-----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, EWrccedOamXqkvUiN7zTCOLzPSmSKWahnTWdAIqscIshELqvaYbtw6C/ab+nTwlT wDN3VHxkUYMTuXeoLa88HQ== 0001144204-06-022629.txt : 20060526 0001144204-06-022629.hdr.sgml : 20060526 20060525201257 ACCESSION NUMBER: 0001144204-06-022629 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060526 DATE AS OF CHANGE: 20060525 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-27465 FILM NUMBER: 06868552 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 1 v044335_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2006 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT Commission File Number: 000-1084047 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter) California 95-4691878 ----------- ---------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 1413 South Howard Avenue, Suite 220, Tampa, FL 33606 ---------------------------------------------- ----- (Address of Principal Executive Offices) Zip Code) (813) 387-3310 -------------- (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| There were 56,455,379 shares of common stock, $0.001 par value, outstanding as of May 24, 2006. 1 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. FORM 10-QSB QUARTER ENDED MARCH 31, 2005 TABLE OF CONTENTS
Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of March 31, 2006 (Unaudited) and December 31, 2005.................................................................. 3 Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2006 and 2005................................................... 4 Condensed Consolidated Statements of Cash Flow (Unaudited) for the Three Months Ended March 31, 2006 and 2005................................................... 5 Notes to the Condensed Consolidated Financial Statements (Unaudited)..................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................... 13 Item 3. Controls and Procedures.............................................................. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................................... 16 Item 3. Defaults upon Senior Securities...................................................... 17 Item 6. Exhibits and Reports on Form 8-K..................................................... 17 Signatures ................................................................................ 18 Index to Exhibits............................................................................. 19
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEET March 31, 2006 (UNAUDITED) (Unaudited) March 31, 2006 ------------ Cash $ 206,517 Notes receivable 117,008 ------------ Total current assets 323,525 ------------ PROPERTY AND EQUIPMENT, NET 30,925 DEPOSITS 35,159 ------------ Total assets $ 389,609 ============ Accounts payable and accrued expenses $ 831,799 Derivative financial instruments 57,871 Convertible debentures 41,918 ------------ Total current liabilities 931,588 ------------ COMMITMENTS AND CONTINGENCIES Preferred stock, 25,000,000 shares authorized, $1.00 stated value Series A, 1,500,000 shares authorized, 450,000 shares outstanding 450,000 Series B, 3,000,000 shares authorized, none outstanding -- Common stock - authorized, 100,000,000 shares of $.001 par value; issued and outstanding, 56,255,379 shares 56,255 Additional paid-in capital 18,563,716 Accumulated (deficit) (19,611,950) ------------ Total stockholders' equity (541,979) ------------ Total liabilities and stockholders' equity $ 389,609 ============ See accompanying notes. 3 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF EARNINGS For the Three Months Ended March 31, ----------------------------- 2006 2005 ------------ ------------ REVENUE Services revenue $ -- $ 155,200 Product sales -- 113,219 Other revenue -- 8,600 ------------ ------------ Total revenue -- 277,019 COST OF REVENUE Cost of services revenue -- 6,855 Cost of product sales and other revenue -- 4,964 ------------ ------------ Total cost of revenue -- 11,819 ------------ ------------ GROSS PROFIT -- 265,200 ------------ ------------ OPERATING EXPENSES General and administrative 239,746 857,029 Commissions and other selling expenses -- 162,296 ------------ ------------ Total operating expenses 239,746 1,019,325 ------------ ------------ INCOME (LOSS) FROM OPERATIONS (239,746) (754,125) ------------ ------------ OTHER INCOME (EXPENSE) NET Other income 1,586 1,491 Derivative income 7,320 -- Interest expense (8,636) -- Interest income, deposits 28 -- Interest income, financing arrangements -- 11,429 ------------ ------------ OTHER INCOME (EXPENSE) NET 298 12,920 ------------ ------------ INCOME BEFORE INCOME TAXES (239,448) (741,205) INCOME TAXES (1,703) -- ------------ ------------ NET INCOME (LOSS) (241,151) (741,205) UNDECLARED PREFERRED STOCK DIVIDENDS (4,500) (4,500) ------------ ------------ INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (245,651) $ (745,705) ============ ============ BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.00) $ (0.01) ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN BASIC AND DILUTED PER SHARE CALCULATION 56,067,036 55,586,198 ============ ============ See accompanying notes. 