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 June 30, 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
(i)
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 August 14, 2001.
Index to Exhibits on Page 11
(ii)
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 9
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 11
Item 6. Exhibits and Reports on Form 8-K 11
(iii)
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 June 30, 2001 (unaudited);
(ii) Condensed Consolidated Statements of Operations (unaudited)
for the six month periods ended June 30, 2000 and 2001 and the
three month periods ended June 30, 2000 and 2001;
(iii)Condensed Consolidated Statements of Stockholders' Deficit for
the six month periods ended June 30, 2001 and 2001 and the
three month periods ended June 30, 2000 and 2001;
(iv) Condensed Consolidated Statements (unaudited) of Cash Flows for
the six month periods ended June 30, 2000 and 2001 and the
three month periods ended June 30, 2000 and 2001; and
(v) Condensed notes to Consolidated Financial
Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF
OPERATION
SIX AND THREE MONTH PERIODS ENDED JUNE 30, 2001 COMPARED WITH
THE SIX AND THREE MONTH PERIODS ENDED JUNE 30, 2000
RESULTS OF OPERATIONS
REVENUES
Revenues for the six months ended June 30, 2001 were $135,838
compared with $188,995 for the prior year period. Revenues for
the three months ended June 30, 2001 were $39,947 compared with
$182,945 for the prior year period. These decreases were due
principally to declines in sales of software licenses and a
decline in hardware resales to related parties.
Changes in specific categories of revenue from the six month
period ended June 30, 2000 to the six month period ended June 30,
2001 were as follows:
- - License revenue from sales of our software products
decreased by $65,500.
- - Revenue for services rendered in installing and maintenance
of our software products increased by $48,487.
1
- - Revenue from hardware and software resales to arm's length
parties decreased by $10,200.
- - Revenue from hardware resales to related parties decreased
by $25,944.
Changes in specific categories of revenue for the three month
period ended June 30, 2000 to the three month period ended June
30, 2001 were as follows:
- - License revenue from sales of our software products
decreased by $92,500.
- - Revenue for services rendered in installing and maintenance
of our software products increased by $12,980.
- - Revenue from hardware and software resales to arm's length
parties decreased by $12,200.
- - Revenue from hardware resales to related parties decreased
by $51,278.
The decreases in our license revenue resulted from lower sales of
our software products. The increases in services revenue
resulted primarily from recognizing revenue from maintenance
services relating to previously recorded sales of our software
products. The decreases in revenue from hardware and software
resales to arm's length parties resulted primarily from lower
sales of our software products, with which our hardware and
software resales are generally bundled.
COSTS OF REVENUES
Total cost of revenues for the six month period ended June 30,
2001 was $40,911 compared with $79,962 for the prior year period.
Substantially all of the decrease resulted from reduced resales
of hardware and software. Cost of hardware and software resales
was $35,920 for the six month period ended June 30, 2001 compared
with $72,064 for the prior year period, a decrease of $36,144.
$25,944 of the decrease related to resales to related parties.
Total cost of revenues for the three month period ended June 30,
2001 was $4,497 compared with $73,912 for the prior year period.
Substantially all of this decrease also resulted from reduced
hardware and software resales. Cost of hardware and software
resales for the three month period ended June 30, 2001 was $2,536
compared with $66,014 for the prior year period, a decrease of
$63,478. $51,278 of the decrease related to resales to related
parties.
Our hardware resales to related parties are made at cost. Our
resales 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 resale of hardware and software;
and
- - the balance of the revenue from any sale to license revenue
or services.
2
OPERATING EXPENSES
Total operating expenses for the six month period ended June 30,
2001 were $9,136,051 compared with $16,074,076 for the prior year
period.
The principal reason for the decrease in operating expenses was a
reduction in our stock-based compensation for the six month
period ended June 30, 2001 to $377,474, compared with $8,481,646
for the prior year period. 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. Most of our
stock-based compensation expense for the six month period ended
June 30, 2000 arose from the grant of 1,000,000 stock options on
January 21, 2000. That grant occurred in the following
circumstances:
- - 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 approximately $5,984,000 during the
six month period ended June 30, 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.
