UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K.

(Mark One)

For the fiscal year endedDecember 31, 20120145

OR

For the transition period from_________ to ____________

Commission file number 1-9330

Registrant’s telephone number: (770) 381-2900

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐ No☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes☐ No☑

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).      Yes☑     No☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.           ☑

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

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

The aggregate market value of the registrant’s common stock held by non-affiliates on June 30, 20142015 was $5,725,325$19,582,276 (computed using the closing price of the common stock on June 30, 20142015 as reported by the NYSE MKT).

As of February 15, 2015, 8,958,02829, 2016, 8,731,299 shares of common stock of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 201526, 2016 are incorporated by reference in Part III hereof.

TABLE OF CONTENTS

PART I

Forward-Looking Statements

In addition to historical information, this Form 10-K may contain forward-looking statements relating to Intelligent Systems Corporation (“ISC”). All statements, trend analyses and other information contained in the following discussion relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, “likely” and “intend”, and other similar expressions constitute forward-looking statements. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. A number of the factors that we believe could impact our future operations are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item7 of this Form 10-K. ISC undertakes no obligation to update or revise its forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results except as required by law.law.

ITEM 1.      BUSINESS

Overview

Intelligent Systems Corporation, a Georgia corporation, and its predecessor companies have operated since 1973 and its securities have been publicly traded since 1981. In this report, sometimes we use the terms “company”, “us”, “ours”, “we”, Registrant“Registrant” and similar words to refer to Intelligent Systems Corporation and subsidiaries. Our executive offices are located at 4355 Shackleford Road, Norcross, Georgia 30093 and our telephone number is (770) 381-2900. Our Internet address is www.intelsys.com.www.intelsys.com. We publish our Securities and Exchange Commission (“SEC”) reports on our website as soon as reasonably practicable after we file them with or furnish them to the SEC, and shareholders may access and download these reports free of charge.

Financial Reporting

We consolidate the resultsOn March 31, 2015, we sold our largest operating subsidiary, ChemFree Corporation to CRC Industries, Inc., a Pennsylvania corporation (“CRC”). ChemFree manufactures and markets a line of operations of companies in which we own a majority interest and over which we exert control. We generally account for investments by the equity method for minority owned companies in which we own 20 to 50 percent and over which we exercise significant influence, but do not exert control. In general,parts washers under the equity method,SmartWasher® trademark. Accordingly, we report our pro rata share ofhave retroactively classified the income or loss generated by each of these businessesChemFree operations as equity income/losses of affiliates on a quarterly basis. Privately owned corporationsdiscontinued operations in which we own less than 20 percent of the equity are carried at the lower of cost or market.all periods presented.

Industry Segments Overview

Ourconsolidated companies operateFollowing the sale of ChemFree, we are primarily engaged in two industry segments: Information Technology Productsthe business of providing technology solutions and Servicesprocessing services to the financial technology and Industrial Products. The principal operating company inservices market, commonly referred to as the FinTech industry. Our FinTech operations are conducted through our Information Technology Products and Services segment is CoreCard Software, Inc. (“CoreCard”) subsidiary and its affiliate companies in Romania and India, as well as the Industrial Products segment consists of ChemFree Corporation (“ChemFree”). As of December 31, 2014, wecorporate office which provides significant administrative, human resources and executive management support to CoreCard. We own 100 percent of ChemFree and approximately 96 percent (on a fully diluted basis) of CoreCard. We also have two wholly owned subsidiaries, CoreCard SRL in Romania and ISC Software in India, that perform software development and testing as well as processing operations support for CoreCard, but do not sell products or services to third parties.

The business discussion which follows contains information on products, markets, competitors, research and development and manufacturing for our operating subsidiaries organized by industry segment. For further detailed financial information concerning our segments, see Note 15 in the accompanying Notes to Consolidated Financial Statements. For further information about trends and risks likely to impact our business, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K.

Our business is not seasonal on a consolidated basis.

Industrial Products Segment

ChemFree Corporation–ChemFree, our largest subsidiary in terms of revenue and profit, designs, manufactures and markets a line of parts washers under the SmartWasher® trademark. The SmartWasher® system uses a proprietary advanced bio-remediation system that cleans automotive parts, machine parts and weapons, without using hazardous, solvent-based chemicals. Typically, the SmartWasher® system consists of a molded plastic tub and sink, recirculating pump, heater, control panel, filter, naturally occurring microorganisms, and aqueous-based degreasing solutions. Unlike traditional solvent-based systems, there are no regulated, hazardous products used or produced in the cleaning process and the SmartWasher® system is completely self-cleaning. Our assembled products are shipped to resellers or direct to customer sites and do not require set-up or on-site support from us. Unit pricing varies by model but typical end-user prices are less than $2,000 per unit. ChemFree sells replacement fluid and filters, which we refer to as consumable supplies, to its customers on a regular basis after the initial parts washer sale. ChemFree has several U.S. and European patents covering its SmartWasher® system and protects its proprietary fluid and filters as trade secrets. As the leader in bio-remediating parts washers, ChemFree introduces new versions and enhancements of its products, formulations and consumable supplies to the market on a periodic basis. ChemFree received approval by the Environmental Protection Agency (“EPA”) for its OzzyJuice® degreasing fluid under the EPA Design for Environment (DfE) program. To date, OzzyJuice® is the only bio-remediating parts washing fluid to be so recognized.

ChemFree’s markets include the automotive, transportation, industrial and military markets. The automotive market includes companies and governmental agencies with fleets of vehicles, individual and chain automobile service centers, and auto parts suppliers. The industrial market includes customers with machinery that requires routine maintenance, such as power plants and manufacturing operations. Military applications include vehicle, aircraft and weapons maintenance. ChemFree sells its products directly to high volume customers as well as through several distribution channels, including international distributors in Europe, Canada, Latin America and the Pacific Rim. Because ChemFree sells in part through large national non-exclusive distributors such as NAPA in the United States and single distributors in certain international markets, its results could be impacted negatively if one or more of such distributors stops carrying ChemFree products. One of ChemFree’s domestic distributors, NAPA, represented 16 percent and 18 percent of our consolidated revenue in 2014 and 2013, respectively. Part of ChemFree’s revenue is derived from lease contracts under which ChemFree provides SmartWasher® machines and supplies to nationwide chains of auto repair shops, primarily Pep Boys.

ChemFree also sells to large volume corporate customers on a direct basis rather than through its distributor network. One such corporate customer, Cintas Corporation, accounted for 21 percent of consolidated revenue in both 2014 and 2013. Cintas buys machines and consumables from ChemFree and provides them to its lease customers in conjunction with regular visits by its service teams to change filters and replenish fluids. A similar services program was successfully launched in Australia by another ChemFree customer and several other initiatives are being explored with customers in other international markets as well as smaller regional service companies in the U.S. market. International markets are individually much smaller than the U.S. domestic market.

