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Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Consolidation, Policy [Policy Text Block]

Consolidation

– The financial statements include the accounts of Intelligent Systems Corporation and its majority owned and controlled U.S. and non-U.S. subsidiary companies after elimination of material inter-company accounts and transactions.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

– In preparing the financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Areas where we use estimates and make assumptions are to determine our allowance for doubtful accounts, valuation of our investments, depreciation and amortization expense, accrued expenses and deferred income taxes.

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Translation of Foreign Currencies

– We consider that the respective local currencies are the functional currencies for our foreign operations. We translate assets and liabilities to U.S. dollars at period-end exchange rates. We translate income and expense items at average rates of exchange prevailing during the period. Translation adjustments are recorded as accumulated other comprehensive gain or loss as a separate component of stockholders’ equity. Upon sale of an investment in a foreign operation, the currency translation adjustment component attributable to that operation is removed from accumulated other comprehensive loss and is reported as part of gain or loss on sale of discontinued operations.

Receivables, Policy [Policy Text Block]

Accounts Receivable and Allowance for Doubtful Accounts

– Accounts receivable are customer obligations due under normal trade terms. They are stated at the amount management expects to collect. We sell our software products and transaction processing services to companies involved in a variety of industries that provide some form of credit or prepaid financing options or perform financial services. We perform continuing credit evaluations of our customers’ financial condition and we do

not

require collateral. The amount of accounting loss for which we are at risk in these unsecured receivables is limited to their carrying value.

Senior management reviews accounts receivable on a regular basis to determine if any receivables will potentially be uncollectible. We include any accounts receivable balances that are estimated to be uncollectible in our overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts as of

December 31,

201

is adequate. However, actual write-offs might exceed the recorded allowance. Refer to Note

Marketable Securities, Policy [Policy Text Block]

Marketable Securities

–

Our marketable securities, which are classified as available-for-sale, are stated at fair value, and primarily consist of investments in exchange traded funds comprised of dividend paying companies. The fair value of the marketable securities is

$438,000

December 31, 2017;

an unrealized gain of

$23,000

is included in other comprehensive income. The fair value of the marketable securities was

$418,000

December 31, 2016;

an unrealized gain of

$22,000

was included in other comprehensive loss.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

– Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred. We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of property and equipment

may

warrant revision, or that the remaining balance of these assets

may

not

be recoverable. An asset is considered to be impaired when its carrying amount exceeds the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss, if any, which is equal to the amount by which the carrying value exceeds its fair value, is charged to current operations. As a result of a comprehensive physical inventory at our India based operations in

2017

and our U.S. based operations in

2016,

various assets were disposed of and the cost of the assets and related accumulated depreciation were removed from the accounts. A net loss of

$2,000

and

$1,000

was recognized, respectively, in the years ended

December 31, 2017

and

2016.

Classification	Useful life in years
Machinery and equipment	3	-	5
Furniture and fixtures	5	-	7
Building		39

The cost of each major class of property and equipment at

December 31,

201

and

2016

is as follows:

(in thousands)	2017			201 6
Machinery and equipment	$	2,519		$	1,696
Furniture and fixtures		153			154
Building		308			308
Subtotal		2,980			2,158
Accumulated depreciation		(1,718	)		(1,458	)
Property and equipment, net	$	1,262		$	700

Depreciation expense

for continuing operations was

$330,000

and

$248,000

2017

and

2016,

respectively. These expenses are included in general and administrative expenses or, for assets associated with our processing data centers, are included in cost of services.

Investment, Policy [Policy Text Block]

Investments

– For entities in which we have a

percent ownership interest and over which we exercise significant influence, but do

not

have control, we account for investments in privately-held companies under the equity method, whereby we record our proportional share of the investee’s net income or net loss as an adjustment to the carrying value of the investment. We account for investments of less than

percent in non-marketable equity securities of corporations at the lower of cost or market. Our policy with respect to investments is to record an impairment charge when we believe an investment has experienced a decline in value that is other than temporary. At least quarterly, we review our investments to determine any impairment in their carrying value and we write-down any impaired asset at quarter-end to our best estimate of its current realizable value. Any such charges could have a material adverse impact on our financial condition or results of operations and are generally

not

predictable in advance. During the year ended

December 31, 2017,

we recognized

$1,738,000

of investment income, net, principally related to a gain of

$1,466,000

on the sale of shares in a tender offer for stock of

one

our investee companies, a privately-held technology company in the FinTech industry, and a gain of

$372,000

on a final payment after the escrow period on the sale of

one

of our prior investee companies. This was offset, to a lesser degree, by a

$100,000

write-down on a cost method investment. During the year ended

December 31, 2016,

we recognized

$713,000

of investment loss, net, attributable to the write-down of

$750,000

on a cost method investment which was offset in part by a gain of

$37,000

on a final payment after the escrow period on a prior minority investment sale. At

December 31, 2017

and

2016,

the aggregate value of investments was

$1,035,000

and

$1,272,000,

respectively. We signed an agreement acquiring a

$1,000,000

investment in a privately-held technology company in the FinTech industry on

December 30, 2016.

