UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period ended March 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
SIDEWARE SYSTEMS INC.
(Exact name of Registrant as specified in its charter)
British Columbia
------------------- ----------------------
(State or jurisdiction (IRS Employer
of incorporation) Identification No.)
1810 Samuel Morse Drive, Reston, Virginia 20190-5316
------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (703) 437-9002
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Shares without par value
------------------------------------
(Title of Class)
Check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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 x No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
66,116,167 common shares without par value as at May 12, 2001.
Index to Exhibits on Page 9
Sideware Systems Inc.
Form 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and
Analysis or Plan of Operation 1
Item 3. Qualitative and Quantitative
Disclosure about Market Risk 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities and Use of Proceeds 9
Item 3. Defaults upon Senior Securities 9
Item 4. Submission of Matters to a Vote of
Securities Holders 9
Item 5. Other Matters 9
Item 6. Exhibits and Reports on Form 8-K 9
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Each of the following items are contained in our Consolidated
Financial Statements and are set forth herein.
(i) Condensed Consolidated Balance Sheets as of December 31, 2000
and March 31, 2001 (unaudited);
(ii) Condensed Consolidated Statements of Operations (unaudited)
for the three month periods ended March 31, 2000 and 2001;
(iii)Condensed Consolidated Statements of Stockholders' Deficit for
the three month period ended March 31, 2001;
(iv) Condensed Consolidated Statements (unaudited) of Cash Flows for
the three month periods ended March 31, 2000 and 2001; and
(v) Notes to Consolidated Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF
OPERATION
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2001 COMPARED WITH THE THREE
MONTH PERIOD ENDED MARCH 31, 2000
During the three month period ended March 31, 2001 we recognized
revenue of $95,891, consisting of:
- - $27,000 in license revenue from sales of our software
products;
- - $35,507 for services rendered in installing and maintenance
of our software products; and
- - $33,384 in hardware and software re-sales.
Of the $33,384 in hardware and software re-sales, approximately
$31,000 came from sales to related parties.
In addition, we have recorded $108,062 in deferred revenue as at
March 31, 2001. Our deferred revenue consists of payments we
have received, and accounts receivable we have recorded, on
account of:
- - future maintenance obligations; and
1
- - software product sales which were not sufficiently completed
by March 31, 2001 to comply with our revenue recognition
policy.
We expect to continue completing our obligations in these
transactions, so that the deferred revenue can be recognized as
revenue in future periods.
Cost of revenues for the three month period ended March 31, 2001
was $36,414. Cost of revenues allocated to hardware and software
re-sales was $33,384, of which approximately $31,000 resulted
from sales to related parties. Our sales to related parties are
made at cost. Our re-sales of hardware and software to arm's
length parties are generally included in sales of software
products. Our current practice is to allocate:
- - an amount equal to the cost of hardware or software sold as
revenue attributed to the re-sale of hardware and software;
and
- - the balance of the revenue from any sale to license revenue
or services.
Cost of revenues allocated to services and license revenue were,
respectively, $2,830 and $200.
We did not realize any revenue from sales of software during the
three month period ended March 31, 2000. Revenue from hardware
and software re-sales was $8,806, all of which came from sales to
related parties. Cost of revenues was also $8,806, in accordance
with our policy re-selling hardware and software to related
parties at cost.
Interest income increased from $91,792 for the three month period
ended March 31, 2000 to $198,496 for the three month period ended
September 30, 2000. Interest income reported for the three month
period ended March 31, 2001 includes a net realized holding gain on
short term investments of $136,550. Net of the realized holding
gain, interest income decreased by $29,846 as a result of lower
average cash balances during the three month period ended March
31, 2001.
Owing to the increase in our work force and the opening of
additional offices in the United States during 2000, cash expenditures
increased in virtually all categories from the three month period
ended March 31, 2000 compared to the three month period ended March 31,
2001. These increases were offset by higher stock-based
compensation expenses during the three month period ended March
31, 2000.
We incur stock-based compensation expenses when we grant stock
options to employees having exercise prices below the prevailing
market prices for our shares, or to consultants based on the fair
value of the options as the services are performed and the options
earned. Total stock-based compensation expenses decreased from
$4,587,942 for the three month period ended March 31, 2000 to
$265,149 for the three month period ended March 31, 2001. Most of
our stock-based compensation expense for the three month period
ended March 31, 2000 arose from the grant of 1,000,000 stock options
on January 21, 2000. That grant occurred in the following circumstances:
2
- - Under regulations of the Canadian Venture Exchange
("CDNX"), where our shares were then trading, the minimum
price for stock options was based on the average closing
price for our shares during the 10 trading days preceding
the grant of stock options.
