U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2001
Commission file number: 0-29138
INTELLECTUAL TECHNOLOGY, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1130227
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization )
1945 Camino Vida Roble, Suite O, Carlsbad, California 92008
(Address of principal executive offices)
(760) 929-9789
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 -X- No ---
As of May 11, 2001, 9,842,681 shares of common stock, par value $0.00001
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes --- No -X-
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, March 31, 2001 1
Statements of Operations and Accumulated Deficit
(Unaudited) for the three month periods ended
March 31, 2001 and 2000 2
Statements of Cash Flows (Unaudited) for the three
months ended March 31, 2001 and 2000 3
Notes to financial statements 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 5-7
PART II. OTHER INFORMATION 8
Signatures 9
Intellectual Technology, Inc.
Balance Sheet
March 31, 2001
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 454,966
Accounts receivable 722,023
Inventory 380,875
Deferred tax asset 75,500
Prepaid expenses 88,160
-------
Total current assets 1,721,524
Property & Equipment
Contract equipment 6,485,509
Equipment - non-contract, office, furniture and
improvements 78,626
---------
6,564,135
Less: Accumulated depreciation 5,566,477
---------
997,658
Other Assets
Patents, net of
accumulated amortization 117,489
Deferred tax asset 81,100
Due from related parties 30,298
Other non-current assets 2,545
---------
Total assets $ 2,950,614
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 262,595
Income taxes payable 134,336
Accrued expenses and reserves 123,927
Note payable 161,733
Due to related party 10,791
---------
Total current liabilities 693,382
Other Liabilities
Long-term debt, net of current portion 395,856
Accrued loss reserve, net of current portion 205,593
Due to related party - long term 132,696
---------
734,145
---------
Stockholders' Equity
Preferred stock, $0.00001 par value, 10,000,000
shares authorized, no shares issued or outstanding -
Common stock, $0.00001 par value, 20,000,000 shares
authorized, 9,842,681 shares issued and outstanding 98
Additional paid-in capital 1,154,452
Retained earnings 368,537
---------
1,523,087
---------
Total liabilities and stockholders' equity $ 2,950,614
=========
The accompanying notes are an integral part of the financial statements.
1
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(unaudited)
For the three months
ended March 31,
----------------------
2001 2000
------------ -------------
REVENUES
Sales, net $ 1,412,757 $ 1,942,360
COST OF REVENUES
Depreciation and amortization 72,836 457,762
Material costs 355,523 348,658
Maintenance and other 246,253 268,987
------------ -------------
Total cost of revenues 674,612 1,075,407
------------ -------------
Gross profit 738,145 866,953
OPERATING EXPENSES
Selling, general and administrative 270,033 298,095
Research and development 44,663 32,872
Depreciation and amortization 18,464 110,224
------------ -------------
Total operating expenses 333,160 441,191
------------ -------------
Income from operations 404,985 425,762
OTHER INCOME (EXPENSE)
Interest income 6,122 6,105
Interest expense (20,789) (71,038)
------------ -------------
Net income before income taxes 390,318 360,829
Income taxes (152,900) (138,573)
------------ -------------
NET INCOME 237,418 222,256
Retained earnings (Accumulated deficit)
Balance, beginning of period 131,119 (324,263)
------------ -------------
Balance, end of period $ 368,537 $ (102,007)
============ =============
INCOME PER SHARE - BASIC $ 0.02 $ 0.02
============ =============
INCOME PER SHARE - DILUTED $ 0.02 N/A
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 9,923,711 10,000,000
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 10,053,211 N/A
============ =============
The accompanying notes are an integral part of the financial statements.
2
Intellectual Technology, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months
ended March 31,
----------------------
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 209,369 $ 502,767
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of non-contract equipment (1,671) (1,067)
Investment in contract costs and equipment (205,685) (1,215)
------------ -------------
Net cash flows from
investing activities (207,356) (2,282)
CASH FLOWS FROM FINANCING ACTIVITES
Repayment by related party 8,774 -
Debt repayments (40,296) (409,972)
Redemption of common stock (31,800) -
------------ -------------
Net cash flows from
financing activities (63,322) (409,972)
------------ -------------
NET INCREASE (DECREASE) IN CASH (61,309) 90,513
CASH AND CASH EQUIVALENTS,
beginning of period 516,275 505,723
------------ -------------
CASH AND CASH EQUIVALENTS,
end of period $ 454,966 $ 596,236
============ =============
The accompanying notes are an integral part of the financial statements.
3
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Management's representation of interim financial information
The accompanying financial statements have been prepared by Intellectual
Technology, Inc. without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted as
allowed by such rules and regulations, and management believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements include all of the adjustments which, in the
opinion of management, as necessary to a fair presentation of financial
position and results of operations. All such adjustments are of a normal
and recurring nature. These financial statements should be read in
conjunction with the audited financial statements at December 31, 2000.
4
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this report, including statements
concerning the Company's future cash and financing requirements, and
other statements contained herein regarding matters that are not
historical facts, are forward looking statements; actual results may
differ materially from those anticipated.
