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: September 30, 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 92081-7807
(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 November 10, 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, September 30, 2003 1
Statements of Operations and Retained Earnings
(Unaudited) for the three month and nine month periods
ended September 30, 2003 and 2002 2
Statements of Cash Flows (Unaudited) for the nine
month periods ended September 30, 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
Intellectual Technology, Inc.
FINANCIAL STATEMENTS
September 30, 2003
Intellectual Technology, Inc.
BALANCE SHEET
September 30, 2003
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 866,722
Bid bond deposit 500,000
Accounts receivable 755,006
Inventory 759,253
Prepaid expenses 99,251
Deferred income tax benefits 5,139
-----------
Total current assets 2,985,371
Property and Equipment
Contract costs and equipment 7,480,841
Non-contract equipment - office and warehouse
equipment, furniture and vehicles 138,092
-----------
7,618,933
Less: accumulated depreciation 6,987,384
-----------
631,549
Other Assets
Patents, trademark and loan fee, net of accumulated
amortization of $722,353 13,217
Deferred income tax benefits, net of current portion 8,468
Due from related party, net of allowance for doubtful
account of $31,887 -
Deposits 6,865
-----------
Total assets $ 3,645,470
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 258,689
Accrued expenses and interest 94,449
Income taxes payable 277,088
Accrued loss reserve 27,788
Due to related party 21,363
-----------
Total current liabilities 679,377
Other Liabilities
Due to related party - long term 105,488
-----------
105,488
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 1,706,055
-----------
2,860,605
-----------
Total liabilities and stockholders' equity $ 3,645,470
===========
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 For the nine months
ended September 30, ended September 30,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES
Transaction fees $ 1,891,431 $ 1,725,240 $ 5,474,209 $ 4,955,696
Other revenue 8,702 - 27,022 380,985
----------- ----------- ----------- -----------
Total revenues 1,900,133 1,725,240 5,501,231 5,336,681
COST OF REVENUES
Materials 543,325 494,480 1,458,847 1,423,271
Cost of other revenue 2,939 - 18,866 226,837
Depreciation and amortization
- contract costs 155,596 110,143 437,209 489,725
Maintenance 300,302 318,016 816,926 970,429
Adjustment to contract losses
previously recognized 3,563 (2,280) - (9,028)
Other contract expenses - 1,592 8,883 22,062
Insurance 6,552 2,188 19,442 13,115
Property and sales taxes 11,700 14,489 36,838 34,536
----------- ----------- ----------- -----------
Total cost of revenues 1,023,977 938,628 2,797,011 3,210,947
----------- ----------- ----------- -----------
Gross profit 876,156 786,612 2,704,220 2,125,734
OPERATING EXPENSES
Depreciation 7,235 3,977 18,054 10,320
Amortization of patent 2,202 2,202 6,606 33,012
Selling, general and
administrative expenses 477,585 341,055 1,237,127 1,095,935
Research and development 101,209 22,997 189,430 149,706
----------- ----------- ----------- -----------
Total operating expenses 588,231 370,231 1,451,217 1,288,973
----------- ----------- ----------- -----------
Income from operations 287,925 416,381 1,253,003 836,761
OTHER INCOME (EXPENSE)
Interest income 1,805 1,936 5,165 5,084
Interest expense (3,525) (11,310) (23,777) (71,471)
----------- ----------- ----------- -----------
Net income before income
taxes 286,205 407,007 1,234,391 770,374
Income taxes 103,150 158,703 459,098 288,929
----------- ----------- ----------- -----------
NET INCOME 183,055 248,304 775,293 481,445
Retained earnings,
beginning of period 1,523,000 804,526 930,762 571,385
----------- ----------- ----------- -----------
Retained earnings,
end of period $ 1,706,055 $ 1,052,830 $ 1,706,055 $ 1,052,830
=========== =========== =========== ===========
Income per share: (Basic
and diluted) $ 0.02 $ 0.03 $ 0.08 $ 0.05
=========== =========== =========== ===========
Wtd. average number of
shares outstanding 9,842,680 9,842,680 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 nine months
ended September 30,
---------------------------------
2003 2002
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 782,057 $ 894,176
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in trademark (490) (1,997)
Increase in deposits (518) (1,914)
Purchase of non-contract equipment (38,800) (26,960)
Investment in contract costs and
equipment (54,547) (221,634)
---------- -----------
Net cash flows from investing
activities (94,355) (252,505)
CASH FLOWS FROM FINANCING ACTIVITIES
New borrowings - 400,000
Debt repayments (339,200) (691,033)
---------- -----------
Net cash flows from financing
activities (339,200) (291,033)
---------- -----------
NET INCREASE IN CASH 348,502 350,638
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 518,220 206,034
---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 866,722 $ 556,672
========== ===========
The accompanying notes are an integral part of the financial statements.
