UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarter Ended March 31, 2005
|_| 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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100 North Tampa Street, Suite 2410, Tampa, FL 33602
- --------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(813) 387-3310
--------------
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
There were 55,586,198 shares of common stock, $0.001 par value, outstanding as
of May 19, 2005.
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2005 (Unaudited)
and December 31, 2004.................................................................. 3
Condensed Consolidated Statements of Operations (Unaudited) for the Three
Months Ended March 31, 2005 and 2004................................................... 4
Condensed Consolidated Statements of Cash Flow (Unaudited) for the Three
Months Ended March 31, 2005 and 2004................................................... 6
Notes to the Condensed Consolidated Financial Statements (Unaudited)..................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 12
Item 3. Controls and Procedures.............................................................. 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 18
Item 3. Defaults upon Senior Securities...................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................................... 19
Signatures ................................................................................ 20
Index to Exhibits............................................................................. 21
2
PART I - FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2005 2004
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash $ 246,025 $ 876,472
Accounts receivable:
Merchant accounts receivable 83,449 87,417
Notes receivable, net of allowance for doubtful
accounts of $186,821 and $245,496, respectively 427,349 594,128
Inventory 10,721 5,471
Refundable income taxes 582,836 582,836
Prepaid expenses and other current assets 38,108 53,745
--------------- ---------------
Total current assets 1,388,488 2,200,069
--------------- ---------------
PROPERTY AND EQUIPMENT, NET 120,099 104,424
GOODWILL 1,088,686 1,088,686
INVESTMENT 183,472 178,120
DEPOSITS 39,215 39,215
--------------- ---------------
Total assets $ 2,819,961 $ 3,610,514
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 930,339 $ 976,573
Deferred revenue 131,100 111,492
Notes payable and current maturities of capital
lease obligations 63,188 79,300
--------------- ---------------
Total current liabilities 1,124,627 1,167,365
--------------- ---------------
CAPITAL LEASE OBLIGATIONS 1,639 8,249
--------------- ---------------
Total liabilities 1,126,266 1,175,614
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (NOTE 5) -- --
STOCKHOLDERS' EQUITY
Preferred stock, issued and outstanding, 450,000 shares 450,000 450,000
Common stock - authorized, 100,000,000 shares of
$.001 par value; issued and outstanding,
55,586,198 55,586 55,586
Additional paid-in capital 18,398,495 18,398,495
Accumulated deficit (17,210,386) (16,469,181)
--------------- ---------------
Total stockholders' equity 1,693,695 2,434,900
--------------- ---------------
Total liabilities and stockholders' equity $ 2,819,961 $ 3,610,514
=============== ===============
See accompanying notes.
3
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended March 31,
----------------------------
2005 2004
------------ ------------
REVENUE
Services revenue $ 155,200 $ 3,501,942
Product sales 113,219 5,753,120
Other revenue 8,600 394,327
------------ ------------
Total revenue 277,019 9,649,389
COST OF REVENUE
Cost of services revenue 6,855 1,496,463
Cost of product sales and other revenue 4,964 3,015,195
------------ ------------
Total cost of revenue 11,819 4,511,658
------------ ------------
GROSS PROFIT 265,200 5,137,731
------------ ------------
OPERATING EXPENSES
General and administrative 857,029 2,923,724
Commissions and other selling expenses 162,296 1,885,458
------------ ------------
Total operating expenses 1,019,325 4,809,182
------------ ------------
INCOME (LOSS) FROM OPERATIONS (754,125) 328,549
------------ ------------
OTHER INCOME (EXPENSE) NET 12,920 65,915
------------ ------------
INCOME BEFORE INCOME TAXES (741,205) 394,463
INCOME TAXES -- (155,813)
------------ ------------
NET INCOME (LOSS) (741,205) 238,650
UNDECLARED PREFERRED STOCK DIVIDENDS (4,500) (20,790)
------------ ------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (745,705) $ 217,860
============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.01) $ 0.00
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN BASIC AND DILUTED PER SHARE CALCULATION 55,586,198 52,897,186
============ ============
See accompanying notes.
4
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
For the Three Months
Ended March 31,
============================
2005 2004
============ ============
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (741,205) $ 238,650
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities
Depreciation and amortization 3,990 78,695
Bad debt expense 146,763 --
Net change in operating assets and liabilities
Merchant account receivables 3,968 (55,972)
Other receivables 6,988 (80,007)
Inventory (5,250) (311)
Prepaid expenses and other current assets 8,648 (201,309)
Accounts payable and accrued expenses (46,234) 1,000,479
Deferred revenue 19,608 246,291
Accrued federal and state income tax -- 155,813
============ ============
Net cash flows from operating activities (602,724) 1,382,330
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received on notes receivable from financed sales 242,617 (211,733)
Increase in notes receivable from new financed sales (222,601) --
Investment (5,352) --
Purchase of fixed assets (19,665) (69,832)
------------ ------------
Net cash flows from investing activities (5,001) (281,565)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable (20,833) --
Payments on capital lease obligations (1,889) (17,071)
------------ ------------
Net cash flows from financing activities (22,722) (17,071)
------------ ------------
NET INCREASE (DECREASE) IN CASH (630,447) 1,083,694
CASH AT BEGINNING OF PERIOD 876,472 3,890,929
------------ ------------
CASH AT END OF PERIOD $ 246,025 $ 4,974,623
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Property and equipment acquired under capital leases $ -- $ 15,521
============ ============
Payments on capital lease obligations 1,889 17,071
============ ============
See accompanying notes.