Plan of Operations and Background
The Company (ITI) designs, manufactures, and leases systems for the
automated preparation and dispensing of motor vehicle registration forms
and license plate decals. ITI refers to the materials used in the
preparation of the vehicle forms and decals as "media". Until 1996, ITI
was principally engaged in research and development of its products and
generated only limited operating revenues. In November 1996, the Company
entered into a three-year lease agreement with the State of Indiana, to
provide printer equipment and self-service terminals for production of
the State's vehicle registrations. The revenue from this lease agreement
is billed on a per transactions basis and includes the media, equipment
maintenance and some software updates. This contract has been extended
through October 2002. The self-service terminals (SST's) are fully
automated and do not require State personnel to be present during the
renewal process. Some of these SST's are located in shopping malls. ITI
has also developed Customer Convenience Centers for use in the motor
vehicle offices, which allow for automated transactions, but are attended
by a State employee. ITI is presently negotiating for the sale or lease
of this equipment. ITI also has an agreement to sell printers and media
to the prime contractor for the State of Maryland motor vehicle offices,
although this has not been a significant source of revenue. In March
1999, ITI entered into a five-year contract with South Dakota to supply
printer equipment, equipment and software maintenance and media on a per
transaction basis. During the quarter ended March 31, 2001, ITI entered
into a subcontractor agreement as part of a contract with the State of
Louisiana to provide printer equipment, software and equipment
maintenance, and media to produce the State's motor vehicle
registrations. ITI does not expect to realize significant revenue from
this contract until the second quarter of 2001.
Results of Operations
For ease in presenting the financial data, figures have been rounded to
the nearest thousand.
For the three months ended March 31, 2001, contract revenues decreased
from $1,942,000 for the three months ended March 31, 2000, to $1,413,000,
a decrease of $529,000 or 27%. This decrease in revenue is due primarily
to a transaction price decrease in a contract.
5
Item 2. (cont.)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Gross profit for the three month comparisons decreased from $867,000
(44.6% of sales) to $738,000 (52.2% of sales) as a result of the
aforementioned price decrease. The gross profit percentage increased due
to the effect of the price decrease in the contract being offset, on a
percentage basis by: (1) decreased contract depreciation due to changes
in the contract equipment life; and, (2) lower maintenance costs due to
lower software costs.
Operating expenses decreased 24.5% from $441,000 for the three months
ended March 31, 2000, to $333,000 in 2001, a decrease of $108,000.
Selling, general and administrative expenses decreased from $298,000 to
$270,000, a decrease of $28,000 or 9.4% primarily due to lower payroll
resulting from an employee termination and the death of two employees (-
$92,000) offset by: (1) less payroll in 2001 versus 2000 attributable to
research and development efforts by existing employees ($18,000), raises
to existing personnel ($5,000), increased expense of a managing Board of
Directors ($15,000); and (2) increased general and administrative
expenses in several areas ($26,000). Depreciation and amortization
decreased from $110,000 for the three months ended March 31, 2000 to
$18,000 in 2001, a decrease of $92,000 due to re-evaluation of the
remaining useful lives of the Company's patents. Research and
development expenses for the three months ended March 31, 2001 and 2000
were $45,000 and $33,000, respectively, representing 3.2% and 1.7% of
sales, respectively. The increase from last year reflects the addition
of an employee. The Company will continue to engage in research and
development of additional applications of its products in related areas
and new product development.
Interest expense decreased from $71,000 in 2000 to $21,000 in 2001, a
decrease of $50,000, reflecting the pay down of equipment financing.
6
Item 2. (cont.)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Liquidity and Capital Resources
During the last two fiscal years, the Company has been able to use cash
flow from operations to repay debt and, as a result has generated
significant increases in working capital. As of March 31, 2001, the
Company has working capital of $1,028,000 versus $398,000 as of March 31,
2000, an improvement of $630,000. Certain equipment financing with a
monthly payment of $134,695 was fully paid off in December 2000. The
Company's remaining debt service consists of contract financing with a
monthly payment of $17,680 ($212,000) per year) through April 2004 and a
patent purchase payment of $5,000 per quarter ($20,000 per year) through
March 2011. For the remainder of 2001, the Company expects to spend
another $70,000 on contract equipment for contracts in effect as of
December 31, 2000 and expects to pay its debt and capital equipment
obligations from internally generated cash flows.
In connection with its expanding contract base, the Company expects
to incur additional capital expenditures in 2001, which will be funded
from both internal cash flows and external financing from lenders with
whom the Company has established relationships.
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Three months ended March 31,
(rounded)
2001 2000
Operating Activities $ 209,000 $ 503,000
Investing Activities (207,000) (2,000)
Financing Activities (63,000) (410,000)
Net effect on cash $ (61,000) $ 91,000
Cash flows provided by operations decreased from $503,000 in 2000 to
$209,000, a decrease of $294,000 due to lower gross profit before
depreciation. Cash flows used in investing activities increased from
$2,000 in 2000 to $207,000 in 2001 due to: (1) Continued installation of
equipment for existing contracts ($33,000); (2) New contract startup
costs ($44,000); and (3) Purchase of printers to satisfy purchase
commitments for future contract use ($129,000). Net cash used in
financing activities decreased from $410,000 in 2000 to $63,000 in 2000
due to payoff of significant debt service in December 2000. Under the
Company's current financing arrangement, certain contract receivables
have been assigned to the note holder. The amount of monthly cash flows
from a contract is remitted net to the Company after debt service is
satisfied.
7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 3. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
8
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
INTELLECTUAL TECHNOLOGY, INC.
By: /S/ Craig Litchin
By: Craig Litchin
Principal Financial Officer
Date: May 15, 2001
9