Leland Strange - CEO Karen Reynolds - CFO Bonnie Herron - Former CFO

Sam Robotsky - Private Investor

Good morning. My name is Kim [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Earnings Release and Investors Conference Call. All lines have bee placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Leland Strange, CEO of Intelligent Systems, you may begin your conference, sir.

Okay. Good morning and everyone welcome to the Intelligent Systems investor conference call. Today our callers easily last under 30 minutes, including question and answer will be brief. But on the call we are going primarily do two things. First, I will briefly comment on 2016 results at June 30, balance sheet which I am going to assume that you are on the call that you have already read it, as it hit the wire this morning. I guess, looking at trading volume, I will sarcastically comment that we may as well not even reported as there has been no shares trading according to what actually, but we will comment more on that later. The second thing is we will update you on the progress and the outlook for our CoreCard business. As usual at the end of the call, we will have some time for questions and answers. With me this morning in the conference room of the call is our CFO, Karen Reynolds along with our former CFO, Bonnie Herron. Depending on the questions, if we have any, I am not deferred to one of them for the answers. We're filing our 10-Q for June 30 quarter later today. It is going to be available on our website at intelsys.com and sec.gov shortly thereafter. I would encourage you to read the Business section, the MD&A and the Risk section of the 10-Q for a more complete understanding of our business and its risks and opportunities. Before I say too much more, I do need to cover quickly the forward-looking statements that's referenced and defined by the SEC. My comments and discussion today will definitely contain some forward-looking statements relating to Intelligent Systems, CoreCard, and its other operations. I do have a script outline, but I also tend to add statements are nuances and many of my statements and other information contained in this discussion are likely to be forward-looking statements. As I use the words anticipate, believe, plan, estimate, expect, likely, intend, along with other similar expressions those obviously are forward-looking statements. If you’re an investor, thinking about investing, you should know such forward-looking statements are not guarantees. Future performance is always somewhat of a guess and involve risks and uncertainties. I give you my best judgment of things as I see them and I judged that might prove to be wrong. I am simply conveying my expectations and beliefs based on what I know and believe with the information I have available today as I have said in this conference room of this call. I may be misinterpreting the information or the info may be wrong so in no way I am not making a firm prediction about the future events or results. Now with that behind us, let's cover financial results. As you are probably all aware, since we sold our ChemFree subsidiary on March 31, 2015, that’s a little over a year ago, our financial reports for all periods show the ChemFree operations as discontinued operations. And, just as an aside, the purchaser of the business appears to be using their worldwide sales and distribution channels to gradually increase ChemFree revenues. They’re obviously very happy with the purchase. They’ve also purchased some of the ChemFree’s former distributors in other parts of the world. So with that sale in all material respects, the CoreCard operation is now ISC’s core business. CoreCard is the primary focus of our management time and our resource allocation. Continuing with the financial summary, the ChemFree sale generated approximately $90 million in cash, not including $2.2 million in escrow to be received in September of this year, so we’ve got a total cash of a little over $21 million. We’re using this cash to support our ongoing operations and strategic initiatives as well as earlier we provided some returns to shareholders. With the Dutch auction tender offer, we distributed a cash dividend of $0.35 per share in the first quarter of this year and that used approximately $3 million of the cash. So, our cash has decreased from $18.1 million at the end of 2015 to $16.8 million as of June 30. That's a reduction of just $1.3 million, even though I said earlier, we distributed $3.1 million. So what’s the difference? Well the difference can be accounted for in large part by the receipt of $2.2 million in cash that related to the sale of our former investee company, which we actually recognized in the fourth quarter but received the cash this year. So even though we gave out $3.1 million, we’re not down a deficit of $3.1 million in cash. In addition for the first six months of 2016, we invested approximately $145,000 capital equipment for our processing and technical [ph] operations and we used approximately $164,000 in cash for operation support as well as corporate and other public company expenses. So from a cash standpoint, we’re in very good shape with another $2.2 million breaking from escrow next month, in September. Now let’s talk about strategic initiatives before getting to operations, because I think that’s something that I’m certainly focused on, something I think you guys are very interested in. I’ve often stated that we’re exploring and open to strategic initiatives that would benefit the shareholders. We've worked long and hard to get CoreCard operations to this point, and I think we've got to do whatever we can to maximize our return to shareholders, of which I happen to be a large one. But what does that really mean for our company? From our perspective, strategic initiatives could take several forms: we could be acquired, we could acquire someone else, or we could merge with someone. In every case, it’d have to be in a FinTech space or closely related. So taking those separately, we could sell or be acquired. We’re open to an acquisition of ISC by a public or private company at the right price that reflects the value of CoreCard and our cash. We are working to simplify our corporate structure to make it easier for someone to understand how to take a public company private if that should be the desire. Now an additional comment on that, it would be very difficult to sell CoreCard outside of Intelligent Systems as a public company because of the tax consequences. So, our current view it's always a bit changed, but our current view at is that if someone wanted to buy us, they’d need to buy as a public company. Second thought is a merger. We, of course, will be open to merging with another entity most likely in the financial services space that would allow us to be part of a larger company that can leverage our investment in the CoreCard technology and our technical resources. Now, I'm going to make a comment here as to why we even need to say the few things I said before that we’re open to be acquired and we’re open for merger. There's obviously most companies who are open to some degree based on the price. I think the difference here that I'm explaining is that there's no entrenched management here. There's no desire to try to hold on the company at any price. We're simply trying to do what's best for all the shareholders, and we're going to be actively doing this. That doesn't mean that we put ourselves on the block, that doesn't mean we have someone out searching for us, that doesn't mean that we have done anything else, although we could. But I just want to make it clear that that it's more from the standpoint of we all realize that we're going to need to get larger one way or the other. We're either going to have to use our cash to get larger as quickly as we can or we need to have another way of doing it, and that's because when you're in the processing business, size definitely matters. And I guess the third thing that I commented on is that we