UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 20, 2002
KNOWLEDGEMAX, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-29974 52-2151837
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
7900 Westpark Drive, Suite T-300
McLean, Virginia 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 893-1800
Sideware Systems Inc.
(former name or former address, if changed since last report)
---------------------
This Form 8-K/A amends the Form 8-K filed on May 21, 2002 by
Knowledgemax, Inc. ("Knowledgemax"), a Delaware corporation formerly
known as Sideware Systems, Inc. The purpose of this amendment to Form
8-K is to provide financial statements and the pro forma financial
information for Knowledgemax, Inc. as required by Item 7 of Form 8-K.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
As previously reported, Sideware Systems, Inc., a Yukon Territory,
Canada corporation (Sideware) completed its merger with Knowledgemax,
Inc., a Delaware corporation (Knowledgemax) whereby Sideware
reincorporated into the State of Delaware, becoming a Delaware
corporation, KM Acquisition Corp., a Delaware corporation, and a
wholly owned subsidiary of Sideware, merged into Knowledgemax,
whereby Knowledgemax was the surviving corporation, and Knowledgemax
changed its name to "Knowledgemax Learning, Inc." Immediately
following this transaction, Sideware changed its corporate name to
"Knowledgemax, Inc." (the Company").
This Form 8-K/A amends the Current Report on Form 8-K dated May
20, 2002 to include the financial statements and pro forma
financial information, as set forth in Item 7 of this form 8-K/A.
The audited financial statements and condensed financial
statements referenced in subparagraph (ii) and (iii) relate to
Knowledgemax (prior to its merger with Sideware) and the pro
forma condensed consolidated financial statements referenced in
subparagraph (i) of Item 7 below gives effect to the business
combination and merger of Sideware and Knowledgemax, and related
transactions.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) and (b) FINANCIAL STATEMENTS.
(i) Pro forma Condensed Consolidated Financial statements for
Knowledgemax, Inc. (unaudited)
a. Pro forma condensed consolidated balance sheet as of
March 31, 2002
b. Pro forma condensed consolidated statement of
operations for the three months ended March 31, 2002
c. Pro forma condensed consolidated statement of
operations for the year ended December 31, 2001
d. Notes to the pro forma condensed consolidated
financial statements
(ii) Condensed financial statements of Knowledgemax, Inc.
(unaudited)
a. Balance sheet March 31, 2002
b. Statement of operations for the three month periods
ended March 31, 2002, and 2001
c. Statements of cash flows for the three month periods
ended March 31, 2002, and 2001
d. Notes to the condensed financial statements
(iii) Audited Financial Statements of Knowledgemax, Inc. as of
December 31, 2001, and 2000, and for the years ended
December 31, 2001, 2000, and 1999.
a. Independent Auditors' Report
b. Balance sheets
c. Statements of Operations
d. Statement of Stockholders' Deficit
e. Statements of cash flows
f. Notes to financial statements
1
(i.) PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS FOR KNOWLEDGEMAX, INC. (UNAUDITED)
The unaudited pro forma consolidated financial information has
been prepared by management and gives effect to the business
combination and merger of Sideware Systems Inc. ("Sideware") and
Knowledgemax, Inc. ("Knowledgemax") and related transactions
including the sale by Sideware of a portion of its interest in
the Chalk Group for cash consideration of $700,000. Following
this sale, Sideware's remaining interest in the Chalk Group is
below 50% and has become a minority interest.
The unaudited pro forma consolidated balance sheet as at March
31, 2002 has been prepared assuming that the transactions
described in note 2 occurred on that date. The pro forma
consolidated statements of operations for the three months ended
March 31, 2002 and the year ended December 31, 2001 have been
compiled assuming that the transactions described in note 2
occurred at the beginning of the earliest periods presented.
The pro forma adjustments, which are based on available
information and certain assumptions that Sideware and
Knowledgemax believe are reasonable under the circumstances, are
applied to the historical consolidated financial statements. As
this transaction resulted in the former stockholders of
Knowledgemax owning greater than 50% of the merged entity, the
acquisition has been accounted for as an acquisition of the net
assets of Sideware by Knowledgemax.
The unaudited pro forma consolidated financial information is
provided for informational purposes only and does not purport to
represent what the financial position or results of operations
would actually have been had the pro forma transactions occurred,
or to project results of operations or financial position for any
future period.
The accompanying unaudited pro forma consolidated financial
information should be read in conjunction with the historical
financial statements of each company and other information
included in this filing.
2
(i) a.
Knowledgemax, Inc.
Pro forma Condensed Consolidated Balance Sheet
(Expressed in United States dollars)
(Unaudited)
=================================================================================================================================
----------Historical----------
Knowledgemax Sideware
Inc. Systems, Inc.
March 31, March 31, Eliminate Pro forma
2002 2002 Chalk (a) Adjustments Pro forma
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 988 $ 241,404 $ 12,584 $ 700,000 (a) $ 954,976
Short-term investments - 17,250 (17,250) - -
Accounts receivable 175,993 75,541 (75,541) - 175,993
Note receivable - 597,893 - (597,893) (d) -
Prepaid expenses and other current assets 24,060 52,961 (21,951) - 55,070
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 201,041 985,049 (102,158) 102,107 1,186,039
Deposits on leases - 75,787 - - 75,787
Intangible assets - 1,141,152 - (1,141,152) (a) -
Goodwill - 593,951 - (593,951) (a) -
Deferred loss - 231,465 - (231,465) (a) -
Property and equipment, net 165,377 276,344 (269,815) - 171,906
Other assets, net 450 - - - 450
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 366,868 $ 3,303,748 $ (371,973) $ (1,864,461) $ 1,434,182
=================================================================================================================================
Liabilities and Stockholders' Deficit
Current liabilities
Bank line of credit $ 67,568 $ - $ - $ - $ 67,568
Bank overdraft 6,959 - - - 6,959
Line of credit - related party 200,000 - - (200,000) (b) -
Accounts payable 617,071 907,200 (325,530) - 1,198,741
Accounts payable - related party 68,466 45,730 (89,480) 43,750 (a) 68,466
Accrued expenses 267,109 - - (30,661) (b) 236,448
Salaries payable 91,315 - - - 91,315
Current installments of obligations
under capital leases 61,038 51,340 (51,340) - 61,038
Notes payable 95,001 312,500 (312,500) - 95,001
Notes payable - related party 352,837 - - - 352,837
Deferred revenue - 98,646 (68,646) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,827,364 1,415,416 (877,496) (186,911) 2,178,373
Notes payable - related party 732,949 488,837 (488,837) (128,206) (b) 6,850
(597,893) (d)
Notes payable 16,001 437,500 (437,500) - 16,001
Obligations under capital leases,
excluding current installments 47,640 47,727 (47,727) - 47,640
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,623,954 2,389,480 (1,851,560) (913,010) 2,248,864
- ---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, par value $.01,
Series A convertible preferred stock
$.01 par value 3,286 - - (3,286) (b) -
Series B convertible preferred stock
$.01 par value 9,527 - - (9,527) (b) -
Common stock, $.001 par value 20,744 47,453,575 (3,148,732) 382 (b) 179,942
1,257 (b)
(44,147,284) (c)
Additional paid-in capital 6,147,686 12,122,161 (6,673,009) 358,485 (b) 7,443,705
11,556 (b)
44,147,284 (c)
(48,670,458) (c)
Accumulated other comprehensive loss - (611,561) 1,896 609,665 (c) -
Accumulated deficit (8,438,329) (58,049,907) 11,299,432 (1,310,318) (a) (8,438,329)
48,060,793 (c)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (2,257,086) 914,268 1,479,587 (951,451) (814,682)
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 366,868 $ 3,303,748 $ (371,973) $ (1,864,461) $ 1,434,182
=================================================================================================================================
See accompanying notes to consolidated financial statements.
3
(i) b.
Knowledgemax, Inc.
Pro Forma Condensed Consolidated Statements of Operations
(Expressed in United States dollars)
(Unaudited)
For the three months ended March 31, 2002
=========================================================================================================
Pro forma
----------Historical---------- adjustments
Knowledgemax Sideware and eliminating
Inc. Systems, Inc. entries Pro forma
- ---------------------------------------------------------------------------------------------------------
Revenue $ 328,199 $ 336,032 $ (336,032) $ 328,199
Costs of revenue - related party 101,969 - - 101,969
Costs of revenue 200,493 219,318 (219,318) 200,493
- ---------------------------------------------------------------------------------------------------------
Gross profit 25,737 116,714 (116,714) 25,737
Operating expenses:
Research and development 259,583 - - 259,583
Sales and marketing and
website operations - 212,126 (212,126) -
General and administrative 553,338 1,014,647 (226,146) 1,341,839
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 812,922 1,226,773 (438,272) 1,601,423
- ---------------------------------------------------------------------------------------------------------
Loss from operations (787,184) (1,110,059) 321,558 (1,575,685)
Other income (expense):
Interest expense (78,827) - - (78,827)
Interest income - 818 (750) 68
- ---------------------------------------------------------------------------------------------------------
Loss before income taxes (866,011) (1,109,241) 320,808 (1,654,444)
Income taxes - - - -
- ---------------------------------------------------------------------------------------------------------
Net loss $ (866,011) $ (1,109,241) $ 320,808 $ (1,654,444)
=========================================================================================================
Basic and fully diluted
net loss per share $ (0.01) $ (0.01) $ (0.01)
Weighted average common shares
used in computing net loss
per share, basic and diluted 82,534,869 85,503,661 168,038,530
See accompanying notes to pro forma consolidated financial statements.
