UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to:
SIDEWARE SYSTEMS INC.
---------------------------------------
(Exact name of Registrant as specified in its charter)
Yukon Territory, Canada
--------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7900 Westpark Drive, Suite T300, McLean, Virginia, 22102
--------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number (703) 437-9002
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Shares without par value
------------------------------------
(Title of Class)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes x No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 85,514,735 common
shares without par value, as at May 9, 2002.
Index to Exhibits on Page 20
Sideware Systems Inc.
Form 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................1
Item 2. Management's Discussion and Analysis
of Financial COndition and Results of Operations.............13
Item 3. Qualitative and Quantitative Disclosure
about Market Risk............................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................19
Item 2. Changes in Securities and Use of Proceeds......................19
Item 3. Defaults upon Senior Securities................................19
Item 4. Submission of Matters to a Vote of
Securities Holders...........................................19
Item 5. Other Information..............................................20
Item 6. Exhibits and Reports on Form 8-K...............................20
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Each of the following items is contained in the Company's Consolidated
Financial Statements and is set forth herein.
(i) Condensed Consolidated Balance Sheets as of December 31, 2001
and March 31, 2002 (unaudited);
(ii) Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited) for the three month periods
ended March 31, 2001 and 2002;
(iii) Condensed Consolidated Statements of Stockholders' Equity
(unaudited) for the three month period ended March 31, 2002;
(iv) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three month periods ended March 31, 2001 and 2002; and
(v) Condensed Consolidated Notes to Financial Statements.
1
Consolidated Financial Statements
(Expressed in United States dollars)
SIDEWARE SYSTEMS INC.
(Prepared in accordance with accounting principles
generally accepted in the United States)
Three month periods ended March 31, 2002 and 2001
(Unaudited)
2
SIDEWARE SYSTEMS INC.
Condensed Consolidated Balance Sheets
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
============================================================================
March 31, December 31,
2002 2001
- ----------------------------------------------------------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 241,404 $ 981,473
Short-term investments 17,250 17,265
Accounts receivable:
Trade, less allowance for
doubtful accounts of $7,754
(December 31, 2001 - $12,368) 75,541 214,899
Other 12,135 18,709
Note receivable (note 4) 597,893 150,000
Prepaid expenses 40,826 87,827
--------------------------------------------------------------------------
985,049 1,470,173
Deposit on lease 75,787 75,761
Intangible assets 1,141,152 1,385,265
Goodwill 593,951 673,185
Deferred loss 231,465 -
Fixed assets 276,344 274,505
- ----------------------------------------------------------------------------
$ 3,303,748 $ 3,878,889
============================================================================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 907,200 $ 929,073
Due to related parties 45,730 42,627
Current portion of obligations under
capital leases 51,340 49,990
Current portion of notes payable 312,500 262,500
Deferred revenue 98,646 189,551
--------------------------------------------------------------------------
1,415,416 1,473,741
Obligations under capital leases 47,727 61,153
Notes payable 437,500 437,500
Due to stockholders for subsidiary
subscriptions receivable 488,837 -
- ----------------------------------------------------------------------------
2,389,480 1,972,394
Stockholders' equity:
Common stock:
Authorized: 300,000,000 common shares
(December 31, 2001 - 198,978,997),
no par value
Issued and outstanding: 85,514,735
(December 31, 2001 - 85,182,891) 47,453,575 47,339,385
Additional paid-in capital 12,122,161 12,122,161
Accumulated other comprehensive income (611,561) (614,385)
Deficit (58,049,907) (56,940,666)
--------------------------------------------------------------------------
914,268 1,906,495
- ----------------------------------------------------------------------------
$ 3,303,748 $ 3,878,889
============================================================================
Subsequent event (note 3)
Discontinued operations (note 7)
See accompanying notes to consolidated financial statements.
