UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Quarter Ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 000-1084047
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
California 95-4691878
- ----------------------------------- -----------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
204 NW Platte Valley Drive
Riverside, MO 64150
(Address of principal executive offices)
(816) 583-8030
(Issuer's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or such shorter period that the Registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
There were 48,307,512 shares of common stock, $0.001 par value, outstanding as
of May 7, 2002.
1
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
Page
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2002 (Unaudited)
and December 31, 2001.................................................................. 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 2002 and 2001............................................. 4
Condensed Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2002 and 2001............................................. 5
Condensed Consolidated Statement of Stockholders' Equity/(Deficiency) (Unaudited) for the
Three Months Ended March 31, 2002...................................................... 6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2002 and 2001............................................. 7
Notes to the Condensed Consolidated Financial Statements (Unaudited)..................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 16
PART II - OTHER INFORMATION
Item 2. Changes in Securities................................................................. 18
Item 6. Exhibits and Reports on Form 8-K...................................................... 18
Signatures ................................................................................ 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2002 2001
------------- --------------
ASSETS
Current Assets
Cash...... ................................................................. $ 148,240 $ 282,307
Accounts receivable, net of allowance for doubtful accounts
of $16,000 and $4,000, respectively........................................ 529,336 49,392
Other receivables.......................................................... 1,497 2,543
Investments - Available for sale.......................................... 126,500 549,896
Prepaid expenses........................................................... - 6,571
Other assets............................................................... 304,750 -
Deferred income tax asset.................................................. 812 812
------------- --------------
Total Current Assets................................................... 1,111,135 891,521
------------- -------------
Property and Equipment, Net..................................................... 171,023 61,512
------------- -------------
Other Assets
Goodwill .................................................................. 13,549,932 13,549,932
Other assets............................................................... - 23,810
Deposit .................................................................. 4,491 4,491
Deferred income tax asset - non-current.................................... 2,908 2,908
------------- -------------
Total Assets .................................................................. $ 14,839,489 $ 14,534,174
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable - Line of credit.............................................. $ 50,000 $ -
Current maturities of long-term debt....................................... 8,003 -
Trade accounts payable and accrued expenses................................ 440,583 156,014
Accrued federal and state income tax....................................... 134,674 -
Reserve for sales returns and allowances................................... 100,000 100,000
------------- -------------
Total Current Liabilities.............................................. 733,260 256,014
------------- -------------
Long-term debt, net of current maturities....................................... 40,957 -
------------- -------------
Stockholders' Equity
Preferred stock - no par; $1.00 stated value; 25,000,000 shares authorized
Series A preferred stock; 1,850,000 shares issued and outstanding........ 1,850,000 1,850,000
Series B preferred stock; 248,491 shares issued and outstanding.......... 248,491 248,491
Common stock - $0.001 par value; 60,000,000 shares authorized
48,289,283 and 48,285,283 shares issued and outstanding, respectively.... 48,289 48,285
Additional paid-in-capital................................................. 12,640,875 12,626,679
Accumulated comprehensive loss............................................. (627,750) (204,354)
Accumulated deficit........................................................ (94,633) (290,941)
------------- --------------
Total Stockholders' Equity...................................................... 14,065,272 14,278,160
------------- -------------
Total Liabilities and Stockholders' Equity...................................... $ 14,839,489 $ 14,534,174
============= =============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
Innovative Software Technologies, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months
Ended March 31,
2002 2001
Sales................................................ $ 2,794,696 $ -
Cost of Sales........................................ 1,122,455 -
------------ -------------
Gross Profit......................................... 1,672,241 -
------------ -------------
Operating Expenses
Selling......................................... 600,891 1,000
General and administrative...................... 742,070 17,831
------------ -------------
Total Operating Expenses........................ 1,342,961 18,831
------------ -------------
Income/(Loss) From Operations........................ 329,280 (18,831)
------------ --------------
Other Income......................................... 1,702 -
------------ -------------
Net Income Before Income Taxes....................... 330,982 -
------------ -------------
Income Tax Expense................................... 134,674 -
------------ -------------
Net Income........................................... $ 196,308 $ (18,831)
============ ==============
Basic and Diluted Income per Share................... $ 0.00 0.00
============ ==============
Weighted Average Number of Common
Shares Outstanding Used in Per Share
Calculation - Basic and Diluted..................... 48,287,416 43,593,213
============ ==============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months
Ended March 31,
2002 2001
----------- -------------
Net income/(loss).................................... $ 196,308 $ (18,831)
Other comprehensive loss:
Unrealized loss on investments....................... (423,396) (25,200)
------------ -------------
.........