4
(i) c.
Knowledgemax, Inc.
Pro Forma Condensed Consolidated Statements of Operations
(Expressed in United States dollars)
(Unaudited)
For the year ended December 31, 2001
=========================================================================================================
Pro forma
----------Historical---------- adjustments
Knowledgemax Sideware and eliminating
Inc. Systems, Inc. entries Pro forma
- ---------------------------------------------------------------------------------------------------------
Revenue $ 618,831 $ 346,334 $ (346,334) $ 618,831
Costs of revenue - related party 225,938 - - 225,938
Costs of revenue 350,864 415,874 (415,874) 350,864
- ---------------------------------------------------------------------------------------------------------
Gross profit 42,029 (69,540) 69,540 42,029
Operating expenses:
Research and development 400,723 - - 400,723
Sales and marketing and
website operations - 261,109 (261,109) -
General and administrative 1,577,751 3,770,335 (419,008) 4,929,078
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 1,978,474 4,031,444 (680,117) 5,329,801
- ---------------------------------------------------------------------------------------------------------
Loss from operations (1,936,445) (4,100,984) 749,657 (5,287,772)
Other income (expense):
Interest expense 572,746 - - 572,746
Interest income - 253,516 (7,976) 245,540
- ---------------------------------------------------------------------------------------------------------
Loss from continuing operations
before extraordinary items (1,363,699) (3,847,468) 741,681 (4,469,486)
Loss from discontinued operations - (10,632,482) 10,632,482 -
- ---------------------------------------------------------------------------------------------------------
Loss before extraordinary items (1,363,699) (14,479,950) 11,374,163 (4,469,486)
Extraordinary items:
Gain on settlement of
accounts payable - 254,819 (254,819) -
Gain on settlement of
stockholder loans - 83,041 (83,041) -
- ---------------------------------------------------------------------------------------------------------
Total extraordinary items - 337,860 (337,860) -
- ---------------------------------------------------------------------------------------------------------
Net loss $ (1,363,699) $ (14,142,090) $ 11,036,303 $ (4,469,486)
=========================================================================================================
Basic and fully diluted
net loss per share $ (0.02) $ (0.21) $ (0.03)
Weighted average common shares
used in computing net loss
per share, basic and diluted 65,002,455 67,186,671 132,189,126
See accompanying notes to pro forma consolidated financial statements.
5
(i) d.
Knowledgemax, Inc.
Notes to Pro Forma Consolidated Financial Statements
(Unaudited)
Three months ended March 31, 2002
(1) Basis of Presentation
The accompanying pro forma consolidated financial statements have
been compiled for purposes of inclusion in the Form 8-K/A, filed
with the Securities and Exchange Commission in the United States,
relating to the proposed business combination and merger of
Sideware Systems Inc. ("Sideware") and Knowledgemax, Inc.
("Knowledgemax").
These pro forma consolidated financial statements are not
necessarily indicative of the financial position and results of
operations that would have been attained had the transaction
actually taken place at the dates indicated and does not purport
to be indicative of the effects that may be expected to occur in
the future.
The pro forma consolidated statements have been compiled from:
a) the unaudited consolidated financial statements of Sideware
as of March 31, 2002 and for the three months then ended;
b) the audited consolidated financial statements of Sideware for
the year ended December 31, 2001;
c) the unaudited financial statements of Knowledgemax as of
March 31, 2002 and the three months then ended;
d) the audited financial statements of Knowledgemax for the year
ended December 31, 2001; and
e) the additional information set out in note 2.
The pro forma consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States in effect at March 31, 2002 and should be read in
conjunction with the historical financial statements of each company
and other information included in this filing and in Sideware's Form
10-K for the year ended December 31, 2001 and Form 10-Q for the three
months ended March 31, 2002. The pro forma consolidated statements
of operations do not include any recurring charges or credits as a
result of the described transactions.
(2) Pro Forma Adjustments and Eliminating Entries
The pro forma consolidated balance sheet as of March 31, 2002 has
been prepared assuming that the transactions described below
occurred on that date. The pro forma consolidated statements of
operations for the three months ended March 31, 2002 and the
6
year ended December 31, 2001 have been compiled assuming the
transaction relating to the proposed merger occurred at the
beginning of the periods presented, but as indicated in note 1,
apply generally accepted accounting principles as they will be in
effect at the date of consummation of the merger.
The pro forma consolidated financial statements give effect to
the following transactions:
a) The sale of a portion of the Chalk Group by Sideware for
proceeds of $700,000 and the related disposition of Chalk Group's
assets, liabilities, revenues and expenses. While the Company
has an approximate 28% interest in Chalk subsequent to the merger,
the Company has determined that it is no longer necessary to
consolidate Chalk and that its remaining investment has no
value. As such, the Company has included no amounts for such
investment on the accompanying pro forma balance sheet.
b) Issuance by Knowledgemax of its capital stock from April 1,
2002 to May 20, 2002 as follows:
(i) issuance of capital stock for $158,867 for settlement of
notes payable and accrued liabilities,
(ii) issuance of capital stock for settlement of the $200,000
principal under its line of credit and for termination of a
warrant agreement;
(iii) conversion of Convertible preferred series A and B stock to
common stock.
c) The continuation of Sideware into Delaware and the acquisition
of Sideware and related elimination of Sideware's share capital
and deficit (note 3).
d) The elimination of the intercompany balances.
(3) Pro Forma Merger
Under the merger, Knowledgemax became a wholly-owned subsidiary
of Sideware through the exchange of all of Knowledgemax's issued
and outstanding capital stock for that number of Sideware common
shares that resulted at closing in the former shareholders of
Knowledgemax owing 52.48% of the issued and outstanding common
shares of Sideware. The merger agreement contains a formula for
calculating the conversion ratio, which resulted in each share of
Knowledgemax being exchanged for 24.82 shares of Sideware at the
time of closing.
As this transaction resulted in the former shareholders of
Knowledgemax owning greater than 50% of the merged entity,
Knowledgemax has accounted for this merger as an acquisition
of Sideware's net assets.
The fair value of the deemed consideration has been estimated
based on the fair value of the net assets of Sideware at the date
of the pro forma consolidated balance sheet and includes actual
cash acquisition costs of approximately $436,000. The
accompanying pro forma financial statements have been prepared
assuming that the merger occurred as of March 31, 2002; however,
the following table shows the total consideration allocated to
7
assets and liabilities acquired, based on estimated fair values
as at May 20, 2002, adjusted for the pro forma disposition of the
Chalk Group:
Cash $ 717,910
Accounts and other receivables 2,243
Prepaid expenses 19,888
Deposit on lease 52,021
Property and equipment, net 4,562
Accounts payable
and accrued liabilities (546,709)
---------
Total net liabilities acquired $ 249,915
============
Consideration paid:
Fair value of equity
instruments issued $ (187,887)
Acquisition costs 435,802
------------
$ (249,915)
============
8
(ii) CONDENSED FINANCIAL STATEMENTS OF
KNOWLEDGEMAX, INC.(unaudited)
(ii) a.
Knowledgemax, Inc.
Condensed Balance Sheet
(Expressed in United States dollars)
(Unaudited)
=============================================================
March 31, 2002
- -------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 988
Accounts receivable 175,993
Prepaid expenses and other current assets 24,060
- -------------------------------------------------------------
Total current assets 201,041
Property and equipment, net 165,377
Other assets, net 450
- -------------------------------------------------------------
Total assets $ 366,868
=============================================================
Liabilities and Stockholders' Deficit
Current liabilities
Bank line of credit $ 67,568
Book overdraft 6,959
Line of credit - related party 200,000
Accounts payable 617,071
Accounts payable - related party 68,466
Accrued expenses 267,109
Salaries payable 91,315
Current installments of obligations
under capital leases 61,038
Notes payable 95,001
Notes payable - related party 352,837
-----------------------------------------------------------
Total current liabilities 1,827,364
Notes payable - related party 732,949
Notes payable 16,001
Obligations under capital leases,
excluding current portion 47,640
- -------------------------------------------------------------
Total liabilities 2,623,954
Commitments and contingencies
Stockholders' deficit:
Preferred stock, par value $.01,
5,000,000 shares authorized
Series A convertible preferred stock
(voting), $.01 par value,
330,000 shares designated, 328,610 shares
issued and outstanding (liquidation
preference of $603,151) 3,286
Series B preferred stock (voting),
$.01 par value, 1,275,000 shares
designated, 952,7658 shares
issued and outstanding (liquidation
preference of $1,484,373) 9,527
Common stock, $.01 par value, 15,000,000 shares
authorized, 2,074,447 shares issued
and outstanding 20,744
Additional paid-in capital 6,147,686
Accumulated deficit (8,438,329)
- -------------------------------------------------------------
Total stockholders' deficit (2,257,086)
- -------------------------------------------------------------
Total liabilities and stockholders' deficit $ 366,868
=============================================================
See accompanying notes to condensed interim financial statements.
