CoreCard Corp - Quarter Report: 2010 March (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2010
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)
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) |
Registrants 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 þ No o
Indicated by check mark whether the registrant has submitted electronically and posted on its
corporate Website, 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). Yes o No o
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, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(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). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of April 30, 2010, 8,958,028 shares of Common Stock of the issuer were outstanding.
Intelligent Systems Corporation
Index
Form 10-Q
Form 10-Q
Page 2
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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, | |||||||
2010 | 2009 | |||||||
(unaudited) | (audited) | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash |
$ | 2,463 | $ | 2,795 | ||||
Accounts receivable, net |
1,923 | 1,680 | ||||||
Notes and interest receivable, current portion |
501 | 492 | ||||||
Inventories, net |
780 | 964 | ||||||
Other current assets |
527 | 399 | ||||||
Total current assets |
6,194 | 6,330 | ||||||
Long-term investments |
1,206 | 1,219 | ||||||
Notes and interest receivable, net of current portion |
1,019 | 1,006 | ||||||
Property and equipment, at cost less accumulated depreciation |
1,269 | 1,256 | ||||||
Patents, net |
211 | 223 | ||||||
Total assets |
$ | 9,899 | $ | 10,034 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 550 | $ | 576 | ||||
Deferred revenue |
1,122 | 1,355 | ||||||
Accrued payroll |
497 | 423 | ||||||
Accrued expenses |
526 | 565 | ||||||
Other current liabilities |
391 | 406 | ||||||
Total current liabilities |
3,086 | 3,325 | ||||||
Long-term liabilities |
92 | 100 | ||||||
Commitments and contingencies (Note 7) |
||||||||
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, 2010 and December 31, 2009 |
90 | 90 | ||||||
Additional paid-in capital |
21,413 | 21,410 | ||||||
Accumulated other comprehensive loss |
(4 | ) | (28 | ) | ||||
Accumulated deficit |
(16,294 | ) | (16,379 | ) | ||||
Total Intelligent Systems Corporation stockholders equity |
5,205 | 5,093 | ||||||
Non-controlling interest |
1,516 | 1,516 | ||||||
Total stockholders equity |
6,721 | 6,609 | ||||||
Total liabilities and stockholders equity |
$ | 9,899 | $ | 10,034 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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Intelligent Systems Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except share and per share amounts)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue |
||||||||
Products |
$ | 3,347 | $ | 2,485 | ||||
Services |
350 | 303 | ||||||
Total revenue |
3,697 | 2,788 | ||||||
Cost of revenue |
||||||||
Products |
1,709 | 1,318 | ||||||
Services |
174 | 294 | ||||||
Total cost of revenue |
1,883 | 1,612 | ||||||
Expenses |
||||||||
Marketing |
566 | 444 | ||||||
General & administrative |
725 | 923 | ||||||
Research & development |
437 | 504 | ||||||
Income (loss) |
86 | (695 | ) | |||||
Other income (expense) |
||||||||
Interest income, net |
27 | 15 | ||||||
Equity in income (loss) of affiliate company |
(12 | ) | 7 | |||||
Other income |
6 | 12 | ||||||
Income (loss) before income taxes |
107 | (661 | ) | |||||
Income taxes |
23 | 1 | ||||||
Net income (loss) |
$ | 84 | $ | (662 | ) | |||
Income (loss) per share: |
||||||||
Basic |
$ | 0.01 | $ | (0.15 | ) | |||
Diluted |
$ | 0.01 | $ | (0.15 | ) | |||
Basic weighted average common shares outstanding |
8,958,028 | 4,478,971 | ||||||
Diluted weighted average common shares outstanding |
8,962,767 | 4,478,971 |
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, | ||||||||
CASH PROVIDED BY (USED FOR): | 2010 | 2009 | ||||||
OPERATIONS: |
||||||||
Net income (loss) |
$ | 84 | $ | (662 | ) | |||
Adjustments to reconcile net income (loss) to net cash used for operating activities: |
||||||||
Depreciation and amortization |
129 | 124 | ||||||
Stock-based compensation expense |
3 | 3 | ||||||
Non-cash interest income, net |
(18 | ) | (18 | ) | ||||
Equity in (income) loss of affiliate company |
12 | (7 | ) | |||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable |
(243 | ) | (66 | ) | ||||
Inventories |
186 | 85 | ||||||
Other current assets |
(128 | ) | 10 | |||||
