Leland Strange - President & CEO.

Sam Robotsky - Private Investor.

Good morning, My name is Macron, I will be your conference operator today. At this time, I would like to welcome everyone to the Shareholders Conference Call. [Operator Instructions]. Thank you. Mr. Strange, President and CEO, you may begin your conference..

Okay, good morning everyone and welcome to the Intelligent Systems, Investor conference call, in line with past investor calls I expect this call to last around 20 minutes during which time I plan to do two things, I briefly comment on the 2015 results and the year-end balance sheet and then I will update you on the progress and outlook for our CoreCard business which essentially is the Intelligent Systems business, they are one and the same.

I used the word brief and that’s my modus operandi as people around the people will attest. So it will not be very long unless there are questions at the end. So thinking about questions if I don’t cover what you want to hear. I'm always willing to add some flavor if there is a particular area of investor interest.

I’m going to assume that you’re on the call, that you have a copy of the earnings release from this morning. I'm not going to repeat all of that information or repeat the press release. At the end of the call, we’ll have time as I said for questions-and-answers either about the press release or about things I might say.

I do have our CFO, Bonnie Herron, with me if you have questions for her if you ask me questions that I can't answer. We expect to file our Form 10-K for the 2015 early next week and it will be available as soon as filed both on our website at intelsys.com or at sec.gov.

I would encourage you to read the business section and the MD&A and the risk section of the 10-K for a more complete understanding of our business, and it's risk as well as it's opportunities.

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

Many of my statements and other information contained in the discussion are likely to be forward-looking statements particularly where I use word such as anticipate, believe, plan, estimate, expect, likely and intend or other similar expressions.

So if you’re an investor or thinking about investing, you should know that such forward-looking statements are not guarantees of future performance and they do involve risk and uncertainties. I plan to give you my best judgment of things as I see them and that judgment might prove to be wrong.

I’m simply convening my expectations based on what I know and believe that at this time that I’m not making any predictions about the future events. So with that behind us as you know since we sold our ChemFree sub almost a year ago our financial reports for both 2015 and 2014 show that ChemFree operations as discontinued operations.

For all intents and purposes we think of our CoreCard operations as IC's core-business. CoreCard is primary focus of our management tide and resource allocation.

As you may remember the ChemFree sale generated approximately 19 million in cash not including 2.2 million in 2.2 million in escrow until September of this year and this is being used to support our ongoing operations and strategic initiatives as well as provide some returns to shareholders.

We did the 2015 Dutch Auction Tender Officer and a recent cash dividends of $0.35 per share for the data for ChemFree cash flow and it's sale.

Our Board of Directors was comfortable approving the cash dividend because our cash balance sheet improved significantly compared to 2014 with over 18.5 million in cash and marketable securities as of December 31, 2015. No debt and had a stockholder equities 23.2 million compared to 6.6 million in the 2014.

It's also interesting when you look at that because it shows how we cannot put -- because you can't we put the asset values on the balance sheet. So you move from a 6.6 million stockholders equity to 23.2 million based on the sale.

During 2015 in addition to using cash for the tender offer we invested approximately $275,000 in capital equipment for our processing and our CoreCard technical operations and also used approximately 2 million for operation support as well as corporate and another public company expenses.

For an operations overview as you can see from the press release revenue from both our software license and services which includes our software maintenance, processing services and professional services grew 27% overall in the fourth quarter of 2015 and 14% for the full fiscal year compared to the same period in 2014.

As we have frequently pointed out the timing of revenue recognition particular on new contracts is often unpredictable and often not under our control.

And I will say this often and I know some people get tired of hearing it but revenue recognition plays a big part in how -- I know how you view the company but from our standpoint we have to simply do what we do without worrying about how it really gets applied.

For example at the end of December we have over 1.8 million in deferred revenue for which we have actually done substantial work and we've built milestone payments and in many cases we've already been paid for that.

