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 September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 000-1084047
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
--------------------------------------
(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
-------------------
(Address of principal executive offices)
(816) 584-8030
--------------
(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 47,323,620 shares of common stock, $0.001 par value, outstanding as
of November 13, 2001.
1
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 2001 (Unaudited)
and December 31, 2000.................................................................. 3
Condensed Statements of Operations (Unaudited) for the
Three Months and Nine Months Ended September 30, 2001 and 2000......................... 4
Condensed Statement of Stockholders' Equity/(Deficiency) (Unaudited) for the
Nine Months Ended September 30, 2001................................................... 5
Condensed Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 30, 2001 and 2000.......................................... 6
Condensed Statements of Comprehensive Income for the
Three and Nine Months Ended September 30, 2001 and 2000................................ 7
Notes to the Condensed Financial Statements (Unaudited).................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 13
PART II - OTHER INFORMATION
Item 2. Changes in Securities................................................................. 14
Item 6. Exhibits and Reports on Form 8-K...................................................... 14
Signatures ................................................................................ 14
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- --------------
ASSETS
Current Assets
Cash...... ............................................................... $ 69,268 $ 888
Accounts receivable........................................................ 4,000 -
Investments - Available for sale.......................................... 300,750 26,250
Prepaid expenses........................................................... 1,875 -
Other current assets....................................................... 358 -
------------- -------------
Total Current Assets................................................... 376,251 27,138
------------- -------------
Property and Equipment, Net..................................................... 37,071 6,744
------------- -------------
Other Assets
Deposit .................................................................. 2,615 -
------------- ------------
Total Assets .................................................................. $ 415,937 $ 33,882
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIENCY)
Current Liabilities
Trade accounts payable and accrued expenses................................ $ 19,224 $ -
Note payable............................................................... 248,491 264,412
------------- -------------
Total Current Liabilities.............................................. 267,715 264,412
------------- -------------
Stockholders' Equity/(Deficiency)
Common stock - $0.001 par value; 60,000,000 shares
authorized; 47,323,620 and 43,593,213 shares issued
and outstanding, respectively............................................ 47,324 4,359
Additional paid-in-capital................................................. 680,078 59,753
Accumulated comprehensive loss............................................. (25,500) -
Accumulated deficit........................................................ (553,680) (294,642)
------------- --------------
Total Stockholders' Equity/(Deficiency)......................................... 148,222 (230,530)
------------- --------------
Total Liabilities and Stockholders' Equity/(Deficiency)......................... $ 415,937 $ 33,882
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Innovative Software Technologies, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales ................................... $ 310,638 $ 1,591 $ 314,638 $ 51,591
Cost of Sales ........................... -- 798 -- 798
------------ ------------ ------------ ------------
Gross Profit ............................ 310,638 793 314,638 50,793
------------ ------------ ------------ ------------
Operating Expenses
General and administrative ......... 221,428 4,339 493,903 10,724
Selling ............................ 44,188 -- 79,773 --
------------ ------------ ------------ ------------
Total Operating Expenses ........... 265,101 4,339 573,676 10,724
------------ ------------ ------------ ------------
Income (Loss) From Operations ........... 45,537 (3,546) (259,038) 40,069
------------ ------------ ------------ ------------
Other Income (Expense)
Other expense ...................... -- -- -- --
Interest income .................... -- -- -- --
Interest expense ................... -- -- -- --
------------ ------------ ------------ ------------
Total Other Income (Expense) ....... -- -- -- --
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes ....... 45,537 (3,546) (259,038) 40,069
Income Tax Expense ...................... -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) ....................... $ 45,537 $ (3,546) $ (259,038) $ 40,069
============ ============ ============ ============
Basic and Diluted Income (Loss) per Share $ 0.00 $ 0.00 $ (0.01) $ 0.00
============ ============ ============ ============
Weighted Average Number of Common
Shares Used in Per Share Calculation ... 46,947,990 43,593,213 45,262,916 43,593,213
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Total
Stock-
Additional Accumulat- holder
Common Stock Paid-in ed Compreh- Accumulated Equity/
Shares Amount Capital ensive loss Deficit (Deficiency)
---------- ---------- ---------- ---------- ---------- ----------
Balance - December 31, 2000 ... 43,593,213 $ 4,359 $ 59,753 $ -- $ (294,642) $ (230,530)
Stock split 3-for-1 ........... -- 41,541 (41,541) -- -- --
Issuance of common stock ...... 3,730,407 1,424 661,866 -- -- 663,290
Unrealized loss on investments -- -- -- (25,500) -- (25,500)
Net loss for the period ....... -- -- -- -- (259,038) (304,375)
---------- ---------- ---------- ---------- ---------- ----------
Balance - September 30, 2001 .. 47,323,620 $ 47,324 $ 680,078 $ (25,500) $ (553,680) $ 148,222
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended September 30,
2001 2000
--------- ---------
Cash Flows From Operating Activities
Net income/(loss) ........................................... $(259,038) $ 40,069
Adjustments to reconcile net (loss) earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................. 6,196 3,144
Sale of platform software for investment securities ....... (300,000) --
Non-cash expenses ......................................... 66,366 --
Changes in operating assets and liabilities:
Accounts Receivable ..................................... (4,000) --
Inventory ............................................... -- (79)
Prepaid Expense ......................................... (1,875) --
Other Current Assets .................................... (358) --
Other Assets ............................................ (2,615) --
Accounts Payable and Accrued liabilities ................ 19,224 (7,339)
--------- ---------
Net Cash Provided by/(Used in) Operating Activities ....... (476,100) 35,795
--------- ---------
Cash Flows From Investing Activities
Capital expenditures ...................................... (36,523) --
--------- ---------
Net Cash Used in Investing Activities ..................... (36,523) --
--------- ---------
Cash Flows From Financing Activities
Issuance of common stock .................................. 596,924 --
Proceeds from borrowing under note payable to related party 35,503 --
Payment on note payable to related party .................. (51,425) (35,516)
--------- ---------
Net Cash Provided by (Used in) Financing Activities ....... 581,001 (35,516)
--------- ---------
Net Increase in Cash and Cash Equivalents .................... 68,380 279
Cash and Cash Equivalents at Beginning of Period ............. 888 4,043
--------- ---------
Cash and Cash Equivalents at End of Period ................... $ 69,268 $ 4,322
========= =========
Supplemental Cash Flow Information:
Unrealized loss on securities available for sale .......... $ (25,500) $ --
========= =========
Issuance of common stock for services provided ............ $ 66,366 $ --
========= =========
Sale of platform software for investment securities ....... $ 300,000 $ --
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net income/(loss) ............................ $ 45,537 $ (3,546) $(259,038) $ 40,069
Other comprehensive income/(loss), net of tax:
Unrealized loss on investments ............... 75 -- (25,500) --
--------- --------- --------- ---------
Other comprehensive income/(loss) ............ $ 75 $ -- $ (25,500) $ --
--------- --------- --------- ---------
Comprehensive income/(loss) .................. 45,612 (3,546) (284,538) 40,069
========= ========= ========= =========
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 will 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 three and nine
months ended September 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 $25,500 and $0 as of September 30, 2001 and December
31, 2000, respectively. Investments consist of 75,000 shares of common
stock of Ensurge, Inc. and 400,000 shares of common stock of Knowledge
Transfer Systems, Inc.
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 nine months ended September 30,
2001 and 2000 were $70,172 and $0, respectively.
10
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2001
and December 31, 2000:
September 30, December 31,
2001 2000
---------------------------------
Machinery and Equipment..............$ 36,866 $ 14,258
Furniture and Fixtures............... 10,465 3,475
Computer Software.................... 4,047 -
Leasehold improvements............... 2,877 -
-------------- --------------
..................................... 54,255 17,733
Less: Accumulated depreciation....... (17,184) (10,989)
--------------- --------------
Net Property and Equipment...........$ 37,071 $ 6,744
============== ==============
Depreciation and amortization expense for the nine months ended
September 30, 2001 and 2000 was $6,196 and $3,144 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
September 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 75,000 shares of Ensurge,
Inc. common stock at a FMV of $0.35 per share, split adjusted. 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 nine
months ended September 30, 2000 totaled $50,000.
