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, 2003
[_] 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
(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, 168,628,267 shares at September 30, 2003.
Transitional Small Business Disclosure Format (Check one): Yes [_] NO [X]
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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 Balance Sheets at September 30, 2003 and 2002 ........... 3
Condensed Statements of Operations for the Nine Months Ended
September 30, 2003 and 2002 .................................... 4
Condensed Statement of Stockholders' Equity for the
Nine Months Ended September 30, 2003 and 2002 .................. 5
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 .................................... 6
Notes to Financial Statements ..................................... 7
Item 2. Management's Discussion and Analysis .............................. 10
Item 3. Controls and Procedures ........................................... 11
PART II OTHER INFORMATION ................................................. 12
Item 5. Other Information ................................................. 12
Item 6. Exhibits and Reports on Form 8-K .................................. 12
SIGNATURES ........................................................ 13
EXHIBITS .......................................................... 14
------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed balance sheets of the Registrant at September 30,
2003 and September 30, 2002, and the unaudited condensed statements of
operations, shareholders' equity, and cash flows for the nine month periods
ended September 30, 2003 and September 30, 2002 follow. The unaudited condensed
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 BALANCE SHEETS
[Unaudited]
September 30,
------------------------------
2003 2002
-------------- --------------
Assets
------
Current assets -
Cash $ 336,065 $ 7,087
Due from Associated Business Group, Inc. -- 28,200
Prepaid expenses 4,990 --
-------------- --------------
Total current assets 341,055 35,287
Super Smart Card (TM) Technology 125,760 138,760
-------------- --------------
Total assets $ 466,815 $ 174,047
============== ==============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities -
Income taxes payable $ 2,750 $ 2,500
Accrued interest payable 34,603 4,603
Note payable 30,000 150,000
-------------- --------------
Total current liabilities 67,353 157,103
-------------- --------------
Commitments and contingencies
Shareholders' Equity
Common shares, $.001 par, 200,000,000
authorized, 168,628,267 and 166,566,627
issued and outstanding, respectively 168,628 166,567
Additional paid in capital 3,268,200 1,107,265
Retained earnings (deficit) (3,037,366) (1,256,888)
-------------- --------------
Total shareholders' equity 399,462 16,944
-------------- --------------
Total liabilities and shareholders' equity $ 466,815 $ 174,047
============== ==============
See notes to condensed financial statements.
3
e-SMART TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
[Unaudited]
Nine Months Ended
September 30,
------------------------------
2003 2002
-------------- --------------
Net Revenue $ -- $ --
Cost of revenue -- --
-------------- --------------
Gross profit -- --
-------------- --------------
Operating expenses:
Research and development 386,042 520,495
Marketing 458,394 357,239
General and administrative 524,977 350,060
Interest, net 27,472 4,603
-------------- --------------
Total operating expenses 1,396,885 1,232,397
-------------- --------------
Income (loss) before taxes (1,396,885) (1,232,397)
Income tax 250 2,500
-------------- --------------
Net income (loss) $ (1,397,135) $ (1,234,897)
============== ==============
Net income (loss) per common share -
basic and fully-diluted $ (0.01) $ (0.01)
============== ==============
Weighted average number of
common shares outstanding 173,820,626 160,700,149
============== ==============
See notes to condensed financial statements.
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e-SMART TECHNOLOGIES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
[Unaudited]
Common Stock Additional Retained
--------------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2002 157,917,200 $ 157,917 $ 2,915 $ (21,991) $ 138,841
Issuance of shares for cash 4,799,424 4,799 851,201 -- 856,000
Issuance of shares for services 3,850,000 3,850 253,150 -- 257,000
Net income (loss) -- -- -- (1,234,897) (1,234,897)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 166,566,624 $ 166,566 $ 1,107,266 $(1,256,888) $ 16,944
------------ ------------ ------------ ------------ ------------
Balance January 1, 2003 170,456,167 $ 170,456 $ 1,485,000 $(1,640,231) $ 15,225
Issuance of shares for cash 14,966,600 14,967 1,702,387 -- 1,717,354
Issuance of shares for services 437,500 437 80,813 -- 81,250
Cancellation of shares
issued for technology (13,000,000) (13,000) -- -- (13,000)
Cancellation of shares
issued for services (4,232,000) (4,232) -- -- (4,232)
Net income (loss) -- -- -- (1,397,135) (1,397,135)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2003 168,628,267 $ 168,628 $ 3,268,200 $(3,037,366) $ 399,462
------------ ------------ ------------ ------------ ------------
See notes to condensed financial statements.