- - We granted options to purchase 1,000,000 shares at $11.08 on
January 21, 2000. In accordance with CDNX regulations, the
$11.08 exercise price was based on the average closing price
of our shares during the 10 trading days preceding January 21,
2000.
- - The closing price for our shares on January 21, 2000 was
$19.00. We used this price in calculating the stock-based
expense arising from this transaction. The total stock-
based expense from this transaction was equal to $6,980,000,
of which we recognized $4,345,525 during the three month period
ended March 31, 2000.
- - The stock options granted on January 21, 2000 were subject
to approval of the CDNX, and could not be exercised before
that approval was obtained. We received CDNX approval on
February 23, 2000. The closing price for our shares on that
date was $10.00.
- - None of the options granted January 21, 2000 have been
exercised.
Inclusive of stock-based compensation expenses, sales and
marketing expenses decreased from $2,676,052 for the three month
period ended March 31, 2000 to $2,479,085 for the three month
period ended March 31, 2001. These amounts include stock-based
compensation of $1,234,618 and $136,767, respectively. Net of
stock-based compensation, sales and marketing expenses increased
from $1,441,434 to $2,342,318. The principal factors which
contributed to this increase included the following:
- - Salaries and benefits allocated to sales and marketing increased
from $626,657 to $1,535,514. During 2000 we hired approximately
65 new sales and marketing employees.
- - Advertising, tradeshows, and other direct marketing expenses
decreased from approximately $372,000 to approximately
$181,000. During the three month period ended March 31, 2000 we
incurred higher expenses in preparing marketing materials and
obtaining marketing studies.
- - Facility costs increased from $79,100 to $204,926, due principally
to expansion of our North Vancouver facility and to costs
associated with our new head office in Reston.
- - Amortization charges allocated to sales and marketing
increased from $5,177 to $101,257.
Total research and development expenses increased from $529,325
for the three month period ended March 31, 2000 to $1,092,665 for
the three month period ended March 31, 2001. These amounts
include stock-based compensation of $30,722 and $87,146,
respectively. Net of stock-based compensation, research and
development expenses increased from $498,603 to $1,005,519. The
principal factors which contributed to this increase included the
following:
3
- - Salaries and benefits allocated to research and development
increased from $393,870 to $774,068. During 2000 we hired
approximately 25 new research and development employees.
- - Amortization charges allocated to research and development
increased from $42,679 to $73,321.
- - Travel costs allocated to research and development increased from
$0 to $35,885, principally as a result of travel by our
research and development personnel between our Reston and
North Vancouver offices.
- - Facility costs allocated to research and development
increased from $30,226 to $87,708.
Total general and administrative expenses decreased from
$4,171,324 for the three month period ended March 31, 2000 to
$1,528,701 for the three month period ended March 31, 2001.
These amounts include stock-based compensation of $3,322,602 and
$41,236, respectively. Net of stock-based compensation, general
and administrative expenses increased from $848,722 to
$1,487,465. The principal factors which contributed to this
increase included the following:
- - Salaries and benefits allocated to general and administrative
expenses increased from $252,429 to $312,083. During 2000 we
hired approximately 10 new administrative employees.
- - Professional services decreased from $287,426 to $98,414.
During the three month period ended March 31, 2000 we incurred
additional professional expenses relating to our financing activities,
to the establishment of our offshore subsidiaries, and to costs
incurred in hiring additional personnel.
- - Recruiting expenses increased from $7,448 to $58,322.
- - We recorded a bad debt expense of $86,420 for the three month period
ended March 31, 2001. There was no similar expense for the three
month period ended March 31, 2000.
- - During the three month period ended March 31, 2001 we recognized
a foreign exchange loss of $681,168, compared with $136,262 for the
three month period ended March 31, 2000. Our foreign exchange losses
result principally from the translation of financial transactions
recorded in Canadian dollars into our functional and reporting
currency of United States dollars for financial reporting purposes.
BOARD OF DIRECTORS
Since January 1, 2001 three new directors have been appointed to
the Sideware Board of Directors.