5
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Organization, Basis of Presentation, and Certain Interim Accounting
Policies
(a) Organization and Description of Business:
Innovative Software Technologies, Inc. (the "Company") was
incorporated in the State of California in May 1998. Prior to the
Company's disposition of operating assets of its EPMG subsidiary,
discussed in Note 3, and its split-off of its Triad subsidiary,
discussed in Note 10, the Company was engaged in the development,
marketing and delivery of business-type educational programs,
generally to individuals, throughout the United States of America.
The Company's educational programs combined both self-training and
coaching by Company employees. Following the split-off of Triad,
this business will be reported as a discontinued operation.
(b) Basis of Presentation:
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Regulation S-B. Accordingly, they do
not contain all of the information and footnotes required by
generally accepted accounting principles for complete consolidated
financial statements. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the Company's
financial condition as of March 31, 2005, and the results of their
operations for the three months ended March 31, 2005 and March 31,
2004, and the cash flows for the three months ended March 31, 2005
and March 31, 2004. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's audited
2004 consolidated financial statements, including the notes thereto,
and the other information set forth therein, included in the
Company's Annual Report on Form 10-KSB for the year ended December
31, 2004. Operating results for the three month period ended March
31, 2005 are not necessarily indicative of the operating results
that may be expected for the year ending December 31, 2005.
(c) Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, EPMG, Inc., Triad Media,
Inc. (f/k/a Hackett Media, Inc.) and SoftSale, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(d) Income Taxes in Interim Periods:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. For purposes of interim financial reporting, the
Company projects its effective income tax rate for the entire fiscal
year, taking into account all taxing jurisdictions, and applies such
rate to interim pre-tax income. Changes in the projected effective
tax rate in future quarters, if any, are accounted for prospectively
in the period of change.
6
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Organization, Basis of Presentation, and Certain Interim Accounting
Policies (continued)
(e) Earnings Per Common Share:
Basic net income per common share is computed by dividing (i) the
net income (loss), as adjusted for the effects of cumulative
dividends on the Series A and B Preferred Stock by (ii) the weighted
average common shares outstanding during the period. Diluted net
income (loss) per share is computed similarly but includes the
effects of dilutive securities in the denominator. Due to the Net
Losses in the current period, the calculation for diluted income per
common share in each period is anti-dilutive. Therefore, Basic and
Diluted Net Loss per common share are the same.
Three Months Ended
March 31,
2005 2004
---- ----
Income (loss) applicable to common stockholders ($ 745,705) $ 217,860
========== ===========
Weighted average common shares outstanding 55,586,198 52,674,733
Shares convertible from preferred stock -- 4,291,003
---------- -----------
Adjusted numerator 55,586,198 57,188,189
========== ===========
Basic income (loss) per common share ($ 0.01) $ 0.00
========== ===========
Diluted income (loss) per common share ($ 0.01) $ 0.00
========== ===========
(2) Liquidity and Management's Plans
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern for a
reasonable period. However, during July 2004, the Company certain
operating assets and liabilities of EPMG, which represented a significant
portion of its revenue producing operations to certain shareholders of the
Company (See Note 3). During April 2005, the Company split off Triad,
further curtailing future operations (See Note 8). The remaining
operations of the Company are minimal. As a result of the EPMG asset
transfer, the Company incurred a loss of $3,231,549 and used cash of
$3,189,958 in its operating activities during the year ended December 31,
2004. The Company incurred a loss of $741,205 and used cash of $630,447
during the three months ended March 31, 2005. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern.
Management is currently engaged is seeking merger and acquisition
candidates within the technologies industry, which have revenue producing
and cash generating operations. As further discussed in Note 8, on May 6,
2005, IST Integrated Solutions, Inc. completed an acquisition of the
assets and operations of Lietz Development, Inc. and Saphire of Tampa Bay,
Inc. (collectively "Data Tech"), a Tampa, Florida based computer equipment
reseller, and hosting and network services provider. While management has
identified a number of other prospective acquisition targets, there can be
no assurance that any acquisition will be completed or that this strategy
would be successful. In addition, management is seeking to raise
additional capital to support its operations until a successful
acquisition or acquisitions can be completed. There can be no assurance
that management will be able to acquire additional capital at acceptable
terms, if at all.
7
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) Liquidity and Management's Plans (continued)
The Company currently has cash and other reserves amounting to $329,474,
certain receivables that are expected to be collected during the year
ended December 31, 2005 amounting to $427,349, net of allowances, and
refundable income taxes of $582,836. In the absence of a strategic
acquisition or funding, described in the previous paragraph, management
believes that it can curtail operating expenses and defer trade payables
sufficient to maintain the Company's operations through the third fiscal
quarter of the year ended December 31, 2005. There can be no assurance
that the Company can identify and acquire a merger candidate at acceptable
terms, if at all. In addition, there can be no assurance that the Company
will be successful in its acquisition of working capital.
