10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ Quarterly Report UNDER SECTION 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019 OR

☐ 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

(Exact name of registrant as specified in its charter)

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)

Registrant’s telephone number, including area code: (770) 381-2900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     ☐	Accelerated filer                       ☐
Non-accelerated filer       ☐	Smaller reporting company     ☑
	Emerging growth company     ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use to the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.01 par value for the class	INS	NYSE American

As of September 30, 2019, 8,897,988 shares of Common Stock of the issuer were outstanding.

Intelligent Systems Corporation

Index

Form 10-Q

		Page
Part I	Financial Information
Item 1	Financial Statements
	Consolidated Balance Sheets at September 30, 2019 and December 31, 2018	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018	4
	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4	Controls and Procedures	15
Part II	Other Information
Item 1	Legal Proceedings	16
Item 6	Exhibits	16
Signatures		17

2

Part I Financial Information

Item 1. Financial Statements

Intelligent Systems Corporation

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

As of	September 30, 2019			December 31, 2018
	(unaudited)			(audited)
ASSETS
Current assets:
Cash	$	23,676		$	18,919
Marketable securities		370			349
Accounts receivable, net		6,059			3,731
Notes and interest receivable, current portion		‒			581
Other current assets		1,039			1,202
Total current assets		31,144			24,782
Investments		3,309			760
Notes and interest receivable, net of current portion		1,272			1,745
Property and equipment, at cost less accumulated depreciation		2,336			1,513
Other long-term assets		1,469			504
Total assets	$	39,530		$	29,304
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	280		$	272
Deferred revenue, current portion		442			781
Accrued payroll		2,049			1,145
Accrued expenses		98			71
Income tax payable		1,504			284
Other current liabilities		1,154			719
Total current liabilities		5,527			3,272
Noncurrent liabilities:
Deferred revenue, net of current portion		41			111
Long-term lease obligation		509			‒
Total noncurrent liabilities		550			111
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,897,988 and 8,817,988 issued and outstanding at September 30, 2019 and December 31, 2018, respectively		89			88
Additional paid-in capital		15,341			15,050
Accumulated other comprehensive loss		(124	)		(92	)
Accumulated income		18,147			10,875
Total Intelligent Systems Corporation stockholders’ equity		33,453			25,921
Total liabilities and stockholders’ equity	$	39,530		$	29,304

The accompanying notes are an integral part of these consolidated financial statements.

3

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except share and per share amounts)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
Revenue
Services	$	7,297		$	5,286	$	20,275	$	13,757
Products		2,225			129		3,725		289
Total net revenue		9,522			5,415		24,000		14,046
Cost of revenue
Services		3,012			2,323		8,445		5,972
Products		−			−		−		136
Total cost of revenue		3,012			2,323		8,445		6,108
Expenses
Marketing		35			85		124		240
General and administrative		700			466		2,394		1,357
Research and development		1,575			805		3,634		2,467
Income from operations		4,200			1,736		9,403		3,874
Other income (loss)		(5	)		245		248		128
Income before Income taxes		4,195			1,981		9,651		4,002
Income taxes		1,103			115		2,379		185
Net income	$	3,092		$	1,866	$	7,272	$	3,817
Earnings per share attributable to Intelligent Systems Corporation:
Basic	$	0.35		$	0.21	$	0.82	$	0.43
Diluted	$	0.34		$	0.21	$	0.81	$	0.43
Basic weighted average common shares outstanding		8,886,321			8,797,988		8,859,544		8,789,099
Diluted weighted average common shares outstanding		9,013,459			8,976,415		8,977,501		8,943,652

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
Net income	$	3,092	$	1,866		$	7,272		$	3,817
Other comprehensive income (loss):
Foreign currency translation adjustments		4		(11	)		(32	)		4
Unrealized gain on available-for-sale marketable securities		−		(11	)		−			(23	)
Total comprehensive income	$	3,096	$	1,844		$	7,240		$	3,798

The accompanying notes are an integral part of these consolidated financial statements.

4

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)	Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Earnings		Stockholders’ Equity
	Shares
Balance at December 31, 2017		8,777,988	$	88	$	14,877	$	(143	)	$	4,631	$	19,453
Net income											893		893
Stock compensation expense						13							13
Foreign currency translation adjustment								1					1
Unrealized loss on marketable securities								(17	)				(17	)
Balance at March 31, 2018		8,777,988	$	88	$	14,890		(159	)	$	5,524	$	20,343
Stock options exercised		20,000				34							34
Net income											1,058		1,058
Stock compensation expense						13							13
Foreign currency translation adjustment								14					14
Unrealized gain on marketable securities								5					5
Balance at June 30, 2018		8,797,988	$	88	$	14,937		(140	)	$	6,582	$	21,467
Net income											1,866		1,866
Stock compensation expense						18							18
Foreign currency translation adjustment								(11	)				(11	)
Unrealized gain on marketable securities								(11	)				(11	)
Balance at September 30, 2018		8,797,988	$	88	$	14,955		(162	)	$	8,448	$	23,329
Balance at December 31, 2018		8,817,988	$	88	$	15,050	$	(92	)	$	10,875	$	25,921
Stock options exercised		33,000		1		58							59
Net income											2,072		2,072
Stock compensation expense						25							25
Foreign currency translation adjustment								(1	)				(1	)
Balance at March 31, 2019		8,850,988	$	89	$	15,133	$	(93	)	$	12,947	$	28,076
Net income											2,108		2,108
Stock compensation expense						55							55
Foreign currency translation adjustment								(35	)				(35	)
Balance at June 30, 2019		8,850,988	$	89	$	15,188	$	(128	)	$	15,055	$	30,204
Stock options exercised		47,000				104							104
Net income											3,092		3,092
Stock compensation expense						49							49
Foreign currency translation adjustment								4					4
Balance at September 30, 2019		8,897,988	$	89	$	15,341	$	(124	)	$	18,147	$	33,453

The accompanying notes are an integral part of these consolidated financial statements.

5

Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Nine Months Ended September 30,
CASH PROVIDED BY (USED FOR):	2019			2018
OPERATING ACTIVITIES:
Net income	$	7,272		$	3,817
Adjustments to reconcile net income from continuing operations to net cash used for operating activities:
Depreciation and amortization		730			429
Stock-based compensation expense		129			44
Non-cash investment expense		−			255
Non-cash interest income		(23	)		(37	)
Equity in loss of affiliate company		104			25
Changes in operating assets and liabilities:
Accounts receivable		(2,328	)		(1,811	)
Other current assets		163			1,249
Other long-term assets		(65	)		(57	)
Accounts payable		8			(52	)
Accrued payroll		904			724
Deferred revenue, current portion		(339	)		70
Accrued expenses		27			(27	)
Other current liabilities		1,167			341
Deferred revenue, net of current portion		(70	)		16
Net cash provided by (used for) operating activities		7,679			4,986
INVESTING ACTIVITIES:
Purchases of property and equipment		(1,553	)		(663	)
Advances of notes receivable		(1,500	)		(1,035	)
Net cash used for investing activities		(3,053	)		(1,698	)
FINANCING ACTIVITIES:
Sale of capital stock pursuant to exercise of option		163			34
Net cash provided by financing activities		163			34
Effects of exchange rate changes on cash		(32	)		4
Net increase in cash		4,757			3,326
Cash at beginning of period		18,919			14,024
Cash at end of period	$	23,676		$	17,350
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes	$	875		$	−

The accompanying notes are an integral part of these consolidated financial statements.