3
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three month periods ended March 31, 2002 and 2001
====================================================================================
2002 2001
- ------------------------------------------------------------------------------------
Revenue:
Television and airline segment production $ 128,607 $ -
Interactive media 207,425 -
----------------------------------------------------------------------------------
336,032 -
Cost of revenues 219,318 -
- ------------------------------------------------------------------------------------
Gross margin 116,714 -
Operating expenses:
Sales and marketing and website operations 212,126 -
General and administrative (including
stock-based compensation of nil
and $41,236 1,014,647 1,528,701
- ------------------------------------------------------------------------------------
1,226,773 1,528,701
- ------------------------------------------------------------------------------------
Operating loss from continuing
operations (1,110,059) (1,528,701)
Interest income 818 198,496
- ------------------------------------------------------------------------------------
Net loss from continuing operations (1,109,241) (1,330,205)
Net loss from discontinued operations (note 7) - (3,512,273)
- ------------------------------------------------------------------------------------
Net loss (1,109,241) (4,842,478)
Other comprehensive loss
Foreign currency translation adjustments - 640,235
Net unrealized holding gain on
short-term investments - (136,550)
----------------------------------------------------------------------------------
- 503,685
- ------------------------------------------------------------------------------------
Comprehensive loss $ (1,109,241) $ (4,338,793)
- ------------------------------------------------------------------------------------
Basic and diluted net loss per share
from continuing operations $ (0.01) $ (0.02)
Basic and diluted net loss per share
from discontinued operations (0.00) (0.06)
Basic and diluted net loss per share (0.01) (0.07)
Weighted average common shares
used in computing net loss per share,
basic and diluted 85,503,661 62,066,046
- ------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three month period ended March 31, 2002
=================================================================================================================
Common Stock Accumulated
------------- Additional other Total
Number paid-in comprehensive stockholders'
of shares Amount capital loss Deficit equity
- -----------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2001 85,182,513 $47,339,385 $12,122,161 $ (614,385) $(56,940,666) $1,906,495
Stock issued
in exchange for
employee
Services 332,222 52,690 - - - 52,690
Cash received on
subscriptions
receivable at
year end - 61,500 - - - 61,500
Foreign currency
translation adjustment - - - 2,824) - 2,824
Net loss - - - - (1,109,241) (1,109,241)
- -----------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2002 85,514,735 $ 47,453,575 $12,122,161 $ (611,561) $(58,049,907) $ 914,268
=================================================================================================================
See accompanying notes to consolidated financial statements.
5
SIDEWARE SYSTEMS INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three month periods ended March 31, 2002 and 2001
=====================================================================================
2002 2001
- -------------------------------------------------------------------------------------
Cash provided by (used in)
Operating activities:
Net loss $ ( 1,109,241) $ (4,842,478)
Items not involving cash:
Amortization of fixed assets 22,528 208,138
Amortization of intangible assets 91,882 -
Stock-based compensation - 265,149
Realized holding gain on short-term investments - (136,550)
Shares issued for services 52,690 -
Changes in non-cash operating
working capital:
Accounts receivable 145,298 199,711
Inventory - 13,568
Prepaid expenses 46,980 115,020
Accounts payable and accrued liabilities (18,396) (425,145)
Due to related parties - (37,722)
Deferred revenue (87,570) (60,599)
-----------------------------------------------------------------------------------
(855,829) (4,700,908)
Financing activities:
Shares issued for cash, net of
share issue costs - 3,732,418
Cash received on subscriptions receivable 61,500 -
Share subscriptions received 488,837 -
Issuance of promissory notes 50,621 -
Repayment of capital lease obligations (11,979) -
-----------------------------------------------------------------------------------
588,979 3,732,418
Investing activities:
Proceeds on maturity of
short-term investments - 5,982,588
Advances in exchange for note receivable (447,893) 12,007
Purchase of fixed assets (24,601) (315,019)
Deposit on lease, net (25) 1,726
-----------------------------------------------------------------------------------
(472,519) 5,681,302
Effect of exchange rates on cash
and cash equivalents (700) 640,235
- -------------------------------------------------------------------------------------
(Decrease) increase in cash and
cash equivalents (740,069) 5,353,047
Cash and cash equivalents,
beginning of period 981,473 949,999
- -------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 241,404 $ 6,303,046
=====================================================================================
Supplemental information:
Interest paid $ - $ -
Taxes paid - -
Non-cash financing and investing activities:
Shares issued for services rendered 52,690 -
Disposal of investment in subsidiary 231,465 -
See accompanying notes to consolidated financial statements.
