UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the three months ended October 31, 1995
Commission File Number: 33-17856-C
INNOVATIVE TECH SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Illinois 65-0071222
(State or other (IRS Employer
jurisdiction
of incorporation or Identification
organization) Number)
444 Jacksonville Road, Suite 200, Warminster, PA 18974
(Address, including zip code, of registrant's
principal executive offices)
(215) 441-5600
(Registrant's telephone number,
including area code)
(Former name, address and fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports, and (2) has
been subject to such filing requirements for the past 90 days.
YES xx NO
Indicate the number of shares outstanding of each of the Issuer's
classes of common stock, as of the latest practicable date.
Class: Common
Outstanding at December 15, 1995: 10,227,837
INNOVATIVE TECH SYSTEMS, INC.
Index to Financial Statements
PART I - FINANCIAL INFORMATION Page(s)
Item 1.
Balance Sheets as of October 31, 1995 and January 3-4
31, 1995
Statements of Operations for the three months ended 5
October 31, 1995 and 1994
Statements of Operations for the nine months ended 6
October 31, 1995 and 1994
Statements of Cash Flows for the nine months ended 7
October 31, 1995 and 1994
Notes to Financial Statements 8-10
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II - OTHER INFORMATION
Item 6.
Exhibits and Reports on Form 8-K 14
INNOVATIVE TECH SYSTEMS, INC.
BALANCE SHEETS
ASSETS October January
31, 31,
1995 1995
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $2,649,042 $5,336,009
Restricted cash 733,685 -
Accounts receivable, net 1,216,438 384,418
Officer advance 35,455 14,869
Due from related party - 50,000
Prepaid insurance 20,250 -
Total current assets 4,654,870 5,785,296
Property and equipment, net 587,245 314,266
Computer software, net of
accumulated amortization of
$335,364 and $231,373 at
October 31, 1995 and
January 31, 1995, respectively 369,928 402,754
Other assets 8,000 3,990
Total assets $5,620,043 $6,506,306
The accompanying notes are an integral part of the financial
statements
INNOVATIVE TECH SYSTEMS, INC.
BALANCE SHEETS
October January
31, 31,
1995 1995
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $162,916 $173,586
Accrued expenses - 38,743
Accrued payroll and related costs 636 91,482
Income taxes accrued 31,450 31,450
Deferred revenue 62,535 82,050
Total current liabilities 257,537 417,311
Commitments & contingent liabilities
Shareholders' equity:
Preferred stock, no par value;
authorized 200,000,000 shares - -
Common stock, par value $.0185;
authorized 100,000,000 shares, issued and
outstanding 10,227,837 as of
October 31, 1995 and January 31, 1995 189,215 63,071
Additional paid-in capital 6,475,501 6,601,645
Warrants 790,750 790,750
Notes receivable (100,000) (100,000)
Accumulated deficit (1,992,960) (1,266,471)
Total shareholders' equity 5,362,506 6,088,995
Total liabilities and
shareholders' equity 5,620,043 6,506,306
The accompanying notes are an integral part of the financial statements
INNOVATIVE TECH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Three Months
Ended
October October
31, 31,
1995 1994
Revenues $917,696 $264,302
Cost of revenues 43,889 21,965
Selling, general and administrative 923,383 683,103
expenses
Loss from operations (49,576) (440,766)
Interest expense - (498)
Other income 59,306 64,674
Income (loss) before income taxes and 9,730 (376,590)
extraordinary item
Benefit from income taxes - (26,152)
Income (loss) before extraordinary item 9,730 (350,438)
Extraordinary item - loss on - (262,392)
extinguishment of debt
Net income (loss) $ 9,730 (612,830)
Income (loss) per common share:
Income (loss) before extraordinary item $.001 $(.035)
Extraordinary item - loss on
extinguishment of debt - (.026)
Income (loss) per common share $.001 $(.061)
Weighted average shares outstanding 10,227,837 9,959,265
(see note 6)
The accompanying notes are an integral part of the financial
statements
INNOVATIVE TECH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Nine Months
Ended
October October
31, 31,
1995 1994
Revenues $1,795,017 $928,691
Cost of revenues 133,058 55,584