could use some of our cash or stock, although probably not stock at the current stock price, to acquire one or more companies that are complementary to our CoreCard business that would allow us to expand our footprint in the financial services industry more rapidly. It might also position the company better for future sale or merger. An example might be an existing program management company or someone with great digital assets that can be used by CoreCard. So while we don't have any specific transactions with near-term potential in mind, this is an area where I continue to have conversations and I’m open to any and all alternatives that might make sense for our shareholders. I mentioned before, but just to add that we might invest in a business where CoreCard has or will have a business relationship. This is the same target profile where we might want to acquire, or for various reasons we don't want to be in control, or the other company doesn't want to sell its control, or it could be that the price is not right for a complete acquisition, but there are advantages to having an equity stake. All right. So, again, I'll not put a timing on this, so something could happen in three months or it could happen in three years. I'm simply saying that we are always actively talking to people in every area here, but we're not chasing something at bad prices and we're not available at bad prices, but we are always in conversations. So, I’ll move from that to the operations overview, and as you can see from the press release, revenue from both our software license and services, which includes our software maintenance, processing services and professional services, grew 28% overall in the second quarter and 40% for the six-month period of 2016 comparing to the same periods in 2015. We are steadily seeing growth in the number of customers using our processing services as well as an increase in the number of accounts of our licensing customers, which generates tier upgrades revenue for us. Plus the volume at our professional services revenue has increased year-over-year as customers continue to engage our services. I would say, even though I’ll talk about resources later, at this point, we have all of our resources very, very busy, and we could use a lot more at this point based on demand from our customers for our professional services at this point. So although the revenue growth trend has been positive, we have frequently pointed out, the timing of revenue recognition, particularly on new contract, is often unpredictable and often not under our control. At the end of June, for example, we have over $2.2 million in deferred revenue; that's work that we've done substantial work and built milestone payments, in many cases have already been paid and have the cash. It’s related to in process and new contracts. We do expect to be able to recognize for GAAP purposes a good portion of this revenue in 2016 that’s related to a global license customer, which we believe will be a substantial long-term partner for us. However, changes in customer schedules or third-party delays could easily push some of the revenue into 2017. We expect to continue to see this kind of volatility in revenue and reported profits and losses. It's not under our control. It's under the control of our customers. So we will continue to simply focus on what we can control. We’ll meet our contract deliverables. Let the GAAP revenue recognition occur when it does. That means quarter-to-quarter financial result comparisons will be pretty meaningless in my opinion, and we will concentrate on yearly improvements and I do think yearly comparisons are very important as opposed to quarterly. I mentioned resources and let me tell a little bit more about that. We have 265 or a few more experienced technical team of professionals at our subsidiaries in the U.S., Romania, and India, although from a strategic and operational perspective we consider them to be one company under the CoreCard name. We are enjoying strong demand, as I said earlier, for our very talented and experienced technical resources on both the license and processing sides of our business and we are constantly increasing capacities to support our growth. In India, we've expanded our employee count by about 50% since the start of the year and plan to continue to add more in the second half of the year. We have about 240 employees there that are housed in our building. They’re developers, testers, QA, business analysts, system support, etc. The bulk of our staff expansion will continue to occur in India. In the U.S., our management team remains constant with a greater than 10-year average with the company. The management team is highly integrated with offshore. They are involved with customer-facing activities. We may consider strategic additions in the U.S. in the future for the right business reasons. And in Romania, it's still a small developer and testing group with the average tenure there of nine years. So, we are very strong with staff and personnel resources. Likewise, our product platform is still a great platform. Our core technology remains a transaction processing platform, in which a wide variety and broad payment systems have been constructed. It’s used by both our license customers and also used by us in our own processing environment. It has proven performance, past customer over five years, millions of accounts, and we're very happy with what we have. We have a suite of applications that are built on this core platform for Indian processing, from account creation, authorizations, interest and fees calculation, collections, cardholder services and many other things. The modules are changed based on whether the application is for credit or prepaid, and it is further tuned for customers based on their specific payments programs, such as debit [ph] cards or short-term consumer loans, gift cards, payrolls, incentives, revolving credit, which could be closed-loop in other words at retailer or open-loop with MasterCard, Discover, Visa. We have business-to-business loans, we have accounts receivables, we have collections, so it's a very broad, heavy of platform that we've invested obviously a lot of shareholder money in getting it. Now from an enhancement standpoint, the world doesn't stay still in terms of what you need, so we continually add new features and functionality to what we call our base software to meet the customer needs and also stay current with market trends. For example, we recently announced completion of our MasterCard EMV certification. This certification means that our platform is now EMV enabled and current and future clients can issue chip cards to be run on our platform. Our customer base; we continue to take on new customers across a wide range of spectrum. We've added customers with credit program in addition to prepaid card programs in our processing services as well as new license customers. One is a global prepaid card processor with very complex and dynamic program requirements. I would say that we often get requests for startups or for folks with very innovative programs, but because of the fact that we’re backed up on resources, we're very choosy in who we will take on. It either needs to be the right-size customers that we think are very advantageous to us and to them, or perhaps if it's a young or startup, it has to be strategic to us. We just can’t take on anybody that wants to come and get processed. So with that, let me conclude with an outlook and summary. As I said, we continue to see gains in all three components of our FinTech-focused businesses: licensing, processing, professional services. However, we will continue to incur expenses in our corporate offices related to being a public company that will impact the CoreCard results, but the CoreCard operations by themselves have turned the corner and are highly likely to be profitable for the full 2016 year. So, with that quick overview summary comments, I'm going to open it up to see if there are any questions.