Comprehensive loss................................... (227,088) (44,031)
============ =============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
Total
Preferred Stock Common Stock Additional Accumulated Stockholders'
----------------------- --------------------- Paid in Compreh- Accumulated Equity
Shares Amount Shares Amount Capital ensive loss Deficit (Deficit)
--------- ----------- ---------- --------- ------------ ------------ ------------ -------------
Balance - December 31, 2001 2,098,491 $ 2,098,491 48,285,283 $ 48,285 $ 12,626,679 $(204,354) $(290,941) $ 14,278,160
Issuance of common stock
for Services provided...... - - 4,000 4 14,196 - - 14,200
Unrealized loss
on investments - - - - - (423,396) - (423,396)
Net income for the
three months ended
March 31, 2002............. - - - - - - 196,308 196,308
--------- ----------- ---------- -------- ------------ ---------- ----------- ------------
Balance - March 31, 2002.... 2,098,491 $ 2,098,491 48,289,283 $ 48,289 $ 12,640,875 $ (627,750) $(94,633) $ 14,065,272
---------------------- ---------- -------- ------------ ---------- ----------- ------------
The accompanying notes are an integral part
of these condensed consolidated financial statements.
6
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months
Ended March 31,
2002 2001
--------------- ----------------
Cash Flows From Operating Activities
Net income/(loss)........................................................$ 196,308 $ (18,831)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization........................................... 17,166 630
Allowance for doubtful accounts......................................... 12,000 -
Non-cash expenses....................................................... 14,200 -
Changes in operating assets and liabilities:
Accounts receivable................................................... (491,944) -
Prepaid expenses...................................................... 6,571 -
Other receivables..................................................... 1,046 -
Other Assets.......................................................... (280,940) -
Accounts payable and accrued expenses................................. 284,569 -
Accrued federal and state income tax.................................. 134,674 -
--------------- -----------------
Net Cash Used In Operating Activities................................... (106,350) (18,201)
--------------- ------------------
Cash Flows Used In Investing Activities
Capital expenditures.................................................... (126,677) -
--------------- ----------------
Net Cash Used In Investing Activities................................... (126,677) -
---------------- ----------------
Cash Flows From Financing Activities
Proceeds from borrowings under line of credit........................... 50,000 -
Proceeds from borrowing under note payable.............................. 50,877 -
Repayments on notes payable............................................. (1,917) 35,503
--------------- -----------------
Net Cash Provided by Financing Activities............................... 98,960 35,503
--------------- -----------------
Net (Decrease)/Increase in Cash and Cash Equivalents....................... (134,067) 17,302
Cash and Cash Equivalents at Beginning of Year............................. 282,307 888
--------------- -----------------
Cash and Cash Equivalents at End of Period................................$ 148,240 $ 18,190
================ =================
Supplemental Cash Flow Information:
Unrealized loss on securities available for sale.......................$ (423,396) $ -
================ =================
The accompanying notes are an integral part
of these condensed consolidated financial statements.
7
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - COMPANY DESCRIPTION
Innovative Software Technologies, Inc. (Innovative) is a software
company, operating in one business segment, specializing in the
aggregation and distribution of business-to-business and
business-to-consumer eService platforms. Through its acquisition of
Hackett Media, Inc. on April 16, 2001, the Company has four main products
that consist of The Financial Toolkit 1.0, an integrated financial
services educational program; Bizkit 1.0, a turnkey e-commerce solution
targeted at small businesses which provides all the resources necessary
to successfully plan, launch, and grow an online presence; Skills in
Demand, an eLearning certification course catering to Information Systems
and Internet Professionals; and etaxnet, a provider of online tax and
consulting services.