ChemFree competes with companies that offer solvent-based systems, other companies that offer aqueous-based systems, and hazardous waste hauling firms. Although smaller than some established solvent-based firms, ChemFree believes it is competitive based on product features, positive environmental impact, desirable health and safety features, less burdensome regulatory compliance, and cleaning performance. Specifically,

ChemFree believes that overall domestic and international market demand for its products could increase if environmental regulations in the U.S. and overseas prohibiting or restricting the use of solvent-based products, with which ChemFree’s products compete, become increasingly stringent and such regulations are enforced effectively by state, local and national governments. Increased acceptance of bio-remediating and aqueous-based systems could result in more competition and pricing pressure as more suppliers of equipment and fluid enter the market.

In certain state and foreign jurisdictions, ChemFree is required to submit documentation and obtain government approval to sell products that contain biological components (i.e. the microorganisms used in bio-remediation). ChemFree has not experienced any difficulty or delay in obtaining such approvals and presently does not anticipate any changes to such regulations that would create an obstacle to its business. ChemFree’s cost of compliance with environmental laws is low as ChemFree’s products do not generate any regulated substances. This fact provides a competitive advantage for ChemFree products over solvent-based products, which subject their users to significant environmental regulation, compliance costs and potential liability.

Customer and warranty service, covering one to three year periods, generally consists of shipping a replacement part to the customer or returning a defective product for replacement to either ChemFree or its distributors. ChemFree purchases raw materials and certain major sub-assemblies built to its specifications from various manufacturers and performs assembly and testing at its facility in Norcross, Georgia. ChemFree blends its proprietary fluid at its facility in Norcross, Georgia and at third party facilities in certain international markets under blending arrangements. While it is possible to acquire most raw material parts and sub-assemblies from multiple sources, ChemFree frequently contracts with a single source for certain components in order to benefit from lower prices and consistent quality, especially with respect to molded plastic parts which are produced using ChemFree-owned molds. One sub-assembly and certain molded plastic parts have only a single qualified supplier presently and shortages or price increases associated with such sole-source suppliers could impact ChemFree’s ability to meet market demand for its products and/or increase its cost of goods sold. ChemFree has from time to time experienced limited shortages of a sole-sourced molded part that is included in one of its products, but this has not had a material impact on its business due to the limited revenue and margin derived from such product. We expect that some general price inflation affecting raw material prices will continue for the foreseeable future; however, it is unclear how significant this will be.

Information Technology Products and Services Segment

CoreCard Software, Inc.– The principal operating company inWe conduct our Information Technology Products and Services segment isbusiness primarily through CoreCard Software, Inc. (“CoreCard”). Our wholly owned subsidiaries, CoreCard SRL and ISC Software in Romania and India, respectively, perform software development and testing for CoreCard but do not sell products or services to third parties. Accordingly, this discussion describes the CoreCard business involving the three entities as a single business unit. CoreCard designs, develops, and markets a comprehensive suite of software solutions to accounts receivable businesses, financial institutions, retailers and processors to manage their credit and debit cards, prepaid cards, private label cards, fleet cards, loyalty programs, and accounts receivable and small loan transactions. CoreCard also uses the same software solutions in its processing operations for companies that prefer to outsource this function to CoreCard rather than license the software for in-house operations.

The CoreCard™CoreCard® software solutions allow companies to offer various types of debit and credit cards as well as revolving loans, to set up and maintain account data, to record advances and payments, to assess fees, interest and other charges, to resolve disputes and chargebacks, to manage collections of accounts receivable, to generate reports and to settle transactions with financial institutions and network associations.

The CoreCard™CoreCard® proprietary software applications are based on CoreCard’s core financial transaction processing platform (CoreENGINE™) and address the unique requirements of customers and program managers that issue or process:

The CoreCard™CoreCard® software solutions allow financial institutions and commercial customers to optimize their card account management systems, improve customer retention, lower operating costs and create greater market differentiation. For example, the CoreCard™CoreCard® solutions are feature-rich, browser-based financial transaction processing solutions that allow customers to automate, streamline and optimize business processes associated with the set-up, administration, management and settlement of credit, prepaid and loan accounts, to process transactions, and to generate reports and statements for these accounts. In addition, because the CoreCard products are designed to run on lowlower cost, scalable PC-based servers, rather than expensive legacy mainframe computers, customers may benefit from a lower overall cost-of-ownership and scalability by adding additional servers as their card volume grows. The CoreCard product functionality includes embedded multi-lingual, multi-currency support, web-based interface, real-time processing, complex rules-based authorizations, account hierarchies, and robust fee libraries. These features support customer-defined pricing and payment terms and allow CoreCard’s customers to create new and innovative card programs to differentiate themselves in the marketplace and improve customer retention.

We believe CoreCard is unique among software companies because it offers a full array of card and account management software solutions, available either for in-house license or outsourced processing by CoreCard’s processing business (“Processing Services”) at the customer’s option. CoreCard also provides customers with a unique option to license the same CoreCard software that is used in the CoreCard processing environment and transfer it in-house for customer controlled processing at a later date.

It has taken more time and resources than expected to build the relationships and infrastructure to support CoreCard’s Processing Services line of business. However, CoreCard is now processing prepaid cards and credit financing for a number of customers and is positionedintends to add moresteadily grow this business as it adds new processing customers in 2015.2016. CoreCard has a data processing center and disaster recovery site at secure third party locations, has received a certification of complianceis certified as compliant with the Payment Card Industry (PCI) Data Security Standards and has an SSAE-16 Type IISOC 1 independent auditoraudit report that can be relied on by its prepaid processing customers. It has obtained certification from the Discover, MasterCard, Star and Pulse networks and expects to complete direct connections and certification by other major network associations in 2015.2016.

CoreCard has relationships with several financial institutions that are important for network certification, referrals for processing or program managers, and sponsoring prospective card programs.

In 2015, CoreCard expects to be aadded Program Manager capabilities in addition to a processor for a small number of card programs,processing services, which will allow the companyus to gain experience and increase revenue potential, although it doeswe do not expect any significant revenue impact near term.

CoreCard’s principal target markets include accounts receivable businesses, prepaid card issuers, retail and private-label issuers, small third-party processors, and small and mid-size financial institutions in the United States andStates. It is adding customers in emerging international markets.markets as well. CoreCard competes with third-party card processors that allow customers to outsource their account transaction processing rather than acquire software to manage their transactions in-house. CoreCard also competes to some extent with larger and more established software suppliers, and a number of software solution providers that offer more limited functional modules. Some of CoreCard’s competitors, especially certain processors, have significantly more financial, marketing and development resources than does CoreCard and have large, established customer bases often tied to long-term contracts. CoreCard believes it can compete successfully in its selected markets by providing to its licensed software customers a robust technology platform, lower overall cost-of-ownership, greater system flexibility, and more customer-driven marketing options. Furthermore, we believe our processing option is an attractive alternative particularly for small, prepaid cardand credit issuers or other companies entering new credit or prepaid markets that may not have the technology expertise to run the software in-house initially. Under our processing option, customers willcan contract with CoreCard to provide them with processing services for their accounts using CoreCard software configured to the customer’s preferences, with an option to license the same software and bring it in-house when and if the customer decides to become its own processor in the future. We believe this transition path for customers is unique in the industry.

