##### 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 June 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)
 o þ




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##### 



Intelligent Systems Corporation
 Index
 Form 10-Q
 PagePart I Financial InformationItem 1 Financial StatementsConsolidated Balance Sheets at June 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 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 4 Submission of Matters to a Vote of Security Holders
    
    
    16Item 6 Exhibits
    
    
    16Signatures
    
    
    17Exhibit 10.1Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1
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Part I FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 Intelligent Systems Corporation
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 June 30,
    
    
    December 31,2009
    
    
    2008(unaudited)ASSETSCurrent assets:Cash
    
    $
    795
    
    
    $
    1,074Accounts receivable, net
    
    
    1,864
    
    
    
    1,570Notes and interest receivable, current portion
    
    
    90
    
    
    
    353Inventories
    
    
    800
    
    
    
    1,051Other current assets
    
    
    444
    
    
    
    280Total current assets
    
    
    3,993
    
    
    
    4,328Long-term investments
    
    
    1,229
    
    
    
    1,209Notes and interest receivable, net of current portion
    
    
    1,358
    
    
    
    1,318Property and equipment, at cost less accumulated depreciation
    
    
    1,400
    
    
    
    1,583Other intangibles, net
    
    
    245
    
    
    
    268Total assets
    
    $
    8,225
    
    
    $
    8,706LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    437
    
    
    $
    325Accounts payable
    
    
    901
    
    
    
    922Deferred revenue
    
    
    1,291
    
    
    
    983Accrued payroll
    
    
    392
    
    
    
    497Accrued expenses and other current liabilities
    
    
    1,072
    
    
    
    970Total current liabilities
    
    
    4,093
    
    
    
    3,697Long-term liabilities, net of current portion
    
    
    200
    
    
    
    249Commitments and contingencies (Note 9)Intelligent Systems Corporation stockholders equity:Common stock, $0.01 par value, 20,000,000 shares authorized, 4,478,971 shares
issued and outstanding at June 30, 2009 and December 31, 2008
    
    
    45
    
    
    
    45Additional paid-in capital
    
    
    18,462
    
    
    
    18,457Accumulated other comprehensive loss
    
    
    (86
    )
    
    
    (92
    )Accumulated deficit
    
    
    (16,005
    )
    
    
    (15,166
    )Total Intelligent Systems Corporation stockholders equity
    
    
    2,416
    
    
    
    3,244Noncontrolling interest 1
    
    
    1,516
    
    
    
    1,516Total stockholders equity
    
    
    3,932
    
    
    
    4,760Total liabilities and stockholders equity
    
    $
    8,225
    
    
    $
    8,706
 1.
    
    Prior years data have been reclassified to conform to the current years
presentation reflecting the adoption of Statement of Financial Accounting Standards No.160. 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 June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008RevenueProducts
    
    $
    2,583
    
    
    $
    3,781
    
    
    $
    5,068
    
    
    $
    8,032Services
    
    
    540
    
    
    
    307
    
    
    
    843
    
    
    
    403Total revenue
    
    
    3,123
    
    
    
    4,088
    
    
    
    5,911
    
    
    
    8,435Cost of revenueProducts
    
    
    1,351
    
    
    
    2,263
    
    
    
    2,668
    
    
    
    4,649Services
    
    
    247
    
    
    
    221
    
    
    
    542
    
    
    
    421Total cost of revenue
    
    
    1,598
    
    
    
    2,484
    
    
    
    3,210
    
    
    
    5,070ExpensesMarketing
    
    
    456
    
    
    
    769
    
    
    
    900
    
    
    
    1,538General & administrative
    
    
    766
    
    
    
    1,205
    
    
    
    1,690
    
    
    
    2,522Research & development
    
    
    506
    
    
    
    904
    
    
    
    1,010
    
    
    
    1,713Loss from operations
    
    
    (203
    )
    
    
    (1,274
    )
    
    
    (899
    )
    
    
    (2,408
    )Other income (expense)Interest income (expense), net
    
    
    16
    
    
    
    (4
    )
    
    
    31
    
    
    
    (9
    )Equity in income of affiliate company
    
    
    12
    
    
    