4 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) INNOVATIVE SOFTWARE TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, ------------------------ 2006 2005 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net cash flows from operating activities $ 192,854 $(602,724) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Cash received on notes receivable from financed sales 333 242,617 Increase in notes receivable from new financed sales -- (222,601) Investment (117,008) (5,352) Purchase of fixed assets -- (19,665) --------- --------- Net cash flows from investing activities (116,675) (5,001) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease in notes payable -- (20,833) Increase in notes payable 100,000 -- Payments on capital lease obligations -- (1,889) --------- --------- Net cash flows from financing activities 100,000 (22,722) --------- --------- NET INCREASE (DECREASE) IN CASH 176,179 (630,447) CASH AT BEGINNING OF PERIOD 30,338 876,472 --------- --------- CASH AT END OF PERIOD $ 206,517 $ 246,025 ========= ========= See accompanying notes. 5 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Basis Of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and Item 310(b) of Regulation S-B. They do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements of the Company as of December 31, 2005, and for the two years then ended, including notes thereto included in the Company's Form 10-KSB. (2) Earnings Per Share The Company calculates net income (loss) per share as required by Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share." Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods when anti-dilutive commons stock equivalents are not considered in the computation. (3) Stockholders' (Deficit) In January 2006 the Company issued an aggregate of 1,300,000 shares of common stock for services rendered. The shares were valued at their fair market value of $39,000 on the date of issue which amount had been accrued in December 2005. In January 2006 the Company issued an aggregate of 950,495 shares of common stock in order to cancel its contract with its CEO "Without Cause" as defined in his employment contract. The shares were valued at their fair market value of $28,515 which amount was charged to operations. In January 2006 the Company issued an aggregate of 3,492,000 shares of common stock in order to eliminate accrued wages due to officers in the amount of $174,600 which approximated the fair market value of the shares. (4) Commitments, Concentrations and Contingencies (a) Leases: Future minimum lease payments under noncancelable operating leases (with initial terms in excess of one year) and future minimum capital lease payments as of March 31, 2006, are as follows: 6 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Operating Year ending December 31: Leases --------------------- 2006 $ 75,150 2007 40,100 2008 -- 2009 -- After 2009 -- --------------------- Total noncancelable lease payments $ 115,250 ===================== Rent expense under all operating leases for the period ended March 31, 2006 and 2005, was $15,701. In December 2004 our former subsidiary Triad Media, Inc. entered into a lease for approximately 3,606 square feet in Kansas City, Missouri with a term beginning February 1, 2005 and ending January 31, 2010 and a base rent of $3,756 per month which the Company guaranteed on behalf of Triad Media, Inc. Following the sale of Triad Media in April 2005, the Company accrued for this potential liability which accrual amounted to $59,892 at December 31, 2005. On February 28, 2006, the Company was informed that Triad Media, Inc. had abandoned the premises. We are currently negotiating a settlement payment with the landlord but there can be no assurance that such negotiations will be successful or that the amount accrued thus far will be sufficient. (b) SEC Investigation: On June 24, 2003, the Securities and Exchange Commission issued a formal order of investigation authorizing subpoenas for documents and testimony in connection with the investigation of certain securities matters. On April 8, 2005, the Independent Committee appointed by the Board of Directors of the Company delivered to the SEC its report based on its internal investigation. The Company has and intends to continue to fully cooperate with the SEC in its investigation. (c) Litigation: SEC Investigation On June 24, 2003 the Securities and Exchange Commission ("SEC") issued a formal order of investigation, authorizing the investigation of certain securities matters. The SEC staff has taken the testimony of certain officers and has informed us that it intends to take additional testimony. The SEC staff has also issued additional requests for the voluntary production of documents. Prior to the issuance of the order, we had voluntarily provided documents and information to the SEC staff in response to informal, non-public inquiries by the staff. On April 8, 2005, the Independent Committee of the Board of Directors turned over the results of its investigation to the SEC. We intend to continue to fully cooperate with the SEC in its investigation. Prosper, Inc. Complaint Subsequent to the spin off of EPMG, as discussed above, the former principals, under