TABLE OF CONTENTS

PART I

Forward-Looking Statements

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 and current shareholders 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 Item 7 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.

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”“company”, “us”, “ours”, “we”, “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 iswww.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.

On 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 parts washers under the SmartWasher® trademark. Accordingly, we have classified the ChemFree operations as discontinued operations in all periods presented.

Following the sale of ChemFree, weWe are primarily engaged in the business of providing technology solutions and processing services to the financial technology and services market, commonly referred to as the FinTech industry. Our FinTech operations are conducted through our CoreCard Software, Inc. (“CoreCard”) subsidiary and its affiliate companies in Romania and India, as well as the corporate office which provides significant administrative, human resources and executive management support to CoreCard. Effective January 1, 2017, we increased our ownership in CoreCard from approximately 96 percent to 100 percent. We also have two other 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.

For further information about trends and risks likely to impact our business, please refer to Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K.

CoreCard Software, Inc.– We conduct our business primarily through CoreCard. Our wholly owned subsidiaries, CoreCard SRL and ISC Software in Romania and India, respectively, perform software development and testing for CoreCard but dohave not sellto date sold products or services directly 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 basic software solutions that it licenses in its processing operations for companies that prefer to outsource this function to CoreCard rather than license the software for in-house operations.although licensees typically request a variety of customizations.

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

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

The CoreCard®CoreCard® software solutions allow financial institutions and commercial customers to optimize their card account management systems, improve customer retention, lower operating costs and create greater market differentiation. For example, theThe 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 lower cost, scalable PC-based servers, rather than expensive legacy mainframe computers, customers may benefit from a lower overall cost-of-ownership andcosts since the solution provides 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’sCoreCard’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.

We continue to add resources to expand upon our infrastructure investment to support CoreCard’s Processing Services line of business. CoreCard processes both prepaid cards and credit financing (private label and open loop/network) for a number of customers and anticipates steadily growing this business further in 2017 as it adds new processing customers.2018. CoreCard has a data processing center and disaster recovery site at secure third party locations, is certified as compliant with the Payment Card Industry (PCI) Data Security Standards and has an SSAE-16SSAE-18 SOC 1 independent audit report that can be relied on by its prepaid and credit 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 2017.2018.

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 addedhas Program Manager capabilities in addition to processing services, which will allowhas allowed us to gain additional experience and increaseadding the potential for increased revenue, potential, although we do not expect any significant revenue impact as a Program Manager near term.

CoreCard’sCoreCard’s principal target markets include accounts receivable businesses, prepaid card issuers, retail and private-label issuers (large and small), small third-party processors, and small and mid-size financial institutions in the United States. It is addinghas customers in international 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 several larger and more established software suppliers, and a number of software solution providers that offer more limited functional modules. Someprocessors. Many 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 and processing customers a robust technology platform, lower overall cost-of-ownership,cost per account fees, greater system flexibility, and more customer-driven marketing options. Furthermore, we believe our processing option is an attractive alternative particularly for small, prepaidProbably even more importantly, the size and credit issuers or companies entering new credit or prepaid markets that may not have the technology expertiseflexibility of CoreCard makes it possible to run the software in-house initially.get to market more quickly with customized, flexible programs. Under our processingProcessing Services option, customers can contract with CoreCard to provide 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 a 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 servicesProcessing Services business.

Historically, most of the company’scompany’s sales have resulted from prospects contacting CoreCard based on an online search. 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, number of accounts on the system, and the number of software modules licensed with initial contract revenue typically ranging from $200,000 to $1 million.licensed. 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 offer processing services (running on the CoreCard software platform). Processing customers pay an implementation and setup fee plus monthly service fees, primarily based on number of accounts, 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’sCoreCard’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 providingprovides 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.regulations with final responsibility resting with the customer. Depending on the extent of changes and new governmental regulations, CoreCard may from time to timewill regularly 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 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) to approve new customer programs which could impact demand for our product and service offerings.

Our business is not seasonal.

considered seasonal although the use of certain of our products may grow with higher end-of-year spending patterns and possibly cause a small revenue increase during this period.

Incubator Program

For more than twenty-fivetwenty-five years, we have been associated with an incubator program (the Gwinnett Innovation Park) 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. 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

FromNon-consolidated Companies

We are primarily engaged in the FinTech industry through CoreCard’s operations; however, 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. Typically, these companies are privately held, early stage companies in technology-related fields. From time to time, we may increase our investment in a company or write down the value of an investment if we believe it is impaired or there may be a liquidation event in 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 sale and a write-down of two of our non-consolidated companies as well as a liquidation event in which we participated on one of our non-consolidated companies.

Research and Development

We spent $2.7$4.4 million and $2.9$2.7 million in the years ended December 31, 20162017 and 2015,2016, respectively, on company sponsored research and development. All of our consolidated research and development expense is related to our FinTech business. We maintain a workforce of approximately 260325 employees in our offshore operations in India and Romania for software development and testing, as well as operations support for processing services. We continuously add new features and functionality to our financial technology software in response to market requirements and trends and expect to continue to do so.

Patents, Trademarks and Trade Secrets

We have one U.S. patent covering aspects of CoreCard’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 several 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 one element in developing and maintaining brand recognition and protecting our intellectual property. We presently market our products under trademarks and service marks such as CoreCard®, CoreENGINE™, CoreISSUE™, CoreCOLLECT™, CoreMONEY™ and others.

Personnel

As of February 15, 2017,15, 2018, we had 286350 full-time equivalent employees (including our subsidiaries in the United States and foreign countries). Of these, 280345 are involved in CoreCard’s software development, testing and operations, and 65 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 1415 to the Consolidated Financial Statements. Except for the risk associated with fluctuations in currency, we do not believe there are any specific risks attendant to our foreign operations that are significantly different than the general business risks discussed elsewhere in this Annual Report.

We have a lease covering approximately 15,000 square feet in Norcross, Georgia to house our product development, sales, service and administration operations for our domestic operations. Our Norcross lease was renewed April 15,March 31, 2015 for a three year term. We also lease a small office in Timisoara, Romania, weRomania. We own a 6,350 square foot office facility in Bhopal, India, to house the software development and testing activities of our offshore subsidiaries andsubsidiaries; we lease approximately 2,000 square feet of additional office space in an adjacent facility in Bhopal, India.India; and we lease approximately 5,500 square feet in Mumbai, India to house additional staff for our offshore software development activities. We believe our facilities are adequate for the foreseeable future.

