UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 2011
OR
   
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission file number 1-9330
INTELLIGENT SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
   
Georgia58-1964787
(State or other jurisdiction of incorporation or organization)		 58-1964787
(I.R.S. Employer Identification No.)
   
4355 Shackleford Road, Norcross, Georgia30093
(Address of principal executive offices)		 30093
(Zip Code)
Registrant’s telephone number, including area code: ((770)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. Yesþ Noo
IndicatedIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).Yesoþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “acceleratedfiler,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
       
Large accelerated filero Accelerated filero Non-accelerated filero Smaller reporting companyþ
    (Do not check if a smaller reporting company)  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 30,July 31, 2011, 8,958,028 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 March 31,June 30, 2011 and December 31, 2010
  3 
     
Consolidated Statements of Operations for the three and six months ended March 31,June 30, 2011 and 2010
  4 
     
Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2011 and 2010
  5 
     
Notes to Consolidated Financial Statements
  6 
     
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
  910 
     
Item 4 Controls and Procedures
  1314 
     
Part II Other Information
    
     
Item 1 Legal Proceedings
  13
Item 5 Other Information
1415 
     
Item 6 Exhibits
  1416 
     
Signatures
  14
16 
     
 Exhibit 3.110.1
 EX.31.1 Section 302 Certification of Chief Executive OfficerExhibit 10.2
 EX.31.2 Section 302 Certification of Chief Financial OfficerExhibit 31.1
 EX.32.1 Section 906 Certification of Chief Executive Officer and Chief Financial OfficerExhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

 

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Part I FINANCIAL INFORMATION
Item 1. 
Financial Statements
Intelligent Systems Corporation
CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)
                
 March 31, December 31,  June 30, December 31, 
 2011 2010  2011 2010 
 (unaudited) (audited)  (unaudited) (audited) 
ASSETS
  
Current assets:  
Cash $2,901 $2,942  $3,190 $2,942 
Accounts receivable, net 2,325 2,227  2,941 2,227 
Notes and interest receivable, current portion 243 600 
Note and interest receivable, current portion 245 600 
Inventories, net 913 833  928 833 
Other current assets 643 404  517 404 
          
Total current assets 7,025 7,006  7,821 7,006 
          
Investments 1,295 1,286  1,306 1,286 
Notes and interest receivable, net of current portion 233 473 
Note and interest receivable, net of current portion 236 473 
Property and equipment, at cost less accumulated depreciation 1,290 1,149  1,353 1,149 
Patents, net 166 177  155 177 
          
Total assets $10,009 $10,091  $10,871 $10,091 
     
      
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
Current liabilities:  
Accounts payable $500 $322  $490 $322 
Deferred revenue, current portion 1,765 1,604  1,901 1,604 
Accrued payroll 521 550  460 550 
Accrued expenses 656 640  782 640 
Other current liabilities 275 307  277 307 
          
Total current liabilities 3,717 3,423  3,910 3,423 
          
Deferred revenue, net of current portion 65 70  60 70 
     
Other long-term liabilities 114 137  146 137 
          
Commitments and contingencies (Note 6) 
Commitments and contingencies (Note 8) 
Intelligent Systems Corporation stockholders’ equity:  
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028 issued and outstanding at March 31, 2011 and December 31, 2010 90 90 
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,958,028 shares issued and outstanding at June 30, 2011 and December 31, 2010 90 90 
Additional paid-in capital 21,426 21,418  21,435 21,418 
Accumulated other comprehensive loss 1 3 
Accumulated other comprehensive income (loss)  (3) 3 
Accumulated deficit  (16,920)  (16,566)  (16,283)  (16,566)
          
Total Intelligent Systems Corporation stockholders’ equity 4,597 4,945  5,239 4,945 
Non-controlling interest 1,516 1,516  1,516 1,516 
          
Total stockholders’ equity 6,113 6,461  6,755 6,461 
          
Total liabilities and stockholders’ equity $10,009 $10,091  $10,871 $10,091 
          
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.

 

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Intelligent Systems Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except share and per share amounts)
                        
 Three Months Ended March 31,  Three Months Ended June 30, Six Months Ended June 30, 
 2011 2010  2011 2010 2011 2010 
Revenue  
Products $3,032 $3,347  $3,645 $3,764 $6,677 $7,111 
Services 512 350  512 844 1,024 1,194 
              
Total revenue 3,544 3,697 
Total net revenue 4,157 4,608 7,701 8,305 
              
Cost of revenue  
Products 1,548 1,709  1,737 2,159 3,285 3,868 
Services 278 174  341 387 620 560 
              
Total cost of revenue 1,826 1,883  2,078 2,546 3,905 4,428 
              
Expenses  
Marketing 520 566  565 553 1,085 1,119 
General & administrative 918 725 
Research & development 639 437 
General and administrative 595 672 1,513 1,397 
Research and development 730 492 1,368 929 
              
Operating income (loss)  (359) 86 
Income (loss) from operations 189 345  (170) 432 
              
Other income (expense)  
Interest income, net 11 27  6 17 17 44 
Equity in income (loss) of affiliate company 9  (12) 11  (10) 20  (22)
Other income 6 6 
Other income, net 458 7 464 13 
              
Income (loss) before income taxes  (333) 107 
Income before income taxes 664 359 331 467 
Income taxes 21 23  27 61 48 84 
              
Net income (loss) $(354) $84 
Net income $637 $298 $283 $383 
              
Income (loss) per share: 
Income per share: 
Basic $(0.04) $0.01  $0.07 $0.03 $0.03 $0.04 
Diluted $(0.04) $0.01  $0.07 $0.03 $0.03 $0.04 
              
Basic weighted average common shares outstanding 8,958,028 8,958,028  8,958,028 8,958,028 8,958,028 8,958,028 
Diluted weighted average common shares outstanding 8,958,028 8,962,767  8,968,253 8,962,735 8,958,069 8,962,493 
              
The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)
                
