PART I - FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
The unaudited condensed consolidated balance sheet of the Registrant at March 31, 2007, the audited balance sheet at December 31, 2006, and the unaudited condensed consolidated statements of operations, shareholders’ equity (deficiency), and cash flows for the three months ended March 31, 2007 and March 31, 2006 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 periods presented.
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e-SMART TECHNOLOGIES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| [Unaudited] | [Audited] | |||||||
| March 31, 2007 |
December 31, 2006 |
|||||||
| Assets | ||||||||
| Current assets - |
||||||||
| Cash |
$ | 130,423 | $ | 49,845 | ||||
| Prepaid expenses |
9,369 | 7,558 | ||||||
| Total current assets |
139,792 | 57,403 | ||||||
| Equipment, net |
38,577 | 41,446 | ||||||
| License of smart card technology, net of amortization |
91,252 | 92,860 | ||||||
| Officers’ advances |
— | 11,549 | ||||||
| Receivable from IVI Smart Technologies, Inc., a related party |
106,362 | — | ||||||
| Lease deposit |
78,865 | 79,713 | ||||||
| Total assets |
$ | 454,848 | $ | 282,971 | ||||
| Liabilities and Shareholders’ Equity (Deficiency) | ||||||||
| Current liabilities - |
||||||||
| Current portion of notes payable |
$ | 509,927 | $ | 509,927 | ||||
| Accounts payable |
1,533,156 | 1,286,904 | ||||||
| Accrued officer’s compensation |
606,785 | 544,285 | ||||||
| Accrued expenses |
120,127 | 76,660 | ||||||
| Total current liabilities |
2,769,995 | 2,417,776 | ||||||
| Note Payable – long-term |
2,647,371 | 1,946,394 | ||||||
| Total liabilities |
5,417,366 | 4,364,170 | ||||||
| Shareholders’ Equity (Deficiency) - |
||||||||
| Preferred Stock, $0.001 par value, 10 million shares authorized; -0- issued and outstanding |
— | — | ||||||
| Common shares, $0.001 par, 490 million shares authorized; 273,409,285 and 242,540,441 shares issued and outstanding in 2007 and 2006, respectively |
273,409 | 242,540 | ||||||
| Additional paid in capital |
72,587,448 | 70,954,225 | ||||||
| Deficit accumulated during development stage |
(77,823,375 | ) | (75,277,964 | ) | ||||
| Total shareholders’ equity (deficiency) |
(4,962,518 | ) | (4,081,199 | ) | ||||
| Total liabilities and shareholders’ equity (deficiency) |
$ | 454,848 | $ | 282,971 | ||||
See notes to condensed consolidated financial statements.
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e-SMART TECHNOLOGIES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[Unaudited]
|
Three Months Ended March 31, |
January 1, 2001 (inception of development period) |
|||||||||||
| 2007 | 2006 | |||||||||||
| Revenue |
$ | — | $ | — | $ | — | ||||||
| Operating expenses: |
||||||||||||
| Research and development |
159,000 | 152,475 | 15,309,309 | |||||||||
| Selling, general and administrative |
2,332,786 | 817,515 | 62,100,624 | |||||||||
| Interest expense |
52,975 | 46,008 | 403,992 | |||||||||
| Total operating expenses |
2,544,761 | 1,015,998 | 77,813,925 | |||||||||
| Loss before provision for taxes |
(2,544,761 | ) | (1,015,998 | ) | (77,813,925 | ) | ||||||
| Provision for income taxes |
650 | 1,040 | 9,450 | |||||||||
| Net Loss |
$ | (2,545,411 | ) | $ | (1,017,038 | ) | $ | (77,823,375 | ) | |||
| Net loss per share |
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.44 | ) | |||
| Weighted average number of common shares outstanding |
265,560,824 | 200,000,000 | 175,063,566 | |||||||||
See notes to condensed consolidated financial statements.
