UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTER ENDED JUNE 30, 2003
[ ] 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 95-4691878
- -------------------------------------- ----------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
204 NW Platte Valley Drive
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 52,897,186 shares of common stock, $0.001 par value, outstanding as
of August 14, 2003.
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
Page
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2003 (Unaudited)
and December 31, 2002................................................. 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 2003 and 2002..................... 4
Condensed Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended June 30, 2003 and 2002..................... 5
Condensed Consolidated Statement of Stockholders' Equity/(Deficiency)
(Unaudited) for the Six Months Ended June 30, 2003.................... 6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 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........................................... 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 29
Item 2. Changes in Securities............................................. 30
Item 3. Defaults upon Senior Securities................................... 30
Item 5. Other Information................................................. 30
Item 6. Exhibits and Reports on Form 8-K.................................. 30
Signatures................................................................ 31
Index to Exhibits......................................................... 32
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2003 2002
----------- -----------
(RESTATED)
ASSETS
Current Assets
Cash $ 2,561,901 $ 1,338,345
Accounts receivable 108,309 14,700
Other receivables 79,104 59,772
Prepaid expenses 40,000 67,179
Other current assets 1,241,109 706,486
----------- -----------
Total Current Assets 4,030,423 2,186,482
----------- -----------
Property and Equipment, Net 454,220 379,349
----------- -----------
Other Assets
Goodwill 1,088,686 1,088,686
Other assets -- --
Deposit 42,656 48,698
----------- -----------
Total Assets $ 5,615,985 $ 3,703,215
=========== ===========
Current Liabilities
Note payable - Line of credit $ 3,974 $ 40,660
Current maturities of long-term debt 85,738 44,274
Accounts payable and accrued expenses 1,364,924 861,366
Deferred revenue 379,062 256,148
Other current liabilities 811,974 83,278
Accrued income taxes (70,000) --
Reserve for sales returns and allowances 710,038 220,266
----------- -----------
Total Current Liabilities 3,285,710 1,505,992
----------- -----------
Note Payable - Long-term -- 87,223
----------- -----------
Total liabilities 3,285,710 1,593,215
----------- -----------
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 418,427 328,491
Common stock - $0.001 par value; 100,000,000 shares authorized and
52,481,289 shares issued and outstanding, `respectively 52,897 52,481
Additional paid-in-capital 13,216,970 13,119,719
Accumulated deficit (13,008,519) (13,041,191)
----------- -----------
Total Stockholders' Equity 2,330,275 2,110,000
----------- -----------
Total Liabilities and Stockholders' Equity $ 5,615,985 $ 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 For the Six Months
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
Sales $ 6,992,995 $ 2,994,339 $ 12,572,203 $ 5,789,035
Cost of sales 3,515,533 999,229 6,062,425 2,121,684
------------ ------------ ------------ ------------
Gross Profit 3,477,462 1,995,110 6,509,778 3,667,351
Operating expenses:
General and administrative 1,763,167 916,707 3,504,324 1,658,777
Selling 1,611,699 681,308 3,066,817 1,282,199
Loss on investment securities -- -- -- --
Non-recurring expenses -- 169,578 -- 169,578
------------ ------------ ------------ ------------
Total Operating Expenses 3,374,866 1,767,593 6,571,141 3,110,554
------------ ------------ ------------ ------------
Income (Loss) From Operations 102,596 227,517 (61,363) 556,797
Other Income (Expense):
Interest and penalties on late tax
Payments (73,000) -- (73,000) --
Other income 30,760 16,390 74,872 18,092
Interest income 18,444 -- 35,831 --
Interest expense (13,668) (6,555) (13,668) (6,555)
------------ ------------ ------------ ------------
Total Other Income (Expense) (37,464) 9,835 24,035 11,537
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 65,132 237,352 (37,328) 568,334
Income Taxes (55,000) 85,326 70,000 220,000
------------ ------------ ------------ ------------
Net Income (Loss) $ 10,132 $ 152,026 $ 32,672 $ 348,334
============ ============ ============ ============
Basic and Diluted Income (Loss)
per Share $ -- $ -- $ -- $ 0.01
============ ============ ============ ============
Weighted Average Number of
Common Shares Used in Per
Share Calculation (basic and
diluted) 52,870,136 48,319,952 52,821,170 48,303,618
============ ============ ============ ============
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 For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(RESTATED) (RESTATED)
