UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
_________________________________________________
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
_____________ _______________
Commission File Number: 000-28675
_________________________________________________
Tribeworks, Inc.
________________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Delaware 94-3370795
________________________________________________________________________________
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
988 Market Street, San Francisco, CA 94102
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(415) 674-5555
________________________________________________________________________________
(Issuer's telephone number, including area code)
N/A
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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. X Yes No
--- ---
The number of shares outstanding of registrant's $0.0004 par value common
stock, as of the close of business on August 16, 2004: 4,708,657 shares.
Transitional Small Business Disclosure Format: Yes X No
--- ---
TRIBEWORKS, INC.
THIRD QUARTER 2004 REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet
September 30, 2004 3
Unaudited Consolidated Statements of Income (Loss)
Three Months and Nine Months Ended September 30, 2004 and 2003 4
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004 and 2003 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 11
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits 15
Signatures 16
Exhibits 17
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TRIBEWORKS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
Current Assets
Cash $ 5,036
Accounts receivable, net of allowance for doubtful accounts of
approximately $3,000 52,214
Prepaid expenses 18,890
------------
TOTAL CURRENT ASSETS 76,140
Other Assets
Equipment, net of accumulated depreciation of $50,294 1,999
------------
TOTAL ASSETS $ 78,139
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 276,920
Accrued expenses 103,858
Due to shareholders 6,232
Note payable 83,701
Deferred revenue 75,474
------------
TOTAL CURRENT LIABILITIES 546,185
------------
Stockholders' Deficit
Preferred stock: 10,000,000 shares authorized, none issued -
Common stock: $.0004 par value, 200,000,000 shares authorized,
4,708,657 shares issued and outstanding 1,883
Additional paid-in capital 3,035,725
Accumulated deficit (3,505,654)
------------
TOTAL STOCKHOLDERS' DEFICIT (468,046)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 78,139
============
The accompanying notes are an integral part of these consolidated financial
statements
-3-
TRIBEWORKS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
REVENUES $ 112,089 $ 338,332 $ 619,742 $ 967,293
COST OF SALES 32,648 127,352 239,938 346,557
---------- ---------- ---------- ----------
GROSS PROFIT 79,441 210,980 379,804 620,736
---------- ---------- ---------- ----------
OPERATING EXPENSES
Product support 12,384 11,063 33,091 33,588
Product development 16,914 36,895 82,938 102,283
Sales and marketing 65,300 54,381 161,148 179,789
General and administrative 75,215 64,681 285,505 241,231
---------- ---------- ---------- ----------
169,813 167,020 562,682 556,891
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (90,372) 43,960 (182,878) 63,845
INTEREST EXPENSE (51) (2,581) (792) (7,546)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (90,423) 41,379 (183,670) 56,299
INCOME TAXES - - - -
---------- ---------- ---------- ----------
NET INCOME (LOSS) (90,423) 41,379 (183,670) 56,299
========== ========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE,
BASIC AND DILUTED $ (0.02) $ 0.01 $ (0.04) $ 0.01
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, BASIC AND DILUTED 4,708,657 4,658,657 4,708,657 4,658,657
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
-4-
TRIBEWORKS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (183,670) $ 56,299
----------- -----------
Adjustments:
Depreciation 924 3,933
Amortization of unearned compensation 3,369 5,862
Changes in:
Accounts receivable 114,204 (17,996)
Costs and estimated earnings in excess of billings on
uncompleted contracts 23,643 (41,175)
Prepaid expenses 38,984 6,980
Accounts payable 28,050 (30,097)
Accrued expenses 85,505 10,589
Deferred revenue and billings in excess of costs
and estimated earnings on uncompleted contracts (145,745) (54,528)
----------- -----------
Total adjustments 148,934 (116,432)
----------- -----------
Net cash used by operating activities (34,736) (60,133)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment - (2,197)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payment of note payable - (37,000)
----------- -----------
NET DECREASE IN CASH (34,736) (99,330)
CASH, BEGINNING OF PERIOD 39,772 143,153
----------- -----------
CASH, END OF PERIOD $ 5,036 $ 43,823
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements
-5-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE A - PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements, although the Company
believes that the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the Company's financial
position as of September 30, 2004, and its results of operations and cash flows
for the three and nine months ended September 30, 2004 and 2003 have been
included. However, operating results for the interim periods noted are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. This report should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual report
on Form 10-KSB for the year ended December 31, 2003.
