##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-9330
 INTELLIGENT SYSTEMS CORPORATION
  Georgia
    
    58-1964787(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)4355 Shackleford Road, Norcross, Georgia
    
    30093(Address of principal executive offices)
    
    (Zip Code)
 (770) 381-2900
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 Yes o No þ




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##### 



Intelligent Systems Corporation
 Index
 Form 10-Q
 PagePart I Financial InformationItem 1 Financial StatementsConsolidated Balance Sheets at September 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 4 Controls and Procedures
    
    
    15Part II Other InformationItem 1 Legal Proceedings
    
    
    16Item 6 Exhibits
    
    
    16Signatures
    
    
    16Ex. 31.1 Section 302 Certification of Chief Executive OfficerEx. 31.2 Section 302 Certification of Chief Financial OfficerEx. 32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer
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Part I FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 Intelligent Systems Corporation
 
 CONSOLIDATED BALANCE SHEETS  (in thousands, except share amounts)
 September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)ASSETSCurrent assets:Cash
    
    $
    3,271
    
    
    $
    1,074Accounts receivable, net
    
    
    2,005
    
    
    
    1,570Notes and interest receivable, current portion
    
    
    
    
    
    
    353Inventories
    
    
    804
    
    
    
    1,051Other current assets
    
    
    422
    
    
    
    280Total current assets
    
    
    6,502
    
    
    
    4,328Long-term investments
    
    
    1,233
    
    
    
    1,209Notes and interest receivable, net of current portion
    
    
    1,378
    
    
    
    1,318Property and equipment, at cost less accumulated depreciation
    
    
    1,316
    
    
    
    1,583Other intangibles, net
    
    
    234
    
    
    
    268Total assets
    
    $
    10,663
    
    
    $
    8,706LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    
    
    
    $
    325Accounts payable
    
    
    1,131
    
    
    
    922Deferred revenue
    
    
    1,496
    
    
    
    983Accrued payroll
    
    
    489
    
    
    
    497Accrued expenses and other current liabilities
    
    
    962
    
    
    
    970Total current liabilities
    
    
    4,078
    
    
    
    3,697Long-term liabilities, net of current portion
    
    
    175
    
    
    
    249Commitments and contingencies (Note 9)Intelligent Systems Corporation stockholders equity:Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028 and
4,478,971 shares issued and outstanding at September 30, 2009 and December 31,
2008, respectively
    
    
    90
    
    
    
    45Additional paid-in capital
    
    
    21,407
    
    
    
    18,457Accumulated other comprehensive loss
    
    
    (77
    )
    
    
    (92
    )Accumulated deficit
    
    
    (16,526
    )
    
    
    (15,166
    )Total Intelligent Systems Corporation stockholders equity
    
    
    4,894
    
    
    
    3,244Noncontrolling interest
    
    
    1,516
    
    
    
    1,516Total stockholders equity
    
    
    6,410
    
    
    
    4,760Total liabilities and stockholders equity
    
    $
    10,663
    
    
    $
    8,706
 The accompanying notes are an integral part of these Consolidated Financial Statements.
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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF OPERATIONS  (unaudited; in thousands, except share and per share amounts)
 Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,2009
    
    
    2008
    
    
    2009
    
    
    2008RevenueProducts
    
    $
    3,147
    
    
    $
    3,121
    
    
    $
    8,215
    
    
    $
    11,152Services
    
    
    268
    
    
    
    305
    
    
    
    1,112
    
    
    
    709Total revenue
    
    
    3,415
    
    
    
    3,426
    
    
    
    9,327
    
    
    
    11,861Cost of revenueProducts
    
    
    1,616
    
    
    
    1,810
    
    
    
    4,285
    
    
    
    6,459Services
    
    
    202
    
    
    
    185
    
    
    
    743
    
    
    
    606Total cost of revenue
    
    
    1,818
    
    
    
    1,995
    
    
    
    5,028
    
    
    
    7,065ExpensesMarketing
    
    
    556
    
    
    
    620
    
    
    
    1,456
    
    
    
    2,158General & administrative
    
    
    972
    
    
    
    907
    
    
    
    2,662
    
    
    
    3,429Research & development
    
    
    620
    
    
    
    902
    
    
    
    1,630
    
    
    
    2,615Loss from operations
    
    
    (551
    )
    
    
    (998
    )
    
    
    (1,449
    )
    
    
    (3,406
    )Other income (expense)Interest income (expense), net
    
    
    26
    
    
    
    5
    
    
    
    57
    
    
    
    (4
    )Equity in income of affiliate company
    
    
    4
    
    
    
    21
    
    
    
    24
    
    
    
    74Other income (expense)
    
    
    6
    
    
    
    (1
    )
    
    
    18
    
    
    
    (1
    )Loss from continuing operations before income
taxes
    
    
    (515
    )
    
