Leland Strange - Chief Executive Officer Karen Reynolds - Chief Financial Officer.

Sam Robotsky - Private Investor.

Good morning. My name is Theresa and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Earnings Release 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. Mr. Leland Strange, CEO, you may begin your conference..

Good morning and welcome to the Intelligent Systems investor conference call. I actually asked the operator to hold on for a few minutes this morning because normally we start with a lot of ball or play, but today I want to do things a little different and we had several people calling in rather than 11.

So I apologize for being a few minutes late, but there was a purpose of doing that.

As I say, I'm going to start the call a little different by telling and discussing on the front end of the call what I personally would like to from management as a shareholder that I did not see specifically or read in the press release, in other words, a little filler to the black and white numbers in commentary that you'll find in the press release and in the 10-Q that of course we'll file later today.

You know if you've been following the Company profile there are operations at this time consists almost totally of our wholly owned subsidiary CoreCard. CoreCard is the primary business of Intelligent Systems at this point in time. Organizationally, we keep the Intelligent Systems parent separate and run CoreCard as a separate company.

And while that is technically an accurate statement, the Intelligent Systems staff, including myself, they build much of their time to CoreCard operations.

You might ask, what else would you do? Well, there is the little administrative task of keeping the company a public entity, so you have the audit, the SEC reporting, shareholder communications, these things that you could just categorize as a public company expense as well as community and industry relations and looking for other opportunities that are aligned with our FinTech focus.

And just an example as part of that, I was in San Francisco on this past Thursday talking to a company kind of fits into what we're trying to do. So that corporate entity, Intelligent Systems is purely an expense with the exception of when we sell all or part of a company in which we own shares.

Of course, that's no longer a regular occurrence, as we have limited ownership in other companies. We sell the larger company and raised all of their cash when we sold ChemFree about two and a half years ago. I'll be happy to answer any questions about this or any other part of our discussion at the end of the call.

I do have our CFO, Karen Reynolds with me to answer specific financial questions. As said earlier that the 10-Q would be filed today, so if you want to beat that on any specifics or you're not really familiar with the company, you really should read carefully the MD&A and the Risk section.

So, what else? So, I'd like to note in summary quickly for management as a shareholder. Well, I guess, it's a health business and I would answer business is good. I would even say it's pretty good.

Now, I guess I have to qualify that and say I'm talking about customer activity, but how that translates into short-term revenue for the bottom line often doesn't correlate on a year-to-year basis. And those of you that understand the company will also know why that's happening, because we discuss it often.

I guess at this point when I'm expressing an opinion about the business betting both the SEC forward-looking statements qualifier and say that I'm using words and expressing an opinion, my best judgment of things, as I see them and that judgment might prove to be wrong.

I'm conveying my expectations based on what I know and what I believe at this time. I'm not making firm predictions about future events. These things are categorized as forward-looking statements and it surely not guarantees of future performance and, of course, do involve risk and uncertainties.

So, I just said the business is good or I would say it's very good. And partially what I mean by that is that all of our resources are in heavy demand by existing and/or potential customers.

Internally, we wonder if we can get it all done with the resources we send [ph] and hiring new ones requires a long training period to become proficient in transaction process in software. We have approximately 265 employees in our India office. We have one large licensing customer that wish we had twice that many.

So, we could help them get more of their customers on the system quickly. It's difficult, because they have customers in all parts of the world, including China and everyone needs some variation in the software. It's not cookie cutter or [indiscernible] is complex.

They're willing to pay for the changes, but we are certainly limited by the resources as far as what we can do for them. And, of course, the pull is not only what we can do for them, but we have other customers and we have other potential customers, so our managers are always fighting for resources.

And I guess it's a good time to mention one of our strategic challenges that we run out and hire many more people knowing that the training costs that push CoreCard into P&L loss or do we push to make a profit? We've generally kind of walk the bad sense a little on one side and a little on the other. We didn't throw it all in.