6
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three months periods ended March 31, 2002 and 2001
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. These include the financial statements of Sideware
Systems Inc.(the "Company") and its subsidiaries, all of which are wholly
owned except for Chalk Media Corp. ("Chalk Media") All material
intercompany balances and transactions have been eliminated on
consolidaiton. 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, 2002.
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, 2001,
as filed in its Annual Report on Form 10-K.
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 7).
7
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three month periods ended March 31, 2002 and 2001
2. Future operations (continued):
In 2001, the Company invested in Chalk.Com Network (Holding)
Corporation ("Chalk.Com") to acquire an 80.7% interest in its issued and
outstanding common shares. Chalk.Com 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'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. In December 2001,
the Company entered into an agreement and plan of merger with
KnowledgeMax, Inc. As a condition of the proposed merger, approximately
$2 million is to be raised (note 4). If the transaction completes,
KnowledgeMax will be the primary business that continues. 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. Reorganization:
In March, 2002, the Company established a wholly-owned subsidiary,
SYD Enterprises Ltd. ("SYD"). The Company exchanged its ownership in
Chalk.Com, consisting of 21,925,050 common shares, for all common
shares of SYD.
In March 2002, Chalk.com established Chalk Media Corp. as the new parent
company for Chalk.com and its wholly owned subsidiaries. SYD then
exchanged all of its ownership in Chalk.Com for an equal number
of common shares of Chalk Media plus an additional 500,000
non-transferable share purchase warrants which entitle SYD to purchase
one Chalk Media common share for $0.25 up to July 20, 2003.
In March 2002, Chalk Media received $301,026 from a Company shareholder
and former director in exchange for common shares of Chalk Media to be
determined at a later date. These funds were used, pursuant to a share
repurchase agreement, to repurchase 3,300,000 common shares of Chalk
Media at a price of $0.09122 per share from SYD. Under the terms of
the repurchase agreement, Chalk Media has the option to repurchase any
or all of the remaining 18,625,050 Chalk Media common shares from SYD
at a price of $0.09122 per share until July 31, 2002.
8
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three month periods ended March 31, 2002 and 2001
3. Reorganization (continued):
As of March 31, 2002, SYD owned 71.2% of Chalk Media's issued and
outstanding common shares (62.4% on a fully diluted basis after allowing
for the exercise of outstanding share purchase warrants and stock options
previously issued in Chalk.Com). This has been accounted for by
the Company as a reduction in its investment in Chalk Media. The
resulting loss on disposal of $231,465 has been deferred and will offset
the dilution gain that will result upon Chalk Media issuing common
shares, per the terms of the share repurchase agreement, for the
$301,026 subscription proceeds received prior to March 31, 2002.
On May 8, 2002, the Company entered into a Waiver Agreement, which
provided for the additional funding and sale of SYD's holdings
in Chalk Media, and for the closing of the proposed merger of the
Company and Knowledgemax. These funds are expected to be provided
by the shareholder and former director.
Pursuant to the Waiver Agreement, on May 8, 2002, Chalk Media received
$250,000 which was used to purchase 2,740,627 common shares of Chalk
Media at a price of $0.09122 per share from SYD. Pursuant to the
Waiver Agreement, within two days of closing the proposed merger
agreement, Chalk Media will receive a further $450,000 to be used to
buy back 4,933,129 common shares of Chalk Media at a price of
$0.09122 per share from SYD.
Chalk Media issued 5,002,000 special warrants for which subscriptions
of $488,837 had been received prior to March 31, 2002 and $595,313 was
received subsequent to March 31, 2002. The special warrants are
convertible on a one to one basis into common shares of Chalk Media
after a final prospectus is receipted.
Subsequent to March 31, 2002, a Share Exchange Agreement was entered
into by Chalk Media, Chalk.Com and third parties. This agreement
provides that each special warrant holder in Chalk.Com is able to
convert each special warrant into two common shares and one share
purchase warrant of Chalk.Com. The two common shares are convertible
into two common shares of Chalk Media and the share purchase warrant
is convertible into one share purchase warrant of Chalk Media. The
share purchase warrants will be exercisable for 18 months after the
closing date, and the exercise price will be the lesser of
(i) Cdn $0.25 per share; and (ii) the price per share of any
financing completed while the share purchase warrants are outstanding.
