UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K.

(Mark One)

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year endedDecember 31, 20120145

OR

 

Transition Report Pursuant to 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(Exact name of registrant as specified in its charter)

Georgia

58-1964787

Georgia58-1964787

 (State(State or other jurisdiction of incorporation or organization)

 (I.R.S.(I.R.S. Employer Identification No.)

4355 Shackleford Road, Norcross, Georgia

30093

(Address of principal executive offices)

(Zip Code)

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

 

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

 

Title of each class

Name of each exchange on which registered

Common Stock, $.01 par value

NYSEMKT

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):

Large accelerated filer

Accelerated filer                      

Non-accelerated filer

Smaller reporting company

 

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

 

 Page

Part I

 
     
 

Item

 
  

1.

Business

1

  

2.

Properties

6

  

3.

Legal Proceedings

6

  

4.

Mine Safety Disclosures

7

     

Part II

 
     
  

5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

7
  

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

8

  

8.

Financial Statements

14

  

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

14

  

9A.

Controls and Procedures

14

  

9B.

Other Information

15

     

Part III

 
     
  

10.

Directors, Executive Officers and Corporate Governance

16

  

11.

Executive Compensation

16

  

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

16

  

13

Certain Relationships and Related Transactions, and Director Independence

17

  

14.

Principal Accountant Fees and Services

17

     

Part IV

 
     
  

15.

Exhibits and Financial Statement Schedules

17

 

Signatures

19

 

   Page
Part I   
    
Item  
 

1.

Business

1

 

2.

Properties

5

 

3.

Legal Proceedings

5

 

4.

Mine Safety Disclosures

5

Part II  

 

   

 

 

5.

Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities

5

 

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

6

 

8.

Financial Statements

12

 

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

12

 

9A.

Controls and Procedures

12

   

 

Part III  

 

   

 

 

10.

Directors, Executive Officers and Corporate Governance

13

 

11.

Executive Compensation

13

 

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

14

 

13

Certain Relationships and Related Transactions, and Director Independence

14

 

14.

Principal Accountant Fees and Services

14

   

 

Part IV  

 

   

 

 

15.

Exhibits and Financial Statement Schedules

15

Signatures

17

 

 
 

 

 

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 CorporationChemFree, 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,

The SmartWasher® system is available in a variety of model sizes and features to meet specific customer needs and incorporate ChemFree’s bio-remediating system, typically employing a heater, recirculating pump, proprietary aqueous based de-greasing fluid and microbe impregnated filter. Compared to solvent-based systems, these features make the SmartWasher® system safer, non-flammable and non-caustic to users and do not require expensive contracts to haul and dispose of regulated materials.

ChemFree’s products have a positive environmental impact because, unlike solvent-based systems, they provide necessary cleaning functions to users without using or generating hazardous chemicals or by-products. As noted above, ChemFree received approval by the Environmental Protection Agency (“EPA”) for its OzzyJuice® degreasing fluid under the EPA Design for Environment (DfE) program, the only bio-remediating parts washing fluid to be so recognized to date.

Unlike solvent-based systems, the SmartWasher® system does not expose workers to harmful, irritating chemicals. ChemFree’s fluid is non-flammable, non-caustic and produces minimal emissions from volatile organic compunds, thus reducing the likelihood of fire and enhancing the safety and health of workers and the workplaces in which parts washers are used.

The SmartWasher® bio-remediation process uses naturally occurring microbes to break down grease, oil and other harmful contaminants into harmless carbon dioxide and water. Since the SmartWasher® system does not generate hazardous substances that are subject to strict environmental regulations, users of the SmartWasher® system eliminate their “cradle to grave” liability and the costs associated with solvent-based systems to comply with regulations for properly manifesting, recordkeeping, hauling and disposing of hazardous substances.


Customer feedback as well as market acceptance and repeat orders over more than fifteen years indicate that the SmartWasher® system cleans as quickly and effectively as solvent-based systems, while providing the additional advantages of positive environmental, health and safety features.

ChemFree also offers its BenchTop Pro model designed to appeal to the home, hobbyist and small shop market, featuring bio-remediating functionality that operates at ambient temperature (i.e. does not require a heater) which it believes is a unique and attractive offering that expands its addressable market.

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:

 

Credit/Debit CardsCards/Loans – revolving or non-revolving credit issued to consumer or business accounts (with or without a physical card) that typically involve interest, fees, settlement, collections, etc. Within this market, CoreCard offers software specifically tailored to handle private label cards, network branded (i.e. MasterCard or VISA) bank cards, fleet cards, short-term consumer loans and revolving accounts receivable.


Prepaid Cards – pre-loaded funds drawn down for purchase or cash withdrawal typically involving a variety of fees but no interest. Numerous examples exist including gift cards, loyalty/reward cards, health benefit cards, payroll and benefits disbursement, student aid disbursement, government assistance payments, corporate expense cards, and transit cards.

 

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.

 

License - Typically CoreCard sells a software license to a customer who then runs the CoreCard software system, configured for the customer’s unique requirements, at a customer controlled location.

ProcessingServices - CoreCard has expanded the ways customers can access or deploy its software by offering processing services that allow customers to outsource their card processing requirements to CoreCard. CoreCard manages all aspects of the processing functions using its proprietary software configured for each processing customer.

 

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.

ITEM 2.      PROPERTIES

PROPERTIES

 

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 PROCEEDINGS

 

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

 

ITEM 5.5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

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.

 

Year Ended December 31,

 

2014

  

2013

  

2015

  

2014

 

High 

Low

High 

Low

High 

Low

High

Low

1st Quarter

 2.68  1.60  1.97  1.21  $2.98  $1.58  $2.68  $1.60 

2nd Quarter

  1.91   1.28   1.60   1.14   3.34   2.64   1.91   1.28 

3rd Quarter

  1.87   1.26   1.75   1.00   3.09   2.44   1.87   1.26 

4th Quarter

  1.64   0.97   1.94   1.32   3.49   2.72   1.64   0.97 

 

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:

 

an initial contract with the customer to license certain software modules, to provide services to get the customer live on the software (such as training and customization) and to provide post contract support (“PCS”) for a specified period of time thereafter (typically three months),

purchase of additional licenses for new modules or for tier upgrades for a higher volume of licensed accounts after the initial contract,

other optional standalone contracts, usually performed after the customer is live on the software, for services such as new interfaces or custom features requested by the customer, additional training and problem resolution not covered in annual maintenance contracts, and

contracts for certain licensed software products that involve an initial fee plus recurring monthly fees during the contract life.

 

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:

A change in revenue level at one of our subsidiaries may impact consolidated revenue or be offset by an opposing change at another subsidiary.


 

Software license revenue in a given period may consist of a relatively small number of contracts and contract values can vary considerably depending on the software product and scope of the license sold. Consequently, even minor delays in delivery under a software contract (which may be out of our control) could have a significant and unpredictable impact on the consolidated revenue that we recognize in a given quarterly or annual period.

Customers may decide to postpone or cancel a planned implementation of our software for any number of reasons, which may be unrelated to our software or contract performance, but which may affect the amount, timing and characterization of our deferred and/or recognized revenue.

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.

The timing of new processing customer implementations is often dependent on third party approvals or processes which are typically not under our direct control.

 

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 fromproducts, which includes software license fees (and, in some cases monthly support fees when the license and support fees are bundled) was $614,000 in 2015, a 20% increase over the $510,000 reported in 2014. The product sales customer base remained consistent year to year with fluctuations in revenue generally reflecting the timing of tier upgrade fees related to the number of accounts covered by certain software licenses. The time required to implement a new software license customer due, in part, to the customizations typically requested by the customer generally results in a long lead time from start to finish. As such, certain software license revenue planned for 2015 has been pushed out to 2016.

Revenue fromservices was $4,168,000 in 2015, which represents a 13 percent increase over the $3,677,000 reported in 2014. Revenue from transaction processing services and professional services were both higher in 2015 as compared to 2014 due to an increase in the number of customers and accounts on file for processing operations and more revenue was generated from professional services due to an increase in the number and value of professional services contracts completed in 2015. Maintenance revenue was lower in 2015 than in 2014, due to the expiration of a contract in the second quarter of 2014. As expected, revenue from processing services continues to grow as CoreCard’s customer base increases; however, the time required to implement new customer programs has taken longer than anticipated due to delays in third party integration and approval processes. 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 request 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.

 

 

 

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.

In the Industrial Products segment, our ChemFree subsidiary reported a 14 percent decline in its total revenue. The decline reflects mainly the expiration of an equipment lease contract in July 2013 when the customer opted to purchase the installed lease machines rather than continue with a lease program, as well as a significant one-time sale of parts washers for a corporate user that occurred in 2013.

In the Information Technology Products and Services segment, software license-related revenue reported by our CoreCard subsidiary increased in 2014 compared to 2013, representing just over 5 percent of consolidated product revenue in 2014. The year-over-year increase in 2014 is due to higher monthly fees and tier upgrade fees for prepaid software contracts.

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.

 

Cost ofproduct revenue in 2014 was $6.0 million (55$219,000 or 36 percent as a percent of total product revenue) asrevenue in 2015 compared to $6.4 million (51$248,000 or 49 percent as a percent of total product revenue)revenue in 2013.2014. The change between periods reflects primarily ChemFree’s productdifferences are relatively immaterial in amount and reflect the number of resources required to support our licensed customers, which may vary depending upon numerous factors such as the mix which in 2014 includes a higher percentage of revenue derived from sales of parts washer machines, which have a highernew versus established customers. The cost of goodsproduct as compared to leased equipment and consumable supplies.a percent of product revenue may fluctuate depending upon the timing of tier upgrade fee revenue which generally has no additional cost of product associated with it.

