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, 2006
|_| 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1413 South Howard Avenue, Suite 220, Tampa, FL 33606
---------------------------------------------- -----
(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 56,455,379 shares of common stock, $0.001 par value, outstanding as
of May 24, 2006.
1
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 Sheet as of March 31, 2006 (Unaudited)
and December 31, 2005.................................................................. 3
Condensed Consolidated Statements of Operations (Unaudited) for the Three
Months Ended March 31, 2006 and 2005................................................... 4
Condensed Consolidated Statements of Cash Flow (Unaudited) for the Three
Months Ended March 31, 2006 and 2005................................................... 5
Notes to the Condensed Consolidated Financial Statements (Unaudited)..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 13
Item 3. Controls and Procedures.............................................................. 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 16
Item 3. Defaults upon Senior Securities...................................................... 17
Item 6. Exhibits and Reports on Form 8-K..................................................... 17
Signatures ................................................................................ 18
Index to Exhibits............................................................................. 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2006
(UNAUDITED)
(Unaudited)
March 31,
2006
------------
Cash $ 206,517
Notes receivable 117,008
------------
Total current assets 323,525
------------
PROPERTY AND EQUIPMENT, NET 30,925
DEPOSITS 35,159
------------
Total assets $ 389,609
============
Accounts payable and accrued expenses $ 831,799
Derivative financial instruments 57,871
Convertible debentures 41,918
------------
Total current liabilities 931,588
------------
COMMITMENTS AND CONTINGENCIES
Preferred stock, 25,000,000 shares authorized, $1.00 stated value
Series A, 1,500,000 shares authorized, 450,000 shares outstanding 450,000
Series B, 3,000,000 shares authorized, none outstanding --
Common stock - authorized, 100,000,000 shares of $.001 par
value; issued and outstanding, 56,255,379 shares 56,255
Additional paid-in capital 18,563,716
Accumulated (deficit) (19,611,950)
------------
Total stockholders' equity (541,979)
------------
Total liabilities and stockholders' equity $ 389,609
============
See accompanying notes.
3
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months
Ended March 31,
-----------------------------
2006 2005
------------ ------------
REVENUE
Services revenue $ -- $ 155,200
Product sales -- 113,219
Other revenue -- 8,600
------------ ------------
Total revenue -- 277,019
COST OF REVENUE
Cost of services revenue -- 6,855
Cost of product sales and other revenue -- 4,964
------------ ------------
Total cost of revenue -- 11,819
------------ ------------
GROSS PROFIT -- 265,200
------------ ------------
OPERATING EXPENSES
General and administrative 239,746 857,029
Commissions and other selling expenses -- 162,296
------------ ------------
Total operating expenses 239,746 1,019,325
------------ ------------
INCOME (LOSS) FROM OPERATIONS (239,746) (754,125)
------------ ------------
OTHER INCOME (EXPENSE) NET
Other income 1,586 1,491
Derivative income 7,320 --
Interest expense (8,636) --
Interest income, deposits 28 --
Interest income, financing arrangements -- 11,429
------------ ------------
OTHER INCOME (EXPENSE) NET 298 12,920
------------ ------------
INCOME BEFORE INCOME TAXES (239,448) (741,205)
INCOME TAXES (1,703) --
------------ ------------
NET INCOME (LOSS) (241,151) (741,205)
UNDECLARED PREFERRED STOCK DIVIDENDS (4,500) (4,500)
------------ ------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (245,651) $ (745,705)
============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.00) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN BASIC AND DILUTED PER SHARE CALCULATION 56,067,036 55,586,198
============ ============
See accompanying notes.
4
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
------------------------
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash flows from operating activities $ 192,854 $(602,724)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received on notes receivable from financed sales 333 242,617
Increase in notes receivable from new financed sales -- (222,601)
Investment (117,008) (5,352)
Purchase of fixed assets -- (19,665)
--------- ---------
Net cash flows from investing activities (116,675) (5,001)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable -- (20,833)
Increase in notes payable 100,000 --
Payments on capital lease obligations -- (1,889)
--------- ---------
Net cash flows from financing activities 100,000 (22,722)
--------- ---------
NET INCREASE (DECREASE) IN CASH 176,179 (630,447)
CASH AT BEGINNING OF PERIOD 30,338 876,472
--------- ---------
CASH AT END OF PERIOD $ 206,517 $ 246,025
========= =========
See accompanying notes.