The accompanying consolidated financial statements do not include any
adjustments that might become necessary should the Company be unable to
continue as a going concern.
(3) EPMG Asset Disposition
On July 2, 2004, the Company entered into a Settlement Agreement with
James R. Garn, Ethan W. Willis, and Ethan and Randy, LC (the "Settlement
Agreement") pursuant to which the parties agreed to settle all disputes
between them, including all disputes relating to the Company's 2001
acquisition from Garn and Willis of the outstanding stock of Energy
Professional Marketing Group, Inc. ("EPMG").
Under the terms of the Settlement Agreement, Garn and Willis (the
"Principals") have surrendered to the Company all of their shares of
capital stock of the Company, comprising 6,784,762 shares of common stock,
1,200,500 shares of Series A Preferred Stock, and 80,000 shares of Series
B Preferred Stock, in exchange for certain assets of EPMG. These assets
include EPMG's rights under certain credit card processing contracts
(including receivables relating to reserves under those contracts in the
amount of approximately $1,000,000), substantially all of the tangible
fixed assets of EPMG's Utah facility, and certain intangible assets of
EPMG, such as specified website domain names, software, and customer lead
data.
The Settlement Agreement also sets forth certain agreements and covenants
relating to the relationship between the parties on a going-forward basis
and the parties' respective businesses activities, including the
following:
o The Company and an entity controlled by the Principals have
entered into agreements providing for the reciprocal supply of
products and customer leads to each other on a going-forward
basis.
o A company controlled by the Principals has agreed to assume
all of EPMG's outstanding service obligations to EPMG's
coaching customers in consideration of the payment of service
fees by the Company totaling $425,000.
o A newly created company controlled and owned by the Principals
has assumed the lease of EPMG's facility in Provo, Utah, and
substantially all employees at such facility have transferred
their employment to such newly created company. Pursuant to
the Settlement Agreement, the Company has released all such
employees from their non-compete obligations to the Company.
8
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) EPMG Asset Disposition (continued)
o The Company has agreed to refrain from soliciting the services
of certain lead providers for a six-month period of time and
from marketing to current active coaching customers for 120
days following the Settlement Agreement.
Pursuant to the Settlement Agreement, the Company, the Principals, and
their respective affiliates have entered into mutual waivers and releases
relating to any and all claims that they may have had against one another
other at any time through the date of the Settlement Agreement. Subsequent
to the settlement, EPMG remained a wholly owned subsidiary of the Company.
The Company recorded the settlement on the effective date. No gain or loss
arose from the settlement pursuant to generally accepted accounting
principles which requires a company's receipt of its own securities in
such transactions to be treated as transactions affecting only
stockholders' equity. In addition, the Company had concluded that the
transaction does not meet the conditions for treatment of EPMG as a
discontinued operation due to the fact that continuing agreements between
the Company, through its Triad subsidiary, and EPMG for cross selling of
each others products and services rise to the level of the Company's
significant continuing involvement in the operations of the disposed
component. However, as discussed in Note 8, the Company split-off Triad in
April 2005.
(4) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following as of March
31, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004
-------------- -----------------
Accrued wages and other $646,344 $710,133
Reserves for returns and refunds 95,872 88,212
Accounts payable 67,563 57,668
Interest and penalties on late tax payments 120,560 120,560
-------- --------
$930,339 $976,573
======== ========
(5) Other Stockholders' Equity
(a) Convertible Preferred Stock:
The Company has 25,000,000 shares of preferred stock authorized and
has designated 1,500,000 shares as $1.00 stated value Series A
Preferred and 3,000,000 shares as $1.00 stated value Series B
Preferred. Series A and Series B Preferred Stock (collectively
"Preferred Stock") have the same terms and conditions. The Preferred
Stock is (i) entitled to cumulative dividends at a rate of 4.0% of
the liquidation value ($1.00 per share), (ii) convertible at any
time into common stock at a rate of 95% of the average closing
market price of the common stock for five days preceding conversion
(6,232,687 common shares as of March 31, 2005), (iii) redeemable at
any time by the Company for $1.00 per share, (iv) entitled to one
vote per share. As of March 31, 2005, 450,000 shares of Series A
Preferred Stock are outstanding.
9
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) Other Stockholders' Equity (continued)
(b) Stock-Based Compensation:
During the periods ended March 31, 2005, and 2004, the Company did
not issue any of its common or preferred stock as compensation. In
addition, the Company has no stock options outstanding from other
periods. Accordingly, pro forma net income (loss) and pro forma net
income (loss) per common share, assuming the fair value approach was
used to value stock options or other similar forms of stock-based
compensation, are the same.
(6) Related Party Transactions
During the three month period ended March 31, 2005, there were no related
party transactions. (See Note 8)
(7) Commitments and Contingencies
(a) Leases:
Future minimum lease payments under noncancelable operating leases
(with initial terms in excess of one year) and future minimum
capital lease payments are as follows:
Capital Operating
Year ending December 31: Leases Leases
-------------------------------------------
2005 $ 5,666 $ 83,613
2006 6,399 85,316
2007 1,049 50,628
2008 - 50,628
After 2008 - 61,338
-------------------------------------------
Total noncancelable lease payments $ 331,524
13,114
======================
Less amount representing interest
1,227
--------------------
$ 11,887
====================
Principal amount due in one year $ 6,579
Principal amount due after one year 5,308
--------------------
$ 11,887
====================
Rent expense under all operating leases for the three months ended
March 31, 2005 and 2004 was $28,185 and $198,877, respectively.
