Good day and thank you for standing by. My name is Selene, I will be your conference operator today. At this time, I would like to welcome everyone to the Earnings Release and Investor 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, you may begin your conference..

Good morning, everyone. Welcome to the Intelligent Systems second quarter investor earnings conference call. We filed our 10-Q this morning with second quarter results and also posted a press release with summary results and comments. We also filed an 8-K this morning, reporting the resignation of P. Petit as a company director.

I hope you either have or will during the call, review those filings. Please note the typical forward looking statements in the followings apply to this call. The call today will consist of about 15 to 20 minutes of company commentary and leave up to about 15 minutes for questions.

In addition to taking questions directly from callers, if you'd like to comment or ask a question by email, which we are monitoring real time, you can email the question to fax@intelsys.com. That's fax, f-a-x. We have the Q and the 8-K on the website now. And we'll be posting an edited version of this call immediately following the call ending.

The Q&A to be added to the transcript of later. Our website address is intelsys.com. Again, same questions as we talked to fax@intelsys.com. I don't plan to necessarily identify the center of the equation, but we'll consider any questions that come in to be answered during this call.

We'll cover on the call second quarter results, competitive landscape, high level view a third quarter and remainder of the year, comment on directors and a legal update. I will turn the next few minutes over to Matt White, the Intelligent Systems and CoreCard, CFO for second quarter result comments..

Thanks, Leland. Before I start, I'd like to remind everyone that during the call we will be making certain forward-looking statements to help you understand Intelligent Systems and its business environment.

These statements involve a number of risk factors, uncertainties and other factors that could cause actual results to differ materially from our expectations. Factors and risk that may affect future operations are included in filings with the SEC, including our 2018 Form 10-K and subsequent filings.

So consider those and making your investment decisions. And now on to the second quarter results. Revenue for the second quarter of 2019 was $7,512,000 compared to revenue for the second quarter of 2018 of $4,573,000, an increase of 64%.

The components of our revenue for the second quarter consisted of license revenue of $700,000, professional services revenue of $4,663,000, processing and maintenance revenue of $1,724,000 and third-party revenue of $425,000. As we’ve mentioned in previous statements, our license revenue will vary from quarter-to-quarter.

But we do anticipate a significant increase in license revenue in the second half of 2019. We receive license revenue primarily when our customers achieve new active account tiers. Once the customer achieves each tier level, they receive a perpetual license up to that number of active accounts. Inactive accounts do not count towards the license tier.

We charge annual maintenance for our license customers, which is reflected in our processing and maintenance revenue line. Maintenance revenue increases when new license tiers are achieved.

For our largest license customer, the customer receives an unlimited perpetual license at a maximum tier level, a very large number of accounts that allows them to utilize the software for any number of active accounts. They currently use the software for a single institution, additional license fees apply, if multiple institutions are added.

We would expect it to be several years, if ever more than five years to hit the maximum tier level. As you can see from the revenue detail provided, professional services revenue comprises a significant portion of our overall revenue for the second quarter and first half of 2019.

However, we expect that to decrease as a percentage of total revenue overtime as our customers utilize the new features we've developed to add active accounts to their system, which is ultimately reflected in our license revenue and processing and maintenance revenue lines.

Additionally, we charge annual maintenance fees for professional services that result in new functionality to our customer, which is also reflected in our processing and maintenance line. We do not generally perform any professional services for third parties that are not licensed or processing customers.

So while a significant portion of our growth in Q2 2019, the first half of 2019 is in license and professional services revenue, expect that to translate into future processing and maintenance revenue.

And finally, for revenue, our third-party revenue clearly has a very low margin and represents services we provide on behalf of our customers that we charge at or slightly above cost. We recognized this revenue growth for accounting purposes. And now, for the rest of the highlights on our income statement.

We recorded income from operations of $2,601,000 for Q2 2019 compared to $1,058,000 for Q2 2018. This resulted in an operating margin of 35% for Q2 2019 compared to 29% for Q2 2018 and 37% for Q1 2019.

We experienced some margin erosion in Q2 2019 compared to Q1 2019, due to higher G&A expenses related to some strategic board initiatives, higher research and development expenses related to accrued employee bonuses and revenue mix, and a little bit lower license revenue for Q2 2019 compared to Q1 2019.

