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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year endedDecember 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO 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
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, $.01 par value
    
    NYSE Amex
 Securities registered pursuant to Section 12(g) of the Act:
 o þ
 Yes o No þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 Yes o No o
 Yes o No þ




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TABLE OF CONTENTS
 PAGEPart IItem1. Business
    
    
    12. Properties
    
    
    63. Legal Proceedings
    
    
    6Part II4. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    76. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    87. Financial Statements
    
    
    158. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    168A(T). Controls and Procedures
    
    
    16Part III9. Directors, Executive Officers and Corporate Governance
    
    
    1710. Executive Compensation
    
    
    1711. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    1812. Certain Relationships and Related Transactions, and Director Independence
    
    
    1813. Principal Accountant Fees and Services
    
    
    18Part IV14. Exhibits and Financial Statement Schedules
    
    
    19Signatures
    
    
    20Exhibit 3(i)Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I
 Forward-Looking Statements
 In addition to historical information, this Form 10-K may contain forward-looking
statements relating to Intelligent Systems Corporation (ISC). All statements,
trend analyses and other information contained in the following discussion
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, likely 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, and that
actual results may differ materially from those contemplated by such
forward-looking statements. A number of the factors that we believe could impact
our future operations are discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 6 of this Form 10-K . ISC
undertakes no obligation to update or revise its forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes in
future operating results.
 
 ITEM 1. BUSINESS
 Overview
 www.intelsys.com
  Financial Reporting
  Industry Segments Overview
    -1-




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Industrial Products Segment
 ChemFree Corporation  ® ® ® ® ®
 ®
      -2-




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Information Technology Products and Services Segment
 CoreCard
Software, Inc. 
  
    
    Credit/Debit Cards  involving revolving or non-revolving credit issued to consumer or
business accounts (with or without a physical card) that typically involve interest, fees,
settlement, collections, etc. Within this market, CoreCard offers software specifically
tailored to handle private label cards, network branded (i.e. MasterCard or VISA) bank cards,
fleet cards, short-term consumer loans and revolving accounts receivable.
 
    
    Prepaid Cards  involving pre-loaded funds drawn down for purchase or cash withdrawal
typically involving a variety of fees but no interest. Numerous examples exist including gift
cards, loyalty/reward cards, health benefit cards, payroll and benefits disbursement,
healthcare cards, government assistance payments, and transit cards.
   
    
    License  Typically CoreCard sells a software license to customers who then run
CoreCards software system, configured for their unique requirements, at a customer controlled
location.
 
    
    SaaS  Recently CoreCard has expanded the ways customers can access or deploy its
software and now offers a boutique processing service that allows customers to outsource their
processing requirements to CoreCard. CoreCard manages all aspects of the processing functions
using its proprietary software configured for each processing customer in a Software as a
Service (SaaS) model.
 
    
    PaaS  For customers who prefer greater customization and control of the processing
environment, CoreCard offers its software, uniquely customized for the customer, hosted by
CoreCard on customer owned equipment at the CoreCard data center, in a Platform as a Service
(PaaS) offering.
   -3-




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Incubator Program
    -4-




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Minority-Owned Partner Companies
  Research and Development
  Patents, Trademarks and Trade Secrets
 ® ® ® ® ®
 Personnel
  Financial Information About Geographic Areas
    -5-




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ITEM 2. PROPERTIES
  
 ITEM 3. LEGAL PROCEEDINGS
       -6-




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PART II
 
 ITEM 4. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  2009
    
    
    2008Year Ended December 31,
    
    High
    
    
    Low
    
    
    High
    
    
    Low1st Quarter
    
    $
    1.50
    
    
    $
    0.55
    
    
    $
    3.99
    
    
    $
    2.902nd Quarter
    
    
    0.95
    
    
    
    0.55
    
    
    
    3.75
    
    
    
    2.903rd Quarter
    
    
    1.51
    
    
    
    0.70
    
    
    
    3.60
    
    
    
    2.104th Quarter
    
    
    2.39
    
    
    
    0.90
    
    
    
    2.12
    
    
    
    0.66
   Equity Compensation Plan Information
  Recent Sales of Unregistered Securities
  Repurchases of Securities
    -7-




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Critical Accounting Policies and Estimates
  Revenue Recognition
   
    
    an initial contract with the customer to license certain software modules, to provide
services to get the customer live on the software (such as training and customization) and to
provide post contract maintenance and support (PCS) for a specified period of time
thereafter (typically 12-month periods),
 
    
    purchase of additional licenses for new modules or for tier upgrades for a higher volume of
licensed accounts after the initial contract,
 
    
    other optional standalone contracts, usually performed after the customer is live on the
software, for services such as new interfaces or custom features requested by the customer,
additional training and problem resolution not covered in annual maintenance contracts, and
 
    
    contracts for certain software products involve an initial fee plus recurring monthly fees
for software usage, maintenance and support, which fees are recognized ratably over the
estimated term of the contract.
      -8-




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Valuation of Investments
 Valuation of Intangibles
     -9-




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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.
 
    
    Software license revenue in a given period may consist of a relatively small number of
contracts and contract values can vary considerably depending on the scope of the software
system sold. Consequently, even minor delays in delivery under a software contract (which may
be out of our control) could have a significant and unpredictable impact on the consolidated
revenue that we recognize in a given quarterly or annual period.
 
