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, 2002
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 )
1040 Joshua Way, Vista, CA 92083-7807
(Address of principal executive offices)
(760) 599-8080
(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, 2002, 9,842,680 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, 2002 1
Statements of Operations and Accumulated Deficit
(Unaudited) for the three month periods ended
March 31, 2002 and 2001 2
Statements of Cash Flows (Unaudited) for the three
month periods ended March 31, 2002 and 2001 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
<page>
Intellectual Technology, Inc.
Balance Sheet
March 31, 2002
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 376,860
Accounts receivable 1,211,148
Inventory 554,832
Prepaid expenses 69,057
Deferred income tax benefits 14,294
-------
Total current assets 2,226,191
Property & Equipment
Contract costs and equipment 7,267,875
Non-contract equipment-office & warehouse
equipment, furniture and vehicles 78,626
---------
7,354,640
Less: accumulated depreciation 6,101,580
---------
1,253,060
Other Assets
Patents, tracemark and loan fee, net of
accumulated amortization of $726,150 47,214
Deferred tax benefits, net of current portion 16,245
Due from related party, net of allowance for
doubtful account of $31,887 -
Deposits 9,221
---------
Total assets $ 3,551,931
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 517,848
Accrued expenses and interest 74,506
Income taxes payable 66,556
Accrued loss reserve 22,000
Bank lines of credit 389,600
Current portion of long-term debt 179,379
Due to related party 11,522
---------
Total current liabilities 1,261,411
Other Liabilities
Long-term debt, net of current portion 216,477
Accrued loss reserve, net of current portion 26,047
Due to related party - long term 120,995
---------
363,519
---------
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 772,451
---------
1,927,001
---------
Total liabilities and stockholders' equity $ 3,551,931
=========
The accompanying notes are an integral part of the financial statements.
1
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Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(unaudited)
For the three months
ended March 31,
----------------------
2002 2001
------------ -------------
REVENUES
Registration decals income $ 1,619,028 $ 1,336,207
Other revenue 380,985 76,550
------------ -------------
Total revenues 2,000,013 1,412,757
COST OF REVENUES
Materials 459,668 306,603
Cost of other revenue 266,837 48,920
Depreciation and amortization- contract
costs 186,355 72,836
Maintenance 271,895 230,738
Provision (credit) for contract losses (1,953) (8,407)
Other contract expenses 1,830 -
Insurance 7,317 3,652
Property and sales taxes 9,426 300
------------ -------------
Total cost of revenues 1,201,375 654,642
------------ -------------
Gross profit 798,638 758,115
OPERATING EXPENSES
Depreciation 2,937 3,059
Amortization of patent 15,405 15,405
Selling, general and administrative 381,895 290,004
Research and development 53,658 44,663
------------ -------------
Total operating expenses 453,895 353,131
------------ -------------
Income from operations 344,743 404,984
OTHER INCOME (EXPENSE)
Interest income 1,657 6,122
Interest expense (23,234) (20,788)
------------ -------------
Net income before income taxes 323,166 390,318
Income taxes (122,100) (152,900)
------------ -------------
NET INCOME 201,066 237,418
Retained earnings - beginning of period 571,385 131,119
------------ -------------
Retained earnings - end of period $ 772,451 $ 368,537
============ =============
INCOME PER SHARE - BASIC $ 0.02 $ 0.02
============ =============
INCOME PER SHARE - DILUTED $ 0.02 $ 0.02
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC 9,842,680 9,923,711
============ =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - DILUTED 9,842,680 10,053,211
============ =============
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,
----------------------
2002 2001
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 115,756 $ 209,369
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in trademark (437) -
Increase in deposits (4,700) -
Purchase of non-contract equipment (11,754) (1,671)
Investment in contract costs and equipment (58,257) (205,685)
------------ -------------
Net cash flows from
investing activities (75,148) (207,356)
CASH FLOWS FROM FINANCING ACTIVITES
Repayment by related party - 8,774
New borrowings 175,000 -
Debt repayments (44,782) (40,296)
Redemption of common stock - (31,800)
------------ -------------
Net cash flows from
financing activities 130,218 (63,322)
------------ -------------
NET INCREASE (DECREASE) IN CASH 170,826 (61,309)
CASH AND CASH EQUIVALENTS,
beginning of period 206,034 515,275
------------ -------------
CASH AND CASH EQUIVALENTS,
end of period $ 376,860 $ 454,966
============ =============
The accompanying notes are an integral part of the financial statements.
3
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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, 2001.
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. Until 1996, ITI
was principally engaged in research and development of its
products and generated only limited operating revenues.
In August 1996, ITI entered into an Equipment Lease, Support
and Maintenance Agreement with the State of Indiana to supply
the equipment and media (materials used in the preparation of
vehicle registration forms) to process the State's vehicle
registrations. The term of the Indiana Contract was for a
period of three years with a one-year renewal option through
October 2000 that was exercised. In May 2000, the Indiana
contract was extended through October 31, 2002.
