U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-QSB
(Mark One)
[ X ] Quarterly report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended: September 30, 2004
[ ] Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from____________ to _________________.
Commission File No: 000-30717
e-SMART TECHNOLOGIES, INC.
--------------------------
(Name of small business in its charter)
Nevada 88-0409261
----------------------------- -------------------
(State or other jurisdiction of incorporation) (IRS Employer Id. No.)
7225 Bermuda Road, Suite C, Las Vegas, Nevada 89119
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(Address of Principal Office including Zip Code)
Issuer's telephone Number: (702) 447 - 5210
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.001 par value, 173,272,612 shares at September 30, 2004.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
e-SMART TECHNOLOGIES, INC.
FORM 10-QSB - QUARTER ENDED SEPTEMBER 30, 2003
INDEX
Page
PART I FINANCIAL INFORMATION 2
Item 1. Financial Statements 2
Condensed Consolidated Balance Sheets at September 30,
2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Nine Months and Three Months Ended September 30,
2004 and 2003 4
Condensed Consolidated Statements of Shareholders' Impairment
for the Period January 1, 2003 through September 30, 2004 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and 2003 6
Notes to the Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 8
Item 3. Controls and Procedures 10
PART II OTHER INFORMATION 11
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
EXHIBITS 13-14
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated balance sheet of the Registrant at
September 30, 2004, the audited balance sheet at December 31, 2003, and the
unaudited condensed consolidated statements of operations, shareholders'
impairment, and cash flows for the nine month periods ended September 30, 2004
and September 30, 2003 follow. The unaudited condensed consolidated financial
statements reflect all adjustments that are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
2
e-SMART TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
[Unaudited]
September 30, December 31,
2004 2003
Assets
Current assets -
Cash $ 9,235 $ 14,096
Due from Associated Business Group, Inc. -- 31,334
Prepaid expenses 30,456 --
Total current assets 39,691 45,430
Super Smart Card TM Technology, net 107,399 109,310
System Development 136,000 --
Leasehold Improvements and Equipment, net 94,510 --
Due from Biosensor, LLC 159,500 --
Deposit - e-Smart Korea, Inc. -- 151,000
---------- -----------
Total assets $ 37,100 $ 305,740
---------- -----------
Liabilities and Shareholders' Impairment
Current liabilities -
Accounts payable 499,847 397,081
Accrued expenses 209,367 38,853
Notes payable 80,000 80,000
Demand note payable - Intermarket Ventures, Inc. 314,000 --
Due to Associated Business Group, Inc. 12,427 --
--------- -----------
Total current liabilities 1,115,641 515,934
Note Payable - Intermarket Ventures, Inc. 300,000 --
--------- -----------
Total liabilities 1,415,641 515,934
--------- -----------
Shareholders' Impairment -
Common shares, $.001 par, 200,000,000
authorized, 173,272,612 and 170,707,012
issued and outstanding, respectively 173,273 170,707
Additional paid in capital 60,879,453 59,497,446
Accumulated deficit (61,931,267) (59,878,347)
---------- -----------
Total shareholders' impairment (878,541) (210,194)
---------- -----------
Total liabilities and shareholders' impairment $ 537,100 $ 305,740
========== ===========
See notes to condensed consolidated financial statements.