 Three Months Ended March 31,  Six Months Ended June 30, 
CASH PROVIDED BY (USED FOR): 2011 2010 
 2011 2010 
  
OPERATIONS:
  
Net income (loss) $(354) $84 
Adjustments to reconcile net income (loss) to net cash used for operating activities: 
Net income $283 $383 
Adjustments to reconcile net income to net cash provided by (used for) operating activities: 
Depreciation and amortization 61 129  180 234 
Stock-based compensation expense 8 3  17 5 
Non-cash interest income, net  (3)  (18)  (8)  (36)
Equity in (income) loss of affiliate company  (9) 12   (20) 22 
Changes in operating assets and liabilities  
Accounts receivable  (98)  (243)  (714)  (700)
Inventories  (80) 186   (95) 192 
Other current assets  (239)  (128)  (113) 219 
Accounts payable 177  (26) 167 48 
Deferred revenue 156  (233) 227  (635)
Accrued payroll  (29) 74   (90) 10 
Accrued expenses  (38)  (39)
Accrued expenses and other liabilities 181 182 
          
Net cash used for operating activities  (448)  (199)
Net cash provided by (used for) operating activities 15  (76)
          
  
INVESTING ACTIVITIES:
  
Proceeds from notes and interest receivable 600  (2)
Proceeds from note and interest receivable 600 2 
Purchases of property and equipment  (191)  (130)  (361)  (226)
          
Net cash provided by (used for) investing activities 409  (132) 239  (224)
          
  
FINANCING ACTIVITIES:
  
Payments on notes payable —  (26) —  (116)
          
Net cash used for financing activities —  (26) —  (116)
          
  
Effects of exchange rate changes on cash  (2) 25   (6) 21 
          
Net decrease in cash  (41)  (332)
Net increase (decrease) in cash 248  (395)
Cash at beginning of period 2,942 2,795  2,942 2,795 
          
Cash at end of period $2,901 $2,463  $3,190 $2,400 
          
  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  
Cash paid during the period for interest $— $2  $— $3 
Cash paid during the period for income taxes $19 $20  $19 $25 
The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Intelligent Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)
1. 
Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. The unaudited Consolidated Financial Statements presented in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and six month periods ended March 31,June 30, 2011 and 2010. The interim results for the three and six months ended March 31,June 30, 2011 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, 2010, as filed in our Annual Report onForm 10-K.
2. 
Other Income from Settlement Agreement— As described in more detail in Part II Other Information, Item 1 Legal Proceedings of this report, our ChemFree subsidiary is a party to an action it brought against J. Walter Co. Ltd. and J. Walter, Inc. in the United States District Court for the Northern District of Georgia. In 2007, ChemFree sought sanctions against J. Walter and the law firm then representing the defendants for asserting a frivolous defense and counterclaim. On May 3, 2011, ChemFree entered into a Settlement Agreement with the defendants’ former attorneys whereby they agreed to pay $450,000 in settlement of ChemFree’s claim.The Settlement Agreement was approved by the court on May 6, 2011 and the payment of $450,000 was received by ChemFree on May 9, 2011. Accordingly, the company recorded $450,000 of income in the quarter ended June 30, 2011, which is reported in the category Other Income in the Consolidated Statements of Operations.
3.
Comprehensive Income (Loss)— Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity in a period. A summary follows:
         
Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 
(unaudited, in thousands) 2011  2010 
Net income (loss) $(354) $84 
Other comprehensive loss        
Foreign currency translation adjustment  (2)  24 
       
Comprehensive income (loss) $(356) $108 
       
                 
Consolidated Statements of      
Comprehensive Income Three Months Ended June 30,  Six Months Ended June 30, 
(unaudited, in thousands) 2011  2010  2011  2010 
Net income $637  $298  $283  $383 
Other comprehensive income:                
Foreign currency translation adjustment  3   4   6   20 
             
Comprehensive income $640  $302  $289  $403 
             
3.4. 
Stock-based Compensation— At March 31,June 30, 2011, we have one stock-basedhad two stock—based compensation planplans in effect. We record compensation cost related to unvested stock option awards by recognizing the unamortized grant date fair value on a straight line basis over the vestingservice periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the periods ended March 31, 2011 and 2010 has beenis recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $8,000$8,500 and $3,000$2,000 of stock-based compensation expense in the quartersthree months ended March 31,June 30, 2011 and 2010, respectively and $17,000 and $5,000 for the six month periods ended June 30, 2011 and 2010, respectively.
The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2010 Form 10-K.
  As of March 31,June 30, 2011, there is $62,000$112,000 of unrecognized compensation cost related to stock options. During the quarter ended June 30, 2011, an aggregate of 12,000 options were granted to the three months ended March 31,independent members of our board of directors pursuant to the 2011 a totalNon-Employee Director Stock Option Plan (Director Plan). Pursuant to the terms of 80,000the Director Plan, the options were granted at fair market value with one thirdon the date of the Annual Shareholders meeting. In addition, during the six month period ended June 30, 2011, an aggregate of 80,000 options vestingwere granted on each anniversary date in 2012, 2013March 1, 2011 at fair market value under the terms of the 2003 Employee Stock Option Plan. No options were exercised or expired during the three and 2014. six month periods ended June 30, 2011.

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The following table summarizes stock options as of March 31,June 30, 2011:
                 
          Wgt Avg    
          Remaining  Aggregate 
      Wgt Avg  Contractual Life  Intrinsic 
  # of Shares  Exercise Price  in Years  Value 
Outstanding at March 31, 2011  274,000  $2.00   5.3  $43,000 
Vested and exercisable at March 31, 2011  176,000  $2.23   2.9  $26,540 
                 
          Wgt Avg    
          Remaining  Aggregate 
      Wgt Avg  Contractual Life  Intrinsic 
  # of Shares  Exercise Price  in Years  Value 
Outstanding at June 30, 2011  286,000  $1.99   5.3  $9,840 
Vested and exercisable at June 30, 2011  188,000  $2.14   3.0  $8,880 
  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 firstsecond quarter of 2011 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 March 31,June 30, 2011. The amount of aggregate intrinsic value will change based on the fair market value of the company’s stock.