We are not a party to any material pending legal proceedings.

Not applicable.

PART II

Market Information

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

We had 219209 shareholders of record as of February 15, 2017.2018. 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. On February 8, 2016, we paid a special cash dividend of $0.35 per share totaling $3,056,000 to shareholders. The company has not paid regular dividends in the past and does not intend to pay dividends in the foreseeable future.

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 2016.

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDResults OF OPERATIONS2017.

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 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. Service revenue consists of fees for processing services; professional services for software customization, consulting, training; reimbursable expenses; and software maintenance and customer support.

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

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

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

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

Certain initial software contracts contain specified future service elements for scheduled completion following the implementation, and related recognition, of the initial license. In these instances, after the initial license recognition, where distinct future performance obligations are identified in the contract and we could reliably measure the completion of each identified performance obligation, we have recognized revenue at the time the individual performance obligation was completed.

Purchases of additional licenses for tier upgrades or additional modules are recognized as license revenue in the periodperiod in which the purchase is 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 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. 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. 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. In the first quarter of 2016, we recorded an impairment charge of $700,000 to reduce the carrying value of Lumense, Inc.toan investee company, an early stage sensor technology company, to management’s estimate of net realizable value. Subsequently, in the second quarter of 2016, we recorded an additional impairment charge of $50,000 to fully write-down our minority equity ownership in Lumense, Inc.the investee company. In the fourthsecond quarter of 2015,2017, we recorded an impairment charge of $792,000$90,000 to reduce the carrying value of NKD Enterprisesan investee company, a privately-held technology company in the FinTech industry. The investee closed on a Series A preferred stock financing resulting in substantial dilution to management’s estimateour investment. Subsequently, in the fourth quarter of net realizable value. During2017, the investee sold its intellectual property and is in process of winding down its operations. As a result, we recorded an additional impairment charge of $10,000 to fully write-down our minority ownership in the investee company. In the third quarter of 2017, we recorded a gain of $372,000, as funds held in escrow from a prior investee company sale, were released. In the same quarter we recordedsold shares in a tender offer for stock of one of our investee companies, a privately-held technology company in the Fintech industry, resulting in a gain on investment of $2.0 million when Lancope, Inc., an investee company, was sold to Cisco, Inc.$1,466,000. Such gains or write-downs can have material impacts on our financial condition or results of operations and are generally not predictable in advance.

Executive Summary

The results reported reflect the effect of the sale of ChemFree subsidiary on March 31, 2015, as explained in more detail in Note 2 to the Consolidated Financial Statements. As such, we have classified the ChemFree operations as discontinued operations in all periods presented. Our consolidated continuing operationsoperations consist of our CoreCard Software subsidiary and its affiliate companies in Romania and India, as well as the corporate office which provides significant administrative, human resources and executive management support to CoreCard.

We provide technology solutions and processing services to the financial services market, commonly referred to as the FinTech industry. We derive ourproduct revenue from licensing our comprehensive suite of financial transaction management software 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. Ourservice revenue consists of fees for 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 tomay do so in the foreseeable future. We may report operating profits on an irregular basis and ourOur results vary in part depending on the size and number of software licenses recognized as well the value and number of professional services contracts recognized in a particular period and the level of expenses incurred to support existing customers and development and sales activities.period. As an example, for the quarter ended SeptemberJune 30, 2016,2017, we reported consolidated operating income in part due to significant revenue associated with the initial implementationrecognition of a keysecond license and customizations provided for such license, as well as customizations of our base product offering for a global license customer. As we continue to grow our Processing Services business, we continue to gain economies of scale on the investment we have made in the infrastructure, resources, processes and software features developed over the past number of years to support this growing side of our business. As such, we may, in the future, also report operating profits on a quarterly and annual basis. We are adding new processing customers at a faster pace than we are adding new license customers, resulting in steady growth in the processing revenue stream. The infrastructure of our multi customer targetingenvironment is scalable for the Asia Pacific market.future. A significant portion of our expense is related to personnel, including approximately 260325 employees located in India and Romania. In addition,the fourth quarter of 2017, we offer processing services as an alternativeopened a second office in India, located near Mumbai, to enable us to attract the level of talent required for customers who prefer to outsource this function instead of licensing our software development and running the application in-house. We may continue 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.testing. In addition, we have certain corporate office expenses associated with being a public company that impact our operating results, even though our main operating entity, CoreCard is profitableperformed near breakeven from operations for the twelve months ended December 31, 2016 and is likely to operate at or near breakeven in the future.    2017.

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

The saleWe continue to maintain a strong cash position. In the latter part of December, 2017, we purchased additional hardware and software for our processing environment in anticipation of a contract currently being negotiated with a potential customer that may result in increased revenue over the ChemFree operationsnext few years. We anticipate additional equipment purchases in 2015 resultedearly 2018. While there is no assurance that the contemplated agreement will be finalized, management believes it will have a successful outcome and in significant cash balances.the event the agreement is not finalized, the potential customer has agreed to take title to and reimburse us for the equipment purchases. We used $692,000 to repurchase shares of our common stock pursuant to a modified “Dutch” auction tender in 2015 and $3,056,000 to pay a special cash dividend of $0.35 per share to shareholders on February 8, 2016. We intend to use cash balances to support the domestic and international operations associated with our CoreCard business and to expand our operations in the FinTech industry through financing the growth of CoreCard and, if appropriate opportunities become available, through acquisitions of businesses in this industry.

Results of Operations

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

Revenue– Total revenue from continuing operations in 2016for the year ended December 31, 2017 was $8,178,000$9,302,000 which represents a 7114 percent increase over 2015. We experienced revenue growth on both the products and services sides of the business. Since a significant component of the year-to-year increase in product and service revenue was related to a single new customer that went live in 2016, it is unlikely that we will experience the same year-over-year revenue growth in 2017.     2016.

Cost of Revenue– Total cost of revenue was 4948 percent of total revenue for the twelve months ended December 31, 2016,2017, compared to 5349 percent for the twelve months ended December 31, 2015.2016.