Exclusive of stock-based compensation expenses, total operating
expenses for the six month period ended June 30, 2001 were
$8,758,577 compared with $7,592,430 for the prior year period.
During 2000 and 2001 we implemented several changes in our
operations that affected our operating costs. These changes
included the following:
- - During the first half of 2000, we increased our workforce
substantially, and opened additional sales offices in the
United States. These changes increased our operating costs
substantially over levels we had experienced historically.
- - Following disappointing sales results during 2000 and the
first quarter of 2001, we subsequently reduced our work
force substantially, and closed some of our sales offices.
Accordingly, salary levels for the second quarter of 2001
were lower than the corresponding period of 2000.
3
- - During the second quarter of 2000 we also transferred our
research and development activities from North Vancouver to
our head office in Reston. We terminated all of our North
Vancouver development personnel and hired new development
personnel in Reston.
- - As a result of our staff reductions and the transfer of our
development activities to Reston, we also incurred
restructuring costs of $1,127,171 during the six month
period ended June 30, 2001. There was no corresponding
expense for the prior year period. Cash restructuring costs
totaled approximately $611,000, consisting principally of
termination payments made to departing employees. Non-cash
restructuring costs totaled approximately $516,000,
resulting principally from writing off capital assets
associated with sales offices we closed.
Total operating expenses for the three month period ended June
30, 2001 were $4,675,835 compared with $8,697,375 for the prior
year period.
The principal reason for the decrease in operating expenses was a
reduction in our stock-based compensation to $112,325 for the
three month period ended June 30, 2001 compared with $3,893,704
for the prior year period. In addition, we incurred
restructuring costs for the three month period ended June 30,
2001 of $1,127,171. There was no corresponding expense for prior
year period.
Exclusive of stock-based compensation expenses and restructuring
costs, total operating expenses for the three month period ended
June 30, 2001 were $3,436,339, compared with $4,803,671 for the
prior year period. Changes in quarterly operating costs for the
three month periods ended June 30, 2001 and the prior year
period, reflect the same factors as those for the six month
periods.
Set forth below is further information on changes in particular
items of our operating expenses.
Sales and marketing expenses for the six month period ended June
30, 2001 were $4,075,073 compared with $7,837,328 for the prior
year period. These amounts include stock-based compensation of
$193,746 and $3,087,309, respectively. Net of stock-based
compensation, total sales and marketing expenses for the six
month period ended June 30, 2001 were $3,881,327, compared with
$4,750,019 for the prior year period. The principal factors that
contributed to this decrease included the following:
- - Salaries and benefits allocated to sales and marketing
increased from $2,096,708 to $2,596,085. This increase for
the six month period was due to the hiring approximately 65
new sales and marketing employees during 2000, offset in
part by the staff reductions during the second quarter of
2001.
- - Advertising, trade shows, and other direct marketing
expenses decreased from $1,440,774 to $193,435. We reduced
our trade show participation during the six month period
ended June 30, 2001. In addition, during the six month
period ended June 30, 2000, we incurred higher expenses in
preparing marketing materials and obtaining marketing
studies.
4
- - Travel costs decreased from $440,822 to $183,349. During
the six month period ended June 30, 2000 we incurred higher
travel as a result of the expansion of our United States
sales force.
- - Facility costs increased from $261,470 to $372,635, due
principally to expansion of our North Vancouver facility in
2000, to costs associated with our new head office in Reston
and, and to costs incurred in establishing new regional
sales offices in the United States.
- - Amortization charges allocated to sales and marketing
increased from $107,046 to $160,847.
Sales and marketing expenses for the three month period ended
June 30, 2001 were $1,595,988, compared with $5,161,276 for the
prior year period. These amounts included stock-based
compensation of $56,980 and $1,852,691, respectively. Net of
stock-based compensation, sales and marketing expenses for the
three month period ended June 30, 2001 were $1,539,008, compared
with $3,308,585 for the prior year period. The principal factors
that contributed to this decrease were as follows:
- - Salaries and benefits allocated to sales and marketing
decreased from $1,470,084 to $1,060,571, principally as a
result of our staff reductions during the second quarter of
2001.
