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 September 30, 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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 50,651,183 shares of common stock, $0.001 par value, outstanding as
of November 14, 2005.
1
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2005 (Unaudited)
and December 31, 2004.................................................................. 3
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine
Months Ended September 30, 2005 and 2004............................................... 4
Condensed Consolidated Statements of Cash Flow (Unaudited) for the Nine
Months Ended September 30, 2005 and 2004............................................... 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.............................................................. 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 19
Item 3. Defaults upon Senior Securities...................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................................... 20
Signatures ................................................................................ 21
Index to Exhibits............................................................................. 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2005 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 52,916 $ 876,472
Accounts receivable
Merchant accounts receivable -- 87,417
Notes receivable, net of allowance for doubtful
accounts of $3,260 and $245,496, respectively 7,607 594,128
Inventory 5,250 5,471
Refundable income taxes 582,836 582,836
Prepaid expenses and other current assets 34,534 53,745
------------ ------------
Total current assets 683,143 2,200,069
PROPERTY AND EQUIPMENT, NET 40,204 104,424
GOODWILL -- 1,088,686
INVESTMENT -- 178,120
DEPOSITS 35,158 39,215
------------ ------------
Total assets $ 758,505 $ 3,610,514
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,054,695 $ 976,573
Deferred revenue -- 111,492
Notes payable and current maturities of capital lease obligations -- 79,300
------------ ------------
Total current liabilities 1,054,695 1,167,365
CAPITAL LEASE OBLIGATIONS -- 8,249
------------ ------------
Total liabilities 1,054,695 1,175,614
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 7) -- --
STOCKHOLDERS' EQUITY (DEFICIENCY)
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, 50,651,183 and 55,586,198
shares as of September 30, 2005 and December 31, 2004, respectively 50,650 55,586
Additional paid-in capital 18,327,206 18,398,495
Accumulated deficit (19,124,045) (16,469,181)
------------ ------------
Total stockholders' equity (deficiency) (296,190) 2,434,900
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 758,505 $ 3,610,514
============ ============
See accompanying notes.
3
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUE
Services revenue $ -- $ 89,700 $ 157,454 $ 7,655,530
Product sales -- 164,963 118,881 9,118,286
Other revenue -- -- 8,600 748,329
------------ ------------ ------------ ------------
Total revenue -- 254,663 284,935 17,522,145
COST OF REVENUE
Cost of services revenue -- 51,501 8,326 3,543,551
Cost of product sales and other revenue -- 47,399 6,248 4,657,024
------------ ------------ ------------ ------------
Total cost of revenue -- 98,900 14,573 8,200,575
------------ ------------ ------------ ------------
GROSS PROFIT -- 155,763 270,362 9,321,570
------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative 288,953 3,408,669 1,526,035 7,933,848
Commissions and other selling expenses -- 11,856 182,316 4,090,845
Writedown of goodwill -- -- 1,088,686 --
------------ ------------ ------------ ------------
Total operating expenses 288,953 3,420,525 2,797,037 12,024,693
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (288,953) (3,264,762) (2,526,675) (2,703,123)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE) NET
Interest and penalties on late tax payments -- 611,920 (10,000) 566,831
Other income (expense) 18,406 (86,002) (129,423) 1,565
Interest income, deposits -- 33,091 -- 44,061
Interest income, financing arrangements 450 -- 13,942 64,070
Interest expense -- (45,088) -- (50,163)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE) NET 18,856 513,921 (125,481) 626,364
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES (270,097) (2,750,841) (2,652,156) (2,076,759)
INCOME TAXES (243) 266,262 (2,708) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) (270,340) (2,484,579) (2,654,864) (2,076,759)
UNDECLARED PREFERRED STOCK DIVIDENDS (4,500) (20,790) (13,500) (41,580)
------------ ------------ ------------ ------------
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (274,840) $ (2,505,369) $ (2,668,364) $ (2,118,339)
============ ============ ============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.01) $ (0.05) $ (0.05) $ (0.04)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN BASIC AND DILUTED PER SHARE CALCULATION 50,651,183 51,432,769 52,621,574 52,405,484
============ ============ ============ ============
See accompanying notes.