Our year-to-date tax -- year-to-date 2019 tax rate was 23.4% compared to 3.5% in the comparable 2018 period due to the utilization of net operating loss carry forwards in 2019. Earnings per diluted share for the quarter was $0.23 compared to $0.12 for Q2 2019. And now I’ll turn it back to Leland..

Thanks, Matt. Let me remind you, as a pure play in the issuer segment of the payment landscape, our revenue generally comes from five sources. First, there's license fees, very little current costs, so high margin. Usually equates to the number of active accounts for which CoreCard Software is being used, but not always.

Sometimes accounts have not met the minimums in the contract, and other times I may have reached the maximum tier. We have none today that reached the maximum tier and don't expect anyone to reach that in the foreseeable future. Second, maintenance and support for licensees.

Recurring revenues that increased with certain professional service work as we add features to the software and as we get additional license fees. Third, professional services. Not technically recurring, but certainly repeating. And forth, processing services. Recurring and generally per account per month.

Fifth managed services, sometimes we monitor or assist in the running of our software for our licensee. There are both permanent and temporary situations prevalent with managed services.

I guess, I should say there's a sixth that is what we call a third party revenue that is pretty much dismissed as real revenue since is passed on immediately to other parties. While we want to be as transparent as possible regarding each of these revenue streams, we’re most mindful that we're constantly negotiating fees and rates for new customers.

Our competitors would like to dissect exactly how we price. We believe it not to be in our shareholders' best interest to be more precise. Let me also explain a comment I made to an analyst last week, who is trying to develop a model similar to those he has for Global Payments, Fiserv and FIS. I said, we are an analyst model nightmare.

Why? First, we're still a small cap company, not yet reaching revenues that help scalable histories. We're being modeled against not midcaps, which would be the next capitalization category up, but against some of the largest companies in the payments universe.

The approximate capitalization of now the big three, our Global Payments combined with TSYS at $45 billion, Fiserv combined with First Data at $40 billion, and FIS with TSYS at $42 million. If my math is correct, our market caps average over 100 times those of Intelligent Systems. And none are into pure issuing as we are.

Look at their press releases, they're pushing and competing heavily in the POS category. For those of you not into the business, I'm not being disrespectful, as POS is an acronym for Point of Sales. That’s acquiring segment of the payments business, which we do not desire to participate in at this time, and probably never.

And except for TSYS, combining with Global Payments, none have a system they licensed. For TSYS it's not a product focus and it's not the system they use for processing in the U.S. We're different, and for better or worse, depending on your investment philosophy.

We are in a category by ourselves, albeit with similarities to the issuing segments of the bigger processors. That's the reason I want to emphasize our revenue sources.

I mentioned earlier that the average capitalization of the big three is approximately $40 billion 100 times our size, the average revenue is projected for the big three in 2019 are approximately $12 billion. That's over 300 times our revenues this year. I'll say a little more about the big three in a minute, but now I'm going to switch gears to legal.

The company is going to vigorously defend from the legal actions posted on the company by the two short and distort reports. It already has in the second quarter and will continue in future quarters because shareholders' money and impact our earnings as we deal with these privileged claims.

We were in the process of renewing our D&O insurance and of course that renewal policy went up a good bit. Today, approximately 30 law firms have jumped on the bandwagon, soliciting clients in an effort to participate in a class action with the hope of getting some sell [indiscernible] money.

I personally did not expect to ever pay one dam from the company to the lawyers to settle. That's my personal observation. I'll note, there was a high level or short interest in our stock as the last Finra [ph] report. It was at 20% plus of our float that will have to be recovered at some point.

For current investors, you may want to check with your broker to see if they're lending out your shares. Interactive brokers is charging this morning approximately 56% APR to lend shares so it could be highly profitable to lend, but also detrimental to your stock price.

I assure you the large shareholders are not allowing the broker to lend for short sales. I said several calls ago that we'd been working through proper board governments that reflects the current company's business and capitalization.

We're continuing to discuss how that might play out, but we will certainly be adding independent board members and maybe sooner than anticipated due to the announced resignation of P. Petit from the board.