3
e-SMART TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[Unaudited]
Nine Months Ended Three Months Ended
September September 30
-------------------- ---------------------
2004 2003 2004 2003
Net Revenue $ -- $ -- $ -- $ --
Cost of revenue -- -- -- --
--------- --------- ---------- ---------
Gross profit -- -- -- --
Operating expenses:
Research and development 413,664 386,042 199,454 105,842
General and administrative 1,625,769 983,371 356,819 465,145
Interest 12,737 27,472 9,737 12,474
--------- --------- ---------- ---------
Total operating expenses 2,052,170 1,396,885 566,010 583,461
--------- --------- ---------- ---------
Loss before taxes (2,052,170)(1,396,885) (566,010) (583,461)
Provision for taxes 750 250 250 --
--------- --------- ---------- ---------
Net Loss $(2,052,920)$(1,397,135) $ (566,260)$(583,461)
=========== ========= ========== =========
Net loss per common share -
basic and fully-diluted $ (0.01)$ (0.01) $ (0.00) $ (0.00)
=========== ========= ========== =========
Weighted average common shares
shares outstanding 172,434,276 173,820,626 173,127,610 167,404,120
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
e-SMART TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF
SHAREHOLDERS' IMPAIRMENT
[Unaudited]
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
Balance, January 1, 2003 153,771,993 $ 153,772 $ 22,714,779 $ (23,106,740 $ (238,189)
Shares issued for cash 16,497,519 16,498 2,531,854 -- 2,548,352
Shares issued for services 437,500 437 80,813 -- 81,250
Options issued for services -- -- 34,170,000 -- 34,170,000
Net loss -- -- -- (36,771,607) (36,771,607)
--------------------------------------------------------------------
Balance, December 31, 2003 170,707,012 $ 170,707 $ 59,497,446 $ (59,878,347) $ (210,194)
--------------------------------------------------------------------
Unaudited
---------
Balance January 1, 2004 170,707,012 $ 170,707 $ 59,497,446 $ (59,878,347) $ (210,194)
Shares issued for cash 2,565,600 2,566 1,382,007 -- 1,384,573
Net loss -- -- -- (2,052,920) (2,052,920)
--------------------------------------------------------------------
Balance, September 30, 2004 173,272,612 $ 173,273 $ 60,879,453 $ (61,931,267) $ (878,541)
--------------------------------------------------------------------
See notes to condensed consolidated financial statements.
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e-SMART TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
Nine Months Ended
September 30,
---------------------------
2004 2003
Cash flows of operating activities - ------------- -------------
Net loss $ (2,052,920) $ (1,397,135)
Adjustments to reconcile net loss to net
cash used by operations:
Depreciation and amortization 5,182 4,823
Services received for common shares -- 77,018
Decrease (increase) in assets -
Due from Associated Business Group, Inc. 31,334 40,000
Prepaid expenses (30,456) (4,990)
Increase (decrease) in liabilities -
Accounts payable 102,766 (4,824)
Accrued expenses 170,514 22,750
Due to Associated Business Group, Inc. 12,427 --
----------- -----------
Net cash used by operating activities (1,761,153) (1,262,358)
----------- -----------
Cash flows of investing activities -
System development (136,000) --
Leasehold and improvements (97,781) --
Advances to Biosensor, LLC (159,500) --
Recoupment of e-Smart Korea deposit 151,000 --
----------- -----------
Net cash used by investing activities (242,281) --
----------- -----------
Cash flows of financing activities -
Proceeds from sale of common shares 1,384,573 1,717,354
Reduction of notes payable -- (120,000)
Borrowings from Intermarket Ventures, Inc. 614,000 --
---------- -----------
Net cash provided by financing activities 1,998,573 1,597,354
---------- -----------
Net increase(decrease) in cash (4,861) 334,996
Cash at beginning of period 14,096 1,069
---------- -----------
Cash at end of period $ 9,235 $ 336,065
========== ===========
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements which include the
accounts of the Registrant and (since commencement of its operations on January
1, 2004) those of its wholly-owned subsidiary e-Smart Korea, Inc., have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the nine month
and three month periods ended September 30, 2004 and 2003, are not necessarily
indicative of the results that may be expected for the respective years ended
December 31, 2004 and 2003.
The unaudited condensed consolidated financial statements should be read in
conjunction with the audited financial statements and related footnotes
included in the Registrant's Annual Report on Form 10-KSB for the two fiscal
years ended December 31, 2003, supplemented by the notes included herein. Such
Annual Report on Form 10-KSB was the first to be filed by the Registrant since
present management assumed control of the Registrant in October 2000. On
September 8, 2004, the Registrant additionally filed an Annual Report on Form
10-KSB for the two years ended December 31, 2002. Prior thereto, the
Registrant's last audited financial statements were filed with the Registrant's
Form 10-SB on May 30, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 reporting period.