As a large shareholder myself, I certainly want to be conservative, but we also didn't push to make as big of a profit as we could make. So, we kind of walked the balance bar. One of our newer and main competitors on the West Coast has raised I think about $76 million.

They've been in business for about five years, just only started generating revenue a few years ago. So, with $76 million invested, they're hiring as best as they can and they're competing with us. They are private.

They are losing money, but their revenues are growing and eventually their right side [ph] would be very profitable, but those profits will follow those revenues in the future. The kind of customers we get, once we get them, they're going to stay on with us for a good bar, because it's hard to change.

Of course, that competitor, they may be acquired well before they get to profitability, which is probably their goal.

So, strategically we have to ask the question, 'Do we adopt that policy to compete or do we continue to push for some profitability or very limited loss?' And I give you this challenge to let you know we're seriously debating, which way to go. And remember I said business is good.

So, if we go that way or we stay with what we're doing, neither one, how do we eventually become profitable? We have to scale the other side of the business, which we are processing. The customer I mentioned is other licensing customer. We still generate really good revenue.

In fact, they are our largest customer at this point due to the professional services we provide to them, not due to the licensing revenue they're paying us. So, to be clear we are scaling the processing side of the business and we will be ramping that up. The competitor I mentioned is strictly in the process inside the business.

So, they have a 100 plus employees only devoted to the processing of prepaid. We certainly have work to do to make it easier to board new customers as we scale up and we are making good progress. For both sides of the business, I believe our significant advantage is the breadth and depth of the product line.

Credit should eventually be our bread and butter, although we'll ride the prepaid away, but as long as it exists. Again the competitor I mentioned is primarily in the prepaid space. So, that's the ongoing flick upfront elevated page of business summary.

Now, how about the affiliated FinTech investments that we've made? Well, we've had winners and we've had losers the past three years and that's generally what's expected. One of our small customers that we invested $100,000 in and I'm not using a number, it's always approximately, so I'm going to say $100,000.

We've actually written most of that off, I believe, in this particular quarter, right, Karen?.

Correct..

Okay, so this quarter. On the other hand, that customer has paid us a good bit of money, probably close to $300,000 in fees and for professional services and for licenses. So, although we may have written - we may eventually write off $100,000, before we've gotten $300,000 and we'll get more over time as they grow.

So, sometimes the investments for purposes other than what it appears to be, now we could have gotten lucky, but they raised more money and we got diluted pretty much to nothing and we decided not to continue with that investment. So, that's an example.

It's well known that we're one of the earliest Kabbage investors and I get asked all the time about what's that worth. Well, it was a small investment and you can tell from our balance sheet that it was well under $0.25 million to $1 million.

We're often asked what's the investment worth since the press says that Kabbage is raising money $1 billion plus evaluation, so we must have made a time.

Well, I've always said I don't know and seriously I had no idea, because our preference generally is attached to successive preferred financing and we don't have knowledge of those attachments and what the bill terms are. We really had no idea of dilution.

So, I was not in a position to say, well, it's worth what we put in it or it's worth 20 times what we put in it or it's worth nothing. We just closed both. Well, recently in a publicly announced investment by Softbank in Kabbage and I think it was around $0.25 million and the press says it was at over $1 billion evaluation.

We have learned that Softbank, as part of that, will be willing to purchase some shares from the earliest investors. And since they are going to purchase some shares, we'll now have the ability to have some idea of what our investments worth.

We now believe that the Kabbage investment in our books were somewhere between $1 million and $2 million, probably somewhere in the middle. It will be offering some of our shares in some type of tender offer that kind of value, but we really have no idea at this point how many we can actually set up.

So, just to be clear, Kabbage is currently and I'm going to emphasize currently but that can change, is currently value there between $1 million and $2 million and it's on our books for definitely less than $0.25 million. So, it's a good investment, but really we didn't make it for that purpose.