Accounts payable |
(26 | ) | 16 | |||||
Deferred revenue |
(233 | ) | (3 | ) | ||||
Accrued payroll |
74 | (72 | ) | |||||
Accrued expenses |
(39 | ) | (20 | ) | ||||
Net cash used for operating activities |
(199 | ) | (610 | ) | ||||
INVESTING ACTIVITIES: |
||||||||
Proceeds from notes and interest receivable |
(2 | ) | 129 | |||||
Dispositions (purchases) of property and equipment |
(130 | ) | 17 | |||||
Net cash provided by (used for) investing activities |
(132 | ) | 146 | |||||
FINANCING ACTIVITIES: |
||||||||
Borrowings under line of credit |
| 240 | ||||||
Repayments made under line of credit |
| (223 | ) | |||||
Payments on notes payable |
(26 | ) | (24 | ) | ||||
Net cash used for financing activities |
(26 | ) | (7 | ) | ||||
Effects of exchange rate changes on cash |
25 | (15 | ) | |||||
Net decrease in cash |
(332 | ) | (486 | ) | ||||
Cash at beginning of period |
2,795 | 1,074 | ||||||
Cash at end of period |
$ | 2,463 | $ | 588 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for interest |
$ | 2 | $ | 10 | ||||
Cash paid during the period for income taxes |
20 | 1 |
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)
(unaudited)
1. | Throughout this report, the terms we, us, ours, ISC and company refer to
Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. |
2. | The unaudited Consolidated Financial Statements presented in this Form 10-Q have been
prepared in accordance with accounting principles generally accepted in the United States
applicable to interim financial statements. Accordingly, they do not include all of the
information and notes required for complete financial statements. In the opinion of ISC
management, these Consolidated Financial Statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the financial position and
results of operations as of and for the three month periods ended March 31, 2010 and 2009.
The interim results for the three months ended March 31, 2010 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, 2009, as filed in our Annual Report on Form 10-K. |
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) | 2010 | 2009 | ||||||
Net income (loss) |
$ | 84 | $ | (662 | ) | |||
Other comprehensive loss |
||||||||
Foreign currency translation adjustment |
24 | (13 | ) | |||||
Comprehensive income (loss) |
$ | 108 | $ | (675 | ) | |||
4. | Stock-based Compensation
At March 31, 2010, we have two stock-based compensation plans in
effect. We record compensation cost related to unvested stock awards by recognizing the
unamortized grant date fair value on a straight line basis over the vesting periods of each
award. We have estimated forfeiture rates based on our historical experience. Stock option
compensation expense for the periods ended March 31, 2010 and 2009 has been recognized as a
component of general and administrative expenses in the accompanying Consolidated Financial
Statements. We recorded $3,000 of stock-based compensation expense in each of the quarters
ended March 31, 2010 and 2009. |
The estimated fair value of options granted is calculated using the Black-Scholes option pricing
model with assumptions as previously disclosed in our 2009 Form 10-K.
As of March 31, 2010, there is $3,000 of unrecognized compensation cost related to stock
options. No options were granted, exercised or forfeited during the three months ended March 31,
2010. The following table summarizes options as of March 31, 2010:
Wgt Avg | ||||||||||||||||
Remaining | Aggregate | |||||||||||||||
Wgt Avg | Contractual Life | Intrinsic | ||||||||||||||
# of Shares | Exercise Price | in Years | Value | |||||||||||||
Outstanding at March 31, 2010 |
233,000 | $ | 2.37 | 3.5 | $ | 6,000 | ||||||||||
Vested and exercisable at
March 31, 2010 |
215,000 | $ | 2.44 | 3.0 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value
(the difference between the companys closing stock price on the last trading day of the first
quarter of 2010 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, 2010. The amount of aggregate intrinsic value will change based on the fair market
value of the companys stock.
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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 notes receivable beyond one
year have been discounted at a rate of 6% 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. |
Financial instruments that potentially subject us to concentrations of credit risk consist
principally of cash, 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.