The CoreCard™CoreCard® software platform and modules include CoreENGINE™, CoreISSUE™, CoreFraud™, CoreCOLLECT™, CoreSALES™, CoreAPP™, CoreMONEY™ and CoreAcquire™. Using the samea proprietary, base transaction processing platform called CoreENGINE, the CoreCard application modules have been further enhanced to meet the specific requirements of different market segments; for instance, CoreISSUE is available in different versions tailored to the requirements for issuing prepaid cards, fleet cards, bank cards or private label cards/accounts as well as accounts receivable management. In addition, CoreCard configures and/or customizes its robust base modules with additional or specific functionality to meet each customer’s requirements. The company has developed and sold such products to customers in the prepaid, fleet, private label, retail and credit markets. As is typical of most software companies, CoreCard expects to continually enhance and upgrade its existing software solutions and to develop additional modules to meet changing customer and market requirements. To date, CoreCard has focused its extensive development and limited sales activities on building a base of customers in each of its target markets, as well as putting in place the infrastructure and processes to be able to scale the business successfully, particularly for the processing services business.

Historically, most of the company’s sales have resulted from prospects contacting CoreCard based on an online search. In 2014, we hired an industry executive to expand sales and marketing activities for its prepaid processing line of business. CoreCard typically sells its products directly to customers, often in competitive situations, with relatively long sales and implementation cycles.

We have several revenue streams. We receive software license fees that vary depending upon the number of licensed users and the number of software modules licensed with initial contract revenue typically ranging from $150,000$200,000 to $1 million. We also derive service revenue from implementation, customization, and annual maintenance and support contracts for our licensed software. In addition to licensing our software, we now offer processing services (running on the CoreCard software platform). Processing customers pay an implementation and setup fee plus monthly service fees under a contract with a term of three or more years. Depending on factors such as contract terms, customer implementation and testing schedule, and extent of customization or configuration required and whether we are licensing or processing, the timing of revenue recognition on contracts may lead to considerable fluctuation in revenue and profitability. There are often delays in implementation cycles, especially for processing customers, due to third party approvals or processes that are outside of CoreCard’s control and thus it is not possible to predict with certainty when we will be able to begin recognizing revenue on new contracts.

CoreCard’s licensed software products are used by its customers to manage and process various credit, debit and prepaid card programs and there are a number of federal and state regulations governing the issuance of and the processing of financial transactions associated with such cards. CoreCard’s customers are required to comply with such regulations and, to the extent that customers depend on their licensed CoreCard software to manage and process their card accounts, the CoreCard software features and functionality must allow customers to comply with the various governmental regulations. CoreCard continually evaluates applicable regulations and regularly upgrades and enhances its software to help its customers meet their obligations to comply with current and anticipated governmental regulations. As part of CoreCard’s processing business, CoreCard is responsible for providing compliance-related services, including data and network security, customer identification screening and regular reporting which enable its customers to be in compliance with all applicable governmental regulations including but not limited to the Bank Secrecy Act and Anti-Money Laundering regulations. Depending on the extent of changes and new governmental regulations, CoreCard may from time to time incur additional costs to modify its software and services to be compliant. CoreCard has no costs related to compliance with environmental laws.

We believe that the uncertainty and turmoil in the financial services sector as well as the increased regulatory and compliance requirements have had a negative impact on buying decisions for potential customers in recent years. The situation has impacted and may continue to impact the willingness and ability of banks and network associations (such as MasterCard or VISA)Visa) to approve new customer programs which could impact demand for our product and service offerings in the near-term.offerings.

Our business is not seasonal.

Incubator Program

For more than twentytwenty-five years, we have operated thebeen associated with an incubator program (the Gwinnett Innovation ParkPark) at our corporate facility in Norcross, a suburb of Atlanta, Georgia. In exchange for a monthly facility fee, incubator companies have access to office space, conference facilities, telecommunication and network infrastructure, business advice, and a network of peers. Lease income from incubator companies reduces our total corporate facility and personnel costs by approximately $30,000 per year. We view this program as a way to stay abreast of new business opportunities and trends which may benefit our company while simultaneously contributing to our local community in a positive way by supporting entrepreneurship and start-ups, with minimal financial outlay or management time.

Non-consolidated Companies

From time to time, we have invested in entrepreneurial companies that we believe are bringing new applications or technologies to business markets and may continue to do so as a regular part of our strategy.so. Typically, these companies are privately held, early stage companies in technology-related fields. Currently,From time to time, we may increase our largest investment in a company or write down the value of an investment if we believe it is impaired or there may be a 25.5 percent interestliquidation event in NKD Enterprises, LLC (dba CoreXpand),which we participate. Typically the timing and amounts of such events are not predictable. Please refer to Note 4 to our Consolidated Financial Statements for more information related to a technology company withsale and a software-as-a-service (SaaS) offering to help companies and educational institutions manage their purchaseswrite-down of consumable supplies (such as printer supplies, cleaning chemicals, cell phone programs, marketing materials, college apparel, etc.) through a personalized online store that includes only those products and vendors that each customer has approved.two of our non-consolidated companies.

Research and Development

We spent $3.2$2.9 million and $2.7$3.2 million in the years ended December 31, 20142015 and 2013,2014, respectively, on company sponsored research and development. During such years, almost allAll of our consolidated research and development expense is related to our CoreCard subsidiary, with the balance spent for research at ChemFree. In the past two years, CoreCard has maintainedFinTech business. We maintain a workforce of approximately 200225 employees in our offshore operations in India and Romania for software development and testing, as well as operations support for our Information Technology Products and Services segment, at a lower cost per employee than the domestic workforce. ChemFree routinely researches and develops product improvements, including addingprocessing services. We continuously add new features and functionality to its parts washer product lineour financial technology software in response to market requirements and new formulationstrends and packaging of consumables.expect to continue to do so.

Patents, Trademarks and Trade Secrets

Our ChemFree subsidiary had 12 U.S. patents issued and has 2 pending as well as 5 patents in foreign jurisdictions issued covering various aspects of the design and construction of the SmartWasher® system and the process of bio-remediation used in the SmartWasher® system. Most of the U.S. patents expired in 2014. ChemFree considers the proprietary formulation of the chemicals used in its fluids, which ChemFree protects as a trade secret, to be an important intellectual property asset and competitive advantage. CoreCard hasWe have one U.S. patent covering aspects of itsCoreCard’s core software platform. It may be possible for competitors to duplicate certain aspects of our products and processes even though we regard such aspects as proprietary. We have registered with the U.S. Patent and Trademark Office and various foreign jurisdictions various trademarks and service marks for our products. We believe that an active trade secret, trade name, trademark, and copyright protection program is importantone element in developing and maintaining brand recognition and protecting our subsidiaries’ intellectual property. Our companiesWe presently market theirour products under trademarks and service marks such as SmartWasher®, OzzyJuice®, OzzyBooster™ ChemFree®CoreCard®, CoreENGINE™, CoreISSUE™, CoreCOLLECT™, CoreMONEY™ and others.