6

Intelligent Systems Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation 

Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. The unaudited Consolidated Financial Statements presented in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and nine month periods ended September 30, 2019 and 2018. The interim results for the three and nine months ended September 30, 2019 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, 2018, as filed in our Annual Report on Form 10-K.

There have been no material changes in the Company’s significant accounting policies, other than the adoption of accounting standards update (“ASU”) 2016-02, Leases (Topic 842) related to the accounting for leases, as of January 1, 2019 as described below, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Accounting Pronouncements Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior accounting guidance. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. We adopted ASU 2016-02 as of January 1, 2019 utilizing the modified retrospective transition method at the beginning of the first quarter of 2019. We have elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date, (3) initial direct costs for any existing leases as of the adoption date and (4) the application of hindsight when determining lease term and assessing impairment of right-of-use assets. The adoption of the new standard on January 1, 2019, resulting in a lease obligation and related right-of-use asset of approximately $1,258,000. The impact on the statement of operations was not material.

We have considered all other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our Consolidated Financial Statements.

2. REVENUE

Disaggregation of Revenue

In the following table, revenue is disaggregated by type of revenue for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
License	$	2,225	$	129	$	3,725	$	289
Professional services		4,579		3,178		13,206		8,050
Processing and maintenance		2,235		1,678		5,770		4,762
Third party		483		430		1,299		945
Total	$	9,522	$	5,415	$	24,000	$	14,046

7

Foreign revenues are based on the location of the customer. Revenues from customers by geographic areas for the three and nine months ended September 30, 2019 and 2018 are as follows:   

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
European Union	$	448	$	950	$	2,899	$	2,496
United States		9,074		4,465		21,101		11,549
Total	$	9,522	$	5,415	$	24,000	$	14,046

Concentration of Revenue

The following table indicates the percentage of consolidated revenue represented by each customer that represented more than 10 percent of consolidated revenue in the three and nine month periods ended September 30, 2019 and 2018. Most of our customers have multi-year contracts with recurring revenue as well as professional services fees that vary by period depending on their business needs.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Customer A		69.8%		37.5%		58.1%		35.3%
Customer B		4.3%		17.0%		11.7%		17.4%

3. INVESTMENTs

Beginning in the quarter ended September 30, 2017, and in subsequent periods we entered into a Loan Agreement and various Promissory Notes, as discussed in more detail in Note 4, with a privately-held identity and professional services company with ties to the FinTech industry. In June 2019, we converted the Loan Agreement and all Promissory Notes into equity resulting in ownership of 40 percent of the company. We also entered into a new Loan Agreement with a principal balance of $1,000,000 that bears interest at the rate of 6.0 percent annually with a maturity date of June 2021. We account for our investment using the equity method of accounting which resulted in a loss of $104,000 for the three and nine months ended September 30, 2019 included in other income (loss) on the Consolidated Statement of Operations. The carrying value is included in long-term investments.

In the quarter ended June 30, 2018, we recorded an impairment charge of $250,000 to reduce the carrying value of our minority equity ownership in one of our investee companies, a privately held technology company and program manager in the FinTech industry.

4. NOTES RECEIVABLE

During the quarter ended September 30, 2017, we entered into a Loan Agreement with a privately-held identity and professional services company with ties to the FinTech industry. We committed to lend up to $1,500,000 all of which has been advanced as of September 30, 2019. During 2018, we advanced $550,000 on three separate simple Promissory Note(s) and in 2019 we advanced an additional $500,000 to the company. As discussed in Note 3, we converted the Loan Agreement and all outstanding Promissory Notes to an equity ownership of 40 percent of the company. At the same time, we entered into and advanced a $1,000,000 Loan Agreement that bears interest at the rate of 6.0 percent annually with a maturity date of June 2021.

During the quarter ended March 31, 2018, we entered into a Convertible Loan Agreement with a private limited India based company in the FinTech industry. We committed to lend up to $435,000 with an initial advance of $235,000. The loan bears interest at the rate of 5.0 percent annually with the maturity date on the third anniversary of funding of such Promissory Note. We are entitled to convert the principal on the initial note for up to ten percent ownership of shares of the company.

8

5. STOCK-based COMPENSATION

At September 30, 2019, we have three stock-based compensation plans in effect. We record compensation cost related to unvested stock awards by recognizing the unamortized grant date fair value on a straight-line basis over the vesting periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the three and nine month periods ended September 30, 2019 and 2018 has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $49,000 and $18,000 of stock-based compensation expense for the three months ended September 30, 2019 and 2018, respectively, and $129,000 and $44,000 for the nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019, there is $476,000 of unrecognized compensation cost related to stock options. There were 47,000 and 80,000 options exercised during the three and nine months ended September 30, 2019, respectively. No options expired unexercised. The following table summarizes options as of September 30, 2019:

	# of Shares		Wgt Avg Exercise Price		Wgt Avg Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at September 30, 2019		153,500	$	7.68		4.7	$	5,197,170
Vested and exercisable at September 30, 2019		111,500	$	2.11		3.0	$	4,396,270

The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2018 Form 10-K.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the company’s closing stock price on the last trading day of the third quarter of 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2019. The amount of aggregate intrinsic value will change based on the market value of the company’s stock.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, marketable securities, trade accounts and notes receivable. Our available cash is held in accounts managed by third-party financial institutions. Cash may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While we monitor cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

7. FAIR VALUE MEASUREMENTS

In determining fair value, the company uses quoted market prices in active markets. GAAP establishes a fair value measurement framework, provides a single definition of fair value, and requires expanded disclosure summarizing fair value measurements. GAAP emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable input be used when available.  Observable inputs are based on data obtained from sources independent of the company that market participants would use in pricing the asset or liability.  Unobservable inputs are inputs that reflect the company’s assumptions about the estimates market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. 

9

The hierarchy is measured in three levels based on the reliability of inputs:

• Level 1

Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.

• Level 2

Valuations based on quoted prices in less active, dealer or broker markets.  Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities.

• Level 3

Valuations derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and not based on market, exchange, dealer, or broker-traded transactions.  Level 3 valuations incorporate certain assumptions and projections that are not observable in the market and significant professional judgment is needed in determining the fair value assigned to such assets or liabilities.

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

Our marketable securities are classified within Level 1 of the valuation hierarchy.

The fair value of equity method and cost method investments has not been determined as it was impracticable to do so due to the fact that the investee companies are relatively small, early stage private companies for which there is no comparable valuation data available without unreasonable time and expense.

8. COMMITMENTS AND CONTINGENCIES

Leases

We have noncancelable operating leases for offices and data centers expiring at various dates through March 2024. These operating leases are included in "Other long-term assets" on the Company's September 30, 2019 Consolidated Balance Sheet and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are included in "other current liabilities" and "Long-term lease obligation" on the Company's September 30, 2019 Consolidated Balance Sheet. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $1,258,000 on January 1, 2019. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of September 30, 2019, total right-of-use assets and operating lease liabilities were approximately $997,000. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. The weighted average discount rate used to determine our lease liabilities was 5.5 percent as of September 30, 2019. The weighted average remaining lease term as of September 30, 2019 was 1.4 years.