Cost ofservice revenue (which relates to the Information Technology Products and Services segment only)in 2015 was $1.8 million (50$2,331,000 or as a percentage of total service revenue 56 percent of service revenue) in 2014 as compared to $2.3 million (61$1,823,000 or as a percentage of total service revenue 50 percent of service revenue) in 2013.2014. Cost of service revenue includes three components: costs to provide annual maintenance and support services to our installed base of licensed customers, costs to provide professional services, and costs to provide our cardfinancial transaction processing services. The cost and gross margins on such services can vary considerably from period to period depending on the customer mix, customer requirements and project complexity as well as the mix of our U.S. and offshore employees working on the various aspects of services provided. We have reduced the costs required to deliver maintenance and customer support to our installed base of license customers. In addition, although our actual costs to provide processing services are slightly higher in 2014 than in 2013 (because we continue to devote the resources necessary to support this new service initiative,our developing processing business, including additional direct costs for regulatory compliance, infrastructure, network certification, infrastructurecertifications, and customer support), the costs increased at a lower rate than did processing revenue resulting in an improvement in gross margin. However, wesupport and currently expect processing-relatedthese costs to continue to outpace processing revenue for the near-term.foreseeable future.

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 shareAs 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 incomeIn 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

Weakness or instability in the global financial markets could have a negative impact on CoreCard due to potential customers (most of whom perform some type of financial services) delaying decisions to purchase software or initiate processing services with CoreCard.services.

As an alternative to licensing itsour software, CoreCard offerswe offer processing services running on the CoreCard software system. There are numerous risks associated with entering any new line of business and if CoreCard failswe fail to manage the risks associated with its processing operations, it could have a negative impact on our business.

Increased federal and state regulations and reluctance by financial institutions to act as sponsor banks for prospective customers could increase CoreCard’sour losses and cash requirements.

Delays in software development projects could cause our customers to postpone implementations or delay payments, which would increase our costs and reduce our revenue and cash.



Our CoreCard subsidiaryWe could fail to deliver software products which meet the business and technology requirements of its target markets within a reasonable time frame and at a price point that supports a profitable, sustainable business model.

CoreCard’sOur processing business is impacted, directly or indirectly, by more regulations than itsour licensed software business. If the company failswe fail to provide services that comply with (or allow itsour customers to comply with) applicable regulations or processing standards, itwe could be subject to financial or other penalties that could negatively impact itsour business.

Software errors or poor quality control may delay product releases, increase our costs, result in non-acceptance of our software by customers or delay revenue recognition.

CoreCardWe could fail to expand itsour base of customers as quickly as anticipated, resulting in lower revenue and profits (or increased losses) and increased cash needs.

CoreCardWe could fail to retain key software developers and managers who have accumulated years of know-how in our target markets and company products, or fail to attract and train a sufficient number of new software developers and testers to support our product development plans and customer requirements at projected cost levels.

Increasing and changing government regulations in the United States and foreign countries related to such issues as data privacy, financial and credit transactions could require changes to our products and services which could increase our costs and could affect our existing customer relationships or prevent us from getting new customers.

Industrial Products Industry

One of ChemFree’s customers represented 21 percent of our consolidated revenue in both 2014 and 2013. Any changes in the volume of orders or timeliness of payments from such customer could potentially have a negative impact on revenue, inventory levels and cash, at least in the near-term.

Delays in production or shortages of certain sole-sourced parts for our ChemFree products could impact revenue and orders. For example, one of ChemFree’s suppliers of a sole-sourced component experienced an equipment malfunction which created a backlog of certain of ChemFree’s products in the second quarter of 2013. Although the shortage and short-term impact of the shortage was resolved, longer term the company is taking steps to reduce its dependency on a single supplier where feasible.


Increases in prices of raw materials and sub-assemblies could reduce ChemFree’s gross profit if it is not able to offset such increased costs with higher selling prices for its products or other reductions in production costs.

In certain situations, ChemFree’s lease customers are permitted to terminate the lease covering one or more SmartWasher® machines. Effective July 1, 2013, one of ChemFree’s lease customers opted to terminate its equipment lease and purchase the machines instead. This termination significantly reduced equipment lease revenue beginning in the second half of 2013 and has resulted in significantly lower revenue and profit from that product line in 2014 which will continue for the foreseeable future.

Other

Delays in anticipated customer payments for any reason would increase our cash requirements and possibly our losses.

Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product offerings) may cause prospective customers to choose an alternative product solution, resulting in lower revenue and profits (or increased losses).

Declines in performance, financial condition or valuation of our minority-owned companies could cause us to write-down the carrying value of our investment or postpone an anticipated liquidity event, which could negatively impact our earnings and cash.

Our future capital needs are uncertain and depend on a number of factors; additional capital may not be available on acceptable terms, if at all.

Other general economic and political conditions could cause customers to delay or cancel purchases.

 

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.

 

Report of Independent Registered Public Accounting Firm – Nichols, Cauley & Associates, LLC

Report of Independent Registered Public Accounting Firm – Habif, Arogeti & Wynne, LLP

Consolidated Balance Sheets at December 31, 2014 and 2013

Consolidated Statements of Operations for the years ended December 31, 2014 and 2013

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014 and 2013

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014 and 2013

Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013

Notes to Consolidated Financial Statements 

Consolidated Balance Sheets at December 31, 2015 and 2014

Consolidated Statements of Operations for the years ended December 31, 2015 and 2014

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015 and 2014

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015 and 2014

Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014

Notes to Consolidated Financial Statements

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.

Item 9A.     Controls and PRocedures

Controls and PRocedures

 

(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

 

ITEM 10.10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

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.

 


ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

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

         

Plan category

 

(a) Number of securities to be
issued upon exercise of outstanding options, warrants and rights

  

(b) Weighted-average exercise price of outstanding options, warrants and rights

  

(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

  

(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights

  

(b) Weighted-average exercise price of outstanding options, warrants and rights

  

(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

 

Equity compensation plans approved by security holders

  214,500  $1.58   138,000   226,500  $1.66   876,000 

Equity compensation plans not approved by security holders

  60,000  $2.22   --   48,000  $2.26   -- 

Total

  274,500  $1.72   138,000   274,500  $1.76   876,000 

 

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.

 

3(i)2.1

Purchase Agreement between CRC Industries, Inc. and Intelligent Systems Corporation dated March 31, 2015. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K dated March 31, 2015)

3.1

Amended and Restated Articles of Incorporation of the Registrant dated March 18, 2010. (Incorporated by reference to Exhibit 3(i) of the Registrant’s Form 10-K for the year ended December 31, 2010.)

 

3(ii)3.2

Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K dated December 7, 2007.)

 

10.1

Lease Agreement dated JuneApril 1, 2004,2015, between the Registrant and ISC Properties, LLC. (Incorporated by reference to Exhibit 10.110.2 of the Registrant’s Form 10-K for the year ended December 31, 2004.)

10.2

Second Amendment to the Lease Agreement between the Registrant and ISC Properties, LLC dated May 25, 2012. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2012.)March 31, 2015).

 

10.3

Management Compensation Plans and Arrangements:

 

(a)

Intelligent Systems Corporation Change in ControlIncentive Stock Plan for Officers

 

(b)

2011 Non-Employee Directors Stock Option Plan

 

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.

 

10.4

Loan Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated October 1, 2003. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-K for the year ended December 31, 2003.)

 

10.5

Security Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated as of October 1, 2003. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-K for the year ended December 31, 2003.)


 

10.6

Form of Security Agreement by and among majority owned subsidiary companies of Intelligent Systems Corporation and Fidelity Bank as of October 1, 2003. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-K for the year ended December 31, 2003.)

 

10.7

Negative Pledge Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated October 1, 2003. (Incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-K for the year ended December 31, 2003.)

 

10.8

Commercial Promissory Note and Rider thereto of Intelligent Systems Corporation in favor of Fidelity Bank dated October 1, 2004. (Incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-K for the year ended December 31, 2003.)

 

10.9

Form of Guarantee of majority owned subsidiaries of Intelligent Systems Corporation in favor of Fidelity Bank dated October 1, 2003. (Incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K for the year ended December 31, 2003.)

 

10.10

TwelfthThirteenth Modification to Loan Documents by and among Intelligent Systems Corporation and Fidelity Bank dated June 27, 2014.March 31, 2015. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2014.March 31, 2015.)

 

21.1

List of subsidiaries of Registrant.