9
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three month periods ended March 31, 2002 and 2001
4. Merger with KnowledgeMax, Inc.:
On December 7, 2001, the Company entered into an agreement and Plan
of Merger with KnowledgeMax, Inc. ("KnowledgeMax"), a private company
incorporated in the United States.
On March 20, 2002, shareholders' approval was obtained for the
merger. Approximately 24.35 shares of the Company's common stock
will be issued for each share of KnowledgeMax common stock,
resulting in the issuance of approximately 93 million common stock.
Immediately following the merger, former KnowledgeMax stockholders
will own approximately 55% of the outstanding common stock of the
Company. The business of KnowledgeMax will become the business
of the Company, and the Company will change its name to
KnowledgeMax. The business combination will be accounted for
using the purchase method of accounting. As the merger results in
the former stockholders of KnowledgeMax owning greater than 50% of
the merged entity, the acquisition will be accounted for as an
acquisition by KnowledgeMax of the net assets of the Company at
their carrying value.
The note receivable represents advances made to KnowledgeMax, Inc.
in anticipation of the merger transaction. The amounts advanced are
unsecured, payable on demand and bear interest at 5% per annum.
5. Stock options:
A summary of the Company's stock option activity is as follows:
Weighted
Number average
of shares exercise price
---------------------------------------------------------------
Balance, December 31, 2001 12,411,500 $ 1.95
Options granted - -
Options expired/cancelled (250,000) 1.00
---------------------------------------------------------------
Balance, March 31, 2002 12,161,500 $ 1.97
===============================================================
Approximately 202,500 of the options outstanding at March 31, 2002
will expire by December 31, 2002 due to prior employee terminations.
10
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three month periods ended March 31, 2002 and 2001
6. Share purchase warrants:
A summary of the Company's warrant activity for the three month
period ended March 31, 2002 is as follows:
Outstanding Outstanding
Exercise price December 31, March 31,
Expiry date per share 2001 Granted Expired 2002
- ----------------------------------------------------------------------------
April 13, 2002 $11.50 45,000 - - 45,000
April 13, 2002 $3.00 139,000 - - 139,000
April 13, 2002 $1.00 900,000 - - 900,000
June 13, 2003 $.13 646,668 - - 646,668
February 22, 2004 $1.00 5,229,752 - - 5,229,752
- ----------------------------------------------------------------------------
6,960,420 - - 6,960,420
============================================================================
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.
7. Discontinued operations:
On September 10, 2001, the Company adopted a plan to suspend operations
relating to the development and sales of its eCRM software. The Company
reduced its work force to five employees in the U.S. and
Canada. 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 lessee 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. As of
January 1, 2002, the Company's eCRM business had been completely
discontinued.
11
SIDEWARE SYSTEMS INC.
Condensed Consolidated Notes to Financial Statements
(Unaudited)
(Expressed in United States dollars)
(Prepared in accordance with accounting principles generally
accepted in the United States)
Three month periods ended March 31, 2002 and 2001
7. Discontinued Operations (continued):
The following represents the revised carrying values of the remaining
assets and liabilities of the discontinued operations included on the
balance sheet:
March 31, December 31,
2002 2001
----------------------------------------------------------------------
(unaudited)
Deposit on lease $ 75,762 $ 75,762
Accounts payable and accrued liabilities 137,341 137,341
---------------------------------------------------------------------
$ 213,013 $ 213,013
=====================================================================
The results of discontinued operations are as follows:
2002 2001
----------------------------------------------------------------------
Revenue:
Licenses $ - $ 27,000
Services - 35,507
Hardware and software resales - 2,000
Hardware resales to related parties - 31,384
----------------------------------------------------------------------
- 95,891
Cost of revenues:
Licenses - 200
Services - 2,830
Hardware and software resales - 2,000
Hardware resales to related parties - 31,384
----------------------------------------------------------------------
- 36,414
----------------------------------------------------------------------
Gross margin - 59,477
Operating expenses:
Sales and marketing (including
stock-based compensation of
$nil and $136,767 - 2,479,085
Research and development (including
stock-based compensation of $nil
and $87,146 - 1,092,665
----------------------------------------------------------------------
- 3,571,750
----------------------------------------------------------------------
Net loss from discontinued operations $ - $ 3,512,273
======================================================================
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
These unaudited 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.
