CoreCard Corp - Quarter Report: 2019 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑

Quarterly Report UNDER SECTION 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2019 OR

 

☐

Transition REPORT UNDER Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _________ to ____________

 

Commission file number 1-9330

 

INTELLIGENT SYSTEMS CORPORATION

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(Exact name of registrant as specified in its charter)

 

Georgia	58-1964787
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4355 Shackleford Road, Norcross, Georgia	30093
(Address of principal executive offices)	(Zip Code)

                    

Registrant’s telephone number, including area code: (770) 381-2900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ☐	Accelerated filer                       ☐
Non-accelerated filer       ☐	Smaller reporting company     ☑
	Emerging growth company     ☐

                    

If an emerging growth company, indicate by check mark if the registrant has elected not to use to the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value for the class	INS	NYSE American

 

As of September 30, 2019, 8,897,988 shares of Common Stock of the issuer were outstanding.

 

 

Intelligent Systems Corporation

 

Index

Form 10-Q

 

 

		Page
Part I	Financial Information
Item 1	Financial Statements
	Consolidated Balance Sheets at September 30, 2019 and December 31, 2018	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018	4
	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4	Controls and Procedures	15
Part II	Other Information
Item 1	Legal Proceedings	16
Item 6	Exhibits	16
Signatures		17

 

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As of		September 30, 2019				December 31, 2018
		(unaudited)				(audited)
ASSETS
Current assets:
Cash		$	23,676			$	18,919
Marketable securities			370				349
Accounts receivable, net			6,059				3,731
Notes and interest receivable, current portion			‒				581
Other current assets			1,039				1,202
Total current assets			31,144				24,782
Investments			3,309				760
Notes and interest receivable, net of current portion			1,272				1,745
Property and equipment, at cost less accumulated depreciation			2,336				1,513
Other long-term assets			1,469				504
Total assets		$	39,530			$	29,304
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	280			$	272
Deferred revenue, current portion			442				781
Accrued payroll			2,049				1,145
Accrued expenses			98				71
Income tax payable			1,504				284
Other current liabilities			1,154				719
Total current liabilities			5,527				3,272
Noncurrent liabilities:
Deferred revenue, net of current portion			41				111
Long-term lease obligation			509				‒
Total noncurrent liabilities			550				111
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,897,988 and 8,817,988 issued and outstanding at September 30, 2019 and December 31, 2018, respectively			89				88
Additional paid-in capital			15,341				15,050
Accumulated other comprehensive loss			(124	)			(92	)
Accumulated income			18,147				10,875
Total Intelligent Systems Corporation stockholders’ equity			33,453				25,921
Total liabilities and stockholders’ equity		$	39,530			$	29,304

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Revenue
Services		$	7,297			$	5,286			$	20,275			$	13,757
Products			2,225				129				3,725				289
Total net revenue			9,522				5,415				24,000				14,046
Cost of revenue
Services			3,012				2,323				8,445				5,972
Products			−				−				−				136
Total cost of revenue			3,012				2,323				8,445				6,108
Expenses
Marketing			35				85				124				240
General and administrative			700				466				2,394				1,357
Research and development			1,575				805				3,634				2,467
Income from operations			4,200				1,736				9,403				3,874
Other income (loss)			(5	)			245				248				128
Income before Income taxes			4,195				1,981				9,651				4,002
Income taxes			1,103				115				2,379				185
Net income		$	3,092			$	1,866			$	7,272			$	3,817
Earnings per share attributable to Intelligent Systems Corporation:
Basic		$	0.35			$	0.21			$	0.82			$	0.43
Diluted		$	0.34			$	0.21			$	0.81			$	0.43
Basic weighted average common shares outstanding			8,886,321				8,797,988				8,859,544				8,789,099
Diluted weighted average common shares outstanding			9,013,459				8,976,415				8,977,501				8,943,652