Legal Matters

On or about July 9, 2019, a securities class action complaint was filed in the United States District Court for the Eastern District of New York (Case No. 1:19-cv-03949) by Michael Skrzeczkoski, individually and on behalf of all others similarly situated, against the company, our executive officers, and each member of the Board of Directors. The complaint alleges, among other things, that certain of our press releases and SEC filings were misleading as a result of the failure to disclose alleged related party transactions affecting revenue recognition and the absence of disclosure regarding certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. The complaint seeks to recover attorney’s fees and costs and unspecified damages on behalf of purchasers who acquired our stock during the period from January 23, 2019, through May 29, 2019, and purportedly suffered financial harm as a result of the alleged misleading statements. On September 26, 2019, the Court appointed Edgardo Canez as lead plaintiff on behalf of the putative class. We dispute these claims and intend to defend the matter vigorously. We have not determined the likelihood of loss to be probable nor is any potential loss estimable at this time, therefore we have not recorded any related liability as of September 30, 2019.

10

There are no other pending or threatened legal proceedings against the company. However, in the ordinary course of business, from time to time we may be involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. We accrue for unpaid legal fees for services performed to date.

9. INCOME TAXES

Income Taxes – We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized, net of a valuation allowance, for the estimated future tax effects of deductible temporary differences and tax credit carry-forwards. A valuation allowance against deferred tax assets is recorded when, and if, based upon available evidence, it is more likely than not that some or all deferred tax assets will not be realized.

There were no unrecognized tax benefits at September 30, 2019 and December 31, 2018. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There were no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the periods presented. We have determined we have no uncertain tax positions.

We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership equals or exceeds 80 percent, as well as individual subsidiary returns in various states and foreign jurisdictions. With few exceptions we are no longer subject to U.S. federal, state and local or foreign income tax examinations by taxing authorities for returns filed more than three years ago.

11

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, 2018 as filed with the Securities and Exchange Commission.

Overview 

Our consolidated operations consist of our CoreCard Software subsidiary and its affiliate companies in India and Romania, as well as the corporate office which provides significant administrative, human resources and executive management support to CoreCard.

We provide technology solutions and processing services to the financial services market, commonly referred to as the FinTech industry. Our service revenue consists of fees for software maintenance and support for licensed software products, fees for processing services that we provide to companies that outsource their financial transaction processing functions to us, and professional services primarily for software customizations provided to both license and processing customers. We derive our product revenue from licensing our comprehensive suite of financial transaction management software to accounts receivable businesses, financial institutions, retailers and processors to manage their credit and debit cards, prepaid cards, private label cards, fleet cards, loyalty programs and accounts receivable and small loan transactions.

Our results vary in part depending on the size and number of software licenses recognized as well as the value and number of professional services contracts recognized in a particular period. As we continue to grow our Processing Services business, we continue to gain economies of scale on the investment we have made in the infrastructure, resources, processes and software features developed over the past number of years to support this growing side of our business. We are adding new processing customers at a faster pace than we are adding new license customers, resulting in steady growth in the processing revenue stream. However, we are also experiencing growth in our license revenue and associated professional services due to the addition of a large new customer in 2018. In total, this customer represented 58 percent of our consolidated revenues for the first nine months of 2019. We expect future professional services, maintenance, and license revenue from this customer in 2019 and future years; however, the amount and timing will be dependent on various factors not in our control such as the number of accounts on file and the level of customization needed by the customer. License revenue from this customer, similar to other license arrangements, is tiered based on the number of active accounts on the system. Once the customer achieves each tier level they receive a perpetual license up to that number of accounts; inactive accounts do not count toward the license tier. The customer receives an unlimited perpetual license at a maximum tier level that allows them to utilize the software for any number of active accounts. They currently use the software for a single institution, additional license fees apply if multiple institutions are added. Support and maintenance fees are charged based on the tier level achieved and increase at new tier levels.

The infrastructure of our multi customer environment is scalable for the future. A significant portion of our expense is related to personnel, including approximately 480 employees located in India and 10 employees located in Romania. Our ability to hire and train employees on our processes and software impacts our ability to onboard new customers and deliver professional services for software customizations. In addition, we have certain corporate office expenses associated with being a public company that impact our operating results.

Our revenue fluctuates from period to period and our results are not necessarily indicative of the results to be expected in future periods. It is difficult to predict the level of consolidated revenue on a quarterly or annual basis for a number of reasons, including the following:

● 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 software product and scope of the license 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.

12

● 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 or contract performance, but which may affect the amount, timing and characterization of our deferred and/or recognized revenue.

● Customers typically require our professional services to modify or enhance their CoreCard software implementation based on their specific business strategy and operational requirements, which vary from customer to customer and period to period.

● The timing of new processing customer implementations is often dependent on third party approvals or processes which are typically not under our direct control.

We continue to maintain a strong cash position. We intend to use cash balances to support the domestic and international operations associated with our CoreCard business and to expand our operations in the FinTech industry through financing the growth of CoreCard and, if appropriate opportunities become available, through acquisitions of businesses in this industry. In November 2018, our Board of Directors authorized a share repurchase program of $5 million. We did not make any share repurchases in 2018 or 2019.

Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes to Consolidated Financial Statements presented in this quarterly report.

Revenue – Total revenue in the three and nine month periods ended September 30, 2019 was $9,522,000 and $24,000,000, respectively, which represents increases of 76 percent and 71 percent compared to the respective periods in 2018.

● Revenue from services was $7,297,000 and $20,275,000 in the three and nine month periods ended September 30, 2019, respectively, which represents an increase of 38 percent and 47 percent compared to the respective periods in 2018. Revenue from transaction processing services, software maintenance and support services, and professional services were greater in the third quarter and year-to-date periods of 2019 as compared to the same periods of 2018 due to an increase in the number of customers and accounts on file, an increase in the number and value of professional services contracts completed during the third quarter and year-to-date period of 2019, primarily related to the large new license customer we added in 2018. We expect that processing services will continue to grow as our customer base increases; however, the time required to implement new customer programs could be delayed due to third party integration and approval processes and other factors. It is not possible to predict with any accuracy the number and value of professional services contracts that our customers will require in a given period. Customers typically request our professional services to modify or enhance their CoreCard® software implementation based on their specific business strategy and operational requirements, which vary from customer to customer and period to period.

● Revenue from products, which is primarily software license fees, was $2,225,000 and $3,725,000 in the three and nine month periods ended September 30, 2019, respectively, compared to $129,000 and $289,000 in the respective comparable periods of 2018. The increase is primarily due to the new license customer, as discussed above.

Cost of Revenue – Total cost of revenue was 32 percent and 35 percent of total revenue in the three and nine month periods ended September 30, 2019, respectively, compared to 43 percent of total revenue in the corresponding periods of 2018. The decrease in cost of revenue as a percentage of revenue is primarily driven by increased product sales with low associated costs. Cost of revenue includes costs to provide annual maintenance and support services to our installed base of licensed customers, costs to provide professional services, and costs to provide our financial transaction processing services. The cost and gross margins on such revenues can vary considerably from period to period depending on the customer mix, customer requirements and project complexity as well as the mix of our U.S. and offshore employees working on the various aspects of services provided. In addition, we continue to devote the resources necessary to support our growing processing business, including direct costs for regulatory compliance, infrastructure, network certifications, and customer support. However, we are continuing to experience economies of scale in our processing environment and did experience a decrease year over year for our cost of financial transaction processing services as a percentage of transaction processing services revenue. This may be subject to change in the future if new regulations or processing standards are implemented causing us to incur additional costs to comply.

