UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ |
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For the quarterly period ended September 30, 2020March 31, 2021 OR
☐ |
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For the transition period from _________ to ____________
Commission file number 1-9330
INTELLIGENT SYSTEMS CORPORATION | |
(Exact name of registrant as specified in its charter) |
Georgia | 58-1964787 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4355 Shackleford Road, Norcross, Georgia | 30093 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (770) 381-2900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
IndicateIndicated by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑No☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☑ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use to the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.01 par value for the class | INS | NYSE American |
As of SeptemberApril 30, 2020, 8,929,3682021, 8,882,350 shares of Common Stock of the issuer were outstanding.
Intelligent Systems Corporation
Index
Form 10-Q10-Q
| Part I | Financial Information | |
Item 1 | Financial Statements | |
Consolidated Balance Sheets at | 3 | |
Consolidated Statements of Operations for the three | 4 | |
Consolidated Statements of Comprehensive Income | 4 | |
Consolidated Statements of Stockholders’ Equity for the three | 5 | |
Consolidated Statements of Cash Flows for the | 6 | |
Notes to Consolidated Financial Statements | 7 | |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
Item 4 | Controls and Procedures | 17 |
Part II | Other Information | |
| Item | ||
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 18 |
Item 6 | Exhibits | 19 |
Signatures | 19 | |
Part IFinancial InformationFINANCIAL INFORMATION
Item1. Financial Statements
Intelligent Systems Corporation
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
As of
| September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | ||||||||||||
| (unaudited) | (audited) | (unaudited) | (audited) | ||||||||||||
| ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 34,391 | $ | 26,415 | $ | 31,001 | $ | 37,956 | ||||||||
Accounts receivable, net | 4,045 | 8,759 | 5,069 | 3,270 | ||||||||||||
Notes and interest receivable, current portion | 220 | -- | ||||||||||||||
Other current assets | 1,217 | 905 | 1,059 | 1,263 | ||||||||||||
Total current assets | 39,653 | 36,079 | 37,349 | 42,489 | ||||||||||||
Investments | 2,063 | 3,081 | 1,788 | 1,921 | ||||||||||||
Notes and interest receivable | 2,643 | 1,795 | ||||||||||||||
Notes and interest receivable, net of current portion | 3,030 | 2,681 | ||||||||||||||
Property and equipment, at cost less accumulated depreciation | 6,890 | 2,177 | 7,555 | 6,914 | ||||||||||||
Other long-term assets | 3,304 | 1,108 | 4,111 | 3,020 | ||||||||||||
Total assets | $ | 54,553 | $ | 44,240 | $ | 53,833 | $ | 57,025 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 465 | $ | 403 | $ | 781 | $ | 714 | ||||||||
Deferred revenue, current portion | 3,475 | 689 | 794 | 1,322 | ||||||||||||
Accrued payroll | 2,016 | 2,503 | 1,543 | 1,901 | ||||||||||||
Accrued expenses | 107 | 153 | 262 | 321 | ||||||||||||
Income tax payable | 792 | 1,100 | 1,383 | 954 | ||||||||||||
Other current liabilities | 1,582 | 1,345 | 2,640 | 4,850 | ||||||||||||
Total current liabilities | 8,437 | 6,193 | 7,403 | 10,062 | ||||||||||||
Noncurrent liabilities: | ||||||||||||||||
Deferred revenue, net of current portion | 3 | 23 | 101 | -- | ||||||||||||
Deferred tax liability | 279 | 275 | 818 | 818 | ||||||||||||
Long-term lease obligation | 2,208 | 460 | 2,864 | 1,994 | ||||||||||||
Total noncurrent liabilities | 2,490 | 758 | 3,783 | 2,812 | ||||||||||||
Intelligent Systems Corporation stockholders’ equity: | ||||||||||||||||
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,929,368 and 8,924,988 issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 89 | 89 | ||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, $0.01 par value: Authorized shares - 20,000,000; | ||||||||||||||||
Issued shares - 8,996,868 and 8,929,368 at March 31, 2021 and December 31, 2020, respectively; | ||||||||||||||||
Outstanding shares - 8,882,350 and 8,885,797 at March 31, 2021 and December 31, 2020, respectively | 90 | 89 | ||||||||||||||
Additional paid-in capital | 15,780 | 15,450 | 15,999 | 15,836 | ||||||||||||
Treasury stock, 114,518 and 43,571 shares at March 31, 2021 and December 31, 2020, respectively, at cost | (4,351 | ) | (1,639 | ) | ||||||||||||
Accumulated other comprehensive loss | (129 | ) | (94 | ) | (136 | ) | (140 | ) | ||||||||
Accumulated income | 27,886 | 21,844 | 31,045 | 30,005 | ||||||||||||
Total Intelligent Systems Corporation stockholders’ equity | 43,626 | 37,289 | ||||||||||||||
Total stockholders’ equity | 42,647 | 44,151 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 54,553 | $ | 44,240 | $ | 53,833 | $ | 57,025 | ||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.consolidated financial statements.
Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share amounts)amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Services | $ | 8,704 | $ | 7,297 | $ | 24,650 | $ | 20,275 | $ | 8,912 | $ | 7,893 | ||||||||||||
Products | 1,600 | 2,225 | 1,600 | 3,725 | ‒ | ‒ | ||||||||||||||||||
Total net revenue | 10,304 | 9,522 | 26,250 | 24,000 | 8,912 | 7,893 | ||||||||||||||||||
Cost of revenue | ||||||||||||||||||||||||
Services | 4,217 | 3,012 | 11,418 | 8,445 | 4,429 | 3,506 | ||||||||||||||||||
Products | − | − | − | − | ‒ | ‒ | ||||||||||||||||||
Total cost of revenue | 4,217 | 3,012 | 11,418 | 8,445 | 4,429 | 3,506 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Marketing | 31 | 35 | 94 | 124 | 37 | 32 | ||||||||||||||||||
General and administrative | 936 | 700 | 2,698 | 2,394 | 880 | 1,058 | ||||||||||||||||||
Research and development | 1,639 | 1,575 | 3,477 | 3,634 | 2,101 | 918 | ||||||||||||||||||
Income from operations | 3,481 | 4,200 | 8,563 | 9,403 | 1,465 | 2,379 | ||||||||||||||||||
Investment income (loss) | (92 | ) | (109 | ) | (1,237 | ) | (105 | ) | (133 | ) | (1,050 | ) | ||||||||||||
Other income (loss) | 59 | 104 | 312 | 353 | ||||||||||||||||||||
Income before Income taxes | 3,448 | 4,195 | 7,638 | 9,651 | ||||||||||||||||||||
Other income, net | 75 | 136 | ||||||||||||||||||||||
Income before income taxes | 1,407 | 1,465 | ||||||||||||||||||||||
Income taxes | 653 | 1,103 | 1,596 | 2,379 | 367 | 418 | ||||||||||||||||||
Net income | $ | 2,795 | $ | 3,092 | $ | 6,042 | $ | 7,272 | $ | 1,040 | $ | 1,047 | ||||||||||||
Earnings per share attributable to Intelligent Systems Corporation: | ||||||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||
Basic | $ | 0.31 | $ | 0.35 | $ | 0.68 | $ | 0.82 | $ | 0.12 | $ | 0.12 | ||||||||||||
Diluted | $ | 0.31 | $ | 0.34 | $ | 0.67 | $ | 0.81 | $ | 0.12 | $ | 0.12 | ||||||||||||
Basic weighted average common shares outstanding | 8,927,908 | 8,886,321 | 8,925,961 | 8,859,544 | 8,899,011 | 8,924,988 | ||||||||||||||||||