4
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
For the Nine Months
Ended September 30,
------------------------------
2005 2004
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,654,864) $(2,076,760)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities
Depreciation and amortization 11,970 176,219
Bad debt expense 158,211 --
Stock based compensation -- 1,750,000
Write down of Goodwill 1,088,686 --
Write down of Investment 30,464 --
Net change in operating assets and liabilities
Merchant account receivables 84,670 (55,832)
Other receivables (6,413) (143,483)
Inventory (5,250) (1,344)
Prepaid expenses and other current assets 15,537 (86,477)
Accounts payable and accrued expenses 283,880 147,729
Deferred revenue 19,608 (446,594)
Accrued federal and state income tax -- (142,579)
----------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES (973,501) (879,121)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received on notes receivable from financed sales* 337,222 (51,629)
Increase in notes receivable from new financed sales* (222,601) --
Triad Media, Inc. cash balance at sale (11,064) --
Sale of Investment 147,656 --
Purchase of fixed assets (23,946) (178,108)
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES 227,267 (229,737)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable (75,435) --
Payment under Settlement Agreement -- (300,000)
Payments on capital lease obligations (1,888) (42,732)
----------- -----------
Net cash flows from financing activities (77,322) (342,732)
----------- -----------
NET INCREASE (DECREASE) IN CASH (823,556) (1,451,590)
CASH AT BEGINNING OF PERIOD 876,472 3,890,929
----------- -----------
CASH AT END OF PERIOD $ 52,916 $ 2,439,339
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Property and equipment acquired under capital leases $ -- $ 15,192
=========== ===========
EPMG Settlement Transaction, July 1 2004:
Decrease in Operating Assets $ 414,870
Decrease in Fixed Assets (1,722,659)
Decrease in Operating Liabilities (1,385,152)
Decrease in Long-term Liabilities 2,137,128
Increase in Equity 555,812
-----------
$ --
===========
*2004 shows net change in Notes Receivable from Financed Sales
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 and the split-off of its Triad subsidiary,
discussed in Note 3, 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.
Currently the Company has no operating business and is
actively seeking to acquire an operating entity.
(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 September 30, 2005,
and the results of its operations for the three and nine
months ended September 30, 2005 and September 30, 2004, and
the cash flows for the nine months ended September 30, 2005
and September 30, 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 and nine month periods ended September 30, 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.,
SoftSale, Inc., IST Medical Group, Inc., and IST Integrated
Solutions, 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 carry-forwards. 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
6
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BASIS OF PRESENTATION, AND CERTAIN INTERIM ACCOUNTING
POLICIES (CONTINUED)
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.
(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 Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
Income applicable to common stockholders ($ 274,840) ($ 2,505,369) ($ 2,668,364) ($ 2,118,339)
============ ============= ============ ============
Weighted average common shares outstanding 50,651,183 51,432,769 52,621,574 52,405,484
------------ ------------- ------------ ------------
Basic and diluted income per common share ($ 0.01) ($ 0.05) ($ 0.05) ($ 0.04)
------------ ------------- ------------ ------------
(2) LIQUIDITY AND MANAGEMENT'S PLANS
The accompanying condensed 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 sold
certain operating assets and liabilities of its EPMG subsidiary, 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 its Triad Media, Inc. subsidiary, further
curtailing future operations (See Note 3). Currently the Company has no
operations. 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 ($2,654,864) and used cash of ($973,501) in
its operating activities during the nine months ended September 30,
2005. Finally, the Company has a working capital deficiency of
($371,552). These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
Management is currently engaged in seeking merger and acquisition
candidates within the technologies and healthcare industries, which
have revenue producing and cash generating operations. As further
discussed in Note 3, on May 6, 2005, IST Integrated Solutions, Inc. (a
wholly-owned subsidiary) 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. Subsequent to the
closing of the acquisition, the Company discovered certain facts that
constituted undisclosed liabilities and/or breaches of representation
or warranty by Data Tech and the Selling Stockholders under the Asset
Purchase Agreement. Therefore, the Company, Data Tech and the Selling
Stockholders executed a mutual rescission agreement on June 27, 2005
pursuant to which this transaction was rescinded (see Part II, Item
6(b) Reports on Form 8-K).
While management has identified a number of other prospective
acquisition targets, there can be
7
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(2) LIQUIDITY AND MANAGEMENT'S PLANS (CONTINUED)
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.