On April 16, 2001, Innovative, with immaterial net assets, acquired 100%
of the outstanding common stock of Hackett Media, Inc. (Hackett). The
acquisition resulted in the owners and management of Hackett having
effective operating control of the combined entity after the acquisition,
with the existing Innovative investors continuing as only passive
investors. Accordingly, these condensed consolidated financial statements
should be read in conjunction with the Company's financial statements and
notes thereto included in the Form 8-K filed April 25, 2001, and Form
8-K/A filed June 15, 2001.
Under accounting principles generally accepted in the United States, the
above noted acquisition is considered to be a capital transaction in
substance, rather than a business combination. That is, the acquisition
is equivalent to the issuance of stock by Hackett for the net monetary
assets of Innovative, accompanied by a recapitalization, and is accounted
for as a change in capital structure. Accordingly, the accounting for the
acquisition is identical to that resulting from a reverse acquisition,
except that no goodwill intangible is recorded. Under reverse takeover
accounting, the post reverse-acquisition comparative historical financial
statements of the "legal acquirer" (Innovative Software Technologies),
are those of the "legal acquiree" (Hackett) (i.e. the accounting
acquirer). The Securities and Exchange Commission requires that capital
transactions consummated after year end but prior to the issuance of the
consolidated financial statements should be given retroactive effect as
if the transaction had occurred on December 31, 2000.
On December 31, 2001, the Company purchased all of the outstanding shares
of Energy Professional Marketing Group, Inc.'s (EMPG), a technology
marketing company specializing in product fulfillment for outside vendors
and technology and database marketing, based in Orem, UT. In connection
with the acquisition, the Company issued 1,500,000 and 3,529,412 of
Series A preferred and common shares, respectively.
8
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - COMPANY DESCRIPTION - Continued
The purchase price for the acquisition above has been allocated on the
basis of the fair value on the acquisition dates as follows:
Assets acquired:
Goodwill............................................... 13,549,932
Net assets acquired.................................... 25,068
---------------
Total Assets Acquired.................................. 13,575,000
==============
Total Purchase Price................................... 13,575,000
==============
The acquisition described above was accounted for as a purchase
transaction in accordance with Statements of Financial Accounting
Standards No. 141 (SFAS 141), "Business Combinations," and, accordingly,
the results of operations and assets and liabilities of the acquired
company are included in the consolidated financial statements from their
respective acquisition dates.
A summary of the company's significant accounting policies applied in the
preparation of the accompanying financial statements follows.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
1. Interim Condensed Financial Statements
The accompanying condensed consolidated financial statements are
unaudited. In the opinion of management, all necessary adjustments
(which include only normal recurring adjustments) have been made to
present fairly the financial position, results of operations and cash
flows for the periods presented. Certain information and disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted. Accordingly, these condensed consolidated
financial statements should be read in conjunction with the Company's
financial statements and notes thereto included in the Form 10-KSB
dated December 31, 2001. The results of operations for the three months
ended March 31, 2002 are not necessarily indicative of the operating
results to be expected for the full year.
2. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001.
SFAS 142 is effective for fiscal years beginning after December 15,
2001; however, certain provisions of this Statement apply to goodwill
and other intangible assets acquired between July 1, 2001 and the
effective date of SFAS 142. Major provisions of these Statements and
their effective dates for the Company are as follows:
9
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
o All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interests method of
accounting is prohibited except for transactions initiated before July
1, 2001.
o Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability.
o Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized.
o Effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization.
o Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
o All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
On January 1, 2002, the Company adopted SFAS 142 and as required
discontinued amortization of goodwill and certain intangible assets
determined to have indefinite useful lives acquired prior to July 1,
2001. This statement also required that within the first interim period
of adoption, the intangible assets with indefinite lives should be
tested for impairment as of the date of adoption, and that if any
impairment results, it should be recognized as a change in accounting
principle. Additionally, SFAS 142 requires that, within six months of
adoption, goodwill be tested for impairment at the reporting unit level
as of the date of adoption. If any impairment is indicated to have
existed upon adoption, it should be measured and recorded before the
end of the year of adoption. SFAS 142 requires that any goodwill
impairment loss recognized as a result of initial application be
reported in the first interim period of adoption as a change in
accounting principle and that the income per share effects of the
accounting change be separately disclosed. The Company has not yet
determined the effect of these new impairment tests related to goodwill
on its consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS 143, Accounting for Asset
Retirement Obligations. SFAS 143 applies to all entities, including
rate-regulated entities, that have legal obligations associated with
the retirement of a tangible long-lived asset that result from
acquisition, constructions or development and (or) normal operations of
the long-lived asset. The application of this Statement is not limited
to certain specialized industries, such as the extractive or nuclear
industries. This Statement also applies, for example, to a company that
operates a manufacturing facility and has a legal obligation to
dismantle the manufacturing plant and restore the underlying land when
it ceases operation of that plant. A liability for an asset retirement
obligation should be recognized if the obligation meets the definition
of a liability and can be reasonable estimated. The initial recording
should be at fair value. SFAS 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The provisions of the Statement are not
expected to have a material impact on the financial condition or
results of operations of the Company.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 retains the existing
requirements to recognize and measure the impairment of long-lived
assets to be held and used or to be disposed of by sale. However, SFAS
144 makes changes to the scope and certain measurement requirements of
existing accounting guidance. SFAS 144 also changes the requirements
relating to reporting the effects of a disposal
10
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
or discontinuation of a segment of a business. SFAS 144 is effective
for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The
adoption of this Statement did not have a significant impact on the
financial condition or results of operations of the Company.
3. Principles of Consolidation
The accompanying consolidated balance sheet includes the accounts of
Innovative Software Technologies, Inc. and the accounts of its
wholly-owned subsidiary Energy Professional Marketing Group, Inc.
(EPMG) as of and for the quarter ended March 31, 2002. All significant
intercompany transactions and balances have been eliminated in
consolidation.
4. Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
97-2, Software Revenue Recognition, which states that revenue is
recognized after delivery of the product. In most cases this occurs the
same day payment is received from our customers. The Company also
reserves for sales returns and allowances based upon historical
experience.
The Company provides support services for some of its products. The
associated revenue is recognized over the term of the sessions which
are typically six weeks in duration.
5. Investments in Equity Securities
All equity securities are classified as available-for-sale. These
securities have been adjusted to their fair market value based upon
quoted market prices. Unrealized holding gains and losses are reported
as a separate component of Stockholder's equity. Unrealized holding
losses amounted to $627,750 and $204,354 as of March 31, 2002 and
December 31, 2001, respectively. Investments consist of 75,000 shares
of common stock of Ensurge, Inc. and 1,900,000 shares of common stock
of Knowledge Transfer Systems, Inc.
6. Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is recognized using the straight-line method
over the estimated useful lives of the assets, which range from three
to seven years. Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful lives or
remaining lease term.
7. Use of Estimates
To comply with accounting principles generally accepted in the United
States, the Company makes estimates and assumptions that effect the
amounts reported in the financial statements and disclosures made in
the accompanying notes. Estimates are used for, but not limited to
reserves for product returns, the collectibility of accounts receivable
and deferred taxes. The Company also uses estimates to determine the
remaining economic lives and carrying value of goodwill and fixed
assets. Despite our intention to establish accurate estimates and
assumptions, actual results may differ from our estimates.
11
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
8. Software Development Costs
In accordance with Statement of Financial Accounting Standards, or SFAS
No. 86, "Accounting for Costs of Computer Software to be Sold, Leased,
or otherwise Marketed," software development costs are expensed as
incurred until the product is available for general release to
customers. To date, the Company's software has been available for
general release concurrent with the establishment of technological
feasibility and, accordingly, no developments costs have been
capitalized.