- - Advertising, trade shows, and other direct marketing
expenses decreased from $1,111,173 to $49,783. We reduced
our trade show participation during the three month period
ended June 30, 2001. In addition, during the three month
period ended June 30, 2000 we incurred higher expenses in
preparing marketing materials and obtaining marketing
studies.
- - Travel costs decreased from $323,214 to $52,633, principally
as a result of our staff reductions during the second
quarter of 2001.
- - Facilities costs decreased from $182,370 to $167,709,
principally as a result of cost savings resulting from the
closure of regional sales offices and our North Vancouver
facility.
- - Amortization charges allocated to sales and marketing
decreased from $66,657 to $59,591.
Research and development expenses for the six month period ended
June 30, 2001 were $1,948,309 compared with $2,210,764 for the
prior year period. These amounts include stock-based
compensation of $127,515 and $502,428, respectively. Net of
stock-based compensation, research and development expenses for
the six month period ended June 30, 2001 were $1,820,794 compared
with $1,708,336 for the prior year period. The principal factors
that contributed to this increase included the following:
- - Salaries and benefits allocated to research and development
increased from $1,190,342 to $1,210,852. During 2000, we
hired approximately 25 new research and development
employees. However, staff reductions during the second
quarter of 2001 largely offset the increased salary costs
resulting from the hirings.
5
- - Travel costs decreased from $99,308 to $82,988. During the
six month periods ended 30, 2000 we incurred higher expenses
due to travel by our research and development personnel
between our Reston and North Vancouver offices.
- - Facilities costs increased from $76,329 to $228,600. The
increase was due principally to expansion of our North
Vancouver facility during 2000. We closed our North
Vancouver facility subsequent to June 30, 2001.
Accordingly, the resulting cost savings were not realized
during the second quarter of 2001.
- - Amortization charges allocated to research and development
increased from $93,936 to $134,648.
Research and development expenses for the three month period
ended June 30, 2001 were $855,644 compared with $1,681,439 for
the prior year period. These amounts include stock-based
compensation of $40,368 and $471,736, respectively. Net of
stock-based compensation, research and development expenses for
the three month period ended June 30, 2001 were $815,276 compared
with $1,209,703 for the prior year period. The principal factors
that contributed to this decrease included the following:
- - Salaries and benefits allocated to research and development
decreased from $796,472 to $436,784, due to our staff
reductions in the second quarter of 2001.
- - Travel costs decreased from $99,308 to $48,103.
- - Facilities costs increased from $46,063 to $140,892,
principally due to expansion of our North Vancouver
facility.
- - Amortization charges allocated to research and development
increased from $52,257 to $61,328.
General and administrative expenses for the six month period
ended June 30, 2001 were $1,985,498 compared with $6,025,984 for
the prior year period. These amounts include stock-based
compensation of $56,213 and $4,891,879, respectively. Net of
stock-based compensation, general and administrative expenses for
the six month period ended June 30, 2001 were $1,929,285 compared
with $1,134,105 for the prior year period. The principal factors
that contributed to this increase included the following:
- - Salaries and benefits allocated to general and
administrative increased from $674,851 to $716,226. The
increase was due to the hiring of approximately 10 new
general and administrative employees during 2000, but was
partly offset by staff reductions in the second quarter of
2001.
- - Professional services decreased from $318,293 to $279,095.
During the six month period ended June 30, 2000 we incurred
additional professional expenses relating to our financing
activities, to the establishment of our offshore subsidiary,
and to costs incurred in hiring additional staff.
- - Facility costs increased from $97,388 to $122,477. The
increase was due principally to expansion of our North
Vancouver facility.
- - Amortization charges allocated to general and administrative
increased from $34,325 to $57,329.