NOTE B - NATURE OF BUSINESS AND ORGANIZATION
The Company's business activity results from a technology that provides
tools for creating and delivering multimedia applications. Internet media
developers use the technology for creation and deployment of electronic content
that utilizes interactive features combining graphics, video, and audio content.
The Company exploits its software primarily through the licensing of its
software tools to multimedia and software developers and through building
customized licensed versions that include professional engineering to meet
contract requirements.
NOTE C - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF CONSOLIDATION
The financial statements of the Company are presented on a consolidated
basis and include the Company and its wholly-owned subsidiaries, Tribeworks
Development Corporation and Tribeworks Japan Limited. All material intercompany
transactions have been eliminated.
During the quarter ended September 30, 2004, the Company officially
closed its Tribeworks Japan subsidiary and office in Japan. The costs of closure
were not material. The Company plans to continue to conduct its business
operations in Japan through the use of consultants.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined.
Significant estimates used in preparing these financial statements
include those used in computing profit percentages under the
percentage-of-completion revenue recognition method. It is at least reasonably
possible that these significant estimates used will change within the next year.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at the amount management expects to
collect on balances outstanding at period-end. The amount of the accounting loss
that the Company is at risk for these unsecured accounts receivable is limited
to their carrying value, which was $52,214 at September 30, 2004. The Company
provides an allowance for doubtful accounts and records bad debts based on a
periodic review of accounts receivable and the collectibility of each account.
EQUIPMENT
Equipment is stated at cost and is depreciated using the straight-line
method over the estimated useful lives of the assets.
-6-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE C - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
TECHNOLOGY LICENSE
The Company's principal business activity focuses on the
commercialization of iShell, which was developed by an officer and director of
the Company and an affiliate of the Company. In November 1999 the Company
purchased all rights, title and interest in iShell in exchange for $100,000 and
warrants to purchase 75,758 shares of common stock at an exercise price of $1.32
per share, valued at $30,000. The $130,000 cost was fully amortized at December
31, 2002.
REVENUE RECOGNITION
Revenue is generally recognized when all contractual or transfer
obligations have been satisfied and collection of the resulting receivable is
probable.
Revenues from membership subscriptions are recognized proportionally
over the membership period, usually one year. Revenues and estimated profits on
custom development services are generally recognized under the
percentage-of-completion method of accounting using a cost-to-cost measurement
methodology; profit estimates are revised periodically based on changes in
facts; any losses on contracts are recognized immediately. Revenue from the sale
of licenses are recognized when all the following criteria are met: persuasive
evidence of an agreement exists, delivery has occurred, the fee is fixed or
determinable and collectability is probable. If all aspects but the last have
been met or if post contract customer support could be material, revenue is
recognized as payments from customers are received.
COMPENSATED ABSENCES
The Company accrues vacation pay for all full-time employees.
SOFTWARE DEVELOPMENT COSTS
The Company expenses all software development costs in the period the
costs are incurred.
STOCK-BASED AWARDS
The Company accounts for stock based awards to employees under its
"Equity Incentive Plan" as compensatory in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). The
Company also issues stock based awards for services performed by consultants and
other non-employees and accounts for them in accordance with Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123").