    
    Acquisitions or sales of subsidiaries may affect our revenue and expense levels, as
occurred in 2008 with the sale of our VISaer business.
 
    
    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.
       -10-




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Results of Operations
  2009 Compared to 2008
  Revenue
 Product revenue ®
 
    
    In 2009, total product revenue was $11.3 million compared to $15.6 million in 2008. Almost
95 percent of total product revenue is derived from sales of products in the Industrial
Products segment and the balance is license revenue generated by the Information Technology
and Services segment. As expected, in the domestic market the number of SmartWasher® machines
sold in 2009 was lower than the number sold in 2008 in large part because the first half of
2008 was fueled by an unusually high volume of shipments related to the successful roll-out of
a national program by a new ChemFree customer. The initial high volume of orders for
SmartWasher® machines from this customer declined to a lower monthly level in the second half
of 2008 and 2009, with steady follow-on sales of fluid and filters to the installed base of
machines. ChemFrees total fluid and filter sales in the domestic U.S. increased 14 percent
in 2009 as compared to 2008, due to a larger installed base of customers that buy such
consumable supplies. In addition, revenue from customers that lease SmartWasher® machines
rose two percent in 2009 as compared to 2008.
 
    
    Product revenue from ChemFrees international sales declined in 2009, reflecting mainly the
effects of the economic slowdown in certain European markets as well as the transition to a
new fluid production arrangement with its master distributor for the European market. Under
the new arrangement, beginning July 2009, ChemFree earns a royalty for each liter of its
proprietary fluid blended for distribution in the European market. The per liter royalty is
approximately the same as the gross profit that ChemFree would have recognized by selling and
shipping fluid produced in the U.S. to its European customers. The new arrangement, while
lowering both revenue and costs for ChemFree, permits the company and its distributors to
lower costs and be proactive in addressing an increasingly competitive market.
 
    
    License revenue generated by the Information Technology Products and Services segment,
which represents approximately 5 percent of total product revenue in 2009, was lower than
license revenue recorded in 2008. Revenue recognized in a given period reflects both the
number of new software implementations completed as well as the contract value of completed
contracts. Our contract values range from $150,000 to over $1.0 million depending on the
scope and type of software licensed. In 2008, the value of one of the contracts completed was
significantly higher than those completed in 2009. As we have frequently cautioned, a number
of factors, some of which may be outside of our control, can cause delays in delivery of our
software and implementation by the customer, thus delaying license revenue recognition. With
mission-critical, complex software systems such as those sold by CoreCard, customer
requirements, available resources and testing cycles may increase the scope and length of time
to complete the project beyond our original estimates.
   -11-




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Service revenue
 Cost of Revenue
 
    
    Cost of productrevenue in 2009 was $5.8 million (51 percent of total product revenue) as
compared to $8.4 million (54 percent of total product revenue) in 2008. The improvement in
gross margin percentage between 2009 and 2008 is due primarily to the fact that in 2009 a
greater proportion of Industrial Products revenue was derived from consumable fluid and filter
products which have a lower cost of sales than do the parts washer machines which made up a
proportionately greater component of product revenue in 2008.
 
    
    Cost of servicerevenue (which relates to the Information Technology Products and Services
segment only) was $984,000 (64 percent of service revenue) in 2009 as compared to $873,000 (68
percent of service revenue) in 2008. The improvement in gross margin percentage between
periods reflects primarily a more efficient utilization of resources to deliver CoreCards
customer support and professional services activities in 2009 than in 2008.
 Operating Expenses
 Write-off of Goodwill
 Operating Loss
 Interest
Income (Expense), net 
 Investment Income, net
 Equity Earnings of Affiliate Company
 Other Income, net
   -12-




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Income Taxes 
 Discontinued Operations
 Net Loss from Discontinued Operations
 Gain (Loss) on Sale of Discontinued Operations
 Liquidity and Capital Resources
     Off-Balance Sheet Arrangements
    -13-




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Factors That May Affect Future Operations
   
    
    Continued weakness 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.
 
    
    Continued weakness in the domestic U.S. and certain European economies could impact the
automotive parts and repair industry and reduce demand for ChemFrees SmartWasher® products
and cause the company to have slower growth than anticipated.
 
    
    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.
 
    
    As an alternative to licensing its software, CoreCard is now offering out-sourced
processing services running on the CoreCard software system. There are numerous risks
associated with entering any new line of business and if CoreCard fails to manage the risks
associated with its processing operations, it could have a negative impact on our business.
 
    
    One of ChemFrees customers represented approximately 35 percent of our consolidated
revenue in 2009 and any unplanned changes in the volume of orders or timeliness of payments
from such customer could have a negative impact on inventory levels and cash, at least in the
near-term.
 
    
    Failure by our ChemFree subsidiary 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.
 
    
    Delays in production or shortages of certain sole-sourced parts for our ChemFree products
could impact revenue and orders.
 
    
    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 could increase operating 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).
 
    
    Increasing government regulation in the United States and foreign countries related to such
issues as data privacy, financial and credit transactions could require changes to our
products and services and could affect our existing customer relationships or prevent us from
getting new customers.
 