Operating Expenses – For the twelve month period ended December 31, 2016,2017, total operating expenses from continuingconsolidated operations were lowergreater than in the corresponding period in 2015.2016 primarily as the result of increased research and development expenses. Research and development expenses were 59 percent higher in 2017 as compared to 2016, mainly due to payroll and related expense for additional offshore technical personnel, as well as an increase in contractor fees for certain development efforts. In addition, we expanded our hiring capabilities of technical resources by opening a second office located near Mumbai, India. General and administrative expenses were lower in 20162017 than in 2015,2016, due to bonuses paid in 2015 related to the sale of the ChemFree subsidiary in 2015 and transaction expenses for the tender offer in 2015. In addition, the decrease in G&A in 2016 reflects lower personnel-related expense at the corporate offices in 2016. Research2017 as well as lower professional fees incurred for legal and development expenses were 5 percent lower in 2016 as compared to 2015, mainly due to more technical personnel expenses being charged to direct cost of services for maintenance, professional services and processing.consulting services. Marketing expenses remained relatively immaterial as a percentage of total operating expenses, 7 percent in 2016 and 5 percent in 2015, however have increased 45decreased 27 percent year over year as we have added newplaced less focus on marketing initiatives for CoreCard in 2016. We anticipate increasing2017. Our client base increased in 2017 with minimal marketing efforts as we continue to have prospects contact us via online searches; however, we will continue to re-evaluate our marketing expenditures inas needed to competitively position the future as we are better positioned to support the processingProcessing Services business.

Investment Income (Loss)– In 2016,2017, we recorded an$1,738,000 of investment lossincome, which was comprised of $713,000.The loss is primarily attributable toa gain of $1,466,000 on the write-downsale of $750,000our investment in a privately-held technology company in the third quarter of 2017, and the gain of $372,000 on ana final payment after the escrow period on a prior minority investment sale, as described in more detail in Note 4 to the Consolidated Financial Statements,Statements. This was offset in part by an impairment charge of $100,000 in 2017 to write down the carrying value of another investee company, as explained in more detail in Note 4 to the Consolidated Financial Statements. In 2016, we recorded an investment loss of $713,000.The loss is attributable to the write-down of $750,000 on an investment, offset in part by a gain of $37,000 on a final payment, after the escrow period, on a prior minority investment sale. 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 the fourth quarter of 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.

Other Income–Other income remained relatively consistent year over year at $166,000 in 2017 and $148,000 in 2016 and $109,000 in 2015.2016. This primarily reflects income earned on our cash balances in both years.

Gain on Sale of Discontinued Operations–As explained in more detail in Note 2 to the Consolidated Financial Statements, we recorded a gain of $18,802,000 on the sale of our ChemFree subsidiary in 2015.

Liquidity and Capital Resources

Our cash balance at December 31, 20162017 was $17,724,000$14,024,000 compared to $18,059,000$17,724,000 at December 31, 2015.2016. The principal use of cash during the period, which occurred in the latter part of December 2017, was the paymentprepayment of $1,745,000 for processing equipment, software and related licenses. This prepayment was made on processing equipment scheduled to be installed in 2018 to enhance our processing environment in anticipation of a special cash dividendsignificant contract under negotiations. The prepayment is shown in “Other Current Assets” at December 31, 2017. We anticipate additional purchases to supplement the processing environment in early 2018. In addition, we advanced $1,250,000 on February 8, 2016a Loan Agreement, as described in more detail in Note 6 to the Consolidated Financial Statements, and we funded our investment of $0.35 per share totaling $3,056,000$1,000,000 in a privately-held technology company, as explained in Note 4 to our shareholders of record as of January 29,the Consolidated Financial Statements. The liability for the investment funding was included in “Other Current Liabilities” at December 31, 2016. In 2016,2017, a principal source of cash was $2,248,000$1,564,000 from the sale of our investment in a privately-held technology company, as described in Note 4 to the Consolidated Financial Statements. In addition, we received $372,000 of cash held in escrow from the sale of one of our prior investee companies, Lancope, Inc.,as described in more detail in Note 4 to Cisco, Inc., on December 23, 2015. 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 was received in early January 2016. In addition, the remaining cash held in escrow of $2,202,000, including interest, from the sale of our ChemFree subsidiary was released in the fourth quarter of 2016.Consolidated Financial Statements.

During the twelve months ended December 31, 2016,2017, continuing operations used $1,257,000$2,467,000 cash for operations of the FinTech business and corporate office. The most significant working capital changes since December 31, 20152016 include an increase in other current assets of $562,000$1,213,000 of which $528,000$1,745,000 relates to an increasethe aforementioned equipment and software purchases on behalf of a potential new customer which is offset by a decrease in work-in-process as certain customizations for in-process contracts and accounts receivable increased $367,000 due to higher billings in 2016.were recognized. In addition, total deferred revenue decreased by $466,000$655,000 as we were able to recognize for GAAP reporting, prior period milestone billings for in-process contracts and deposits for professional services when the projects were completed in 2016.2017.

We used $313,000$894,000 cash to acquire computer equipment forand related software licenses primarily to upgrade our processing data centers, as we plan for future growth in our Processing Services business, and to upgradeadd office equipment for new technical resources. In addition, we used $50,000 cash to increase our investmentresources hired in a prior investee, a privately-held technology company.

In the twelve months ended December 31, 2016, discontinued operations used $120,000 cash, to pay a tax liability related to the sale of ChemFree as further explained in Note 2 to the Consolidated Financial Statements.

We previously had a line of credit with a maximum principal availability of $1,250,000 based on qualified receivables; however, we have not borrowed under the bank line of credit in the past five years and do not expect to need to do so in the foreseeable future. As a result, when the line of credit expired on June 30, 2016, we decided not to renew the bank line for an additional period.2017.

Subsequent to the 20162017 year-end, we entered into a Loan Agreement with a private limited company in India in the FinTech industry. We advanced $235,000 on January 4, 2017 we funded our investment of $1,000,000the Loan Agreement during the quarter ended March 31, 2018, as described in a privately held technology company as explainedmore detail in Note 418 to the Consolidated Financial Statements.

