INTELLIGENT SYSTEMS CORP (Form: 10-K, Received: 03/04/2021 16:02:45)

The accompanying notes are an integral part of these Consolidated Financial Statements.

*At December 31, 2020, approximately $3,361,000 was authorized for future repurchases of our common stock.

The accompanying notes are an integral part of these Consolidated Financial Statements.

1.	ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization – In this document, terms such as the “Company”, “we”, “us”, “our” and “ISC” refer to Intelligent Systems Corporation, a Georgia corporation, and its consolidated subsidiaries.

Consolidation – The financial statements include the accounts of Intelligent Systems Corporation and its majority owned and controlled U.S. and non-U.S. subsidiary companies after elimination of material inter-company accounts and transactions.

Nature of Operations – Our operations consist primarily of our CoreCard Software, Inc. (“CoreCard”) subsidiary and its affiliate companies in Romania, India and Dubai, as well as the corporate office in Atlanta, Georgia which provides significant administrative, human resources and executive management support to CoreCard. CoreCard provides technology solutions and processing services to the financial technology and services market, commonly referred to as the FinTech industry.

Use of Estimates – In preparing the financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Areas where we use estimates and make assumptions are to determine our allowance for doubtful accounts, valuation of our investments, depreciation and amortization expense, accrued expenses and deferred income taxes.

Translation of Foreign Currencies – We consider that the respective local currencies are the functional currencies for our foreign operations. We translate assets and liabilities to U.S. dollars at period-end exchange rates. We translate income and expense items at average rates of exchange prevailing during the period. Translation adjustments are recorded as accumulated other comprehensive gain or loss as a separate component of stockholders’ equity. Upon sale of an investment in a foreign operation, the currency translation adjustment component attributable to that operation is removed from accumulated other comprehensive loss and is reported as part of gain or loss on sale of discontinued operations.

Accounts Receivable and Allowance for Doubtful Accounts – Accounts receivable are customer obligations due under normal trade terms. They are stated at the amount management expects to collect. We sell our software products and transaction processing services to companies involved in a variety of industries that provide some form of credit or prepaid financing options or perform financial services. We perform continuing credit evaluations of our customers’ financial condition and we do not require collateral. The amount of accounting loss for which we are at risk in these unsecured receivables is limited to their carrying value.

Senior management reviews accounts receivable on a regular basis to determine if any receivables will potentially be uncollectible. We include any accounts receivable balances that are estimated to be uncollectible in our overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available to us, we believe our allowance for doubtful accounts as of December 31, 2020 is adequate. However, actual write-offs might exceed the recorded allowance. Refer to Note 4 for additional information.

Property and Equipment – Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Repairs and maintenance costs are expensed as incurred. We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of property and equipment may warrant revision, or that the remaining balance of these assets may not be recoverable. An asset is considered to be impaired when its carrying amount exceeds the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss, if any, which is equal to the amount by which the carrying value exceeds its fair value, is charged to current operations.

The cost of each major class of property and equipment at December 31, 2020 and 2019 is as follows:

(in thousands)	Useful life in years				2020			2019
Machinery and equipment		3	-	5	$	11,793		$	4,995
Furniture and fixtures		5	-	7		210			203
Building			39			306			301
						12,309			5,499
Accumulated depreciation						(5,395	)		(3,322	)
Property and equipment, net					$	6,914		$	2,177

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Depreciation expense was $2,138,000 and $1,012,000 in 2020 and 2019, respectively. These expenses are included in general and administrative expenses or, for assets associated with our processing data centers, are included in cost of services.

Investments – For entities in which we have a 20 to 50 percent ownership interest and over which we exercise significant influence, but do not have control, we account for investments in privately-held companies under the equity method, whereby we record our proportional share of the investee’s net income or net loss as an adjustment to the carrying value of the investment. We account for investments of less than 20 percent in non-marketable equity securities of corporations at the lower of cost or market. Our policy with respect to investments is to record an impairment charge when we conclude that an investment has experienced a decline in value. We have elected to use the measurement alternative for our non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment. At least quarterly, we review our investments to determine any impairment in their carrying value and we write-down any impaired asset at quarter-end to our best estimate of its current realizable value. Any such charges could have a material adverse impact on our financial condition or results of operations and are generally not predictable in advance.

At December 31, 2020 and 2019, the aggregate value of investments was $1,921,000 and $3,081,000, respectively.

