-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nyiob/5XPdx4/hFd+cFMhnqP5PX1eukzjMt3M1TTMUte/B8Dz67jw+14uMn2V66C aX/LZTLDEydSF3i7Exsuvw== 0001144204-04-016914.txt : 20041026 0001144204-04-016914.hdr.sgml : 20041026 20041026164918 ACCESSION NUMBER: 0001144204-04-016914 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20041026 DATE AS OF CHANGE: 20041026 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVATIVE SOFTWARE TECHNOLOGIES INC CENTRAL INDEX KEY: 0001084047 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 954691878 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27465 FILM NUMBER: 041097162 BUSINESS ADDRESS: STREET 1: 5072 NORTH 300 WEST CITY: PROVO STATE: UT ZIP: 84604 BUSINESS PHONE: 801-371-0755 MAIL ADDRESS: STREET 1: 5072 NORTH 300 WEST CITY: PROVO STATE: UT ZIP: 84604 10QSB/A 1 v07570_10qsba.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB/A (Amendment No. 1) ----------- (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2003 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____________ to ____________ Commission File Number 000-1084047 ------------ Innovative Software Technologies, Inc. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) California 95-4691878 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 204 NW Platte Valley Drive Riverside, MO 64150 (Address of Principal (Zip Code) Executive Offices) (816) 584-8030 -------------- (Registrant's Telephone Number, Including Area Code) 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 53,297,958 shares of common stock, $0.001 par value, outstanding as of May 15, 2002. 1 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. FORM 10-QSB QUARTER ENDED MARCH 31, 2003 TABLE OF CONTENTS Page ---- PART I-FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited) and December 31, 2002.............................................. 3 Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2003 and 2002......................... 4 Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2003 and 2002......................... 5 Condensed Consolidated Statement of Stockholders' Equity/(Deficiency) (Unaudited) for the Three Months Ended March 31, 2003.............. 6-7 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2003 and 2002......................... 8 Notes to the Condensed Consolidated Financial Statements (Unaudited). 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 19 Item 3. Controls and Procedures............................................ 22 PART II - OTHER INFORMATION Item 2. Changes in Securities.............................................. 23 Item 6. Exhibits and Reports on Form 8-K................................... 23 Signatures................................................................. 24 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Restated) March 31, December 31, 2003 2002 ------------ ------------ ASSETS Current Assets Cash $ 1,462,821 $ 1,338,345 Accounts receivable 6,678 14,700 Other receivables 96,102 59,772 Prepaid expenses 85,818 67,179 Other current assets 918,992 706,486 ------------ ------------ Total Current Assets 2,570,411 2,186,482 ------------ ------------ Property and Equipment, Net 438,436 379,349 ------------ ------------ Other Assets Goodwill 1,088,686 1,088,686 Other assets -- -- Deposit 42,656 48,698 ------------ ------------ Total Assets $ 4,140,189 $ 3,703,215 ============ ============ Current Liabilities Note payable - Line of credit $ 4,518 $ 40,660 Current maturities of long-term debt 92,723 44,274 Accounts payable and accrued expenses 755,156 861,366 Deferred revenue 267,540 256,148 Other current liabilities 391,193 83,278 Accrued income taxes (125,000) -- Reserve for sales returns and allowances 470,245 220,266 ------------ ------------ Total Current Liabilities 1,856,375 1,505,992 ------------ ------------ Long-term debt, net of current maturities -- 87,223 Stockholders' Equity Preferred stock - no par; 25,000,000 shares authorized Series A preferred stock; 1,697,167 shares issued and outstanding; $1.00 stated value 1,650,500 1,650,500 Series B preferred stock; 328,491 shares issued and outstanding; $1.00 stated value 386,848 328,491 Common stock - $0.001 par value; 52,897,186 shares authorized and 52,481,289 shares issued and outstanding, respectively 52,848 52,481 Additional paid-in-capital 13,212,269 13,119,719 Accumulated deficit (13,018,651) (13,041,191) ------------ ------------ Total Stockholders' Equity 2,283,814 2,110,000 ------------ ------------ Total Liabilities and Stockholders' Equity $ 4,140,189 $ 3,703,215 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Innovative Software Technologies, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended March 31, (Restated) 2003 2002 ------------ ----------- Sales $ 5,579,208 $ 2,794,696 Cost of Sales 2,546,892 1,122,455 ------------ ----------- Gross Profit 3,032,316 1,672,241 ------------ ----------- Operating Expenses Selling 1,455,118 600,891 General and administrative 1,741,157 742,070 ------------ ----------- Loss on investment securities Non-recurring expenses Total Operating Expenses 3,196,275 1,342,961 ------------ ----------- Income/(Loss) From Operations (163,959) 329,280 ------------ ----------- Other Income (Expense) Other income 44,112 -- Interest expense 17,387 -- ------------ ----------- Interest income Total Other Income (Expense) 61,499 -- ------------ ----------- Net Income Before Income Taxes (102,460) 330,982 ------------ ----------- Income Tax Expense 125,000 134,674 ------------ ----------- Net Income $ 22,540 $ 196,308 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 52,675,733 48,287,416 ============ =========== 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, (Restated) 2003 2002 ------------ ------------ Net income/(loss) $22,540 $ 196,308 Other comprehensive loss: Unrealized loss on investments -- (423,396) ------------ ------------ Other comprehensive income/(loss) Comprehensive loss 22,540 (227,088) ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements. 5 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2003