JACK KEMP. Mr. Kemp is a co-founder of Empower America, an
organization devoted to ensuring that government actions foster
growth, economic well-being, freedom, and individual
responsibility. In 1996, Mr. Kemp was the Vice-Presidential
candidate for the Republican Party. Prior to founding Empower
America, Mr. Kemp served for four years as U.S. Secretary of
Housing and Urban Development, and for 18 years in the U.S. House
4
of Representatives. Mr. Kemp also serves as a director of Oracle
Corp., Hawk Corporation, Proxicom, Inc., and Speedway Motorsports
Inc.
JOHN SHOEMAKER. For the past 10 years, Mr. Shoemaker has held a
variety of senior executive positions with Sun Microsystems.
Since July 2000, he has served as executive vice president of
Sun's systems product group. Prior to joining Sun Microsystems,
Mr. Shoemaker was the senior vice president of electronic
printing and the vice president and general manager of the
document systems business at Xerox Corporation.
KENNETH THORNTON. Mr. Thornton was previously employed by IBM,
as General Manager of IBM's Public Sector. In this role, he led
IBM's government, education, healthcare and pharmaceuticals
business operations worldwide. Previously, he served as the vice
president and general manager of IBM's Mid-Atlantic Area, where
he was responsible for leading IBM's marketing and services
operations in the Mid-Atlantic states. Prior positions with IBM
include Industry Director of the Public Sector, Regional Manager
of the Atlantic Region, Director of Federal Marketing Operations
and Sales Branch Manager. Mr. Thornton has been a member of the
Internet2 Executive Council, a part of IBM's Worldwide Management
Council, and a member of IBM's Corporate Technology Council.
REDUCTION IN PERSONNEL
During March and April 2001, we implemented a substantial
reduction in our work force. We have terminated approximately 50
employees.
We are also transferring our research and development operations
from North Vancouver, British Columbia to our head office in
Reston, Virginia. We have 14 development personnel working in
North Vancouver on a transitional basis, to complete some of the
development work in progress, and to assist in transferring
development work to Reston personnel. We are in the process of
hiring development personnel in Reston, and we expect to complete
the transition of our development work to Reston by the end of June
2001. We expect that the transfer will reduce rent and travel
costs, and provide efficiencies by having our senior technical
staff and development team in one location. We are also reducing
sales, marketing, general and administrative expenditures, and
closing several remote sales offices.
On completion of the reduction in our work force and the transfer
of our development work to Reston, our workforce will total
approximately 75 employees, consisting of approximately:
- - 28 development personnel;
- - 32 sales and marketing personnel; and
- - 15 general and administrative personnel.
Costs associated with this restructuring activity will be recorded
in the quarter ended June 30, 2001 or as determinable thereafter.
5
LIQUIDITY AND CAPITAL RESOURCES - PLAN OF OPERATION
As at April 30, 2001 our cash resources total approximately $5
million.
As a result of the cost saving measures described above, we
expect to reduce our operating costs. We estimate that our
average monthly expenditures for the remainder of 2001 will be
approximately $850,000 per month. We expect our principal
expenditures to be approximately as follows:
salaries and benefits - $600,000 per month
discretionary marketing - $65,000 per month
general and administrative - $85,000 per month
Monthly expenditures for the remainder of the second quarter will
be slightly higher, owing to termination and transitional
expenses. By the end of the second quarter of 2001, we expect
that our monthly cash expenditures will be approximately $800,000
per month, representing a reduction of approximately 33% from the
first quarter of 2001.
Based on the foregoing, we believe that our present cash
resources will be sufficient to pay ongoing cash operating
expenses until approximately the end of October 2001.
We are reducing our discretionary marketing expenses, as our
previous marketing programs did not produce substantial sales.
We are also reducing our sales force, but plan to retain
approximately 32 sales and marketing personnel for the immediate
future. We believe that if our products begin to gain market
acceptance, our remaining sales force will be large enough to
support a sales program.
To continue as a going concern, we will either have to raise
additional capital or begin to generate substantial sales
revenue. If we cannot do either by the end of the third quarter
of 2001, we face a risk that our business will fail. If it
appears that we will be unable either to raise capital or
generate sales, we may try to reduce costs further by ceasing
efforts to sell our current products. That course of action
would involve focusing our remaining resources on product
development, to develop products with substantially different or
enhanced features. However, we have no assurance that such
development work would lead to more successful products, that we
would be able to complete the development of those products, or
that we would be able to raise the funds necessary to market
those products, once completed.
