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, 1997
Commission file number: 0-29138
INTELLECTUAL TECHNOLOGY, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1130227
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10639 Roselle Street Suite B San Diego, CA 92121
(Address of principal executive offices)
(619) 552-0001
(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 18, 1997, 1997, 10,000,000 shares of common stock, par value
$0.0005 per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes --- No -X-
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INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Balance Sheet, June 30, 1997 3
Statements of Operations and
Accumulated Deficit (Unaudited)
for the three and six month periods ended
June 30, 1997 and 1996 4
Statements of Cash Flows (Unaudited)
for the six months
ended June 30, 1997 and 1996 5
Notes to financial statements 6-7
Item 2. Management's Discussion and Analysis or
Plan of Operations 8-10
PART II. OTHER INFORMATION 11
Signatures 12
2
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Intellectual Technology, Inc.
BALANCE SHEET
June 30, 1997
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 162,109
Accounts receivable 222,797
Inventory 196,279
Prepaid consulting fees 69,767
----------
Total current assets 650,952
PROPERTY AND EQUIPMENT
Vehicle registration equipment 2,804,238
Office and administrative equipment 64,855
--------
2,869,093
Accumulated depreciation 294,557
-------
Total fixed assets, net 2,574,536
OTHER ASSETS
Patent, net of accumulated amortization 3,790,868
Organization costs, net 1,888
New Hampshire contract acquisition costs, net 63,714
Deferred loan fees 37,291
Deferred NCR contract fees, net 333,997
---------
Total other assets 4,227,758
---------
TOTAL ASSETS $ 7,453,246
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 529,296
Accrued liabilities 158,273
Notes payable - related parties 191,209
Notes payable - other 1,076,625
Accrued interest 74,415
-----------
Total current liabilities 2,029,818
OTHER LIABILITIES
Due to related party (net of discount) 3,998,400
Long-term debt 2,138,860
-----------
6,137,260
STOCKHOLDERS' EQUITY
Preferred stock, $0.00001 par value; 20,000,000 shares
authorized; no shares issued and outstanding -
Common stock, $0.0005 par value; 500,000,000
shares authorized; 10,000,000 shares issued and
outstanding at March 31, 1997. 5,000
Additional paid-in capital 1,186,550
Accumulated deficit (1,905,382)
---------
Total stockholders' equity (713,832)
---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 7,453,246
=========
The accompanying notes are an integral part of the financial statements.
3
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Intellectual Technology, Inc.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
For the quarter ended For the six months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------- --------- ---------- --------
SALES
Indiana Contract $ 498,926 $ - $ 1,005,663 $ -
New Hampshire contract 74,878 - 148,269 -
Maryland contract 174,443 - 207,311 -
--------- -------- ---------- --------
Total Sales 748,247 - 1,361,243 -
COST OF SALES
Material cost 186,737 - 276,492 -
Maintenance 36,444 - 82,008 -
Depreciation and
Amortization 170,973 - 344,373 -
--------- -------- ---------- --------
Total cost of sales 394,154 - 702,873 -
OPERATING EXPENSES
Marketing 37,069 16,924 61,373 30,931
General &
Administrative 214,388 56,516 325,605 92,564
Research & development 12,244 4,697 20,097 23,838
Rent 4,733 - 10,412 -
Interest expense 177,447 55,805 315,808 110,798
Depreciation and
Amortization 87,316 69,791 162,035 139,579
--------- -------- --------- --------
Total expenses 533,197 203,733 895,330 397,710
--------- -------- --------- --------
Loss from operations (179,104) (203,733) (236,960) (397,710)
Income taxes 800 800 800 800
--------- -------- --------- --------
NET LOSS (179,904) (204,533) (237,760) (398,510)
Accumulated deficit
Balance, beginning of
period (1,725,478) (895,587) (1,667,622) (701,610)
--------- --------- --------- ---------
Balance, end of period (1,905,382) (1,100,120) (1,905,382) (1,100,120)
========= ========= ========= =========
NET LOSS PER SHARE (0.02) (0.02) (0.02) (0.04)
========= ========= ========== =========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 10,000,000 9,000,000 9,583,333 9,000,000
========== ========= ========= =========
The accompanying notes are an integral part of the financial statements.
