10QSB 1 iti0903q.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: 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