UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Transition Period
from ____________ to ____________
Commission File Number 000-1084047
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Innovative Software Technologies, Inc.
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(Exact Name of Registrant as Specified in its Charter)
California 95-4691878
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5072 North 300 West
Provo, UT 84604
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
204 NW Platte Valley Drive
Riverside, MO 64150
- ------------------------------ ----------
(Previous Address of Principal (Zip Code)
Executive Offices)
(801) 371-0755
--------------
(Registrant's Telephone Number, Including Area Code)
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 53,297,958 shares of common stock, $0.001 par value, outstanding as
of May 15, 2002.
1
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page
----
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited)
and December 31, 2002.................................................................. 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 2003 and 2002............................................. 4
Condensed Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2003 and 2002............................................. 5
Condensed Consolidated Statement of Stockholders' Equity/(Deficiency) (Unaudited) for the
Three Months Ended March 31, 2003...................................................... 6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2003 and 2002............................................. 7
Notes to the Condensed Consolidated Financial Statements (Unaudited)..................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 20
Item 3. Controls and Procedures............................................................... 23
PART II - OTHER INFORMATION
Item 2. Changes in Securities................................................................. 23
Item 6. Exhibits and Reports on Form 8-K...................................................... 23
Signatures ................................................................................ 24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2003 2002
------------- --------------
ASSETS
Current Assets
Cash...... ................................................................ $ 1,462,821 $ 1,338,345
Accounts receivable........................................................ 6,678 14,700
Other receivables.......................................................... 96,102 59,772
Prepaid expenses........................................................... 85,818 67,179
Other current assets....................................................... 918,992 706,486
------------- --------------
Total Current Assets................................................... 2,570,411 2,186,482
------------- -------------
Property and Equipment, Net..................................................... 438,436 379,349
------------- -------------
Other Assets
Goodwill .................................................................. 1,088,686 1,088,686
Other assets............................................................... -- --
Deposit .................................................................. 42,656 48,698
------------- -------------
Total Assets .................................................................. $ 4,140,189 $ 3,703,215
============= =============
Current Liabilities
Note payable - Line of credit.............................................. $ 4,518 $ 40,660
Current maturities of long-term debt....................................... 92,723 44,274
Accounts payable and accrued expenses...................................... 755,156 861,366
Deferred revenue........................................................... 353,540 256,148
Other current liabilities.................................................. 391,193 83,278
Reserve for sales returns and allowances................................... 240,245 220,266
------------- -------------
Total Current Liabilities.............................................. 1,837,375 1,505,992
------------- -------------
Long-term debt, net of current maturities....................................... -- 87,223
Stockholders' Equity
Preferred stock - no par; 25,000,000 shares authorized Series A preferred
stock; 1,650,500 shares issued and
outstanding; $1.00 stated value.......................................... 1,650,500 1,650,500
Series B preferred stock; 408,491 shares issued and
outstanding; $1.00 stated value.......................................... 408,491 328,491
Common stock - $0.001 par value; 100,000,000 shares authorized
and 52,847,955 shares issued and outstanding, respectively.............. 52,848 52,481
Additional paid-in-capital................................................. 13,132,269 13,119,719
Accumulated deficit........................................................ (12,941,294) (13,041,191)
------------- -------------
Total Stockholders' Equity...................................................... 2,302,814 2,110,000
------------- -------------
Total Liabilities and Stockholders' Equity...................................... $ 4,140,189 $ 3,703,215
============= =============
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
Ended March 31,
-----------------------------
2003 2002
------------------------------
Sales $ 5,493,208 $ 2,794,696
Cost of Sales 2,546,892 1,122,455
----------- -----------
Gross Profit 2,946,316 1,672,241
----------- -----------
Operating Expenses
Selling 1,225,118 600,891
General and administrative 1,682,800 742,070
----------- -----------
Total Operating Expenses 2,907,918 1,342,961
----------- -----------
Income/(Loss) From Operations 38,398 329,280
----------- -----------
Other Income (Expense)
Other income 44,112 --
1,702
Interest expense 17,387 --
----------- -----------
Total Other Income (Expense) 61,499 --
----------- -----------
1,702
Net Income Before Income Taxes 99,897 330,982
----------- -----------
Income Tax Expense -- 134,674
----------- -----------
Net Income $ 99,897 $ 196,308
=========== ===========
Basic and Diluted Income per Share $ 0.00 0.00
=========== ===========
Weighted Average Number of Common
Shares Outstanding Used in Per Share
Calculation - Basic and Diluted 52,675,733 48,287,416
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months
Ended March 31,
2003 2002
--------- ----------
Net income/(loss) $ 99,897 $ 196,308