    27
    
    
    
    19
    
    
    
    53Other income
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    Loss from continuing operations before income
taxes
    
    
    (175
    )
    
    
    (1,251
    )
    
    
    (836
    )
    
    
    (2,364
    )Income taxes
    
    
    2
    
    
    
    5
    
    
    
    3
    
    
    
    17Loss from continuing operations
    
    
    (177
    )
    
    
    (1,256
    )
    
    
    (839
    )
    
    
    (2,381
    )Loss from discontinued operations
    
    
    
    
    
    
    (85
    )
    
    
    
    
    
    
    (446
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    2,884
    
    
    
    
    
    
    
    2,884Net income (loss)
    
    $
    (177
    )
    
    $
    1,543
    
    
    $
    (839
    )
    
    $
    58Loss per share from continuing operations:Basic
    
    $
    (0.04
    )
    
    $
    (0.28
    )
    
    $
    (0.19
    )
    
    $
    (0.53
    )Diluted
    
    $
    (0.04
    )
    
    $
    (0.28
    )
    
    $
    (0.19
    )
    
    $
    (0.52
    )Income per share from discontinued operations:Basic
    
    $
    
    
    
    $
    0.62
    
    
    $
    
    
    
    $
    0.54Diluted
    
    $
    
    
    
    $
    0.62
    
    
    $
    
    
    
    $
    0.54Income (loss) per share:Basic
    
    $
    (0.04
    )
    
    $
    0.34
    
    
    $
    (0.19
    )
    
    $
    0.01Diluted
    
    $
    (0.04
    )
    
    $
    0.34
    
    
    $
    (0.19
    )
    
    $
    0.01Basic weighted average common shares
outstanding
    
    
    4,478,971
    
    
    
    4,478,971
    
    
    
    4,478,971
    
    
    
    4,478,971Diluted weighted average common shares
outstanding
    
    
    4,478,971
    
    
    
    4,546,365
    
    
    
    4,478,971
    
    
    
    4,545,727
 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)
 Six Months Ended June 30,CASH PROVIDED BY (USED FOR):
    
    2009
    
    
    2008OPERATIONS:Net income (loss)
    
    $
    (839
    )
    
    $
    58Adjustments to reconcile net income (loss) to net cash used for operating activities:Depreciation and amortization
    
    
    270
    
    
    
    260Stock-based compensation expense
    
    
    6
    
    
    
    9Gain on sale of VISaer business
    
    
    
    
    
    
    (2,884
    )Non-cash interest income, net
    
    
    (36
    )
    
    
    (15
    )Equity in income of affiliate company
    
    
    (19
    )
    
    
    (53
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    (294
    )
    
    
    22Accrued interest
    
    
    2
    
    
    
    5Inventories
    
    
    251
    
    
    
    112Other current assets
    
    
    (165
    )
    
    
    892Accounts payable
    
    
    (20
    )
    
    
    (93
    )Deferred revenue
    
    
    308
    
    
    
    46Accrued payroll
    
    
    (105
    )
    
    
    (251
    )Accrued expenses and other current liabilities
    
    
    98
    
    
    
    6Other liabilities
    
    
    (4
    )
    
    
    (42
    )Net cash used for operating activities
    
    
    (547
    )
    
    
    (1,928
    )INVESTING ACTIVITIES:Proceeds from sale of discontinued operations
    
    
    
    
    
    
    3,025Investment in subsidiary
    
    
    
    
    
    
    (125
    )Proceeds from notes and interest receivable
    
    
    263
    
    
    
    285Purchases of property and equipment
    
    
    (64
    )
    
    
    (154
    )Net cash provided by investing activities
    
    
    199
    
    
    
    3,031FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    335
    
    
    
    1,400Repayments made under line of credit
    
    
    (223
    )
    
    
    (1,820
    )Borrowings under notes payable
    
    
    
    
    
    
    124Payments on notes payable
    
    
    (49
    )
    
    
    (133
    )Net cash provided by (used for) financing activities
    
    
    63
    
    
    
    (429
    )Effects of exchange rate changes on cash
    
    
    6
    
    
    