Although we paid a special cash dividend to shareholders in 2016, we do not expect to pay any regular or special dividends in the foreseeable future. We expect to have sufficient liquidity from cash on hand as well as projected customer payments to support our operations and capital equipment purchases in the foreseeable future. Currently we expect to use cash in excess of what is required for our current operations for opportunities we believe will expand our FinTech business, as exemplified in certain recent transactions described in Notes 6 and 18, although there can be no assurance that appropriate opportunities will 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 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.

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

RRecentecent Accounting Pronouncements – In February 2016, the FASB issued ASU 2016-02 – Leases (Topic 842) related to the accounting for leases. This pronouncement requires lessees to record most leases on their balance sheet, while expense recognition on the income statement remains similar to current lease accounting guidance. The guidance also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. Under the new guidance, lease classification as either a finance lease or an operating lease will determine how lease-related revenue and expense are recognized. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the effect on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-08 – Revenue from Contracts with Customers (Topic 606) related to reporting revenue gross versus net, or principal versus agent considerations. This pronouncement is meant to clarify the guidance in FASB ASU 2014-09, Revenue from Contracts with Customers, as it pertains to principal versus agent considerations. Specifically, the guidance addresses how entities should identify goods and services being provided to a customer, the unit of account for a principal versus agent assessment, how to evaluate whether a good or service is controlled before being transferred to a customer, and how to assess whether an entity controls services performed by another party. The pronouncement has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We are currently evaluating the effect on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09 – Compensation – Stock Compensation (Topic 718) related to simplifications of employee share-based payment accounting. This pronouncement eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. The pronouncement also addresses simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding requirements. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. We are currently evaluating the effect on our Consolidated Financial Statements.

In April 2016, the FASB issued ASU 2016-10 – Revenue from Contract with Customers (Topic 606) related to identifying performance obligations and licensing. This pronouncement is meant to clarify the guidance in FASB ASU 2014-09, Revenue from Contracts with Customers. Specifically, the guidance addresses an entity’s identification of its performance obligations in a contract, as well as an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. The pronouncement has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We are currently evaluating the effect on our Consolidated Financial Statements.

In May 2016, the FASB issued ASU 2016-12 – Revenue from Contracts with Customers (Topic 606) related to narrow scope improvements. This pronouncement is meant to clarify the guidance in FASB ASU 2014-09, Revenue from Contracts with Customers. The amendments in this update do not change the core principle of the guidance in Topic 606, but rather, the amendments in this update affect certain aspects of Topic 606 which include: assessing the collectability criterion, accounting for contracts that do not meet certain criteria, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications, and completed contracts. The pronouncement has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We are currently evaluating the effect on our Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held though Related Parties that are Under Common Control, which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. This guidance is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation of restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending cash balances on the statement of cash flows. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Under this new standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019. Early application is permitted. We do not believe the adoption of this new guidance will have a material impact on our consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The amendments in this Update clarify the scope of the nonfinancial asset guidance in Subtopic 610-20. The amendments also clarify that the derecognition of all businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. In addition, the amendments eliminate the exception in the financial asset guidance for transfers of investments (including equity method investments) in real estate entities and supersede the guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest Subsection within Topic 845. The amendments in this Update also provide guidance on the accounting for what often are referred to as partial sales of nonfinancial assets within the scope of Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other noncontrolled investee. This guidance is effective for public entities for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period. We are currently evaluating the impact this will have on our consolidated financial statements.

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

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

Consolidated Balance Sheets at December 31, 20162017 and 20152016

Consolidated Statements of Operations for the years ended December 31, 20162017 and 20152016

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 20162017 and 20152016

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 20162017 and 20152016

Consolidated Statements of Cash Flows for the years ended December 31, 20162017 and 20152016

Notes to Consolidated Financial Statements

None.

Item 9A.     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. AtAs 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 systemssystems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment.

There were no significant changes in the company’scompany’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’sManagement’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’scompany’s management evaluated the effectiveness of the company’s internal control over financial reporting as of December 31, 2016.2017. 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, 2016,2017, 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’scompany’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.

PART III

PART III

Please refer to the subsection entitled “Proposal“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 20172018 Annual Meeting of Shareholders (the “Proxy Statement”) for information about the individualsindividual nominated as directorsdirector 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’scompany’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“Proposal 1 - The Election of Two DirectorsOne Director - Executive Compensation” in the Proxy Statement for information about management compensation. This information is incorporated into this Item 11 by reference.

The following table sets forth the amount of securities authorized for issuance under our equity compensation plans as of December 31, 2016.2017.

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))
Equity compensation plans approved by security holders			264,500			$	1.99				834,000
Equity compensation plans not approved by security holders			40,000			$	2.52				--
Total			304,500			$	2.06				834,000

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))
Equity compensation plans approved by security holders			215,500			$	2.19				817,000
Equity compensation plans not approved by security holders			28,000			$	1.95				--
Total			243,500			$	2.17				817,000

 

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, 2017 and 2016, 17,000 options and 2015, 12,000 options were granted in each year, respectively, under the 2011 Director Plan, and zero12,000 options and 8,000zero options, respectively, expired unexercised. In 2016, 12,0002017, under the Directors Plans, zero options were exercised.exercised and 6,000 options were canceled. 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. In 2017, 60,000 options were exercised under the 2003 Plan. 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 were made in 2017 under the 2015 Plan. In the year ended December 31, 2016, 30,000 options were granted to a new officer of the company under the 2015 Plan. No grants were made in 2015 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“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 $210,000 and $275,000$210,000 in theboth years ending December 31, 20162017 and 2015, respectively. Simultaneous with the sale of our ChemFree subsidiary on March 31, 2015, we renewed our facility lease with ISC Properties, Inc. and reduced the amount of space leased.2016.

 

Please refer to the subsection entitled “Proposal“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.

ITEM 14.     Principal Accountant Fees and Services

 

Please refer to the subsection entitled “Independent“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

ITEM 15.

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 Karen J. Reynolds, 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.

 

2.1	Purchase Agreement between CRC Industries, Inc. and Intelligent Systems CorporationCorporation 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.)

 

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

 

10.1	Lease Agreement dated April 1, 2015, between the Registrant and ISC Properties, LLC. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Form 10-Q for the quarter ended March 31, 2015.)