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Net income		$	3,092			$	1,866			$	7,272			$	3,817
Other comprehensive income (loss):
Foreign currency translation adjustments			4				(11	)			(32	)			4
Unrealized gain on available-for-sale marketable securities			−				(11	)			−				(23	)
Total comprehensive income		$	3,096			$	1,844			$	7,240			$	3,798

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(in thousands, except share amounts)		Common Stock								Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Accumulated Earnings				Stockholders’ Equity
		Shares
Balance at December 31, 2017			8,777,988			$	88			$	14,877			$	(143	)		$	4,631			$	19,453
Net income																			893				893
Stock compensation expense											13												13
Foreign currency translation adjustment															1								1
Unrealized loss on marketable securities															(17	)							(17	)
Balance at March 31, 2018			8,777,988			$	88			$	14,890				(159	)		$	5,524			$	20,343
Stock options exercised			20,000								34												34
Net income																			1,058				1,058
Stock compensation expense											13												13
Foreign currency translation adjustment															14								14
Unrealized gain on marketable securities															5								5
Balance at June 30, 2018			8,797,988			$	88			$	14,937				(140	)		$	6,582			$	21,467
Net income																			1,866				1,866
Stock compensation expense											18												18
Foreign currency translation adjustment															(11	)							(11	)
Unrealized gain on marketable securities															(11	)							(11	)
Balance at September 30, 2018			8,797,988			$	88			$	14,955				(162	)		$	8,448			$	23,329
Balance at December 31, 2018			8,817,988			$	88			$	15,050			$	(92	)		$	10,875			$	25,921
Stock options exercised			33,000				1				58												59
Net income																			2,072				2,072
Stock compensation expense											25												25
Foreign currency translation adjustment															(1	)							(1	)
Balance at March 31, 2019			8,850,988			$	89			$	15,133			$	(93	)		$	12,947			$	28,076
Net income																			2,108				2,108
Stock compensation expense											55												55
Foreign currency translation adjustment															(35	)							(35	)
Balance at June 30, 2019			8,850,988			$	89			$	15,188			$	(128	)		$	15,055			$	30,204
Stock options exercised			47,000								104												104
Net income																			3,092				3,092
Stock compensation expense											49												49
Foreign currency translation adjustment															4								4
Balance at September 30, 2019			8,897,988			$	89			$	15,341			$	(124	)		$	18,147			$	33,453

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		Nine Months Ended September 30,
CASH PROVIDED BY (USED FOR):		2019				2018
OPERATING ACTIVITIES:
Net income		$	7,272			$	3,817
Adjustments to reconcile net income from continuing operations to net cash used for operating activities:
Depreciation and amortization			730				429
Stock-based compensation expense			129				44
Non-cash investment expense			−				255
Non-cash interest income			(23	)			(37	)
Equity in loss of affiliate company			104				25
Changes in operating assets and liabilities:
Accounts receivable			(2,328	)			(1,811	)
Other current assets			163				1,249
Other long-term assets			(65	)			(57	)
Accounts payable			8				(52	)
Accrued payroll			904				724
Deferred revenue, current portion			(339	)			70
Accrued expenses			27				(27	)
Other current liabilities			1,167				341
Deferred revenue, net of current portion			(70	)			16
Net cash provided by (used for) operating activities			7,679				4,986
INVESTING ACTIVITIES:
Purchases of property and equipment			(1,553	)			(663	)
Advances of notes receivable			(1,500	)			(1,035	)
Net cash used for investing activities			(3,053	)			(1,698	)
FINANCING ACTIVITIES:
Sale of capital stock pursuant to exercise of option			163				34
Net cash provided by financing activities			163				34
Effects of exchange rate changes on cash			(32	)			4
Net increase in cash			4,757				3,326
Cash at beginning of period			18,919				14,024
Cash at end of period		$	23,676			$	17,350
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes		$	875			$	−

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1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation 

 

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, 2019 and 2018. The interim results for the three and nine months ended September 30, 2019 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, 2018, as filed in our Annual Report on Form 10-K.