6
- - Bad debt increased from $4,518 to $206,473. Several of our
customers from fiscal 2000 went bankrupt during 2001,
requiring accounts receivable to be written off.
- - During the six month period ended June 30, 2001 we
recognized a foreign exchange loss of $7,517, compared
with a foreign exchange gain of $377,236 for the six month
period ended June 30, 2000. Our foreign exchange gains and
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.
General and administrative expenses for the three month period
ended June 30, 2001 were $1,097,032 compared with $1,854,660 for
the prior year period. These amounts include stock-based
compensation of $14,977 and $1,569,277, respectively. Net of
stock-based compensation, general and administrative expenses for
the three month period ended June 30, 2001 were $1,082,055
compared with $285,383 for the prior year period. The principal
factors that contributed to this increase included the following:
- - Salaries and benefits allocated to general and
administrative decreased from $422,422 to $404,142,
principally as a result of our staff reductions during the
second quarter of 2001.
- - Professional services increased from $30,867 to $168,283.
During the second quarter of 2001 we incurred additional
professional expenses relating to the filing of a
registration statement under the Securities Act of 1933.
- - Facility costs increased from $51,906 to $62,612. The
increase was due principally to expansion of our North
Vancouver facility.
- - Amortization charges allocated to general and administrative
increased from $17,653 to $23,768.
- - Bad debt increased from $17,141 to $120,053, as a result of
the bankruptcy of several of our customers from 2000.
- - During the three month period ended June 30, 2001 we
recognized a foreign exchange gain of $33,417, compared with
a foreign exchange gain of $513,498 for the six month period
ended June 30, 2000.
NON-OPERATING INCOME
Interest income for the six month period ended June 30, 2001 was
$238,529 compared with $364,878 for the prior year period.
Interest income reported for the six month period ended June 30,
2001 includes a net realized holding gain on short term
investments of $136,550. Net of the realized holding gain,
interest income decreased by $262,899 as a result of lower
average cash balances during the six month period ended June 30,
2001.
Interest income for the three month period ended June 30, 2001
was $40,033 compared with $273,086 to for the prior year period.
The decrease was a result of lower average cash balances during
the three month period ended June 30, 2001.
7
NET LOSS
Our net loss for the six month period ended June 30, 2001 was
$8,802,595 compared with $15,600,165 for the prior year period.
These amounts include stock-based compensation of $377,474 and
$8,481,646, respectively. Net of stock-based compensation, our
net loss for the six month period ended June 30, 2001 was
$8,425,121 compared with $7,118,519 for the prior year period.
Our net loss for the three month period ended June 30, 2001 was
$4,600,352 compared with $8,315,256 for the prior year period.
These amounts include stock-based compensation of $112,325 and
$3,893,704, respectively. Net of stock-based compensation, our
net loss for the three month period ended June 30, 2001 was
$4,488,027 compared with $4,421,552 for the prior year period.
LIQUDITY AND CAPITAL RESOURCES - PLAN OF OPERATION
As at June 30, 2001, our cash resources total approximately $2.56
million. Other than trade debt, we have no material debt
outstanding as at June 30, 2001.
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 $450,000, net of certain restructuring costs
relating to reductions in force. We expect our principal
expenditures to be approximately as follows:
salaries and benefits - $295,000 per month
discretionary marketing - $15,000 per month
general and administrative - $140,000 per month
Monthly expenditures for July and August 2001 will be higher,
owing to termination and transitional expenses. 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.
Following the formation of our strategic alliance with IBM which
we announced on June 28, 2001, we have decided to focus a
significant portion of our sales efforts on the IBM strategic
alliance, on value added resellers participating in the Sideware
Partner Program, and in the development of a relationship with
Sun Microsystems and other potential partners. Accordingly, we
continue to reduce our discretionary marketing expenses and
direct sales efforts since they did not produce substantial
revenues. Our sales and marketing force has been reduced from
approximately 32 to 12 employees with approximately 10 additional
commission-based independent contractors. We believe that if
our products begin to gain market acceptance, our remaining sales
force will be large enough to support a sales program.