That's related to in process, new contracts and things which we expect to reg down for GAAP purposes in 2016 and probably close to half of that amount we initially expected to recognize in 2015.

But changes in cost reschedules our third party delays have pushed the revenue from 2015 into 2016, there is nothing that the company could do in order to change that it's simply going along with the customers' business. We expect to continue to see this kind of volatility in revenue and reported profits and losses.

So we'll continue to simply focus of what we can control. We will meet our contract deliverables and let the GAAP revenue recognition occur when it does. It can be exasperating for our internal forecasting although in reality as I said the business goes on and we simply do the work, get paid and we let the revenue recognition fall whenever it falls.

Our [indiscernible] been a little time providing some insight into how we look at our business and what we believe to be unique and valuable assets of our CoreCard operations. Although we have legal subsidiaries in the U.S., Romania and India we consider them all to be one company and they operate as one company.

Even the names in those other countries may be a little different but we call them CoreCard as far as our internal work. So if you look at the company as of in total we have a workforce -- let's say it three ways, let's talk about the workforce, let's talk about the technology and then let's talk about the Enterprise.

With the workforce, we have over 240 experienced technical payment professionals. These are located in the U.S., they are located in Romania and in India. As far as India, I just returned two weeks ago from a management meeting over there where we have 215 employees, they are housed in our building.

You have a combination developers, testers, quality assurance, business analyst, system support. So 215 technical employees.

They're all focused on the FinTech industry and our software something that you will find it unusual in India operation is that we have 23 of those employees that’s greater than 10% who have more than 10 years' experience with our company, more than 35% of those employees have more than five years' experience with CoreCard.

So, usually you will find in India a very high turnover rate, our turnover rate is only in the first two or three years as weed out employees that we don't and we continue to train and nurture the employees that have proven to be the kind of [indiscernible] that we want, so we have a very high rate of keeping good employees and with 35% having more than five years of the company and that's very valuable.

Customers are highly complementary of the skills and knowledge of our employees famous industry as well as our software.

Another great advantage is that since most of our employees are in India and India is certainly is a lower cost location, we have a competitive advantage which allows us to have bench there and to offer board cost for development, testing and operations support to our customers.

While we consider India and our India operation to be one of the main competitive advantages of the company but in the U.S. we also have all of our employees here have average tenure of greater than 10 years. The management team is highly integrated with our off-shore group and mainly the U.S.

folks provide direction for the India team as well as customer facing activities. Romania, it's a smaller group.

We have developers, testers but again the average tenure is nine years so you can see that from a workforce standpoint we do have a lot of experience, technical payment professional even though we have a fairly low cost rate for our customers.

The second element, [indiscernible] the technology we have a transaction processing platform of which a variety of payment system have been constructed.

It's proven performance, we have licensed customers that have used it for more than five years with millions of accounts, we have a suite of applications that’s built on a décor [ph] platform for Indian processing.

Anywhere from account creation, authorizations, interest, fee calculations, elections, card holders services and all the other things you expect from a payment processor. The modules are tuned base of whether the applications are for credit or for prepaid or for some other application.

And then there are other team for customers based on the specific payments program such as blink cards, short term consumer loans, prepaid cards, gift cards, payroll cards, revolving credit both [indiscernible] or open loop which also are user retails but their MasterCard, Discover, Visa.

We do business to business loans, we have accounts receivable, we have collections. We've initially undertook a very significant challenge to be a player in all the areas of financial transactions and certainly we could be subject to criticism for not focusing just one niche but we chose to be a full suite player in payment process.

The cost of entry is obviously very high. We've paid that cost. I'm actually pretty happy with the regulatory issues that that companies face now because we paid the price and therefore I don't expect a lot of new entrants in this space.

I would say it was a move from our technology or technology to the enterprise is that while I can talk about enterprise domain, the main way to look at that from my perspective is customers. We have several large publically traded companies with deep technology expertise who have licensed our software to run portions of their business.