6
PRIVATE PLACEMENT
On February 22, 2001 we completed a private placement of
5,229,752 units. We issued 3,667,252 units at a price of $0.76
per unit and 1,562,500 units at a price of $0.80 per unit. Each
unit consisted of one share and one share purchase warrant. Each
share purchase warrant entitled the holder to purchase one
additional share for a period of three years at a price of $1.00.
We paid commissions totalling $282,253 to H.C. Wainwright & Co.,
Inc. for acting as placement agent in the private placement. In
addition, we issued to H.C. Wainwright warrants to acquire
526,316 units at a price of $0.76 per unit, with each unit
consisting of one share and one share purchase warrant. The
brokers' warrants, and any share purchase warrants issued under
them, expire February 22, 2004. The purchasers of the units
included the following directors and executive officers:
Grant Sutherland 1,250,000 units
Paul Hildebrand and Alder Enterprises Ltd. acquired,
respectively, 187,500 and 125,000 units. Mr. Hildebrand is our
corporate Secretary and Alder Enterprises Ltd. is a private
holding company in which Mr. Hildebrand holds a 45% interest.
Under regulations of the Toronto Stock Exchange, Mr. Sutherland,
Mr. Hildebrand, and Alder Enterprises Ltd. were required to pay
$0.80 per unit, as opposed to $0.76 per unit for other
purchasers.
PRODUCT DEVELOPMENT
Our next planned product release is the Sideware Enterprise
Interaction Suite 4.0, which we expect to release during the
final two weeks of June 2001. Version 4.0 will include
two new components, Sideware Assist and Sideware Wireless.
Sideware Assist will permit a company to provide automated
responses to questions from its customers. Sideware Assist will
offer customers an inquiry window, in which questions can be
typed. Sideware Assist will utilize the principles of natural
language processing and interpretation to interpret the
questions, and to select an appropriate response from a series of
pre-defined responses.
We expect that installations of Sideware Assist will be highly
customized to individual users, and will require a user to
assemble:
- - a "knowledge" database of words, phrases, and questions
that are likely to be used by its customers; and
- - a set of standardized responses, and procedures that can be
used to select the appropriate response.
Sideware Assist will utilize the Relationship Modeling Engine of
Banter, Inc. to perform natural language processing and
artificial intelligence functions. Banter, Inc. is a software
development company headquartered in San Francisco, California.
7
Sideware Wireless will include software that interfaces with
browsers used by wireless devices, such as cellular phones or
palm pilots. Wireless will thus permit customers using those
devices to interact with companies using Sideware Collaboration.
The e-mail management component of the Enterprise Interaction
Suite 4.0 will consist of the "Reply" program of Banter, Inc.
We expect that additional development work will be required,
following the release of version 4.0 of the Enterprise Interaction
Suite, to integrate the Reply program into the common queue created
by Sideware Telephony. We expect to complete that additional
development work by the end of August, 2001.
We have entered into a reseller agreement with Banter, Inc.,
pursuant to which we are authorized to distribute both the
Relationship Modeling Engine and the Reply program of Banter,
Inc. The reseller agreement specifies royalty rates, depending
on volume, which we must pay to Banter, Inc. on sales of Reply
and the Relationship Modeling Engine. The term of the agreement
is to March 31, 2002.
We previously intended to include Sideware VoIP in version 4.0 of
the Enterprise Interaction Suite. Sideware VoIP was intended to
provide Voice over Internet capability, permitting users to send
voice messages over the Internet to CSRs. We planned to
incorporate the technology of Lipstream Networks into Sideware
VoIP. On May 1, 2001, Lipstream Networks announced that it was
ceasing operation due to financial difficulties. As a result,
development of Sideware VoIP will be delayed. We have not yet
prepared a new development schedule for Sideware VoIP.
Our development plans may change, depending on our technical and
financial capabilities, and our assessment of the demands of the
marketplace. There can be no assurance that our development work
will produce commercially viable products, or that we will be
able to license the third party technology we require on
commercially acceptable terms.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
RISK
As at March 31, 2001 we have not entered into or acquired
financial instruments that have a material market risk. We have
no financial instruments for trading or other purposes and no
derivative or other financial instruments with off balance sheet
risk. All financial assets and liabilities are due within the
next twelve months and are classified as current assets or
liabilities in the consolidated balance sheet provided with this
prospectus. The fair value of all financial instruments at March
31, 2001 is not materially different from their carrying value.
8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As at the date of this Form 10-Q we are not involved in any
material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
During the three month period ended March 31, 2001 we did not
submit any matters to a vote of security holders.