8
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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
RISK
As at June 30, 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
June 30, 2001 is not materially different from their carrying value.
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
At our Annual Meeting of Stockholders held on June 28, 2001,
the following matters were submitted to a vote of our
stockholders:
1. The number of directors was fixed at eight, which was
approved by a vote of 40,208,816 shares in favor, 428,377
shares against and 129,882 shares abstaining.
9
2. The Board of Directors was re-elected in its entirety for
terms ending at our 2002 Annual Meeting of Stockholders.
Name Shares Voted in Favor Shares Withheld
James L. Speros 40,076,234 562,789
W. Grant Sutherland 39,475,326 1,163,706
Jay H. Nussbaum 40,463,420 175,612
Jack Kemp 40,478,590 160,042
John Shoemaker 40,488,420 145,612
Kenneth Thornton 40,503,420 135,612
Peter Kozicki 39,583,016 1,053,116
Edward White 39,602,876 1,036,156
3. Ratification of the selection of KPMG LLP as independent public
accountants for fiscal year 2001, which was approved by a vote of
40,184,043 shares in favor, 267,845 shares against and 251,331
shares abstaining.
4. A special resolution requiring approval by 75% of the votes
cast on the resolution was approved by a vote of 11,431,258 shares
in favor, 225,019 shares against and 233,370 shares abstaining.
The resolution authorizes and approves:
(a) the application of the Company to the registrar under the
Company Act British Columbia for authorization to continue under
the Business Corporations Act (Yukon);
(b) the application pursuant to the Business Corporations Act
(Yukon), for a certificate of continuance continuing the Company
as if it had been incorporated thereunder, including the filing
of Articles of Continuance which affect the change to the
constating documents of the Company to conform to the Business
Corporations Act (Yukon), such as changing the address of the
registered office to Whitehorse, Yukon Territories, Canada be
and is subject to receipt by the Company of all required
regulatory approvals;
(c) notwithstanding the foregoing, the directors of the
Company are authorized and empowered to abandon the application
for continuance under the Business Corporations Act (Yukon) and
to revoke all or any one of these resolutions as any time prior
to their being acted upon without further approval of the
Shareholders of the Company;
(d) any director or office of the Company be and is hereby
authorized and empowered, acting for, and in the name of and
on behalf of the name of the Company to execute or cause to be
executed, under the seal of the Company or otherwise and to
deliver or caused to be delivered, such other documents and
instruments and to do or caused to be done, such other acts
and things as in the opinion of such one director or officer
of the Company may be necessary or desirable in order to
carry out the intent of the resolution.
10
5. The Company's Stock Option Plan (2001) was adopted and
approved by a vote of disinterested shareholders only by a
vote of 6,577,674 shares in favor, 2,133,104 shares against
and 327,366 shares abstaining. Pursuant to rules of the Toronto
Stock Exchange, votes attaching to shares owned beneficially
by corporate insiders were not counted on this resolution.
6. The Company was authorized issue up to 15,000,000 shares
and 15,000,000 share purchase warrants or other securities
convertible to the common shares of the Company pursuant to
private Placements on such terms and conditions as the Directors
of the Company may approve by a vote of 9,585,042 shares in favor,
1,159,958 shares against and 881,647 shares abstaining.
ITEM 5. OTHER MATTERS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the three month period ended June 30, 2001, we filed one
report on Form 8-K.
On April 12, 2001, we filed a report on Form 8-K stating that
we were moving our research and development operations to Reston,
Virginia from Vancouver, British Columbia and were implementing
cost savings measures by closing several remote offices and
reducing sales, marketing, and other expenses.
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
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
11
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 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
12
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.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: August 14, 2001 Sideware Systems Inc.
By: /s/"Grant Sutherland"
___________________
Grant Sutherland
Director
Dated: August 14, 2001 By: /s/"Stewart Walchli"
___________________
Stewart Walchli
14
Consolidated Financial Statements
(Expressed in United States dollars)
SIDEWARE SYSTEMS INC.