 

23.1

Consent of Nichols, Cauley & Associates, LLC

23.2

Consent of Habif, Arogeti & Wynne, LLP.LLP


 

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS

XBRL Instance Document ***

  

101.SCH

XBRL Taxonomy Extension Schema ***

  

101.CAL

XBRL Taxonomy Extension Calculation ***

  

101.DEF

XBRL Taxonomy Extension Definitions ***

  

101.LAB

XBRL Taxonomy Extension Labels ***

  

101.PRE

XBRL Taxonomy Extension Presentation ***


***

XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

INTELLIGENT SYSTEMS CORPORATION

Registrant

 

Registrant

 

 

 

Date: February 18, 2015March 16, 2016

By:

/s/ J. Leland Strange

 

 

 J. Leland Strange

 

 

 Chairman of the Board, President

 

 and Chief Executive Officer

       

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

Signature

Capacity

Date

/s/ J. Leland Strange

      J. Leland Strange

Chairman of the Board, President,

Chief Executive Officer and Director

(Principal Executive Officer)

February 18, 2015March 16, 2016

   

/s/ Bonnie L. Herron

      Bonnie L. Herron

Chief Financial Officer

(Principal Accounting and Financial Officer)

February 18, 2015March 16, 2016

   

/s/ Philip H. Moise

      Philip H. Moise

Director

February 18, 2015March 16, 2016

   

/s/ Cherie M. Fuzzell

      Cherie M. Fuzzell

Director

February 18, 2015

/s/ James V. Napier

     James V. Napier

Director

February 18, 2015March 16, 2016

   

/s/ Parker H. Petit

      Parker H. Petit

Director

February 18, 2015March 16, 2016

  

 

 

INTELLIGENT SYSTEMS CORPORATION

 

INDEX TO FINANCIAL STATEMENTS

 

The following consolidated financial statements of the Registrant and its subsidiaries are submitted herewith in response to Item 8:

 

Financial Statements:

Financial Statements:

 

Report of Independent Registered Public Accounting Firm -– Nichols, Cauley & Associates, LLC

F-2

Report of Independent Registered Public Accounting Firm – Habif, Arogeti & Wynne, LLP

 F-2F-3

Consolidated Balance Sheets at December 31, 20142015 and 20132014

 F-3F-4

Consolidated Statements of Operations for the years ended December 31, 20142015 and 2013      2014

 F-4F-5

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 20142015 and 20132014

 F-5F-6

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 20142015 and 20132014

 F-6F-7

Consolidated Statements of Cash Flows for the years ended December 31, 20142015 and 20132014

 F-7F-8

Notes to Consolidated Financial Statements

 F-8F-9

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of

Intelligent Systems Corporation

 

We have audited the accompanying consolidated balance sheets of Intelligent Systems Corporation and subsidiaries (the “Company”) as of December 31, 2014 and 2013,2015 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the yearsyear then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.audit.

 

We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Intelligent Systems Corporation and subsidiaries as of December 31, 2015 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Nichols, Cauley & Associates, LLC

Atlanta, Georgia

March 2, 2016


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Intelligent Systems Corporation

We have audited the accompanying consolidated balance sheet of Intelligent Systems Corporation and subsidiaries (the “Company”) as of December 31, 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for theyear then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Intelligent Systems Corporation and subsidiaries as of December 31, 2014, and 2013, and the results of their operations and their cash flows for the yearsyear then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/ Habif, Arogeti & Wynne, LLP

 

 

 

Atlanta, Georgia

February 18, 2015, except for Note 7 and Note 18, (not presented herein) to the consolidated financial statements appearing under Item 8 of the Company’s 2014 Annual Report on Form 10-K/A, as to which the date is March 17, 2015.

 

 

 

Intelligent Systems Corporation

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

As of December 31, 2014  2013  

2015

  

2014

 

ASSETS

                

Current assets:

                

Cash

 $2,624  $3,433  $18,059  $2,624 

Marketable securities

  463   351   396   463 

Accounts receivable, net

  1,777   2,427   962   501 

Inventories, net

  1,042   1,106 

Other current assets

  509   327   2,846   338 

Restricted cash

  2,200   -- 

Assets from discontinued operations

  --   3,012 

Total current assets

  6,415   7,644   24,463   6,938 

Investments

  1,605   1,650   1,015   1,605 

Property and equipment, at cost less accumulated depreciation

  1,069   1,145   636   581 

Patents, net

  19   64 

Other long-term assets

  97   124   59   81 

Total assets

 $9,205  $10,627  $26,173  $9,205 
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current liabilities:

                

Accounts payable

 $280  $472  $78  $90 

Deferred revenue, current portion

  636   668   1,830   610 

Accrued payroll

  734   680   495   582 

Accrued expenses

  282   623   25   24 

Other current liabilities

  274   267   243   274 

Liabilities from discontinued operations

  120   838 

Total current liabilities

  2,206   2,710   2,791   2,418 

Deferred revenue, net of current portion

  191   238   195   191 

Other long-term liabilities

  230   185   18   18 

Commitments and contingencies (Note 8)

                

Intelligent Systems Corporation stockholders’ equity:

                

Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028issued and outstanding at December 31, 2014 and 2013

  90   90 

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

  87   90 

Additional paid-in capital

  21,537   21,488   20,875   21,537 

Accumulated other comprehensive loss

  (110)  (98)  (184)  (110)

Accumulated deficit

  (12,750)  (12,674)

Accumulated income (deficit)

  5,270   (12,750)

Total Intelligent Systems Corporation stockholders’ equity

  8,767   8,806   26,048   8,767 

Noncontrolling interest

  (2,189)  (1,312)  (2,879)  (2,189)

Total stockholders’ equity

  6,578   7,494   23,169   6,578 

Total liabilities and stockholders’ equity

 $9,205  $10,627  $26,173  $9,205 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

Year Ended December 31,

 

2014

  

2013

  

2015

  

2014

 

Revenue

                

Products

 $10,908  $12,608  $614  $510 

Services

  3,678   3,710   4,168   3,677 

Total net revenue

  14,586   16,318   4,782   4,187 

Cost of revenue

                

Products

  6,028   6,367   219   248 

Services

  1,823   2,257   2,331   1,823 

Total cost of revenue

  7,851   8,624   2,550   2,071 

Expenses

                

Marketing

  1,408   1,632   242   271 

General and administrative

  2,914   2,680   1,935   950 

Research and development

  3,207   2,679   2,877   3,189 

Legal Settlement

  387   259 

Income (loss) from operations

  (1,181)  444 

Other income (expense)

        

Interest income, net

  --   1 

Loss from operations

  (2,822)  (2,294)

Investment income

  128   1   1,247   128 

Equity in income (loss) of affiliate company

  (1)  21 

Other income, net

  52   71 

Income (loss) from continuing operations before income taxes

  (1,002)  538 

Other income

  109   18 

Loss from continuing operations before income taxes

  (1,466)  (2,148)

Income taxes

  53   69   3   18 

Net income (loss) from continuing operations

  (1,055)  469 

Income from discontinued operations, no tax effect

  100   -- 

Net loss from continuing operations

  (1,469)  (2,166)

Gain on sale of discontinued operations, net of taxes

  18,802   -- 

Income (loss) from discontinued operations, no tax effect

  (3)  1,211 

Net income (loss)

  (955)  469   17,330   (955)

Net loss attributable to noncontrolling interest

  879   615   690   879 

Net income (loss) attributable to Intelligent Systems Corporation

 $(76) $1,084  $18,020  $(76)

Income per share from continuing operations based on income attributable to Intelligent Systems Corporation:

     

Net income (loss) per share from continuing operations: Basic and diluted

 $(0.01) $0.12 

Income per share from discontinued operations based on income attributable to Intelligent Systems Corporation:

 

Net income per share from discontinued operations: Basic and diluted

 $0.01  $0.00 

Earnings (loss) per share attributable to Intelligent Systems Corporation:

        

Basic: Continuing operations

 $(0.09) $(0.15)

Discontinued operations

  2.14   0.14 

Earnings (loss) per share

 $2.05  $(0.01)

Diluted: Continuing operations

 $(0.08) $(0.15)

Discontinued operations

  2.10   0.14 

Earnings (loss) per share

 $2.02  $(0.01)

Basic weighted average common shares outstanding

  8,958,028   8,958,028   8,806,875   8,958,028 

Diluted weighted average common shares outstanding

  8,958,028   8,959,742   8,912,109   8,958,028 

Net income (loss) attributable to Intelligent Systems Corporation:

        

Loss from continuing operations

 $(779) $(1,287)

Income from discontinued operations

  18,799   1,211 

Net income (loss) attributable to Intelligent Systems Corporation

 $18,020  $(76)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME (LOSS)

(in thousands)

 

Year Ended December 31,

 

2014

  

2013

  

2015

  

2014

 

Net income (loss)

 $(955) $469  $17,330  $(955)

Other comprehensive income:

                

Foreign currency translation adjustments

  10   10   (6)  10 

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

  (20)  14 

Unrealized loss on available-for-sale marketable securities

  (68)  (20)

Total comprehensive income (loss)

  (965)  493   17,256   (965)

Comprehensive loss attributable to noncontrolling interest

  877   594   690   877 

Comprehensive income (loss) attributable to Intelligent Systems Corporation

 $(88) $1,087  $17,946  $(88)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

 

 

Year Ended December 31,

  

Year Ended December 31,

 

STOCKHOLDERS’ EQUITY

 

2014

  

2013

  

2015

  

2014

 

Intelligent Systems Corporation stockholders’ equity:

                

Common stock, number of shares, beginning and end of year

  8,958,028   8,958,028 

Common stock, amount, beginning and end of year

 $90  $90 

Common stock, number of shares, beginning of year

  8,958,028   8,958,028 

Stock option exercised

  4,000   -- 

Stock repurchased during year in tender offer

  (230,729)  -- 

End of year

  8,731,299   8,958,028 

Common stock, amount, beginning of year

 $90  $90 

Stock repurchased during year in tender offer

  (3)  -- 

End of year

  87   90 

Additional paid-in capital, beginning of year

  21,488   21,406   21,537   21,488 

Stock repurchased during year in tender offer

  (689)  -- 

Stock option exercised

  8   -- 

Stock compensation expense

  49   82   19   49 

End of year

  21,537   21,488   20,875   21,537 

Accumulated other comprehensive loss, beginning of year

  (98)  (101)  (110)  (98)

Foreign currency translation adjustment

  8   (11)  (6)  8 

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

  (20)  14 

Unrealized loss on available-for-sale marketable securities

  (68)  (20)

End of year

  (110)  (98)  (184)  (110)

Accumulated deficit, beginning of year

  (12,674)  (13,758)

Accumulatedearnings (deficit), beginning of year

  (12,750)  (12,674)

Net income (loss)

  (76)  1,084   18,020   (76)

End of year

  (12,750)  (12,674)  5,270   (12,750)

Total Intelligent Systems Corporation stockholders’ equity

  8,767   8,806   26,048   8,767 

Noncontrollinginterest, beginning of year

  (1,312)  (718)

Noncontrolling interest, beginning of year

  (2,189)  (1,312)