Preferred Stock Series A Preferred Stock Series B Common Stock Shares Amount Shares Amount Shares Amount ---------- ----------- ------- -------- ---------- ------- Balance - December 31, 2001 1,850,000 $ 1,850,002 248,491 $248,491 48,285,283 $48,285 Issuance of Common stock for services provided -- -- -- -- 4,000 4 Issuance of Common stock -- -- -- -- 40,730 41 Issuance of Common stock for services provided -- -- -- -- 6,125 6 Issuance of Common Stock for software -- -- -- -- 53,845 54 Issuance of Common stock -- -- -- -- 24,375 24 Issuance of Common Stock for services provided -- -- -- -- 291,250 291 Conversion of Series A Preferred Stock to Common Stock (199,500) (199,500) -- -- 3,000,000 3,000 Issuance of Common stock for services provided -- -- -- -- 5,000 5 Issuance of Common stock -- -- -- -- 76,960 77 Issuance of Common stock -- -- -- -- 23,169 23 Issuance of Common stock for services provided -- -- -- -- 39,702 40 Series A Preferred Stock Dividend -- -- -- -- 107,568 108 Series A Preferred Stock Dividend -- -- -- -- 30,734 31 Series A Preferred Stock Dividend -- -- -- -- 420,054 420 Series B Preferred Stock Dividend -- -- -- -- 72,494 72 Issuance of Series B Preferred Stock for Executive Compensation -- -- 80,000 80,000 -- -- Unrealized loss on investments -- -- -- -- -- -- Unrealized loss on investments recognized in income due to other than temporary impairment -- -- -- -- -- -- Net income for the year ended ended December 31, 2002 -- -- -- -- -- -- ---------- ----------- ------- -------- ---------- ------- Balance - December 31, 2002 1,650,500 $ 1,650,500 328,491 $328,491 52,481,289 $52,481 ========== =========== ======= ======== ========== =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2003 (split table continued)
Retained Additional Accumulated Earnings Total paid-in- Comprehensive (Accumulated Stockholders' capital Loss Deficit) Equity ----------- ----------- ------------ ------------ (Restated) (Restated) Balance - December 31, 2001 $12,626,679 ($ 204,354) ($ 290,941) $ 14,278,160 Issuance of Common stock for services provided 14,196 -- -- 14,200 Issuance of Common stock 36,951 -- -- 36,992 Issuance of Common stock for services provided 20,644 -- -- 20,650 Issuance of Common Stock for software 69,94 -- -- 70,000 Issuance of Common stock 23,219 -- -- 23,243 Issuance of Common Stock for services provided 21,553 -- -- 21,844 Conversion of Series A Preferred Stock to Common Stock 196,500 -- -- -- Issuance of Common stock for services provided 370 -- -- 375 Issuance of Common stock 18,939 -- -- 19,016 Issuance of Common stock 3,992 -- -- 4,015 Issuance of Common stock for services provided 4,760 -- -- 4,800 Series A Preferred Stock Dividend 13,892 -- (14,000) -- Series A Preferred Stock Dividend 3,969 -- (4,000) -- Series A Preferred Stock Dividend 54,250 -- (54,670) -- Series B Preferred Stock Dividend 9,859 -- (9,931) -- Issuance of Series B Preferred Stock for Executive Compensation -- -- -- 80,000 Unrealized loss on investments -- (1,424,896) -- (1,424,896) Unrealized loss on investments recognized in income due to other than temporary impairment -- 1,629,250 -- 1,629,250 Net income for the year ended ended December 31, 2002 -- -- (12,667,649) (12,667,649) Balance - December 31, 2002 $13,119,719 $ -- ($13,041,191) $ 2,110,000 =========== =========== ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 7 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31,
(Restated) 2003 2002 ----------- --------- Cash Flows From Operating Activities Net income/(loss) $ 22,540 $ 196,308 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization 45,093 17,166 Allowance for doubtful accounts -- 12,000 Prepaid non-cash executive compensation 60,000 -- Prepaid non-cash public relations expense 2,250 -- Stock base compensation 58,357 -- Non-cash expenses 30,667 14,200 Changes in operating assets and liabilities: Accounts receivable 8,022 (491,944) Prepaid expenses (18,639) 6,571 Other receivables (36,330) 1,046 Other current assets Other assets (212,506) (280,940) Deposits 6,042 -- Accounts payable and accrued expenses (106,210) 284,569 Other liabilities 307,915 -- Reserve for returns and allowances 249,979 -- Deferred revenue 11,392 -- Accrued federal and state income tax (125,000) 134,674 ----------- --------- Net Cash Provided by/(Used In) Operating Activities 303,572 (106,350) ----------- --------- Cash Flows Used In Investing Activities Capital expenditures (104,181) (126,677) ----------- --------- Net Cash Used In Investing Activities (104,181) (126,677) ----------- --------- Cash Flows From Financing Activities Issuance of common stock Proceeds from borrowings under line of credit -- 50,000 Proceeds from borrowing under note payable 8,085 50,877 Repayments under line of credit agreement (36,142) 50,877 Repayments on notes payable (46,859) (1,917) ----------- --------- Net Cash (Used in)/Provided by Financing Activities (74,916) 98,960 ----------- --------- Net Increase /(Decrease) in Cash and Cash Equivalents 124,476 (134,067) Cash and Cash Equivalents at Beginning of Year 1,338,345 282,307 ----------- --------- Cash and Cash Equivalents at End of Period $ 1,462,821 $ 148,240 =========== ========= Supplemental Cash Flow Information: Unrealized loss on securities available for sale $ -- ($423,396) =========== ========= Issuance common stock for software $ =========== ========= Issuance of common stock for services provided =========== ========= Issuance of Series B preferred stock for executive compensation $ 20,000 $ -- =========== =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 8 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - COMPANY DESCRIPTION Innovative Software Technologies, Inc. (the "Company" or the "Innovative"), operating in one business segment, is a software company specializing in small business and financial eLearning tools and consulting services. The Company's main products are EMS, a turnkey web builder, e-commerce solution and data management system targeted to small businesses; The Financial Toolkit 1.0, an integrated financial services and education program; Skills in Demand, consisting of eLearning courses that cater to small business owners and entrepreneurs, and eTaxNet, a provider of online tax and consulting services. In addition, the Company offers, for most of its software and learning products, technical support and coaching services. The Company's management combines its expertise in the field of direct marketing, software, coaching and sales management to small businesses and consumers. The combination of marketing and technological support offers clients complete end-to-end business services solutions designed to fit their ebusiness transactional technology training needs. On April 16, 2001, Innovative, with immaterial net assets, acquired 100% of the outstanding common stock of Hackett Media, Inc. (Hackett). The acquisition resulted in the owners and management of Hackett having effective operating control of the combined entity after the acquisition, with the existing Innovative investors continuing as only passive investors. Under accounting principles generally accepted in the United States (US GAAP), the above noted acquisition is considered to be a capital transaction in substance, rather than a business combination. That is, the acquisition is equivalent to the issuance of stock by Hackett for the net monetary assets of Innovative, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition, except