(Prepared in accordance with generally accepted
accounting principles in the United States)
Six months ended June 30, 2001 and 2000
(Unaudited)
15
SIDEWARE SYSTEMS INC.
Condensed Consolidated Balance Sheets
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
============================================================================
June 30, December 31,
2001 2000
- ----------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,558,579 $ 949,999
Short-term investments - 5,982,588
Accounts receivable:
Trade, less allowance for
doubtful accounts of $55,984
(December 31, 2000 - $142,047) 195,442 467,783
Other 64,851 126,842
Due from related parties - 29,859
Current portion of long-term
receivables 124,072 6,849
Inventory 38,956 46,829
Prepaid expenses 316,958 549,639
--------------------------------------------------------------------------
3,298,858 8,160,388
Deposit on lease 118,758 129,926
Long-term receivables (note 8) - 105,587
Deferred finance charges (note 8) - 95,583
Fixed assets 1,404,577 1,967,818
- ----------------------------------------------------------------------------
$ 4,822,193 $ 10,459,302
============================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 506,806 $ 1,246,683
Due to related parties 6,402 -
Deferred revenue 94,280 $ 168,661
--------------------------------------------------------------------------
607,488 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 (83,421) (460,895)
Accumulated other comprehensive loss (640,235) (503,685)
Deficit (51,601,171) (42,798,576)
--------------------------------------------------------------------------
4,214,705 9,043,958
- ----------------------------------------------------------------------------
$ 4,822,193 $ 10,459,302
============================================================================
See accompanying notes to consolidated financial statements.
16
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 month periods ended Six month periods ended
June 30, June 30,
------------------------- ------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------
Revenue:
Licenses $ 14,315 $ 106,815 $ 41,315 $ 106,815
Services 23,096 10,116 58,603 10,116
Hardware and software resales 2,536 14,736 4,536 14,736
Hardware resales to related
parties - 51,278 31,384 57,328
------------------------------------------------------------------------------------------
39,947 182,945 135,838 188,995
Cost of revenues:
Licenses 200 485 400 485
Services 1,761 7,413 4,591 7,413
Hardware and software resales 2,536 14,736 4,536 14,736
Hardware resales to related
parties - 51,278 31,384 57,328
- -------------------------------------------------------------------------------------------
4,497 73,912 40,911 79,962
- -------------------------------------------------------------------------------------------
Gross margin 35,450 109,033 94,927 109,033
Operating expenses:
Sales and marketing
(including stock-based
compensation of
$56,980, $1,852,691,
$193,746 and $3,087,309) 1,595,988 5,161,276 4,075,073 7,837,328
Research and development
(including stock-based
compensation of $40,368,
$471,736, $127,515 and
$502,458) 855,644 1,681,439 1,948,309 2,210,764
General and administrative
(including stock-based
compensation of $14,977,
$1,569,277, $56,213 and
$4,891,879)(note 9) 1,097,032 1,854,660 1,985,498 6,025,984
Restructuring costs
(note 7) 1,127,171 - 1,127,171 -
-----------------------------------------------------------------------------------------
4,675,835 8,697,375 9,136,051 16,074,076
- -------------------------------------------------------------------------------------------
Operating loss (4,640,385) (8,588,342) (9,041,124) (15,965,043)
Interest income 40,033 273,086 238,529 364,878
- -------------------------------------------------------------------------------------------
Net loss for the period $ (4,600,352) $ (8,315,256) $ (8,802,595) $ (15,600,165)
Other comprehensive
loss:
Foreign currency translation
adjustments (note 9) - (455,380) - (488,255)
Net realized holding gain on
short-term investments - - (136,550) -
-----------------------------------------------------------------------------------------
- (455,380) (136,550) (488,255)
Comprehensive loss $ (4,600,352) $ (8,770,636) $ (8,939,145) $(16,088,420)
===========================================================================================
Basic and diluted loss per
share $ (0.07) $ (0.14) $ (0.14) $ (0.27)
Weighted average shares
used in computing net
loss per share,
basic and diluted 65,145,789 58,458,793 63,605,918 56,748,820
===========================================================================================
See accompanying notes to consolidated financial statements.