    (66
    )Net increase (decrease) in cash
    
    
    (279
    )
    
    
    608Cash at beginning of period
    
    
    1,074
    
    
    
    554Cash at end of period
    
    $
    795
    
    
    $
    1,162SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    22
    
    
    $
    42Cash paid during the period for income taxes
    
    $
    2
    
    
    $
    17
 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 six month periods ended June 30, 2009 and
2008. The interim results for the three and six months ended June 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 Certain prior period amounts have been reclassified to conform to the
current period presentation. On January 1, 2009, we adopted Statement of Financial Accounting
Standards No. 160 (SFAS No. 160), Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51, the provisions of which, among others, require that
minority interests be renamed noncontrolling interests and be presented as a component of
equity for all periods presented. Accordingly, $1,516,000 of minority interest which had been
recorded in the liability section of the balance sheet at December 31, 2008 has been
reclassified to stockholders equity for all periods presented.We also reclassified shipping and handling amounts billed to customers from cost of sales to
revenue totaling $369,000 and $640,000 for the three and six months ended June 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 June 30,
    
    
    Six Months Ended June 30,(unaudited, in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net sales
    
    $
    
    
    
    $
    133
    
    
    $
    
    
    
    $
    761Operating loss
    
    $
    
    
    
    $
    (95
    )
    
    $
    
    
    
    $
    (454
    )Net loss from discontinued operations
    
    $
    
    
    
    $
    (85
    )
    
    $
    
    
    
    $
    (446
    )
 5.
    
    Comprehensive Loss In accordance with Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, comprehensive loss is the total of net loss and all other
non-owner changes in equity in a period. A summary follows:
 Consolidated Statements of Comprehensive Loss
    
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited, in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Net income (loss)
    
    $
    (177
    )
    
    $
    1,543
    
    
    $
    (839
    )
    
    $
    58Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    19
    
    
    
    (61
    )
    
    
    6
    
    
    
    (66
    )Comprehensive income (loss)
    
    $
    (158
    )
    
    $
    1,482
    
    
    $
    (833
    )
    
    $
    (8
    )
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6.
    
    Stock-based Compensation At June 30, 2009, we have two stock-based compensation
plans in effect. In December 2004, the FASB issued FASB Statement No. 123R (SFAS No. 123R),
Share-Based Payment which replaced APB No. 25 and SFAS No. 123. We adopted SFAS No.123R
effective January 1, 2006 using the modified prospective application method of adoption which
requires us to record compensation cost related to unvested stock awards by recognizing the
unamortized grant date fair value in accordance with provisions of SFAS 123R on a straight
line basis over the service periods of each award. We have estimated forfeiture rates based on
our historical experience. Stock option compensation expense is recognized as a component of
general and administrative expenses in the accompanying Consolidated Financial Statements. As
a result of adopting SFAS No. 123R, we recorded $3,000 and $6,000 of stock-based compensation
expense in the three months ended June 30, 2009 and 2008, respectively and $6,000 and $9,000
for the six month periods ended June 30, 2009 and 2008, respectively.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 June 30, 2009, there is $13,000 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 six month periods ended June 30, 2009. The following
table summarizes options as of June 30, 2009:
 Wgt AvgRemaining
    
    
    AggregateWgt Avg
    
    
    Contractual Life
    
    
    Intrinsic# of Shares
    
    
    Exercise Price
    
    
    in Years
    
    
    ValueOutstanding at June 30, 2009
    
    
    233,000
    
    
    $
    2.37
    
    
    
    4.2
    
    
    
    Vested and exercisable at June 30, 2009
    
    
    215,000
    
    
    $
    2.44
    
    
    
    3.8
    
    
    
    
  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 June 30,
    
    
    Six Months Ended June 30,(unaudited)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008ChemFree Customer A
    
    
    33
    %
    
    
    42
    %
    
    
    34
    %
    
    
    42
    %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 June 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
June 30, 2009, our borrowing base calculation resulted in availability of $1,250,000, of which
we had drawn down $437,000 at June 30, 2009. 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) of various
calculated amounts at the end of each calendar quarter beginning September 30, 2009.
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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.Future minimum lease payments are as follows:
 Year ended December 31,(in thousands)2009
    
    $
    2322010
    
    
    4652011
    
    
    4652012
    
    
    194Total minimum lease payments
    
    $
    1,356
 Legal Matters 
  10.
    