Personnel

As of February 1, 2015,15, 2016, we had 263252 full-time equivalent employees in our company (including our subsidiaries in the United States and foreign countries). Of these, 227246 are involved in CoreCard’s software development, testing and operations, 29 in manufacturing operations, and 76 in corporate functions. Our employees are not represented by a labor union, we have not had any work stoppages or strikes and we believe our employee relations are good.

Financial Information About Geographic Areas

See Note 14 to the Consolidated Financial Statements. Except for the risk associated with fluctuations in currency, we do not believe there are any specific risks attendant to our foreign operations that are significantly different than the general business risks discussed elsewhere in this Annual Report.

We have a lease covering approximately 61,00015,000 square feet in Norcross, Georgia to house our product development, manufacturing, sales, service and administration operations for our domestic subsidiaries.operations. Our Norcross lease expires on May 31, 2015. Presently, we expect to renew the lease on essentially the same terms and conditions. Five percent of the space we lease in Norcross, Georgia is subleased to non-affiliated businesses in our business incubator.was renewed April 15, 2015 for a three year term. We also lease a small office in Timisoara, Romania and we own a 6,350 square foot office facility in Bhopal, India to house the software development and testing activities of our offshore subsidiaries. We believe our facilities are adequate for the foreseeable future. We do not invest in real estate or interests in real estate, mortgages, or securities of persons primarily engaged in real estate activities.

ITEM 3.      LEGAL PROCEEDINGSWe are not a party to any material pending legal proceedings.

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.

ITEM 4.Mine Safety Disclosures

ITEM 4.

Mine Safety Disclosures

Not applicable.

PART II

Market Information

Our common stock is listed and traded on the NYSE MKT (“NYSE”) under the symbol INS. The following table sets forth, for the periods indicated, the range of high and low sales prices for our common stock as reported by the NYSE.

We had 257235 shareholders of record as of February 1, 2015.15, 2016. This number does not include beneficial owners of our common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries. TheOn February 9, 2016, we paid a special cash dividend of $0.35 per share totaling $3,056,000 to shareholders. However, the company has not paid regular dividends in the past and does not expect to pay any regular dividends in the foreseeable future. Under our revolving line of credit facility, we are precluded from paying dividends without obtaining consent from our lender. See Note 6 to the Consolidated Financial Statements.

Equity Compensation Plan Information

See Item 12 for information regarding securities authorized for issuance under equity compensation plans, which is incorporated herein by reference.

Recent Sales of Unregistered Securities

There have been no sales of unregistered securities by the company during the period covered by this Form 10-K.

Repurchases of Securities

The company did not repurchase any of its shares of common stock during the fourth quarter of 2014.2015.

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDResults OF OPERATIONS

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDResults OF OPERATIONS

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. We consider certain accounting policies related to revenue recognition and valuation of investments and accrued expenses to be critical policies due to the estimation processes involved in each. For a detailed description on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements.

Revenue Recognition -— Product revenue consists of fees from software licenses and sales or leases of industrial products.licenses. Service revenue related to our software products consists of fees for processing services; professional services for software customization, consulting, training, customization,training; reimbursable expenses,expenses; and software maintenance and customer support.

We recognize revenue for industrial products when products are shipped, at which time title transfers to the customer and there are no remaining future obligations. We do not provide for estimated sales returns allowances because ChemFree’s well-established policy rarely authorizes such transactions. As an alternative to selling our parts washers, we may lease our equipment to customers under operating leases. For leased equipment, we recognize revenue monthly at the contracted monthly rate during the term of the lease. We also recognize royalty income based on the quantity of ChemFree’s proprietary fluid that is blended for the European market pursuant to an arrangement with ChemFree’s master European distributor. We classify shipping and handling amounts billed to customers in net revenue and the costs of the shipping and handling to customers as a component of cost of revenue.

Our software license arrangements generally fall into one of the following four categories:

We review each contract to determine if multiple elements exist. As such, only arrangements under the initial contract described above contain multiple elements. Our revenue recognition policies for each of the situations described above are discussed below.

Presently, our initial software contracts do not meet the criteria for separate accounting because the software usually requires significant modification or customization that is essential to its functionality. At present, we use the completed contract method to account for our contracts as we do not have an adequate basis on which to prepare reliable estimates of percentage-of-completion for these contracts. Moreover, there are inherent hazards with software implementations, such as changes in customer requirements or software defects, that make estimates unreliable.

Accordingly, software revenue related to the license and the specified service elements (except for PCS) in the initial contract are recognized at the completion of the contract, when (i) there are no material uncertainties regarding customer acceptance, (ii) cancellation provisions, if any, have expired and (iii) there are no significant obligations remaining. We account for the PCS element contained in the initial contract based on vendor-specific objective evidence of fair value, which are annual renewal fees for such services, and PCS is recognized ratably on a straight-line basis over the period specified in the contract. Upon renewal of the PCS contract by the customer, we recognize revenues ratably on a straight-line basis over the period specified in the PCS contract. All of our software customers purchase software maintenance and support contracts and renew such contracts annually.

Purchases of additional licenses for tier upgrades or additional modules are recognized as license revenue in the period in which the purchase is made.

made for perpetual licenses or ratably over the remaining contract term for non-perpetual licenses..

Services provided under standalone contracts that are optional to the customer and are outside of the scope of the initial contract are single element services contracts. These standalone services contracts are not essential to the functionality of the software contained in the initial contract and generally do not include acceptance clauses or refund rights as may be included in the initial software contracts, as described above. Revenues from these services contracts, which are generally performed within a relatively short period of time, are recognized when the services are complete.

For contracts for licensed software which include an initial fee plus recurring monthly fees for software usage, maintenance and support, we recognize the total fees ratably on a straight line basis over the estimated life of the contract as product revenue since there is no Vendor Specific Objective Evidence (VSOE) for the maintenance and support services.

For processing services which include an initial fee plus recurring monthly fees for services, we recognize the initial fees ratably on a straight line basis over the estimated life of the contract as services revenue.

Revenue is recorded net of applicable sales tax.

Deferred revenue consists of advance payments by software customers for annual or quarterly PCS, advance payments from customers for software licenses and professional services not yet delivered, and initial implementation payments for processing services or bundled license and support services in multi-year contracts. Deferred revenue is classified as long-term until such time that it becomes likely that the services or products will be provided within 12 months of the balance sheet date.