17
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
Common Stock Additional Deferred other Total
Number of paid-in stock-based comprehensive stockholders
Shares Amount 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 (note 6) 5,229,752 4,037,121 - - - - 4,037,121
Share issue costs
(note 6) - (304,703) - - - - (304,703)
Amortization
of deferred
stock-based
compensation - - - 377,474 - - 377,474
Net unrealized
holding gain
on short-term
investments - - - - (136,550) - (136,550)
Loss for the
period - - - - - (8,802,595) (8,802,595)
- ------------------------------------------------------------------------------------------------------------------
Balance,
June 30,
2001 66,116,167 $44,392,800 $12,146,732 $ (83,421) $ (640,235) $(51,601,171) $ 4,214,705
==================================================================================================================
See accompanying notes to consolidated financial statements.
18
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)
==================================================================
Six months ended June 30,
----------------------
2001 2000
- ------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss for the period $ (8,802,595) $(15,600,165)
Items not involving cash:
Amortization 352,825 237,410
Stock-based compensation 377,474 8,481,646
Loss on disposal of assets 515,752 -
Write-down of long-term
receivable 65,000 -
Realized holding gain on
short-term investments (136,550) -
Changes in non-cash operating
working capital:
Accounts receivable 334,332 (161,847)
Due to related parties 36,261 79,344
Due to officers - (223,378)
Inventory 7,873 57,364
Prepaid expenses 232,681 (48,232)
Accounts payable and accrued
liabilities (739,877) 242,539
Deferred revenue (74,381) 104,398
- -------------------------------------------------------------------
(7,831,205) (6,830,921)
Financing activities:
Shares issued for cash, net of
share issue costs 3,732,418 18,323,340
Share subscriptions receivable - (18,345)
- -------------------------------------------------------------------
3,732,418 18,304,995
Investing activities:
Proceeds on maturity of
short-term investments 5,982,588 -
Long-term receivables and
deferred charges 18,947 3,856
Purchase of fixed assets (305,336) (1,006,745)
Deposit on lease, net 11,168 (60,462)
-----------------------------------------------------------------
5,707,367 (1,063,351)
- -------------------------------------------------------------------
Effect of exchange rates on
cash and cash equivalents - (456,903)
- -------------------------------------------------------------------
Increase in cash and
cash equivalents 1,608,580 9,953,820
Cash and cash equivalents,
beginning of period 949,999 5,929,801
- -------------------------------------------------------------------
Cash and cash equivalents,
end of period $2,558,579 $15,883,621
===================================================================
See accompanying notes to consolidated financial statements.
19
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)
Six month periods ended June 30, 2001 and 2000
- ----------------------------------------------------------------------
1. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements have
been prepared by Sideware Systems Inc.(the "Company") 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 the Company's
audited consolidated financial statements and notes for the
year ended December 31, 2000, as filed in its Annual Report on
Form 10-K and 10-KA.
2. Future Operations
These consolidated financial statements have been prepared on
the going concern basis under which an entity is considered to
be able to realize its assets and satisfy its liabilities and
commitments in the ordinary course of business. Through the
date of these consolidated financial statements the Company
has not generated significant revenues, and has incurred
operating losses and negative cash flow from operating
activities. Operations to date have been primarily financed
by equity transactions.
In April 2001, the Company began a restructuring that involved
the termination of a substantial portion of its work force,
the transferring of the research and development operations
from North Vancouver, British Columbia to its head office in
Reston, Virginia, a reduction in sales, marketing, general and
administrative expenditures, and the closing of several remote
sales offices. As a result of these cost saving measures, the
Company has materially reduced its operating costs and
believes that its present cash resources will be sufficient to
pay ongoing cash operating expenses until approximately the
end of October 2001.
