UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
_________________________________________________
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
_____________ _______________
Commission File Number: 000-28675
_________________________________________________
Tribeworks, Inc.
________________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Delaware 94-3370795
________________________________________________________________________________
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
988 Market Street, San Francisco, CA 94102
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(415) 674-5555
________________________________________________________________________________
(Issuer's telephone number, including area code)
N/A
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. X Yes No
--- ---
The number of shares outstanding of registrant's $0.0004 par value common
stock, as of the close of business on August 16, 2004: 4,708,657 shares.
Transitional Small Business Disclosure Format: Yes X No
--- ---
TRIBEWORKS, INC.
SECOND QUARTER 2004 REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheet
June 30, 2004 3
Unaudited Consolidated Statements of Income (Loss)
Three Months and Six Months Ended June 30, 2004 and 2003 4
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibits 16
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TRIBEWORKS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
Current Assets
Cash $ 27,025
Accounts receivable, net of allowance for doubtful accounts of
approximately $4,000 26,992
Costs and estimated earnings in excess of billings
on uncompleted contracts 17,897
Prepaid expenses 41,287
_________
TOTAL CURRENT ASSETS 113,201
Other Assets
Equipment, net of accumulated depreciation of $49,985 2,307
_________
TOTAL ASSETS $ 115,508
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 272,688
Accrued expenses 46,666
Due to shareholders 6,232
Note payable 83,701
Deferred revenue 84,325
_________
TOTAL CURRENT LIABILITIES 493,612
_________
Stockholders' Deficit
Preferred stock: 10,000,000 shares authorized, none issued -
Common stock: $.0004 par value, 200,000,000 shares authorized,
4,708,657 shares issued and outstanding 1,883
Additional paid-in capital 3,035,725
Unearned compensation (481)
Accumulated deficit (3,415,231)
_________
TOTAL STOCKHOLDERS' DEFICIT (378,104)
_________
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 115,508
=========
The accompanying notes are an integral part of these consolidated financial
statements
-3-
TRIBEWORKS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
____ ____ ____ ____
REVENUES $ 219,848 $ 264,519 $ 507,653 $ 628,961
COST OF SALES 91,290 84,269 207,290 219,205
________ _______ _______ _______
GROSS PROFIT 128,558 180,250 300,363 409,756
________ _______ _______ _______
OPERATING EXPENSES
Product support 11,573 10,924 20,707 22,525
Product development 30,383 37,443 66,024 65,388
Sales and marketing 46,635 67,534 95,848 125,408
General and administrative 92,337 73,445 210,290 176,550
________ _______ _______ _______
180,928 189,346 392,869 389,871
________ _______ _______ _______
INCOME (LOSS) FROM OPERATIONS (52,370) (9,096) (92,506) 19,885
________ _______ _______ _______
OTHER INCOME (EXPENSE)
Interest expense (202) (2,277) (741) (4,965)
________ _______ _______ _______
INCOME (LOSS) BEFORE INCOME TAXES (52,572) (11,373) (93,247) 14,920
INCOME TAXES - - - -
________ _______ _______ _______
NET INCOME (LOSS) $ (52,572) $ (11,373) (93,247) 14,920
======== ======== $ ======= $ =======
EARNINGS (LOSS) PER COMMON SHARE
Basic $ (0.01) $ - $ (0.02) $ -
======== ======== ======= =======
Diluted $ (0.01) $ - $ (0.02) $ -
======== ======== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,708,657 4,658,657 4,708,657 4,658,657
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements
-4-
TRIBEWORKS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
2004 2003
____ ____
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (93,247) $ 14,920
________ _________
Adjustments:
Depreciation 616 3,860
Amortization of unearned compensation 2,888 4,419
Changes in:
Accounts receivable 139,426 (18,876)
Costs and estimated earnings in excess of billings on
uncompleted contracts 5,746
Prepaid expenses 16,587 1,597
Accounts payable 23,818 (9,867)
Accrued expenses 28,313 23,107
Deferred revenue and billings in excess of costs
and estimated earnings on uncompleted contracts (136,894) (8,658)
________ _________
Total adjustments 80,500 (4,418)
________ _________
Net cash provided (used) by operating activities (12,747) 10,502
________ _________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment - (2,197)
________ _________
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payment of note payable - (30,000)
________ _________
NET DECREASE IN CASH (12,747) (21,695)
CASH, BEGINNING OF PERIOD 39,772 143,153
________ _________
CASH, END OF PERIOD $ 27,025 $ 121,458
======== =========
The accompanying notes are an integral part of these consolidated financial
statements
-5-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE A - PRINCIPLES OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, although the Company
believes that the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the Company's financial
position as of June 30, 2004, and its results of operations and cash flows for
the three and six months ended June 30, 2004 and 2003 have been included.
