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 September 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:
68,086,965 common shares without par value as at November 13,
2001.
Index to Exhibits on Page 9
(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 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities and Use of Proceeds 8
Item 3. Defaults upon Senior Securities 8
Item 4. Submission of Matters to a Vote of
Securities Holders 8
Item 5. Other Matters 8
Item 6. Exhibits and Reports on Form 8-K 8
(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 September 30, 2001 (unaudited);
(ii) Condensed Consolidated Statements of Operations (unaudited)
for the nine month periods ended September 30, 2000 and 2001 and
the three month periods ended September 30, 2000 and 2001;
(iii)Condensed Consolidated Statements of Stockholders' Deficit for
the nine month period ended September 30, 2001;
(iv) Condensed Consolidated Statements (unaudited) of Cash Flows for
the nine month periods ended September 30, 2000 and 2001; and
(v) Condensed notes to Consolidated Financial
Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF
OPERATION
NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2001 COMPARED WITH
THE NINE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2000
OVERVIEW
On September 7, 2001 we completed the acquisition of a 66.7%
interest in the Chalk Group of Companies. The Chalk Group began
business in 1996 as the producer of "Dave Chalk's Computer Show",
a television show aimed at educating consumers in new
technologies. Since then, the Chalk Group has expanded its
business to include production of other types of audio/visual
educational and training content. The Chalk Group currently has
three principal lines of business:
- - production of interactive e-Learning Internet content and
infrastructure;
- - production of the television show "Dave Chalk Computer
Life"; and
- - production of video presentations for broadcast during
airline flights.
The financial statements presented below include the operations
of the Chalk Group, which we have consolidated in our financial
statements with effect from the date of acquisition.
During September 2001 we also suspended efforts to sell our
electronic Customer Relationship Management ("eCRM") software,
which we had been unable to market
1
successfully, and discontinued our business activities in this
business segment. Accordingly, development of the business of the
Chalk Group is currently our principal business activity.
Operating results relating to our eCRM software business are
included in the net loss from discontinued operations reported
in our financial statements for the three and nine month periods
ended September 30, 2001.
RESULTS OF OPERATIONS
COMPREHENSIVE LOSS
Our comprehensive loss for the nine month period ended September
30, 2001 was $12,601,796, compared with $23,780,089 for the
prior year period. The decrease resulted principally from a reduction
in our net loss from discontinued operations from $23,603,124 to
$12,595,415. Factors contributing to this reduction are set out below,
under the heading "Net loss from discontinued operations." Continuing
operations resulted in net income of $113,025 for the nine month period
ended September 30, 2001, compared with net income of $529,861 for the
nine month period ended September 30, 2000. These results were due
principally to interest income, as explained more fully below under
headings relating to continuing operations.
Our comprehensive loss for the three month period ended September
30, 2001 was $3,662,653, compared with $7,691,669 for the three
month period ended September 30, 2000. This decrease also
resulted principally from a reduction in our net loss from
discontinued operations, from $7,638,081 to $3,554,294.
Continuing operations resulted in a net loss of $125,503 for the
three month period ended September 30, 2001 compared with net
income of $164,983 for the nine month period ended September 30,
2000. Factors contributing to these changes are also set out
below, under the applicable headings.
REVENUES - CONTINUING OPERATIONS
Consolidated revenues from continuing operations for the nine and
three month periods ended September 30, 2001 were $136,019.
These amounts included:
- - $110,093 from television and airline segment productions;
and
- - $25,926 from the sale of interactive Internet media
content.
All of these revenues were earned within the Chalk Group. There
was no corresponding revenue during the nine and three month
periods ended September 30, 2000, as we did not have any interest in
the Chalk Group during those periods.
COST OF REVENUES - CONTINUING OPERATIONS
Cost of revenues for the three and nine month periods ended
September 30, 2001 was $91,611. The principal components of this
amount were:
2
- - approximately $42,000 in salaries relating to the
production of media content sold;
- - approximately $19,000 in post-production costs; and
- - approximately $15,000 in fees paid to airlines to secure
in-flight broadcast time.
All of these costs of revenue were incurred by the Chalk Group.
There were no corresponding costs of revenue for the nine and
three month periods ended September 30, 2000, as we did not any
have interest in the Chalk Group during those periods.