Financial Accounting Standards Board Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), requires the
Company to provide pro forma information regarding net income (loss) and
earnings (loss) per share as if compensation cost for all awards had been
determined in accordance with the fair value based method prescribed in SFAS 123
as follows:
-7-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE C - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss), as reported $ (90,423) $ 41,379 $ (183,670) $ 56,299
Add: Stock-based compensation expense included in
net income or loss, no tax effect 481 1,524 3,369 5,862
Deduct: Total stock-based compensation expense
determined under fair value method for all awards, no
tax effect - (4,384) (3,488) (15,958)
----------- --------- ------------ ---------
Pro forma net income (loss) $ (89,942) $ 38,519 $ (183,789) $ 46,203
=========== ========= ============ =========
Net income (loss) per share, basic and diluted:
As reported $ (0.02) $ 0.01 $ (0.04) $ 0.01
=========== ========== ============ =========
Pro forma $ (0.02) $ 0.01 $ (0.04) $ 0.01
=========== ========== ============ =========
We did not grant any options during the nine months ended September, 30
2004.
FOREIGN CURRENCY TRANSLATION
Tribeworks Japan prepares its financial statements in a currency other
than U.S. dollars. Results of operations and cash flows are translated at
average exchange rates during the period, and assets and liabilities are
translated at end-of-period exchange rates. To date, the foreign currency
translation effect was immaterial and, therefore, translation adjustments were
not included as a separate component of accumulated other comprehensive income
(loss) in stockholders' equity (deficit).
NET EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share ("EPS") is computed based on net income
(loss) divided by the weighted average number of common shares outstanding.
Diluted EPS is computed based on net income (loss) divided by the weighted
average number of common shares and potential common share equivalents
outstanding. Potential common share equivalents, consisting of stock options,
warrants, and convertible debt, totaled 722,207 and 456,979 at September 30,
2004 and 2003, respectively. However, such potential common share equivalents
would have no effect on diluted earnings per share or would be anti-dilutive for
the three and nine months ended September 30, 2004 and 2003. Therefore, basic
and diluted earnings per share are the same for the three and nine months ended
September 30, 2004 and 2003.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial
statements in order to conform to the 2004 financial statement presentation.
-8-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE D - COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED
CONTRACTS
At September 30, 2004, there was one job in progress that consisted of
approximately $13,000 in costs incurred, $11,000 of estimated earnings, less
$24,000 of billings.
NOTE E - NOTE PAYABLE
On January 21, 2001, the Company borrowed $100,000 under a Private
Placement Agreement. Under the terms of the agreement the lender, upon the
closing of a "Qualified Financing" (as that term is defined in the agreement),
could convert the loan to common stock of the Company. Such conversion never
took place, and on June 12, 2003, the Company and the creditor restructured this
note. The original terms for the $100,000 note accrued simple interest at 10%,
with all principal and accrued interest due on demand. The restructured note
accrues interest at 4% and was increased by $20,000 for previously accrued
interest. The new note is nonconvertible, and calls for an initial payment of
$30,000, which was made during June 2003, and then monthly payments of $3,500
through February 2005, with a final payment of $24,201 in March 2005. If the
Company makes all note payments timely in accordance with the note agreement,
the creditor will forgive $20,000 of the final payment. In accordance with
Statement of Financial Accounting Standards No. 15, ACCOUNTING BY DEBTORS AND
CREDITORS FOR TROUBLED DEBT RESTRUCTURINGS ("SFAS 15"), the carrying value of
the debt, including accrued interest, is equal to the total amount of future
payments under the new note. Consequently, all future debt payments will reduce
the principal balance and no interest expense will be recorded for this note.
The Company failed to make the scheduled note payments after September 2003
and has received notification of default from the lender. As such, the note was
due in full on September 30, 2004 and is accruing default interest at a rate of
4% on the outstanding payment amounts of the note.
NOTE F - GOING CONCERN
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate
the continuation of the Company as a going concern. However, although the
Company reported net income during 2003 and 2002, the Company reported a net
loss for the three and nine months ended September 30, 2004 and had a working
capital deficiency of $470,045 and an equity deficiency of $468,046 at September
30, 2004. The Company is also in default on its note payable and has deferred
payment of certain accounts payable and accrued expenses. Given these results,
additional capital or improved operations will be needed to sustain the
Company's operations.
Management's plans in this regard include additional marketing of its
product line with special emphasis on custom development services and technology
licensing opportunities worldwide.