However, operating results for the interim periods noted are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. This report should be read in conjunction with the Company's financial
statements and notes thereto contained in the Company's annual report on Form
10-KSB for the year ended December 31, 2003.
NOTE B - NATURE OF BUSINESS AND ORGANIZATION
On August 20, 1998, the Company began its business activities. The
Company's business activity results from a technology that provides tools for
creating and delivering multimedia applications. Internet media developers use
the technology for creation and deployment of electronic content that utilizes
interactive features combining graphics, video, and audio content. The Company
exploits its software primarily through the licensing of its software tools to
multimedia and software developers and through building customized licensed
versions that include professional engineering to meet contract requirements.
NOTE C - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF CONSOLIDATION
The financial statements of the Company are presented on a consolidated
basis and include the Company and its wholly-owned subsidiaries, Tribeworks
Development Corporation and Tribeworks Japan Limited. All material intercompany
transactions have been eliminated.
USE OF ESTIMATES
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
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. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined.
Significant estimates used in preparing these financial statements
include those used in computing profit percentages under the
percentage-of-completion revenue recognition method. It is at least reasonably
possible that these significant estimates used will change within the next year.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at the amount management expects to
collect on balances outstanding at period-end. The amount of the accounting loss
that the Company is at risk for these unsecured accounts receivable is limited
to their carrying value, which is $26,992 at June 30, 2004. The Company provides
an allowance for doubtful accounts and records bad debts based on a periodic
review of accounts receivable and the collectibility of each account.
EQUIPMENT
Equipment is stated at cost and is depreciated using the straight-line
method over the estimated useful lives of the assets.
-6-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE C - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
TECHNOLOGY LICENSE
The Company's principal business activity focuses on the
commercialization of iShell, which was developed by an officer and director of
the Company and an affiliate of the Company. In November 1999 the Company
purchased all rights, title and interest in iShell in exchange for $100,000 and
warrants to purchase 75,758 shares of common stock at an exercise price of $1.32
per share, valued at $30,000. The $130,000 cost was fully amortized at December
31, 2002.
REVENUE RECOGNITION
Revenue is generally recognized when all contractual or transfer
obligations have been satisfied and collection of the resulting receivable is
probable.
Revenues from membership subscriptions are recognized proportionally
over the membership period, usually one year. Revenues and estimated profits on
custom development services are generally recognized under the
percentage-of-completion method of accounting using a cost-to-cost measurement
methodology; profit estimates are revised periodically based on changes in
facts; any losses on contracts are recognized immediately. Revenue from the sale
of licenses are recognized when all the following criteria are met: persuasive
evidence of an agreement exists, delivery has occurred, the fee is fixed or
determinable and collectability is probable. If all aspects but the last have
been met or if post contract customer support could be material, revenue is
recognized as payments from customers are received.
COMPENSATED ABSENCES
The Company accrues vacation pay for all full-time employees.
SOFTWARE DEVELOPMENT COSTS
The Company expenses all software development costs in the period the
costs are incurred.