Actual results could differ from those estimates.
Note 2 - Related Party Transactions
Common Ownership
Approximately 77% of the Registrant's outstanding common shares are owned by
IVI Smart Technologies, Inc., a Delaware corporation (the "Licensor"), that is
the sole owner of all of the Super Smart Card TM technology licensed to the
Registrant in November 2000, August 2001, and September 2001, for a 20-year
term for commercialization throughout China, the remainder of Asia exclusive of
China, and the United States of America, respectively. In addition, the
Licensor's parent, Intermarket ventures, Inc., a Utah corporation ("Ventures")
has advanced the Registrant $300,000 in 6% term notes during June 2004 and
$314,000 in 5% demand notes at various dates throughout the three months ended
September 30, 2004. Mary A. Grace, the
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Registrant's President and Chief Executive Officer, is a director, executive
officer and principal stockholder of the Licensor and Ventures. Tamio Saito,
the Registrant's Chief Technology Officer, is also an executive officer and
principal stockholder of the Licensor and Ventures. The Licensor is in a
position to materially influence the direction of the Registrant, its efforts
in raising the additional capital critical to its success, and the strategies
employed in commercialization of the licensed technology, assuming the
Registrant's business plan is ultimately successful. At September 30, 2004
the Registrant had incurred indebtedness to its parent of $614,000
consisting of a demand obligation bearing interest at 5% and a term
obligation bearing interest at 6% over 36 months.
Note 3 - Going Concern
The Registrant's condensed consolidated financial statements have been
presented on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business.
As shown in the accompanying financial statements, the Registrant had negative
working capital at September 30, 2004, of $1,075,950. In addition, the
Registrant has incurred an accumulated deficit of $(61,931,267) through
September 30, 2004. The Registrant is dependent upon the efforts of its
management to raise proceeds from continued debt or equity placements to
sustain the research and development and ultimate commercialization of their
respective interests in the Super Smart Card TM technology. The Registrant's
ability to continue to receive the necessary level of funding support through
the efforts of its management cannot be guaranteed. The condensed consolidated
financial statements do not include any adjustments that might be necessary if
the Registrant is unable to continue as a going concern.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion contains forward-looking statements regarding the
Registrant, its business, prospects and results of operations that are subject
to certain risks and uncertainties posed by many factors and events that could
cause the Registrant's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that may affect such forward-looking statements include the
Registrant's ability to successfully exploit its licensed technology, develop
new products and new markets for its licensed technology; the impact of
competition on the Registrant's proposed operations, changes in law or
regulatory requirements that adversely affect or preclude customers from using
the Registrant's licensed technology, delays in the Registrant's introduction
of new products or services, and failure by the Registrant to keep pace with
emerging technologies.
When used in this discussion, words such as "believes", "anticipates",
"expects", "intends", and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. The Registrant undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Registrant in this report and other reports filed with
the
8
Securities and Exchange Commission ("SEC") that attempt to advise interested
parties of the risks and factors that may affect the Registrant's business.
Nine Months Ended September 30, 2004 and September 30, 2003
Revenues - Since obtaining the license to the Super Smart Card TM technology in
November 2000, the Registrant has been engaged in research and development
efforts to enhance and broaden the technology's applications and in exploring
the global market for its optimal commercialization. In the opinion of
management, the Registrant's Super Smart Card TM is ready for commercialization.
This fact notwithstanding, the Registrant is still in its development stage for
accounting purposes as it has not experienced revenues in either of the nine
month periods ended September 30, 2004 ("9M04") or September 30, 2003 ("9M03").
Cost of Revenues - Consistent with the Registrant still being in its development
stage, it did not experience cost of revenues in either 9M04 or 9M03.