the new name of Prosper, Inc. filed a complaint that seeks a refund to the benefit of Prosper of certain reserve funds amounting to $580,000 that are due to former vendors. Under the EPMG Settlement Agreement, we agreed to pay certain reserves potentially owing to third-party vendors upon specified conditions. The lawsuit alleges that we have breached the obligation to pay these reserves, but we contest that the conditions for these payments have been satisfied and/or contest the amounts and payees of the payments that are alleged to be owed by us. 7 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Although we believe that these allegations do not have any merit, if Prosper, Inc. were to prevail in its complaint there would be serious negative financial consequences resulting from utilization of our cash reserves. Moreover, such an action could divert management's time and efforts away from the business of the Company. Kansas City Explorers The Company is a defendant in a lawsuit in the Circuit Court of Platte County, Missouri, "Kansas City Explorers vs. Innovative Software" case no. 04CV82050 in which the claimant is seeking money for advertising which it alleges is still due, and have alleged damages of $50,028. The claimant has been court ordered to produce answers to certain discovery requests of the Company which they have failed to produce. Management intends to aggressively defend the claim based upon the lack of contract between the parties, lack of proof of damages, as well as minimal proof of advertising services actually performed for Company products and services. (5) Convertible Notes and Derivative Instrument Liabilities Derivative financial instruments The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company reviews the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services they provide. Certain instruments, including convertible debt and equity instruments and the freestanding options and warrants issued in connection with those convertible instruments, may be subject to registration rights agreements, which impose penalties for failure to register the underlying common stock by a defined date. If the convertible debt or equity instruments are not considered to be "conventional", then the existence of the potential cash penalties under the related registration rights agreement requires that the embedded conversion option be accounted for as a derivative instrument liability. Similarly, the potential cash penalties under the related registration rights agreement may require us to account for the freestanding options and warrants as derivative financial instrument liabilities, rather than as equity. In addition, when the ability to physical or net-share settle the conversion option or the exercise of the freestanding options or warrants is deemed to be not within the control of the company, the embedded conversion option or freestanding options or warrants may be required to be accounted for as a derivative financial instrument liability. 8 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments. If freestanding options or warrants were issued in connection with the issuance of convertible debt or equity instruments and will be accounted for as derivative instrument liabilities (rather than as equity), the total proceeds received are first allocated to the fair value of those freestanding instruments. If the freestanding options or warrants are to be accounted for as equity instruments, the proceeds are allocated between the convertible instrument and those derivative equity instruments, based on their relative fair values. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount. To the extent that the fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, usually using the effective interest method. When the instrument is convertible preferred stock, the dividends payable are recognized as they accrue and, together with the periodic amortization of the discount, are charged directly to retained earnings. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed periodically, including at the end of each reporting period. If re-classification is required, the fair value of the derivative instrument, as of the determination date, is re-classified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date. In January 2006 the Board of Directors of the Company approved the raising of up to $1,000,000 via the issuance of promissory notes to accredited investors. These notes have a term of one year, are convertible into shares of common stock of the Company at a 30% discount to a future Qualified Financing (as therein described), and have 20% warrant coverage at a strike price of $0.05. As of March 31, 2006, the Company had raised $100,000 under such notes. The warrants have been accounted for as derivative instrument liabilities (see below) in accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company's Own Common Stock" (EITF 00-19). Accordingly, the initial fair value of the warrants, amounting to an aggregate of $1,620 was recorded as a derivative instrument liability. The fair value of the warrants was determined using the Black-Scholes valuation model, based on the market price of the common stock on the dates the Warrants were issued, an expected dividend yield of 0%, a risk-free interest rate based on constant maturity rates published by the U.S. Federal Reserve, applicable to the life of the Warrants, expected volatility of 114%, and the five year life of the Warrants. The Company is required to re-measure the fair value of the warrants at each reporting period. 