Other comprehensive loss:
Unrealized loss on investments -- (423,396)
--------- ---------
Comprehensive loss 99,897 (227,088)
========= =========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(split table)
Preferred Stock Series A Preferred Stock Series B Common Stock
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
Balance - December 31, 2001 1,850,000 $ 1,850,002 248,491 $ 248,491 48,285,283 $ 48,285
Issuance of Common stock
for services provided -- -- -- -- 4,000 4
Issuance of Common stock -- -- -- -- 40,730 41
Issuance of Common stock
for services provided -- -- -- -- 6,125 6
Issuance of Common Stock
for software -- -- -- -- 53,845 54
Issuance of Common stock -- -- -- -- 24,375 24
Issuance of Common Stock
for services provided -- -- -- -- 291,250 291
Conversion of Series A Preferred
Stock to Common Stoc (199,500) (199,500) -- -- 3,000,000 3,000
Issuance of Common stock
for services provided -- -- -- -- 5,000 5
Issuance of Common stock -- -- -- -- 76,960 77
Issuance of Common stock -- -- -- -- 23,169 23
Issuance of Common stock
for services provided -- -- -- -- 39,702 40
Series A Preferred Stock Dividend -- -- -- -- 107,568 108
Series A Preferred Stock Dividend -- -- -- -- 30,734 31
Series A Preferred Stock Dividend -- -- -- -- 420,054 420
Series B Preferred Stock Dividend -- -- -- -- 72,494 72
Issuance of Series B Preferred
Stock for Executive Compensation -- -- 80,000 80,000 -- --
Unrealized loss on investments -- -- -- -- -- --
Unrealized loss on investments
recognized in income due to
other than temporary impairment -- -- -- -- -- --
Net income for the year ended
ended December 31, 2002 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance - December 31, 2002 1,650,500 1,650,500 328,491 328,491 52,481,289 52,481
=========== =========== =========== =========== =========== ===========
6(A)
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(split table continued)
Retained
Additional Accum. Earnings Total
paid-in- Comprehen- (Accumulated Stockholders'
capital sive Loss Deficit) Equity
----------- ----------- ----------- -----------
Balance - December 31, 2001 $ 12,626,679 $ (204,354) $ (290,941) $ 14,278,160
Issuance of Common stock
for services provided 14,196 -- -- 14,200
Issuance of Common stock 36,951 -- -- 36,992
Issuance of Common stock
for services provided 20,644 -- -- 20,650
Issuance of Common Stock
for software 69,946 -- -- 70,000
Issuance of Common stock 23,219 -- -- 23,243
Issuance of Common Stock
for services provided 21,553 -- -- 21,844
Conversion of Series A Preferred
Stock to Common Stoc 196,500 -- -- --
Issuance of Common stock
for services provided 370 -- -- 375
Issuance of Common stock 18,939 -- -- 19,016
Issuance of Common stock 3,992 -- -- 4,015
Issuance of Common stock
for services provided 4,760 -- -- 4,800
Series A Preferred Stock Dividend 13,892 -- (14,000) --
Series A Preferred Stock Dividend 3,969 -- (4,000) --
Series A Preferred Stock Dividend 54,250 -- (54,670) --
Series B Preferred Stock Dividend 9,859 -- (9,931) --
Issuance of Series B Preferred
Stock for Executive Compensation -- -- -- 80,000
Unrealized loss on investments -- (1,424,896) -- (1,424,896)
Unrealized loss on investments
recognized in income due to
other than temporary impairment -- 1,629,250 -- 1,629,250
Net income for the year ended
ended December 31, 2002 -- -- (12,667,649) (12,667,649)
----------- ----------- ----------- -----------
Balance - December 31, 2002 13,119,719 -- (13,041,191) 2,110,000
=========== =========== =========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
6(B)
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended March 31,
2003 2002
--------------- -----------------
Cash Flows From Operating Activities
Net income/(loss)........................................................$ 99,897 $ 196,308
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 45,093 17,166
Allowance for doubtful accounts -- 12,000
Prepaid non-cash executive compensation 60,000 --
Prepaid non-cash public relations expense 2,250 --
Non-cash expenses 30,667 14,200
Changes in operating assets and liabilities:
Accounts receivable 8,022 (491,944)
Prepaid expenses (18,639) 6,571
Other receivables (36,330) 1,046
Other assets (212,506) (280,940)
Deposits 6,042 --
Accounts payable and accrued expenses (106,210) 284,569
Other liabilities 307,915 --
Reserve for returns and allowances 19,979 --
Deferred revenue 97,392 --
Accrued federal and state income tax -- 134,674
---------- ----------
Net Cash Provided by/(Used In) Operating Activities 303,572 (106,350)
---------- ----------
Cash Flows Used In Investing Activities
Capital expenditures (104,181) (126,677)
---------- ----------
Net Cash Used In Investing Activities (104,181) (126,677)
---------- ----------
Cash Flows From Financing Activities
Proceeds from borrowings under line of credit -- 50,000
Proceeds from borrowing under note payable 8,085 50,877
Repayments under line of credit agreement (36,142 50,877
Repayments on notes payable (46,859) (1,917)
---------- ----------
Net Cash (Used in)/Provided by Financing Activities (74,916) 98,960
---------- ----------
Net Increase /(Decrease) in Cash and Cash Equivalents 124,476 (134,067)
Cash and Cash Equivalents at Beginning of Year 1,338,345 282,307
---------- ----------
Cash and Cash Equivalents at End of Period................................$ 1,462,821 $ 148,240
========== ==========
Supplemental Cash Flow Information:
Unrealized loss on securities available for sale.......................$ -- $ (423,396)
========== ==========
Issuance of Series B preferred stock for executive compensation........$ 20,000 $ --
========== ==========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
7
INNOVATIVE SOFTWARE
TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - COMPANY DESCRIPTION
Innovative Software Technologies, Inc. (the "Company" or the
"Innovative"), operating in one business segment, is a software company
specializing in small business and financial eLearning tools and
consulting services. The Company's main products are EMS, a turnkey web
builder, e-commerce solution and data management system targeted to small
businesses; The Financial Toolkit 1.0, an integrated financial services
and education program; Skills in Demand, consisting of eLearning courses
that cater to small business owners and entreprenuers, and eTaxNet, a
provider of online tax and consulting services. In addition, the Company
offers, for most of its software and learning products, technical support
and coaching services.