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4.5. 
Fair Value of Financial Instruments— The carrying value of cash, accounts receivable, accounts payable and certain other financial instruments (such as short-term borrowings, accrued expenses, and other current liabilities) included in the accompanying consolidated balance sheets approximates their fair value principally due to the short-term maturity of these instruments. The carrying value of non-interest bearing notenotes receivable beyond one year hashave been discounted at a rate of 4% which approximates rates offered in the market for notes receivable with similar terms and conditions. The fair value of equity method and cost method investments has not been determined as it was impracticable to do so 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.
  Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, trade accounts and note 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.
5.6. 
Concentration of Revenue— The following table indicates the percentage of consolidated revenue represented by each customer for any period in which such customer represented more than 10% of consolidated revenue.
                        
 Three Months Ended March 31,  Three Months Ended June 30, Six Months Ended June 30, 
(unaudited) 2011 2010  2011 2010 2011 2010 
ChemFree Customer A  11%  12%  27%  28%  30%  31%
ChemFree Customer B  33%  35%  13%  13%  12%  13%
ChemFree Customer C  11%  10%
ChemFree Customer D  11% — 
CoreCard Customer C  12% — — — 
CoreCard Customer D —  11% — — 
6.7.
Short-term Borrowings — On June 30, 2011, we renewed our working capital line of credit with our bank. The revolving line of credit bears interest at the higher of the prime rate plus one and one half percent and 6.5% (6.5% at June 30, 2011); is secured by all assets of the company and our principal subsidiaries; is guaranteed by our subsidiaries; and expires June 30, 2012. We may borrow an aggregate of 80 percent of qualified accounts receivable of our consolidated subsidiaries plus 50 percent of inventory, up to a maximum of $1,250,000. At June 30, 2011, our borrowing base calculation resulted in availability of $1,250,000, of which we had drawn down $0. The terms of the loan contain typical covenants not to sell or transfer material assets, to create liens against assets, to merge with another entity, to change corporate structure or the nature of our business, to declare or pay dividends, or to redeem shares of common stock. The loan agreement also contains covenants not to change the chief executive and chief financial officers of the company or to make loans to or invest in new minority-owned companies, without first obtaining the consent of our bank in each case. Furthermore, the terms of the loan include a covenant requiring the company to maintain a minimum tangible net worth as defined in the loan agreement at the end of each calendar quarter during the loan term. As of June 30, 2011, we were in compliance with the loan covenants.
8. 
Commitments and Contingencies— Please refer to Note 7 to ourin the Consolidated Financial Statements included in our 2010 Form 10-K for a description of our commitments and contingencies in addition to those disclosed here.

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Legal Matters —ChemFree Patent Matter — In December 2004,As explained in detail in Part II, Item 1 of this report, our ChemFree subsidiary filedhas been involved since 2004 in a legal matter related to a patent infringement action brought against J. Walter Co. Ltd. and J. Walter, Inc. (“J. Walter”) in the United States Court for the Northern District of Georgia. The complaint alleged that certain of the defendants’ products infringed four U.S. patents held by ChemFree and sought a ruling to compel the defendants to cease their infringing activities. The trial took place during the week of July 13, 2009. On June 18, 2010, the judge issued his preliminary Findings of Fact and Conclusions of Law which found (i) that certain of J. Walter’s products did infringe on ChemFree’s four patents-in-suit; (ii) in ChemFree’s favor on the issue of the patents’ named co-inventors and (iii) in J. Walter’s favor on the issue of invalidity of the four patents-in-suit for “obviousness”. In his ruling on invalidity of four of ChemFree’s patents due to obviousness, the judge relied heavily on a 2007 U.S. Supreme Court ruling (issued more than three years after ChemFree’s lawsuit was filed) which modified the manner for determining obviousness of a patent by replacing the long-standing rigid application of the “teaching, suggestion or motivation test” for determining obviousness with an “expansive and flexible approach”. On July 6, 2010, ChemFree filed a Motion for Reconsideration of the judge’s findings and conclusions followed on July 23, 2010 by the filing of a Second Motion for Additional Findings and Conclusions.conclusions. In an unusual turn of events, in October 2010, the judge hearing the case was arrested by the Federal Bureau of Investigation on criminal charges by the FBI, subsequently resigned and ChemFree’s case was reassigned to a new judge. A hearing withOn June 6, 2011, the new judge was held on February 11,issued a final ruling in J. Walter’s favor upholding the invalidity finding of the first judge and awarding recovery of allowable taxable costs from ChemFree. On July 1, 2011, andChemFree appealed the parties have submitted various additional filingsruling to the United States Court of Appeals for the judge’s consideration. We cannotFederal Court. ChemFree also filed a motion to disallow the clerk’s award for the recovery of allowable taxable costs. While the company presently believes it will prevail in its appeal, there can be no certainty that the Court of Appeals will find in its favor. If ChemFree does not prevail in the appeal, there is at least a reasonable possibility that ChemFree would incur some expenses for certain whenallowable taxable costs (which donot include attorney fees) in an amount to be determined by the case will finally be disposed of or whatcourt at the ultimate resolution will be.time.
  From time to time we are or may become a party to a number of other legal matters arising inIn the ordinary course of business. It is management’s opinion thatbusiness, we are not currentlymay be from time to time involved in anyvarious pending or threatened legal proceedingsactions. The litigation process is inherently uncertain and it is possible that willthe resolution of such matters might have a material adverse impact oneffect upon our consolidated financial position condition and/or results of operations.

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7.Except as noted above, other commitments and contingencies described in Note 7 to our Consolidated Financial Statements included in our 2010 Form 10-K are unchanged.
9. 
Industry Segments — — Segment information is presented consistentlyconsistent with the basis described in theour 2010 Form 10-K. The following table contains segment information for continuing operations for the three and six months ended March 31,June 30, 2011 and 2010.
                        
