18919 18919
market cap 533949652 400433656 298209313 220100600 160550240
shares
outstanding 8851000 8851000 8851000 8851000 8851000
share price 60.33 45.24 33.69 24.87 18.14
EV/Rev 10.07 10.07 10.07 10.07 10.07
cash 18919 18919 18919 18919 18919
market cap 475238715 376407172 297341938 234089750 183488000
shares
outstanding 8851000 8851000 8851000 8851000 8851000
share price 53.69 42.53 33.59 26.45 20.73
So the company could be worth between $53/share to $60/share in FY 2022E, according to
conservative estimates.

11. Blue Sky:
In the event that INS really manage to become a world class processor, which it is certainly on
the trajectory to becoming one, it would be worth billions. As a comparison, I listed the market
cap of the companies that the company has deemed to be worth class processors. If the company
continues to execute for the next few years, we might be seeing the birth of a new billion dollar
company.
company name market cap
first data 25.16B
Fiserv 35.18B
total systems 22.57B
Downside case:
I can’t see a scenario where this company does not grow, but in the event that it turns out to be
fraudulent, then it’s likely to be rerated or even go to 0.
Catalyst
i. Fraud allegation is dispelled
ii. Recognition of Goldman’s contract (which might also be a downside depending on
how much it is).
iii. Acquired by strategic buyer such as Goldman. To find out more, you can read
Gregory Vousvounis’s article on this subject.
iv. Scaling of the processing business segment and/or licensing business segment.
Conclusion
As with most stocks in the microcap world, once a company shows great promise and the
general public is made aware of it, Euphoria sets in and the stock tend to skyrocket. At its 52
week high of $48/share, INS is probably not a good bet as it would require perfect execution
to live up to the market’s expectations. However, thanks to the short reports that brought it
down to its mid 20s, the built in expectations isn’t as high and as such, the risk to reward is
now much more favourable as compared to a few weeks ago, provided that there is no
fraudulent activity actually going on.
My take is that INS has a great management team, is probably not fraudulent and probably has
the tech to achieve what they claim to be able to do. Landing Goldman as a client for it’s
licensing business segment is a strange deviation from it’s aim of focusing more on the
processing business segment, but it does have it’s benefits. Going forward, I would like to see
INS landing more clients in its processing segment rather than licensing segment. The most
important thing is that this company has the option to choose which business segment it wants
to focus on because both are oversubscribed and that’s a good problem to have in my opinion
because it means either way, it is likely to grow.
Feel free to private message me or email me at dennisinvesting@gmail.com if you have
any questions regarding this company. I’ll try my best to answer them when I’m free

12. Discussion on single code base and multiple code base
Single code base
While I am unable to comment on how Corecard & CoreIssue is able to process complex real
time financial transactions and also parameterise them. I’ve identified one reason which I
believe is one of the reasons as to why Corecard has been able to achieve the “one platform
that could work anywhere in the world” system. It is because Corecard functions on a single
codebase. The system may be divided into smaller applications, but when they are deployed
all of the applications remain on the single code base. I believe that this is not common practice
in the industry and the benefits are that it increases flexibility as companies no longer have to
integrate multiple software products to obtain a complete card management system.
Single code base vs multiple code base explained
A codebase is a simply a collection of source code used to build a particular software system,
application, or software component. A single (monolithic) codebase or repository simplifies
integration because changes to different components or refactoring of code between
components can be done easily and atomically. This allows operations across the entire
codebase. A separate codebase or a distributed codebase keeps individual repositories smaller
and more manageable, enforcing at the same time separation between components, but it also
requires integration between codebases (or with the main repository), and complicates changes
that span multiple codebases.
To learn more about the advantages of a single codebase, you can click here to read this case
study from Google.
Why sustainable is this moat?
The next reasonable question to ask after understanding the difference between single code
base and multiple code base is whether is is a sustainable competitive advantage. For this, I
asked 2 of my friends to comment on it, one is a PhD in computer science, and another has a
degree in computer science. However, note that they are both not specialized in payment
processing.
1. Friend with computer science degree:
Qn: Can other payment processor can achieve the same thing as Corecard by switching
their codebase from single to multiple?
Ans: It’s achievable only if the company willing to take the risk to revamp their
codebase from multiple to single codebase. This might introduce a lot bugs, etc.
Requires a lot of resource.
Qn: So is INS superior to other payment processing company because it is single code
base?
Ans: I not really sure about it. Haven’t got time to do analysis. But from what I’ve read
(on the surface) seems to be much promising than other payment processing companies

13. 2. Friend with PhD in computer science:
Qn: Can other payment processor can achieve the same thing as Corecard by switching
their codebase from single to multiple?
Ans: I think that while possible, this might slow down a company. Usually a fast
moving company will just adopt the technology that can do the job in the fastest way.
But on the other hand, the legacy build up is also real. Tech firms usually have dev ops
that are doing migration all the time. If the dev guys are good, changing codebase every
now and then is something that we all accept as part of our job, we hate it, but we do it
because its necessary. So I think agile companies has no such worries
In other words, to quote another one of my friend who happens to be part of the conversation
with the PhD friend. “Whether this is a good competitive advantage will depend on how inept
Corecard's competitors are. But if the stasis at multiple code basis has been around for a long
time, then it shows the ineptness is quite strong, and hence, a good advantage for Corecard”

14. Any forward-looking opinions, assumptions, assessments, or similar statements
constitute only subjective views. This information should not be relied on for investment
decisions and is subject to change due many factors, including fluctuating market
conditions and economic factors. Such Statements involve inherent risks, many of which
cannot be predicted or quantified and are beyond our control. Future evidence and actual
results could differ materially from those set forth in, contemplated by, or underlying
these Statements, which are subject to change without notice. In light of the foregoing,
there can be no assurance and no representation is given that these Statements are now,
or will prove to be, accurate or complete. We undertake no responsibility or obligation to
revise or update such Statements.