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e-SMART TECHNOLOGIES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
SHAREHOLDERS’ EQUITY (DEFICIENCY)
|
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total | |||||||||||||
| Shares | Amount | |||||||||||||||
| [Audited] | ||||||||||||||||
| Balance January 1, 2006 |
200,000,000 | $ | 200,000 | $ | 63,777,497 | $ | (67,507,910 | ) | $ | (3,530,413 | ) | |||||
| Issuance of shares in relation to related party borrowings |
20,990,441 | 20,990 | 4,150,278 | 4,171,268 | ||||||||||||
| Issuance of shares for services |
21,550,000 | 21,550 | 3,026,450 | — | 3,048,000 | |||||||||||
| Net loss |
— | — | — | (7,770,054 | ) | (7,770,054 | ) | |||||||||
| Balance, December 31, 2006 |
242,540,441 | 242,540 | 70,954,225 | (75,277,964 | ) | (4,081,199 | ) | |||||||||
| [Unaudited] | ||||||||||||||||
| Balance, January 1, 2007 |
242,540,441 | 242,540 | 70,954,225 | (75,277,964 | ) | (4,081,199 | ) | |||||||||
| Issuance of shares for services |
30,868,844 | 30,869 | 1,633,223 | — | 1,664,092 | |||||||||||
| Net loss |
— | — | — | (2,545,411 | ) | (2,545,411 | ) | |||||||||
| Balance, March 31, 2007 |
273,409,285 | $ | 273,409 | $ | 72,587,448 | $ | (77,823,375 | ) | $ | (4,962,518 | ) | |||||
See notes to condensed consolidated financial statements.
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e-SMART TECHNOLOGIES, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
|
Three Months Ended March 31, |
January 1, 2001 (inception of |
|||||||||||
| 2007 | 2006 | |||||||||||
| Cash flows from Operating Activities - |
||||||||||||
| Net loss |
$ | (2,545,411 | ) | $ | (1,017,038 | ) | $ | (77,823,375 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
| Issuance of common stock and common stock options for services |
1,664,092 | — | 60,660,592 | |||||||||
| Depreciation and amortization |
5,502 | 3,511 | 82,938 | |||||||||
| Bad debt expense |
— | — | 312,505 | |||||||||
| Changes in Assets and Liabilities - |
||||||||||||
| (Increase) decrease in prepaid expenses |
(1,811 | ) | 150 | (9,369 | ) | |||||||
| Decrease in officers’ advances |
11,549 | 16,151 | — | |||||||||
| Increase in accounts payable |
246,252 | 156,284 | 1,533,156 | |||||||||
| Increase in accrued expenses |
105,967 | 70,637 | 999,152 | |||||||||
| Net Cash Used in Operating Activities |
(513,860 | ) | (770,305 | ) | (14,244,401 | ) | ||||||
| Cash Flows from Investing Activities - |
||||||||||||
| Acquisition of equipment |
(1,025 | ) | (5,709 | ) | (84,167 | ) | ||||||
| Purchase of technology licenses |
— | — | (128,600 | ) | ||||||||
| Advances to Biosensor, LLC |
— | — | (312,505 | ) | ||||||||
| Advances to IVI Smart Technologies, Inc., a related party |
(106,362 | ) | (106,362 | ) | ||||||||
| (Addition) reduction of lease deposit |
848 | (3,711 | ) | (78,865 | ) | |||||||
| Net Cash Used in Investing Activities |
(106,539 | ) | (9,420 | ) | (710,499 | ) | ||||||
| Cash Flows from Financing Activities - |
||||||||||||
| Advances from Intermarket Ventures, Inc., a related party |
700,977 | 750,324 | 7,664,232 | |||||||||
| Proceeds from other borrowings, net |
— | — | 47,500 | |||||||||
| Proceeds from issuances of common stock |
— | — | 7,373,591 | |||||||||
| Net Cash Provided by Financing Activities |
700,977 | 750,324 | 15,085,323 | |||||||||
| Net Increase (decrease) in Cash |
80,578 | (29,401 | ) | 130,423 | ||||||||
| Cash at Beginning of Period |
49,845 | 164,584 | — | |||||||||
| Cash at End of Period |
$ | 130,423 | $ | 135,183 | $ | 130,423 | ||||||
| Supplemental non-cash financing activities - |
||||||||||||
| Issuance of common stock for services |
$ | 1,644,092 | $ | — | $ | 4,994,592 | ||||||
See notes to condensed consolidated financial statements.
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e-SMART TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
The Company has been in the development stage since the commencement of its operations on January 1, 2001. The accompanying unaudited consolidated financial statements include the accounts of the Registrant and those of its wholly-owned subsidiaries, e-Smart Korea, Inc. and e-Smart Systems, Inc., and 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 three month periods ended March 31, 2007 and 2006, are not necessarily indicative of the results that may be expected for the respective years ended December 31, 2007 and 2006.
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 fiscal year ended December 31, 2006, supplemented by the notes included herein.
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.
Certain prior year amounts disclosed in the accompanying financial statements and notes thereto have been reclassified to conform to the current period’s presentation.