Net income/(loss) $ 10,132 $ 152,026 $ 32,672 $ 348,334
Other comprehensive
income/(loss), net of tax:
Unrealized loss on investments -- (86,518) -- (509,914)
--------- --------- --------- ---------
Other comprehensive
income/(loss) $ 10,132 $ (86,518) $ 32,672 $(509,914)
--------- --------- --------- ---------
Comprehensive income/(loss) 10,132 65,508 32,672 (161,580)
========= ========= ========= =========
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 SIX MONTHS ENDED JUNE 30, 2003
Retained
Accum. Earnings Total
Preferred Stock Preferred Stock Common Stock Additional Comprehen- (Accum- Stock-
Series A Series B paid-in- sive ulated) holders'
Shares Amount Shares Amount Shares Amount capital Loss Deficit) Equity
--------- --------- ------- ------- ---------- ------ ---------- --------- ----------- -----------
(RESTATED) (RESTATED)
Balance -
December 31, 2001 1,850,000 $ 1,850,000 248,491 $ 248,491 48,285,283 $ 48,285 $ 12,626,679 $(204,354) $(290,941) $14,278,160
Issuance of Common
stock for
services provided 4,000 4 14,196 14,200
Issuance of Common
stock 40,730 41 36,951 36,992
Issuance of Common
stock for
services provided 6,125 6 20,644 20,650
Issuance of Common
Stock for software 53,845 54 69,946 70,000
Issuance of Common
stock 24,375 24 23,219 23,243
Issuance of Common
Stock for
services provided 291,250 291 21,553 21,844
Conversion of Series A
Preferred Stock to
Common Stock (199,500) (199,500) 3,000,000 3,000 196,500 -
Issuance of Common
stock for
services provided 5,000 5 370 375
Issuance of Common
stock 76,960 77 18,939 19,016
Issuance of Common
stock 23,169 23 3,992 4,015
Issuance of Common
stock for
services provided 39,702 40 4,760 4,800
Series A Preferred
Stock Dividend 107,568 108 13,892 (14,000) -
Series A Preferred
Stock Dividend 30,734 31 3,969 (4,000) -
Series A Preferred
Stock Dividend 420,054 20 54,250 (54,670) -
Series B Preferred
Stock Dividend 72,494 72 9,859 (9,931) -
Issuance of Series B
Preferred Stock for
Executive Compensation 80,000 80,000 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
December 31, 2002 - - - - - - (12,667,649)(12,667,649)
--------- --------- ------- ------- ---------- ------ ---------- --------- ----------- -----------
Balance -
December 31, 2002 1,650,500 1,650,500 328,491 328,491 52,481,289 52,481 13,119,719 - (13,041,191) 2,110,000
========= ========= ======= ======= ========== ====== ========== ========= =========== ===========
Issuance of
Common Stock
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended June 30,
--------------------------
2003 2002
----------- -----------
(RESTATED)
Cash Flows From Operating Activities
Net income/(loss) $ 32,672 $ 348,334
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 95,102 40,798
Allowance for doubtful accounts -- 124,500
Prepaid non-cash executive compensation 40,000 --
Prepaid non-cash public relations expense 2,250 --
Stock-based compensation 89,936 --
Non-cash expenses 55,417 34,850
Changes in operating assets and liabilities:
Accounts receivable (93,609) (564,128)
Prepaid expenses 27,179 (13,664)
Other receivables (19,332) (17,569)
Other current assets (534,623) (311,911)
Other assets -- 23,810
Deposits 6,042 (31,707)
Accounts payable and accrued expenses 503,558 423,850
Other liabilities 728,696 169,578
Reserve for returns and allowances 489,772 34,964
Deferred revenue 122,914 179,690
Accrued federal and state income tax (70,000) 221,844
----------- -----------
Net Cash Provided by/(Used In) Operating Activities 1,475,974 663,239
----------- -----------
Cash Flows Used In Investing Activities
Capital expenditures (169,973) (325,037)
----------- -----------
Net Cash Used In Investing Activities (169,973) (325,037)
----------- -----------
Cash Flows From Financing Activities
Issuance of common stock -- 36,992
Proceeds from borrowings under line of credit -- 50,000
Proceeds from borrowing under note payable 8,085 81,186
Repayments under line of credit agreement (36,686) (5,029)
Repayments on notes payable (53,844) (7,176)
----------- -----------
Net Cash (Used in)/Provided by Financing Activities (82,445) 155,973
----------- -----------
Net Increase /(Decrease) in Cash and Cash Equivalents 1,223,556 494,175
Cash and Cash Equivalents at Beginning of Year 1,338,345 282,307
----------- -----------
Cash and Cash Equivalents at End of Period $ 2,561,901 $ 776,482
=========== ===========
Supplemental Cash Flow Information:
Unrealized loss on securities available for sale $ -- $ (509,914)
=========== ===========
Issuance common stock for software -- $ 70,000
=========== ===========
Issuance of common stock for services provided 4,750 34,850
=========== ===========
Issuance of Series B Preferred Stock for executive compensation $ 40,000 $ --
=========== ===========
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 "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
entrepreneurs, 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. (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.