The investment is included in the

December 31, 2016

aggregate value; however, the funding of the investment did

not

occur until subsequent to year end on

January 4, 2017.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Fair Value of Financial Instruments

–

The carrying value of cash, accounts receivable, notes receivable, accounts payable and certain other financial instruments (such as accrued expenses and other current assets and liabilities) included in the accompanying consolidated balance sheets approximates their fair value principally due to the short-term maturity of these instruments.

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash

, trade accounts, and notes receivable. Our available cash is held in accounts managed by

third

-party financial institutions. Cash

may

exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While we monitor cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced

loss or lack of access to our cash; however, we can provide

assurances that access to our cash will

not

be impacted by adverse conditions in the financial markets.

A concentration of credit risk

may

exist with respect to trade receivables, as a substantial portion of our customers are concentrated in

the financial services industry.

We perform ongoing credit evaluations of customers worldwide and do

not

require collateral from our customers. Historically, we have

not

experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

Fair Value Measurement, Policy [Policy Text Block]

Fair Value Measurements

–

In determining fair value, we use quoted market prices in active markets. Generally accepted accounting principles (“GAAP”) establishes a fair value measurement framework, provides a single definition of fair value, and requires expanded disclosure summarizing fair value measurements. GAAP emphasizes that fair value is a market-based measurement,

not

an entity specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable input be used when available.

Observable inputs are based on data obtained from sources independent of the company that market participants would use in pricing the asset or liability. Unobservable inputs are inputs that reflect the company’s assumptions about the estimates market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The hierarchy is measured in

three

levels based on the reliability of inputs:

•

Level

- Valuations based on quoted prices in active markets for identical assets or liabilities that the company has the ability to access. Valuation adjustments and block discounts are

not

applied to Level

instruments.

•

Level

- Valuations based on quoted prices in less active, dealer or broker markets. Fair values are primarily obtained from

third

party pricing services for identical or comparable assets or liabilities.

•

Level

- Valuations derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and

not

based on market, exchange, dealer, or broker-traded transactions. Level

valuations incorporate certain assumptions and projections that are

not

observable in the market and significant professional judgment is needed in determining the fair value assigned to such assets or liabilities.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Our available-for-sale investments are classified within level

of the valuation hierarchy.

The fair value of equity method and cost method investments has

not

been determined as it is impracticable to do so due to the fact that the investee companies are relatively small, early stage private companies for which there is

comparable valuation data available without unreasonable time and expense.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

– Product revenue consists of fees from software licenses. Service revenue consists of fees for processing services; professional services for software customization, consulting, training; reimbursable expenses; and software maintenance and customer support.

Our software license arrangements generally fall into

one

of the following

four

categories:

●	an initial contract with the customer to license certain software modules, to provide services to get the customer live on the software (such as training and customization) and to provide post contract support (“PCS”) for a specified period of time thereafter (typically three months),

●	purchase of additional licenses for new modules or for tier upgrades for a higher volume of licensed accounts after the initial contract,

●	other optional standalone contracts, usually performed after the customer is live on the software, for services such as new interfaces or custom features requested by the customer, additional training and problem resolution not covered in annual maintenance contracts, and

●	contracts for certain licensed software products that involve an initial fee plus recurring monthly fees during the contract life.

We review each contract to determine if multiple elements exist. As such, only arrangements under the initial contract described above contain multiple elements. Our revenue recognition policies for each of the situations described above are discussed below.

Presently, our initial software contracts do

not

meet the criteria for separate accounting because the software usually requires significant modification or customization that is essential to its functionality. At present, we use the completed contract method to account for our contracts as we do

not

have an adequate basis on which to prepare reliable estimates of percentage-of-completion for these contracts. Moreover, there are inherent hazards with software implementations, such as changes in customer requirements or software defects that make estimates unreliable.

Accordingly, software revenue related to the license and the specified service elements (except for PCS) in the initial contract are recognized at the completion of the contract, when (i) there are

material uncertainties regarding customer acceptance, (ii) cancellation provisions, if any, have expired and (iii) there are

significant obligations remaining. We account for the PCS element contained in the initial contract based on vendor-specific objective evidence of fair value, which are annual renewal fees for such services, and PCS is recognized ratably on a straight-line basis over the period specified in the contract. Upon renewal of the PCS contract by the customer, we recognize revenues ratably on a straight-line basis over the period specified in the PCS contract. All of our software customers purchase software maintenance and support contracts and renew such contracts annually.

Certain initial software contracts contain specified future service elements for scheduled completion following the implementation, and related recognition, of the initial license. In these instances, after the initial license recognition, where distinct future performance obligations are identified in the contract and we could reliably measure the completion of each identified performance obligation, we have recognized revenue at the time the individual performance obligation was completed.

Purchases of additional licenses for tier upgrades or additional modules are

generally recognized as license revenue in the period in which the purchase is made for perpetual licenses or ratably over the remaining contract term for non-perpetual licenses.