9 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Because the conversion price of the Convertible Notes is not fixed, the Convertible Notes are not "conventional convertible debt" as that term is used in EITF 00-19. Accordingly, the Company is required to bifurcate and account separately for the embedded conversion options, together with any other derivative instruments embedded in the Convertible Notes. The conversion option related to each Convertible Note was bifurcated from the Convertible Note and accounted for separately as a derivative instrument liability (see below). The bifurcated embedded derivative instruments, including the embedded conversion options which were valued using the Flexible Monte Carlo Simulation methodology, were recorded at their initial fair value of an aggregate of $63,571. The discount from the face amount of the Convertible Notes represented by the value assigned to the Warrants and bifurcated derivative instruments is being amortized over the period to the due date of each Convertible Note, using the effective interest method. Amortization for the period ending March 21, 2006 was $7,109. A summary of the Convertible Notes and derivative instrument liabilities at March 31, 2006, is as follows: Convertible Notes; 10% per annum; due March 30, 2007 $100,000 Less: unamortized discount related to warrants and bifurcated embedded derivative instruments (58,082) ----------------- Total carrying value at March 31, 2006 $41,918 ================= Derivative financial instrument liabilities We use the Black-Scholes valuation model to value the Warrants and the embedded conversion option components of any bifurcated embedded derivative instruments that are recorded as derivative liabilities. In valuing the Warrants and the embedded conversion option components of the bifurcated embedded derivative instruments, at the time they were issued and at March 31, 2006, we used the market price of our common stock on the date of valuation, an expected dividend yield of 0% and the remaining period to the expiration date of the warrants or repayment date of the Convertible Notes. All warrants and conversion options can be exercised by the holder at any time. Because of the limited historical trading period of our common stock, the expected volatility of our common stock over the remaining life of the conversion options and Warrants has been estimated at 50%. The risk-free rates of return used were based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the conversion options or Warrants. 10 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) At March 31, 2006, the following derivative liabilities related to common stock Warrants and embedded derivative instruments were outstanding:
Exercise Value - Price Per Value - Issue March 31, Issue Date Expiry Date Share Date 2006 - ----------------- --------------- ---------------------------- ------------------ ----------------- ----------------- 1/20/2006 1/20/2011 120,000 warrants $ 0.05 $ 360 $ 540 2/10/2006 2/10/2011 280,000 warrants $ 0.05 $ 1,260 $ 1,260 ----------------- Fair value of freestanding derivative instrument liabilities for warrants $ 1,800 ----------------- Value - Value - Issue March 31, Issue Date Expiry Date Date 2006 - ----------------- --------------- ---------------------------- ------------------ ----------------- ----------------- 1/20/2006 1/20/2011 120,000 warrants $ 23,571 $ 16,071 2/10/2006 2/10/2011 280,000 warrants $ 40,000 $ 40,000 ----------------- Fair value of bifurcated embedded derivative instrument liabilities associated with the above convertible notes $ 56,071 ----------------- Total derivative financial instruments $ 57,871 =================
The following table reflects the number of common shares into which the aforementioned derivatives are indexed at March 31, 2006: Common shares indexed: Embedded derivative instruments 3,571,429 Freestanding derivatives (warrants) 400,000 ----------- 3,971,429 =========== (7) Basis of Reporting The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern for a reasonable period. However, during July, 2004, the Company spun off its EPMG operations, which represented a significant portion of its revenue producing operations to certain shareholders of the Company. During April 2005, the Company spun off Triad Media, further curtailing future operations. The Company has incurred a loss of $241,151 and has working capital and stockholder deficits of $608,063 and $541,980 at March 31, 2006. In addition, the Company currently has no revenue generating operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. 