(b) SEC Investigation:
On June 24, 2004, the Securities and Exchange Commission issued a
formal order of investigation authorizing subpoenas for documents
and testimony in connection with the investigation of certain
securities matters. On April 8, 2005, the Independent Committee
appointed by the Board of Directors of the Company delivered to the
SEC its report based on its internal investigation. The Company has
and intends to continue to fully cooperate with the SEC in its
investigation.
10
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7) Commitments and Contingencies (continued)
(c) Litigation:
Subsequent to the transfer of certain operating assets and
liabilities of EPMG, as discussed above, the former principals of
EPMG, under the new name of Prosper, Inc. filed a complaint that
seeks a refund to the benefit of Prosper of certain reserve funds
amounting to $580,000 that are due to former vendors. Under the EPMG
Settlement Agreement, we agreed to pay certain reserves potentially
owing to third-party vendors upon specified conditions. The lawsuit
alleges that we have breached the obligation to pay these reserves,
but we contest that the conditions for these payments have been
satisfied and/or contest the amounts and payees of the payments that
are alleged to be owed by us.
Although we believe that these allegations do not have any merit, if
Prosper, Inc. were to prevail in its complaint there would be
serious negative financial consequences resulting from utilization
of our cash reserves. Moreover, such an action could divert
management's time and efforts away from the business of the Company.
(8) Subsequent Events
(a) Triad Media, Inc. Sale
Effective April 20, 2005, the Company entered into a stock purchase
agreement with Douglas Shane Hackett, the Company's former Chief Executive
Officer, for the sale to Mr. Hackett of all common shares of the Company's
subsidiary Triad Media, Inc. in exchange for 4,935,015 shares of
Innovative Software common stock from Mr. Hackett. Since the transaction
involves the Company's receipt of its own common stock in exchange for the
subsidiary common stock, the Company will record this transaction during
its second fiscal quarter in 2005 as an equity transaction on the basis
that receipts of a company's own equity is generally a capital
transaction.
In addition, Triad Media possesses the continuing relationship and
involvement with EPMG following the EPMG asset disposition described in
Note 3. As a result of this transaction, the Company is no longer engaged
in the development, marketing and delivery of business-type educational
programs and has no continuing involvement with EPMG or Triad. Financial
statements issued subsequent to the stock purchase agreement will be
restated to reflect EPMG and Triad Media, Inc. as a discontinued
operation.
The following unaudited pro forma statement of operations reflects the
EPMG asset disposition and the Triad sale as if the transactions had been
effected on January 1, 2004 and January 1, 2005, respectively. The
following unaudited pro forma balance sheet reflects the EPMG asset
disposition and Triad split-off as if the transactions had been effected
on March 31, 2005. Unaudited pro forma financial information is not
necessarily indicative of the operations that would have resulted had the
transactions been effected on the respective dates.
11
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(8) Subsequent Events (continued)
2004 Consolidated 2004 Annual Income Statements for 2004
Annual Income Discontinued Operations Pro Forma Pro Forma Annual
Statement As Reported Triad Media, Inc. EPMG, Inc. Adjustments Income Statement
--------------- --------------- --------------- --------------- ---------------
Revenue $ 17,341,520 $ 413,443 $ 16,928,077 $ (17,341,520) 1 $ --
Cost of Sales 8,708,050 94,677 8,613,374 (8,708,050) 1 --
--------------- --------------- --------------- --------------- ---------------
Gross Profit 8,633,470 318,767 8,314,703 (8,633,470) --
--------------- --------------- --------------- --------------- ---------------
Operating Expenses:
General and Administrative 8,218,831 2,285,038 3,085,503 (5,370,541) 1 2,848,290
Selling 4,047,152 676,296 3,368,656 (4,044,952) 1 2,200
Writedown of Goodwill -- -- -- (1,088,686) 2 1,088,686
--------------- --------------- --------------- --------------- ---------------
Total Operating Expenses 12,265,982 2,961,334 6,454,159 (10,504,179) 3,939,176
--------------- --------------- --------------- --------------- ---------------
Other Income (Expense) 151,127 -- 73,113 (73,113) 1 78,013
--------------- --------------- --------------- --------------- ---------------
Income (Loss) from Continuing
Operations $ (3,481,386) $ (2,642,568) $ 1,933,658 $ 1,797,596 $ (3,861,162)
=============== =============== =============== =============== ===============
2005 Consolidated 2005 Q1 Income Statements for 2005
Q1 Income Statement Discontinued Operations Pro Forma Pro Forma Q1
As Reported Triad Media, Inc. EPMG, Inc. Adjustments Income Statement
--------------- --------------- --------------- --------------- ---------------
Revenue $ 277,019 $ 270,414 $ -- $ (270,414) 1 $ 6,605
Cost of Sales 11,819 11,469 -- (11,469) 1 350
