UNITED STATES
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: MARCH 31, 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
---------------------------------------------------
(Address of Principal Office including Zip Code)
Issuer's telephone Number: (702) 447- 5210
---------------
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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. Yes[ ] No[X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, par value $.001 per share, 172,728,610 SHARES at March 31, 2004.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
e-SMART TECHNOLOGIES, INC.
FORM 10-QSB - QUARTERLY PERIOD ENDED MARCH 31, 2004
INDEX
Page
PART I FINANCIAL INFORMATION.................................................. 2
Item 1. Financial Statements................................................... 2
Condensed Consolidated Balance Sheets at March 31, 2004
and December 31, 2003............................................... 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2004 and 2003.................. 4
Condensed Consolidated Statement of Stockholders' Equity
for the Three Months Ended March 31, 2004 and 2003.................. 5
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2004 and 2003.................. 6
Notes to the Condensed Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis................................... 9
Item 3. Controls and Procedures................................................ 13
PART II OTHER INFORMATION...................................................... 13
Item 1. Legal Proceedings...................................................... 13
Item 5. Other Information...................................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................... 15
SIGNATURES
EXHIBITS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated balance sheets of e-Smart
Technologies, Inc., (the "Registrant" or the "Company"), at March 31, 2004 and
December 31, 2003, and the unaudited condensed consolidated statements of
operations, stockholders' equity, and cash flows for the three month periods
ended March 31, 2004 and March 31, 2003 follow. The unaudited condensed
consolidated financial statements reflect all adjustments that are, in the
opinion of management, necessary to render a fair statement of the results for
the interim periods presented.
2
e-SMART TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2004 2003
------------ ------------
ASSETS
Current assets -
Cash $ 177,668 $ 14,096
Due from Associated Business Group, Inc. 2,572 31,334
Prepaid expenses 31,783 --
------------ ------------
Total current assets 212,023 45,430
Super Smart Card(TM)Technology 107,738 109,310
System Development 100,000 --
Leasehold and Improvements 57,332 --
Due from Biosensor LLC 149,000 --
Deposit - e-Smart Korea -- 151,000
------------ ------------
Total assets $ 626,093 $ 305,740
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities -
Accounts payable $ 389,944 $ 397,081
Notes payable 80,000 80,000
Accrued expenses 93,078 38,853
------------ ------------
Total current liabilities 563,022 515,934
------------ ------------
Shareholders' Equity (Deficiency) -
Common Stock, par value $.001 per share,
300,000,000 authorized, 172,728,610 and
172,728,610 issued and outstanding, respectively 172,729 170,707
Additional paid in capital 60,565,546 59,497,446
Retained (deficit) (60,675,204) (59,878,347)
------------ ------------
Total shareholders' equity (deficiency) 63,071 (210,194)
------------ ------------
Total liabilities and shareholders' equity $ 626,093 $ 305,740
============ ============
See notes to condensed consolidated financial statements.
3
e-SMART TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[Unaudited]
Three Months Ended
March 31,
-----------------------------------
2004 2003
------------- -------------
Net Revenue $ -- $ --
Cost of revenue -- --
------------- -------------
Gross profit -- --
------------- -------------
Operating expenses:
Research and development 60,528 50,000
Selling, general and administrative 734,579 73,503
Interest 1,500 7,499
------------- -------------
Total operating expenses 796,607 131,002
------------- -------------
Loss before taxes (796,607) (131,002)
Income tax 250 250
------------- -------------
Net Loss $ (796,857) $ (131,252)
============= =============
Net income (loss) per common share -
basic and fully-diluted $ (0.01) $ (0.00)
============= =============
Weighted average number of
common shares outstanding
171,582,774 153,876,310
============= =============
See notes to condensed consolidated financial statements.