that no goodwill intangible is recorded. Under reverse takeover accounting, the post reverse-acquisition comparative historical financial statements of the "legal acquirer" (Innovative Software Technologies), are those of the "legal acquiree" (Hackett) (i.e. the accounting acquirer). On December 31, 2001, the Company purchased all of the outstanding shares of Energy Professional Marketing Group, Inc.'s (EPMG), a technology marketing company specializing in product fulfillment for outside vendors and technology and database marketing, based in Provo, Utah. In connection with the acquisition, the Company issued 1,500,000 and 3,529,412 of Series A preferred and common shares, respectively. The purchase price for the acquisition of EPMG has been allocated on the fair value basis on the acquisition date as follows: Assets acquired: Goodwill $13,549,932 Net assets acquired 25,068 ----------- Total Assets Acquired $13,575,000 =========== Total Purchase Price $13,575,000 =========== The acquisition described above was accounted for as a purchase transaction in accordance with Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations," and, accordingly, the results of operations and assets and liabilities of the acquired company are included in the consolidated financial statements from the acquisition date. 9 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the Company's significant accounting policies applied in the preparation of the accompanying financial statements follows. 1. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows: o All business combinations initiated after June 30, 2001 must use the purchase method of accounting. o The pooling of interests method of accounting is prohibited except for transactions initiated before July 1, 2001. o Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability. o Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. o Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. o Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. o All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. As of January 1, 2002, which is the beginning of fiscal 2002, the Company will not amortize the goodwill which it recognized in connection with the acquisition of EPMG. The Company's goodwill was subject to a transitional impairment test as of December 31, 2001 and an annual impairment test, using a two-step process prescribed by SFAS No. 142. The Company completed the transitional impairment test for EPMG at June 30, 2002, the applicable reporting unit, and no impairment of goodwill was found to exist as of the beginning of fiscal 2002. During 2002, the trading price of the Company's stock declined significantly, raising questions about whether the fair value of goodwill exceeds its carrying amount. An evaluation of the carrying amount of goodwill was conducted during the 4th quarter 2002, which included an evaluation of whether the decline in the trading price of the Company's stock is other than temporary. The Company determined that the decline in its trading price was other than temporary and subsequent to December 31, 2002, engaged an independent valuation firm to perform a valuation of the Company. This resulted in a write-down in goodwill by the Company of $12,461,246 as of December 31, 2002. In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations". SFAS 143 applies to all entities, including rate-regulated entities, that have legal obligations associated with the retirement of a tangible long-lived asset that result from acquisition, construction or development and (or) normal operations of the long-lived asset. A liability for an asset retirement obligation should be recognized if the obligation meets the definition of a liability and can be reasonably estimated. The initial recording should be at fair value. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002, with earlier application encouraged. The provisions of the Statement are not expected to have a material impact on the financial condition or results of operations of the Company. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. 10 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) However, SFAS 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The adoption of this Statement did not have a significant impact on the financial condition or results of operations of the Company. In April 2002, the FASB issued SFAS No. 145 (SFAS 145). Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB 30 for classification as an extraordinary item shall be reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as well as otherexisting authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Certain provisions of SFAS 145 are effective for transactions occurring after May 15, 2002 while other are effective for fiscal years beginning after May 15, 2002. The Company does not expect SFAS 145 to have a material effect on its financial condition or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). This standard addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated by the Company after December 31, 2002. The Company does not expect SFAS 146 to have a material effect on its financial condition or results of operations. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions" (SFAS 147). This standard relates to the application of the purchase method of accounting to all acquisitions of financial institutions, except transactions between two or more mutual enterprises. This standard also relates to the application of SFAS 144 to certain long-term customer-relationship intangible assets recognized in an acquisition of a financial institution, including those acquired in transactions between mutual enterprises. SFAS 147 is effective on October 1, 2002. The Company does not expect SFAS 147 to have a material effect on its financial condition or results of operations. In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation--Transition and Disclosure (SFAS 148). This standard amends the disclosure and certain transition provisions of SFAS 123, Accounting for Stock-Based Compensation. Its disclosure provisions are effective for 2002 annual financial statements for calendar year-end companies. The Company does not expect that adoption of SFAS 148 will have a material impact on its financial condition or results of operations. 2. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements are unaudited. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Form 10-KSB dated December 31, 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the operating results to be expected for the full year. 3. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements includes the accounts of Innovative Software Technologies, Inc. and the accounts of its wholly-owned subsidiary Energy Professional Marketing Group, Inc. (EPMG) as of and for the three months ended March 31, 2003. All significant intercompany transactions and balances have been eliminated in consolidation. 11 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 4. REVENUE RECOGNITION The Company recognizes revenue after delivery of the product. To the extent the Company sells software, revenue is recognized in accordance with Statement of Position 97-2, Software Revenue Recognition. In most cases this occurs the same day payment is received from our customers. The Company also reserves for sales returns and allowances based upon historical experience. The Company provides support services for some of its products. Payments received by the Company for these services are generally recorded as deferred revenue and recognized over the term of the services. The Company also provides extended payment terms on the sale of its software and related coaching for up to two years. Since payments terms on these sales exceed 12 months, the fee for the software and license is presumed not to be determinable. In addition, the probability of collection decreases as the payment terms are extended. As a result, the Company recognizes revenue on these sales as the payments are collected from the customer. 5. INVESTMENTS SECURITIES All investment securities are classified as available-for-sale. These investment securities have been adjusted to their fair market value based upon quoted market prices. Unrealized holding gains and losses are reported as a separate component of stockholder's equity. The Company will regularly perform reviews of the fair value of its investment securities and assets whether there exists any other than temporary impairment. 6. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is recognized using the straight-line and double-declining balance method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives or remaining lease term. 7. USE OF ESTIMATES To comply with US GAAP, the Company makes estimates and assumptions that effect the amounts reported in the financial statements and disclosures made in the accompanying notes. Estimates are used for, but not limited to reserves for product returns, the collectibility of accounts receivable and deferred taxes. The Company also uses estimates to determine the remaining economic lives and carrying value of goodwill and fixed assets. Despite our intention to establish accurate estimates and assumptions, actual results may differ from our estimates. 8. SOFTWARE DEVELOPMENT COSTS In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for Costs of Computer Software to be Sold, Leased, or otherwise Marketed," software development costs are expensed as incurred until the product is available for general release to customers. To date, the Company's software has been available for general release concurrent with the establishment of technological feasibility and, accordingly, no development costs have been capitalized. The Company capitalizes costs related to the development of computer software developed or obtained for internal use in accordance with the American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Costs incurred in the application development phase are capitalized and amortized over their useful life, not to exceed five years. 12 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 9. ADVERTISING COSTS Advertising and promotion costs are expensed as incurred. 10. IMPAIRMENT AND LONG-LIVED ASSETS The Company will regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. The reviews take into account facts or circumstances, either internal or external, which indicate that the carrying value of the asset cannot be recovered. NOTE C - INVESTMENT SECURITIES The Company currently holds three investment securities, which the Company acquired in connection with strategic business transactions and relationships. Our available-for-sale securities are carried at fair value and unrealized gains or losses are included in stockholders' equity. The Company held the following investment securities at March 31, 2003 and December 31, 2002. The cost basis of our investment securities reflects adjustments for other than temporary impairments in value. Investment Cost Gross Unrealized Estimated Securities Basis Gains Losses Fair Value ------ ------ ---------- ---------- March 31, 2003 EnSurge, Inc. common stock $ -- $ -- $ -- $ -- Knowledge Transfer Systems, Inc. common stock -- -- -- -- Knowledge Transfer Systems, Inc. preferred stock -- -- -- -- ------ ------ ---------- ---------- $ -- $ -- $ -- $ -- ====== ====== ========== ========== Investment Cost Gross Unrealized Estimated Securities Basis Gains Losses Fair Value ------ ------ ---------- ---------- December 31, 2002 EnSurge, Inc. common stock Knowledge Transfer Systems, Inc. common stock $ -- $ -- $ -- $ -- Knowledge Transfer Systems, Inc. preferred stock -- -- -- -- ------ ------ ---------- ---------- $ -- $ -- $ -- $ -- ====== ====== ========== ========== The Knowledge Transfer Systems, Inc. common stock was received in consideration for the sale of four software coaching platforms to Ensurge, Inc. These investment securities were recorded at a 30% discount due to restrictions and limitations contained in Rule 144 of the Securities and Exchange Commission. The primary restriction relates to the one-year holding period of the investment securities after the effective date of sale. As of December 31, 2002, the one-year holding period on these investment securities expired and the investment securities were recorded at 100% of their fair market value. Due to the decline in market value of Knowledge Transfer Systems, Inc. common stock, the Company considered the value of these securities permanently impaired and wrote down the entire carrying value of these investment securities as of December 31, 2002. The reduction in carrying value on these investment securities resulted in a loss on investment of $728,000 during the year ended December 31, 2002. 