4
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Intellectual Technology, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
ended June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES $ (936,713) $(110,704)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in patent costs (8,812) (472)
Investment in non-contract equipment (4,129) -
Investment in vehicle registration
equipment, software, and
installation (486,428) -
-------- -------
Net cash used by
investing activities (499,369) (472)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 8,200 108,360
New borrowings 3,614,190 -
Repayment of debt (586,812) -
Repayment of related party debt (1,376,495) -
Loan fees paid (66,500) -
--------- -------
Net cash provided by financing
activities 1,592,583 108,360
--------- -------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 156,501 108,360
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,608 2,906
-------- -------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 162,109 $ 90
========= =======
The accompanying notes are an integral part of the financial statements.
5
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Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1. Significant accounting policies
A complete summary of significant accounting policies may be found in the
Company's audited financial statements for the year ended December 31, 1996
which were filed as part of the Company's Form 8-K dated March 12, 1997, and
its subsequent amendments. The accompanying financial statements should be
read in connection with these reports.
Operations
Intellectual Technology, Inc. ("the Company") is engaged in the design,
manufacture, leasing and sale of equipment supporting the automated
preparation and dispensing of motor vehicle registration forms and license
plate decals.
Revenue Recognition
It is the Company's policy to recognize revenue as is appropriate under the
terms of its contracts with its customers.
The majority of the Company's revenues are currently derived from an equipment
lease contract with the State of Indiana. Revenues for this contract are
recognized on a per transaction basis as they are billed. Support costs,
which are billed up front early in the lease period by subcontractors, are
deferred, and are being charged to operations over the term of the support
contract. Maintenance costs are expensed as incurred.
Vehicle Registration Equipment
Direct costs of the manufacture and installation of vehicle registration
equipment have been capitalized and are being charged to operations over
a four year period which represents the duration of the Indiana contract,
plus extension provision. Also included in the financial statement caption
Vehicle Registration Equipment are costs which qualify for deferral under SFAS
No. 13 - Accounting for Leases. Specifically, these initial contract startup
costs include direct costs to establish the terms and conditions of the
contract.
2. 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.
6
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Intellectual Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
3. Refinancing of certain short term debt instruments
During the second quarter of 1997, ITI secured financing of $2,506,190, in the
form of a 13.053% note payable in monthly installments of $100,000 through
November, 1997, and $138,487 through November, 1999. Proceeds from this
debt issuance were used to retire $1,998,100 in outstanding short term
liabilities, including $1,260,000 which was owed to related parties. The
remaining proceeds, which totaled approximately $508,000, were used for working
capital purposes.
4. Development stage activities
Since its inception in 1992, ITI Nevada has been engaged in the research,
development, design and promotion of its products. Until November 1, 1996,
the Company was a development stage enterprise as defined in SFAS No. 7, having
generated virtually no operating revenues from such activities.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
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
in the forward looking statements.
PLAN OF OPERATIONS
Since its inception in 1992 until the first quarter of 1997, the Company has
been in the development stage and has been engaged primarily in the design,
development and promotion of systems for the automated preparation and
dispensing of motor vehicle registration forms.
Effective November 1, 1996, ITI Nevada entered into an Equipment Lease, Support
and Maintenance Agreement ("the Indiana Contract") with the Indiana Bureau of
Motor Vehicles Commission (the "BMVC") which provides for the BMVC to lease
from ITI both self-service terminals and stand alone printers. ITI is required
to install an initial group of 11 self-service terminals and 96 stand-alone
printers. The equipment contained in this initial group is projected to produce
a total of 1.4 million vehicle registration transactions annually. The BMVC has
also committed to lease an additional 25 self-service terminals and 195 stand
alone printers, which equipment is to be installed by ITI by November 1, 1997.
The Indiana contract is priced on a per-transaction basis with the Company
receiving between $0.885 and $1.22 per transaction. The contract extends for a
period of three years, subject to an option to renew on the part of the BMVC for
an additional year.
To assist it in performing its obligations under the Indiana Contract, ITI
Nevada entered into a Subcontractor agreement with NCR ("the NCR Agreement")
wherein the Company will provide the printers, printing media, facilities
management, printer installation, billing and self-service terminal provisioning
aspects of the Indiana Contract. As part of this contract, the Company is
requiring NCR to provide the self service terminals, program management,
software development, maintenance, and self-service terminal installation ("NCR
Services"). The Company will pay NCR approximately $1,800,000 for its
participation in the initial phase of the Indiana contract (consisting of NCR
services to 11 self-service terminals and 96 stand alone printers). The Company
will be billed separately for NCR services with respect to the additional 25
terminals and 195 printers requested by the BMVC.