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, | ||||||||
(unaudited) | 2010 | 2009 | ||||||
ChemFree Customer A |
12 | % | 14 | % | ||||
ChemFree Customer B |
35 | % | 35 | % | ||||
ChemFree Customer C |
10 | % | 13 | % |
7. | Commitments and Contingencies
Please refer to Note 7 to our Consolidated Financial
Statements included in our 2009 Form 10-K for a description of our commitments and
contingencies in addition to those disclosed here. |
Legal Matters In December 2004, our ChemFree subsidiary filed a patent infringement action
against J. Walter Co. Ltd. and J. Walter, Inc. in the United States Court for the Northern
District of Georgia. The complaint alleges that certain of the defendants products infringe
various U.S. patents held by ChemFree and seeks a ruling to compel the defendants to cease their
infringing activities. The defendants have asserted various defenses. The trial took place
during the week of July 13, 2009. At the conclusion of the trial, the judge issued several
rulings from the bench which supported two of ChemFrees claims. However, other substantive
matters have not yet been ruled upon. On May 5, 2010, the judge convened a hearing with both
plaintiff and defendant attorneys and indicated that he expected to issue his final ruling in
the matter in the near future. While the resolution and timing of any legal action is not
predictable, ChemFree believes it has sufficient grounds to prevail in these actions, although
there can be no assurance that the remaining issues will be resolved in its favor. Depending
upon the final rulings, ChemFree will have a number of options to consider which could include
but are not limited to pursuit of recovery of damages or an appeal.
As previously disclosed, in our Form 10-K for the year ended December 31, 2009, management of
IBS Technics, the company that acquired certain assets and the operations of our VISaer
subsidiary in April 2008 alleged a breach of representations in the Asset Purchase Agreement
(APA). On April 15, 2010, we received a formal notice from IBS Technics seeking
indemnification under the APA in the amount of approximately $2.6 million for alleged breaches
of certain representations and warranties in the APA. We disagree with their allegations and
intend to respond within 30 days of the notice date. If we cannot agree on a mutually
acceptable resolution to this matter, it is possible that it will proceed to binding arbitration
as required under the APA. Given the status of the matter and our belief that we have
reasonable grounds to refute the IBS allegations and prevail in any litigation, presently we
have not taken a reserve against the amount receivable from IBS Technics. If the matter is
taken to arbitration or other legal proceedings, it is at least reasonably possible that the
amount of the receivable could be reduced.
NYSE Amex Listing In December 2008, the NYSE Amex determined that we did not meet certain of
the NYSE Amex continued listing standards, specifically relating to minimum shareholders equity
of $4 million. On March 16, 2009, the NYSE Amex accepted our plan to regain compliance with the
continued listing standards by June 18, 2010. On April 14, 2010, we received notice from the
NYSE Amex that we had regained compliance with the continued listing standards. As with all
listed companies, we will be subject to regular monitoring to ensure compliance with continued
listing standards. Failure to meet continued listing standards could impact our stock price.
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8. | Industry Segments
Segment information is presented consistently with the basis described in
the 2009 Form 10-K. The following table contains segment information for the three months
ended March 31, 2010 and 2009. |
Three Months Ended March 31, | ||||||||
(unaudited, in thousands) | 2010 | 2009 | ||||||
Information Technology |
||||||||
Revenue |
$ | 562 | $ | 343 | ||||
Operating loss |
(277 | ) | (579 | ) | ||||
Industrial Products |
||||||||
Revenue |
3,135 | 2,445 | ||||||
Operating income |
670 | 255 | ||||||
Consolidated Segments |
||||||||
Revenue |
3,697 | 2,788 | ||||||
Operating income (loss) |
393 | (324 | ) | |||||
Corporate expenses |
(307 | ) | (371 | ) | ||||
Consolidated operating income (loss) |
$ | 86 | $ | (695 | ) | |||
Depreciation and Amortization |
||||||||
Information Technology |
$ | 23 | $ | 1 | ||||
Industrial Products |
102 | 119 | ||||||
Consolidated segments |
125 | 120 | ||||||
Corporate |
4 | 4 | ||||||
Consolidated depreciation and amortization |
$ | 129 | $ | 124 | ||||
Capital Expenditures |
||||||||
Information Technology |
$ | 99 | $ | (22 | ) | |||
Industrial Products |
31 | 3 | ||||||
Consolidated segments |
130 | (19 | ) | |||||
Corporate |
| 2 | ||||||
Consolidated capital expenditures |
$ | 130 | $ | (17 | ) | |||
(unaudited, in thousands) | March 31, 2010 | December 31, 2009 | ||||||
Identifiable Assets |
||||||||
Information Technology |
$ | 2,748 | $ | 2,693 | ||||
Industrial Products |
4,460 | 3,824 | ||||||
Consolidated segments |
7,208 | 6,517 | ||||||
Corporate |
2,691 | 3,517 | ||||||
Consolidated assets |
$ | 9,899 | $ | 10,034 | ||||
9. | Income Taxes
We have recognized tax benefits from all tax positions we have taken, and
there has been no adjustment to any carry forwards (net operating loss or research and
development credits) in the quarter ended March 31, 2010. As of March 31, 2010, we do not
have any unrecognized tax benefits and we do not anticipate any significant changes in the
balance of unrecognized tax benefits during the next twelve months. |
Our policy is to recognize accrued interest related to uncertain tax positions in interest
expense and related penalties, if applicable, in general and administrative expense. No such
interest expense or penalties were recognized during the three months ended March 31, 2010 and
2009.
