CoreCard Corp - Quarter Report: 2020 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑

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

 

For the quarterly period ended September 30, 2020 OR                

 

☐

Transition REPORT UNDER Section 13 or 15(D) of the Securities Exchange Act of 1934

 

For the transition period from _________ to ____________

 

Commission file number 1-9330

 

INTELLIGENT SYSTEMS CORPORATION

(Exact name of registrant as specified in its charter)

 

Georgia	58-1964787
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4355 Shackleford Road, Norcross, Georgia	30093
(Address of principal executive offices)	(Zip Code)

  

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

 

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

 

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

 

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

 

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

             

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

 

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

 

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

 

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

 

As of September 30, 2020, 8,929,368 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 (unaudited)
	Consolidated Balance Sheets at September 30, 2020 and December 31, 2019	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019	4
	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3	Legal Proceedings	17
Item 4	Controls and Procedures	18
Part II	Other Information
Item 6	Exhibits	19
Signatures		20

 

As of		September 30, 2020				December 31, 2019
		(unaudited)				(audited)
ASSETS
Current assets:
Cash		$	34,391			$	26,415
Accounts receivable, net			4,045				8,759
Other current assets			1,217				905
Total current assets			39,653				36,079
Investments			2,063				3,081
Notes and interest receivable			2,643				1,795
Property and equipment, at cost less accumulated depreciation			6,890				2,177
Other long-term assets			3,304				1,108
Total assets		$	54,553			$	44,240
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	465			$	403
Deferred revenue, current portion			3,475				689
Accrued payroll			2,016				2,503
Accrued expenses			107				153
Income tax payable			792				1,100
Other current liabilities			1,582				1,345
Total current liabilities			8,437				6,193
Noncurrent liabilities:
Deferred revenue, net of current portion			3				23
Deferred tax liability			279				275
Long-term lease obligation			2,208				460
Total noncurrent liabilities			2,490				758
Intelligent Systems Corporation stockholders’ equity:
Common stock, $0.01 par value, 20,000,000 shares authorized, 8,929,368 and 8,924,988 issued and outstanding at September 30, 2020 and December 31, 2019, respectively			89				89
Additional paid-in capital			15,780				15,450
Accumulated other comprehensive loss			(129	)			(94	)
Accumulated income			27,886				21,844
Total Intelligent Systems Corporation stockholders’ equity			43,626				37,289
Total liabilities and stockholders’ equity		$	54,553			$	44,240

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
Revenue
Services		$	8,704			$	7,297			$	24,650			$	20,275
Products			1,600				2,225				1,600				3,725
Total net revenue			10,304				9,522				26,250				24,000
Cost of revenue
Services			4,217				3,012				11,418				8,445
Products			−				−				−				−
Total cost of revenue			4,217				3,012				11,418				8,445
Expenses
Marketing			31				35				94				124
General and administrative			936				700				2,698				2,394
Research and development			1,639				1,575				3,477				3,634
Income from operations			3,481				4,200				8,563				9,403
Investment income (loss)			(92	)			(109	)			(1,237	)			(105	)
Other income (loss)			59				104				312				353
Income before Income taxes			3,448				4,195				7,638				9,651
Income taxes			653				1,103				1,596				2,379
Net income		$	2,795			$	3,092			$	6,042			$	7,272
Earnings per share attributable to Intelligent Systems Corporation:
Basic		$	0.31			$	0.35			$	0.68			$	0.82
Diluted		$	0.31			$	0.34			$	0.67			$	0.81
Basic weighted average common shares outstanding			8,927,908				8,886,321				8,925,961				8,859,544
Diluted weighted average common shares outstanding			9,022,996				9,013,459				9,021,314				8,977,501

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
Net income		$	2,795			$	3,092			$	6,042			$	7,272
Other comprehensive income (loss):
Foreign currency translation adjustments			11				4				(35	)			(32	)
Total comprehensive income		$	2,806			$	3,096			$	6,007			$	7,240

