CoreCard Corp (CCRD) 2009 Q2 法說會逐字稿

Thank you for your patience. Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the Intelligent Systems second quarter 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)

I will now turn the call over to Mr. Leland Strange, President and CEO. Sir, you may begin.

Thank you. Good morning and welcome everyone to the Intelligent Systems investor conference call. You recall it's been just over a month since we had an in-depth investor presentation on our Company. So this call will be much shorter than the one in July and also shorter than the ones we'll have in the future. During the last call, I said we would begin doing quarterly conference calls. I wanted to go ahead and have this call even though there hasn't been a lot of change in the past month. During the time today though, I plan to provide an update, completed rights offering, review the second quarter and year to date results with a focus on our ChemFree, CoreCard software subsidiaries. I assume that you have a copy of the earnings release from this morning. And I'm not going to repeat the information to the press release. At the end we will have time for a few questions and answers. Bonnie Herron our CFO is here with me and she'll answer any of the questions that relate to the 10-Q filing which will be filed later today or for the press release.

I wanted to make a point that this call is primarily for current and potential shareholders. But everyone, including myself has to be aware that in comments and questions, we typically also see on our call logs, employees, current and potential customers for CoreCard and ChemFree but even potential acquirers of those two entities. Opposition lawyers for ongoing litigation situations as well as others for which we have no idea for which they're listening. Keep in mind we have a variety of people that are on these calls.

I need to go through the forward-looking statements comment and remind you that the discussion today probably contains forward-looking statements that relate to Intelligent Systems. All the statements, print analysis and other information contained in this discussion as well as statements including words such as anticipate, believe, plan, estimate, expect, likely, intend, and any other kind of similar expression all constitute forward-looking statements as understood and practiced in the world of public companies. Prospective investors need to be aware of the risks and uncertainties and be aware that the actual results may differ materially from those contemplated by forward-looking statements. All of these statements are based on information available to Intelligent Systems as of today. I want to give you my best judgment of things as I see them, and that judgment is sometimes wrong. But it's given for no purpose other than to let you know what I personally think. Take it that way rather than as a prediction or as an absolute.

Start with the rights offering. Well, obviously we had more participation than expected. I think I mentioned in the previous call that I did not expect it to be fully subscribed. We did not need that full amount of money. I was looking for about $2 million. Well, as it turned out, my judgment in that case was wrong clearly. It was oversubscribed by 13%. We had a little over 100 shareholders participate, including our Board of Directors and management and most of the other large shareholders participated. Several of those did not get nearly what they had asked for because of the way that the oversubscription worked and Bonnie if you have questions, she can talk about that a little later. It's not a pro rata 13% of what you asked for from an oversubscription standpoint. It starts with you get first your shares and then you get that many more shares if you asked for them and then you continue as some kind of iterative process to cut people back. Some of the larger requests did not get fulfilled.

Our proceeds were $3.1 million before expenses. Our expenses are a little over $100,000. So we had almost $3 million in the number. How are we going to use it? Well, we first paid town our line of credit which was a little over $400,000. That leaves us with $200 million roughly at that point in time. We're going to use the balance of it primarily to support CoreCard growth plans as we talked about earlier. I'll have to say that we're going to have to carefully plan how to put what I call extra funds to best use. We're working on that plan now. I will have better information for that in a future call. Because it will change what we do having the additional cash.

We now have 8.958 million shares outstanding. So approximately 9 million shares. The stock price trading as we speak, many of you all have this screen too and it went down to $1 from $1.17. So it's trading at $1, that gives up, the Company valuation of about 9 million now. The valuation was 3 million at the time of the rights offering. The additional cash for some reason has increased the valuation of the Company, or obviously probably more to the point. People have a little more exposure to what we're doing. So that's the rights offering summary and we can come back if you have questions later on that.

Financial results summary, keep in mind that the reported results on the press release do not include the effect of the rights offering. The impact on cash and shareholders' equity which show up in Q3 balance sheet is not in the balance sheet that you'll see once we file the filings today. We should be back in compliance with continued listing standards for the New York Stock Exchange AMAX, but it will take at least another quarter before the Exchange will confirm this. There should be no problems there.