As of September 30, 2005, the Company has cash and other reserves
amounting to $52,916, certain receivables that are expected to be
collected during the year ended December 31, 2005 amounting to $7,607,
net of allowances, and refundable income taxes, net of interest and
penalties due, of approximately $450,000. 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 fourth 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.
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, SPLIT-OFF OF TRIAD MEDIA, AND ACQUISITION OF
DATA TECH
(a) 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") 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.
Pursuant to the Settlement Agreement, the Company, the Principals, and
their respective affiliates 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.
8
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) EPMG ASSET DISPOSITION, SPLIT-OFF OF TRIAD MEDIA, AND ACQUISITION OF
DATA TECH (CONTINUED)
(b) Split-off of Triad Media, Inc.
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 involved the Company's receipt of its own common stock in
exchange for the subsidiary common stock, the Company recorded this
transaction as an equity transaction on the basis that receipts of a
company's own equity is generally a capital transaction.
(c) Data Tech Rescission
On May 6, 2005, IST Integrated Solutions, Inc., a wholly-owed
subsidiary of the Company ("IST Integrated"), 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,
and Christopher Lietz and Todd Lietz, (collectively the "Selling
Stockholders"). The original 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 the Company's common stock
(valued at the closing market price of the shares on May 6, 2005).
Subsequent to the acquisition the Company discovered certain facts that
constituted undisclosed liabilities and/or breaches of representation
or warranty by Data Tech and the Selling Stockholders under the Asset
Purchase Agreement. On June 27, 2005 the Company and IST Integrated
executed a mutual rescission agreement and release with Data Tech and
the Selling Stockholders the effect of which was to rescind the earlier
acquisition agreement between the parties. No portion of the Purchase
Price or Performance Consideration (as defined in Section 1.4 of the
Asset Purchase Agreement) had been paid by the Company in connection
with the Asset Purchase Transaction. There were no penalties to either
party with respect to the rescission. Expenditures relating to the
failed acquisition in the amount of approximately $83,000 were expensed
in the second quarter.
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of
September 30, 2005 and December 31, 2004:
September 30, 2005 December 31, 2004
------------------ -----------------
Accrued expenses $ 757,118 $ 710,133
Reserves for returns and refunds -- 88,212
Accounts payable 167,017 57,668
Interest and penalties on late tax payments 130,560 120,560
---------- ------------
$1,054,695 $ 976,573
========== ============
9
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 September 30, 2005), (iii) redeemable at
any time by the Company for $1.00 per share, (iv) entitled to
one vote per share. As of September 30, 2005, 450,000 shares
of Series A Preferred Stock were outstanding and no shares of
Series B Preferred Stock were outstanding.
(b) Stock-Based Compensation:
During the nine-month periods ended September 30, 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 TRANSACTION
None.
10
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7) COMMITMENTS AND CONTINGENCIES
(a) Leases:
Future minimum lease payments under noncancelable operating
leases (with initial terms in excess of one year) are as
follows:
Operating
Year ending December 31: Leases
---------------
2005 $ 15,701
2006 36,635
2007 -
2008 -
After 2008 -
---------------
Total noncancelable lease payments $ 52,336
===============
Rent expense under all operating leases for the nine months ended
September 30, 2005 was $57,145.
(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:
PROSPER, INC.
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 approximately $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 believe that the conditions for these
payments have not 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.
11
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
SEEMA URE, M.D.
On July 15, 2005 Seema Ure, M.D., a former employee of the
Company's IST Medical Group, Inc. subsidiary, filed a
complaint against the Company asserting breach of contract and
breach of fiduciary duty seeking damages in excess of $15,000.
The Company believes it has affirmative defenses and potential
counterclaims against Ms. Ure and intends to defend this
action vigorously. However, there can be no assurance of a
successful outcome for the Company. The Company has filed an
answer to this complaint and is preparing for depositions.
(8) CORPORATE LEASE GUARANTEE OBLIGATION
In November 2004 the Company signed a corporate guarantee on behalf of
Triad Media, Inc, its wholly owned subsidiary, for an operating lease
on facilities in Kansas City, Missouri. Triad Media, Inc. was
subsequently split-off (see notes 2 and 3). The Triad Media lease has a
term of 5 years from February 2005 through January 2010. As of
September 30, 2005 the remaining total obligation on this lease was
$204,340. The Company evaluated the fair value of this guarantee
according to FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others", and recorded a charge of $70,474 for this
lease guarantee obligation. The Company will periodically assess the
adequacy of this lease guarantee obligation and adjust the amount as
necessary.
(9) SUBSEQUENT EVENTS
None.
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-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 and
nine months ended September 30, 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 to the former principals of
EPMG (from whom we acquired the stock of EPMG in December 2001) under a
settlement agreement with said 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. These two former subsidiaries
represented substantially all of our operations during the 2004 fiscal year and
the nine month period ended September 30, 2005.
ACQUISITION OF DATA TECH
On May 6, 2005, IST Integrated Solutions, Inc., a wholly-owed subsidiary, ("IST
Integrated") 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, and Christopher Lietz and Todd Lietz, (collectively the
"Selling Stockholders"). 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).
Subsequent to closing the acquisition the Company discovered certain facts that
constituted undisclosed liabilities and/or breaches of representation or
warranty by Data Tech and the Selling Stockholders under the Asset Purchase
Agreement. On June 27, 2005 the Company and IST Integrated executed a mutual
rescission agreement and release with Data Tech and the Selling Stockholders the
effect of which was to rescind the earlier acquisition agreement between the
parties. No portion of the Purchase Price or Performance Consideration (as
defined in Section 1.4 of the Asset Purchase Agreement) had been paid by the
Company in connection with the Asset Purchase Transaction. There were no
penalties to either party with respect to the rescission. Expenditures relating
to the failed acquisition in the amount of approximately $83,000 were expensed
in the period ended June 30, 2005.
13
CURRENT STRATEGY
Although the Company currently has no operating business, management is
currently engaged in seeking merger and acquisition candidates within the
technologies and healthcare industries, which have revenue producing and cash
generating operations. While certain acquisition candidates have been
investigated, 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 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 $10,867 as of September 30, 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 years. As of September 30, 2005, we have recorded reserves of $3,260 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.
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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, representing the fair
value of future coaching sessions that students have paid for but not yet
received, was $-0- as of September 30, 2005 as the Company has exited the
educational business with the split-off of its Triad Media, Inc. subsidiary.
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2005 compared to the three and nine
months ended September 30, 2004.
REVENUES
Revenues for the three months ended September 30, 2005 and 2004 were $-0- and
$254,663 respectively, which represents a 100% decrease. Revenues for the nine
months ended September 30, 2005 and 2004 were $284,935 and $17,522,145,
respectively, which represents a 98% decrease. Our principal source of revenue
for these periods consisted of business education and coaching services.
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 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. Our only source of revenues
prospectively will be those from businesses that we acquire in the future, if
any.
COST OF SALES AND MARGINS
Cost of sales for the three months ended September 30, 2005 and 2004 were $-0-
and $98,900, respectively, representing a decrease of 100%. Cost of sales for
the nine months ended September 30, 2005 and 2004 were $14,573 and $8,200,575,
respectively, representing a decrease of 100%. 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 2004. Upon the
split-off of our Triad subsidiary in April 2005, we are no longer in the
business of education and coaching services.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended September 30,
2005 and 2004 were $355,238 and $3,408,669, respectively, representing a
decrease of 90%. General and administrative expenses for the nine months ended
September 30, 2005 and 2004 were $1,592,320 and $7,933,848, respectively,
representing a decrease of 80%. General and administrative expenses as a
percentage of sales rose to 559% for the nine months ended September 30, 2005
from 45% for the nine months ended 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 reason for the increase in general and administrative
expenses relative to sales was a result of the dramatic decrease in sales
following the sale of the EPMG assets, the recognition of $150,000 in bad debt
expense for the period, and the disposition of the Triad subsidiary. In
addition, even as management curtails activity certain expenses relating to
Company's infrastructure (including legal and auditing expenses) will remain.
15
COMMISSIONS AND OTHER SELLING EXPENSES
Selling expenses for the three months ended September 30, 2005 and 2004 were
$-0- and $11,856, respectively, representing a decrease of 100%. Selling
expenses for the nine months ended September 30, 2005 and 2004 were $182,316 and
$4,090,845, respectively, representing a decrease of 96%. 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 and Triad
Media.