STOCK-BASED AWARDS
The Company accounts for stock based awards to employees under its
"Equity Incentive Plan" as compensatory in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). The
Company also issues stock based awards for services performed by consultants and
other non-employees and accounts for them in accordance with Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123").
Financial Accounting Standards Board Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), requires the
Company to provide pro forma information regarding net income (loss) and
earnings (loss) per share as if compensation cost for all awards had been
determined in accordance with the fair value based method prescribed in SFAS 123
as follows:
-7-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE C - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
____ ____ ____ ____
Net income (loss), as reported $ (52,572) $ (11,373) $ (93,247) $ 14,920
Add: Stock-based compensation expense included in
net income or loss, no tax effect 1,444 1,524 2,888 4,419
Deduct: Total stock-based compensation expense
determined under fair value method for all awards, no
tax effect (2,044) (5,064) (3,488) (11,574)
__________ __________ __________ _________
Pro forma net income (loss) $ (53,172) $ (14,913) $ (93,847) $ 7,765
========== ========== ========== =========
Net income (loss) per share, basic and diluted:
As reported $ (0.01) $ (0.00) $ (0.02) $ 0.00
========== ========== ========== =========
Pro forma $ (0.01) $ (0.00) $ (0.02) $ 0.00
========== ========== ========== =========
The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions: no dividend yield; expected volatility of 25%;
weighted-average risk-free interest rate of 3.40%; and weighted-average expected
option life of three years. No options were granted during the second quarter of
2004.
FOREIGN CURRENCY TRANSLATION
Tribeworks Japan prepares its financial statements in a currency other
than U.S. dollars. Results of operations and cash flows are translated at
average exchange rates during the period, and assets and liabilities are
translated at end-of-period exchange rates. To date, the foreign currency
translation effect was immaterial and, therefore, translation adjustments were
not included as a separate component of accumulated other comprehensive income
(loss) in stockholders' equity (deficit).
NET EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share ("EPS") is computed based on net income
(loss) divided by the weighted average number of common shares outstanding.
Diluted EPS is computed based on net income (loss) divided by the weighted
average number of common shares and potential common share equivalents
outstanding. Potential common share equivalents are those related to stock
options and warrants and the note payable. However, such potential common share
equivalents would have no effect on diluted earnings per share for the six
months ended June 30, 2004 and 2003. Therefore, basic and diluted earnings per
share are the same for the three and six months ended June 30, 2004 and 2003.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 financial
statements in order to conform to the 2004 financial statement presentation.
-8-
TRIBEWORKS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE D - COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED
CONTRACTS
At June 30, 2004, costs and estimated earnings in excess of billings on
uncompleted contracts, which was comprised of one job in progress, consisted of
$9,401 of costs and $8,496 of estimated earnings, less billings of $0.
NOTE E - NOTE PAYABLE
On January 21, 2001, the Company borrowed $100,000 under a Private
Placement Agreement. Under the terms of the agreement the lender, upon the
closing of a "Qualified Financing" (as that term is defined in the agreement),
could convert the loan to common stock of the Company. Such conversion never
took place, and on June 12, 2003, the Company and the creditor restructured this
note. The original terms for the $100,000 note accrued simple interest at 10%,
with all principal and accrued interest due on demand. The restructured note
accrues interest at 4% and was increased by $20,000 for previously accrued
interest. The new note is nonconvertible, and calls for an initial payment of
$30,000, which was made during June 2003, and then monthly payments of $3,500
through February 2005, with a final payment of $24,201 in March 2005. If the
Company makes all note payments timely in accordance with the note agreement,
the creditor will forgive $20,000 of the final payment. In accordance with
Statement of Financial Accounting Standards No. 15, ACCOUNTING BY DEBTORS AND
CREDITORS FOR TROUBLED DEBT RESTRUCTURINGS ("SFAS 15"), the carrying value of
the debt, including accrued interest, is equal to the total amount of future
payments under the new note. Consequently, all future debt payments will reduce
the principal balance and no interest expense will be recorded for this note.