ITEM 5. OTHER MATTERS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the three month period ended March 31, 2001, we filed three
reports on Form 8-K.
On January 30, 2001 we filed a report on Form 8-K stating that we
had granted 5,830,500 stock options.
On February 16, 2001 we filed a report on Form 8-K stating that
John Shoemaker and Jack Kemp had joined our board of directors, and
that we had granted a further 798,000 stock options.
On March 9, 2001 we filed a report on Form 8-K stating that we had
completed the private placement described above.
INDEX TO EXHIBITS
Number Exhibit
3.1(1) Memorandum of Incorporation dated March 30, 1983
3.2(1) Articles of Incorporation dated March 30, 1983
3.3(1) Special Resolution dated January 12, 1984
9
3.4(1) Special Resolution dated June 15, 1989
3.5(1) Special Resolution dated September 27, 1990
3.6(1) Special Resolution dated December 18, 1996
3.7(1) Articles of Incorporation
3.8(1) Special Resolution dated January 29, 1998
3.9(5) Special Resolution dated June 28, 2000
4.1(1) Escrow Agreement dated June, 1996
4.2(4) 2000 Stock Option Plan
4.3(4) Amended 2000 Stock Option Plan
4.4(6) Stock Option Plan (2001)
10.1(1) Operating Agreement between the Company and
BrainTech, Inc., dated October 18, 1996
10.2(2) Software Development and License Agreement dated
September 20, 1999 between the Company and
BrainTech, Inc.
10.3(2) Software Development License Agreement between
the Company and Sideware International SRL
effective August 27, 1999
10.4(2) Research and Development Cost Sharing Agreement
between the Company and Sideware International
SRL effective August 27, 1999
10.5(2) Distribution and Sales Agreement between the
Company and Sideware Corp. effective January 1,
1999
10.6(1) Assignment of Lease and Modification of Lease
Agreement dated August 17, 1998 between HOOPP
Realty Inc., Techwest Management Inc., Sideware
Systems Inc., and BrainTech, Inc.
10.7(1) Lease Agreement dated January 25, 1999 between
Sideware Corp. and Elden Investments, LLC with
Addendum dated February 8, 1999
10.8(2) Agreement between the Company and IBM for
participation in the Enterprise Growth
Opportunity program
10.9(2) Reseller agreement between the Company and
Enterprise Soft
10.10(2) Software license agreement between the Company
and ICEsoft AS
10.11(2) Lease effective as of July 1, 1999 between the
Company, Techwest Management Ltd., BrainTech,
Inc. and Pacific Centre Leaseholds Ltd.
10.12(2) Assignment Agreement effective as of July 1,
1999 between the Company, Techwest Management
Ltd., BrainTech, Inc., and SJM Management Ltd.
10.13(2) Cost Sharing and Allocation Agreement dated
October 29, 1999 between the Company and
BrainTech, Inc.
10.14(2) Agreement between the Company and Advanced
Contact Solutions Inc.
10.15(2) Contract Agreement No. SDW001 between the
Company and Science Applications International
Corp.
10.16(2) IBM International Independent Software Vendor
Agreement
10.17(2) Distribution and Sales Agreement between
Sideware Corp. and Sideware International SRL
10.18(3) Lease Agreement dated March 6, 2000 between
Sideware Corp. and
10
Reston L.L.C.
10.19(3) Lease Agreement between Sideware Corp. and
Sanctuary Park Realty Holding Company
10.20(3) Sub-Lease Agreement dated January 15, 2000
between San Jose State University Foundation and
Sideware Systems Inc.
10.21(3) Lease Agreement dated February 24, 2000 between
CEO Suites, Inc. and Sideware Corp.
10.22(6) Change of Control Severance Agreement with Rahul
Badhan
10.23(6) Change of Control Severance Agreement with Scott
Friedlander
10.24(6) Change of Control Severance Agreement with
Stewart Walchli
10.25(6) ASP Software Products Distribution and License
Agreement dated January 21, 2001 between
Sideware International SRL and Sideware Corp.
10.26(6) End User Software Products Distribution and
License Agreement dated January 21, 2001 between
Sideware International SRL and Sideware Corp.
10.27(6) Assignment of Lease
11.1 Computation of net loss per share
(1) Exhibit already on file - exhibit to our Form20-F
registration statement filed in May 1999.
(2) Exhibit already on file - exhibit to our Form F-1
registration statement 333-90893 filed in December 1999.
