{ "docId": "019dd923-622c-750b-8b96-a068dbd6ba32", "docSlug": "7b9732353f21", "documentTitle": "OSI Systems, Inc. (OSIS)", "authorId": "51_Muddy_Waters", "authorName": "Carson C. Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2018-01-31 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 3, "pageCount": 5, "prevPage": 2, "nextPage": 4, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 12, "notes": "This is a research note page focusing on forensic accounting and investigative analysis of corporate disclosures.", "elementsJson": [ "paragraph", "bullet_list", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-a068dbd6ba32/3", "deckHref": "/decks/019dd923-622c-750b-8b96-a068dbd6ba32", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-a068dbd6ba32.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-a068dbd6ba32#slide-3", "components": [ { "bbox": null, "kind": "callout", "text": "OSIS appears to have taken pains to keep its “partnership” hidden from investors. We see this as affirmation that the relationship is a conduit for corruption.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-0f20-71ed-bddd-be404b1c8ff5", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.78, "x": 0.11, "y": 0.29 }, "kind": "list", "text": "We see no financial contribution from ICMS to S2 Albania. S2 Albania’s December 31, 2015 liabilities confirm that substantially all of S2 Albania’s capitalization came from OSIS. The financials show US$11.7 million in payables to OSIS. (Note that S2 Albania had negative shareholders’ equity of US$-1.1 million.)", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "4c99c243-e43e-40e4-bbd1-58b4aae02a8c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.13, "w": 0.78, "x": 0.11, "y": 0.38 }, "kind": "list", "text": "We see no account evidencing investment in S2 Albania by ICMS or ICMS Construction. We see nothing on ICMS’s CY2016 balance sheet that could resemble a meaningful investment in S2 Albania. Of its US$3.06 million in assets as of December 31, 2016, US$2.97 million are current assets. (US$1.8 million – 59.6% – is prepaid expenses; the balance is substantially all cash and receivables.) Of the US$80,000 of non-current assets, 99.99% is PP&E.", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b3d5302e-7528-49e2-8f24-33aea8f73c2c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.78, "x": 0.11, "y": 0.16 }, "kind": "list", "text": "We see no S2 Albania assets to which ICMS could conceivably have contributed. As of December 31, 2015, S2 Albania had total assets of US$10.8 million. Virtually all of the assets – US$9.6 million – were PP&E. According to the footnotes, 98.5% of PP&E (US$9.6 million) were machines (i.e., likely equipment from OSIS) – with no construction or buildings disclosed at all.", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d82c630c-58aa-42fc-a80e-78cbbe19b7cb", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.78, "x": 0.11, "y": 0.09 }, "kind": "paragraph", "text": "That said, we can assume that based on OSIS's January 27, 2016 statement OSIS expected “Albania to be fully operational within [that] quarter”, substantially all of the assets S2 Albania needed were on the balance sheet as of the end of CY2015.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0835d9f1-8f87-4726-b6b3-5c028346ffe9", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.09, "w": 0.78, "x": 0.11, "y": 0.52 }, "kind": "paragraph", "text": "We also see nothing on the CY2016 balance sheet of ICMS Construction, which is an affiliate of ICMS, that evidences investment in S2 Albania. (Note that ICMS Construction does not own the equity in S2 Albania.) ICMS Construction has a total of US$704,000 of assets, of which US$647,000 are receivables. There is no meaningful PP&E or investments. ICMS Construction had $627 million of revenue in 2015, which means it undertook no significant construction prior to 2016.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "2d4c8a57-1ff9-4d27-b085-4b322e625927", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.18, "w": 0.78, "x": 0.11, "y": 0.62 }, "kind": "paragraph", "text": "OSIS appears to have taken pains to keep its “partnership” hidden from investors. We see this as affirmation that the relationship is a conduit for corruption. When OSIS trumpeted the award of the Albania concession as potentially worth $150 million to $250 million, it would have been an opportune time to mention that it would only be entitled to half of the profits. When Ajay Mehra patted OSIS management on the back by saying the deal “reinforces the attractiveness and compelling value of our turnkey service model”, the lack of any mention of the supposedly critical role their construction company was playing would seem a material omission. When the new government sought to renegotiate the concession agreement against a backdrop of news stories calling the concession award and the transfer of S2 Albania shares corrupt, OSIS chose not to publicly discuss this controversy or its partner.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "3f310f00-3f8c-445c-9ec8-b38a8253c4e8", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "“reinforces the attractiveness and compelling value of our turnkey service model” — Ajay Mehra", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-0f20-71ed-bddd-c0324fb84209", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.78, "x": 0.11, "y": 0.82 }, "kind": "source-note", "text": "Source: Bloomberg Q2 FY16 earnings call transcript. All December 31, 2015 conversions use USD/ALL: 126.1. There were ~US$1.2 million in cash and receivables. Including OSIS's UK Rapiscan subsidiary. All December 31, 2016 conversions use USD/ALL: 128.27.", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f705d317-13c6-4aa9-a38e-2ab549df24ef", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 4, "from": 3, "beatId": "7203553a-9c7c-447b-93f4-e883ff78b0aa", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Struggle", "beatSlug": "overcoming-monster-the-struggle", "evidence": "The exposure of contradictions in OSI Systems' claims", "position": 1, "confidence": 0.8, "parentBeatName": "Development", "parentBeatSlug": "development" } ], "loops": [ { "to": 5, "from": 3, "name": "The Reveal", "slug": "05-the-reveal", "bestFor": "Product launches, strategic pivots, unexpected findings", "matchId": "3b3d5496-8489-43ab-b9f9-2356aec5965c", "evidence": "The document presents evidence to contradict OSI Systems' claims", "position": 0, "objective": "To reveal the inconsistency in OSI Systems' claims", "structure": "Setup the Question -> Build Suspense -> The Big Reveal", "confidence": 0.7, "description": "Build mystery and anticipation, then deliver a surprising or powerful conclusion" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }