UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 000-1084047
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
California 95-46918978
---------- -----------
(State or other jurisdiction (IRS Employer Identification No.
of incorporation or organization)
112 Northwest Parkway
Riverside, MO 64150
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(Address of principal executive offices)
(816) 583-8030
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(Issuer's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or such shorter period that the Registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
There were 46,156,212 shares of common stock, $0.001 par value, outstanding as
of August 10, 2001.
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2001 (Unaudited)
and December 31, 2000.................................................................. 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months and Six Months Ended June 30, 2001 and 2000............................... 4
Condensed Consolidated Statement of Stockholders' Equity/(Deficiency) (Unaudited) for the
Six Months Ended June 30, 2001......................................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2001 and 2000................................................ 6
Condensed Consolidated Statements of Comprehensive Income for the
Six Months Ended June 30, 2001......................................................... 7
Notes to the Condensed Consolidated Financial Statements (Unaudited)..................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 13
PART 11 - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 14
Signatures ................................................................................ 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2001 2000
------------ ------------
ASSETS
Current Assets
Cash .......................................................... $ 99,439 $ 888
Investments - available for sale ............................. 675 26,250
Prepaid expenses .............................................. 2,550 --
Other current assets .......................................... 597 --
------------ ------------
Total Current Assets ...................................... 103,261 27,138
------------ ------------
Property and Equipment, Net ........................................ 31,236 6,744
------------ ------------
Other Assets
Deposit ....................................................... 2,615 --
------------ ------------
Total Assets ....................................................... $ 137,112 $ 33,882
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIENCY)
Current Liabilities
Trade accounts payable and accrued expenses ................... $ 21,935 $ --
Note Payable .................................................. 248,491 264,412
------------ ------------
Total Current Liabilities ................................. 270,426 264,412
------------ ------------
Stockholders' Equity/(Deficiency)
Common stock - $0.0003 par value; 20,000,000 shares authorized; 15,385,404
and 14,531,071 shares issued
and outstanding, respectively ............................... 4,615 4,359
Additional paid-in-capital .................................... 486,663 59,753
Unrealized loss on securities available for sale .............. (25,575) --
Accumulated deficit ........................................... (599,017) (294,642)
------------ ------------
Total Stockholders' Equity/(Deficiency) ............................ (133,314) (230,530)
------------ ------------
Total Liabilities and Stockholders' Equity/(Deficiency) ............ $ 137,112 $ 33,882
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Innovative Software Technologies, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales ................................... $ 4,000 $ -- $ 4,000 $ 50,000
Cost of Sales ........................... -- -- -- --
------------ ------------ ------------ ------------
Gross Profit ............................ 4,000 -- 4,000 50,000
------------ ------------ ------------ ------------
Operating Expenses
General and administrative ......... 254,959 4,459 272,790 6,384
Selling ............................ 34,585 -- 35,585 --
------------ ------------ ------------ ------------
Total Operating Expenses ........... 289,544 4,459 308,375 6,384
------------ ------------ ------------ ------------
Income (Loss) From Operations ........... (285,544) 4,459 (304,375) 43,616
------------ ------------ ------------ ------------
Other Income (Expense)
Other expense ...................... -- -- -- --
Interest income .................... -- -- -- --
Interest expense ................... -- -- -- --
------------ ------------ ------------ ------------
Total Other Income (Expense) ....... -- -- -- --
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes ....... (285,544) 4,459 (304,575) 43,616
Income Tax Expense ...................... -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) ....................... $ (285,544) $ 4,459 $ (304,575) $ 43,616
============ ============ ============ ============