The Company's management combines its expertise in the field of direct
marketing, software, coaching and sales management to small businesses
and consumers. The combination of marketing and technological support
offers clients complete end-to-end business services solutions designed
to fit their ebusiness transactional technology training needs.
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.
Under accounting principles generally accepted in the United States (US
GAAP), 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).
On December 31, 2001, the Company purchased all of the outstanding shares
of Energy Professional Marketing Group, Inc.'s (EPMG), a technology
marketing company specializing in product fulfillment for outside vendors
and technology and database marketing, based in Provo, Utah. In
connection with the acquisition, the Company issued 1,500,000 and
3,529,412 of Series A preferred and common shares, respectively.
8
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - COMPANY DESCRIPTION - Continued
The purchase price for the acquisition of EPMG has been allocated on the
fair value basis on the acquisition date as follows:
Assets acquired:
Goodwill...............................................$ 13,549,932
Net assets acquired.................................... 25,068
--------------
Total Assets Acquired..................................$ 13,575,000
==============
Total Purchase Price...................................$ 13,575,000
==============
The acquisition described above was accounted for as a purchase
transaction in accordance with Statement of Financial Accounting
Standards No. 141 (SFAS 141), "Business Combinations," and, accordingly,
the results of operations and assets and liabilities of the acquired
company are included in the consolidated financial statements from the
acquisition date.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies applied in the
preparation of the accompanying financial statements follows.
1. Recent Accounting Pronouncements
In June 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:
9
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
o All business combinations initiated after June 30, 2001 must use
the purchase method of accounting. The pooling of interests 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.
o 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.
As of January 1, 2002, which is the beginning of fiscal 2002, the
Company will not amortize the goodwill which it recognized in
connection with the acquisition of EPMG. The Company's goodwill was
subject to a transitional impairment test as of December 31, 2001 and
an annual impairment test, using a two-step process prescribed by SFAS
No. 142. The Company completed the transitional impairment test for
EPMG at June 30, 2002, the applicable reporting unit, and no impairment
of goodwill was found to exist as of the beginning of fiscal 2002.
During 2002, the trading price of the Company's stock declined
significantly, raising questions about whether the fair value of
goodwill exceeds its carrying amount. An evaluation of the carrying
amount of goodwill was conducted during the 4th quarter 2002, which
included an evaluation of whether the decline in the trading price of
the Company's stock is other than temporary. The Company determined
that the decline in its trading price was other than temporary and
subsequent to December 31, 2002, engaged an independent valuation firm
to perform a valuation of the Company. This resulted in a write-down in
goodwill by the Company of $12,461,246 as of December 31, 2002.
In August 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations". SFAS 143 applies to all entities, including
rate-regulated entities, that have legal obligations associated with
the retirement of a tangible long-lived asset that result from
acquisition, construction or development and (or) normal operations of
the long-lived asset. A liability for an asset retirement obligation
should be recognized if the obligation meets the definition of a
liability and can be reasonably estimated. The initial recording should
be at fair value. SFAS 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The provisions of the Statement are not
expected to have a material impact on the financial condition or
results of operations of the Company.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 retains the
existing requirements to recognize and measure the impairment of
long-lived assets to be held and used or to be disposed of by sale.
However, SFAS 144 makes changes to the scope and certain measurement
requirements of existing accounting guidance. SFAS 144 also changes the
requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The adoption of
this Statement did not have a significant impact on the financial
condition or results of operations of the Company.
10
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In April 2002, the FASB issued SFAS No. 145 (SFAS 145). Any gain or
loss on extinguishment of debt that was classified as an extraordinary
item in prior periods presented that does not meet the criteria in APB
30 for classification as an extraordinary item shall be reclassified.
SFAS 145 also amends SFAS 13, Accounting for Leases as well as other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. Certain provisions of SFAS 145 are effective for
transactions occurring after May 15, 2002 while other are effective for
fiscal years beginning after May 15, 2002. The Company does not expect
SFAS 145 to have a material effect on its financial condition or
results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This standard
addresses financial accounting and reporting for costs associated with
exit or disposal activities. SFAS 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when
the liability is incurred. The provisions of SFAS 146 are effective for
exit or disposal activities that are initiated by the Company after
December 31, 2002. The Company does not expect SFAS 146 to have a
material effect on its financial condition or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions" (SFAS 147). This standard relates to the
application of the purchase method of accounting to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises. This standard also relates to the application of SFAS 144
to certain long-term customer-relationship intangible assets recognized
in an acquisition of a financial institution, including those acquired
in transactions between mutual enterprises. SFAS 147 is effective on
October 1, 2002. The Company does not expect SFAS 147 to have a
material effect on its financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148 Accounting for
Stock-Based Compensation--Transition and Disclosure (SFAS 148). This
standard amends the disclosure and certain transition provisions of
SFAS 123, Accounting for Stock-Based Compensation. Its disclosure
provisions are effective for 2002 annual financial statements for
calendar year-end companies. The Company does not expect that adoption
of SFAS 148 will have a material impact on its financial condition or
results of operations.
2. Interim Condensed Consolidated 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
US GAAP 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, 2002. The results of operations for the
three months ended March 31, 2003 are not necessarily indicative of the
operating results to be expected for the full year.