 

(unaudited, in thousands, except share amounts)		Common Stock								Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Accumulated Earnings				Stockholders’ Equity
		Shares				Amount
Balance at December 31, 2018			8,817,988			$	88			$	15,050			$	(92	)		$	10,875			$	25,921
Stock options exercised			33,000				1				58												59
Net income																			2,072				2,072
Stock compensation expense											25												25
Foreign currency translation adjustment															(1	)							(1	)
Balance at March 31, 2019			8,850,988			$	89			$	15,133			$	(93	)		$	12,947			$	28,076
Net income																			2,108				2,108
Stock compensation expense											55												55
Foreign currency translation adjustment															(35	)							(35	)
Balance at June 30, 2019			8,850,988			$	89			$	15,188			$	(128	)		$	15,055			$	30,204
Stock options exercised			47,000								104												104
Net income																			3,092				3,092
Stock compensation expense											49												49
Foreign currency translation adjustment															4								4
Balance at September 30, 2019			8,897,988			$	89			$	15,341			$	(124	)		$	18,147			$	33,453
Balance at December 31, 2019			8,924,988			$	89			$	15,450			$	(94	)		$	21,844			$	37,289
Net income																			1,047				1,047
Stock compensation expense											62												62
Foreign currency translation adjustment															(31	)							(31	)
Balance at March 31, 2020			8,924,988			$	89			$	15,512			$	(125	)		$	22,891			$	38,367
Net income																			2,200				2,200
Stock compensation expense											61												61
Foreign currency translation adjustment															(15	)							(15	)
Balance at June 30, 2020			8,924,988			$	89			$	15,573			$	(140	)		$	25,091			$	40,613
Net income																			2,795				2,795
Stock compensation expense			4,380								207												207
Foreign currency translation adjustment															11								11
Balance at September 30, 2020			8,929,368			$	89			$	15,780			$	(129	)		$	27,886			$	43,626

 

		Nine Months Ended September 30,
CASH PROVIDED BY (USED FOR):		2020				2019
OPERATING ACTIVITIES:
Net income		$	6,042			$	7,272
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,460				730
Stock-based compensation expense			330				129
Non-cash investment expense			1,009				−
Non-cash interest income			(93	)			(23	)
Equity in loss of affiliate company			268				104
Changes in operating assets and liabilities:
Accounts receivable			4,714				(2,328	)
Other current assets			(312	)			163
Other long-term assets			185				(65	)
Accounts payable			62				8
Accrued payroll			(487	)			904
Deferred revenue, current portion			2,786				(339	)
Accrued expenses			(46	)			27
Other current liabilities			(993	)			1,167
Deferred revenue, net of current portion			259				(70	)
Net cash provided by operating activities			15,184				7,679
INVESTING ACTIVITIES:
Purchases of property and equipment			(6,173	)			(1,553	)
Advances of notes receivable			(1,000	)			(1,500	)
Net cash used for investing activities			(7,173	)			(3,053	)
FINANCING ACTIVITIES:
Sale of capital stock pursuant to exercise of option			−				163
Net cash provided by financing activities			−				163
Effects of exchange rate changes on cash			(35	)			(32	)
Net increase in cash			7,976				4,757
Cash at beginning of period			26,415				18,919
Cash at end of period		$	34,391			$	23,676
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes		$	1,826			$	875

 

1.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation 

 

Throughout this report, the terms “we”, “us”, “ours”, “ISC” and “Company” refer to Intelligent Systems Corporation, including its wholly-owned and majority-owned subsidiaries. The unaudited Consolidated Financial Statements presented in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of ISC management, these Consolidated Financial Statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and nine month periods ended September 30, 2020 and 2019. The interim results for the three and nine months ended September 30, 2020 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, 2019, as filed in our Annual Report on Form 10-K.