OPERATING EXPENSES - CONTINUING OPERATIONS
Total operating expenses for continuing operations for the nine
and three month periods ended September 30, 2001 were $176,414.
This amount consisted of:
- - $60,896 in sales and marketing and website operation expenses;
and
- - $115,518 in general and administrative expenses.
All of these operating expenses were incurred by, or related to
business operations undertaken by, the Chalk Group.
There were no corresponding operating expenses for the nine and
three month periods ended September 30, 2000, as we did not have any
interest in the Chalk Group during those periods.
NON-OPERATING INCOME - CONTINUING OPERATIONS
Our non-operating income has consisted of interest earned on cash
balances. Interest income decreased:
- - from $529,861 for the nine month period ended September 30,
2000 to $245,031 for the nine month period ended
September 30, 2001; and
- - from $164,983 for the three month period ended September
30, 2000 to $6,503 for the three month period ended
September 30, 2001.
The principal reason for the decreases was lower average cash
balances during 2001.
NET INCOME (LOSS) - CONTINUING OPERATIONS
Our net income from continuing operations for the nine month
period ended September 30, 2000 was $529,861. The principal
reason for this net income was interest earned on our cash
balances. There were no losses or expenses to offset the
interest income, as:
- - our eCRM software business has been classified as a
discontinued operation; and
- - we did not have any interest in the Chalk Group during
2000.
For the nine month period ended September 30, 2001, our net
income from continuing operations decreased to $113,025. The
decrease was due to lower interest income,
3
resulting from lower average cash balances, as well as operating
losses of the Chalk Group totaling $132,006.
Net income from continuing operations for the three month period
ended September 30, 2000 was $164,983, due to interest income on
cash balances. For the three month period ended September 30,
2001, we recorded a net loss from continuing operations of
$125,503. The loss resulted from operating losses of the Chalk
Group, totaling $132,006, as well as reduced interest income on
lower average cash balances.
NET LOSS FROM DISCONTINUED OPERATIONS
Our net loss from discontinued operations consists of our net
loss in the development and marketing of eCRM software, which business
segment we terminated during September 2001.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED WITH
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Net loss from discontinued operations for the nine month period
ended September 30, 2001 was $12,595,415, compared with
$23,603,124 for the nine month period ended September 30, 2000.
The principal reason for the decrease was lower stock-based
compensation, which was $377,474 for the nine month period ended
September 30, 2001, compared with $11,421,903 for the nine month
period ended September 30, 2000. Our stock-based compensation
expenses have resulted principally from stock options granted to
employees at prices below the prevailing market prices for our
shares. Excluding stock-based compensation expenses, net losses
from discontinued operations were approximately constant, at
$12,217,941 for the nine month period ended September 30, 2001
and $12,181,221 for the nine month period ended September 30, 2000.
The principal components of these amounts included the following.
- - Revenue from discontinued operations decreased from
$379,743 to $135,838, principally as a result of a
reduction of approximately $210,000 in software
license revenue. In addition, hardware re-sales to related
parties decreased by approximately $34,000.
- - Cost of revenues from discontinued operations decreased
from $106,712 to $40,911, principally as a result in the
reduction of hardware sales to related parties, which we
made at cost.
- - Sales and marketing expenses decreased from $12,425,135 to
$5,002,421, inclusive of stock-based compensation of
$4,438,594 and $193,746, respectively. Excluding stock-
based compensation, sales and marketing expenses
decreased from $7,986,541 to $4,808,675, principally as a
result of reductions in our sales and marketing personnel
during 2001 and reduced attendance at industry trade
shows.
4
- - Research and development expenses decreased from $3,509,669
to $2,560,334, inclusive of stock-based compensation of
$1,054,573 and $127,515, respectively. Excluding stock-
based compensation, research and development expenses
were approximately constant, at $2,455,096 for the nine
month period ended September 30, 2000 and $2,432,819 for
the nine month period ended September 30, 2001.
- - General and administrative expenses decreased from
$7,941,351 to $2,630,416, inclusive of stock-based
compensation of $5,928,736 and $56,213 respectively.