We have customers who are heavily backed by significant VCs and with significant VC money. They have licensed our software to run their applications. So I look at our customers as being best way to validate what we have from a technology workforce and an enterprise solution.

Now let me say here from an enterprise, we do two things we both license our software and we process using our license software. So by processing using our software we’re basically eating our own cooking which I think is always a good idea if you're going to license other people to prove you can use it.

Our license model and the revenue for that includes both the initial license as well as implementation, customizations, you get [indiscernible] where people use it for more accounts later. You get annual maintenance and you get professional services.

We have under license now international -- large international players who are not yet rely but they have signed license agreements and we’re working hard to get them [indiscernible] to several different countries. The other part of the model is the processing model, we have used the same software that we license in a processing environment.

So we do processing for prepaid for closed loop, open credit, B2B lending and it's based on the same software usually you have 3 to 5 year contracts, in some cases where what's probably program manager for starting these programs and in other cases we simply process for other program managers.

The key to processing is for the -- will the program manager or whether we process for other people is the bank, the bank is in control of the open loop whether it's prepaid or credit they are in control because every card that’s issued has to have a bank being sponsored regardless of what name may be on the card.

And of course banks are under even more regulatory oversight currently, risk is a big factor so the banks are very selective on what kind of programs they will allow us to run as a program manager and/or other people referring to us as a processor.

But overall if you look at our workforce, our technology and where we are, I am very pleased with the position we're in. I know one thing people always ask is well who do you compare yourselves to? I hate the answer I have to give because I would love to have some great comparisons.

Unfortunately we know of no one who both license their software as well as processes their own software. If we would look at simply the processing model I would say we are a mini-PACES or a mini-First Data. Now neither PACES nor First Data will license their software to third parties which we will do.

we can process any kind of customer that PACES or First Data can process. Now both of those parties are also in the merge and acquiring business which we do not and that we do -- you simply take the cards from the merchant at the point of sale.

But as far as issuing we can pretty much do anything PACES or First Data can do that and we can do that at lower cost. To say we can do it at lower cost doesn’t mean that we're going to charge less. It simply says we think we can do that at lower cost in spite their scale. So that’s the answer I would give to how do we compare.

The next question I guess we often get well, when you’re going to take money? How much you’re going to invest? I had a hard time answering that directly but you heard me talk earlier about revenue recognition. I can choose to make money in 2016 by being very careful in revenue recognition and not choosing to position the company for further growth.

I don't know that that will be the choice we will take. So I would tell you that revenue recognition is probably the main factor is whether we will make money or not make money in 2016 but in any event we will be very close to break even on cash flow after any significant investments we decide to make in the processing environment.

We will continue to add staff in India, preparing to become a much larger company overall. So we think we’re really positioned very well to be a really good position company in the FinTech industry. Now I will leave it there and open the line for any questions. If I have anything -- simulated question on the line please.

So we will ask our operator just to let us know if there are any questions..

[Operator Instructions]. Your next question comes from a participant. Your line is open. Please state your first and last name..

You’ve accomplished a lot, having sold ChemFree and gotten a lot of cash. Can you and your business model with CoreCard seems exciting going forward.

Could you talk on how much money you’ve spent developing CoreCard? Is it 10 million, is it 5 million, is it 20 million and that has been expense and what do we have to do to tell your story? You say you want to aggressively sell you want to be aggressive in telling you story.

I presume this is for both to get more business and tell the investment community on who CoreCard is..

Okay. Let me try to answer that, I will say that we've spent more than 20 million in terms of developing CoreCard. So it's could be like a magnitude. It's not on our books for anything that's all been expense. So that's kind of the [indiscernible] there.

I don't know that I used the word aggressive in telling our story but I may have, but in any event we’re going to -- the way I'm say we're going to slowly ramp our messaging in the cultural space. Again there is, I don't need a lot of new customers. I know that sounds strange but this business still is very well.