 Three Months Ended March 31,  Three Months Ended June 30, Six Months Ended June 30, 
(unaudited, in thousands) 2011 2010  2011 2010 2011 2010 
Information Technology
  
Revenue $550 $562  $991 $1,376 $1,541 $1,938 
Operating loss  (554)  (277)  (291)  (41)  (844)  (318)
Industrial Products
  
Revenue 2,994 3,135  3,166 3,232 6,160 6,367 
Operating income 582 670  687 641 1,269 1,311 
              
Consolidated Segments
  
Revenue 3,544 3,697  4,157 4,608 7,701 8,305 
Operating income (loss) 29 393 
Operating income 396 600 425 993 
Corporate expenses  (388)  (307)  (207)  (255)  (595)  (561)
              
Consolidated operating income (loss) $(359) $86 
Consolidated operating income ( loss) $189 $345 $(170) $432 
              
  
Depreciation and Amortization
  
Information Technology $40 $23  $34 $1 $74 $24 
Industrial Products 18 102  82 100 100 202 
              
Consolidated segments 58 125  116 101 174 226 
Corporate 3 4  3 4 6 8 
              
Consolidated depreciation and amortization $61 $129  $119 $105 $180 $234 
              
  
Capital Expenditures
  
Information Technology $127 $99  $35 $59 $161 $158 
Industrial Products 63 31  136 36 199 67 
              
Consolidated segments 190 130  171 95 360 225 
Corporate 1 —  — — 1 1 
              
Consolidated capital expenditures $191 $130  $171 $95 $361 $226 
              

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(unaudited, in thousands) March 31, 2011 December 31, 2010  June 30, 2011 December 31, 2010 
Identifiable Assets
  
Information Technology $2,186 $2,618  $2,468 $2,618 
Industrial Products 6,289 6,016  7,022 6,016 
          
Consolidated segments 8,475 8,634  9,490 8,634 
Corporate 1,534 1,457  1,381 1,457 
          
Consolidated assets $10,009 $10,091  $10,871 $10,091 
          
8.10. 
Income Taxes — — We have recognized tax benefits from all tax positions we have taken, and there has been no adjustment to any carry forwards, (netnet operating loss or research and development credits)R&D credits in the past two years. As of March 31,June 30, 2011, the company has recorded a liability of $122,228 in connection with unrecognized tax benefits related to uncertain tax positions. The liability includes $19,711 of interest and penalties. As of December 31, 2010, the company has recorded a liability of $90,000 in connection with unrecognized tax benefits, related to uncertain tax positions. The liability includeswhich included $15,000 of interest and penalties. As of March 31,June 30, 2011, management expects some incremental but not significant changes in the balance of unrecognized tax benefits over the next twelve months.
  Our policy is to recognize accrued interest related to uncertain tax positions in interest expense and related penalties, if applicable, in general and administrative expense. During the three and six months ended March 31,June 30, 2011, we recognized $5,007 in interest expense and $61 in penalties related to uncertain tax positions. During the three and six months ended June 30, 2010, nowe recognized $4,113 in interest orexpense and $4,509 in penalties were recognized.related to the uncertain tax positions.
  We file a consolidated U.S. federal income tax return for all subsidiaries in which our ownership equals or exceeds 80%,80 percent, as well as individual subsidiary returns in various states and foreign jurisdictions. OurFor periods prior to April 15, 2008, our VISaer subsidiary filed a separate U.S. federal income tax return prior to April 1, 2008.return. With few exceptions we are no longer subject to U.S. federal, state and local or foreign income tax examinations by taxing authorities for years before 2006.

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9.11. 
Recent Accounting Pronouncements —We— 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.
10.12. 
Subsequent EventEvents— We evaluated subsequent events through the date when these financial statements were issued. We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Consolidated Financial Statements.

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Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, this Form 10-Q may contain forward-looking statements relating to ISC. All statements, trend analyses and other information relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, and “intend”, and other similar expressions, constitute forward-looking statements. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties including those factors described below under “Factors That May Affect Future Operations”, and that actual results may differ materially from those contemplated by such forward-looking statements. Except to the extent required by law, 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 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission.
Overview
Our consolidated subsidiaries operate in two industry segments: Information Technology Products and Services (“Information Technology”) and Industrial Products. The Industrial Products segment includes ChemFree Corporation (bio-remediating parts washers)washer systems). The Information Technology sector consists of CoreCard Software, Inc. (“CoreCard”) (software for managing accounts receivables, prepaid, credit and debit prepaid, private label cards, revolving consumer loans and accounts receivable)cards).
We derive our product revenue from sales of software licenses in our Information Technology sector and sales and leases of equipment and supplies in our Industrial Products sector. Our service revenue consists of fees for activities such as customization, implementation, consulting, training, maintenance and support for licensed software products as well as for our card processing services in our Information Technology sector. Our revenue fluctuates from period to period and our results are not necessarily indicative of the results to be expected in future periods. Period-to-period comparisons may not be meaningful and it is difficult to predict the level of consolidated revenue on a quarterly or annual basis for a number of reasons, including the following:
A change in revenue level at one of our subsidiaries may be offset by an opposing change at another subsidiary.
Customers may decide to postpone or cancel a planned implementation of our software for any number of reasons, which may be unrelated to our software features or contract performance, but which may affect the amount, timing and characterization of our deferred and/or recognized revenue.
•A change in revenue level at one of our subsidiaries may be offset by an opposing change at another subsidiary.
•Customers may decide to postpone or cancel a planned implementation of our software for any number of reasons, which may be unrelated to our software features or contract performance, but which may affect the amount, timing and characterization of our deferred and/or recognized revenue.
•In the Information Technology sector, license revenue in a given period may consist of a relatively small number of contracts. Consequently, even small delays in a delivery under a software contract (which may be out of our control) could have an unpredictable impact on consolidated revenue that is recognized in a given quarterly or annual period.
We reported a net profit of $637,000 and $283,000 for the three and six months ended June 30, 2011. Included in these results is non-recurring income of $450,000 earned by our ChemFree subsidiary upon the settlement of a relatively small number of contracts. Consequently, even small delayslegal action which is described in a delivery under a software contract (which may be out of our control) could have an unpredictable impact on consolidated revenue that is recognizedmore detail in a given quarterly or annual period.
Note 2 to the Consolidated Financial Statements. Frequently we report consolidated operating losses on a quarterly or annual basis and are likely to do so in the future from time to time. Our ChemFree subsidiary generates an operating profit on a regular basis but our earlier stage subsidiary, CoreCard, is not consistently profitable, mainly due to significant research and development expense that is invested to complete new product offerings and the deferral of revenue recognition until initialnew software license contracts are complete and accepted by customers.complete. Depending upon the size and number of software licenses recognized in a particular period and the level of expenses incurred to support development and sales activities, CoreCard may report operating profits on an irregular basis as it builds its customer base. A significant portion of our subsidiaries’ expense is related to personnel. For these and other reasons, our operating profits or losses may vary from quarterperiod to quarterperiod and at the present time are generally not predictable with any degree of certainty.