Excluding stock-based compensation, general and
administrative expenses increased from $2,012,615 to
$2,574,203. The principal factors contributing to this
increase were the following:
- Our foreign exchange loss increased by approximately
$500,000. 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.
- Bad debt expenses increased by approximately $270,000.
Several of our customers from fiscal 2000 went bankrupt
during 2001, requiring accounts receivable to be written
off.
- Professional fees decreased by approximately $325,000,
principally as a result of using in-house personnel to do
more of our legal and accounting work.
- - For the nine month period ended September 30, 2001 we
recorded costs associated with discontining operations
of $1,370,003. Cash costs totaled approximately $372,000,
consisting principally of termination payments made to
departing employees. Non-cash costs totaled approximately
$998,000, resulting principally from writing off capital
assets associated with office premises which we no longer use.
- - For the nine month period ended September 30, 2001 we also
recorded restructuring costs of $1,127,168. 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
office premises which we no longer use. The terminated
employees and written off capital assets were all related
to, or used in, the eCRM business segment exclusively.
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED WITH
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000
Net loss from discontinued operations for the three month period
ended September 30, 2001 was $3,354,294, compared with $7,683,081
for the three month period ended September 30, 2000. The
principal reason for the decrease was lower stock-based
5
compensation, which was $0 for the three month period ended
September 30, 2001 and $3,210,257 for the three month period
ended September 30, 2000. Excluding stock-based compensation
expenses, net losses from discontinued operations were $3,354,294
for the three month period ended September 30, 2001 and $4,472,824
for the three month period ended September 30, 2000. The principal
components of these amounts included the following.
- - Revenue from discontinued operations decreased from
$190,748 to $0.
- - Cost of revenues decreased from $163,998 to $0.
- - Sales and marketing expenses decreased from $4,587,807 to
$927,348, inclusive of stock-based compensation of
$1,351,285 and $0, respectively. Excluding stock-based
compensation, sales and marketing expenses decreased from
$3,236,522 to $927,348, principally as a result of reductions
in our sales and marketing personnel during 2001 and
reduced attendance at industry trade shows.
- - Research and development expenses decreased from $1,298,905
to $612,025, inclusive of stock-based compensation of
$552,115 and $0, respectively. Excluding stock-based
compensation, research and development expenses decreased
from $746,790 to $612,025, principally as a result of
personnel reductions during 2001.
- - General and administrative expenses decreased from
$1,915,367 to $644,918, inclusive of stock-based
compensation of $1,036,857 and $0, respectively.
Excluding stock-based compensation, general and
administrative expenses decreased from $878,510 to
$644,918. The principal factors contributing to this
decrease were the following:
- Salaries and benefits allocated to general and
administrative expenses decreased by approximately
$180,000, principally as a result of our personnel reductions
during 2001.
- Professional fees decreased by approximately $260,000,
principally as a result of using in-house personnel to do
more of our legal and accounting work.
- The reductions in salary and professional expenses were offset
in part by increases in foreign exchange losses and bad debt
expenses, which increased by approximately $81,000 and $73,000,
respectively.
- - For the three month period ended September 30, 2001 we
recorded costs associated with discontinuing operations
of $1,370,003. Cash costs totaled approximately $372,000,
consisting principally of termination payments made to
departing employees. Non-cash costs totaled approximately
$998,000, resulting principally from writing off capital
assets associated with office premises which we no longer use.
6
OTHER COMPREHENSIVE LOSS
For the nine month period ended September 30, 2001, we recorded a
net realized holding loss on short-term investments of $136,550.
There was no corresponding loss for the nine month period ended
September 30, 2000, or for either of the three month periods
ended September 30, 2000 or September 30, 2001.
LIQUDITY AND CAPITAL RESOURCES - PLAN OF OPERATION
Following our acquisition of a majority interest in the Chalk
Group, development of the business of the Chalk Group has become
our first priority. On October 22, 2001, the Chalk Group
announced an agreement with Microsoft Canada to produce 15 video
vignettes, to be used on the web site of Microsoft Canada,
demonstrating key features of the Windows XP operating system.
On acquisition of the Chalk Group, we invested $1 million in the
Chalk Group. As at November 12, 2001, the Chalk Group holds cash
balances of approximately $850,000.