I want to thank P for his 18 years of service and his continued believe during those years, as we invested in R&D to realize the potential of the CoreCard technology. In concluding my remarks, I would just reiterate that I continue to believe and major corporations have validated the future of CoreCard.

I mentioned earlier, the revenues of the big three in the payment space is being 300 times current CoreCard revenue. While all of that revenue is not from the issuing segment, I believe it goes to the size of the markets we’re serving, they’re huge and everyone is not going to want to have their credit system of record with the big three.

We are a great alternative with our innovative products and speed to market. We're very pleased with where we are now and where we're headed. In our previous call, I referenced Warren Buffett, when he says the same thing as we emphasize that accounting treatments don't always translate to the actual progress of the business quarter-to-quarter.

Our quarters are going to be lumpy. Although since I first started saying that two years ago it does not and it has not to-date appeared true. But it is and will be at some point as we get big bucks from license revenue or and as we transition from one big customer to another.

I'll close with another belief of mine that has been shared recently by Buffett, which is don't obsess on the details as you look quarter-to-quarter. The big picture is that is a big market and we're going to conservatively keep moving forward. I'll stop now and take questions. Remember, you can send them to fax@intelsys.com if you wish.

Operator, open the line for questions please. .

Certainly, sir. [Operator Instructions] Your first question is from Jonathan Ang [ph]. Your line is now open. .

Hi, good morning, Mr. Strange. I'm so excited to talk to you. I am an investor from Malaysia. And I come from the opposite part of the world. It's 11 O'clock at night here. But the story of CoreCard was so inspiring, that I just had to call in to congratulate you as a strong leader. I mean, you can easily be my grandfather, and you're still going strong.

I understand that….

Thank you very much..

Yes. I understand that you're currently working with a very big licensing client. And it seems that the project is about to materialize anytime soon. And we expect -- we're going to expect millions of transactions coming in. I understand that for companies that are growing, especially for INS.

There may be speed bumps along the way as you scale your business. Could you add some color, if we might experience any speed bumps, or any potential risks or operational gaps in the business.

For example, will the data centers be able to transact a search in millions of transactions? And will there be any material backlash, if INS can’t handle these transactions smoothly?.

Sure. I’d be glad to come on that. First, I can tell you there have been many, many hundreds of hours of testing to make sure that we can handle a very big client load that our software can handle it. It's always a combination of partners that make the complete product. For example, if you are issuing a credit card, you're going to help somebody apply.

That application is usually not on our system. That's only on a third-party system. The company that's issued the card is going to have to have rules and connections to other people to get the data they need to decide whether they will approve the credit card holder.

And after that happens, when you're assuming, it's approved, you still have issues, where you might have reward vendors, you may have third-party records for the software. So there's -- I'm going to say there's probably 10 different parties involved in the issuance of software.

Now we'd like to say that we're the most important, of course, some of those others might say the same thing. But we’re the system of record. We keep up with all of the answers which are -- which is the most important and the most complex thing. It's possible that there can be problems in a new system that have nothing to do with us.

For example, we may be sending responses to someone and the other party times out. Meaning they can't take it as best we can send it.

Now we’ve test it, test it, test it, we are able to do really large numbers of transaction per second, larger than any other partners that we're working with, with a couple of large clients actually can accept and handle at this point in time.

So, I guess first, I don't really expect any big problems, I always expect some little bumps, but I don't expect any big problems. And I think one has to be cautious even though everybody goes back and looks at CoreCard since this presents with the system of record. The problem really could be other places as opposed to CoreCard.

We don't anticipate we're going to have a problem..

Thank you for your clarification. I just have one follow-up question. Thank you for being so generous with your time.

So when you say, you guys can handle larger transactions per second, are we talking about in the neighborhood of 10,000 per second, 20,000 per second, could you give us some color on that?.

Let's say we're talking about between -- I don't want to be specific between 250 and 1,000 per second. Now, that's based on the particular set of hardware and software that’s currently stood up. You can add more hardware and probably go much higher.

We think it’s scalable to much higher, but there's no reason for that, we think the 250 to 1,000 per second is sufficient for anything we see in the next year or two..

All right, thank you, Mr. Strange. You have answer my questions, and I'm really thankful for your time..