As of June 30, 1997, a total of two self service terminals and 130 stand alone
printers had been installed and were operational.
For the remainder of the calendar year, the Company will be concentrating on the
completion of its installation of the remaining printers and terminals called
for under the Indiana contract.
The Company has also entered into an agreement to sell the State of Maryland a
total of 11 stand alone printers, 11 kiosks, and associated media products
similar to those provided under lease to the state of Indiana. The Company
continues to pursue agreements for the sale or lease of its products with other
jurisdictions.
The Company may engage in research and development of additional applications of
its products in related areas such as driver records, voter registrations, tax
payments, electronic benefit vouchers, driver's license extensions and similar
areas.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATION (continued)
The Company currently has 8 full time employees and one part time employee, of
which four are in administration, two in marketing, and three in operations.
The company may further expand its marketing and operating personnel in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are borrowings from third party
investors, and internally generated cash flows.
The Company currently derives a substantial portion of its operating cash flow
from receipts from the Indiana contract. The BMVC is billed monthly based on
the number of transactions processed by the leased equipment for the preceding
month. Bills are payable under standard 30 day terms.
The Company also receives revenue from a smaller contract with the state of
New Hampshirefor drivers license photographic equipment, which is billed
and payable monthly on a per transaction basis, and from sales of vehicle
registration equipment and media to the State of Maryland.
Current assets decreased $6,000 from March 31, 1997 to June 30, 1997. This
small decline reflects a reduction in accounts receivable of $245,000, an
increase in inventory of $85,000 and an increase in cash of $155,000.
The Company's investment in vehicle registration equipment increased $269,000
during the second quarter of 1997.
During the second quarter of 1997, the Company refinanced certain short term
obligations and trade payables. Accounts payable decreased by $800,000, while
outstanding short term notes payable showed a net decline of $1,250,000,
including $1,163,000 which was paid to retire related party indebtedness. The
Company incurred a total of $2,506,000 in long term financing, which will be
repayable with interest of 13.053% in monthly installments of ranging from
$100,000 to $138,487 through November, 1999. In total, the Company's current
liabilities decreased from $4,000,000 at March 31, 1997 to $2,100,000 at June
30, 1997 as a result of this refinancing.
The Company continues to exhibit a working capital deficit, which totals
$1,379,000 at June 30, 1997. The company plans to reduce this deficit by
securing additional financing, and through the application of positive operating
cash flows.
The long-term amount due to a related party increased from $3,980,000 to
$3,998,000 at June 30, 1997. This reflects the remaining amortization of the
discount associated with this debt, as well as a small payment which reduced the
face amount of this obligation from $4,000,000. During the second quarter, the
agreement governing repayment of this obligation was amended to provide for a
due date of May, 1998.
During the second quarter, the Company realized gross profit of $354,000, or
47.3% as compared with $304,000 (49.6%) for the previous quarter. The total
dollar increase reflects a $140,000 increase in billings to the state of
Maryland, which is offset by a $97,000 increase in materials cost, and a small
decline in maintenance costs.
The number of transactions on the Indiana contract, and the resulting revenues,
declined slightly from the first quarter's amounts. Total transactions for the
year to date period June 30, 1997, as well as gross profit levels, continue to
meet management's expectations for the first year of the Indiana contract.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATION (continued)
For the quarter ended June 30, 1997, the Company's selling, general and
administrative expenses increased to $251,000 from $136,000 from the first
quarter. This increase is primarly due to increased payroll costs for the
addition of a sales and operations person to service the Indiana contract and
the addition of a monthly management fee to one of the Company's directors. It
also includes a $24,000 increase in marketing costs which is reflective of the
Company's efforts to obtain contracts with additional states.
10
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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) Exhibit 27 - Financial Data Schedule, filed herewith electronically"
(b) Reports on Form 8-K None
11
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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.
Date: August 19, 1997 INTELLECTUAL TECHNOLOGY, INC.
BY: /S/ Janice L. Welch
Secretary/Treasurer/Principal
Financial Officer
12
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