 

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, to require financial assets carried at amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions and forecasts. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are within the scope of lease accounting standards. Further, the FASB issued ASU No. 2019-04, ASU No. 2019-05, ASU 2019-10 and ASU 2019-11 to provide additional guidance on the credit losses standard. The ASUs are effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. Adoption of the ASUs is on a modified retrospective basis. We plan to adopt the ASUs on January 1, 2023. The ASUs are currently not expected to have a material impact on our Consolidated Financial Statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. This standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We plan to adopt this standard in the first quarter of 2021 and the adoption is not expected to have a material impact on the Consolidated Financial Statements.

 

In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (“ASU 2020-01”), which clarifies certain interactions between the guidance to account for certain equity securities, investments under the equity method of accounting and forward contracts or purchased options to purchase securities under Topic 321, Topic 323 and Topic 815. For public entities, ASU 2020-01 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2020. We are currently assessing the impact that the adoption of ASU 2020-01 will have 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.

 

2.         REVENUE

 

Disaggregation of Revenue

 

In the following table, revenue is disaggregated by type of revenue for the three and nine months ended September 30, 2020 and 2019:

 

 

Foreign revenues are based on the location of the customer. Revenues from customers by geographic area for the three and nine months ended September 30, 2020 and 2019 are as follows:   

 

 

Concentration of Revenue

 

The following table indicates the percentage of consolidated revenue represented by each customer that represented more than 10 percent of consolidated revenue in the three and nine month periods ended September 30, 2020 and 2019. Most of our customers have multi-year contracts with recurring revenue as well as professional services fees that vary by period depending on their business needs.

 

 

3.         NOTES RECEIVABLE

 

During the quarter ended September 30, 2017, we entered into a Loan Agreement with a privately-held identity and professional services company with ties to the FinTech industry. We committed to lend up to $1,500,000 all of which has been advanced as of December 31, 2019. During 2018 and 2019, we advanced $1,050,000 on four separate simple Promissory Notes. During 2019, as discussed in Note 4, we converted the Loan Agreement and all outstanding Promissory Notes to an equity ownership of 40 percent of the company. At the same time, we entered into and advanced a $1,000,000 Loan Agreement that bears interest at the rate of 6.0 percent annually with a maturity date of June 2021. We expect to defer payment of the June 2021 Loan and have therefore classified the Loan as long-term. In October 2019 and January 2020, we entered into Loan Agreements and advanced an additional $500,000 and $1,000,000, respectively, that bear interest at the rate of 6.0 percent annually with a maturity date of October 2021 and January 2022, respectively. A portion of the company’s business has been negatively impacted by the pandemic while other portions of its business have improved. We evaluate the carrying values of our notes receivable on a continuing basis to determine whether there are any indications that the carrying amount of the note receivable may not be recoverable. We have not recorded any impairments related to this investment as of September 30, 2020, however, significant variations from current expectations could impact future assessments resulting in future impairment charges.

 

In the quarter ended March 31, 2018, we entered into a Convertible Loan Agreement with a private limited India based company in the FinTech industry. We committed to lend up to $435,000 with an initial advance of $235,000. The loan bears interest at the rate of 5.0 percent annually with the maturity date on the third anniversary of funding of such Promissory Note. We are entitled to convert the principal on the initial Note for up to ten percent ownership of shares of the company. Due to the economic downturn resulting from the Indian government’s response to COVID-19 and the impact of the economic downturn on the private limited India based company, we have determined that the principal and interest is likely not collectible and therefore recorded a valuation allowance for the quarter ended March 31, 2020 of $259,000, included in investment loss on the Consolidated Statement of Operations.