Operating Expenses - Operating expenses rose to $2,052,170 for 9M04 compared to
$1,396,885 for 9M03; an increase of $655,285 or 47%. The principal factors
underlying this increase were as follows: 1) increased marketing expenses
during 9M04 compared to 9M03 consistent with the Registrant's efforts to get
closer to generating revenues, 2) an increase in general and administrative
expenses during 9M04 consistent with the Registrant beginning to create the
infrastructure it will require to oversee its affairs, and 3) an increase in
research and development expenses in 9M04 in line with the Registrant's
technology becoming closer to commercialization.
Loss Before Taxes and Income Taxes - As a result of the foregoing, loss before
taxes for 9M04 was $(2,052,170) compared to $(1,396,885) for 9M03 upon which
the Registrant's provision for taxes in both periods was solely attributable
to minimum state franchise taxes payable.
Net Loss - Consistent with the foregoing analysis, the Registrant reported a
net loss of $(2,052,920) or $(0.01) per share for 9M04, compared to a net loss
of $(1,397,135) or $(0.01) per share for 9M03, based upon weighted average
shares outstanding of 172,434,276 and 173,820,626, respectively.
Three Months Ended September 30, 2004 and September 30, 2003
Revenues - Since obtaining the license to the Super Smart Card TM technology in
November 2000, the Registrant has been engaged in research and development
efforts to enhance and broaden the technology's applications and in exploring
the global market for its optimal commercialization. In the opinion of
management, the Registrant's Super Smart Card TM is ready for commercialization.
This fact notwithstanding, the Registrant is still in its development stage for
accounting purposes as it has not experienced revenues in either of the three
month periods ended September 30, 2004 ("3Q04") or September 30, 2003 ("3Q03").
Cost of Revenues - Consistent with the Registrant still being in its development
stage, it did not experience cost of revenues in either 3Q04 or 3Q03.
9
Operating Expenses - Operating expenses were $566,010 for 3Q04 compared to
$583,461 for 3Q03 resulting in a decrease of $17,451 or 3%. The principal
factors underlying this decrease were as follows: (1) increased marketing
expenses during 3Q04 compared to 2Q03 consistent with the Registrant's efforts
to get closer to generating revenues and (2) increased research and development
expenses in 3Q04, which were offset by (3) decreased general and
administrative expenses during 3Q04 as a result of the Registrant having
prepaid a substantial portion of the infrastructure required to oversee its
affairs during the first six months of 2004.
Loss Before Taxes and Income Taxes - As a result of the foregoing, loss before
taxes for 3Q04 was $(566,010) compared to $(583,461) for 3Q03 upon which the
Registrant's provision for taxes in 3Q04 was solely attributable to minimum
state franchise taxes payable.
Net Loss - Consistent with the foregoing analysis, the Registrant reported a
net loss of $(566,260) or $(0.00) per share for 3Q04, compared to a net loss of
$(583,461) or $(0.00) per share for 3Q03, based upon weighted average shares
outstanding of 173,127,610 and 167,404,120, respectively.
Liquidity and Capital Resources - The Registrant has limited working capital
and is dependent upon the efforts of its management in raising proceeds derived
from private securities offerings for funds for the continuation of its
proposed smart card business. Currently, the Registrant does not have any
existing credit facilities or similar bank borrowing arrangements. The
Registrant will need to obtain additional financing in order to carry out its
entire business plan. There can be no assurance that any additional financing
will be available to the Registrant on acceptable terms, if at all. If the
Registrant raises additional funds by issuing additional equity securities,
further dilution to existing equity holders will result. If adequate
additional funds are not available, the Registrant may be required to curtail
significantly its long term business objectives and the Registrant still may
not be able to transition out of the development stage, notwithstanding that
the BVS2 TM systems and Super Smart Card TM and other smart card system
technologies are ready for commercialization.
At September 30, 2004, the Registrant had current assets of $39,691 (including
cash of $9,235, current liabilities of $1,115,641, and an accumulated deficit
of $(61,931,267). The Registrant periodically evaluates its liquidity
requirements, capital needs and availability of capital resources in view of
its plans for commercialization of its technology, and other operating cash
needs. In the opinion of Registrant's management, the Registrant is entirely
dependent upon a material infusion of capital from the sale of securities to
its accredited investors during the next several months in order to sustain its
current developmental efforts, commence commercial operations, and ultimately
transition out of the development stage.