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e-SMART TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
[Unaudited]
Nine Months Ended
September 30,
------------------------------
2003 2002
-------------- --------------
Cash flows of operating activities
Net income (loss) $ (1,397,135) $ (1,234,897)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Issuance of common shares for services 81,250 257,000
Cancellation of stock issued for services (4,232) --
Decrease (increase) in assets -
Due from Telpac Services, Inc. 33,199 (28,200)
Prepaid expenses (4,990) --
Increase (decrease) in liabilities -
Accrued interest payable 22,500 4,603
Income taxes payable 250 2,500
-------------- --------------
Net cash provided (used) by operating activities (1,269,158) (998,994)
-------------- --------------
Cash flows of investing activities
Reduction in cost of technology 13,000 --
-------------- --------------
Net cash provided by investing activities 13,000 --
-------------- --------------
Cash flows of financing activities
Increase (reduction) of note payable (120,000) 150,000
Proceeds from sale of common shares 1,717,354 856,000
Cancellation of common shares issued for license (13,000) --
-------------- --------------
Net cash provided by financing activities 1,584,354 1,006,000
-------------- --------------
Net increase (decrease) in cash 328,196 7,006
Cash at beginning of period 7,869 81
-------------- --------------
Cash at end of period $ 336,065 $ 7,087
============== ==============
See notes to condensed financial statements.
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e-SMART TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited financial statements 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 periods ended September 30, 2003, and 2002
are not necessarily indicative of the results that may be expected for the
respective years ended December 31, 2003, and 2002.
The enclosed condensed financial statements at September 30, 2003, and
September 30, 2002 should be read in conjunction with previously reported
audited financial statements of the Registrant. However, the Registrant has not
filed an Annual Report on Form 10-KSB since management assumed control of the
Registrant in October 2000. The Registrant's last audited financial statements
were filed with the Registrant's Form 10-SB 12G on May 30, 2000.
The preparation of financial statements, in conformity with the 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
Approximately 75% of the Registrant's 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 for a 30 year term for commercialization throughout Asia and
the United States. Mary A. Grace, the Registrant's President and Chief
Executive Officer, is a director, executive officer and principal stockholder of
the Licensor. Tamio Saito, the Registrant's Chief Technology Officer, is also
an executive officer and principal stockholder of the Licensor.
Pursuant to a Research and Development Services Agreement dated January 1, 2001,
and reduced to writing on May 29, 2003 (the BBT Agreement"), the Registrant
engaged Big Bang Technologies, Inc., a California corporation controlled by and
under common control of Tamio Saito, a co-inventor of the Super Smart Card (TM)
technology ("BBT"), as the Registrant's research and development co-coordinator,
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administrator and personnel provider. BBT was also engaged to provide the
Registrant with state of the art software development, testing, laboratory and
other services related to the Registrant's smart card technology, and the
services of Tamio Saito as the Registrant's Chief Technology Officer.
The BBT Agreement, which provides for mutual confidentiality and non-compete
protection, is for a term of one year, and is thereafter automatically renewed
for successive one year terms unless sooner terminated in accordance with its
provisions. In consideration for BBT's services, the Registrant agreed to
promptly pay monthly invoices submitted by BBT. During the nine months ended
September 30, 2002, and September 30, 2003, the Registrant paid BBT an aggregate
of $290,000 and $315,000, respectively, under the BBT Agreement.
Pursuant to an Advisory and Administrative Services Agreement dated January 1,
2001, and reduced to writing on May 29, 2003 (the ABG Agreement"), the
Registrant engaged Associated Business Group, Inc., a Nevada corporation
controlled by and under common control of the father of the other co-inventor of
the Registrant's Super Smart Card (TM) technology ("ABG"), as the principal
administrative services provider for the Registrant. Pursuant to the ABG
Agreement, the Registrant engaged ABG to administer the receipt of investor's
funds, to pay expenses and to perform other necessary and related administrative
services. ABG also agreed to utilize its best efforts to cover temporary
shortfalls in the Registrant's cash receipts.
