Leland Strange – President and CEO Bonnie Herron – CFO.

Sam Robotsky Al Shams.

Good morning. At this time, I would like to welcome everyone to the Second Quarter 2014 Earnings Release and Investors Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. Thank you.

Leland Strange, President and CEO, you may begin your conference..

Okay, good morning everyone and welcome to the Intelligent Systems, Investor conference call, pretty much in line with the last few calls we’ve had, I expect this call to probably last only 50 minutes from my presentation and through the questions we’ll do that.

So, during that time, I’ll briefly review the second quarter and year-to-date year results for 2014. And then give you some flavor on the progress and outlook for the remainder of 2014 for both ChemFree and CoreCard software. I used the word brief and that’s what I’ll be unless there are question at the end.

I’m always willing to add some flavor if there is a particular area of investor interest. I’m going to assume that if you’re on the call, that you have a copy of the earnings release from this morning. So I will not repeat all of the information that you found in reading the press release.

At the end of the call, we’ll have time for some questions-and-answers and I have our CFO, Bonnie Herron, with me if you have questions for her. As usual our Form 10-Q for the second quarter will be filed later today, with the SEC and it will be available on our website at intelsys.com or at sec.gov.

You should read the business section and the MD&A and I guess the risk section of the 10-Q for a more complete understanding of our business, our risk.

Despite my proclivity for gravity, I do need to deal with the concept known as forward-looking statements, so I’ll remind you that the discussion today will contain forward-looking statements that relate to Intelligent Systems and its operations.

Many of my statements and other information that will be in the discussion or likely to be forward-looking statements, particularly if I use word as anticipate, or I believe or plan or estimate, made or expect wisely, intend or any other similar expressions.

If you are an investor or thinking about investing, you should know that those forward-looking statements are not guarantees of any future performance and they involve risk and uncertainties. And we’ll feel free with that caveat to give you my best judgment of things, as I see them and that judgment might prove to be wrong.

I’m simply going to convey my expectations based on what I know and believe that this time that I’m not making any firm prediction about the future events. So with that, on the last conference call, I commented that our aggregate financial results in my opinion or never good predictors of company progress or even like [there are].

I have often said their results are likely to vary significantly from quarter-to-quarter and that’s proven out. Results are best explained by looking at our two main operating subsidiaries ChemFree and CoreCard individually rather than on a consolidated basis.

So I think it makes the most sense to comment on the revenue and profitability trends in my discussion of each of those subsidiaries, rather than trying to do in the aggregate at this point.

But on the balance sheet side, cash is cash and it’s not distorted by any accounting convention such as deferred revenue or amortized cost and sometimes cloud the current picture. For me cash is a good indicator for what the company is doing.

At June 30, 2014 we had cash of $2.9 million and that is down from $3.4 million at December 31, and it’s approximately to say this at the end of the first quarter this year and you would know this, but I’ll tell you slightly better than our plan for 2014 at this point.

During the six month period, we used a $130,000 for capital equivalent and then $235,000 for the first of three payments on ChemFree legal settlement that I’ll explain later. And then we used about $300,000 for other operating expenses at corporate offices in CoreCard.

We also received $169,000 cash when IBM bought a privately held company, a company is called Silverpop, in which we owned a small interest. We were actually an early investor in Silverpop, but it took a great number of years for it to pan out I don’t know 7 to 10 years and there was a lot of money put in over and above the first investor.

So we got diluted significantly throughout that time. We did not continue to invest in the company. This particular transaction also contributed to the investment income of a $125,000 that’s included in our P&L statement.

Also note that we renewed our bank line in June, but we really have not used any bank debt in over four years, so we don’t see any near-term need to do so. We simply have that line as a safety measure or just I think it’s a good business practice.

As we reported in our Form 10-Q for the first quarter, ChemFree had an unexpected and significant effect that had a onetime negative impact on year-to-date results for this year.

