ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
We were incorporated in the State of California in May 1998 under the name "Innovative Software Technologies, Inc." On November 30, 2007, we were incorporated in the State of Delaware under the name “Innovative Software Technologies, Inc.” Immediately prior to the acquisition of AcXess, Inc. (“AcXess”)on June 26, 2006, we had nominal assets and revenues and no business operations.
Innovative commenced business on April 16, 2001, when it acquired 100% of the outstanding common stock of Triad Media, Inc. ("Triad"), formerly known as Hackett Media, Inc. ("Hackett"), in a share exchange transaction. The acquisition resulted in the owners of Hackett holding 90% of our outstanding capital stock and having effective operating control of the combined entity after the acquisition. As a result of this acquisition, our primary business consisted of Internet sales and marketing.
On December 31, 2001, we purchased all of the outstanding shares of Energy Professional Marketing Group, Inc. ("EPMG"), a technology marketing company based in Provo, Utah specializing in product fulfillment for outside vendors and technology and database marketing. In connection with the acquisition, we issued 1,500,000 and 3,529,412 of Series A preferred and common shares, respectively. Following the purchase, EPMG became our wholly owned subsidiary.
On September 26, 2003, the former principals of EPMG alleged in writing that they were entitled to rescind the 2001 acquisition of EPMG. On July 2, 2004, we entered into a Settlement Agreement with the former principals of EPMG under the terms of which the former principals surrendered all of their 6,784,762 shares of common stock, 1,200,500 shares of Series A Preferred Stock, and 80,000 shares of Series B Preferred Stock, in exchange for certain assets and liabilities of EPMG. Subsequent to the settlement agreement, the former principals filed an action against us for breach of the Settlement Agreement related to certain reserve liabilities. On February 6, 2007, we entered into a Settlement Agreement and Mutual Release with Prosper, Inc. pursuant to which we agreed to pay Prosper, Inc. $10,000 in consideration for our release and dismissal of this action.
In October 2004 we relocated our corporate headquarters from Kansas City, Missouri, to Tampa, Florida.
On April 20, 2005, we entered into a stock purchase agreement with Douglas S. Hackett for the sale to Mr. Hackett of all common shares of our subsidiary, Triad, in exchange for the surrender by Mr. Hackett of 4,935,015 shares of our common stock held by him. Since the transaction involves receipt of our common stock in exchange for the subsidiary, we recorded this transaction in April 2005 as an equity transaction.
On May 6, 2005, our IST Integrated Solutions, Inc. subsidiary completed an acquisition of the assets and operations of Lietz Development, Inc. and Saphire of Tampa Bay, Inc. (collectively "Data Tech"), a Tampa, Florida based computer equipment reseller, and hosting and network services provider. Subsequent to the closing of the acquisition, the Company identified and/or discovered certain facts that constituted undisclosed liabilities or breaches of representation or warranty by Data Tech. On June 27, 2005, the Company executed a mutual rescission agreement and release with Data Tech the effect of which was to rescind the earlier acquisition agreement between the parties. No portion of the Purchase Price or Performance Consideration (as defined in Section 1.4 of the Asset Purchase Agreement) had been paid by the Company in connection with the transaction.
For the remainder of the 2005 calendar year we 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 were 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.
On June 26, 2006, we completed the acquisition of AcXess, Inc., a Florida corporation, in a stock exchange transaction pursuant to a Stock Exchange Agreement by and between us, AcXess, the Shareholders of AcXess, and Anthony F. Zalenski, acting as the Shareholder's Agent (the "Exchange Agreement"). As a result of the Transaction, AcXess became our wholly owned subsidiary. In accordance with the provisions of Statements of Financial Accounting Standards No. 141 (“SFAS”) “Business Combination (“SFAS 141”)”, AcXess was deemed to be the purchaser in the transaction for financial reporting purposes. For accounting purposes, AcXess is treated as the continuing reporting entity and the inception date of AcXess was January 12, 2005.
AcXess’ strategy was to provide Business Continuity (BC) and application hosting services to the Small and Medium Enterprise (SME) market. After careful review the Company determined that the capital requirements and time to market for the products and services of AcXess were greater than previously expected. As a result of this finding the Company entered into an agreement on July 24, 2007 to sell approximately 78.1% of the common stock of AcXess to the AcXess management team. In exchange for this sale the Company will receive:
(1)
A promissory note in the amount of $1,000,000. The note will have a term of two years and will bear interest at a rate of 10% per year. The note is collateralized with all assets of AcXess and has an acceleration clause for any material default.
(2)
A license agreement grant that gives the Company a non-exclusive worldwide right to license products under Axcess’ patents relating to Business Continuity (BC) solutions.
(3)
The return of 4,477,292 shares of common stock and the cancellation of fully vested options to purchase 5,978,349 shares of the Company’s common stock.
On June 19, 2009, the Company reached a revised agreement with the AcXess management team. Pursuant to this revised agreement, the Company sold all of its shares of capital stock of AcXess to the management team in exchange for
(1)
all 4,477,292 shares of the Company’s common stock held by the AcXess Managers;
(2)
the cancellation of options to purchase 5,978,349 shares of the Company’s common stock held by the AcXess Managers;
(3)
a Secured Promissory Note (the "Note") in the principal amount of $500,000, with a three year maturity date, an 8% interest rate, a prepayment discount schedule that allows for gradually decreasing discounts beginning with a maximum prepayment discount of $350,000 if $150,000 is paid within three months of the June 19, 2009 issue date, and a pledge of all of the assets of AcXess as security for the Note, as specified in a separate Security Agreement; and
(4)
a release from AcXess and the AcXess Managers of all claims they may have against the Company and its officers, directors, employees, shareholders, affiliates and affiliated companies and for all damages that relate to the Initial Agreement, the transactions contemplated thereby, and any matter relating to AcXess or its business, operations, assets or liabilities.
On June 17, 2009, the Company, purchased substantially all of the assets of The WEB Channel Network, LLC., a Florida limited liability company (the “Seller”), and certain other assets of Robert W. Singerman, the manager and sole owner of the Seller. The Company also entered into an Employment Agreement with Mr. Singerman, and Mr. Singerman entered into a Non-Disclosure, Non-Competition, Non-Solicitation and Invention Agreement with the Company.
The purchased assets include substantially all of the assets of the Seller, including all of its intellectual property and its signed and pending production agreements, and all of Mr. Singerman’s equity positions in several limited liability companies and various web channels. The intellectual property acquired includes all such property intended to be used in: (i) the development and application of standard definition video integrated with Internet protocol television and web design; (ii) the encoding process of FLASH video with Internet protocol television; (iii) audio digital recording for Internet protocol radio and television; (iv) a Content Management System for Internet protocol television; acquiring, formatting, programming, encoding, testing and deploying licensed previously produced broadcast video; and (v) PODCASTS with Internet protocol television. The intellectual property components also include (a) the unencumbered ownership of over 100 strategic web domain names, (b) all inventions (whether patentable or un-patentable and whether or not reduced to practice), all trademarks, service marks, trade dress, logos, trade names, and corporate names, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, and (d) all trade secrets and confidential business information including ideas, research and development, and know-how.
The purchase price consisted of: (i) the Company’s agreement to make cash installment payments of $25,000 within 15 days of the June 17, 2009 sale and $75,000 prior to September 30, 2009; (ii) a promissory note in the amount of $500,000 payable over five years in annual installments of $100,000 in principal plus accrued interest, secured by all of the Purchased Assets pursuant to a Security Agreement; and (iii) stock purchase warrants of the Company for 5,000,000 shares of the Company’s common stock at an exercise price of $0.03 per share
CURRENT OPERATING PLAN
The focus of the Company is on acquiring software and software services based companies. Any potential acquisition candidate must be able to demonstrate
§
A sustainable competitive advantage
§
A value proposition that is simple to articulate and present
§
A strong and committed management team that values the opportunity to be part of a publicly traded company
To assess the viability of a potential acquisition the Company utilizes both its management team and a team of industry experts. This combined expertise provides significant knowledge in the area of software architecture, product development, establishment of distribution channels, maximization of revenue channels and the true value and nature of the “competitive advantage”.
The Company plans on acquiring these companies by utilizing the Company’s stock and by raising additional capital for operating expenses if required.
INSURANCE MATTERS
We carry director’s and officer’s liability insurance.
EMPLOYEES
As of March 31, 2009, we had one employee who is the Company’s Chief Financial Officer and acting Chief Executive Officer.
RISK FACTORS
WE ARE A DEVELOPMENT STAGE COMPANY AND WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN BASE AN INVESTMENT DECISION.
We have a limited operating history upon which you can make an investment decision, or upon which we can accurately forecast future sales. You should, therefore, consider us subject to the business risks associated with a new business. The likelihood of our success must be considered in light of the expenses, difficulties and delays frequently encountered in connection with the formation and initial operations of a new business.
TO DATE WE HAVE HAD SIGNIFICANT OPERATING LOSSES, AND AN ACCUMULATED DEFICIT AND HAVE HAD LIMITED REVENUES AND DO NOT EXPECT TO BE PROFITABLE FOR AT LEAST THE FORESEEABLE FUTURE, AND CANNOT PREDICT WHEN WE MIGHT BECOME PROFITABLE, IF EVER.
We have been operating at a loss since our inception, and we expect to continue to incur losses for the foreseeable future. Net loss for the year ended March 31, 2009 was $969,131 resulting in an accumulated deficit of $5,867,392. We may not be able to generate significant revenues in the future. As a result, we expect to continue to experience negative cash flow for at least the foreseeable future and cannot predict when, or even if, we might become profitable.
OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have experienced significant operating losses in the current and prior years. At March 31, 2009, our principal sources of liquidity were cash and cash equivalents of $627. We do not expect that our cash on hand and cash generated by operations will be sufficient to fund our operating and capital needs beyond the next three months. As a result of our limited cash resources and history of operating losses, our auditors have expressed in their report on our consolidated financial statements that there is substantial doubt about our ability to continue as a going concern. We presently have no commitments for additional financing. If we are unable to obtain financing on terms acceptable to us, or at all, we may not be able to fulfill our customer commitments and/or be forced to cease all operations and liquidate our assets.
ADDITIONAL FINANCING IS NECESSARY FOR THE IMPLEMENTATION OF OUR GROWTH STRATEGY.
We will require additional debt and/or equity financing to pursue our growth strategy. Given our limited operating history and existing losses, there can be no assurance that we will be successful in obtaining additional financing. Lack of additional funding could force us to substantially curtail our growth plans or cease operations. Furthermore, the issuance by us of any additional securities pursuant to any future financing activities undertaken by us would dilute the ownership of existing shareholders and may reduce the price of our common stock.
Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. Our failure to successfully obtain additional future funding may jeopardize our ability to continue our business and operations.
WE MAY BE UNABLE TO IMPLEMENT OUR GROWTH STRATEGY.
We may not be successful in finding acquisition candidates that meet our requirements or are interested in our offering. We may not be able to expand our product and service offerings, our client base and markets, or implement the other features of our business strategy at the rate or to the extent presently planned. Our projected growth will place a significant strain on our administrative, operational and financial resources. If we are unable to successfully manage our future growth, establish and continue to upgrade our operating and financial control systems, recruit and hire necessary personnel or effectively manage unexpected expansion difficulties, our financial condition and results of operations could be materially and adversely affected.
POTENTIAL CLAIMS ALLEGING INFRINGEMENT OF THIRD PARTY'S INTELLECTUAL PROPERTY BY US COULD HARM OUR ABILITY TO COMPETE AND RESULT IN SIGNIFICANT EXPENSE TO US AND LOSS OF SIGNIFICANT RIGHTS.
From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays, disrupt our relationships with our customers or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon our operating results. Royalty or licensing agreements, if required, may not be available on terms acceptable to us. If a claim against us is successful and we cannot obtain a license to the relevant technology on acceptable terms, license a substitute technology or redesign our products to avoid infringement, our business, financial condition and results of operations would be materially adversely affected.
WE MAY FACE PRODUCT LIABILITY FOR THE SERVICES WE PROVIDE.
Developing, marketing and sale of our products and services may subject us to product liability claims. We currently do not have insurance coverage against product liability risks. Although we intend to purchase such insurance, such insurance coverage may not be adequate to satisfy any liability that may arise. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a service, injury to our reputation and loss of revenues. As a result, regardless of whether we are insured, a product liability claim or product recall may result in losses that could be material to us.
WE FACE COMPETITION IN OUR MARKETS FROM A NUMBER OF LARGE AND SMALL COMPANIES, SOME OF WHICH HAVE GREATER FINANCIAL, RESEARCH AND DEVELOPMENT, PRODUCTION AND OTHER RESOURCES THAN WE HAVE.
Our services face competition from services which may be used as an alternative or substitute thereof. In addition we compete with several large companies in the business continuity business. To the extent these companies, or new entrants into the market, offer comparable services at lower prices, our business could be adversely affected. Our competitors can be expected to continue to improve the design and performance of their products and services and to introduce new products and services with competitive performance characteristics. There can be no assurance that we will have sufficient resources to maintain our current competitive position.