11
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements includes the
accounts of Innovative Software Technologies, Inc. and the accounts of
its wholly-owned subsidiary Energy Professional Marketing Group, Inc.
(EPMG) as of and for the three months ended March 31, 2003. All
significant intercompany transactions and balances have been eliminated
in consolidation.
4. Revenue Recognition
-------------------
The Company recognizes revenue after delivery of the product. To the
extent the Company sells software, revenue is recognized in accordance
with Statement of Position 97-2, Software Revenue Recognition. In most
cases this occurs the same day payment is received from our customers.
The Company also reserves for sales returns and allowances based upon
historical experience.
The Company provides support services for some of its products.
Payments received by the Company for these services are generally
recorded as deferred revenue and recognized over the term of the
services.
The Company also provides extended payment terms on the sale of its
software and related coaching for up to two years. Since payments terms
on these sales exceed 12 months, the fee for the software and license
is presumed not to be determinable. In addition, the probability of
collection decreases as the payment terms are extended. As a result,
the Company recognizes revenue on these sales as the payments are
collected from the customer.
5. Investments Securities
----------------------
All investment securities are classified as available-for-sale. These
investment 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. The
Company will regularly perform reviews of the fair value of its
investment securities and assess whether there exists any other than
temporary impairment.
6. Property and Equipment
----------------------
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is recognized using the straight-line and
double-declining balance method over the estimated useful lives of the
assets, which range from three to seven years. Leasehold improvements
are amortized using the straight-line method over the lesser of the
estimated useful lives or remaining lease term.
12
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Use of Estimates
----------------
To comply with US GAAP, the Company makes estimates and assumptions
that effect the amounts reported in the financial statements and
disclosures made in the accompanying notes. Estimates are used for, but
not limited to reserves for product returns, the collectibility of
accounts receivable and deferred taxes. The Company also uses estimates
to determine the remaining economic lives and carrying value of
goodwill and fixed assets. Despite our intention to establish accurate
estimates and assumptions, actual results may differ from our
estimates.
8. Software Development Costs
--------------------------
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased, or
otherwise Marketed," software development costs are expensed as
incurred until the product is available for general release to
customers. To date, the Company's software has been available for
general release concurrent with the establishment of technological
feasibility and, accordingly, no development costs have been
capitalized.
The Company capitalizes costs related to the development of computer
software developed or obtained for internal use in accordance with the
American Institute of Certified Public Accountants Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Costs incurred in the application
development phase are capitalized and amortized over their useful life,
not to exceed five years.
9. Advertising Costs
-----------------
Advertising and promotion costs are expensed as incurred.
10. Impairment and Long-lived Assets
--------------------------------
The Company will regularly perform reviews to determine if the carrying
values of our long-lived assets are impaired. The reviews take into
account facts or circumstances, either internal or external, which
indicate that the carrying value of the asset cannot be recovered.
13
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - INVESTMENT SECURITIES
The Company currently holds three investment securities, which the Company
acquired in connection with strategic business transactions and relationships.
Our available-for-sale securities are carried at fair value and unrealized gains
or losses are included in stockholders' equity. The Company held the following
investment securities at March 31, 2003 and December 31, 2002. The cost basis of
our investment securities reflects adjustments for other than temporary
impairments in value.
Investment Cost Gross Unrealized Estimated
Securities Basis Gains Losses Fair Value
- --------------------------------- -------------- --------- ---------- -----------
March 31, 2003
EnSurge, Inc. common stock $ -- $ -- $ -- $ --
Knowledge Transfer Systems, Inc.
common stock -- -- -- --
Knowledge Transfer Systems, Inc.
preferred stock -- -- -- --
-------------- --------- ---------- -----------
$ -- $ -- $ -- $ --
============== ========= ========== ===========
Investment Cost Gross Unrealized Estimated
Securities Basis Gains Losses Fair Value
- --------------------------------- -------------- --------- ---------- -----------
December 31, 2002
EnSurge, Inc. common stock $ -- $ -- $ -- $ --
Knowledge Transfer Systems, Inc.
common stock -- -- -- --
-------------- --------- ---------- ------------
$ -- $ -- $ -- $ --
============== ========== ========== ============
The Knowledge Transfer Systems, Inc. common stock was received in consideration
for the sale of four software coaching platforms to Ensurge, Inc. These
investment securities were recorded at a 30% discount due to restrictions and
limitations contained in Rule 144 of the Securities and Exchange Commission. The
primary restriction relates to the one-year holding period of the investment
securities after the effective date of sale. As of December 31, 2002, the
one-year holding period on these investment securities expired and the
investment securities were recorded at 100% of their fair market value. Due to
the decline in market value of Knowledge Transfer Systems, Inc. common stock,
the Company considered the value of these securities permanently impaired and
wrote down the entire carrying value of these investment securities as of
December 31, 2002. The reduction in carrying value on these investment
securities resulted in a loss on investment of $728,000 during the year ended
December 31, 2002.
The Company received Ensurge, Inc. common stock in consideration for the sale of
certain vintage furniture in 2000. Due to the decline in market value of
Ensurge, Inc. common stock, the Company considered the carrying value of $26,250
permanently impaired which resulted in a loss on investment securities of
$26,250 during the year-ended December 31, 2002.