In early May, during an arbitration hearing relating to a contract dispute with CES that was a former -- sales agent of whether -- sales commissions were owned after the contract terminated in 2012. We both agreed to solve the dispute.

We obviously did not believe we hold the many thing or we would not have gone into the arbitration, well I guess it was more mitigation. On the other hand, we agreed in the sum of process to pay them a total of $706,000 in three equal payments and we’ve made two payments in May and August and we’ll make the final one in November.

This was a very difficult decision for me and ChemFree’s management that we believe our original interpretation of the terms would laid into the commissions earned after the contract terminated was correct.

However, we decided to sell into the inherent uncertainty of the binding arbitration process and the potential for an even greater negative impact on the company, it’s the arbitrators who find it really was in CES’s favor. So, although we felt we were away, we thought we had a very good opportunity of winning it even after the arbitration hearing.

We made and this judgment to pay $706,000 rather take the risk that we might have to pay over $1.5 million. So this one-time expense of $387,000 deal to have a significant impact on ChemFree’s and the consolidated year-to-date results and it had an impact on cash.

On our last call, I said we expected ChemFree to achieve solid, profitable results in 2014, although revenue is likely to fall a short of last year’s level given what we knew then. We also plan to carefully manage the business and expenses with that revenue expectation in mind.

Excluding the legal settlement that, I talked at above we’re tracking fairly close to what I – when I made remarks.

Compared to the second quarter and year-to-date period in 2013, ChemFree revenue and gross profit declined due to a situation I explained the number we called, about this time last year, when ChemFree’s large customers decided to buy is leased equipment rather than continue to lease it.

That development alone accounts for especially all of ChemFree revenue and gross profit decline compared to the same periods in 2013. They remained a ChemFree customer, but the fact that they bought it keeps us from recognizing the leasing term. We do continue to sell them fully so that they will continue to be a good customer.

ChemFree recently added a new domestic distributor to its reseller channel and continues to focus on adding service organization and national accounts as well as continuing to push international expansion.

We’ve had some success adding to the prospect pipeline, but the sales channels take a long time to develop for large orders and we do not expect any significant impact on revenue in the short-term.

On a positive note, ChemFree is still solidly profitable and cash flow positive in 2014, and the second quarter trend showed growth in both sales volume apart sponsor machines and consumables as well as improved profitability compared to the first quarter of 2014.

We continue to carefully manage the business expenses in cash in line with our outlook that I previously talked about.

So for CoreCard, on our call at March, I said the CoreCard would grow its processing revenue in 2014, but we would also increase sales and marketing investment as well as upfront certification and other network association expenses necessary to grow the business, if you consider these infrastructure expenses.

This probably means we would have less cash at the end of the year and we will not report the same level of profitability in 2014 that we had in 2013. On the other hand, we hope to have some processing contract that will 3 to 5 year contract terms giving us greater predictability on part of our revenue going forward.

So in the second quarter, and year-to-date period for this year, CoreCard is tracking better than what we budgeted and it’s in line with the above remarks that I just previously made from our last call.

Our processing services revenue is more than 50% higher from where it was last year at this time, because we converted a number of prepaid programs to our full processing services. So the volume of prepaid card for processing is considerably higher than it was a year ago.

Our maintenance and professional services revenue continues to be a solid contributor on an annual basis, although the timing and the amount of professional services revenue recognized each quarter can certainly vary significantly depending on customer priorities and schedules and our ability to help the time to do those.

We are developing a stronger prospect pipeline for processing and licensing customers, although these relationships are frustratingly slow to get to contract stage for any number of reasons, usually beyond our control.

I often, I think some like a broken record when I say this, but I want to say it get emphasis that we have undertaken a significant challenge to be a player in all areas of natural transactions that involve account receivables.

I believe the cost of entry into these markets is very high and in addition to cost there are other hurdles such as regulatory that by the way and that holds the piece to get higher correctly every month. So I don’t expect many new entrants in the way of new companies entering this business.