The Company failed to make the scheduled note payments after September
2003 and has received notification of default from the lender. As such, the note
was due in full on June 30, 2004 and is accruing default interest at a rate of
4% on the outstanding payment amounts of the note.
NOTE F - GOING CONCERN
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplate
the continuation of the Company as a going concern. However, although the
Company reported net income during 2003 and 2002, the Company reported a net
loss for the three and six months ended June 30, 2004 and had a working capital
deficiency of $380,411 and an equity deficiency of $378,104 at June 30, 2004.
The Company is also in default on its note payable and has deferred payment of
certain accounts payable and accrued expenses. Given these results, additional
capital or improved operations will be needed to sustain the Company's
operations.
Management's plans in this regard include additional marketing of its
product line with special emphasis on custom development services and technology
licensing opportunities in the U.S. and Japan. The Company also is considering
to seek equity financing and other possible corporate transactions during 2004.
In view of the matters described, there is substantial doubt about the
Company's ability to continue as a going concern. The recoverability of the
recorded assets and satisfaction of the liabilities reflected in the
accompanying balance sheet is dependent upon continued operation of the Company,
which is in turn dependent upon the Company's ability to meet its cash flow
requirements on a continuing basis and to succeed in its future operations.
There can be no assurance that management will be successful in implementing its
plans. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
NOTE G - REVERSE STOCK SPLIT
On March 24, 2004, the Board of Directors authorized a one-for-four
reverse stock split of the Company's common stock. The reverse split became
effective on June 4, 2004, thereby reducing the number of common shares
outstanding by 75% and increasing the par value to $0.0004. All references in
the accompanying consolidated financial statements to the number of common
shares, number and exercise price of stock options and stock warrants, and per
share amounts for the periods prior to the reverse stock split have been
restated to reflect the reverse stock split.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
The following discussion contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to risks and uncertainties.
These forward-looking statements are based on our management's beliefs as well
as assumptions and information currently available to us. When used in this
report, the words "believe," "expect," "anticipate," "estimate" and similar
expressions are intended to identify forward-looking statements. There are
several important factors that could cause actual results to differ materially
from historical results and percentages and results anticipated by the
forward-looking statements, such as, but not limited to:
o whether or not our products are accepted by the marketplace and
the pace of any such acceptance,
o our ability to continue to grow our Tools and Enterprise
businesses,
o improvements in the technologies of our competitors,
o changing economic conditions, and
o other factors, some of which will be outside of our control.
We have sought to identify most risks to our business but cannot
predict whether or to what extent any of such risks may be realized. There can
be no assurance that we have identified all possible risks that might arise.
Investors should carefully consider all such risks before making an investment
decision with respect to our common stock. We caution you not to place undue
reliance on any forward-looking statements, all of which speak only as of the
date of this report. You should refer to and carefully review the information in
future documents we file with the Securities and Exchange Commission.
FINANCIAL CONDITION
We experienced a net loss of $52,572 for the quarter ended June 30,
2004. This loss is primarily attributable to a decrease in revenues in both our
Enterprise and Tools business, and increased administrative costs from efforts
surrounding our recent annual meeting and reverse stock split. Consequently, in
order to strengthen our financial stability, we are increasing the sales
activities of certain personnel, and we have undertaken cost-cutting measures.
Such cost-cutting measures include closing our Tribeworks Japan subsidiary,
which we expect to be completed during the third quarter of 2004, reducing our
headcount, and reducing discretionary spending. The costs to close the
Tribeworks Japan subsidiary are not material and thus we have not accrued any
additional expenses for the closure. There is a risk these cost-cutting measures
could have a negative impact on revenues. We are also implementing a new
executive compensation plan that we expect will have an adverse impact on
profitability.