Other comprehensive income

  2   21   --   2 

Net loss

  (879)  (615)  (690)  (879)

End of year

  (2,189)  (1,312)  (2,879)  (2,189)

Total stockholders’ equity

 $6,578  $7,494  $23,169  $6,578 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands) 

Year Ended December 31,

 
  

2015

  

2014

 

OPERATING ACTIVITIES:

        

Net income (loss)

 $17,330  $(955)

Income from discontinued operations

  (18,799)  (1,211)

Loss from continuing operations

  (1,469)  (2,166)
Adjustments to reconcile net loss from continuing operations to net cash used for operating activities:        

Depreciation and amortization

  217   155 

Stock-based compensation expense

  19   49 

Non-cash income from discontinued operations

  --   100 

Non-cash investment and interest income (loss), net

  1,005   (127)

Equity in loss of affiliate company

  14   1 

Changes in operating assets and liabilities:

        

Accounts receivable, net

  (461)  200 

Other current assets

  (2,508)  (119)

Other long term assets

  22   27 

Accounts payable

  (12)  (41)

Accrued payroll

  (87)  57 

Deferred revenue, current portion

  1,220   (29)

Accrued expenses

  1   (182)

Other current liabilities

  (31)  99 

Deferred revenue, net of current portion

  4   -- 

Other long-term liabilities

  --   18 

Net cash used for operating activities

  (2,066)  (1,958)
         

INVESTING ACTIVITIES:

        

Purchase of marketable securities

  --   (132)

Purchases of property and equipment

  (272)  (189)

Purchase of long-term investment

  (430)  -- 

Proceeds from sale of long-term investment

  --   171 

Net cash used for investing activities

  (702)  (150)
         

FINANCING ACTIVITIES:

        

Sale of capital stock pursuant to exercise of option

  8   -- 

Repurchase of capital stock pursuant to tender offer

  (692)  -- 

Net cash used for financing activities

  (684)  -- 
         

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

  (189)  1,377 

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

  19,082   (88)

Net cash provided by discontinued operations

  18,893   1,289 

Effects of exchange rate changes on cash

  (6)  10 

Net increase (decrease) in cash

  15,435   (809)

Cash at beginning of year

  2,624   3,433 

Cash at end of year

 $18,059  $2,624 

Supplemental disclosure of cash flow information:

        

Cash paid for income taxes

 $--  $65 

(in thousands)

 

Year Ended December 31,

 
  

2014

  

2013

 

OPERATING ACTIVITIES:

        

Net income (loss)

 $(955) $469 

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:

     

Depreciation and amortization

  398   435 

Stock-based compensation expense

  49   82 

Non-cash investment and interest income, net

  (127)  10 

Non-cash income from discontinued operations

  100   -- 

Equity in (income) loss of affiliate company

  1   (21)

Changes in operating assets and liabilities:

        

Accounts receivable, net

  650   611 

Inventories, net

  64   (77)

Other assets, net

  (155)  (90)

Accounts payable

  (192)  178 

Accrued payroll

  54   161 

Deferred revenue, current portion

  (32)  (250)

Accrued expenses

  (182)  (88)

Accrued settlement

  (259)  -- 

Other current liabilities

  7   (112)

Deferred revenue, net of current portion

  (47)  190 

Other long-term liabilities

  45   37 

Net cash provided by (used for) operating activities

  (581)  1,535 
         

INVESTING ACTIVITIES:

        

Purchase of marketable securities

  (132)  (67)

Proceeds from note and interest receivable

  --   250 

Proceeds from sale of equipment

  --   4 

Purchases of property and equipment

  (277)  (559)

Patent addition

  --   (6)

Proceeds from sale of long-term investment

  171   (60)

Net cash used by investing activities

  (238)  (438)

Effects of exchange rate changes on cash

  10   (11)

Net increase (decrease) in cash

  (809)  1,086 

Cash at beginning of year

  3,433   2,347 

Cash at end of year

 $2,624  $3,433 
         

Supplemental disclosure of cash flow information:

        

Cash paid for income taxes

 $65  $54 
         

Non-Cash Transactions:

        

Transfer of property and equipment to inventory

 $--  $147 

Sale of vehicle for note receivable, net

 $--  $21 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

1.

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization - In this document, terms such as the “company”, “we”, “us”, “our” and “ISC” refer to Intelligent Systems Corporation, a Georgia corporation, and its consolidated subsidiaries.

 

Consolidation - The financial statements include the accounts of Intelligent Systems Corporation and its majority owned and controlled U.S. and non-U.S. subsidiary companies after elimination of material inter-company accounts and transactions.

 

Nature of Operations – We are engaged— As further explained in two industries: Information Technology ProductsNote 2, on March 31, 2015, we sold our largest operating subsidiary, ChemFree Corporation. Accordingly, we have retroactively classified the ChemFree operations as discontinued operations in all periods presented. Our continuing operations consist primarily of our CoreCard Software, Inc. (“CoreCard”) subsidiary and Servicesits affiliate companies in Romania and Industrial Products. Operations in the Information Technology Products and Services segment include development and sales of software licensesIndia, as well as providing financial transactionthe corporate office which provides significant administrative, human resources and executive management support to CoreCard. CoreCard provides technology solutions and processing services professionalto the financial technology and services and software maintenance and support by our CoreCard Software subsidiary. Operations inmarket, commonly referred to as the Industrial Products segment include the manufacture and sale of bio-remediating parts washer systems by our ChemFree subsidiary. Our operations are explained in further detail in Note 15. Our affiliate companies (in which we have a minority ownership) are mainly involved in the information technologyFinTech industry.

 

Use of Estimates - In preparing the financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Areas where we use estimates and make assumptions are to determine our allowance for doubtful accounts, valuation of our investments, depreciation and amortization expense, warranty expense, accrued expenses and deferred income taxes.

 

Translation of Foreign Currencies - We consider that the respective local currencies are the functional currencies for our foreign operations. We translate assets and liabilities to U.S. dollars at period-end exchange rates. We translate income and expense items at average rates of exchange prevailing during the period. Translation adjustments are recorded as accumulated other comprehensive gain or loss as a separate component of stockholders’ equity. Upon sale of an investment in a foreign operation, the currency translation adjustment component attributable to that operation is removed from accumulated other comprehensiveloss and is reported as part of gain or loss on sale of discontinued operations.

 

Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable are customer obligations due under normal trade terms. They are stated at the amount management expects to collect. We sell our software products and transaction processing services to distributors and corporate end userscompanies involved in a variety of industries principally automotive parts and repair andthat provide some form of credit or prepaid financing options or perform financial services. We perform continuing credit evaluations of our customers’ financial condition and we do not require collateral. The amount of accounting loss for which we are at risk in these unsecured receivables is limited to their carrying value.

 

Senior management reviews accounts receivable on a regular basis to determine if any receivables will potentially be uncollectible. We include any accounts receivable balances that are estimated to be uncollectible in our overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts as of December 31, 20142015 is adequate. However, actual write-offs might exceed the recorded allowance. Refer to Note 5.

 

Marketable SecuritiesOur marketable securities, which are classified as available-for-sale, are stated at fair value, and primarily consist of investments in exchange traded funds comprised of dividend paying companies. The fair value of the marketable securities is $396,000 at December 31, 2015; an unrealized loss of $68,000 is included in other comprehensive income. The fair value of the marketable securities was $463,000 at December 31, 2014; an unrealized loss of $20,000 iswas included in other comprehensive income.


Inventories - We state the value of inventories at the lower of cost or market determined on a first-in first-out basis. Market is defined as net realizable value. The value of inventories, net of allowances of $95,000 and $102,000 at December 31, 2014 and 2013, respectively, is as follows:

(in thousands)

 

2014

  

2013

 

Raw materials

 $879  $940 

Finished goods

  163   166 

Total inventories

 $1,042  $1,106 

 

Property and Equipment - Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method.  Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset.  Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred. We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of property and equipment may warrant revision, or that the remaining balance of these assets may not be recoverable. An asset is considered to be impaired when its carrying amount exceeds the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss, if any, which is equal to the amount by which the carrying value exceeds its fair value, is charged to current operations. For each of the years ended December 31, 20142015 and 2013,2014, no such impairment existed.

 


Classification

 

Useful life in years

 

Machinery and equipment

  3-5 

Furniture and fixtures

  5-7 

Leasehold improvements

  1-5 

Building

  39  

 

The cost of each major class of property and equipment at December 31, 20142015 and 20132014 is as follows:

 

(in thousands)

 

2014

  

2013

  

2015

  

2014

 

Machinery and equipment

 $4,268  $3,989  $2,178  $1,911 

Furniture and fixtures

  192   194   197   192 

Leasehold improvements

  281   281   258   258 

Building

  308   308   308   308 

Subtotal

  5,049   4,772   2,941   2,669 

Accumulated depreciation

  (3,980)  (3,627)  (2,305)  (2,088)

Property and equipment, net

 $1,069  $1,145  $636  $581 

 

Depreciation expense for continuing operations was $353,000$217,000 and $386,000$155,000 in 20142015 and 2013,2014, respectively. These expenses are included in general and administrative expenses exceptor, for assets associated with respect to our Industrial Products segment, where the component of depreciation expense that relates primarily to production activities and products leased to customers isprocessing data centers, are included in cost of revenue.services.


 

Leased Equipment-InFollowing the Industrial Products segment, certain equipment is leased to customers. The cost, carrying value and accumulated depreciation associated with thesale of our ChemFree subsidiary in March 2015, we no longer have any leased equipment at December 31, 2014 and 2013 was as follows:

(in thousands)

 

2014

  

2013

 

Cost of leased equipment

 $514  $473 

Accumulated depreciation

  (355)  (290)

Carrying value of leased equipment

 $159  $183 

There is no contingentor lease rental income under the leases. We recognized lease revenue of $617,000 and $1,566,000 in the year end December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, the amount of future non-cancellable lease income was $425,000 and $125,000, respectively. The leased equipment assets are included in machinery and equipment on the company’s balance sheet at December 31, 2014 and 2013.income.