We made it to help us Kabbage as a customer and they are a very good customer. They're a processing customer, doing very complex credit type work all around the world. So, we're processing for them in the UK, France, Spain, as well as the U.S.

and they continue to grow and I guess I would say given the size of the investment they've got, I'm pretty comfortable that the number that I said will continue to be a good value for us in the $1 million to $2 million range, although given the opportunity we'll probably cash out a large portion of our investment, because that's not our primary business.

So, hopefully that is - that would be a good news. For me it has nothing to do with stock price. I wouldn't know would it run buy stock or sell stock based on that, it's a very insignificant number in the overall value of CoreCard.

The more significant number for Kabbage in the evaluation of CoreCard is that they are a licensing customer paying us fairly for a very complex business and that they are doing that for years and that's a lot more than what we've made on their [ph]. That's why I don't consider it some type of a market moving event.

But that's my quick summary of the business upfront. If I talk about a little bit on strategic initiatives, I've often said and I'll repeat again that we're open to anything that would benefit the company. We continue to remain open and are still considering various alternatives that could be we could sell the company.

That's what shareholders do to make a lot of money the basic way, we could merge with someone else. We could merge with another process or we could merge with one of our customers. We could merge with the bank. There is all kinds of things that we could do that I believe could be an advantage to our shareholders. We could acquire something.

We could use some of our cash to acquire one or more companies that are complimentary or we can invest in some other things such as the Kabbage and we've done some of those recently that helps us acquire other business. So, we don't have any specific transactions with near-term potential that we're working on other than maybe a couple of investments.

And it's an area where we're going to continue to have conversations and continue to be open for anything that makes sense for our shareholders, of which I personally am a large one and would be happy to see a really great exit of that. So, that's my - that's the different type of approach.

I wanted to take the first part of the conference call before we talk a little bit of what normally happens in these type of calls and that's simply to review of what we've just reported. On a liquidity standpoint, our cash has decreased from $17.7 million at the end of '16 to $15.9 million as of the end of June.

On December 30, 2016, we've signed an agreement to invest $1 million in a private technology company and program manager. This is in alignment with what I talked earlier about our corporate operations. We might do that. We've funded that in January of 2017.

So, of the decrease of about $1.8 million - is it $1.8 million, yes, that $1 million was due to that investment. In addition, we invest a little less than $100,000 in capital equipment and by the way we will continue to be investing in capital equipment as we grow our processing operation.

And we did use in the past six months about $700,000 for operation support, as well as corporate and other public company expenses. So, we didn't really use a whole lot of cash for ongoing operations.

You'll find in the press release that our revenue from both software license and services, which includes maintenance processing and professional services, grew 100% in the second quarter of 2017, 53% from the six-month period 2017, compared to the same periods in 2016.

Now, I always just discount that, because revenue recognition were very small [ph] continues to distort those numbers in terms of real meaning for our shareholders.

It's really too early to speculate if we'll experience that same year-over-year revenue growth for the remainder of 2017 and particularly because of the reason I just mentioned, which is when we get new contracts with revenue recognition that's often unpredictable and often not under our control.

We're just not large enough to account for some of the quarterly swings of revenue that we may experience. An example at the end of June we had almost $1 million in deferred revenue for which we have done most of the work and we've built milestone payments, in many cases have already been paid for it.

So, we will recognize that we believe in 2017 that it will not be highly profitable, so we will recognize it. So, revenues should go up. It's possible that some of that could be pushed out in 2018 and it all depends on the task of being willing to sign off on what he has. So, again just to emphasize, we'll continue to have volatility.

The CoreCard operation did experience profits for the six months ended June 30th, 2017. I guess that's good, but also a question, maybe we should spent a whole lot more in terms of ramp up and that's something we're going to continue to talk about. Outlook summary. It's already noted in our discussion today.

We continue to see gains in all three components of our FinTech-focused businesses, licensing, processing, and professional services. This growth obviously has impacted in a positive way the bottom line. Let's see. We may decide to encourage the little businesses by investing in the future growth of the company that could be from people.

It's going to involve more hardware as we set up for new types of businesses. And we have to recognize that the FinTech arena is rapidly changing and we feel that we're in a position to take advantage of that and continue to grow nice in the future. With that, you can see I am not going to review everything in the press release.