(3) Exhibit already on file - exhibit to our Form 20-F
annual report covering the year ended December 31, 1999.
(4) Exhibit already on file - exhibit to our Form F-3
registration statement no. 333-34984 filed in April 2000.
(5) Exhibit already on file - exhibit to our Form 10-Q
filed in October 2000.
(6) Exhibit already on file - exhibit to our Form 10-K
filed in March 2001.
11
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of
1934, the registrant caused this Quarterly Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 11, 2001 Sideware Systems Inc.
"Grant Sutherland"
W. Grant Sutherland
Director
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of
1934, this annual report has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
Chief Financial Officer
"Stewart Walchli" (Principal Financial and May 11, 2001
- -------------------- Accounting Officer)
Stewart F. Walchli
12
Consolidated Financial Statements
(Expressed in United States dollars)
SIDEWARE SYSTEMS INC.
(Prepared in accordance with generally accepted
accounting principles in the United States)
Three months ended March 31, 2001 and 2000
(Unaudited)
SIDEWARE SYSTEMS INC.
Condensed Consolidated Balance Sheets
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
============================================================================
March 31, December 31,
2001 2000
- ----------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 6,303,046 $ 949,999
Short-term investments - 5,982,588
Accounts receivable:
Trade, less allowance for
doubtful accounts of $6,153
(December 31, 2000 - $142,047) 318,578 467,783
Other 76,336 126,842
Due from related parties 67,581 29,859
Current portion of long-term
receivables 6,670 6,849
Inventory 33,261 46,829
Prepaid expenses 434,619 549,639
--------------------------------------------------------------------------
7,240,091 8,160,388
Deposit on lease 128,200 129,926
Long-term receivables 98,727 105,587
Deferred finance charges 90,615 95,583
Fixed assets 2,074,669 1,967,818
- ----------------------------------------------------------------------------
$ 9,632,332 $ 10,459,302
============================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 821,538 $ 1,246,683
Deferred revenue 108,062 $ 168,661
--------------------------------------------------------------------------
929,600 1,415,344
Stockholders' equity:
Common stock
Authorized: 199,949,375 common shares,
no par value
Issued and outstanding: 66,116,167
(2000 - 60,886,415) 44,392,800 40,660,382
Additional paid-in capital 12,146,732 12,146,732
Deferred stock-based compensation (195,746) (460,895)
Accumulated other comprehensive income - (503,685)
Deficit (47,641,054) (42,798,576)
--------------------------------------------------------------------------
8,702,732 9,043,958
- ----------------------------------------------------------------------------
$ 9,632,332 $ 10,459,302
============================================================================
See accompanying notes to consolidated financial statements.
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
================================================================
Three months ended March 31,
-----------------------
2001 2000
- ----------------------------------------------------------------
Revenue:
Licenses $ 27,000 $ -
Services 35,507 -
Hardware and software resales 2,000 -
Hardware resales to related
parties 31,384 8,806
--------------------------------------------------------------
95,891 8,806
Cost of revenues:
Licenses 200 -
Services 2,830 -
Hardware and software resales 2,000 -
Hardware resales to related
parties 31,384 8,806
--------------------------------------------------------------
36,414 8,806
- ----------------------------------------------------------------
Gross margin 59,477 -
Operating expenses:
Sales and marketing (including
stock-based compensation of
$136,767 and $1,234,618) 2,479,085 2,676,052
Research and development (including
stock-based compensation of
$87,146 and $30,722) 1,092,665 529,325
General and administrative (including
stock-based compensation of
$41,236 and $3,322,602) 1,528,701 4,171,324
--------------------------------------------------------------
5,100,451 7,376,791
- ----------------------------------------------------------------
Operating loss (5,040,974) (7,376,701)
Non-operating:
Interest income 198,496 91,792
--------------------------------------------------------------
198,496 91,792
- ----------------------------------------------------------------
Loss for the period $ (4,842,478) $ (7,284,909)
Other comprehensive income (loss):
Foreign currency translation
adjustments 640,235 (32,875)
Net realized holding gain on
short-term investments (136,550) -
--------------------------------------------------------------
503,685 (32,875)
Comprehensive loss $ (4,338,793) $ (7,317,784)
================================================================
Basic and diluted loss per share:
Net loss $ (0.08) $ (0.13)
Weighted average shares used in
computing net loss per share,
basic and diluted 62,066,046 56,190,341
================================================================
See accompanying notes to consolidated financial statements.