Current monthly expenditures of the Chalk Group are approximately
$190,000 per month. The principal monthly expenditures are
approximately as follows:
salaries and benefits - $115,000 per month
variable production costs - $30,000 per month
general and administrative - $45,000 per month
Revenue for the Chalk Group, for the eight month period ended August
31, 2001, was approximately $1 million. We believe there is a
reasonable prospect that the Chalk Group will achieve positive
cash flow by the second quarter of 2002.
Sideware Systems Inc. has exhausted substantially all of its cash
resources. As at November 12, 2001, Sideware has available cash
of approximately $80,000. Additional amounts totalling
approximately $88,000 are held by third parties as security under
lease and credit agreements.
We have terminated our lease obligations relating to our head
office in Reston Virginia. We have approximately 10 employees on
payroll, and we are seeking opportunities to acquire or merge
with other businesses. If we are not able to enter into a merger
or acquisition agreement, we will have to terminate most or all
of our remaining employees, and utilize our remaining cash
resources to cover basic overhead and corporate governance
expenditures.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
RISK
As at September 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
7
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 September 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. In July 2001, a former employee commenced
legal proceedings from Chalk,com Network (Holding) Corp. claiming
damages for wrongful termination. We do not believe that the
proceedings will have a material adverse effect on either our business
or the business of the Chalk Group.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On September 5, 2001, we issued 2,941,176 shares to Grant
Sutherland, one of our directors, at a price of $0.34 per share.
The shares were issued to an accredited investor pursuant to Rule
506 to Regulation D to the Securities Act of 1933.
Subsequent to September 30, 2001, 970,238 escrow shares were cancelled
when escrow conditions attaching to the shares expired.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
ITEM 5. OTHER MATTERS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the three month period ended September 30, 2001, we filed
four reports on Form 8-K.
On July 5, 2001, we filed a report on Form 8-K stating that we had
entered into a marketing alliance with IBM, and that Kenneth
Thornton had been appointed Chairman of our Board
8
of Directors. The Form 8-K also stated the results of our June 28,
2001 annual stockholders' meeting.
On August 3, 2001, we filed a report on Form 8-K stating that we
were reducing our sales and marketing force.
On September 7, 2001, we filed a report on Form 8-K stating that
we had acquired a majority interest in the Chalk Group.
On September 10, 2001, we filed a report on Form 8-K stating that
we were suspending efforts to market our eCRM software, and
reducing our work force further.
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
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
9
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
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.
10
(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
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: November 14, 2001 Sideware Systems Inc.
By: /s/"James L. Speros"
___________________
James L. Speros
President, Chief Executive Officer,
and Director
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
/s/"Stewart F. Walchli" Chief Financial Officer (Principal November 14, 2001
- ----------------------- Financial and 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)
Nine month periods ended September 30, 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)
============================================================================
September 30, December 31,
2001 2000
- ----------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,512,059 $ 949,999
Short-term investments - 5,982,588
Accounts receivable:
Trade, less allowance for
doubtful accounts of $12,412
(December 31, 2000 - $142,047) 368,023 467,783
Other 30,066 126,842
Due from related parties - 29,859
Current portion of long-term
receivables (note 5) - 6,849
Inventory - 46,829
Prepaid expenses 129,834 549,639
--------------------------------------------------------------------------
2,039,982 8,160,388
Deposit on lease 120,439 129,926
Long-term receivables (note 5) - 105,587
Deferred finance charges (note 5) - 95,583
Intangible assets (note 6) 1,486,861 -
Fixed assets (note 7) 560,483 1,967,818
- ----------------------------------------------------------------------------
$ 4,207,735 $ 10,459,302
============================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,323,166 $ 1,246,683
Due to related parties 6,142 -
Current portion of obligations under
capital leases (note 8) 40,360 -
Deferred revenue 280,450 $ 168,661
--------------------------------------------------------------------------
1,650,118 1,415,344
Obligations under capital leases (note 8) 57,758 -
Due to stockholders (note 9) 947,085 -
- ----------------------------------------------------------------------------
2,655,681 1,415,344
Stockholders' equity:
Common stock
Authorized: 199,949,375 common shares,
no par value
Issued and outstanding: 67,057,343
(2000 - 60,886,415) 45,392,800 40,660,382
Additional paid-in capital 12,063,311 12,146,732
Deferred stock-based compensation - (460,895)
Accumulated other comprehensive loss (623,091) (503,685)
Deficit (55,280,966) (42,798,576)
--------------------------------------------------------------------------
1,552,054 9,043,958
- ----------------------------------------------------------------------------
$ 4,207,735 $ 10,459,302
============================================================================
Discontinued operations (note 13)
Commitments (note 14)
Contingencies (note 15)
See accompanying notes to consolidated financial statements.