    
    CoreCard could fail to expand its base of customers as quickly as anticipated, resulting in
lower revenue and profits (or increased losses) and increased cash needs.
 
    
    In certain situations, ChemFrees 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.
   -14-




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
    
    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.
 
    
    Failure to meet the continued listing standards of NYSE Amex could result in delisting of
our common stock, with a potentially negative impact on the market price and liquidity of our
common stock.
 
    
    Our future capital needs are uncertain and depend on a number of factors; additional
capital may not be available on acceptable terms, if at all.
 
    
    Other general economic and political conditions could cause customers to delay or cancel
software purchases.
  Recent Accounting Pronouncements
       
 ITEM 7. FINANCIAL STATEMENTS
  Report of
Independent Registered Public Accounting Firm  Habif, Arogeti & Wynne, LLP
    
    
    F-2Consolidated Balance Sheets at December 31, 2009 and 2008
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2009 and 2008
    
    
    F-4Consolidated Statements of Stockholders Equity and Comprehensive Loss for the years ended December 31, 2009 and 2008
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
   -15-




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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 8A(T). CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
   Changes in internal control over financial reporting
   Managements report on internal control over financial reporting
   Internal Control  Integrated Framework.
    -16-




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PART III
 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   www.intelsys.com
 
 ITEM 10. EXECUTIVE COMPENSATION
    -17-




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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Securities Authorized for Issuance Under Equity Compensation Plans
 (c) Number of securitiesremaining available for future(a) Number of securities to be
    
    
    (b) Weighted-average
    
    
    issuance under equityissued upon exercise of
    
    
    exercise price of
    
    
    compensation plansoutstanding options, warrants
    
    
    outstanding options,
    
    
    (excluding securitiesPlan category
    
    and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    111,000
    
    
    $
    1.78
    
    
    
    350,000Equity compensation
plans not approved
by security holders
    
    
    122,000
    
    
    $
    2.91
    
    
    
    72,000Total
    
    
    233,000
    
    
    $
    2.37
    
    
    
    422,000
   
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
   
 ITEM 13. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    -18-




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PART IV
 
 ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  2.1
    
    
    Asset Purchase Agreement among IBS Technics, Inc., Intelligent Systems Corporation, VISaer
(UK) Limited and VISaer, Inc. dated April 4, 2008. (Incorporated by reference to Exhibit 2.1
of the Registrants Form 8-K dated April 16, 2008.)3
    (i)
    
    Amended and Restated Articles of Incorporation of the Registrant dated March 18, 2010.3
    (ii)
    
    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
    
    
    Lease Agreement dated June 1, 2004, between the Registrant and ISC Properties, LLC.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 10-K for the year ended
December 31, 2004.)10.2
    
    
    First Amendment to the Lease Agreement between the Registrant and ISC Properties, LLC dated
June 1, 2009. (Incorporated by reference to Exhibit 10.1 to the Registrants Form 10-Q for the
quarter ended June 30, 2009.)10.3
    
    
    Management Compensation Plans and Arrangements:(a) Intelligent Systems Corporation 2003 Stock Incentive Plan(b) Intelligent Systems Corporation Change in Control Plan for Officers(c) Intelligent Systems Corporation Outside Directors Retirement Plan(d) Non-Employee Directors Stock Option PlanExhibit 10.3(a) is incorporated by reference to Exhibit 10.2(a) to the Registrants Form 10-K for the year ended December 31, 2003.Exhibits 10.3(b) and (c) are incorporated by reference to Exhibit 10.4 to the Registrants Form 10-K for the year ended December 31, 1993.Exhibit 10.3(d) is incorporated by reference to Exhibit 10.3 to the Registrants Form 10-K for the year ended December 31, 2000.10.4
    
    
    Loan Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated October
1, 2003. (Incorporated by reference to Exhibit 10.3 to the Registrants Form 10-K for the
year ended December 31, 2003.)10.5
    
    
    Security Agreement by and among Intelligent Systems Corporation and Fidelity Bank dated as of
October 1, 2003. (Incorporated by reference to Exhibit 10.4 to the Registrants Form 10-K for
the year ended December 31, 2003.)10.6
    
    
    Form of Security Agreement by and among majority owned subsidiary companies of Intelligent
Systems Corporation and Fidelity Bank as of October 1, 2003. (Incorporated by reference to
Exhibit 10.5 to the Registrants Form 10-K for the year ended December 31, 2003.)10.7
    
    
    Negative Pledge Agreement by and among Intelligent Systems Corporation and Fidelity Bank
dated October 1, 2003. (Incorporated by reference to Exhibit 10.6 to the Registrants Form
10-K for the year ended December 31, 2003.)10.8
    
    
    Commercial Promissory Note and Rider thereto of Intelligent Systems Corporation in favor of
Fidelity Bank dated October 1, 2004. (Incorporated by reference to Exhibit 10.7 to the
Registrants Form 10-K for the year ended December 31, 2003.)10.9
    
    
    Form of Guarantee of majority owned subsidiaries of Intelligent Systems Corporation in favor
of Fidelity Bank dated October 1, 2003. (Incorporated by reference to Exhibit 10.3 to the
Registrants Form 10-K for the year ended December 31, 2003.)
   -19-