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. A portion of the goodwill has
been written down by the Company as of December 31, 2002. See Note B to the
Condensed Consolidated Financial Statements (Unaudited).
8
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
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.
9
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 six months ended June
30, 2003 are not necessarily indicative of the operating results to be expected
for the full year. The balance sheet as of December 31, 2002 has been derived
from the Company's audited consolidated balance sheet as of that date.
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
six months ended June 30, 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, as amended by SOP 98-4 and SOP 98-9
and clarified by Staff Accounting Bulletin (SAB) 101 Revenue Recognition in
Financial Statements. 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.
10
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. INVESTMENT 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.
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.
11. CONCENTRATION OF CREDIT RISK
The Company has increasingly relied on ESI to provide the Company with sales
leads. As a percentage of the overall sales leads provided to the Company for
the three months ended June 30, 2003, 57% of the leads were provided by ESI.
This is compared to 35% for the three months ended March 31, 2003.
11
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 June 30, 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
June 30, 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.
12
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 bankruptcy
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.
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:
June 30, December 31,
2003 2002
------------------------
Machinery and Equipment.........$314,344 $ 246,594
Furniture and Fixtures.......... 61,994 51,683
Computer Software............... 280,610 190,624
Leasehold improvements.......... 36,018 34,092
-------- ------------
................................. 692,966 522,993
Less: Accumulated depreciation
and amortization (238,746) (143,644)
--------- ------------
Property and Equipment, Net.....$454,220 $ 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 $1,219,397 and
$706,486 as of June 30, 2003 and December 31, 2002, respectively.
13
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
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. $ 23,648 $ 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. 52,276 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. 9,814 43,853
-------- --------
85,738 131,497
Less current maturities 85,738 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
June 30, 2003 was 4.00%). As of June 30, 2003, there was $46,026 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.
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 first quarter 2003 for services rendered in 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.
14
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The Company has withheld 137,942 of such shares of
common stock payable to two stockholders in connection with a dispute with such
stockholders.
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 Iwasaka Investments, Ltd. with the terms of the agreement. The Company
believes that the termination of this agreement will have no adverse effect on
the operations of the Company.
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 $40,000 for the six months ended June 30, 2003. The remaining
$40,000 will be incurred during the following two 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.
Stock issued for services - The Company issued 49,231 shares of its common stock
at a fair market value of $0.096 per share in the second quarter 2003 for
professional services rendered.
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.
15
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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). The Company paid ESI a
total of $1,850,789 for sales lead generation for the six months ended June 30,
2003. In addition, the Company reserved for potential returned sales from ESI in
the amount of $177,441 as of June 30, 2003. Also, revenue received by the
Company for ESI's use of merchant accounts, office supplies and rent totaled
$39,558 for the six months ended June 30, 2003.
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.
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 June 30, 2003 are as follows:
Year Ending December 31:
2003 $ 131,999
2004 223,998
2005 168,499
2006 37,467
-----------
Total $ 561,963
===========
On June 24, 2003, the Securities and Exchange Commission ("SEC") issued a formal
order of investigation with respect to the Company, authorizing the
investigation of certain securities matters relating to the Company. The SEC
staff has informed the Company that it intends to take the testimony of certain
officers of the Company. Prior to the issuance of the order, the Company had
voluntarily provided documents and information to the SEC staff in response to
informal, non-public inquiries by the staff. The Company intends to fully
cooperate with the SEC in its investigation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company 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 entrepreneurs, 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.
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, including those set forth under
"Cautionary Statement Concerning Forward-Looking Statements" below.
16
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2003.
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. 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.
17
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, as amended by SOP 98-4 and SOP 98-9
and clarified by Staff Accounting Bulletin (SAB) 101 Revenue Recognition in
Financial Statements. 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 estimates the
amount earned for services based upon the period of time that has elapsed since
the invoice date. For example, if an agreement provides for a ten-week course of
coaching services, the Company estimates that one-half of the revenues for
coaching services are earned after five weeks. If the ten-week course begins
five weeks before the end of a fiscal quarter, the Company will recognize
one-half of the coaching revenues as revenues received in the fiscal quarter and
will record one-half as deferred revenue. The Company makes two assumptions in
recognizing coaching revenues: (1) that coaching services begin immediately
after the invoice date and (2) that customers do not make-up missed coaching
sessions, unless customers specifically request that their coaching sessions be
placed on hold. The Company believes that these assumptions are reasonable based
upon the Company's experience.
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.