11
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - COMMITMENTS AND CONTINGENCIES
In 2001, the Company entered into an operating lease for certain office
space. Future minimum lease payments under the operating lease as of
September 30, 2001 are as follows:
Year Ending December 31:
2001....................................$ 5,625
2002 22,500
2003 22,500
2004 22,500
2005 22,500
2006 5,625
-----------
Total...................................$ 101,250
===========
Rent expense for the nine months ended September 30, 2001 and 2000 was
$11,250 and $1,423, respectively.
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
Sales for the three months ended September 30, 2001 and 2000 were
$310,638 and $1,591, respectively, which represents a significant increase. The
company's principal source of revenue for the third quarter of 2000 was the sale
of vintage furniture and fixtures. The Company's current quarter sources of
revenue changed due to the acquisition of one company. Revenue sources for the
three months ended September 30, 2001 consisted of product sales and consulting
services. The primary component of the current quarter sources of revenue
consisted of the sale of a software platform to NowSeven.com, Inc.,in exchange
for investment securities amounting to $300,000. The President and Chief
Executive Officer of the Company is the former President and Chief Executive
Officer of NowSeven.com, Inc.
Cost of sales for the three months ended September 30, 2001 and 2000
were $0 and $798, respectively. Cost of sales for the third quarter 2000
represents costs associated with the purchase of vintage furniture and fixtures
for the purpose of resale. The company's current quarter cost of goods sold
changed due to the acquisition of one company. There were no cost of goods sold
for the three months ended September 30, 2001; however, 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
September 30, 2001 and 2000 were, respectively, $221,428 and $4,339. The
Company's current quarter general and administration expenses consisted
primarily of salaries and wages of $77,608, professional fees of $59,770, travel
and entertainment of $43,343, and utility expenses of $6,379. The remaining
costs of $34,328 are from general operations.
Selling expenses for the three months ended September 30, 2001 and 2000
were $43,673 and $0, respectively. The current quarter costs consisted primarily
of advertising expenses associated with key products of $38,272 and salaries and
wages of $5,402.
Depreciation and amortization expense for the three months ended
September 30, 2001 and 2000, was $3,585 and $1,048, respectively. Depreciation
and amortization expense increased primarily as a result of the additions of
computer equipment and furniture and fixtures in the current period.
Liquidity and Capital Resources
At September 30, 2001, cash and short-term investments are $69,268, an
increase of $68,380 from December 31, 2000. Cash flow used in operations was
$476,100 for the nine months ended September 30, 2001. The company has one note
payable outstanding to a shareholder of the company. The balance of the note
payable as of September 30, 2001 is $248,491 while stockholders' equity amounts
to $148,222 as of September 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 will be received
13
in increments in 2001 and the remaining $1.5 million be received based upon the
company's performance. As of September 30, 2001, $550,000 of the initial $1
million was received by the company. The Company's current quarter proceeds
under the terms of the above Finance Agreement totaled $150,000. These proceeds
were converted under the terms of the Finance Agreement to equity securities in
the current quarter. An additional $100,000 was received on October 23, 2001.
In addition, the company in the current quarter received $46,923
through private placements to individual investors overseas. These capital
infusions are to be used to cover operations and working capital requirements
for the next three months.
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.
PART II- OTHER INFORMATION
-----------------
Item 2. Changes in Securities.
----------------------
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 will be received
in increments in 2001 and the remaining $1.5 million be received based upon the
company's performance. As of September 30, 2001, $550,000 of the initial $1
million was received by the company. The Company's current quarter proceeds
under the terms of the above Finance Agreement totaled $150,000. These proceeds
were converted under the terms of the Finance Agreement to equity securities in
the current quarter. These securities were issued under the exemption provided
by Section 4(2) of the Securities Act of 1933.
In addition, the company in the current quarter received $46,923
through private placements to individual investors overseas. These capital
infusions are to be used to cover operations and working capital requirements
for the next three months. These securities were issued under the exemption
provided by Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
None
OTHER ITEMS
There were no other items to be reported under Part II of this report.
14
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: November 13, 2001 /s/ Douglas S. Hackett
--------------------------
Douglas S. Hackett
President, Chief Executive Officer and Director