 

Investments - We— For entities in which we have a 20 to 50 percent ownership interest and over which we exercise significant influence, but do not have control, we account for investments in privately-held companies under the equity method, whereby we record our proportional share of the investee’s net income or net loss as an adjustment to the carrying value of the investment, for (i) entities in which we have a 20 to 50 percent ownership interest and over which we exercise significant influence, but do not have control or (ii) entities that are organized as partnerships or limited liability companies.investment. We account for investments of less than 20 percent in non-marketable equity securities of corporations at the lower of cost or market. Our policy with respect to cost method investments is to record an impairment charge when we believe an investment has experienced a decline in value that is other than temporary. 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 could have a material adverse impact on our financial condition or results of operations and are generally not predictable in advance. During the year ended December 31, 2015, we recognized $1,247,000 of investment income, net, principally related to a gain of $2,034,000 on the sale of one of our cost method investments which was offset in part by an impairment charge of $792,000 to reduce the carrying value of our equity method investment to $100,000, management’s estimate of realizable value. During the year ended December 31, 2014, we recognized $145,000 on the sale of one of our cost method investments and we also took a net impairment charge of $17,000 to reduce the carrying value of another cost method investment to zero, management’s estimate of realizable value. In 2013, we recognized $1,000 income related to the sale of a previously written-off investment. The aggregate value of investments accounted for by the equity method was $913,000 and $914,000 at December 31, 2014 and 2013, respectively. At December 31, 20142015 and 2013,2014, the aggregate value of investments accounted for by the cost method was $692,000$1,015,000 and $736,000,$1,605,000, respectively.

 

Patents -Patents are carried at cost netFollowing the sale of relatedour ChemFree subsidiary, we no longer have any undepreciated patent assets on our balance sheet and no amortization and are amortized using the straight-line method over their estimated useful lives of 10 years. We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful lives of the patents may warrant revision, or that the remaining balance of these assets may not be recoverable. An asset is considered to be impaired when its carrying amount exceeds the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss, if any, which is equal to the amount by which the carrying value exceeds its fair value, is charged to currentexpense for continuing operations. For each of the years ended December 31, 2014 and 2013, no such impairment existed.

 

Patents, net, at December 31, 2014 and 2013 consisted of the following:

(in thousands)

 

2014

  

2013

 

Patents

 $491  $491 

Accumulated amortization

  (472)  (427)

Patents, net

 $19  $64 


In 2014, we recorded $45,000 of patent amortization expense. As of December 31, 2014, annual amortization expense for patents for the following years is expected to be:

(in thousands)

    

2015

 $4 

2016

  4 

2017

  4 

2018

  4 

2019

  3 

Total amortization expense

 $19 

FairFair Value of Financial Instruments-The—The carrying value of cash, accounts receivable, accounts payable and certain other financial instruments (such as short-term borrowings, accrued expenses and other current assets and 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 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.


 

A concentration of credit risk may exist with respect to trade receivables, as a substantial portion of our customers are concentrated in the following industries.

ChemFree:     Industrialfinancial services companies, automotive parts distributors and equipment rental depots

CoreCard:      Financial services companiesindustry.

 

We perform ongoing credit evaluations of customers worldwide and do not require collateral from our customers. Historically, we have not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

 

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

 

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

 

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

 

• Level 1

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

 

• Level 2

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

 


• Level 3

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

 

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

 

Our 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 is 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.

 

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:

 

an initial contract with the customer to license certain software modules, to provide services to get the customer live on the software (such as training and customization) and to provide post contract support (“PCS”) for a specified period of time thereafter (typically three months),

purchase of additional licenses for new modules or for tier upgrades for a higher volume of licensed accounts after the initial contract,



other optional standalone contracts, usually performed after the customer is live on the software, for services such as new interfaces or custom features requested by the customer, additional training and problem resolution not covered in annual maintenance contracts, and

contracts for certain licensed software products that involve an initial fee plus recurring monthly fees during the contract life.

 

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 generally 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 -Deferred revenue consists of advance payments by software customers for annual or quarterly PCS;PCS, advance payments from customers for software licenses and professional services not yet delivered;delivered, and initial implementation payments for processing services onor bundled license and support services in multi-year contracts and payments by ChemFree customers for advance billings related to leased equipment or consumables.contracts. We do not anticipate any loss under these arrangements. 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.

 

Cost of Revenue- Cost— For cost of revenue for ChemFree products includes direct material, direct labor, and production overhead. For software contracts and processing services contracts, we capitalize the contract specific direct costs, which are included in other current assets and other long-term assets on the Consolidated Balance Sheets, and recognize the costs when the associated revenue is recognized. Cost of revenue for services includes direct cost of services rendered, including reimbursed expenses, pass-through third party costs, and data center and compliance costs for processing services. We also capitalize the initial implementation fees for processing services contracts and recognize the costs over the life of the contract, when the corresponding revenue is recognized.

 

Software Development Expense- Research and development costs are expensed in the period in which they are incurred. Contract specific software development costs are capitalized and recognized when the related contract revenue is recognized.

 


Warranty Costs - We accrue— Following the sale of our ChemFree subsidiary, we do not provide for estimated costs associated with ourthe industrial product warranties as an expense in the period the related sales are recognized.warranties. The warranty accrualrelated to software license contracts consists of a defined number of months (usually three) of PCS after the go-live date, which is included in accrued expenses at December 31, 2014as of the go-live date and 2013. At December 31, 2014 and 2013,recognized over the warranty accrual was $122,000 and $141,000, respectively.period.

 

Legal Expense-Legal—Legal expenses for continuing operations are recorded as a component of general and administrative expense in the period in which such expenses are incurred. LegalIn 2015, legal expenses associated with the sale of our ChemFree subsidiary were included as a component of the transaction related expenses in 2014 and 2013 related todetermining the legal settlement described in Note 8 were reclassified and are included ingain on the legal settlement expense line item.sale of discontinued operations.

 

Research and Development - Research and development costs consist principally of compensation and benefits paid to certain company employees and certain other direct costs. All research and development costs are expensed as incurred.

 

Stock Based Compensation - We record compensation cost related to unvested stock-based 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 years ended December 31, 20142015 and 20132014 has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $49,000$19,000 and $82,000$49,000 of stock-based compensation expense in the years ended December 31, 20142015 and 2013,2014, respectively.


 

In the years ended December 31, 20142015 and 2013,2014, a total of 16,00012,000 and 17,00016,000 options, respectively, were granted pursuant to the 2011 Non-employee Directors Stock Option Plan. The fair value of each option granted in 20142015 and 20132014 has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

Year ended December 31,

 

2014

  

2013

  

2015

  

2014

 

Risk free interest rate

  2.5%  2.5%  2.7%  2.5%

Expected life of option in years

  10   10   10   10 

Expected dividend yield rate

  0%  0%  0%  0%

Expected volatility

  73%  74%  66%  73%

 

Under these assumptions, the weighted average fair value of options granted in 2015 and 2014 was $2.10 and 2013 was $1.06 and $1.05 per share, respectively. The fair value of the grants is being amortized over the vesting period for the options. All of the company’s stock-based compensation expense relates to stock options. The total remaining unrecognized compensation cost at December 31, 20142015 related to unvested options amounted to $17,000$23,000 and is expected to be recognized over 20152016 and 2016.2017.

 

Income Taxes -We utilize the asset and liability method of accounting for income taxes. As such, deferred tax assets and liabilities are established to recognize the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax bases and for net tax operating loss carryforwards.

 

We follow the provisions of Financial Accounting Standards Board accounting guidance on accounting for uncertain tax positions. Accordingly, assets and liabilities are recognized for a tax position, based solely on its technical merits that is believed to be more likely than not to be fully sustainable upon examination. Accrued interest relating to uncertain tax positions is recorded as a component of interest expense and penalties related to uncertain tax positions are recorded as a component of general and administrative expense.

 

Comprehensive Income (Loss) - Comprehensive lossincome (loss) represents net income (loss) adjusted for the results of certain stockholders’ equity changes not reflected in the Consolidated Statements of Operations. These items are accumulated over time as “accumulated other comprehensive loss” on the Consolidated Balance Sheet and consist primarily of net earnings/loss and foreign currency translation adjustments associated with foreign operations that use the local currency as their functional currency and unrealized gains and losses on marketable securities.

 

Reclassifications-Certain prior year numbers have been reclassified to conform to the current year presentation.


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 guidance will havestandard 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 on our consolidated financial statements.

 

2.

DISCONTINUED OPERATIONS

 

On March 31, 2015, we and CRC Industries, Inc., a Pennsylvania corporation (“CRC”), entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) whereby we sold all of the issued and outstanding stock of our wholly owned subsidiary, ChemFree Corporation (“ChemFree”), to CRC (the “ChemFree Sale”). The purchase price for the all-cash sale was $21,600,000, subject to customary post-closing adjustments, including a working capital adjustment. The company retained all net cash of ChemFree as of the closing date. In 2008,the quarter ended March 31, 2015, the company soldrecorded a gain on the businesssale of ChemFree of $18,746,000 and substantiallyhas retroactively classified the ChemFree operations as discontinued operations in all periods presented. Following the assetsclosing of its VISaer subsidiary. In 2014, the statute of limitations expired on a liability that had been retained bysale, the company recorded a net of $56,000 in post-closing adjustments primarily to reduce our estimated tax liability, resulting in a gain on the sale of $18,802,000 in the year ended December 31, 2015. The company is applying operating loss and accordingly,capital loss carryforwards against the company recognized $100,000gain on sale and expects to incur an alternative minimum tax liability of approximately $120,000 on the transaction, which amount is included in income fromliabilities of discontinued operations uponas of December 31, 2015. At the extinguishmentclosing, a total of $3,300,000 of the liability.purchase price was placed in escrow for purposes of securing our obligations to indemnify CRC and to refund a portion of the purchase price if ChemFree’s actual working capital amount on the closing date is less than the agreed upon target set forth in the Stock Purchase Agreement. In the quarter ended September 30, 2015, $880,000 of the escrow amount, net of the final working capital adjustment of $220,000 was released to the company. The remaining escrow balance of $2,200,000, which will remain in escrow until September 30, 2016, is shown as Restricted Cash as of December 31, 2015.