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From time to time, we also generate income or incur losses from non-operating sources and we may do so in the future. We may derive income from sales of subsidiary, affiliate and other minority-owned companies. Occasionally, we record a charge if we believe the value of a non-consolidated company is impaired. We also recognize on a quarterly basis our pro rata share of the income or losses of an affiliate company accounted for by the equity method. The timing and amount of any gain or loss recognized as a result of a sale or the amount of equity in the income or losses of affiliates generally are not under our control and are not necessarily indicative of future results, either on a quarterly or annual basis.

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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 from continuing operations in the three month period ended March 31,June 30, 2011 was $3.5$4.2 million a decline of 4 percent compared to $4.6 million in the firstsecond quarter of 2010. Revenue from sales in domestic and international markets represented approximately 83 percent and 17 percent, respectively, ofFor the six month period ended June 30, 2011, total revenue was $7.7 million, compared with $8.3 million in the first quarter of 2011 compared to 86 percent and 14 percent, respectively,same period in the first quarter of 2010.
 • 
Revenue fromproducts, which includes sales and leases of equipment and supplies in our Industrial Products segment as well as software license fees related to the Information Technology segment, was $3.0$3.6 million in the three month period ended March 31,June 30, 2011, a 3 percent decrease compared to $3.3the three month period ended June 30, 2010. Product revenue was $6.7 million in the three monthssix month period ended March 31,June 30, 2011, a decline of 6 percent compared to the six month period ended June 30, 2010. The slight decline in product revenue in the firstsecond quarter and year-to-date period of 2011 compared to the prior year periods is the net effect of an increase in international revenue and total sales of consumable supplies at our ChemFree subsidiary which was offset in part by a decline in domestic sales of ChemFree’s SmartWasher® parts washer machines. SoftwareIn addition, software license revenue associated with the Information Technology segment declined in the three and six month periodperiods ended March 31,June 30, 2011 compared to the three month period ended March 31,same periods in 2010 due to a changefewer new contracts completed with lower total value in a customer’s go-live date which postponed license revenue recognition until the second quarter of 2011. By comparison,2011 than in the first quarter of 2010, CoreCard recognized revenue on the successful installation of its first international customer.corresponding periods last year. As we have frequently cautioned, a number of factors, some of which may be outside of our control, can cause delays in delivery of our software and implementation by the customer, thus delaying license revenue recognition.
Service revenue associated with the Information Technology segment was $512,000 in the first quarter of 2011, a 46 percent increase compared to $350,000 in the first quarter of 2010. The change is attributed mainly to an increase in the installed base of CoreCard customers that pay for maintenance and technical support as well as more professional services projects that were completed for customers in 2011. We expect that professional services revenue will continue to grow as CoreCard’s customer base increases; however, it is not possible to predict with any accuracy the number and value of professional services contracts that CoreCard’s customers will require in a given period. 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.
•
Servicerevenue associated with the Information Technology segment was $512,000 and $1,024,000 in the three and six months ended June 30, 2011, respectively, compared to $844,000 and $1,193,000 in the respective periods in 2010. Service revenue includes three components: revenue from annual maintenance and support contracts for our installed customer base, revenue from professional services (such as software customizations or modifications) and revenue from our card processing services. The change in the quarter and year-to-date periods in 2011 compared to the same periods in 2010 is attributed to the net effect of an increase in the installed base of customers that pay for maintenance and technical support and card processing services, offset by fewer professional services projects that were completed for CoreCard customers. The number and timing of professional services contracts vary significantly from period to period based on customer requirements and priorities.
Cost of Revenue— Total cost of revenue was 5250 percent and 51 percent of total revenue in the three and six month periodperiods ended March 31,June 30, 2011, respectively, compared to 5155 percent and 53 percent of total revenue in the first quarter of 2010.three and six month periods ended June 30, 2010, respectively. The slight change reflects primarily the fact that revenuechanges between periods reflect changes in ChemFree’s and CoreCard’s product and service mix from services represented a greater percentage of revenue in the first quarter of 2011 than in the first quarter of 2010. Cost of product revenue was unchanged at 51 percent of total product revenue in the first quarter of 2011 and 2010. Cost of services was 54 percent of services revenue in 2011 comparedperiod to 50 percent in the same period last year. The mix of service revenue in a given period, as well as the number of customers and new products being supported and the mix of U.S. and offshore employees working on professional service projects impact the cost and gross margins during a given period.
•
Cost ofproductrevenue was 48 percent and 49 percent of product revenue in the three and six months ended June 30, 2011, respectively, compared to costs of 57 percent and 54 percent of product revenue in the respective periods in 2010. In 2011, the lower cost of sales as a percent of revenue reflects a favorable mix at ChemFree of higher margin consumable products in 2011 as well as some unit cost reductions from bringing its filter production in-house in 2011. In addition, CoreCard’s costs associated with the software contracts recognized in 2011 were lower than the costs associated with contracts recognized in 2010, because they involved less complex implementations and were not fixed price contracts, as was the case in 2010.
•
Cost of servicerevenue (which relates to our CoreCard business only) was 67 percent and 61 percent of service revenue in the three and six month periods ended June 30, 2011, respectively, as compared to 46 percent and 47 percent of service revenue in the respective periods last year. The mix of service revenue in a given period, as well as the number of customers and new products being supported, impacts the gross margin on service revenue. Cost of service revenue includes three components: the 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 card processing services. The cost and gross margins on professional services revenue are tied to specific projects and vary depending on the specific project requirements and complexity as well as the mix of our U.S. and offshore employees working on the project. Our initial costs to provide card processing services is high relative to the revenue earned because we are putting in place the systems and processes necessary to support this new service initiative. We had no such costs in the second quarter and year-to-date periods in 2010 because we were not yet offering card processing services. CoreCard is providing a high level of support to its customers for both maintenance and professional services activities to ensure it builds a solid base of reference customers and puts in place an infrastructure for future growth.