A DOWNTURN IN ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS.
The software industry historically has been subject to substantial cyclical variations, and our business typically relies upon the expenditure of corporate information technology spending. A significant downturn in the United States or global economy or any other uncertainties regarding future economic prospects could affect corporate information technology spending habits, which would have a material adverse impact on our operations and financial results.
WE ARE DEPENDENT UPON KEY PERSONNEL.
Our success is heavily dependent on the continued active participation of our current executive officers listed under "Management." Loss of the services of one or more of our officers could have a material adverse effect upon our business, financial condition or results of operations. Further, our success and achievement of our growth plans depend on our ability to recruit, hire, train and retain other highly qualified technical and managerial personnel. Competition for qualified employees among companies in the technology industry is intense, and the loss of any of such persons, or an inability to attract, retain and motivate any additional highly skilled employees required for the expansion of our activities, could have a materially adverse effect on us. The inability on our part to attract and retain the necessary personnel and consultants and advisors could have a material adverse effect on our business, financial condition or results of operations.
WE ARE CONTROLLED BY CURRENT OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS.
Our directors, executive officers and principal (5%) stockholders and their affiliates beneficially own approximately 46% of the outstanding shares of Common Stock. Accordingly, our executive officers, directors, principal stockholders and certain of their affiliates will have substantial influence on the ability to control the election of our Board of Directors of the Company and the outcome of issues submitted to our stockholders.
OUR BUSINESS MAY BE AFFECTED BY FACTORS OUTSIDE OF OUR CONTROL.
Our ability to increase sales, and to profitably distribute and sell our products and services, is subject to a number of risks, including changes in our business relationships with our principal distributors, competitive risks such as the entrance of additional competitors into our markets, pricing and technological competition, risks associated with the development and marketing of new products and services in order to remain competitive and risks associated with changing economic conditions and government regulation.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE NOTES AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholders may not convert their convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholders could sell more than this limit while never holding more than this limit.
OUR COMMON STOCK TRADES IN A LIMITED PUBLIC MARKET; ACCORDINGLY, INVESTORS FACE POSSIBLE VOLATILITY OF SHARE PRICE.
Our common stock is currently quoted on the OTC.BB under the ticker symbol INIV.OB. As of July 1, 2009, there were 103,514,199 shares of Common Stock outstanding.
There can be no assurance that a trading market will be sustained in the future. Factors such as, but not limited to, technological innovations, new products, acquisitions or strategic alliances entered into by us or our competitors, government regulatory actions, patent or proprietary rights developments and market conditions for penny stocks in general could have a material effect on the liquidity of our common stock and volatility of our stock price.
FLUCTUATIONS IN OUR OPERATING RESULTS AND ANNOUNCEMENTS AND DEVELOPMENTS CONCERNING OUR BUSINESS AFFECT OUR STOCK PRICE.
Our operating results are subject to numerous factors, including purchasing policies and requirements of our customers, our ability to grow through strategic acquisitions and any expenses and capital expenditures which we incur in distributing products. These factors, along with other factors described under "Risk Factors", may affect our operating results and may result in fluctuations in our quarterly results all of which could affect our stock price or could result in volatility in our stock price.
OUR COMMON STOCK WILL BE SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
●
that a broker or dealer approve a person's account for transactions in penny stocks; and
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the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
●
obtain financial information and investment experience objectives of the person; and
●
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
●
sets forth the basis on which the broker or dealer made the suitability determination; and
●
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON STOCK.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if its stock price appreciates.
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive offices are located at 1413 South Howard Avenue, Suite 220, Tampa Florida, 33606. This office consists of approximately 200 square feet, which we rent for $1,000 per month. The term of the lease is month to month.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business. Except as disclosed below we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse affect on business, financial condition or operating results.
KANSAS CITY EXPLORERS COMPLAINT
We are 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 ours, 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 our products and services. Kansas City Explorers have pursued the court and have been granted a court date of September 23, 2009.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the OTCBB under the symbol "INIV.OB". The high and the low trades for our shares for each quarter of actual trading were:
The closing price for the common stock on March 31, 2009 was $0.002 per share.
HOLDERS
As of July 1, 2009, we had approximately 1,225 active holders of our common stock. The number of active record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers and registered clearing agencies. The transfer agent of our common stock is Island Stock Transfer, 100 Second Avenue South, Suite 104N, St. Petersburg, Florida 33701.
DIVIDENDS
We have neither declared nor paid any cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. We have had minimal revenue and losses since inception. Our current policy is that if we were to generate revenue and earnings we would retain any earnings in order to finance our operations. Our Board of Directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions they deem relevant and in accordance with applicable corporate law.
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information with respect to each equity compensation plan under which our common stock is authorized for issuance, as of the fiscal year ended March 31, 2009.
On August 9, 2006, our Board of Directors adopted the 2006 Innovative Software Technologies, Inc. Equity Incentive Plan, which stipulated 20 million shares of common stock available for option grants. The table below shows the activity under this plan as of March 31, 2009:
On August 24, 2007 our Board of Directors adopted the 2007 Innovative Software Technologies, Inc. Equity Incentive Plan which stipulated 60 million shares of common stock available for option grants. The Table below shows the activity under this plan as of March 31, 2009:
OPTIONS GRANTS IN LAST FISCAL YEAR
None.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
There have been no options exercised in the last fiscal year.
RECENT SALES OF UNREGISTERED SECURITIES
The shares of stock issued in the following transactions were valued at the closing market price on the date of issue.
On May 30, 2008, the Company issued shares of common stock at a price of $0.05 per share for previously accrued salary in the amount of $31,500 to the Company’s Chief Financial Officer. A total of 630,000 shares of common stock were issued to the officer.
On May 30, 2008, the Company issued shares of common stock at a price of $0.05 per share for previously accrued salary in the amount of $35,000 to the Company’s Chief Executive Officer. A total of 700,000 shares of common stock were issued to the officer.
On July 11, 2008, the Company issued 1,000,000 shares of common stock at a price of $0.02 per share for previously accrued liability in the amount of $20,000 for legal fees.
All of the above offerings and sales were deemed to be exempt under Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of our company or executive officers of our company, and transfer was restricted by our company in accordance with the requirements of the Securities Act of 1933.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
OVERVIEW
The following discussion summarizes information about our accounting policies and practices and information about our operations in a comparative manner for the fiscal years ended March 31, 2009 and 2008. 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.
ACQUISITION OF ACXESS, INC.
On June 26, 2006, we completed the acquisition of AcXess, Inc., a Florida corporation, in a stock exchange transaction pursuant to a Stock Exchange Agreement by and between us, AcXess, the Shareholders of AcXess, and Anthony F. Zalenski, acting as the Shareholder's Agent (the "Exchange Agreement"). As a result of the Transaction, AcXess became our wholly owned subsidiary. In accordance with the provisions of Statements of Financial Accounting Standards No. 141 (“SFAS”) “Business Combination (“SFAS 141”)”, AcXess was deemed to be the purchaser in the transaction for financial reporting purposes. For accounting purposes, AcXess is treated as the continuing reporting entity and the inception date of AcXess was January 12, 2005.
AcXess’ strategy was to provide Business Continuity (BC) and application hosting services to the Small and Medium Enterprise (SME) market. After careful review the Company determined that the capital requirements and time to market for the products and services of AcXess were greater than previously expected. As a result of this finding the Company entered into an agreement on July 24, 2007 to sell approximately 78.1% of the common stock of AcXess to the AcXess management team. In exchange for this sale the Company will receive:
(1)
A promissory note in the amount of $1,000,000. The note will have a term of two years and will bear interest at a rate of 10% per year. The note is collateralized with all assets of AcXess and has an acceleration clause for any material default.
(2)
A license agreement grant that gives the Company a non-exclusive worldwide right to license products under AcXess’ patents relating to Business Continuity (BC) solutions.
(3)
The return of 4,477,292 shares of common stock and the cancellation of fully vested options to purchase 5,978,349 shares of the Company’s common stock.
On June 19, 2009, the Company reached a revised agreement with the AcXess management team. Pursuant to this revised agreement, the Company sold all of its shares of capital stock of AcXess to the management team in exchange for
(1)
all 4,477,292 shares of the Company’s common stock held by the AcXess Managers;
(2)
the cancellation of options to purchase 5,978,349 shares of the Company’s common stock held by the AcXess Managers;
(3)
a Secured Promissory Note (the “Note”) in the principal amount of $500,000, with a three year maturity date, an 8% interest rate, a prepayment discount schedule that allows for gradually decreasing discounts beginning with a maximum prepayment discount of $350,000 if $150,000 is paid within three months of the June 19, 2009 issue date, and a pledge of all of the assets of AcXess as security for the Note, as specified in a separate Security Agreement; and
(4)
a release from AcXess and the AcXess Managers of all claims they may have against the Company and its officers, directors, employees, shareholders, affiliates and affiliated companies and for all damages that relate to the Initial Agreement, the transactions contemplated thereby, and any matter relating to AcXess or its business, operations, assets or liabilities.
On June 17, 2009, the Company, purchased substantially all of the assets of The WEB Channel Network, LLC., a Florida limited liability company (the “Seller”), and certain other assets of Robert W. Singerman, the manager and sole owner of the Seller. The Company also entered into an Employment Agreement with Mr. Singerman, and Mr. Singerman entered into a Non-Disclosure, Non-Competition, Non-Solicitation and Invention Agreement with the Company.
The purchased assets include substantially all of the assets of the Seller, including all of its intellectual property and its signed and pending production agreements, and all of Mr. Singerman’s equity positions in several limited liability companies and various web channels. The intellectual property acquired includes all such property intended to be used in: (i) the development and application of standard definition video integrated with Internet protocol television and web design; (ii) the encoding process of FLASH video with Internet protocol television; (iii) audio digital recording for Internet protocol radio and television; (iv) a Content Management System for Internet protocol television; acquiring, formatting, programming, encoding, testing and deploying licensed previously produced broadcast video; and (v) PODCASTS with Internet protocol television. The intellectual property components also include (a) the unencumbered ownership of over 100 strategic web domain names, (b) all inventions (whether patentable or un-patentable and whether or not reduced to practice), all trademarks, service marks, trade dress, logos, trade names, and corporate names, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, and (d) all trade secrets and confidential business information including ideas, research and development, and know-how.
The purchase price consisted of: (i) the Company’s agreement to make cash installment payments of $25,000 within 15 days of the June 17, 2009 sale and $75,000 prior to September 30, 2009; (ii) a promissory note in the amount of $500,000 payable over five years in annual installments of $100,000 in principal plus accrued interest, secured by all of the Purchased Assets pursuant to a Security Agreement; and (iii) stock purchase warrants of the Company for 5,000,000 shares of the Company’s common stock at an exercise price of $0.03 per share
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our 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.
Revenue Recognition
The Company recognizes revenues from contracts in which the Company provides website hosting and consulting services as the services are performed. The contractual terms of the agreements dictate the recognition of revenue by the Company. Payments received in advance are deferred until the service is provided.
Contract costs include all direct equipment, material, and labor costs and those indirect costs related to contract performance, such as indirect labor. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in contract performance, contract conditions, and estimated profitability that may result in revisions to costs and income are recognized in the period in which the revisions are determined.
For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which superseded SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. SAB No. 104 incorporates Emerging Issues Task Force (“EITF”) No. 00-21, “Multiple-Deliverable Revenue Arrangements.” EITF No. 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. Through March 31, 2008, all of the Company’s revenue has been service revenue.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2009. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, accounts payable and notes payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values.
Offering Costs
We defer costs associated with the raising of capital until such time as the offering is completed, at which time the costs are charged against the capital raised. Should the offering be terminated the costs are charged to operations during the period when the offering is terminated.
Net Income (Loss) Per Common Share
We calculate net income (loss) per share as required by SFAS No. 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 in which the Company incurs losses common stock equivalents, if any, are not considered, as their effect would be anti dilutive.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major improvements and additions are added to the property and equipment accounts while replacements, maintenance and repairs, which do not extend the life of the assets, are expensed.
Depreciation and amortization are computed by using the straight-line method over the estimated useful lives of the assets.
Long-Lived Assets
The carrying value of long-lived assets is reviewed on a regular basis for the existence of facts and circumstances that suggest impairment. Should there be an impairment, the Company measures the amount of the impairment based on the amount that the carrying value of the impaired asset exceeds the discounted cash flows expected to result from the use and eventual disposal of the impaired assets.
Segment Information
We follow SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information ("SFAS 131")." Certain information is disclosed, per SFAS 131, based on the way management organizes financial information for making operating decisions and assessing performance. We currently operate in a single segment and will evaluate additional segment disclosure requirements as the Company expands its operations.
Income Taxes
We follow SFAS No. 109, "Accounting for Income Taxes" for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Stock-Based Compensation
Compensation expense related to the grant of equity instruments and stock-based awards to employees are accounted for using the fair value of such equity instruments recognizing expenses as services are performed following SFAS No. 123(R), "Accounting for Stock-Based Compensation", issued in December 2004 and effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005.