The following condensed financial information is provided for the ChemFree discontinued operations for the periods shown:

Year ended December 31,(in thousands)

 

2015

  

2014

 

Net sales

 $2,902  $10,398 

Operating income

  197   2,021 

Net income before income taxes

  6   1,146 

Income taxes

  9   35 

Net income (loss) from discontinued operations

 $(3) $1,111 

 

 

 

Following are the major components of the assets and liabilities of discontinued operations presented separately on the balance sheet:

As of December 31,(in thousands)

 

2015

  

2014

 

Major classes of assets included as part of discontinued operations:

        

Accounts receivable

 $--  $1,276 

Inventories

  --   1,042 

Property, plant & equipment

  --   488 

Other assets

  --   206 

Total assets of discontinued operations

 $--  $3,012 
         

Major classes of liabilities included as part of discontinued operations:

        

Accounts payable

 $--  $190 

Accrued payroll

  --   152 

Other current liabilities

  120   284 

Other liabilities

  --   212 

Total liabilities of discontinued operations

 $120  $838 

3.

OPTION AGREEMENT

 

On March 20, 2012, Intelligent Systems Corporation entered into an Option Agreement (the “Option Agreement”) with Central National Bank, a national banking association (“CNB”). The Option Agreement grants to CNB the option to acquire from ISC the number of shares of stock in the company’s CoreCard Software subsidiary equal to five percent (5%) of ISC’s equity ownership in CoreCard. Currently, ISC owns approximately 96% on a fully diluted basis of the equity of CoreCard. The number of shares covered by the option may be increased, up to ten percent (10%), based on achievement of certain volumes of prepaid cards issued by CNB and processed by CoreCard, as defined in the Option Agreement. The option has an exercise price of one million dollars for each five percent (5%) of ISC’s interest in CoreCard, expires on December 31, 2017 and can be exercised at any time before it expires. Further, at any time between September 30, 2014 and June 30, 2017, subject to certain earlier termination provisions, CNB may elect to require ISC to repurchase the option at a purchase price equal to the fair market value of the option less one million dollars. As of December 31, 2014,2015, CNB has not requested that ISC repurchase the option. We entered into the Option Agreement in recognition of CNB’s cooperation and contribution to building CoreCard’s card processing business. During the year ended December 31, 2012, we recorded an expense of $18,000 in the marketing category and have recordedcarry a long-term liability of $18,000 at December 31, 20142015 and 20132014 to recognize the financial impact of the Option Agreement.

 

4.

INVESTMENTS

 

At December 31, 20142015 and 2013,2014, our ownership interest in NKD Enterprises, LLC was 25.5%. We account for our investment by the equity method of accounting. The carrying value of NKD Enterprises, LLC is included in long-term investments. AtIn December 31, 2014,2015, we recorded an impairment charge of $792,000 to reduce the carrying value of our investment in NKD Enterprises, LLC exceeded our portionto management’s estimate of the net assets of NKD Enterprises, LLC by approximately $164,000 which is considered to be goodwill and is not being amortized.realizable value.

 

 

Carrying Value

  

Carrying Value

 

At December 31,(in thousands)

 

2014

  

2013

  

2015

  

2014

 

NKD Enterprises, LLC

 $913  $914  $107  $913 


 

The following table presents the unaudited summarized financial information for NKD Enterprises, LLC for the respective time periods:

 

As of and for the year ended December 31,

        

(in thousands)

 

2014

  

2013

 

Revenues

 $1,782  $1,789 

Operating income (loss)

  (2)  85 

Net income (loss)

  (2)  85 

As of and for the year ended December 31, (in thousands)

 

2015

  

2014

 

Revenues

 $1,878  $1,782 

Operating loss

  (58)  (2)

Net loss

  (58)  (2)

 

As of and for the year ended December 31,

        

(in thousands)

 

2014

  

2013

 

As of and for the year ended December 31, (in thousands)

 

2015

  

2014

 

Current assets

 $260  $180  $133  $260 

Non-current assets

  3,004   3,007   3,004   3,004 

Current liabilities

  328   249   260   328 

Stockholders’ equity

  2,936   2,938   2,877   2,936 

 

On December 23, 2015, one of our investee companies in which we held a small equity stake, Lancope Inc., was sold to Cisco, Inc. We recognized a gain of $2,034,000 against our carrying value of $214,000 in the fourth quarter of 2015. Cash from the sale of $2,248,000 (which is included in “Other Current Assets” at December 31, 2015) was received in early January 2016. A portion of the sale proceeds is being held in escrow for eighteen months for claims that the buyer may assert against Lancope, Inc. Our portion of the escrow may be as much as $390,000; however, as there is presently no way to estimate how much, if any, of the escrow will be released to us, we have not included any provision for the receipt of any escrow funds in our current financial statements.


 

5.

ACCOUNTS RECEIVABLEand customer concentrations

 

At both December 31, 20142015 and 2013,2014, our allowance for doubtful accounts amounted to $13,000 and $16,000, respectively.$0. Net charges against the allowance for doubtful accounts were $12,000$0 in both 2015 and $4,000 in 2014 and 2013, respectively.2014.

 

The following table indicates the percentage of consolidated revenue from continuing operations and year-end accounts receivable represented by each customer that represented more than 10 percent of consolidated revenue from continuing operations or year-end accounts receivable.

 

 

Revenue

  

Accounts Receivable

  

Revenue

  

Accounts Receivable

 
 

2014

  

2013

  

2014

  

2013

  

2015

  

2014

  

2015

  

2014

 

ChemFree

                

Customer A

  16%  18%  20%  17%  22.5%  24.7%  23.6%  37.1%

Customer B

  9%  8%  12%  15%  18.7%  12.7%  6.4%  -- 

Customer C

  21%  21%  15%  18%  2.0%  --   28.9%  -- 

CoreCard

                

Customer D

  7%  6%  10%  10%  3.9%  6.2%  11.6%  15.4%

 

6.

SHORT-TERM BORROWINGS

 

Terms and borrowings under our primary credit facility are summarized as follows:

 

Year ended December 31,

         

2015

  

2014

 

(in thousands)

 

2014

  

2013

 

Maximum outstanding (month-end)

 $--  $--  $--  $-- 

Outstanding at year-end

  --   --   --   -- 

Interest rate at year-end

  6.0%  6.0%  6.0%  6.0%

Average interest rate

  6.0%  6.0%  6.0%  6.0%

 

We established a working capital credit facility with a bank in October 2003 and have renewed the line periodically with the most recent renewal on June 27, 2014. The revolving line of credit bears interest at the higher of prime rate plus one and one half percent or 6.0%, is secured by all of our assets and those of our principal subsidiaries, is guaranteed by our subsidiaries, and expires June 30, 2016. We may borrow an aggregate of 80 percent of qualified accounts receivable of our consolidated subsidiaries plus 10 percent of inventory, up to a maximum of $1,250,000. At December 31, 2014,2015, our borrowing base calculation resulted in availability of the full $1,250,000$518,000 under the line, of which we had drawn down zero. The terms of the loan contain typical covenants not to sell or transfer material assets, to create liens against assets, to merge with another entity, to change corporate structure or the nature of our business, to declare or pay dividends, or to redeem shares of common stock. The loan agreement also contains covenants not to change the Chief Executive Officer and Chief Financial Officer of the Company or to make loans to or invest in new minority-owned companies, without first obtaining the consent of the financial institution in each case.

 

 

 

7.

INCOME TAXES

 

The income tax provision from continuing operations consists of the following:

 

Year ended December 31,

        

(in thousands)

 

2014

  

2013

 

Current

 $26  $43 

Provision for uncertain tax positions

  27   26 

Total

 $53  $69 

Year ended December 31,(in thousands)

 

2015

  

2014

 

Current

 $3  $18 

Total

 $3  $18 

 

Following is a reconciliation of estimated income taxes at the statutory rate from continuing operations to estimated tax expense (benefit) as reported:

 

Year ended December 31,

 

2014

  

2013

  

2015

  

2014

 

Statutory rate

  35%  35%  35%  35%

Change in valuation allowance

  (34%)  (35%)  (35%)  (34%)

Other – state

  4%  13%

Effective rate

  5%  13%  0%  1%

 

Net deferred tax assets consist of the following at December 31:

 

(in thousands)

 

2014

  

2013

  

2015

  

2014

 

Deferred tax assets:

                

Federal, state and foreign loss carryforwards

 $7,039  $6,527  $1,850  $3,862 

Capitalized research and development

  241   475 

Capital loss carryforward

  --   3,570 

Deferred revenue

  71   77   68   71 

Federal and state tax credits

  2,269   1,762   653   520 

Other

  503   563   (79)  503 

Total deferred tax asset

  10,123   9,404   2,492   8,526 

Less valuation allowance

  (10,123)  (9,404)  (2,492)  (8,526)

Net deferred tax asset

 $--  $--  $--  $-- 

 

Federal and state tax credits of $2.3 million$653,000 included in the above table expire at various dates between 20182024 and 2027.2035.