9
(ii) b.
Knowledgemax, Inc.
Condensed Statements of Operations
(Expressed in United States dollars)
(Unaudited)
==========================================================================
Three months ended
March 31,
2002 2001
- --------------------------------------------------------------------------
Revenue $ 328,199 $ -
Costs of revenue - related party 101,969 -
Costs of revenue 200,493 -
- --------------------------------------------------------------------------
Gross profit 25,737 -
Operating expenses:
Research and development 259,583 27,008
General and administrative 553,338 205,855
- --------------------------------------------------------------------------
Total operating expenses 812,922 232,863
- --------------------------------------------------------------------------
Loss from operations (787,184) (232,863)
Interest expense (78,827) (22,997)
- --------------------------------------------------------------------------
Loss before income taxes (866,011) (255,860)
Income taxes - -
- --------------------------------------------------------------------------
Net loss $ (866,011) (255,860)
==========================================================================
Basic and fully diluted net loss
per share 82,534,869 57,472,947
Weighted average common shares used
in computing net loss per share,
basic and diluted $ (0.01) $ (0.00)
See accompanying notes to condensed interim financial statements.
10
(ii) c.
Knowledgemax, Inc.
Condensed Statements of Cash Flows
(Expressed in United States dollars)
(Unaudited)
==========================================================================
Three months ended
March 31,
2002 2001
- --------------------------------------------------------------------------
Cash flows used in operating
activities:
Net loss $ (866,011) $ (255,860)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 16,754 20,128
Issuance of common stock
for services - 25,000
Warrant expense 45,274 -
Non-cash stock compensation
expense 7,008 2,585
Non-cash conversion of accrued
interest into Series B
convertible preferred stock 11,939 -
Change in assets and liabilities;
(Increase) decrease in accounts
receivable (26,982) -
(Increase) decrease in prepaid
expenses and other assets 29,162 -
Increase (decrease) in accounts
payable and accrued expenses 310,177 71,558
- --------------------------------------------------------------------------
Net cash used in operating
activities (472,680) (136,589)
Cash flows from Investing
activities:
(Purchases of) proceeds from return
of property and equipment (16,672) -
- --------------------------------------------------------------------------
Net cash used in investing
activities (16,672) -
Cash flows from financing
activities:
(Repayments on) proceeds from
line of credit (5,402) (3,348)
Repayments on capital leases (9,814) -
Repayments on notes payable (2,381) -
Proceeds from issuance of
notes payable related party 454,743 -
Repayments on notes payable (34,399) -
Book overdraft 6,959 -
Proceeds from issuance of Series B
convertible debt - 50,000
Proceeds from issuance of Series B
convertible preferred stock - 200,000
- --------------------------------------------------------------------------
Net cash provided by financing
activities 409,706 246,652
- --------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (79,645) 110,063
Cash and cash equivalents,
beginning of period 80,633 11,088
- --------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 988 $ 121,151
==========================================================================
Supplemental disclosure of
cash flow information:
Interest paid $ 11,572 $ 2,061
Conversion of accounts payable
into stock 177,922 -
Conversion of notes payable
related party and accrued
interest to Series B convertible
preferred stock $ 70,000 $ -
See accompanying notes to condensed interim financial statements.
11
(ii) d.
Knowledgemax, Inc.
Notes to Unaudited Condensed Interim Financial Statements
March 31, 2002 and 2001
(1) Description of Operations
Knowledgemax, Inc. (the "Company") has developed an eBusiness
supply chain and delivery system for commercially available
learning and knowledge products and customer proprietary
information.
(2) Basis of Presentation
The unaudited interim condensed financial statements have been
prepared by the Company in accordance with accounting principles
generally accepted in the United States of America and reflect
all adjustments,,which are normal and recurring in nature,
that, in the opinion of management, are necessary for fair
presentation of the interim financial information.
The unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have
been condensed or omitted pursuant to those rules and regulations,
but the Company believes that the disclosures are adequate to ensure
the information presented is not misleading. These unaudited condensed
financial statements and notes included herein should be read in
conjunction with the Company's audited financial statements and notes
for the year ended December 31, 2001.
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.
(3) Risks and Uncertainties - Liquidity and Capital Resources and
Competitive Environment
The Company's growth has required, and will continue to require,
substantial capital to fund expanding working capital needs, new
business initiatives and capital expenditures. To date, the funding
of these requirements has come primarily from outside investors.
While outside investors have historically provided the required
funding, they have no obligation to continue to do so. The Company
intends to seek additional financing from investors; such funding
may be in the form of debt, equity, or some combination. There can
12
be no assurance of continued funding by outside investors or other
sources or that such funding will be on terms favorable to the
Company.
The Company expects to continue to focus on developing and enhancing
its software and website applications as well as expanding its
service offerings and revenues; however, the Company anticipates
generating operating losses and negative cash flows from operations
for the foreseeable future. The markets the Company is pursuing are
highly competitive and there can be no assurance that the Company's
service offerings will be successful, or that the Company will ever
generate operating profits or positive cash flows.
The Company has a limited operating history and its prospects are
subject to the risks, expenses, and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for
Internet products and services. These risks include, among others,
the failure to develop a viable online delivery service, inability
to maintain and increase its customer base, and interruptions of
service from the Internet service provider that hosts the Company's
web site.
The Company has experienced operating losses and negative cash flows
from operations since its inception, has working capital and
stockholders' deficiencies, and has been unable to repay certain
obligations when due.
These factors described above, either individually or in the
aggregate, could have an adverse effect on the Company's financial
condition and future operating results and create an uncertainty as
to the Company's ability to continue as a going concern. The
unaudited condensed interim financial statements do not include any
adjustments that might be necessary should the Company be unable to
continue as a going concern.
(4) Merger of the Company
On December 7, 2001, the Company entered into an agreement to merge
with Sideware Systems, Inc., a publicly traded company. On March 20,
2002, shareholders' approval was obtained for the merger. On May
21, 2002 the merger between the two companies was completed.
Immediately following the merger, former Knowledgemax stockholders
owned approximately 52% of the outstanding common stock of the merged
entity. The business of Knowledgemax became the business of the
merged entity and the merged entity changed its name from Sideware
Systems Inc. to Knowledgemax, Inc. The business combination will be
accounted for using the purchase method of accounting. As this
13
transaction resulted in the former shareholders of Knowledgemax owning
greater than 50% of the merged entity, Knowledgemax has accounted for
this merger as an acquisition of Sideware's net assets.
(5) Summary of Significant Accounting Policies - Revenue Recognition
The Company recognizes revenue from the 3rd party materials such as
sale of books and learning materials, videos and CDs, net of any
discounts or promotions, when the materials are received and accepted
by the customer. The Company takes title to the materials upon
transfer from the shipper and assumes risks and rewards of ownership
including risk of loss while the products are in transit to the
customer and for collection of billings to the customer. The Company
does not act as an agent or broker for the supplier. Shipping charges
assessed to the customer are included in net sales. There were no
discounts or promotions during the three month period ended March 31,
2002.
(6) Equity Transactions
For the three months ended March 31, 2002, the Company granted 55,000
options to purchase common stock to employees at an exercise price of
$2.97 per share. There were no grants of options to purchase common
stock to non-employees during this same period.
For the three months ended March 31, 2002, the Company issued 23,569
shares of common stock to a third party developer to settle a related
party note payable and accrued interest totaling $70,000. The Company
also issued 39,563 shares of common stock for services rendered to the
Company for $117,490 and 20,347 shares of series B convertible
preferred stock for services rendered for $60,430. The Company also
issued 4,020 shares of Series B convertible preferred stock for
interest totaling $11,939.
(7) Note Payable
In April 2001, the Company received a $70,000 loan from Montgomery
County, Maryland, the county in which the Company was previously
located. The loan bears interest at 10% and is due 5 years from the
date of issuance provided that the Company meets certain
requirements such as maintaining a presence in the county. The
Company's decision to terminate its office lease effective February
2002 and its relocation outside of the county violates the provisions
of the agreement and, accordingly, upon the Company's departure from
the county in February 2002, the county may call the note for full
payment at any time thereafter. Accordingly, the amount is presented
as a current liability in the accompanying unaudited condensed
balance sheet as of March 31, 2002.
14
(8) Earnings Per Share
Weighted averages number of shares outstanding have been determined
based upon the equivalent number of shares that would have been
outstanding as contemplated by the merger in Note 4.
15
(iii) AUDITED FINANCIAL STATEMENTS of KNOWLEDGEMAX, INC.
AS OF DECEMBER 31, 2001, AND 2000, AND FOR THE
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999.