Impairment of Long-Lived Assets
We account for long-lived assets and goodwill in accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144")" and SFAS No. 142, "Goodwill and Other Intangible Assets ("SFAS 142")." SFAS 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. SFAS 142 requires annual tests for impairment of goodwill and intangible assets that have indefinite useful lives and interim tests when an event has occurred that more likely than not has reduced the fair value of such assets.
Recent Pronouncements
Effective at the beginning of the first quarter of 2009, the Company adopted the provision of FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
As a result of the implementation of FIN 48, the Company has not changed any of its tax accrual estimates. The Company files U.S. federal and U.S. state tax returns. For state tax returns the Company is generally no longer subject to tax examinations for years prior to 1996.
Effective April 1, 2008, the Company partially adopted SFAS 157, which provides a framework for measuring fair value. Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The partial adoption of this standard only resulted in additional disclosure requirements and had no financial statement impact. Delayed application of this statement is permitted for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company has not applied the provisions of SFAS 157 for intangible assets and long-lived assets measured for fair value for impairment assessment under Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Effective April 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities - Including an Amendment of SFAS No. 115 (SFAS 159). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS 159 permits the Company to choose to measure eligible items at fair value at specified election dates. The Company will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. In connection with the adoption of this standard, the Company did not elect any additional financial instruments to be recorded at fair value.
Effective December 31, 2008, the Company adopted the Emerging Issues Task Force (“EITF”) Issue No. 08-4: Transition Guidance for Conforming Changes to Issue No. 98-5 (EITF 08-4), which was ratified by the consensus of the FASB in June 2008. The objective of EITF 08-4 is to provide transition guidance for conforming changes made to Issue No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” that resulted from Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” and FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This transition guidance is unique in that the current changes reflect matters that should have been addressed in the past, but were missed. Issue No. 08-4 concludes that conforming changes made to Issue No. 98-5 that result from Issue No. 00-27 and Statement No. 150 are effective for financial statements issued for fiscal years ending after December 15, 2008. The effect of these changes is to be applied retrospectively with the cumulative effect of the change being reported in retained earnings. If a company must make a change in its accounting to implement these changes, then the disclosure requirements in FAS 154 should be followed. The adoption of EITF 08-4 did not impact the Company's consolidated financial statements.
SFAS No. 160 - In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. SFAS No. 160 will apply to fiscal years and interim periods beginning on or after December 15, 2008. We adopted SFAS No. 160 on January 1, 2009 and it had no material impact on our consolidated financial statements.
SFAS No. 161 - In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We adopted SFAS No. 161 on January 1, 2009 and it had no material impact on our consolidated financial statements.
SFAS No. 165 - We adopted SFAS No. 165, Subsequent Events for the Quarterly Report for the period ending June 30, 2009. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, which are referred to as subsequent events. The statement clarifies existing guidance on subsequent events, including a requirement that a public entity should evaluate subsequent events through the issue date of the financial statements, the determination of when the effects of subsequent events should be recognized in the financial statement and disclosures regarding all subsequent events. Adoption of SFAS 165 did not have a material affect on our condensed consolidated financial statements. We have updated subsequent events through August 14, 2009, which is the date of this filing.
SFAS No. 141(R) - In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS No. 141(R) also requires transaction costs related to the business combination to be expensed as incurred. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted SFAS No. 141(R) on April 1, 2009 and it had no material impact on our consolidated financial statements.
In April 2009, the Company adopted several new pronouncements issued by the FASB related to fair value measurement, recording and disclosure. FASB Staff Position, or FSP, No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures relating to fair value of financial instruments for both interim and annual reporting periods. FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance on estimating the fair value of a financial instrument when the volume and level of activity for the asset or liability has significantly decreased in relation to normal market activity for the asset or liability. FSP No. 115-2 and FSP No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provide additional guidance for recording impairment losses on securities. All of these fair value measurement pronouncements were effective for interim and annual reporting periods ending after June 15, 2009. The adoption of these pronouncements did not have a material impact on the Company’s condensed consolidated financial statements.
SFAS No. 167 - In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which amends FASB Interpretation (FIN) No. 46(R), Consolidation of Variable Interest Entities, for variable interest entities to determine whether a variable interest entity must be consolidated. SFAS No. 167 requires an entity to perform an analysis to determine whether an entity’s variable interest or interests give it a controlling financial interest in a variable interest entity. This statement requires ongoing reassessments of whether an entity is the primary beneficiary of a variable interest entity and enhanced disclosures that provide more transparent information about an entity’s involvement with a variable interest entity. The new standard will become effective for us on January 1, 2010. We are currently evaluating the impact of adopting SFAS No. 167 on the consolidated financial statements.
In May 2008, the FASB issued Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. This staff position addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the allocation in computing earnings per share under the two-class method described in SFAS 128, Earnings Per Share. The FASB concluded that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. If awards are considered participating securities, the Company is required to apply the two-class method of computing basic and diluted earnings per share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. The implementation of EIFT 03-6-1 did not impact the Company’s consolidated financial statements.
In November 2007, FASB issued EITF 07-1, “Accounting for Collaborative Arrangements" (“EITF 07-1”).” EITF 07-1 requires additional disclosures related to collaborative arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The implementation of EIFT 07-1 did not impact the Company’s consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification, or Codification, will become the single official source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, with the exception of guidance issued by the SEC and its staff. The Codification did not change GAAP, but reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. SFAS No. 168 is effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009. The Company does not expect the adoption of SFAS No. 168 to have a material impact on its condensed consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force ("EITF"), the American Institute of Certified Public Accountants ("AICPA"), and the SEC did not or are not believed by management to have a material impact on our present condensed consolidated financial statements.
RESULTS OF OPERATIONS
Fiscal year ended March 31, 2009 compared to the fiscal year ended March 31, 2008.
The revenues and costs of sales are wholly attributed to AcXess. An agreement has been entered into to sell the Company’s interest in AcXess. The General and Administrative expenses are attributable to both AcXess and Innovative Software.
Revenues
Revenues for the fiscal years ended March 31, 2009 and 2008 were $357,746 and $216,583, respectively, an increase of $141,163 or approximately 65%. Revenue was derived primarily from the contracts that AcXess has with Microsoft, Citri, and SAP, and we experienced an increase in activity from these customers during the year ended March 31, 2009.
In June 2009, we entered into an agreement to sell our interest in AcXess, and do not expect to receive a significant revenue stream from this entity in the coming twelve months.
Cost of Sales and Margins
Cost of sales for the fiscal years ended March 31, 2009 and 2008 were $169,711 and $67,502, respectively, an increase of $102,209 or approximately 151%. Cost of sales primarily consisted of network charges that AcXess incurred at its data site, and we experienced significant cost increases from our hosting company during the year ended March 31, 2009. Gross profit of $188,035 and $149,081 resulted in a gross profit margin of 53% and 69% for the years ended March 31, 2009 and 2008, respectively. Gross margin percentage decreased due to increases in costs associated with hosting facilities during the fiscal year ended March 31, 2009.
Sales, General, and Administrative Expenses
Sales, general and administrative expenses for the years ended March 31, 2009 and 2008 were $747,963 and $1,440,271, respectively, a decrease of $692,308 or approximately 48%. Sales, general and administrative expenses consisted primarily of payroll and related costs of $273,547 (including $165,150 of non-cash compensation related to stock options vested by officers); legal and accounting fees in the amount of $148,654; consulting fees in the amount of $114,000; depreciation and amortization expense in the amount of $84,163; insurance expense in the amount of $37,236; bad debt expense of $29,320; facilities and related expense in the amount of $23,101; travel and entertainment expenses of $11,563; and professional fees in the amount of $6,210.
Of our total sales, general and administrative costs for the year ended March 31, 2009, $266,385 or approximately 39% is directly attributable to AcXess. In June 2009, we entered into an agreement to sell our interest in AcXess. However, as we plan to acquire additional operating companies, we do not expect our operating expenses to significantly decrease in the coming twelve months.
Other Income (Expense)
Other expense, net for the year ended March 31, 2009, was expense of $409,203 compared to expense of $195,819 for the year ended March 31, 2008, a net increase in expense of $213,384 or approximately 109%. During the prior year, the Company recognized a gain of $270,919 from the change in the fair value of derivative liabilities; these derivatives were reclassified to equity during the year ended March 31, 2008, and there was no such gain or loss during the current year. During the year ended March 31, 2009, the Company incurred interest expense of $406,657 compared to $469,109 during the year ended March 31, 2008. The reason for the decrease in interest expense was decrease in debt due to the conversion of notes payable. During the years ended March 31, 2009 and 2008, the Company had a gain on the sale of fixed assets of $2,205 and $2,518, respectively. In addition, during the year ended March 31, 2009, the Company recorded other expense of $4,571 related to the amortization of the discount due to the conversion feature associated with the liability for preferred stock; there was no such charge during the comparable period of the prior year.
Net Loss
For the reasons stated above, our net loss for the year ended March 31, 2009, amounted to $969,131 compared to a net loss of $1,487,009 during the prior period, a net decrease in loss of $517,878 , or approximately 35%.
LIQUIDITY AND CAPITAL RESOURCES
The March 31, 2009 financial statements have been prepared assuming that we will continue as a going concern. However, we have incurred a loss of $5,867,392 from inception (January 12, 2005) through March 31, 2009, and have working capital and stockholder deficits of $2,041,278 and $2,004,819 , respectively, at March 31, 2009. In addition, the Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, we expect to incur operating losses for the foreseeable future. Our financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
Management intends to continue to fund operations through additional financings. However there can be no assurance of successful financing or acquisition activity in the future. As of March 31, 2009, the Company had cash and cash equivalents of $627.
On December 22, 2006, the Company entered into a securities purchase agreement (the "Agreement") with an accredited investor (the "Investor") for the sale of $1,000,000 Convertible Debentures (the "Debentures"). In connection with the Agreement, the Investor received (i) a warrant to purchase 8,928,571 shares of common stock ("Long-Term Warrants") exercisable at $0.30 and (ii) a warrant to purchase 1,785,714 shares of common stock ("Short-Term Warrants") exercisable at $0.143 per share. The Long-Term Warrants and the Short-Term Warrants are exercisable for a period four years from the date of issuance and the earlier of (i) December 22, 2007 and (ii) the date a registration statement(s) covering the resale of all Registrable Securities (as defined in the Registration Rights Agreement) is declared effective by the Commission (the "Initial Exercise Date") and on or prior to the close of business on the four month anniversary of the Initial Exercise Date, respectively.
The Debentures bear interest at 4% until June 22, 2007, and 9% thereafter, payable in arrears and mature three years from the date of issuance. Accrued interest will be payable in cash semi-annually, beginning on July 1, 2007.
In February 2007 we entered into a master leasing arrangement with Gulf Pointe Capital, LLC for equipment purchases up to a total of $500,000 (see Contractual Obligations below).
During the year ended March 31, 2009, the Company received cash advances in the aggregate amount of $89,742 from a shareholder. These advances bear interest at the rate of 10% per annum.
At March 31, 2009, we had current liabilities of $2,041,905.
We have no material commitments for capital expenditures. Capital expenditures for the fiscal years ended March 31, 2009 and 2008, amounted to $8,985 and $59,771, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet arrangements as of March 31, 2009.
CONTRACTUAL OBLIGATIONS
In February 2007, the Company entered into a $500,000 Master Lease Line for Equipment Purchases (the “Master Lease Agreement”). At that time, the Company sold property and equipment for $125,000 and leased them back under the Master Lease Agreement. The Company recognized a gain on the sale of those assets of $10,633, which was deferred and will be recognized over the 24-month term of the lease. At March 31, 2009, the balance of this deferred gain was $0.
The Master Lease Agreement calls for draws of a minimum of $100,000, a minimum term of 18 months and a maximum term of 36 months. The lease entered into in February 2007 has monthly payments of $6,363. The Company accounted for this lease as a capital lease.
In connection with the Master Lease Agreement, the Company agreed to issue five year warrants to the lender to purchase 1,350,000 shares of the Company’s common stock at an exercise price of $0.18 per share. Ten percent (135,000) of the warrants vested upon execution of the Master Lease Agreement. The remaining 90% of the warrants vest on a pro rata basis as the lender provides funding under the Master Lease Agreement. As such, 303,750 warrants vested upon execution of the sale lease-back described above. The total number of warrants, 438,750, was valued using the Black-Scholes method and applied to the capital lease obligation in accordance with Accounting Principles Board (“APB”) No. 14. This resulted in a decrease in capital lease obligation of $37,726 and a corresponding increase in additional paid-in capital.
On April 16, 2008, the Company announced that it had terminated its planned acquisition of Xalles Limited that had been announced on October 5, 2007. In conjunction with this planned acquisition, Xalles had advanced to the Company the amount of $158,079 to provide working capital for the Company. On April 14, 2008 (the “Effective Date”), Innovative Software Technologies, Inc., (the “Company”), Xalles Limited, an Irish corporation (“Xalles”), and Meridian Bay Limited, a Hong Kong corporation (“Meridian”) terminated an agreement to purchase all of the outstanding shares of Xalles, which had been entered into by the parties on October 1, 2007 (the “Agreement”). Continued due diligence by the Company resulted in the Company’s decision to not pursue the acquisition under the terms specified by the Agreement.