I'm not going to talk about what's in the 10-Q. You can read that for yourselves. And just sort of to end the call, so that our next conference call will be at the end of the fiscal year unless we have any significant new developments to report. And, operator, at this point we'll be glad to answer any questions.

I might add that one of our loyal long-term large shareholder Stan Rothman [ph], a nice supporting shareholder understands very well what we're doing, phone in and he said he would be on the call today. So, I can't expect any questions from him. He is usually the one that leads the questions.

But at this point we'll pause for a moment to see if anybody has any questions. Operator, I'll let you take over for that..

Yeah. Good morning, Leland. It's very informative..

Good. Good..

And so, the deferred revenue at the end of the March 31 quarter was $1.338 million. Now, it's 936. So, you picked up 400,000. And as you sort of talked about the service revenue, now service revenue could be deferred.

Is that correct, Leland?.

Not really service revenue. Well, there are PSA some time that straight yard for [indiscernible] the real large ones. Generally it's license revenue that gets deferred..

Okay.

So, the 265 employees where the previous quarter you had 270, does it appear the services will continue as long as you have the number of employees?.

Use my numbers as rough numbers, okay. When I say 265, 270, 275, they are rough numbers. We do some turnover around, so and that's India. We are talking about Indian employees there. We could do more services if we had more employees.

But remember what I said, it takes about a year to make them effective, so that we end up getting a drain or other warnings..

And as far as the research and development, do you have to continue spending this money going forward?.

It's always changing. The FinTech space always changes. There is always things you want to do. As an example, we now do a whole lot of things on our mobile phone that we did use today. We spent money getting mobile applications run with our current software. So, yeah, it's a constant change..

And would you say this - in your Q last quarter, your four largest customers were 11%, 13%, 15% and 14%.

So, this large customer that you have is in this range or are they doing more than these numbers right now?.

Well, this past quarter they did a lot more than that number, but that's going to come and go to, because remember it has to do with revenue recognition. We may have done the same number. We may have put in the same number of hours, but if we recognize revenue, it could jump up to 25%, 30% and then they go back to 14%.

It didn't mean we did more or less work for them in the quarter. It had to with other revenues had to be recognized..

Okay. Now, with all the mergers and acquisitions that's been going on in your space, have some people come forward to try to acquire you? What is going on and I guess you sort of spread out all your options and it's going to depend what you and the Board think is the best option for Intelligent Systems to maximize value for shareholders.

And are we working on any transactions or a lot of transactions where we might see something in the next six months?.

We're working on no particular transaction at this point..

Okay. Okay.

And then judgment do we in order to increase the processing as you've indicated this company that raised $76 million and is processing a lot more and you haven't made a decision whether you want to spend more money to sort of ramp up or is that open at this point?.

Yeah, we're doing a lot of analysis of that. And keep in mind that company primarily just a one segment of our business which is prepaid and they do not license their software. So they get $76 million devoted to what today would probably rivers in 25% of our revenues..

Yeah. The one thing that I've seen that companies in similar space to you they spend an awful lot of money, they have a negative equity, they've spent. They carry a lot of goodwill. And based on their rationale, your company should be worth significantly more the fact that you've been in the forefront for a lot of companies starting up.

And is there somehow a way to sort of capitalize on this and sort of get a higher valuation?.

Well, if you know the formula, let me know. Obviously we're doing what we can, but we're going to run the company once that is if you're here and going to try to be shareholder on the other side, we're going to be open. But we can't tell people but buyers are they decide the job that we're going to do..

Okay. Leland, you're doing a good job and like they say at some point to take it to the bank..

All right. Thanks.

Any other questions?.

There are no further questions at this time..

Okay. We want to thank everyone for being on the call. And again if there's any questions that they can't be answered given the compliance environment, feel free to call myself or Karen, otherwise we look forward to having this discussion again on the next call in about six months. Thank you everyone..

Thank you..

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