13

Operating Expenses – In the three and nine month periods ended September 30, 2019, total operating expenses from consolidated operations were greater than in the corresponding period in 2018 primarily as the result of increased research and development expenses as well as higher general and administrative expenses. Research and development expenses were 96 percent and 47 percent higher in three and nine month periods in 2019, respectively, as compared to the same periods in 2018, mainly due to payroll and related expense for additional offshore technical personnel and a recognition based bonus accrual. General and administrative expenses were higher in 2019 than in 2018, due to higher legal and advisory expenses related to continuing contract negotiations and strategic initiatives of the Board as well as higher personnel-related expense at CoreCard and the corporate offices in 2019. Marketing expenses decreased for the three and nine month periods in 2019 as compared to the respective periods in 2018 as we continued to place less focus on marketing initiatives for CoreCard in 2019. Our client base continues to increase with minimal marketing efforts as we continue to have prospects contact us via online searches; however, we will continue to re-evaluate our marketing expenditures as needed to competitively position the business.   

Other Income (Loss) – In the three and nine months ended September 30, 2019, we recorded a loss of $5,000 and income of $248,000, respectively, compared to income of $245,000 and $128,000 for the comparable 2018 periods. The decrease in the third quarter of 2019 is primarily due to losses on equity method investments related to a 40% equity interest acquired in the second quarter of 2019, partially offset by higher income earned on our cash balances. The increase for the nine month period is primarily due to 2018 investment activity that did not recur in 2019 as well as higher income earned on our cash balances. The nine month period in 2018 included the write-down of $250,000 on an investment, as described in more detail in Note 3 to the Consolidated Financial Statements, offset in part by income earned on our cash balances.

Income Taxes – Our effective tax rate for the three and nine months ended September 30, 2019 was 26.3 percent and 24.7 percent, respectively, compared to 5.8 percent and 4.6 percent for the respective periods in 2018. The increase is due to utilization of net operating loss carryforwards in 2018.

Liquidity and Capital Resources

Our cash balance at September 30, 2019, was $23,676,000 compared to $18,919,000 at December 31, 2018. During the nine months ended September 30, 2019, cash provided by operations was $7,679,000 compared to cash provided by operations of $4,986,000 for the nine months ended September 30, 2018. The increase is primarily due to higher net income and an increase in other current liabilities, primarily income taxes payable. In addition, we advanced $1,500,000 on a Promissory Note and a Loan Agreement which is described in more detail in Note 4 to the Consolidated Financial Statements.

During the nine months ended September 30, 2019, we used $1,553,000 to acquire computer equipment primarily for enhancements to our processing environment in the U.S. and the technical resources added in our India offices.

We expect to have sufficient liquidity from cash on hand as well as projected customer payments to support our operations and capital equipment purchases in the foreseeable future. Currently, we expect to use cash in excess of what is required for our current operations for opportunities we believe will expand our CoreCard and FinTech business, although there can be no assurance that appropriate opportunities will arise.

Off-Balance Sheet Arrangements

We do not currently have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, liquidity or results of operations.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. We consider certain accounting policies related to revenue recognition and valuation of investments to be critical policies due to the estimation processes involved in each. To the extent deemed material, management discusses its estimates and judgments with the Audit Committee of the Board of Directors. For a detailed description on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Reference is also made to the discussion of the application of these critical accounting policies and estimates contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for 2018. During the nine month period ended September 30, 2019, there were no significant or material changes in the application of critical accounting policies, other than the adoption of ASU 2016-02, Leases (Topic 842) as described further in Note 1 and 8 to the Consolidated Financial Statements, that would require an update to the information provided in the Form 10-K for 2018.

14

Factors That May Affect Future Operations

Future operations are subject to risks and uncertainties that may negatively impact our future results of operations or projected cash requirements. It is difficult to predict future quarterly and annual results with certainty.

In addition to the factors discussed above in Overview to Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, numerous factors may affect our consolidated results of operations or financial condition, including but not limited to:

● Weakness or instability in the global financial markets could have a negative impact due to potential customers (most of whom perform some type of financial services) delaying decisions to purchase software or initiate processing services.

● Increased federal and state regulations and reluctance by financial institutions to act as sponsor banks for prospective customers could result in losses and additional cash requirements.

● In 2018, we added a large new license customer that represented approximately 70 percent and 58 percent of our consolidated revenues for the three and nine months ended September 30, 2019, respectively. Failure to meet our responsibilities under the related contract could result in breach of contract and loss of the customer and related future revenues.

● Delays in software development projects could cause our customers to postpone implementations or delay payments, which would increase our costs and reduce our revenue and cash.

● We could fail to deliver software products which meet the business and technology requirements of our target markets within a reasonable time frame and at a price point that supports a profitable, sustainable business model.

● Our processing business is impacted, directly or indirectly, by more regulations than our licensed software business. If we fail to provide services that comply with (or allow our customers to comply with) applicable regulations or processing standards, we could be subject to financial or other penalties that could negatively impact our business.

● 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.

● We could fail to expand our base of customers as quickly as anticipated, resulting in lower revenue and profits and increased cash needs.

● We 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.

● Increasing and changing government regulations 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 which could increase our costs and could affect our existing customer relationships or prevent us from getting new customers.

● Delays in anticipated customer payments for any reason would increase our cash requirements and could adversely impact our profits.

● 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 losses).

● 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 purchases.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the company carried out an evaluation, under the supervision and with the participation of the company’s management, including the company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective. There were no significant changes in the company’s internal control over financial reporting or in other factors identified in connection with this evaluation that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

15

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

On or about July 9, 2019, a securities class action complaint was filed in the United States District Court for the Eastern District of New York (Case No. 1:19-cv-03949) by Michael Skrzeczkoski, individually and on behalf of all others similarly situated, against the company, our executive officers, and each member of the Board of Directors. The complaint alleges, among other things, that certain of our press releases and SEC filings were misleading as a result of the failure to disclose alleged related party transactions affecting revenue recognition and the absence of disclosure regarding certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. The complaint seeks to recover attorney’s fees and costs and unspecified damages on behalf of purchasers who acquired our stock during the period from January 23, 2019, through May 29, 2019, and purportedly suffered financial harm as a result of the alleged misleading statements. On September 26, 2019, the Court appointed Edgardo Canez as lead plaintiff on behalf of the putative class. We dispute these claims and intend to defend the matter vigorously.

Item 6. Exhibits

The following exhibits are filed or furnished with this report:

 3.1 Amended and Restated Articles of Incorporation of the Registrant dated May 4, 2011 (Incorporated by reference to Exhibit 3.(1) to the Registrant’s Form 10-Q for the period ended March 31, 2011.)

 3.2 Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10-Q dated May 3, 2019.)

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.

