CoreCard(CCRD) - 2019 Q4 - Annual Report

Part I Business Overview Intelligent Systems Corporation, through its CoreCard subsidiary, provides comprehensive FinTech software and processing services for card and loan programs, with 2019 revenue significantly driven by a new license customer - The company's business is primarily conducted through its subsidiary, CoreCard, providing technology solutions and processing services to the FinTech industry[11] - CoreCard offers a suite of software solutions for managing credit, debit, prepaid cards, loans, and loyalty programs, leveraging scalable PC-based servers for cost advantage[13][14][17] - The business operates on two primary models: software licenses for in-house use and outsourced processing services, with an option for processing clients to later license the software[18][19][24] - A single new license customer acquired in 2018 accounted for 60% of consolidated revenues in fiscal year 2019[21][66] - The company maintains a significant offshore presence with over 500 employees in India and Romania for software development, testing, and operations support[32][34] Properties The company operates from leased offices in Georgia, Romania, and India, alongside an owned facility in Bhopal, India, with plans for further expansion to support growth - Leases approximately 15,000 sq ft in Norcross, GA for domestic operations[37] - Owns a 6,350 sq ft facility in Bhopal, India, and leases additional space in Bhopal and Mumbai for offshore development[37] Legal Proceedings The company faces a securities class action lawsuit and two shareholder derivative actions, all alleging misleading statements and related-party transaction issues, which it intends to vigorously defend - A securities class action complaint was filed in July 2019, alleging misleading SEC filings regarding related party transactions and former director disclosures, with an amended complaint in November 2019[38] - Two shareholder derivative actions were filed in February 2020, with similar allegations against current and former directors and officers[39] - The company disputes all claims and intends to vigorously defend these legal proceedings, with no liability recorded as potential loss is not determinable[38][213] Part II Market for Common Equity and Shareholder Matters The company's common stock trades on NYSE American under 'INS', with no dividends paid or planned, and no share repurchases made in 2019 - Common stock is listed on the NYSE American under the symbol INS[42] - The company does not intend to pay dividends in the foreseeable future[42] - The company did not repurchase any common stock during 2019[47] Management's Discussion and Analysis (MD&A) MD&A highlights a 71% revenue increase in 2019 driven by a major license customer, improved operating margins, strong liquidity, and key risks including customer concentration and potential COVID-19 impacts Critical Accounting Policies Critical accounting policies involve significant estimates for revenue recognition, particularly for software licenses (point-in-time) and services (over-time), and for valuing non-public investments - Revenue recognition and investment valuation are critical accounting policies due to significant estimation processes[47] - Software license revenue is generally recognized at a point in time upon delivery due to stand-alone functionality[51] - Processing services revenue is recognized over time as services are provided, typically based on volume or activity[58] Results of Operations (2019 vs. 2018) Total revenue increased 71% to $34.3 million in 2019, driven by significant license and services revenue growth from a major customer, leading to improved margins and higher net income despite increased operating expenses Key Financial Performance (2019 vs. 2018) | Financial Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $34.3M | $20.1M | +71% | | Product Revenue | $5.7M | $1.3M | +324% | | Services Revenue | $28.6M | $18.8M | +52% | | Net Income | $11.0M | $6.2M | +76% | | Diluted EPS | $1.22 | $0.70 | +74% | - Cost of revenue as a percentage of total revenue decreased to 34% in 2019 from 42% in 2018, primarily due to increased high-margin product sales[75] - Operating expenses increased due to higher R&D costs (from $3.4 million to $5.5 million) for additional technical personnel and higher G&A costs from ongoing litigation[76] Liquidity and Capital Resources Cash balance increased to $26.4 million by year-end 2019, driven by $10.6 million in operating cash flow, with current liquidity deemed sufficient for operations, though no shares were repurchased under the authorized program Cash Position and Flow | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash Balance | $26.4M | $18.9M | | Cash Provided by Operations (FY 2019) | $10.6M | $6.7M | - The company advanced $2.0 million on Promissory Notes and used $1.7 million for