--------------- --------------- --------------- --------------- ---------------
Gross Profit 265,200 258,945 -- (258,945) 6,255
--------------- --------------- --------------- --------------- ---------------
Operating Expenses:
General and Administrative 857,029 341,241 -- (341,241) 1 515,787
Selling 162,296 162,296 -- (162,296) 1 --
Writedown of Goodwill -- -- -- -- 2 --
--------------- --------------- --------------- --------------- ---------------
Total Operating Expenses 1,019,325 503,537 -- (503,537) 515,787
--------------- --------------- --------------- --------------- ---------------
Other Income (Expense) 12,920 1,765 -- (1,765) 1 11,156
--------------- --------------- --------------- --------------- ---------------
Income (Loss) from Continuing
Operations $ (741,205) $ (242,828) $ -- $ 242,828 $ (498,377)
=============== =============== =============== =============== ===============
March 31, 2005 March 31, 2005 Balance Sheets for March 31, 2005
Consolidated Balance Sheet Discontinued Operations Pro Forma Pro Forma
As Reported Triad Media, Inc. EPMG, Inc. Adjustments Balance Sheet
--------------- --------------- --------------- --------------- ---------------
Current Assets $ 1,388,488 $ 341,852 $ -- $ (341,852) 1 $ 1,046,636
Fixed Assets, net 120,099 76,196 -- (76,196) 1 43,904
Goodwill 1,088,686 -- -- (1,088,686) 2 --
Other Assets 222,687 4,057 -- (4,057) 1 218,631
--------------- --------------- --------------- --------------- ---------------
Total Assets $ 2,819,961 $ 422,105 $ -- $ (1,510,791) $ 1,309,170
=============== =============== =============== =============== ===============
Current Liabilities -
Continuing Operations $ 1,124,627 $ -- $ -- -- 1,3 $ 499,754
Current Liabilities -
Discontinued Operations -- 312,034 624,873 -- 1,3 624,873
Long-term Liabilities 1,639 1,639 -- (1,639) 1 --
Other capital 18,904,081 2,238,907 (4,780,187) (570,847) 1 18,333,234
Retained Earnings (17,210,386) (2,130,476) 4,155,313 (938,305) 2 (18,148,691)
--------------- --------------- --------------- --------------- ---------------
Total Liabilities and Equity $ 2,819,961 $ 422,105 $ -- $ (1,510,791) $ 1,309,170
=============== =============== =============== =============== ===============
Notes:
1. These adjustments reflect the reclassification of operations,
assets, and liabilities related to the discontinuation of the
education and coaching business. Upon the disposal of Triad pursuant
to the Stock Purchase Agreement, the Company will account for its
education and coaching business as a discontinued operation. No gain
12
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(8) Subsequent Events (continued)
or loss arose from the disposal of Triad in April 2005, or the
disposal of EPMG during 2004, pursuant to generally accepted
accounting principles which requires a company's receipt of its own
securities in such transactions to be treated as transactions
affecting only stockholders' equity.
2. Adjustment to write-off goodwill relating to the education and
coaching business to operating expenses.
3. Adjustment to reclassify retained liabilities to current liabilities
of discontinued operations. The retention of these liabilities, in
management's view, does not constitute continuing involvement in the
disposed companies' operations.
(b) Data Tech Acquisition
On May 6, 2005, IST Integrated Solutions, Inc. (a wholly-owed subsidiary)
completed an acquisition of the assets and operations of Lietz
Development, Inc. and Saphire of Tampa Bay, Inc. (collectively dba "Data
Tech"), a Tampa, Florida based computer equipment reseller, and hosting
and network services provider. The purchase price amounted to
approximately $358,000 of consideration, comprising the assumption of
$250,000 in debt and the issuance of 1,350,000 shares of our common stock
(valued at the closing market price of the shares on May 6, 2005).
The purchase of Data Tech will be accounting for as a purchase business
combination, which will involve the allocation of the purchase price to
the assets and liabilities acquired, or assumed, based upon fair values on
the purchase date.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion includes statements that are forward looking in nature.
The accuracy of such statements depends on a variety of factors that may affect
the business and operations of the Company. Certain of these factors are
discussed under "Business - Factors Influencing Future Results and Accuracy of
Forward-Looking Statements" included in Part 1 of this report. 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.
Overview
Innovative Software Technologies, Inc. (the "Company") is a California
corporation that has historically been engaged in the business of development,
marketing and delivery of Internet websites, database management programs, and
business educational programs, generally to individuals. The following
discussion summarizes information about our accounting policies and practices
and information about our operations in a comparative manner for the three
months ended March 31, 2005 and 2004. Our management's discussion and analysis
of financial condition and results of operations should be read in conjunction
with our consolidated financial statements and related notes thereto included
elsewhere herein.