 

We had a deferred tax asset of approximately $10.1$2.5 million and $9.4$8.5 million at December 31, 20142015 and December 31, 2013,2014, respectively. The deferred tax asset has been offset by a valuation allowance in 2015 and 2014 and 2013 of $10.1$2.5 million and $9.4$8.5 million, respectively, because the company believes that it is more likely than not that the amount will not be realized. No deferred taxes have been provided on temporary differences related to investments in foreign subsidiaries because these investments are considered to be permanent.

  

 

 

As of December 31, the following net operating loss carryforwards, if unused as offsets to future taxable income, will expire during the following years:

 

(in thousands)

 

2014

  

2013

  

2015

  

2014

 

2019

 $2,901  $2,901 

2021

  1,184   1,184  $689  $689 

2022

  1,083   1,083   849   849 

2023

  1,302   1,302 

2030

  4   4 

2031

  298   298 

Thereafter

  13,642   12,177   3,445   9,196 

Total

 $20,112  $18,647  $5,285  $11,036 

 

Of the net operating losses detailed above, $11.3$1.5 million are related to net operating losses that VISaer and CoreCard incurred prior to theirits acquisition by the company. These net operating losses are subject to Separate Return Limitation Year rules and may be restricted under IRC Section 382 to be utilized by the company.rules. These net operating loss carryforwards will begin to expire in years 20192021 through 2028.2022.

 

We have recognized tax benefits from all tax positions we have taken, and there has been no adjustment to any carry forwards (net operating loss or research and development credits) in the past two years. As of December 31, 2014 and 2013, the company has recorded a liability of $212,000 and $185,000, respectively, in connection withThere were no unrecognized tax benefits related to uncertain tax positions. The liability includes $52,000 and $39,000 of interest and penalties as of December 31, 20142015 and 2013, respectively. As of December 31, 2014, management expects some incremental, but not significant, changes in the balance of unrecognized tax benefits over the next twelve months.

2014. 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 related to uncertainor penalties associated with any unrecognized tax positions inbenefits, nor was any interest expense and related penalties, if applicable, in general and administrative expense. Duringrecognized during the year ended December 31, 2014 and 2013,periods presented. We have determined we recognized $10,000 and $8,000 in interest expense, respectively, and $3,000 and $2,000 in penalties, respectively, related to thehave 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 2011.

 

8.

COMMITMENTS AND CONTINGENCIES

 

LeasesWe have noncancellable operating leases for offices and data centers expiring at various dates through April 2017.March 2018. Future minimum lease payments are as follows:

 

Year ended December 31,

    

(in thousands)

    

2015

 $254 

Year ended December 31,(in thousands)

    

2016

  60  $351 

2017

  20   257 

2018

  64 

Total minimum lease payments

 $334  $672 

 

The above future minimum lease payments include $194,000$484,000 payable to a related party. See Note 11 for further discussion.

 

Rental expense for leased facilities and equipment related to continuing operations amounted to $468,000$416,000 and $467,000$468,000 in the years ended December 31, 2015 and 2014, and 2013, respectively. Non-affiliated companies sublease space from the company. In the years ended December 31, 2014 and 2013, respectively, we received $23,000 and $27,000 in sublease rental income which reduced our rental expense during these years.

 

Legal Matters In April 2013, Clearwater Environmental Services (“CES”) asserted a claim against ChemFree for additional sales commission that CES alleged was owed pursuant to a Target Account Sales Agreement (“TASA”) that terminated October 31, 2012. The company believed that all amounts due to CES had been paidThere are no pending or threatened legal proceedings. However, in full in accordance with the terms of the TASA and vigorously defended against this claim. The dispute was the subject of arbitration proceedings, as required under the terms of the TASA. In 2014, the parties engaged in the discovery phase of the arbitration and, in addition to the sales commissions CES contended were owed under their interpretation of the TASA, CES also asserted various additional claims. The total amount claimed by CES was in excess of $1.7 million. The arbitration hearing was held April 22 – 24, 2014 in Atlanta, Georgia. On April 24, 2014, prior to a ruling by the arbitrator, the parties agreed on the general terms of a settlement of the dispute and a final agreement was entered into effective as of May 12, 2014 (the “Settlement Agreement”).


Under the terms of the Settlement Agreement, ChemFree and CES agreed to settle and compromise all claims between them related to the TASA. ChemFree agreed to pay to CES the sum of $706,000 in 3 payments: $236,000 within five days of the signing of the Settlement Agreement on May 12, 2014 (“Effective Date”), $235,000 to be paid 90 days after the Effective Date and the final $235,000 to be paid 180 days after the Effective Date. The parties exchanged mutual general releases of all claims that were or could have been asserted related to the TASA. Intelligent Systems was a party to the Settlement Agreement solely for the purpose of guaranteeing ChemFree’s payments.

While the company believes that its original interpretation of the terms of the TASA relating to commissions earned after the contract terminated 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 in CES’s favor.

As a result of the Settlement Agreement, the company recorded Legal Settlement expenses of $387,000 in the quarter ended March 31, 2014 for amounts settled and owed in excess of amounts accrued in prior periods. The settlement amount of $706,000 includes $61,000 that was expensed and paid to CES in a prior period. However, since CES never cashed the check for such amount, this amount is included in the calculation of the amount shown on the line item accrued settlement in the statement of cash flows. As of December 31, 2014, all payments due under the Settlement Agreement have been paid.

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.

 

9.

POST-RETIREMENT BENEFITS

 

Effective January 1, 1992, we adopted the Outside Directors’ Retirement Plan which provides that each non-employee director, upon resignation from the Board of Directors after reaching the age of 65, will receive a cash payment equal to $5,000 for each full year of service as a director of the Company (and its predecessors and successors) up to $50,000. The plan was terminated in 2011. At December 31, 20142015 and 2013,2014, we have accrued $59,000 and $125,000, and $141,000which is included in other current liabilities in the Consolidated Balance Sheets, for future payments that were earned under the plan before it was terminated.

 


10.

DEFINED CONTRIBUTION PLANS

 

We maintain a 401(k) defined contribution plan covering all U.S. employees. Our matching contributions, net of forfeitures, under the plan, which are optional and based on the level of individual participant’s contributions, amounted to $36,000 and $40,000 in 2015 and $39,000 in 2014, and 2013, respectively.

 

11.

RELATED PARTY TRANSACTION

 

The lease on our headquarters and primary facility in Norcross, Georgia is held by ISC Properties, LLC, an entity controlled by our Chairman and Chief Executive Officer, J. Leland Strange. Mr. Strange holds a 100% ownership interest in ISC Properties, LLC. We paid rent of $468,000$275,000 and $467,000$468,000 to ISC Properties, LLC in the years ended December 31, 20142015 and 2013,2014, respectively. We have determined that ISC Properties, LLC is not a variable interest entity.

 

12.

STOCKHOLDERS’ EQUITY

 

We have authorized 20,000,000 shares of common stock, $0.01 par value per share and 2,000,000 shares of special stock, of which none is outstanding. The Board of Directors has authorized stock repurchasesOn April 22, 2015, we commenced a modified “Dutch” auction style tender offer to purchase for cash shares of our common stock from time to time butfor an aggregate purchase price of no repurchasesmore than $5 million. The tender offer expired May 19, 2015. We accepted for tender 230,729 shares of common stock at a purchase price per share of $3.00 for an aggregate purchase price of $692,000. Shares repurchased were authorized or madecancelled, resulting in a decline in the two years ending 2014 and there are nonumber of outstanding authorizations for repurchases.shares at December 31, 2015 as compared to December 31, 2014.

 


13.

STOCK OPTION PLANS

 

We instituted the 2003 Incentive Stock Plan (the “2003 Plan”) in March 2003. The 2003 Plan authorizesauthorized the issuance of up to 450,000 options to purchase shares of common stock to officers and key employees, with vesting of such options occurring equally over a 3-year time period. In 2013, the 2003 Plan expired with 80,000197,500 options ungranted. In June 2015, shareholders approved the 2015 Incentive Stock Plan (the “2015 Plan”) which authorizes the issuance of up to 750,000 options to purchase shares of common stock to employees and key consultant and advisors. There have been no grants under the 2015 Plan. In August 2000, we instituted a Non-Employee Directors’ Stock Option Plan (the “Directors Plan”) that authorized the issuance of up to 200,000 shares of common stock to non-employee directors. Upon adoption of the Directors Plan, each non-employee director was granted an option to acquire 5,000 shares. At each Annual Meeting, each director receives a grant of 4,000 options, which vest in 50% increments on the first and second anniversary. The Directors Plan expired in 2011, with 48,00060,000 options ungranted. The shareholders approved a new plan, the 2011 Non-Employee Directors Stock Plan (the “2011 Directors Plan”), in May 2011, with essentially the same terms and conditions as the Directors Plan. Stock options under all plans are granted at an exercise price equal to fair value on the date of grant and vest over 22-3 years. As of December 31, 2014,2015, a total of 1,231,5001,243,500 options under all plans have been granted, 724,320728,320 have been exercised, 232,680240,680 have been cancelled, 250,000254,500 are fully vested and exercisable and 24,50020,000 are not vested. All options expire ten years from their respective dates of grant.

 

As of December 31, 2014,2015, there was $17,000$23,000 unrecognized compensation cost related to stock options granted under the plans, which is expected to be a recognized over a weighted-average period of 1.5 years.

