10QSB 1 iti0603q.txt 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, 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 August 5, 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, June 30, 2003 1 Statements of Operations and Retained Earnings (Unaudited) for the three month and six month periods ended June 30, 2003 and 2002 2 Statements of Cash Flows (Unaudited) for the six month periods ended June 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 Certifications 11 Intellectual Technology, Inc. FINANCIAL STATEMENTS June 30, 2003 Intellectual Technology, Inc. BALANCE SHEET June 30, 2003 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 920,188 Accounts receivable 813,098 Inventory 668,918 Prepaid expenses 115,010 Deferred income tax benefits 7,155 ----------- Total current assets 2,524,369 Property and Equipment Contract costs and equipment 7,477,560 Non-contract equipment - office and warehouse equipment, furniture and vehicles 127,813 ----------- 7,605,373 Less: accumulated depreciation 6,826,871 ----------- 778,502 Other Assets Patents, trademark and loan fee, net of accumulated amortization of $720,151 15,084 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 $ 3,340,749 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 189,635 Accrued expenses and interest 86,073 Income taxes payable 236,415 Accrued loss reserve 24,225 Due to related party 21,363 ----------- Total current liabilities 557,711 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 1,523,000 ----------- 2,677,550 ----------- Total liabilities and stockholders' equity $ 3,340,749 =========== 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 six months ended June 30, ended June 30, ----------------------- ----------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- REVENUES Transaction fees $ 1,725,307 $ 1,611,428 $ 3,582,778 $ 3,505,491 Other revenue 10,992 - 18,320 105,950 ----------- ----------- ----------- ----------- Total revenues 1,736,299 1,611,428 3,601,098 3,611,441 COST OF REVENUES Materials 452,911 469,123 915,521 1,120,828 Cost of other revenue 10,839 - 15,928 74,800 Depreciation and amortization - contract costs 140,614 193,227 281,613 379,582 Maintenance 273,471 373,446 516,624 652,414 Adjustment to contract losses previously recognized (3,563) (4,796) (3,563) (6,749) Other contract expenses 8,883 18,640 8,883 20,470 Insurance 6,480 3,610 12,890 10,927 Property and sales taxes 12,587 10,621 25,138 20,047 ----------- ----------- ----------- ----------- Total cost of revenues 902,222 1,063,871 1,773,034 2,272,319 ----------- ----------- ----------- ----------- Gross profit 834,077 547,557 1,828,064 1,339,122 OPERATING EXPENSES Depreciation 5,657 3,406 10,819 6,343 Amortization of patent 2,202 15,405 4,404 30,810 Selling, general and administrative expenses 428,139 380,057 759,542 754,880 Research and development 35,202 73,051 88,221 126,708 ----------- ----------- ----------- ----------- Total operating expenses 471,200 471,919 862,986 918,741 ----------- ----------- ----------- ----------- Income from operations 362,877 75,638 965,078 420,381 OTHER INCOME (EXPENSE) Interest income 1,919 1,491 3,360 3,148 Interest expense (10,299) (36,928) (20,252) (60,162) ----------- ----------- ----------- ----------- Net income before income taxes 354,497 40,201 948,186 363,367 Income taxes 132,748 8,126 355,948 130,226 ----------- ----------- ----------- ----------- NET INCOME 221,749 32,075 592,238 233,141 Retained earnings, beginning of period 1,301,251 772,451 930,762 571,385 ----------- ----------- ----------- ----------- Retained earnings, end of period $ 1,523,000 $ 804,526 $ 1,523,000 $ 804,526 =========== =========== =========== =========== Income per share: (Basic and diluted) $ 0.02 $ 0.00 $ 0.06 $ 0.02 =========== =========== =========== =========== 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 six months ended June 30, --------------------------------- 2003 2002 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES $ 817,292 $ 432,054 CASH FLOWS FROM INVESTING ACTIVITIES Investment in trademark (155) (829) Increase in deposits (518) (1,914) Purchase of non-contract equipment (24,185) (22,734) Investment in contract costs and equipment (51,266) (192,549) ---------- ----------- Net cash flows from investing activities (76,124) (218,026) CASH FLOWS FROM FINANCING ACTIVITIES New borrowings - 400,000 Debt repayments (339,200) (658,048) ---------- ----------- Net cash flows from financing activities (339,200) (258,048) ---------- ----------- NET INCREASE (DECREASE) IN CASH 401,968 (44,020) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 518,220 206,034 ---------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 920,188 $ 162,014 ========== =========== The accompanying notes are an integral part of the financial statements. 3 Intellectual Technology, Inc. NOTES TO FINANCIAL STATEMENTS June 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. 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 six months ended June 30, 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 six months ended June 30, 2003, transaction fee revenues increased from $3,230,000, to $3,583,000, an increase of $353,000 or 11%. This increase in revenue is primarily due to revenue from additional contracts. Other revenues decreased from $381,000 to $11,000, 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 six-month comparisons increased from $1,339,000 in 2002 (37% of sales) to $1,828,000 (51% of sales) in 2003, an increase of $489,000. 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. Selling, general and administrative expenses increased $5,000 from $755,000 for the six months ended June 30, 2002, to $760,000 in 2003. There was a decrease in pre-contract costs and marketing expenses of $50,000 offset by an increase in payroll of $59,000 due to the hiring of two additional personnel. The Company expects that pre-contract and marketing expenses will increase for the remainder of the fiscal year due to increased expenditures in the third quarter relative to contract bids. Research and development expenses for the six months ended June 30, 2003 and 2002 were $88,000 (2.4% of sales) and $127,000 (3.5% 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 $60,000 in 2002 to $20,000 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: Six months ended June 30, (Rounded) 2003 2002 ---------- ----------- Operating activities $ 817,000 $ 432,000 Investing activities (76,000) (218,000) Financing activities (339,000) (258,000) ---------- ----------- Net effect on cash $ 402,000 $ (44,000) =========== =========== Cash flows provided by operations increased from $432,000 in 2002 to $817,000 in 2003, an increase of $385,000 due primarily to an increase in net income before depreciation and amortization of $239,000 and net decreases in accounts receivable of $100,000 and increased income tax accruals in 2003. Cash flows used in investing activities decreased from $218,000 in 2002 to $76,000 in 2003 due to the timing of contract installations. 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, paid off contract financing in the amount of $438,000 and expended $220,000 for other 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: August 12, 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: August 12, 2003 /s/ Craig Litchin Principal Executive Officer Principal Financial Officer 11