CCRD 10-Q Quarter ended Sept. 30, 2015

As of

September 30, 2015

December 31, 2014

ASSETS

Current assets:

Cash

Marketable securities

Accounts receivable, net

Note and interest receivable

Other current assets

Assets from discontinued operations

Total current assets

Investments

Property and equipment, at cost less accumulated depreciation

Restricted cash, noncurrent portion

Other long-term assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Deferred revenue, current portion

Accrued payroll

Accrued expenses

Other current liabilities

Liabilities from discontinued operations

Total current liabilities

Deferred revenue, net of current portion

Other long-term liabilities

Intelligent Systems Corporation stockholders’ equity:

Common stock, $0.01 par value, 20,000,000 shares authorized, 8,731,299 and 8,958,028 issued and outstanding at September 30, 2015 and  December 31, 2014, respectively

Additional paid-in capital

Accumulated other comprehensive loss

Retained earnings (deficit)

Total Intelligent Systems Corporation stockholders’ equity

Noncontrolling interest

Total stockholders’ equity

Total liabilities and stockholders’ equity

2015

2014

2015

2014

Revenue

Products

Services

Total net revenue

Cost of revenue

Products

Services

Total cost of revenue

Expenses

Marketing

General and administrative

Research and development

Loss from operations

Other income

Loss from continuing operations before income taxes

Income taxes

Loss from continuing operations

Gain (loss) on sale of discontinued operations, net of taxes

Income (loss) from discontinued operations, net of taxes

Net income (loss)

Net loss attributable to noncontrolling interest

Net income (loss) attributable to Intelligent Systems Corporation

Basic

Continuing operations

Discontinued operations

Earnings (loss) per share

Diluted

Continuing operations

Discontinued operations

Earnings (loss) per share

Basic weighted average common shares outstanding

Diluted weighted average common shares outstanding

Loss from continuing operations

Income from discontinued operations

Net income (loss) attributable to Intelligent Systems Corporation

Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,

2015

2014

2015

2014

Net income (loss)

Other comprehensive income (loss):

Foreign currency translation adjustments

Unrealized gain (loss) on available-for-sale marketable securities

Total comprehensive income (loss)

Comprehensive loss attributable to noncontrolling interest

Comprehensive income (loss) attributable to Intelligent Systems Corporation

Nine Months Ended September 30 ,

CASH PROVIDED BY (USED FOR):

2015

2014

OPERATING ACTIVITIES :

Net income (loss)

Income from discontinued operations

Net loss from continuing operations

Depreciation and amortization

Stock-based compensation expense

Investment income, net

Equity in (income) loss of affiliate company

Changes in operating assets and liabilities:

Accounts receivable

Other current assets

Other long term assets

Accounts payable

Accrued payroll

Deferred revenue, current portion

Accrued expenses

Other current liabilities

Deferred revenue, net of current portion

Other long-term liabilities

Net cash used for operating activities

INVESTING ACTIVITIES:

Purchase of marketable securities

Purchases of property and equipment

Advance on note receivable

Long-term investment

Net cash used for investing activities

FINANCING ACTIVITIES :

Sale of capital stock pursuant to exercise of option

Repurchase of capital stock pursuant to tender offer

Net cash used for financing activities

Net cash provided by (used for) operating activities from discontinued operations

Net cash provided by (used for) investing activities from discontinued operations

Net cash provided by discontinued operations

Effects of exchange rate changes on cash

Net increase (decrease) in cash

Cash at beginning of period

Cash at end of period

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for income taxes

1.

Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. The unaudited Consolidated Financial Statements presented in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and nine month periods ended September 30, 2015 and 2014. The interim results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with our Consolidated Financial Statements and notes thereto for the fiscal year ended December 31, 2014, as filed in our Annual Report on Form 10-K/A.

2.

Sale of Subsidiary; Discontinued Operations – On March 31, 2015, we and CRC Industries, Inc., a Pennsylvania corporation (“CRC”), entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) whereby we sold all of the issued and outstanding stock of our wholly owned subsidiary, ChemFree Corporation (“ChemFree”), to CRC (the “ChemFree Sale”). The purchase price for the all-cash sale was $21,600,000, subject to customary post-closing adjustments, including a working capital adjustment. The company retained all net cash of ChemFree as of the closing date. In the quarter ended March 31, 2015, the company recorded a gain on the sale of ChemFree of $18,746,000 and has retroactively classified the ChemFree operations as discontinued operations in all periods presented. The company intends to apply operating loss and capital loss carryforwards against the gain of sale and presently expects to incur an alternative minimum tax liability of approximately $181,000 on the transaction, which amount is included in liabilities of discontinued operations as of June 30, 2015. At the closing, a total of $3,300,000 of the purchase price was placed in escrow for purposes of securing our obligations to indemnify CRC and to refund a portion of the purchase price if ChemFree’s actual working capital amount on the closing date is less than the agreed upon target set forth in the Stock Purchase Agreement. Based on the initial post-closing working capital determination, we accrued $200,000 for a working capital adjustment, which amount was reflected in the gain on sale calculation reported in the Form 10-Q for the period ended March 31, 2015. In the quarter ended June 30, 2015, we expensed an additional $20,000 for the final working capital adjustment. In the quarter ended September 30, 2015, $880,000 that had been held as Restricted Cash – Current Portion related to the escrow was released to the company. The remaining escrow balance of $2,200,000, which will remain in escrow until September 30, 2016, is shown as Restricted Cash – Noncurrent Portion.