 


Stock option activity during the years ended December 31, 20142015 and 20132014 was as follows:

 

  

2014

  

2013

 

Options outstanding at January 1

  270,500   345,500 

Options cancelled

  (12,000)  (92,000)

Options granted

  16,000   17,000 

Options outstanding at December 31

  274,500   270,500 
         

Options available for grant at December 31

  138,000   154,000 
         

Options exercisable at December 31

  250,000   194,167 
         

Exercise price ranges per share:

        

Granted

 $1.35  $1.33 

Outstanding

 $0.69 - $3.84  $0.69 - $3.84 
         

Weighted average exercise price per share:

        

Granted

 $1.35  $1.33 

Outstanding at December 31

 $1.72  $1.75 

Exercisable at December 31

 $1.76  $1.83 


  

2015

  

2014

 

Options outstanding at January 1

   274,500    270,500 

Options cancelled

   (8,000)   (12,000)

Options exercised

   (4,000)   -- 

Options granted

   12,000    16,000 

Options outstanding at December 31

   274,500    274,500 
           

Options available for grant at December 31

   876,000    138,000 
           

Options exercisable at December 31

   254,500    250,000 
           

Exercise price ranges per share:

          

Granted

 $ 2.97  $ 1.35 

Exercised

 $ 2.08    -- 

Outstanding

 $0.69-$3.84  $0.69-$3.84 
           

Weighted average exercise price per share:

          

Granted

 $ 2.97  $ 1.35 

Exercised

 $ 2.08    -- 

Outstanding at December 31

 $ 1.76  $ 1.72 

Exercisable at December 31

 $ 1.72  $ 1.76 

 

The following tables summarize information about the stock options outstanding under the company’s option plans as of December 31, 2014.2015.

 

 

Options Outstanding:

             
 

Range of
Exercise Price

  

Number
Outstanding

  

Wgt. Avg. Contractual
Life Remaining (yrs)

  

Wgt. Avg.
Exercise Price

  

Aggregate
Intrinsic Value

 
 $0.69 - $2.08   250,500   6.4  $1.55  $31,525 
 $3.30 - $3.84   24,000   2.9  $3.57   -- 
 $0.69 -$3.84   274,500   6.1  $1.72  $31,525 

Options Outstanding:

             

Range of 
Exercise Price

  

Number
Outstanding

  

Wgt. Avg. Contractual
Life Remaining (years)

  

Wgt. Avg.
Exercise Price

  

Aggregate
Intrinsic Value

 
$0.69-$2.08   238,500   5.7  $1.52  $356,145 
$2.97-$3.84   36,000   4.4  $3.37  $54,960 
$0.69-$3.84   274,500   5.5  $1.76  $411,105 

 

 

Options Exercisable:

             
 

Range of
Exercise Price

  

Number
Exercisable

  

Wgt. Avg. Contractual
Life Remaining (yrs)

  

Wgt. Avg.
Exercise Price

  

Aggregate
Intrinsic Value

 
 $0.69 - $2.08   226,000   6.0  $1.57  $24,985 
 $3.30 -$3.84   24,000   2.9  $3.57   -- 
 $0.69 -$3.84   250,000   5.7  $1.76  $24,985 

Options Exercisable:

             

Range of
Exercise Price

  

Number
Exercisable

  

Wgt. Avg. Contractual
Life Remaining (years)

  

Wgt. Avg.
Exercise Price

  

Aggregate
Intrinsic Value

 
$0.69-$2.08   230,500   5.6  $1.53  $337,985 
$2.97-$3.84   24,000   1.9  $3.57  $54,960 
$0.69-$3.84   254,500   5.3  $1.72  $392,945 

 

Aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the company’s closing stock price on the last trading day of the year ended December 31, 20142015 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 December 31, 2014.2015. The amount of aggregate intrinsic value will change based on the fair value of the company’s common stock.

 


14.

FOREIGN Revenues AND OPERATIONS

 

Foreign revenues are based on the location of the customer. Revenues from customers associated with continuing operations by geographic areas for the years ended December 31, 20142015 and 20132014 are as follows:

 

Year ended December 31,

        

(in thousands)

 

2014

  

2013

 

Foreign Countries:

        

United Kingdom

 $1,301  $1,284 

Pacific Rim *

  550   598 

Canada

  489   496 

Brazil

  5   59 

Other

  93   35 

Subtotal

  2,438   2,472 

United States

  12,148   13,846 

Total

 $14,586  $16,318 

* Includes Australia, New Zealand, Japan and Singapore

Year ended December 31,(in thousands) 

2015

  

2014

 

Foreign Countries:

        

European Union

 $128  $51 

Other

  4   15 

Subtotal

  132   66 

United States

  4,650   4,121 

Total

 $4,782  $4,187 

 

In 2003, we established a subsidiary of CoreCard Software in Romania for software development and testing activities. In 2006, we established a subsidiary in India for additional software development and testing activities.activities as well as support for processing operations. With the exception of a facility in India which was acquired in 2007 to house our India-based employees and which had a net book value of $199,000$191,000 and $209,000$199,000 at December 31, 20142015 and 2013,2014, respectively, substantially all long-lived assets are in the United States.

 

At December 31, 20142015 and 2013,2014, continuing operations of foreign subsidiaries had assets of $557,000$501,000 and $502,000,$557,000, respectively, and total liabilities of $351,000$435,000 and $304,000,$351,000, respectively. The majority of these assets and liabilities are in India. There are no currency exchange restrictions related to our foreign subsidiaries that would affect our financial position or results of operations. Refer to Note 1 for a discussion regarding how we account for translation of non-U.S. currency amounts.

 


15.

INDUSTRY SEGMENTS

 

Our consolidatedFollowing the sale of our ChemFree subsidiary, management considers our remaining subsidiaries, are involved in twoconsisting of CoreCard and its affiliate companies, to be one operating segment. Historically, we have described this industry segments:segment as Information Technology Products and Services but as our company and Industrial Products. Operations in Information Technology Productsthe financial software and Services involve development and sales of software licenses as well as providingservices industries have evolved, we now consider the financial transaction processingsolutions and services professional services and software maintenance and support services by our CoreCard Software subsidiary. Operations in the Industrial Product segment include the manufacture and sale of bio-remediating parts washers and related consumable supplies by our ChemFree subsidiary. Total revenue by(“FinTech”) industry segment includes sales to unaffiliated customers. There are no sales between our industry segments. Operating income (loss) is total revenue less operating expenses. None of the corporate overhead expense is allocated to the individual industry segments. Identifiable assets by industry segment are those assets that are used in our subsidiaries in each industry segment. Corporate assets are principally cash, marketable securities and investments.be more appropriate.

 

The following table contains segment information for the years ended December 31, 2014 and 2013:

Year ended December 31,(in thousands)

 

2014

  

2013

 

Information Technology

        

Revenue

 $4,188  $4,202 

Operating loss

  (1,879)  (1,290)

Depreciation and amortization

  150   189 

Capital expenditures

  190   174 

Identifiable assets

  1,621   1,725 
         

Industrial Products

        

Revenue

 $10,398  $12,116 

Operating income

  2,021   3,074 

Depreciation and amortization

  243   240 

Capital expenditures

  87   380 

Identifiable assets

  5,357   6,716 
         

Consolidated Segments

        

Revenue

 $14,586  $16,318 

Operating income

  142   1,784 

Depreciation and amortization

  393   429 

Capital expenditures

  277   554 

Identifiable assets

  6,978   8,441 

A reconciliation of consolidated segment data above to consolidated data follows:

Year ended December 31, (in thousands)

 

2014

  

2013

 

Consolidated segments operating income

 $142  $1,784 

Corporate expenses

  (1,323)  (1,340)

Consolidated income (loss) from continuing operations

 $(1,181) $444 
         

Depreciation and amortization

        

Consolidated segments

 $393  $429 

Corporate

  5   6 

Consolidated

 $398  $435 
         

Capital expenditures

        

Consolidated segments

 $277  $554 

Corporate

  --   5 

Consolidated

 $277  $559 

As of December 31,(in thousands)

 

2014

  

2013

 

Assets

        

Consolidated segments identifiable assets

 $6,978  $8,441 

Corporate

  2,227   2,186 

Consolidated

 $9,205  $10,627 


16.

Net INCOME (Loss) PER SHARE

 

Basic net income (loss) per share is computed by dividing net income (loss) attributable to Intelligent Systems Corporation (numerator) by the weighted average number of common shares outstanding (denominator) during the period and excludes the dilutive effect of stock options. Diluted income (loss) per share gives effect to all dilutive potential common shares outstanding during a period. In computing diluted income per share, the average stock price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method for the hypothetical exercise of stock options.

 


The following tables represent required disclosure of the reconciliation of the income (loss) and the shares used in the basic and diluted income (loss) per share computation:

 

Year ended December 31,

                

(in thousands, except per share data)

 

2014

  

2013

  

2015

  

2014

 

Basic

                

Net income (loss) attributable to Intelligent Systems Corporation

 $(76) $1,084  $18,020  $(76)

Weighted average common shares outstanding

  8,958   8,958   8,807   8,958 

Net income (loss) per share

 $(0.01) $0.12  $2.05  $(0.01)
                

Diluted

                

Net income (loss) attributable to Intelligent Systems Corporation

 $(76) $1,084  $18,020  $(76)

Weighted average common shares outstanding

  8,958   8,958   8,807   8,958 

Effect of dilutive potential common shares: stock options

  --   2   105   -- 

Total

  8,958   8,960   8,912   8,958 

Net income (loss) per share

 $(0.01) $0.12  $2.02  $(0.01)

 

At December 31, 2013,2015, there were 113,500105,000 dilutive stock options exercisable, which had an immaterial impact on the calculation of diluted income per share.exercisable.

 

17.

Subsequent events

 

On February 8, 2016, we paid a special cash dividend of $0.35 per share to shareholders of record on January 29, 2016. The company has not in the past paid regular dividends and does not expect to do so in the foreseeable future.

We are not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Consolidated Financial Statements.

 

 

F-22

 F-23