4
e-SMART TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
[Unaudited]
Common Stock Additional Retained
--------------------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
-------------------------------------------------------------------------------------
Balance, January 1, 2003 153,771,993 $ 153,772 $ 22,714,779 $(23,106,740) $ (238,189)
Issuance of shares for cash 201,450 201 27,799 -- 28,000
Net income (loss) -- -- -- (131,252) (131,252)
-------------------------------------------------------------------------------------
Balance, March 31, 2003 153,973,443 $ 153,973 $ 22,742,578 $(23,237,992) $ (341,441)
-------------------------------------------------------------------------------------
Balance January 1, 2004 170,707,012 $ 170,707 $ 59,497,446 $(59,878,347) $ (210,194)
Issuance of shares for cash 2,021,598 2,022 1,068,100 -- 1,070,122
Net income (loss) -- -- -- (796,857) (796,857)
-------------------------------------------------------------------------------------
Balance, March 31, 2004 172,728,610 $ 172,729 $ 60,565,546 $(60,675,204) $ 63,071
-------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
5
e-SMART TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
Three Months Ended
March 31,
-----------------------------
2004 2003
----------- -----------
Cash flows of operating activities
Net loss $ (796,857) $ (131,252)
Adjustments to reconcile net loss to net
cash used by operations:
Depreciation and amortization 1,983 1,572
Decrease (increase) in assets -
Due from Associated Business Group, Inc. 28,762 --
Prepaid expenses (31,783) (65,600)
Increase (decrease) in liabilities -
Accounts payable (7,137) 161,694
Accrued expenses 54,225 7,500
----------- -----------
Net cash used by operating activities (750,807) (26,086)
----------- -----------
Cash flows of investing activities
System development (100,000) --
Leasehold and improvements (57,743) --
Advances to Biosensor LLC (149,000) --
Recoupment of e-Smart Korea deposit 151,000 --
----------- -----------
Net cash used by investing activities (155,743) --
----------- -----------
Cash flows of financing activities
Proceeds from sale of common shares 1,070,122 28,000
----------- -----------
Net cash provided by financing activities 1,070,122 28,000
----------- -----------
Net increase in cash 163,572 1,914
Cash at beginning of period 14,096 1,069
----------- -----------
Cash at end of period $ 177,668 $ 2,983
=========== ===========
See notes to condensed consolidated financial statements.
6
e-SMART TECHNOLOGIES, INC.
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 three month periods ended March 31,
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. 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 42% 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 for a 20-year term for commercialization throughout
Asia and the United States. In addition, the Licensor's parent, Intermarket
Ventures, Inc., a Utah corporation ("Ventures"), is the owner of approximately
35% of the Registrant's outstanding common shares. Mary A. Grace, the
Registrant's President, Chief Executive Officer and Chief Financial 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
7
executive officer and principal stockholder of the Licensor and Ventures. The
Licensor and Ventures are 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.
Research and Development Services Agreement
-------------------------------------------
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,
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 term of the BBT Agreement, which provides for mutual confidentiality and
non-compete protection, is 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 three months ended
March 31, 2003, the Registrant paid BBT an aggregate of $50,000 under the BBT
Agreement.
Pursuant to an amendment to the BBT Agreement dated April 19, 2004 and effective
as of January 1, 2004, and as hereinafter described in Item 5, the Registrant:
(i) subleased an aggregate of 1,200 square feet of space plus common areas and
the use of a conference room for $3,000 per month; (ii) hired four former
research employees of BBT; (iii) agreed to pay BBT an aggregate of $22,000 per
month to provide the services of Tamio Saito and other BBT employees to the
Registrant in conjunction with software development, testing, laboratory and
other services related to the Registrant's smart card technology; and (iv)
agreed to reimburse BBT for expenses incurred on the Registrant's behalf.
Advisory and Administrative Service Agreement
---------------------------------------------
Pursuant to an Advisory and Administrative Services Agreement effective January
1, 2001, and dated May 29, 2003 (the "ABG Agreement"), the Registrant engaged
Associated Business Group, Inc., a Nevada corporation controlled by the father
of Wayne Drizin, a co-inventor of our Super Smart Card(TM) technology and the
BVS2(TM) platform ("ABG"), to administer the receipt of investor's funds, to pay
expenses and to perform other necessary and related administrative services
including utilizing its best efforts to cover temporary shortfalls in the
Registrant's cash receipts. 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. The term of the ABG Agreement,
which
8
provides for mutual confidentiality and non-compete protection, is one year, and
is thereafter automatically renewed for successive one year terms unless sooner
terminated in accordance with its provisions.