 

10.3	Management Compensation Plans and Arrangements:

(a)

Intelligent Systems Corporation Stock Incentive Stock Plan

(b)

2011 Non-Employee Directors Stock Option Plan

	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.

21.1	List of subsidiaries of Registrant.

 

23.1	Consent of Nichols, Cauley & Associates, LLC.

 

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: March 17, 2017 15, 2018	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 thethe capacities and on the dates indicated:

 

Signature	Capacity	Date
		Date
/s/ J. Leland Strange  J. Leland Strange	Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)		March 17, 201715 ,2018
/s/Karen J. Reynolds  Karen J. Reynolds	Chief Financial Officer (Principal Accounting and Financial Officer)		March 17, 201715, 2018
/s/ Cherie M. FuzzellA. Russell Chandler III  Cherie M. FuzzellA. Russell Chandler III	Director		March 17, 201715, 2018
/s/ Philip H. Moise  Philip H. Moise	Director		March 17, 201715, 2018
/s/ Parker H. Petit  Parker H. Petit	Director		March 17, 201715, 2018

 

 

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:

 

Report of Independent Registered Public Accounting Firm – Nichols, Cauley & Associates, LLC	F-2
Consolidated Balance Sheets at December 31, 20162017 and 2015 2016	F-3
Consolidated Statements of Operations for the years ended December 31, 20162017 and 2015 2016	F-4
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 20162017 and 2015 2016	F-5F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 20162017 and 2015 2016	F-6F-5
Consolidated Statements of Cash Flows for the years ended December 31, 20162017 and 2015 2016	F-7F-6
Notes to Consolidated Financial Statements	F-8F-7

 

 

 

Nichols, Cauley & Associates, LLC

2800 Century Parkway, Suite 900

Atlanta, Georgia 30345

404-214-1301 FAX 404-214-1302

atlanta@nicholscauley.com

 

	NICHOLS, CAULEY& ASSOCIATES, LLC 2800 Century Parkway, Suite 900 Atlanta, Georgia 30345 404-214-1301     FAX 404-214-1302 atlanta@nicholscauley.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors

of Intelligent Systems Corporation

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Intelligent Systems Corporation and subsidiaries (the “Company”) as of December 31, 20162017 and 2015,2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’stockholders’ equity and cash flows for each of the two years then ended. in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements based on our audit.audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

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.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. OurAs part of our audits, included considerationwe are required to obtain and understanding 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’sCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audit providesaudits provide 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, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Nichols, Cauley and Associates, LLC

 

We have served as the Company’s auditor since 2015.

Atlanta, Georgia

March 3, 20175, 2018

 

 

Intelligent Systems Corporation

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

As of December 31,		2016				2015				2017				2016
ASSETS
Current assets:
Cash		$	17,724			$	18,059			$	14,024			$	17,724
Marketable securities			418				396				438				418
Accounts receivable, net			1,329				962				1,208				1,329
Notes and interest receivable, current portion											16				--
Other current assets			1,160				2,846				2,373				1,160
Restricted cash			--				2,200
Total current assets			20,631				24,463				18,059				20,631
Investments			1,272				1,015				1,035				1,272
Notes and interest receivable, net of current portion											1,250				--
Property and equipment, at cost less accumulated depreciation			700				636				1,262				700
Other long-term assets			101				59				173				101
Total assets		$	22,704			$	26,173			$	21,779			$	22,704
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	301			$	78			$	321			$	301
Deferred revenue, current portion			1,474				1,830				853				1,474
Accrued payroll			515				495				595				515
Accrued expenses			43				25				98				43
Other current liabilities			1,338				243				408				1,338
Liabilities from discontinued operations			--				120
Total current liabilities			3,671				2,791				2,275				3,671
Deferred revenue, net of current portion			85				195				51				85
Other long-term liabilities			18				18				--				18
Commitments and contingencies (Note 8)
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,743,299 and 8,731,299 issued and outstanding at December 31, 2016 and 2015, respectively			87				87
Commitments and contingencies (Note 9)
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,777,988 and 8,743,299 issued and outstanding at December 31, 2017 and 2016, respectively											88				87
Additional paid-in capital			17,864				20,875				14,877				17,864
Accumulated other comprehensive loss			(163	)			(184	)			(143	)			(163	)
Accumulated income			4,158				5,270				4,631				4,158
Total Intelligent Systems Corporation stockholders’ equity			21,946				26,048
Total Intelligent Systems Corporation stockholders’ equity											19,453				21,946
Noncontrolling interest			(3,016	)			(2,879	)			--				(3,016	)
Total stockholders’ equity			18,930				23,169
Total liabilities and stockholders’ equity		$	22,704			$	26,173
Total stockholders’ equity											19,453				18,930
Total liabilities and stockholders’ equity										$	21,779			$	22,704

 

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,		2017				2016
Revenue
Products		$	849			$	1,137
Services			8,453				7,041
Total net revenue			9,302				8,178
Cost of revenue
Products			320				626
Services			4,175				3,352
Total cost of revenue			4,495				3,978
Expenses
Marketing			255				350
General and administrative			1,588				1,797
Research and development			4,367				2,740
Loss from operations			(1,403	)			(687	)
Investment income (loss)			1,738				(713	)
Other income			166				148
Income (loss) before income taxes			501				(1,252	)
Income taxes			28				(3	)
Net income (loss)			473				(1,249	)
Net loss attributable to noncontrolling interest			--				137
Net income (loss) attributable to Intelligent Systems Corporation		$	473			$	(1,112	)
Earnings (loss) per share attributable to Intelligent Systems Corporation:
Basic		$	0.05			$	(0.13	)
Diluted		$	0.05			$	(0.13	)
Basic weighted average common shares outstanding			8,766,425				8,736,299
Diluted weighted average common shares outstanding			8,881,814				8,736,299