On September 7, 2001 the Company 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 in this report include the operations
of the Chalk Group, which have been consolidated in the Company's
financial statements with effect from the date of acquisition.
During September 2001 the Company also suspended efforts to sell its
electronic Customer Relationship Management ("eCRM") software, which
the Company had been unable to market successfully, and discontinued
its business activities in this business segment. Accordingly,
development of the business of the Chalk Group is currently the
Company's principal business activity. Operating results relating
to the eCRM software business are included in the net loss from
discontinued operations reported in the Company's financial statements
for the three month periods ended March 31, 2002 and 2001.
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.
13
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 2002 COMPARED WITH THE THREE MONTH
PERIOD ENDED MARCH 31, 2001.
COMPREHENSIVE LOSS
The Company's comprehensive loss for the three month period ended
March 31, 2002 was $1,109,241, compared with a loss of $4,338,793
for the prior year period. The decrease in the loss resulted
principally from a reduction in our net loss from discontinued
operations from $3,512,273 to zero. Continuing operations resulted
in a net loss of $1,110,059 for the three month period ended
March 31, 2002, compared with a net loss of $1,528,701 for the
prior year period. Interest income was $818 for the three month
period ended March 31, 2002 compared to $198,496 for the prior
year period.
Factors contributing to these changes are set out below, under
their respective headings.
FACTORS CONTRIBUTING TO THE COMPREHENSIVE LOSS
REVENUES - CONTINUING OPERATIONS
Consolidated revenues from continuing operations for the three month
period ended March 31, 2002 were $336,032. These amounts included:
- $128,607 from television and airline segment productions; and
- $207,425 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 three month period ended
March 31, 2001, as the Company had no interest in the Chalk Group
during that period.
COST OF REVENUES - CONTINUING OPERATIONS
Cost of revenues for the three month period ended March 31, 2002
was $219,318. The principal components of this amount were:
- $173,149 in salaries relating to the production
of media content sold;
- $36,785 in post-production costs and rent; and
- $9,384 for support of the website and domain registrations
All of these costs of revenue were incurred by the Chalk Group.
There were no corresponding costs of revenue for the three month
period ended March 31, 2001 as the Company had no interest in the
Chalk Group during that period.
OPERATING EXPENSES - CONTINUING OPERATIONS
14
Total operating expenses for continuing operations for the three
month period ended March 31, 2002 were $1,226,773. This amount
consisted of general and administrative expenses and expenses
relating to the proposed merger with KnowledgeMax, Inc. and the
preparation and filing of a Registration Statement on Form S-4
in January 2002 and the extraordinary general meeting of
shareholders to approve the merger and related transactions that
was held in March 2002. The total operating expenses of $1,528,701
for the three month period ended March 31, 2001 consisted entirely
of general and administrative expenses allocated from the
discontinued eCRM business. There were no Chalk Group operating
expenses in that period as the Company had no interest in the Chalk
Group during that period.
NON-OPERATING INCOME - CONTINUING OPERATIONS
The Company's non-operating income has consisted of interest earned
on cash balances. Interest income decreased from $198,496 for the
three month period ended March 31, 2001 to $818 for the three month
period ended March 31, 2002. The principal reason for the decrease
was lower average cash balances during 2002.
NET LOSS - CONTINUING OPERATIONS
The net loss from continuing operations for the three month period
ended March 31, 2002 was $1,109,241 compared to the net loss for
the prior year period of $1,330,205. The decrease in the net loss
was primarily due to the decrease in interest income and reduced
operating expenses offset by costs associated with the merger.
NET LOSS FROM DISCONTINUED OPERATIONS
The net loss from discontinued operations consists of the costs
for development and marketing of eCRM software that was terminated
during September 2001.
Net loss from discontinued operations for the three month period
ended March 31, 2002 was zero compared with a net loss of $3,512,273
for the three month period ended March 31, 2001. For the current
year period all expenses incurred by Sideware have been classified
as operating expenses. For the prior year period, sales and
marketing, research and development and some general and
administrative expenses were classified into discontinued operations
due to the suspension of activities relating to the eCRM business
announced in September 2001.