On April 19, 2004, the Registrant and ABG amended the ABG Agreement, as
hereinafter described in Part II, Item 5. In lieu of the original ABG Agreement,
the Registrant entered into a one year administrative services consulting
agreement with ABG wherein ABG agreed to supervise the Registrant's Nevada
office and perform other necessary and related administrative services in
consideration of a monthly fee of $1,500, plus any expenses incurred on the
Registrant's behalf. The new agreement, which contains confidentiality and
non-compete protection, is terminable by either party on six months prior
written notice.
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 March 31, 2004, of $350,999. In addition, the Registrant has
incurred an accumulated deficit of $(60,675,204) through March 31, 2004. The
Registrant is dependent upon its own efforts and the efforts of the Licensor and
Ventures 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 in this manner and to receive this level of support from the Licensor
and Ventures is uncertain. 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 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
9
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.
THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 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 March 31, 2004 ("1Q `04") or March 31,
2003 ("1Q `03").
On March 30, 2004, the Registrant executed a framework agreement with the
Republic of Kyrgyzstan ("Kyrgyzstan") for the proposed nationwide deployment and
operation of the Registrant's technology as a national ID card and visitor visa
for all guests of Kyrgyzstan. In the course of on-going talks and negotiations
with Kyrgyzstan, the parties have discussed a possible arrangement involving (i)
the distribution of the Registrant's Super Smart Card(TM) to every citizen of
Kyrgyzstan over the age of fourteen and (ii) the use of the Super Smart Card(TM)
in a substantial volume of financial transactions that take place in Kyrgyzstan
involving numerous e-government related functions. The framework agreement is
subject to Kyrgyzstan's execution of all documents required by the Registrant to
satisfy its bankers in connection with the financing of the agreement. The
framework agreement is also subject to a variety of other contingencies, and it
is impossible at this time to predict when, if ever, the agreement with
Kyrgyzstan will result in any cash flow for the Registrant. In connection with
this proposed transaction, the Registrant, through its subsidiary in Korea, is
in the process of completing necessary in-country studies required for the
possible deployment of its BVS2(TM) platform and in finalizing agreements with
one of its implementation partners and other vendors as would be required to
effectuate deployment.
COST OF REVENUES - Consistent with the Registrant still being in its development
stage, it did not experience cost of revenues in either 1Q `04 or 1Q `03.
OPERATING EXPENSES - Operating expenses rose to $796,607 for 1Q `04 compared to
$131,002 for 1Q `03; an increase of $665,605 or 508%. The principal factors
underlying this increase were as follows: 1) increased marketing expenses during
1Q `04 compared to 1Q '03 consistent with the Registrant's efforts to get closer
to developing revenues, 2) an increase in general and administrative expenses
during 1Q `04 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 1Q `04 in line with the Registrant's
technology becoming closer to commercialization.
10
LOSS BEFORE TAXES AND INCOME TAXES - As a result of the foregoing, loss before
taxes for 1Q `04 was $(796,607) compared to $(131,002) for 1Q `03 upon which the
Registrant's provision for taxes in both periods was solely attributable to
state and local taxes payable.
NET LOSS - Consistent with the foregoing analysis, the Registrant reported a net
loss of $(796,607) or $(0.01) per share for 1Q `04, compared to a net loss of
$(131,252) or $(0.00) per share for 1Q `03, based upon weighted average shares
outstanding of 171,582,774 and 153,876,310, respectively.
LIQUIDITY AND CAPITAL RESOURCES - The Registrant has limited working capital and
is dependent upon its own efforts and the efforts of the Licensor and Ventures
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
for working capital needs. Until the Registrant begins receiving adequate cash
flows, if any, it 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 to the Registrant for implementation of deployment
contracts, the Registrant may be required to curtail significantly its long term
marketing objectives and the Registrant still may not be able to transition out
of the development stage, notwithstanding management's belief that the BVS2(TM)
systems and Super Smart Card(TM) and other system technologies are ready for
commercialization.
At March 31, 2004, the Registrant had current assets of $212,023 (including cash
of $177,668), current liabilities of $563,022, and negative working capital of
$350,999. 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 2004. The Registrant may rely on these same resources, as well as debt
financing from time to time to meet its long-term capital needs.
While we cannot predict the future with any certainty, we anticipate that our
first system will be deployed within the next 12 months and we plan to continue
our marketing and research and development efforts with a view towards placing
multiple systems into operation as soon as possible. While there can be no
assurance, we are looking forward to the sale and deployment of at least two
additional systems during this period encompassing an eventual anticipated
aggregate of approximately twenty million Super Smart Cards(TM).