You're welcome. Thank you..

Your next question is from Nickleo Best [ph]. Your line is now open..

Hi, Strange. I have a question to follow-up on this the progress on the processing 25 million accounts. You have mentioned in the last call that the architecture and hardware was one of the bottleneck.

Can you update us the status now and have you overcome the challenges?.

We're not even trying to deal with that right now, we've got our focus on getting a big license customer up and a couple of other things. I gave you where we up and where we would head and we're going to head there, but that's not really a big target that we have to have right now.

So that's not even something we're looking at or working on right now..

Okay. And with the -- I heard that the quarter one or the quarter two 2019, the G&A was $1.1 million, but last quarter was $594,000.

Can you share with us, why is there a big jump?.

This is Matt. As I mentioned in my remarks, that’s due to some additional legal costs, and some board initiatives that are causing that increase..

Is this cost also includes more -- hiring more people..

No, it's more third-party costs due to legal and some other things the board decided to do..

Okay. And the last question is on ISYS, INS has been very busy with this very large customer and this has taken up most of your resources.

Is this going -- how long will this takes on and with how long are you going to start working with other customers who is sitting on hold?.

Okay, first, let me say it's not taking on most of our resources, it's not taking on half of our resources. It'd be hard for us to say exactly how many, but the resources assigned to that project are simply working a whole lot of hours.

We have other -- obviously other revenue as you can see from the report, and we have a lot of people dedicated to that other revenue. Now in some cases that other revenue may not be as profitable even as this depending on what he's doing. So it's not taking on even half of our resources. Not close, I would say at this point..

Okay, thank you very much. That's all from year side..

Your next question is from Calvin Fitch [ph]. Your line is now open..

Hello, this Calvin here. So on 13 April CoreCard shared that it expanded its international processing services.

So apart from reading the press release, how should investors interpret it? Because I was just figuring out like why would it warrant a press release and how does it enhance our ability to actually win more businesses from other client?.

Kevin there are a lot of reason put in press releases and many of them are customer related or potential customer related. So I certainly don't want to get into more details to that..

Okay, thank you..

Next question is from Audrey Chan. Your line is now open..

Just a question, how does our company ensure quality over cost, while expanding fast to meet professional services hinder multi-clients.

In terms of the company culture can you share what is so unique that allow many employees to stay on so many years? And do you see any key employee leave?.

I would like to be -- I would like to say it’s because of great management that I stay a long time, but I’m smiling as I say that. No, it is a company culture that we both try to select and it's a little bit of self-selection, we try to find folks that want to be dedicated to the mission that we have and to see this thing ultra-successful.

We try to treat employees well, we respect the employees. We understand that they’re the important part of what makes all this work. But other than that, I don't know what to tell you, but, yes, we do have a lot more long-term employees, particular internationally been practically any other company that I know of, and nobody else is even close.

Do we see any key employees leave. We certainly don't know of any at this point, we think we are rewarding them well and don’t see any problems with that..

Thank you.

Just another question, how are we positioning ourselves to reduce if there is any key employee visa and then are we also expecting to hire more people in the coming two quarters?.

We're always hiring people, so there's always job openings and we had new employees start today, we’ll have new employees starting every week, not in masses, in India you end up making an offer and it’s usually 60 days before they can come.

Sometimes they don't show because they end up getting a better offer in between time, but we’re always -- we've clearly got plenty of job openings and we are continuing to hire employees and we’ll continue to do that for a lot of time as far as I can tell..

Okay.

Just one last question, you do face -- do your employees says like other companies approaching them?.

I didn’t understand. .

Do your employees face like under other companies pushing them like….

Yes, constantly, when you are as successful as we are and when you have employees that are very experienced in the payment base, you’ve got recruiters calling them all the time. They consistently pretty much of let us know and they’re constantly trying to approach them, occasionally they gets up.

So it's not like we never lose any, we hoped one's we lose are only those with two or three years' experience, not those with 5 to 10 or 15 years' experience and that has been our experience those who stay over five years were usually able to keep.

But, yes, they’re being -- all these big companies I've named they are trying to approach our employees..

Okay, thank you very much..

Your next question is from Matthew Schroder. Your line is now open. .