NET LOSS
The Company's net loss for the three month period ended
March 31, 2002 was $1,109,241 compared with $4,842,475 for the
prior year period
OTHER COMPREHENSIVE LOSS
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For the three month period ended March 31, 2002, there were no other
comprehensive loss items. For the prior year period, there were
$503,685 of such expenses, consisting of a foreign currency
translation gain of $640,235 and a net realized holding loss on
short-term investments of $138,550. The change is due to the cash
balances and monetary assets during the current year period being
significantly less than the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
In December 2001, Sideware raised $1,350,000 in private placement
financing, issuing 13,500,000 shares at a price of $0.10 per share.
Pursuant to the merger agreement with Knowledgemax, Inc., those
proceeds were used to fund the operations of both companies prior
to closing of the merger. Approximately $600,000 of these funds were
advanced to Knowledgemax, Inc. These amounts advanced are unsecured,
payable on demand and bear interest at 5% per annum.
For the quarter ending March 31, 2002, Sideware (excluding
Chalk Group) and KnowledgeMax incurred monthly expenditures of
approximately $350,000 per month, consisting of approximately:
- $200,000 per month in salaries; and
- $150,000 per month in general and administrative expenses,
excluding expenses relating to the merger.
On March 27, 2002, Sideware entered into agreements that resulted
in Chalk Group's repurchasing 3,300,000 of its common shares from
Sideware for aggregate proceeds of $301,026.
On May 8, 2002, Chalk Group repurchased another 2,740,627 of its
common shares from Sideware for aggregate proceeds of $250,000.
Chalk has further agreed to repurchase another 4,933,129 common
shares from Sideware for aggregate proceeds of $450,000 within two
business days after the closing date of the merger between Sideware
and KnowledgeMax. These total funds of $700,000 will be sufficient
to fund the operations of the Company through the end of May 2002.
The Company is attempting to raise additional investments to provide
for the funding of the Company after May 2002. As KnowledgeMax's
business has never generated operating profits or positive cash flow,
this additional investment is essential to the continued operation of
the business. To raise additional capital, the Company may have to
issue additional shares, which may dilute the interests of existing
stockholders substantially. There can be no assurance that the Company
will be able to raise additional capital on favorable terms, or at all.
If the Company is not able either to raise additional capital or
commence generating substantial sales revenue prior to then, it faces
a risk of insolvency.
As at March 31, 2002 cash and cash equivalents and short term
investments were $258,654, a decrease of $740,084 from
December 31, 2001. Working capital at March 31, 2002 was a deficit
of $430,367, a decrease of $426,799 from December 31, 2001. The
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decrease in cash and working capital resulted from the unprofitable
operations of the Company during the quarter as well as amounts loaned
to KnowledgeMax.
Net cash used in operating activities for the quarter ended
March 31, 2002 was $855,829, compared to $4,700,908 for the quarter
ended March 31, 2001. The decrease in the net cash used was primarily
the result of reduced expenses following the discontinuance of the
eCRM business.
Net cash provided by financing activities for the quarter ended
March 31, 2002 was $588,979 due to the private placement of shares
subscriptions. In the quarter ending March 31, 2001, net cash
provided by financing activities was $3,732,418 from the private
placement of common shares in February 2001.
Net cash provided from investing activities for the quarter ending
March 31, 2002 was $472,519 primarily due to the purchase of fixed
assets. For the quarter ending March 31, 2001, net cash provided
from investing activities was $5,681,302 from the proceeds on
maturity of short-term investments offset by the purchase of
fixed assets.
For the quarter ending March 31, 2002, there was a loss of $700
due to exchange rates on cash and cash equivalents. For the quarter
ending March 31, 2001, there was a gain of $640,235 due to favorable
exchange rate movements on larger cash balances.
RESIGNATIONS OF OFFICERS AND DIRECTORS
The following officers and directors have resigned their positions
with the Company:
Name Position Effective Date
--------------------------------------------------------------------------
Paul Hildebrand Secretary March 14, 2002
Peter Kozicki Director March 20, 2002
W. Grant Sutherland Director March 20, 2002
Edward A. White Director March 20, 2002
Jay H. Nussbaum Director April 1, 2002
TRANSACTIONS WITH CHALK MEDIA CORP.