In view of the matters described, there is substantial doubt about the
Company's ability to continue as a going concern. The recoverability of the
recorded assets and satisfaction of the liabilities reflected in the
accompanying balance sheet is dependent upon continued operation of the Company,
which is in turn dependent upon the Company's ability to meet its cash flow
requirements on a continuing basis and to succeed in its future operations.
There can be no assurance that management will be successful in implementing its
plans. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE G - REVERSE STOCK SPLIT
On March 24, 2004, the Board of Directors authorized a one-for-four
reverse stock split of the Company's common stock. The reverse split became
effective on June 4, 2004, thereby reducing the number of common shares
outstanding by 75% and increasing the par value to $0.0004. All references in
the accompanying consolidated financial statements to the number of common
shares, number and exercise price of stock options and stock warrants, and per
share amounts for the periods prior to the reverse stock split have been
restated to reflect the reverse stock split.
-9-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE H - DEFERRED COMPENSATION ARRANGEMENT
Effective July 1, 2004, the Company entered into one-year compensation
arrangements with two of its executive officers. The arrangements provide for
annualized salaries of $120,000 and $110,000 for the Company's Chief Executive
Officer and Chief Financial Officer, respectively. As part of the arrangement,
any of this compensation accrued but not paid can be converted, at the option of
the executive officers, into common shares of the Company at any time through
June 30, 2007. The conversion rate is equal to the accrued amount divided by the
average closing bid of the Company's common stock for the 20 trading days
previous to the election date. As part of the arrangement, the Company will hold
any issued shares in escrow for one year following the date of conversion.
Termination of employment during the one-year period shall cause the issued
stock to be forfeited and returned to the Company and, as such, the outstanding
salary underlying the forfeited stock shall not be owed. At September 30, 2004,
the Company had recorded accrued but unpaid salary related to this arrangement
of approximately $50,000.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
The following discussion contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to risks and uncertainties.
These forward-looking statements are based on our management's beliefs as well
as assumptions and information currently available to us. When used in this
report, the words "believe," "expect," "anticipate," "estimate" and similar
expressions are intended to identify forward-looking statements. There are
several important factors that could cause actual results to differ materially
from historical results and percentages and results anticipated by the
forward-looking statements, such as, but not limited to:
o whether or not our products are accepted by the marketplace and
the pace of any such acceptance,
o our ability to continue to grow our Tools and Enterprise
businesses,
o improvements in the technologies of our competitors,
o changing economic conditions, and
o other factors, some of which will be outside of our control.
We have sought to identify most risks to our business but cannot
predict whether or to what extent any of such risks may be realized. There can
be no assurance that we have identified all possible risks that might arise.
Investors should carefully consider all such risks before making an investment
decision with respect to our common stock. We caution you not to place undue
reliance on any forward-looking statements, all of which speak only as of the
date of this report. You should refer to and carefully review the information in
future documents we file with the Securities and Exchange Commission.
FINANCIAL CONDITION
We experienced a net loss of $90,423 for the quarter ended September
30, 2004. This loss is primarily attributable to a decrease in revenues in both
our Enterprise and Tools businesses, and an increase in expenses associated with
new compensation arrangements with our principal executives. While we closed the
quarter with only $5,036 in cash, our recently announced contract with Pioneer
Corporation will serve to improve our mid-term financial situation. However, in
order to strengthen our long-term financial stability, we must substantially
increase revenues, and do so in a cost-effective manner.
In order to retain and motivate our principal executives, we instituted
new compensation arrangements with them during the third quarter of 2004. These
arrangements establish a set salary for the executives, which if not paid in
cash, is accrued on our balance sheet and recorded as compensation expense in
our statement of income (loss). Accrued salary may be converted by the
executives into common stock. The compensation arrangements are described more
fully in Note H to the financial statements.
During the third quarter of 2004, we officially closed our Tribeworks
Japan subsidiary, a measure taken to decrease costs. We still continue to
perform work for Japanese customers, primarily with Pioneer Corporation, and
this work is performed via our consultants that either work in Japan, or work in
other parts of the world and periodically travel to Japan. The costs to close
the Tribeworks Japan subsidiary were not material. We believe the net effect of
the closure will be a positive financial impact.