A quick summary on the results. The loss from continuing operations was lower in 2009 versus 2008. Both in Q2 and year to date. The main reasons are simply that we had continued profitability at ChemFree with a favorable mix of fluid and filter supplies with good margins. We make more money on fluid and filters than we do on selling machines. So when we have a large machine quarter we will not have the same profit margins. So it's very difficult to look at our gross margins on a quarter to quarter basis and make any -- come to any conclusions other than the mix is different.

Another reason for the lower loss is that we had more professional services at CoreCard. We also had lowered our cost at CoreCard by taking reductions everywhere, and basically across the Company, we had expense reductions that we implemented in late 2008 so we had obviously lower expenses during this quarter. The 2008 results by the way included $2.9 million gain on the sale of VISaer and that's discontinued operations.

Give you a quick overview on ChemFree, it was solidly profitable in the second quarter and year to date. The revenue is lower than '08, but it's on plan for the year. 2008 spiked due to a large customer rollout of machines. We never expected that rollout to continue and be extrapolated through the year. So we're pretty much as we expected. We did have significant fluid and filters sold to the installed base, we hope to continue to do that. The revenue is trending slightly up in the domestic market but we're still being cautious for the outlook. The demand in Europe is being impacted more by the recession than in the US. So we're down in our European sales. A big issue for ChemFree is the legal.

We did have a trial the week of July 13, in front of the judge. It was a full week trial, started on Monday ended late on Friday. We had two rulings from the bench in ChemFree's favor. One of the defenses or a couple of the defenses from the defendant, Walter, was that the inventors were named wrong on the patents. The judge ruled from the bench that that was not right. The inventorship is correct. And the other defense obviously was that they did not infringe. The judge also ruled from the bench that they had infringed on our patent.

Now there's a wildcard, we filed this patent in December of 2004 I believe. So that's almost four years ago. Five years ago, right. And two years ago the Supreme Court came out with a new ruling and as you can expect, the Supreme Court does not make very many rulings for patent cases. So this was a significant ruling. Two years ago they came out and ruled on obviousness. They set up new rules as to what's obvious. Which means that if it's obvious based on those rules, the patent should not have been granted and therefore the patent is voidable. Now, I'm giving you a layman's interpretation, don't try to take that to the bank for a legal interpretation. Basically, this was a new defense now that folks are using when you charge them with infringement. That key defense has not been ruled upon by the judge.

Filings are due in August. The judge will then rule on that one big remaining issue and then a couple of small ones. It's clear we won on the major things that we were suing for when we sued back in December 2004. However, this wildcard could upset things. I'm optimistic and I think I have reason to be optimistic. We know in the system you can't be sure about this. And regardless of who wins this last ruling, either party will appeal I'm certain. I can tell you that we had significantly more legal costs than I expected for this past -- well, I guess we'll go into this current quarter for the trial. I haven't looked at a final billing or anything, but I suspect there were $0.25 million or more just to get through the trial for this quarter.

We'll continue to have legal expenses as we do this other filing in August. After that, we'll have choices to make. There are a lot of other things that we can file. Many of them are to get our money back if we win this next ruling we'll certainly go and try to collect legal fees. No guess on whether we can win that or not. But there is also no guess on how much it will cost. It will cost us a lot to go for it but we're going to go for it because we think there's significant potential returns since we did win the infringement part of the case. The judge rules for us, we will continue to have some legal expenses for a while. So I will have to say now, we'll just have to wait for the next phase to see how the judge rules to know where we go with that. ChemFree as a business is operating very profitably. On target, and we're very happy with the business.

CoreCard in Q2 in year to date we had significant increase in revenue from professional services and maintenance. We do have more customer, more projects, and you can expect professional services to vary a lot by quarter. Maintenance is predictable, but not professional services. So it's going to be hard to measure that Company quarter by quarter until we get a larger installed base. We now have deferred revenue of approximately $1 million for in process contracts. Timing of revenue recognition depends more on the customer than CoreCard. We can't control when the customers decide to go live. Usually, they have to be live with our software before we have an event that triggers revenue recognition. Sometimes it's even after that. So it's very hard to manage based on revenue recognition. I tend to look at cash, I tend to look at in process and not worry about when the accountants are going to let us recognize the revenue.