capital expenditures, primarily for its processing environment and India office[82] - A $5 million share repurchase program was authorized in November 2018, with no repurchases made in 2018 or 2019[83][71] Risk Factors Future operations face risks including significant customer concentration, potential adverse impacts from the coronavirus outbreak, software development delays, regulatory compliance issues, and competitive pressures - Significant customer concentration risk exists, with one large license customer representing 60% of consolidated revenues for 2019[86] - The company identified potential adverse impacts from the recent coronavirus outbreak, which could slow customer account growth and delay new projects[67][88] - Other key risks include delays in software development, failure to comply with processing business regulations, competitive pressures, and failure to retain key personnel[86][88] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with the latter audited by an independent firm and no material changes reported - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2019[94] - Management's report on internal control over financial reporting concluded controls were effective as of December 31, 2019, based on the COSO framework[99] - The effectiveness of the company's internal control over financial reporting was audited by Nichols, Cauley & Associates, LLC[99] Part III Security Ownership and Equity Compensation Plans As of December 31, 2019, equity compensation plans had 126,500 outstanding options with a $8.94 weighted-average exercise price and 763,000 securities available for future issuance Securities Authorized for Issuance Under Equity Compensation Plans (as of Dec 31, 2019) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 126,500 | $8.94 | 763,000 | Related Party Transactions The company leases its Norcross, Georgia headquarters from ISC Properties, LLC, an entity wholly owned by its Chairman and CEO, with $210,000 in rent paid in both 2019 and 2018 - The company leases its primary facility from ISC Properties, LLC, an entity 100% owned by Chairman and CEO J. Leland Strange[112] - Lease payments to the related party totaled $210,000 for the year ended December 31, 2019, and also for 2018[112] Consolidated Financial Statements Consolidated Balance Sheets As of December 31, 2019, total assets increased to $44.2 million, driven by higher cash and accounts receivable, with total liabilities at $6.9 million and stockholders' equity at $37.3 million Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $36,079 | $24,782 | | Cash | $26,415 | $18,919 | | Accounts receivable, net | $8,759 | $3,731 | | Total Assets | $44,240 | $29,304 | | Total Current Liabilities | $6,193 | $3,272 | | Total Liabilities | $6,951 | $3,383 | | Total Stockholders' Equity | $37,289 | $25,921 | Consolidated Statements of Operations For fiscal year 2019, total net revenue reached $34.3 million, with income from operations more than doubling to $13.4 million, resulting in net income of $11.0 million or $1.22 diluted EPS Consolidated Statement of Operations (in thousands, except per share data) | Account | 2019 | 2018 | | :--- | :--- | :--- | | Total net revenue | $34,303 | $20,100 | | Total cost of revenue | $11,759 | $8,524 | | Income from operations | $13,382 | $6,142 | | Net income | $10,969 | $6,244 | | Basic EPS | $1.24 | $0.71 | | Diluted EPS | $1.22 | $0.70 | Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $10.6 million in 2019, contributing to a $7.5 million net increase in cash, despite $3.3 million used in investing activities Consolidated Statement of Cash Flows (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $10,585 | $6,656 | | Net cash used for investing activities | ($3,297) | ($1,900) | | Net cash provided by financing activities | $210 | $111 | | Net increase in cash | $7,496 | $4,895 | | Cash at end of year | $26,415 | $18,919 | Selected Notes to Financial Statements Notes detail revenue disaggregation by type and geography, significant customer concentration with one customer accounting for 60% of 2019 revenue, ongoing legal proceedings, related-party transactions, and stock option activity Disaggregation of Revenue (in thousands) | Revenue Type | 2019 | 2018 | | :--- | :--- | :--- | | License | $5,725 | $1,349 | | Professional services | $19,203 | $11,041 | | Processing and maintenance | $7,650 | $6,394 | | Total | $34,303 | $20,100 | Customer Concentration (2019) | Customer | % of Revenue | % of Accounts Receivable | | :--- | :--- | :--- | | Customer A | 60% | 80% | | Customer B | 11% | 11% | - In June 2019, outstanding loans to a privately-held FinTech services company were converted into a 40% equity stake, now accounted for using the equity method[196] - During 2019, 107,000 stock options were exercised and 42,000 new options granted, with 126,500 options outstanding as of year-end[223]