Results of Operations for the Three Months Ended June 30, 2003 compared to Three
Months Ended June 30, 2002
SALES
Sales for the three months ended June 30, 2003 and 2002 were $6,992,995 and
$2,994,339, respectively, which represents a 134% increase from the prior
period. The Company's principal source of revenue for the three months ended
June 30, 2003 consisted of software product and service sales. The primary
reason for the increase in sales can be attributed to the consolidation of all
of its administrative and accounting functions to the Provo, UT office in an
effort to improve the Company's fulfillment and shipping operations and improve
corporate responsiveness. This consolidation was completed in September 2002.
This has enabled the Utah office to greatly improve its ability to service its
customers. The Company has experienced substantial increases in sales per sales
associate as a result of the consolidation. In conjunction with this
consolidation, the Company has hired additional sales and marketing associates
which has also positively impacted sales for the six months ended June 30, 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. Among the Company's products and services, sales of the
Company's personal finance products and services have been increasing at a
faster rate than its other products and services.
COST OF SALES
Cost of sales for the three months ended June 30, 2003 and 2002 was $3,515,533
and $999,229, respectively, representing an increase of 252%. Cost of sales for
the three months ended June 30, 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 June 30, 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. In addition, cost of
sales increased 17% as a percentage of sales when comparing the three months
ended June 30, 2003 and 2002. This increase is mainly attributable to the rise
in the cost of generating sales leads and the providing of coaching services for
the same period a year ago. See "Related Party Transactions - Relationship with
ESI" below.
GROSS MARGIN
Gross profit as a percentage of revenues was 49.8% for the three months ended
June 30, 2003 and 66.6% for the three months ended June 30, 2002. The decrease
was caused by the rise in costs of generating sales leads and the providing of
coaching services. See "Cost of Sales" above.
18
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SELLING
Selling expenses for the three months ended June 30, 2003 and 2002 were
$1,611,699 and $681,308, respectively, representing an increase of 125%. 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. Selling costs have increased in proportion as a percentage of sales
for the three months ended June 30, 2003 and 2002. The Company pays 40% of net
earnings before taxes into a profit sharing pool that is divided equally among
three executive officers of the Company.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 30, 2003 and
2002 were $1,763,167 and $916,707, respectively, representing an increase of
89%. 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 expenses was attributable to
higher administrative wage costs for the three months ended June 30, 2003.
NON-RECURRING EXPENSES
Non-recurring expense for the three months ended June 30, 2003 and 2002 was $0
and $169,578, respectively. Non-recurring expense in 2002 represented back wages
due to EPMG's employees. This cost resulted from a completed examination of the
Company's labor practices by the United States Department of Labor. The period
of examination covered the Company's operations from May 2000 to May 2002.
INCOME TAXES
The Company accrued for income taxes of $55,000 and $85,326 for the three months
ended June 30, 2003 and 2002, respectively. The Company's effective income tax
rates were 0% and 36% for the three months ended June 30, 2003 and 2002,
respectively. The Company did not record a provision for income taxes for the
three months ended June 30, 2003, based on the Company's future tax loss
attributable to the goodwill amortization from the write off of goodwill in
2002. See "Critical Accounting Policies - Goodwill and Intangible Assets" above.
NET INCOME
The Company had net income of $10,132 for the three months ended June 30, 2003
compared to net income of $152,026 for the three months ended June 30, 2002. The
increase in net income was due to the Company not recording a provision for
income taxes in the current quarter. See "Income Taxes" above. Net income before
income taxes increased $15,359 or 6.5% when comparing the three months ended
June 30, 2003 and 2002 . In addition, net income before income taxes decreased
4.3% as a percentage of sales when comparing the three months ended June 30,
2003 and 2002. This decrease is mainly attributable to the rise in the cost of
generating sales leads and the providing of coaching services for the same
period a year ago. See "Cost of Sales" above.
Results of Operations for the Six Months Ended June 30, 2003 compared to Six
Months Ended June 30, 2002
SALES
Sales for the six months ended June 30, 2003 and 2002 were $12,572,203 and
$5,789,035, respectively, which represents a 116% increase from the prior
period. The Company's principal source of revenue for the six months ended June
30, 2003 consisted of software product and service sales. The primary reason for
the increase in sales can be attributed to the consolidation of 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 consolidation was completed in September 2002. This has
enabled the Utah office to greatly improve the Company's ability to service its
customers. The Company has experienced substantial increases in sales per sales
associate as a result of the consolidation. In conjunction with this
consolidation, the Company has hired additional sales and marketing associates
which has also positively impacted sales for the first six months of 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. Among the Company's products and services, sales of the
Company's personal finance products and services have been increasing at a
faster rate than its other products and services.