[Operator Instructions] And your first question comes from the line of Sam Robotsky. Your line is open.

Yeah, good morning, Leland and Bonnie, and welcome Karen.

Thank you.

Thank you.

So, let's see. We consider the possibility of being profitable and it appears you're going to have more revenue in the second half than the first half, is there something that we need to do to generate greater revenue, or is there more salespeople we need to hire, or what do we need to do to sort of increase the revenue stream for the processing?

Yeah, the only place that really matters is in the processing, that's where you get the leverage. Let me say, first of all. That's where you get the leverage without adding a lot more people. Now, we're adding more people because of the professional services and licensing primarily. But I honestly can't take own poor business in the next six months than what we have. We are adding people as fast we can. It takes time to train the kind of people we have to have in this business. And we will do find this year. We will -- I am pretty sure we're going very well next year. We're not going to grow about 50% next year, but we are going to grow. So, I don’t -- there is nothing else we can do now except continue to add people and get them up and trained to try to get ahead of the game.

Okay. Now the bank that instituted the credit card, are they still working on that, or where are they?

I am not sure what you're referring to Sam.

There was one the bank that was going to have a credit card and they had a right to buy some stock in Intelligent Systems and CoreCard. Are they still with us or--?

Yeah, that wasn’t really a credit card, that was a prepaid card, and they are still with us.

Okay. Are they making the progress we'd like them to make, or is there anything that needs to be done to make that move along quicker to increase.

They're not growing their business very quickly, but there's nothing we can do about it. They're totally independent. We just process more on.

Okay. The…

We're not that interested in any way. There is noting we can do that.

Okay. Now, we wrote down the luminance investment to $50,000, is there any -- do we expect any transaction to happen with that this current year, or is that--?

We actually have written it off completely this quarter.

Okay.

That means we don't expect any return from it.

Okay. And the other investments that would carrying, are they worth more and were not able to write it up or there's any value of these other investments that we're carrying now?

There's very few that we have remaining. And you can't write any of them on our balance sheet, there will be very few -- I must say it’s a less than $0.25 million on our balance sheet for investment, poor investment. Let me get an answer from Karen. 240, pretty close to say than $0.25 million on our balance sheet and I don't think it would be realistic to expect any great return from them, although we are obviously would be happy with a surprise. We were surprised with one last year. But there's no objective information that will tell you that you could expect any big hit from them.

Okay. And we -- yes.

But I am not going to write anything off this point. We will hope to as least get our money back.

Okay. And at this point, we've used all the tax losses that we had that we can on the gain in the ChemFree.

Yes, there are some incidental losses out there, but not enough for a matter.

Okay. Now, we spoke of looking for some type of transaction. But is it fair to say that we are not at the stage where we're hiring an investment banker to explore this, we're just doing this on our own as we develop the business and we're looking for opportunities, and if something happens, but we're not ready to hire somebody to speed up the process?

That is accurate.

Okay. All right. Leland, you have done a good job and hopefully something will happen where people will want to work with us and grow the company and that makes sense. And we'll -- maybe the stock will get more active. But let's see what happens. Good luck.

All right. Thank you, Sam.

[Operator Instructions] And there are no further questions at this time

Okay. Well, I want to thank you for taking the time to be on the call. As you know we generally hold calls twice a year, so you can expect the next call to be after the end of the fiscal year, unless there are some significant new developments to report before that. So, again, thank you for your time this morning. And if you have further questions you can always try to call myself or Karen, our CFO. Thanks everyone.

Ladies and gentlemen, this concludes today's conference call and you may now disconnect.