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10.10
    
    
    Eighth Modification to Loan Documents by and among Intelligent Systems Corporation and
Fidelity Bank dated June 26, 2009. (Incorporated by reference to Exhibit 10.2 to the
Registrants Form 10-Q for the quarter ended June 30, 2009.)21.1
    
    
    List of subsidiaries of Registrant.23.1
    
    
    Consent of Habif, Arogeti & Wynne, LLP.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 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  INTELLIGENT SYSTEMS CORPORATIONRegistrantDate: March 23, 2010
    
    By:
    
    /s/ J. Leland StrangeJ. Leland StrangeChairman of the Board, Presidentand Chief Executive Officer
  Signature
    
    Capacity
    
    Date/s/ J. Leland Strange

J. Leland Strange
    
    Chairman of the Board, President, 
Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 23, 2010/s/ Bonnie L. Herron

Bonnie L. Herron
    
    Chief Financial Officer
(Principal Accounting and Financial Officer)
    
    March 23, 2010/s/ James V. Napier
    
    Director
    
    March 23, 2010James V. Napier/s/ John B. Peatman
    
    Director
    
    March 23, 2010John B. Peatman/s/ Parker H. Petit
    
    Director
    
    March 23, 2010Parker H. Petit
   -20-




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Exhibit Index
 Exhibit Number
    
    Description3
    (i)
    
    Amended and Restated Articles of Incorporation of the Registrant dated March 18, 2010.21.1
    
    
    List of subsidiaries of Registrant.23.1
    
    
    Consent of Habif, Arogeti & Wynne, LLP.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 Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
   -21-




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INTELLIGENT SYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
  Financial Statements:
 Report of Independent Registered Public Accounting Firm  Habif, Arogeti, & Wynne, LLP
    
    
    F-2Consolidated Balance Sheets  December 31, 2009 and 2008
    
    
    F-3Consolidated Statements of Operations  Years Ended December 31, 2009 and 2008
    
    
    F-4Consolidated Statements of Stockholders Equity and Comprehensive Loss  Years Ended December 31, 2009 and 2008
    
    
    F-5Consolidated Statements of Cash Flows  Years Ended December 31, 2009 and 2008
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/ Habif, Arogeti & Wynne, LLP
 
  F-2




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Intelligent Systems Corporation
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share amounts)
 As of December 31,
    
    2009
    
    
    2008ASSETSCurrent assets:Cash
    
    $
    2,795
    
    
    $
    1,074Accounts receivable, net
    
    
    1,680
    
    
    
    1,570Notes and interest receivable, current portion
    
    
    492
    
    
    
    353Inventories, net
    
    
    964
    
    
    
    1,051Other current assets
    
    
    399
    
    
    
    280Total current assets
    
    
    6,330
    
    
    
    4,328Long-term investments
    
    
    1,219
    
    
    
    1,209Notes and interest receivable, net of current portion
    
    
    1,006
    
    
    
    1,318Property and equipment, at cost less accumulated depreciation
    
    
    1,256
    
    
    
    1,583Patents, net
    
    
    223
    
    
    
    268Total assets
    
    $
    10,034
    
    
    $
    8,706LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    $
    
    
    
    $
    325Accounts payable
    
    
    576
    
    
    
    922Deferred revenue
    
    
    1,355
    
    
    
    983Accrued payroll
    
    
    423
    
    
    
    497Accrued expenses
    
    
    565
    
    
    
    622Other current liabilities
    
    
    406
    
    
    
    348Total current liabilities
    
    
    3,325
    
    
    
    3,697Long-term liabilities
    
    
    100
    
    
    
    249Commitments and contingencies (Note 7)Intelligent Systems Corporation stockholders equity:Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028 and 4,478,971
issued and outstanding at December 31, 2009 and 2008, respectively
    
    
    90
    
    
    
    45Additional paid-in capital
    
    
    21,410
    
    
    
    18,457Accumulated other comprehensive loss
    
    
    (28
    )
    
    
    (92
    )Accumulated deficit
    
    
    (16,379
    )
    
    
    (15,166
    )Total Intelligent Systems Corporation stockholders equity
    
    
    5,093
    
    
    
    3,244Non-controlling interest
    
    
    1,516
    
    
    
    1,516Total stockholders equity
    
    
    6,609
    
    
    
    4,760Total liabilities and stockholders equity
    
    $
    10,034
    
    
    $
    8,706
 The accompanying notes are an integral part of these consolidated financial statements.
  F-3




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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except share and per share amounts)
 Year Ended December 31,
    
    2009
    
    
    2008RevenueProducts
    
    $
    11,319
    
    
    $
    15,603Services
    
    
    1,547
    
    
    
    1,278Total net revenue
    
    
    12,866
    
    
    
    16,881Cost of revenueProducts
    
    
    5,785
    
    
    
    8,427Services
    
    
    984
    
    
    
    873Total cost of revenue
    
    
    6,769
    
    
    
    9,300ExpensesMarketing
    
    
    1,923
    
    
    
    2,655General and administrative
    
    
    3,273
    
    
    
    4,275Research and development
    
    
    2,180
    
    
    
    3,487Goodwill impairment loss
    
    
    
    
    
    
    369Loss from operations
    
    
    (1,279
    )
    
    
    (3,205
    )Other income (expense)Interest income (expense), net
    
    
    87
    
    
    