As a result of the termination of the Agreement and the signing of the Release, and in order to recognize the obligation of the Company due to a series of advancements made to it by Xalles, the Company issued a promissory note to the benefit of Xalles in the amount of $158,079 on April 14, 2008, repayable on or before December 18, 2008 (the “Note”). The outstanding principal amount of the Note bears interest beginning on April 14, 2008, calculated on the basis of a 360-day year for the actual number of days elapsed through the actual payment date at the following rates of interest: eight percent (8%) per annum through June 15, 2008; ten percent (10%) per annum through August 16, 2008, twelve percent (12%) per annum through October 17, 2008; and fourteen percent (14%) per annum through December 18, 2008. This Note may be prepaid, either in whole or in part, at any time without penalty. The outstanding principal balance of this Note, plus accrued but unpaid interest, was due and payable on December 18, 2008 and is in default at March 31, 2009. As of March 31, 2009, the Company is in negotiations with Xalles regarding a restructuring or renegotiation of the Note; however, there is no assurance that such a restructuring will be achieved at terms beneficial to the Company if at all.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Innovative Software Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Innovative Software Technologies, Inc. (the Company) (a development stage company) as of March 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for the years ended March 31, 2009 and 2008, and the period from January 12, 2005 (Inception) through March 31, 2009. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innovative Software Technologies, Inc. as of March 31, 2009 and 2008, and the results of its operations and its cash flows for the years ended March 31, 2009 and 2008, and the period from Inception through March 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has sustained losses and negative cash flows from operations for the period from Inception through March 31, 2009, whereby its accumulated deficit during the development stage is approximately $5.9 million. The Company’s ability to meet its obligations in the ordinary course of business is dependent upon its ability to establish profitable operations, raise additional financing through public or private equity financings, enter into collaborative or other arrangements with corporate sources, or secure other sources of financing to fund operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2009 and 2008
AND THE PERIOD FROM INCEPTION (JANUARY 12, 2005) THROUGH MARCH 31, 2009
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INNOVATIVE SOFTWARE TECHNOLOGIES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATIVE SOFTWARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2009 AND 2008
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Description of Business:
Innovative Software Technologies, Inc. (the "Company") was incorporated in the State of Delaware in November 2007. Prior to the acquisition of AcXess, Inc. ("AcXess"), a Florida corporation, discussed in Note 3, the Company had no operations. The Company is in the development stage and has not commenced significant operations as of March 31, 2009. Therefore the Company's activities are reported in accordance with Statement of Financial Accounting Standards ("SFAS") No. 7, "Development Stage Enterprises", which requires the Company's statements of operations, stockholders' deficit and cash flows to include activity from the date of the Company's inception (January 12, 2005).
On June 26, 2006, Innovative Software Technologies, Inc., (“Innovative”), completed the acquisition of AcXess, Inc., a Florida corporation (“AcXess”), in a stock exchange transaction. As a result of the Transaction, AcXess became a wholly owned subsidiary of Innovative.
AcXess was formed to provide Business Continuity ("BC") products and services to the Small and Medium Enterprise ("SME") market. BC products and services are an advanced form of disaster recovery solutions for electronic data backup wherein the data and/or applications are available upon failure through means of connectivity to remote server locations. The Company intends to deliver its BC service through reseller channels including but not limited to Citrix Systems, Inc. ("Citrix") resellers. Management has identified Citrix mid-market client companies as its initial target market in North America. We currently have one BC customer.
On November 28, 2007 the (“Effective Date”) Innovative Software Technologies, Inc., (“Innovative Software-CA”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Innovative Software Technologies, Inc., a Delaware entity (“Innovative Software-DE”). Pursuant to the Merger Agreement, Innovative Software-CA and Innovative Software-DE were merged with and into the surviving corporation, Innovative Software-DE, (“Innovative”, or the “Company.”). As of the Effective Date, the certificate of incorporation and bylaws of the surviving corporation became the certificate of incorporation and bylaws of the Company, and the directors and officers in office of the surviving corporation became the members of the Board of Directors and officers of the Company. Following the execution of the Merger Agreement, on July 9, 2007, the Company filed with the Secretary of State of Delaware a Certificate of Merger with respect to the Innovative Software-CA and Innovative Software-DE merger.
On July 24, 2007, the Company entered into a Stock Purchase Agreement (the “Agreement”) with AcXess, Inc., its wholly owned subsidiary, Thomas Elowson, President of AcXess, Raymond Leitz, Chief Technical Officer of AcXess, and Helge Solberg, Chief Architect of AcXess, (collectively, Elowson, Leitz, and Solberg referred to herein as the “Buyers”) wherein (i) AcXess redeemed shares of its common stock from the Company in return for the issuance of a promissory note to the benefit of the Company and the signing of a Non-Exclusive License Agreement with the Company, and (ii) the Buyers exchanged stock of the Company held by them in exchange for stock in AcXess and Elowson canceled options for stock in the Company held by him in exchange for stock in AcXess. Immediately following the above redemptions and exchanges, the Company will continue to own 984,457 shares, or approximately 21.9% of the outstanding common stock, of AcXess. The transactions contemplated by the Agreement are expected to close upon approval of the transactions by the Company’s shareholders. AcXess has 4,500,000 shares of common stock outstanding. The Company has determined that it is in its best interests to close this transaction after acquiring another operating entity; however, there can be no assurance that the Company will be successful in negotiating an agreement to acquire another operating entity nor can there be any assurance that the Company, should it successfully negotiate an agreement to acquire another operating entity, will be successful in closing such a transaction. Please refer to the Company’s current report on Form 8-K as filed with the Securities and Exchange Commission on July 30, 2007.
The Company also provides High Availability ("HA") service to large companies. HA is an advanced form of hosting service that provides application access to multiple concurrent users and includes specialized scheduling and tracking features. HA services are sold using in-house business development personnel. The Company currently has three customers: Microsoft, Inc., Citrix and SAP, Inc.
The number of customers to date is limited and all of our revenue for the past year has been generated through the HA business.
(b) Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AcXess, and its inactive subsidiaries EPMG, Inc. and SoftSale, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents:
For purposes of the statement of cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.
(d) Accounts Receivable:
Trade accounts receivable consist of outstanding billings to customers for both HA and BC services. Both types of services are provided under contracts ranging from three to twenty-four months in duration. Past due balances over 90 days are reviewed individually for collectibility. An allowance for doubtful accounts is established based on the Company's best estimate of the amount of probable credit losses in its existing accounts receivable. At March 31, 2009 and 2008, the Company had an allowance for doubtful accounts in the amount of $3,345 and $6,310, respectively. Interest is not charged on past due accounts.
(e) Deferred Financing Costs:
The Company capitalizes financing costs as incurred and amortizes these costs to interest expense over the life of the underlying instruments. During the year ended March 31, 2009 and 2008, the Company charged deferred financing costs in the amount of $0 and $136,222 to interest expense as the notes payable related to these financing costs were converted to equity.
(f) Offering Costs:
Direct costs of an equity offering are charged to additional paid-in capital upon closing of the offering and receipt of funds.
(g) Property and Equipment:
Property and equipment are stated at cost. Property and equipment acquired under capital leases are stated at the present value of the minimum lease payments.
Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets, generally 5 years for office equipment, 5 years for furniture and fixtures, and 3 years for computers and software. Equipment acquired pursuant to capital leases is amortized over the term of the lease.
(h) Long-Lived Assets
The Company accounts for its long-lived assets under the provision of Statements of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company's long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should an impairment in value be indicated, the carrying value of intangible assets will be adjusted based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.
(i) Income Taxes:
The Company has implemented the provisions on Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires that income tax accounts be computed using the liability method. Deferred taxes are determined based upon the estimated future tax effects of differences between the financial reporting and tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws.
(j) Revenue Recognition:
The Company recognizes revenues from contracts, in which the Company provides website hosting and consulting services, as the services are performed. The contractual terms of the agreements dictate the recognition of revenue by the Company. Payments received in advance are deferred until the service is provided.
Contract costs include all direct equipment, material, and labor costs and those indirect costs related to contract performance, such as indirect labor. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in contract performance, contract conditions, and estimated profitability that may result in revisions to costs and income are recognized in the period in which the revisions are determined.
For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which superseded SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. SAB No. 104 incorporates Emerging Issues Task Force (“EITF”) No. 00-21, “Multiple-Deliverable Revenue Arrangements.” EITF No. 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. Through March 31, 2009, all of the Company’s revenue has been service revenue.
(k) Customer Concentration
During the years ended March 31, 2009 and 2008, three customers accounted for approximately 97% and 77% of revenues. The loss of these customers would have a material adverse effect on financial results.
(l) Earnings Per Common 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 common stock equivalents are not considered in the computation.
Basic loss per share is based on the weighted effect of common shares issued and outstanding, and is calculated by dividing net loss by the weighted average shares outstanding during the period. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding (common stock options, common stock warrants and preferred stock.
At March 31, 2009 and 2008, options and warrants to purchase 22,488,869 and 57,397,869 shares of common stock, respectively, at exercise prices ranging from $0.05 to $0.30 per share were outstanding, but were not included in the computation of diluted earnings per share as their effect would be antidilutive. Further, at March 31, 2009 and 2008, 204,545,455 and 16,071,429 shares of common stock, respectively, convertible from Preferred Stock and associated dividends, were not included in the computation of diluted earnings per share as their effect would be antidilutive. Also, at March 31, 2009 and 2008, 8,928,571 shares of common stock from convertible debentures were not included in the computation of diluted earnings per shares as their effect would be antidilutive.
(m) Stock-Based Compensation:
The company recognizes the cost of stock options and restricted stock in accordance with SFAS No. 123 (Revised 2004) (“SFAS No. 123(R)”), “Share Based Payment.” SFAS No. 123(R) requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward-known as the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments.
The company may, from time to time, issue common stock, stock options or common stock warrants to acquire services or goods from non-employees. Common stock, stock options and common stock warrants issued to persons other than employees or directors are recorded on the basis of their fair value, as required by SFAS No. 123 (“SFAS No. 123”), “Accounting for Stock Based Compensation”, which is measured as of the date required by EITF Issue 96-18 (“EITF 96-18”), “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” In accordance with EITF 96-18, the stock options or common stock warrants are valued using the Black-Scholes model on the basis of the market price of the underlying common stock on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to non-performance, is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.
(n) Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.
(o) Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. The estimated fair values approximate their carrying value because of the short-term maturity of these instruments or the stated interest rates are indicative of market interest rates.
(p) Recent Accounting Standards:
Recently adopted accounting pronouncements
Effective at the beginning of the first quarter of 2009, the Company adopted the provision of FIN 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
As a result of the implementation of FIN 48, the Company has not changed any of its tax accrual estimates. The Company files U.S. federal and U.S. state tax returns. For state tax returns the Company is generally no longer subject to tax examinations for years prior to 1996.
Effective April 1, 2008, the Company partially adopted SFAS 157, which provides a framework for measuring fair value. Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The partial adoption of this standard only resulted in additional disclosure requirements and had no financial statement impact. Delayed application of this statement is permitted for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company has not applied the provisions of SFAS 157 for intangible assets and long-lived assets measured for fair value for impairment assessment under Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Effective April 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities - Including an Amendment of SFAS No. 115 (SFAS 159). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS 159 permits the Company to choose to measure eligible items at fair value at specified election dates. The Company will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. In connection with the adoption of this standard, the Company did not elect any additional financial instruments to be recorded at fair value.
Effective December 31, 2008, the Company adopted the Emerging Issues Task Force (“EITF”) Issue No. 08-4: Transition Guidance for Conforming Changes to Issue No. 98-5 (EITF 08-4), which was ratified by the consensus of the FASB in June 2008. The objective of EITF 08-4 is to provide transition guidance for conforming changes made to Issue No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” that resulted from Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” and FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This transition guidance is unique in that the current changes reflect matters that should have been addressed in the past, but were missed. Issue No. 08-4 concludes that conforming changes made to Issue No. 98-5 that result from Issue No. 00-27 and Statement No. 150 are effective for financial statements issued for fiscal years ending after December 15, 2008. The effect of these changes is to be applied retrospectively with the cumulative effect of the change being reported in retained earnings. If a company must make a change in its accounting to implement these changes, then the disclosure requirements in FAS 154 should be followed. The adoption of EITF 08-4 did not impact the Company's consolidated financial statements.
SFAS No. 160 - In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. SFAS No. 160 will apply to fiscal years and interim periods beginning on or after December 15, 2008. We adopted SFAS No. 160 on January 1, 2009 and it had no material impact on our consolidated financial statements.
SFAS No. 161 - In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 to provide a better understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and their effect on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We adopted SFAS No. 161 on January 1, 2009 and it had no material impact on our consolidated financial statements.