The Company capitalizes costs related to the development of computer
software developed or obtained for internal use in accordance with the
American Institute of Certified Public Accountants Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." Costs incurred in the application
development phase are capitalized and amortized over their useful life,
not to exceed five years.
9. Advertising Costs
Advertising and promotion costs are expensed as incurred. Advertising
costs charged against income for the three months ended March 31, 2002
and 2001, were approximately $144,000 and $1,000, respectively.
10. Impairment and Long-term Assets
The Company will regularly perform reviews to determine if the carrying
values of our long-lived assets are impaired. The reviews look for the
existence of facts or circumstances, either internal or external, which
indicate that the carrying value of the asset cannot be recovered.
There have been no events or circumstances indicating the possible
impairment of our long-lived asset as of March 31, 2002.
NOTE C - MARKETABLE SECURITIES
The Company currently holds two marketable securities, which the Company
acquired in connection with strategic business transactions and relationships.
Our available-for-sale equity securities are carried at fair value and
unrealized gains or losses are included in stockholders' equity. The Company
held the following marketable securities at March 31, 2002 and December 31,
2001. The cost basis of our marketable securities reflects adjustments for other
than temporary impairments in value as well as sales of securities.
12
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Available-for-sale Equity Cost Gross Unrealized Estimated
Securities Basis Gains Losses Fair Value
December 31, 2001
EnSurge, Inc. common stock $ 26,250 $ - $ (25,950) $ 300
KT Solutions common stock 728,000 10,500 (188,904) 549,596
---------- ----------- ---------- ---------
$ 754,250 $ 10,500 $(214,854) $ 549,896
========= =========== ========== =========
March 31, 2002
EnSurge, Inc. common stock $ 26,250 $ - $ (26,100) $ 150
KT Solutions common stock 728,000 - (601,650) 126,350
---------- ----------- ---------- ---------
$ 754,250 $ - $(627,750) $ 126,500
========== =========== ========== =========
The KT Solutions common stock was received in consideration for the sale of four
software coaching platforms to Ensurge, Inc. These securities were recorded at a
30% discount due to restrictions and limitations contained in Rule 144 of the
Securities and Exchange Commission. The primary restriction relates to the one
year holding period of the securities after the effective date of sale.
These securities we hold are traded on the OTC Bulletin Board. All of our
marketable securities are stocks of high technology companies whose market
prices have been extremely volatile. The market prices of these companies'
stocks have declined substantially the past two years. The market prices of
these stocks could continue to decline. These declines could result in a
material reduction in the carrying value of these assets and have a negative
impact on our operating results and financial condition. If our
available-for-sale securities experience further declines in fair value that are
considered other than temporary, the Company will reflect the additional loss in
our net income in the period when subsequent permanent impairment becomes
apparent.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is recognized using the straight-line method over the estimated
useful lives of the assets, which range from 3 to 7 years. Leasehold
improvements are amortized using the straight-line method over the lesser of the
estimated useful lives or remaining lease term. Property and equipment consist
of the following:
March 31, December 31,
2002 2001
---------------- --------------
Machinery and Equipment................................$ 162,973 $ 55,615
Furniture and Fixtures................................. 37,775 18,740
Computer Software...................................... 5,951 5,667
Leasehold improvements................................. 2,877 2,877
-------------- --------------
....................................................... 209,576 82,899
Less: Accumulated depreciation......................... (38,553) (21,387)
--------------- --------------
Net Property and Equipment.............................$ 171,023 $ 61,512
============== ==============
Depreciation and amortization expense for the three months ended
March 31, 2002 and 2001 was $17,166 and $630 respectively.
13
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - NOTES PAYABLE
March 31, December 31,
2002 2001
-------------- ---------------
Notes payable, financial institution, principal and accrued interest at
7.78% payable in monthly installments of principal and interest of $217 to
$655 maturing from
November 2006 to February 2007 48,960 -
--------- ---------
48,960 -
Less Current Portion 8,003 -
--------- ---------
Notes Payable - Long-Term $ 40,957 $ -
========= =========
The Company has an unsecured line of credit facility with a financial
institution for borrowings up to $50,000. Borrowings under the line bear
interest at Prime plus 2% (the Prime rate of interest as of March 31, 2002 was
4.75%). As of March 31, 2002, there was no available credit on the facility.