Discontinuance of Business
Historically, we have been engaged primarily in the development, marketing and
delivery of Internet websites, database management programs, and business
educational programs, generally to individuals, throughout the United States of
America through our EPMG and Triad subsidiaries. In July 2004, we transferred
certain operating assets and liabilities of EPMG back to the former principals
of EPMG (from whom we acquired the stock of EPMG in [insert date]) under a
settlement agreement with such former principals. However, the transfer of these
assets and liabilities did not result in a discontinuation of this business. In
April 2005, our board of directors determined to discontinue this business and
undertake a strategy of growth through acquisition of private companies and
internal product and services development focused on small and medium sized
businesses ("SMB") and the medical market, and accordingly we split-off our
Triad subsidiary (f/k/a Hackett Media, Inc.) in April 2005. As a result,
effective April 20, 2005, we are no longer engaged in this business and have no
continuing involvement with EPMG or Triad. Accordingly, our financial statements
subsequent to the stock purchase agreement related to Triad will be restated to
reflect EPMG and Triad as discontinued operations. These two former subsidiaries
represented substantially all of our operations during the 2005 fiscal year and
the three-month period ended March 31, 2005.
New Strategy
In furtherance of our new strategy, we have identified several acquisition
candidates that provide a variety of complimentary products and services
including:
o Internet email and website hosting
14
o Secure email and hosting for HIPPA compliant service
o Network services including hardware and software reselling
o Internally developed software applications for the medical
marketplace
o Medical based product reselling
o HIPPA consulting
o Graphics and web based industry targeted software
In the first quarter of 2005 we formed two new subsidiaries, "IST Integrated
Solutions, Inc." ("IST Integrated") and "IST Medical Group, Inc." ("IST
Medical"). IST Integrated's mission is to provide a complementary set of
information technology based products and services to the SMB marketplace. IST
Medical's mission is to provide products and services to address the information
needs of healthcare providers through the development of integrated clinical and
administrative solutions. IST Integrated and IST Medical will also function as
acquisition vehicles. In addition, our SoftSale, Inc. subsidiary, a distributor
of software products, will continue to be a distributor for third party as well
as internally developed products.
Acquisition of Data Tech
On May 6, 2005, IST Integrated Solutions, Inc. completed an acquisition of the
assets and operations of Lietz Development, Inc. and Sapphire of Tampa Bay, Inc.
(collectively dba "Data Tech"), a Tampa, Florida based computer equipment
reseller, and hosting and network services provider. The purchase price amounted
to approximately $358,000 of consideration, comprising the assumption of
$250,000 in debt and the issuance of 1,350,000 shares of our common stock
(valued at the closing market price of the shares on May 6, 2005).
The purchase of Data Tech will be accounted for as a purchase business
combination, which will involve the allocation of the purchase price to the
assets and liabilities acquired, or assumed, based upon fair values on the
purchase date.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon the Company's 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
us 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.
Allowance for Doubtful Accounts
- --------------------------------
Our gross notes receivable amounted to $614,170 as of March 31, 2005 and relate
to product financing arrangements entered into with our clients. These notes are
unsecured, bear interest at 15% and have terms ranging between one and five
15
years. As of March 31, 2005, we have recorded reserves of $186,821 for estimated
uncollectible amounts.
The allowance for doubtful accounts is based upon our best estimate of the
amount of probable credit losses in the existing notes based upon our historical
loss rates experienced on such financing arrangements. A note is considered
impaired pursuant to Financial Accounting Standards Board Statement 114,
Accounting by Creditors for Impairment of a Loan. Pursuant to Statement 114, a
note is impaired if it is probable that we will not collect all principal and
interest contractually due. The impairment is measured based on the present
value of expected future cash flows discounted at the note's effective interest
rate. We do not accrue interest when a note is considered impaired. When
ultimate collectibility of the principal balance of the impaired note is in
doubt, all cash receipts on impaired notes are applied to reduce the principal
amount of such notes until the principal has been recovered and are recognized
as interest income thereafter. Impairment losses are charged against the
allowance when all possible means of collection have been exhausted and the
potential for recovery is considered remote.
Revenue Recognition and Returns and Allowances
- ----------------------------------------------
We have evaluated our product offerings in the context SAB 101 Revenue
Recognition and EITF 00-21 Revenue Arrangements with Multiple Deliverables and
have determined that revenues associated with the multimedia educational
materials (product sales) require accounting separate from the educational and
coaching services (services revenue). The fair value of these offerings is
established through separate third party sales of each of these products and
services.
Product Sales: We recognize product sales upon delivery to our students, as
evidenced by third party shipping providers, which is the point where the
student assumes ownership and risk of loss. Shipping costs are billed to
students and are included as a component of revenue and cost of product sales.
Returns are provided for based upon the Company's historical return experience.
Services Revenues: The educational offering includes multiple sessions with a
Company-employed coach. We recognize services revenue pro rata as
coaching/training sessions are rendered. Deferred revenue represents the fair
value of future coaching sessions that students have paid for, $131,100 as of
March 31, 2005, but not yet received.
Our obligation to provide coaching and training ceases one year following the
sale. Refunds for unused courses are not provided for in the sales arrangement
with the student. However, the Company offers refunds in certain circumstances
for which a history has been developed to estimate and reserve such amounts.
Results of Operations
Three months ended March 31, 2005 compared to the three months ended March 31,
2004.