5
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis Of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) for interim financial
information and Item 310(b) of Regulation S-B. They do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the financial statements of the Company as of December 31,
2005, and for the two years then ended, including notes thereto included in the
Company's Form 10-KSB.
(2) Earnings Per Share
The Company calculates net income (loss) per share as required by Statement of
Financial Accounting Standards (SFAS) 128, "Earnings per Share." Basic earnings
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding for the period. Diluted earnings
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of common shares and dilutive common stock equivalents
outstanding. During periods when anti-dilutive commons stock equivalents are not
considered in the computation.
(3) Stockholders' (Deficit)
In January 2006 the Company issued an aggregate of 1,300,000 shares of common
stock for services rendered. The shares were valued at their fair market value
of $39,000 on the date of issue which amount had been accrued in December 2005.
In January 2006 the Company issued an aggregate of 950,495 shares of common
stock in order to cancel its contract with its CEO "Without Cause" as defined in
his employment contract. The shares were valued at their fair market value of
$28,515 which amount was charged to operations.
In January 2006 the Company issued an aggregate of 3,492,000 shares of common
stock in order to eliminate accrued wages due to officers in the amount of
$174,600 which approximated the fair market value of the shares.
(4) Commitments, Concentrations 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 as of March 31, 2006, are as follows:
6
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating
Year ending December 31: Leases
---------------------
2006 $ 75,150
2007 40,100
2008 --
2009 --
After 2009 --
---------------------
Total noncancelable lease payments $ 115,250
=====================
Rent expense under all operating leases for the period ended March
31, 2006 and 2005, was $15,701. In December 2004 our former
subsidiary Triad Media, Inc. entered into a lease for approximately
3,606 square feet in Kansas City, Missouri with a term beginning
February 1, 2005 and ending January 31, 2010 and a base rent of
$3,756 per month which the Company guaranteed on behalf of Triad
Media, Inc. Following the sale of Triad Media in April 2005, the
Company accrued for this potential liability which accrual amounted
to $59,892 at December 31, 2005. On February 28, 2006, the Company
was informed that Triad Media, Inc. had abandoned the premises. We
are currently negotiating a settlement payment with the landlord but
there can be no assurance that such negotiations will be successful
or that the amount accrued thus far will be sufficient.
(b) SEC Investigation:
On June 24, 2003, 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.
(c) Litigation:
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 8, 2005, the Independent Committee
of the Board of Directors turned over the results of its
investigation to the SEC. We intend to continue to fully cooperate
with the SEC in its investigation.
Prosper, Inc. Complaint
Subsequent to the spin off of EPMG, 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.
7
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Kansas City Explorers
The Company is a defendant in a lawsuit in the Circuit Court of
Platte County, Missouri, "Kansas City Explorers vs. Innovative
Software" case no. 04CV82050 in which the claimant is seeking money
for advertising which it alleges is still due, and have alleged
damages of $50,028. The claimant has been court ordered to produce
answers to certain discovery requests of the Company which they have
failed to produce. Management intends to aggressively defend the
claim based upon the lack of contract between the parties, lack of
proof of damages, as well as minimal proof of advertising services
actually performed for Company products and services.
(5) Convertible Notes and Derivative Instrument Liabilities
Derivative financial instruments
The Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.
The Company reviews the terms of convertible debt and equity instruments issued
to determine whether there are embedded derivative instruments, including the
embedded conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. In circumstances where the
convertible instrument contains more than one embedded derivative instrument,
including the conversion option, that is required to be bifurcated, the
bifurcated derivative instruments are accounted for as a single, compound
derivative instrument. Also, in connection with the sale of convertible debt and
equity instruments, the Company may issue freestanding options or warrants that
may, depending on their terms, be accounted for as derivative instrument
liabilities, rather than as equity. The Company may also issue options or
warrants to non-employees in connection with consulting or other services they
provide.