    
    (973
    )
    
    
    (1,350
    )
    
    
    (3,337
    )Income taxes
    
    
    6
    
    
    
    12
    
    
    
    10
    
    
    
    29Loss from continuing operations
    
    
    (521
    )
    
    
    (985
    )
    
    
    (1,360
    )
    
    
    (3,366
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    (439
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,884Net loss
    
    $
    (521
    )
    
    $
    (978
    )
    
    $
    (1,360
    )
    
    $
    (921
    )Loss per share from continuing operations:Basic
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.25
    )
    
    $
    (0.75
    )Diluted
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.25
    )
    
    $
    (0.75
    )Income per share from discontinued operations:Basic
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.55Diluted
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.54Loss per share:Basic
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.25
    )
    
    $
    (0.20
    )Diluted
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.25
    )
    
    $
    (0.20
    )Basic weighted average common shares
outstanding
    
    
    7,465,023
    
    
    
    4,478,971
    
    
    
    5,474,350
    
    
    
    4,478,971Diluted weighted average common shares
outstanding
    
    
    7,465,023
    
    
    
    4,545,837
    
    
    
    5,474,350
    
    
    
    4,545,764
 The accompanying notes are an integral part of these Consolidated Financial Statements.
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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited, in thousands)
 Nine Months Ended Sept. 30,CASH PROVIDED BY (USED FOR):
    
    2009
    
    
    2008OPERATIONS:Net loss
    
    $
    (1,360
    )
    
    $
    (921
    )Adjustments to reconcile net loss to net cash used for operating activities:Depreciation and amortization
    
    
    414
    
    
    
    384Stock-based compensation expense
    
    
    9
    
    
    
    15Gain on sale of VISaer business
    
    
    
    
    
    
    (2,884
    )Non-cash interest income, net
    
    
    (54
    )
    
    
    (33
    )Equity in income of affiliate company
    
    
    (24
    )
    
    
    (74
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    (435
    )
    
    
    (231
    )Accrued interest
    
    
    2
    
    
    
    5Inventories
    
    
    247
    
    
    
    175Other current assets
    
    
    (142
    )
    
    
    811Accounts payable
    
    
    209
    
    
    
    (35
    )Deferred revenue
    
    
    513
    
    
    
    393Accrued payroll
    
    
    (9
    )
    
    
    (146
    )Accrued expenses and other current liabilities
    
    
    (9
    )
    
    
    (290
    )Other liabilities
    
    
    (6
    )
    
    
    (35
    )Net cash used for operating activities
    
    
    (645
    )
    
    
    (2,866
    )INVESTING ACTIVITIES:Proceeds from sale of discontinued operations
    
    
    
    
    
    
    3,025Investment in subsidiary
    
    
    
    
    
    
    (125
    )Proceeds from notes and interest receivable
    
    
    352
    
    
    
    407Purchases of property and equipment
    
    
    (112
    )
    
    
    (133
    )Net cash provided by investing activities
    
    
    240
    
    
    
    3,174FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    335
    
    
    
    1,743Repayments made under line of credit
    
    
    (660
    )
    
    
    (1,820
    )Borrowings under notes payable
    
    
    
    
    
    
    124Payments on notes payable
    
    
    (74
    )
    
    
    (168
    )Proceeds from rights offering
    
    
    2,986
    
    
    
    Net cash provided by (used for) financing activities
    
    
    2,587
    
    
    
    (121
    )Effects of exchange rate changes on cash
    
    
    15
    
    
    
    (67
    )Net increase in cash
    
    
    2,197
    
    
    
    120Cash at beginning of period
    
    
    1,074
    
    
    
    554Cash at end of period
    
    $
    3,271
    
    
    $
    674SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    26
    
    
    $
    12Cash paid during the period for income taxes
    
    $
    2
    
    
    $
    12
 The accompanying notes are an integral part of these Consolidated Financial Statements.
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Intelligent Systems Corporation
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1.

    
    Throughout this report, the terms we, us, ours, ISC and company refer to
Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries.
 2.

    
    The unaudited Consolidated Financial Statements presented in this Form 10-Q have been
prepared in accordance with accounting principles generally accepted in the United States
applicable to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion of ISC
management, these Consolidated Financial Statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the financial position and
results of operations as of and for the three and nine month periods ended September 30, 2009
and 2008. The interim results for the three and nine months ended September 30, 2009 are not
necessarily indicative of the results to be expected for the full year. These statements
should be read in conjunction with our Consolidated Financial Statements and notes thereto for
the fiscal year ended December 31, 2008, as filed in our Annual Report on Form 10-K.
 3.

    
    Reclassification We reclassified shipping and handling amounts billed to customers from
cost of sales to revenue totaling $237,000 and $877,000 for the three and nine months ended
September 30, 2008, respectively, to conform to our current period presentation. We classify
shipping and handling amounts billed to customers in revenue and the cost of the shipping and
handling to customers as a component of cost of revenue.
 4.