Revenues
- --------
Revenues for the three months ended March 31, 2005 and 2004 were $162,247 and
$9,649,389, respectively, which represents a 98% decrease. Our principal source
of revenue for the three months ended March 31, 2005 and 2004 consisted of
business education and coaching services, which represented 95% of consolidated
revenues. Revenues decreased substantially as a result of the transfer of EPMG
assets in July 2004 pursuant to a Settlement Agreement with Randy Garn and Ethan
Willis whereby certain operating assets of our EPMG subsidiary, together with
certain liabilities, were transferred to Garn and Willis (see note 3 in the
16
Notes to the Condensed Consolidated Financial Statements herein). As a result of
the split-off of our Triad subsidiary in April 2005, we are no longer in the
business of education and coaching services. On a pro forma basis, assuming that
these transactions had occurred on January 1, 2005, we would have had revenues
of $6,605. Subsequent to April 2005, we will restate our financial statements to
reflect EPMG and Triad as discontinued operations and, accordingly, will report
no revenues from this business. Our only source of revenues prospectively will
be those from (1) our Softsale subsidiary, which is in its early stages of
development, (2) Data Tech, which was acquired May 6, 2005and (3) business that
we acquire in the future, if any.
We recorded revenues for multimedia education materials (product sales) upon
delivery of the material to our students. We recorded revenues for coaching
sessions rendered and we deferred revenue for coaching sessions that are paid
for but have not yet been rendered. We deferred $131,100 of services revenue as
of March 31, 2005 and $2,103,538 as of March 31, 2004. Our deferral as of March
31, 2005 is substantially less than the amount deferred as of March 31, 2004 as
the number of open coaching sessions for which we are responsible for decreased
significantly after the EPMG asset disposition.
Cost of Sales and Margins
- -------------------------
Cost of sales for the three months ended March 31, 2005 and 2004 were $11,819
and $4,511,658, respectively, representing a decrease of 99%. Cost of sales
included (i) the cost of the multimedia educational materials that we ship to
our students, (ii) the wages paid to our coaches and (iii) the commissions that
we pay to lead sources. Cost of sales decreased substantially as a result of the
above-described disposition of EPMG operating assets in July 2005. Upon the
split-off of our Triad subsidiary in April 2005, we are no longer in the
business of education and coaching services. On a pro forma basis, assuming that
these transactions had occurred on January 1, 2005, we would have had cost of
sales of $350. Subsequent to April 2005, we will restate our financial
statements to reflect EPMG and Triad as discontinued operations and,
accordingly, will report no cost of sales from this business.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses for the three months ended March 31, 2005
and 2004 were $742,257 and $2,923,724, respectively, representing an decrease of
75%. General and administrative expenses as a percentage of sales rose to 458%
in 2005 from 30% in 2004. Our 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 reasons for the increase in general and administrative expenses relative
to sales was a result of the fall in sales following the sale of the EPMG assets
while maintaining the company infrastructure including legal expenses relating
to the SEC investigation.
Commissions and Other Selling Expenses
- --------------------------------------
Selling expenses for the three months ended March 31, 2005 and 2004 were
$162,296 and $1,885,458, respectively, representing a decrease of 92%. Selling
expenses consisted primarily of commissions paid to sales associates as well as
marketing and advertising expenses associated with key products and services.
The decrease in selling expenses is attributed to the disposal of EPMG assets.
Other Income (Expense)
- ----------------------
17
Other income, net of other expenses for the three months ended March 31, 2005
and 2004 were $12,920 and $65,915, respectively, representing a decrease of 20%.
The decrease is primarily attributable to a decrease in interest income from our
financing notes receivable balance.
Income Taxes
- ------------
Our benefit from income taxes amounted to $-0- for the three months ended March
31, 2005 compared to a provision of $(155,813) for the three months ended March
31, 2004. The Company did not record any income tax benefit from current period
losses as the realization of such benefit in future periods is uncertain.
Net Loss
- --------
Our net loss for the three months ended March 31, 2005 amounted to $741,205,
compared to a net income of $238,650 for the period ended March 31, 2004. This
decrease was attributable to the matters discussed above relating to the EPMG
asset disposition, which included decreased revenue and markedly increased
general and administrative expenses. Our decision to split off Triad in April
2005 is expected to decrease our net loss by approximately $50,000 per month
following the split off.
Liquidity and Capital Resources
Our consolidated financial statements have been prepared assuming that the
Company will continue as a going concern for a reasonable period. However,
during the period ended March 31, 2005, we incurred a loss of $741,205 and used
cash of $749,487 in our operating activities. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management is currently seeking merger and acquisition candidates within the
technologies industry, which have revenue producing and cash generating
operations. As further discussed in Note 8 to the accompanying financial
statements, on May 6, 2005, IST Integrated Solutions, Inc. completed an
acquisition of the assets and operations of Lietz Development, Inc. and Sapphire
of Tampa Bay, Inc. (collectively dba "Data Tech"), a Tampa, Florida based
computer equipment reseller, and hosting and network services provider. While we
have identified a number of other prospective acquisition targets, there can be
no assurance that any acquisition will be completed or that this strategy would
be successful. In addition, we anticipate that we will need to raise additional
capital to support our operations until a successful acquisition or acquisitions
can be completed. There can be no assurance we will be able to acquire
additional capital at acceptable terms, if at all.
