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, 2003
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 14, 2003, 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 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet, March 31, 2003 1
Statements of Operations and Retained Earnings
(Unaudited) for the three month periods
ended March 31, 2003 and 2002 2
Statements of Cash Flows (Unaudited) for the three
month periods ended March 31, 2003 and 2002 3
Notes to financial statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5-7
Item 3. Controls and Procedures 8
PART II. OTHER INFORMATION 9
Signatures 10
Certifications 11
Intellectual Technology, Inc.
FINANCIAL STATEMENTS
March 31, 2003
Intellectual Technology, Inc.
BALANCE SHEET
March 31, 2003
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 824,694
Accounts receivable 883,290
Inventory 704,084
Prepaid expenses 103,554
Deferred income tax benefits 7,155
-----------
Total current assets 2,522,777
Property and Equipment
Contract costs and equipment 7,426,445
Non-contract equipment - office and warehouse
equipment, furniture and vehicles 115,684
-----------
7,542,129
Less: accumulated depreciation 6,682,118
-----------
860,011
Other Assets
Patents, trademark and loan fee, net of accumulated
amortization of $717,949 17,132
Deferred income tax benefits, net of current portion 15,929
Due from related party, net of allowance for doubtful
account of $31,887 -
Deposits 6,865
-----------
Total assets $ 3,422,714
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 209,556
Accrued expenses and interest 80,959
Income taxes payable 213,915
Accrued loss reserve 27,788
Current portion of long-term debt 131,064
Due to related party 18,159
-----------
Total current liabilities 681,441
Other Liabilities
Long-term debt, net of current portion 176,780
Due to related party - long term 108,692
-----------
285,472
Stockholders' Equity
Preferred stock, $0.00001 par value, 1,000,000 shares
authorized, no shares issued or outstanding -
Common stock, $0.00001 par value, 20,000,000 shares
authorized, 9,842,680 shares issued and outstanding 98
Additional paid-in capital 1,154,452
Retained earnings 1,301,251
-----------
2,455,801
-----------
Total liabilities and stockholders' equity $ 3,422,714
===========
The accompanying notes are an integral part of the financial statements.
1
Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For the three months
ended March 31,
-----------------------
2003 2002
----------- -----------
REVENUES
Transaction fees $ 1,857,471 $ 1,619,028
Other revenue 7,328 380,985
----------- -----------
Total revenues 1,864,799 2,000,013
COST OF REVENUES
Materials 467,698 459,668
Cost of other revenue - 266,837
Depreciation and amortization
- contract costs 140,999 186,355
Maintenance 243,361 278,970
Adjustment to contract losses
previously recognized - (1,953)
Other contract expenses - 1,830
Insurance 6,410 7,317
Property and sales taxes 12,551 9,426
----------- -----------
Total cost of revenues 871,019 1,208,450
----------- -----------
Gross profit 993,780 791,563
OPERATING EXPENSES
Depreciation 5,162 2,937
Amortization of patent 2,202 15,405
Selling, general and
administrative expenses 331,196 374,820
Research and development 53,019 53,658
----------- -----------
Total operating expenses 391,579 446,820
----------- -----------
Income from operations 602,201 344,743
OTHER INCOME (EXPENSE)
Interest income 1,441 1,657
Interest expense (9,953) (23,234)
----------- -----------
Net income before income
taxes 593,689 323,166
Income taxes 223,200 122,100
----------- -----------
NET INCOME 370,489 201,066
Retained earnings,
beginning of period 930,762 571,385
----------- -----------
Retained earnings,
end of period $ 1,301,251 $ 772,451
=========== ===========
Income per share: (Basic
and diluted) $ 0.04 $ 0.02
=========== ===========
Wtd. average number of
shares outstanding 9,842,680 9,842,680
=========== ===========
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,
---------------------------------
2003 2002
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 350,556 $ 115,756
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in trademark - (437)
Increase in deposits (518) (4,700)
Purchase of non-contract equipment (12,057) (11,754)
Investment in contract costs and
equipment (151) (58,257)
---------- -----------
Net cash flows from investing
activities (12,726) (75,148)
CASH FLOWS FROM FINANCING ACTIVITIES
New borrowings - 175,000
Debt repayments (31,356) (44,782)
---------- -----------
Net cash flows from financing
activities (31,356) 130,218
---------- -----------
NET INCREASE IN CASH 306,474 170,826
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 518,220 206,034
---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 824,694 $ 376,860
========== ===========
The accompanying notes are an integral part of the financial statements.
3
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
March 31, 2003
(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, are 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, 2002.
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.
Contracts
In August 1996, ITI entered into an Equipment Lease, Support and
Maintenance Agreement (the "Indiana Contract") with the Indiana Bureau
of Motor Vehicle Commission (the "BMVC") to implement ITI's printing
system solution in Indiana. The initial term of the Indiana Contract was
for a period of three years. Several amendments have extended the
contract through October 31, 2004.