3
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 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. The Company expects that the contract will be
extended.
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 expired June 30, 2003, but is
subject to annual renewal by the State at the end of each contract year.
In May 2003, this contract was renewed through June 2004.
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 nine months ended September 30, 2003, 96% 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 nine months ended September 30, 2003, transaction fee revenues
increased from $4,956,000, to $5,474,000, an increase of $518,000 or 10%.
This increase in revenue is primarily due to revenue from additional
contracts. Other revenues decreased from $381,000 to $27,000, 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. 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 nine-month comparisons increased from $2,125,000 in
2002 (40% of sales) to $2,704,000 (49% of sales) in 2003, an increase of
$579,000 or 27%. 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.
Selling, general and administrative expenses increased $141,000 from
$1,096,000 for the nine months ended September 30, 2002, to $1,237,000 in
2003. There was an increase in pre-contract costs and marketing expenses
of $90,000 due to increased efforts to bid on state contracts and
demonstrate the Company's products. Payroll associated expenses increased
$70,000 primarily due to the hiring of two additional personnel. Research
and development expenses for the nine months ended September 30, 2003 and
2002 were $189,000 (3.4% of sales) and $150,000 (2.8% 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 $71,000 in 2002 to $24,000 in 2003, due
to the refinancing and pay-off 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 to invest less than $100,000 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:
Nine months ended September 30,
(Rounded)
2003 2002
---------- -----------
Operating activities $ 782,000 $ 894,000
Investing activities (94,000) (253,000)
Financing activities (339,000) (291,000)
---------- -----------
Net effect on cash $ 349,000 $ 350,000
=========== ===========
Cash flows provided by operations decreased from $894,000 in 2002 to
$782,000 in 2003, a decrease of $112,000. Net income before depreciation
and amortization actually increased $209,000 from $1,026,000 to
$1,235,000 in 2003. However, the Company's cash flows from operations
were reduced by a $500,000 security bond deposit to bid on a state
contract. At this time, the Company is unsuccessful in its bid attempt
and expects that the deposit will be refunded after certain conditions
are met. The Company does not consider this deposit a cash equivalent.
Cash flows used in investing activities decreased from $253,000 in 2002
to $94,000 in 2003 due to the timing of contract installations. Capital
expenditures for non-contract equipment and vehicles totaled $27,000 in
2002 and $39,000 in 2003. Net cash of $339,000 was used in financing
activities in 2003 to pay off all bank financing. In 2002, the Company
borrowed $400,000 on its line of credit, which was converted to a term
loan, and paid off contract financing in the amount of $438,000 and paid
down its line of credit and the term loan in the aggregate amount of
$245,000.
7
Item 3. - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted
an evaluation, under the supervision and with the participation of the
Chief Executive Officer and Chief Financial Officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act").
Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There
was no change in the Company's internal control over financial reporting
during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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
31.1 Certification pursuant to Rule 13a-14(a) or
15d-14(a)under the Securities Exchange Act of 1934,
as amended.
32.1 Certification of Chief Executive Officer and
President 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: November 12, 2003
10