Hi, Leland and hi Matt, thank you very much for taking my call, and congratulations on a excellent quarter. Just one question in reviewing the 10-Q, there were some little bit of discussion about an investment in which the company now has a 40% equity interest and extended another million dollar loan.

Could you give us a little bit more color on what your vision or strategy is for that investment?.

It’s connected in a slight way with CoreCard and that it’s in the FinTech space it’s in the guarantee space.

And we made the first investment in it several years ago and I actually just really believe in the people and the company, I think there could be some continued connection with CoreCard, but it even was not where we believe it's a good company that might give us a nice exit at some point.

So it's a little bit of the VC or the investment side, but in stage with the FinTech side. And we probably wouldn't have done it as a brand new investment. But since it's one that we've had for a little while, we decided to go ahead and let's stand it up in a way that it can be very successful. They do a lot of consulting in the identity space.

They run conferences in the identity space. And need identity for everything. Even Alexa with Amazon, Alexa needs to know who's talking to it. And so we'll probably give more color on that sometime next year as it makes more -- as it becomes -- as it has more traction. But that's the highlight of it..

Excellent. And then one small question, I know everyone is focused on big licensing customer that's coming up. In the 10-Q, I think for the first time you've broken out European revenue versus U.S. revenue and to perhaps my surprise is about 16% of revenue, and is growing quite nicely.

Could you just give us an idea of your view on that and outlook?.

Yes, I'll let Matt talk about that..

Yes, that's something we usually break out in our 10-K. We’ve started including that in the 10-Q I believe starting in Q1. But that's been a customer of ours for -- we've been operating in the European Union for several years. So it's not a new space for us. So we expect that to continue to grow..

We have license revenue -- we have licensed customers that are international. I would expect we will end up with some others. But that's probably primarily from one major licensed customer where that increased..

Okay, thank you very much..

Your next question is from Sam Rebotsky. Your line is now open. .

Yes. Good. Good morning, Leland and Matt. Good quarter, you had indicated you previously were unable to take on additional large customers.

Do you have an idea of when you expect to be able to take on a large, another large customer?.

Well, we're talking to several possibilities at this point. And you take on folks a little at a time. You may have a potential very large customer, but the first year, they may be fairly small. So it's not quite on off. It's more of a volume transition.

But if I had to answer it more like an on off, I'm going to say it toward the end of the year, but that doesn't mean you're getting a lot of revenues towards the end of the year. It means you're just starting again with the large customer..

Okay.

And as far as the number of employees, is my recollection it was like 400 is that the number of employees you presently have? Have you increased your -- the number of employees in this quarter?.

It's closer to 500 now..

500. That's good. That's very good. .

It may actually be a little over, but it's in that range. .

Okay. Very good. And -- okay. Well, look, Leland, I guess with the speculation of your -- of the major customer you have that’s -- that feeds the stock unfortunately. And I guess, at some point you talk more precisely when you're allowed to talk about customers. And good luck with the lawsuit. You've done nothing wrong.

Unfortunately, the stock has risen and decreased and risen and decreased. And it's all these speculators basically, who didn't know you a couple of years ago. Just discovered Intelligent Systems. Keep up the good work. .

Okay, thanks. Thank you Sam. Let me -- while operator, lines up any other questions, let me answer a couple that came in by email. One said that, you’ve generated approximately $15 million in free cash flow since last year, plus cash is the largest component of working capital.

Can you please talk about how you intend to use that cash? Only thing I can say about that is we've made no specific plans. We are always looking at potential acquisitions. We haven't found anything that fits a criteria that's priced the way we would like it right now.

But we could use part of that cash to invest partially in a company rather than take it on completely. We're not planning on doing dividends with it at this point, I'm not going to say we never would. But that’s not the current plan, we're going to keep holding the cash, as we find a good strategic use for it.

The other part of the question, hold on a minute was, as you transition to processes from licensing, do you think you can remain profitable on a quarterly basis? Well, yes, I don't expect us to, even though I talked about lumpy, I'm not talking about lumpy in the sense of, we're going to lose money.

Now we should remain very profitable on a quarterly basis. And the license bumps should all be up, as opposed to do anything the other way. So hope that clarifies anything I might have earlier.