Additionally, based on our recently executed Cooperation agreement with Guo Xin
Well-tel Technology Co., Ltd., and EarthNetMedia Trading Co., Ltd., two entities
in the
11
People's Republic of China ("PRC"), we will continue with our efforts to obtain
the required licenses allowing us to effectuate mass distribution of the Super
Smart Card(TM) and the operation of the BVS2(TM) throughout the PRC. Towards
this end, we are seeking an export license from the U.S. Commerce Department to
deliver our products and systems to the PRC. Given the U.S. Commerce
Department's rejection of an export license in connection with the Registrant's
prior agreement with the PRC, there can be no assurance that any future export
license will be forthcoming in the foreseeable future or at any time.
Since present management assumed control in 2000, our only source of funds has
been through private placements of our equity securities to accredited
investors. We presently are dependent upon private investors and expect this
dependence to continue until sometime after the sale of our first system,
enabling the Registrant to generate sufficient income to cover operating costs.
As of the date of this Report, we expect that this dependence will continue
until at least the fourth quarter of 2004; and based upon our current and
planned 2004 rate of operating commitments, that we will require approximately
$2,500,000 in additional subscriptions during this period. There can be no
assurance that we will continue to be able to rely upon this source of funds.
Moreover, the Initial Decision of the Administrative Law Judge to revoke the
registration of our common stock and the possibility that, if our appeal of the
Initial Decision fails, the SEC will suspend or permanently halt the trading in
our common stock, may have a material adverse effect on the Registrant's ability
to raise necessary capital. Such an outcome would deprive public investors in
our securities of a short term exit strategy and will increase the difficulty of
continuing to raise money in this fashion. This in turn would have a material
adverse effect on our ability to transition out of the development stage.
Accordingly, on March 24, 2004, we petitioned the SEC for a review of this
Initial decision.
Our ability to maintain what we believe to be the state-of-the-art quality of
our Super Smart Card(TM) technology is dependent upon our ongoing research and
development to improve our product's 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(TM) platform.
This research and development is an integral part of our operating commitments
for 2004 and as such, is dependent upon funds from subscribers. Accordingly, our
ability to continue research and development efforts are subject to the same
risks enumerated in the preceding paragraph.
We acquire equipment in connection with our research and development activities
on an almost constant basis. Our planned 2004 budget is approximately $1,000,000
for such acquisitions, but could change depending on a number of factors,
including any failure to meet our sales expectations or capital requirements. In
connection with the anticipated sale of one or more systems, we will need to
lease additional space for an operations and testing center for certain
customers.
Commencing January 1, 2004, we began the integration of the San Jose research
and development center and its staff and operations into our Company. As part of
this
12
integration, we expect to hire between six and ten new employees. In addition,
and commencing upon the first deployment of one of our systems, management
anticipates that the Company: (i) will be required to retain an additional six
to ten employees to perform administrative, logistics and quality control
functions; and (ii) will need to open a local liaison office with an
administrative and clerical staff consisting of two or three people.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
During the quarter ended March 31, 2004, 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, as amended (the "Exchange Act"), 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
Chief Executive and Chief Financial Officer of the Registrant concluded that the
Registrant's disclosure controls and procedures have been improved substantially
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 more operating quarter.
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, 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.
On March 4, 2004, Lillian A. McEwan, Administrative Law Judge, published an
Initial Decision in the Proceeding. In her decision, the Administrative Law
Judge (i) ordered: that, effective 21 days after the date of the initial
decision, the registration of the Registrant's common stock be revoked as a
result of the Registrant's violations of the
13
periodic reporting requirements of the Exchange Act and (ii) dismissed the
allegations in the Proceeding that the Registrant violated Section 12b-20 of the
Exchange Act. Notwithstanding the decision of the Administrative Law Judge, the
Registrant timely filed its Annual Report on Form 10-KSB for the fiscal year
ending December 31, 2003 (which Form 10-KSB also included audited financial
statements for fiscal year ended December 31, 2002). On March 24, 2004, and in
accordance with applicable rules, the Registrant appealed the Administrative Law
Judge's decision to the SEC and its stock continues to trade, as it had
previously, in the over-the-counter market. On April 26, 2004, e-Smart filed its
Brief in Support of Petition for Review of Initial Decision of Administrative
Law Judge. The Petition for Review is currently pending before the SEC.