Valuation of Investments– - We hold minority interests in non-publicly traded companies whose values are difficult to determine and are based on management’s estimate of realizability of the value of the investment. Future adverse changes in market conditions, poor operating results, lack of progress of the underlying investee company or its inability to raise capital to support its business plan could result in investment losses or an inability to recover the current carrying value of the investment. Since some of the companies in which we hold minority positions are backed by venture capitalists, the value of our investment may be impacted by the amount, terms and valuation of the investee’s financial transactions with third party venture funds or the terms of the sale of the investee company to a third party. Our policy with respect to minority interests is to record an impairment charge when we believe an investment has experienced a decline in value that is other than temporary. For instance, this could occur if the investee company is sold for less than our pro rata carrying value or if a new round of funding is at a lower valuation than our investment was made or if the financing terms for the new investors (such as preferences on liquidation) otherwise reduce the estimated value of our investment. We do not write-up the carrying value of our investments based on favorable changes or financial transactions. At least quarterly, we review our investments to determine any impairment in their carrying value and we write-down any impaired asset at quarter-end to our best estimate of its current realizable value. Any such charges couldIn the fourth quarter of 2015, we recorded an impairment charge of $792,000 to reduce the carrying value of NKD Enterprises to management’s estimate of net realizable value. During the same quarter, we recorded a gain on investment of $2.0 million when Lancope, Inc., an investee company, was sold to Cisco, Inc. Such gains or writedowns can have a material adverse impactimpacts on our financial condition or results of operations and are generally not predictable in advance.

Accrued Expenses- Management regularly makes estimates with respect to expenses that should be accrued inExecutive Summary

The results reported reflect the current reporting period, based on its best judgmenteffect of expenses that may be incurred in the future. Oursale of ChemFree subsidiary accrues for estimated costs associated with its product warrantieson March 31, 2015, as an expenseexplained in the period the related sales are recognized. Product warranties typically cover repair or replacement of defective parts for a one year period, or for up to three years for certain parts under extended warranty provisions. Such estimates are based on a number of factors, mainly on historical data of costs for warranty parts and services. Warranty accrual rates are reviewed and adjusted periodically. For new products introduced into the market, there is no historical data on which to base accrual rates and management estimates the warranty rates based on its best judgment, taking into consideration warranty costs for similar products where possible. In hindsight, actual warranty expenses may be more or less than estimated and could result in an adjustment to the warranty accrual in future periods. At January 1, 2014, the accrual for warranty expense was $141,000. During 2014, actual warranty expenses were $130,000, additional warranty accruals were $111,000, and the warranty accrual balance at December 31, 2014 was $122,000. Management also regularly assesses any liability related to legal activity and uses its best judgment to determine the likelihood and potential cost for any such liability and what amount, if any, should be accrued. As noteddetail in Note 82 to the Consolidated Financial Statements,Statements. We have retroactively classified the ChemFree operations as discontinued operations in all periods presented. Our consolidated continuing operations consist of our ChemFreeCoreCard Software subsidiary settled a litigation matter involving a contract dispute and recorded Legal Settlement expenses of $387,000its affiliate companies in 2014 for amounts settledRomania and owed in excess of amounts accrued in prior periods. WhileIndia, as well as the company believes that its original interpretation of the contract terms relatingcorporate office which provides significant administrative, human resources and executive management support to commissions earned was correct, it decided that a settlement was in its best interests due to the inherent uncertainty of the binding arbitration process and the potential for an even greater negative impact on the company if the arbitrator’s final ruling was not in its favor. As of December 31, 2014, the company has accrued $55,000 in legal fees related to this matter.CoreCard.

Executive Summary

We provide technology solutions and processing services to the financial services market, commonly referred to as the FinTech industry. We derive ourproduct revenue from saleslicensing our comprehensive suite of financial transaction management software to accounts receivable businesses, financial institutions, retailers and leases of equipmentprocessors to manage their credit and supplies in our Industrial Products sectordebit cards, prepaid cards, private label cards, fleet cards, loyalty programs, and from sales of software licenses in our Information Technology Productsaccounts receivable and Services sector.small loan transactions. Ourservice revenue consists of fees for consulting, customization, processing services,software maintenance and support for licensed software products, fees for processing services that we provide to companies that outsource their financial transaction processing functions to us, and professional services primarily for software customizations provided to both license and processing customers.

We have frequently recognized consolidated operating losses on a quarterly and annual basis and are likely to do so in the foreseeable future. We may report operating profits on an irregular basis and our Information Technology Productsresults vary in part depending on the size and Services sector. number of software licenses recognized in a particular period and the level of expenses incurred to support existing customers and development and sales activities. A significant portion of our expense is related to personnel, including approximately 225 employees located in India and Romania. In addition, we offer processing services as an alternative for customers who prefer to outsource this function instead of licensing our software and running the application in-house. We are likely to incur losses in the near future because revenue for processing services is spread out over multi-year contracts while we are currently investing in the infrastructure, resources, processes and software features to support this developing business. In addition, we have certain corporate office expenses associated with being a public company that impact our operating results.

Our revenue fluctuates from period to period and our results are not necessarily indicative of the results to be expected in future periods. Period-to-period comparisons may not be meaningful and itIt is difficult to predict the level of consolidated revenue on a quarterly or annual basis for a number of reasons, including the following:

We have frequently recognized consolidated operating losses on a quarterly and annual basis and may do so in the future from time to time. Our ChemFree subsidiary has regularly generated an operating profit and positive cash flow and is focusing on optimizing profitable operations and the long-term valueThe sale of the business. Our CoreCard subsidiary is not consistently profitable,ChemFree operations has resulted in part duesignificant cash balances. We used $692,000 to significant research and development expense that is invested in its product offerings and the deferral of initial contract revenue recognition until licensed software and associated services are delivered to and implemented by its customers. Depending upon the size and number of software licenses recognized in a particular period and the level of expenses incurred to support existing customers and development and sales activities, CoreCard may report operating profits on an irregular basis as it builds a larger customer base. In addition, CoreCard provides processing services as an alternative for customers who prefer to outsource this function instead of licensing our software and running the application in-house. There are a number of uncertainties related to this new line of business. We are likely to incur losses in the foreseeable future for the processing business because contract revenue is spread out over the life of each contract while we are currently investing in the infrastructure, resources and processes to support a growing processing business. A significant portion of CoreCard’s expense is related to personnel, including a workforce of approximately 200 employees located in India. For these and other reasons, our operating results may vary from quarter to quarter and at the present time are generally not predictable with a reasonable degree of certainty on a quarterly or annual basis.

From time to time, we derive income from sales of holdings in affiliate and other minority-owned companies or we may record a charge if we believe the value of a non-consolidated company is impaired. We also recognize on a quarterly basis our pro rata share of the income or losses of an affiliate company accounted for by the equity method. The timing and amount of the gain or loss recognized as a result of a sale or the amount of equity in the income or losses of an affiliate generally are not under our control and are not necessarily indicative of future results, either on a quarterly or annual basis.

In recent years, mostrepurchase shares of our common stock pursuant to a modified “Dutch” auction tender that ended on May 19, 2015. We intend to use cash has been generated by our ChemFree operations. We have used a significant amount of the cashbalances to support the domestic and international operations associated with our CoreCard subsidiarybusiness and to expand our operations in the corporate office.