14
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On September 23, 2002, the Company sold the Business Development Series,
e-learning content and software to Knowledge Transfer Systems, Inc. in exchange
for 875,000 Knowledge Transfer Systems, Inc. preferred shares with a stated
value of $1.00 per share. The preferred shares are convertible, at the
discretion of the Company, to Knowledge Transfer Systems, Inc. common stock at
95% of the fair market value of Knowledge Transfer System's common stock based
on a five day average proceeding the date of conversion. Due to the disclosure
by the management of Knowledge Transfer Systems, Inc. of a possible bankcruptcy
by its wholly-owned subsidiary, KT Solutions, Inc., the Company considered the
value of these securities permanently impaired and wrote down the entire
carrying value of these investment securities as of December 31, 2002. The
reduction in carrying value on these investment securities resulted in a loss on
investment of $875,000 during the year ended December 31, 2002. The President
and Chief Executive Officer of the Company is the former President and Chief
Executive Officer of Ensurge, Inc., which was the parent company of KT
Solutions, Inc. At the time of the sale of the Business Development Series to
Knowledge Transfer Systems, Inc. for 875,000 Knowledge Transfer Systems, Inc.
preferred shares, there was no related party relationship between the companies
and/or the officers and directors of the companies at the time of the
transaction.
The above common stock investment securities are traded on the OTC Bulletin
Board. All of the Company's investment securities are stocks of high technology
companies whose market prices have been extremely volatile. The market prices of
these companies' stocks have declined substantially in the past two years.
NOTE D - PROPERTY & EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation as
follows:
March 31, December 31,
2003 2002
---------------------------------
Machinery and Equipment................................$ 282,603 $ 246,594
Furniture and Fixtures................................. 56,594 51,683
Computer Software...................................... 251,958 190,624
Leasehold improvements................................. 36,018 34,092
-------------- --------------
....................................................... 627,173 522,993
Less: Accumulated depreciation and amortization........ (188,737) (143,644)
-------------- --------------
Property and Equipment, Net............................$ 438,436 $ 379,349
============== ==============
NOTE E - OTHER ASSETS
The Company has established several merchant service accounts whereby the
Company processes a high volume of customer sales transactions through certain
credit card vendors. These merchant service companies typically hold a
percentage of each sales transaction as a reserve against future cancellations.
The amount held by these merchant service companies amounts to $918,992 and
$706,486 as of March 31, 2003 and December 31, 2002, respectively.
15
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------ -------------
Notes payable, financial institution, collaterized by telephone equipment,
principal and imputed interest payable in monthly installments of $1,250
and $385 due in August 2004 $ 24,899 $ 20,469
Notes payable, financial institution, secured by a lien on certain
furniture and equipment, principal and interest payable in monthly
installments of $2,464
due in July 2005 57,319 67,175
Notes payable, financial institution, collaterized by Vehicles, principal
and accrued interest at 7.78% payable in monthly installments of principal
and imputed interest maturing from $217 to $655 from
November 2006 to February 2007 10,505 43,853
-------- --------
92,723 131,497
Less Current Maturities 92,723 44,274
-------- --------
Long-term - net of current maturities $ -- $ 87,223
======== ========
The Company has an unsecured line of credit facility with a financial
institution for borrowings up to $50,000 expiring August 31, 2005. Borrowings
under the line bear interest at Prime plus 2% (the Prime rate of interest as of
March 31, 2003 was 4.75%). As of March 31, 2003, there was $45,482 available on
the credit facility.
NOTE G - Capital Transactions
Stock-split - Innovative's Board of Directors authorized a three-for-one stock
split on July 11, 2001. This was effective on August 10, 2001 to stockholders of
record on July 31, 2001. All share and per share amounts referred to in the
financial statements and notes have been restated to reflect this stock split.
Issuance of common stock - The Company issued 40,730, 24,375, 76,960, and 23,169
shares of its common stock in 2002 through private placements to individual
foreign investors.
Issuance of Series B preferred stock - The Company issued 80,000 shares of its
Series B preferred stock to certain directors of the Company as compensation at
a stated value of $1.00 per share in 2002.
Issuance of common stock for software - The Company issued 53,845 shares of its
common stock in 2002 as part of payment under the terms of a software purchase
agreement entered into by the Company. The agreement stipulates that the Company
receives business management software for both the Internet and real estate
markets as well as hosting and maintenance services.
16
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock issued for services - The Company issued 4,000 shares of its common stock
at a fair market value of $3.55 per share in the first quarter 2002. In
addition, the Company issued 6,125 shares of its common stock during the second
quarter 2002 at fair market value of $3.37 per share.
Stock issued for services - The Company issued 291,250 and 5,000 shares of its
common stock at a fair market value of $0.075 per share in the fourth quarter
2002. In addition, the Company issued 39,702 shares of its common stock during
the fourth quarter 2002 at an average fair market value of $0.121 per share.
Conversion of Series A Preferred Stock - Two directors of the Company converted
199,500 shares of Series A preferred stock to 3,000,000 shares of common stock
during the fourth quarter 2002. The Series A preferred stock is convertible to
the Company's common stock at 95% of the fair market value of the common stock
at the date of conversion. The Market Price of the Company's common stock on the
date of conversion was $0.07.
Series A Preferred Stock Dividend - The Company issued 558,356 shares of its
common stock as a Series A preferred stock dividend during the fourth quarter
2002. The holders of the shares of Series A Preferred received dividends at the
rate of 4% per annum payable in shares of the Company's common stock. The number
of shares of common stock distributed as a dividend was calculated by dividing
such payment by 95% of the Market Price on the average of the first five trading
days after January 1 of each year. The term "Market Price" means, as of any
date, the average of the daily closing price for the five consecutive trading
days ending on such date.