(iii) a.
Independent Auditors' Report
The Board of Directors
Knowledgemax, Inc.:
We have audited the accompanying balance sheets of Knowledgemax, Inc. as
of December 31, 2001 and 2000, and the related statements of operations,
stockholders' deficit, and cash flows for each of the years in the three-
year period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 13 to the financial statements, on December 7, 2001,
the Company entered into an agreement to merge with Sideware Systems,
Inc., a publicly-traded company. The merger was completed on May 21,
2002, and the Company's stockholders received greater than 50% of
the voting interests of the merged company.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Knowledgemax,
Inc. as of December 31, 2001 and 2000, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As described in note 2 to
the financial statements, the Company has incurred losses and negative
cash flows from operations since inception, has working capital and
stockholders' deficiencies, and has been unable to repay certain
obligations when due. These factors raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in note 2. The financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.
/s/ KPMG LLP
McLean, Virginia
August 15, 2002
16
(iii) b.
Knowledgemax, Inc.
Balance Sheets
December 31, 2001 and 2000
============================================================================
2001 2000
- ----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 80,633 $ 11,188
Accounts receivable 149,011 -
Prepaid expenses and other current assets 53,222 -
--------------------------------------------------------------------------
Total current assets 282,866 11,188
Property and equipment, net 165,309 76,175
Other assets, net 600 1,200
- ----------------------------------------------------------------------------
Total assets $ 448,775 $ 88,563
============================================================================
Liabilities and Stockholders' Deficit
Current liabilities
Bank line of credit $ 72,970 $ 84,072
Line of credit - related party 200,000 200,000
Accounts payable 535,260 390,282
Accounts payable - related party 46,901 6,606
Accrued expenses 208,997 113,461
Accrued expenses - related party - 50,000
Salaries payable 122,570 264,613
Current installments of obligations
under capital leases 41,347 -
Notes payable 94,716 -
Notes payable - related party 159,909 27,090
--------------------------------------------------------------------------
Total current liabilities 1,482,670 1,136,124
Notes payable - related party 573,511 565,905
Notes payable 18,667 -
Obligations under capital leases,
excluding current portion 77,145 -
- ----------------------------------------------------------------------------
Total liabilities 2,151,993 1,702,029
Commitments and contingencies (Notes 2 and 10)
Stockholders' deficit:
Preferred stock, par value $.01,
5,000,000 shares authorized
Series A convertible preferred stock
(voting), $.01 par value,
330,000 shares designated, 328,610 shares
issued and outstanding (liquidation
preference of $603,151) 3,286 3,286
Series B preferred stock (voting),
$.01 par value, 1,275,000 shares
designated, 928,398 and 485,231 shares
issued and outstanding respectively
(liquidation preference of $1,484,373) 9,284 4,852
Common stock, $.01 par value, 15,000,000 shares
authorized, 2,011,315 and 1,483,950 shares
issued and outstanding, respectively 20,113 14,840
Additional paid-in capital 5,836,416 3,426,683
Accumulated deficit (7,572,317) (5,063,127)
--------------------------------------------------------------------------
Total stockholders' deficit (1,703,218) (1,613,466)
- ----------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 448,775 $ 88,563
============================================================================
See accompanying notes to financial statements.
17
(iii) c.
Knowledgemax, Inc.
Statements of Operations
Years ended December 31, 2001, 2000, and 1999
====================================================================================
2001 2000 1999
- ------------------------------------------------------------------------------------
Revenue $ 618,831 $ - $ -
Costs of revenue - related party 225,938 - -
Costs of revenue 350,864 - -
- ------------------------------------------------------------------------------------
Gross profit 42,029 - -
Operating expenses:
Research and development 400,723 479,457 447,925
General and administrative 1,577,751 1,535,015 867,151
- ------------------------------------------------------------------------------------
Total operating expenses 1,978,473 2,014,472 1,315,076
- ------------------------------------------------------------------------------------
Loss from operations (1,936,444) (2,014,472) (1,315,076)
Other income (expense):
Interest expense (572,746) (593,261) (86,380)
Interest income - 751 1,752
- ------------------------------------------------------------------------------------
Loss before income taxes (2,509,190) (2,606,982) (1,399,704)
Income taxes - - -
- ------------------------------------------------------------------------------------
Net loss $ (2,509,190) (2,606,982) (1,399,704)
====================================================================================
See accompanying notes to financial statements.
18
(iii) d.
Knowledgemax, Inc.
Statements of Stockholders' Deficit
(Expressed in United States dollars)
Years ended December 31, 2001, 2000, and 1999
==================================================================================================================================
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock Common Stock Additional
-------------------- -------------------- -------------------- paid-in Accumulated
Shares Amount Shares Amount Shares Amount capital Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 - $ - - $ - 1,000,143 $ 10,001 $405,913 $(1,056,441) $ (640,527)
Exchange of stock
subscription receivable
for services rendered - - - - - - 46,500 - 46,500
Net loss - - - - - - - (1,399,704) (1,399,704)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 - - - - 1,000,143 10,001 452,413 (2,456,145) (1,993,731)
Conversion of Series A
convertible debt 297,746 2,977 - - - - 527,607 - 530,584
Issuance of Series A
convertible preferred
stock for consulting
services 30,864 309 - - - - 91,357 - 91,666
Series A beneficial
conversion charge - - - - - - 371,801 - 371,801
Issuance of Series B
convertible preferred
stock - - 303,245 3,033 - - 897,597 - 900,630
Conversion of series B
convertible debt - - 113,640 1,136 - - 336,379 - 337,515
Issuance of Series B
convertible preferred
stock for consulting
services - - 51,937 519 - - 153,731 - 154,250
Issuance of Series B
convertible preferred
stock in settlement of
related party accrued
interest - - 16,409 164 - - 48,569 - 48,733
Issuance of common stock
for services - - - - 471,651 4,717 489,415 - 494,132
Issuance of common stock
to related party for
accrued interest - - - - 10,000 100 9,900 - 10,000
Option compensation
expense - - - - - - 3,486 - 3,486
Warrant expense - - - - - - 42,294 - 42,294
Exercise of stock
options - - - - 2,156 22 2,134 - 2,156
Net loss - - - - - - - (2,606,982) (2,606,982)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2000 328,610 3,286 485,231 4,852 1,483,950 14,840 3,426,683 (5,063,127) (1,613,466)
Issuance of Series B
convertible preferred
stock - - 211,279 2,113 - - 625,387 - 627,500
Conversion of Series B
convertible debt - - 141,898 1,419 - - 420,063 - 421,482
Issuance of Series B
convertible preferred
stock for notes payable,
accrued interest, and
services - - 29,216 292 - - 86,481 - 86,773
Issuance of Series B
convertible preferred
stock in settlement of
related party notes
payable and accrued
interest - - 44,694 447 - - 132,294 - 132,741
Issuance of Series B
convertible preferred
stock in settlement of
related party accrued
interest - - 16,080 161 - - 47,597 - 47,758
Issuance of common stock
for services - - - - 500,865 5,008 587,577 - 592,585
Option compensation expense - - - - - - 47,543 - 47,543
Warrant expense - - - - - - 436,556 - 436,556
Exercise of stock options - - - - 26,500 265 26,235 - 26,500
Net loss - - - - - - - (2,509,190) (2,509,190)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2001 328,610 $3,286 928,398 $9,284 2,011,315 $20,113 $5,836,416 $(7,572,317) $(1,703,218)
==================================================================================================================================
See accompanying notes to financial statements.
19
(iii) e.
Knowledgemax, Inc.
Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
======================================================================================
2001 2000 1999
- --------------------------------------------------------------------------------------
Cash flows used in operating
activities:
Net loss $ (2,509,190) $ (2,606,982) $ (1,399,704)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 41,022 28,574 10,367
Amortization of deferred
financing fees - 7,064 21,168
Issuance of common stock
for services 592,585 494,132 -
Warrant expense 436,556 42,294 -
Non-cash stock compensation
expense 47,543 3,486 -
Beneficial conversion charge - 371,801 -
Non-cash conversion of accrued
interest into Series A
convertible preferred stock - 55,584 -
Series B convertible preferred
stock issued for services 18,053 154,250 -
Series A convertible preferred
stock issued for services - 91,666 -
Non-cash conversion of accrued
interest into Series B
convertible preferred stock 31,648 12,515 -
Non-cash conversion of related
party accrued interest into
Series B convertible preferred
stock 47,758 48,733 -
Issuance of common stock to related
party for accrued interest - 10,000 -
Change in assets and liabilities;
(Increase) decrease in accounts
receivable (149,011) - -
(Increase) decrease in prepaid
expenses and other assets (53,222) 2,979 10,163
Increase (decrease) in accounts
payable and accrued expenses 263,783 411,123 630,925
- --------------------------------------------------------------------------------------
Net cash used in operating
activities (1,232,475) (872,781) (727,081)
Cash flows from Investing
activities:
Purchase of property and equipment - (71,209) (7,110)
- --------------------------------------------------------------------------------------
Net cash used in investing
activities - (71,209) (7,110)
Cash flows from financing
activities:
(Repayments on) proceeds from
line of credit (11,102) 35,826 48,246
Repayments on capital lease
obligations (11,064) - -
Repayments on notes payable (3,521) - -
Proceeds from issuance of
notes payable 252,125 - -
Proceeds from issuance of Series A
convertible promissory notes - - 500,000
Principal repayments on Series A
convertible debt - (25,000) -
Bank overdraft - (8,434) 8,434
Proceeds from issuance of
common stock 26,500 2,156 -
Proceeds from issuance of Series B
convertible debt 421,482 50,000 175,000
Proceeds from issuance of Series B
convertible preferred stock 627,500 900,630 -
- --------------------------------------------------------------------------------------
Net cash provided by financing
activities 1,301,920 955,178 731,680
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 69,445 11,188 (2,511)
Cash and cash equivalents,
beginning of period 11,188 - 2,511
- --------------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 80,633 $ 11,188 $ -
======================================================================================
Supplemental disclosure of
cash flow information:
Interest paid $ 28,075 $ 2,156 $ -
Supplemental disclosure of
noncash activities:
Assets acquired under
capital lease $ 129,556 $ - -
Conversion of accounts payable
into notes payable 175,016 485,965 -
Conversion of Series A convertible
debt to Series A convertible
preferred stock - 475,000 -
Conversion of Series B convertible
debt to Series B convertible
preferred stock 421,482 325,000 -
Issuance of Series B convertible
preferred stock in settlement
of notes payable 169,813 - -
See accompanying notes to consolidated financial statements.
20
(iii) f.
Knowledgemax, Inc.
Notes to Financial Statements
December 31, 2001 and 2000
(1) Organization and Nature of Business
On May 1, 1998, Knowledgemax, Inc. (the "Company") was incorporated
in the State of Maryland. On June 17, 1998, Leadership Library
Limited Partnership was merged into Knowledgemax, Inc. On June 8,
2000, Leadership Library, Inc., the former general partner of
Leadership Library Limited Partnership, was merged into
Knowledgemax, Inc. On August 17, 2000, the Company reincorporated in
the State of Delaware.
The Company's main activity consists of developing the
Knowledgemax.com website, a book selling, e-Commerce, and e-learning
database platform for companies to select, purchase, and deliver
knowledge resources and education to their employees.
The Company was classified as a development stage enterprise until
May 2001, when the Company began generating revenues.
On December 21, 2001, the Company entered into an agreement to merge
with Sideware Systems, Inc., (Sideware) a publicly traded company
(see note 13).
(2) Risks and Uncertainties - Liquidity and Capital Resources and
Competitive Environment
The Company's growth has required, and will continue to require,
substantial capital to fund expanding working capital needs, new
business initiatives, and capital expenditures. To date, the funding
of these requirements has come primarily from outside investors.
While outside investors have historically provided the required
funding, they have no obligation to continue to do so. The Company
intends to seek additional funding from investors, which funding may
be in the form of debt, equity, or some combination. There can be no
assurance of continued funding by outside investors or other sources
or that such funding will be on favorable terms to the Company.
The Company expects to continue to focus on developing and enhancing
its software and website applications as well as expanding its
service offerings and generating revenues, however, the Company
anticipates generating operating losses and negative cash flows from
operations for the foreseeable future. The markets the Company is
pursuing are highly competitive and there can be no assurance that
the Company's service offerings will be successful, or that the
Company will ever generate operating profits or positive cash flows.
The Company has a limited operating history and its prospects are
subject to the risks, expenses, and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for
Internet products and services. These risks include the failure to
develop a viable online delivery service, inability to maintain and
increase its customer base and interruptions of service from the
Internet service provider that hosts the Company's web site, as well
as other risks and uncertainties.
The Company has experienced operating losses and negative cash flows
from operations since its inception, has working capital and
stockholders' deficiencies and has been unable to repay certain
obligations when due.
The merger with Sideware, see note 13, will provide the Company with
access to additional capital, resources, the public market for
securities, and technology to assist in funding requirements. There
21
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
can be no assurance that the merger will provide sufficient resources
or access to capital to support or sustain the operations of the
Company.
These factors described above, either individually or in the
aggregate, could have an adverse effect on the Company's financial
condition and future operating results and create an uncertainty as
to the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going
concern.
(3) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or
less when purchased are considered cash equivalents. Cash and
cash equivalents consist of cash on deposit with banks and money
market funds stated at cost which approximates fair value. At
times, these accounts may exceed federally insured limits. The
Company has not experienced any losses in such bank accounts. The
Company believes it is not exposed to significant credit risk
related to cash and cash equivalents.
(b) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, as
estimated by management, which include cash equivalents, accounts
payable, accrued expenses, bank line of credit, and line of
credit-related party approximate their fair values due to the
relatively short duration of these instruments, the stated
interest rate of these instruments, and the security interests of
these instruments. The carrying amount of the Company's notes
payable-related party and notes payable as compared to their
fair value are disclosed in notes 7(c) and 9(c). The fair values
of these notes payable-related party and notes payable were
calculated as the present value of the future cash flows
discounted at the Company's estimated incremental borrowing rate.
(c) Property and Equipment
Property and equipment is carried at historical cost less
accumulated depreciation and amortization. Property and equipment
under capital leases are stated at the present value of future
minimum lease payments. Depreciation and amortization is
calculated using the straight-line method based on the estimated
useful lives of the assets as follows:
Leased equipment and software lesser of 3 years or lease term
Computer equipment and software 3-5 years
Furniture and fixtures 5-7 years
(d) Recovery of Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, the Company periodically
reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
22
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to the undiscounted future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to
sell.
(e) Research and Development Costs
Research and development costs are expensed as incurred.
(f) Stock Options and Warrants
The Company accounts for employee stock-based compensation
arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES and related interpretations and complies with
the disclosure provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Under APB No. 25, compensation expense
is based upon the difference, if any, between the fair value of
the Company's stock and the exercise price on the date of the
grant. Stock options and warrants to purchase common stock
granted to other than employees as consideration for goods or
services rendered are measured at fair value and are recognized
as the goods or services are provided in accordance with SFAS
No. 123 and related interpretations.
(g) Revenue Recognition
The Company recognizes revenue from the sale of books and
learning materials, net of any discounts or promotions, when the
products are received and accepted by the customer. The Company
takes title to the books upon transfer from the shipper and
assumes risks and rewards of ownership including risk of loss
while the products are in transit to the customer and for
collection. The Company does not act as an agent or broker for
the supplier. Shipping charges assessed to the customer are
included in net sales.
(h) Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(i) Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
23
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses
during the reporting period. Actual results may differ from those
estimates.
(j) Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance
with SFAS No. 130, REPORTING COMPREHENSIVE INCOME. The Company
has determined that there were no transactions that have taken
place during the years ended December 31, 2001, 2000, or 1999,
that would be classified as other comprehensive income (loss).
(k) Web Site Development Costs
Web site development costs are accounted for in accordance with
Emerging Issues Task Force Issue (EITF) No. 00-2, ACCOUNTING FOR
WEB SITE DEVELOPMENT COSTS and Statement of Position (SOP) 98-1,
ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE.
(l) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, BUSINESS COMBINATIONS, which addresses the
financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, BUSINESS COMBINATIONS, and SFAS
No. 38, ACCOUNTING FOR PREACQUISITION CONTINGENCIES OF PURCHASED
ENTERPRISES, and is applicable to all business combinations
initiated after June 30, 2001. SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting and broadens the criteria
for recording intangible assets separate from goodwill.
Recorded goodwill and intangibles will be evaluated against the
new criteria and may result in certain intangibles being
reclassified to goodwill, or alternatively, amounts initially
recorded as goodwill may be separately identified and recognized
apart from goodwill. The Company does not expect that the
adoption of SFAS No. 141 will have a material impact on the
financial statements presented herein.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, which is effective beginning in fiscal year
2002. This statement addresses financial accounting and reporting
for intangible assets acquired individually or with a group of
other assets at acquisition. This statement also addresses
financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. Under SFAS No.
142, goodwill will not be amortized. Instead, the statement
requires that entities perform an initial impairment assessment
upon adoption and then again on at least an annual basis or upon
the occurrence of triggering events, if earlier, to identify
potential goodwill impairment and measure the amount of goodwill
impairment loss to be recognized, if any. An impairment loss is
recognized when the carrying amount of reporting unit goodwill
exceeds the implied fair value of that goodwill. After a goodwill
impairment loss is recognized, the adjusted carrying amount of
the goodwill shall be its new accounting basis. The Company does
24
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
not expect that the adoption of SFAS No. 141 will have a material
impact on the financial statements presented herein.