For additional comments on issues that may impact us, please readFinTech industry through financing the section entitled Factors That May Affect Future Operations latergrowth of CoreCard and, if appropriate opportunities become available, through acquisitions of businesses in this discussion.industry.

Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in this Annual Report.

Overview of 2014 Compared to 2013

In 2014, ChemFree reportedRevenue– Total revenue from continuing operations in 2015 was $4,782,000 which represents a solidly profitable year (even with14 percent increase over 2014. We experienced revenue growth on both the legal settlement expense of $387,000 described in Note 8 to the Consolidated Financial Statements), although total revenue in 2014 was lower than in 2013. We anticipate that ChemFree will continue to be consistently profitable in the foreseeable future as it focuses on optimizing operating resultsproducts and the long-term valueservices sides of the business.      CoreCard provides licensed software and processing services to customers in the financial services industry, which has been experiencing a changing regulatory, competitive and business process environment. We believe these factors may continue to impact CoreCard’s revenue and prospects for new customers (such as issuers, processors and program managers of credit and prepaid cards) in the foreseeable future as companies postpone software purchases and implementations, decide to outsource rather than manage in-house software implementations, or encounter reluctance by financial institutions to act as sponsor banks for prospective customers. Although we continue to believe there is a substantial market for our products and services, we are carefully monitoring the evolving dynamics in our markets as we add new resources, products, infrastructure and marketing activities to support existing customers and to continue to add new customers. It has taken significantly more time and resources than expected to build the relationships and infrastructure to support CoreCard’s processing services initiative. In 2014, CoreCard increased revenue from its processing business, launched an expanded sales effort for its prepaid processing services and added more issuer bank relationships and network certifications, although we expect to incur losses in the processing business in the near term as revenue from processing customers is spread over multi-year contracts and we will need to continue to invest in this new line of business.

Revenue-Total consolidated revenue for the year ended December 31, 2014 was $14.6 million, a decrease of 11 percent compared to the prior year.

Product revenue includes sales and leases of SmartWasher® machines and consumable supplies by our ChemFree subsidiary in the Industrial Products segment as well as software license-related revenue by our CoreCard Software subsidiary in the Information Technology Products and Services segment. In 2014, revenue from product sales was $11.0 million, a decrease of 13 percent compared to 2013.

Service revenue generated by our Information Technology Products and Services segment was $3.7 million in 2014, essentially the same as reported in 2013, although the mix of service revenue varied year-to-year. Year-over-year, the company increased revenue from processing services and professional services while maintenance revenue declined in 2014 as compared to 2013 due to a strategic decision by a customer to outsource certain processes, including one that had been running on our licensed software. We expect that our processing services and maintenance services for existing and new customers will continue to grow as CoreCard’s customer base increases; however, it is not possible to predict with any accuracy the number and value of professional services contracts that CoreCard’s customers will require in a given period. Customers typically require our professional services to modify or enhance their CoreCard software implementation based on their specific business strategy and operational requirements, which vary from customer to customer and period to period.

Cost of Revenue -– Total cost of revenue was $7.9 million (5453 percent of total revenue) in 2014revenue for the twelve months ended December 31, 2015, compared to $8.6 million (5349 percent of total revenue) in 2013.for the twelve months ended December 31, 2014.

Operating Expenses-Consolidated marketing – For the twelve month period ended December 31, 2015, total operating expenses from continuing operations were 14 percent ($224,000) lowerhigher than in 2014 compared to 2013 due mainly to reduced sales commission and advertising expense incurred by ChemFree. Consolidated generalthe corresponding period in 2014. General and administrative expenses were significantly higher by 9 percent ($233,000)in 2015 than in 2014, comparedmainly due to 2013 due mainlyfactors related to the sale of the ChemFree subsidiary. In 2014 a significant component of corporate G&A expenses was charged to our former ChemFree subsidiary for services provided by the corporate office to ChemFree and is included in the line item Income from Discontinued Operations. Following the sale of ChemFree in March 2015, corporate activities and resources (and the associated expense) have been re-focused on our FInTech business and strategic initiatives, resulting in higher management and legal expense at CoreCard. Consolidated researchG&A expenses for continuing operations in 2015. In addition, the increase in G&A expenses for 2015 includes bonuses paid following the ChemFree sale as well as transaction expenses for the tender offer. Research and development expenses were 2010 percent ($528,000) higherlower in 20142015 as compared to 2013. As a general rule, changes between periods reflect2014, mainly differences in the mix and number of U.S. and offshoredue to more technical personnel expenses that arebeing charged to direct cost of services revenue for maintenance, processing and professional services and processing. Marketing expenses remained relatively immaterial as a percentage of total operating expenses, 5% in a given period versus base R&D activities.

Legal Settlement Expense-As a result2015 and 6% in 2014, as resources have been more heavily dedicated to the research and development efforts of the settlement ofbusiness. We anticipate increasing marketing expenditures in the ChemFree legal matter described in Note 8future as we are better positioned to support the Consolidated Financial Statements, in 2014 we incurred $387,000 in legal settlement expenses, reflecting the difference between the $706,000 settlement amount and amounts accrued in prior periods.processing business.

Investment IncomeIncome-–In 2015, we recorded $1,247,000 of investment income, which was comprised primarily of $2,034,000 on the sale of our minority interest in Lancope, Inc., in December 2015 offset in part by an impairment charge of $792,000 in the fourth quarter of 2015 to write down the carrying value of another investee company, NKD Enterprises, to our estimate of net realizable value. In 2014, we recorded investment income, net, of $128,000. We recorded a gain of $145,000, on the sale of our minority interest in Silverpop, a privately-held company that was sold in 2014. Offset against this investment gain was a write-down of $17,000 to reduce the carrying value to of a privately held company in which we owned a small interest to zero, our estimate of its net realizable value.

Equity Earnings (Loss)Gain on Sale of Affiliate CompanyDiscontinued Operations-We recognize our pro rata share–As explained in more detail in Note 2 to the Consolidated Financial Statements, we recorded a gain of the earnings and losses of an affiliate company that we record$18,802,000 on the equity method. In 2014, we recorded $1,000sale of our ChemFree subsidiary in net equity loss of the affiliate company compared to $21,000 in net equity income of the affiliate company in 2013. The change between periods reflects a decline in profitability of the affiliate company.2015.

Other Income netFrom Discontinued Operations- We recorded other income–In 2015, there was a loss from discontinued operations of $52,000$3,000 prior to the sale on March 31, 2015, compared to $71,000 in 2013, reflecting primarily lower purchase discounts and dividends earned on marketable securitiesincome from discontinued operations of $1,211,000 in 2014.

Income Taxes- We recorded $53,000Liquidity and $69,000, in the years ended December 31, 2014 and 2013, respectively, for federal alternative minimum and state income tax expense, including amounts accrued for uncertain tax positions.Capital Resources

Income from DiscontinuedOperations- In 2008, the company sold the business and substantially all the assets of its VISaer subsidiary. In 2014, the statute of limitations expired on a liability that had been retained by the company and accordingly, the company recognized $100,000 in income from discontinued operations upon the extinguishment of the liability.