101.INS** XBRL Instance

101.SCH** XBRL Taxonomy Extension Schema

101.CAL** XBRL Taxonomy Extension Calculation

101.DEF** XBRL Taxonomy Extension Definitions

101.LAB** XBRL Taxonomy Extension Labels

101.PRE** XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

16

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

	INTELLIGENT SYSTEMS CORPORATION Registrant
Date: November 1, 2019		By:	/s/ J. Leland Strange
		J. Leland Strange Chief Executive Officer, President
Date: November 1, 2019		By:	/s/ Matthew A. White
		Matthew A. White Chief Financial Officer

17

Exhibit Index

Exhibit No.	Descriptions
3.1	Amended and Restated Articles of Incorporation of the Registrant dated May 4, 2011 (Incorporated by reference to Exhibit 3.(1) to the Registrant’s Form 10-Q for the period ended March 31, 2011.)
3.2	Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Form 10-Q dated May 3, 2019.)
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.
101.INS**	XBRL Instance
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculations
101.DEF**	XBRL Taxonomy Extension Definitions
101.LAB**	XBRL Taxonomy Extension Labels
101.PRE**	XBRL Taxonomy Extension Presentation

**   XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

18

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, J. Leland Strange, certify that:

1. I have reviewed this report on Form 10-Q of Intelligent Systems Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 1, 2019

  /s/ J. Leland Strange 

J. Leland Strange

Chief Executive Officer and President

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Matthew A. White, certify that:

1. I have reviewed this report on Form 10-Q of Intelligent Systems Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 1, 2019

  /s/ Matthew A. White

Matthew A. White

Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the SARBANES-OXLEY ACT OF 2002

Each of the undersigned officers of Intelligent Systems Corporation (the “Company”) hereby certifies to his or her knowledge that the Company’s report on Form 10-Q for the period ended September 30, 2019 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 1, 2019	/s/ J. Leland Strange
	J. Leland Strange  Chief Executive Officer and President

/s/ Matthew A. White

 Matthew A. White

 Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Intelligent Systems Corporation and will be retained by Intelligent Systems Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Note 8 - Commitments and Contingencies (Details Textual) - USD ($)	Sep. 30, 2019	Jan. 01, 2019
Operating Lease, Right-of-Use Asset	$ 997,000	$ 1,258,000
Operating Lease, Liability, Total	$ 997,000	$ 1,258,000
Operating Lease, Weighted Average Discount Rate, Percent	5.50%
Operating Lease, Weighted Average Remaining Lease Term	1 year 146 days

XML

Note 3 - Investments (Details Textual) - USD ($)	1 Months Ended	3 Months Ended		9 Months Ended	12 Months Ended
	Jun. 30, 2019	Sep. 30, 2019	Jun. 30, 2018	Sep. 30, 2019	Dec. 31, 2018
Other Nonoperating Income (Expense) [Member] | Equity Method Investments [Member]
Gain (Loss) on Investments, Total		$ (104,000)		$ (104,000)
Privately-Held Identity and Professional Services Company With Ties to the FinTech Industry [Member]
Payments to Acquire Notes Receivable				$ 500,000	$ 550,000
Privately-Held Identity and Professional Services Company With Ties to the FinTech Industry [Member] | Loan Agreement, Six Percent, Maturing June 2021 [Member]
Payments to Acquire Notes Receivable	$ 1,000,000
Notes Receivable, Stated Interest Rate	6.00%
Privately-Held Identity and Professional Services Company With Ties to the FinTech Industry [Member]
Equity Method Investment, Ownership Percentage	40.00%
Other than Temporary Impairment Losses, Investments, Total			$ 250,000

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Sep. 30, 2019	Dec. 31, 2018
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, authorized (in shares)	20,000,000	20,000,000
Common stock, issued (in shares)	8,897,988	8,817,988
Common stock, outstanding (in shares)	8,897,988	8,817,988

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
OPERATING ACTIVITIES:
Net income	$ 7,272	$ 3,817
Adjustments to reconcile net income from continuing operations to net cash used for operating activities:
Depreciation and amortization	730	429
Stock-based compensation expense	129	44
Non-cash investment expense		255
Non-cash interest income	(23)	(37)
Equity in loss of affiliate company	104	25
Changes in operating assets and liabilities:
Accounts receivable	(2,328)	(1,811)
Other current assets	163	1,249
Other long-term assets	(65)	(57)
Accounts payable	8	(52)
Accrued payroll	904	724
Deferred revenue, current portion	(339)	70
Accrued expenses	27	(27)
Other current liabilities	1,167	341
Deferred revenue, net of current portion	(70)	16
Net cash provided by (used for) operating activities	7,679	4,986
INVESTING ACTIVITIES:
Purchases of property and equipment	(1,553)	(663)
Advances of notes receivable	(1,500)	(1,035)
Net cash used for investing activities	(3,053)	(1,698)
FINANCING ACTIVITIES:
Sale of capital stock pursuant to exercise of option	163	34
Net cash provided by financing activities	163	34
Effects of exchange rate changes on cash	(32)	4
Net increase in cash	4,757	3,326
Cash at beginning of period	18,919	14,024
Cash at end of period	23,676	17,350
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes	$ 875

XML

Note 5 - Stock-based Compensation (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable [Table Text Block]

	# of Shares		Wgt Avg Exercise Price		Wgt Avg Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at September 30, 2019		153,500	$	7.68		4.7	$	5,197,170
Vested and exercisable at September 30, 2019		111,500	$	2.11		3.0	$	4,396,270

XML

Note 8 - Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Legal Matters and Contingencies [Text Block]

8. COMMITMENTS AND CONTINGENCIES

Leases

We have noncancelable operating leases for offices and data centers expiring at various dates through

March 2024.

These operating leases are included in "Other long-term assets" on the Company's

September 30, 2019

Consolidated Balance Sheet and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are included in "other current liabilities" and "Long-term lease obligation" on the Company's

September 30, 2019

Consolidated Balance Sheet. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately

$

1,258,000

on

January 1, 2019.

Operating lease right-of-use assets and liabilities commencing after

January 1, 2019

are recognized at commencement date based on the present value of lease payments over the lease term. As of

September 30, 2019,

total right-of-use assets and operating lease liabilities were approximately

$997,000

.

Because the rate implicit in each lease is

not

readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. The weighted average discount rate used to determine our lease liabilities was

5.5

percent as of

September 30, 2019.

The weighted average remaining lease term as of

September 30, 2019

was

1.4

years.

Legal Matters

On or about

July 9, 2019,

a securities class action complaint was filed in the United States District Court for the Eastern District of New York (Case

No.

1:19

-cv-

03949

) by Michael Skrzeczkoski, individually and on behalf of all others similarly situated, against the company, our executive officers, and each member of the Board of Directors. The complaint alleges, among other things, that certain of our press releases and SEC filings were misleading as a result of the failure to disclose alleged related party transactions affecting revenue recognition and the absence of disclosure regarding certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. The complaint seeks to recover attorney’s fees and costs and unspecified damages on behalf of purchasers who acquired our stock during the period from

January 23, 2019,

through

May 29, 2019,

and purportedly suffered financial harm as a result of the alleged misleading statements. On

September 26, 2019,

the Court appointed Edgardo Canez as lead plaintiff on behalf of the putative class. We dispute these claims and intend to defend the matter vigorously. We have

not

determined the likelihood of loss to be probable nor is any potential loss estimable at this time, therefore we have

not

recorded any related liability as of

September 30, 2019.

There are

no

other pending or threatened legal proceedings against the company. However, in the ordinary course of business, from time to time we

may

be involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. We accrue for unpaid legal fees for services performed to date.