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Operating Expenses— In the three and six month periodperiods ended March 31,June 30, 2011, total consolidated operating expenses were 20higher by 10 percent higherand 15 percent, respectively, than in the corresponding periodperiods in 2010. MarketingConsolidated marketing expenses were relatively unchanged in the three and six month periods ended June 30, 2011 compared to the same periods in 2010. Consolidated general and administrative expenses were lower by $45,000 (8 percent)11 percent ($77,000) in the three month period ended June 30, 2011 reflecting lower legal, bonus and accounting fees than in the same period of 2010. General and administrative expenses were 8 percent ($115,000) higher in the six month period ended June 30, 2011, compared to the same period in 2010 due mainly to lower sale commissions and travel expenses incurred by ChemFree reflecting lower domestic equipment sales. General and administrative expenses were $192,000 (26 percent) higher in the first quarter of 2011 than in the first quarter of 2010, reflecting mainly higher legal, auditstock option and payroll expenses at ChemFree and the corporate office. Researchsalary expenses. Consolidated research and development expenses were $202,000 (46 percent)48 percent and 47 percent higher in the first quarter ofthree and six month periods ended June 30, 2011, respectively, compared to the same period last year, mainlyperiods in 2010, due to a lower percentage of personnel related R&D expenses charged to cost of sales for revenue recognized in 2011, as well as an increase in the number of personnelemployees and compensation rates at ourthe company’s India office as well as higher benefitsbased software development and other personnel related expenses at CoreCard’s U.S.testing operations.

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Interest Income, net— We recorded net interest income of $11,000$6,000 and $27,000 $17,000,in the three monthsand six month periods ended March 31,June 30, 2011, respectively, compared to net interest income of $17,000 and 2010, respectively.$44,000 in the three and six month periods ended June 30, 2010. The difference between periods reflects primarily the fact that our total note receivable related to the sale of our former VISaer subsidiary was lower in 2011 than in 2010 due to a write down of the carrying balance of the note receivable in the quarter ended December 31, 2010, as explained in more detail in Note 2 to the Consolidated Financial Statements contained in our 2010 Annual Report on Form 10-K.
Equity in Income (Loss) of Affiliate Company— On a quarterly basis, we recognize our pro rata share of the earnings or losses of an affiliate company that we account for byrecord on the equity method. We recorded $9,000$11,000 and $20,000 in net equity income of our affiliate company in the first quarter ofthree and six month periods ended June 30, 2011, respectively, compared to $12,000 in net equity losses of $10,000 and $22,000 in the first quarter of 2010.three and six months ended June 30, 2010, respectively. The change between periods reflects improved profitability of the affiliate company.company in 2011.
Other Income— As explained in more detail in Note 2 to the Consolidated Financial Statements, the second quarter and year-to-date results for 2011 include income of $450,000 earned by our ChemFree subsidiary upon the settlement of a legal matter.
Income Taxes— We recorded $21,000$27,000 and $23,000$48,000, in the three and six month periods ended March 31,June 30, 2011, and 2010, respectively, for state income tax expense, at the ChemFree subsidiary. We believe our net deferredwhich amounts include $26,000 in connection with uncertain tax assets should be fully reserved at March 31, 2011 given their character and our historical losses. Accordingly, no deferred tax assets have beenpositions. An expense of $56,000 was recorded at March 31, 2011.
Net Income (Loss) —Overall, we recorded a net loss from continuing operations of $354,000 in the first quarter of 2011 compared to net income of $84,000 earnedended June 30, 2010 in the first quarter of 2010. ChemFree continued to show strong profits, although slightly lower than in the prior year. CoreCard’s expenses increased on relatively flat period-to-period revenue as it invested in hiring and training more employees at its India operations to support its strategic initiatives.connection with uncertain tax positions.
Liquidity and Capital Resources
Our cash balance at March 31,June 30, 2011 was $3.2 million compared to $2.9 million essentially the same as the cash balance at December 31, 2010. During the threesix months ended March 31,June 30, 2011, a principal sourcesources of cash wasinclude receipt of a $600,000 payment from the purchaser of our former VISaer subsidiary (as explained in more detail in Note 2 to the Consolidated Financial Statements contained in our 2010 Annual Report on Form 10-K) as well as receipt of a $450,000 payment related to the Settlement Agreement (as explained in more detail in Note 2 to the Consolidated Financial Statements contained herein). Major working capital changes included:
an increase in accounts receivable of $98,000$714,000 due to the timing of contract milestone billings as well as a change in payment terms for a large customer
an increase of $80,000$95,000 in inventory due mainly to receipthigher levels of a shipment ofcertain materials that had been backlogged parts at the end of the quarterDecember 2010
a net increase in deferred revenue of $156,000$227,000 reflecting milestone billings to CoreCard customers in advance of revenue recognition
an increase in accounts payable reflecting the timing of receiptand level of inventory parts at quarter endpurchases
WeDuring the first six months of 2011, we used $191,000$361,000 cash to invest in capital equipment mainly to upgrade CoreCard’s data centers and India office for its new processing andservices, software testing automation initiatives and additional off-shore employees as well as vehicle and production equipment purchases at ChemFree.
We currently project that we will have sufficient liquidity from cash on hand, continued cash positive operations at ChemFree, projected customer payments at CoreCard and periodic working capital borrowings, if needed, to support our operations and capital equipment purchases in the foreseeable future. We renewed our line of credit in June 20102011 with a maximum principal availability of $1.25 million based on qualified receivables and inventory levels which we will use as necessary to support short-term cash needs. We have not borrowed under the line of credit since its renewal. We presently project that we will have sufficient accounts receivable, inventory balances and tangible net worth for the foreseeable future to support the borrowing base and loan covenants for any required draws under our bank line of credit. The line of credit expires June 30, 2011,2012, subject to the bank renewing the line for an additional period. If the bank does not renew our line of credit and if we have cash requirements, we may experience a short-term cash shortfall. Delays in meeting project milestones or software delivery commitments at CoreCard could cause customers to postpone payments and increase our need for cash. Presently, we do not believe there is a material risk that we will not perform successfully on any contracts but if customer payments are delayed for any reason, if we do not control costs or if we encounter unforeseen technical or quality problems, then we could require more cash than presently planned.