Fair Value of Financial Instruments – The carrying value of cash, accounts receivable, notes receivable, accounts payable and certain other financial instruments (such as accrued expenses and other current assets and 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, 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.

A concentration of credit risk may exist with respect to trade receivables, as a substantial portion of our customers are concentrated in the financial services industry.

We perform ongoing credit evaluations of customers worldwide and do not require collateral from our customers. Historically, we have not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area.

Fair Value Measurements – In determining fair value, we use quoted market prices in active markets. Generally accepted accounting principles (“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 the Company has 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.

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

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

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

The fair value of equity method investments has not been determined as it is 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.

Revenue Recognition – Product revenue consists of fees from software licenses. Service revenue consists of fees for processing services; professional services for software customization, consulting, training; reimbursable expenses; and software maintenance and customer support.

Our software license arrangements generally fall into one of the following four categories:

●	an initial contract with the customer to license certain software modules, to provide services to get the customer live on the software (such as training and customization) and to provide post contract support (“PCS”) for a specified period of time thereafter,

●	purchase of additional licenses for new modules or for tier upgrades for a higher volume of licensed accounts,

●	other optional standalone contracts, usually performed after the customer is live on the software, for services such as new interfaces or custom features requested by the customer, additional training and problem resolution not covered in annual maintenance contracts, or

●	contracts for certain licensed software products that involve an initial fee plus recurring monthly fees during the contract life.

At contract inception, we assess the products and services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a product or service (or bundle of products or services) that is distinct. A performance obligation is distinct if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. To identify our performance obligations, we consider all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. We recognize revenue when or as we satisfy a performance obligation by transferring control of a product or service to a customer. Our revenue recognition policies for each of the situations described above are discussed below.

Our software licenses generally have significant stand-alone functionality to the customer upon delivery and are considered to be functional intellectual property. Additionally, the purpose in granting these software licenses to a customer is typically to provide the customer a right to use our intellectual property. Our software licenses are generally considered distinct performance obligations, and revenue allocated to the software license is typically recognized at a point in time upon delivery of the license. Initial implementation fees do not meet the criteria for separate accounting because the software usually requires significant modification or customization that is essential to its functionality. We recognize revenue related to implementations over the life of the customer once the implementation is complete.

We account for the PCS element contained in the initial contract based on relative standalone selling price, which is annual renewal fees for such services, and PCS is recognized ratably on a straight-line basis over the period specified in the contract as we generally satisfy these performance obligations evenly using a time-elapsed output method over the contract term given there is no discernible pattern of performance. Upon renewal of the PCS contract by the customer, we recognize revenues ratably on a straight-line basis over the period specified in the PCS contract. All of our software customers purchase software maintenance and support contracts and renew such contracts annually.

Certain initial software contracts contain specified future service elements for scheduled completion following the implementation, and related recognition, of the initial license. In these instances, after the initial license recognition, where distinct future performance obligations are identified in the contract and we could reliably measure the completion of each identified performance obligation, we have recognized revenue at the time the individual performance obligation was completed.

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Purchases of additional licenses for tier upgrades or additional modules are generally recognized as license revenue in the period in which the purchase is made for perpetual licenses or ratably over the remaining contract term for non-perpetual licenses.

Services provided under standalone contracts that are optional to the customer and are outside of the scope of the initial contract are single element services contracts. These standalone services contracts are not essential to the functionality of the software contained in the initial contract and generally do not include acceptance clauses or refund rights as may be included in the initial software contracts, as described above. Revenues from these services contracts, which are generally performed within a relatively short period of time, are recognized when the services are complete or in some cases as the services are provided. These revenues generally re-occur as contracts are renewed. Payment terms for professional services may be based on an upfront fixed fee with the remainder due upon completion or on a time and materials basis.

For contracts for licensed software which include an initial fee plus recurring monthly fees for software usage, maintenance and support, we recognize the total fees ratably on a straight-line basis over the estimated life of the contract as services revenue.