In October 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS," which is
effective beginning in fiscal year 2002. SFAS No. 144 supersedes
previous guidance for financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a
business to be disposed of. SFAS No. 144 retains the fundamental
provisions of existing generally accepted accounting principles
with respect to recognition and measurement of long-lived asset
impairment contained in SFAS No. 121. However, SFAS No. 144
provides new guidance intended to address certain significant
implementation issues associated with SFAS No. 121, including
expanded guidance with respect to appropriate cash flows to be
used, whether recognition of any long-lived asset impairment is
required, and if required, how to measure the amount of
impairment. SFAS No. 144 also requires that any net assets to be
disposed of by sale be reported at the lower of carrying value or
fair market value less costs to sell, and expands the reporting
of discontinued operations to include any component of an entity
with operations and cash flows that can be clearly distinguished
from the rest of the company. The Company does not expect that
the adoption of SFAS No. 144 will have a material impact on the
financial statements presented herein.
(m) Reclassifications
Certain prior year amounts have been reclassified to conform to
fiscal year 2001 presentation.
(4) Concentrations of credit risk
The Company revenues and receivables are generated and due from one
customer.
The Company uses a primary book distributor to supply books for sale
to its customer. The book distributor is also a related party (see
note 9), and accounted for 39% of its total cost of revenue during
the year ended December 31, 2001. The Company also utilizes other
vendors and negotiates terms which are competitive with those of the
primary book distributor.
25
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
(5) Property and Equipment
Property and equipment consist of the following at December 31, 2001
and 2000:
December 31,
------------------------
2001 2000
-------- --------
Computer equipment and software $243,759 $107,918
Furniture and fixtures 10,688 16,973
--------- ---------
Total 254,447 124,891
Less accumulated depreciation and
amortization (89,138) (48,716)
--------- ---------
Net property and equipment $165,309 $ 76,175
========= =========
Computer equipment and software with a total cost of $129,556 are
being held under capital leases at December 31, 2001 with accumulated
amortization of $18,319.
(6) Bank Line of Credit
In July 1998, the Company entered into a line of credit facility with
a bank. The maximum amount of the line is $100,000 as of December
31, 2001. The debt is secured by the personal guarantee of a
stockholder, and carries an interest rate of the bank's prime lending
rate plus 1 % which was 6.5% and 9% as of December 31, 2001 and 2000,
respectively. The Company is required to make monthly principal and
interest repayments of approximately $2,000 and there is no stated
maturity date on the line of credit. Payment of the balance is at
the discretion of the holder in the event the guarantee is withdrawn.
(7) Notes Payable
(a) Series A Convertible Notes
At various dates during 1999, the Company issued Series A
convertible notes ("Series A notes") for an aggregate of
$500,000, bearing interest at the rate of 8 % per annum.
In 2000, the Company repaid $25,000 of the principal balance plus
accrued interest. The Series A notes were due one year after the
date of issuance and were convertible, immediately and at any
time, at the option of the holder, in whole or in part, into
shares of the Company's common stock. In addition, in the event
that the Company completed the sale of stock in a qualified
offering as defined in the agreements, the Series A notes plus
accrued interest would be convertible, at the option of the
holder, into shares of the Company's Series A convertible
preferred stock ("Series A preferred stock") at a conversion
price of 80 % of the price of the qualified offering if the
offering was completed within 120 days of the issuance of the
series A notes, and 60 % of the price per share of the
qualified offering if completed after 120 days of the issuance of
the series A notes. The issuance of the Company's Series B
convertible preferred stock (see note 6(b)) was considered a
26
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
qualified offering under the terms of the Series A notes. The
qualified offering occurred more than 120 days after the issuance
of the Series A notes. In August 2000, at the election of the
Series A note holders, the remaining principal balance of the
Series A notes of $475,000, plus accrued interest of $55,584, was
converted into 297,746 shares of the Company's Series A preferred
stock at a price of $1.782 per share. To account for the
beneficial conversion feature of the Series A notes, the Company
recorded $371,801 of additional interest expense for the year
ended December 31, 2000. In addition, in August 2000, the
Company issued 30,864 shares of Series A preferred stock in
settlement of $91,666 owed for advances and services provided to
the Company.
(b) Series B Convertible Notes
At various dates during 1998 and 1999, the Company issued Series
B convertible notes ("Series B notes") for an aggregate of
$275,000, bearing interest at the rate of 8 % per annum.
In 2000, the Company issued an additional $50,000 of the series B
notes. The Series B notes plus accrued interest were
convertible, at the option of the holder, in whole or in part,
into shares of the Company's Series B convertible preferred stock
("Series B stock") in the event of a qualified offering as
defined in the agreement, at a price per share equal to the price
per share of the qualified offering. In August 2000, the Company
completed the sale of 303,245 shares of Series B stock at a price
of $2.97 per share for total proceeds of $900,630. The Series B
stock represented a qualified offering under the terms of the
Series B notes. In August 2000, at the election of the Series B
note holders, the outstanding principal balance of the Series B
notes of $325,000, plus accrued interest of $12,515 was converted
into 113,640 shares of Series B stock at $2.97 per share. In
2000, the Company also issued 51,937 shares of Series B stock in
full settlement of $154,250 owed for consulting services and the
Company issued 16,409 shares of Series B stock in settlement of
$48,733 of accrued interest owed under the Company's line of
credit with a wholesale book distributor (the "book distributor")
(see note 9(a)).
27
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
(c) Promissory notes
The following is a summary of notes payable as of:
2001 2000
-------- --------
Unsecured note due on demand,
interest accrues at 7% per annum. $ 14,780 $ -
Secured note due on demand
at 10% per annum 70,000 -
Unsecured note due November 30, 2004
at 11% per annum, with
monthly payments of $1,057 28,603 -
--------- --------
113,383 -
--------- --------
Less current portion notes payable 94,716 -
--------- --------
Long term portion notes payable $ 18,667 $ -
========= ========
The fair value of the notes payable, at December 31, 2001, was
approximately $108,000.
(8) Stockholders' Equity
The Company's Certificate of Incorporation, as amended and restated,
authorizes the Company to issue 5,000,000 shares of preferred stock
and 15,000,000 shares of common stock.
SERIES A and SERIES B CONVERTIBLE PREFERRED STOCK
The holders of the Series A and Series B Convertible Preferred
stock (together the "Preferred stock") have various rights and
preferences as follows:
Voting Rights
The holders of the Series A preferred stock are entitled to vote
together with the holders of the Series B preferred stock and the
holders of the common stock as a single class on most matters.
The total number of votes is equal to the number of common shares
that could be acquired upon conversion into common stock at the
conversion rate in effect at that date. Any merger,
reorganization, authorization of new shares, issuance of
warrants, and other transactions as defined in the Preferred
stock purchase agreements must be approved by one half of the
holders of the Preferred stock, voting separate from the holders
of the common stock.
Dividends
The Preferred stock accrues cumulative dividends at a rate of 8%
per share per annum when and if dividends are declared by
the Board of Directors. Unpaid and undeclared dividends on the
Series A Convertible Preferred Stock were $46,847 and $17,567, as
of December 31, 2001 and 2000, respectively. Unpaid and
undeclared dividends on the Series B Convertible Preferred Stock
were $167,643 and $43,234, as of December 31, 2001 and 2000,
respectively.
28
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
Liquidation
In the event of any liquidation, dissolution, or winding up of
the affairs of the Company, as defined in the Amended and
Restated Certificate of Incorporation, holders of the Preferred
stock are entitled to receive a liquidation price equal to the
original per share price paid plus any unpaid cumulative
dividends to the date of liquidation, dissolution, or winding up
of the affairs of the Company, whether or not declared, before
any distribution is made to any other class of stock.
Conversion
At any time, the holders of the Preferred stock may convert all
or some shares of Preferred stock into shares of common stock.
The Preferred stock is automatically converted into common stock
in the event of a qualified initial public offering of shares of
common stock, as defined in the Preferred stock purchase
agreements. As of December 31, 2001, the conversion rate was
such that each share of Preferred stock was convertible into one
share of common stock. No shares were converted to common stock
during the years ended December 31, 2001, 2000, and 1999.
(9) Related Party Transactions
(a) The Book Distributor Transactions
On July 2, 1998, the Company entered into a strategic agreement
(the "agreement") with the book distributor, the Company's
supplier of training and technical books, fulfillment and
shipping services and a supplier of database management services.
Under the agreement, the Company sold the book distributor
148,533 shares of common stock for $250,000. In addition, the
book distributor issued the Company a line of credit of up to
$200,000, bearing interest at the rate of 8% per annum,
due on April 30, 2000. The Company made draws against the line
of credit for the $200,000 limit. In connection with this line
of credit, the Company issued the book distributor a warrant to
purchase, at any time after July 2, 1998 and through April 30,
2003, in whole or in part, at the option of the holder, common
shares equal to a 5% fully diluted interest in the Company at the
date of exercise for $200,000.
The fair value of the warrant on the date of grant of $38,816,
was recorded as a deferred financing fee and amortized to
interest expense from July 2, 1998 through April 30, 2000, which
coincided with the original maturity date of the related line of
credit. The fair value was estimated using the Black-Scholes
option pricing model with the following assumptions: expected
life of 5 years, expected volatility of 70%, expected dividend
yield of 0%, and risk free interest rate of 5.47%.