In the fourth quarter of 1998, the Company entered into a
five-year Agreement (effective April 1, 1999) with the State
of South Dakota to implement ITI's printing system.
Commencing on April 1, 1999, ITI supplied the equipment and
media to process 100% of the annual vehicle and boat
registrations in South Dakota.
Effective January 1, 2001, the Company entered into a
Subcontractor Agreement with a contractor for the State of
Louisiana Department of Public Safety and Corrections Office
of Motor Vehicles. In June 2001, ITI supplied the equipment
and media to begin production of 100% of the mail-in vehicle
registrations in Louisiana. In September 2001, ITI supplied
the equipment and media to begin production of these
registrations issued at the State's branch locations.
For the three months ended March 31, 2002, 86% of total
revenues were derived from the above contracts and
agreements.
In March 2002, the Company signed a contract, effective
through June 30, 2003, with the State of New Hampshire to
produce "Safe Boating Certificate Cards". The State reserves
the right to extend this contract each year for up to an
additional four years and can also terminate the contract for
any reason by giving thirty days written notice. The gross
revenue from this contract is expected to be $65,000 in the
first contract year and $32,000 annually thereafter. No
revenue is expected from this contract until the third
quarter of 2002.
In April 2002, the Company signed a contract with the State
of Ohio to supply the equipment and media to issue mail-in
vehicle registrations. The gross revenue from this contract
is expected to be between $500,000 and $700,000 annually. No
revenue is expected from this contract until the third
quarter of 2002.
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, 2002, contract revenues
increased from $1,412,000, to $2,000,000, an increase of
$588,000 or 42%. This increase in revenue is primarily due
to revenue from an additional contract and other revenue from
the sale of equipment to other contractors.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Gross profit for the three-month comparisons increased from
$758,000 in 2001 (54% of sales) to $798,000 (40% of sales) in
2002 as a result of the aforementioned revenue increases.
The gross profit percentage decreased due to lower profit
margins from new business as well as higher depreciation
allowances due to increased changes in capital cost
estimates. The Company expects profit margins to continue to
decline due to the competitive bid environment, fixed
contract prices and unanticipated costs.
Operating expenses increased $101,000 or 29% from $353,000
for the three months ended March 31, 2001, to $454,000 in
2002. This is primarily due to: (1) Increase in payroll of
$43,000 due the hiring of additional personnel and changes in
cost allocations of the payroll of existing personnel from
R&D to product demonstration, (2) Increased use of outside
consultants for the evaluation of new business and
demonstration of the Company's products ($40,000); and (3)
Increase in research and development ($9,000.) Research and
development expenses for the three months ended March 31,
2002 and 2001 were $54,000 (2.7% of sales) and $45,000 (3.2%
of sales), respectively. The Company will continue to engage
in research and development of additional applications of its
products in related areas and new product development. The
Company expects future operating expenses to increase due to
relocation of the Company's corporation headquarters to a
larger facility, continued use of outside consultants,
planned efforts to redesign the Company's products and expand
research and development in new products.
Interest expense increased from $21,000 in 2001 to $23,000 in
2002, as the lower interest costs due to the pay down of
contract cost financing was more than offset by the use of
bank credit lines and the related loan costs thereof.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Liquidity and Capital Resources
During the quarter ended March 31, 2002, the Company borrowed
$175,000 under a $300,0000 revolving credit line, which bears
interest at the prime rate plus 2%. The loan is secured by
all of the Company's assets and is due in December 2002.
The Company had available a $400,000 line-of-credit with a
bank secured by accounts receivable, equipment and general
intangibles. The line bears interest a Prime plus two
percent (with a minimum interest rate of 7%) and requires
interest only payments through June 2002, at which time, any
unpaid balance will convert to a three year installment loan.
On May 15th, the Company utilized these credit lines to
prepay the remaining balance of contract cost financing in
the amount of $379,000. The Company's remaining debt service
consists of a patent purchase payment of $5,000 per quarter
through March 2011.
The Company expects to spend $250,000 on contract costs and
equipment in the next two quarters for existing contracts
which will be funded from internally generated cash flows
and, if necessary, by borrowings 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)
2002 2001
Operating activities $ 116,000 $ 209,000
Investing activities (75,000) (207,000)
Financing activities 130,000 (63,000)
-------- ---------
Net effect on cash $ 171,000 $ (61,000)
======== =========
Cash flows provided by operations decreased from $209,000 in
2001 to $116,000, a decrease of $93,000 due primarily to net
increases in accounts receivable. This was partially offset
by an increase in net income before depreciation of $66,000.
Cash flows used in investing activities decreased from
$207,000 in 2001 to $75,000 in 2002 due to the installation
phase of the Louisiana contract in 2001. Net cash of $63,000
was used in financing activities in 2001 and $45,000 in 2002
to pay existing debt service. In 2002, the Company borrowed
$175,000 on its line of credit.
7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
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: May 17, 2002
9