Selling, general and administrative 2,707,157 1,385,923
expenses
Loss from operations (1,045,198) (512,816)
Interest expense - (83,301)
Other income 318,709 75,408
Loss before income taxes and (726,489) (520,709)
extraordinary item
Benefit from income taxes - (26,152)
Loss before extraordinary item (726,489) (494,557)
Extraordinary item - loss on - (262,392)
extinguishment of debt
Net loss $(726,489) $(756,949)
Loss per common share:
Loss before extraordinary item $(.071) $(.068)
Extraordinary item - loss on
extinguishment of debt - (.036)
Loss per common share $(.071) $(.104)
Weighted average shares outstanding 10,227,837 7,235,208
(see note 6)
The accompanying notes are an integral part of the financial
statements
INNOVATIVE TECH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months
Ended
October October
31, 31,
1995 1994
Cash flows from operating activities:
Net loss $(726,489) $(756,949)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 172,080 78,791
Extraordinary loss and amortization of - 325,000
original issue discount
Changes in operating assets and
liabilities:
Accounts receivable (832,020) 66,053
Officer advance (20,586) (8,458)
Due from related party 50,000 -
Prepaid insurance (20,250) -
Other assets (4,010) (1,490)
Accounts payable (10,670) 105,368
Accrued expenses (38,743) (19,166)
Income taxes - (45,000)
Accrued payroll and related costs (90,846) 9,006
Deferred income taxes - 11,400
Deferred revenue (19,515) 16,095
Net cash used in operating (1,541,049) (219,350)
activities
Cash flows from investing activities:
Purchase of property and equipment (195,939) (195,269)
Leasehold improvements (145,129) -
Capitalization of software (3,431) (34,922)
development tools
Capitalization of software (67,734) (283,083)
development costs
Restricted cash (733,685) -
Proceeds from note receivable - -
Note receivable - -
Net cash used in investing (1,145,918) (513,274)
activities
Cash flows from financing activities:
Private placement of common stock - 48,100
Net proceeds from public offering - 6,442,025
Notes receivable - (100,000)
Proceeds from note payable - 1,300,000
Repayment of note payable - (1,300,000)
Net cash provided by financing activities - 6,390,125
Net (decrease) increase in (2,686,967) 5,657,501
cash and cash equivalents
Cash and cash equivalents, beginning of 5,336,009 226,022
period
Cash and cash equivalents, end of period 2,649,042 5,883,523
Cash paid during the period for:
Income taxes - $7,448
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
The accompanying financial statements are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily indicative of
results for a full year. The financial statements and notes are presented
as permitted by Form 10-Q and do not contain certain information included
in the Company's annual financial statements and notes.
1. Property and Equipment:
Property and equipment are comprised of the following:
October January
31, 31,
1995 1995
(unaudited) (audited)
Computers and office
equipment $375,196 $315,112
Furniture and fixtures 224,422 89,717
Leasehold 145,129 -
improvements
744,747 404,829
Less accumulated
depreciation (157,502) (90,563)
$587,245 $314,266
2. Loss Per Common Share:
The computations of loss per common share and fully diluted loss per
share were the same for the periods ended October 31, 1995 and 1994.
3. Deferred Revenue:
Deferred revenue of $62,535 at October 31, 1995 represents advances paid
by customers for maintenance services not yet performed. This amount is
recognized ratably over the life of the maintenance contract.
4. Private Placement of Common Stock:
On April 29, 1994 the Company completed a private placement, agreed to on
November 18, 1993, in which 1,556,634 shares of restricted Common Stock
were sold to six outside investors for $48,100. All voting rights
pertaining to such shares of the Common Stock have been assigned to two
officers of the Company. The funds raised in the private placement were
used for the purchase of computer equipment and furniture. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, the
1,556,634 shares privately placed at a price lower than the public
offering price on July 26, 1994 are treated as outstanding for all
periods presented.
NOTES TO FINANCIAL STATEMENTS - (Continued)
5. Bridge Debt:
On May 11, 1994, the Company issued $1,300,000 principal amount of seven
percent Promissory Notes (the Bridge Debt) and 3,900,000 common stock
purchase warrants (the Bridge Debt Warrants). The Bridge Debt Warrants
were valued at the public offering price of $.083 per warrant,
aggregating $325,000, which constituted original issue discount on the
debt. Each Bridge Debt Warrant is exercisable to purchase one share of
Common Stock at an exercise price of $2.33 per share during the 60 month
period commencing 12 months after the effective date of the Company's
Public Offering, which was July 26, 1994. The Company issued the Bridge
Debt and the Bridge Debt Warrants to a limited group of investors, who
were previously unaffiliated with the Company, for aggregate
consideration of $1,300,000. The Bridge Debt was repayable together with
interest at the rate of seven percent per annum upon the earlier of (I)
the Company's consummation of a public or private financing of its equity
securities or (ii) 12 months after issuance. The effective rate of
interest on this Bridge Debt was 42.7%. The Bridge Debt Warrants were
automatically converted into Redeemable Warrants on July 26, 1994, when
the Company's Public Offering became effective. On August 2, 1994, the
Company repaid the $1,300,000 Bridge Debt, including interest of $20,693.
The original issue discount was charged to the statement of operations as
interest expense of $62,608 and an extraordinary loss on extinguishment
of debt of $262,392. There were no underwriting discounts or commissions
paid in connection with these transactions.
6. Stock Splits:
The Board of Directors of the Company approved a three-for-one split of
all outstanding shares of Common Stock and all outstanding Common Stock
Purchase Warrants on August 23, 1995. The three-for-one split was
effective on September 18, 1995.
The shareholders of the Company approved a one-for-18.54 reverse stock
split of all outstanding shares of Common Stock on July 22, 1994.
All historic share amounts in the accompanying financial statements and
notes to financial statements have been adjusted to reflect the stock
splits. All references in the statements of operations with regard to
average number of shares of Common Stock and related per share amounts
have been calculated giving retroactive effect to the stock splits.
7. Preferred Stock:
On July 22, 1994, the shareholders of the Company approved the conversion
of all Senior Preferred Stock into Common Stock on a one-for-one basis
(prior to the reverse stock split) and the authorization of a new class
of preferred stock with no par value and 200,000,000 authorized shares.
8. Public Offering:
On July 26, 1994, the Company completed a public offering of 3,900,000
shares of its Common Stock and 5,400,000 Redeemable Warrants. On August
2, 1994, the Company received net proceeds of $6,043,433 from the
offering, and charged $347,179 relating to legal, accounting, printing
and filing fees to equity as a reduction of the net proceeds.
On September 14, 1994, the Company's underwriter exercised the over-
allotment option to purchase up to 585,000 additional shares of Common
Stock and/or 810,000 Redeemable Warrants. An additional 472,920 shares
of Common Stock and 810,000 Redeemable Warrants were purchased. The net
proceeds received by the Company were $743,534.
The shares of Common Stock and Redeemable Warrants are separately
tradeable. Each Redeemable Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $2.33 for a period of 60
months commencing 12 months after the effective date of the offering.
Each Redeemable Warrant is redeemable by the Company at a redemption
price of $.083 per Redeemable Warrant commencing 15 months after the
effective date of the offering upon not less than 30 days prior written
notice by the Company, provided that the average closing bid price of the
Common Stock equals or exceeds $2.92 for any 20 trading days within a
period of 30 consecutive trading days ending on the fifth trading day
immediately prior to the notice of redemption.