As of March 31, 2005 we had cash and other reserves amounting to $329,474, and
certain receivables that are expected to be collected during the year ended
December 31, 2005 amounting to $427,349 net of allowances and refundable income
taxes of $582,836. In the absence of a strategic acquisition of funding,
described in Note 2 to our financial statements, management believes that it can
curtail operating expenses and defer trade payables sufficient to maintain our
existence through the third fiscal quarter of the year ended December 31, 2005.
There can be no assurances that we can acquire companies or curtail our expenses
sufficiently to maintain our operations.
Our financial statements do not include any adjustments that might become
necessary should the Company be unable to continue as a going concern.
At March 31, 2005 we had current assets of $1,388,488, which represents a
decrease of $811,581 over current assets as of December 31, 2004. Much of the
decrease is attributable to a decrease in cash. At March 31, 2005 we had cash on
hand of $246,025, which represents a decrease of $630,447 over the balances as
of December 31, 2004.
18
At March 31, 2005 we had current liabilities of $1,124,627, which represents a
decrease of $42,738 over current liabilities as of December 31, 2004.
As March 31, 2005 our working capital decreased to $263,861 from $1,032,704 as
of December 31, 2004. This decrease results primarily from the use of cash in
operations as noted above due to the lack of cash generating revenue and the
continued high rate of corporate expenses. With the April 2005 split off of
Triad, we currently have no operating business and no cash is being generated
from revenues. Accordingly, our working capital will decline as we address our
new business development initiatives.
We have no material commitments for capital expenditures. Capital expenditures
for the three months ended March 31, 2005 amounted to $19,665. We may require
additional facilities and support equipment if our growth rate continues at the
current rate.
We currently do not have a stock option or stock purchase plan. We also
currently do not have any employee benefit plans that would require the use of
our securities.
Off Balance-Sheet Arrangements
The Company has no material off-balance sheet arrangements as of March 31, 2005.
Item 3. Controls and Procedures
(a) As of March 31, 2005, the Chief Executive Officer and Chief Financial
Officer of the Company, with the participation of the Company's
management, carried out an evaluation of the effectiveness of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer believe that, as of the date of the evaluation,
the Company's disclosure controls and procedures are effective in making
known to them material information relating to the Company (including its
consolidated subsidiaries) required to be included in this report.
(b) There were no changes in the Company's internal controls or in other
factors that could significantly affect internal controls, known to the
Chief Executive Officer or the Chief Financial Officer, subsequent to the
date of the evaluation.
19
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
From time to time, we are involved in litigation concerning our business
operations. Management believes that the litigation in which we are currently
involved is not reasonably likely to be material to its financial condition,
results of its operations or its cash flows, other than the litigation noted
below.
SEC Investigation
- -----------------
On June 24, 2003 the Securities and Exchange Commission ("SEC") issued a formal
order of investigation, authorizing the investigation of certain securities
matters. The SEC staff has taken the testimony of certain officers and has
informed us that it intends to take additional testimony. The SEC staff has also
issued additional requests for the voluntary production of documents. Prior to
the issuance of the order, we had voluntarily provided documents and information
to the SEC staff in response to informal, non-public inquiries by the staff. On
April 8th, 2005 the Independent Committee of the Board of Directors turned over
the results of its investigation to the SEC and we intend to continue to fully
cooperate with the SEC in its investigation.
Prosper, Inc. Complaint
- -----------------------
Subsequent to the EPMG asset disposition, as discussed above, the former
principals, under the new name of Prosper, Inc. filed a complaint that seeks a
refund to the benefit of Prosper of certain reserve funds amounting to $580,000
that are due to former vendors. Under the EPMG Settlement Agreement, we agreed
to pay certain reserves potentially owing to third-party vendors upon specified
conditions. The lawsuit alleges that we have breached the obligation to pay
these reserves, but we contest that the conditions for these payments have been
satisfied and/or contest the amounts and payees of the payments that are alleged
to be owed by us.
Although we believe that these allegations do not have any merit, if Prosper,
Inc. were to prevail in its complaint there would be serious negative financial
consequences resulting from utilization of our cash reserves. Moreover, such an
action could divert management's time and efforts away from the business of the
Company.
20
Item 3. Defaults upon Senior Securities
(b)There has not been any material arrearage in the payment of dividends
on any preferred stock.
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 on Form 8-K
During the period covered by this report, the Company filed the
following report on Form 8-K:
On February 4th, 2005, the Company filed a Current Report on
Form 8-K under Item 8.01 (Other Events) stating that it had
discovered certain material misrepresentations and omissions
made to the Company in connection with the negotiation and
closing of the acquisition of the business assets of Get In
the Game, Inc., a seminar and online marketing business.
21
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 20, 2005 /s/ Peter M. Peterson
----------------------------------------
Peter M. Peterson
Chairman of the Board,
Chief Executive Officer, and President
/s/ Christopher J. Floyd
----------------------------------------
Christopher J. Floyd
Chief Financial Officer,
Vice President of Finance, and Secretary
22
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
31.1 Certification of Chief Executive Officer of Innovative Software
Technologies, Inc. pursuant to Rule 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer of Innovative Software
Technologies, Inc. pursuant to Rule 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer of Innovative Software
Technologies, Inc. pursuant to 18 U.S.C. 1350.
32.2 Certification of Chief Financial Officer of Innovative Software
Technologies, Inc. pursuant to 18 U.S.C. 1350.
23