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ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
During the quarter ended September 30, 2004, the Registrant continued to
implement controls and procedures designed to ensure that information required
to be disclosed in the reports that the Registrant files or submits under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), are recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC. Based upon their evaluation of the controls and
procedures implemented within 90 days of the filing date of this Quarterly
Report, the Chief Executive and Chief Financial Officer of the Registrant
concluded that the Registrant's disclosure controls and procedures have been
improved during the past three months. Such officer also concluded that the
Registrant's controls and procedures will likely equal or exceed those required
of the Registrant within one or two more operating quarters.
Changes in Internal Controls
The Registrant made no significant changes in its internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the evaluation of those controls by the Chief Executive and Chief Financial
Officer.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Administrative Proceeding
On December 12, 2003, the SEC commenced an Administrative Proceeding against
the Registrant seeking, inter alia, to interrupt public trading in the
Registrant's securities (the "Proceeding"). Pending a decision by the
Administrative Law Judge, Lillian A. McEwen (the "ALJ"), the Registrant agreed
to utilize its best efforts to prepare and file its Annual Report on Form
10-KSB for the two fiscal years ending December 31, 2003, on or before March
30, 2004.
However, and on March 4, 2004, Judge, published an Initial Decision in the
Proceeding. In her Initial Decision, the ALJ found that the Registrant failed
to make the required filings, as alleged, and therefore violated Exchange Act
Section 13(a) and Rules 13a-1 and 13a-13. In assessing sanctions, the ALJ found
that the Registrant's violations were not only recurrent but also egregious,
lasting over three years and continuing to the present. The ALJ added that,
although the Registrant represents that it intends to bring itself into full
compliance with the periodic reporting requirements no later than March 31,
2004, this endeavor seems doomed. Because the ALJ was convinced that the
11
Registrant could not readily remedy its periodic reporting violations, she
concluded that a suspension would not sufficiently protect the investing public.
The ALJ, therefore, rendered a decision to revoke the Registrant's registration.
On March 30, 2004, the Registrant filed a Form 10-KSB covering fiscal years
ending on December 31, 2002 and 2003. On March 23, 2004, the Registrant filed a
petition with the SEC for review of the ALJ 's decision. The Registrant's
petition was granted on March 26, 2004. On March 30, 2004, the Division of
Enforcement asked that the ALJ's decision be summarily affirmed pursuant to
Rule of Practice 411(e). The Division also moved for leave, under Commission
Rule of Practice 410(d), to file a brief in opposition to the Registrant's
petition for review. By June 30, 2004, the Registrant had filed all Form
10-QSB Quarterly Reports required to be filed for the two years ended December
31, 2003. On May 17, 2004, the Registrant timely filed its Form 10-QSB
Quarterly report for the three months ended March 31, 2004.
On July 16, 2004, the SEC published an order wherein the Division of
Enforcement's motions for summary affirmance and for leave to file a brief in
opposition to the Registrant's petition for review were denied. On August 16,
2004, the Registrant timely filed its Form 10-QSB Quarterly report for the
three and six months ended June 30, 2004. On September 8, 2004, the Registrant
filed an Annual Report on Form 10-KSB for the two years ended December 31, 2002.
On October 12, 2004, the SEC ordered the administrative proceeding brought
against the Registrant remanded to the ALJ to afford her an opportunity to
reassess her sanctioning determination in light of the circumstances of this
case and the Registrant's subsequent filing of reporting record as outlined
above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
31.1 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2003
32.2 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2003
Reports on Form 8-K: None.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
e-Smart Technologies, Inc.
By: /s/ Mary A. Grace
--------------------------
Chief Executive Officer, and Director
By: /s/ Mary A. Grace
--------------------------
Chief Financial Officer
Dated: November 15, 2004
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