Series B Preferred Stock Dividend - The Company issued 72,494 shares of its
common stock as a Series B preferred stock dividend during the fourth quarter
2002. The holders of the shares of Series B Preferred received dividends at the
rate of 4% per annum payable in shares of the Company's common stock. The number
of shares of common stock distributed as a dividend was calculated by dividing
such payment by 100% of the Market Price on the average of the first five
trading days after January 1 of each year. The term "Market Price" means, as of
any date, the average of the daily closing price for the five consecutive
trading days ending on such date.
Finance Agreement - During 2001, Hackett Media, Inc. financed its operation
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
would be received in increments in 2001, if necessary, and the remaining $1.5
million would be received based upon the Company's performance. As of September
30, 2002, $700,000 of the initial $1 million investment was received by the
Company. These proceeds were converted to equity securities during 2001. During
the fourth quarter 2001, all of the common shares issued in connection with the
conversion of debt in connection with the Finance Agreement above were reissued
as Series A preferred shares and common shares as follows: Of the initial
$700,000 invested in 2001, $350,000 was converted to Series A preferred shares
at a stated value of $1 per share. The remaining $350,000 was reissued as
700,000 shares of common stock at $0.50 per share. During the fourth quarter
2002, the Company passed a Board of Directors' Resolution to formally terminate
the Finance Agreement with Iwasaka Investments, Ltd. due to the non-compliance
by the lender under the terms of the agreement. The Company is currently in
negotiation with Iwasaka Investments, Ltd. to recoup any and all outstanding
shares issued as part of this Finance Agreement. The Company believes that the
termination of this agreement will have no adverse effect on the operations of
the Company.
17
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Issuance of Series B preferred stock - The Company issued 80,000 shares of its
Series B preferred stock to certain directors of the Company as prepaid
executive compensation and executive compensation at a stated value of $1.00 per
share in the first quarter 2003. The company recorded non-cash executive
compensation of $20,000 for the three months ended March 31, 2003. The remaining
$60,000 will be incurred during the following three quarters of 2003.
Stock issued for prepaid services - The Company issued 233,333 shares of its
common stock in exchange for $2,250 of prepaid public relation services in the
first quarter 2003.
Stock issued for charitable contribution - The Company issued 133,333 shares of
its common stock as a charitable contribution at a fair market value of $0.08
per share in the first quarter 2003.
NOTE H - Related Party Transactions
On December 31, 2001, a Company executive and shareholder converted a
non-interest bearing note payable amounting to $248,491 to Series B preferred
stock at a conversion rate of a $1 per share stated value. There was no formal
maturity date and there was no interest associated with the note.
Also, during 2001, the Company sold four software coaching platforms to
NowSeven.com, Inc., Ziabon, Inc., SF Acquisition Corp., Inc., and Ishopper
Internet Services, Inc. in exchange for investment securities amounting to
$308,000, $133,000, $147,000, and $140,000, respectively. The President and
Chief Executive Officer of the Company is the former President and Chief
Executive Officer of Ensurge, Inc., which is the parent company of the
wholly-owned subsidiaries listed above. Due to the decline in market value of
Knowledge Transfer Systems, Inc. common stock, the Company considered the value
of these securities permanently impaired and wrote down the entire carrying
value of these investment securities as of December 31, 2002.
During 2002, the Company initiated the purchase of sales leads from Education
Success Institute, Inc. (ESI). ESI is owned and operated by two directors of the
Company (Ethan Andrew Willis and James Randolph Garn). Expenses incurred by the
Company totaled $663,159 for the three months ended March 31, 2003. The Company
paid ESI a total of $458,816 for sales lead generation for the three months
ended March 31, 2003. In addition, the Company will purchase certain operating
supplies for ESI. As of March 31, 2003, the amount owed the Company for these
supplies amounted to $5,417.
The President and Chief Executive Officer of the Company is the former President
and Chief Executive Officer of Ensurge, Inc., which was the parent company of KT
Solutions, Inc. At the time of the sale of the Business Development Series to
Knowledge Transfer Systems, Inc. for 875,000 Knowledge Transfer Systems, Inc.
preferred shares in 2002, there was no related party relationship between the
companies and/or the officers and directors of the companies at the time of the
transaction.
18
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - COMMITMENTS AND CONTINGENCIES
In March, May and September 2002, the Company entered into operating leases for
certain office space. Future minimum lease payments under these operating leases
as of December 31, 2002 are as follows:
Year Ending December 31:
2003................................. 197,998
2004................................. 223,998
2005................................. 168,499
2006................................. 37,467
-----------
Total................................$ 627,962
===========
NOTE N - SUBSEQUENT EVENTS
On April 23, 2003, Innovative Software Technologies, Inc. dismissed Grant
Thornton LLP as the Company's independent accountant. The Company dismissed
Grant Thornton based on certain correspondence received from Grant Thornton
pursuant to Section 10A of the Securities Exchange Act of 1934 in which Grant
Thornton expressed concern as to the propriety of certain transactions, notified
the Company that the firm could not continue to be associated with the Company's
December 2001 and 2000 financial statements and that the reports thereon could
no longer be relied upon. The Company took strong exception to such
correspondence and filed a Current Report on Form 8-K dated April 24, 2003
presenting its position on the matter.
On April 11, 2003, the Company engaged the accounting firm of Robison, Hill &
Co., as the Company's new independent accountant to audit its financial
statements for the fiscal years ended December 31, 2002 and 2001.