To continue as a going concern, the Company will either have
to raise additional capital or begin to generate substantial
sales revenue. If the Company cannot do either by the end of
the third quarter of 2001, there is a risk that the business
will fail. If it appears that the Company will be unable
either to raise capital or generate sales, the Company will
try to reduce costs further by ceasing efforts to sell its
current products. That course of action would involve
focusing remaining resources on product development, to
develop products with substantially different or enhanced
features. However, the success of this course of action is
uncertain.
20
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)
Six month periods ended June 30, 2001 and 2000
- ----------------------------------------------------------------------
2. FUTURE OPERATIONS (CONTINUED):
The consolidated financial statements do not include
any adjustments relating to the recoverability of assets
and classification of assets and liabilities that might
be necessary should the Company be unable to continue
as a going concern.
3. FOREIGN CURRENCY TRANSLATION:
Effective for its fiscal year beginning January 1, 2001, the
Company established the U.S. dollar as their 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, 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.
4. 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 7,553,500 0.84
Options expired (1,209,000) 2.01
---------------------------------------------------------------
Balance, June 30, 2001 17,256,900 $ 3.10
===============================================================
Approximately 6,800,000 of the options outstanding at June 30,
2001 will expire by December 31, 2001 due to employee terminations
(note 7).
21
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements, page 3
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Six month periods ended June 30, 2001 and 2000
- --------------------------------------------------------------------
5. SHARE PURCHASE WARRANTS:
A summary of the Company's warrant activity for the six month
period ended June 30, 2001 is as follows:
========================================================================================================
Outstanding Outstanding
Exercise December 31, June 30,
Expiry date price per share 2000 Granted Expired 2001
- --------------------------------------------------------------------------------------------------------
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 (2,197,882) 9,632,277
========================================================================================================
The share purchase warrants issued in consideration for financing,
outstanding at December 31, 2000, having an exercise price of U.S.
$10.00 and U.S. $2.82 expiring April 13, 2002 were repriced to U.S.
$3.00 and U.S. $1.00 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.
6. PRIVATE PLACEMENT:
On February 22, 2001, the Company issued, through a private
placement, 5,229,752 common shares, for net proceeds of
approximately $3,732,418. 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.
22
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements, page 3
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Six month periods ended June 30, 2001 and 2000
7. RESTRUCTURING COSTS:
In March 2001, the Company began a restructuring that involved
the termination of a substantial portion of its work force,
the transferring of the research and development operations
from North Vancouver, British Columbia to its head office in
Reston, Virginia, a reduction in sales, marketing, general and
administrative expenditures, and the closing of several remote
sales offices. Restructuring costs for the three and six
month periods ended June 30, 2001 totaled approximately
$1,127,000. The amount consisted of approximately $516,000
relating to the writedown of capital assets as well as
approximately $611,000 consisting principally of severance
payments made to terminated employees
8. LONG-TERM RECEIVABLES AND DEFERRED FINANCE CHARGES:
As a result of the restructuring and termination of employees,
all employees loans, disclosed as long-term receivables and
deferred charges as at December 31, 2000, become due and payable
within ninety days of termination and any unpaid amounts have be
classified as a current asset.
9. THREE MONTHS ENDED MARCH 31, 2001 FIGURES:
The Company has reduced its deficit and increased its accumulated
other comprehensive loss by reducing its foreign exchange loss,
which had been included in general and administrative expenses, by
$640,235 for the three months ended March 31, 2001 to appropiately
reflect the Company's change in its functional curency from the
Canadian dollar to the U.S. dollar. The financial statement
balances adjusted are as follows:
- ------------------------------------------------------------------------------
As previously Adjustment Adjusted
reported balance
- ------------------------------------------------------------------------------
As at March 31, 2001:
Accumulated other comprehensive $ - $ (640,235) $ (640,235)
income
Deficit (47,641,054) 640,235 (47,000,819)
For the three month period ended
March 31, 2001:
General and administrative 1,528,701 (640,235) 888,466
Foreign currency translation
adjustments (640,235) 640,235 -
- ------------------------------------------------------------------------------
23