Basic and Diluted Income (Loss) per Share $ (0.02) 0.00 $ (0.02) 0.00
============ ============ ============ ============
Weighted Average Number of Common
Shares Used in Per Share Calculation ... 15,082,515 14,531,071 14,806,793 14,531,071
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
Total
Stock-
Additional Unrealized holder
Common Stock Paid-in Loss on Accumulated Equity/
Shares Amount Capital Securities Deficit (Deficiency)
---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 2000 ... 14,531,071 $ 4,359 $ 59,753 $ -- $ (294,642) $ (230,530)
Issuance of common stock ...... 854,333 256 426,910 -- -- 427,166
Unrealized loss on investments -- -- -- (25,575) -- (25,575)
Net loss for the period ....... -- -- -- -- (304,375) (304,375)
---------- ---------- ---------- ---------- ---------- ----------
Balance - June 30, 2001 ....... 15,385,404 $ 4,615 $ 486,663 $ (25,575) $ (599,017) $ (133,314)
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
--------- ---------
Cash Flows From Operating Activities
Net income/(loss) ............................................ $(304,375) $ 43,616
Adjustments to reconcile net (loss) earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................. 2,610 2,095
Non-cash expenses ......................................... 27,166 --
Changes in operating assets and liabilities:
Inventory ............................................... -- (877)
Prepaid Expense ......................................... (2,550) --
Other Current Assets .................................... (597) --
Other Assets ............................................ (2,615) --
Accounts Payable and Accrued liabilities .............. 21,936 (6,930)
--------- ---------
Net Cash Provided by/(Used in) Operating Activities ....... (258,425) 37,904
--------- ---------
Cash Flows From Investing Activities
Capital expenditures ...................................... (27,102) --
--------- ---------
Net Cash Used in Investment Activities .................... (27,102) --
--------- ---------
Cash Flows From Financing Activities
Issuance of common stock .................................. 400,000 --
Proceeds from borrowing under note payable to related party 35,503 --
Payment on note payable to related party .................. (51,425) (35,214)
--------- ---------
Net Cash Provided by (Used in) Financing Activities ....... 384,078 (35,214)
--------- ---------
Net Increase in Cash and Cash Equivalents .................... 98,551 2,690
Cash and Cash Equivalents at Beginning of Period ............. 888 4,043
--------- ---------
Cash and Cash Equivalents at End of Period ................... $ 99,439 $ 6,733
========= =========
Supplemental Cash Flow Information:
Unrealized loss on securities available for sale .......... $ (25,575) $ --
========= =========
Issuance of common stock for services provided ............ $ 27,166 $ --
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
--------------- -----------------
Net income/(loss).........................................................$ (304,375) $ 43,616
Other comprehensive income/(loss), net of tax:
Unrealized loss on investments, net of
tax of $(10,230) and $0.........................................$ (15,345) $ -
----------------- ----------------=
Other comprehensive income/(loss).........................................$ (15,345) $ -
----------------- -----------------
Comprehensive income/(loss)...............................................$ (319,720) $ 43,616
================= =================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - COMPANY DESCRIPTION
Innovative Software Technologies, Inc. (Innovative) is a global software
company specializing in the aggregation and distribution of
business-to-business and business-to-consumer eService platforms. Through
its acquisition of Hackett Media, Inc. on April 16, 2001, the Company has
three main products that consist of The Financial Toolkit 1.0, an
integrated financial services package that allows consumers to perform a
comprehensive personal finance evaluation, and then creates a competitive
bidding environment from a network of financial service providers; Bizkit
1.0, a turnkey e-commerce solution targeted at small businesses which
provides all the resources necessary to successfully plan, launch, and
grow an online presence; and Skills in Demand, an eLearning certification
course catering to Information Systems and Internet Professionals.
In addition, the company was also in the business of selling vintage
furniture and fixtures prior to December 31, 2000.
On April 16, 2001, Innovative with immaterial net assets, acquired 100%
of the outstanding common stock of Hackett Media, Inc. (Hackett). The
acquisition resulted in the owners and management of Hackett having
effective operating control of the combined entity after the acquisition,
with the existing Innovative investors continuing as only passive
investors. Accordingly, these condensed consolidated financial statements
should be read in conjunction with the Company's financial statements and
notes thereto included in the Form 8-K filed April 25, 2001, and Form
8-K/A filed June 15, 2001.