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Long-term, we currently expect that liquidity will continue to improve and consolidated operations will generate sufficient cash to fund their requirements with use of our credit facility to accommodate short-term needs. Other long-term sources of liquidity include potential sales of investments, subsidiaries or other assets although there are no current plans to do so. Furthermore, the timing and amount of any such transactions are uncertain and, to the extent they involve non-consolidated companies, generally not within our control.

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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, valuation of acquired intangibles and impairment of long-lived assets, and valuation of investments to be critical policies due to the estimation processes involved in each. 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, 2010. 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 2010. During the three and six month periodperiods ended March 31,June 30, 2011, there were no significant or material changes in the application of critical accounting policies that would require an update to the information provided in the Form 10-K for 2010.10-K.
Factors That May Affect Future Operations
Future operations in both the Information Technology Products and Services and Industrial Products segments 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. Any trend or delay that affects even one of our subsidiaries could have a negative impact on the company’s consolidated results of operations or cash requirements on a quarterly or annual basis. In addition, the carrying value of our investments is impacted by a number of factors which are generally beyond our control since we are typically a non-controlnon-controlling shareholder in a private companiescompany with limited liquidity.
Among the numerous factors that may affect our consolidated results of operations or financial condition are the following:
Further weakness in the global financial markets could have a negative impact on CoreCard due to potential customers (most of whom are financial institutions or services firms) delaying software purchase or implementation decisions.
Stricter regulations and reluctance by financial institutions to act as sponsor banks for prospective customers (such as issuers and processors of credit and prepaid cards) could increase CoreCard’s losses and cash requirements.
Delays in software development projects could cause our customers to delay implementations or delay payments, which would increase our costs and reduce our revenue.
Our CoreCard subsidiary could fail to deliver software products which meet the business and technology requirements of its target markets within a reasonable time frame and at a price point that supports a profitable, sustainable business model.
As an alternative to licensing its software, CoreCard is now offering outsourced processing services running on the CoreCard software system. There are numerous risks associated with entering any new line of business and if CoreCard fails to manage the risks associated with its processing operations, it could have a negative impact on our business.
One of ChemFree’s customers represented 3130 percent of our consolidated revenue in the first quarterhalf of 2011 and any unplanned changes in the volume of orders or timeliness of payments from such customer could potentially have a negative impact on inventory levels and cash, at least in the near-term.

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It is unclear whether the activity in the ChemFree legal action described in Note 28 to the Consolidated Financial Statements will have any impact on our ChemFree subsidiary in the foreseeable future but if the finding of invalidity of certain of ChemFree’s patents is sustained inby the judge’s final ruling,Appeals court, it could result in increased competition in the marketplace and greater price pressure and lower margins, thus potentially impacting revenue, profits and projected cash flows. In addition, it is possible that a negative ruling could affect management’s estimate of future cash flows related to the affected patents. This could result in a write down of some or all of the unamortized carrying value of the ChemFree patents, which was $166,000$155,000 (for all ChemFree patents) as of March 31,June 30, 2011.
Delays in production or shortages of certainany sole-sourced parts for our ChemFree products could impact revenue and orders.
Anticipated increases in prices of raw materials and sub-assemblies could reduce ChemFree’s gross profit if it is not able to offset such increased costs with higher selling prices for its products or other reductions in production costs.
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.

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Competitive pressures (including pricing, changes in customer requirements and preferences, and competitor product offerings) may cause prospective customers to choose an alternative product solution, resulting in lower revenue and profits (or increased losses).
Increasing 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.
CoreCard could fail to expand its base of customers as quickly as anticipated, resulting in lower revenue and profits (or increased losses) and increased cash needs.
• 
In certain situations, ChemFree’s lease customers are permitted to terminate the lease covering a SmartWasher® machine, requiring the unamortized balance of the original machine cost to be written off which could reduce profits in that reporting period and result in lower revenue in future periods.
CoreCard could fail to retain key software developers and managers who have accumulated years of know-how in our target markets and company products, or fail to attract and train a sufficient number of new software developers and testers to support our product development plans and customer requirements at projected cost levels.
Delays in anticipated customer payments for any reason would increase our cash requirements and possibly our losses.
Declines in performance, financial condition or valuation of minority-owned companies could cause us to write-down the carrying value of our investment or postpone an anticipated liquidity event, which could negatively impact our earnings and cash.
Failure to meet the continued listing standards of NYSE Amex could result in delisting of our common stock, with a potentially negative impact on the market price and liquidity of our common stock.
Our future capital needs are uncertain and depend on a number of factors; additional capital may not be available on acceptable terms, if at all.
Other general economic and political conditions could cause customers to delay or cancel software purchases.
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.