XML

Note 4 - Notes Receivable

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Financing Receivables [Text Block]

4. NOTES RECEIVABLE

During the quarter ended

September 30, 2017,

we entered into a Loan Agreement with a privately-held identity and professional services company with ties to the FinTech industry. We committed to lend up to

$1,500,000

all of which has been advanced as of

September 30, 2019.

During

2018,

we advanced

$550,000

on

three

separate simple Promissory Note(s) and in

2019

we advanced an additional

$500,000

to the company. As discussed in Note

3,

we converted the Loan Agreement and all outstanding Promissory Notes to an equity ownership of

40

percent of the company. At the same time, we entered into and advanced a

$1,000,000

Loan Agreement that bears interest at the rate of

6.0

percent annually with a maturity date of

June 2021.

During the quarter ended

March 31, 2018,

we entered into a Convertible Loan Agreement with a private limited India based company in the FinTech industry. We committed to lend up to

$435,000

with an initial advance of

$235,000.

The loan bears interest at the rate of

5.0

percent annually with the maturity date on the

third

anniversary of funding of such Promissory Note. We are entitled to convert the principal on the initial note for up to

ten

percent ownership of shares of the company.

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Current assets:
Cash	$ 23,676	$ 18,919
Marketable securities	370	349
Accounts receivable, net	6,059	3,731
Notes and interest receivable, current portion		581
Other current assets	1,039	1,202
Total current assets	31,144	24,782
Investments	3,309	760
Notes and interest receivable, net of current portion	1,272	1,745
Property and equipment, at cost less accumulated depreciation	2,336	1,513
Other long-term assets	1,469	504
Total assets	39,530	29,304
Current liabilities:
Accounts payable	280	272
Deferred revenue, current portion	442	781
Accrued payroll	2,049	1,145
Accrued expenses	98	71
Income tax payable	1,504	284
Other current liabilities	1,154	719
Total current liabilities	5,527	3,272
Noncurrent liabilities:
Deferred revenue, net of current portion	41	111
Long-term lease obligation	509
Total noncurrent liabilities	550	111
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,897,988 and 8,817,988 issued and outstanding at September 30, 2019 and December 31, 2018, respectively	89	88
Additional paid-in capital	15,341	15,050
Accumulated other comprehensive loss	(124)	(92)
Accumulated income	18,147	10,875
Total Intelligent Systems Corporation stockholders’ equity	33,453	25,921
Total liabilities and stockholders’ equity	$ 39,530	$ 29,304

XML

Consolidated Statements of Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	AOCI Attributable to Parent [Member]	Retained Earnings [Member]	Total
Balance (in shares) at Dec. 31, 2017	8,777,988
Balance at Dec. 31, 2017	$ 88	$ 14,877	$ (143)	$ 4,631	$ 19,453
Net income				893	893
Stock compensation expense		13			13
Foreign currency translation adjustment			1		1
Unrealized gain (loss) on marketable securities			(17)		(17)
Balance (in shares) at Mar. 31, 2018	8,777,988
Balance at Mar. 31, 2018	$ 88	14,890	(159)	5,524	20,343
Balance (in shares) at Dec. 31, 2017	8,777,988
Balance at Dec. 31, 2017	$ 88	14,877	(143)	4,631	19,453
Net income					3,817
Unrealized gain (loss) on marketable securities					(23)
Balance (in shares) at Sep. 30, 2018	8,797,988
Balance at Sep. 30, 2018	$ 88	14,955	(162)	8,448	23,329
Balance (in shares) at Mar. 31, 2018	8,777,988
Balance at Mar. 31, 2018	$ 88	14,890	(159)	5,524	20,343
Net income				1,058	1,058
Stock compensation expense		13			13
Foreign currency translation adjustment			14		14
Unrealized gain (loss) on marketable securities			5		5
Stock options exercised (in shares)	20,000
Stock options exercised		34			34
Balance (in shares) at Jun. 30, 2018	8,797,988
Balance at Jun. 30, 2018	$ 88	14,937	(140)	6,582	21,467
Net income				1,866	1,866
Stock compensation expense		18			18
Foreign currency translation adjustment			(11)		(11)
Unrealized gain (loss) on marketable securities			(11)		(11)
Balance (in shares) at Sep. 30, 2018	8,797,988
Balance at Sep. 30, 2018	$ 88	14,955	(162)	8,448	23,329
Balance (in shares) at Dec. 31, 2018	8,817,988
Balance at Dec. 31, 2018	$ 88	15,050	(92)	10,875	25,921
Net income				2,072	2,072
Stock compensation expense		25			25
Foreign currency translation adjustment			(1)		(1)
Stock options exercised (in shares)	33,000
Stock options exercised	$ 1	58			59
Balance (in shares) at Mar. 31, 2019	8,850,988
Balance at Mar. 31, 2019	$ 89	15,133	(93)	12,947	28,076
Balance (in shares) at Dec. 31, 2018	8,817,988
Balance at Dec. 31, 2018	$ 88	15,050	(92)	10,875	25,921
Net income					7,272
Unrealized gain (loss) on marketable securities
Stock options exercised (in shares)					80,000
Balance (in shares) at Sep. 30, 2019	8,897,988
Balance at Sep. 30, 2019	$ 89	15,341	(124)	18,147	$ 33,453
Balance (in shares) at Mar. 31, 2019	8,850,988
Balance at Mar. 31, 2019	$ 89	15,133	(93)	12,947	28,076
Net income				2,108	2,108
Stock compensation expense		55			55
Foreign currency translation adjustment			(35)		(35)
Balance (in shares) at Jun. 30, 2019	8,850,988
Balance at Jun. 30, 2019	$ 89	15,188	(128)	15,055	30,204
Net income				3,092	3,092
Stock compensation expense		49			49
Foreign currency translation adjustment			4		4
Unrealized gain (loss) on marketable securities
Stock options exercised (in shares)					47,000
Stock options exercised		104			$ 104
Balance (in shares) at Sep. 30, 2019	8,897,988
Balance at Sep. 30, 2019	$ 89	$ 15,341	$ (124)	$ 18,147	$ 33,453

XML

Note 7 - Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Fair Value Disclosures [Text Block]

7. FAIR VALUE MEASUREMENTS

In determining fair value, the company uses quoted market prices in active markets. GAAP establishes a fair value measurement framework, provides a single definition of fair value, and requires expanded disclosure summarizing fair value measurements. GAAP emphasizes that fair value is a market-based measurement,

not

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

GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable input be used when available.  Observable inputs are based on data obtained from sources independent of the company that market participants would use in pricing the asset or liability.  Unobservable inputs are inputs that reflect the company’s assumptions about the estimates market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. 

The hierarchy is measured in

three

levels based on the reliability of inputs:

• Level

1

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

not

applied to Level

1

instruments.

• Level

2

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

third

party pricing services for identical or comparable assets or liabilities.

• Level

3

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

not

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

3

valuations incorporate certain assumptions and projections that are

not

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

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

Our marketable securities are classified within Level

1

of the valuation hierarchy.

The fair value of equity method and cost method investments has

not

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

no

comparable valuation data available without unreasonable time and expense.