On April 23, 2003, the Company filed Form 8-K on the engagement of a new
independent accounting firm, Robison, Hill & Co., effective April 11, 2003, to
audit the Company's financial statements for the fiscal years ended December 31,
20002 and 2001.
The Company entered into arbitration with a vendor concerning the cancellation
of a contract which resulted in a settlement in April 2003 of $20,000. This
settlement amount between the two parties was fully accrued for as of December
31, 2002.
19
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, and actual results could 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.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon the Company's condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities at the date of the Company's financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
believes that its critical accounting policies include those described below.
For a detailed discussion on the application of these and other accounting
policies, see Note B in the Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002.
Goodwill and Intangible Assets
As discussed in Note A in the accompanying consolidated financial statements,
the Company, on December 31, 2001, purchased all of the outstanding shares of
Energy Professional Marketing Group Inc. (EPMG) for $13.5 million in
Innovative's common and Series A preferred stock.
Purchase accounting requires extensive use of accounting estimates and judgments
to allocate the purchase price to the fair market value of the assets purchased
and liabilities assumed. The Company has accounted for its acquisitions using
the purchase method of accounting. Values were assigned principally to goodwill
based upon management's allocation of the purchase price to EPMG's workforce in
place at the date of the transaction.
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142). This statement affects the
Company's treatment of goodwill and other intangible assets. The statement
requires that goodwill existing at the date of adoption be reviewed for possible
impairment and that impairment tests be periodically repeated, with impaired
assets written down to fair value. Additionally, existing goodwill and
intangible assets must be assessed and classified within the statement's
criteria. Intangible assets with finite useful lives will continue to be
amortized over those periods. Amortization of goodwill and intangible assets
with indeterminable lives will cease.
During 2002, the trading price of the Company's stock declined significantly,
raising questions about whether the fair value of goodwill exceeds its carrying
amount. An evaluation of the carrying amount of goodwill was conducted during
the 4th quarter 2002, which included an evaluation of whether the decline in the
trading price of the Company's stock is other than temporary. The Company
determined that the decline in its trading price was other than temporary and
subsequent to December 31, 2002, engaged an independent valuation firm to
perform a valuation of the Company. This resulted in a write-down in goodwill by
the Company of $12,461,246 as of December 31, 2002. Goodwill amounts to
$1,088,868 as of March 31, 2003.
20
Investment securities
Investment securities are considered to be impaired when a decline in fair value
below cost basis is determined to be other than temporary. The Company employs a
methodology in evaluating whether a decline in fair value below cost basis is
other than temporary that considers available evidence regarding its investment
securities. In the event that the cost basis of a security exceeds its fair
value, the Company evaluates, among other factors: the duration of the period
that, and extent to which, the fair value is less than cost basis; the financial
health of and business outlook for the investee, including industry and sector
performance, changes in technology and operational and financing cash flow
factors; overall market conditions and trends, and; the Company's intent and
ability to hold the investment. Once a decline in fair value is determined to be
other than temporary, a write-down is recorded and a new cost basis in the
security is established. Assessing the above factors involves inherent
uncertainty. Accordingly, write-downs, if recorded, could be materially
different from the actual market performance of investment securities in the
Company's portfolio, if, among other things, relevant information related to the
Company's investment securities was not publicly available or other factors not
considered by the Company would have been relevant to the determination of
impairment during the 2002. As discussed in Note C to the accompanying financial
statements, the Company wrote-down the value of investment securities by
$1,629,250 in 2002. The new cost basis in the investment securities
written-down, as of December 31, 2002, is $0.
Revenue Recognition
The Company recognizes revenue after delivery of the product. To the extent the
Company sells software, revenue is recognized in accordance with Statement of
Position 97-2, Software Revenue Recognition. In most cases this occurs the same
day payment is received from our customers. The Company also reserves for sales
returns and allowances based upon historical experience.
The Company provides support services for some of its products. Payments
received by the Company for these services are generally recorded as deferred
revenue and recognized over the term of the services.
The Company also provides extended payment terms on the sale of its software and
related coaching for up to two years. Since payments terms on these sales exceed
12 months, the fee for the software and license is presumed not to be
determinable. In addition, the probability of collection decreases as the
payment terms are extended. As a result, the Company recognizes revenue on these
sales as the payments are collected from the customer.
With any accounting policy that applies judgments and estimates, actual results
could significantly differ from those estimates.
Results of Operations for the Three Months Ended March 31, 2003
compared to Three Months Ended March 31, 2002
- --------------------------------------------------------------------------------
Sales
Sales for the three months ended March 31, 2003 and 2002 were $5,493,208 and
$2,794,696, respectively, which represents a 97% increase from the prior period.
The Company's principal source of revenue for the three months ended March 31,
2003 consisted of product and service sales. The primary reason for the increase
in sales can be attributed to the consolidation all of its administrative and
accounting functions to the Provo, UT office in an effort to improve its
fulfillment and shipping operations and improve corporate responsiveness. This
has enabled the Utah office to greatly improve its ability to service its
customers. In conjunction with this consolidation, the Company has hired
additional sales and marketing associates which has also positively impacted
21
sales in the first quarter 2003. Also, in first quarter 2003, the Company
initiated the utilization of its training center in Orem, UT to assist its
customers in maintaining and expanding their Internet presence. We believe that
through consumer education and enhanced customer service, we can increase
customer participation and generate significant internal growth
Cost of Sales
Cost of sales for the three months ended March 31, 2003 and 2002 was $2,546,892
and $1,122,455, respectively, representing an increase of 127%. Cost of sales
for the three months ended March 31, 2003 and 2002 represented costs associated
with the generation of sales leads and the providing of coaching services to
customers that purchase the Company's products. The main reason for the increase
in cost of sales for the three months ended March 31, 2003, as compared to a
year ago for the same period, can be attributed to cost of sales increasing in
conjunction with the increase in sales for the period.