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Part II. OTHER INFORMATION
Item 1. 
Legal Proceedings
As previously reported in Part 1, Item 3 of our 2010 Annual Report on Form 10-K, our ChemFree subsidiary is a party to an action it brought against J. Walter Co. Ltd. and J. Walter, Inc. in the United States District Court for the Northern District of Georgia,Georgia. The complaint alleged that certain of the defendants’ products infringed four U.S. patents held by ChemFree and sought a ruling to compel the defendants to cease their infringing activities. The defendants asserted various defenses. The trial took place during the week of July 13, 2009. On June 18, 2010, the judge issued his Findings of Fact and Conclusions of Law which is describedfound (i) that certain of J. Walter’s products did infringe on ChemFree’s four patents-in-suit; (ii) in NoteChemFree’s favor on the issue of the patents’ named co-inventors and (iii) in J. Walter’s favor on the issue of invalidity of the four patents-in-suit for “obviousness”. In his ruling on invalidity of four of ChemFree’s patents due to obviousness, the judge relied heavily on a 2007 U.S. Supreme Court ruling (issued more than three years after ChemFree’s lawsuit was filed) which modified the manner for determining obviousness of a patent by replacing the long-standing rigid application of the “teaching, suggestion or motivation test” for determining obviousness with an “expansive and flexible approach”. ChemFree filed a Motion for Reconsideration of the judge’s findings and conclusions followed by the filing of a Second Motion for Additional Findings and Conclusions. In October 2010, the judge hearing the case was arrested on criminal charges by the FBI, subsequently resigned and ChemFree’s case was reassigned to a new judge. On June 6, 2011, the new judge issued a final ruling in J. Walter’s favor upholding the invalidity finding of the first judge and awarding recovery of allowable taxable costs from ChemFree. On July 1, 2011, ChemFree appealed the ruling to the Consolidated Financial Statements. InUnited States Court of Appeals for the Federal Court. ChemFree also filed a motion to disallow the clerk’s recovery of allowable taxable costs. While the company presently believes it will prevail in the appeal, there can be no certainty that the Court of Appeals will find in its favor. If ChemFree does not prevail in the appeal, there is at least a reasonable possibility that ChemFree would incur some expenses for certain allowable taxable costs (which donot include attorney fees) in an amount to be determined by the court at the time.
As previously reported in our Form 10-Q for the period ended March 31, 2011, in September 2007 ChemFree sought sanctions against the defendants in that actionJ. Walter and the law firm then representing the defendants for asserting acertain frivolous defensedefenses and counterclaim.counterclaims. In June 2008, the court imposed sanctions on the law firm, whowhich no longer represents the defendants, and ChemFree submitted an application to the court seeking an award of attorneys fees associated with defending the frivolous claims. The court found in ChemFree’s favor and awarded sanctions against the former law firm. On May 3, 2011, ChemFree entered into a Settlement Agreement with the defendants’ former attorneys whereby they agreed to pay $450,000 to ChemFree in settlement of ChemFree’s claim for attorneys fees.claim. The Settlement Agreement was approved by the court on May 6, 2011 and payment of the $450,000 was received by ChemFree on May 9, 2011.
Other thanIn the J. Walter litigation,ordinary course of business, we are not currently subject to any material legal proceedings. However,may be from time to time we may become a party to certaininvolved in various pending or threatened legal proceedings inactions. The litigation process is inherently uncertain and it is possible that the ordinary courseresolution of business. We do not believe any ongoing legal proceedings willsuch matters might have a material adverse effect onupon our consolidated financial position condition and/or results of operations.

 

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Item 5.
Other Information
On May 4, 2011, we amended and restated our articles of incorporation to delete provisions authorizing the issuance of Series A Preferred Stock. No shares of Series A Preferred Stock have ever been issued, and such shares were issuable only pursuant to the company’s Rights Plan dated November 25, 1997, which has now expired.
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 filed herewith.
3.2Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of3.(1) to the Registrant’s Form 8-K dated December 7, 2007.)
31.1Certification of Chief Executive Officer Pursuant to Section 302 of10-Q for the Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Chief Executive Officer and Chief Financial Officer furnished as required by Section 906 of the Sarbanes-Oxley Act of 2002.
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: May 9, 2011 By:  /s/ J. Leland Strange
J. Leland Strange 
Chief Executive Officer, President 
Date: May 9, 2011 By:  /s/ Bonnie L. Herron
Bonnie L. Herron 
Chief Financial Officer 

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EXHIBIT INDEX
Exhibit
No.Descriptions
3.1Amended and Restated Articles of Incorporation of the Registrant dated May 4, 2011, filed herewith.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 8-K dated December 7, 2007.)
10.1Tenth Modification to Loan Documents by and among Intelligent Systems Corporation and Fidelity Bank dated June 30, 2011, filed herein.
10.2Settlement Agreement executed May 3, 2011, filed herein.
     
 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.
101XBRL Instance Document
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: August 15, 2011 By: /s/ J. Leland Strange
J. Leland Strange 
Chief Executive Officer, President 
Date: August 15, 2011 By: /s/ Bonnie L. Herron
Bonnie L. Herron 
Chief Financial Officer 

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EXHIBIT INDEX
Exhibit
No.Descriptions
3.1Amended 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)
3.2Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K dated December 7, 2007.)
10.1Tenth Modification to Loan Documents by and among Intelligent Systems Corporation and Fidelity Bank dated June 30, 2011, filed herein.
10.2Settlement Agreement executed May 3, 2011, filed herein.
31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Chief Executive Officer and Chief Financial Officer furnished as required by Section 906 of the Sarbanes-Oxley Act of 2002.
101XBRL Instance Document

 

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