Year Ended December 31,		2016				2015
Revenue
Products		$	1,137			$	614
Services			7,041				4,168
Total net revenue			8,178				4,782
Cost of revenue
Products			626				219
Services			3,352				2,331
Total cost of revenue			3,978				2,550
Expenses
Marketing			350				242
General and administrative			1,797				1,935
Research and development			2,740				2,877
Loss from operations			(687	)			(2,822	)
Investment income (loss)			(713	)			1,247
Other income			148				109
Loss from continuing operations before income taxes			(1,252	)			(1,466	)
Income taxes			(3	)			3
Net loss from continuing operations			(1,249	)			(1,469	)
Gain on sale of discontinued operations, net of taxes			--				18,802
Loss from discontinued operations, no tax effect			--				(3	)
Net income (loss)			(1,249	)			17,330
Net loss attributable to noncontrolling interest			137				690
Net income (loss) attributable to Intelligent Systems Corporation		$	(1,112	)		$	18,020
Earnings (loss) per share attributable to Intelligent Systems Corporation:
Basic: Continuing operations		$	(0.13	)		$	(0.09	)
Discontinued operations			0.00				2.14
Earnings (loss) per share		$	(0.13	)		$	2.05
Diluted:  Continuing operations		$	(0.13	)		$	(0.08	)
Discontinued operations			0.00				2.10
Earnings (loss) per share		$	(0.13	)		$	2.02
Basic weighted average common shares outstanding			8,736,299				8,806,875
Diluted weighted average common shares outstanding			8,736,299				8,912,109
Net income (loss) attributable to Intelligent Systems Corporation:
Loss from continuing operations		$	(1,112	)		$	(779	)
Income from discontinued operations			--				18,799
Net income (loss) attributable to Intelligent Systems Corporation		$	(1,112	)		$	18,020

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

Year Ended December 31,		2017				2016
Net income (loss)		$	473			$	(1,249	)
Other comprehensive income:
Foreign currency translation adjustments			(25	)			(1	)
Unrealized gain on available-for-sale marketable securities			23				22
Total comprehensive income (loss)			471				(1,228	)
Comprehensive loss attributable to noncontrolling interest			--				137
Comprehensive income (loss) attributable to Intelligent Systems Corporation		$	471			$	(1,091	)

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

 

 

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)STOCKHOLDERS’ EQUITY

(in thousands)thousands, except share amounts)

Year Ended December 31,		2016				2015
Net income (loss)		$	(1,249	)		$	17,330
Other comprehensive income:
Foreign currency translation adjustments			(1	)			(6	)
Unrealized gain (loss) on available-for-sale marketable securities			22				(68	)
Total comprehensive income (loss)			(1,228	)			17,256
Comprehensive loss attributable to noncontrolling interest			137				690
Comprehensive income (loss) attributable to Intelligent Systems Corporation		$	(1,091	)		$	17,946

		Year Ended December 31,
STOCKHOLDERS’ EQUITY		2017				2016
Intelligent Systems Corporation stockholders’ equity:
Common stock, number of shares, beginning of year			8,743,299				8,731,299
Stock option exercised			60,000				12,000
Stock repurchased during year			(25,311	)			--
End of year			8,777,988				8,743,299
Common stock, amount, beginning of year		$	87			$	87
Stock option exercised			1				--
End of year			88				87
Additional paid-in capital, beginning of year			17,864				20,875
Dividends paid			--				(3,056	)
Minority holdings acquired			(3,038	)			--
Stock option exercised			(1	)			14
Stock compensation expense			52				31
End of year			14,877				17,864
Accumulated other comprehensive loss, beginning of year			(163	)			(184	)
Minority holdings acquired			22				--
Foreign currency translation adjustment			(25	)			(1	)
Unrealized gain on available-for-sale marketable securities			23				22
End of year			(143	)			(163	)
Accumulated earnings, beginning of year			4,158				5,270
Net income (loss)			473				(1,112	)
End of year			4,631				4,158
Total Intelligent Systems Corporation stockholders’ equity			19,453				21,946
Noncontrolling interest, beginning of year			(3,016	)			(2,879	)
Minority holdings acquired			3,016				--
Net loss			--				(137	)
End of year			--				(3,016	)
Total stockholders’ equity		$	19,453			$	18,930

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

 

 

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS

(in thousands, except share amounts)thousands)

		Year Ended December 31,
		2017				2016
OPERATING ACTIVITIES:
Net income (loss)		$	473			$	(1,249	)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization			330				248
Stock-based compensation expense			52				31
Gain on sale of long-term investment			(1,838	)			--
Non-cash investment expense			103				750
Non-cash interest income			(16	)			--
Equity in loss of affiliate company			39				43
Loss on disposal of property and equipment			2				1
Changes in operating assets and liabilities:
Accounts receivable, net			121				(367	)
Other current assets			(1,213	)			(562	)
Other long term assets			(72	)			(42	)
Accounts payable			20				223
Accrued payroll			80				20
Deferred revenue, current portion			(621	)			(356	)
Accrued expenses			55				18
Other current liabilities			70				95
Deferred revenue, net of current portion			(34	)			(110	)
Other long-term liabilities			(18	)			--
Net cash used for operating activities			(2,467	)			(1,257	)
INVESTING ACTIVITIES:
Purchases of property and equipment			(894	)			(313	)
Advances on note and interest receivable			(1,250	)
Purchase of long-term investment			(1,000	)			(50	)
Proceeds from sale of long-term investments			1,936				4,448
Net cash provided by (used for) investing activities			(1,208	)			4,085
FINANCING ACTIVITIES:
Distribution of dividend to stockholders			--				(3,056	)
Sale of capital stock pursuant to exercise of option			--				14
Net cash used for financing activities			--				(3,042	)
Net cash used for discontinued operations			--				(120	)
Effects of exchange rate changes on cash			(25	)			(1	)
Net decrease in cash			(3,700	)			(335	)
Cash at beginning of year			17,724				18,059
Cash at end of year		$	14,024			$	17,724
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	28			$	120
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Unfunded investment in privately-held technology company		$	--			$	1,000