1
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 Nine month periods ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------
Revenue:
Television and airline
segement production $ 110,093 $ - $ 110,093 $ -
Interactive media 25,926 - 25,926 -
------------------------------------------------------------------------------------------
136,019 - 136,019 -
Cost of revenues 91,611 - 91,611 -
- --------------------------------------------------------------------------------------------
Gross margin 44,408 - 44,408 -
Operating expenses:
Sales and marketing and
website operations 60,896 - 60,896 -
General and administrative 115,518 - 115,518 -
------------------------------------------------------------------------------------------
176,414 - 176,414 -
- --------------------------------------------------------------------------------------------
Operationg loss from
continuing operations (132,006) - (132,006) -
Interest income 6,503 164,983 245,031 529,861
- --------------------------------------------------------------------------------------------
Net income (loss) from
continuing operations (125,503) 164,983 113,025 529,861
Net loss from discontinued
operations (note 13) (3,554,294) (7,638,081) (12,595,415) (23,603,124)
- --------------------------------------------------------------------------------------------
Net loss $(3,679,797) $ (7,473,098) $(12,482,390) $ (23,073,263)
Other comprehensive
loss:
Foreign currency translation
adjustments 17,144 (281,571) 17,144 (708,826)
Net realized holding gain on
short-term investments - - (136,550) -
------------------------------------------------------------------------------------------
17,144 (281,571) (119,406) (708,826)
Comprehensive loss $ (3,662,653) $ (7,691,669) $(12,601,796) $(23,780,089)
=============================================================================+==============
Basic and diluted net loss
per share from continuing
operations $ 0.00 $ 0.00 $ 0.00 $ 0.01
Basic and diluted net loss
per share from
discontinued operations $ (0.05) $ (0.13) $ (0.19) $ (0.41)
Basic and diluted net loss
per share $ (0.06) $ (0.13) $ (0.19) $ (0.40)
Weighted average shares
used in computing net
loss per share,
basic and diluted 65,881,083 59,040,289 63,378,281 57,502,937
===============================+============================================================
See accompanying notes to consolidated financial statements.
2
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 12) 8,170,928 5,037,121 - - - - 5,037,121
Share issue costs
(note 12) - (304,703) - - - - (304,703)
Amortization
of deferred
stock-based
compensation - - - 377,474 - - 377,474
Deferred stock-
based
compensation - - (83,421) 83,421 - - -
Net unrealized
holding gain
on short-term
investments - - - - (136,550) - (136,550)
Foreign currency
translation
adjustment - - - - (17,144) - 17,144
Net loss - - - - - (12,482,390) (12,482,390)
- ------------------------------------------------------------------------------------------------------------------
Balance,
September 30,
2001 69,057,343 $45,392,800 $12,063,311 $ - $ (623,091) $(55,280,966) $ 1,552,054
==================================================================================================================
See accompanying notes to consolidated financial statements.