Diluted weighted average common shares outstanding | 9,022,996 | 9,013,459 | 9,021,314 | 8,977,501 | 8,933,090 | 9,021,754 | ||||||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited, in thousands) |
| Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Net income | $ | 1,040 | $ | 1,047 | ||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustments | 4 | (31 | ) | |||||
Total comprehensive income | $ | 1,044 | $ | 1,016 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)STOCKHOLDERS’ EQUITY
(unaudited, in thousands)thousands, except share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 2,795 | $ | 3,092 | $ | 6,042 | $ | 7,272 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments | 11 | 4 | (35 | ) | (32 | ) | ||||||||||
Total comprehensive income | $ | 2,806 | $ | 3,096 | $ | 6,007 | $ | 7,240 | ||||||||
Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Earnings | Stockholders’ Equity | |||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
Balance at December 31, 2019 | 8,924,988 | $ | 89 | $ | 15,450 | $ | -- | $ | (94 | ) | $ | 21,844 | $ | 37,289 | ||||||||||||||
Net income | 1,047 | 1,047 | ||||||||||||||||||||||||||
Stock compensation expense | 62 | 62 | ||||||||||||||||||||||||||
Foreign currency translation adjustment | (31 | ) | (31 | ) | ||||||||||||||||||||||||
Balance at March 31, 2020 | 8,924,988 | $ | 89 | $ | 15,512 | $ | -- | $ | (125 | ) | $ | 22,891 | $ | 38,367 | ||||||||||||||
Balance at December 31, 2020 | 8,885,797 | $ | 89 | $ | 15,836 | $ | (1,639 | ) | $ | (140 | ) | $ | 30,005 | $ | 44,151 | |||||||||||||
Common stock repurchased* | (70,947 | ) | (2,712 | ) | (2,712 | ) | ||||||||||||||||||||||
Stock options exercised | 67,500 | 1 | 106 | 107 | ||||||||||||||||||||||||
Net income | 1,040 | 1,040 | ||||||||||||||||||||||||||
Stock compensation expense | 57 | 57 | ||||||||||||||||||||||||||
Foreign currency translation adjustment | 4 | 4 | ||||||||||||||||||||||||||
Balance at March 31, 2021 | 8,882,350 | $ | 90 | $ | 15,999 | $ | (4,351 | ) | $ | (136 | ) | $ | 31,045 | $ | 42,647 | |||||||||||||
*At March 31, 2021, approximately $649,000 was authorized for future repurchases of our common stock. In April 2021, the Board authorized an additional $10 million for our share repurchase program.
The accompanying notes are an integral part of these Consolidated Financial Statements.
Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands, except share amounts) | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Earnings | Stockholders’ Equity | |||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance at December 31, 2018 | 8,817,988 | $ | 88 | $ | 15,050 | $ | (92 | ) | $ | 10,875 | $ | 25,921 | ||||||||||||
Stock options exercised | 33,000 | 1 | 58 | 59 | ||||||||||||||||||||
Net income | 2,072 | 2,072 | ||||||||||||||||||||||
Stock compensation expense | 25 | 25 | ||||||||||||||||||||||
Foreign currency translation adjustment | (1 | ) | (1 | ) | ||||||||||||||||||||
Balance at March 31, 2019 | 8,850,988 | $ | 89 | $ | 15,133 | $ | (93 | ) | $ | 12,947 | $ | 28,076 | ||||||||||||
Net income | 2,108 | 2,108 | ||||||||||||||||||||||
Stock compensation expense | 55 | 55 | ||||||||||||||||||||||
Foreign currency translation adjustment | (35 | ) | (35 | ) | ||||||||||||||||||||
Balance at June 30, 2019 | 8,850,988 | $ | 89 | $ | 15,188 | $ | (128 | ) | $ | 15,055 | $ | 30,204 | ||||||||||||
Stock options exercised | 47,000 | 104 | 104 | |||||||||||||||||||||
Net income | 3,092 | 3,092 | ||||||||||||||||||||||
Stock compensation expense | 49 | 49 | ||||||||||||||||||||||
Foreign currency translation adjustment | 4 | 4 | ||||||||||||||||||||||
Balance at September 30, 2019 | 8,897,988 | $ | 89 | $ | 15,341 | $ | (124 | ) | $ | 18,147 | $ | 33,453 | ||||||||||||
Balance at December 31, 2019 | 8,924,988 | $ | 89 | $ | 15,450 | $ | (94 | ) | $ | 21,844 | $ | 37,289 | ||||||||||||
Net income | 1,047 | 1,047 | ||||||||||||||||||||||
Stock compensation expense | 62 | 62 | ||||||||||||||||||||||
Foreign currency translation adjustment | (31 | ) | (31 | ) | ||||||||||||||||||||
Balance at March 31, 2020 | 8,924,988 | $ | 89 | $ | 15,512 | $ | (125 | ) | $ | 22,891 | $ | 38,367 | ||||||||||||
Net income | 2,200 | 2,200 | ||||||||||||||||||||||
Stock compensation expense | 61 | 61 | ||||||||||||||||||||||
Foreign currency translation adjustment | (15 | ) | (15 | ) | ||||||||||||||||||||
Balance at June 30, 2020 | 8,924,988 | $ | 89 | $ | 15,573 | $ | (140 | ) | $ | 25,091 | $ | 40,613 | ||||||||||||
Net income | 2,795 | 2,795 | ||||||||||||||||||||||
Stock compensation expense | 4,380 | 207 | 207 | |||||||||||||||||||||
Foreign currency translation adjustment | 11 | 11 | ||||||||||||||||||||||
Balance at September 30, 2020 | 8,929,368 | $ | 89 | $ | 15,780 | $ | (129 | ) | $ | 27,886 | $ | 43,626 | ||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS
(unaudited, in thousands)
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
CASH PROVIDED BY (USED FOR): | 2020 | 2019 | ||||||||||||||
2021 | 2020 | |||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 6,042 | $ | 7,272 | $ | 1,040 | $ | 1,047 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Depreciation and amortization | 1,460 | 730 | 855 | 302 | ||||||||||||
Stock-based compensation expense | 330 | 129 | 57 | 62 | ||||||||||||
Non-cash investment expense | 1,009 | − | ||||||||||||||
Non-cash investment loss | -- | 1,009 | ||||||||||||||
Non-cash interest income | (93 | ) | (23 | ) | (37 | ) | (32 | ) | ||||||||
Equity in loss of affiliate company | 268 | 104 | 133 | 41 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 4,714 | (2,328 | ) | |||||||||||||
Accounts receivable, net | (1,799 | ) | 676 | |||||||||||||
Other current assets | (312 | ) | 163 | 204 | (74 | ) | ||||||||||
Other long-term assets | 185 | (65 | ) | (33 | ) | (6 | ) | |||||||||
Accounts payable | 62 | 8 | 67 | (31 | ) | |||||||||||
Accrued payroll | (487 | ) | 904 | (358 | ) | (1,091 | ) | |||||||||
Deferred revenue, current portion | 2,786 | (339 | ) | (528 | ) | 3,422 | ||||||||||
Accrued expenses | (46 | ) | 27 | 211 | 140 | |||||||||||
Other current liabilities | (993 | ) | 1,167 | (2,239 | ) | 236 | ||||||||||
Deferred revenue, net of current portion | 259 | (70 | ) | 101 | (8 | ) | ||||||||||
Net cash provided by operating activities | 15,184 | 7,679 | ||||||||||||||
Net cash (used for) provided by operating activities | (2,326 | ) | 5,693 | |||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Purchases of property and equipment | (6,173 | ) | (1,553 | ) | (1,496 | ) | (539 | ) | ||||||||
Advances of notes receivable | (1,000 | ) | (1,500 | ) | ||||||||||||
Advances on notes and interest receivable | (550 | ) | (1,000 | ) | ||||||||||||
Proceeds from payments on notes receivable | 18 | -- | ||||||||||||||
Net cash used for investing activities | (7,173 | ) | (3,053 | ) | (2,028 | ) | (1,539 | ) | ||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Sale of capital stock pursuant to exercise of option | − | 163 | 107 | -- | ||||||||||||