		Year Ended December 31,
STOCKHOLDERS’ EQUITY		2016				2015
Intelligent Systems Corporation stockholders’ equity:
Common stock, number of shares, beginning of year			8,731,299				8,958,028
Stock option exercised			12,000				4,000
Stock repurchased during year in tender offer			--				(230,729	)
End of year			8,743,299				8,731,299
Common stock, amount, beginning of year		$	87			$	90
Stock repurchased during year in tender offer			--				(3	)
End of year			87				87
Additional paid-in capital, beginning of year			20,875				21,537
Dividends paid			(3,056	)			--
Stock repurchased during year in tender offer			--				(689	)
Stock option exercised			14				8
Stock compensation expense			31				19
End of year			17,864				20,875
Accumulated other comprehensive loss, beginning of year			(184	)			(110	)
Foreign currency translation adjustment			(1	)			(6	)
Unrealized gain (loss) on available-for-sale marketable securities			22				(68	)
End of year			(163	)			(184	)
Accumulatedearnings (deficit), beginning of year			5,270				(12,750	)
Net income (loss)			(1,112	)			18,020
End of year			4,158				5,270
Total Intelligent Systems Corporation stockholders’ equity			21,946				26,048
Noncontrolling interest, beginning of year			(2,879	)			(2,189	)
Net loss			(137	)			(690	)
End of year			(3,016	)			(2,879	)
Total stockholders’ equity		$	18,930			$	23,169

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,
		2016				2015
OPERATING ACTIVITIES:
Net income (loss)		$	(1,249	)		$	17,330
Income from discontinued operations			--				(18,799	)
Loss from continuing operations			(1,249	)			(1,469	)
Adjustments to reconcile net loss from continuing operations to net cash used for operating activities:
Depreciation and amortization			248				217
Stock-based compensation expense			31				19
Non-cash investment and interest income (loss), net			750				1,005
Equity in loss of affiliate company			43				14
Loss on disposal of property and equipment			1				--
Changes in operating assets and liabilities:
Accounts receivable, net			(367	)			(461	)
Other current assets			(562	)			(2,508	)
Other long term assets			(42	)			22
Accounts payable			223				(12	)
Accrued payroll			20				(87	)
Deferred revenue, current portion			(356	)			1,220
Accrued expenses			18				1
Other current liabilities			95				(31	)
Deferred revenue, net of current portion			(110	)			4
Net cash used for operating activities			(1,257	)			(2,066	)
INVESTING ACTIVITIES:
Purchases of property and equipment			(313	)			(272	)
Purchase of long-term investment			(50	)			(430	)
Proceeds from sale of long-term investments			4,448				--
Net cash provided by (used for) investing activities			4,085				(702	)
FINANCING ACTIVITIES:
Distribution of dividend to stockholders			(3,056	)			--
Sale of capital stock pursuant to exercise of option			14				8
Repurchase of capital stock pursuant to tender offer			--				(692	)
Net cash used for financing activities			(3,042	)			(684	)
Net cash used for operating activities from discontinued operations			(120	)			(189	)
Net cash provided by investing activities from discontinued operations			--				19,082
Net cash provided by (used for) discontinued operations			(120	)			18,893
Effects of exchange rate changes on cash			(1	)			(6	)
Net increase (decrease) in cash			(335	)			15,435
Cash at beginning of year			18,059				2,624
Cash at end of year		$	17,724			$	18,059
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	120			$	--
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION:
Unfunded investment in privately-held technology company		$	1,000			$	--

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

 

1.	ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

OrganizationOrganization– 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 – As further explained in Note 2, on March 31, 2015, we sold our largest operating subsidiary, ChemFree Corporation. Accordingly, we have classified the ChemFree operations as discontinued operations in all periods presented. Our continuing operations consist primarily of our CoreCard Software, Inc. (“CoreCard”) subsidiary and its affiliate companies in Romania and India, as well as the corporate office which provides significant administrative, human resources and executive management support to CoreCard. CoreCard provides technology solutions and processing services to the financial technology and services market, commonly referred to as the FinTech 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, 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 comprehensive loss 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 companies involved in a variety of industries that 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, 20162017 is adequate. However, actual write-offs might exceed the recorded allowance. Refer to Note 5.

 

Marketable Securities–Our 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 $418,000$438,000 at December 31, 2016; 2017; an unrealized gain of $22,000$23,000 is included in other comprehensive loss.income. The fair value of the marketable securities was $396,000$418,000 at December 31, 2015; 2016; an unrealized lossgain of $68,000$22,000 was included in other comprehensive loss.

 

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 the year ended December 31, 2015, no such impairment existed. As a result of a comprehensive physical inventory at our India based operations in 2017 and our U.S. based operations in 2016, various assets were disposed of and the cost of the assets and related accumulated depreciation were removed from the accounts. A net loss of $1,000$2,000 and $1,000 was recognized, respectively, in the yearyears ended December 31, 2017 and 2016.

 

 

Classification		Useful life in years
Machinery and equipment		3	-	5
Furniture and fixtures		5	-	7
Leasehold improvements		1	-	5
Building		39

Classification		Useful life in years
Machinery and equipment		3	-	5
Furniture and fixtures		5	-	7
Building			39

 

The cost of each major class of property and equipment at December 31, 20162017 and 20152016 is as follows:

 

(in thousands)		2016				2015				2017				2016
Machinery and equipment		$	1,696			$	2,178			$	2,519			$	1,696
Furniture and fixtures			154				197				153				154
Leasehold improvements			0				258
Building			308				308				308				308
Subtotal			2,158				2,941				2,980				2,158
Accumulated depreciation			(1,458	)			(2,305	)			(1,718	)			(1,458	)
Property and equipment, net		$	700			$	636			$	1,262			$	700

 

Depreciation expense for continuing operations was $248,000$330,000 and $217,000$248,000 in 20162017 and 2015,2016, respectively. These expenses are included in general and administrative expenses or, for assets associated with our processing data centers, are included in cost of services.

 

Following the sale of our ChemFree subsidiary in March 2015, we no longer have any leased equipment or lease rental income.

Investments – 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. 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 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, 2017, we recognized $1,738,000 of investment income, net, principally related to a gain of $1,466,000 on the sale of shares in a tender offer for stock of one our investee companies, a privately-held technology company in the FinTech industry, and a gain of $372,000 on a final payment after the escrow period on the sale of one of our prior investee companies. This was offset, to a lesser degree, by a $100,000 write-down on a cost method investment. During the year ended December 31, 2016, we recognized $713,000$713,000 of investment loss, net, attributable to the write-down of $750,000$750,000 on a cost method investment which was offset in part by a gain of $37,000$37,000 on a final payment after the escrow period on a prior minority investment sale. During the year ended At 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. At December 31, 2016 2017 and 2015,2016, the aggregate value of investments was $1,272,000$1,035,000 and $1,015,000,$1,272,000, respectively. We signed an agreement acquiring a $1,000,000$1,000,000 investment in a privately-held technology company in the FinTech industry on December 30, 2016. The investment is included in the December 31, 2016 aggregate value; however, the funding of the investment did not occur until subsequent to year end on January 4, 2017.