19
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
COST OF SALES
Cost of sales for the six months ended June 30, 2003 and 2002 was $6,062,425 and
$2,121,684, respectively, representing an increase of 186%. Cost of sales for
the six months ended June 30, 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 June 30, 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. In addition, cost of
sales increased 12% as a percentage of sales when comparing the six months ended
June 30, 2003 and 2002. This increase is mainly attributable to the rise in the
cost of generating sales leads and the providing of coaching services for the
same period a year ago. See "Related Party Transactions - Relationship with ESI"
below.
GROSS MARGIN
Gross profit as a percentage of revenues was 51.5% for the six months ended June
30, 2003 and 63.3% for the six months ended June 30, 2002. The decrease was
caused by the rise in the cost of generating sales leads and the providing of
coaching services for the same period a year ago. .
SELLING
Selling expenses for the six months ended June 30, 2003 and 2002 were $3,066,817
and $1,282,199, respectively, representing an increase of 115%. 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. Selling
costs have increased in proportion as a percentage of sales for the six months
ended June 30, 2003 and 2002.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the six months ended June 30, 2003 and
2002 were $3,414,388 and $1,658,777, respectively, representing an increase of
106%. 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 expenses was attributable to
higher administrative wages for the six months ended June 30, 2003.
NON-RECURRING EXPENSES
Non-recurring expense for the six months ended June 30, 2003 and 2002 was $0 and
$169,578, respectively. Non-recurring expense in 2002 represented back wages due
to EPMG's employees. This cost resulted from a completed examination of the
Company's labor practices by the United States Department of Labor. The period
of examination covered the Company's operations from May 2000 to May 2002.
INCOME TAXES
The Company accrued income taxes of $70,000 and $220,000 for the six months
ended June 30, 2003 and 2002, respectively. The Company effective income tax
rates were 0% and 39% for the six months ended June 30, 2003 and 2002,
respectively. The Company did not record a provision for income taxes for the
three months ended June 30, 2003, based on the Company's future tax loss
attributable to the goodwill amortization from the write off of goodwill in
2002. See "Critical Accounting Policies - Goodwill and Intangible Assets" above.
20
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NET INCOME
We had net income of $32,672 for the six months ended June 30, 2003 compared to
net income of $348,334 for the six months ended June 30, 2002. The increase in
net income was due to the Company not recording a provision for income taxes in
the current quarter. See "Income Taxes" above. Net income before income taxes
decreased $215,726 or 38% when comparing the six months ended June 30, 2003 and
2002. In addition, net income before income taxes decreased 7.0% as a percentage
of sales when comparing the six months ended June 30, 2003 and 2002. This
decrease is mainly attributable to the rise in the cost of generating sales
leads and the providing of coaching services for the same period a year ago. See
"Cost of Sales" above.
RELATED PARTY TRANSACTIONS
Relationship with ESI. In September 2002, Energy Professional Marketing Group,
Inc. (EPMG), a wholly-owned subsidiary of the Company, entered into an
Opportunity and Strategic Alliance Agreement with Education Success Institute
(ESI). Under the agreement, EPMG purchases sales leads from ESI. ESI is owned
and operated by Ethan A. Willis and James R. Garn, each of whom serves as a vice
president and director of the Company. Under the agreement, with respect to cash
sales made by EPMG to sales leads generated by ESI, gross sales after a reserve
of 4% are divided 66% to EPMG and 34% to ESI. The Company believes that the
agreement is the product of arm's length negotiation between the parties. The
Company was generating a significant portion of their sales leads internally;
however, this was generally unprofitable for the Company and the decision was
made to outsource the generation of sales leads to ESI. The Company paid ESI a
total of $1,391,973 for sales lead generation for the three months ended June
30, 2003 and $1,850,789 for sales lead generation for the six months ended June
30, 2003. In addition, the Company reserved for potential returned sales from
ESI in the amount of $177,441 as of June 30, 2003. Also, revenue received by the
Company for ESI's use of merchant accounts, office supplies and rent totaled
$6,880 for the three months ended June 30, 2003 and $32,678 for the six months
ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, cash was $2,561,901, an increase of $1,223,556 from December
31, 2002. Cash provided by operations was $1,475,974 for the six months ended
June 30, 2003. The primary reason for the positive operating cash for the six
months ended June 30, 2003, can be attributed to the Company's higher sales
volume during the first six months of 2003. In addition, the Company's primary
merchant service company ceased holding a percentage of each sales transaction
as a reserve against future cancellations, which has positively impacted cash in
the current quarter. The Company also experienced non-cash prepaid expenses and
non-cash expenditures of $97,667 during the six months ended June 30, 2003,
which also positively effected cash. The Company paid down its note payable and
line of credit balances by $90,530 during the six months ended June 30, 2003.