    (3
    )Investment income, net
    
    
    
    
    
    
    7Equity in income of affiliate company
    
    
    9
    
    
    
    37Other income, net
    
    
    21
    
    
    
    6Loss from continuing operations before taxes
    
    
    (1,162
    )
    
    
    (3,158
    )Income taxes
    
    
    9
    
    
    
    28Loss from continuing operations
    
    
    (1,171
    )
    
    
    (3,186
    )Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (489
    )Gain (loss) on sale of discontinued operations, net of taxes
    
    
    (42
    )
    
    
    2,852Net loss
    
    $
    (1,213
    )
    
    $
    (823
    )Loss per share from continuing operations: Basic and diluted
    
    $
    (0.18
    )
    
    $
    (0.71
    )Income (loss) per share from discontinued operations: Basic and diluted
    
    
    (0.01
    )
    
    
    0.53Net loss per share: Basic and diluted
    
    $
    (0.19
    )
    
    $
    (0.18
    )Basic weighted average common shares outstanding
    
    
    6,345,270
    
    
    
    4,478,971Diluted weighted average common shares outstanding
    
    
    6,345,270
    
    
    
    4,478,971
 The accompanying notes are an integral part of these consolidated financial statements.
  F-4




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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF
 STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
 (in thousands, except share amounts)
 Year Ended December 31,STOCKHOLDERS EQUITY
    
    2009
    
    
    2008Common stock, number of shares,beginning of year
    
    
    4,478,971
    
    
    
    4,478,971Additions during year
    
    
    4,479,057
    
    
    
    End of year
    
    
    8,958,028
    
    
    
    4,478,971Common stock, amount,beginning of year
    
    $
    45
    
    
    $
    45Additions during year
    
    
    45
    
    
    
    End of year
    
    
    90
    
    
    
    45Additional paid-in capital,beginning of year
    
    
    18,457
    
    
    
    18,437Additions during year
    
    
    2,953
    
    
    
    20End of year
    
    
    21,410
    
    
    
    18,457Accumulated other comprehensive loss,beginning of year
    
    
    (92
    )
    
    
    (127
    )Foreign currency translation adjustment
    
    
    64
    
    
    
    35End of year
    
    
    (28
    )
    
    
    (92
    )Accumulated deficit,beginning of year
    
    
    (15,166
    )
    
    
    (14,343
    )Net loss
    
    
    (1,213
    )
    
    
    (823
    )End of year
    
    
    (16,379
    )
    
    
    (15,166
    )Non-controlling interest, beginning and end of year
    
    
    1,516
    
    
    
    1,516Total stockholders equity
    
    $
    6,609
    
    
    $
    4,760COMPREHENSIVE LOSSNet loss
    
    $
    (1,213
    )
    
    $
    (823
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    64
    
    
    
    35Total comprehensive loss
    
    $
    (1,149
    )
    
    $
    (788
    )
 The accompanying notes are an integral part of these consolidated financial statements.
  F-5




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Intelligent Systems Corporation
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended December 31,2009
    
    
    2008OPERATING ACTIVITIES:Net loss
    
    $
    (1,213
    )
    
    $
    (823
    )Adjustments to reconcile net loss to net cash used for operating activities:Depreciation and amortization
    
    
    552
    
    
    
    511Stock-based compensation expense
    
    
    11
    
    
    
    20Loss (gain) on sale of discontinued operations
    
    
    42
    
    
    
    (2,852
    )Non-cash interest income
    
    
    (72
    )
    
    
    (51
    )Goodwill impairment loss
    
    
    
    
    
    
    369Equity in income of affiliate company
    
    
    (9
    )
    
    
    (37
    )Changes in operating assets and liabilities, net of effect of sale of discontinued operationsAccounts receivable, net
    
    
    (110
    )
    
    
    569Accrued interest receivable
    
    
    2
    
    
    
    7Inventories, net
    
    
    87
    
    
    
    372Other current assets
    
    
    (119
    )
    
    
    53Accounts payable
    
    
    (346
    )
    
    
    (124
    )Accrued payroll
    
    
    (75
    )
    
    
    (406
    )Deferred revenue
    
    
    372
    
    
    
    (960
    )Accrued expenses
    
    
    (57
    )
    
    
    (410
    )Net cash used for operating activities
    
    
    (935
    )
    
    
    (3,762
    )INVESTING ACTIVITIES:Proceeds from sale of investments or marketable securities
    
    
    
    
    
    
    7Proceeds from sale of discontinued operations
    
    
    
    
    
    
    4,250Investment in subsidiary
    
    
    
    
    
    
    (182
    )Proceeds from notes and interest receivable
    
    
    352
    
    
    
    497Advances under note receivable
    
    
    (100
    )
    
    
    Purchases of property and equipment
    
    
    (179
    )
    
    
    (171
    )Net cash provided by investing activities
    
    
    73
    
    
    
    4,401FINANCING ACTIVITIES:Borrowings under line of credit
    
    
    335
    
    
    
    2,022Repayments made on line of credit
    
    
    (660
    )
    
    
    (2,112
    )Borrowings under notes payable
    
    
    
    
    
    
    124Payments on notes payable
    
    
    (99
    )
    