Net cash provided by financing activities | − | 163 | ||||||||||||||
Repurchases of common stock | (2,712 | ) | -- | |||||||||||||
Net cash used for financing activities | (2,605 | ) | -- | |||||||||||||
Effects of exchange rate changes on cash | (35 | ) | (32 | ) | 4 | (31 | ) | |||||||||
Net increase in cash | 7,976 | 4,757 | ||||||||||||||
Net (decrease) increase in cash | (6,955 | ) | 4,123 | |||||||||||||
Cash at beginning of period | 26,415 | 18,919 | 37,956 | 26,415 | ||||||||||||
Cash at end of period | $ | 34,391 | $ | 23,676 | $ | 31,001 | $ | 30,538 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
Cash paid during the period for income taxes | $ | 1,826 | $ | 875 | ||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.Consolidated Financial Statements.
Intelligent Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. |
|
Basis of Presentation
Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “Company”“company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. The unaudited Consolidated Financial Statements presented in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and nine month periods ended September 30, 2020March 31, 2021 and 2019.2020. The interim results for the three and nine months ended September 30, 2020March 31, 2021 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with our Consolidated Financial Statements and notes thereto for the fiscal year ended December 31, 2019,2020, as filed in our Annual Report on Form 10-K.
There have been no material changes in the Company’s significant accounting policies in the first quarter of 2021, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, to require financial assets carried at amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions and forecasts. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are within the scope of lease accounting standards. Further, the FASB issued ASU No. 2019-04, ASU No. 2019-05, ASU 2019-10 and ASU 2019-11 to provide additional guidance on the credit losses standard. The ASUs are effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. Adoption of the ASUs is on a modified retrospective basis. We plan to adopt the ASUs on January 1, 2023. The ASUs are currently not expected to have a material impact on our Consolidated Financial Statements.
Recent Accounting Pronouncements Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. This standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We plan to adoptadopted this standard in the first quarter of 2021 and the adoption isdid not expected to have a material impact on the Consolidated Financial Statements.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (“ASU 2020-01”), which clarifies certain interactions between the guidance to account for certain equity securities, investments under the equity method of accounting and forward contracts or purchased options to purchase securities under Topic 321, Topic 323 and Topic 815. For public entities, ASU 2020-01 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2020. We are currently assessingadopted this standard in the impact thatfirst quarter of 2021 and the adoption of ASU 2020-01 willdid not have a material impact on ourthe 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.
2. | REVENUE |
Disaggregation of Revenue
In the following table, revenue is disaggregated by type of revenue for the three and nine months ended September 30, 2020March 31, 2021 and 2019:2020:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Three months ended March 31, (in thousands) | 2021 | 2020 | ||||||||||||||||||||||
License | $ | 1,600 | $ | 2,225 | $ | 1,600 | $ | 3,725 | $ | -- | $ | -- | ||||||||||||
Professional services | 5,392 | 4,579 | 15,827 | 13,206 | 5,747 | 5,279 | ||||||||||||||||||
Processing and maintenance | 2,950 | 2,235 | 7,817 | 5,770 | 2,607 | 2,194 | ||||||||||||||||||
Third party | 362 | 483 | 1,006 | 1,299 | 558 | 420 | ||||||||||||||||||
Total | $ | 10,304 | $ | 9,522 | $ | 26,250 | $ | 24,000 | $ | 8,912 | $ | 7,893 | ||||||||||||
Foreign revenues are based on the location of the customer. Revenues from customers by geographic areaareas for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Three months ended March 31, (in thousands) | 2021 | 2020 | ||||||||||||||||||||||
European Union | $ | 364 | $ | 448 | $ | 948 | $ | 2,899 | $ | 31 | $ | 320 | ||||||||||||
United States | 9,940 | 9,074 | 25,302 | 21,101 | 8,881 | 7,573 | ||||||||||||||||||
Total | $ | 10,304 | $ | 9,522 | $ | 26,250 | $ | 24,000 | $ | 8,912 | $ | 7,893 | ||||||||||||
Concentration of Revenue
The following table indicates the percentage of consolidated revenue represented by each customer that represented more than 10 percent of consolidated revenue in the three and nine month periods ended September 30, 2020March 31, 2021 and 2019.2020. Most of our customers have multi-year contracts with recurring revenue as well as professional services fees that vary by period depending on their business needs.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Customer A | 68 | % | 70 | % | 67 | % | 58 | % | ||||||||
Customer B | 3 | % | 4 | % | 3 | % | 12 | % | ||||||||
Customer C | 11 | % | 6 | % | 11 | % | 6 | % | ||||||||
| Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Customer A | 71 | % | 66 | % | ||||
3. |
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During the quarter ended September 30, 2017, we entered into a Loan Agreement with a privately-held identity and professional services company with ties to the FinTech industry. We committed to lend up to $1,500,000 all of which has been advanced as of December 31, 2019.advanced. During 2018, and 2019, we advanced $1,050,000$550,000 on fourthree separate simple Promissory Notes. During 2019, asNote(s). As discussed in Note 4, we converted the Loan Agreement and all outstanding Promissory Notes to an equity ownership of 40 percent of the company. At the same time, we entered into and advanced a $1,000,000 Loan Agreement that bears interest at the rate of 6.0 percent annually with a maturity date of June 2021. We expect to defer payment of the June 2021 Loan and have therefore classified the Loan as long-term. In October 2019 and January 2020, we entered into Loan Agreements and advanced an additional $500,000 and $1,000,000, respectively, that bearbears interest at the rate of 6.0 percent annually with a maturity datedates of October 2021 and January 2022, respectively. A portionIn January 2021, we deferred payment of these Loans to December 2023 and have therefore classified the company’s business has been negatively impacted by the pandemic while other portions of its business have improved. We evaluate the carrying values of our notes receivable on a continuing basis to determine whether there are any indications that the carrying amount of the note receivable may not be recoverable. We have not recorded any impairments related to this investmentLoans as of September 30, 2020, however, significant variations from current expectations could impact future assessments resulting in future impairment charges.long-term.
