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, 2004
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, 2004, 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, 2004 1
Statements of Operations and Retained Earnings
(Unaudited) for the three month periods
ended March 31, 2004 and 2003 2
Statements of Cash Flows (Unaudited) for the three
month periods ended March 31, 2004 and 2003 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, 2004
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 978,533
Accounts receivable 1,064,615
Inventory 1,023,678
Prepaid expenses 68,109
-----------
Total current assets 3,134,935
Property and Equipment
Contract costs and equipment 7,458,578
Non-contract equipment - office and warehouse
equipment, furniture and vehicles 149,330
-----------
7,607,908
Less: accumulated depreciation 7,166,291
-----------
441,617
Other Assets
Patents, trademark and loan fee, net of accumulated
amortization of $728,849 9,329
Deposits 7,076
-----------
Total assets $ 3,592,957
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 244,974
Dividends payable 196,973
Accrued expenses and interest 92,275
Income taxes payable 140,732
Deferred income tax liabilities 10,000
Due to related party 27,930
-----------
Total current liabilities 712,884
Other Liabilities
Deferred income tax liabilities - net of current portion 14,000
Due to related party - net of current portion 98,921
-----------
112,921
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 1,612,602
-----------
2,767,152
-----------
Total liabilities and stockholders' equity $ 3,592,957
===========
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,
-----------------------
2004 2003
----------- -----------
REVENUES
Transaction fees $ 2,063,882 $ 1,857,471
Other revenue 10,174 7,328
----------- -----------
Total revenues 2,074,056 1,864,799
COST OF REVENUES
Materials 633,505 467,698
Cost of other revenue 7,286 -
Depreciation and amortization
- contract costs 123,283 140,999
Maintenance 241,465 243,361
Insurance 6,678 6,410
Property and sales taxes 11,700 12,551
----------- -----------
Total cost of revenues 1,023,917 871,019
----------- -----------
Gross profit 1,050,139 993,780
OPERATING EXPENSES
Depreciation 5,982 5,162
Amortization of patent 1,926 2,202
Selling, general and
administrative expenses 408,348 331,196
Research and development 225,559 53,019
----------- -----------
Total operating expenses 641,815 391,579
----------- -----------
Income from operations 408,324 602,201
OTHER INCOME (EXPENSE)
Interest income 1,868 1,441
Interest expense (2,199) (9,953)
----------- -----------
Net income before income
taxes 407,993 593,689
Income taxes 144,650 223,200
----------- -----------
NET INCOME 263,343 370,489
Retained earnings,
beginning of period 1,546,232 930,762
Dividends (196,973) -
----------- -----------
Retained earnings,
end of period $ 1,612,602 $ 1,301,251
=========== ===========
Income per share: (Basic) $ 0.03 $ 0.04
=========== ===========
Income per share: (Diluted) $ 0.03 $ 0.04
=========== ===========
Weighted average number of
Shares outstanding - Basic 9,842,680 9,842,680
=========== ===========
Weighted average number of
Shares outstanding - Diluted 10,103,206 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,
---------------------------------
2004 2003
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 341,574 $ 115,756
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in deposits and trademarks (819) (518)
Purchase of non-contract equipment (1,374) (12,057)
Investment in contract costs and
equipment (33,247) (151)
---------- -----------
Net cash flows from investing
activities (35,440) (12,726)
CASH FLOWS FROM FINANCING ACTIVITIES
Debt repayments - (31,356)
---------- -----------
Net cash flows from financing
activities (31,356) 130,218
---------- -----------
NET INCREASE IN CASH 306,134 306,474
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 672,399 518,220
---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 978,533 $ 824,694
========== ===========
The accompanying notes are an integral part of the financial statements.
3
Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
March 31, 2004
(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, 2003.
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. This contract expires 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 expired 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, ITI 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, 2004, 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.
In September 2003, ITI signed a contract with the State of Nevada to supply
the equipment and media to begin production of 100% of the mail-in vehicle
registrations and branch decals. This contract expires September 30, 2008.
The State reserves the right to terminate the contract for any reason by
giving sixty days written notice.