At this time we have deferred plans to raise funds through equity
financing. However, in an effort that we believe may increase shareholder value,
we are currently contemplating a going private transaction. However, we do not
have definitive plans for a going private transaction at this time. In the
meantime, we continue to strive to operate our business efficiently, pay down
debt, and to seek new mobile Enterprise business opportunities, with companies
like palmOne, Palm Source, and others. Our financial success viability and
success continues to rely on key contracts, the future existence of which is not
assured. For instance, our business with a single customer accounted for 24% of
our total revenues for this quarter. On account of our recently announced
contract with Pioneer Corporation, we expect this ratio will increase in future
quarters.
-11-
We sell our software and generate revenues through two main
distribution channels: the graphics software tools business and the enterprise
application development business. Tools customers, usually graphics industry
professionals, license our iShell(R) branded multimedia application authoring
tools, iShell or iShell Mobile, by purchasing the software via our online store
or via telephone with one of our sales representatives. Tools customers either
buy our software with a permanent license or pay an annual subscription fee that
includes a license to use our software and free software upgrades. Kinoma Media
Album (KMA), our first consumer multimedia tool, is sold through three online
stores: Kinoma.com, Handango.com and PalmGear.com.
We first introduced our multimedia authoring tool iShell(R) in January
1999, as a cross-platform software product to allow developers to create
multimedia applications in a variety of categories, such as sales and business
presentations, informational/catalog titles, training courses and modules for
corporations and/or educational institutions, games, learning aids, enhanced CDs
(audio CDs that also contain videos and other visual digital content), video
yearbooks, and recruitment presentations.
Beginning in 2003, we partnered with Kinoma, Inc. ("Kinoma") to create
new products for the mobile software market, specifically targeting Palm OS
devices. Kinoma makes Kinoma Player, which is a high-resolution, interactive
movie player for handhelds running the Palm OS. To date we have developed two
products in partnership with Kinoma that create Kinoma Player content, iShell
Mobile, an iShell-based application development tool, launched in October 2003,
and Kinoma Media Album, a consumer multimedia management tool, launched in May
of 2004. Kinoma receives a per unit royalty on sales of iShell Mobile and Kinoma
Media Album. In addition to building these two products together, we have
utilized Kinoma as a subcontractor on Enterprise projects.
In our Enterprise business, most of our customers are large
corporations that require development of custom multimedia tools or complex
multimedia applications. Enterprise customers usually pay for consulting
services performed by Tribeworks' employees and subcontractors. Certain
Enterprise customers also license our software, usually for a fixed fee or on a
per unit basis. As evidenced by results for this quarter, we generally
anticipate Enterprise business growth, particularly Enterprise consulting
revenues, to be less predictable and "bumpier" than our Tools business revenues
in the foreseeable future, and this could impact whether or not we will be
profitable on a quarter-to-quarter basis. The primary reason is that our
Enterprise business has a smaller number of customers. The addition of new
mobile Enterprise solutions has expanded the potential customer base and could
decrease volatility going forward. We expect to continue to underwrite the cost
of software research and development with money received from Enterprise
customers.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $112,089 for the three months ended September 30,
2004, a decrease of 67% compared to total revenues of $338,332 for the three
months ended September 30, 2003. The Tools Business, which primarily includes
sales of commercial or educational use of our iShell 4, iShell Mobile, and
Kinoma Media Album software, and sales of books and third party plug-ins,
decreased by 22% to $67,172 for the third quarter of 2004, compared to $85,955
for the third quarter of 2003. The Enterprise business decreased in the third
quarter of 2004 by 82% to $44,917, compared with $252,377 for the third quarter
of 2003. Enterprise revenues for the third quarter of 2004 consisted of $39,217
in consulting revenues and $5,700 in licensing revenues, compared with $197,791
in consulting revenues and $54,585 in licensing revenues for the third quarter
of 2003. The decrease in Enterprise consulting revenues is primarily
attributable to a large decrease in revenues associated with our ongoing
contract with Pioneer Corporation for development of software products that
allow users to create and manage content for digital signs. We believe that
revenues associated with Pioneer Corporation may increase in future quarters,
based on the recently announced contract. International revenues, which consist
of sales to foreign customers, represented 52% of revenues for the third quarter
of 2004, compared to 58% of revenues for the third quarter of 2003. Revenues
from Japanese customers decreased to 26% of total revenues for the third quarter
of 2004 from 49% for the third quarter of 2003.