3
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)
==================================================================
Nine months ended September 30,
----------------------
2001 2000
- ------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss for the period $(12,482,390) $(23,073,263)
Items not involving cash:
Amortization of fixed assets 467,729 436,995
Amortization of intangible
assets 28,556 -
Stock-based compensation 377,474 11,421,903
Loss on disposal of assets 1,514,439 -
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 618,098 (425,233)
Due to related parties 35,999 71,335
Due to officers - (215,353)
Inventory 46,829 53,438
Prepaid expenses 437,376 (172,942)
Accounts payable and accrued
liabilities (737,277) 602,150
Deferred revenue (215,748) 128,609
- -------------------------------------------------------------------
(9,980,465) (11,315,031)
Financing activities:
Shares issued for cash, net of
share issue costs 4,732,418 18,988,783
Stockholders loans 21,729 -
Repayment of lease
oblgations (3,301) -
- -------------------------------------------------------------------
4,750,847 18,988,783
Investing activities:
Proceeds on maturity of
short-term investments 5,982,588 (5,425,938)
Long-term receivables and
deferred charges 143,019 9,036
Purchase of fixed assets (305,336) (1,557,207)
Deposit on lease, net 9,487 (90,494)
Business acquisition (29,046) -
-----------------------------------------------------------------
5,800,712 (7,064,603)
- -------------------------------------------------------------------
Effect of exchange rates on
cash and cash equivalents (9,033) (448,708)
- -------------------------------------------------------------------
Increase in cash and
cash equivalents 562,060 160,441
Cash and cash equivalents,
beginning of period 949,999 5,929,801
- -------------------------------------------------------------------
Cash and cash equivalents,
end of period $1,512,059 $ 6,090,242
===================================================================
See accompanying notes to consolidated financial statements.
4
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 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. They include the financial statements of
Sideware Systems Inc. (the "Company") and its subsidiaries, all
of which are wholly owned except for Chalk.Com Network (Holding)
Corporation (note 6). 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 annual 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/A.
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. In September 2001, the Company decided to suspend
operations relating to the development and sales of its
Electronic Customer Relationship Management ("eCRM") software
(note 13).
5
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
- ----------------------------------------------------------------------
2. FUTURE OPERATIONS (CONTINUED):
In September 2001, the Company invested $1,000,001 in
Chalk.Com Network (Holding) Corporation to acquire 18,000,0000
common shares of Chalk.Com Network (Holding) Corporation.
The 18,000,000 common shares represent 66.7% of the issued and
outstanding shares of Chalk.Com Network (Holding) Corporation,
or 60.3% on a fully diluted basis, after allowing for the
exercise of outstanding share purchase warrants and stock
options previously issued by Chalk.Com Network (Holding)
Corporation. Chalk.Com Network (Holding) Corporation
specializes in creating e-commerce enabled multimedia
solutions for manufacturers of technology-related products.
The Company uses online and offline media distribution which
include the internet, television, in-flight airline
entertainment and radio. The Company will be concentrating
its efforts on developing the business of Chalk.Com Network
(Holding) Corporation and focus on the eLearning market.
The Company's future operations and its continuation as a
going concern are dependent upon its ability to increase its
customer base, increase sales of its e-learning product to
generate positive cash flows from operations and ultimately
attaining profitability. Depending on the Company's
ability to develop sales and related cash flows, the Company
may need to raise additional capital through public or private
financings that may not be available on reasonable terms. 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:
Prior to January 1, 2001, the functional currency of the Company
was the Canadian dollar. 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 represented
the primary market of revenues and for the Company's operations,
including the primary currency in which expenses associated with
its eCRM business were incurred. Monetary assets and liabilities
denominated in a foreign currency are translated into the Company's
functional currency 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 the functional
currency are reflected in earnings for the period.
6
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
3. FOREIGN CURRENCY TRANSLATION (CONTINUED):
Commencing with the discontinuance of the eCRM business and the
acquisition of Chalk.com Network (Holding) Corporation (note 6)
the functional currency was determined to be the Canadian
dollar. Accordingly, foreign currency denominated balances of
the Company are remeasured into Canadian dollars as described in the
preceeding paragraph.
For the fiscal year ended December 31, 2000, the Company
adopted the U.S. dollar as its reporting currency. Where the
Company's functional currency is the Canadian dollar it
translates the Canadian dollar statements into U.S. dollar
reporting currency using the current rate method. The assets
and liabilities are translated in U.S. dollars using period
end rates and revenue and expense are translated at the
average exchange rate for the period. Exchange gains and
losses resulting from the translation are recorded as a
separate component of shareholders' equity and reported as
other comprehensive income.
4. REVENUE RECOGNITION:
(i) The Company recognizes revenue from a sale or licensing
arrangement of a television and airline segment production
when persuasive evidence of a sale or licensing arrangement
exists, the film is complete, and has been delivered in
accordance with the terms of the arrangement, the license
period of the arrangement has begun, the arrangement fee is
fixed and determinable and the collection of the arrangement
fee is reasonably assured.