At this time we have deferred plans to raise funds through equity
financing, primarily so we can refocus our energy on the development of new
mobile Enterprise business opportunities. We still plan to raise funds through
equity financing in the future. Our financial success continues to rely on key
contracts, the future existence of which is not assured. For instance, our
business with a single customer accounted for 24% of our total revenues for this
quarter.
We sell our professional software and generate revenues through two
main distribution channels: the graphics software tools business and the
enterprise application development business. Tools customers, usually graphics
industry professionals, license our iShell(R) branded multimedia application
authoring tools, iShell 4 or iShell Mobile, by purchasing the software via our
online store or via telephone with one of our sales representatives. Tools
customers either buy our software with a permanent license or pay an annual
subscription fee that includes a license to use our software and free software
upgrades. Kinoma Media Album (KMA), our first consumer multimedia tool, is sold
through three online stores: Kinoma.com, Handango.com and PalmGear.com.
We first introduced our multimedia authoring tool iShell(R) in January
1999, as a cross-platform software product to allow developers to create
multimedia applications in a variety of categories, such as sales and business
presentations, informational/catalog titles, training courses and modules for
corporations and/or educational institutions, games, learning aids, enhanced CDs
(audio CDs that also contain videos and other visual digital content), video
yearbooks, and recruitment presentations.
-10-
Beginning in 2003, we partnered with Kinoma, Inc. ("Kinoma") to create
new products for the mobile software market, specifically targeting Palm OS
devices. Kinoma makes Kinoma Player 2, which is a high-resolution, interactive
movie player for handhelds running the Palm OS. To date we have developed two
products in partnership with Kinoma that create Kinoma Player 2 content, iShell
Mobile, an iShell-based application development tool, launched in October 2003,
and Kinoma Media Album, a consumer multimedia management tool, launched in May
of 2004. Kinoma receives a per unit royalty on sales of iShell Mobile and Kinoma
Media Album. In addition to building these two products together, we have
utilized Kinoma as a subcontractor on Enterprise projects.
In our Enterprise business, most of our customers are large
corporations that require development of custom multimedia tools or complex
multimedia applications. Enterprise customers usually pay for consulting
services performed by Tribeworks' employees and subcontractors. Certain
Enterprise customers also license our software, usually for a fixed fee or on a
per unit basis, although we recorded no Enterprise licensing revenues during
this quarter. As evidenced by results for this quarter, we generally anticipate
Enterprise business growth, particularly Enterprise consulting revenues, to be
less predictable and "bumpier" than our Tools business revenues in the
foreseeable future, and this could impact whether or not we continue to be
profitable on a quarter-to-quarter basis. The primary reason is that our
Enterprise business has a smaller number of customers. The addition of new
mobile Enterprise solutions has expanded the potential customer base and could
decrease volatility going forward. We expect to continue to underwrite the cost
of software research and development with money received from Enterprise
customers.
While we strive to operate our business efficiently and profitably, we
cannot make assurances that every quarter will be profitable, and we may
sacrifice near-term results for long-term results.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $219,848 for the three months ended June 30, 2004,
a decrease of 17% compared to total revenues of $264,519 for the three months
ended June 30, 2003. The Tools Business, which primarily includes sales of
commercial or educational use of our iShell 4, iShell Mobile, and Kinoma Media
Album software, and sales of books and third party plug-ins, decreased by 20% to
$71,909 for the second quarter of 2004, compared to $89,595 for the second
quarter of 2003. The Enterprise business decreased in the second quarter of 2004
by 15% to $147,939, compared with $174,924 for the second quarter of 2003.
Enterprise revenues for the second quarter of 2004 consisted of $147,939 in
consulting revenues and $0 in licensing revenues, compared with $162,256 in
consulting revenues and $12,668 in licensing revenues for the second quarter of
2003. The decrease in Enterprise consulting revenues is primarily attributable
to an approximately 50% decrease in revenues associated with our ongoing
contract with Pioneer Corporation for development of software products that
allow users to create and manage content for digital signs. We expect that
revenues associated with Pioneer Corporation will increase in future quarters.