The licensed revenue because of that will be bumpy quarter to quarter. In terms of current status prospects, there's a lot of things in the pipeline. Many of these things take a while. We're simply, at the present time, working out all the bumps in the system for prepay. We have a couple of live customers doing well, growing their base and as with any sulfur product, you have a few bumps that you're working on as you introduce new releases. As I say, we have prospects. I'm not at liberty to talk about them at this point. But we're very happy with the way things look at CoreCard.

We, as I mentioned earlier in introduction, we're in the process of doing some major planning to develop the best course and timing for using the rights offering in order to grow CoreCard. We may use more than we planned. We may not. I haven't -- we haven't made that decision yet but we could increase our marketing, do more on the website, do more with PR, we could spend more on the establishment of our processing business.

Right now the processing business is designed to be more of a boutique processor. We don't have a plan for expanding it quickly until we get a little bit under our belt as a boutique processor. Then we'll make that decision. We may decide to add more to our India resources. We believe that's a very strong competitive advantage. You probably recall that we own a building in India. We also own -- we have an interest in a building in India where we own about half of it, also, the employees are ours. They're not outsourced. So for that reason we get good pricing. We're in an area where we have very low turnover, it's practically nonexistent. So we believe that's a competitive advantage. We may need to add some management to CoreCard, in fact, we will need to add -- we definitely need to add management to ScoreCard, the question is when.

So that's kind of the quick summary. I think I'm going to leave it at that and we'll see if you have any questions at this point. So operator, if you'll open it up for questions I'll be happy to take a few.

(Operator Instructions) And your first question comes from the line of [Sam Gromotski].

Good morning, Leland and Bonnie.

This was very successful. And I guess now the market has to evaluate both of your companies. They're sort of tried to evaluate it a little better.

Is there anyway to talk more in the CoreCard about the kind of companies in the space to better understand this valuation? Is that fair?

It's a fair question. And let me tell you why it's somewhat difficult. There's nobody comparable so we have to talk about comparables in certain categories. For example, licensing software -- there's nobody that licensed fleet software, prepaid software. Bank CoreCard Software. And they are and collections. And nobody offers the variety of packages that we have. You'll find people that license accounts receivable software, they can't do bank card, the can't fleet card, they can't do prepaid. You'll have just one or two companies, including one new one out of New York that's -- that will be a major competitor in the prepaid space who is licensing prepaid software. They do not license bank card software, fleet card software, AR software. And it's very different. Meaning that prepaid does not have interest calculations. And that's a very difficult thing to get in when you look at interest, meaning how you have to reverse transactions, you have to do a whole lot of things on that. The prepaid competitor is a company called, the TXVIA. They recently received an investment from Bank Capital, it's privately held, it has excellent management. It probably has 8 to 10 highly paid people out of the industry. They will be successful in the prepaid space licensing software with their model. It will be a very high cost, high burn rate company with a lot of capital. But they don't have the other software.

And then I can't think of anybody that licensed for example fleet software. I'm not sure of anyone that actually licensed bank card software in the US. So what you end up having then is the second category is processors. And obviously, that's people like TSYS and First Data on bank card software or private label accounts receivable software. And then you have other companies, not public, Galileo, well, Metavante is a public, so Galileo, IC2, Metavante, these guys do prepaid software. Galileo and IC2 does not do any of the interest thing.

No one has the broad portfolio we have which is both a blessing and a curse, obviously. Long term it's a significant plus for us. Short term, it's probably a negative in terms of focus and how much it would cost to head down any one of those paths. And that's part of our planning process at this point. But we clearly have -- we clearly are -- the only guys that can both license this software and very shortly be able to process for folks also. Typically, it's one or the other. Does that help you?