Certain instruments, including convertible debt and equity instruments and the
freestanding options and warrants issued in connection with those convertible
instruments, may be subject to registration rights agreements, which impose
penalties for failure to register the underlying common stock by a defined date.
If the convertible debt or equity instruments are not considered to be
"conventional", then the existence of the potential cash penalties under the
related registration rights agreement requires that the embedded conversion
option be accounted for as a derivative instrument liability. Similarly, the
potential cash penalties under the related registration rights agreement may
require us to account for the freestanding options and warrants as derivative
financial instrument liabilities, rather than as equity. In addition, when the
ability to physical or net-share settle the conversion option or the exercise of
the freestanding options or warrants is deemed to be not within the control of
the company, the embedded conversion option or freestanding options or warrants
may be required to be accounted for as a derivative financial instrument
liability.
8
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Derivative financial instruments are initially measured at their fair value. For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income. For option-based derivative financial instruments,
the Company uses the Black-Scholes option pricing model to value the derivative
instruments.
If freestanding options or warrants were issued in connection with the issuance
of convertible debt or equity instruments and will be accounted for as
derivative instrument liabilities (rather than as equity), the total proceeds
received are first allocated to the fair value of those freestanding
instruments. If the freestanding options or warrants are to be accounted for as
equity instruments, the proceeds are allocated between the convertible
instrument and those derivative equity instruments, based on their relative fair
values. When the convertible debt or equity instruments contain embedded
derivative instruments that are to be bifurcated and accounted for as
liabilities, the total proceeds allocated to the convertible host instruments
are first allocated to the fair value of all the bifurcated derivative
instruments. The remaining proceeds, if any, are then allocated to the
convertible instruments themselves, usually resulting in those instruments being
recorded at a discount from their face amount.
To the extent that the fair values of the freestanding and/or bifurcated
derivative instrument liabilities exceed the total proceeds received, an
immediate charge to income is recognized, in order to initially record the
derivative instrument liabilities at their fair value.
The discount from the face value of the convertible debt, together with the
stated interest on the instrument, is amortized over the life of the instrument
through periodic charges to income, usually using the effective interest method.
When the instrument is convertible preferred stock, the dividends payable are
recognized as they accrue and, together with the periodic amortization of the
discount, are charged directly to retained earnings.
The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed periodically,
including at the end of each reporting period. If re-classification is required,
the fair value of the derivative instrument, as of the determination date, is
re-classified. Any previous charges or credits to income for changes in the fair
value of the derivative instrument are not reversed. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based
on whether or not net-cash settlement of the derivative instrument could be
required within twelve months of the balance sheet date.
In January 2006 the Board of Directors of the Company approved the raising of up
to $1,000,000 via the issuance of promissory notes to accredited investors.
These notes have a term of one year, are convertible into shares of common stock
of the Company at a 30% discount to a future Qualified Financing (as therein
described), and have 20% warrant coverage at a strike price of $0.05. As of
March 31, 2006, the Company had raised $100,000 under such notes.
The warrants have been accounted for as derivative instrument liabilities (see
below) in accordance with EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed To, and Potentially Settled In, a Company's Own Common
Stock" (EITF 00-19). Accordingly, the initial fair value of the warrants,
amounting to an aggregate of $1,620 was recorded as a derivative instrument
liability. The fair value of the warrants was determined using the Black-Scholes
valuation model, based on the market price of the common stock on the dates the
Warrants were issued, an expected dividend yield of 0%, a risk-free interest
rate based on constant maturity rates published by the U.S. Federal Reserve,
applicable to the life of the Warrants, expected volatility of 114%, and the
five year life of the Warrants. The Company is required to re-measure the fair
value of the warrants at each reporting period.
9
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Because the conversion price of the Convertible Notes is not fixed, the
Convertible Notes are not "conventional convertible debt" as that term is used
in EITF 00-19. Accordingly, the Company is required to bifurcate and account
separately for the embedded conversion options, together with any other
derivative instruments embedded in the Convertible Notes.