On March 27, 2002, Sideware Systems Inc. entered into a series of
agreements in order to facilitate the repurchase of shares by Chalk Media
from Sideware. These agreements are as follows:
1. Sideware exercised its right to acquire 200,000 common shares of
Chalk.com Network (Holding) Corporation in accordance with and
subject to the provisions of Sideware's Special Warrant Certificate.
This increased Sideware's ownership in Chalk.com Network (Holding)
Corporation to 21,925,050 common shares.
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2. Sideware Systems Inc. sold its entire interest in Chalk.com Network
(Holding) Corporation to SYD Enterprises Ltd, a wholly owned
subsidiary of Sideware Systems Inc., for shares valued at $2,000,003,
or $0.09122 per Chalk.com Network (Holding) Corporation common share.
The purchase price was paid by SYD Enterprises Ltd.'s issuing to
Sideware Systems Inc. 2,000,003 common shares at an issue price
of $1.00 per share.
3. SYD Enterprises Ltd. sold its entire interest in Chalk.com Network
(Holding) Corporation to Chalk Media Corp. for a total purchase
price of $2,000,003. The purchase price was paid by Chalk Media
Corp.'s issuing to SYD Enterprises Ltd. 21,925,050 common shares
and allotting for issuance upon exercise 500,000 Chalk Media Warrants.
4. Sideware Systems Inc., SYD Enterprises Ltd. and Chalk Media Corp.
entered into a share repurchase agreement pursuant to which Chalk
Media Corp. may repurchase its common shares from SYD Enterprises
Ltd. at a price of $0.09122 per common share. In accordance with
the agreement, Chalk Media Corp. repurchased 3,300,000 of its shares
from SYD Enterprises Ltd. for an aggregate price of $301,026. This
reduced the number of common shares of Chalk Media Corp. held by SYD
Enterprises Ltd. to 18,625,050.
On May 8, 2002, the Company entered into a Waiver Agreement, which
provided for the additional funding and sale of SYD's holdings
in Chalk Media, and for the closing of the proposed merger of the
Company and Knowledgemax. These funds are expected to be provided
by the shareholder and former director.
Pursuant to the Waiver Agreement, on May 8, 2002, Chalk Media received
$250,000 which was used to purchase 2,740,627 common shares of Chalk
Media at a price of $0.09122 per share from SYD. Pursuant to the
Waiver Agreement, within two days of closing the proposed merger
agreement, Chalk Media will receive a further $450,000 to be used to
buy back 4,933,129 common shares of Chalk Media at a price of
$0.09122 per share from SYD.
Chalk Media issued 5,002,000 special warrants for which subscriptions
of $488,837 had been received prior to March 31, 2002 and $595,313 was
received subsequent to March 31, 2002. The special warrants are
convertible on a one to one basis into common shares of Chalk Media
after a final prospectus is receipted.
Subsequent to March 31, 2002, a Share Exchange Agreement was entered
into by Chalk Media, Chalk.Com and third parties. This agreement
provides that each special warrant holder in Chalk.Com is able to
convert each special warrant into two common shares and one share
purchase warrant of Chalk.Com. The two common shares are convertible
into two common shares of Chalk Media and the share purchase warrant
is convertible into one share purchase warrant of Chalk Media. The
share purchase warrants will be exercisable for 18 months after the
closing date, and the exercise price will be the lesser of
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(i) Cdn $0.25 per share; and (ii) the price per share of any
financing completed while the share purchase warrants are outstanding.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
As at March 31, 2002 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 report. The fair value of all financial instruments
at March 31, 2002 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
egal proceedings. In July 2001, a former employee commenced legal
proceedings from Chalk.com Network (Holding) Corp. claiming damages
for wrongful termination. This matter was settled during the quarter
ended March 31, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On January 3, 2002, the Company issued 332,222 common shares to
certain directors and officers at a price of $0.165 per share. These
shares were in satisfaction of $47,667 of unpaid salaries and bonus.