In the fourth quarter of 1998, the Company entered into a five-year
Agreement with the State of South Dakota to implement ITI's printing
system. On April 1, 1999, ITI supplied the equipment and media to process
100% of the annual registrations in South Dakota. This contract expires
on March 31, 2004.
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 and in September 2001, branch
installation began. In 2002, the installation of ITI's equipment
statewide was completed. The Company expects this subcontractor agreement
to be in effect at least through December 2004.
In April 2002, the Company signed a contract with the State of Ohio to
supply the equipment and media to begin production of 100% of the mail-in
vehicle registrations. This contract expires June 30, 2003, but is
subject to annual renewal by the State at the end of each contract year.
In March 2002, the Company signed a contract, effective through June 30,
2007,with the State of New Hampshire to produce "Safe Boating Certificate
Cards." The State reserves the right to terminate the contract for any
reason by giving thirty days written notice.
For the three months ended March 31, 2003, 99% of ITI's total revenues
were derived from the above contracts and agreements.
5
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
For ease in presenting the financial data, figures have been rounded to
to the nearest thousand.
For the three months ended March 31, 2003, transaction fee revenues
increased from $1,619,000, to $1,858,000, an increase of $239,000 or 15%.
This increase in revenue is primarily due to revenue from additional
contracts. Other revenues decreased from $381,000 to $7,000, due to non-
core revenue from the sale of printer equipment to other contractors
in 2002 and the timing of supplemental contract billings. Other revenues
are not necessarily representative of the Company's ongoing business
operations. Total revenues decreased from $2,000,000 to $1,865,000.
Historically, more transaction fees have been generated in the first
three quarters of the Company's fiscal year. The first quarter typically
is the highest (30% of the total) and the fourth quarter is the lowest
(under 17% of the total).
Gross profit for the three-month comparisons increased from $792,000 in
2002 (40% of sales) to $994,000 (53% of sales) in 2003, an increase of
$202,000. The gross profit percentage increased due to lower depreciation
allowances (longer useful lives) from contract extensions and lower
material and maintenance costs. The Company expects future profit margins
to somewhat decline due to the competitive bid environment, fixed
contract prices and unanticipated costs.
Operating expenses decreased $55,000 or 12% from $447,000 for the three
months ended March 31, 2002, to $392,000 in 2003. This is primarily due
to a decrease in pre-contract costs and marketing expenses of $80,000;
partially offset by an increase in payroll of $26,000 due the hiring of
two additional personnel. Research and development expenses for the
three months ended March 31, 2003 and 2002 were $53,000 (2.8% of sales)
and $54,000 (2.7% 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.
Interest expense decreased from $23,000 in 2002 to $10,000 in 2003, due
to the refinancing and pay down of contract cost financing.
6
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
The Company has available a $300,000 line-of-credit with a bank secured
by accounts receivable, equipment and general intangibles. The line bears
interest at Prime plus two percent (with a minimum interest rate of 7%)
and is subject to renewal in December 2003.
In April 2003, the Company paid off contract cost financing in the amount
of $308,000.
The Company's remaining debt service consists of a patent purchase
payment of $5,000 per quarter through March 2011.
At this time, the Company expects no significant investment in contract
costs and equipment in the next quarter.
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Three months ended March 31,
(Rounded)
2003 2002
---------- -----------
Operating activities $ 350,000 $ 116,000
Investing activities (13,000) (75,000)
Financing activities (31,000) 130,000
---------- -----------
Net effect on cash $ 306,000 $ 171,000
=========== ===========
Cash flows provided by operations increased from $116,000 in 2002 to
$350,000 in 2003, an increase of $234,000 due primarily to an increase in
net income before depreciation and amortization of $113,000 and net
decreases in accounts receivable. Cash flows used in investing activities
decreased from $75,000 in 2002 to $13,000 in 2003 because the Company did
not install any contract equipment in the March 2003 quarter. Net cash
of $31,000 was used in financing activities in 2003 for debt service. In
2002, the Company borrowed $175,000 on its line of credit and expended
$45,000 for debt service.
7
Item 3. - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, also acting as Chief Financial
Officer, after evaluating the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15(d)-14(c)
under the Securities Exchange Act of 1934, as amended) as of May 5, 2003,
(the "Evaluation Date"), has concluded that, the Company's disclosure
controls and procedures were effective to ensure the timely collection,
evaluation and disclosure of information relating to the Company that
would potentially be subject to disclosure under the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated
thereunder. There were no significant changes in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the Evaluation Date, including any corrective
actions with regard to significant deficiencies and material weaknesses.
8
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
99.1 Certification of Chief Executive Officer and Chief
Financial Officer of the Company, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
9
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 14, 2003
10
Certifications
I, Craig Litchin, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Intellectual
Technology, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Craig Litchin
Principal Executive Officer
Principal Financial Officer
11