The conversion option related to each Convertible Note was bifurcated from the
Convertible Note and accounted for separately as a derivative instrument
liability (see below). The bifurcated embedded derivative instruments, including
the embedded conversion options which were valued using the Flexible Monte Carlo
Simulation methodology, were recorded at their initial fair value of an
aggregate of $63,571.
The discount from the face amount of the Convertible Notes represented by the
value assigned to the Warrants and bifurcated derivative instruments is being
amortized over the period to the due date of each Convertible Note, using the
effective interest method. Amortization for the period ending March 21, 2006 was
$7,109.
A summary of the Convertible Notes and derivative instrument liabilities at
March 31, 2006, is as follows:
Convertible Notes; 10% per annum; due March 30,
2007 $100,000
Less: unamortized discount related to warrants
and bifurcated embedded derivative instruments (58,082)
-----------------
Total carrying value at March 31, 2006 $41,918
=================
Derivative financial instrument liabilities
We use the Black-Scholes valuation model to value the Warrants and the embedded
conversion option components of any bifurcated embedded derivative instruments
that are recorded as derivative liabilities.
In valuing the Warrants and the embedded conversion option components of the
bifurcated embedded derivative instruments, at the time they were issued and at
March 31, 2006, we used the market price of our common stock on the date of
valuation, an expected dividend yield of 0% and the remaining period to the
expiration date of the warrants or repayment date of the Convertible Notes. All
warrants and conversion options can be exercised by the holder at any time.
Because of the limited historical trading period of our common stock, the
expected volatility of our common stock over the remaining life of the
conversion options and Warrants has been estimated at 50%. The risk-free rates
of return used were based on constant maturity rates published by the U.S.
Federal Reserve, applicable to the remaining life of the conversion options or
Warrants.
10
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At March 31, 2006, the following derivative liabilities related to common stock
Warrants and embedded derivative instruments were outstanding:
Exercise Value -
Price Per Value - Issue March 31,
Issue Date Expiry Date Share Date 2006
- ----------------- --------------- ---------------------------- ------------------ ----------------- -----------------
1/20/2006 1/20/2011 120,000 warrants $ 0.05 $ 360 $ 540
2/10/2006 2/10/2011 280,000 warrants $ 0.05 $ 1,260 $ 1,260
-----------------
Fair value of freestanding derivative instrument liabilities for warrants $ 1,800
-----------------
Value -
Value - Issue March 31,
Issue Date Expiry Date Date 2006
- ----------------- --------------- ---------------------------- ------------------ ----------------- -----------------
1/20/2006 1/20/2011 120,000 warrants $ 23,571 $ 16,071
2/10/2006 2/10/2011 280,000 warrants $ 40,000 $ 40,000
-----------------
Fair value of bifurcated embedded derivative instrument liabilities
associated with the above convertible notes $ 56,071
-----------------
Total derivative financial instruments $ 57,871
=================
The following table reflects the number of common shares into which the
aforementioned derivatives are indexed at March 31, 2006:
Common shares indexed:
Embedded derivative instruments 3,571,429
Freestanding derivatives (warrants) 400,000
-----------
3,971,429
===========
(7) Basis of Reporting
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 spun off its EPMG operations, which
represented a significant portion of its revenue producing operations to certain
shareholders of the Company. During April 2005, the Company spun off Triad
Media, further curtailing future operations. The Company has incurred a loss of
$241,151 and has working capital and stockholder deficits of $608,063 and
$541,980 at March 31, 2006. In addition, the Company currently has no revenue
generating operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
11
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Management is currently engaged in seeking merger and acquisition candidates
within the technologies industry, which have revenue producing and cash
generating operations. While management has identified a number of 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.
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.
(8) Subsequent Events
In April 2006 the Company issued 200,000 shares of its common stock to settle an
outstanding legal account payable of $45,073. The shares were issued pursuant to
the exemption under Section 4(2) of the Securities Act of 1933, as amended,
based on the recipient's access to information regarding the Company and its
sophistication in making investments of this nature.