In the quarter ended March 31, 2018, we entered into a Convertible Loan Agreement with a private limited India based company in the FinTech industry. We committed to lend up to $435,000 with an initial advance of $235,000. The loan bears interest at the rate of 5.0 percent annually with the maturity date on the third anniversary of funding of such Promissory Note. We are entitled to convert the principal on the initial Notenote for up to ten percent ownership of shares of the company. Due toFor the economic downturn resulting from the Indian government’s response to COVID-19 and the impact of the economic downturn on the private limited India based company,quarter ended March 31, 2020, we have determined that the principal and interest is likely not collectible and therefore recorded a valuation allowance for the quarter ended March 31, 2020 of $259,000, included in investment loss on the Consolidated Statement of Operations.
In February 2021, we entered into and advanced a $550,000 Promissory Note with a privately held technology company and program manager in the FinTech industry, discussed further below in Note 4. The note bears interest at the rate of 4.6 percent annually with the maturity date of October 2023.
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Beginning in 2017, and in subsequent periods we entered into a Loan Agreement and various Promissory Notes as discussed in more detail in Note 3, with a privately held identity and professional services company with ties to the FinTech industry. In June 2019, we converted the Loan Agreement and all Promissory Notes into equity resulting in ownership of 40 percent of the company. We account for our investment using the equity method of accounting which resulted in losses of $92,000$133,000 and $268,000$41,000 for the three and nine months ended September 30,March 31, 2021 and 2020, respectively, included in investment loss on the Consolidated Statement of Operations. The carrying value of $2,053,000$1,788,000 is included in long-term investments. A portion of the company’s business has been negatively impacted by the pandemic while other portions of its business have improved. We evaluate on a continuing basis whether any impairment indicators are present that would require additional analysis or write-downs of the investment. While we have not recorded an impairment related to this investment or determined that an impairment trigger existed at September 30, 2020,March 31, 2021, significant variations from current expectations could impact future assessments resulting in future impairment charges.
On December 30, 2016 we signed an agreement to invest $1,000,000 in a privately held technology company and program manager in the FinTech industry, with $500,000 of the investment held in escrow to pay future fees to CoreCard pursuant to a Processing Agreement entered into by the parties. The investment was funded on January 4, 2017. In the quarter ended June 30, 2018, we recorded an impairment charge of $250,000 to reduce the carrying value due to the investee’s limited funding to support its operation and sales and marketing efforts. In the quarter ended March 31, 2020, due to the uncertainty from the economic downturn resulting from the recent pandemic, we determined that the fair value of our investment was $0 and therefore we recorded an impairment charge of $750,000, included in investment loss on the Consolidated Statement of Operations for the quarter ended March 31, 2020. CoreCard remains in an ongoing business relationship with the company pursuant to a Processing Agreement and a Program Management Services Agreement. CoreCard is positioned to assume the program management aspects of the investee company if the need should arise to ensure their program(s) ongoing viability and the completion of the Processing Agreement with CoreCard. As program manager for this company, we receive cash periodically to fund the customer’s various programs. We held $866,000 and $3,335,000 at March 31, 2021 and December 31, 2020, respectively, in cash on behalf of this customer which is included in other current liabilities on the Consolidated Balance Sheet.
5. | RELATED PARTY TRANSACTION |
5.
The lease on our headquarters and primary facility in Norcross, Georgia is held by ISC Properties, LLC, an entity controlled by our Chairman and Chief Executive Officer, J. Leland Strange. Mr. Strange holds a 100% ownership interest in ISC Properties, LLC. In March 2021, we signed a new lease for our headquarters facility for a 5 year term as disclosed on our Form 8-K dated April 1, 2021.
6. | STOCK-BASED COMPENSATION |
At September 30, 2020,March 31, 2021, we have three stock-based compensation plans in effect. In August 2020, shareholders approved the 2020 Non-Employee Directors’ Stock Incentive Plan (the “2020 Plan”), which authorizes the issuance of 200,000 shares of common stock to non-employee directors. We record compensation cost related to unvested stock awards by recognizing the unamortized grant date fair value on a straight-line basis over the vesting periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the three and nine monththree-month periods ended September 30,March 31, 2021 and 2020 and 2019 has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $207,000$57,000 and $49,000$62,000 of stock-based compensation expense forduring the three monthsquarters ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $330,000 and $129,000 for the nine months ended September 30, 2020 and 2019, respectively.
As of September 30, 2020,March 31, 2021, there is $235,000$122,000 of unrecognized compensation cost related to stock options. There were no67,500 options exercised during the three and nine months ended September 30, 2020. During the quarter ended September 30, 2020, an aggregate of 4,380 shares totaling $150,000March 31, 2021. No options were granted toduring the three independent members of our board of directors pursuant to the 2020 Plan. Pursuant to the terms of the 2020 Plan, the shares were granted at fair market value on the date of the Annual Meeting of Shareholders and vested upon issuance. No options expired unexercised during the quarter.months ended March 31, 2021 or 2020. The following table summarizes options as of September 30, 2020:March 31, 2021:
# of Shares | Wgt Avg Exercise Price | Wgt Avg Remaining Contractual Life in Years | Aggregate Value | |||||||||||||
Outstanding at September 30, 2020 | 126,500 | $ | 8.94 | 4.1 | $ | 3,801,190 | ||||||||||
Vested and exercisable at September 30, 2020 | 102,500 | $ | 5.61 | 2.8 | $ | 3,421,390 | ||||||||||
# of Shares | Wgt Avg Exercise Price | Wgt Avg Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
Outstanding at March 31, 2021 | 59,000 | $ | 17.35 | 7.4 | $ | 1,389,970 | ||||||||||
Vested and exercisable at March 31, 2021 | 45,000 | $ | 14.83 | 7.2 | $ | 1,173,570 | ||||||||||
The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 20192020 Form 10-K.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the thirdfirst quarter of 20202021 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2020.March 31, 2021. The amount of aggregate intrinsic value will change based on the market value of the Company’s stock.
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The carrying value of cash, marketable securities, accounts receivable, notes receivable, accounts payable and certain other financial instruments (such as accrued expenses, and other current liabilities) included in the accompanying Consolidated Balance Sheetsconsolidated balance sheets approximates their fair value principally due to the short-term maturity of these instruments.
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, marketable securities and trade accounts and notes receivable.accounts. Our available cash is held in accounts managed by third-party financial institutions. Cash may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While we monitor cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.
8. |
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In determining fair value, the Company uses quoted market prices in active markets. GAAP establishes a fair value measurement framework, provides a single definition of fair value, and requires expanded disclosure summarizing fair value measurements. GAAP emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.
GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable input be used when available. Observable inputs are based on data obtained from sources independent of the Company that market participants would use in pricing the asset or liability. Unobservable inputs are inputs that reflect the company’s assumptions about the estimates market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The hierarchy is measured in three levels based on the reliability of inputs:
• Level 1
Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
• Level 2
Valuations based on quoted prices in less active, dealer or broker markets. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities.