Revenues from processing services are typically volume- or activity-based depending on factors such as the number of accounts processed, number of accounts on the system, number of hours of services or computer resources used. For processing services which include an initial fee plus recurring monthly fees for services, we recognize the initial fees ratably on a straight-line basis over the estimated life of the contract as services revenue. The payment terms may include tiered pricing structures with the base tier representing a minimum monthly usage fee. For processing services revenues, we stand ready to provide continuous access to our processing platforms and perform an unspecified quantity of outsourced and transaction-processing services for a specified term or terms. Accordingly, processing services are generally viewed as a stand-ready performance obligation comprised of a series of distinct daily services. We typically satisfy our processing services performance obligations over time as the services are provided.

Technology or service components from third parties are frequently embedded in or combined with our products or service offerings. We are often responsible for billing the client in these arrangements and transmitting the applicable fees to the third party. We determine whether we are responsible for providing the actual product or service as a principal, or for arranging for the solution or service to be provided by the third party as an agent. Judgment is applied to determine whether we are the principal or the agent by evaluating whether we have control of the product or service prior to it being transferred to the customer. The principal versus agent assessment is performed at the performance obligation level. Indicators that we consider in determining if we have control include whether we are primarily responsible for fulfilling the promise to provide the specified product or service to the customer, whether we have inventory risk and discretion in establishing the price the customer ultimately pays for the product or service. Depending upon the level of our contractual responsibilities and obligations for delivering solutions to end customers, we have arrangements where we are the principal and recognize the gross amount billed to the customer and other arrangements where we are the agent and recognize the net amount retained.

Revenue is recorded net of applicable sales tax.

Deferred Revenue – Deferred revenue consists of advance payments by software customers for annual or quarterly PCS, advance payments from customers for software licenses and professional services not yet delivered, and initial implementation payments for processing services or bundled license and support services in multi-year contracts. We do not anticipate any loss under these arrangements. Deferred revenue is classified as long-term until such time that it becomes likely that the services or products will be provided within 12 months of the balance sheet date.

Cost of Revenue – For cost of revenue for software contracts, we capitalize the contract specific direct costs, which are included in other current assets and other long-term assets on the Consolidated Balance Sheets and recognize the costs when the associated revenue is recognized. Cost of revenue for services includes direct cost of services rendered, including reimbursed expenses, pass-through third party costs, and data center, network association and compliance costs for processing services. We also capitalize the initial implementation fees for processing services contracts and recognize the costs over the life of the contract when the corresponding revenue is recognized.

Software Development Expense – Research and development costs are expensed in the period in which they are incurred. Contract specific software development costs are capitalized and recognized when the related contract revenue is recognized.

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Warranty Costs –The warranty related to software license contracts consists of a defined number of months (usually three) of PCS after the go-live date, which is accrued as of the go-live date and recognized over the warranty period.

Legal Expense – Legal expenses for continuing operations are recorded as a component of general and administrative expense in the period in which such expenses are incurred.

Research and Development – Research and development costs consist principally of compensation and benefits paid to certain Company employees and certain other direct costs. All research and development costs are expensed as incurred.

Stock Based Compensation – We record compensation cost related to unvested stock-based 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 years ended December 31, 2020 and 2019 has been recognized as a component of general and administrative expenses in the accompanying Consolidated Financial Statements. We recorded $386,000 and $191,000 of stock-based compensation expense for the years ended December 31, 2020 and 2019, respectively.

There were 4,380 shares granted in the year ended December 31, 2020, pursuant to the 2020 Non-employee Directors’ Stock Incentive Plan, and a total of 12,000 options were granted in the year ended December 31, 2019, pursuant to the 2011 Non-employee Directors Stock Option Plan. No options were granted in 2020. The fair value of each option granted in 2019 has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

Year ended December 31,	2020		2019
Risk free interest rate		N/A		2.58	%
Expected life of option in years		N/A		10
Expected dividend yield rate		N/A		0	%
Expected volatility		N/A		51	%

Under these assumptions, the weighted average fair value of options granted in 2019 was $16.15 per share. The fair value of the grants is being amortized over the vesting period for the options. All of the Company’s stock-based compensation expense relates to stock options and stock grants. The total remaining unrecognized compensation cost at December 31, 2020 related to unvested options was $235,000 and is expected to be recognized by the first quarter of 2022.

Income Taxes – We account for income taxes under the liability method. We record deferred income taxes using enacted tax laws and rates for the years in which the taxes are expected to be paid. Deferred income tax assets and liabilities are recorded based on the differences between the financial reporting and income tax bases of assets and liabilities. We assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred tax assets. We record a valuation allowance, as necessary, to reduce our deferred tax assets to the amount of future tax benefit that we estimate is more likely than not to be realized.