The shares were issued to accredited investors pursuant to Rule 506
to Regulation D to the Securities Act of 1933 as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At an extraordinary meeting of stockholders held on March 20, 2002,
five proposals were submitted for consideration and were approved
by stockholders as follows:
1. the Agreement and Plan of Merger and Reorganization dated
December 7, 2001 between Sideware Systems Inc.,
KnowledgeMax, Inc. and KM Acquisition Corp;
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2. continuation of Sideware to Delaware, as a corporation
under the General Corporation Law of Delaware;
3. an increase in the authorized capital of Sideware to
300,000,000 common shares;
4. an amendment to Sideware's certificate of incorporation after
the continuance to Delaware, to change the corporate name of
Sideware to "KnowledgeMax, Inc." following the merger; and
5. a new Sideware 2002 Equity Incentive Plan.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
During the three month period ended March 31, 2002, the Company
filed no reports on Form 8-K.
INDEX TO EXHIBITS
Number Exhibit
2.1(7) Agreement and Plan of Merger and Reorganization
(included as Appendix A to the joint proxy
statement/prospectus
2.2 Special Warrant Exercise Form dated
March 27, 2002 to Chalk.Com Network (Holding) Corp.
2.3 Share Purchase agreement dated March 27, 2002
between Sideware Systems Inc. and SYD Enterprises Ltd.
2.4 Purchase and Sale Agreement dated March 27, 2002
between sideware Systems Inc., SYD Enterprises Ltd.,
and Chalk Media Corp.
2.5 Share Repurchase Agreement dated March 27, 2002
between Sideware Systems Inc., SYD Enterprises Ltd.,
and Chalk Media Corp.
2.6 Irrevocable Direction to Pay dated March 27, 2002
to Chalk Media Corp. from SYD Enterprises Ltd.
2.7 Waiver Agreement dated May 8, 2002 between Sideware
Systems Inc., KM Acquisition Corp., KnowledgeMax, Inc.,
SYD Enterprises Ltd., Chalk Media Corp., Grant
Sutherland and James L. Speros
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
3.10(7) Articles of Continuation of Sideware to the Yukon Territory
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3.11(7) Bylaws of Sideware
10.1(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.
10.2(2) Lease effective as of July 1, 1999 between the Company,
Techwest Management Ltd., BrainTech, Inc. and Pacific Centre
Leaseholds Ltd.
10.3(2) Assignment Agreement effective as of July 1, 1999 between the
Company, Techwest Management Ltd., BrainTech, Inc.,
and SJM Management Ltd.
10.4(6) Change of Control Severance Agreement with Rahul Bardhan
10.5(7) Change of Control Severance Agreement with James Speros
10.6(7) Amendment agreement between James Speros and Sideware
10.7(7) Amendment agreement between Rahul Bardhan and Sideware
10.8(6) Assignment of Lease
10.9(3) 2000 Stock Option Plan
10.10(4) Amended 2000 Stock Option Plan
10.11(6) Stock Option Plan (2001)
10.12(7) Sideware 2002 Equity Incentive Plan (included as Appendix G
to the joint proxy statement - prospectus)
10.13(7) Form of stock option agreement under Sideware 2002 Incentive
Equity Plan
11.1 Computation of net loss per share
(1) Incorporated by reference to exhibit to Sideware's Registration
Statement on Form 20-F filed in May 1999 (file no. 000-29974)
(2) Incorporated by reference to exhibit to Sideware's Registration
Statement on Form F-1 filed on November 12, 1999
(file no. 333 90893)
(3) Incorporated by reference to exhibit to Sideware's Registration
Statement on Form F-3 filed on April 18, 2000 (file no. 333 34984)
(4) Incorporated by reference to exhibit to Amendment No. 1 to
Sideware's Registration Statement on Form F-3/A filed on
June 8, 2000 (file no. 333-34984)
(5) Incorporated by reference to exhibit to Sideware's Form 10-Q
for the quarter ended September 30, 2000 filed on
November 15, 2000 (file no. 000-29974)
(6) Incorporated by reference to exhibit to Sideware's Form 10-K
for the year ended December 31, 2000 filed on March 23
(file no. 000-29974)
(7) Incorporated by reference to exhibit to Sideware's Registration
Statement on Form S-4 filed on January 11, 2002
(registration no. 333-76648)
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SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
registrant has caused this Quarterly Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 16, 2002 Sideware Systems Inc.
/s/ James L. Speros
-----------------------------------
James L. Speros
President, Chief Executive Officer, and Director
Principal Financial and Accounting Officer
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