Revenues were $619,742 for the nine months ended September 30, 2004, a
decrease of 36% from revenues of $967,293 for the nine months ended September
30, 2003. The Tools Business decreased in the first nine months of 2004 by 14%
to $235,839, compared with $274,310 for the first nine months of 2003. The
Enterprise business decreased in the first nine months of 2004 by 45% to
$383,903, compared with $692,983 for 2003.
-12-
COST OF SALES
Cost of sales includes royalties paid to third parties for licensed
technology, costs associated with order fulfillment, credit card fees, web
hosting fees, and costs associated with consulting services, including salaries,
subcontractor fees, and out-of-pocket expenses. Cost of sales was $32,648 for
the three months ended September 30, 2004, down from $127,352 for the three
months ended September 30, 2003. Gross margins increased on a percentage basis
to 71% for the third quarter of 2004 from 62% for the third quarter of 2003,
primarily caused by a higher distribution of revenues to the Tools business,
which generates higher gross margins than the Enterprise business.
Cost of sales was $239,938 for the nine months ended September 30,
2004, down from $346,557 for the nine months ended September 30, 2003. Gross
margins were 61% for the first nine months of 2004 and 64% for the first nine
months of 2003.
OPERATING EXPENSES
Product support expenses consist mainly of compensation, benefits and
consulting fees paid to product support personnel. Product support expenses were
$12,384 and $11,063 for the quarters ended September 30, 2004 and 2003,
respectively. As a percentage of Tools sales, product support expenses were 18%
and 13% for the third quarters of 2004 and 2003, respectively. Product support
expenses were $33,091 and $33,588 for the nine months ended September 30, 2004
and September 30, 2003, respectively.
Product development expenses consist primarily of compensation and
benefits to support product development. Product development expenses were
$16,914 and $36,895 for the quarters ended September 30, 2004 and 2003,
respectively. This decrease is primarily due to the fact that core development
of Kinoma Media Album was taking place during the third quarter of 2003, and
final development of the first release of iShell Mobile was also in progress
during that quarter. Product development expenses were $82,938 and $102,283 for
the nine months ended September 30, 2004 and 2003, respectively.
Sales and marketing expenses consist primarily of compensation and
benefits and other public relations and marketing costs. Sales and marketing
expenses were $65,300 and $54,381 for the quarters ended September 30, 2004 and
2003, respectively. Most of this increase is due to an increase in expenses
associated with new compensation arrangements with our principal executives, as
described in Note H to the financial statements. Sales and marketing expenses
were $161,148 and $179,789 for the nine months ended September 30, 2004 and
2003, respectively.
General and administrative expenses consist primarily of compensation
and benefits, fees for professional services, and overhead. General and
administrative expenses were $75,215 and $64,681 for the quarters ended
September 30, 2004 and 2003, respectively. This increase is primarily due to an
increase in expenses associated with new compensation arrangements with our
principal executives, as described in Note H to the financial statements.
General and administrative expenses were $285,505 and $241,231 for the nine
months ended September 30, 2004 and 2003, respectively.
OTHER EXPENSE
Other expense was $51 for the quarter ended September 30, 2004,
consisting of $51 of interest expense, compared to other expense of $2,581 for
the quarter ended September 30, 2003, consisting of $2,581 of interest expense.
Other expense was $792 for the nine months ended September 30, 2004, consisting
of $792 of interest expense, compared to other expense of $7,546 for the nine
months ended September 30, 2003, consisting of $7,546 of interest expense.