Now we will have new entrants in the easier part such as prepaid, but we will not see many new entrants and particularly the thing that’s we’re very strong in which is revolving credit.

Revolving credit it’s been another favor in the past few years due to the general financial conditions in the company and the fact that there is a lot of subprime revolving credit that is considered predatory.

But I expect the pendulum to start shrugging back and we’re seeing signs of that, more people are interested in getting back into the revolving credit area and that definitely is our expertise and definitely something very hard to get right for any new entrant. We also the fact that we can both license or process is unique in the business.

So we stay focused on that particular strategy believing that we will get the payout for it in the future. So generally that’s my summary for the first half of the year and I will just mention that we hold this call twice a year.

So the next call would be in the first quarter 2015 after we have our 2014 audit and after the Form 10-K is complete unless of course there is significantly developments that we need to report before then.

So with that, I will see if there are any questions and thank you for your time, but we’ll open it up to see if anybody has any questions on either anything I’ve said or anything else they want to ask..

[Operator Instructions] Your first question comes from the line of Sam Robotsky. Your line is open..

Hi, Leland..

Hi, Sam..

Hi, Bonnie..

Yes, good morning..

It’s been a long time, I have been so busy I have been missing the call, and we haven’t sort of caught up and you’ve been very busy between legal expenses and getting all the operations and all that, could you sort of indicate does it appear that there will be improvements in size and scope to show better profitability in the third and fourth quarter?.

No not particularly, it’s a slow growth rate the contracts that we work on for processing, they take time the good part about it is they will be predictable going into the future years. But, we’re not expecting anything significant to be added to the third or fourth quarter.

One of the things I didn’t mention though that, comes to mind as you mentioned that is, we have two banks that are willing to use their cards for us and that’s very strong because, that’s very difficult I guess banks to do that nowadays they are regulated pretty heavily and the regulators typically are not in favor of this kind of business and the other side is that we are, we do have direct connect switches with MasterCard and Discover are next step which would be start moving to Visa as license to be a six to nine month or one year process, but it’s on our roadmap.

So, no Sam it’s continued to be just a slow hard cloud..

Is the bank, the new banks, the company, the bank that as the right to buy 10% of the stock that is still involved are there more interested or how are they doing?.

Well they are still one of our two banks, this is such a minor part of their banking business, which other way is required by regulators to be a minor part.

It’s not something that is high on their mind let’s just say, they continue to offer a good cooperation within area, any area they can and also we are processing for that bank towards that they issue, in addition to we’re a program manager under the hospices of that bank, so good relationships with both banks..

Do you need more cash to let you get there quicker, is there anything that would permit you to get where you want to be faster?.

Well, that’s something you always and we’ve done that over the last few years always ask ourselves as a place we ought to throw cash and by to get there and the answer always comes up no, and that’s just not from inside, but when I go and ask outside, what you see, obviously you can urge through somebody or buying something, but is not, it is not a good strategic reason to do that.

So no, really is not, it’s – because of the regulations and that environment, you really have to wait for some things to roll off and new things to roll on. So, we don’t really see a need for cash..

Okay.

So, when we separate the CoreCard and the ChemFree, ChemFree you resolved your legal expenses you have additional people that are doing things instead of licensing they own it, is there something you can do to also get the ChemFree bigger, bigger scale is there what can you do to have larger volume in the ChemFree?.

We are obviously doing anything that we can think of or I can show to as think of, so we don’t know how to push it in another level, we’ve got some of the largest distributors of the country, NAPA is an excellent distributor, we’ve just signed up probably the only other distributor that’s in their league, so we’ll be rolling out with them in the next few months.

We’ve got one of the largest service providers in the country as one of our distributor.

So we’re in the big leagues in terms of those areas, so we are – we are having some issues trying to get heavy and to military or government that would be another big plus, we are in a lot of places there, but we can’t break the – and frankly there are places let me be discreet in what I say here there are many places that could use our product but they are political implications and other, let’s just say there are other connections that may keep our product out.