On November 27, 1995, the Company received proceeds of $59,400 from the
exercise of underwriter warrants, which were offered in connection with
the July 26, 1994 Public Offering.
9. Supplemental Statement of Cash Flow Information:
The Company acquired $1,235 of property and equipment for which payment
had not been made at October 31, 1995, which is included in accounts
payable.
10. Significant Customers:
For the three months ended October 31, 1995, revenues from CIBC,
Principal Financial Group and the United States Department of Defense
were approximately 23%, 16% and 15%, respectively, of total revenues. For
the three months ended October 31, 1994, revenues from the United States
Department of Defense were approximately 37% of total revenues.
11. Related Party Transactions:
On September 2, 1994 the Company loaned $50,000 to each of two officers,
who are also major shareholders of the Company. These notes were repaid
in full on April 28, 1995. On March 29, 1995 the Company loaned an
additional $50,000 to each of these two officers. The notes are not
collateralized, non-interest bearing and are repayable in full on March
29, 1996. The notes are classified as a reduction of shareholders'
equity in the October 31, 1995 balance sheet. These notes were repaid in
full on November 28, 1995.
On January 20, 1995, the Company loaned $50,000 to Thompson Enterprises,
L.P., a limited partnership, which is classified as a current asset in
the Company's balance sheet at January 31, 1995. The amount was repaid
in full on April 20, 1995.
On March 17, 1995, the Company pledged a six month $700,000 certificate
of deposit as collateral for a mortgage loan obtained by Thompson
Enterprises, L.P., which is classified as restricted cash in the
accompanying balance sheet.
12. Notes Receivable:
On March 3, 1995, the Company loaned $1,000,000, which was held in
escrow, to a non-affiliated company. The loan was evidenced by a
promissory note, which provided for the payment of a $10,000 origination
fee on March 13, 1995 and an additional $90,000 origination fee on May 2,
1995. The loan and the origination fee were paid in full on May 5,
1995.
On May 12, 1995, the Company loaned $750,000, which was held in escrow,
to a non-affiliated company. The loan is evidenced by a promissory note,
which provided for the payment of a $55,000 origination fee on June 1,
1995. The loan was paid in full on August 24, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
In the first quarter of fiscal 1995, the Company was in need of capital
to finance the purchase of computer development equipment and traditional
bank financing was not available on terms acceptable to the Company. To
provide the needed capital, the Company completed a private placement
(the Private Placement) on April 29, 1994 in which 1,556,634 shares of
restricted Common Stock were sold to six outside investors for $48,100,
or $.03 per share. All voting rights pertaining to such shares of the
Common Stock have been assigned to two officers of the Company. The
funds raised in the private placement were used for the purchase of
computer equipment and furniture.
On May 11, 1994, the Company issued $1,300,000 principal amount of seven
percent Promissory Notes (the Bridge Debt) and 3,900,000 common stock
purchase warrants (the Bridge Debt Warrants). Each Bridge Debt Warrant
is exercisable to purchase one share of Common Stock at an exercise price
of $2.33 per share during the 60 month period commencing 12 months after
the effective date of the Company's Public Offering, which was July 26,
1994. The Company issued the Bridge Debt and the Bridge Debt Warrants to
a limited group of investors, who were previously unaffiliated with the
Company, for aggregate consideration of $1,300,000. The Bridge Debt
Warrants were automatically converted into Redeemable Warrants on July
26, 1994, when the Company's Public Offering became effective. On August
2, 1994, the Company repaid the $1,300,000 Bridge Debt, including
interest of $20,693.
The shareholders of the Company approved a one-for-18.54 reverse stock
split of all outstanding shares of Common Stock on July 22, 1994. As a
result, all historic share amounts and per share amounts in the
accompanying balance sheets have been adjusted to reflect the reverse
stock split. All references in the statements of operations with regard
to average number of shares of Common Stock and related per share amounts
have been calculated giving retroactive effect to the one-for-18.54
reverse stock split.