We record tax benefits for positions that we believe are more likely than not of being sustained under audit examinations. We assess the potential outcome of such examinations to determine the adequacy of our income tax accruals. We recognize interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes on our Consolidated Statements of Operations. We adjust our income tax provision during the period in which we determine that the actual results of the examinations may differ from our estimates or when statutory terms expire. Changes in tax laws and rates are reflected in our income tax provision in the period in which they occur.

Comprehensive Income (Loss) – Comprehensive income (loss) represents net income adjusted for the results of certain stockholders’ equity changes not reflected in the Consolidated Statements of Operations. These items are accumulated over time as “accumulated other comprehensive loss” on the Consolidated Balance Sheets and consist primarily of net earnings/loss and foreign currency translation adjustments associated with foreign operations that use the local currency as their functional currency.

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.

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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 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.

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.

7.	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 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 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:

Year Ended December 31,	2020			2019

Right-of-use asset, net and lease liabilities (in thousands)	$	2,889		$	945
Cash paid for operating lease liabilities (in thousands)	$	1,033		$	563
Weighted average remaining lease term (years)		3.5			1.1
Weighted average discount rate		3.8	%		5.5	%

Maturities of our operating lease liabilities as of December 31, 2020 is as follows:

	Operating Leases
	(In thousands)
2021	$	983
2022		795
2023		718
2024		495
Thereafter		108
Total lease liabilities	$	3,099

Lease expense for the years ended December 31, 2020 and 2019 consisted of the following:

Year Ended December 31, (in thousands)	2020		2019
Cost of revenue	$	725	$	230
General and administrative		214		210
Research and development		113		123
Total	$	1,052	$	563

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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.

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 (the “Derivative Matter”). 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 (“Plaintiffs’ Motion for Discovery”). On December 23, 2020, the Court entered a stipulation among the parties whereby Plaintiffs’ Motion for Discovery shall be withdrawn, the Company will engage in limited discovery, and the parties agree that the Derivative Matter shall be stayed pending resolution of the motion to dismiss in the related above-mentioned securities litigation matter, among other things.

10.

STOCK COMPENSATION PLANS

We instituted the 2003 Incentive Stock Plan (the “2003 Plan”) in March 2003. The 2003 Plan authorized the issuance of up to 450,000 options to purchase shares of common stock to officers and key employees, with vesting of such options occurring equally over a 3-year time period. In 2013, the 2003 Plan expired with 197,500 options ungranted. In the years ended December 31, 2020 and 2019, no options and 25,000 options, respectively, were exercised under the 2003 Plan. In June 2015, shareholders approved the 2015 Incentive Stock Plan (the “2015 Plan”) which authorizes the issuance of up to 750,000 options to purchase shares of common stock to employees and key consultants and advisors. In 2020 and 2019, no options were exercised under the 2015 Plan. In 2020, no options were granted and in 2019 30,000 options were granted under the 2015 Plan. In 2019, 10,000 options were cancelled under the 2015 Plan.

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In August 2000, we instituted a Non-Employee Directors’ Stock Option Plan (the “Directors Plan”) that authorized the issuance of up to 200,000 options to purchase shares of common stock to non-employee directors. Upon adoption of the Directors Plan, each non-employee director was granted an option to acquire 5,000 shares. At each Annual Meeting, each director receives a grant of 4,000 options, which vest in 50% increments on the first and second anniversary. The Directors Plan expired in 2011, with 60,000 options ungranted. The shareholders approved a new plan, the 2011 Non-Employee Directors Stock Plan (the “2011 Directors Plan”), in May 2011, with essentially the same terms and conditions as the Directors Plan. In the years ended December 31, 2020 and 2019, no options and 12,000 options were granted to non-employee members of our board of directors at the 2020 and 2019 Annual Meetings, respectively, pursuant to the 2011 Directors Plan. Additionally, in 2020 and 2019, no options and 8,000 options, respectively, were exercised under the Directors Plan. In 2020 and 2019, no options and 74,000 options, respectively, were exercised under the 2011 Directors Plan. In 2020, no options were cancelled and in 2019, under the 2011 Directors Plan, 6,000 options were cancelled.