11 INNOVATIVE SOFTWARE TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Management is currently engaged in seeking merger and acquisition candidates within the technologies industry, which have revenue producing and cash generating operations. While management has identified a number of prospective acquisition targets, there can be no assurance that any acquisition will be completed or that this strategy would be successful. In addition, management is seeking to raise additional capital to support its operations until a successful acquisition or acquisitions can be completed. There can be no assurance that management will be able to acquire additional capital at acceptable terms, if at all. The accompanying consolidated financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern. (8) Subsequent Events In April 2006 the Company issued 200,000 shares of its common stock to settle an outstanding legal account payable of $45,073. The shares were issued pursuant to the exemption under Section 4(2) of the Securities Act of 1933, as amended, based on the recipient's access to information regarding the Company and its sophistication in making investments of this nature. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion includes statements that are forward looking in nature. The accuracy of such statements depends on a variety of factors that may affect the business and operations of the Company. Certain of these factors are discussed under "Business - Factors Influencing Future Results and Accuracy of Forward-Looking Statements" included in Part 1 of this report. When used in this discussion, the words "expect(s)", "feel(s)", "believe(s)", "will", "may", "anticipate(s)" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, and actual results could differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, and are urged to carefully review and consider the various disclosures elsewhere in this Form 10-KSB. Overview The following discussion summarizes information about our accounting policies and practices and information about our operations in a comparative manner for the three months ended December 31, 2006 and 2005. Our management's discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere herein. Discontinuance of Business Historically, we have been engaged primarily in the development, marketing and delivery of Internet websites, database management programs, and business educational programs, generally to individuals, throughout the United States of America through our EPMG and Triad subsidiaries. In July 2004, we spun off assets, liabilities and operations of EPMG located in Utah pursuant to a settlement agreement with the former principals, but did not exit the business at that time. In March of 2005, our board of directors determined to exit this business and undertake a strategy of growth through acquisition of private companies and internal product and services development focused on small and medium sized businesses and the medical market, and spun off Triad in April 2005. As a result, effective April 20, 2005, we were no longer engaged in this business and had no continuing involvement with EPMG or Triad. For the remainder of the 2005 calendar year the Company had no business operations and sought to engage in a business combination with a company with operations. As a result of the sale of Triad we are no longer engaged in the development, marketing and delivery of business-type educational programs and also had no continuing involvement with the business of EPMG. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company's financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company's critical accounting policies are discussed in its annual report on Form 10-KSB for the year ended December 31, 2005. 13 Results of Operations Three months ended March 31, 2006 compared to the three months ended March 31, 2005. Revenues Revenues for the three months ended March 31, 2006 and 2005 were $-0- and $277,019, respectively. The Company currently has no operations and is seeking an appropriate acquisition candidate. Cost of Sales and Margins Cost of sales for the three months ended March 31, 2006 and 2005 were $-0- and $11,819, respectively. General and Administrative Expenses General and administrative expenses for the three months ended March 31, 2006 and 2005 were $239,746 and $857,029, respectively, representing a decrease of 72%. General and administrative expenses consisted primarily of salaries and wages, professional fees, rent, travel expenses, payroll taxes, telephone expenses and other general and administrative expenses. Commissions and Other Selling Expenses Selling expenses for the three months ended March 31, 2006 and 2005 were $-0- and $162,296, respectively. Selling expenses consisted primarily of commissions paid to sales associates as well as marketing and advertising expenses associated with key products and services. Other Income (Expense) Other income (expense), for the three months ended March 31, 2006 and 2005 were $298 and $12,920, respectively, representing a decrease of 98%. The decrease is primarily attributable to a decrease in interest income from our financing notes receivable balance. Income Taxes Our provision from income taxes amounted to $1,703 for the three months ended March 31, 2006 compared to a provision of $-0- for the three months ended March 31, 2005. Net Loss Our net loss for the three months ended March 31, 2006 amounted to ($241,151), compared to a net loss of ($741,205) for the period ended March 31, 2005. Liquidity and Capital Resources Our consolidated financial statements have been prepared assuming that the Company will continue as a going concern for a reasonable period. However, during the period ended March 31, 2006, we incurred a loss of ($241,151) and working capital and stockholder deficits of $608,063 and $541,980, respectively. These conditions raise substantial doubt about the Company's ability to continue as a going concern. 