Under accounting principles generally accepted in the United States, the
above noted acquisition is considered to be a capital transaction in
substance, rather than a business combination. That is, the acquisition
is equivalent to the issuance of stock by Hackett for the net monetary
assets of Innovative, accompanied by a recapitalization, and is accounted
for as a change in capital structure. Accordingly, the accounting for the
acquisition is identical to that resulting from a reverse acquisition,
except that no goodwill intangible is recorded. Under reverse takeover
accounting, the post reverse-acquisition comparative historical financial
statements of the "legal acquirer" (Innovative Software Technologies),
are those of the "legal acquiree" (Hackett) (i.e. the accounting
acquirer). The Securities and Exchange Commission requires that capital
transactions consummated after year end but prior to the issuance of the
consolidated financial statements should be given retroactive effect as
if the transaction had occurred on December 31, 2000.
A summary of the company's significant accounting policies applied in the
preparation of the accompanying financial statements follows.
8
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE B - SUMMARY OF ACCOUNTING POLICIES
1. Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001.
SFAS 142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of
SFAS 142. Major provisions of these Statements and their effective dates
for the Company are as follows:
o All business combinations initiated after June 30, 2001 must use
the purchase method of accounting. The pooling of interest method
of accounting is prohibited except for transactions initiated
before July 1, 2001.
o Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual
or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged,
either individually or as part of a related contract, asset or
liability.
o Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and intangible
assets with indefinite lives no longer be subject to amortization.
o Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator.
o All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
Although it is still reviewing the provisions of these Statements,
management's preliminary assessment is that these Statements will not
have a material impact on the Company's financial position or results of
operations.
2. Interim Condensed Financial Statements
The accompanying condensed consolidated financial statements are
unaudited. In the opinion of management, all necessary adjustments (which
include only normal recurring adjustments) have been made to present
fairly the financial position, results of operations and cash flows for
the periods presented. Certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. Accordingly, these condensed consolidated financial statements
should be read in conjunction with the Company's financial statements and
notes thereto included in the Form 10-KSB dated December 31, 2000, Form
8-K dated April 16, 2001, and Form 8-K/A dated June 15, 2001. The results
of operations for the six months ended June 30, 2001 are not necessarily
indicative of the operating results to be expected for the full year.
9
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
3. Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
97-2, Software Revenue Recognition, which states that revenue is
recognized after delivery of the product.
4. Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives.
Accelerated methods are used for both book and tax purposes.
Machinery and Equipment 3 - 5 years
Office Furniture and Fixtures 5 - 7 years
5. Investments in Equity Securities
All equity securities are classified as available-for-sale. These
securities have been adjusted to their fair market value based upon
quoted market prices. Unrealized holding gains and losses are reported as
a separate component of Stockholder's equity. Unrealized holding losses
amounted to $25,575 and $0 as of June 30, 2001 and December 31, 2000,
respectively. Investments consist of 15,000 shares of common stock of
Ensurge, Inc., a company affiliated through common ownership (See Note D
below).
6. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
7. Advertising Costs
Advertising and promotion costs are expensed as incurred. Advertising
costs charged against income for the six months ended June 30, 2001 and
2000 were $34,586 and $0, respectively.
10
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2001 and
December 31, 2000:
June 30, December 31,
2001 2000
---------------------------------
Machinery and Equipment..........$ 33,007 $ 14,258
Furniture and Fixtures........... 6,587 3,475
Computer Software................ 3,014 -
Leasehold improvements........... 2,228 -
-------------- --------------
................................. 44,835 17,733
Less: Accumulated depreciation... (13,599) (10,989)
-------------- --------------
Net Property and Equipment.......$ 31,236 $ 6,744
============== ==============
Depreciation and amortization expense for the six months ended June 30,
2001 and 2000 was $2,610 and $2,095 respectively.
NOTE D - Related Party Transactions
Note payable to shareholder represents the balance due for advances made
to the company. The balance within the note payable account as of June
30, 2001 and December 31, 2000 was $248,491 and $264,412, respectively.
There is no formal maturity date and no imputed interest associated with
the note.
A company executive and shareholder is also the shareholder of an
affiliated company, JCL Holdings, Inc (JCL). On December 30, 2000,
Hackett Media sold its inventory to JCL for 15,000 shares of Ensurge,
Inc. common stock at a FMV of $1.75 per share. The Company recorded the
shares at a fair market value of $26,250. The inventory of $11,448 was
transferred to the related party at cost. The difference of $14,802 was
recorded as contributed capital.