The Company anticipates paying down additional notes payable amounts during
2003. Stockholders' equity amounts to $2,330,275 as of June 30, 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 $40,000 for the six months
ended June 30, 2003, related to these Series B preferred shares. The remaining
$40,000 will be incurred during the following two quarters of 2003.
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 issued 39,702 shares of its common stock for professional services
provided during the first quarter 2003.
The Company issued 49,231 shares of its common stock for professional services
provided during the second 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.
21
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TRENDS
The following is a description of certain trends, events and uncertainties that
may affect the Company's future financial results. Due to the potential for
change in factors associated with our business, it is impossible to predict or
quantify future changes in the Company's business, results of operations and
financial condition. See "-Cautionary Statement Concerning Forward-Looking
Statements."
SEC Investigation. As disclosed in Part II, Item 1, the Securities and Exchange
Commission issued a formal order of investigation with respect to the Company,
authorizing the investigation of certain securities matters relating to the
Company. The Company cannot predict the length or potential outcome of the SEC
investigation, or the potential impact of the investigation on the Company. If
the SEC's investigation results in any formal adverse determination, which may
include a fine or other remedies, the Company's financial condition, results of
operations and business could be materially adversely affected. The Company has
incurred, and may continue to incur, significant legal and other costs in
connection with this investigation.
Reliance on Education Success Institute, Inc. (ESI). As disclosed in the
"Related Party Transactions" section above, the Company has increasingly relied
on ESI to provide the Company with sales leads. As a percentage of the overall
sales leads provided to the Company for the three months ended June 30, 2003,
57% of the leads were provided by ESI. This is compared to 35% for the three
months ended March 31, 2003. If the lead generation provided by ESI were to
cease for any reason, the Company's financial condition, results of operations
and business could be materially adversely affected.
Internet Marketing Programs. A substantial portion of the Company's sales are
developed through marketing programs on the Internet. In the Company's
experience, specific marketing programs or methods of marketing on the Internet
generally have limited periods of effectiveness. The Company may not rely upon
any single marketing program or method of marketing for any significant period
of time. In order to continue to market effectively on the Internet, the Company
must continue to adapt its current marketing programs and develop new effective
programs. Any failure by the Company to continue to develop effective Internet
marketing programs could have a material adverse effect on the Company's
business, results of operations and financial condition.
Retention of Sales Personnel. The Company's business is substantially dependent
upon the Company's ability to attract and retain effective sales personnel. Any
substantial turnover among sales personnel or the loss of key sales personnel
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Sales Tax Audit. The Company is scheduled to undergo a sales and use tax audit
by the State of Utah. The Company has reserved $90,000 as of June 30, 2003 for
payment of sales and use taxes that have not been paid to the State of Utah
during the past three years. The Company believes that the accrual is sufficient
to cover any sales and use taxes that may be owed. However, there can be no
assurance that auditors will not determine that a higher amount is owed by the
Company.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-QSB that are
not statements of historical fact may constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are subject to risks and uncertainties, as described
below.
Examples of forward-looking statements include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, the payment or non-payment of dividends, capital structure and
other financial items, (ii) statements of plans and objectives of the Company's
management or Board of Directors, including plans or objectives relating to the
Company's products or services, (iii) statements of future economic performance,
and (iv) statements of assumptions underlying the statements described in (i),
(ii) and (iii). Forward-looking statements can often be identified by the use of
forward-looking terminology, such as "believes," "expects," "may," "will,"
"should," "could," "intends," "plans," "estimates" or "anticipates," variations
thereof or similar expressions.
Forward-looking statements are not guarantees of future performance or results.
They involve risks, uncertainties and assumptions. The Company's future results
of operations, financial condition and business operations may differ materially
from those expressed in these forward-looking statements. Investors are
cautioned not to put undue reliance on any forward-looking statement.
22
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
There are a number of factors that could cause actual results to differ
materially from those discussed in the forward-looking statements, including
those factors described below. Other factors not identified herein could also
have such an effect. The Company provides a detailed discussion of risk factors
in various SEC filings, including its Form 10-KSB for the fiscal year ended
December 31, 2002, and readers are encouraged to review these filings. Among the
factors that could cause actual results to differ materially from those
discussed in the forward-looking statements are the following:
o the Company's ability to generate sales leads in a cost-effective
manner;
o the Company's ability to develop strategic relationships with other
businesses;
o the level of competition in the Company's industry;
o the rate of growth of the Internet and online commerce;
o the Company's ability to manage rapid growth in its business;
o customer spending patterns;
o the mix of products sold to customers;
o the mix of net sales derived from products as compared with
services;
o the Company's ability to develop new products and services that keep
up with rapid technological change;
o the Company's ability to attract and retain qualified personnel;
o the Company's ability to retain senior management and other key
employees;
o the outcome of the current SEC investigation involving the Company;
o changes in general economic conditions.