International revenues, which consist of sales to foreign customers, represented
50% of revenues for the second quarter of 2004, compared to 58% of revenues for
the second quarter of 2003. Revenues from Japanese customers decreased to 29% of
total revenues for the second quarter of 2004, down from 47% for the second
quarter of 2003.
Revenues were $507,653 for the six months ended June 30, 2004, a
decrease of 19% from revenues of $628,961 for the six months ended June 30,
2003. The Tools Business decreased in the first six months of 2004 by 10% to
$168,667, compared with $188,355 for the first six months of 2003. The
Enterprise business decreased in the first six months of 2004 by 23% to
$338,986, compared with $440,606 for 2003.
COST OF SALES
Cost of sales includes royalties paid to third parties for licensed
technology, costs associated with order fulfillment, credit card fees, web
hosting fees, and costs associated with consulting services, including salaries,
subcontractor fees, and out-of-pocket expenses. Cost of sales was $91,290 for
the three months ended June 30, 2004, up from $84,269 for the three months ended
June 30, 2003. Gross margins decreased on a percentage basis to 58% for the
second quarter of 2004 from 68% for the second quarter of 2003, primarily caused
by higher relative subcontractor costs on certain Enterprise projects during the
quarter.
Cost of sales was $207,290 for the six months ended June 30, 2004, down
from $219,205 for the six months ended June 30, 2003. Gross margins decreased on
a percentage basis from 65% for the first six months of 2003 to 59% for the
first six months of 2004.
-11-
OPERATING EXPENSES
Product support expenses consist mainly of compensation, benefits and
consulting fees paid to product support personnel. Product support expenses were
$11,573 and $10,924 for the quarters ended June 30, 2004 and 2003, respectively.
As a percentage of Tools sales, product support expenses were 16% and 12% for
the second quarters of 2004 and 2003, respectively. This increase is primarily
attributable to reduced Tools revenues and relatively fixed product support
expenses. Product support expenses were $20,707 and $22,525 for the six months
ended June 30, 2004 and June 30, 2003, respectively.
Product development expenses consist primarily of compensation and
benefits to support product development. Product development expenses were
$30,383 and $37,443 for the quarters ended June 30, 2004 and 2003, respectively.
Product development expenses were $66,024 and $65,388 for the six months ended
June 30, 2004 and June 30, 2003, respectively.
Sales and marketing expenses consist primarily of compensation and
benefits, advertising, mail order costs, trade show expenses, and other public
relations and marketing costs. Sales and marketing expenses were $46,635 and
$67,534 for the quarters ended June 30, 2004 and 2003, respectively. Most of
this decrease is based on less expense for developing our website, which we
substantially redesigned during the first and second quarters of 2003, and
decreased wages for certain sales personnel, whose wages are tethered to sales
performance. Sales and marketing expenses were $95,848 and $125,408 for the six
months ended June 30, 2004 and June 30, 2003, respectively.
General and administrative expenses consist primarily of compensation
and benefits, fees for professional services, and overhead. General and
administrative expenses were $92,337 and $73,445 for the quarters ended June 30,
2004 and 2003, respectively. This increase is primarily due to the increased
cost of doing business as a public company as a result of new securities
regulations, including increased accounting and legal fees, and also due to
costs associated with our recent annual meeting and reverse stock split. General
and administrative expenses were $210,290 and $176,550 for the six months ended
June 30, 2004 and June 30, 2003, respectively.
OTHER INCOME (EXPENSE)
Other expense was $202 for the quarter ended June 30, 2004, consisting
of $202 of interest expense, compared to other expense of $2,277 for the quarter
ended June 30, 2003, consisting of $2,277 of interest expense. Other expense was
$741 for the six months ended June 30, 2004, consisting of $741 of interest
expense, compared to other expense of $4,965 for the six months ended June 30,
2003, consisting of $4,965 of interest expense.