 

4.         INVESTMENTS

 

Beginning in 2017, and in subsequent periods we entered into a Loan Agreement and various Promissory Notes, as discussed in more detail in Note 3, with a privately held identity and professional services company with ties to the FinTech industry. In June 2019, we converted the Loan Agreement and all Promissory Notes into equity resulting in ownership of 40 percent of the company. We account for our investment using the equity method of accounting which resulted in losses of $92,000 and $268,000 for the three and nine months ended September 30, 2020, respectively, included in investment loss on the Consolidated Statement of Operations. The carrying value of $2,053,000 is included in long-term investments. A portion of the company’s business has been negatively impacted by the pandemic while other portions of its business have improved. We evaluate on a continuing basis whether any impairment indicators are present that would require additional analysis or write-downs of the investment. While we have not recorded an impairment related to this investment or determined that an impairment trigger existed at September 30, 2020, significant variations from current expectations could impact future assessments resulting in future impairment charges.

 

On December 30, 2016 we signed an agreement to invest $1,000,000 in a privately held technology company and program manager in the FinTech industry, with $500,000 of the investment held in escrow to pay future fees to CoreCard pursuant to a Processing Agreement entered into by the parties. The investment was funded on January 4, 2017. In the quarter ended June 30, 2018, we recorded an impairment charge of $250,000 to reduce the carrying value due to the investee’s limited funding to support its operation and sales and marketing efforts. In the quarter ended March 31, 2020, due to the uncertainty from the economic downturn resulting from the recent pandemic, we determined that the fair value of our investment was $0 and therefore we recorded an impairment charge of $750,000, included in investment loss on the Consolidated Statement of Operations for the quarter ended March 31, 2020. CoreCard remains in an ongoing business relationship with the company pursuant to a Processing Agreement and a Program Management Services Agreement. CoreCard is positioned to assume the program management aspects of the investee company if the need should arise to ensure their program(s) ongoing viability and the completion of the Processing Agreement with CoreCard.

 

5.         STOCK-BASED COMPENSATION

 

At September 30, 2020, we have three stock-based compensation plans in effect. In August 2020, shareholders approved the 2020 Non-Employee Directors’ Stock Incentive Plan (the “2020 Plan”), which authorizes the issuance of 200,000 shares of common stock to non-employee directors. We record compensation cost related to unvested stock awards by recognizing the unamortized grant date fair value on a straight-line basis over the vesting periods of each award. We have estimated forfeiture rates based on our historical experience. Stock option compensation expense for the three and nine month periods ended September 30, 2020 and 2019 has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $207,000 and $49,000 of stock-based compensation expense for the three months ended September 30, 2020 and 2019, respectively, and $330,000 and $129,000 for the nine months ended September 30, 2020 and 2019, respectively.

 

As of September 30, 2020, there is $235,000 of unrecognized compensation cost related to stock options. There were no options exercised during the three and nine months ended September 30, 2020. During the quarter ended September 30, 2020, an aggregate of 4,380 shares totaling $150,000 were granted to the three independent members of our board of directors pursuant to the 2020 Plan. Pursuant to the terms of the 2020 Plan, the shares were granted at fair market value on the date of the Annual Meeting of Shareholders and vested upon issuance. No options expired unexercised during the quarter. The following table summarizes options as of September 30, 2020:

 

 

 

The estimated fair value of options granted is calculated using the Black-Scholes option pricing model with assumptions as previously disclosed in our 2019 Form 10-K.

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2020. The amount of aggregate intrinsic value will change based on the market value of the Company’s stock.

 

6.         FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

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

 

7.         FAIR VALUE MEASUREMENTS

 

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

 

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

 

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

 

• Level 1

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

 

• Level 2

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

 

• Level 3

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

 

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

 

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. The fair value of our cost method investments was determined using Level 3 inputs.

 

8.         COMMITMENTS AND CONTINGENCIES

 

Leases

 

We have noncancelable operating leases for offices and data centers expiring at various dates through March 2025. These operating leases are included in "Other long-term assets" on the Company's September 30, 2020 and December 31, 2019 Consolidated Balance Sheets and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are included in "Other current liabilities" and "Long-term lease obligation" on the Company's September 30, 2020 and December 31, 2019 Consolidated Balance Sheets. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.