    Income Taxes Effective January 1, 2007, we adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48, (FIN No. 48) Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition
threshold that a tax position is required to meet before being recognized in the financial
statements and provides guidance on derecognition, measurement, classification, 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 a result of
the implementation of FIN No. 48. The adoption of FIN No. 48 did not have a material effect on
our consolidated financial position or results of operations. As of June 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.
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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 six months ended June 30, 2009 and 2008.
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(unaudited, in thousands)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Information TechnologyRevenue
    
    $
    566
    
    
    $
    322
    
    
    $
    910
    
    
    $
    431Operating loss
    
    
    (267
    )
    
    
    (945
    )
    
    
    (846
    )
    
    
    (2,022
    )Industrial ProductsRevenue
    
    
    2,557
    
    
    
    3,766
    
    
    
    5,001
    
    
    
    8,004Operating income (loss)
    
    
    332
    
    
    
    (146
    )
    
    
    587
    
    
    
    172Consolidated SegmentsRevenue
    
    
    3,123
    
    
    
    4,088
    
    
    
    5,911
    
    
    
    8,435Operating income (loss)
    
    
    65
    
    
    
    (1,091
    )
    
    
    (260
    )
    
    
    (1,850
    )Corporate expenses
    
    
    (268
    )
    
    
    (183
    )
    
    
    (639
    )
    
    
    (558
    )Consolidated operating loss from
continuing operations
    
    $
    (203
    )
    
    $
    (1,274
    )
    
    $
    (899
    )
    
    $
    (2,408
    )Depreciation and AmortizationInformation Technology
    
    $
    28
    
    
    $
    26
    
    
    $
    29
    
    
    $
    60Industrial Products
    
    
    114
    
    
    
    106
    
    
    
    232
    
    
    
    187Consolidated segments
    
    
    142
    
    
    
    132
    
    
    
    261
    
    
    
    247Corporate
    
    
    4
    
    
    
    6
    
    
    
    9
    
    
    
    13Consolidated depreciation and
amortization
    
    $
    146
    
    
    $
    138
    
    
    $
    270
    
    
    $
    260Capital ExpendituresInformation Technology
    
    $
    69
    
    
    $
    (37
    )
    
    $
    47
    
    
    $
    (36
    )Industrial Products
    
    
    10
    
    
    
    61
    
    
    
    13
    
    
    
    185Consolidated segments
    
    
    79
    
    
    
    24
    
    
    
    60
    
    
    
    149Corporate
    
    
    3
    
    
    
    3
    
    
    
    4
    
    
    
    5Consolidated capital expenditures
    
    $
    82
    
    
    $
    27
    
    
    $
    64
    
    
    $
    154
 (unaudited, in thousands)
    
    June 30, 2009
    
    
    December 31, 2008Identifiable AssetsInformation Technology
    
    $
    2,708
    
    
    $
    2,600Industrial Products
    
    
    4,006
    
    
    
    4,415Consolidated segments
    
    
    6,714
    
    
    
    7,015Corporate
    
    
    1,511
    
    
    
    1,691Consolidated assets
    
    $
    8,225
    
    
    $
    8,706
 12.
    
    New Accounting Pronouncements In December 2007, the FASB issued Statement No. 160 (SFAS No.
160) Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No.
51. SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest (minority interest) in a subsidiary and the deconsolidation of a
subsidiary. It clarifies that the noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. It also changes the way the consolidated income statement is presented,
requiring disclosure on the face of the income statement of the amount of consolidated net
income attributable to the parent and to the noncontrolling interest. SFAS No. 160 also
establishes appropriate accounting for changes in a parents ownership interest that do not
result in deconsolidation and when a subsidiary is deconsolidated. SFAS No. 160 requires
expanded disclosure to identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008.
Accordingly, we adopted SFAS No. 160 on January 1, 2009. The adoption of SFAS No. 160
resulted in the renaming of a minority interest totaling $1,516,000 which had previously been
recorded in the liability section of the balance sheet to a noncontrolling interest presented
as a component of stockholders equity for all periods presented.
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 
   13.
    