• Level 3
Valuations derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and not based on market, exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections that are not observable in the market and significant professional judgment is needed in determining the fair value assigned to such assets or liabilities.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The fair value of equity method and cost method investments has not been determined as it was impracticable to do so due to the fact that the investee companies are relatively small, early stage private companies for which there is no comparable valuation data available without unreasonable time and expense. The fair value of our cost method investments was determined using Level 3 inputs.
9. |
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Leases
We have noncancelable operating leases for offices and data centers expiring at various dates through March 2025.2026. These operating leases are included in "Otherother long-term assets"assets on the Company's September 30, 2020March 31, 2021 and December 31, 20192020 Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are included in "Otherother current liabilities"liabilities and "Long-termlong-term lease obligation"obligation on the Company's September 30, 2020March 31, 2021 and December 31, 20192020 Consolidated Balance Sheets. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Supplemental Information–Information–Leases
Supplemental information related to our right-of-use assets and related lease liabilities is as follows:
September 30, 2020 | December 31, 2019 | March 31, 2021 | December 31, 2020 | |||||||||||||
Right-of-use asset, net and lease liabilities (in thousands) | $ | 3,170 | $ | 945 | $ | 3,950 | $ | 2,889 | ||||||||
Cash paid for operating lease liabilities (in thousands) | $ | 754 | $ | 563 | ||||||||||||
Weighted average remaining lease term (years) | 3.6 | 1.1 | 4.0 | 3.5 | ||||||||||||
Weighted average discount rate | 3.9 | % | 5.5 | % | 4.3 | % | 3.8 | % | ||||||||
For the three months ended March 31, 2021 and 2020, cash paid for operating leases included in operating cash flows was $284,000 and $160,000, respectively.
Maturities of our operating lease liabilities as of September 30, 2020March 31, 2021 is as follows:
Operating Leases | Operating Leases | |||||||
(In thousands) | (In thousands) | |||||||
2020 | $ | 293 | ||||||
2021 | 977 | $ | 903 | |||||
2022 | 795 | 1,086 | ||||||
2023 | 718 | 1,009 | ||||||
2024 | 495 | 785 | ||||||
2025 | 399 | |||||||
Thereafter | 108 | 73 | ||||||
Total lease liabilities | $ | 3,386 | $ | 4,255 | ||||
Lease expense for the three months ended September 30,March 31, 2021 and 2020 and 2019 consisted of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | ||||||||||||||||||
Cost of Revenue | $ | 218 | $ | 78 | $ | 508 | $ | 201 | $ | 218 | $ | 78 | ||||||||||||
General and Administrative | 52 | 52 | 157 | 157 | 56 | 52 | ||||||||||||||||||
Research and Development | 30 | 18 | 89 | 55 | 10 | 30 | ||||||||||||||||||
Total | $ | 300 | $ | 148 | $ | 754 | $ | 413 | $ | 284 | $ | 160 | ||||||||||||
Legal Matters
On or about July 9, 2019, a securities class action complaint was filed in the United States District Court for the Eastern District of New York (Case No. 1:19-cv-03949) by Michael Skrzeczkoski, individually and on behalf of all others similarly situated, against the company,Company, and certain current and former directors and officers. The complaint alleges, among other things, that certain of our press releases and SEC filings were misleading as a result of the failure to disclose alleged related party transactions affecting revenue recognition and the absence of disclosure regarding certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. The complaint seeks to recover attorney’s fees and costs and unspecified damages on behalf of purchasers who acquired our stock during the period from January 23, 2019, through May 29, 2019, and purportedly suffered financial harm as a result of the alleged misleading statements. On September 26, 2019, the Court appointed Edgardo Canez as lead plaintiff (“Lead Plaintiff”) on behalf of the putative class. On November 18, 2019, Lead Plaintiff, individually and on behalf of a putative class of persons or entities who purchased or otherwise acquired publicly traded Companycompany securities from May 23, 2014 through May 29, 2019, filed an amended class action complaint against the Company, and certain current and former directors and officers (the “Amended Complaint”). The Amended Complaint alleges similar allegations in violation of Sections 10(b) and 20(a) of the Securities Exchange Act as the previously filed complaint. The Amended Complaint seeks to recover attorney’s fees and costs and unspecified damages. On January 2, 2020, Defendants submitted a motion to dismiss, and on March 3, 2020, briefing on the motion to dismiss was completed. TheOn April 6, 2021, the Court entered an order granting the motion to dismiss is currently pending. We dispute these claims and intend to defend the matter vigorously. We have not determined the likelihood of loss to be probable nor is any potential loss estimable at this time, therefore we have not recorded any related liability as of September 30, 2020.dismiss.
On or about February 14, 2020, two purported shareholders, derivatively and on behalf of the Company, filed substantially similar shareholder derivative actions in the Eastern District of New York against certain current and former directors and officers (the “Individual Defendants”), and the Company as a nominal defendant (together with the Individual Defendants, the “Defendants”). The complaints assert a claim against Messrs. Strange, Moise, Petit, Fuzzell and Chandler for a violation of Section 14(a) of the Securities Exchange Act by issuing purportedly misleading statements in the Company’s 2017 and 2018 Proxies. The complaints also assert claims against the Individual Defendants for breaches of fiduciary duty, waste of corporate assets, and unjust enrichment arising out of, among other things, purportedly undisclosed related party transactions, other relationships, and certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. and other companies. The relief sought in the complaints includes changes to the Company’s corporate governance procedures, unspecified damages, equitable relief, restitution, and attorney’s fees and costs. On April 20, 2020, the two derivative actions were consolidated and captioned, In re Intelligent Systems Corporation Stockholder Derivative Litigation, Lead Case No. 1:20-cv-00832, in the Eastern District of New York.York (the “Derivative Matter”). On June 19, 2020, Defendants filed their motion to dismiss, and briefing was subsequently completed. After a conference held on August 24, 2020, the parties agreed that Defendants’ motion to dismiss would be temporarily withdrawn without prejudice to refile after the conclusion of any discovery permitted by further Court order. On September 8, 2020, Plaintiffs moved for leave to conduct limited discovery (“Plaintiffs’ Motion for Discovery”). On December 23, 2020, the Court entered a stipulation among the parties whereby Plaintiffs’ Motion for Discovery shall be withdrawn, the Company will engage in limited discovery, and the parties agree that the Derivative Matter shall be stayed pending resolution of the motion to which Defendants’ responsedismiss in the related above-mentioned securities litigation matter, among other things. The matter is due no later than December 7, 2020.currently stayed. We have not determined the likelihood of loss to be probable nor is any potential loss estimable at this time, therefore we have not recorded any related liability as of March 31, 2021.
There are no other pending or threatened legal proceedings. However, in the ordinary course of business, from time to time we may be involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. We accrue for unpaid legal fees for services performed to date.
10. | INCOME TAXES |
9. INCOME TAXES
We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized, net of a valuation allowance, for the estimated future tax effects of deductible temporary differences and tax credit carry-forwards. A valuation allowance against deferred tax assets is recorded when, and if, based upon available evidence, it is more likely than not that some or all deferred tax assets will not be realized.
There were no unrecognized tax benefits at September 30, 2020March 31, 2021 and December 31, 2019.2020. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There were no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the periods presented. We have determined we have no uncertain tax positions.