XML

Note 3 - Investments

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Equity Method Investments and Joint Ventures Disclosure [Text Block]

3. INVESTMENT s

Beginning in the quarter ended

September 30, 2017,

and in subsequent periods we entered into a Loan Agreement and various Promissory Notes, as discussed in more detail in Note

4,

with a privately-held identity and professional services company with ties to the FinTech industry. In

June 2019,

we converted the Loan Agreement and all Promissory Notes into equity resulting in ownership of

40

percent of the company. We also entered into a new Loan Agreement with a principal balance of

$1,000,000

that bears interest at the rate of

6.0

percent annually with a maturity date of

June 2021.

We account for our investment using the equity method of accounting which resulted in a loss of

$104,000

for the

three

and

nine

months ended

September 30, 2019

included in other income (loss) on the Consolidated Statement of Operations. The carrying value is included in long-term investments.

In the quarter ended

June 30, 2018,

we recorded an impairment charge of

$250,000

to reduce the carrying value of our minority equity ownership in

one

of our investee companies, a privately held technology company and program manager in the FinTech industry.

XML

Note 2 - Revenue (Tables)

9 Months Ended

Sep. 30, 2019

Notes Tables

Disaggregation of Revenue [Table Text Block]

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
License	$	2,225	$	129	$	3,725	$	289
Professional services		4,579		3,178		13,206		8,050
Processing and maintenance		2,235		1,678		5,770		4,762
Third party		483		430		1,299		945
Total	$	9,522	$	5,415	$	24,000	$	14,046

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
European Union	$	448	$	950	$	2,899	$	2,496
United States		9,074		4,465		21,101		11,549
Total	$	9,522	$	5,415	$	24,000	$	14,046

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Customer A		69.8%		37.5%		58.1%		35.3%
Customer B		4.3%		17.0%		11.7%		17.4%

XML

Note 5 - Stock-based Compensation - Summary of Stock Options (Details)	9 Months Ended
	Sep. 30, 2019 USD ($) $ / shares shares
Shares outstanding (in shares) | shares	153,500
Shares outstanding, weighted average exercise price (in dollars per share) | $ / shares	$ 7.68
Shares outstanding, weighted average remaining contractual life (Year)	4 years 255 days
Shares outstanding, aggregate intrinsic value | $	$ 5,197,170
Shares vested and exercisable (in shares) | shares	111,500
Shares vested and exercisable, weighted average exercise price (in dollars per share) | $ / shares	$ 2.11
Shares vested and exercisable, weighted average remaining contractual life (Year)	3 years
Shares vested and exercisable, aggregate intrinsic value | $	$ 4,396,270

XML

Note 2 - Revenue - Concentration of Revenue (Details) - Revenue Benchmark [Member] - Customer Concentration Risk [Member]	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Customer A [Member]
Concentration	69.80%	37.50%	58.10%	35.30%
Customer B [Member]
Concentration	4.30%	17.00%	11.70%	17.40%

XML

Note 1 - Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

 

Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. The unaudited Consolidated Financial Statements presented in this Form

10

-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do

not

include all of the information and notes required for complete financial statements. In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the

three

and

nine

month periods ended

September 30, 2019

and

2018.

The interim results for the

three

and

nine

months ended

September 30, 2019

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, 2018,

as filed in our Annual Report on Form

10

-K.

There have been

no

material changes in the Company’s significant accounting policies, other than the adoption of accounting standards update (“ASU”)

2016

-

02,

Leases (Topic

842

) related to the accounting for leases, as of

January 1, 2019

as described below, as compared to the significant accounting policies described in the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2018.

Accounting Pronouncements Adopted

In

February 2016,

the FASB issued ASU

2016

-

02,

Leases (Topic

842

) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior accounting guidance. ASU

2016

-

02

requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. We adopted ASU

2016

-

02

as of

January 1, 2019

utilizing the modified retrospective transition method at the beginning of the

first

quarter of

2019.

We have elected the package of practical expedients, which allows the Company

not

to reassess (

1

) whether any expired or existing contracts as of the adoption date are or contain a lease, (

2

) lease classification for any expired or existing leases as of the adoption date, (

3

) initial direct costs for any existing leases as of the adoption date and (

4

) the application of hindsight when determining lease term and assessing impairment of right-of-use assets. The adoption of the new standard on

January 1, 2019,

resulting in a lease obligation and related right-of-use asset of approximately

$1,258,000.

The impact on the statement of operations was

not

material.

We have considered all other recently issued accounting pronouncements and do

not

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

XML

Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenue
Total net revenue	$ 9,522	$ 5,415	$ 24,000	$ 14,046
Cost of revenue
Total cost of revenue	3,012	2,323	8,445	6,108
Expenses
Marketing	35	85	124	240
General and administrative	700	466	2,394	1,357
Research and development	1,575	805	3,634	2,467
Income from operations	4,200	1,736	9,403	3,874
Other income (loss)	(5)	245	248	128
Income before Income taxes	4,195	1,981	9,651	4,002
Income taxes	1,103	115	2,379	185
Net income	$ 3,092	$ 1,866	$ 7,272	$ 3,817
Earnings per share attributable to Intelligent Systems Corporation:
Basic (in dollars per share)	$ 0.35	$ 0.21	$ 0.82	$ 0.43
Diluted (in dollars per share)	$ 0.34	$ 0.21	$ 0.81	$ 0.43
Basic weighted average common shares outstanding (in shares)	8,886,321	8,797,988	8,859,544	8,789,099
Diluted weighted average common shares outstanding (in shares)	9,013,459	8,976,415	8,977,501	8,943,652
Service [Member]
Revenue
Total net revenue	$ 7,297	$ 5,286	$ 20,275	$ 13,757
Cost of revenue
Total cost of revenue	3,012	2,323	8,445	5,972
Product [Member]
Revenue
Total net revenue	2,225	129	3,725	289
Cost of revenue
Total cost of revenue				$ 136

XML

Note 9 - Income Taxes

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Income Tax Disclosure [Text Block]

9. INCOME TAXES

Income Taxes – We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized, net of a valuation allowance, for the estimated future tax effects of deductible temporary differences and tax credit carry-forwards. A valuation allowance against deferred tax assets is recorded when, and if, based upon available evidence, it is more likely than

not

that some or all deferred tax assets will

not

be realized.

There were

no

unrecognized tax benefits at

September 30, 2019

and

December 31, 2018.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There were

no

accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the periods presented. We have determined we have

no

uncertain tax positions.

We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership equals or exceeds

80

percent, as well as individual subsidiary returns in various states and foreign jurisdictions. With few exceptions we are

no

longer subject to U.S. federal, state and local or foreign income tax examinations by taxing authorities for returns filed more than

three

years ago.

XML

Note 5 - Stock-based Compensation

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

5. STOCK-based COMPENSATION

At

September 30, 2019,

we have

three

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

three

and

nine

month periods ended

September 30, 2019

and

2018

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

$49,000

and

$18,000

of stock-based compensation expense for the

three

months ended

September 30, 2019

and

2018,

respectively, and

$129,000

and

$44,000

for the

nine

months ended

September 30, 2019

and

2018,

respectively.

As of

September 30, 2019,

there is

$476,000

of unrecognized compensation cost related to stock options. There were

47,000

and

80,000

options exercised during the

three

and

nine

months ended

September 30, 2019,

respectively.