NetLossAttributable toNoncontrollingInterest-Accounting standards require us to attribute to the noncontrolling interest (held by common shareholders of our CoreCord Software subsidiary) its share of the losses of the subsidiary. The difference between periods reflects increased losses of the subsidiary in 2014 as compared to 2013.

Liquidity and Capital Resources 

Our cash balance at December 31, 20142015 was $2.6 million$18,059,000 compared to a cash balance of $3.4 million$2,624,000 at December 31, 2013. Available-for-sale marketable securities were $463,0002014. The principal source of cash during the period was the sale of the ChemFree subsidiary which generated cash proceeds of $18,202,000 on the closing of the transaction. In addition, a total of $3,300,000 of the sale price was placed in escrow for purposes of securing our obligations to indemnify the buyer 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 working capital. As of December 31, 2015, $880,000 of the escrow funds, net of the working capital adjustment, has been released to us and is included in our cash balance at year end. The remaining escrow balance of $2,200,000 will remain in escrow until September 30, 2016 and is recorded as Restricted Cash at December 31, 2014 compared to $351,000 at2015.

During the twelve months ended December 31, 2013. During 2014, we2015, continuing operations used $581,000 net$2,066,000 cash for operating activities, including payments totaling $645,000operations of the FinTech business and corporate office as well as payment of bonuses related to the sale of the ChemFree legal settlement matter describedsubsidiary. The most significant working capital changes since December 31, 2014 include an increase in other current assets of $2,508,000 of which $2,248,000 relates to the sale of our minority interest in Lancope as explained in Note 84 to the Consolidated Financial Statements. Other major working capital changes include a reductionStatements, as well as an increase in accounts receivable of $650,000 reflecting both lower$461,000 due to higher billings in the fourth quarter2015, along with an increase in deferred revenue of 2014 as well as improved collections.$1,220,000 due to milestone billings for in-process contracts and deposits for professional services, which are not yet recognizable for GAAP reporting.

We also used $272,000 cash to acquire computer equipment for our processing data centers and to upgrade office equipment for technical resources. In 2014,addition, we used $277,000$430,000 cash to acquire minority interests in two privately-held technology companies.

As explained in Note 12 to the Consolidated Financial Statements, on April 22, 2015, we initiated a modified “Dutch” auction tender offer to purchase for capital purchases, primarily computer equipment,cash shares of our common stock for an aggregate purchase price of up to $5.0 million. Upon completion of the tender offer, we purchased and $132,000 for additional purchasesretired 230,729 shares, using $692,000 of marketable securities. We also received cashthe proceeds from investments of $171,000,the ChemFree sale

In the twelve months ended December 31, 2015, discontinued operations generated $18,893,000 net cash, principally from the sale of a privately held technology companyChemFree discussed above and further explained in which we owned a small equity interest.Note 2 to the Consolidated Financial Statements.

We currently project that we will have sufficient liquidity from cash on hand, continued cash positive operations at ChemFree, and projected customer payments at CoreCard to support our operations and capital equipment purchases in the foreseeable future. Other potential sources of short-term liquidity include sales of marketable securities, if needed. We renewed our line of credit in June 2014 with a maximum principal availability of $1.25 million$1,250,000 based on qualified receivables and inventory levels whichreceivables; however, we will use as necessary to support short-term cash needs. We have not borrowed under the bank line of credit in the past four years and do not expect to do so in the foreseeable future.five years. The line of credit expires June 30, 2016, subject to the bank renewing the line for an additional period. Presently,

Subsequent to the 2015 year-end, on February 8, 2016 we paid a special cash dividend of $0.35 per share totaling $3,056,000 to shareholders of record as of January 29, 2016. Although we do not believe there is a material risk thatexpect to pay any regular or special dividends in the foreseeable future, we will not perform successfullyreserve the right to do so at management’s discretion pending both board approval and our lender’s consent. We expect to have sufficient liquidity from cash on contracts but ifhand as well as projected customer payments are delayedto support our operations and capital equipment purchases in the foreseeable future. Currently we expect to use cash in excess of what is required for any reason, ifour current operations for opportunities we do not control costs or if we encounter unforeseen technical or quality problems, then we could require more cash than presently planned.

Long-term, we currently expectbelieve will expand our FinTech business, although there can be no assurance that liquidityappropriate opportunities will continue to improve and consolidated operations will generate sufficient cash to fund their requirements with use of our credit facility to accommodate short-term needs. Other long-term sources of liquidity include potential sales of investments, subsidiaries or other assets. Furthermore, the timing and amount of any such transactions are uncertain and, to the extent they involve non-consolidated companies, generally not within our control.arise.

Off-Balance Sheet Arrangements

We do not currently have any off-balance sheet arrangements that are reasonably likely to have a current or future material adverse effect on our financial condition, liquidity or results of operations.

Factors That May Affect Future Operations

Future operations in the Information Technology Products and Services and Industrial Products segments are subject to risks and uncertainties that may negatively impact our future results of operations or projected cash requirements. It is difficult to predict future quarterly and annual results with certainty. Any trend or delay that affects even one of our subsidiaries could have a negative impact on the company’s consolidated results of operations or cash requirements on a quarterly or annual basis. In addition, the carrying value of our investments is impacted by a number of factors which are generally beyond our control since we are typically a non-control shareholder in a private company with limited liquidity.

Among the numerous factors that may affect our consolidated results of operations or financial condition are the following:

Information Technology Products and Services Industry

Industrial Products Industry

Other

Recent Accounting Pronouncements

– In May 2014, the FASB issued ASU 2014-09, “RevenueRevenue from Contracts with Customers (Topic 606).” The core principle and in August 2015 issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date which amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new accounting guidance is that a company should recognizecontrol-based revenue to depictrecognition model, changes the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchangebasis for those goods or services. The new accounting guidance provides a five-step analysis of transactions to determinedeciding when and how revenue is recognized over time or at a point in time, provides new and requires enhancedmore detailed guidance on specific topics and expands and improves disclosures about revenue. This update isIn addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer. These amendments are effective for annual reporting periods beginning after December 15, 2016,2017, including interim reporting periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, and caninterim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance of ASU 2014-09. The amendments should be adopted eitherapplied retrospectively to all periods presented or as aretrospectively with the cumulative effect adjustmentrecognized at the date of adoption.initial application. We are currently evaluating the effect adoptingimpact of this new accounting standard on our consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) - Simplifying Income Statement Presentation by Eliminating the Concepts of Extraordinary Items. ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and is not expected to have a material effect on our operating results or financial condition.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10). The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition the amendments in this Update eliminate certain disclosure requirements. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of this new accounting guidance will have on our consolidated financial statements.

ITEM 8.     FINANCIAL STATEMENTS

ITEM 8.

FINANCIAL STATEMENTS

The following Consolidated Financial Statements and related report of independent registered public accounting firm are included in this report and are incorporated by reference in Part II, Item 8 hereof. See Index to Financial Statements on page F-1 hereof.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

(a)     Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. At of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and with the participation of the company’s management, including the company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective at that reasonable assurance level.