We file a consolidated U.S. federal income tax return for all subsidiaries in which our
ownership exceeds 80 percent, as well as individual subsidiary returns in various states and
foreign jurisdictions. Our VISaer subsidiary filed a separate U.S. federal income tax return
prior to April 1, 2008. With few exceptions we are no longer subject to U.S. federal, state and
local or foreign income tax examinations by taxing authorities for years before 2005.
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10. | Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board
(FASB) issued accounting guidance which amends the criteria for allocating a contracts
consideration to individual services or products
in multiple-deliverable arrangements. The guidance establishes a selling price hierarchy for
determining the selling price of a deliverable, which includes: (1) vendor-specific objective
evidence if available, (2) third-party evidence if vendor-specific evidence is not available,
and (3) estimated selling price if neither vendor-specific nor third-party evidence is
available. This guidance is effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010 (January 1, 2011 for us), and we
are currently evaluating the potential impact, if any, on our Consolidated Financial Statements. |
In June 2009, the FASB issued accounting guidance which amends the consolidation principles for
Variable Interest Entities (VIEs) by requiring consolidation of VIEs based on which party has
control of the entity. The guidance is effective for fiscal years beginning after November 15,
2009, and interim periods within those fiscal years. The adoption of this accounting guidance
did not have a material impact on our Consolidated Financial Statements.
In May 2009, the FASB issued guidance establishing general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued. This guidance was effective for interim or annual financial periods ending after June
15, 2009, and the adoption of this guidance did not have any impact on our Consolidated
Financial Statements.
We have considered all other recently issued accounting pronouncements and do not believe the
adoption of such pronouncements will have a material impact on our Consolidated Financial
Statements.
11. | Subsequent Event
We evaluated subsequent events through May 14, 2010 when these financial
statements were issued. Except as otherwise disclosed in this report, 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. Managements 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 readers
familiarity with the information contained in Item 6. Managements Discussion and Analysis of
Financial Condition and Results of Operations, in the Form 10-K for the year ended December 31,
2009 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). The Information Technology sector
consists of CoreCard Software, Inc. (CoreCard) (software for managing accounts receivables,
credit and debit 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 implementation, consulting, training, maintenance and support for
software products 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. |
| In the Information Technology sector, 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 profit of $84,000 for the first quarter of 2010. However, 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 initial software contracts are complete and accepted by
customers. 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 quarter to quarter and at the present time are generally
not predictable with any degree of certainty.
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, 2010
was $3.7 million, a 33 percent increase compared to the first quarter of 2009. Revenue from sales
in domestic and international markets represented approximately 86 percent and 14 percent,
respectively, of total revenue.
| Revenue from products, which includes sales and leases of equipment and supplies in our
Industrial Products segment as well as software license fees related to the Information
Technology segment, was $3.3 million in the three month period ended March 31, 2010, a 35
percent increase compared to $2.5 million in the three months ended March 31, 2009. The
increase in product revenue in the first quarter of 2010 compared to the prior year reflects
principally strong performance by our ChemFree subsidiary with higher volume of SmartWasher®
parts washers sold in both the domestic and international markets reflecting the general
economic recovery, as well as more sales of consumable supplies of fluid and filters to a
larger base of SmartWasher® users. Software license revenue associated with the Information
Technology segment increased in the three month period ended March 31, 2010 compared to the
three month period ended March 31, 2009 reflecting a successful installation of CoreCards
first international customer. |
| Service revenue associated with the Information Technology segment was $350,000 in the
first quarter of 2010, 16 percent higher than the level reported for the same period in 2009.