Services provided under standalone contracts that are optional to the customer and are outside of the scope of the initial contract are single element services contracts. These standalone services contracts are

not

essential to the functionality of the software contained in the initial contract and generally do

not

include acceptance clauses or refund rights as

may

be included in the initial software contracts, as described above. Revenues from these services contracts, which are generally performed within a relatively short period of time, are recognized when the services are complete.

For contracts for licensed software which include an initial fee plus recurring monthly fees for software usage, maintenance and support, we recognize the total fees ratably on a straight line basis over the estimated life of the contract as product revenue since there is

Vendor Specific Objective Evidence (VSOE) for the maintenance and support services.

For processing services which include an initial fee plus recurring monthly fees for services, we recognize the initial fees ratably on a straight line basis over the estimated life of the contract as services revenue.

Revenue is recorded net of applicable sales tax.

Revenue Recognition, Deferred Revenue [Policy Text Block]

Deferred Revenue

–

Deferred revenue consists of advance payments by software customers for annual or quarterly PCS, advance payments from customers for software licenses and professional services

not

yet delivered, and initial implementation payments for processing services or bundled license and support services in multi-year contracts. We do

not

anticipate any loss under these arrangements. Deferred revenue is classified as long-term until such time that it becomes likely that the services or products will be provided within

months of the balance sheet date.

Cost of Sales, Policy [Policy Text Block]

Cost of Revenue

– For cost of revenue for software contracts, we capitalize the contract specific direct costs, which are included in other current assets and other long-term assets on the Consolidated Balance Sheets, and recognize the costs when the associated revenue is recognized. Cost of revenue for services includes direct cost of services rendered, including reimbursed expenses, pass-through

third

party costs, and data center, network association and compliance costs for processing services. We also capitalize the initial implementation fees for processing services contracts and recognize the costs over the life of the contract, when the corresponding revenue is recognized.

Research, Development, and Computer Software, Policy [Policy Text Block]

Software Development Expense

– Research and development costs are expensed in the period in which they are incurred. Contract specific software development costs are capitalized and recognized when the related contract revenue is recognized.

Standard Product Warranty, Policy [Policy Text Block]

Warranty Costs

–The warranty related to software license contracts consists of a defined number of months (usually

three

) of PCS after the go-live date, which is accrued as of the go-live date and recognized over the warranty period.

Legal Costs, Policy [Policy Text Block]

Legal Expense

–

Legal expenses for continuing operations are recorded as a component of general and administrative expense in the period in which such expenses are incurred.

Research and Development Expense, Policy [Policy Text Block]

Research and Development

– Research and development costs consist principally of compensation and benefits paid to certain company employees and certain other direct costs. All research and development costs are expensed as incurred.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock Based Compensation

– We record compensation cost related to unvested stock-based awards by recognizing the unamortized grant date fair value on a straight line basis over the vesting periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the years ended

December 31, 2017

and

2016

has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded

$52,000

and

$31,000

of stock-based compensation expense in the years ended

December 31, 2017

and

2016,

respectively.

total of

17,000

options and

12,000

options were granted in the years ended

December 31, 2017

and

2016,

respectively, pursuant to the

2011

Non-employee Directors Stock Option Plan. In

2016,

a total of

30,000

options were granted pursuant to the Intelligent Systems Corporation Stock Incentive Plan (the “Plan”). The fair value of each option granted in

2017

and

2016

has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

Year ended December 31,	2017			2016
Risk free interest rate		.98	%		.28	%
Expected life of option in years		10			10
Expected dividend yield rate		0	%		0	%
Expected volatility		52	%		65	%

Under these assumptions, the weighted average fair value of options granted in

201

and

2016

was

$2.34

and

$2.63

per share, respectively. The fair value of the grants is being amortized over the vesting period for the options. All of the company’s stock-based compensation expense relates to stock options. The total remaining unrecognized compensation cost at

December 31, 2017

related to unvested options amounted to

$77,000

and is expected to be recognized in

2018

and

2019.

Income Tax, Policy [Policy Text Block]

Income Taxes

–

We utilize the asset and liability method of accounting for income taxes. As such, deferred tax assets and liabilities are established to recognize the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax bases and for net tax operating loss carryforwards.

We follow the provisions of Financial Accounting Standards Board accounting guidance on accounting for uncertain tax positions. Accordingly, assets and liabilities are recognized for a tax position, based solely on its technical merits that is believed to be more likely than

not

to be fully sustainable upon examination. Accrued interest relating to uncertain tax positions is recorded as a component of interest expense and penalties related to uncertain tax positions are recorded as a component of general and administrative expense.

Comprehensive Income, Policy [Policy Text Block]

Comprehensive Income (Loss)

– Comprehensive income (loss) represents net income (loss) adjusted for the results of certain stockholders’ equity changes

not

reflected in the Consolidated Statements of Operations. These items are accumulated over time as “accumulated other comprehensive loss” on the Consolidated Balance Sheet and consist primarily of net earnings/loss and foreign currency translation adjustments associated with foreign operations that use the local currency as their functional currency as well as unrealized gains and losses on marketable securities.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

– We have considered all recently issued accounting pronouncements and do

not

believe the adoption of such pronouncements will have a material impact on our Consolidated Financial Statements.