On July 22, 1994, the shareholders of the Company approved the conversion
of all Senior Preferred Stock into Common Stock on a one-for-one basis
(prior to the reverse stock split) and the authorization of a new class
of preferred stock with no par value and 200,000,000 authorized shares.
On July 26, 1994, the Company completed a public offering of 3,900,000
shares of its Common Stock and 5,400,000 Redeemable Warrants. On August
2, 1994, the Company received proceeds of $6,043,433 from the offering.
On September 14, 1994, the Company's underwriter exercised the over-
allotment option to purchase up to 585,000 additional shares of Common
Stock and/or 810,000 Redeemable Warrants. An additional 472,920 shares
of Common Stock and 810,000 Redeemable Warrants were purchased. The
proceeds received by the Company were $743,534.
On August 23, 1995, the Board of Directors of the Company approved a
three-for-one split of all outstanding shares of Common Stock and all
outstanding Common Stock Purchase Warrants. The split was effective on
September 18, 1995.
The Company's cash position, including restricted cash of $733,685, at
October 31, 1995 decreased $1,953,282 or 37% from the January 31, 1995
balance. The decrease was primarily attributable to $1,541,049 used in
operations to support the Company's product development efforts, and
increased advertising and marketing activities. Advertising and
marketing activities accounted for $406,083 of the decrease. In
addition, the Company purchased $195,939 of property and equipment, and
$145,129 in leasehold improvements. The leasehold improvements relate to
the Company's move to its new headquarters located in Warminster,
Pennsylvania. The move was effective on September 1, 1995.
The most significant product development efforts relate to the
development of a Microsoft Windows version of the Company's SPAN-FM
software products. In connection with these efforts, the Company
capitalized $71,165 during the nine months ended October 31, 1995. In
accordance with the provisions of SFAS No. 86, the Company expensed all
costs incurred in order to reach technological feasibility.
Technological feasibility was reached in April 1994, as evidenced by the
Company's working models of the products. There were no costs
capitalized for the three months ended October 31, 1995 as the Windows
version of the SPAN FM products are currently available for release.
The capitalized costs are being amortized over a 5 year period.
The Company has expanded its direct sales staff by hiring regional sales
representatives that operate from their homes with product shipment,
support and customization being done from the Company's home office in
Warminster, Pennsylvania. The Company currently has regional sales
representatives located in Boston; Tampa; Winnipeg, Canada; New York;
Philadelphia and Los Angeles.
The Company has signed an exclusive five-year OEM agreement with the
Intergraph Corporation to private label certain Innovative Tech software
packages. The financial terms of the agreement provide for Innovative
Tech to receive 30 percent royalties on all sales of the SPAN-FM
software by Intergraph Corporation. Minimum royalties during each year
of the agreement must be $1.5 million in order for Intergraph Corporation
to maintain exclusive distribution rights. The Company received $75,420
and $172,170 in royalties pursuant to the agreement for the three and
nine months ended October 31, 1995, respectively.
Accounts receivable at October 31, 1995 increased $832,020 over the
January 31, 1995 balance. This increase is due primarily to the
increased sales volume during the three months ended October 31, 1995.
The Company has not experienced any material collection difficulties.
Working capital at October 31, 1995 was $4,397,333. Included in accounts
payable at October 31, 1995 is $1,235 of property and equipment which was
paid in the fourth quarter of fiscal year 1996. The Company has no loans
or notes payable at October 31, 1995.
The Company's cash position at October 31, 1994 increased $5,657,501
from the January 31, 1994 balance of $226,022. The increase was due to
the proceeds received from the public offering. The proceeds were used
to support the hiring of additional sales, marketing and software
development personnel (41 employees at October 31, 1994 vs. 23
employees at April 30, 1994), and the purchase of $172,644 of furniture
and equipment. In addition the Company paid $344,942 for professional
fees associated with the Company's public offering.
Accounts receivable at October 31, 1994 decreased $66,053 over the
January 31, 1994 balance. The Company has not experienced any material
collection difficulties.