ITEM 5. OTHER INFORMATION
Delinquent Filings
------------------
The Registrant has not filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months. Although the
Registrant has been subject to the Exchange Act filing requirements during the
preceding 12 months, the Registrant has only filed its Form 10-QSB Quarterly
Reports for the quarterly periods ended June 30, 2003 and September 30, 2003,
and has timely filed its Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2003 (which Form 10-KSB also included audited financial statements
for fiscal year ended December 31, 2002). Upon the timely filing of this Report
and its Form 10-QSB Quarterly Report for the six months ended June 30, 2004, the
Registrant will have filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months.
Modification of Research and Development Services Agreement
-----------------------------------------------------------
Pursuant to a one year Research and Development Services Agreement effective
January 1, 2001, and dated 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 and the BVS2(TM) platform ("BBT"), as the Registrant's research and
development co-coordinator, 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 our smart card technology, and
the services of Tamio Saito as our Chief Technology Officer.
On April 19, 2004, the Registrant and BBT amended the BBT Agreement effective as
of January 1, 2004 (the "Amendment"). Pursuant to the Amendment: (i) BBT
subleased an aggregate of 1,200 square feet of space plus common areas and the
use of a conference room at 1810 Old Oakland Road, Suite F, San Jose, California
to the Registrant, for $3,000 per month, subject to approval of the landlord;
(ii) the Registrant hired four former research employees of BBT; (iii) the
Registrant agreed to pay BBT an aggregate of $22,000 per month to provide the
services of Tamio Saito and other BBT employees to the Registrant in conjunction
with software development, testing, laboratory and other
14
services related to the Registrant's smart card technology; and (iv) the
Registrant agreed to reimburse BBT for expenses incurred on the Registrant's
behalf.
Amendment to Advisory and Administrative Services Agreement
-----------------------------------------------------------
Pursuant to an Advisory and Administrative Services Agreement effective January
1, 2001, and dated May 29, 2003 (the "ABG Agreement"), the Registrant engaged
Associated Business Group, Inc., a Nevada corporation controlled by the father
of Wayne Drizin, a co-inventor of our Super Smart Card(TM) technology and the
BVS2(TM) platform ("ABG"), to administer the receipt of investor's funds, to pay
expenses and to perform other necessary and related administrative services
including utilizing its best efforts to cover temporary shortfalls in the
Registrant's cash receipts. 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 April 19, 2004, the Registrant and ABG amended the ABG Agreement effective as
of April 30, 2004. In lieu of the original ABG Agreement, the Registrant entered
into a one year administrative services consulting agreement with ABG wherein
ABG agreed to supervise the Registrant's Nevada office and perform other
necessary and related administrative services in consideration of a monthly fee
of $1,500, plus any expenses incurred on the Registrant's behalf. The new
agreement, which contains confidentiality and non-compete protection, is
terminable by either party on six months prior written notice.
Agreement with the Republic of Kyrgyzstan
-----------------------------------------
On March 30, 2004, the Registrant entered into an agreement with the Republic of
Kyrgyzstan through its Ministry of Transportation and Communication. Pursuant to
that agreement, the Registrant agreed, subject to agreement of all open terms
and conditions, to consider the merits of a proposal to install, maintain, and
operate its Biometric Verification Security System(TM) ("BVS2TM") platform and
its Super Smart Card(TM) on a "BOT" contract as the basis of a nationwide
payment clearing and verification system (the "System") that is intended to be
integrated into virtually all of Kyrgyzstan's commercial payment modalities
(ATM's, point-of-sale machines, Internet, etc.).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10(m) Amendment to Advisory and Occupancy Services Agreement, dated
April 19, 2004, by and between Associated Business Group, Inc.
and e-Smart Technologies, Inc.
10(n) Amendment to Research and Development Services Agreement,
dated
15
April 19, 2004, by and between Big Bang Technologies, Inc. and
e-Smart Technologies, Inc.
10(o) Agreement, dated March 30, 2004, by and between the Ministry
of Transportation and Communication of the Republic of
Kyrgyzstan's Supervisory institute for e-Government on behalf
of the Republic of Kyrgyzstan and e-Smart Technologies, Inc.
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.
16
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: May 17, 2004