    
    (188
    )Proceeds from rights offering
    
    
    2,986
    
    
    
    Net cash provided by (used for) financing activities
    
    
    2,562
    
    
    
    (154
    )Effects of exchange rate changes on cash
    
    
    21
    
    
    
    35Net increase in cash
    
    
    1,721
    
    
    
    520Cash at beginning of year
    
    
    1,074
    
    
    
    554Cash at end of year
    
    $
    2,795
    
    
    $
    1,074
 The accompanying notes are an integral part of these consolidated financial statements.
  F-6




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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)  (in thousands)
 Year Ended December 31,2009
    
    
    2008SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    29
    
    
    $
    51Cash paid for income taxes
    
    
    8
    
    
    
    38
 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES IN 2008:
 Sale of VISaer Business:
  (in thousands)Proceeds from sale:Cash
    
    $
    3,025Note receivable, net of discount
    
    
    1,261Liabilities assumed by (assets transferred to) buyer:Other current assets
    
    
    (660
    )Property and equipment, net
    
    
    (15
    )Intangible assets
    
    
    (1,835
    )Other assets
    
    
    (17
    )Accrued payroll
    
    
    258Accounts payable
    
    
    437Deferred revenue
    
    
    584Other liability
    
    
    (126
    )Accrued transaction related expenses
    
    
    (60
    )Gain on sale of VISaer business
    
    $
    2,852
 The accompanying notes are an integral part of these consolidated financial statements.
  F-7




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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization
 Nature of Operations
 Use of Estimates
 Consolidation
 Translation of Foreign Currencies
 Accounts Receivable and Allowance for Doubtful Accounts
   F-8




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Inventories
 (in thousands)
    
    2009
    
    
    2008Raw materials
    
    $
    814
    
    
    $
    876Finished goods
    
    
    150
    
    
    
    175Total inventories
    
    $
    964
    
    
    $
    1,051
 Property and Equipment
 Classification
    
    Useful life in yearsMachinery and equipment
    
    
    3  5Furniture and fixtures
    
    
    5  7Leasehold improvements
    
    
    1  5Building
    
    
    39
  (in thousands)
    
    2009
    
    
    2008Machinery and equipment
    
    $
    3,113
    
    
    $
    3,773Furniture and fixtures
    
    
    155
    
    
    
    163Leasehold improvements
    
    
    262
    
    
    
    295Building
    
    
    475
    
    
    
    413Subtotal
    
    
    4,006
    
    
    
    4,644Accumulated depreciation
    
    
    (2,750
    )
    
    
    (3,061
    )Property and equipment, net
    
    $
    1,256
    
    
    $
    1,583
   F-9




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Leased Equipment
 (in thousands)
    
    2009
    
    
    2008Cost of leased equipment
    
    $
    887
    
    
    $
    1,341Accumulated depreciation
    
    
    (623
    )
    
    
    (949
    )Carrying value of leased equipment
    
    $
    264
    
    
    $
    392
  Investments
 Goodwill
  (in thousands)
    
    2009
    
    
    2008Beginning balance, net
    
    $
    
    
    
    $
    2,047Additions during year
    
    
    
    
    
    
    157Derecognition related to VISaer sale
    
    
    
    
    
    
    (1,835
    )Goodwill impairment loss
    
    
    
    
    
    
    (369
    )Ending balance, net
    
    $
    
    
    
    $
    
 Patents 
  F-10




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(in thousands)
    
    2009
    
    
    2008Patents
    
    $
    464
    
    
    $
    464Accumulated amortization
    
    
    (241
    )
    
    
    (196
    )Patents, net
    
    $
    223
    
    
    $
    268
  (in thousands)2010
    
    $
    452011
    
    
    452012
    
    
    452013
    
    
    452014
    
    
    43Total amortization expense
    
    $
    223
 Fair Value of Financial Instruments
      Revenue Recognition
   F-11




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##### Table of Contents




    
    an initial contract with the customer to license certain software modules, to provide
services to get the customer live on the software (such as training and customization) and to
provide post contract support (PCS) for a specified period of time thereafter (typically 12
month periods),
 
    
    purchase of additional licenses for new modules or for tier upgrades for a higher volume of
licensed accounts after the initial contract,
 
    
    other optional standalone contracts, usually performed after the customer is live on the
software, for services such as new interfaces or custom features requested by the customer,
additional training and problem resolution not covered in annual maintenance contracts, and
 
    
    contracts for certain software products involve an initial fee plus recurring monthly fees
for software usage, maintenance and support, which fees are recognized ratably over the
estimated term of the contract.
      Reclassification 
 Deferred Revenue 
  F-12




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Cost of Revenue
 Software Development Expense
  Warranty Costs
 Legal Expense
 Research and Development
 Stock Based Compensation
  Year ended December 31,
    
    2009
    
    
    2008Risk free interest rate
    
    
    0.5
    %
    
    
    2
    %Expected life of option in years
    
    
    10
    
    
    
    6.6Expected dividend yield rate
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    56
    %
    
    
    50
    %
  Income Taxes 
  F-13




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Comprehensive Loss
 Recent Accounting Pronouncements 
      2. DISCONTINUED OPERATIONS
 Sale of VISaer Business
  F-14




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Year Ended December 31,(in thousands)
    