That's very helpful because Metavante which is being acquired at this point at a significant valuation, it just shows that the operation has significant value, much more than the market values it. But it's a judgment call of where you get the funds and you develop it and people become more aware. Now, and as far as your pipeline, as far as the CoreCard, you'll have more funds to build it. And is it higher than the -- at the end of the first quarter, do you have more opportunities? How would you look at the pipeline right now?

I'm going to say similar to where it was in the first quarter. We have not started any significant marketing. We were waiting for this event. We were getting things in place. And we'll be doing marketing late third quarter that will be a little different and going into next year.

Okay. Now as far as the ChemFree, I guess the difficulty is that this party that you're litigating whether there is a way of amicably -- I guess it's been unfortunate. Nothing has been amicable up to this point. It would be desirable for both parties to sort of say take some of the legal expenses that's going to be spent and negotiate a fair settlement from both parties. But that doesn't seem to -- going to happen, I guess. That's fair at this point in time?

Well, we're amicable, we don't mind talking. This is just business for me. Nothing personal. I would say that no one -- it's not likely they would be interesting in talking until the judge rules. This next ruling on that obviousness issue based on the Supreme Court ruling is not very well vetted in the courts. There's not a lot of cases that you can go back on. And I suspect there wouldn't with a conversation. There's no reason for us to go and start that conversation. We've won the first two. It was proven they infringed. And we would like to get some legal expenses out of this. Obviously we do not if we lose the next point. We'd certainly talk. But I can't see any discussions of settlement.

As far as developing ChemFree, it would appear that there should be a desire in some kind of the legislation to promote ChemFree. And do you need to spend any money to develop ChemFree, make it a broader, more -- over the longest part of the United States or in any way international.

I don't see any significant increase in ChemFree expenses. Sometimes you have to let the markets come to you and spend all kind of money. If you don't let them come to you, you've wasted your money. This is one where companies in the US are having to fight that battle between do we worry about environmental or do we just run our business. I'll liken -- give some comparison, if you're a very large Company you look at the ChemFree product of which you have limited numbers of in your Company as a trash can. And management does spend a lot of time on trash cans. So it's a matter of slowly permeating through the market.

Well, congratulations, Leland, on an inexpensive way of raising $3 million. And evidently, the market believed in you. Now let's see to tell your story a little more to get a better valuation. And good luck on everything going forward.

Thank you.

And your next question comes from the line of [Al Shams].

I was just curious. What amount of absolute dollars do you think we're spending on a quarterly basis on legal fees? Just a rough estimate?

Bonnie, do you want to take a hit from last quarter?

Well, we spent through the first six months of the year just right at $0.5 million.

Gee.

And probably for July for the trial period it's probably as Leland mentioned close to $0.25 million. It varies significantly. Obviously, this third quarter is much higher expense level. We actually, that $500,000 that we spent this year is actually lower than the corresponding period last year if you can believe that. It was down because a lot of the preliminary work was done last year. But it obviously varies by month and by quarter. We certainly hope this is the biggest number we're going to see.

I think the thing about that though, we did win what we were going after. And it seemed a shame to cut that back too much when we were already in pretty heavily. And I don't want, I think our track record is pretty clear as far as the other side. We're going to spend what we have to do. We have the cash, we're gong to spend what we have to do. So they need to be aware of that and we're happy to negotiate something. But we're not going to do it out of a lack of ability to do what we need to do.

Okay.

The good part of that is that at some point that stops and that all goes to the bottom line.

Bonnie, what did you say was spent in the month of July for the trial?

About a $0.25 million.

It would be nice to see this thing settled and then go away. That's for sure.

It would be nice to spend a little bit more and get a lot of that recovery on legal expenses. That would be nice.

Absolutely, absolutely. Okay. Thank you for your time.

And there are no further questions at this time.

Okay. Well, we thank you for taking the time to be on the short call. We'll be doing it again at the end of next quarter. We appreciate you interest in the Company. As usual if you have any questions that we'll be able to answer directly, feel free to give either Bonnie or myself a call. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.