We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership equals or exceeds 80 percent,80%, as well as individual subsidiary returns in various states and foreign jurisdictions. With few exceptions we are no longer subject to U.S. federal, state and local or foreign income tax examinations by taxing authorities for returns filed more than three years ago.
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, this Form 10-Q may contain forward-looking statements relating to ISC. All statements, trend analyses and other information 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”“anticipate”, “believe”“believe”, “plan”“plan”, “estimate”“estimate”, “expect”“expect”, “intend”and “intend”, and other similar expressions, constitute forward-looking statements. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties including those factors described below under “Factors“Factors That May Affect Future Operations”Operations”, and that actual results may differ materially from those contemplated by such forward-looking statements. ISC undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results.
For purposes of this discussion and analysis, we are assuming and relying upon the reader’sreader’s familiarity with the information contained in Item 7. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, in the Form 10- K for the year ended December 31, 20192020 as filed with the Securities and Exchange Commission.
Overview
Our consolidated operations consist of our CoreCard Software subsidiary and its affiliate companies in Romania, India and India,the United Arab Emirates 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 our product 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 loan transactions. Our service 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.
Our results vary in part depending on the size and number of software licenses recognized as well as the value and number of professional services contracts recognized in a particular period. 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. 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. However, we also receive license revenue and are also experiencing growth in our professional services revenue due to the addition of Goldman Sachs Group, Inc. as a large new customer in 2018.2018, referred to as “Customer A” in the Notes to Consolidated Financial Statements. In total, this customer represented 67%71% and 58%66% of our consolidated revenues in the first nine monthsquarters of 20202021 and 2019,2020, respectively. We expect future professional services, maintenance, and license revenue from this customer in 20202021 and future years; however, the amount and timing will be dependent on various factors not in our control such as the number of accounts on file and the level of customization needed by the customer. Our contracts with this customer are filed as Exhibits 10.1, 10.2, 10.3 and 10.4 to this Form 10-Q. License revenue from this customer, similar to other license arrangements, is tiered based on the number of active accounts on the system. Once the customer achieves each tier level, they receive a perpetual license up to that number of accounts; inactive accounts do not count toward the license tier. The customer receives an unlimited perpetual license at a maximum tier level that allows them to utilize the software for any number of active accounts. They currently use the software for a single institution and additional license fees apply if multiple institutions are added.added, which we expect to occur in the second half of 2021. Support and maintenance fees are charged based on the tier level achieved and increase at new tier levels.
WhileIn 2020, we experienced the loss of a large customer due to insolvency. In October 2020, we opened offices in Dubai and Chennai and hired some of the insolvent customer’s employees. In April 2021, we converted one of their customers to our processing platform. We expect revenue for the remainder of 2021 and future years from servicing this customer and adding new customers in the region.
We typically receive revenue based on the number of active accounts on file rather than transaction volume and therefore the COVID-19 pandemic and related to the coronavirus could adverselyeconomic slowdown has had a muted impact on our future results if the abilityresults. Most of our customers to continue to add new accounts is negatively impacted by the decrease in economic activity caused by the virus. As noted above, we receive license revenue when our customers achieve new active account tiers. The impact of slower growth or declines in active accounts would result in lower than expected license revenue which would then result in lower than expected maintenance revenue. Similarly, we typically receive processing revenue based on the number of active accounts our customers have on our system. If our customers fail to add new accounts or experience declines in active accounts due to inactivity, we could experience lower than expected growth in processing revenue or lower processing revenue. We could also experience delays or declines in professional services revenue and new customer sign-ups and implementations if customers or potential customers delay or cancel their plans due to the virus related economic slowdown. Thus far, we have experienced some slowdowns in customer account growth and some customers have stopped adding new accounts resulting in flat or declining active accounts. The impact on results to date was limited and, for the second and third quarter, was mitigated primarily by new program offerings by a large customer related to government stimulus efforts. These programs are limited in duration and will likely start to decline in the fourth quarter. We could therefore experience more significant negative impacts on full year results which we are not currently able to quantify.
Additionally, our operations could be impacted, and we could experience higher costs if, despite our mitigation and prevention efforts, the virus spread prevents affected employees from performing key duties. Our employees in India have been requiredworking remotely throughout the pandemic which has primarily impacted our ability to work remotely since mid-March.hire and train new employees. We have maintainedbeen able to maintain key functions;functions and business continuity while delivering growth in our professional services revenue; however, the continuancehiring and training constraints could impact future growth in our professional services revenue. Additionally, with the recent increase in severity of remote work will likely negatively impact productivitythe pandemic in India, we could experience operational disruptions or service delays which could impact operationsthe amount and revenues.timing of revenues for the remainder of the year.
The infrastructure of our multi customer environment is scalable for the future. A significant portion of our expense is related to personnel, including approximately 530575 employees located in India and Romania. In October 2020, we added new locations in Dubai, United Arab Emirates and Chennai, India to expand our international capabilities. Our ability to hire and train employees on our processes and software impacts our ability to onboard new customers and deliver professional services for software customizations. In addition, we have certain corporate office expenses associated with being a public company that impact our operating results.
Our revenue fluctuates from period to period and our results are not necessarily indicative of the results to be expected in future periods. It is difficult to predict the level of consolidated revenue on a quarterly or annual basis for a number of reasons, including the following:
● | Software license revenue in a given period may consist of a relatively small number of contracts and contract values can vary considerably depending on the software product and scope of the license sold. Consequently, even minor delays in delivery under a software contract (which may be out of our control) could have a significant and unpredictable impact on the consolidated revenue that we recognize in a given quarterly or annual period. |
● | Customers may decide to postpone or cancel a planned implementation of our software for any number of reasons, which may be unrelated to our software or contract performance, but which may affect the amount, timing and characterization of our deferred and/or recognized revenue. |
● | Customers typically require our professional services to modify or enhance their CoreCard software implementation based on their specific business strategy and operational requirements, which vary from customer to customer and period to period. |
● | The timing of new processing customer implementations is often dependent on third party approvals or processes which are typically not under our direct control. |
We continue to maintain a strong cash position. 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. In November 2018, our Board of Directors authorized a share repurchase program of $5 million. We did not make anymade share repurchases of $2.7 million for the three months ended 2021, and no share repurchases in 2020 or 2019.the three month period ended March 31, 2020. We have $0.6 million of authorized share repurchases remaining at March 31, 2021. In April 2021, the Board authorized an additional $10 million for our share repurchase program.
Results of Operations
The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notesnotes to Consolidated Financial Statements presented in this quarterly report.
Revenue – Total revenue in the three and nine month periodsthree-month period ended September 30, 2020March 31, 2021 was $10,304,000 and $26,250,000, respectively,$8,912,000 which represents increasesa 13% percent increase over the first quarter of 8 percent and 9 percent compared to the respective periods in 2019.2020.