(ii) The Company recognizes revenue for interactive media in
accordance with SAB 101 which states revenue generally is
realized or realizable and earned when all of the following
criteria are met: Persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered,
the seller's price to the buyer is fixed or determinable, and
collectibility is reasonably assured. Revenues are recognized
upon delivery of the module when the risks of ownership are
transferred.
(iii) If the Company does not meet any one of the situations
described above, all revenue from the arrangement is deferred
until such time as the conditions are met.
7
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
5. LONG-TERM RECEIVABLES AND DEFERRED FINANCE CHARGES:
As a result of the restructuring and termination of employees,
all employees loans except $65,000, disclosed as long-term
receivables and deferred charges as at December 31, 2000, were
repaid. Approximately $65,000 of long-term receivables was
forgiven as part of a severance package to an employee.
6. BUSINESS ACQUISITION:
On September 7, 2001, the Company acquired 66 percent of the
outstanding common shares of Chalk.Com Network (Holding)
Corporation. The business combination was accounted for using
the purchase method of accounting with effect from the date of
acquisition. Accordingly, these consolidated statements include
the operations of Chalk.Com Network (Holding) Corporation from
the date ownership was assumed by the Company until September 30,
2001.
===============================================================
---------------------------------------------------------------
Net assets acquired (at fair value):
Cash $ 1,078,705
Fixed assets 274,390
Intangible assets 1,515,417
Capital leases (60,753)
Due to stockholders (942,771)
Net non-cash operating working
capital deficiency (757,236)
---------------------------------------------------------------
Net assets acquired $ 1,107,751
===============================================================
Consideration given for net assets acquired:
Cash $ 1,107,751
===============================================================
8
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
6. BUSINESS ACQUISITION (CONTINUED):
The intangible assets that make up the amount of $1,515,417
include future revenue based intangibles of $49,500, and employment
contract based intangibles of $1,465,917. Future revenue intangibles
are being amortized over the weighted average life of the contracts,
which is one year. Accumulated amortization is $4,128. The employment
contract intangibles are being amortized the life of the contract,
which is five years. Accumulated amortization is $24,428.
7. FIXED ASSETS:
Included in fixed assets are assets held under capital leases
with a net book value of $116,793.
8. OBLIGATIONS UNDER CAPITAL LEASE:
During the year, the Company entered into various leases for
furniture and equipment expiring in 2004. The obligations
require the following minimum payments:
======================================================
Year ending September 30:
2002 $ 51,401
2003 51,401
2004 15,125
------------------------------------------------------
Future minimum lease payments 117,927
Amount representing interest 19,809
------------------------------------------------------
98,118
Current portion 40,360
------------------------------------------------------
$ 57,758
======================================================
9. DUE TO STOCKHOLDERS:
At September 30, 2001, the Company owed $947,805 to various
stockholders. Pursuant to the terms of the loan agreements,
Chalk.com Network (Holding) Corporation received proceeds of
$875,000. Interest is accrued semi-annually at a rate of 7%
per annum. The principal and accrued interest are due and
payable in full within sixty days of Chalk.Com Network (Holding)
Corporation completing an equity financing in the aggregate
amount of $7,000,000 or greater.
9
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements, page 6
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
10. 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/cancelled (4,608,400) 2.68
---------------------------------------------------------------
Balance, September 30, 2001 13,857,500 $ 3.16
===============================================================
Approximately 4,500,000 of the options outstanding at September 30,
2001 will expire by December 31, 2001 due to employee terminations
(note 13).
11. SHARE PURCHASE WARRANTS:
A summary of the Company's warrant activity for the six month
period ended September 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
(note 12) U.S. 0.92 - 5,229,752 - 5,229,752
- --------------------------------------------------------------------------------------------------------
6,600,407 5,229,752 (3,615,136) 8,215,023
========================================================================================================
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.
10
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
- --------------------------------------------------------------------
12. PRIVATE PLACEMENTS:
On February 22, 2001, the Company issued, through a private
placement, 5,229,752 common shares, for net proceeds of
$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.
On September 7, 2001, the Company issued, through a private
placement, 2,941,176 common shares, for net proceeds of
$1,000,000.