When I'm talking about bumps, I'm not -- I am talking about transition, I'm not really talking about any serious downside, I'm really talking about well, we’re going to have some real nice revenue that might not get repeated in the next quarter or the next... Another question that came in on email was, to expand on the comments on lending.

You know, I'm telling to make sure that people understand, that's the secret sauce, that's the hard thing that people do. And that's the big thing that we do that a lot of other people can't do in the same way we can.

So lending, whether it be credit cards, whether it be other types of lending, we have customers that are doing point of sale, lending for other very big companies around the world. So we do all kinds of lending, we also do the shuffle stuff, the prepaid, we’ll gift rewards, but lending is the bread and butter.

And the reason people would generally come to us and say that slowly, because people also come to us for just prepaid and other kinds of things also.

All right, are there any other questions, operator?.

Yes, sir. Your next question is a follow-up question from Jonathan Ang [ph] Your line is now open. .

Hi, Mr. Leland. I'm starting to realize you are able [ph] to do some complex transactions, which differentiate your software even further. So pertaining to the licensing revenue model, I mean, in a typical scenario, which you've given in Q2 2018.

You mentioned about 1 million, sorry, -- you mentioned about $1 million for 1 million customers as a hypothetical example. So for clients requiring greater complexity, what are the configurations in how you price your licenses? And, how do you feel about pricing it at about $1 per license, is that considered cheap in the industry.

So I just want to understand more about the industry..

Well, I used the right word I said $1 hypothetically, in order to try to explain how tiers work, I didn't say that we price quite at a $1.

And as I said earlier, I am not going to talk about how we price it, it might be $5 for small licensing with smaller numbers, it could be $10 for smaller licensee, with smaller numbers, it could be $0.60 for a licensee that had 50 million accounts. So there's a wide range of pricing based on the complexity, and also the number of accounts.

And I'm not going to get into any details exactly what it would be for which because that's not in our best interest in discussing with current or future customers..

All right, thank you, Mr. Strange..

Your next question is from Calvin Sol [ph]. Your line is now open. .

Mr. Strange and Matt, congratulations on a great quarter. And my question is more pertaining to the disruption in the FinTech space right now. When we look at China, we have the likes of Alipay, WeChat Pay and even Facebook is coming up with Libra.

Basically they are gateway and processor together and they were able to charge lower processing fees, and some of the FinTech already doing that too.

So in the long-term, given our pricing structure, how do you feel about our pricing structure in comparison with the market or any potential destruction coming up?.

I talked about earlier about the size of the market, given the big three. We’re talking about billions of dollars that are out there in revenue. We're not going to be looking for the low end of the revenue chain, we will let somebody else have it, that's fine.

Can we do it, sure we could do it till we price to make money probably, but we are going to do go for the more complex things, not the ones where Alipay. But I will say we have customers that may be dealing with Alipay now and in some of things they do is Alipay is paying for it. So I'm not worried about the destruction of pricing at all..

Right that is good and clear, that’s all my question. Thank you..

Have anymore, we're getting closer to end of our time..

Yes, sir. Your question is a, follow-up question from Nuclear Best [ph]. Your line is now open. .

Hi, thank you. My question is you are talking about processing complex, can you share with us more about the key features on this processing path? And also the real advantage of having a real time processing how that help in this payment industry..

That’s really probably way too much to talk about in a Q&A. I mean real-time environment is simply what everybody wants, you can’t do it with a legacy systems, you can do still real time, which is what you're doing but people want real time that's only what you can do certain things.

I think the other part of the question about complex credits go back in re-day one of our scripts from the last one or two -- either the last call or the one before that, where I explained at an example with best pro shop for a very complex credit. There are all kinds of complex credits.

So it would not be I think helpful to try to dissect that anymore on a Q&A. But thank you for the question. Operator do you have any other questions that are not follow-up any new questionnaires because we need to cut it off here shortly..

There are no further questions at this time. You may continue..

Okay, thanks everyone for joining us. It looks like a rough day in the market. So we will conclude and you go back and :40:34 your assets. Thanks everyone. .

This concludes today's conference call. Thank you everyone for participating. You may now disconnect..