Each time the Company issues additional equity interests or
rights to acquire equity interests, the number of shares of
common stock into which the warrant is exercisable increases so
that the number of common shares to be acquired is equal to a 5%
fully diluted interest. This results in the modification of a
vested award and a new measurement date for the warrant. The
Company recognizes, as interest expense, the additional cost
arising from the modification of the warrant in the period of
modification. During the year ended December 31, 2000, the
Company recognized additional interest expense of $42,294 for
modifications made to the warrant. No interest expense was
recognized during the year ended December 31, 1999 as no
modifications were made to the warrant. The fair value of each
29
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
modification made to the warrant during the year ended December
31, 2000 was estimated on the modification date using the Black-
Scholes option pricing model with the following assumptions;
expected life equal to the remaining contractual life of the
warrant, expected volatility of 70%, expected dividend yield of
0%, and risk free interest rate of 5.11%.
During the year ended December 31, 2001, the Company recognized
additional interest expense of $436,556 for modifications made to
the warrant. The fair value of each modification made to the
warrant during the year ended December 31, 2001 was estimated on
the modification date using the Black-Scholes option pricing
model with the following assumptions; expected life equal to the
remaining contractual life of the warrant, expected volatility of
70%, expected dividend yield of 0%, and risk free interest rate
of 4.40%.
In connection with the merger with Sideware, in December 2001,
the line of credit was extended until June 30, 2002 and the
warrant was amended to increase the percentage of common shares
equal to a 7.5% fully diluted interest in the Company. The
effect of this change was recorded in December 2001. The book
distributor executed the warrant and received 335,730 shares upon
completion of the merger with Sideware in May 2002 (See note 13).
Under the terms of the agreement, the Company granted one board
of directors position to a representative from the book
distributor. In addition, the agreement, as amended, allows the
Company to utilize the book distributor's book inventory database
for a period through one year after the effective date of the
proposed merger (note 13) at no cost. Thereafter, the Company
will be assessed a charge for the use of this database in the
event that the Company relicenses this database to its third
party customers. The agreement expires on July 1, 2006.
On April 30, 2000, the Company was in default on the $200,000
line of credit due to non-payment at maturity. The book
distributor waived the default provisions; however, the 12
percent default interest rate clause contained in the agreement
was enacted. The book distributor has consistently extended the
maturity date of the line of credit for 3 to 6 month periods, the
latest extension making the line of credit due on June 30, 2002.
The book distributor applied the outstanding balance of $200,000
to the exercise of the warrant to purchase shares of the
Company's common stock in May 2002.
In June 2000, the Company issued the book distributor 10,000
shares of common stock for accrued interest of $10,000.
In August 2000, the Company issued the book distributor 16,409
shares of series B convertible preferred stock for accrued
interest of $48,733.
In December 2001, the Company issued the book distributor 16,080
shares of series B convertible preferred stock for accrued
interest of $47,758.
Accounts payable - related party include $46,901 and $6,606 as of
December 31, 2001 and 2000, respectively, for amounts due to the
book distributor.
30
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
(b) Settlements of Obligations with Stock
(i) Common Stock Issuances
In June 2000, the Company issued 100,000 fully vested shares of
common stock to an officer of the Company as a signing bonus.
The fair value of the 100,000 shares of common stock was
estimated to be $100,000 and was recorded as a component of
general and administrative expenses in the accompanying
statements of operations during the year ended December 31, 2000.
In June 2000, the Company issued 100,000 shares of common stock
to an officer of the Company as part of an employment package.
The officer immediately holds all rights associated with the
common shares, however, the shares vested ratably over one year.
The fair value of the 100,000 shares was estimated to be
$100,000. The shares were vested 50% during the six months ended
December 31, 2000 and 50% during the six months ended June 30,
2001. Accordingly, $50,000 was recorded as a component of
general and administrative expenses in the accompanying
statements of operations during each of the years ended December
31, 2000 and 2001, respectively.
On June 14, 2000, the Company issued 271,651 shares of common
stock for $344,132 of accrued compensation for services rendered
by employees, officers, and consultants of the Company.
On April 16, 2001, the Company issued 237,997 shares of common
stock for $329,717 of accrued compensation, for services rendered
by employees, officers, and consultants of the Company.
On October 24, 2001, the Company issued 262,868 shares of common
stock for $262,868 of compensation, for services rendered by
employees, officers, and consultants of the Company.
(ii) Preferred Stock Issuances
During 2001, the Company sold 211,279 shares of Series B
convertible preferred stock at $2.97 per share for total proceeds
of $627,500.
During 2001, the Company issued Series B convertible notes in the
amount of $421,482. This note was converted into 141,898 shares
of Series B convertible preferred stock at $2.97 per share also
during 2001.
In December 2001, the Company issued 29,216 shares of Series B
convertible preferred stock in exchange for notes payable of
$80,836 and accrued interest of $5,937. These notes were
obligations incurred for recruiting services and investment
banking fees.
In December 2001, the Company issued 44,694 shares of Series B
convertible preferred stock in exchange for notes payable of
$107,030 and accrued interest of $25,711. This note was incurred
for expenses paid on behalf of the company. This note was
converted into Series B convertible preferred stock at $2.97 per
share.
31
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
(c) Related Party Notes Payable
A summary of related party notes payable as of December 31, 2001
and 2000 follows:
December 31,
----------------------
2002 2001
---------- ----------
Unsecured note for development services due
January 1, 2003, interest accrues at 12%
per annum $ 227,327 $ 159,908
Unsecured note for legal services due
May 20, 2002, interest accrues at 9.5%
per annum. Converted into 43,167 shares
of Series B convertible preferred
stock at $2.97 per share, in May 2002 128,206 128,206
Unsecured note for development services
due January 5, 2002, interest accrues
at 8% per annum 27,090 27,090
Unsecured note for development services
due January 5, 2002, interest accrues
at 8% per annum. Converted into 23,569
shares of common stock at $2.97 per
share, in January 2002 67,978 67,978
Unsecured note for legal services due
earlier of June 11, 2003 or financing
event, interest accrues at 6% per annum,
monthly principal and interest payments
of $8,000 132,819 -
Demand note payable with interest at 5%
per annum 150,000 -
Unsecured note for legal services due
August 10, 2001, interest accrues at
7% per annum. Converted into 13,468
shares of Series B convertible preferred
stock at $2.97 per share, during 2001 - 40,000
Unsecured note for expenses paid on
behalf of the Company, due January 1, 2001
interest accrues at 10% per annum.
Converted into 36,037 shares of Series B
convertible preferred stock at $2.97
per share, during 2001 - 107,030
Unsecured note for recruiting services
due July 1, 2001, interest accrues at
7% per annum. Converted into 21,139 shares
of Series B convertible preferred stock at
$2.97 per share, during 2001 - 62,783
---------- ----------
733,420 592,995
Less current portion (159,909) (27,090)
----------- ----------
Long term portion $ 573,511 $ 565,905
========== ==========
The fair value of related party notes payable, at December 31, 2001
and 2000 was approximately $683,000 and $565,000, respectively.
(d) Other
Accrued expenses - related party included $50,000 at December 31, 2000
for maintenance fees due to a developer that holds stock in the Company.
32
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
(10) Stock Options
In June 2000, the Company approved the 2000 Equity Incentive Plan
(the "2000 Plan") which provides for the granting of incentive or
non-qualified stock options to employees, directors, consultants and
advisors of the Company to purchase shares of its common stock within
prescribed periods. Options are granted at an exercise price equal
to the estimated fair value on the grant date, as determined by the
Board of Directors. The options generally vest over two years; one-
third on the date of grant, one-third on the first anniversary of the
grant date and the remaining one-third on the second anniversary of
the grant date. The options generally expire ten years after the
grant date. As of December 31, 2001 the Company has reserved 700,000
shares of common stock for issuance under the 2000 Plan.
Stock option activity, including both employee and non-employee
options, for the 2000 Plan during the years ended December 31, 2001
and 2000 is as follows:
Number of Average
Shares Exercise Price
------------ -----------------
Balance, December 31, 1999 - $ -
Granted 398,150 1.00
Forfeited/canceled - -
Exercised (2,156) 1.00
-------- -------
Balance, December 31, 2000 395,994 $ 1.00
Granted 226,000 1.70
Forfeited/canceled (29,494) 2.00
Exercised (26,500) 1.00
-------- --------
Balance, December 31, 2001 566,000 $ 1.28
======== ========
Under the 2000 Plan, 486,000 options were outstanding at $1.00 per
share, and 80,000 were outstanding at $2.97 per share, at
December 31, 2001. The weighted-average remaining contractual life
of those options was 8.82 years. At December 31, 2001, the number of
options exercisable under the 2000 Plan totaled 219,984 and the
weighted-average exercise price of those options exercisable was
$1.00.