The ABG Agreement, which provides for mutual confidentiality and non-compete
protection, is for a term of one year, and is thereafter automatically renewed
for successive one year terms unless sooner terminated in accordance with its
provisions. In consideration for ABG's services, the Registrant agreed to pay
ABG a fee of $10,000 per month subject to ABG's right to convert the same into
restricted shares of the Registrant's common stock at a conversion price equal
to 75% of the mean between the closing bid and asked prices for the Registrant's
common stock on the day before the date ABG elects to convert.
On December 1, 2003, the Licensor and certain other holders comprising
approximately 77% of the Registrant's issued and outstanding shares adopted
resolutions by consent pursuant to Section 78.320 of the Nevada Revised Statutes
in lieu of a meeting of the Registrant's shareholders. The resolutions re-
elected two former directors and elected one new director, granted to the board
the power to select new independent auditors, increased the number of authorized
shares of common stock from 200 million to 300 million, created the 2003 Long
Term Incentive Plan wherein 75 million shares are reserved for issuance, and
granted 30 million options thereunder. The approved actions will become
operative 20 days after the mailing to the Registrant's stockholders of an
Information Statement that must first be prepared and filed with the Securities
and Exchange Commission ("SEC"). A total of 50 million five year options were
granted to the Registrant's Chief Executive Officer, the co-inventors of the
Super Smart Card (TM) technology and certain employees. The options are
8
exercisable at a price equal to 100% of the closing bid price for the
Registrant's common stock on December 1, 2003, or $1.00 per share.
On November 15, 2003, the Registrant entered into a written Compensation
Settlement Agreement with Mary A. Grace, its President and Chief Executive
Officer. Pursuant to the agreement, the Registrant agreed to pay Ms. Grace a
salary of $250,000 per year commencing on January 1, 2004. In consideration for
Ms. Grace's releasing the Registrant from its obligation to accrue her former
salary of $250,000 per year or $750,000 for the three years ending December 31,
2003, the Registrant agreed to pay to Ms. Grace a preferred distribution of 50%
of future profits limited to $600,000. In addition, and in consideration for
the Registrant's return to Ms. Grace of certain marketable securities, Ms. Grace
released the Registrant from any prior obligations under a contemplated stock
purchase agreement.
Note 3 - Going Concern
The Registrant's 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's positive
working capital at September 30, 2003 was $273,702. Irrespective of its present
working capital position, the Registrant has incurred an accumulated deficit of
$(3,037,366) through September 30, 2003. The Registrant is currently dependent
upon the proceeds from continued debt or equity placements to sustain the
research and development and ultimate commercialization of its Super Smart Card
(TM) technology. The Registrant's ability to continue this course of action is
uncertain. The financial statements do not include any adjustments that might
be necessary if the Registrant is unable to continue as a going concern.
Note 4 - Common Stock
During the nine months ended September 30, 2003, the Registrant issued an
aggregate of 650,000 five year Common Stock Purchase Warrants exercisable at
$1.00 per share, and options to purchase 50,000,000 shares of Common Stock at
$1.00 per share. As of the date of this Report, no warrants or options have
been exercised. Exercise of the options is contingent upon the Registrant's
filing of an Information Statement with the SEC.
On December 1, 2003, a majority of the Registrant's shareholders approved
resolutions increasing the number of authorized shares from 200 million to 300
million, creating a Long Term Incentive Plan and granting 50 million options.
The 5,000,000 authorized shares of $.001 par value preferred stock in various
series remain unchanged.
9
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,
without limitation, the Registrant's ability to successfully develop new
products for new markets; the impact of competition on the Registrant's
revenues, changes in law or regulatory requirements that adversely affect or
preclude customers from using the Registrant's products for certain
applications, 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 SEC that attempt to
advise interested parties of the risks and factors that may affect the
Registrant's business.
Nine Months Ended September 30, 2003 and September 30, 2002
Revenues - Since licensing 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 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 and has not
experienced revenues in either of the nine month periods ended September 30,
2003 ("9M3") or September 30, 2002 ("9M2").