SFAS No. 165 - We adopted SFAS No. 165, Subsequent Events for the Quarterly Report for the period ending June 30, 2009. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, which are referred to as subsequent events. The statement clarifies existing guidance on subsequent events, including a requirement that a public entity should evaluate subsequent events through the issue date of the financial statements, the determination of when the effects of subsequent events should be recognized in the financial statement and disclosures regarding all subsequent events. Adoption of SFAS 165 did not have a material affect on our condensed consolidated financial statements. We have updated subsequent events through August 14, 2009, which is the date of this filing.
SFAS No. 141(R) - In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) requires the acquirer of a business to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at fair value. SFAS No. 141(R) also requires transaction costs related to the business combination to be expensed as incurred. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted SFAS No. 141(R) on April 1, 2009 and it had no material impact on our consolidated financial statements.
In April 2009, the Company adopted several new pronouncements issued by the FASB related to fair value measurement, recording and disclosure. FASB Staff Position, or FSP, No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures relating to fair value of financial instruments for both interim and annual reporting periods. FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides additional guidance on estimating the fair value of a financial instrument when the volume and level of activity for the asset or liability has significantly decreased in relation to normal market activity for the asset or liability. FSP No. 115-2 and FSP No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provide additional guidance for recording impairment losses on securities. All of these fair value measurement pronouncements were effective for interim and annual reporting periods ending after June 15, 2009. The adoption of these pronouncements did not have a material impact on the Company’s condensed consolidated financial statements.
SFAS No. 167 - In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which amends FASB Interpretation (FIN) No. 46(R), Consolidation of Variable Interest Entities, for variable interest entities to determine whether a variable interest entity must be consolidated. SFAS No. 167 requires an entity to perform an analysis to determine whether an entity’s variable interest or interests give it a controlling financial interest in a variable interest entity. This statement requires ongoing reassessments of whether an entity is the primary beneficiary of a variable interest entity and enhanced disclosures that provide more transparent information about an entity’s involvement with a variable interest entity. The new standard will become effective for us on January 1, 2010. We are currently evaluating the impact of adopting SFAS No. 167 on the consolidated financial statements.
In May 2008, the FASB issued Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. This staff position addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the allocation in computing earnings per share under the two-class method described in SFAS 128, Earnings Per Share. The FASB concluded that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. If awards are considered participating securities, the Company is required to apply the two-class method of computing basic and diluted earnings per share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. The implementation of EIFT 03-6-1 did not impact the Company’s consolidated financial statements.
In November 2007, FASB issued EITF 07-1, “Accounting for Collaborative Arrangements" (“EITF 07-1”).” EITF 07-1 requires additional disclosures related to collaborative arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The implementation of EIFT 07-1 did not impact the Company’s consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification, or Codification, will become the single official source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, with the exception of guidance issued by the SEC and its staff. The Codification did not change GAAP, but reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure. SFAS No. 168 is effective for financial statements issued for interim and annual reporting periods ending after September 15, 2009. The Company does not expect the adoption of SFAS No. 168 to have a material impact on its condensed consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force ("EITF"), the American Institute of Certified Public Accountants ("AICPA"), and the SEC did not or are not believed by management to have a material impact on our present condensed consolidated financial statements.
(2) LIQUIDITY AND MANAGEMENT'S PLANS
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has incurred a loss of $5,867,392 from inception (January 12, 2005) through March 31, 2009, and has a working capital deficiency and stockholder deficit of $2,041,278 and $2,004,819 respectively, at March 31, 2009. The Company currently has minimal revenue generating operations and expects to incur substantial operating expenses in order to expand its business. As a result, the Company expects to incur operating losses for the foreseeable future. The accompanying financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.
Management intends to continue to finance operations through financing activities as well as to seek potential acquisitions that have positive cash flows; however, there can be no assurance of successful financing or acquisition activity in the future.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 2009 and 2008:
Depreciation expense was $84,162 and $87,291 for the years ended March 31, 2009 and 2008, respectively. During the year ended March 31, 2009, the Company purchased assets in the amount of $8,985.
(4) DEFERRED REVENUE
The Company’s wholly-owned subsidiary, AcXess, Inc., receives payment in advance for certain of its services, primarily website hosting. These payments are recognized as revenue over the period for which the services are provided. As of March 31, 2009 and 2008, these advance payments aggregated a total of $30,301 and $112,781, respectively; these amounts will be taken into revenue over the respective subsequent twelve month periods.
(5) ADVANCES PAYABLE
Advances payable of $89,742 at March 31, 2009, consists of cash advances to the Company by Aspen Capital and a shareholder, Peter Peterson. These cash advances will accrue interest at a rate of 10% per annum. During the year ended March 31, 2009, we accrued interest in the amount of $3,715 and $855, respectively, for these cash advances.
During the year ended March 31, 2009, the Company converted a cash advance of $155,511 and accrued interest in the amount of $2,568, into a promissory note payable in the amount of $158,079 to Xalles, an Irish corporation (“Xalles”). The Company had been involved in negotiations to purchase Xalles. These funds were advanced to the Company by Xalles for the purpose of general working capital and trade payables of both Xalles and the Company. See note 7.
(6) NOTE PAYABLE
On April 14, 2008, the Company issued a promissory note (the “Note”) to the benefit of Xalles in the amount of $158,079 pursuant to the conversion of an advance made to the Company by Xalles (see note 6). The outstanding principal amount of the Note bears interest beginning on April 14, 2008, calculated on the basis of a 360-day year for the actual number of days elapsed through the actual payment date at the following rates of interest: eight percent (8%) per annum through June 15, 2008; ten percent (10%) per annum through August 16, 2008, twelve percent (12%) per annum through October 17, 2008; and fourteen percent (14%) per annum through December 18, 2008. This Note may be prepaid, either in whole or in part, at any time without penalty. The outstanding principal balance of this Note, plus accrued but unpaid interest, was due and payable on December 18, 2008 and is in default at March 31, 2009. The Company is currently in negotiations with Xalles regarding a restructuring or renegotiation of the Note. However, there is no assurance that such a restructuring will be achieved at terms beneficial to the Company if at all.
(7) 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. These penalties are measured and accrued in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”. 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 instrument liability.
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.
When freestanding options or warrants are 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. When 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. During the year ended March 31, 2008, due to the conversion of the Convertible Notes Payable to common stock (see below), the Company reclassified derivative liabilities in the amount of $993,015 from liability to equity.
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 (the “Notes”) to accredited investors. These notes have a term of six months, an interest rate of 12% per annum, and are convertible into shares of common stock of the Company at a 30% discount to a future Qualified Financing (as therein described). As a result of this, the Company could ultimately issue an unlimited number of shares of common stock. This resulted in liability treatment for all of the related derivatives. In addition, each of the Notes is issued with warrants to purchase Company common stock at a strike price of $0.05 per share. The number of warrants granted is determined by multiplying the face value of each note issued by four. In October the Board of Directors of the Company approved an increase in the amount to be raised under this financing to $1,500,000. A total of $1,107,500 had been raised as of November 10, 2006, when the Company closed the round. During the three and nine months ended December 31, 2007, the Company was in default on all Notes totaling a principal amount of $1,107,500. In the event of a default resulting from the Company's non-payment of principal or interest when due, a holder of the Notes may declare all unpaid principal and accrued interest due and payable immediately. The Company was served a complaint from one investor demanding repayment of $55,000 under one of the Notes. The Company reached a settlement agreement with this investor, and executed a mutual release and the complaint was dismissed on October 25, 2007. No notice has been received from any other holder of the Notes and the Company is currently in the process of renegotiating the terms of the Notes (as noted below); however there can be no assurance that such negotiations will be successful.
On December 22, 2006, the Company entered into a securities purchase agreement with an accredited investor (the “Investor”) for the sale of $1,000,000 Convertible Debentures (the “Debentures”). In connection with the Agreement, the Investor received (i) a warrant to purchase 8,928,571 shares of common stock (“Long-Term Warrants”) exercisable at $0.30 and (ii) a warrant to purchase 1,785,714 shares of common stock (“Short Term Warrants”) exercisable at $0.143 per share. The Long Term Warrants and the Short Term Warrants are exercisable for a period four years from the date of issuance and the earlier of (i) December 22, 2007 and (ii) the date a registration statement(s) covering the resale of all Registrable Securities (as defined in the Registration Rights Agreement) is declared effective by the SEC (the “Initial Exercise Date”) and on or prior to the close of business on the four month anniversary of the Initial Exercise Date, respectively. The Debentures are convertible at the option of the holder into shares of common stock at a price of $0.112 per share. The Company incurred approximately $81,140 in interest expense relating to the Debentures due to the “Liquidating Damages” clause specified in the Purchase Agreement as a registration statement covering the Registrable Securities was declared effective by the SEC on July 23, 2007, 123 days after the agreed upon date in the Purchase Agreement, March 23, 2007. The penalty is calculated as 2% per 30 day period or partial 30 day period beyond the dates stipulated above. The maximum aggregate liquidated damages payable to a Holder under this Agreement is 10.5% of the aggregate subscription amount paid by such Holder pursuant to the Purchase Agreement. Pursuant to Emerging Issues Task Force issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, there are no gains or losses associated with this penalty, as it is not indexed to or settled in the stock of the Company.
The default on the Notes discussed above is an “Event of Default” in accordance with the terms of the Debenture and, therefore, the Debenture holder may declare all principal and interest due and payable immediately; however, the Company has received no notice from the Debenture holder demanding such repayment.
The Debentures bear interest at 4% until June 22, 2007 and 9% thereafter, payable in arrears and mature three years from the date of issuance. Accrued interest is payable in cash semi-annually, beginning on July 1, 2007. The Company has not made the interest payment of $21,271 due on July 1, 2007 and intends to negotiate a settlement with the Debenture holder; however there can be no assurance that such negotiation will be successful.
Warrants were initially 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”) primarily as a result of the possible conversion of other debt into a possible unlimited number of shares. Accordingly, the initial fair values of the warrants, amounting to an aggregate of $82,239 relating to the issuance of the Notes, and $964,286 relating to the issuance of the Debentures, were 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% (based on analysis of historical stock prices of the Company and its selected peers), and the five year and four year life of the warrants relating to the Notes and Debentures, respectively. The Company is required to re-measure the fair value of the warrants at each reporting period.
Because the conversion price of the Notes is not fixed, they are not “conventional convertible debt” as that term is used in EITF 00-19 primarily as a result of the possible conversion of other debt into a possible unlimited number of shares. Accordingly, the Company is required to bifurcate and account separately for the embedded conversion options, together with any other derivative instruments embedded in the Notes. The Debentures are a hybrid instrument that embodies several derivative features. The instrument is not afforded the “conventional” convertible exemption because of certain full-ratchet anti-dilution protections afforded the investors. Further, certain derivative features did not meet the conditions for equity classification set forth in EITF 00-19. As a result, the Company has combined all embedded derivatives into one compound derivative financial instrument for financial accounting and reporting.
The freestanding warrants issued with the Debentures are also hybrid instruments that embody derivative features. While bifurcation of the embedded derivatives was not required, the warrants did not otherwise meet all of the conditions for equity classification set forth in EITF 00-19. As a result, the Company has recorded the warrants as derivative liabilities at fair value.
The conversion option related to each of the Notes was bifurcated from the 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 $801,911.
The discount from the face amount of the 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 of the Notes, using the effective interest method. Amortization related to the Notes for the years ended March 31, 2009 and 2008 was $265,011 and $252,323.
On August 23, 2007, the Company issued an aggregate of 5,672,655 shares of common stock in exchange for the conversion of the Notes with the principal amount of $263,315 and accrued interest of $20,318 totaling $283,633, based on a conversion price of $0.05 per share. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The balance of the Notes at September 30, 2007 was $902,722. During the three months ended December 31, 2007, the Company also converted the following Notes: on October 12, 2007, the Company issued 14,633,759 shares of its common stock in exchange for the conversion of convertible promissory notes and accrued interest therein in the aggregate amount of $731,688, based on a conversion price of $0.05 per share; On October 19, 2007, the Company issued 574,630 shares of its common stock in exchange for the conversion of convertible promissory notes and accrued interest therein in the aggregate amount of $28,732, based on a conversion price of $0.05 per share; and on December 17, 2007, the Company issued 3,581,314 shares of its common stock in exchange for the conversion of convertible promissory notes and accrued interest therein in the aggregate amount of $179,066, based on a conversion price of $0.05 per share. These transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. At December 31, 2007, all of the Notes had been converted and none remain outstanding. At the time of the conversions, the Company reclassified the outstanding derivative liabilities at the time of the conversions in the aggregate amount of $993,015 related to the Convertible Promissory Notes to additional paid-in capital during the year ended March 31, 2008.
As a result of this conversion, all outstanding warrants and embedded derivative liabilities were recharacterized as equity and reclassified to additional paid-in capital.
