Item  1.    Financial Statements    2
   Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006    3
   Condensed Consolidated Statements of Operations for the Six Months and Three Months Ended June 30, 2007 and 2006    4
   Condensed Consolidated Statements of Shareholders’ Equity (Deficiency) for January 1, 2006 through June 30, 2007    5
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006    6
   Notes to the Condensed Consolidated Financial Statements    7
Item 2.    Management’s Discussion and Analysis or Plan of Operations    8
Item 3.    Controls and Procedures    11
PART II    OTHER INFORMATION    12
Item 5.    Other Matters    12
Item 6.    Exhibits and Reports on Form 8-K    12
   SIGNATURES    13
   EXHIBITS    14 - 18

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

The unaudited condensed consolidated balance sheet of the Registrant at June 30, 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 six months and three months ended June 30, 2007 and June 30, 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]
June 30,

2007

     [Audited]
December 31,
2006		  
Assets     

Current assets -

     

Cash

    $ 107,382     $ 49,845  

Prepaid expenses

      12,012       7,558  
                

Total current assets

      119,394       57,403  

Equipment, net

      39,708       41,446  

License of smart card technology, net of amortization

      89,645       92,860  

Officers’ advances

      —         11,549  

Lease deposit

      88,959       79,713  
                

Total assets

    $ 337,706     $ 282,971  
                
Liabilities and Shareholders’ Equity (Deficiency)     

Current liabilities -

     

Current portion of notes payable

    $ 59,927     $ 509,927  

Accounts payable

      1,576,624       1,286,904  

Accrued officer’s compensation

      —         544,285  

Accrued expenses

      7,842       76,660  
                

Total current liabilities

      1,644,393       2,417,776  

Note Payable – long-term

      —         1,946,394  
                

Total liabilities

      1,644,393       4,364,170  
                

Shareholders’ Equity (Deficiency) -

     

Preferred Stock, $0.001 par value, 20 million shares authorized; 17.5 million and -0- shares issued and outstanding in 2007 and 2006, respectively

      17,500       —    

Common shares, $0.001 par, 730 million shares authorized; 628,918,509 and 242,540,441 shares issued and outstanding in 2007 and 2006, respectively

      628,918       242,540  

Additional paid in capital

      90,823,131       70,954,225  

Deficit accumulated during development stage

      (92,776,236 )     (75,277,964 )
                

Total shareholders’ equity (deficiency)

      (1,306,687 )     (4,081,199 )
                

Total liabilities and shareholders’ equity (deficiency)

    $ 337,706     $ 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]

 

    

 

Six Months Ended June 30,

     Three Months Ended June 30,    

January 1, 2001
(inception of
development
period) to
June 30,

2007

  
     2007     2006     2007     2006    

Revenue

    $ —       $ —       $ —       $ —       $ —    
                                        

Operating expenses:

           

Research and development

      2,835,083       327,574       2,676,083       175,099       17,985,392  

Marketing, general and administrative

      14,549,978       1,698,461       12,217,192       880,946       74,317,816  

Interest

      111,911       101,008       58,936       55,000       462,928  
                                        

Total operating expenses

      17,496,972       2,127,043       14,952,211       1,111,045       92,766,136  
                                        

Loss before provision for Income taxes

      (17,496,972 )     (2,127,043 )     (14,952,211 )     (1,111,045 )     (92,766,136 )

Provision for income taxes

      1,300       1,500       650       460       10,100  
                                        

Net Loss

    $ (17,498,272 )   $ (2,128,543 )   $ (14,952,861 )   $ (1,111,505 )   $ (92,776,236 )
                                        

Loss per share

    $ (0.05 )   $ (0.01 )   $ (0.04 )   $ (0.00 )   $ (0.50 )
                                        

Weighted average number of common shares outstanding

      358,575,737       200,000,000       430,299,037       200,000,000       185,669,223  
                                        

See notes to condensed consolidated financial statements.

 

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e-SMART TECHNOLOGIES, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF

SHAREHOLDERS’ EQUITY (DEFICIENCY)

 

     Preferred Stock   

 

Common Stock

   

Additional
Paid-in

Capital

   

Accumulated

Deficit

    

Total

  
   Shares    Amount    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

    —        —      112,813,844      112,814      10,459,428      —         10,572,242  

Issuance of shares in relation to related party borrowings

    —        —      145,064,224      145,064      4,555,478      —         4,700,542  

Issuance of shares in payment of license fee

    17,500,000      17,500    128,500,000      128,500      4,854,000      —         5,000,000  

Net loss

   —        —      —        —        —        (17,498,272 )     (17,498,272 )
                                               

Balance, June 30, 2007

    17,500,000    $ 17,500    628,918,509    $ 628,918    $ 90,823,131    $ (92,776,236 )   $ (1,306,687 )
                                               

See notes to condensed consolidated financial statements.

 

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e-SMART TECHNOLOGIES, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

[Unaudited]

 

    

 

Six Months Ended June 30,

    

January 1, 2001
(inception of
(development) period

to June 30, 2007

  
   2007     2006    

Cash flows from Operating Activities -

       

Net loss

    $ (17,498,272 )   $ (2,128,543 )   $ (92,776,236 )

Adjustments to reconcile net loss to net cash used in operating activities:

       

Issuance of common stock and common stock options for services

      10,572,242       —         69,568,742  

Issuance of preferred stock and common stock in payment of license fee

      5,000,000       —         5,000,000  

Depreciation and amortization

      11,695       8,256       89,131  

Bad debt expense

      —         —         312,505  

Changes in assets and liabilities -

       

Increase in prepaid expenses

      (4,454 )     (3,693 )     (12,012 )

Decrease in officers’ advances

      11,549       31,689       —    

Increase in accounts payable

      289,720       171,297       1,576,624  

Increase (decrease) in accrued expenses

      (613,103 )     178,971       280,082  
                        

Net Cash Used in Operating Activities

      (2,230,623 )     (1,742,023 )     (15,961,164 )
                        

Cash Flows from Investing Activities -

       

Acquisition of equipment

      (6,742 )     (10,710 )     (89,884 )

Purchase of technology licenses

      —         —         (128,600 )

Advances to Biosensor, LLC

      —         —         (312,505 )

(Addition) reduction of lease deposit

      (9,246 )     (7,835 )     (88,959 )
                        

Net Cash Used in Investing Activities

      (15,988 )     (18,545 )     (619,948 )
                        

Cash Flows from Financing Activities -

       

Increase (decrease) in advances from Intermarket Ventures, Inc., a related party

      (2,396,394 )     1,995,133       4,566,861  

Proceeds from other borrowings, net

      —         —         47,500  

Proceeds from issuances of shares

      —         —         7,373,591  

Shares issued in relation to

related party borrowings

      4,700,542       —         4,700,542  
                        

Net Cash Provided by Financing Activities

      2,304,148       1,995,133       16,688,494  
                        

Net Increase (decrease) in cash

      57,537       234,565       107,382  

Cash at Beginning of Period

      49,845       164,584       —