14 Management is currently seeking merger and acquisition candidates within the technologies industry, which have revenue producing and cash generating operations. While we have identified a number of other prospective acquisition targets, there can be no assurance that any acquisition will be completed or that this strategy would be successful. In addition, we anticipate that we will need to raise additional capital to support our operations until a successful acquisition or acquisitions can be completed. There can be no assurance we will be able to acquire additional capital at acceptable terms, if at all. As of March 31, 2006 we had cash and other reserves amounting to $206,517. Our financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern. At March 31, 2006 we had current assets of $323,525, which represents a decrease of $290,166 over current assets as of December 31, 2005. At March 31, 2006 we had cash on hand of $206,517, which represents an increase of $176,179 over the balances as of December 31, 2005. At March 31, 2006 we had current liabilities of $931,588 which represents a decrease of $256,143 over current liabilities as of December 31, 2005. At March 31, 2006 our working capital deficit increased to ($608,063) from ($574,039) as of December 31, 2005. Our working capital will decline as we address our new business development initiatives. We have no material commitments for capital expenditures. Capital expenditures for the three months ended March 31, 2006 amounted to $-0-. We currently do not have a stock option or stock purchase plan. We also currently do not have any employee benefit plans that would require the use of our securities. Off Balance-Sheet Arrangements The Company has no material off-balance sheet arrangements as of March 31, 2006. Item 3. Controls and Procedures (a) The Chief Executive Officer and Chief Financial Officer of the Company, with the participation of the Company's management, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 as of March 31, 2006. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the date of the evaluation, the Company's disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report. (b) There were no changes in the Company's internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, subsequent to the date of the evaluation. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings From time to time, we are involved in litigation concerning our business operations. Management believes that the litigation in which we are currently involved is not reasonably likely to be material to its financial condition, results of its operations or its cash flows, other than the litigation noted below. SEC Investigation On June 24, 2003 the Securities and Exchange Commission ("SEC") issued a formal order of investigation, authorizing the investigation of certain securities matters. The SEC staff has taken the testimony of certain officers and has informed us that it intends to take additional testimony. The SEC staff has also issued additional requests for the voluntary production of documents. Prior to the issuance of the order, we had voluntarily provided documents and information to the SEC staff in response to informal, non-public inquiries by the staff. On April 8th, 2005 the Independent Committee of the Board of Directors turned over the results of its investigation to the SEC and we intend to continue to fully cooperate with the SEC in its investigation. Prosper, Inc. Complaint Subsequent to the EPMG asset disposition, as discussed above, the former principals, under the new name of Prosper, Inc. filed a complaint that seeks a refund to the benefit of Prosper of certain reserve funds amounting to $580,000 that are due to former vendors. Under the EPMG Settlement Agreement, we agreed to pay certain reserves potentially owing to third-party vendors upon specified conditions. The lawsuit alleges that we have breached the obligation to pay these reserves, but we contest that the conditions for these payments have been satisfied and/or contest the amounts and payees of the payments that are alleged to be owed by us. Although we believe that these allegations do not have any merit, if Prosper, Inc. were to prevail in its complaint there would be serious negative financial consequences resulting from utilization of our cash reserves. Moreover, such an action could divert management's time and efforts away from the business of the Company. Kansas City Explorers The Company is a defendant in a lawsuit in the Circuit Court of Platte County, Missouri, "Kansas City Explorers vs. Innovative Software" case no. 04CV82050 in which the claimant is seeking money for advertising which it alleges is still due, and have alleged damages of $50,028. The claimant has been court ordered to produce answers to certain discovery requests of the Company which they have failed to produce. Management intends to aggressively defend the claim based upon the lack of contract between the parties, lack of proof of damages, as well as minimal proof of advertising services actually performed for Company products and services. 