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: June 30, 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 August 7, 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, June 30, 2001 1
Statements of Operations (Unaudited) for the
three and six month periods ended
June 30, 2001 and 2000 2-3
Statements of Cash Flows (Unaudited) for the six
months ended June 30, 2001 and 2000 4
Notes to financial statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-7
PART II. OTHER INFORMATION 8
Signatures 9
Intellectual Technology, Inc.
Balance Sheet
June 30, 2001
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 673,227
Accounts receivable 450,925
Inventory 463,055
Deferred tax asset 64,500
Prepaid expenses 83,833
-------
Total current assets 1,735,540
Property & Equipment
Contract equipment 7,087,204
Equipment - non-contract, office, furniture and
improvements 79,208
---------
7,168,412
Less: Accumulated depreciation 5,676,703
---------
1,487,709
Other Assets
Patents, net of
accumulated amortization 102,115
Deferred tax asset 65,469
Due from related parties 30,298
Other non-current assets 2,419
---------
Total assets $ 3,423,550
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 681,684
Income taxes payable 65,689
Accrued expenses and reserves 154,813
Note payable 165,975
Due to related party 10,970
---------
Total current liabilities 1,079,131
Other Liabilities
Long-term debt, net of current portion 352,738
Accrued loss reserve, net of current portion 197,570
Due to related party - long term 129,707
---------
680,015
---------
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 509,854
---------
1,664,604
---------
Total liabilities and stockholders' equity $ 3,423,550
=========
The accompanying notes are an integral part of the financial statements.
1
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
For the quarter
ended June 30,
----------------------
2001 2000
------------ -------------
REVENUES
Sales, net $ 1,261,739 $ 1,796,648
COST OF REVENUES
Depreciation and amortization 108,820 391,442
Material costs 330,423 387,805
Maintenance and other 249,326 279,566
------------ -------------
Total cost of revenues 688,569 1,058,813
------------ -------------
Gross profit 573,170 737,835
OPERATING EXPENSES
Selling, general and administrative 291,154 310,357
Research and development 17,315 54,332
Depreciation and amortization 18,811 80,597
------------ -------------
Total operating expenses 327,280 445,286
------------ -------------
Income from operations 245,890 292,549
OTHER INCOME (EXPENSE)
Interest income 6,120 8,709
Interest expense (21,686) (57,451)
------------ -------------
Net income before income taxes 230,324 243,807
Income tax expense 89,007 85,242
------------ -------------
NET INCOME 141,317 158,565
Retained earnings (Accumulated deficit)
Balance, beginning of period 368,537 (102,007)
------------ -------------
Balance, end of period $ 509,854 $ 56,558
============ =============
INCOME PER SHARE - BASIC $ 0.01 $ 0.02
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 9,923,711 10,000,000
============ =============
The accompanying notes are an integral part of the financial statements.
2
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
For the six months
ended June 30,
----------------------
2001 2000
------------ -------------
REVENUES
Sales, net $ 2,674,496 $ 3,739,008
COST OF REVENUES
Depreciation and amortization 181,656 849,204
Material costs 685,946 736,463
Maintenance and other 495,579 548,553
------------ -------------
Total cost of revenues 1,363,181 2,134,220
------------ -------------
Gross profit 1,311,315 1,604,788
OPERATING EXPENSES
Selling, general and administrative 561,188 608,452
Research and development 61,979 87,204
Depreciation and amortization 37,275 190,821
------------ -------------
Total operating expenses 660,442 886,477
------------ -------------
Income from operations 650,873 718,311
OTHER INCOME (EXPENSE)
Interest income 12,243 14,814
Interest expense (42,474) (128,489)
------------ -------------
Net income before income taxes 620,642 604,636
Income tax expense 241,907 223,815
------------ -------------
NET INCOME 378,735 380,821
Retained earnings (Accumulated deficit)
Balance, beginning of period 131,119 (324,263)
------------ -------------
Balance, end of period $ 509,854 $ 56,558
============ =============
INCOME PER SHARE - BASIC $ 0.04 $ 0.04
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 9,923,711 10,000,000
============ =============
The accompanying notes are an integral part of the financial statements.