    Subsequent Event 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
from the rights offering, which was oversubscribed. Giving effect to the rights offering, we
have 8,957,942 shares of common stock outstanding as of July 30, 2009. We expect that
expenses related to the transaction will be between $110,000 and $120,000. 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.
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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.
 
    
    Our subsidiaries are relatively small in revenue size and, in the Information Technology
sector, revenue in a given period 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 can 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 $2.6 million in the three month period ended June 30, 2009, a 32
percent decline compared to the three month period ended June 30, 2008. Product revenue
declined by 37 percent in the year-to-date period of 2009 compared to the first six months of
2008. The decline in product revenue in the second quarter and year-to-date periods in 2009
compared to the prior year periods is primarily associated with a decline in domestic sales of
ChemFree parts washer equipment (our Industrial Products segment) due to the fact that in the
first half of 2008, a new customer was in the middle of a national program to sell ChemFree
products to its installed customer base, 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 three and six month period ended June 30, 2009 was lower than during the rollout period
last year. There was also a period-to-period decline in international equipment sales
reflecting the general economic slowdown in certain European markets. Total sales of
ChemFrees fluid and filter consumables in the domestic and international markets increased in
the three and six month period ended June 30, 2009 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 six
month period of 2008 reflecting the temporary impact of a transition to a new fluid blending
facility in the UK to serve the European market. Software license revenue associated with the
Information Technology segment increased in both the three and six month periods ended June
30, 2009 compared to the respective periods in 2008 but was not a significant contributor to
product revenue in either period. 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 $540,000 and
$843,000 in the three and six months ended June 30, 2009, representing increases of 76 percent
and 109 percent compared to the respective periods in 2008. The change 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.
 
    
    Due to general economic conditions and uncertainty about the impact of a slow economy on
the automotive repair and supplies industry, ChemFree expects a relatively flat volume of
machine sales for the foreseeable future and is carefully managing its costs and inventory
levels accordingly. We expect that sales of replenishment fluid and filter to the installed
base of customers and lease revenue will be 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 to continue to add new prospects and customers. 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.
 Cost of Revenue
 
    
    Cost of product revenue was 52 percent and 53 percent of product revenue in the three
and six months ended June 30, 2009, respectively compared to costs of 60 percent and 58
percent of product revenue in the respective periods in 2008. Higher margin fluid and
filters represented 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 three and six month periods ended June 30,
2009 as compared to the respective periods 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 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 stable gross margin percentage from period to
period.
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Operating Expenses
 Interest Income (Expense), net
 Equity in Income of Affiliate Company
 Other Income
 Income Taxes
 Discontinued Operations
 Loss from Discontinued Operations
 Liquidity and Capital Resources
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Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  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 continuing weakness in the domestic US and European
economies will impact the automotive parts and repair industry and reduce 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 34 percent of our consolidated revenue in the first
half 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.
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
    
    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 audit-related 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 Alternext U.S.
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 4.
    
    Submission of Matters to a Vote of Security Holders
  
 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.)10.1
    
    
    First Amendment to the Lease agreement between the Registrant and ISC Properties, LLC dated June 1, 2009.10.2
    
    
    Eighth Modification to Loan Documents by and among Intelligent Systems and Fidelity Bank dated June 26, 2009.31.1
    
    
    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.
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SIGNATURES
  INTELLIGENT SYSTEMS CORPORATION
RegistrantDate: August 11, 2009
    
    By:
    
    /s/ J. Leland Strange

J. Leland StrangeChief Executive Officer, PresidentDate: August 11, 2009
    
    By:
    
    /s/ Bonnie L. HerronBonnie L. HerronChief Financial Officer
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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.)10.1
    
    
    First Amendment to the Lease agreement between the Registrant and ISC Properties, LLC dated June 1,
2009.10.2
    
    
    Eighth Modification to Loan Documents by and among Intelligent Systems and Fidelity Bank dated June
26, 200931.1
    
    
    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 18