13 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C - INVESTMENT SECURITIES (CONTINUED) The Company received Ensurge, Inc. common stock in consideration for the sale of certain vintage furniture in 2000. Due to the decline in market value of Ensurge, Inc. common stock, the Company considered the carrying value of $26,250 permanently impaired which resulted in a loss on investment securities of $26,250 during the year-ended December 31, 2002. On September 23, 2002, the Company sold the Business Development Series, e-learning content and software to Knowledge Transfer Systems, Inc. in exchange for 875,000 Knowledge Transfer Systems, Inc. preferred shares with a stated value of $1.00 per share. The preferred shares are convertible, at the discretion of the Company, to Knowledge Transfer Systems, Inc. common stock at 95% of the fair market value of Knowledge Transfer System's common stock based on a five day average proceeding the date of conversion. Due to the disclosure by the management of Knowledge Transfer Systems, Inc. of a possible bankruptcy by its wholly-owned subsidiary, KT Solutions, Inc., the Company considered the value of these securities permanently impaired and wrote down the entire carrying value of these investment securities as of December 31, 2002. The reduction in carrying value on these investment securities resulted in a loss on investment of $875,000 during the year ended December 31, 2002. The President and Chief Executive Officer of the Company is the former President and Chief Executive Officer of Ensurge, Inc., which was the parent company of KT Solutions, Inc. At the time of the sale of the Business Development Series to Knowledge Transfer Systems, Inc. for 875,000 Knowledge Transfer Systems, Inc. preferred shares, there was no related party relationship between the companies and/or the officers and directors of the companies at the time of the transaction. The above common stock investment securities are traded on the OTC Bulletin Board. All of the Company's investment securities are stocks of high technology companies whose market prices have been extremely volatile. The market prices of these companies' stocks have declined substantially in the past two years. NOTE D - PROPERTY & EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation as follows: March 31, December 31 2003 2002 --------- --------- Machinery and Equipment $ 282,603 $ 246,594 Furniture and Fixtures 56,594 51,683 Computer Software 251,958 190,624 Leasehold improvements 36,018 34,092 --------- --------- 627,173 522,993 Less: Accumulated depreciation and amortization (188,737) (143,644) --------- --------- Property and Equipment, Net $ 438,436 $ 379,349 ========= ========= NOTE E - OTHER ASSETS The Company has established several merchant service accounts whereby the Company processes a high volume of customer sales transactions through certain credit card vendors. These merchant service companies typically hold a percentage of each sales transaction as a reserve against future cancellations. The amount held by these merchant service companies amounts to $918,992 and $706,486 as of March 31, 2003 and December 31, 2002, respectively. 14 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE F - LONG-TERM DEBT Long-term debt consists of the following:
March 31, December 31, 2003 2002 --------- --------- Notes payable, financial institution, collaterized by telephone equipment, principal andimputed interest payable in monthly installments of $1,250 and $385 due in August 2004 $ 24,899 $ 20,469 Notes payable, financial institution, secured by a lien on certain furniture and equipment, principal and interest payable in monthly installments of $2,464 due in July 2005 57,319 67,175 Notes payable, financial institution, collaterized by Vehicles, principal and accrued interest at 7.78% payable in monthly installments of principal and imputed interest maturing from $217 to $655 from November 2006 to February 2007 10,505 43,853 --------- --------- 92,723 131,497 Less Current Maturities 92,723 44,274 --------- --------- Long-term - net of current maturities $ -- $ 87,223 ========= =========
The Company has an unsecured line of credit facility with a financial institution for borrowings up to $50,000 expiring August 31, 2005. Borrowings under the line bear interest at Prime plus 2% (the Prime rate of interest as of March 31, 2003 was 4.75%). As of March 31, 2003, there was $45,482 available on the credit facility. NOTE G - CAPITAL TRANSACTIONS Stock-split - Innovative's Board of Directors authorized a three-for-one stock split on July 11, 2001. This was effective on August 10, 2001 to stockholders of record on July 31, 2001. All share and per share amounts referred to in the financial statements and notes have been restated to reflect this stock split. Issuance of common stock - The Company issued 40,730, 24,375, 76,960, and 23,169 shares of its common stock in 2002 through private placements to individual foreign investors. Issuance of Series B preferred stock - The Company issued 80,000 shares of its Series B preferred stock to certain directors of the Company as compensation at a stated value of $1.00 per share in 2002. Issuance of common stock for software - The Company issued 53,845 shares of its common stock in 2002 as part of payment under the terms of a software purchase agreement entered into by the Company. The agreement stipulates that the Company receives business management software for both the Internet and real estate markets as well as hosting and maintenance services. 15 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE G - CAPITAL TRANSACTIONS (CONTINUED) Stock issued for services - The Company issued 4,000 shares of its common stock at a fair market value of $3.55 per share in the first quarter 2002. In addition, the Company issued 6,125 shares of its common stock during the second quarter 2002 at fair market value of $3.37 per share. Stock issued for services - The Company issued 91,250 and 5,000 shares of its common stock at a fair market value of $0.075 per share in the fourth quarter 2002. In addition, the Company issued 39,702 shares of its common stock during the fourth quarter 2002 at an average fair market value of $0.121 per share. Conversion of Series A Preferred Stock - Two directors of the Company converted 199,500 shares of Series A preferred stock to 3,000,000 shares of common stock during the fourth quarter 2002. The Series A preferred stock is convertible to the Company's common stock at 95% of the fair market value of the common stock at the date of conversion. The Market Price of the Company's common stock on the date of conversion was $0.07. Series A Preferred Stock Dividend - The Company issued 558,356 shares of its common stock as a Series A preferred stock dividend during the fourth quarter 2002. The holders of the shares of Series A Preferred received dividends at the rate of 4% per annum payable in shares of the Company's common stock. The number of shares of common stock distributed as a dividend was calculated by dividing such payment by 95% of the Market Price on the average of the first five trading days after January 1 of each year. The term "Market Price" means, as of any date, the average of the daily closing price for the five consecutive trading days ending on such date. Series B Preferred Stock Dividend - The Company issued 72,494 shares of its common stock as a Series B preferred stock dividend during the fourth quarter 2002. The holders