    2009
    
    
    2008*Net sales
    
    $
    
    
    
    $
    760Operating loss
    
    
    
    
    
    
    (479
    )Net loss before tax
    
    
    
    
    
    
    (489
    )Income tax
    
    
    
    
    
    
    Net loss from discontinued operations
    
    $
    
    
    
    $
    (489
    )
 *
    
    through April 15, 2008 3. INVESTMENTS
  At December 31,
    
    Carrying Value(in thousands)
    
    2009
    
    
    2008NKD Enterprises
    
    $
    944
    
    
    $
    934
  As of and for the year ended December 31,(in thousands)
    
    2009
    
    
    2008Revenues
    
    $
    1,857
    
    
    $
    2,142Operating income
    
    
    22
    
    
    
    146Net income
    
    
    36
    
    
    
    146Current assets
    
    $
    274
    
    
    $
    318Non-current assets
    
    
    3,024
    
    
    
    3,028Current liabilities
    
    
    238
    
    
    
    316Stockholders equity
    
    
    3,060
    
    
    
    3,030
  F-15




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4. ACCOUNTS RECEIVABLE, NOTES RECEIVABLE AND CUSTOMER CONCENTRATIONS
   Revenue
    
    
    Accounts Receivable2009
    
    
    2008
    
    
    2009
    
    
    2008ChemFreeCustomer A
    
    
    13
    %
    
    
    11
    %
    
    
    18
    %
    
    
    14
    %Customer B
    
    
    6
    %
    
    
    9
    %
    
    
    6
    %
    
    
    18
    %Customer C
    
    
    35
    %
    
    
    35
    %
    
    
    18
    %
    
    
    18
    %Customer D
    
    
    12
    %
    
    
    9
    %
    
    
    20
    %
    
    
    17
    %CoreCardCustomer E
    
    
    2
    %
    
    
    10
    %
    
    
    18
    %
    
    
    6
    %
   5. SHORT-TERM BORROWINGS
  Year ended December 31,(in thousands)
    
    2009
    
    
    2008Maximum outstanding (month-end)
    
    $
    437
    
    
    $
    1,815Outstanding at year end
    
    
    
    
    
    
    325Interest rate at year end
    
    
    6.75
    %
    
    
    6.75
    %Average interest rate
    
    
    6.75
    %
    
    
    7.0
    %
  F-16




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6. INCOME TAXES
  Year ended December 31,(in thousands)
    
    2009
    
    
    2008Current
    
    $
    9
    
    
    $
    28
  Year ended December 31,
    
    2009
    
    
    2008Statutory rate, blended
    
    
    (35
    %)
    
    
    (38
    %)Change in valuation allowance
    
    
    35
    %
    
    
    38
    %Other
    
    
    1
    %
    
    
    1
    %Effective rate
    
    
    1
    %
    
    
    1
    %
  F-17




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##### Table of Contents



(in thousands)
    
    2009
    
    
    2008Deferred tax assets:Federal, state and foreign loss carryforwards
    
    $
    6,364
    
    
    $
    5,734Capitalized research and development
    
    
    2,428
    
    
    
    3,126Deferred revenue
    
    
    (461
    )
    
    
    (611
    )Federal and state tax credits
    
    
    2,135
    
    
    
    3,103Other
    
    
    281
    
    
    
    254Total deferred tax asset
    
    
    10,747
    
    
    
    11,606Less valuation allowance
    
    
    (10,747
    )
    
    
    (11,606
    )Net deferred tax asset
    
    $
    
    
    
    $
    
    (in thousands)
    
    2009
    
    
    20082017
    
    $
    1,038
    
    
    $
    1,0382019
    
    
    2,901
    
    
    
    2,9012021
    
    
    1,184
    
    
    
    1,1842022
    
    
    1,083
    
    
    
    1,0832023
    
    
    1,778
    
    
    
    1,778Thereafter
    
    
    10,198
    
    
    
    8,176Total
    
    $
    18,182
    
    
    $
    16,160
     F-18




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7. COMMITMENTS AND CONTINGENCIES
 Leases

 Year ended December 31,(in thousands)2010
    
    $
    4652011
    
    
    4652012
    
    
    193Total minimum lease payments
    
    $
    1,123
   Legal Matters
  VISaer Stock Purchase Transaction
  F-19




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##### Table of Contents



NYSE Amex Listing
  8. POST-RETIREMENT BENEFITS
  9. DEFINED CONTRIBUTION PLANS
  10. RELATED PARTY TRANSACTION
  11. STOCKHOLDERS EQUITY
   F-20




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12. STOCK OPTION PLANS
    2009
    
    
    2008Options outstanding at January 1
    
    
    221,000
    
    
    
    209,000Options granted
    
    
    12,000
    
    
    
    12,000Options outstanding at December 31
    
    
    233,000
    
    
    
    221,000Options available for grant at December 31
    
    
    422,000
    
    
    
    434,000Options exercisable at December 31
    
    
    215,000
    
    
    
    203,000Exercise price ranges per share:Granted
    
    $
    0.69
    
    
    $
    3.30Outstanding
    
    $
    0.69  $4.26
    
    
    $
    1.51  $4.26Weighted average exercise price per share:Granted
    
    $
    0.69
    
    
    $
    3.30Outstanding at December 31
    
    $
    2.37
    
    
    $
    2.46Exercisable at December 31
    
    $
    2.44
    
    
    $
    2.37
  F-21




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##### Table of Contents



Options Outstanding:
 Wgt. Avg.Range of
    
    Number
    
    
    Contractual
    
    
    Wgt. Avg.
    