The Company provided consulting services for an affiliated company during
2000, Ensurge, Inc. The consulting fees earned for the six months ended
June 30, 2000 totaled $50,000.
11
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - COMMITMENTS AND CONTINGENCIES
In 2001, the Company entered into an operating lease for certain office
space. Future minimum lease payments under the operating lease as of June
30, 2001 are as follows:
Year Ending December 31:
2001..............................................$ 11,250
2002 22,500
2003 22,500
2004 22,500
2005 22,500
2006 5,625
----------
Total.............................................$ 106,875
==========
Rent expense for the six months ended June 30, 2001 and 2000 was $5,625
and $0, respectively.
NOTE F - SUBSEQUENT EVENTS
On July 2, 2001, the Company's Board of Director's approved a
three-to-one forward split of the Company's stock effective August 10,
2001. The shareholder's of record as of July 31, 2001 will receive a
total of 3 common shares for each common share owned as of the record
date.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
When used in this discussion, the words "expect(s)", "feel(s)",
"believe(s)", "will", "may", "anticipate(s)" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, and are urged to carefully review
and consider the various disclosures elsewhere in this Form 10-QSB.
Results of Operations
There were minimal sales for the three and six months ended June 30,
2001 and 2000. The Company's principal source of revenue for the second quarter
of 2001 resulted from a small consulting project.
There was no cost of sales for the three and six months ended June 30,
2001 and 2000, respectively. As our expected sales increase in the coming
periods, we expect our cost of sales to increase proportionately.
General and administrative expenses for the three months ended June 30,
2001 and 2000 were, respectively, $254,959 and $4,459. General and
administration expenses consisted primarily of salaries and wages of $75,417,
professional fees of $68,728, travel and entertainment of $57,365, payroll taxes
of $12,466, and telephone expenses of $6,883. The remaining costs of $34,100 are
from general operations.
Selling expenses for the three months ended June 30, 2001 and 2000 were
$34,585 and $0, respectively. The current quarter costs consisted primarily of
advertising expenses associated with key products.
Depreciation and amortization expense for the three months ended June
30, 2001 and 2000, was $1,980 and $1,048, respectively. Depreciation and
amortization expense increased primarily as a result of the additions of
computer equipment in the current period.
Liquidity and Capital Resources
At June 30, 2001, cash and short-term investments are $99,439, an
increase of $98,551 from December 31, 2000. Cash flow used in operations was
$258,425 for the six months ended June 30, 2001. The company has one note
payable outstanding to a shareholder of the company. The balance of the note
payable as of June 30, 2001 is $248,491 while stockholders' deficiency amounts
to $133,314 as of June 30, 2001.
The company has financed its operations to date primarily through a
Finance Agreement of convertible debt and securities. The Finance Agreement
calls for financing of up to $2.5 million of which $1 million be received in
increments in 2001 and the remaining $1.5 million be received based upon the
company's performance. As of June 30, 2001, $400,000 of the initial $1 million
was received by the company. An additional $100,000 was received in August of
2001.
The company expects that its existing cash resources and available
financing will be sufficient to meet its operating requirements and ordinary
capital spending needs until the company expects its cash generated from
operations will be sufficient to meet its operating requirements and ordinary
capital spending needs going forward.
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.
2.1 Share Exchange Agreement dated as of April 16, 2001, by and
among Hackett Media, Inc. and Innovative Software
Technologies, Inc. (Exhibit number 2.1 on June 15, 2001 Form
8-K/A).
During the period covered by this report, the Company filed the following
reports on Form 8-K:
On April 25, 2001, as amended on June 15, 2001, reporting the April 16, 2001
acquisition of Hackett Media, Inc.
OTHER ITEMS
There were no other items to be reported under Part II of this report.
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.
Innovative Software Technologies, Inc.
Date: August 10, 2001 /s/ Douglas S. Hackett
----------------------
Douglas S. Hackett
President, Chief Executive Officer and
Director
14