of the shares of Series B Preferred received dividends at the rate of 4% per annum payable in shares of the Company's common stock. The number of shares of common stock distributed as a dividend was calculated by dividing such payment by 100% of the Market Price on the average of the first five trading days after January 1 of each year. The term "Market Price" means, as of any date, the average of the daily closing price for the five consecutive trading days ending on such date. Finance Agreement - During 2001, Hackett Media, Inc. financed its operation primarily through a Finance Agreement of convertible debt and securities. The Finance agreement calls for financing of up to $2.5 million of which $1 million would be received in increments in 2001, if necessary, and the remaining $1.5 million would be received based upon the Company's performance. As of September 30, 2002, $700,000 of the initial $1 million investment was received by the Company. These proceeds were converted to equity securities during 2001. During the fourth quarter 2001, all of the common shares issued in connection with the conversion of debt in connection with the Finance Agreement above were reissued as Series A preferred shares and common shares as follows: Of the initial $700,000 invested in 2001, $350,000 was converted to Series A preferred shares at a stated value of $1 per share. The remaining $350,000 was reissued as 700,000 shares of common stock at $0.50 per share. During the fourth quarter 2002, the Company passed a Board of Directors' Resolution to formally terminate the Finance Agreement with Iwasaka Investments, Ltd. due to the non-compliance by the lender under the terms of the agreement. The Company is currently in negotiation with Iwasaka Investments, Ltd. to recoup any and all outstanding shares issued as part of this Finance Agreement. The Company believes that the termination of this agreement will have no adverse effect on the operations of the Company. Issuance of Series B preferred stock - The Company issued 80,000 shares of its Series B preferred stock to certain directors of the Company as prepaid executive compensation and executive compensation at a stated value of $1.00 per share in the first quarter 2003. The company recorded non-cash executive compensation of $20,000 for the three months ended March 31, 2003. The remaining $60,000 will be incurred during the following three quarters of 2003. Stock issued for prepaid services - The Company issued 233,333 shares of its common stock in exchange for $2,250 of prepaid public relation services in the first quarter 2003. Stock issued for charitable contribution - The Company issued 133,333 shares of its common stock as a charitable contribution at a fair market value of $0.08 per share in the first quarter 2003. 16 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE H - RELATED PARTY TRANSACTIONS On December 31, 2001, a Company executive and shareholder converted a non-interest bearing note payable amounting to $248,491 to Series B preferred stock at a conversion rate of a $1 per share stated value. There was no formal maturity date and there was no interest associated with the note. Also, during 2001, the Company sold four software coaching platforms to NowSeven.com, Inc., Ziabon, Inc., SF Acquisition Corp., Inc., and Ishopper Internet Services, Inc. in exchange for investment securities amounting to $308,000, $133,000, $147,000, and $140,000, respectively. The President and Chief Executive Officer of the Company is the former President and Chief Executive Officer of Ensurge, Inc., which is the parent company of the wholly-owned subsidiaries listed above. Due to the decline in market value of Knowledge Transfer Systems, Inc. common stock, the Company considered the value of these securities permanently impaired and wrote down the entire carrying value of these investment securities as of December 31, 2002. During 2002, the Company initiated the purchase of sales leads from Education Success Institute, Inc. (ESI). ESI is owned and operated by two directors of the Company (Ethan Andrew Willis and James Randolph Garn). Expenses incurred by the Company totaled $663,159 for the three months ended March 31, 2003. The Company paid ESI a total of $458,816 for sales lead generation for the three months ended March 31, 2003. In addition, the Company will purchase certain operating supplies for ESI. As of March 31, 2003, the amount owed the Company for these supplies amounted to $5,417. The President and Chief Executive Officer of the Company is the former President and Chief Executive Officer of Ensurge, Inc., which was the parent company of KT Solutions, Inc. At the time of the sale of the Business Development Series to Knowledge Transfer Systems, Inc. for 875,000 Knowledge Transfer Systems, Inc. preferred shares in 2002, there was no related party relationship between the companies and/or the officers and directors of the companies at the time of the transaction. NOTE I - COMMITMENTS AND CONTINGENCIES In March, May and September 2002, the Company entered into operating leases for certain office space. Future minimum lease payments under these operating leases as of December 31, 2002 are as follows: Year Ending December 31: 2003 197,998 2004 223,998 2005 168,499 2006 37,467 -------- Total $627,962 ======== 17 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE N - SUBSEQUENT EVENTS On April 23, 2003, Innovative Software Technologies, Inc. dismissed Grant Thornton LLP as the Company's independent accountant. The Company dismissed Grant Thornton based on certain correspondence received from Grant Thornton pursuant to Section 10A of the Securities Exchange Act of 1934 in which Grant Thornton expressed concern as to the propriety of certain transactions, notified the Company that the firm could not continue to be associated with the Company's December 2001 and 2000 financial statements and that the reports thereon could no longer be relied upon. The Company took strong exception to such correspondence and filed a Current Report on Form 8-K dated April 24, 2003 presenting its position on the matter. On April 11, 2003, the Company engaged the accounting firm of Robison, Hill & Co., as the Company's new independent accountant to audit its financial statements for the fiscal years ended December 31, 2002 and 2001. On April 23, 2003, the Company filed Form 8-K on the engagement of a new independent accounting firm, Robison, Hill & Co., effective April 11, 2003, to audit the Company's financial statements for the fiscal years ended December 31, 2002 and 2001. The Company entered into arbitration with a vendor concerning the cancellation of a contract which resulted in a settlement in April 2003 of $20,000. This settlement amount between the two parties was fully accrued for as of December 31, 2002. 