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
==================================================================================================================
Accumulated
Additional Deferred other Total
Share capital paid-in stock-based comprehensive stockholders
Number Assigned capital compensation loss Deficit equity
- ------------------------------------------------------------------------------------------------------------------
Balance, December
31, 2000 60,886,415 $40,660,382 $12,146,732 $ (460,895) $ (503,685) $ (42,798,576) $ 9,043,958
Shares issued
for cash 5,229,752 4,037,121 - - - - 4,037,121
Share issue costs - (304,703) - - - - (304,703)
Amortization
of deferred
stock-based
compensation - - - 265,149 - - 265,149
Net unrealized
holding gain
on short-term
investments - - - - (136,550) - (136,550)
Foreign currency
translation
adjustment - - - - 640,235 - 640,235
Loss for the
period - - - - - (4,842,478) (4,842,478)
- ------------------------------------------------------------------------------------------------------------------
Balance,
March 31,
2001 66,116,167 $44,392,800 $12,146,732 $ (195,746) $ - $(47,641,054) $ 8,702,732
==================================================================================================================
See accompanying notes to consolidated financial statements.
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
================================================================
Three months ended March 31,
-----------------------
2001 2000
- ----------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss for the period $ (4,979,028) $(7,284,909)
Items not involving cash:
Amortization 208,138 101,487
Stock-based compensation 265,149 4,587,942
Changes in non-cash operating
working capital:
Accounts receivable 199,711 16,636
Due to related parties (37,722) (107,004)
Due to officers - (217,795)
Inventory 13,568 (174,407)
Prepaid expenses 115,020 (62,711)
Accounts payable and accrued
liabilities (425,145) 360,069
Deferred revenue (60,599) 5,436
- ----------------------------------------------------------------
(4,700,908) (2,775,258)
Financing activities:
Share subscriptions receivable - 10,854,952
Shares issued for cash, net of
share issue costs 3,732,418 7,037,225
Share subscriptions receivable - (259,960)
- ----------------------------------------------------------------
3,732,418 17,632,217
Investing activities:
Proceeds on maturity of
short-term investments 5,982,588 -
Long-term receivables and deferred
charges 12,007 897
Purchase of fixed assets (315,019) (249,670)
Deposit on lease, net 1,726 (67,904)
--------------------------------------------------------------
5,681,302 (316,677)
- ----------------------------------------------------------------
Effect of exchange rates on cash and
cash equivalents 640,235 (38,208)
- ----------------------------------------------------------------
Increase in cash and
cash equivalents 5,353,047 14,502,074
Cash and cash equivalents,
beginning of period 949,999 5,929,801
- ----------------------------------------------------------------
Cash and cash equivalents,
end of period $6,303,046 $20,431,875
================================================================
See accompanying notes to consolidated financial statements.
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements, page 1
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Three months ended March 31, 2001 and 2000
1. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements have
been prepared by Sideware Systems Inc. ("Sideware") in
accordance with generally accepted accounting principles in the
United States and reflect all adjustments (all of which are normal
and recurring in nature) that, in the opinion of management, are
necessary for fair presentation of the interim financial
information. The results of operations for the interim periods
presented are not necessarily indicative of the results expected
for any subsequent quarter or for the entire year ending December
31, 2001. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. These unaudited condensed consolidated financial
statements and notes included herein should be read in
conjunction with Sideware's audited consolidated financial
statements and notes for the year ended December 31, 2000, as
filed in its Annual Report on Form 10-K.
2. FOREIGN CURRENCY TRANSLATION:
Effective for its fiscal year beginning January 1, 2001, the
Company established the U.S. dollar as its functional currency for
all of its operations as it represents the primary market of revenues
and for the Company's operations. Accordingly, foreign currency
denominated balances of the Company are translated to U.S. dollars.
Monetary assets and liabilities denominated in a foreign currency
are translated to U.S. dollars at the rate of exchange in effect
at the balance sheet date. Other assets and revenue and expense items
are measured using the rate of exchange prevailing at their respective
transaction dates. Exchange gains and losses resulting from the
translation of foreign denominated monetary assets and liabilities to
U.S. dollars are reflected in earnings for the period.