No

options expired unexercised. The following table summarizes options as of

September 30, 2019:

	# of Shares		Wgt Avg Exercise Price		Wgt Avg Remaining Contractual Life in Years		Aggregate Intrinsic Value
Outstanding at September 30, 2019		153,500	$	7.68		4.7	$	5,197,170
Vested and exercisable at September 30, 2019		111,500	$	2.11		3.0	$	4,396,270

The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our

2018

Form

10

-K.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the company’s closing stock price on the last trading day of the

third

quarter of

2019

and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on

September 30, 2019.

The amount of aggregate intrinsic value will change based on the market value of the company’s stock.

XML

Note 9 - Income Taxes (Details Textual) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Unrecognized Tax Benefits, Ending Balance	$ 0	$ 0
Unrecognized Tax Benefits, Income Tax Penalties and Interest Accrued, Total	0	0
Liability for Uncertainty in Income Taxes, Current	$ 0	$ 0

XML

Note 4 - Notes Receivable (Details Textual) - USD ($)	1 Months Ended	3 Months Ended	9 Months Ended	12 Months Ended
	Jun. 30, 2019	Mar. 31, 2018	Sep. 30, 2019	Dec. 31, 2018	Sep. 30, 2017
Privately-Held Identity and Professional Services Company With Ties to the FinTech Industry [Member]
Equity Method Investment, Ownership Percentage	40.00%
Privately-Held Identity and Professional Services Company With Ties to the FinTech Industry [Member]
Receivable Commitment to Lend					$ 1,500,000
Payments to Acquire Notes Receivable			$ 500,000	$ 550,000
Privately-Held Identity and Professional Services Company With Ties to the FinTech Industry [Member] | Loan Agreement, Six Percent, Maturing June 2021 [Member]
Payments to Acquire Notes Receivable	$ 1,000,000
Notes Receivable, Stated Interest Rate	6.00%
Private Limited India Based Company in the FinTech Industry [Member]
Receivable Commitment to Lend		$ 435,000
Payments to Acquire Notes Receivable		$ 235,000
Notes Receivable, Stated Interest Rate		5.00%
Private Limited India Based Company in the FinTech Industry [Member] | Maximum [Member]
Notes Receivable, Conversion, Percentage		10.00%

XML

Note 1 - Summary of Significant Accounting Policies (Details Textual) - USD ($)	Sep. 30, 2019	Jan. 01, 2019
Operating Lease, Liability, Total	$ 997,000	$ 1,258,000
Operating Lease, Right-of-Use Asset	$ 997,000	1,258,000
Accounting Standards Update 2016-02 [Member]
Operating Lease, Liability, Total		1,258,000
Operating Lease, Right-of-Use Asset		$ 1,258,000

XML

Note 5 - Stock-based Compensation (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($) shares	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) shares	Sep. 30, 2018 USD ($)
Number of Stock-based Compensation Plans in Effect	3		3
Share-based Payment Arrangement, Expense | $	$ 49,000	$ 18,000	$ 129,000	$ 44,000
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total | $	$ 476,000		$ 476,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period | shares	47,000		80,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Expirations in Period | shares			0

XML

Note 2 - Revenue - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Total net revenue	$ 9,522	$ 5,415	$ 24,000	$ 14,046
European Union [Member]
Total net revenue	448	950	2,899	2,496
UNITED STATES
Total net revenue	9,074	4,465	21,101	11,549
License [Member]
Total net revenue	2,225	129	3,725	289
Professional Services [Member]
Total net revenue	4,579	3,178	13,206	8,050
Processing and Maintenance [Member]
Total net revenue	2,235	1,678	5,770	4,762
Third party [Member]
Total net revenue	$ 483	$ 430	$ 1,299	$ 945

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2019 shares
Document Information [Line Items]
Entity Registrant Name	INTELLIGENT SYSTEMS CORP
Entity Central Index Key	0000320340
Trading Symbol	ins
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)	8,897,988
Entity Shell Company	false
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Amendment Flag	false
Title of 12(b) Security	Common Stock, $0.01 par value for the class

XML

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Net income	$ 3,092	$ 1,866	$ 7,272	$ 3,817
Other comprehensive income (loss):
Foreign currency translation adjustments	4	(11)	(32)	4
Unrealized gain on available-for-sale marketable securities		(11)		(23)
Total comprehensive income	$ 3,096	$ 1,844	$ 7,240	$ 3,798

XML

Note 2 - Revenue

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

2. REVENUE

Disaggregation of Revenue

In the following table, revenue is disaggregated by type of revenue for the

three

and

nine

months ended

September 30, 2019

and

2018:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
License	$	2,225	$	129	$	3,725	$	289
Professional services		4,579		3,178		13,206		8,050
Processing and maintenance		2,235		1,678		5,770		4,762
Third party		483		430		1,299		945
Total	$	9,522	$	5,415	$	24,000	$	14,046

Foreign revenues are based on the location of the customer. Revenues from customers by geographic areas for the

three

and

nine

months ended

September 30, 2019

and

2018

are as follows:   

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
European Union	$	448	$	950	$	2,899	$	2,496
United States		9,074		4,465		21,101		11,549
Total	$	9,522	$	5,415	$	24,000	$	14,046

Concentration of Revenue

The following table indicates the percentage of consolidated revenue represented by each customer that represented more than

10

percent of consolidated revenue in the

three

and

nine

month periods ended

September 30, 2019

and

2018.

Most of our customers have multi-year contracts with recurring revenue as well as professional services fees that vary by period depending on their business needs.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Customer A		69.8%		37.5%		58.1%		35.3%
Customer B		4.3%		17.0%		11.7%		17.4%

XML

Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

 

Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. The unaudited Consolidated Financial Statements presented in this Form

10

-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do

not

include all of the information and notes required for complete financial statements. In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the

three

and

nine

month periods ended

September 30, 2019

and

2018.

The interim results for the

three

and

nine

months ended

September 30, 2019

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, 2018,

as filed in our Annual Report on Form

10

-K.

There have been

no

material changes in the Company’s significant accounting policies, other than the adoption of accounting standards update (“ASU”)

2016

-

02,

Leases (Topic

842

) related to the accounting for leases, as of

January 1, 2019

as described below, as compared to the significant accounting policies described in the Company’s Annual Report on Form

10

-K for the year ended

December 31, 2018.

New Accounting Pronouncements, Policy [Policy Text Block]

Accounting Pronouncements Adopted

In

February 2016,

the FASB issued ASU

2016

-

02,

Leases (Topic

842

) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior accounting guidance. ASU

2016

-

02

requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. We adopted ASU

2016

-

02

as of

January 1, 2019

utilizing the modified retrospective transition method at the beginning of the

first

quarter of

2019.

We have elected the package of practical expedients, which allows the Company

not

to reassess (

1

) whether any expired or existing contracts as of the adoption date are or contain a lease, (

2

) lease classification for any expired or existing leases as of the adoption date, (

3

) initial direct costs for any existing leases as of the adoption date and (

4

) the application of hindsight when determining lease term and assessing impairment of right-of-use assets. The adoption of the new standard on

January 1, 2019,

resulting in a lease obligation and related right-of-use asset of approximately

$1,258,000

.

The impact on the statement of operations was

not

material.

We have considered all other recently issued accounting pronouncements and do

not

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

XML

Note 6 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Fair Value, Option [Text Block]

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, marketable securities, trade accounts and notes receivable. Our available cash is held in accounts managed by

third

-party financial institutions. Cash

may

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

no

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

no

assurances that access to our cash will

not

be impacted by adverse conditions in the financial markets.