12
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-KSB.
Overview
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 December 31, 2006 and 2005. 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 spun off
assets, liabilities and operations of EPMG located in Utah pursuant to a
settlement agreement with the former principals, but did not exit the business
at that time. In March of 2005, our board of directors determined to exit 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 and the medical market, and spun off Triad in April
2005. As a result, effective April 20, 2005, we were no longer engaged in this
business and had no continuing involvement with EPMG or Triad.
For the remainder of the 2005 calendar year the Company had no business
operations and sought to engage in a business combination with a company with
operations. As a result of the sale of Triad we are no longer engaged in the
development, marketing and delivery of business-type educational programs and
also had no continuing involvement with the business of EPMG.
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's
critical accounting policies are discussed in its annual report on Form 10-KSB
for the year ended December 31, 2005.
13
Results of Operations
Three months ended March 31, 2006 compared to the three months ended March 31,
2005.
Revenues
Revenues for the three months ended March 31, 2006 and 2005 were $-0- and
$277,019, respectively. The Company currently has no operations and is seeking
an appropriate acquisition candidate.
Cost of Sales and Margins
Cost of sales for the three months ended March 31, 2006 and 2005 were $-0- and
$11,819, respectively.
General and Administrative Expenses
General and administrative expenses for the three months ended March 31, 2006
and 2005 were $239,746 and $857,029, respectively, representing a decrease of
72%. General and administrative expenses consisted primarily of salaries and
wages, professional fees, rent, travel expenses, payroll taxes, telephone
expenses and other general and administrative expenses.
Commissions and Other Selling Expenses
Selling expenses for the three months ended March 31, 2006 and 2005 were $-0-
and $162,296, respectively. Selling expenses consisted primarily of commissions
paid to sales associates as well as marketing and advertising expenses
associated with key products and services.
Other Income (Expense)
Other income (expense), for the three months ended March 31, 2006 and 2005 were
$298 and $12,920, respectively, representing a decrease of 98%. The decrease is
primarily attributable to a decrease in interest income from our financing notes
receivable balance.
Income Taxes
Our provision from income taxes amounted to $1,703 for the three months ended
March 31, 2006 compared to a provision of $-0- for the three months ended March
31, 2005.
Net Loss
Our net loss for the three months ended March 31, 2006 amounted to ($241,151),
compared to a net loss of ($741,205) for the period ended March 31, 2005.
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, 2006, we incurred a loss of ($241,151) and
working capital and stockholder deficits of $608,063 and $541,980, respectively.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern.
14
Management is currently seeking merger and acquisition candidates within the
technologies industry, which have revenue producing and cash generating
operations. 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, 2006 we had cash and other reserves amounting to $206,517. 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, 2006 we had current assets of $323,525, which represents a decrease
of $290,166 over current assets as of December 31, 2005. At March 31, 2006 we
had cash on hand of $206,517, which represents an increase of $176,179 over the
balances as of December 31, 2005.
At March 31, 2006 we had current liabilities of $931,588 which represents a
decrease of $256,143 over current liabilities as of December 31, 2005.
At March 31, 2006 our working capital deficit increased to ($608,063) from
($574,039) as of December 31, 2005. 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, 2006 amounted to $-0-.
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, 2006.
Item 3. Controls and Procedures
(a) 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 as of March 31, 2006.
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.
15
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.
Kansas City Explorers
The Company is a defendant in a lawsuit in the Circuit Court of Platte County,
Missouri, "Kansas City Explorers vs. Innovative Software" case no. 04CV82050 in
which the claimant is seeking money for advertising which it alleges is still
due, and have alleged damages of $50,028. The claimant has been court ordered to
produce answers to certain discovery requests of the Company which they have
failed to produce. Management intends to aggressively defend the claim based
upon the lack of contract between the parties, lack of proof of damages, as well
as minimal proof of advertising services actually performed for Company products
and services.
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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.
The exhibits required by this item are listed in the Index to Exhibits set
forth at the end of this Form 10-QSB.
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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 24, 2006 /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
18
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.
19