The conversion option related to the Debentures was bifurcated from the Debentures and accounted for separately as a derivative instrument liability. The bifurcated embedded derivative instruments, including the embedded conversion option which was valued using the Flexible Monte Carlo Simulation methodology, was recorded at its initial fair value of an aggregate of $553,466.
The discount from the face amount of the Debentures represented by the value assigned to the warrants and bifurcated derivative instruments is being amortized over the period to the due date of the Debentures, using the effective interest method. Amortization related to the Debentures for the year ended March 31, 2009 and 2008, was $265,011 and $60,395, respectively.
A summary of the Debentures and unamortized discount at March 31, 2009 and 2008, is as follows:
The Company uses 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 reclassification date, the Company 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 Notes. All warrants and conversion options can be exercised by the holder at any time.
Because of the limited historical trading period of the Company’s common stock, the expected volatility of the Company’s common stock over the remaining life of the conversion options and warrants has been estimated at 114% (based on analysis of historical stock prices of the Company and its selected peers). 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.
The Registration Rights Agreement contains a “Liquidating Damages” provision, whereby the Company is obligated to file a registration statement covering the Registrable Securities within 60 days of the Purchase Agreement, and cause such registration statement to become effective within 90 days of the Purchase Agreement. If either of these deadlines is not met, the Company incurs a penalty in the amount of 2% per month of the aggregate purchase price of the securities. The Company filed such registration statement within the 60 day period, but the registration statement did not become effective until 123 days after the Purchase Agreement, and the Company incurred liquidated damages in the amount of $81,140. The Purchase Agreement became effective on July 23, 2007, 123 days after the agreed upon date in the Purchase Agreement, March 22, 2007. This penalty is payable in cash, and accordingly the provisions of and the amount of $81,140 was carried as a current liability on the Company’s balance sheet at March 31, 2009 and 2008.
(8) STOCKHOLDERS' EQUITY
(a) Recent issuances of common stock:
The shares of stock issued in the following transactions were valued at the closing market price on the date of issue.
On May 30, 2008, the Company issued shares of common stock at a price of $0.05 per shares for previously accrued salary in the amount of $31,500 to the Company’s Chief Financial Officer. A total of 630,000 shares of common stock were issued to the officer.
On May 30, 2008, the Company issued shares of common stock at a price of $0.05 per shares for previously accrued salary in the amount of $35,000 to the Company’s Executive Officer. A total of 700,000 shares of common stock were issued to the officer.
On July 11, 2008 the Company issued 1,000,000 shares of common stock as a price of $0.02 per share for a previously accrued liability in the amount of $20,000 for legal fees.
(b) Convertible Preferred Stock:
The Company has 25,000,000 shares of preferred stock authorized and has designated 1,500,000 shares as $1.00 stated value Series A Preferred and 3,000,000 shares as $1.00 stated value Series B Preferred, of which 450,000 and -0- shares, respectively, are issued and outstanding as of March 31, 2007. Series A and Series B Preferred Stock (collectively "Preferred Stock") have the same terms and conditions. The Preferred Stock is (i) entitled to cumulative dividends at a rate of 4.0% of the liquidation value ($1.00 per share), (ii) convertible at any time into common stock at a rate of 95% of the average closing market price of the common stock for five days preceding conversion, (iii) redeemable at any time by the Company for $1.00 per share, and (iv) entitled to one vote per share.
During the year ended March 31, 2009, the Company had 450,000 shares of preferred stock outstanding. The Company has accrued 4% or $4,500 per quarter of undeclared preferred stock dividends. As of March 31, 2009, the Company has $18,000 and $49,500 in undeclared preferred stock dividends for the year ended March 31, 2009 and from inception (January 12, 2005) through March 31, 2009, respectively.
Total preferred stock on the Company’s balance sheet at March 31, 2009 was $450,000. The number of shares of common stock issuable for the conversion of preferred stock exceeded the number of shares of common stock authorized by 39,477,094 shares, which represents 19.3% of the total number of shares into which the preferred shares are convertible at March 31, 2009. The Company reclassified of 19.3% the total value of its preferred shares, or $86,850, to current liabilities on its balance sheet at March 31, 2009. The Company also calculated the value of the beneficial conversion feature associated with this liability at $4,571, and charged this amount to operations and to additional paid-in capital at March 31, 2009.
(c) Equity Incentive Plan:
On August 9, 2006, the Company adopted the Innovative Software Technologies, Inc. 2006 Equity Incentive Plan (the "Plan"). An aggregate of 20 million shares of common stock is authorized for issuance under the Plan. Options must terminate no later than the tenth (10th) anniversary of the date of grant, and each incentive stock option granted to any 10% Owner-Employee (as defined in the Plan) must terminate no later than the fifth (5th) anniversary of the date of grant. The Company accounts for stock-based compensation using the fair value method as defined in SFAS No. 123, "Accounting for Stock-Based Compensation" and estimates the fair value of each option grant on the grant date using an option-pricing model.
On August 24, 2007, the Company adopted the Innovative Software Technologies, Inc. 2007 Equity Incentive Plan (the “2007 Plan”). An aggregate of 60 million shares of common stock is authorized for issuance under the 2007 Plan. The Company accounts for stock-based compensation using the fair value method as defined in SFAS No. 123, "Accounting for Stock-Based Compensation" and estimates the fair value of each option grant on the grant date using an option-pricing model. During the years ended March 31, 2009 and 2008, the Company recognized $165,150 and $300,794, respectively, in stock-based compensation.
A summary of the Company's stock option 2006 and 2007 Plans as of March 31, 2009, and the changes during the years ending March 31, 2009 and 2008, is presented below:
Exercise prices of options outstanding at March 31, 2009:
Aggregate intrinsic value of options outstanding and exercisable at March 31, 2009 and 2008 was $0. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $0.002 and $ 0.02 as of March 31, 2009 and 2008, respectively, and the exercise price multiplied by the number of options outstanding. As of March 31, 2009, total unrecognized stock-based compensation expense related to stock options was $0. The total stock-based compensation expense for the years ended March 31, 2009 and 2008 was $165,150 and $300,794, respectively.
All options were granted at exercise prices that either equaled or exceeded fair market value at the respective dates of grant. No options had been granted to a 10% Owner-Employee.
During the year ended March 31, 2008, the Company used the Black-Scholes method to value options issued. The significant assumptions made were as follows:
The expected life of the awards is based on the Company's historical exercise patterns and the term of the options. The risk free interest rate range is based on zero coupon U.S Treasury strips for the comparable term. The expected volatility is derived from the changes in the Company's historical common stock prices over a time frame similar to the expected life of the awards. The dividend yield is based on the Company's historical yield, which was considered a non-dividend paying equity assumption. The suboptimal exercise option is the stock-price-to-exercise-price ratio at which suboptimal early option exercise is assumed, generally between 1.5 and 3. Empirical data from actual exercise patterns at S&P 1500 companies indicated a median price ratio for exercise of 2.0, which is the assumption applied in Lattice models. Lastly, the post vesting forfeiture rate is based on the Company's rate at which employees may lose unvested options when they leave their jobs and may be forced to exercise prematurely then unexercised but vested options.
(d) warrants:
A summary of the Company's warrants as of March 31, 2009, and the changes during the years ending March 31, 2009 and 2008, is presented below:
(9) RELATED PARTY TRANSACTIONS
On August 9, 2006, the Company entered into an employment agreement with Thomas J. Elowson, the Company's Chief Operating Officer and President. The agreement has a term of 3 years, stipulates a minimum annual salary of $84,000, and has certain provisions regarding termination of employment with and without "cause" as therein defined. In addition, the employment contract provides for a signing bonus of $10,000 payable upon a fundraising event or series of related fundraising events under which the Company raises a cumulative gross amount of at least $2 million. As of March 31, 2009, this signing bonus has not been paid as the condition for its payment has not been met. In connection with his employment agreement the Company granted Mr. Elowson options to purchase 5,978,349 shares of common stock in the Company. The options have an exercise price of $0.14 per share, expire on August 8, 2011, and vested immediately. In June 2009, the Company reached an agreement to sell its ownership interest in its operating subsidiary AcXess. At this time, Mr. Elowson’s employment agreement was terminated, his options were cancelled.
On February 16, 2007, we entered into an employment agreement with Philip Ellett, the Company's former Chief Executive Officer. Pursuant to the terms of the agreement Mr. Ellett is to receive an annual base salary of $84,000 a year and is entitled to receive an increase to his base salary and receive certain bonuses if certain managed business objectives are met by the Company during the 2007 calendar year. Mr. Ellett also received options to purchase 6,000,000 shares of common stock at an exercise price of $0.08 per share. The options vest according to the following schedule: (1) 1,000,000 vested upon approval by the board of directors of the Plan (2) the remaining 5,000,000 will begin vesting on January 31, 2008 at 138,889 per month, for a total of 36 months. The options expire on February 16, 2012. Mr. Ellett resigned his position as the Company’s Chief Executive Officer effective February 19, 2009. These options were forfeited and cancelled during the fiscal year ending March 31, 2009.
In October, 2007, The Company granted options to purchase an additional 21,000,000 shares of its common stock at a price of $0.05 per share to its former Chief Executive Officer, Mr. Ellett. These options have a term of ten years, and vest as follows: 5,250,000 at the grant date, and the balance at the rate of 437,500 per month over the succeeding thirty-six months. During the years ended March 31, 2009, and 2008 the Company recognized an expense of $155,837 and $221,638 respectively, for the value of these options vested during the year. These options were forfeited and cancelled during the fiscal year ending March 31, 2009.
In October 2007, the Company granted options to purchase 7,500,000 shares of its common stock at a price of $0.05 per share to its former Vice President and Chief Financial Officer. These options have a term of ten years, and vest as follows: 1,875,000 at the grant date, and the balance at the rate of 156,250 per month over the succeeding thirty-six months. During the year ended March 31, 2009 and 2008, the Company recognized an expense of $9,313 and $79,156, respectively, for the value of these options vested during the year. These options were forfeited and cancelled during the fiscal year ending March 31, 2009.
Included in the accompanying balance sheet at March 31, 2009 and 2008 is $59,500 and $21,000, respectively, in accrued salary due to the Company's former Chief Executive Officer, who resigned effective February 12, 2009.
Included in the accompanying balance sheet at March 31, 2009 and 2008 is $7,000 and $37,500, respectively, in accrued salary due to the Company's previous Chief Financial Officer, who resigned effective May 31, 2008.
In October 2007, the Company converted accrued salary to its Vice President and Chief Financial Officer in the amount of $60,500 into common stock at the fair value of $0.05 per share for a total of 1,210,000 shares.
In May 2008, the Company converted accrued salary to its Chief Financial Officer in the amount of $31,500 into common stock at a fair value of $0.05 per share for a total of 630,000 shares.
In May 2008, the Company converted accrued salary to its Chief Executive Officer in the amount of $35,000 into common stock at a fair value of $0.05 per share for a total of 700,000 shares.
During the year ended March 31, 2009, the Company accrued salary in the amount of $50,000 to the Company’s current Chief Executive Officer and Chief Financial Officer, whose tenure with the Company began on June 1, 2008.
The Company currently rents its primary office from a shareholder. This facilitiy consist of approximately 200 square feet of office space and the cost is $1,000 per month. There is no formal lease, and the agreement is on a month to month basis.
(10) INCOME TAXES
In July 2006, the FASB issued FIN No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This pronouncement prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in the our tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 were adopted on April 1, 2007. The adoption of FIN 48 did not have a material impact on our financial statements. As of March 31, 2009, all of the federal income tax returns Innovative Software has filed are still subject to adjustment upon audit.
The Company’s provision for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 34% to income before income taxes as a result of the following (in thousands):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
Due to the uncertainty of the Company’s ability to generate taxable income to realize its net deferred tax assets at March 31, 2009, a full valuation allowance has been recognized for financial reporting purposes. The Company’s valuation allowance for deferred tax assets increased by $182,000 during the year ended March 31, 2009. The increase in the deferred tax assets in 2009 was primarily the result of increasing net operating loss carryforwards during the year.
At March 31, 2009, the Company had federal net operating loss carryforwards of approximately $5.4 million for income tax reporting purposes, which begin to expire in 2025. The Company’s ability to utilize the carryforwards may be limited in the event of an ownership change as defined in current income tax regulations.
(11) COMMITMENTS AND CONTINGENCIES
(a) Leases:
The Company does not have any non-cancellable operating leases with initial terms in excess of one year as of March 31, 2009. Future minimum capital lease payments as of March 31, 2009, are as follows:
In February 2007 the Company entered into a $500,000 Master Lease Line for Equipment Purchases (the “Master Lease Agreement”). At that time, the Company sold property and equipment for $125,000 and leased them back under the Master Lease Agreement. The Company recognized a gain on the sale of those assets of $10,633 which was deferred and will be recognized over the 24 month term of the lease. At March 31, 2009, the balance of this deferred gain was $0.
The Master Lease Agreement calls for draws of a minimum of $100,000, a minimum term of 18 months and a maximum term of 36 months. The lease entered into in February 2007 has monthly payments of $6,363. The Company accounted for this lease as a capital lease.
