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

 

 

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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 March 31, 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

(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 ☐

 

Indicated 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, 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. (Check one):

 

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(s)	Name of each exchange on which registered
Common Stock, $.01 par value for the Class	INS	NYSE American

 

As of April 30, 2019, 8,850,988 shares of Common Stock of the issuer were outstanding.

 

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Intelligent Systems Corporation

 

Index

Form 10-Q

 

 

		Page
Part I	Financial Information
Item1	Financial Statements
	Consolidated Balance Sheets at March 31, 2019 and December 31, 2018	3
	Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018	4
	Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018	5
	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 4	Controls and Procedures	14
Part II	Other Information
Item 6	Exhibits	15
Signatures		15

 

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As of		March 31, 2019				December 31, 2018
		(unaudited)				(audited)
ASSETS
Current assets:
Cash		$	22,071			$	18,919
Marketable securities			379				349
Accounts receivable, net			3,689				3,731
Notes and interest receivable, current portion			‒				581
Other current assets			1,092				1,202
Total current assets			27,231				24,782
Investments			760				760
Notes and interest receivable, net of current portion			2,861				1,745
Property and equipment, at cost less accumulated depreciation			1,445				1,513
Other long-term assets			1,637				504
Total assets		$	33,934			$	29,304
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	272			$	272
Deferred revenue, current portion			905				781
Accrued payroll			1,285				1,145
Accrued expenses			127				71
Income tax payable			943				284
Other current liabilities			1,582				719
Total current liabilities			5,114				3,272
Noncurrent liabilities:
Deferred revenue, net of current portion			74				111
Long-term lease obligation			670				‒
Total noncurrent liabilities			744				111
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,850,988 and 8,817,988 issued and outstanding at March 31, 2019 and December 31, 2018, respectively			89				88
Additional paid-in capital			15,133				15,050
Accumulated other comprehensive loss			(93	)			(92	)
Accumulated income			12,947				10,875
Total Intelligent Systems Corporation stockholders’ equity			28,076				25,921
Total liabilities and stockholders’ equity		$	33,934			$	29,304

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		Three Months Ended March 31,
		2019				2018
Revenue
Services		$	6,166			$	3,963
Products			800				95
Total net revenue			6,966				4,058
Cost of revenue
Services			2,534				1,607
Products			‒				136
Total cost of revenue			2,534				1,743
Expenses
Marketing			38				68
General and administrative			594				473
Research and development			1,195				953
Income from operations			2,605				821
Other income			126				72
Income before income taxes			2,731				893
Income taxes			659				‒
Net income		$	2,072			$	893
Earnings per share attributable to Intelligent Systems Corporation:
Basic		$	0.23			$	0.10
Diluted		$	0.23			$	0.10
Basic weighted average common shares outstanding			8,841,321				8,777,988
Diluted weighted average common shares outstanding			8,990,438				8,912,130

 

		Three Months Ended March 31,
		2019				2018
Net income		$	2,072			$	893
Other comprehensive income (loss):
Foreign currency translation adjustments			(1	)			1
Unrealized loss on available-for-sale marketable securities			‒				(17	)
Total comprehensive income		$	2,071			$	877

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		Common Stock								Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Accumulated Earnings				Stockholders’ Equity
		Shares				Shares
Balance at December 31, 2017			8,777,988			$	88			$	14,877			$	(143	)		$	4,631			$	19,453
Stock options exercised			--				--
Net income																			893				893
Stock compensation expense											13												13
Foreign currency translation adjustment															1								1
Unrealized gain on marketable securities															(17	)							(17	)
Balance at March 31, 2018			8,777,988			$	88			$	14,890				(159	)		$	5,524			$	20,343
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

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		Three Months Ended March 31,
CASH PROVIDED BY (USED FOR):		2019				2018
OPERATING ACTIVITIES:
Net income		$	2,072			$	893
Adjustments to reconcile net income from continuing operations to net cash used for operating activities:
Depreciation and amortization			180				131
Stock-based compensation expense			25				13
Non-cash investment expense			--				5
Non-cash interest income			(30	)			(21	)
Equity in loss of affiliate company			--				19
Changes in operating assets and liabilities:
Accounts receivable			42				(1,716	)
Other current assets			110				(2,657	)
Other long-term assets			(37	)			(34	)
Accounts payable			--				(192	)
Accrued payroll			140				334
Deferred revenue, current portion			124				(5	)
Accrued expenses			56				7
Other current liabilities			1,061				(7	)
Deferred revenue, net of current portion			(37	)			43
Net cash used for operating activities			3,706				(3,187	)
INVESTING ACTIVITIES:
Purchases of property and equipment			(112	)			(170	)
Advances of notes receivable			(500	)			(485	)
Net cash used for investing activities			(612	)			(655	)
FINANCING ACTIVITIES:
Sale of capital stock pursuant to exercise of option			59				--
Net cash provided by financing activities			59				--
Effects of exchange rate changes on cash			(1	)			1
Net increase (decrease) in cash			3,152				(3,841	)
Cash at beginning of period			18,919				14,024
Cash at end of period		$	22,071			$	10,183

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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 month periods ended March 31, 2019 and 2018. The interim results for the three months ended March 31, 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, in the first quarter of 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 in the first quarter of 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 months ended March 31, 2019 and 2018:

 

 

 

Foreign revenues are based on the location of the customer. Revenues from customers by geographic areas for the three months ended March 31, 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 month periods ended March 31, 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.

Notes Receivable

 

In 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 March 31, 2019. The loan bears interest at the rate of 6.0 percent annually with the maturity date for each Promissory Note on the fourth anniversary of funding of such Promissory Note, extendable by one additional year at the borrower’s election. We are entitled to purchase, at a nominal price, certain Warrant Units in conjunction with each advance. Upon exercising the Warrant Units, we are entitled to receive up to fourteen percent ownership of Common A Units in the company.

 

During 2018, we advanced $550,000 on three separate simple Promissory Note(s) and in 2019 we advanced an additional $500,000 to the aforementioned identity and professional services company. The Notes bear interest at the rate of 6.0 percent annually with an original maturity date six months from the date of funding the Notes. In March 2019, the parties agreed to extend the maturity date of these Promissory Notes to December 31, 2020.

 

In 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.

 

4.

Stock-based Compensation

 

At March 31, 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 month periods ended March 31, 2019 and 2018 has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $25,000 and $13,000 of stock-based compensation expense during the quarters ended March 31, 2019 and 2018, respectively.

 

 

As of March 31, 2019, there is $401,000 of unrecognized compensation cost related to stock options. We granted 30,000 options during the three months ended March 31, 2019. The following table summarizes options as of March 31, 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 first 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 March 31, 2019. The amount of aggregate intrinsic value will change based on the market value of the company’s stock.

 

5.

Fair Value of Financial Instruments

 

The carrying value of cash, marketable securities, accounts 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 and trade accounts. 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.

 

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.

 

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:

 

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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.

 

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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.

 

 

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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 available-for-sale investments 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.

 

7.

Commitments and Contingencies

 

Leases

 

We have noncancellable operating leases for offices and data centers expiring at various dates through June 2022. These operating leases are included in "Other long-term assets" on the Company's March 31, 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 March 31, 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 March 31, 2019, total right-of-use assets and operating lease liabilities were approximately $1,131,000. 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% as of March 31, 2019. The weight average remaining lease term as of March 31, 2019 was 2 years.

 

Legal Matters

 

There are no pending or threatened legal proceedings. 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.

 

8.

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 March 31, 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%, 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 years before 2013.

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