    
    AggregateExercise Price
    
    Outstanding
    
    
    Life Remaining
    
    
    Exercise Price
    
    
    Intrinsic Value$0.69  $2.08
    
    
    148,000
    
    
    4.0 yrs
    
    
    $
    1.54
    
    
    $
    3,000$3.15  $4.26
    
    
    85,000
    
    
    3.2 yrs
    
    
    $
    3.82
    
    
    
    $0.69  $4.26
    
    
    233,000
    
    
    3.7 yrs
    
    
    $
    2.37
    
    
    $
    3,000
 Options Exercisable:
 Wgt. Avg.Range of
    
    Number
    
    
    Contractual
    
    
    Wgt. Avg.Exercise Price
    
    Exercisable
    
    
    Life Remaining
    
    
    Exercise Price$1.51  $2.08
    
    
    136,000
    
    
    3.6 yrs
    
    
    $
    1.62$3.15  $4.26
    
    
    79,000
    
    
    2.8 yrs
    
    
    $
    3.86$1.51  $4.26
    
    
    215,000
    
    
    3.3 yrs
    
    
    $
    2.44
  13. FOREIGN REVENUES AND OPERATIONS
  Year ended December 31,(in thousands)
    
    2009
    
    
    2008Foreign Countries:United Kingdom
    
    $
    736
    
    
    $
    1,591Chile
    
    
    11
    
    
    
    19Pacific Rim *
    
    
    112
    
    
    
    144Canada
    
    
    269
    
    
    
    13Other
    
    
    28
    
    
    
    44Subtotal
    
    
    1,156
    
    
    
    1,811United States
    
    
    11,710
    
    
    
    15,070Total
    
    $
    12,866
    
    
    $
    16,881
 *
    
    Includes Australia, New Zealand, Japan and Singapore    F-22




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14. INDUSTRY SEGMENTS
   Year ended December 31,(in thousands)
    
    2009
    
    
    2008Information TechnologyRevenue
    
    $
    2,160
    
    
    $
    3,042Operating loss
    
    
    (1,682
    )
    
    
    (2,619
    )Depreciation and amortization
    
    
    82
    
    
    
    86Capital expenditures
    
    
    109
    
    
    
    16Identifiable assets
    
    
    2,693
    
    
    
    2,600Industrial ProductsRevenue
    
    $
    10,706
    
    
    $
    13,839Operating income
    
    
    1,479
    
    
    
    399Depreciation and amortization
    
    
    453
    
    
    
    395Capital expenditures
    
    
    64
    
    
    
    143Identifiable assets
    
    
    3,824
    
    
    
    4,415Consolidated SegmentsRevenue
    
    $
    12,866
    
    
    $
    16,881Operating loss
    
    
    (203
    )
    
    
    (2,220
    )Depreciation and amortization
    
    
    535
    
    
    
    481Capital expenditures
    
    
    173
    
    
    
    159Identifiable assets
    
    
    6,517
    
    
    
    7,015
  Year ended December 31,(in thousands)
    
    2009
    
    
    2008Consolidated segments operating loss
    
    $
    (203
    )
    
    $
    (2,220
    )Corporate expenses
    
    
    (1,076
    )
    
    
    (985
    )Consolidated loss from continuing operations
    
    $
    (1,279
    )
    
    $
    (3,205
    )Depreciation and amortizationConsolidated segments
    
    $
    535
    
    
    $
    481Corporate
    
    
    17
    
    
    
    30Consolidated
    
    $
    552
    
    
    $
    511
  F-23




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##### Table of Contents



Year ended December 31,(in thousands)
    
    2009
    
    
    2008Capital expendituresConsolidated segments
    
    $
    173
    
    
    $
    159Corporate
    
    
    6
    
    
    
    12Consolidated
    
    $
    179
    
    
    $
    171
 As of December 31,(in thousands)
    
    2009
    
    
    2008AssetsConsolidated segments identifiable assets
    
    $
    6,517
    
    
    $
    7,015Corporate
    
    
    3,517
    
    
    
    1,691Consolidated
    
    $
    10,034
    
    
    $
    8,706
 15. NET LOSS PER SHARE
   Year ended December 31,(in thousands except per share data)
    
    2009
    
    
    2008BasicNet loss
    
    $
    (1,213
    )
    
    $
    (823
    )Weighted average common shares outstanding
    
    
    6,345
    
    
    
    4,479Net loss per share
    
    $
    (0.19
    )
    
    $
    (0.18
    )DilutedNet loss
    
    $
    (1,213
    )
    
    $
    (823
    )Weighted average common shares outstanding
    
    
    6,345
    
    
    
    4,479Effect of dilutive potential common shares: stock options
    
    
    
    
    
    
    Total
    
    
    6,345
    
    
    
    4,479Net loss per share
    
    $
    (0.19
    )
    
    $
    (0.18
    )
  16. SUBSEQUENT EVENTS
   F-24