NOTE F - Capital Transactions
Stock-split - Innovative's Board of Directors authorized a three-for-one stock
split on July 11, 2001. This was affected by distributing a 200% stock dividend
on August 10, 2001 to stockholders of record on July 31, 2001. All share and per
share amounts referred to in the financial statements and notes have been
restated to reflect this stock split.
Stock issued for services - The Company issued 4,000 shares of its common stock
at a fair market value of $3.55 per share on February 12, 2002. Shares were
issued as compensation expense for the quarter ended March 31, 2002.
Finance Agreement - The Company has financed its operation to date primarily
through a Finance Agreement of convertible debt and securities. The Finance
agreement calls for financing of up to $2.5 million of which $1 million would be
received in increments in 2001, if necessary, and the remaining $1.5 million
would be received based upon the Company's performance. As of March 31, 2002,
$700,000 of the initial $1 million investment was received by the Company. These
proceeds were converted to equity securities during 2001.
During the fourth quarter 2001, all of the common shares issued in connection
with the conversion of debt in connection with the Finance Agreement above were
reissued as Series A preferred shares and common shares as follows: Of the
initial $700,000 invested in 2001, $350,000 was converted to Series A preferred
shares at a stated value of $1 per share. The remaining $350,000 was reissued as
700,000 shares of common stock at $0.50 per share.
NOTE G - Related Party Transactions
On December 31, 2001, a company executive and shareholder converted a note
payable amounting to $248,491 to Series B preferred stock at a conversion rate
of a $1 per share stated value. There was no formal maturity date and there was
no interest associated with the note.
14
Innovative Software Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
During 2001, the Company sold four software platforms to NowSeven.com, Inc.,
Ziabon, Inc., SF Acquisition Corp., Inc., and Ishopper Internet Services, Inc.
in exchange for investment securities amounting to $308,000, 133,000, 147,000,
and 140,000, respectively. The President and Chief Executive Officer of the
Company is the former President and Chief Executive Officer of Ensurge, Inc.,
which is the parent company of the above wholly-owned subsidiaries listed above.
NOTE H - COMMITMENTS AND CONTINGENCIES
In March and May 2002, the Company entered into operating leases for certain
office space. Future minimum lease payments under these operating leases as of
March 31, 2002 are as follows:
Year Ending December 31:
2002...........................................................$ 91,167
2003........................................................... 140,600
2004........................................................... 140,600
2005........................................................... 49,433
2006........................................................... -
----------
Total.......................................................... $ 421,800
=========
Rent expense for the three months ended March 31, 2002 and 2001 was
approximately $21,000 and $0, respectively.
NOTE I - PENDING ACQUISITION
On March 12, 2002, the Company signed a definitive agreement to acquire iCrypt,
Inc., a Torrance, California, technology company that has developed a suite of
email encryption software products for both corporate and consumer markets, for
$10,000,000 in restricted preferred stock and the Company's common stock. The
closing of this acquisition is contingent upon due diligence findings and the
ability of the companies to meet certain terms and conditions precedent to
close. There is no assurance that this transaction will be consummated.
15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
When used in this discussion, the words "expect(s)", "feel(s)",
"believe(s)", "will", "may", "anticipate(s)" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties, which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, and are urged to carefully review
and consider the various disclosures elsewhere in this Form 10-QSB.
Results of Operations for the Three Months Ended March 31, 2002 compared to
Three Months Ended March 31, 2001
Revenues
Sales for the three months ended March 31, 2002 and 2001 were $2,794,696 and $0,
respectively, which represents a significant increase from the prior period. The
company's principal source of revenue for the three months ended March 31, 2002
consisted of product sales. The main reason for the increase in product sales
can be attributed to the acquisition of EPMG as of December 31, 2001. This
wholly-owned subsidiary of the Company accounted for $2,007,230 in sales of
existing products and services for the three months ended March 31, 2002.
