10QSB 1 iti0304q.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: 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