    
    Discontinued Operations As explained in more detail in Note 2 to the Consolidated Financial
Statements included in our Form 10-K for the year ended December 31, 2008, effective April 16,
2008, the company and two subsidiaries, VISaer, Inc. and VISaer (U.K.) Limited (collectively,
VISaer) completed the sale of substantially all the assets related to VISaers business
pursuant to the terms of an asset purchase agreement (the Asset Purchase Agreement) between
IBS Technics, Inc. (IBS Technics) and VISaer. IBS Technics is a subsidiary of IBS Software
Services, Inc., a software services company that had previously provided certain software
development services to VISaer as an independent third party contractor. The VISaer business
is presented as discontinued operations for all periods presented.
 The following condensed financial information is provided for the VISaer discontinued operations
for the periods shown.
 Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,(unaudited, in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net sales
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    761Operating loss
    
    $
    
    
    
    $
    (17
    )
    
    $
    
    
    
    $
    (471
    )Income (loss) from
discontinued operations
    
    $
    
    
    
    $
    7
    
    
    $
    
    
    
    $
    (439
    )
 5.

    
    Comprehensive Loss Comprehensive loss is the total of net loss and all other non-owner
changes in equity in a period. A summary follows: Consolidated Statements ofComprehensive Loss
    
    Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,(unaudited, in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (521
    )
    
    $
    (978
    )
    
    $
    (1,360
    )
    
    $
    (921
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    9
    
    
    
    
    
    
    
    15
    
    
    
    (67
    )Comprehensive loss
    
    $
    (512
    )
    
    $
    (978
    )
    
    $
    (1,345
    )
    
    $
    (988
    )
 6.

    
    Stock-based Compensation At September 30, 2009, we have two stock-based
compensation plans in effect. We record compensation cost related to unvested stock awards by
recognizing the unamortized grant date fair value on a straight line basis over the service
periods of each award. We have estimated forfeiture rates based on our historical experience.
Stock-based compensation expense is recognized as a component of general and administrative
expenses in the accompanying Consolidated Financial Statements. We recorded $3,000 and $6,000
of stock-based compensation expense in the three months ended September 30, 2009 and 2008,
respectively and $9,000 and $15,000 for the nine month periods ended September 30, 2009 and
2008, respectively.
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The estimated fair value of options granted is calculated using the Black-Scholes option pricing
model with assumptions as previously disclosed in our Form 10-K.
 As of September 30, 2009, there is $10,000 of unrecognized compensation cost related to stock
options. During the quarter ended June 30, 2009, an aggregate of 12,000 options were granted to
the three independent members of our board of directors pursuant to the non-employee director
stock option plan (Director Plan). Pursuant to the terms of the Director Plan, the options were
granted at fair market value on the date of the Annual Shareholders meeting. No options were
exercised or forfeited during the three and nine month periods ended September 30, 2009. The
following table summarizes options as of September 30, 2009:
 Wgt AvgWgt Avg
    
    
    RemainingExercise
    
    
    Contractual Life
    
    
    Aggregate# of Shares
    
    
    Price
    
    
    in Years
    
    
    Intrinsic ValueOutstanding at Sept. 30, 2009
    
    
    233,000
    
    
    $
    2.37
    
    
    
    4.0
    
    
    $
    7,440Vested and exercisable at
Sept. 30, 2009
    
    
    215,000
    
    
    $
    2.44
    
    
    
    3.5
    
    
    
    
 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value
(the difference between the companys closing stock price on the last trading day of the third
quarter of 2009 and the exercise price, multiplied by the number of in-the-money options) that
would have been received by the option holders had all option holders exercised their options on
September 30, 2009. The amount of aggregate intrinsic value will change based on the fair
market value of the companys stock.
 7.

    
    Concentration of Revenue The following table indicates the percentage of consolidated
revenue represented by each customer for any period in which such customer represented more
than 10% of consolidated revenue.
 Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,(unaudited)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008ChemFree Customer A
    
    
    41
    %
    
    
    40
    %
    
    
    37
    %
    
    
    41
    %ChemFree Customer B
    
    
    12
    %
    
    
    12
    %
    
    
    13
    %
    
    
    13
    %ChemFree Customer C
    
    
    
    
    
    
    11
    %
    
    
    
    
    
    
    ChemFree Customer D
    
    
    11
    %
    
    
    
    
    
    
    12
    %
    
    
    
 8.