In August 2020, shareholders approved the 2020 Non-Employee Directors’ Stock Incentive Plan (the “2020 Plan”), which replaces the 2011 Director Plan and authorizes the issuance of 200,000 shares of common stock to non-employee directors. During 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. We expect to grant each independent director $50,000 of stock on the date of each subsequent Annual Meeting.

Stock options under all plans are granted at an exercise price equal to fair value on the date of grant and vest over 2-3 years. As of December 31, 2020, a total of 1,356,500 options under all plans have been granted, 947,320 have been exercised, 282,680 have been cancelled, 102,500 are fully vested and exercisable and 24,000 are not vested. All options expire ten years from their respective dates of grant.

As of December 31, 2020, there was $235,000 of unrecognized compensation cost related to stock options granted under the plans, which is expected to be recognized by the first quarter of 2022.

Stock option activity during the years ended December 31, 2020 and 2019 was as follows:

		2020			2019
Options outstanding at January 1				126,500				207,500
Options cancelled				-				(16,000	)
Options exercised				-				(107,000	)
Options granted				-				42,000
Options outstanding at December 31				126,500				126,500

Options available for grant at December 31				885,620				763,000

Options exercisable at December 31				102,500				84,500

Exercise price ranges per share:
Granted				N/A		$19.99	-	$39.11
Exercised				N/A		$0.69	-	$7.80
Outstanding		$1.52	-	$39.11		$1.52	-	$39.11

Weighted average exercise price per share:
Granted				-	$			25.45
Exercised				-	$			1.97
Outstanding at December 31	$			8.94	$			8.94
Exercisable at December 31	$			5.61	$			2.21

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The following tables summarize information about the stock options outstanding under the Company’s option plans as of December 31, 2020.

Options Outstanding:
Range of Exercise Price			Number Outstanding		Wgt. Avg. Contractual Life Remaining (in years)		Wgt. Avg. Exercise Price		Aggregate Intrinsic Value
$1.52	-	$1.72		67,500		0.5	$	1.59	$	2,600,325
$3.50	-	$39.11		59,000		7.6	$	17.35	$	1,342,770
$1.52	-	$39.11		126,500		3.8	$	8.94	$	3,943,095

Options Exercisable:
Range of Exercise Price			Number Exercisable		Wgt. Avg. Contractual Life Remaining (in years)		Wgt. Avg. Exercise Price		Aggregate Intrinsic Value
$1.52	-	$1.72		67,500		0.5	$	1.59	$	2,600,325
$3.50	-	$39.11		35,000		7.3	$	13.36	$	936,370
$1.52	-	$39.11		102,500		2.8	$	5.61	$	3,536,695

Aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year ended December 31, 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 December 31, 2020. The amount of aggregate intrinsic value will change based on the fair value of the Company’s common stock.

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)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value	INS	NYSE American

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

			Page

Part I

Item
	1.	Business	1
	1B.	Unresolved Staff Comments	4
	2.	Properties	4
	3.	Legal Proceedings	4
	4.	Mine Safety Disclosures	4

Part II

	5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	5
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6
	8.	Financial Statements	11
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	12
	9A.	Controls and Procedures	12
	9B.	Other Information	13

Part III

	10.	Directors, Executive Officers and Corporate Governance	13
	11.	Executive Compensation	13
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	13
	13.	Certain Relationships and Related Transactions, and Director Independence	14
	14.	Principal Accountant Fees and Services	14

Part IV

	15.	Exhibits and Financial Statement Schedules	15
Signatures			16

	Total Number of Shares Purchased		Average Price Paid per Share¹		Total Number of Shares Purchased as Part of Publicly Announced Program ²		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program ²
October 1, 2020 to October 31, 2020		-		-		-	$	5,000,000
November 1, 2020 to November 30, 2020		42,961	$	37.63		42,961	$	3,384,000
December 1, 2020 to December 31, 2020		610	$	38.47		610	$	3,361,000
Total		43,571	$	37.62		43,571	$	3,361,000

Plan category	(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights		(b) Weighted-average exercise price of outstanding options, warrants and rights		(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		126,500	$	8.94		885,620
Equity compensation plans not approved by security holders		--		--		--
Total		126,500	$	8.94		885,620

	(b)	2011 Non-Employee Directors Stock Option Plan
	(c)	2020 Non-Employee Directors’ Stock Incentive Plan

	Exhibit 10.3(a) is incorporated by reference to the Registrant’s 2015 Definitive Proxy Statement on Schedule 14A.
	Exhibit 10.3(b) is incorporated by reference to the Registrant’s 2011 Definitive Proxy Statement on Schedule 14A.