WRITE-DOWN OF GOODWILL
Following the split-off of its Triad Media, Inc. subsidiary, the Company
effectively exited the education and coaching services business. As such, all
remaining goodwill relating to its acquisition of EPMG, Inc. in the amount of
$1,088,686 was determined to be impaired and written off in the second quarter
of 2005.
OTHER INCOME (EXPENSE)
Other income (expense) for the three months ended September 30, 2005 and 2004
were $18,856 and $513,921, respectively, representing a decrease of 96%. Other
income (expense) for the nine months ended September 30, 2005 and 2004 were
($125,481) and $626,364 respectively, representing a decrease of 120%. The
decrease is primarily attributable to a decrease in interest income due to our
declining financing notes receivable balance as well as a charge of
approximately $83,000 for our failed acquisition of Data-Tech (see note 3), a
write-down on investment of $30,464, and the charge of $70,474 for our corporate
guarantee for the Triad Media, Inc. lease (see note 8).
INCOME TAXES
Our provision for income taxes amounted to $2,708 for the nine months ended
September 30, 2005 compared to a provision of $-0- for the nine months ended
September 30, 2004. The current year provision reflects various state income tax
requirements.
NET LOSS
Our net loss for the three months ended September 30, 2005 amounted to
($270,340), compared to a net loss of ($2,484,579) for the period ended
September 30, 2004. Our net loss for the nine months ended September 30, 2005
amounted to ($2,654,864), compared to a net loss of ($2,076,759) for the period
ended September 30, 2004. This decrease was attributable to the matters
discussed above relating to the EPMG asset disposition and our split off of
Triad Media, which included decreased revenue and markedly increased general and
administrative expenses along with the write-off of $1,088,686 of goodwill.
16
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 six month period ended September 30, 2005, we incurred a loss of
($2,654,864) and used cash totaling $823,556. 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
technology and healthcare industries, which have revenue producing and cash
generating operations. While we have 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, 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 September 30, 2005, the Company has cash and other reserves amounting to
$52,916, certain receivables that are expected to be collected during the year
ended December 31, 2005 amounting to $7,607, net of allowances, and refundable
income taxes, net of interest and penalties due, of approximately $450,000. 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 fourth
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 September 30, 2005 we had current assets of $683,143, which represents a
decrease of $1,516,926 over current assets as of December 31, 2004. Much of the
decrease is attributable to a decrease in cash. At September 30, 2005 we had
cash on hand of $52,916, which represents a decrease of $823,556 over the
balances as of December 31, 2004. At September 30, 2005 we had current
liabilities of $1,054,695, which represents a decrease of $112,670 over current
liabilities as of December 31, 2004.
As September 30, 2005 our working capital decreased to a negative ($371,552)
from a positive $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 operations. Accordingly, our working capital
will likely decline as we address our new business development initiatives.
We have no material commitments for capital expenditures. Capital expenditures
for the nine months ended September 30, 2005 amounted to $23,946. We do not
expect additional facilities or equipment expenditures in the absence of
acquisitions.
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 September 30,
2005.
17
ITEM 3. CONTROLS AND PROCEDURES
(a) As of September 30, 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.
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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
approximately $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.
SEEMA URE, M.D.
On July 15, 2005 Seema Ure, M.D., a former employee of the Company's IST Medical
Group, Inc. subsidiary, filed a complaint against the Company asserting breach
of contract and breach of fiduciary duty seeking damages in excess of $15,000.
The Company believes it has affirmative defenses and potential counterclaims
against Ms. Ure and intends to defend this action vigorously. However, there can
be no assurance of a successful outcome for the Company. The Company has filed
an answer to this complaint and is preparing for depositions.
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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 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 July 18, 2005 the Company filed a Current Report on Form 8-K under
Item 7.01 (Regulation FD Disclosure) stating that it executed a mutal rescission
agreement and release the effect of which was to rescind the earlier acquisition
agreement between the Company and Data Tech and the selling stockholders
executed May 9, 2005.
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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: November 15, 2005 /S/ PETER M. PETERSON
--------------------------------------------
Peter M. Peterson
Chairman of the Board,
Chief Executive Officer, and President
Principal Executive Officer
/S/ CHRISTOPHER J. FLOYD
--------------------------------------------
Christopher J. Floyd
Chief Financial Officer,
Vice President of Finance, and Secretary
Principal Financial and Accounting Officer
21
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.
22