    
    Short-term Borrowings In June 2009, we renewed our working capital line of credit with our
bank. The revolving line of credit bears interest at the higher of the prime rate plus one
and one half percent and 6.75% (6.75% at September 30, 2009), is secured by all assets of the
company and our principal subsidiaries, is guaranteed by our subsidiaries, and expires June
30, 2010. We may borrow an aggregate of 80 percent of qualified accounts receivable of our
consolidated subsidiaries plus 50 percent of inventory, up to a maximum of $1,250,000. At
September 30, 2009, our borrowing base calculation resulted in availability of $1,250,000, of
which we had drawn down zero. The terms of the loan contain typical covenants not to sell or
transfer material assets, to create liens against assets, to merge with another entity, to
change corporate structure or the nature of our business, to declare or pay dividends, or to
redeem shares of common stock. The loan agreement also contains covenants not to change the
chief executive and chief financial officers of the company or to make loans to or invest in
new minority-owned companies, without first obtaining the consent of our bank in each case.
Furthermore, the terms of the loan renewal include a covenant requiring the company to
maintain a minimum tangible net worth (as defined in the loan agreement) at the end of each
calendar quarter beginning September 30, 2009. The company was in compliance with this
covenant as of September 30, 2009.
 9.

    
    Commitments and Contingencies
 Lease On June 1, 2009, we entered into an amendment to our lease for the facility at 4355
Shackelford Road, Norcross, Georgia that houses our corporate offices and the operations of our
two subsidiary companies. The amendment extended the term of the lease for three years through
May 31, 2012. All other terms and conditions of the original lease remain unchanged. The lease
is with a related party as explained in Note 12 to the Consolidated Financial Statements
contained in our 2008 Form 10-K.
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As of September 30, 2009, future minimum lease payments are as follows:
 Year ended December 31,(in thousands)2009
    
    $
    1162010
    
    
    4652011
    
    
    4652012
    
    
    194Total minimum lease payments
    
    $
    1,240
 Legal Matters In December 2004, our ChemFree subsidiary filed a patent infringement
action against J. Walter Co. Ltd. and J. Walter, Inc. in the United States Court for the
Northern District of Georgia. The complaint alleges that certain of the defendants products
infringe various U.S. patents held by ChemFree and seeks a ruling to compel the defendants to
cease their infringing activities. The defendants have asserted various defenses. The trial
took place during the week of July 13, 2009. At the conclusion of the trial, the judge issued
several rulings from the bench which supported two of ChemFrees claims. However, other
substantive matters have not yet been ruled upon. The parties submitted closing arguments and
other filings in August 2009. The remaining issues are expected to be ruled upon by the judge
at some unspecified future date. While the resolution and timing of any legal action is not
predictable, ChemFree believes it has sufficient grounds to prevail in these actions, although
there can be no assurance that the remaining issues will be resolved in its favor. Depending
upon the final rulings, ChemFree will have a number of options to consider which could include
but are not limited to pursuit of recovery of damages or an appeal.
 During the quarter ended September 30, 2009, we were contacted by management of IBS Technics,
the company that acquired certain assets and operations of our VISaer subisidiary, as explained
in more detail in Note 4 to the Consolidated Financial Statements. They propose an adjustment
to the $1.5 million owed to VISaer in three equal installments beginning April 2010 for an
alleged breach of a representation in the Asset Purchase Agreement. We disagree with their
allegation. Although there has been no formal request to arbitrate the matter as required under
the contract, this dispute may result in legal action if the parties are not able to reach a
resolution. Given the status of the matter and our belief that we have reasonable grounds to
refute their allegations, presently we have not taken a reserve against the amount receivable
from IBS Technics, of $1.4 Million, net of discount and expenses, at September 30, 2009.
 Except as noted above, other commitments and contingencies described in Note 9 to our
Consolidated Financial Statements included in our 2008 Form 10-K are unchanged.
 10.

    
    Income Taxes We account for income taxes as required by the Income Taxes Topic of the FASB
Accounting Standards Codification. This Topic clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements and prescribes a recognition
threshold and measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Topic also provides guidance on
derecognition, measurement, clarification, interest and penalties, accounting in interim
periods, disclosure and transition issues. We have recognized tax benefits from all tax
positions we have taken, and there has been no adjustment to any carry forwards (net operating
loss or research and development credits). As of September 30, 2009, we do not have any
unrecognized tax benefits and we do not anticipate any significant changes in the balance of
unrecognized tax benefits during the next twelve months.
 Our policy is to recognize accrued interest related to uncertain tax positions in interest
expense and related penalties, if applicable, in general and administrative expenses. No such
interest expense or penalties were recognized during the three or nine months ended September
30, 2009 and 2008.
 We file a consolidated U.S. federal income tax return for all subsidiaries in which our
ownership exceeds 80 percent, as well as individual subsidiary returns in various states and
foreign jurisdictions. For periods prior to April 15, 2008, our VISaer subsidiary filed a
separate U.S. federal income tax return. With few exceptions we are no longer subject to U.S.
federal, state and local or foreign income tax examinations by taxing authorities for years
before 2005.
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11.