Results of Operations
Revenues for the three months ended October 31, 1995 and 1994 were
$917,696 and $264,302, respectively. Revenues for the nine months ended
October 31, 1995 and 1994 were $1,795,017 and $928,691, respectively.
Management attributes these increases to the release of the Windows
version of its SPAN-FM products, and increased sales and marketing
activities.
The Company continues to provide services to the Department of Defense,
and sales made by the Company to the Department of Defense constituted
approximately 15% and 37% of the Company's total revenues for the three
months ended October 31, 1995 and 1994. The Company anticipates that
sales to the United States Department of Defense will continue to be a
significant part of the Company's revenues during fiscal year 1996. Such
continued sales to the United States Department of Defense will arise as
a result of the Company's performance of its obligations under existing
agreements with the United States Department of Defense.
Cost of revenues were $43,889 and $21,965 for the three months ended
October 31, 1995 and 1994, respectively. Cost of revenues were $133,058
and $55,584 for the nine months ended October 31, 1995 and 1994,
respectively. Included within cost of revenues is computer hardware
purchased by the Company and subsequently sold to customers, and
amortization of capitalized software. Hardware purchases are made only
as required under customer contracts. Therefore, the volume of hardware
purchases may fluctuate significantly based upon specific contract
requirements.
Selling, general and administrative expenses for the three months ended
October 31, 1995 increased $240,280 over the three month period ended
October 31, 1994. Selling, general and administrative expenses for the
nine months ended October 31, 1995 increased $1,321,234 over the nine
month period ended October 31, 1994. The increase is due primarily to
increased wages incurred by the Company as a result of hiring additional
employees to support the Company's development, sales and marketing
efforts. As a result of these increased development and marketing
efforts, management expects revenues to increase, as evidenced by the
significant revenue growth reported for the three months ended October
31, 1995; however, there can be no assurance that revenues will continue
to increase.
Revenues for the three months ended October 31, 1994 and 1993 were
$264,302 and $322,291, respectively. The Company continues to provide
services to the Department of Defense, and sales made by the Company to
the Department of Defense constituted approximately 37% and 40% of the
Company's total revenues for the three months ended October 31, 1994 and
1993. The Company anticipates that sales to the United States Department
of Defense will continue to be a material part of the Company's revenues
during the remainder of the Company's 1995 fiscal year. Revenues for the
nine months ended October 31, 1994 and 1993 were $928,691 and $1,148,612
respectively. The difference is attributable to the increased volume of
revenues from the United States Department of Defense during 1993. In
addition, sales were somewhat affected by the anticipated release of the
Microsoft Windows version of the SPAN product line.
Selling, general and administrative expenses for the three and nine
months ended October 31, 1994 increased $409,193 and $640,230 over the
three and nine months ended October 31, 1993, respectively. The increase
was due primarily to increased wages incurred by the Company as a result
of hiring employees to increase marketing and development efforts. As a
result of such increased marketing and development efforts, management
expects revenues to increase, however there can be no assurance that
revenues will increase.
Net income (loss) for the three months ended October 31, 1994 and 1993
was $(612,830) and $4,677, respectively. Net income (loss) for the nine
months ended October 31, 1994 and 1993 was $(756,949) and $165,774,
respectively. The loss for the three and nine month period was due to
the increased selling , general and administrative expenditures described
above, and the non-cash interest charge of $325,000 relating to
amortization of the original issue discount on the $1.3 million bridge
debt. The original issue discount was recorded as interest expense of
$62,608 and extraordinary loss on early extinguishment of debt.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
None.
(b) Reports on form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
INNOVATIVE TECH SYSTEMS, INC.
(Registrant)
Dated: December 15, 1995
Innovative Tech Systems, Inc.
By:\s\Louis J. Desiderio
Louis J. Desiderio,
Vice President, Chief Financial Officer
and Assistant Secretary