In connection with the Master Lease Agreement, the Company agreed to issue five year warrants to the lender to purchase 1,350,000 shares of the Company’s common stock at an exercise price of $0.18 per share. Ten percent (135,000) of the warrants vested upon execution of the Master Lease Agreement. The remaining 90% of the warrants vest as on a pro rata basis as the lender provides funding under the Master Lease Agreement. As such 303,750 warrants vested upon execution of the sale lease-back described above. The total number of warrants, 438,750, was valued using the Black-Scholes method and applied to the capital lease obligation in accordance with Accounting Principles Board (“APB”) No. 14. This resulted in a decrease in capital lease obligation of $37,726 and a corresponding increase in additional paid-in capital.
Rent expense under all operating leases for the year ended March 31, 2009, and 2008, was $13,177 and $27,649 respectively. As of March 31, 2009, our principal executive offices are located at 1413 South Howard Avenue, Suite 220, Tampa Florida, 33606. This office consists of approximately 200 square feet which we rent for $1,000 per month. There is no formal lease, and the office is rented on a month to month basis.
(b) SEC Investigation:
On June 24, 2003, the Securities and Exchange Commission ("SEC") 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. On June 25, 2007, the SEC notified the Company that it had concluded the investigation as it relates to the Company and was not recommending any enforcement action.
(c) Litigation:
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, and other legal and equitable defenses. Kansas City Explorers have pursued the court and have been granted a court date of September 23, 2009.
(12) SUBSEQUENT EVENTS
Asset Purchase Agreement
On June 17, 2009, the Company, purchased substantially all of the assets of The WEB Channel Network, LLC a Florida limited liability company , and certain other assets of Robert W. Singerman, the manager and sole owner of Seller. The Company also entered into an Employment Agreement with Mr. Singerman, Mr. Singerman also entered into a Non-Disclosure, Non-Competition, Non-Solicitation and Invention Agreement with the Company.
The Purchased Assets include substantially all of the assets of The Web Channel Network, including all of its intellectual property and its signed and pending production agreements, and all of Mr. Singerman’s equity positions in several limited liability companies and various web channels. The intellectual property acquired includes all such property intended to be used in: (i) the development and application of standard definition video integrated with Internet protocol television and web design; (ii) the encoding process of FLASH video with Internet protocol television; (iii) audio digital recording for Internet protocol radio and television; (iv) a Content Management System for Internet protocol television; acquiring, formatting, programming, encoding, testing and deploying licensed previously produced broadcast video; and (v) PODCASTS with Internet protocol television. The intellectual property components also include (a) the unencumbered ownership of over 100 strategic web domain names, (b) all inventions (whether patentable or un-patentable and whether or not reduced to practice), all trademarks, service marks, trade dress, logos, trade names, and corporate names, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, and (d) all trade secrets and confidential business information including ideas, research and development, and know-how.
The purchase price consisted of: (i) the Company’s agreement to make cash installment payments of $25,000 within 15 days of the June 17, 2009 sale and $75,000 prior to September 30, 2009; (ii) a promissory note in the amount of $500,000 payable over five years in annual installments of $100,000 in principal plus accrued interest, secured by all of the Purchased Assets pursuant to a Security Agreement; and (iii) stock purchase warrants of the Company for 5,000,000 shares of the Company’s common stock at an exercise price of $0.03 per share. The warrants were valued at an aggregate of $15,000 via the Black-Scholes valuation model using the following variables: Term of 5 years, risk-free interest rate of 0.5%, volatility of 461%.
The Merger has been accounted for under the acquisition method of accounting in accordance with Statement of Financial Accounting Standard (SFAS) No. 141(R), “Business Combinations.” After considering all the relevant factors in determining the acquiring enterprise, including, but not limited to, relative voting rights, composition of the board of directors and senior management, and the relative size of the companies, the merger was deemed a acquisition and the Company was treated as the “acquiring” company for accounting and financial reporting purposes.
A summary of the components of the estimated purchase price for the acquisition, is as follows:
The Company is still in the process of determining the fair value of the tangible and intangible assets acquired and liabilities assumed. The preliminary purchase price was allocated based on a determination of the value of the assets acquired. No liabilities were assumed. The following represents the allocation of the purchase price to the acquired assets of $615,000. This allocation was based on the fair value of the assets as of June 17, 2009:
Sale of AcXess Inc.
On June 19, 2009, the Company sold all of its shares of capital stock of AcXess Inc., three senior executives of AcXess.
The sale also constituted a settlement of allegations by the AcXess executives that the Company had breached the Initial Agreement by failing to close on the sale within a reasonable time after the July 24, 2007 execution and delivery of the Initial Agreement and the subsequently obtained shareholder approval.
As consideration for the sale of all the outstanding 4,500,000 shares of capital stock of AcXess held by the Company to AcXess and the AcXess Managers, the Company received the following:
(i)
all 4,477,292 shares of the Company’s common stock held by the AcXess Managers;
(ii)
the cancellation of options to purchase 5,978,349 shares of the Company’s common stock held by the AcXess Managers;
(iii)
a Secured Promissory Note in the principal amount of $500,000, with a three year maturity date, an 8% interest rate, a prepayment discount schedule that allows for gradually decreasing discounts beginning with a maximum prepayment discount of $350,000 if $150,000 is paid within three months of the June 19, 2009 issue date, and a pledge of all of the assets of AcXess as security for the Note, as specified in a separate Security Agreement ); and
(iv)
a release from AcXess and the AcXess Managers of all claims they may have against the Company and its officers, directors, employees, shareholders, affiliates and affiliated companies and for all damages that relate to the Initial Agreement, the transactions contemplated thereby, and any matter relating to AcXess or its business, operations, assets or liabilities.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation and Conclusion of Disclosure Controls and Procedures
The Company conducted an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e), as amended) as of March 31, 2009.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this Report were not effective as a result of a material weakness in internal control over financial reporting as of March 31, 2009- as discussed below.
Management’s Report on Internal Control
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f), as amended) of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2009. Management’s assessment identified the following material weakness in internal control over financial reporting:
Management determined there was an insufficient number of personnel with appropriate technical accounting and SEC reporting expertise to adhere to certain control disciplines, and to evaluate and properly record certain non-routine and complex transactions.
Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2009 because of the material weakness described in the preceding paragraph. A material weakness in internal control over financial reporting is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2009 has not been audited by PMB Helin Donovan, LLP, an independent registered public accounting firm.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Below are the names and certain information regarding our executive officers and directors.
NAME
AGE
POSITION
Robert V. Rudman
Chief Executive Officer, Chief Financial Officer, Director & Secretary
Thomas Elowson
President & Chief Operating Officer (Resigned on July 28, 2009)
Officers are elected annually by the Board of Directors, at our annual meeting, to hold such office until an officer's successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
Robert V. Rudman, Chief Executive Officer, Chief Financial Officer, Director and Secretary
Mr. Rudman is a Canadian Chartered Accountant with more than thirty years of experience in the field of accounting and financial management in positions of increasing responsibility. In 1977, he left his employment with Price Waterhouse to join the Park Lane group of companies operating in the property/casualty insurance industry. Mr. Rudman served as Chief Financial Officer until 1982 when he established his own financial advisory firm based in Vancouver, Canada. Specializing in valuations, mergers and acquisitions, the firm grew significantly by way of a merger and organic growth. In 1992, Mr. Rudman joined the automotive technology firm, SmarTire Systems Inc. as the Chief Financial Officer and in 1995, he accepted his new role as Chief Executive Officer. In May of 2005, Mr. Rudman moved to West Palm Beach, Florida to join the financial advisory firm of D.P. Martin & Associates Inc. as the Director of Finance. In November of 2007, he accepted the position of Managing Director in the financial advisory firm of Aspen Capital Partners LLC based in Tampa, Florida. During his career as a professional accountant and financial adviser, Mr. Rudman has been instrumental in arranging a wide range of debt and equity financings, in structuring a number of mergers and acquisitions, in developing strategic and operational business plans, and in the preparation and filing of all required regulatory reports. His scope of experience includes both domestic and international transactions. On June 1, 2008, Mr. Rudman accepted the position of Chief Financial Officer and Secretary of Innovative Software Technologies, Inc. in addition to his role at Aspen Capital Partners LLC. On February 12, 2009, Philip D. Ellett resigned as the Company’s Chief Executive Officer and sole Director. In addition to his other responsibilities, Mr. Rudman agreed to accept the position of Chief Executive Officer and sole Director.
Thomas Elowson, President and Chief Operating Officer
Mr. Elowson has served as the President and Chief Operating Officer of the Company since August 2006. From August 2004 to August 2006 Mr. Elowson served as an independent consultant in development of the company. From January 2004 to August 2004, Mr. Elowson served as President & COO of SecureCore AS, a smart card security consulting company. From March 2001 until January 2004, Mr. Elowson served as Executive Vice President of Sospita AS, a smartcard software technology company based in Oslo, Norway. As a co-founder of TeleComputing, Inc., from 1998 to 2001, he served as vice president on the executive team that raised $45 million for the U.S. launch of this world-leading ASP, and was responsible for developing the key partnerships with Microsoft, Compaq, MCI and Citrix. TeleComputing also achieved a successful IPO on the Oslo exchange during his time with the company. Mr. Elowson is also a founder of the ASP Industry Consortium, and served two terms on the Industry Board of Directors. Elowson has led teams to develop remote application hosting strategies for both business and consumers along with corporate growth strategies for major partnerships in the U.S., Europe and Asia. On June 19, 2009, the Company reached an agreement with Mr. Elowson and two other senior executives regarding the management buyout of AcXess. On July 20, 2009, Mr. Elowson resigned his positions in the Company.
ELECTION OF DIRECTORS AND OFFICERS
Holders of our Common Stock are entitled to one (1) vote for each share held on all matters submitted to a vote of the stockholders, including the election of directors.
The Board of Directors will be elected at the annual meeting of the shareholders or at a special meeting called for that purpose. Each director shall hold office until the next annual meeting of shareholders and until the director's successor is elected and qualified. If a vacancy occurs on the Board of Directors, including a vacancy resulting from an increase in the number of directors, then the shareholders may fill the vacancy at the next annual meeting or at a special meeting called for the purpose, or the Board of Directors may fill such vacancy.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
Based solely upon the written representations of our executive officers and directors and upon copies of the reports that they have filed with the Securities and Exchange Commission ("SEC"), during the year ended March 31, 2009, our executive officers and directors filed with the SEC on a timely basis all required reports relating to transactions involving shares of our common stock beneficially owned by them.
COMMITTEES
Our business, property and affairs are managed by or under the direction of the board of directors. Members of the board are kept informed of our business through discussion with the chief executive and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board and its committees.
AUDIT COMMITTEE
Presently, the Company is not in a position to attract, retain and compensate additional directors in order to acquire a director who qualifies as an "audit committee financial expert", but the Company intends to retain an additional director who will qualify as such an expert, as soon as reasonably practicable.
CODE OF ETHICS
The Company has not yet adopted a formal written code of ethics that applies to its principal executive, financial and accounting officers.
DIRECTOR INDEPENDENCE
At March 31, 2009, Mr. Rudman is the Company’s sole director; he is not independent.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation paid to our Chief Executive Officer and the other executive officers at the end of the last two completed fiscal years. We refer to all of these officers collectively as our "named executive officers."
Summary Compensation Table
(1) On May 31, 2008, Mr. Floyd resigned as our Chief Financial Officer.
(2) On June 1, 2008, Mr. Rudman was appointed as our Chief Financial Officer and on February 12, 2009 Mr. Rudman assumed the additional duties of Acting Chief Executive Officer and Director.
(3) Issuance of 700,000 shares of common stock as payment for back salary.
(4) Issuance of 630,000 shares of common stock as payment for back salary
(5) On February 12, 2009, Mr. Ellett resigned as our Chief Executive Officer
(6) On July 28, 2009, Mr. Elowson resigned as President and Chief Operating Officer.
Outstanding Equity Awards at Fiscal Year-End Table:
COMPENSATION OF DIRECTORS
It is intended that each member of our board of directors who is not an employee (a "non-employee director") will receive an annual retainer in cash and/or shares of Common Stock or in options to purchase shares of Common Stock as determined by our board of directors and all directors will be reimbursed for costs and expenses related to attendance at meetings of the board of directors. The amount of this retainer has not yet been determined.
Our employee directors will not receive any additional compensation for serving on our board of directors or any committee of our board of directors, and our non-employee directors will not receive any compensation from us for their roles as directors other than the retainer, attendance fees and stock or stock option grants described above.