All statements herein are made as of the date of this report. The Company does
not undertake to publicly release any revisions to forward-looking statements to
reflect events occurring or information obtained after the date of this report.
ITEM 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
that are designed to ensure that information required to be disclosed in the
Company's reports under the Securities Exchange Act of 1934, as amended is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
June 30, 2003. Based upon that evaluation and subject to the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
design and operation of the Company's disclosure controls and procedures
provided reasonable assurance that the disclosure controls and procedures are
effective to accomplish their objectives.
In addition, there was no change in the Company's internal control over
financial reporting that occurred during the quarter ended June 30, 2003 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
23
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 24, 2003, the Securities and Exchange Commission ("SEC") issued a formal
order of investigation with respect to the Company, authorizing the
investigation of certain securities matters relating to the Company. The SEC
staff has informed the Company that it intends to take the testimony of certain
officers of the Company. Prior to the issuance of the order, the Company had
voluntarily provided documents and information to the SEC staff in response to
informal, non-public inquiries by the staff. The Company intends to fully
cooperate with the SEC in its investigation.
The Company cannot predict the length or potential outcome of the SEC
investigation, or the potential impact of the investigation on the Company. If
the SEC's investigation results in any formal adverse determination, which may
include a fine or other remedies, the Company's financial condition, results of
operations and business could be materially adversely affected. The Company has
incurred, and may continue to incur, significant legal and other costs in
connection with this investigation.
In addition, the Company has formed a committee of independent directors of the
Company to investigate the matters raised by Grant Thornton LLP in a letter to
the Company dated April 4, 2003, which is filed as Exhibit 99.2 to the Current
Report on Form 8-K filed by the Company on April 24, 2003. The committee is also
authorized to investigate such other matters relating to the Company as it deems
advisable.
The Company is subject to various other claims and lawsuits from time to time in
the ordinary course of business. Management does not believe that the outcome of
these other matters will have a material adverse effect on the Company's
financial condition, results of operations or business.
ITEM 2. CHANGES IN SECURITIES
The Company issued 39,702 and 49,231 shares of common stock on January 31, 2003,
and May 21, 2003, respectively, to legal counsel in partial payment for legal
services rendered to the Company in the fourth quarter of 2002 and the first
quarter of 2003, respectively, based on the average market value of the shares
during the respective quarter in which the related legal services were rendered.
Such shares were issued in reliance on the exemption provided by section 4(2) of
the Securities Act of 1933, based on the Company's belief that the recipient of
the shares was a sophisticated investor and had access to information regarding
the Company. The certificates evidencing those shares contain legends indicating
they were acquired for investment and restricting transfer in the absence of an
effective registration or satisfaction of other conditions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(b) There has not been any material arrearage in the payment of dividends on any
preferred stock. The Company has withheld a dividend payment of 137,942 shares
of common stock payable on Series A Preferred Stock to two stockholders in
connection with a dispute with such stockholders.
ITEM 5. OTHER INFORMATION.
Hans C. Beyer resigned as a director of the Company during the second quarter of
2003.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits
The exhibits required by this item are listed in the Index to Exhibits set forth
at the end of this Form 10-QSB.
b. Reports of Form 8-K
During the period covered by this report, the Company filed the following
reports on Form 8-K:
On April 24, 2003, the Company filed a Current Report on Form 8-K regarding the
dismissal of Grant Thornton, LLP as the Company's independent accounting firm,
and 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. This Current Report on Form 8-K
was amended on May 29, 2003 and June 4, 2003.
On April 24, 2003, the Company filed a Current Report on Form 8-K regarding the
receipt of written notice under Section 10A of the Securities Exchange Act of
1934, as amended, from Grant Thornton, LLP, the Company's independent accounting
firm, the dismissal of Grant Thornton, LLP as the Company's independent
accounting firm and the engagement of Robison Hill & Co. as the Company's new
independent accounting firm.
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: October 19, 2004 /s/ Peter M. Peterson
--------------------------
Peter M. Peterson
Chief Executive Officer
and Director
/s/ Christopher J. Floyd
--------------------------
Christopher J. Floyd
Chief Financial Officer
25
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Amendment to the Articles of Incorporation of Innovative
Software Technologies, Inc.
3.2 Articles of Incorporation of Innovative Software Technologies,
Inc., as amended.
3.3 Certificate of Designation of the Series A Preferred Stock of
Innovative Software Technologies, Inc. (incorporated by
reference from Exhibit 2.2 to the Company's Current Report on
Form 8-K/A filed March 14, 2002).