● | Revenue from services was |
● | Revenue from products, which is primarily software license fees, was |
Cost of Revenue – Total cost of revenue was 4150 percent and 4344 percent of total revenue in the three and nine monththree-month periods ended September 30,March 31, 2021 and 2020, respectively, compared to 32 percent and 35 percent of total revenue in the corresponding periods of 2019.respectively. The increase in cost of revenue as a percentage of revenue is primarily driven by decreased product sales with low associated costs.investments made in our processing infrastructure including hardware and software purchases and additional space in our data centers. Cost of revenue includes costs to provide annual maintenance and support services to our installed base of licensed customers, costs to provide professional services, and costs to provide our financial transaction processing services. The cost and gross margins on such revenues can vary considerably from period to period depending on the customer mix, customer requirements and project complexity as well as the mix of our U.S. and offshore employees working on the various aspects of services provided. In addition, we continue to devote the resources necessary to support our growing processing business, including direct costs for regulatory compliance, infrastructure, network certifications, and customer support. Investments in our infrastructure in 2020 and 2021 are in anticipation of adding customers in future periods. As such, we will not experience economies of scale unless we add additional customers, as anticipated. This may be subject to change in the future if new regulations or processing standards are implemented causing us to incur additional costs to comply.
Operating Expenses– In the three monththree-month period ended September 30, 2020,March 31, 2021, total operating expenses from consolidated operations were highergreater than in the corresponding period in 20192020 primarily due to higher generalincreased research and administrative expenses. In the nine month period ended September 30, 2020, total operating expenses from consolidated operations were slightly higher than in the corresponding period in 2019 primarily due to higher general and administrativedevelopment expenses, partially offset by lower researchdecreased general and development and marketingadministrative expenses. Research and development expenses were 4129% percent higher and 4 percent lower in three and nine month periods in 2020, respectively,2021 as compared to the same periods in 2019. In the three month period ended September 30, 2020, research and development expenses were higher mainly due to increased payroll and related expense forto hiring of additional offshore technical personnel. InAdditionally, we hired onshore technical personnel to work on the nine month period ended September 30, 2020, research and development expenses were lower mainly due to lower recognition-based bonus accruals, partially offset by higher payroll and related expense for additional offshore technical personnel.of an updated platform. General and administrative expenses were 34 percent higherlower in the three month period ended September 30,2021 than in 2020, primarily due to higher stock compensation and salaries expenses due tolower legal costs resulting from the new 2020 Non-Employee Directors’ Stock Incentive Plan and an increase in headcount, respectively. Additionally, General and administrative expenses were 13 percent higher in the nine month period ended September 30, 2020 due to higher legal and advisory expenses related to ongoing securities litigation as discussed below partially offset by strategic initiatives of the Board that did not recur in the comparable 2020 period.Part II, Item 1 below. Marketing expenses decreased 11 percent and 24 percent for the three and nine month periods in 2020, respectively, as compared to the same periods in 2019remained relatively unchanged year over year as we continued to place less focus on marketing initiatives for CoreCard. Our client base continues to increase 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 as needed to competitively position the Processing Services business.
Investment Income (Loss)– In the three and nine monthsquarter ended September 30, 2020,March 31, 2021, we recorded $92,000 and $1,237,000$133,000 of investment losses respectively, compared to investment losses of $109,000 and $105,000$1,050,000 for the three and nine monthsquarter ended September 30, 2019, respectively.March 31, 2020. The 2020 investment losses for the nine months ended September 30, 2020 primarily relate to impairment charges on investments resulting from the economic downturn caused by the recent pandemic and losses on equity method investments. Equity method losses for the three months ended March 31, 2021 were $133,000. We did not record any impairments in 2021.
Other Income, (Loss) net – In the three and nine monthsquarter ended September 30, 2020,March 31, 2021, we recorded $75,000 in other income of $59,000 and $312,000, respectively, compared to income of $104,000 and $353,000$136,000 for the comparable 2019 periods.quarter ended March 31, 2020. The decrease for the three and nine month periods is primarilyresults from lower interest income due to lower interest rates in the 2020 period.partially offset by higher cash and notes receivable balances.
Income Taxes– Our effective tax ratesrate for the three and nine monthsquarter ended September 30, 2020 were 18.9 percent and 20.9 percentMarch 31, 2021, was 26.1% compared to an effective tax ratesrate of 26.3 percent and 24.7 percent28.5% for the respective periods in 2019. In the three and nine month periodsquarter ended September 30, 2020, ourMarch 31, 2020. The lower effective tax rates were lower primarilyrate is due to research and development tax credits recognizeda valuation allowance on investment losses recorded in the third quarter.first quarter of 2020 that did not recur in the first quarter of 2021.
Liquidity and Capital Resources
Our cash balance at September 30, 2020March 31, 2021 was $34,391,000$31,001,000 compared to $26,415,000$37,956,000 at December 31, 2019.2020. During the nine monthsquarter ended September 30, 2020,March 31, 2021, cash provided byused for operations was $15,184,000$2,326,000 compared to cash provided by operations of $7,679,000$5,693,000 for the nine monthsquarter ended September 30, 2019.March 31, 2020. The increasedecrease is primarily due to higherlower deferred revenue and lowerbalances, a decrease in cash held for program management funding, higher accounts receivable balances, and a non-cash impairment charge,losses in 2020 that did not recur in 2021, partially offset by lower accrued income taxes, net income and accrued payroll.higher depreciation. In addition, we advanced $550,000 and $1,000,000 on a Promissory NoteNotes for the three months ended March 31, 2021 and 2020, respectively, which is described in more detail in Note 3 to the Consolidated Financial Statements.
We used $6,173,000$1,496,000 of cash to acquire computer equipment primarily for the technical resources added in our India office and to upgradecontinued investments in our existing processing environment in the U.S.
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 CoreCardFinTech business, as exemplified in transactions described in Notes 3 and FinTech business,4, although there can be no assurance that appropriate opportunities will arise. Additionally, in November 2018, our Board of Directors authorized a share repurchase program of $5 million. We made share repurchases of $2.7 million in the first quarter of 2021, and we made no share repurchases in the first quarter of 2020. At March 31, 2021, approximately $649,000 was authorized for future repurchases of our common stock. In April 2021, the Board authorized an additional $10 million for our share repurchase program.
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 effect on our financial condition, liquidity or results of operations.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. We consider certain accounting policies related to revenue recognition and valuation of investments to be critical policies due to the estimation processes involved in each. Management discusses its estimates and judgments with the Audit Committee of the Board of Directors. For a detailed description on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020. Reference is also made to the discussion of the application of these critical accounting policies and estimates contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for 2019.2020. During the nine monththree-month period ended September 30, 2020,March 31, 2021, there were no significant or material changes in the application of critical accounting policies.