For the three months ended March 31, 2004, 99% of ITI's total revenues were
derived from the above contracts and agreements.
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 the
nearest thousand.
For the three months ended March 31, 2004, transaction fee revenues increased
from $1,857,000, to $2,064,000, an increase of $207,000 or 11%. This
increase in revenue is primarily due to revenue from an additional contract
and a price increase in an existing contract. Historically, more transaction
fees have been generated in the first three quarters of the Company's fiscal
year. Typically, under 17% of total transaction fees are generated in the
fourth quarter.
Gross profit for the three-month comparisons increased from $994,000 in 2003
(53% of sales) to $1,050,000 (51% of sales) in 2004, an increase of $56,000.
The gross profit increase was attributable to higher sales volume.
Operating expenses increased $250,000 or 64% from $392,000 for the three
months ended March 31, 2003, to $642,000 in 2004. $173,000 of this increase
was for research and development. Research and development expenses for the
three months ended March 31, 2004 and 2003 were $226,000 (10.9% of sales) and
$53,000 (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.
Other selling, general and administrative expenses increased from $331,000 in
2003 to $408,000 in 2004, an increase of $77,000. There was an increase in
pre-contract costs and marketing expenses of $41,000 due to increased efforts
to bid on state contracts and demonstrate the Company's products. In
addition, the Company incurred $32,000 in consulting fees associated with
general corporate projects.
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
The Company has available a $400,000 line-of-credit with a bank secured by
accounts receivable, equipment, and general intangibles. The line bears
interest at Prime plus 1.25 percent (with a minimum interest rate of 5.25%)
and is subject to renewal in December 2004. However, as of March 31, 2004
and the date of this filing, there was no outstanding balance.
The Company's remaining debt service consists of a patent purchase payment of
$5,000 per quarter through March 2011. However, the Company has made no
payments on the note since the third quarter of 2002.
At this time, the Company expects no significant investment in contract costs
and equipment in the next quarter.
On March 15, 2004, the Company's Board of Directors declared a dividend of
$196,973 ($.02 per share) payable on April 15, 2004 to stockholders of record
as of March 18, 2004.
The following is a summary of the Company's cash flows from operating,
investing, and financing activities:
Three months ended March 31,
(Rounded)
2004 2003
Operating activities $ 341,000 $ 350,000
Investing activities (35,000) (13,000)
Financing activities (-) (31,000)
-------- -------
Net effect on cash $ 306,000 $ 306,000
In the first quarter 2003, the Company paid down contract costs financing in
the amount of $31,000 and in April 2003, the Company paid off the remaining
balance of $308,000. In 2004, the Company expended $33,000 in equipment to
support existing contracts.
Off Balance Sheet Arrangements
The Company leases its office space and certain office equipment under
operating leases through the year 2007. Refer to footnote 6 of the annual
financial statements included in the Company's 2003 Form 10-KSB.
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-15(e) or 15(d)-15(e) under
the Securities Exchange Act of 1934, as amended) as of March 31, 2004, (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.
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 of Chief Executive Officer of the Company pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer of the Company pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1 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
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 15, 2004
Exhibit 31.1
Section 302 Certification
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 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 report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter that has materially
affected, or is reasonable likely to materially affect, the small
business issuer's internal control over financial reporting; and;
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of The small business issuer's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's ability
to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: May 15, 2004
/s/ Craig Litchin
Principal Executive Officer
Exhibit 31.2
Section 302 Certification
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 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 report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter that has materially
affected, or is reasonable likely to materially affect, the small
business issuer's internal control over financial reporting; and;
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of The small business issuer's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's ability
to record, process, summarize and report financial information; and
c) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: May 15, 2004
/s/ Craig Litchin
Principal Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Intellectual Technology, Inc.
(the "Company") on Form 10-QSB for the period ending March 31, 2004, (the
"Report"), I, Craig Litchin, Chief Executive Officer and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirement of Section 13(a) or 15 (d)
of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the Company's financial position and results of operations.
/s/ Craig Litchin
Chief Executive Officer and
Chief Financial Officer
May 15, 2004