The per share weighted-average fair value of the options granted in
2001 and 2000 was $0.53 and $0.62 respectively on the grant date
using the Black-Scholes option pricing model with the following
weighted-average assumptions:
2001 2000
---------- ----------
Risk free interest rates 4.52% 6.18%
Expected lives 5 years 5 years
Dividend yield 0% 0%
Expected volatility 70% 70%
33
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
The Company applied APB No. 25 and related interpretations in
accounting for its employee stock options and, accordingly, no
compensation cost has been recognized for its stock options in the
accompanying financial statements as the exercise price of the stock
options granted is equal to the estimated fair value of the common
stock on the date of grant. The following table presents the pro
forma net loss that would have been recorded by the Company for the
years ended December 31, 2001 and 2000 had the Company determined
compensation expense for employees based on the fair value
methodology under SFAS No. 123. The pro forma impact for 2001 and
2000 may not be indicative of the impact in future periods.
2001 2000
------------- -------------
Net loss - as reported $ (2,509,190) $ (2,606,982)
============= =============
Net loss - pro forma $ (2,581,691) $ (2,782,255)
============= =============
During the years ended December 31, 2001 and 2000, the Company
granted 56,000 and 34,656 options, respectively, to non-employees.
Pursuant to SFAS No. 123. the fair value of these options is re-
measured, using the Black-Sholes option pricing model, at each
reporting date until vested and is recognized as expense over the
vesting period. For the years ended December 31, 2001 and 2000,
approximately $48,000, and $4,000, respectively, was recognized as
compensation expense relating to these options.
(11) Commitments
(a) Leases
The Company had an operating lease for office space, which
terminated on February 5, 2002. Rental expense attributable to
this operating lease was approximately $54,000 and $55,000 for
the years ended December 31, 2001, and 2000, respectively. In
January 2002, the Company leased new office space at a monthly
lease cost of approximately $12,000, for a period of 13 months,
to expire in February 2003.
34
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
During 2001, the Company leased computer software and equipment
under agreements that are classified as capital leases. The
future minimum annual payments required under these lease
agreements were as follows:
Year ending December 31:
2002 $ 51,288
2003 $ 51,288
2004 $ 32,957
-----------
Total future minimum capital lease payments 135,533
Amount representing interest (17,041)
-----------
Present value of net minimum capital
lease payments 118,492
Less: current installments of obligations
under capital leases (41,347)
------------
Obligations under capital leases,
excluding current installments $ 77,145
============
(b) Legal Proceedings
The Company is subject to legal proceedings and claims which
arise in the ordinary course of business. As of December 31,
2001, management is not aware of any asserted or pending
litigation or claims against the Company that would have a
material adverse effect on the Company's financial condition,
results of operations, or liquidity.
35
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
(12) Income Taxes
The Company has incurred operating losses since its inception and has
recognized no current or deferred tax provision or benefit. The
provision for income taxes is different from that which would be
obtained by applying the statutory federal income tax rate to loss
before income taxes. The significant items causing this difference
are as follows:
Year ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Expected tax benefit at
34% statutory rate $ 853,125 $ 886,374 $ 475,899
State tax, net of federal
benefit 102,529 107,996 69,067
Beneficial conversion expense (148,429) (140,792) -
Non-deductible expenses (455) (3,110) (823)
Increase in valuation allowances (806,770) (850,468) (544,143)
--------- --------- ---------
- - -
========= ========= =========
Temporary differences that give rise to deferred tax assets and
liabilities at December 31, 2001 and 2000 are as follows:
December 31,
----------------------------
2001 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 868,925 $ 101,138
Start-up expenses 1,053,029 1,127,873
Accrued expenses 471,364 372,043
------------ ------------
Total gross deferred tax assets 2,393,318 1,601,054
Deferred tax liabilities:
Depreciation and amortization 1,035 15,541
------------ ------------
2,392,283 1,585,513
Valuation allowance (2,392,283) (1,585,513)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
As of December 31, 2001, the Company had net operating loss
carryforwards available to offset future taxable income of
approximately $2,230,000, which will expire in 2018 through 2021.
The valuation allowance is the result of the uncertainty regarding
the ultimate realization of the tax benefits related to the deferred
tax assets. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some or
all of the deferred tax asset will not be realized. Management
considers estimates of taxable income and the reversal of temporary
differences in making this estimate. The valuation allowance was
recorded to reduce net deferred tax assets to zero, as management
believes it is more likely than not that the deferred tax assets will
not be realized. Further, as a result of certain financing and
36
KNOWLEDGEMAX, INC.
Notes to Financial Statements
December 31, 2001 and 2000
capital transactions, an annual limitation on the future utilization
of a portion of the net operating loss carryforwards may have
occurred. As a result, the net operating loss carryforwards may not
be fully utilized before they expire.
(13) Subsequent Events
On December 7, 2001, the Company entered into an agreement to merge
with Sideware Systems, Inc., a publicly-traded company. On March
20, 2002, the Company's and Sideware Systems Inc.'s shareholders
approved the merger transaction. On May 21, 2002, the Company
completed the merger on terms consistent with the merger agreement,
and the Company's shareholders received greater than 50% of the
voting interests of the merged company. The merger terms included
the sale of a portion of an investment held by Sideware, for
$700,000, immediately prior to the merger.
On July 29, 2002, the Company executed a line of credit agreement
with an investment bank. The line of credit is for $800,000 with
interest at 10%, for a period of six months. The line is secured
under a junior security agreement by all of the assets of the
Company. The agreement also calls for the issuance of up to
2,050,000 warrants to purchase the Company's stock at
$.10 per share, for a period of three months, and an additional
2,050,000 warrants to purchase the Company's common stock at
$.10 per share if the line is extended for an additional three months.
37
CERTIFICATION
I, E. Linwood Pearce, in my capacity as Chief Executive Officer
of Knowledgemax, Inc. (the Company), hereby certify that the
current Report of Form 8-K dated May 21, 2002, as amended on Form
8-K/A as filed with the Securities and Exchange Commission on the
date hereof ("the Report"), fully complies with the requirements
of Section 13(a) of the Securities Act of 1934 and that the
information contained in the Report fairly presents, in all
material respects, the financial condition of the Company at the
end of such period and the results of operations of the Company
for such periods.
By: /s/ E. Linwood Pearce
------------------------------
E. Linwood Pearce
Chief Executive Officer,
Chairman of the Board
Dated: September 23, 2002
CERTIFICATION
I, James L. Speros, in my capacity as President of "New
Knowledgemax, Inc." formerly Sideware Systems, Inc., (Sideware)
hereby certify that the current Report of Form 8-K dated May 21,
2002, as amended on Form 8-K/A as filed with the Securities and
Exchange Commission on the date hereof ("the Report"), fully
complies with the requirements of Section 13(a) of the Securities
Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial
condition of the Sideware at the end of such period and the
results of operations of the Sideware for such periods.
By: /s/ James L. Speros
------------------------------
James L. Speros
President
Dated: September 23, 2002
I, Charles P. Abod II, CPA, in my capacity as Acting Chief
Financial Officer of Knowledgemax, Inc. (the Company), hereby
certify that the current Report of Form 8-K dated May 20, 2002,
as amended on Form 8-K/A as filed with the Securities and
Exchange Commission on the date hereof ("the Report"), fully
complies with the requirements of Section 13(a) of the Securities
Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial
condition of the Company at the end of such period and the
results of operations of the Company for such periods.
By: /s/ Charles P. Abod, II, CPA
------------------------------
Charles P. Abod II, CPA
Acting Chief Financial Officer
Dated: September 23, 2002
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 hereunto duly authorized.
KNOWLEDGEMAX, INC.
(Registrant)
Dated: September 23, 2002
By: /s/ E. Linwood Pearce
------------------------------
E. Linwood Pearce
Chief Executive Officer,
Chairman of the Board
By: /s/ James L. Speros
------------------------------
James L. Speros
President
By: /s/ Charles P. Abod
------------------------------
Charles P. Abod II, CPA
Acting Chief Financial Officer
38
EXHIBIT INDEX
2.1 Consent of Independent Auditors'
Independent Auditors' Consent
The Board of Directors
Knowledgemax, Inc.:
We consent to the incorporation by reference in the registration
statement (No. 333-76648) on Form S-8 of Knowledgemax, Inc.
(formerly Sideware Systems, Inc.) of our report dated August 15,
2002, with respect to the balance sheets of Knowledgemax, Inc. as
of December 31, 2001 and 2000, and the related statements of
operations, stockholders' deficit and cash flows for each of the
years in the three-year period ended December 31, 2001, which
report appears in the Form 8-K/A of Knowledgemax, Inc. dated May
20, 2002.
Our report dated August 15, 2002 contains an explanatory
paragraph that states that the Company has incurred losses and
negative cash flows from operations since inception, has working
capital and stockholders' deficiencies and has been unable to
repay certain obligations when due, that raise substantial doubt
about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Our report dated December 15, 2002, contains an emphasis
paragraph that states that the Company has entered into an
agreement to merge with Sideware Systems, Inc., a publicly-traded
company. The merger was completed on May 21, 2002 and the
Company's shareholders received greater than 50% of the voting
interests of the merged company.
/s/ KPMG LLP
McLean, VA
September 20, 2002