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:
● | Weakness or instability in the global financial markets could have a negative impact due to potential customers (most of whom perform some type of financial services) delaying decisions to purchase software or initiate processing services. |
● | Increased federal and state regulations and reluctance by financial institutions to act as sponsor banks for prospective customers could result in losses and additional cash requirements. |
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● | Delays in software development projects could cause our customers to postpone implementations or delay payments, which would increase our costs and reduce our revenue and cash. |
● | We could fail to deliver software products which meet the business and technology requirements of our target markets within a reasonable time frame and at a price point that supports a profitable, sustainable business model. |
● | Our processing business is impacted, directly or indirectly, by more regulations than our licensed software business. If we fail to provide services that comply with (or allow our customers to comply with) applicable regulations or processing standards, we could be subject to financial or other penalties that could negatively impact our business. |
● | Software errors or poor quality control may delay product releases, increase our costs, result in non-acceptance of our software by customers or delay revenue recognition. |
● | We could fail to expand our base of customers as quickly as anticipated, resulting in lower revenue and profits and increased cash needs. |
● | We could fail to retain key software developers and managers who have accumulated years of know-how in our target markets and company products or fail to attract and train a sufficient number of new software developers and testers to support our product development plans and customer requirements at projected cost levels. |
● | Increasing and changing government regulations in the United States and foreign countries related to such issues as data privacy, financial and credit transactions could require changes to our products and services which could increase our costs and could affect our existing customer relationships or prevent us from getting new customers. |
● | Delays in anticipated customer payments for any reason would increase our cash requirements and could adversely impact our profits. |
● | Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product offerings) may cause prospective customers to choose an alternative product solution, resulting in lower revenue and profits (or losses). |
● | Our future capital needs are uncertain and depend on a number of factors; additional capital may not be available on acceptable terms, if at all. |
● | Volatility in the markets, including as a result of political instability, civil unrest, war or terrorism, or pandemics or other natural disasters, such as the recent outbreak of coronavirus, could adversely affect future results of operations and could negatively impact the valuation of our investments. |
| Other general economic and political conditions could cause customers to delay or cancel purchases. |
Item 3.4. Controls and Procedures
As of the end of the period covered by this report, the Company 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. There were no significant changes in the company’s internal control over financial reporting or in other factors identified in connection with this evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about July 9, 2019, a securities class action complaint was filed in the United States District Court for the Eastern District of New York (Case No. 1:19-cv-03949) by Michael Skrzeczkoski, individually and on behalf of all others similarly situated, against the company, and certain current and former directors and officers. The complaint alleges, among other things, that certain of our press releases and SEC filings were misleading as a result of the failure to disclose alleged related party transactions affecting revenue recognition and the absence of disclosure regarding certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. The complaint seeks to recover attorney’s fees and costs and unspecified damages on behalf of purchasers who acquired our stock during the period from January 23, 2019, through May 29, 2019, and purportedly suffered financial harm as a result of the alleged misleading statements. On September 26, 2019, the Court appointed Edgardo Canez as lead plaintiff (“Lead Plaintiff”) on behalf of the putative class. On November 18, 2019, Lead Plaintiff, individually and on behalf of a putative class of persons or entities who purchased or otherwise acquired publicly traded Companycompany securities from May 23, 2014 through May 29, 2019, filed an amended class action complaint against the Company,company, and certain current and former directors and officers (the “Amended Complaint”). The Amended Complaint alleges similar allegations in violation of Sections 10(b) and 20(a) of the Securities Exchange Act as the previously filed complaint. The Amended Complaint seeks to recover attorney’s fees and costs and unspecified damages. On January 2, 2020, Defendants submitted a motion to dismiss, and on March 3, 2020, briefing on the motion to dismiss was completed. TheOn April 6, 2021, the Court entered an order granting the motion to dismiss is currently pending. We dispute these claims and intend to defend the matter vigorously.dismiss.
On or about February 14, 2020, two purported shareholders, derivatively and on behalf of the Company, filed substantially similar shareholder derivative actions in the Eastern District of New York against certain current and former directors and officers (the “Individual Defendants”), and the Company as a nominal defendant (together with the Individual Defendants, the “Defendants”). The complaints assert a claim against Messrs. Strange, Moise, Petit, Fuzzell and Chandler for a violation of Section 14(a) of the Securities Exchange Act by issuing purportedly misleading statements in the Company’s 2017 and 2018 Proxies. The complaints also assert claims against the Individual Defendants for breaches of fiduciary duty, waste of corporate assets, and unjust enrichment arising out of, among other things, purportedly undisclosed related party transactions, other relationships, and certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. and other companies. The relief sought in the complaints includes changes to the Company’s corporate governance procedures, unspecified damages, equitable relief, restitution, and attorney’s fees and costs. On April 20, 2020, the two derivative actions were consolidated and captioned, In re Intelligent Systems Corporation StockholderDerivative Litigation, Lead Case No. 1:20-cv-00832, in the Eastern District of New York.York (the “Derivative Matter”). On June 19, 2020, Defendants filed their motion to dismiss, and briefing was subsequently completed. After a conference held on August 24, 2020, the parties agreed that Defendants’ motion to dismiss would be temporarily withdrawn without prejudice to refile after the conclusion of any discovery permitted by further Court order. On September 8, 2020, Plaintiffs moved for leave to conduct limited discovery (“Plaintiffs’ Motion for Discovery”). On December 23, 2020, the Court entered a stipulation among the parties whereby Plaintiffs’ Motion for Discovery shall be withdrawn, the Company will engage in limited discovery, and the parties agree that the Derivative Matter shall be stayed pending resolution of the motion to which Defendants’ responsedismiss in the related above-mentioned securities litigation matter, among other things. The matter is due no later than December 7, 2020.currently stayed.
For information regarding our accounting for legal contingencies, see Note 89 of the Notes to Consolidated Financial Statements in this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Securities
The following table sets forth information regarding our purchases of shares of our common stock during the three months ended March 31, 2021:
Total Number of Shares Purchased | Average Price Paid per Share1 | Total Number of Shares Purchased as Part of Publicly Announced Program2 | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program 2 | |||||||||||||
January 1, 2021 to January 31, 2021 | - | - | - | $ | 3,361,000 | |||||||||||
February 1, 2021 to February 28, 2021 | 24,412 | $ | 38.73 | 24,412 | $ | 2,415,000 | ||||||||||
March 1, 2021 to March 31, 2021 | 46,535 | $ | 37.92 | 46,535 | $ | 649,000 | ||||||||||
Total | 70,947 | $ | 38.22 | 70,947 | $ | 649,000 | ||||||||||
1 This price includes per share commissions paid.
2 Our stock repurchase program, which was initially announced in November 2018, allows for the repurchase of up to a total of $5 million of our common stock, of which $4.35 million has been utilized. In April 2021, the Board authorized an additional $10 million for our share repurchase program. Under this publicly announced program, we are authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. The repurchase program does not have an expiration date and may be suspended or discontinued at any time.
Item 4. Controls and Procedures
Evaluation of Disclosure Control Over Financial Reporting
As of the end of the period covered by this report, the Company 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.
Changes in Internal Control Over Financial Reporting
There were no significant changes in the Company’s internal control over financial reporting or in other factors identified in connection with this evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II. OTHER INFORMATION
Item 6.6. Exhibits
The following exhibits are filed or furnished with this report:
3.1 |
3.2 |
10.1† |
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 |
101.INS** | XBRL Instance |
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. | |
| † | Certain portions of this exhibit have been omitted pursuant to Item 601 of Regulation S-K(b)(10)(iv). |
SignaturesSIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
| INTELLIGENT SYSTEMS CORPORATION |
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| Registrant | |||
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Date: | By: |
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| J. Leland Strange |
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| Chief Executive Officer, President |
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| Date: May 4, 2021 | By: | ||
| Matthew A. White | |||
| Chief Financial Officer | |||
Exhibit IndexEXHIBIT INDEX
** 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. † Certain portions of this exhibit have been omitted pursuant to Item 601 of Regulation S-K(b)(10)(iv). |