Effective for the fiscal year ended December 31, 2000, the
Company adopted the U.S. dollar as its reporting currency. The
Company's functional currency for the fiscal year ended December
31, 2000, was the Canadian dollar. The Company's financial
statements for fiscal 2000 were prepared in Canadian dollars before
translation to the U.S. dollar reporting currency. Accordingly, foreign
currency denominated balances of the Company were re-measured in
Canadian dollars as follows: assets and liabilities are
translated into U.S. dollars at the rate of exchange in effect at
the balance sheet date and revenue and expense items at the
average rates for the applicable period. Unrealized gains and
losses resulting from the translation to U.S. dollars are
accumulated in a separate component of stockholders' equity
described as accumulated other comprehensive income.
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements, page 2
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Three months ended March 31, 2001 and 2000
3. STOCK OPTIONS:
A summary of the Company's stock option activity is as follows:
===============================================================
Weighted
Number average
of shares exercise price
Balance, December 31, 2000 10,912,400 $ 4.56
Options granted 458,000 1.00
Options cancelled/expired (219,500) 4.21
---------------------------------------------------------------
Balance, March 31, 2001 11,150,900 $ 4.38
===============================================================
On January 18, 2001, February 9, 2001, February 22, 2001, and March
7, 2001 the Company granted, under the 2001 Option Plan, 5,680,500,
490,000, 190,000, and 150,000 options, respectively, at $1.00 per share.
All options are exerciseable for five years and subject to vesting
schedules of up to 18 months. The 2001 Option Plan, and all options
granted under it, are subject to approval by the Company's
shareholders. The Company intends to seek that approval at its
next general stockholders' meeting. For accounting purposes,
these options will not be deemed to have been granted until
approved by the stockholders' and compensation cost, if any, will be
measured based on market values at that time.
Approximately 3.6 million of the options outstanding at March 31,
2001 and included in the options granted under the 2001 Option Plan,
will expire by August 31, 2001 due to employee terminations (note
6).
4. SHARE PURCHASE WARRANTS:
A summary of the Company's warrant activity for the three month
period ended March 31, 2001 is as follows:
[/CAPTION]
=================================================================================================================
Outstanding Outstanding
Exercise December 31, March 31,
Expiry date price per share 2000 Granted Exercised Expired 2002
- -----------------------------------------------------------------------------------------------------------------
March 26, 2001 U.S. 0.383 197,882 - - (197,882) -
April 7, 2001 CDN 0.63 2,000,000 - - - 2,000,000
September 14, 2001 U.S. 1.89 1,417,254 - - - 1,417,254
December 14, 2001 U.S. 1.89 1,901,271 - - - 1,901,271
April 13, 2001/2002 U.S. 10.00/11.50 45,000 - - - 45,000
April 13, 2002 U.S. 3.00 139,000 - - - 139,000
April 13, 2002 U.S. 1.00 900,000 - - - 900,000
February 22, 2004 U.S. 1.00 - 5,229,752 - - 5,229,752
- -----------------------------------------------------------------------------------------------------------------
6,600,407 5,229,752 - (197,882) 11,632,277
=================================================================================================================
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements, page 3
(Unaudited)
(Expressed in U.S. dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Three months ended March 31, 2001 and 2000
4. SHARE PURCHASE WARRANTS (continued):
The share purchase warrants issued in consideration for financing,
outstanding at December 31, 2000 having an exercise price of U.S.$1.00
and U.S.$3.00 expiring April 13, 2002 were repriced from U.S.$10.00 and
U.S.$2.82 in March 2001. The term of the re-priced warrants will be
reduced to 30 days if, over any period of twenty consecutive days, the
weighted average trading price for the Company's shares exceeds the new
exercise price by 25% or more.
5. PRIVATE PLACEMENT:
On February 22, 2001, the Company issued, through a private
placement, 5,229,752 common shares, for net proceeds of
approximately $3,732,417. Additionally, the Company issued
5,229,752 share purchase warrants. The Company also issued
brokers' warrants, permitting the holders to acquire 526,316
units at a price of $0.76 per unit, with each unit consisting of
one share and one share purchase warrant. Each share purchase
warrant entitles the holder to purchase one additional common
share of the Company, for a period of three years, at a price of
$1.00 per share.
6. SUBSEQUENT EVENT:
Subsequent to March 31, 2001, the Company announced the closure
of its North Vancouver B.C. office and an overall reduction in its
workforce. Total severance payments resulting from this change are
currently estimated to be approximately $450,000. Other expenses
related to the office closure are not determinable at this time.
Costs associated with this restructuring activity will recorded
in the quarter ended June 30, 2001 or as determinable thereafter.