18 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, 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. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company's financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes that its critical accounting policies include those described below. For a detailed discussion on the application of these and other accounting policies, see Note B in the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002. Goodwill and Intangible Assets As discussed in Note A in the accompanying consolidated financial statements, the Company, on December 31, 2001, purchased all of the outstanding shares of Energy Professional Marketing Group Inc. (EPMG) for $13.5 million in Innovative's common and Series A preferred stock. Purchase accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets purchased and liabilities assumed. The Company has accounted for its acquisitions using the purchase method of accounting. Values were assigned principally to goodwill based upon management's allocation of the purchase price to EPMG's workforce in place at the date of the transaction. Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). This statement affects the Company's treatment of goodwill and other intangible assets. The statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives will cease. During 2002, the trading price of the Company's stock declined significantly, raising questions about whether the fair value of goodwill exceeds its carrying amount. An evaluation of the carrying amount of goodwill was conducted during the 4th quarter 2002, which included an evaluation of whether the decline in the trading price of the Company's stock is other than temporary. The Company determined that the decline in its trading price was other than temporary and subsequent to December 31, 2002, engaged an independent valuation firm to perform a valuation of the Company. This resulted in a write-down in goodwill by the Company of $12,461,246 as of December 31, 2002. Goodwill amounts to $1,088,868 as of March 31, 2003. 19 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Investment securities Investment securities are considered to be impaired when a decline in fair value below cost basis is determined to be other than temporary. The Company employs a methodology in evaluating whether a decline in fair value below cost basis is other than temporary that considers available evidence regarding its investment securities. In the event that the cost basis of a security exceeds its fair value, the Company evaluates, among other factors: the duration of the period that, and extent to which, the fair value is less than cost basis; the financial health of and business outlook for the investee, including industry and sector performance, changes in technology and operational and financing cash flow factors; overall market conditions and trends, and; the Company's intent and ability to hold the investment. Once a decline in fair value is determined to be other than temporary, a write-down is recorded and a new cost basis in the security is established. Assessing the above factors involves inherent uncertainty. Accordingly, write-downs, if recorded, could be materially different from the actual market performance of investment securities in the Company's portfolio, if, among other things, relevant information related to the Company's investment securities was not publicly available or other factors not considered by the Company would have been relevant to the determination of impairment during the 2002. As discussed in Note C to the accompanying financial statements, the Company wrote-down the value of investment securities by $1,629,250 in 2002. The new cost basis in the investment securities written-down, as of December 31, 2002, is $0. Revenue Recognition The Company recognizes revenue after delivery of the product. To the extent the Company sells software, revenue is recognized in accordance with Statement of Position 97-2, Software Revenue Recognition. In most cases this occurs the same day payment is received from our customers. The Company also reserves for sales returns and allowances based upon historical experience. The Company provides support services for some of its products. Payments received by the Company for these services are generally recorded as deferred revenue and recognized over the term of the services. The Company also provides extended payment terms on the sale of its software and related coaching for up to two years. Since payments terms on these sales exceed 12 months, the fee for the software and license is presumed not to be determinable. In addition, the probability of collection decreases as the payment terms are extended. As a result, the Company recognizes revenue on these sales as the payments are collected from the customer. With any accounting policy that applies judgments and estimates, actual results could significantly differ from those estimates. Results of Operations for the Three Months Ended March 31, 2003 compared to Three Months Ended March 31, 2002 Sales Sales for the three months ended March 31, 2003 and 2002 were $5,579,208 and $2,794,696, respectively, which represents a 97% increase from the prior period. The Company's principal source of revenue for the three months ended March 31, 2003 consisted of product and service sales. The primary reason for the increase in sales can be attributed to the consolidation all of its administrative and accounting functions to the Provo, UT office in an effort to improve its fulfillment and shipping operations and improve corporate responsiveness. This has enabled the Utah office to greatly improve its ability to service its customers. In conjunction with this consolidation, the Company has hired additional sales and marketing associates which has also positively impacted sales in the first quarter 2003. Also, in first quarter 2003, the Company initiated the utilization of its training center in Orem, UT to assist its customers in maintaining and expanding their Internet presence. We believe that through consumer education and enhanced customer service, we can increase customer participation and generate significant internal growth. 