21.1	List of subsidiaries of Registrant.

23.1	Consent of Nichols, Cauley & Associates, LLC.

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document ***

101.SCH	XBRL Taxonomy Extension Schema ***

101.CAL	XBRL Taxonomy Extension Calculation ***

101.DEF	XBRL Taxonomy Extension Definitions ***

101.LAB	XBRL Taxonomy Extension Labels ***

101.PRE	XBRL Taxonomy Extension Presentation ***

	INTELLIGENT SYSTEMS CORPORATION
	Registrant

Date: March 4, 2021	By:	/s/ J. Leland Strange
		J. Leland Strange
		Chairman of the Board, President
		and Chief Executive Officer

Signature	Capacity	Date

/s/ J. Leland Strange J. Leland Strange	Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer)	March 4, 2021

/s/ Matthew A. White Matthew A. White	Chief Financial Officer (Principal Accounting and Financial Officer)	March 4, 2021

/s/ A. Russell Chandler III A. Russell Chandler III	Director	March 4, 2021

/s/ Philip H. Moise Philip H. Moise	Director	March 4, 2021

/s/ Elizabeth W. Camp Elizabeth W. Camp	Director	March 4, 2021

Report of Independent Registered Public Accounting Firm – Nichols, Cauley & Associates, LLC	F-2
Consolidated Balance Sheets at December 31, 2020 and 2019	F-4
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019	F-5
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020 and 2019	F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019	F-7
Notes to Consolidated Financial Statements	F-8

As of December 31,	2020			2019
ASSETS
Current assets:
Cash	$	37,956		$	26,415
Accounts receivable, net		3,270			8,759
Other current assets		1,263			905
Total current assets		42,489			36,079
Investments		1,921			3,081
Notes and interest receivable		2,681			1,795
Property and equipment, at cost less accumulated depreciation		6,914			2,177
Other long-term assets		3,020			1,108
Total assets	$	57,025		$	44,240

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	714		$	403
Deferred revenue, current portion		1,322			689
Accrued payroll		1,901			2,503
Accrued expenses		321			153
Income tax payable		954			1,100
Other current liabilities		4,850			1,345
Total current liabilities		10,062			6,193
Deferred revenue, net of current portion		--			23
Deferred tax liability		818			275
Long-term lease obligation		1,994			460
Total noncurrent liabilities		2,812			758
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, $0.01 par value: Authorized shares - 20,000,000;
Issued shares - 8,929,368 and 8,924,988 at December 31, 2020 and 2019, respectively;
Outstanding shares - 8,885,797 and 8,924,988 at December 31, 2020 and 2019, respectively		89			89
Additional paid-in capital		15,836			15,450
Treasury stock, 43,571 and 0 shares as of December 31, 2020 and 2019, respectively, at cost		(1,639	)		--
Accumulated other comprehensive loss		(140	)		(94	)
Accumulated income		30,005			21,844
Total stockholders’ equity		44,151			37,289
Total liabilities and stockholders’ equity	$	57,025		$	44,240

(in thousands, except share amounts)	Common Stock					Additional Paid-In Capital		Treasury Stock			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		107,000			1		209										210
Net income															10,969		10,969
Stock compensation expense							191										191
Foreign currency translation adjustment												(2	)				(2	)
Balance at December 31, 2019		8,924,988		$	89	$	15,450	$	--		$	(94	)	$	21,844	$	37,289
Common stock repurchased*		(43,571	)						(1,639	)							(1,639	)
Net income															8,161		8,161
Stock compensation expense		4,380					386										386
Foreign currency translation adjustment												(46	)				(46	)
Balance at December 31, 2020		8,885,797		$	89	$	15,836	$	(1,639	)	$	(140	)	$	30,005	$	44,151