Cost of Revenues - Consistent with the Registrant still being in its development
stage, it did not experience cost of revenues in either 9M3 or 9M2.
Operating Expenses - Operating expenses rose to $1,396,885 for 9M3 compared to
$1,232,397 for 9M2; an increase of $164,488 or 13%. The principal components of
this increase were as follows: 1) an increase in marketing expenses ($458,394
during 9M3 compared to $357,239 for 9M2) of $101,155 consistent with the
Registrant efforts to get closer to developing revenues, 2) an increase in
general and administrative expenses ($524,977 during 9M3 compared to $350,060
for 9M2) of $174,917 consistent with the Registrant beginning to create the
infrastructure it will require to oversee its affairs, 3) a reduction of
research and development expenses ($386,042 in 9M3 compared to $520,495 for 9M2)
of $134,453 which is also in line with the Registrant's technology becoming
closer to marketability, and finally 4) an increase in interest expense of
$22,869.
10
Loss Before Taxes and Income Taxes - As a result of the foregoing, loss before
taxes for 9M3 was $(1,396,885) compared to $(1,232,397) for 9M2; an increase of
$164,488 or 13%. The Registrant's provision for taxes in both periods was
solely attributable to state and local taxes payable.
Net Income - Consistent with the foregoing analysis, the Registrant reported a
net loss of $(1,397,135) or $(0.01) per share for 9M3, compared to a net loss of
$(1,234,897) or $(0.01) per share for 9M2, based upon weighted average shares
outstanding of 173,820,626 and 160,700,149, respectively.
Liquidity and Capital Resources
The Registrant has limited working capital and is dependent upon 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 may result. If adequate additional
funds are not available, the Registrant may be required to curtail significantly
its long term business objectives and, notwithstanding that the BVS2 (TM)
systems and Super Smart Card (TM) and other system technologies are ready for
commercialization.
At September 30, 2003 the Registrant had current assets of $341,055 (including
cash of $336,065), current liabilities of $67,353, and working capital of
$273,702. 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 generating sufficient cash
from the sale of securities to its accredited investors to meet its requirements
through 2003. The Registrant may rely on these same resources, as well as debt
financing from time to time to meet its long-term capital needs.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
------------------------------------------------
During the third quarter ended September 30, 2002 the Registrant began 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 (the "34 Act"), as amended, is 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 report, the
11
Chief Executive and Chief Financial officer of the Registrant concluded that the
Registrant's disclosure controls and procedures, which were completely
inadequate only months ago, had begun to show signs of substantial improvement.
The officers concluded that such controls would equal or exceed those required
of the Registrant within one more operating quarter.
(b) 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 5. OTHER INFORMATION
Delinquent Filings
The Registrant is delinquent in its reporting obligations under the 34 Act.
Aside from three Current Reports on Form 8-K, the last periodic reports filed by
the Registrant under the 34 Act were the Registrant's Form 10-QSB for the six
months ended June 30, 2003, and the Form 10-QSB for nine months ended September
30, 2000, and audited financial statements filed with the Form 10-SB12G on May
30, 2000.
Administrative Proceeding
On December 12, 2002, the Securities and Exchange Commission ("SEC") commenced
an Administrative Proceeding against the Registrant seeking, inter alia, to
interrupt public trading in the Registrant's securities. Pending a decision by
the Administrative Law Judge, the Registrant has 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 31, 2004.
Engagement of Financial Expert
On September 30, 2003, the Registrant engaged Anthony R. Russo, a Certified
Public Accountant in the State of New York, to assist the Registrant in
preparing its delinquent periodic filings due under the Securities Exchange Act
of 1934, as amended; and preparing for an audit of the Registrant's financial
statements for the two years ending December 31, 2003.
Retention of Independent Accountants
On December 19, 2003, the Registrant engaged Rosenberg Rich Baker Berman &
Company, CPA's, Bridgewater, New Jersey, to act as the Registrant's independent
accountants to examine the financial statements of the Registrant for the two
years ending December 31, 2003.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 99.1 - Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
99.2 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K: None.
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 Systems, Inc.
By: /s/ Mary A. Grace
---------------------------------------
Chief Executive Officer, and Director
By: /s/ Mary A. Grace
---------------------------------------
Chief Financial Officer
Dated: December 30, 2003
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