Cost of Sales
Cost of sales for the three months ended March 31, 2002 and 2001 was $1,122,455
and $0, respectively. Cost of sales for the three months ended 2002 represented
costs associated with the generation of sales leads and the providing of
coaching services to customers that purchase our products. The main reason for
the increase in cost of sales can be attributed to the acquisition of EPMG as of
December 31, 2001. This wholly-owned subsidiary accounted for $997,243 in cost
of sales of existing products and services for the three months ended March 31,
2002.
Selling
Selling expenses for the three months ended March 31, 2002 and 2001 were
$600,891 and $1,000, respectively. These costs consisted primarily of marketing
and advertising expenses associated with key products and commissions. The
advertising and marketing expenses within the current period consisted primarily
of expenses related to internet marketing and sales commissions. The main reason
for the increase in selling costs can be attributed to the acquisition of EPMG
as of December 31, 2001. This wholly-owned subsidiary accounted for $364,352 in
sales commissions and advertising for the three months ended March 31, 2002.
General and Administrative
General and administrative expenses for the three months ended March 31,
2002 and 2001 were $742,070 and $17,831, respectively. The Company's general and
administration expenses during 2002 and 2001 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 EPMG in the current period.
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Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31,
2002 and 2001 was $17,166 and $630, respectively. Depreciation and amortization
expense increased primarily as a result of the additions of computer equipment
and furniture and fixtures.
Income Tax Expense
The Company recorded a tax expense from continued operations of $134,674
and $0 for the three months ended March 31, 2002 and 2001, respectively. The tax
expense in the current period reflects the recording of federal and state taxes
at an effective annual rate of 41%.
Liquidity and Capital Resources
At March 31, 2002, cash was $148,240, a decrease of $134,067 from December
31, 2001. Cash flow used in operations was $106,350 for the three months ended
March 31, 2002. The primary reason for the negative operating cash flow for the
three months ended March 31, 2002, can be attributed to the increase in the
account receivable balance during the current quarter. This was primarily due to
temporary delays in credit card processing. Other assets increased approximately
$280,940 for the quarter ended March 31, 2002. This was primarily due to credit
card processors, utilized by the Company, holding additional funds as a reserve
for the significant volume increase in credit card transactions. In addition,
the Company received proceeds from a line of credit facility during the current
quarter amounting to $50,000. Also, the Company entered into three term loans
during the quarter amounting to $50,878 to purchase vehicles. Stockholders'
equity amounts to $14,065,272 as of March 31, 2002.
The Company was financed, during 2001, primarily through a Finance
Agreement of convertible debt and securities. The Finance agreement called for
financing of up to $2.5 million of which $1 million would be received in
increments in 2001, if necessary, and the remaining $1.5 million would be
received based upon the Company's performance, as defined in the agreement. As
of December 31, 2002, $700,000 of the initial $1 million investment was received
by the Company. These proceeds were converted to equity securities during 2001.
No amounts were advanced to the Company in the current quarter.
In addition, during 2001, all of the common shares issued in connection
with the Finance Agreement above were reissued as Series A preferred shares and
common shares as follows: Of the initial $700,000 invested in 2001, $350,000 was
converted to Series A preferred shares at a stated value of $1 per share. The
remaining $350,000 was reissued as 700,000 shares of common stock at $0.50 per
share.
The Company also issued 4,000 shares of its common stock for various
services provided during the current quarter ended 2002.
The company expects that its existing cash resources, cash flow generated
from operations, and available financing will be sufficient to meet its
operating requirements and ordinary capital spending needs going forward.
However, the Company will continue to seek additional sources of capital for
expansion and possible acquisitions either through its existing Finance
Agreement or through private placements of equity securities.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
The company in the current quarter issued 4,000 shares of common stock as
compensation expense. These securities were issued under the exemption provided
by Section 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K.
None
OTHER ITEMS
There were no other items to be reported under Part II of this report.
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 7, 2002 /s/ Douglas S. Hackett
--------------------------
Douglas S. Hackett
President, Chief Executive Officer and Director
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