 

There have been no material changes in the Company’s significant accounting policies, other than the adoption of accounting standards update (“ASU”) 2016-02, Leases (Topic 842) related to the accounting for leases, as of January 1, 2019 as described below, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Accounting Pronouncements Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior accounting guidance. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. We adopted ASU 2016-02 as of January 1, 2019 utilizing the modified retrospective transition method at the beginning of the first quarter of 2019. We have elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date, (3) initial direct costs for any existing leases as of the adoption date and (4) the application of hindsight when determining lease term and assessing impairment of right-of-use assets. The adoption of the new standard on January 1, 2019, resulting in a lease obligation and related right-of-use asset of approximately $1,258,000. The impact on the statement of operations was not material.

 

We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our Consolidated Financial Statements.

 

 

2.

REVENUE

 

Disaggregation of Revenue

 

In the following table, revenue is disaggregated by type of revenue for the three and nine months ended September 30, 2019 and 2018:

 

 

 

Foreign revenues are based on the location of the customer. Revenues from customers by geographic areas for the three and nine months ended September 30, 2019 and 2018 are as follows:   

 

 

Concentration of Revenue

 

The following table indicates the percentage of consolidated revenue represented by each customer that represented more than 10 percent of consolidated revenue in the three and nine month periods ended September 30, 2019 and 2018. Most of our customers have multi-year contracts with recurring revenue as well as professional services fees that vary by period depending on their business needs.

 

 

 

3.	INVESTMENTs

 

Beginning in the quarter ended September 30, 2017, and in subsequent periods we entered into a Loan Agreement and various Promissory Notes, as discussed in more detail in Note 4, with a privately-held identity and professional services company with ties to the FinTech industry. In June 2019, we converted the Loan Agreement and all Promissory Notes into equity resulting in ownership of 40 percent of the company. We also entered into a new Loan Agreement with a principal balance of $1,000,000 that bears interest at the rate of 6.0 percent annually with a maturity date of June 2021. We account for our investment using the equity method of accounting which resulted in a loss of $104,000 for the three and nine months ended September 30, 2019 included in other income (loss) on the Consolidated Statement of Operations. The carrying value is included in long-term investments.

 

In the quarter ended June 30, 2018, we recorded an impairment charge of $250,000 to reduce the carrying value of our minority equity ownership in one of our investee companies, a privately held technology company and program manager in the FinTech industry.

 

 

4.	NOTES RECEIVABLE

 

During the quarter ended September 30, 2017, we entered into a Loan Agreement with a privately-held identity and professional services company with ties to the FinTech industry. We committed to lend up to $1,500,000 all of which has been advanced as of September 30, 2019. During 2018, we advanced $550,000 on three separate simple Promissory Note(s) and in 2019 we advanced an additional $500,000 to the company. As discussed in Note 3, we converted the Loan Agreement and all outstanding Promissory Notes to an equity ownership of 40 percent of the company. At the same time, we entered into and advanced a $1,000,000 Loan Agreement that bears interest at the rate of 6.0 percent annually with a maturity date of June 2021.

 

During the quarter ended March 31, 2018, we entered into a Convertible Loan Agreement with a private limited India based company in the FinTech industry. We committed to lend up to $435,000 with an initial advance of $235,000. The loan bears interest at the rate of 5.0 percent annually with the maturity date on the third anniversary of funding of such Promissory Note. We are entitled to convert the principal on the initial note for up to ten percent ownership of shares of the company.

 

 

 

5.	STOCK-based COMPENSATION

 

At September 30, 2019, we have three stock-based compensation plans in effect. We record compensation cost related to unvested stock awards by recognizing the unamortized grant date fair value on a straight-line basis over the vesting periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the three and nine month periods ended September 30, 2019 and 2018 has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $49,000 and $18,000 of stock-based compensation expense for the three months ended September 30, 2019 and 2018, respectively, and $129,000 and $44,000 for the nine months ended September 30, 2019 and 2018, respectively.