We just need to slowly add good customer accounts to make the company solid and profitable. So we will be slowly ramping up a message from the customer standpoint. Right now we get a decent number of in-bound leads and our current customers do a decent job of referral but we will ramp that up.

As to what we’re going to do on the investor space, I don’t know Sam, right now, I don’t how much more aggressive we're going to do as you know we're pretty much the low key company.

I believe in letting your performance determine your outcome rather than talk about it and so we're going to -- we will tell our story but I don't know that we're going to -- I don't know I used the word aggressive but I will say that we're going slowly ramp up the volume..

Okay.

And as far as taxes, did we fully utilize all our tax loss carry forwards that we still have tax loss carry forwards?.

We pretty much used them all..

The cash that we have, do we plan to make acquisitions? Do we plan to hold the cash? The money that you are going to return on the cash investing I assume it's invested in a secure manner. So it's really not investing.

So, clearly having spent 20 million developing the company which is over to $2.5 per share and you have a significant business that could be developed as your competitors more companies in this space have gone public recently and they have created a lot of goodwill on their books and therefore your company should be worth more.

Do you expect to use the cash for acquisitions or what your thoughts about this?.

Well in the past we've talked about our strategic alternatives and I want to elaborate on that a little bit. Our cash is certainly available for acquisitions and if the right thing comes along at the right price we will do that.

In fact I said at the wrong way, we’re actively looking for things and I'm frequently talking to different entities about that possibility but we're not going to go out and do this purchase, it's just to wrap up the revenue side. So we will use cash for that if we find the right opportunity.

The other side on strategic alternatives were also open to working with someone else that sees what we have and feels like we would fit within their organization. So we kind of work both sides of that.

I would just say for cash now we're holding on to what we have to see about making purchases if we find that not a viable thing to do we might hand a little bit more out to shareholders during the year, but that decision hasn’t been made at this point..

Okay. And as far as -- I don’t know if there are any other questions in queue and tell me I'll be glad to get off and let somebody else come in if there's somebody else has any questions. But I'll just ask a couple or more unless there is somebody else.

With the deferred revenue of a 1.8 million plus 200,000 that is expected to be included in revenue during the current year you indicated.

What is the pipeline look like? Can we get additional revenue in the pipeline? And how does it look compared to the same quarter last year and the previous quarter in three months and six months ago?.

Okay. When you look at pipeline you either look at it as -- with the deferred revenue in mind man meaning where are they going to go wild, whether they are going to recognize it. I don't look at it that way. If you're in the [indiscernible] running the business recognition happens when recognition happens.

What you look at is how much business do you’ve, how much cash you’re getting in. I would say this is better this quarter than it was first quarter last year. We expect clearly for this year to be better than last year in terms of the pipeline. There's really no question about that.

How will the revenue recognition play out in terms of -- what that looks like in the books? I don’t know.

We could end this year with 1.8 million in deferred revenue too or get into share with 0.5 million of deferred revenues and all of that will determine how the books look for P&L but I can tell you that I would expect year to clearly be better than last year.

In fact, I mean there is almost no question about the [indiscernible] actual business that we generate. It's moving up..

And as far as the 240 employees, what kind of revenue can we generate with this type of employees? Could you do another 2 million of revenue or do you have to hire more people or what is the -- how do you look at this?.

Sam, that’s probably not a question I can answer directly. We’re going to continue to hire people, have much where I can do with current employees, yes I can do more with the current employees but I don't know how to put a number to that right now..

Well Leland you’ve accomplished a lot and hopefully more people could know about Intelligence Systems and basically CoreCard. I'm not sure if that at this point in time the change of name since you're all basically CoreCard, that that's appropriate but it seems exciting and hopefully more people could discover you and you've done a good job.

Good luck..

Thank you, Sam.

Any other questions?.

There are no further questions at this time..

Okay. If there are no further questions, again appreciate your interest in the company. Hopefully we have answered the questions that you’ve had in mind and stay tune for further developments. Thank you, everybody..

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