Note 2 – Letter of Comment
From time to time the Staff of the Securities and Exchange Commission’s Division of Corporate Finance may examine the periodic reports of a Registrant for compliance and form and forward to the Registrant comments regarding the Registrant’s prior filings (a “Letter of Comment”). The Company seeks to respond to all Letters of Comment received addressing any and all issues raised, including the filing of amended quarterly and annual reports as appropriate.
Note 3 – Related Party Transactions
The Company is the owner of three technology licenses each of which grants the Company exclusivity to the technology covered in a particular territory. The three territories covered are the People’s Republic of China, the remainder of Asia and the United States of America. The licenses, which have a term of twenty years commencing January 1, 2001, were granted to the Company by IVI Smart Technologies, Inc. (“IVI”).
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In addition, at March 31, 2007 and December 31, 2006, the Company was indebted to Intermarket in the amount of $3,097,371 and $2,396,394, respectively, plus accrued interest. These obligations are unsecured and bear interest between 5 to 6%. Of the above amounts, $450,000 was due on demand, and the remaining balance, $2,647,371 and $1,946,394 at March 31, 2007 and 2006, respectively, were due on December 31, 2008.
Intermarket, together with its two principal stockholders (the Company’s President and Chief Executive Officer Mary A. Grace and its Chief Technology Officer Tamio Saito), continue to own a substantial percentage of the common stock of the Company and will continue to have the ability to materially influence the direction of the Company, its efforts in raising the additional capital critical to its success, and the strategies employed in commercialization of the licensed technology. In addition, the Planned Reorganization will include the receipt by IVI of Preferred Series A shares which possess 70% voting control of the Company in exchange for loans received from Intermarket and licenses granted by IVI.
Note 4 – 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 March 31, 2007, of $2,630,203. In addition, the Registrant has incurred an accumulated deficit of $(77,823,375) through March 31, 2007. 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™ 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 OR PLAN OF OPERATION |
Plan of Operation
Since the inception of our development period on January 1, 2001, and continuing through March 31, 2007, our primary source of funds have been private placements of our equity securities to accredited investors and loans to the Company. We expect that this dependence will continue until the Company finalizes broader funding or our first system starts to generate sufficient cash flow to cover our operating costs.
As of the date of this Report, we expect this dependence to continue until the third or fourth quarter of 2007. There can be no assurance that we will continue to be able to rely on these sources of funds.
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Over the next 12 months we expect to continue our marketing and research and development efforts and to implement our first system, demonstrating the viability of our Super Smart Card™ and BVS2™ based products and related technologies.
Our ability to maintain what we believe to be the state-of-the-art quality of our Super Smart Card™ and BVS2™ system and related technologies is dependent upon our ability to continue to improve our products functionality and durability, and to reduce their cost of manufacture. In addition, we are constantly trying to find and develop new products that enhance the functionality of our BVS2™ platform. This research and development is expected to continue throughout 2007 and well into 2008. Accordingly, the Company expects to continue to be dependent upon funds from its affiliates and from existing accredited investors, subject to the same risks enumerated in the preceding paragraph.
We are constantly acquiring software and equipment in connection with our research and development activities. Our planned 2007 budget is approximately $3,000,000 for such acquisitions, but could change depending upon our rate of accomplishment in the anticipated sales of one or more systems. Should such sales occur, we will also require an operations and testing center near those customers’ offices as a condition of contract.
During 2007 in the United States, we intend to fill a number of key management, marketing and technology positions commensurate with our intended growth and expanded operations.
Off-Balance Sheet Arrangements
During the three months ended March 31, 2007, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. The Company is presently negotiating certain proposed relationships, which if accepted by all parties, may contain terms that have off-balance sheet implications; see Note 12 to the Consolidated Financial Statements included in Item 7 of our Form 10-KSB for the year ended December 31, 2006.
Forward Looking Statements:
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.
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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 Securities and Exchange Commission (“SEC”) that attempt to advise interested parties of the risks and factors that may affect the Registrant’s business.
Discussion and Analysis of Three Months Ended March 31, 2007 and March 31, 2006
Revenues – Since obtaining the license to the Super Smart Card™ 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™ 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 March 31, 2007 (“1Q7”) or March 31, 2006 (“1Q6”).
Operating Expenses – Operating expenses were $2,544,761 for 1Q7 compared to $1,015,998 1Q6 resulting in an increase of $1,528,763 or 150%. This increase was principally attributable to the various engineering and consulting services which were acquired with common shares valued at $1,664,092; there were no comparable charges in 1Q6
Loss Before Taxes and Income Taxes – As a result of the foregoing, loss before taxes for 1Q7 was $(2,544,761) compared to $(1,015,998) for 1Q6 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