20 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Cost of Sales Cost of sales for the three months ended March 31, 2003 and 2002 was $2,546,892 and $1,122,455, respectively, representing an increase of 127%. Cost of sales for the three months ended March 31, 2003 and 2002 represented costs associated with the generation of sales leads and the providing of coaching services to customers that purchase the Company's products. The main reason for the increase in cost of sales for the three months ended March 31, 2003, as compared to a year ago for the same period, can be attributed to cost of sales increasing in conjunction with the increase in sales for the period. Selling Selling expenses for the three months ended March 31, 2003 and 2002 were$1,455,118 and $600,891, respectively, representing an increase of 104%. These costs consisted primarily of commissions paid to sales associates as well as marketing and advertising expenses associated with key products and services. The main reason for the increase in selling costs can be attributed to the increase in sales of products and services from new and existing sales associates. General and Administrative General and administrative expenses for the three months ended March 31, 2003 and 2002 were $1,741,157 and $742,070, respectively, representing an increase of 127%. The Company's general and administration expenses consisted primarily of salaries and wages, professional fees, rent, travel expenses, payroll taxes, telephone expenses and other general and administrative expenses necessary to support the operations of the Company in the current period. The primary reason for the increase in general and administrative costs was attributable to higher wages paid in the first quarter 2003. Liquidity and Capital Resources At March 31, 2003, cash was $1,462,821, an increase of $124,476 from December 31, 2002. Cash provided by operations was $303,572 for the three months ended March 31, 2003. The primary reason for the positive operating cash for the three months ended March 31, 2003, can be attributed to the Company's higher sales volume during the first three months of 2003. In addition, the Company experienced an increase in its deferred revenue for the three months ended March 31, 2003. The Company's higher sales volume regarding coaching sessions was the primary reason for the increase in deferred revenue. The Company also experienced non-cash prepaid expenses and non-cash expenditures of $92,916 during the current quarter, which also positively effected cash. The Company paid down its note payable and line of credit balances by $83,001 during the current quarter. The Company anticipates paying down additional notes payable amounts during 2003. Stockholders' equity amounts to $2,283,814 as of March 31, 2003. The Company issued 80,000 shares of its Series B preferred stock to certain directors of the Company as prepaid executive compensation and executive compensation at a stated value of $1.00 per share in the first quarter 2003. The company recorded non-cash executive compensation of $20,000 for the three months ended March 31, 2003, related to these Series B preferred shares. The remaining $60,000 will be incurred during the following three quarters of 2003. The Company issued 233,333 shares of its common stock during the first quarter 2003 for prepaid public relation services to be provided in future periods. The Company issued 133,333 shares of its common stock as a charitable contribution during the first quarter 2003. The Company expects that its existing cash resources and cash flow generated from operations will be sufficient to meet its operating requirements and ordinary capital expenditure needs during the next twelve months. However, the Company will continue to seek additional sources of capital for expansion and possible acquisitions through private placements of equity securities. Such sources of capital may, however, not be available to the Company at agreeable interest rates or at all. 21 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Item 3. Controls and Procedures Based on their evaluation, as of a date within 90 days of the filing date of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities The Company in the current quarter issued 233,333 shares of common stock for prepaid public relation services to be provided in future periods. In addition, the Company issued 133,333 shares of common stock as a charitable contribution during the current period. These securities were issued under the exemption provided by Section 4(2) of the Securities Act of 1933. The Company issued 80,000 shares of its Series B preferred stock to certain directors of the Company as prepaid executive compensation and executive compensation at a stated value of $1.00 per share in the first quarter 2003. The company recorded non-cash executive compensation of $20,000 for the three months ended March 31, 2003, related to these Series B preferred shares. The remaining $60,000 will be incurred during the following three quarters of 2003. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits 31.1 - CEO Certification 31.2 - CFO Certification b. Reports of Form 8-K During the period covered by this report, the Company filed the following reports on Form 8-K. On April 23, 2003, the Company filed Form 8-K on the engagement of a new independent accounting firm, Robison, Hill & Co., effective April 11, 2003, to audit the Company's financial statements for the fiscal years ended December 31, 2002 and 2001. On April 23, 2003, the Company filed Form 8-K on the dismissal of Grant Thornton, LLP as the Company's independent accounting firm. OTHER ITEMS There were no other items to be reported under Part II of this report. 23 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Innovative Software Technologies, Inc. Date: October 19, 2004 /s/ Peter M. Peterson ------------------------------------- Peter M. Peterson Chief Executive Officer and Director /s/ Christopher J. Floyd ----------------------------------- Christopher J. Floyd Chief Financial Officer 24 EX-31.1 2 v07570_ex31-1.txt INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CHIEF EXECUTIVE OFFICER CERTIFICATION I, Peter M. Peterson, Chief Executive Officer and Director of Innovative Software Technologies, Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Innovative Software Technologies, Inc. (the "Registrant"); 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 19, 2004 /s/ Peter M. Peterson --------------------------------------- Peter M. Peterson Chief Executive Officer and Director (Principal Executive Officer) EX-31.2 3 v07570_ex31-2.txt INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CHIEF FINANCIAL OFFICER CERTIFICATION I, Christopher J. Floyd, Chief Financial Officer of Innovative Software Technologies, Inc., certify that: 1. I have reviewed this Annual Report on Form 10-QSB of Innovative Software Technologies, Inc. (the "Registrant"); 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Quarterly Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 19, 2004 /s/ Christopher J. Floyd --------------------------------------- Christopher J. Floyd Chief Financial Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----