    
    Industry Segments Segment information is presented consistently with the basis described in
the 2008 Form 10-K. The following table contains segment information for continuing operations
for the three and nine months ended September 30, 2009 and 2008.
 Three Months Ended Sept. 30,
    
    
    Nine Months Ended Sept. 30,(unaudited, in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Information TechnologyRevenue
    
    $
    412
    
    
    $
    320
    
    
    $
    1,322
    
    
    $
    751Operating loss
    
    
    (603
    )
    
    
    (915
    )
    
    
    (1,449
    )
    
    
    (2,936
    )Industrial ProductsRevenue
    
    
    3,003
    
    
    
    3,106
    
    
    
    8,005
    
    
    
    11,110Operating income
    
    
    298
    
    
    
    98
    
    
    
    884
    
    
    
    270Consolidated SegmentsRevenue
    
    
    3,415
    
    
    
    3,426
    
    
    
    9,327
    
    
    
    11,861Operating loss
    
    
    (305
    )
    
    
    (817
    )
    
    
    (565
    )
    
    
    (2,666
    )Corporate expenses
    
    
    (246
    )
    
    
    (181
    )
    
    
    (884
    )
    
    
    (740
    )Consolidated operating loss from
continuing operations
    
    $
    (551
    )
    
    $
    (998
    )
    
    $
    (1,449
    )
    
    $
    (3,406
    )Depreciation and AmortizationInformation Technology
    
    $
    28
    
    
    $
    14
    
    
    $
    57
    
    
    $
    73Industrial Products
    
    
    111
    
    
    
    103
    
    
    
    343
    
    
    
    291Consolidated segments
    
    
    139
    
    
    
    117
    
    
    
    400
    
    
    
    364Corporate
    
    
    4
    
    
    
    7
    
    
    
    14
    
    
    
    20Consolidated depreciation and
amortization
    
    $
    143
    
    
    $
    124
    
    
    $
    414
    
    
    $
    384Capital ExpendituresInformation Technology
    
    $
    18
    
    
    $
    (32
    )
    
    $
    65
    
    
    $
    (68
    )Industrial Products
    
    
    28
    
    
    
    9
    
    
    
    41
    
    
    
    194Consolidated segments
    
    
    46
    
    
    
    (23
    )
    
    
    106
    
    
    
    126Corporate
    
    
    1
    
    
    
    1
    
    
    
    6
    
    
    
    10Consolidated capital expenditures
    
    $
    47
    
    
    $
    (22
    )
    
    $
    112
    
    
    $
    136
 (unaudited, in thousands)
    
    September 30,  2009
    
    
    December 31, 2008Identifiable AssetsInformation Technology
    
    $
    2,864
    
    
    $
    2,600Industrial Products
    
    
    3,846
    
    
    
    4,415Consolidated segments
    
    
    6,710
    
    
    
    7,015Corporate
    
    
    3,953
    
    
    
    1,691Consolidated assets
    
    $
    10,663
    
    
    $
    8,706
 12.

    
    Fair Value of Financial Instruments The carrying value of cash, accounts receivable,
accounts payable and certain other financial instruments (such as short-term borrowings,
accrued expenses, and other current liabilities) included in the accompanying consolidated
balance sheets approximates their fair value principally due to the short-term maturity of
these instruments. The carrying value of non-interest bearing notes receivables beyond one
year have been discounted at a rate of 6% which approximates rates currently offered in the
market for notes receivable with similar terms and conditions. The fair value of equity
method and cost method investments has not been determined as it was impracticable to do so.
 Financial instruments that potentially subject us to concentrations of credit risk consist
principally of cash and trade accounts and notes receivable. Our available cash and cash
equivalents are held in accounts managed by third-party financial institutions and consists of
cash in our operating accounts and invested cash. The invested cash is invested in
interest-bearing funds managed by third-party financial institutions. These funds generally
invest in direct obligations of the government of the United States. Cash held in operating
accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While
we monitor cash and cash equivalents balances in our operating accounts
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 no loss or lack of
access to our cash or cash equivalents; however, we can provide no assurances that access to our
cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
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13.

    
    Stockholder Rights Offering On July 17, 2009, we completed a rights offering of common
stock to our shareholders. Under the terms of the rights offering, we distributed at no
charge to the holders of our common stock non-transferable rights to purchase shares of our
common stock. We distributed one right for each share of common stock owned by such holder on
the record date of June 17, 2009. Each right entitled the holder to purchase one share of our
common stock at a subscription price of $.70 per share. Stockholders on the record date were
also entitled to subscribe, subject to allotment among all subscribing stockholders, for
additional shares not subscribed for by other stockholders. A registration statement relating
to the rights offering filed with the Securities and Exchange Commission was declared
effective on June 18, 2009. The rights offering commenced on June 18, 2009 and terminated on
July 17, 2009. The company sold 4,479,014 new shares of common stock and received gross
proceeds of $3,135,310, less expenses related to the transaction of $149,000, from the rights
offering. Giving effect to the rights offering, we have 8,958,028 shares of common stock
outstanding as of September 30, 2009. Subsequent to the completion of the rights offering, we
paid down our working capital line of credit in full and expect to use remaining proceeds from
the rights offering primarily to support plans for our CoreCard subsidiary as well as other
general working capital purposes.
 14.