Patents–Following the sale of our ChemFree subsidiary, we no longer have any undepreciated patent assets on our balance sheet and no amortization expense for continuing operations.

Fair Value of Financial Instruments–The carrying value of cash, accounts receivable, notes receivable, accounts payable and certain other financial instruments (such as 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, trade accounts, and trade accounts.notes receivable. Our available cash is held in accounts managed by third-partythird-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 financial services industry.

 

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. Service revenue consists of fees for processing services; professional services for software customization, consulting, training; reimbursable expenses; and software maintenance and customer support.

 

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.

 

Certain initial software contracts contain specified future service elements for scheduled completion following the implementation, and related recognition, of the initial license. In these instances, after the initial license recognition, where distinct future performance obligations are identified in the contract and we could reliably measure the completion of each identified performance obligation, we have recognized revenue at the time the individual performance obligation was completed. 

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 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, 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. 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– For cost of revenue for software 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, network association 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 –The warranty related to software license contracts consists of a defined number of months (usually three)three) of PCS after the go-live date, which is accrued as of the go-live date and recognized over the warranty period.

 

Legal Expense–Legal expenses for continuing operations are recorded as a component of general and administrative expense in the period in which such expenses are incurred. In 2015, legal expenses associated with the sale of our ChemFree subsidiary were included as a component of the transaction related expenses in determining the gain on the 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, 2016 2017 and 20152016 has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $31,000$52,000 and $19,000$31,000 of stock-based compensation expense in the years ended December 31, 2016 2017 and 2015,2016, respectively.

 

In eachA total of17,000 options and 12,000 options were granted in the years ended December 31, 2016 2017 and 2015, a total of 12,000 options were granted2016, respectively, pursuant to the 2011 Non-employee Directors Stock Option Plan. In 2016, a total of 30,000 options were granted pursuant to the Intelligent Systems Corporation Stock Incentive Plan (the “2015 Plan”“Plan”). The fair value of each option granted in 20162017 and 20152016 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,		2016				2015				2017				2016
Risk free interest rate			.28	%			.27	%			.98	%			.28	%
Expected life of option in years			10				10				10				10
Expected dividend yield rate			0	%			0	%			0	%			0	%
Expected volatility			65	%			66	%			52	%			65	%

 

Under these assumptions, the weighted average fair value of options granted in 20162017 and 20152016 was $2.63$2.34 and $2.10$2.63 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, 2016 2017 related to unvested options amounted to $103,000$77,000 and is expected to be recognized from 2017 through in 2018 and 2019.

 

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 income (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 as well as unrealized gains and losses on marketable securities.

 

 

Recent Accounting Pronouncements– In February 2016, the FASB issued ASU 2016-02 – Leases (Topic 842) related to the accounting for leases. This pronouncement requires lessees to record most leases on their balance sheet, while expense recognition on the income statement remains similar to current lease accounting guidance. The guidance also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. Under the new guidance, lease classification as either a finance lease or an operating lease will determine how lease-related revenue and expense are recognized. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the effect on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-08 – Revenue from Contracts with Customers (Topic 606) related to reporting revenue gross versus net, or principal versus agent considerations. This pronouncement is meant to clarify the guidance in FASB ASU 2014-09, Revenue from Contracts with Customers, as it pertains to principal versus agent considerations. Specifically, the guidance addresses how entities should identify goods and services being provided to a customer, the unit of account for a principal versus agent assessment, how to evaluate whether a good or service is controlled before being transferred to a customer, and how to assess whether an entity controls services performed by another party. The pronouncement has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We are currently evaluating the effect on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09 – Compensation – Stock Compensation (Topic 718) related to simplifications of employee share-based payment accounting. This pronouncement eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. The pronouncement also addresses simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding requirements. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. We are currently evaluating the effect on our Consolidated Financial Statements.

In April 2016, the FASB issued ASU 2016-10 – Revenue from Contract with Customers (Topic 606) related to identifying performance obligations and licensing. This pronouncement is meant to clarify the guidance in FASB ASU 2014-09, Revenue from Contracts with Customers. Specifically, the guidance addresses an entity’s identification of its performance obligations in a contract, as well as an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. The pronouncement has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We are currently evaluating the effect on our Consolidated Financial Statements.

In May 2016, the FASB issued ASU 2016-12 – Revenue from Contracts with Customers (Topic 606) related to narrow scope improvements. This pronouncement is meant to clarify the guidance in FASB ASU 2014-09, Revenue from Contracts with Customers. The amendments in this update do not change the core principle of the guidance in Topic 606, but rather, the amendments in this update affect certain aspects of Topic 606 which include: assessing the collectability criterion, accounting for contracts that do not meet certain criteria, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications, and completed contracts. The pronouncement has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. We are currently evaluating the effect on our Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held though Related Parties that are Under Common Control, which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. This guidance is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation of restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending cash balances on the statement of cash flows. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017. Early application is permitted. We are currently evaluating the impact this will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Under this new standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019. Early application is permitted. We do not believe the adoption of this new guidance will have a material impact on our consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The amendments in this Update clarify the scope of the nonfinancial asset guidance in Subtopic 610-20. The amendments also clarify that the derecognition of all businesses and nonprofit activities (except those related to conveyances of oil and gas mineral rights or contracts with customers) should be accounted for in accordance with the derecognition and deconsolidation guidance in Subtopic 810-10. In addition, the amendments eliminate the exception in the financial asset guidance for transfers of investments (including equity method investments) in real estate entities and supersede the guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest Subsection within Topic 845. The amendments in this Update also provide guidance on the accounting for what often are referred to as partial sales of nonfinancial assets within the scope of Subtopic 610-20 and contributions of nonfinancial assets to a joint venture or other noncontrolled investee. This guidance is effective for public entities for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period. We are currently evaluating the impact this will have on our consolidated financial statements.

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