PROVISION FOR INCOME TAXES
We recorded no tax provision for the quarter ended September 30, 2004
and no tax provision for the quarter ended September 30, 2003. We recorded no
tax provision for the nine months ended September 30, 2004 and no tax provision
for the nine months ended September 30, 2003.
NET INCOME (LOSS)
Net loss was $90,423 for the quarter ended September 30, 2004, compared
to a net profit of $41,379 for the quarter ended September 30, 2003. Net loss
was $183,670 for the nine months ended September 30, 2004, compared to a net
profit of $56,299 for the nine months ended September 30, 2003.
-13-
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had cash of $5,036 compared to $43,823 at
September 30, 2003. Our capital requirements have been reduced significantly
from previous quarters based on cost reductions. At September 30, 2004, the
principal source of liquidity for the Company was $5,036 of cash. Based on our
projected cash flow requirements, taking into account our cash balance,
anticipated revenues from our ongoing business, and projected expenditures, we
do not believe we will be required to raise equity financing within the next 12
months.
Cash used by operating activities was $21,989 for the quarter ended
September 30, 2004 and cash used by operating activities was $70,635 for the
quarter ended September 30, 2003. Cash used by operating activities was $34,736
for the nine months ended September 30, 2004 and cash used by operating
activities was $60,133 for the nine months ended September 30, 2003.
Cash used in investing activities for the quarters ended September 30,
2004 and 2003 was $0 and $0, respectively. Cash used in investing activities for
the nine months ended September 30, 2004 and 2003 was $0 and $2,197,
respectively.
Cash used in financing activities for the quarters ended September 30,
2004 and 2003 was $0 and $7,000, respectively. Cash used in financing activities
for the nine months ended September 30, 2004 and 2003 was $0 and $37,000,
respectively.
We cannot make assurances that we will be profitable and that should we
seek investment funds, that such funds will be available to us or available on
commercially reasonable terms. We do not expect to devote substantial capital
resources to additional hiring of personnel if more funds do not become
available to us. In addition, the inability to obtain sufficient funds from
operations and external sources will have a material adverse effect on our
business, results of operations, and financial condition.
ITEM 3. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer of the
Registrant have concluded, based on their evaluation as of the end of the period
covered by this Report, that the Registrant's disclosure controls and procedures
are effective to ensure that information required to be disclosed by the
Registrant in the reports filed or submitted by it under the Securities Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and include controls and procedures designed to ensure that information
required to be disclosed by the Registrant in such reports is accumulated and
communicated to the Registrant's management, including the Chief Executive
Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of such evaluation.
-14-
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
We made no sales of the Company's common stock during the quarter ended
September 30, 2004.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
2.1 Agreement of Merger between Tribeworks, Inc., a California
corporation, and Tribeworks Acquisition Corporation, dated
November 2, 1999 (Incorporated by reference to Exhibit 2.1 to
the Registrant's Form 10-SB/A filed July 10, 2000).
3.1 Certificate of Incorporation of Tribeworks, Inc., a Delaware
corporation (Incorporated by reference to Exhibit 3.1 to the
Registrant's Form 10-SB/A filed July 10, 2000).
3.2 Bylaws of Tribeworks, Inc., a Delaware corporation
(Incorporated by reference to Exhibit 3.2 to the Registrant's
Form 10-SB/A filed July 10, 2000).
10.5 Tribeworks, Inc. 2004 Employee Stock Incentive Plan
(Incorporated by reference to Exhibit B to the Registrant's
Proxy Statement on Schedule 14A filed April 14, 2004).
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) and 15d-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) and 15d-14(a).
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act.
-15-
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.
Tribeworks, Inc.,
a Delaware corporation
Date: November 22, 2004 /s/ DUNCAN J. KENNEDY
-------------------------
Duncan J. Kennedy,
President and Chief Executive Officer
/s/ ROBERT C. DAVIDORF
--------------------------
Robert C. Davidorf,
Chief Financial Officer
-16-