3.4 Certificate of Designation of the Series B Preferred Stock of
Innovative Software Technologies, Inc.
3.5 By-laws of Innovative Software Technologies, Inc.
(incorporated by reference from Exhibit 3(b) to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1999).
4.1 Specimen Certificate of Common Stock (incorporated by
reference from Exhibit 4(a) to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999).
4.2 Articles FOURTH and FIFTH of the Articles of Incorporation of
Innovative Software Technologies, Inc., as amended (incorporated
by reference from Exhibit 3.2 to this Quarterly Report on Form
10-QSB).
4.3 Certificate of Designation of the Series A Preferred Stock of
Innovative Software Technologies, Inc. (incorporated by
reference from Exhibit 2.2 to the Company's Current Report on
Form 8-K/A filed March 14, 2002).
4.4 Certificate of Designation of the Series B Preferred Stock of
Innovative Software Technologies, Inc. (incorporated by
reference from Exhibit 3.4 to this Quarterly Report on Form
10-QSB).
4.5 Sections 3 - 17, 28, 39 - 46 and 51 - 53 of the By-laws of
Innovative Software Technologies, Inc. (incorporated by
reference from Exhibit 3(b) to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1999).
4.6 Financing Agreement dated January 25, 2001 among Iwasaka
Investments Limited, Shane Hackett and Hackett Media, Inc.
Executive Compensation Plans and Arrangements: Exhibits 10.2, 10.3,
10.4, 10.5 and 10.6 to the Quarterly Report on Form 10-QSB for fiscal quarter
ended June 30, 2003
26
10.1 Opportunity and Strategic Alliance Agreement dated September 1,
2002 by and between Energy Professional Marketing Group, Inc.
and Education Success, Inc.
10.2 Employment Agreement dated April 15, 2001 between Innovative
Software Technologies, Inc. and Douglas S. Hackett.
10.3 Employment Agreement dated December 31, 2001 between Energy
Professional Marketing Group, Inc. and James R. Garn.
10.4 Amendment dated July 15, 2002 to the Employment Agreement
between Energy Professional Marketing Group, Inc. and James R.
Garn.
10.5 Employment Agreement dated December 31, 2001 between Energy
Professional Marketing Group, Inc. and Ethan A. Willis.
10.6 Amendment dated July 15, 2002 to the Employment Agreement
between Energy Professional Marketing Group, Inc. and Ethan A.
Willis.
10.7 Indemnity Agreement dated August 17, 2001 between Innovative
Software Technologies, Inc. and Douglas Shane Hackett.
10.8 Indemnity Agreement/Hold Harmless Agreement dated August 17,
2001 among Innovative Software Technologies, Inc. and Scott
Mehaffey, Shawn M. Thomas, Margie Hackett and Douglas S.
Hackett.
10.9 Indemnity Agreement dated August 17, 2001 between Innovative
Software Technologies, Inc. and Margie Hackett.
10.10 Indemnity Agreement dated August 17, 2001 between Innovative
Software Technologies, Inc. and Scott Mehaffey.
10.11 Indemnity Agreement dated August 17, 2001 between Innovative
Software Technologies, Inc. and Margie Hackett.
10.12 Indemnity Agreement dated August 17, 2001 between Innovative
Software Technologies, Inc. and Shawn M. Thomas.
10.13 Indemnity Agreement dated January 9, 2002 among Innovative
Software Technologies, Inc. and Ethan Willis and Randy Garn.
10.14 Indemnity Agreement dated August 16, 2002 among Innovative
Software Technologies, Inc. and Ethan Willis and Randy Garn.
10.15 Indemnity Agreement dated August 15, 2002 among Innovative
Software Technologies, Inc. and Douglas Shane Hackett.
21 Subsidiaries of the Registrant.
31.1 Certification of Chief Executive Officer of Innovative
Software Technologies, Inc. dated August 14, 2003.
27
31.2 Certification of Chief Financial Officer of Innovative
Software Technologies, Inc. dated August 14, 2003.
32.1 Certification of Chief Executive Officer of Innovative Software
Technologies, Inc. dated August 14, 2003, which is accompanying
this Quarterly Report on Form 10-QSB for the quarter ended June
30, 2003 and is not treated as filed in reliance on Section
601(b)(32) of Regulation S-B.
32.2 Certification of Chief Financial Officer of Innovative Software
Technologies, Inc. dated August 14, 2003, which is accompanying
this Quarterly Report on Form 10-QSB for the quarter ended June
30, 2003 and is not treated as filed in reliance on Section
601(b)(32) of Regulation S-B.
28