    
    Subsequent Events We evaluated subsequent events through November 11, 2009 when these
financial statements were issued. We are not aware of any significant events that occurred
subsequent to the balance sheet date but prior to the filing of this report that would have a
material impact on our Consolidated Financial Statements.
 15.

    
    New Accounting Pronouncements In October 2009, the FASB issued Accounting Standards Update
(ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements, which amends Accounting
Standards Codification (ASC) Topic 605, Revenue Recognition. ASU 2009-13 amends the ASC to
eliminate the residual method of allocation for multiple-deliverable revenue arrangements, and
requires that arrangement consideration be allocated at the inception of an arrangement to all
deliverables using the relative selling price method. The ASU also establishes a selling
price hierarchy for determining the selling price of a deliverable, which includes: (1)
vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific
evidence is not available, and (3) estimated selling price if neither vendor-specific nor
third-party evidence is available. Additionally, ASU 2009-13 expands the disclosure
requirements related to a vendors multiple-deliverable revenue arrangements. The changes to
the ASC as a result of this update are effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010
(January 1, 2011 for us), and we are currently evaluating the potential impact, if any, of the
adoption on our Consolidated Financial Statements.
 In May 2009, the FASB issued authoritative guidance establishing general standards of accounting
for and disclosure of events that occur after the balance sheet date but before financial
statements are issued. This guidance, which was incorporated into ASC Topic 855, Subsequent
Events, was effective for interim or annual financial periods ending after June 15, 2009, and
the adoption did not have any impact on our Consolidated Financial Statements.
 In December 2007, the FASB issued authoritative guidance establishing accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the parent.
Specifically, this guidance requires the presentation of noncontrolling interests as equity in
the Consolidated Balance Sheets, and separate identification and presentation in the
Consolidated Statement of Operations of net income attributable to the entity and the
noncontrolling interest. This guidance, which was incorporated into ASC Topic 810,
Consolidation, was adopted by us as of January 1, 2009, and, as required, was applied to the
prior periods financial statements. This guidance also established accounting and reporting
standards regarding deconsolidation and changes in a parents ownership interest, which will be
applied prospectively to any such transactions in 2009 onward. As a result of the adoption, we
reclassified a non-controlling interest totaling $1,516,000, which had previously been recorded
in the liability section of the consolidated balance sheets, as a component of stockholders
equity for all periods presented.
 In December 2007, the FASB issued revised authoritative guidance related to business
combinations, which provides for recognition and measurement of identifiable assets and goodwill
acquired, liabilities assumed, and any noncontrolling interest in the acquiree at fair value.
The guidance also established disclosure requirements to enable the evaluation of the nature and
financial effects of a business combination. We adopted this guidance, which was incorporated
into ASC Topic 805, Business Combinations, as of January 1, 2009, and the adoption did not
have a material impact on our Consolidated Financial Statements.
 We have considered all other recently issued accounting pronouncements and do not believe the
adoption of such pronouncements will have a material impact on our Consolidated Financial
Statements.
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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 In addition to historical information, this Form 10-Q may contain forward-looking statements
relating to ISC. All statements, trend analyses and other information relative to markets for our
products and trends in revenue, gross margins and anticipated expense levels, as well as other
statements including words such as anticipate, believe, plan, estimate, expect, and
intend, and other similar expressions, constitute forward-looking statements. Prospective
investors are cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties including those factors described below under
Factors That May Affect Future Operations, and that actual results may differ materially from
those contemplated by such forward-looking statements. ISC undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated
events or changes in future operating results.
 For purposes of this discussion and analysis, we are assuming and relying upon the readers
familiarity with the information contained in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, in the Form 10-K for the year ended December 31,
2008 as filed with the Securities and Exchange Commission.
 Overview
   
    
    A change in revenue level at one of our subsidiaries may impact consolidated revenue or
be offset by an opposing change at another subsidiary.
    
    Customers may decide to postpone or cancel a planned implementation of our software for
any number of reasons, which may be unrelated to our software features or contract
performance, but which may affect the amount, timing and characterization of our deferred
and/or recognized revenue.
    