When you think about what we’re selling and I’ll give you an example let’s say, I want to go to Chicago who has a big fleet operation and they do a lot of outsourcing and they have a lot of agreements with people like Safety-Kleen. I can’t get a lot of attention when effectively, what I’m selling is a (inaudible).

This is replaced with their waste, so you don’t spend a lot of time that how levels thinking about buying [trash] cans..

Okay. All right, I got one more comment and I guess you’ve had although you normally don’t comment about stock activity, lot of stock activity and you’ve needed to say you don’t comment that there is nothing going on.

And I would suggest possibly having either another conference call instead of waiting until January, so that there is more information in the marketplace of telling people what you’re doing and sort reiterating your plans, so the marketplace knows what you’re doing, because this activity that whatever the rationale they trade a lot of the Intelligent Systems and it goes up and it goes down.

So, I think – has your advisors given you any advice what to do about this?.

No there is, of course we have no idea why we get huge volumes one day and get practically no volumes other days. We are not we are coming to say we are not in contact with anybody. So, we just believe that they are part of that or participating in that.

We have nothing going on, there is someone could estimate, the only thing I would tell you is that anyone could guess that we would be happy to do an appropriate exit at the right price at the right time..

That sounds good Leland..

And we’ve made no secret of that, but we know that there is no – there is no discussions of that opportunity setting out there. There is always companies that come and knock on our door and look around a little bit. But, I guess what I’m trying to say is, we do not know why that’s happening there is no change in the story.

And the reason we decided not to have conference calls more often because, I feel like I’m just so repetitive already. I’m a guy didn’t like to waste a lot of time and be brief and I had to be saying the same thing.

Well, so we’ll take in consideration, but the fact is, I do hope there is time where there is reason for a lot of activity, obviously I will tell you that. But, we know of no reason why anything any of that activity is happening..

Well, keep doing what you’re doing and hopefully we’ll get a paid day soon for everybody. And hopefully there are other people on the call to ask some questions. Thank you, Leland and Bonnie..

Thank you..

[Operator Instructions]. There are no further questions at this time. I apologize; we do have a question from the line of Al Shams. Your line is open..

Yes Leland, good morning. Just kind of following up on some of the comments from the previous caller, have you thought about kind of an end game for the company, none of us are getting any younger and this has been how a longer more drawn our process, I guess than any of us thought.

Have you given any thoughts to that?.

I mean, we are always open to an opportunity or an exit for all or any part of the company, I’ve said that for 25 to 30 years. So that hasn’t changed. We’re not sitting here as an infringed management saying we don’t want to do something.

So, we’re always exploring opportunities, I think I probably can’t say any more than that, but the answer is, we have said for 25 years. I remember sitting in a conference room and someone asked about something in Brazil and I had that’s, those are days we wore a lot of (inaudible) I’ll sell you half of my tie.

Everything is for sale at the right price at the right time..

Okay, well I know we’re getting to a point with CoreCard where we’re going to have something that’s going to be producing sustainable revenues and cash flows..

Every quarter we get further down that path. I’d like to give you a date when it’s very positive; I can’t because I’m going keep investing in infrastructure to keep making it strong and stronger. But every quarter we are, we have got positive traction on [at that] where we are at the end of every quarter than it was before.

And that to me that’s important that you’re not stalled or that you don’t go backwards..

And you feel you’ll get a good return on those expenditures?.

Well I’m not, I’m a fairly decent size shareholder and I’m, I feel it’s a good investment to make..

Okay.

But, no sense when we could get to a point where CoreCard might be an independent self-supporting sustainable operation on its own?.

No I’m not, not willing to make that kind of prediction..

Okay, okay. Thanks for inspire..

All right. Thank you. And I want to thank everyone for taking the time to be on this call today. And as usually if there is something, we didn’t cover that we could – I would be happy to talk with you. So, I look forward to talking to you again in a few months. Thank you everyone..

This concludes today’s conference call. You may now disconnect..