The change is attributed mainly to an increase in the installed base of CoreCard customers
that pay for maintenance and technical support. |
Cost of Revenue Total cost of revenue was 51 percent of total revenue in the three month period
ended March 31, 2010 compared to 58 percent of total revenue in the first quarter of 2009. The
improvement is related principally to favorable changes in ChemFrees product mix from period to
period as well as increased service revenue and lower costs to deliver services at CoreCard.
| Cost of product revenue was 51 percent and 53 percent of product revenue in the three
months ended March 31, 2010 and 2009, respectively. Higher margin consumable supplies
(fluid and filters) represented a larger percentage of product revenue in the first quarter
of 2010 than in the comparable period in 2009, resulting in an improved gross margin. |
| Cost of service revenue (which relates to our software business only) as a percent of
service revenue was 50 percent and 97 percent in the three month periods ended March 31,
2010 and 2009, respectively. The mix of service revenue in a given period, as well as the
number of customers and new products being supported, impacts the gross margin on service
revenue. The cost to provide annual maintenance and support services as a percentage of
service revenue has declined as CoreCards installed base of customers with maintenance
contracts increases, since costs are spread across a larger maintenance revenue base. The
cost of professional services revenue is tied to specific projects and generally yields
higher gross margins compared to maintenance services, depending on the mix of our U.S. and
offshore employees working on the project. |
Operating Expenses In the three month period ended March 31, 2010, total consolidated operating
expenses were 8 percent lower than in the corresponding period in 2009. Marketing expenses were
higher by $122,000 (27 percent) in the three month period in 2010 compared to the same period in
2009 due to higher sales commissions paid by ChemFree, restoration of salary reductions that were
in effect in 2009, and greater travel expenses to support sales growth. General and administrative
expenses were 21 percent lower in the first quarter of 2010 than in the first quarter of 2009,
reflecting mainly lower legal expenses. Research and development expenses were 13 percent lower in
the first quarter of 2010 compared to the same period last year, mainly due to a greater allocation
of personnel related R & D expenses to work-in-process for software contracts not yet complete.
Interest Income, net We recorded net interest income of $27,000 and $15,000 in the three months
ended March 31, 2010 and 2009, respectively. The difference between periods reflects primarily the
effect of higher interest earning bank deposits in the first quarter of 2010.
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 by the equity method.
We recorded $12,000 in net equity losses in the first quarter of 2010 compared to $7,000 in net
equity income of our affiliate company in the three months ended March 31, 2009. The change between
periods reflects a decline in profitability of the affiliate company due to expenses for new
marketing and sales initiatives in 2010.
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Income Taxes We recorded $23,000 and $1,000 in the three month periods ended March 31, 2010 and
2009, respectively, for state income tax expense at the ChemFree subsidiary. We believe our net
deferred tax assets should be fully reserved at March 31, 2010 given their character and our
historical losses. Accordingly, no deferred tax assets have been recorded at March 31, 2010.
Net Income (Loss) We earned net income of $84,000 in the first quarter of 2010 compared to a net
loss of $662,000 in the first quarter of 2009. The improvement reflects a significant increase in
profits earned by our ChemFree subsidiary and improved performance at our CoreCard subsidiary.
Liquidity and Capital Resources
Our cash balance at March 31, 2010 was $2.5 million compared to a cash balance of $2.8 million at
December 31, 2009. During the three months ended March 31, 2010, we used $199,000 cash for
operations, principally to support CoreCard and our international R&D operations. Working capital
changes included an increase in accounts receivable of $243,000 due to higher sales and a decline
of $186,000 in inventory levels due to lower purchasing volume and higher sales. We used cash for
capital equipment expenditures for our expanding work force in India, a mold for certain parts
washer parts and a disaster recovery site for CoreCards new processing initiative.
We currently project that we will have sufficient liquidity from cash on hand and projected
customer payments and periodic working capital borrowings, if needed, to support our operations in
the foreseeable future. We have a bank line of credit with a maximum availability of $1.25 million
based on qualifying accounts receivable and inventory levels which we use from time to time to
support short-term cash needs. As of March 31, 2010, we have no borrowings under the line and 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
draws, if any, under our bank line of credit. However, the line expires on June 30, 2010, subject
to the bank renewing the line for an additional period. There can be no assurance that the line of
credit will be renewed on terms acceptable to the company, if at all.