    In a given period, new license revenue related to our Information Technology sector may
consist of a relatively small number of new contracts. Consequently, even small delays in a
delivery under a new software contract (which may be out of our control) could have a
significant and unpredictable impact on consolidated revenue that we recognize in a given
quarterly or annual period.
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Results of Operations
  Revenue
 
    
    Revenue from products, which includes sales and leases of equipment and supplies in our
Industrial Products segment as well as software license fees related to the Information
Technology segment, was $3.1 million in both three month periods ended September 30, 2009 and
2008. In the year-to-date period of 2009, product revenue declined by 26 percent compared to
the first nine months of 2008. The 2009 year-to-date decline is primarily due to the fact that
in the first half of 2008, one of ChemFrees largest customers was in the middle of a national
program to sell ChemFree products resulting in a high initial volume of sales. With the
initial rollout complete, as anticipated the number of new machines sold to this customer in
the first half of 2009 was lower than during the rollout period last year. During the first
two quarters of 2009, there was also a period-to-period decline in equipment sales in the
international market reflecting the general economic slowdown in certain European markets.
However, in the third quarter of 2009, sales of new SmartWasher® machines in both the domestic
and international markets were stronger than in the first two quarters of 2009. Worldwide
sales of ChemFrees fluid and filter consumables in the three and nine month periods ended
September 30, 2009 increased compared to the same periods in 2008, reflecting an increasing
base of users of its SmartWasher® part washers. However, sales of fluid to the European
market were lower in the year-to-date 2009 period compared to the nine month period of 2008
due to a transition to a new fluid blending facility in the UK. In order to reduce shipping
costs and improve supply to its European market, effective in the third quarter of 2009,
ChemFree earns a fee based on fluid blended in the UK that is equal to the gross margin
ChemFree historically earned on fluid shipments from the US to its UK distributor. As a
result, gross revenue reported on fluid for the European markets is lower in 2009 (and will be
going forward as well) but the gross profit to ChemFree is comparable under this new
arrangement to what it would have earned shipping bulky fluid containers overseas.
 
    
    Software license revenue associated with the Information Technology segment increased in
both the three and nine month periods ended September 30, 2009 compared to the respective
periods in 2008 due to more new license contracts. The company recognizes software license
revenue generally upon completion of each contract and acceptance by customers.
 
    
    Service revenue associated with the Information Technology segment was $268,000 and
$1,112,000 in the three and nine months ended September 30, 2009, representing a decline of 12
percent and an increase of 57 percent compared to the respective periods in 2008.
Year-to-date, the growth in service revenue is attributed to increased professional services
projects that were completed for CoreCard customers as well as an increase in the installed
base of customers that pay for maintenance and technical support. On a quarterly basis,
revenue from customer projects will vary depending on customer requirements and timetables,
whereas maintenance revenue is fairly consistent.
 
    
    Due to general economic conditions and uncertainty about the impact of a slow economy on
the automotive repair and supplies industry, ChemFree had anticipated a relatively flat volume
of machine sales for 2009 and carefully managed its costs and inventory levels accordingly.
Sales of replenishment fluid and filter to the installed base of customers and lease revenue
have been relatively unaffected by fluctuations in general economic conditions. Turmoil in the
global financial markets could impact CoreCards revenue and prospects in the foreseeable
future if customers or prospects postpone software purchases or implementations. We are
carefully monitoring the evolving dynamics in the marketplace and proactively lowered expenses
going into 2009. We expect to fully support existing customers and contracts and have added
new prospects and customers in 2009. We expect to use the funds received from the successful
completion of our stockholder rights offering as described in more detail in Note 13 to the
Consolidated Financial Statements to support CoreCards growth plans, as well as other general
corporate purposes.
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Cost of Revenue
 
    
    Cost of product revenue was 51 percent and 52 percent of product revenue in the three
and nine months ended September 30, 2009, respectively compared to costs of 58 percent of
product revenue in the three and nine month periods in 2008. Revenue from higher margin
fluid and filters and software licenses was a larger percentage of product revenue in 2009
than in the comparable periods in 2008, resulting in the improved gross margin.
    
    Cost of service revenue (which relates to our CoreCard business only) was significantly
lower as a percent of service revenue in the nine month period ended September 30, 2009 as
compared to the same period last year. The mix of service revenue in a given period, as
well as the number of customers and new products being supported, impacts the gross margin
on service revenue. The year-to-date improvement in gross margin in 2009 is due in part to
a higher volume of professional service revenue which has a relatively lower cost to
deliver than does our customer support and maintenance revenue (both of which are included
in the category of service revenue). CoreCard is providing a high level of support to its
initial customers to ensure it builds a solid base of reference customers and puts in place
an infrastructure for future growth. Cost of providing routine maintenance and support
services as a percentage of service revenue is expected to decrease as CoreCards installed
base of customers increases, whereas the cost of professional services is expected to have
a relatively consistent gross margin percentage from period to period for similar types of
projects.
 Operating Expenses
 Interest Income (Expense), net
 Equity in Income of Affiliate Company
 Other Income
 Income Taxes
  Page 13




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Discontinued Operations
 Income (Loss) from Discontinued Operations
 Liquidity and Capital Resources
     Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   Page 14




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Factors That May Affect Future Operations
   
    
    Turmoil in the global financial markets could have a serious negative impact on CoreCard
due to potential customers (most of whom are financial institutions or services firms)
delaying purchase or implementation decisions.
 