13. DISCONTINUED OPERATIONS:
On September 10, 2001, the Company adopted a plan to suspend
operations relating to the development and sales of its eCRM
soft ware. The Company reduced its work force to approximately
ten employees in the U.S. and Canada, six of which are working on
a transitional basis, with the remaining expected to be
integrated into the operations of Chalk.Com Network (Holding)
Corporation. Fixed assets have been written down to market
value and the Company is in the process of selling the assets.
The Company has been removed as the leasee from the Reston,
Virginia facilities as of November 15, 2001 and is currently
negotiating to remove itself from the leased offices in
Vancouver, British Columbia. The Company expects to have
these operations completely wound down by December 31, 2001.
11
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
13. DISCONTINUED OPERATIONS (CONTINUED):
============================================================================================
Three month periods ended Six month periods ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------
Revenue:
Licenses $ - $ 144,410 $ 41,315 $ 251,225
Services - 34,025 58,603 44,141
Hardware and software resales - 4,117 4,536 18,853
Hardware resales to related
parties - 8,916 31,384 65,524
------------------------------------------------------------------------------------------
- 190,748 135,838 379,743
Cost of revenues:
Licenses - 347 400 832
Services - 14,090 4,591 21,503
Hardware and software resales - 4,117 4,536 18,853
Hardware resales to related
parties - 8,196 31,384 65,524
- -------------------------------------------------------------------------------------------
- 26,750 40,911 106,712
- -------------------------------------------------------------------------------------------
Gross margin - 163,998 94,927 273,031
Operating expenses:
Sales and marketing
(including stock-based
compensation of
$nil, $1,351,285
$193,746 and $4,438.594) 927,348 4,587,807 5,002,421 12,425,135
Research and development
(including stock-based
compensation of $nil,
$552,115, $127,515 and
$1,054,573) 612,025 1,298,905 2,560,334 3,509,669
General and administrative
(including stock-based
compensation of $nil,
$1,036,857, $56,213 and
$5,928,736) 644,918 1,915,367 2,630,416 7,941,351
Costs of discontuing
operations 1,370,003 - 1,310,003 -
Restructuring costs - 1,127,168 -
-----------------------------------------------------------------------------------------
3,554,294 7,802,079 12,690,342 23,876,155
- -------------------------------------------------------------------------------------------
Operating loss from
continuing operations (3,554,294) (7,638,081) (12,595,415) (23,603,124)
- -------------------------------------------------------------------------------------------
Net loss from
discontinued operations $ (3,554,294) $ (7,638,081) $ (12,595,415) $ (23,603,124)
===========================================================================================
12
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
13. DISCONTINUED OPERATIONS (CONTINUED):
Restructuring costs had been accrued in accordance with SAB
100. For the nine month period ended September 30, 2001,
restructuring costs totaled approximately $1,127,000, which
consisted of $611,000 of severance payments to terminated
employees and $516,000 relating to the writedown of fixed assets.
Costs associated with discontinuing operations for the three month
period ended September 30, 2001 included $372,000 of severance payments
to terminated employees and $998,000 relating to the writedown of fixed
assets.
The following represents the revised carrying values of the
remaining assets and liabilities of the discontinued operations
included on the balance sheet as at September 30, 2001:
=================================================================
-----------------------------------------------------------------
Accounts receivable $ 30,066
Prepaid expenses 107,268
Deposit on lease 120,439
Fixed assets 299,143
Accounts payable and accrued liabilities 586,205
Due to related parties 6,140
-----------------------------------------------------------------
=================================================================
14. COMMITMENTS:
The Company has obligations under operating lease arrangements,
which require the following minimum payments for the fiscal
periods ending December 31:
=================================================================
-----------------------------------------------------------------
2001 $ 128,879
2002 176,342
2003 45,039
-----------------------------------------------------------------
350,260
=================================================================
13
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with generally accepted accounting
principles in the United States)
Nine month periods ended September 30, 2001 and 2000
15. LEGAL CONTINGENCY:
In July 2001, an employee filed a claim against Chalk.Com Network
(Holding) Corporation and its for breach of an employment
contract. The Company believes the likelihood of this claim being
successful is low. The damages are not specified and the possible
settlement is not determinable as of the date of these financial statements.
14