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 as
necessary to accommodate short-term needs. Other long-term sources of liquidity include potential
sales of investments or subsidiaries although the timing and amount of any such transactions are
uncertain and, to the extent they involve non-consolidated companies, are generally not within our
control.
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, 2009. Reference is also made to the discussion of the application of these
critical accounting policies and estimates contained in Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for 2009. During
the three month period ended March 31, 2010, 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 2009.
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 companys 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-controlling shareholder in a private company with limited liquidity.
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Among the numerous factors that may affect our consolidated results of operations or financial
condition are the following:
| Continued weakness in the global financial markets could have a serious negative impact on
CoreCard due to potential customers (most of whom are financial institutions or services
firms) delaying purchase or implementation decisions. |
| Reluctance by financial institutions to act as sponsor banks for prospective customers
(such as issuers and processors of credit and prepaid cards) could increase CoreCards losses
and cash requirements. |
| Continued weakness in the domestic U.S. and certain European economies could impact the
automotive parts and repair industry and reduce demand for ChemFrees SmartWasher® products
and cause the company to have slower growth than anticipated. |
| Delays in software development projects could cause our customers to delay implementations
or delay payments, which would increase our costs and reduce our revenue. |
| Our CoreCard subsidiary could fail to deliver software products which meet the business and
technology requirements of its target markets within a reasonable time frame and at a price
point that supports a profitable, sustainable business model. |
| As an alternative to licensing its software, CoreCard is now offering 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 ChemFrees customers represented approximately 35 percent of our consolidated
revenue in the first quarter of 2010 and any unplanned changes in the volume of orders or
timeliness of payments from such customer could have a negative impact on inventory levels and
cash, at least in the near-term. |
| Failure by our ChemFree subsidiary to protect its intellectual property assets could
increase competition in the marketplace and result in greater price pressure and lower
margins, thus potentially impacting sales, profits and projected cash flows. |
| Delays in production or shortages of certain sole-sourced parts for our ChemFree products
could impact revenue and orders. |
| Software errors or poor quality control may delay product releases, increase our costs,
result in non-acceptance of our software by customers or delay revenue recognition. |
| Compliance with the internal control over financial reporting requirements of Section 404
of the Sarbanes-Oxley Act of 2002 could increase operating expenses and divert management and
staff resources. |
| Competitive pressures (including pricing, changes in customer requirements and preferences,
and competitor product offerings) may cause prospective customers to choose an alternative
product solution, resulting in lower revenue and profits (or increased losses). |
| Increasing government regulation in the United States and foreign countries related to such
issues as data privacy, financial and credit transactions could require changes to our
products and services and could affect our existing customer relationships or prevent us from
getting new customers. |
| CoreCard could fail to expand its base of customers as quickly as anticipated, resulting in
lower revenue and profits (or increased losses) and increased cash needs. |
| In certain situations, ChemFrees 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. |
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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 companys management, including the companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the companys 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 companys disclosure controls and procedures are effective. There were no
significant changes in the companys 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 companys
internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described in Note 7 to the Consolidated Financial Statements, we are not currently
subject to any material legal proceedings. However, from time to time, we may become a party to
certain legal proceedings in the ordinary course of business. As of March 31, 2010, we do not
believe any ongoing legal proceedings will have a material adverse effect on our consolidated
financial position or results of operations.
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 March 18, 2010.
(Incorporated by reference to Exhibit 3.(1) to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2009.) |
|||
3.2 | Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of
the Registrants Form 8-K dated December 7, 2007.) |
|||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer furnished as required by
Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 14, 2010
|
By: | /s/ J. Leland Strange
|
||||
Chief Executive Officer, President | ||||||
Date: May 14, 2010
|
By: | /s/ Bonnie L. Herron | ||||
Bonnie L. Herron | ||||||
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit | ||||
No. | Descriptions | |||
3.1 | Amended and Restated Articles of Incorporation of the Registrant dated March 18, 2010.
(Incorporated by reference to Exhibit 3.(1) to the Registrants Annual Report on Form 10-K for the
year ended December 31, 2009.) |
|||
3.2 | Bylaws of the Registrant dated December 7, 2007. (Incorporated by reference to Exhibit 3.2 of the
Registrants Form 8-K dated December 7, 2007.) |
|||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer furnished as required by
Section 906 of the Sarbanes-Oxley Act of 2002. |
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