3
Intellectual Technology, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
ended June 30,
----------------------
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 1,074,408 $ 1,130,260
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of non-contract equipment (5,070) (3,840)
Investment in contract costs and equipment (807,379) (266,363)
------------ -------------
Net cash flows from
investing activities (812,449) (270,203)
CASH FLOWS FROM FINANCING ACTIVITES
Repayment by related party 8,774 -
Debt repayments (81,981) (835,665)
Redemption of common stock (31,800) -
------------ -------------
Net cash flows from
financing activities (105,007) (835,665)
------------ -------------
NET INCREASE IN CASH 156,952 24,392
CASH AND CASH EQUIVALENTS,
beginning of period 516,275 505,723
------------ -------------
CASH AND CASH EQUIVALENTS,
end of period $ 673,227 $ 530,115
============ =============
The accompanying notes are an integral part of the financial statements.
4
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.
5
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. Revenue is earned through per transaction
billings which include the media, equipment maintenance and software updates
and also through outright sales of equipment and supplies. ITI contracts
directly with States and indirectly though subcontract arrangements with
third parties. ITI markets basic printing systems for use by Motor Vehicle
Department personnel, fully automated self-service terminals, and newly
developed Customer Convenience Centers for use in the motor vehicle offices,
which allow for automated transactions, but are partially attended by a State
employee.
Results of Operations
For ease in presenting the financial data, figures have been rounded to the
nearest thousand.
For the six months ended June 30, 2001, contract revenues decreased from
$3,739,000 for the six months ended June 30, 2001, to $2,674,000, a decrease
of $1,065,000 or 28.5%. This decrease in revenue is due primarily to
scheduled transaction price decreases.
Gross profit for the six month comparisons decreased from $1,605,000 in
2000 (42.9% of sales) to $1,311,000 (49% of sales) in 2001 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 support costs.
Operating expenses decreased 25.5% from $886,000 for the six months ended
June 30, 2000, to $660,000 in 2001, a decrease of $226,000. Selling, general
and administrative expenses decreased from $608,000 to $561,000, a decrease
of $47,000 or 7.7% primarily due to lower payroll resulting from an employee
termination and the death of two employees (-$191,000) partially offset by
(1) lower research and development payroll in 2001 versus 2000 ($37,000),
(2) raises to existing personnel ($10,000), increased expense of a managing
Board of Directors ($26,000), new hires ($39,000); and (2) increased general
and administrative expenses in several areas ($32,000 or 14%). Depreciation
and amortization decreased from $191,000 for the six months ended June 30,
2001 to $37,000 in 2000, a decrease of $154,000 due to re-evaluation of the
remaining useful lives of the Company's patents and equipment. Research and
development expenses for the six months ended June 30, 2001 and 2000 were
$62,000 and $87,000, respectively, representing 2.3% of sales for both
periods. This decrease from last year reflects the redirection of
efforts of existing employees from research and development to product
applications for new and potential contracts. 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 $128,000 in 2000 to $42,000 in 2001, a
decrease of $86,000, 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 substantially reduce long term debt. 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
$50,000 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 of $200,000 for the remainder of 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:
Six months ended June 30,
(rounded)
2001 2000
Operating Activities $1,074,000 $ 1,130,000
Investing Activities (812,000) (270,000)
Financing Activities (105,000) (836,000)
Net effect on cash $ 157,000 $ 24,000
Cash flows provided by operations decreased from $1,130,000 in 2000 to
$1,074,000, a decrease of $56,000 due to lower net profit before
depreciation and non-cash adjustments of $1,006,000 offset by a decreases
in working capital components of $950,000 from 2000. The major changes in
working capital components were: (1) a reduction in accounts receivable
compared to last year due to timing of collections and lower revenues
- -$279,000; (2) Certificate of deposits not renewed this year-$144,000;
and (3) Increases in accounts payable due to contract costs and equipment
purchases for a new State contract in the process of being financed by
long term debt. The increase in Cash flows used in investing activities
increased from $270,000 in 2000 to $812,000 in 2001 primarily due to: (1)
continued installation and replacement of equipment for existing contracts
($194,000); and (2) New contract costs and equipment ($630,000). Net cash
used in financing activities decreased from $836,000 in 2000 to $105,000
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
During the June 30, 2001 fiscal quarter, incentive stock options
to purchase 150,000 common shares were granted as part of an
employment agreement. The Options were granted under the
Company's 2000 Stock Option Plan at a price equal to 110% of the
trading market price on the grant date. Vesting occurs equally
over a three year period.
Item 3. Defaults Upon Senior Securities
None
Item 4. 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
Principal Financial Officer
Date: August 13, 2001