Selling
Selling expenses for the three months ended March 31, 2003 and 2002 were
$1,225,118 and $600,891, respectively, representing an increase of 104%. These
costs consisted primarily of commissions paid to sales associates as well as
marketing and advertising expenses associated with key products and services.
The main reason for the increase in selling costs can be attributed to the
increase in sales of products and services from new and existing sales
associates.
General and Administrative
General and administrative expenses for the three months ended March 31, 2003
and 2002 were $1,682,801 and $742,070, respectively, representing an increase of
127%. The Company's general and administration expenses consisted primarily of
salaries and wages, professional fees, rent, travel expenses, payroll taxes,
telephone expenses and other general and administrative expenses necessary to
support the operations of the Company in the current period. The primary reason
for the increase in general and administrative costs was attributable to higher
wages paid in the first quarter 2003.
Liquidity and Capital Resources
At March 31, 2003, cash was $1,462,821, an increase of $124,476 from
December 31, 2002. Cash provided by operations was $303,572 for the three months
ended March 31, 2003. The primary reason for the positive operating cash for the
three months ended March 31, 2003, can be attributed to the Company's higher
sales volume during the first three months of 2003. In addition, the Company
experienced an increase in its deferred revenue for the three months ended March
31, 2003. The Company's higher sales volume regarding coaching sessions was the
primary reason for the increase in deferred revenue. The Company also
experienced non-cash prepaid expenses and non-cash expenditures of $92,916
during the current quarter, which also positively effected cash. The Company
paid down its note payable and line of credit balances by $83,001 during the
current quarter. The Company anticipates paying down additional notes payable
amounts during 2003. Stockholders' equity amounts to $2,302,814 as of March 31,
2003.
The Company issued 80,000 shares of its Series B preferred stock to certain
directors of the Company as prepaid executive compensation and executive
compensation at a stated value of $1.00 per share in the first quarter 2003. The
company recorded non-cash executive compensation of $20,000 for the three months
ended March 31, 2003, related to these Series B preferred shares. The remaining
$60,000 will be incurred during the following three quarters of 2003.
22
The Company issued 233,333 shares of its common stock during the first
quarter 2003 for prepaid public relation services to be provided in future
periods.
The Company issued 133,333 shares of its common stock as a charitable
contribution during the first quarter 2003.
The Company expects that its existing cash resources and cash flow
generated from operations will be sufficient to meet its operating requirements
and ordinary capital expenditure needs during the next twelve months. However,
the Company will continue to seek additional sources of capital for expansion
and possible acquisitions through private placements of equity securities. Such
sources of capital may, however, not be available to the Company at agreeable
interest rates or at all.
Item 3. Controls and Procedures
-----------------------
Based on their evaluation, as of a date within 90 days of the filing
date of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, 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
---------------------
The Company in the current quarter issued 233,333 shares of common
stock for prepaid public relation services to be provided in future periods. In
addition, the Company issued 133,333 shares of common stock as a charitable
contribution during the current period. These securities were issued under the
exemption provided by Section 4(2) of the Securities Act of 1933.
The Company issued 80,000 shares of its Series B preferred stock to
certain directors of the Company as prepaid executive compensation and executive
compensation at a stated value of $1.00 per share in the first quarter 2003. The
company recorded non-cash executive compensation of $20,000 for the three months
ended March 31, 2003, related to these Series B preferred shares. The remaining
$60,000 will be incurred during the following three quarters of 2003.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a. Exhibits
99-1 - CEO Certification
99-2 - CFO Certification
b. Reports of Form 8-K
During the period covered by this report, the Company filed the
following reports on Form 8-K.
23
On April 23, 2003, the Company filed Form 8-K on the engagement of
a new independent accounting firm, Robison, Hill & Co., effective
April 11, 2003, to audit the Company's financial statements for
the fiscal years ended December 31, 2002 and 2001.
On April 23, 2003, the Company filed Form 8-K on the dismissal of
Grant Thornton, LLP as the Company's independent accounting firm.
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: May 14, 2003 /s/ Douglas S. Hackett
-------------------------------------
Douglas S. Hackett
President, Chief Executive Officer
and Director
/s/ Linda W. Haslem
-----------------------------------
Linda W. Haslem
Chief Financial Officer
24
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Douglas S. Hackett, President, Chief Executive Officer and Director of
Innovative Software Technologies, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Innovative
Software Technologies, Inc. (the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date");
and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and
the audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Douglas S. Hackett
----------------------------------------------------
Douglas S. Hackett
President, Chief Executive Officer and Director
(Principal Executive Officer)
25
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Linda W. Haslem, Chief Financial Officer of Innovative Software Technologies,
Inc., certify that:
1. I have reviewed this Annual Report on Form 10-QSB of Innovative
Software Technologies, Inc. (the "Registrant");
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Quarterly Report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date");
and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and
the audit committee of Registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 31, 2003 /s/ Linda W. Haslem
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Linda W. Haslem
Chief Financial Officer
(Principal Financial and Accounting Officer)
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