3.

Tender Offer Stock Repurchase - On April 22, 2015, we commenced a modified “Dutch” auction style tender offer to purchase for cash shares of our common stock for an aggregate purchase price of no more than $5 million. The tender offer expired May 19, 2015. We accepted for tender 230,729 shares of common stock at a purchase price per share of $3.00 for an aggregate purchase price of $692,187. Shares repurchased were cancelled, resulting in a decline in the number of outstanding shares at September 30, 2015.

4.

Stock-based Compensation - At September 30, 2015, we have three stock–based compensation plans in effect. We record compensation cost related to unvested stock option awards by recognizing the unamortized grant date fair value on a straight line basis over the service periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense is recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $5,000 and $14,000 of stock-based compensation expense in the three months ended September 30, 2015 and 2014, respectively and $13,000 and $44,000 for the nine month periods ended September 30, 2015 and 2014, respectively. The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2014 Form 10-K/A.

5.

Fair Value of Financial Instruments - The carrying value of cash, accounts receivable, accounts payable and certain other financial instruments (such as short-term borrowings, accrued expenses, and other current liabilities) included in the accompanying consolidated balance sheets approximates their fair value principally due to the short-term maturity of these instruments.

6.

Fair Value Measurements - In determining fair value, the Company uses quoted market prices in active markets.  GAAP establishes a fair value measurement framework, provides a single definition of fair value, and requires expanded disclosure summarizing fair value measurements. GAAP emphasizes that fair value is a market-based measurement, not an entity specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.

7.

Inventories – Following the sale of our former ChemFree subsidiary on March 31, 2015, we no longer have any inventory.

8.

Concentration of Revenue – In the three month periods ended September 30, 2015 and 2014, the two largest customers represented in aggregate 46 percent and 42 percent of consolidated revenue, respectively. In the nine month period ended September 30, 2015 and 2014, the two largest customers represented in aggregate 44 percent and 49 percent of consolidated revenue, respectively. Most of our customers have multi-year contracts with recurring minimum revenue as well as professional services fees, that vary by period depending on their business needs.

9.

Commitments and Contingencies – Please refer to Note 8 to our Consolidated Financial Statements included in our 2014 Form 10-K/A for a description of our commitments and contingencies in addition to those disclosed herein. Effective April 1, 2015, we entered into a new lease for our U.S. operations. Accordingly, our future minimum lease payments for offices and data centers expiring at various dates through March 31, 2018 are as follows:

10.

Industry Segment – Following the sale of our ChemFree subsidiary, management considers our remaining subsidiaries, consisting of CoreCard and its affiliate companies, to be one operating segment. Historically, we have described this industry segment as Information Technology Products and Services but as our company and the financial software and services industries have evolved, we now consider the financial transaction solutions and services (“FinTech”) industry segment to be more appropriate.

11.

Income Taxes – We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized, net of a valuation allowance, for the estimated future tax effects of deductible temporary differences and tax credit carry-forwards. A valuation allowance against deferred tax assets is recorded when, and if, based upon available evidence, it is more likely than not that some or all deferred tax assets will not be realized.

12.

Reclassification – Certain prior year numbers related to the ChemFree subsidiary have been reclassified to conform to the current year presentation.

13.

Recent Accounting Pronouncements – In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-8, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This guidance states that the disposal of a component of an entity is to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The pronouncement also requires additional disclosures regarding individually significant disposals of components that do not meet the criteria to be recognized as a discontinued operations as well as additional and expanded disclosures. ASU 2014-8 was effective for periods after December 15, 2014 and accordingly, we have prepared the Consolidated Financial Statements presented herein in accordance with this ASU.

14.

Subsequent Event – On October 28, 2015, Lancope, Inc., a technology company in which we hold a less than 1 percent equity interest, announced that it had agreed to be acquired by Cisco in a cash transaction valued at approximately $452 million. The transaction is scheduled to close within 90 days, subject to customary closing conditions including escrow provisions. At September 30, 2015, our carrying value for Lancope was $214,000. Based on preliminary information provided to us, if and when the transaction is completed, we would receive between $2.2 million and $2.5 million in total compensation. There can be no assurance, however, that the transaction will be concluded on the terms announced, or that it will be concluded at all. We are not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Consolidated Financial Statements.