    
    Reluctance by financial institutions to act as sponsor banks for prospective customers
(such as issuers and processors of credit and prepaid cards) could increase CoreCards losses
and cash requirements.
 
    
    It is unclear to what extent the general weakness in the domestic US and European economies
will impact the automotive parts and repair industry and reduce future demand for ChemFrees
SmartWasher® products.
 
    
    Delays in software development projects could cause our customers to delay implementations
or delay payments, which would increase our costs and reduce our revenue.
 
    
    Our CoreCard subsidiary could fail to deliver software products which meet the business and
technology requirements of its target markets within a reasonable time frame and at a price
point that supports a profitable, sustainable business model.
 
    
    One of ChemFrees customers represented 37 percent of our consolidated revenue in the first
nine months of 2009 and any unplanned changes in the volume of orders or timeliness of
payments from such customer could have a negative impact on revenue, profits, inventory levels
and cash, at least in the near-term.
 
    
    Failure by ChemFree to protect its intellectual property assets could increase competition
in the marketplace and result in greater price pressure and lower margins, thus potentially
impacting sales, profits and projected cash flows.
 
    
    Software errors or poor quality control may delay product releases, increase our costs,
result in non-acceptance of our software by customers or delay revenue recognition.
 
    
    Compliance with the internal control over financial reporting requirements of Section 404
of the Sarbanes-Oxley Act of 2002 will increase expenses and divert management and staff
resources.
 
    
    Competitive pressures (including pricing, changes in customer requirements and preferences,
and competitor product offerings) may cause prospective customers to choose an alternative
product solution, resulting in lower revenue and profits (or increased losses).
 
    
    CoreCard could fail to expand its base of customers, resulting in lower revenue and profits
(or increased losses), increased cash needs and possibly leading to restructuring or cutting
back of the subsidiarys operations.
 
    
    In certain limited situations, ChemFree lease customers are permitted to terminate the
lease covering a SmartWasher® machine, requiring the unamortized balance of the original
machine cost to be written off which could reduce profits in that reporting period and result
in lower revenue in future periods.
 
    
    CoreCard could fail to retain key software developers and managers who have accumulated
years of know-how in our target markets and company products, or fail to attract and train a
sufficient number of new software developers and testers to support our product development
plans and customer requirements at projected cost levels.
 
    
    Delays in anticipated customer payments for any reason would increase our cash requirements
and possibly our losses.
 
    
    Declines in performance, financial condition or valuation of minority-owned companies could
cause us to write-down the carrying value of our investment or postpone an anticipated
liquidity event, which could negatively impact our earnings and cash flow.
 
    
    Failure to regain compliance with the continued listing standards of NYSE Amex could result
in delisting of our common stock, with a potentially negative impact on market price and
liquidity of our common stock.
 
    
    Other general economic and political conditions could cause customers to delay or cancel
software purchases.
 
 Item 4.
    
    Controls and Procedures
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Part II. OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 6.
    
    Exhibits
  3.1
    
    
    Amended and Restated Articles of Incorporation of the Registrant dated November 14, 1991, as
amended November 25, 1997. (Incorporated by reference to Exhibit 3.1 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 1991 and to Exhibit 3.1 to the
Registrants Report on Form 8-K dated November 25, 1997.)3.2
    
    
    Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of
the Registrants Form 8-K dated December 7, 2007.)31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer furnished as required by
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  INTELLIGENT SYSTEMS CORPORATION
RegistrantDate:  November 13, 2009
    By:
    
    /s/ J. Leland StrangeJ. Leland StrangeChief Executive Officer, PresidentDate:  November 13, 2009
    By:
    
    /s/ Bonnie L. HerronBonnie L. HerronChief Financial Officer  Page 16




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EXHIBIT INDEX
 ExhibitNo.
    
    Descriptions3 .1
    
    
    Amended and Restated Articles of Incorporation of the Registrant dated November 14, 1991, as
amended November 25, 1997. (Incorporated by reference to Exhibit 3.1 to the Registrants Annual
Report on Form 10-K for the year ended December 31, 1991 and to Exhibit 3.1 to the Registrants
Report on Form 8-K dated November 25, 1997.)3.2
    
    
    Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the
Registrants Form 8-K dated December 7, 2007.)31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer furnished as required by
Section 906 of the Sarbanes-Oxley Act of 2002.
  Page 17