 

As of September 30, 2019, there is $476,000 of unrecognized compensation cost related to stock options. There were 47,000 and 80,000 options exercised during the three and nine months ended September 30, 2019, respectively. No options expired unexercised. The following table summarizes options as of September 30, 2019:

 

 

The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2018 Form 10-K.

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the company’s closing stock price on the last trading day of the third quarter of 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2019. The amount of aggregate intrinsic value will change based on the market value of the company’s stock.

 

 

6.	FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying value of cash, marketable securities, accounts receivable, notes receivable, accounts payable and certain other financial instruments (such as 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.

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, marketable securities, trade accounts and notes receivable. Our available cash is held in accounts managed by third-party financial institutions. Cash may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While we monitor cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

 

 

7.	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.

 

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable input be used when available.  Observable inputs are based on data obtained from sources independent of the company that market participants would use in pricing the asset or liability.  Unobservable inputs are inputs that reflect the company’s assumptions about the estimates market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. 

 

 

The hierarchy is measured in three levels based on the reliability of inputs:

 

• Level 1

Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.

 

• Level 2

Valuations based on quoted prices in less active, dealer or broker markets.  Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities.

 

• Level 3

Valuations derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and not based on market, exchange, dealer, or broker-traded transactions.  Level 3 valuations incorporate certain assumptions and projections that are not observable in the market and significant professional judgment is needed in determining the fair value assigned to such assets or liabilities.

 

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

Our marketable securities are classified within Level 1 of the valuation hierarchy.

 

The fair value of equity method and cost method investments has not been determined as it was impracticable to do so due to the fact that the investee companies are relatively small, early stage private companies for which there is no comparable valuation data available without unreasonable time and expense.

 

 

8.	COMMITMENTS AND CONTINGENCIES

 

Leases

 

We have noncancelable operating leases for offices and data centers expiring at various dates through March 2024. These operating leases are included in "Other long-term assets" on the Company's September 30, 2019 Consolidated Balance Sheet and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are included in "other current liabilities" and "Long-term lease obligation" on the Company's September 30, 2019 Consolidated Balance Sheet. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $1,258,000 on January 1, 2019. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of September 30, 2019, total right-of-use assets and operating lease liabilities were approximately $997,000. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. The weighted average discount rate used to determine our lease liabilities was 5.5 percent as of September 30, 2019. The weighted average remaining lease term as of September 30, 2019 was 1.4 years.

 

Legal Matters

 

On or about July 9, 2019, a securities class action complaint was filed in the United States District Court for the Eastern District of New York (Case No. 1:19-cv-03949) by Michael Skrzeczkoski, individually and on behalf of all others similarly situated, against the company, our executive officers, and each member of the Board of Directors. The complaint alleges, among other things, that certain of our press releases and SEC filings were misleading as a result of the failure to disclose alleged related party transactions affecting revenue recognition and the absence of disclosure regarding certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. The complaint seeks to recover attorney’s fees and costs and unspecified damages on behalf of purchasers who acquired our stock during the period from January 23, 2019, through May 29, 2019, and purportedly suffered financial harm as a result of the alleged misleading statements. On September 26, 2019, the Court appointed Edgardo Canez as lead plaintiff on behalf of the putative class. We dispute these claims and intend to defend the matter vigorously. We have not determined the likelihood of loss to be probable nor is any potential loss estimable at this time, therefore we have not recorded any related liability as of September 30, 2019.

 

 

There are no other pending or threatened legal proceedings against the company. However, in the ordinary course of business, from time to time we may be involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. We accrue for unpaid legal fees for services performed to date.

 

 

9.	INCOME TAXES

 

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.

 

There were no unrecognized tax benefits at September 30, 2019 and December 31, 2018. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There were no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the periods presented. We have determined we have no uncertain tax positions.

 

We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership equals or exceeds 80 percent, as well as individual subsidiary returns in various states and foreign jurisdictions. With few exceptions we are no longer subject to U.S. federal, state and local or foreign income tax examinations by taxing authorities for returns filed more than three years ago.

 

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