 

Supplemental Information–Leases

 

Supplemental information related to our right-of-use assets and related lease liabilities is as follows:

 

 

 

Maturities of our operating lease liabilities as of September 30, 2020 is as follows:

 

 

 

Lease expense for the three months ended September 30, 2020 and 2019 consisted of the following:

 

 

 

Legal Matters

 

On or about July 9, 2019, a securities class action complaint was filed in the United States District Court for the Eastern District of New York (Case No. 1:19-cv-03949) by Michael Skrzeczkoski, individually and on behalf of all others similarly situated, against the company, and certain current and former directors and officers. The complaint alleges, among other things, that certain of our press releases and SEC filings were misleading as a result of the failure to disclose alleged related party transactions affecting revenue recognition and the absence of disclosure regarding certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. The complaint seeks to recover attorney’s fees and costs and unspecified damages on behalf of purchasers who acquired our stock during the period from January 23, 2019, through May 29, 2019, and purportedly suffered financial harm as a result of the alleged misleading statements. On September 26, 2019, the Court appointed Edgardo Canez as lead plaintiff (“Lead Plaintiff”) on behalf of the putative class. On November 18, 2019, Lead Plaintiff, individually and on behalf of a putative class of persons or entities who purchased or otherwise acquired publicly traded Company securities from May 23, 2014 through May 29, 2019, filed an amended class action complaint against the Company, and certain current and former directors and officers (the “Amended Complaint”). The Amended Complaint alleges similar allegations in violation of Sections 10(b) and 20(a) of the Securities Exchange Act as the previously filed complaint. The Amended Complaint seeks to recover attorney’s fees and costs and unspecified damages. On January 2, 2020, Defendants submitted a motion to dismiss, and on March 3, 2020, briefing on the motion to dismiss was completed. The motion to dismiss is currently pending. We dispute these claims and intend to defend the matter vigorously. We have not determined the likelihood of loss to be probable nor is any potential loss estimable at this time, therefore we have not recorded any related liability as of September 30, 2020.

 

On or about February 14, 2020, two purported shareholders, derivatively and on behalf of the Company, filed substantially similar shareholder derivative actions in the Eastern District of New York against certain current and former directors and officers (the “Individual Defendants”), and the Company as a nominal defendant (together with the Individual Defendants, the “Defendants”). The complaints assert a claim against Messrs. Strange, Moise, Petit, Fuzzell and Chandler for a violation of Section 14(a) of the Securities Exchange Act by issuing purportedly misleading statements in the Company’s 2017 and 2018 Proxies. The complaints also assert claims against the Individual Defendants for breaches of fiduciary duty, waste of corporate assets, and unjust enrichment arising out of, among other things, purportedly undisclosed related party transactions, other relationships, and certain allegations against former director Parker H. Petit in connection with his former position with MiMedx, Inc. and other companies. The relief sought in the complaints includes changes to the Company’s corporate governance procedures, unspecified damages, equitable relief, restitution and attorney’s fees and costs. On April 20, 2020, the two derivative actions were consolidated and captioned, In re Intelligent Systems Corporation Stockholder Derivative Litigation, Lead Case No. 1:20-cv-00832, in the Eastern District of New York. On June 19, 2020, Defendants filed their motion to dismiss, and briefing was subsequently completed. After a conference held on August 24, 2020, the parties agreed that Defendants’ motion to dismiss would be temporarily withdrawn without prejudice to refile after the conclusion of any discovery permitted by further Court order. On September 8, 2020, Plaintiffs moved for leave to conduct limited discovery to which Defendants’ response is due no later than December 7, 2020.

 

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

 

9.         INCOME TAXES

 

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

 

There were no unrecognized tax benefits at September 30, 2020 and December 31, 2019. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There were no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the periods presented. We have determined we have no uncertain tax positions.

 

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