PROVISION FOR INCOME TAXES
We recorded no tax provision for the quarter ended June 30, 2004 and no
tax provision for the quarter ended June 30, 2003. We recorded no tax provision
for the six months ended June 30, 2004 and no tax provision for the six months
ended June 30, 2003.
NET INCOME (LOSS)
Net loss was $52,572 for the quarter ended June 30, 2004, compared to a
net loss of $11,373 for the quarter ended June 30, 2003. Net loss was $93,247
for the six months ended June 30, 2004, compared to a net profit of $14,920 for
the six months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had cash of $27,025 compared to $121,458 at June
30, 2003.
Our capital requirements have been reduced significantly from previous
quarters based on cost reductions. Since inception, the Company has financed its
operations through issuance of stock and through revenues from the Tools and
Enterprise businesses. Through June 30, 2004, the Company had raised $2,672,656
from the sale of stock. At June 30, 2004, the principal source of liquidity for
the Company was $27,025 of cash.
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Cash used by operating activities was $33,385 for the quarter ended
June 30, 2004 and cash provided by operating activities was $95,775 for the
quarter ended June 30, 2003. Cash used by operating activities was $12,747 for
the six months ended June 30, 2004 and cash provided by operating activities was
$10,502 for the six months ended June 30, 2003.
Cash used in investing activities for the quarters ended June 30, 2004
and 2003 was $0 and $0, respectively. Cash used in investing activities for the
six months ended June 30, 2004 and 2003 was $0 and $2,197, respectively.
Cash used in financing activities for the quarters ended June 30, 2004
and 2003 was $0 and $30,000, respectively. Cash used in financing activities for
the six months ended June 30, 2004 and 2003 was $0 and $30,000, respectively.
We cannot make assurances that we will be profitable and that should we
seek investment funds, that such funds will be available to us or available on
commercially reasonable terms. We do not expect to devote substantial capital
resources to additional hiring of personnel if more funds do not become
available to us. In addition, the inability to obtain sufficient funds from
operations and external sources will have a material adverse effect on our
business, results of operations, and financial condition.
ITEM 3. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer of the
Registrant have concluded based on their evaluation as of the end of the period
covered by this Report, that the Registrant's disclosure controls and procedures
are effective to ensure that information required to be disclosed by the
Registrant in the reports filed or submitted by it under the Securities Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and include controls and procedures designed to ensure that information
required to be disclosed by the Registrant in such reports is accumulated and
communicated to the Registrant's management, including the Chief Executive
Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of such evaluation.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
We made no sales of the Company's common stock during the quarter ended
June 30, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included in this report or incorporated
by reference into this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
______ _______________________
2.1 Agreement of Merger between Tribeworks, Inc., a California
corporation, and Tribeworks Acquisition Corporation, dated
November 2, 1999 (Incorporated by reference to Exhibit 2.1 to
the Registrant's Form 10-SB/A filed July 10, 2000).
3.1 Certificate of Incorporation of Tribeworks, Inc., a Delaware
corporation (Incorporated by reference to Exhibit 3.1 to the
Registrant's Form 10-SB/A filed July 10, 2000).
3.2 Bylaws of Tribeworks, Inc., a Delaware corporation
(Incorporated by reference to Exhibit 3.2 to the Registrant's
Form 10-SB/A filed July 10, 2000).
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) and 15d-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) and 15d-14(a).
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act.
(b) The following reports on Form 8-K were filed during the quarter
ended June 30, 2004:
Current Report on Form 8-K (Items 5 and 7) filed with the Securities
and Exchange Commission on June 3, 2004.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Tribeworks, Inc.,
a Delaware corporation
Date: August 16, 2004 /s/ DUNCAN J. KENNEDY
_________________________
Duncan J. Kennedy,
President and Chief Executive Officer
/s/ ROBERT C. DAVIDORF
__________________________
Robert C. Davidorf,
Chief Financial Officer
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