	Year Ended December 31,
CASH PROVIDED BY (USED IN):	2020			2019
OPERATING ACTIVITIES:
Net income	$	8,161		$	10,969
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,138			1,012
Stock-based compensation expense		386			191
Gain on sale of investment		(125	)		(34	)
Provision for deferred income taxes		543			555
Non-cash investment loss		1,009			--
Non-cash interest income		(131	)		(49	)
Equity in loss of affiliate company		400			332
Changes in operating assets and liabilities:
Accounts receivable, net		5,489			(5,028	)
Other current assets		(358	)		224
Other long-term assets		22			61
Accounts payable		311			131
Accrued payroll		(602	)		1,358
Deferred revenue, current portion		633			(92	)
Accrued expenses		168			82
Other current liabilities		2,945			961
Deferred revenue, net of current portion		(23	)		(88	)
Net cash provided by operating activities		20,966			10,585

INVESTING ACTIVITIES:
Purchases of property and equipment		(6,875	)		(1,676	)
Advances on note and interest receivable		(1,000	)		(2,000	)
Proceeds from sale of investments		135			379
Net cash used in investing activities		(7,740	)		(3,297	)

FINANCING ACTIVITIES:
Sale of capital stock pursuant to exercise of option		--			210
Repurchases of common stock		(1,639	)		--
Net cash (used in) provided by financing activities		(1,639	)		210
Effects of exchange rate changes on cash		(46	)		(2	)
Net increase in cash		11,541			7,496
Cash at beginning of year		26,415			18,919
Cash at end of year	$	37,956		$	26,415
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	1,826		$	1,159

	Revenue						Accounts Receivable
	2020			2019			2020			2019
Customer A		69	%		60	%		59	%		80	%
Customer B		2	%		11	%		10	%		11	%
Customer C		10	%		6	%		6	%		2	%

1.1	Registered Office and Agent	1
1.2	Principal Office	1
1.3	Other Offices	1

2.1	Place of Meetings	1
2.2	Annual Meetings	1
2.3	Special Meetings	1
2.4	Notice of Meetings	2
2.5	Waiver of Notice	2
2.6	Voting Group; Quorum; Vote Required to Act	2
2.7	Voting of Shares	3
2.8	Proxies	3
2.9	Presiding Officer	3
2.10	Adjournments	3
2.11	Conduct of the Meeting	4
2.12	Action of Shareholders Without a Meeting	4
2.13	Matters Considered at Annual Meetings	4

3.1	General Powers	5
3.2	Number, Election and Term of Office	5
3.3	Removal of Directors	5
3.4	Election of Directors	5
3.5	Vacancies	6
3.6	Compensation	6
3.7	Committees of the Board of Directors	6
3.8	Qualification of Directors	6
3.9	Certain Nomination Requirements	7

4.1	Regular Meetings	7
4.2	Special Meetings	7
4.3	Place of Meetings	7
4.4	Notice of Meetings	8
4.5	Quorum	8
4.6	Vote Required for Action	8
4.7	Participation by Conference Telephone	8
4.8	Action by Directors Without a Meeting	8
4.9	Adjournments	8
4.10	Waiver of Notice	8

5.1	Offices	9
5.2	Term	9
5.3	Compensation	9
5.4	Removal	9
5.5	Chairman of the Board	9
5.6	Chief Executive Officer	10
5.7	President	10
5.8	Vice Presidents	10
5.9	Secretary	10
5.10	Treasurer	10

7.1	Shares	12
7.2	Rights of Corporation with Respect to Registered Owners	12
7.3	Transfers of Shares	12
7.4	Duty of Corporation to Register Transfer	12
7.5	Lost, Stolen, or Destroyed Certificates	13
7.6	Fixing of Record Date	13
7.7	Record Date if None Fixed	13

8.1	Indemnification of Directors	13
8.2	Indemnification of Others	14
8.3	Other Organizations	14
8.4	Advances	14
8.5	Non-Exclusivity	15
8.6	Insurance	15
8.7	Notice	15
8.8	Security	15
8.9	Amendment	15
8.10	Agreements	16
8.11	Continuing Benefits	16
8.12	Successors	16
8.13	Severability	16
8.14	Additional Indemnification	16

9.1	Inspection of Books and Records	16
9.2	Fiscal Year	17
9.3	Corporate Seal	17
9.4	Annual Statements	17
9.5	Notice	17

Subsidiary Name	State / Country of Organization

CoreCard Software, Inc.	Delaware
CoreCard SRL	Romania
ISC Software Pvt. Ltd.	India
CoreCard Software DMCC	United Arab Emirates

	/s/ J. Leland Strange
	J. Leland Strange
	Chief Executive Officer and President

	/s/ Matthew A. White
	Matthew A. White
	Chief Financial Officer