(b)     Changes in internal control over financial reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment.

There were no significant changes in the company’s internal control over financial reporting or in other factors identified in connection with this evaluation that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

(c)     Management’s report on internal control over financial reporting

The management of Intelligent Systems Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a – 15(f) under the Securities Exchange Act of 1934. The company maintains accounting and internal control systems which are intended to provide reasonable assurance that the assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with management’s authorization and accounting records are reliable for preparing financial statements in accordance with accounting principles generally accepted in the United States of America.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, risk.

The company’s management evaluated the effectiveness of the company’s internal control over financial reporting as of December 31, 2014.2015. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission inInternal Control – Integrated Framework. Based on our evaluation management believes that, as of December 31, 2014,2015, the company’s internal control over financial reporting is effective based on those criteria.

This Annual Report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit smaller reporting companies such as our company to provide only management’s report in the Annual Report.

Item 9B.      Other information

As previously indicated, the company has undertaken an exploration of strategic alternatives to enhance shareholder value. This analysis has been focused on the potential realizable value of its CoreCard and ChemFree subsidiaries and the possibility of a sale at a favorable price of one or both, focusing initially on ChemFree. While the company has entered into discussions with potential buyers, no formal offer has been received, nor has the board of directors formally determined to proceed with a sale of either subsidiary. The company expects to continue this process – including discussions with potential purchasers. However, there can be no assurance that the board will elect to proceed with a sale or, if it were to so elect, that a sale at an acceptable price could be effected. Unless otherwise required by law, the company does not intend to provide updates or comment further concerning this process unless a transaction is approved by the board or the review process is completed.

PART III

Please refer to the subsection entitled “Proposal 1 - The Election of Two DirectorsOne Director - Nominees”Nominee” and “Proposal 1 – The Election of Two DirectorsOne Director – Executive Officers” in our Proxy Statement for the 20152016 Annual Meeting of Shareholders (the “Proxy Statement”) for information about the individuals nominated as directors and about the directors and executive officers of the company. This information is incorporated into this Item 10 by reference. Information regarding compliance by directors and executive officers of the company and owners of more than 10 percent of our common stock with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, is contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. This information is incorporated into this Item 10 by reference. Information regarding the company’s Audit Committee and its composition is contained under the caption “Proposal 1 – The Election of Two DirectorsOne Director - Nominees”Nominee” and “Proposal 1 – The Election of Two DirectorsOne Director – Meetings and Committees of the Board of Directors” in the Proxy Statement. This information is incorporated into this Item 10 by reference.

There have been no material changes to the procedures by which shareholders may recommend nominees to the company’s Board of Directors.

We have a Code of Ethics that applies to all directors, officers, and employees. The Code of Ethics is posted on our website at www.intelsys.com. We also disclose on our website, within the time required by the rules of the SEC, any waivers of, or amendments to, the Code of Ethics for the benefit of an executive officer.

ITEM 11.     EXECUTIVE COMPENSATION

ITEM 11.

EXECUTIVE COMPENSATION

Please refer to the subsection entitled “Proposal 1 - The Election of Two DirectorsOne Director - Executive Compensation” in the Proxy Statement for information about management compensation. This information is incorporated into this Item 11 by reference.

The following table sets forth the amount of securities authorized for issuance under our equity compensation plans as of December 31, 2014.2015.

Securities Authorized for Issuance Under Equity Compensation Plans

Effective August 22, 2000, the company adopted the Non-Employee Director Stock Option Plan (the “Director Plan”). The Director Plan expired in 2010 and was replaced by the 2011 Non-Employee Director Stock Option Plan (the “2011 Director Plan”), with essentially the same terms and conditions as the expired Director Plan. Up to 200,000 shares of common stock were authorized for issuance under the Director Plan and 2011 Director Plan to non-employee directors with each director receiving an initial grant of 5,000 options followed by annual grants of 4,000 options on the date of each subsequent Annual Meeting. In the years ended December 31, 2015 and 2014, 12,000 and 2013, 16,000 and 17,000 options, respectively were granted under the 2011 Director Plan;Plan, and 8,000 and 12,000 options, and 92,000respectively, expired unexercised. In 2015, 4,000 options expired unexercised in 2014 and 2013, respectively.were exercised. The company instituted the 2003 Stock Incentive Plan (the “2003 Plan”) in March 2003 and the 2003 Plan expired in 2013. The 2003 Plan authorized the issuance of up to 450,000 options to purchase shares of common stock to officers and key employees. No options were granted or exercised under the 2003 Plan in the past two years. In 2015, shareholders approved the Intelligent Systems Corporation Stock Incentive Plan (the “2015 Plan”) that provides for the issuance of up to 750,000 shares of common stock to employees and key consultants and advisors. No grants have been made under the 2015 Plan. Stock options are granted under the company’s equity compensation plans at fair market value on the date of grant and vest ratably over two or three year periods after the date of grant.

Please refer to the subsection entitled “Voting – Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for information about the ownership of our common stock by certain persons. This information is incorporated into this Item 12 by reference.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The lease on our headquarters and primary facility at 4355 Shackleford Road, Norcross, Georgia is held by ISC Properties, LLC, an entity controlled by J. Leland Strange, our Chairman and Chief Executive Officer. Mr. Strange holds a 100% ownership interest in ISC Properties, LLC. We paid ISC Properties, LLC $468,000$275,000 and $467,000$468,000 in the years ending December 31, 2015 and 2014, respectively. Simultaneous with the sale of our ChemFree subsidiary on March 31, 2015, we renewed our facility lease with ISC Properties, Inc. and 2013, respectively.reduced the amount of space leased.

Please refer to the subsection entitled “Proposal 1 - The Election of Two DirectorsOne Director - Nominees”Nominee” in the Proxy Statement referred to in Item 10 for information regarding the independence of the company’s directors. This information is incorporated into this Item 13 by reference.

ITEM 14.     Principal Accountant Fees and Services

ITEM 14.

Principal Accountant Fees and Services

Please refer to the subsection entitled “Independent Registered Public Accountants” in the Proxy Statement for information about the fees paid to and services performed by our independent public accountants. This information is incorporated into this Item 14 by reference.

PART IV

ITEM15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

We are filing the following exhibits with this report or incorporating them by reference to earlier filings. Shareholders may request a copy of any exhibit by contacting Bonnie L. Herron, Secretary, Intelligent Systems Corporation, 4355 Shackleford Road, Norcross, Georgia 30093; telephone (770) 381-2900. There is a charge of $.50 per page to cover expenses of copying and mailing.

Exhibit 10.3(a) is incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-K for the year ended December 31, 1993.

Exhibit 10.3(a) is incorporated by reference to the Registrant’s 2015 Definitive Proxy Statement on Schedule 14A.

Exhibit 10.3(b) is incorporated by reference to the Registrant’s 2011 Definitive Proxy Statement on Schedule 14A.