16 Item 3. Defaults upon Senior Securities (b) There has not been any material arrearage in the payment of dividends on any preferred stock. Item 6. Exhibits. The exhibits required by this item are listed in the Index to Exhibits set forth at the end of this Form 10-QSB. 17 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Innovative Software Technologies, Inc. Date: May 24, 2006 /s/ Peter M. Peterson -------------------------------------------- Peter M. Peterson Chairman of the Board, Chief Executive Officer, and President /s/ Christopher J. Floyd -------------------------------------------- Christopher J. Floyd Chief Financial Officer, Vice President of Finance, and Secretary 18 INDEX TO EXHIBITS Exhibit Number Description 31.1 Certification of Chief Executive Officer of Innovative Software Technologies, Inc. pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer of Innovative Software Technologies, Inc. pursuant to Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer of Innovative Software Technologies, Inc. pursuant to 18 U.S.C. 1350. 32.2 Certification of Chief Financial Officer of Innovative Software Technologies, Inc. pursuant to 18 U.S.C. 1350. 19 EX-31.1 2 v044335_ex31-1.txt Exhibit 31.1 CHIEF EXECUTIVE OFFICER CERTIFICATION I, Peter M. Peterson, President, Chief Executive Officer and Chairman of the Board of Innovative Software Technologies, Inc., certify that: 1. I have reviewed this quarterly report of Innovative Software Technologies, Inc. (the "small business issuer"); 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 small business issuer as of, and for, the periods presented in this quarterly report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, 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 small business issuer's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this quarterly report any change in the small business issuer's internal control over financial quarterly reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial quarterly reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial quarterly reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial quarterly reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and quarterly report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial quarterly reporting. Date: May 24, 2006 /s/ Peter M. Peterson ------------------------------------------ Peter M. Peterson President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) EX-31.2 3 v044335_ex31-2.txt Exhibit 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION I, Christopher J. Floyd, Vice President of Finance and Chief Financial Officer of Innovative Software Technologies, Inc., certify that: 1. I have reviewed this quarterly report of Innovative Software Technologies, Inc. (the "small business issuer"); 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 small business issuer as of, and for, the periods presented in this quarterly report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, 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 small business issuer's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) Disclosed in this quarterly report any change in the small business issuer's internal control over financial quarterly reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial quarterly reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial quarterly reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial quarterly reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and quarterly report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial quarterly reporting. Date: May 24, 2006 /s/ Christopher J. Floyd -------------------------------------------- Christopher J. Floyd Chief Financial Officer, Vice President of Finance, and Secretary (Principal Financial and Accounting Officer) EX-32.1 4 v044335_ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Innovative Software Technologies, Inc (the "Company") on Form 10-QSB for the period ending March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter M. Peterson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Peter M. Peterson - --------------------- Peter M. Peterson Chief Executive Officer May 24, 2006 EX-32.2 5 v044335_ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Innovative Software Technologies, Inc. (the "Company") on Form 10-QSB for the period ending March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Christopher J. Floyd, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Christopher J. Floyd - ------------------------ Christopher J. Floyd Chief Financial Officer May 24, 2006 -----END PRIVACY-ENHANCED MESSAGE-----