EMPLOYMENT AGREEMENTS
On February 16, 2007, we entered into an employment agreement with Philip Ellett, the Company's Chief Executive Officer. Pursuant to the terms of the agreement, the Company will employ Mr. Ellett until such time it terminates him. Mr. Ellett is to receive an annual base salary of $84,000 a year. Mr. Ellett is entitled to receive an increase to his base salary and receive certain bonuses if certain managed business objectives are met by the Company during the 2007 calendar year. Mr. Ellett also received 6,000,000 options to purchase common stock at a strike price of $0.08. The options vest according to the following schedule: (1) 1,000,000 vested upon approval of the Plan (2) the remaining 5,000,000 will begin vesting on January 31, 2008 at 138,889 per month, for a total of 36 months. The options with expire on February 16, 2017. Mr. Ellett's salary and bonus schedule will be reviewed by the Board of Directors on an annual basis. During the term of his employment and for a period thereafter, Mr. Ellett will be subject to non-competition and non-solicitation provisions, subject to standard exceptions. Mr. Ellett resigned effective as of February 12, 2009.
On August 9, 2006, we entered into an employment agreement with Thomas J. Elowson for the position of Chief Operating Officer and President. The contract has a term of three years, stipulates a minimum annual salary of $84,000, and has certain provisions regarding termination of employment with and without "cause" as therein defined. In addition, the employment contract provides for a signing bonus of $10,000 payable upon a financing event or series of related financing events wherein we raise a cumulative gross amount of at least $2 million. In connection with his employment agreement, we granted Mr. Elowson 5,978,349 options to purchase shares of our common stock. The options vest immediately and have an exercise price of $0.13 per share, the closing price on the Over the Counter Bulletin Board on August 9, 2006. Mr. Elowson resigned effective as of July 28, 2009.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, as of July 1, 2009, with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company's executive officers and directors; and (iii) the Company's directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
(1) Information with respect to beneficial ownership is based upon information furnished by each stockholder or contained in filings made with the Securities and Exchange Commission. Unless otherwise indicated, beneficial ownership includes both sole investment and voting power.
(2) Based upon 103,514,199 shares of common stock outstanding as of July 1, 2009 and, with respect to each stockholder, the number of shares which would be outstanding upon the exercise by such stockholder of outstanding rights to acquire stock, either upon exercise of outstanding options, warrants or conversion of other securities within 60 days of July 2, 2009.
(3) Mr. Ellett resigned his position effective February 12, 2009.
(4) Mr. Elowson resigned his position effective July 28, 2009.
(5) Mr. Peterson was the chairman and CEO of the Company from August 2004 through June 2006. Amount includes warrants to purchase 2,446,235 shares of common stock held by Aspen Capital Partners, a firm in which Mr. Peterson holds a majority interest.
(6) Mrs. Zalenski is the wife of our former chairman and CEO, Anthony F. Zalenski.
(7) As of the date hereof, Crescent and Cantara beneficially owns 5,950,000 shares of Common Stock and has the right to acquire additional shares of Common Stock upon the (a) exercise of common stock purchase warrants held by Crescent and Cantara that was issued to it by the Issuer on December 22, 2006 (the “Warrant”) and (b) conversion of a convertible debenture held by Crescent and Cantara that was issued to it by the Issuer on December 22, 2006 (the “Debenture”). However, the Warrants and the Debenture each contain a limitation prohibiting the exercise and conversion thereof, respectively, to the extent that Crescent and Cantara (together with its affiliates) would beneficially own in excess of 4.99% of the outstanding Common Stock immediately after giving effect to such exercise or conversion, respectively (subject to a waiver on not less than 61 days prior notice). Since Crescent and Canatra currently beneficially owns 5.75% of the issued and outstanding Common Stock, the Warrants and Debenture are not currently exercisable and convertible, respectively, and have not been included in the calculations of the number of shares of Common Stock beneficially owned by Crescent and Cantara or the number of issued and outstanding shares of Common Stock of the Issuer.
(1) Information with respect to beneficial ownership is based upon information furnished by each stockholder or contained in filings made with the Securities and Exchange Commission. Unless otherwise indicated, beneficial ownership includes both sole investment and voting power.
(2) Based upon 450,000 shares of Series A Preferred Stock outstanding as of July 1, 2009 and, with respect to each stockholder, the number of shares which would be outstanding upon the exercise by such stockholder of outstanding rights to acquire stock, either upon exercise of outstanding options, warrants or conversion of other securities within 60 days of July 1, 2009.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 1, 2004, we entered into an employment agreement with Peter Peterson that provided for his employment as Chief Executive Officer of the Company, which agreement was to expire on August 1, 2007. The agreement stipulated an annual base salary of $180,000 and an incentive compensation plan to be determined by the board. Mr. Peterson's employment agreement was mutually terminated by Mr. Peterson and the Company effective January 4, 2006. In lieu of paying Mr. Peterson's salary for January 2006 and the following 12 months thereafter as stipulated in the employment contract, we agreed to a one-time issuance to Mr. Peterson of 950,495 shares of common stock, payment of salary though January 2006, and health benefits to continue for the 2006 calendar year. Mr. Peterson retained the office of Chief Executive Officer until the date of our acquisition of AcXess.
ITEM 14.
ITEM 14. PRINCIPAL AUDITOR FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for professional services rendered by our principal accountants for the audit of our financial statements and for the reviews of the financial statements included in our annual report on Form 10-K and 10-Qs respectively, and for other services normally provided in connection with statutory filings were $64,000 and $41,000, respectively, for the fiscal years ended March 31, 2009 and March 31, 2008.
AUDIT-RELATED FEES
We did not incur any other fees for the years ended March 31, 2009 and March 31, 2008 for professional services rendered by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements that are not included in "Audit Fees".
TAX FEES
We did not incur any fees for tax compliance by our independent auditors during the fiscal years ended March 31, 2009 and March 31, 2008.
ALL OTHER FEES
We did not incur any fees for other professional services rendered by our independent auditors during the fiscal years ended March 31, 2009 and March 31, 2008.
ITEM 15.
ITEM 15. EXHIBITS
Exhibit Number
Description Of Exhibit
2.1
Stock Exchange Agreement by and between Innovative Software Technologies, Inc., AcXess, Inc., the Shareholders of AcXess, Inc., and Anthony F. Zalenski, acting as the Shareholder's Agent, dated as of June 26, 2006. (4)
3.1
Amendment to the Articles of Incorporation of Innovative Software Technologies, Inc.(1)
3.2
Articles of Incorporation of Innovative Software Technologies, Inc., as amended.(1)
3.3
Certificate of Designation of the Series A Preferred Stock of Innovative Software Technologies, Inc. (incorporated by reference from Exhibit 22 to the Company's Current Report on Form 8-K/A filed March 14, 2002).
3.4
Certificate of Designation of the Series B Preferred Stock of Innovative Software Technologies, Inc.(1)
3.5
By-laws of Innovative Software Technologies, Inc. (incorporated by reference from Exhibit B to Amendment No. 1 to the Company's Information Statement on Schedule 14C filed with the Commission on January 11, 2007).
3.6
Certificate of Amendment to Articles of Incorporation filed on August 8, 2001 (9)
4.1
Specimen Certificate of Common Stock (incorporated by reference from Exhibit 4(a) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999).
4.2
Form of Investor Certificate (6)
4.3
Form of Promissory Note, dated October 16, 2006 (6)
4.4
Form of Warrant, dated October 16, 2006 (6)
4.5
Form of Convertible Debenture, dated December 22, 2006 (7)
Exhibit Number
Description Of Exhibit
4.6
Form of Long Term Warrant, dated December 22, 2006 (7)
4.7
Form of Short Term Warrant, dated December 22, 2006 (7)
10.1
Director Indemnification Agreement dated August 14, 2003 between Innovative Software Technologies, Inc. and Peter M. Peterson(2)
10.2
Director Indemnification Agreement dated August 4, 2003 between Innovative Software Technologies, Inc. and William E. Leathem(2)
10.3
Employment Agreement dated August 1, 2004 between Innovative Software Technologies, Inc. and Christopher J. Floyd.(4)
10.4
Innovative Software Technologies Inc. 2006 Equity Incentive Plan (5)
10.5
Form of Stock Option Award under 2006 Equity Incentive Plan (5)
10.6
Employment Agreement by and between Anthony F. Zalenski and Innovative Software Technologies, Inc., dated as of August 9, 2006 (5)
10.7
Employment Agreement by and between Thomas J. Elowson and Innovative Software Technologies, Inc., dated as of August 9, 2006 (5)
10.8
Form of Registration Rights Agreement, dated as of October 16, 2006 (6)
10.9
Form of Securities Purchase Agreement, dated as of December 22, 2006 (7)
10.10
Form of Registration Rights Agreement, dated as of December 22, 2006(7)
10.11
Employment Agreement by and between Philip Ellett and Innovative Software Technologies, Inc., dated as of August 9, 2006 (8)
16.1
Letter of Stark Winter Schenkein & Co., LLP, dated October 27, 2006 (incorporated by reference to Exhibit 161 to the Company's Current Report on Form 8-K filed with the SEC on October 31, 2006)
16.2
Letter of Lougheed, Scalfaro & Company LLC, dated February 8, 2006 (incorporated by reference to Exhibit 161 to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2006)
21.1
List of Subsidiaries
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1)
Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears the same exhibit number.
(2)
Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 2004 which bears the same exhibit number.
(3)
Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears exhibit number 101.
(4)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on June 30, 2006
(5)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on August 15, 2006
(6)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on October 20, 2006
(7)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on December 29, 2006
(8)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on February 23, 2007
(9)
Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears the exhibit number 31.
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: August 13, 2009
By:
/s/ Robert V. Rudman
Robert V. Rudman
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
EXHIBIT INDEX
Exhibit Number
Description Of Exhibit
2.1
Stock Exchange Agreement by and between Innovative Software Technologies, Inc., AcXess, Inc., the Shareholders of AcXess, Inc., and Anthony F. Zalenski, acting as the Shareholder's Agent, dated as of June 26, 2006. (4)
3.1
Amendment to the Articles of Incorporation of Innovative Software Technologies, Inc.(1)
3.2
Articles of Incorporation of Innovative Software Technologies, Inc., as amended.(1)
3.3
Certificate of Designation of the Series A Preferred Stock of Innovative Software Technologies, Inc. (incorporated by reference from Exhibit 22 to the Company's Current Report on Form 8-K/A filed March 14, 2002).
3.4
Certificate of Designation of the Series B Preferred Stock of Innovative Software Technologies, Inc.(1)
3.5
By-laws of Innovative Software Technologies, Inc. (incorporated by reference from Exhibit B to Amendment No. 1 to the Company's Information Statement on Schedule 14C filed with the Commission on January 11, 2007).
3.6
Certificate of Amendment to Articles of Incorporation filed on August 8, 2001 (9)
4.1
Specimen Certificate of Common Stock (incorporated by reference from Exhibit 4(a) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999).
4.2
Form of Investor Certificate (6)
4.3
Form of Promissory Note, dated October 16, 2006 (6)
4.4
Form of Warrant, dated October 16, 2006 (6)
4.5
Form of Convertible Debenture, dated December 22, 2006 (7)
Exhibit Number
Description Of Exhibit
4.6
Form of Long Term Warrant, dated December 22, 2006 (7)
4.7
Form of Short Term Warrant, dated December 22, 2006 (7)
10.1
Director Indemnification Agreement dated August 14, 2003 between Innovative Software Technologies, Inc. and Peter M. Peterson(2)
10.2
Director Indemnification Agreement dated August 4, 2003 between Innovative Software Technologies, Inc. and William E. Leathem(2)
10.3
Employment Agreement dated August 1, 2004 between Innovative Software Technologies, Inc. and Christopher J. Floyd.(4)
10.4
Innovative Software Technologies Inc. 2006 Equity Incentive Plan (5)
10.5
Form of Stock Option Award under 2006 Equity Incentive Plan (5)
10.6
Employment Agreement by and between Anthony F. Zalenski and Innovative Software Technologies, Inc., dated as of August 9, 2006 (5)
10.7
Employment Agreement by and between Thomas J. Elowson and Innovative Software Technologies, Inc., dated as of August 9, 2006 (5)
10.8
Form of Registration Rights Agreement, dated as of October 16, 2006 (6)
10.9
Form of Securities Purchase Agreement, dated as of December 22, 2006 (7)
10.10
Form of Registration Rights Agreement, dated as of December 22, 2006(7)
10.11
Employment Agreement by and between Philip Ellett and Innovative Software Technologies, Inc., dated as of August 9, 2006 (8)
16.1
Letter of Stark Winter Schenkein & Co., LLP, dated October 27, 2006 (incorporated by reference to Exhibit 161 to the Company's Current Report on Form 8-K filed with the SEC on October 31, 2006)
16.2
Letter of Lougheed, Scalfaro & Company LLC, dated February 8, 2006 (incorporated by reference to Exhibit 161 to the Company's Current Report on Form 8-K filed with the SEC on February 17, 2006)
21.1
List of Subsidiaries
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1)
Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears the same exhibit number.
(2)
Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 2004 which bears the same exhibit number.
(3)
Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears exhibit number 101.
(4)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on June 30, 2006
(5)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on August 15, 2006
(6)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on October 20, 2006
(7)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on December 29, 2006
(8)
Incorporated by reference from the exhibit to the Company's Current Report on Form 8-K filed with the SEC on February 23, 2007
(9)
Incorporated by reference from the exhibit to the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2004 which bears the exhibit number 31.