x
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period ended June 30, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to____________
KNOWLEDGEMAX, INC.
(Exact name of Registrant as specified in its charter)
Delaware, USA 52-2151837
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organizaiton) Identification No.)
Commission File No. 0-29974
7900 Westpark Drive, Suite T-300, McLean, Virginia 22102-4233
(Address of Principal Executive offices)
Issuer's Telephone Number: (703) 893-1800
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Shares with $0.001 par value
(Title of Class)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
180,483,066 common shares with $0.001 par value as of
September 23, 2002.
Index to Exhibits on Page
KNOWLEDGEMAX, INC.
QUARTERLY REPORT ON FORM 10-Q
For the quarter ended June 30, 2002
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ..................................................1
Condensed consolidated statements of operations for the
three and six months ended June 30, 2002 and 2001
Condensed consolidated balance sheets as of
June 30, 2002 and December 31, 2001
Condensed consolidated statements of cash flows for the
six months ended June 30, 2002 and 2001
Notes to condensed consolidated financial statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .........................9
Item 3. Qualitative and Quantitative
Disclosure about Market Risk .........................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................................14
Item 2. Changes in Securities and Use of Proceeds ............................14
Item 3. Defaults upon Senior Securities ......................................14
Item 4. Submission of Matters to a Vote of
Securities Holders ...................................................14
Item 5. Other Information ....................................................14
Item 6. Exhibits and Reports on Form 8-K .....................................15
ii
Forward-Looking Statements Disclosure
This document, including information incorporated by reference, and
future filings by Knowledgemax, Inc. (the 'Company') on Form 10-K,
Form 10-Q, and Form 8-K and future oral and written statements by
the Company and its management, may contain forward-looking
statements about the Company and its subsidiary which we believe are
within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating
and financial performance, and funding and growth opportunities
expected or anticipated to be realized by management. Words such as
'may,' 'could,' 'should,' 'would,' 'believe,' 'anticipate,'
'estimate,' 'expect,' 'intend,' 'plan' and similar expressions are
intended to identify these forward-looking statements. The
important factors we discuss below and elsewhere in this document,
as well as other factors discussed under the caption 'Management's
Discussion and Analysis of Financial Condition and results of
Operations' in this document and identified in our filings with the
SEC, and those presented elsewhere by our management from time to
time, could cause actual results to differ materially from those
indicated by the forward-looking statements made in this document:
- - the strength of the United States economy in general and the
strength of the local economies in which we conduct our
operations;
- - our reliance on a limited number of clients;
- - our ability to raise sufficient funds to meet our operating
requirements;
- - the timely development of and acceptance of our new products
and services and the perceived overall value of these products
and services by users, including the features, pricing and
quality compared to competitors' products and services;
- - our ability to repay the debt and obligations incurred;
- - complexities involved in implementing and integrating our
services;
- - fluctuations in revenues and operating results;
- - the impact of technological changes;
- - dependence on a small number of vendors and service providers;
- - litigation; and
- - our success at managing the risks involved in our business.
Forward-looking statements by the Company and its management are
based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions of management and are not
guarantees of future performance. The Company disclaims any
obligation to update or revise any forward-looking statements based
on the occurrence of future events, the receipt of new information,
or otherwise.
The Company is in the process of changing its Independent certified
public accountants. Upon the hiring of the new accountants and
dismissing the current accountants. The Company intends to file a
Current Report on Form 8-K reporting the change in our certifying
accountants within five business days of the reportable event.
As a result of these actions, the review required by independent
auditors under Regulation S-X of the Securities Exchange Act of the
financial information contained in this quarterly report on Form 10-Q
has not been completed as of the date hereof. Upon completion of our
independent auditor's review we will promptly file an amendment
indicating the result thereof. We anticipate our independent
auditors to complete their review on or before October 4, 2002.
iii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Financial Statements
KNOWLEDGEMAX, INC.
Six month periods ended June 30, 2002 and 2001
(Unaudited)
1
Knowledgemax, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
=============================================================================
June 30, December 31,
2002 2001
- -----------------------------------------------------------------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 20,793 $ 80,633
Accounts receivable 193,642 149,011
Prepaid expenses and other current assets 124,218 53,222
- -----------------------------------------------------------------------------
Total current assets 338,653 282,866
Property and equipment, net 153,332 165,309
Other assets, net 300 600
- ----------------------------------------------------------------------------
Total assets $ 492,285 448,775
=============================================================================
Liabilities and Stockholders' Deficit
Current liabilities
Bank line of credit $ 62,519 72,970
Line of credit - related party - 200,000
Accounts payable 1,267,737 535,260
Accounts payable - related party 61,450 46,901
Accrued expenses 334,527 208,997
Salaries payable 131,248 122,570
Current installments of obligations
under capital leases 43,430 41,347
Notes payable 95,293 94,716
Notes payable - related party 365,578 159,909
- -----------------------------------------------------------------------------
Total current liabilities 2,361,782 1,482,670
Notes payable - related party - 573,511
Notes payable 13,260 18,667
Obligations under capital leases,
excluding current portion 55,042 77,145
- -----------------------------------------------------------------------------
Total liabilities 2,430,084 2,151,993
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 convertible preferred stock
(voting), $.01 par value, 775,000 shares
designated, 928,3988 shares
issued and outstanding (liquidation
preference of $1,484,373) - 9,284
Common stock, $.001 par value, 300,000,000
shares authorized, 179,941,937 and
2,011,315 shares shares issued and
outstanding, respectively 180,483 20,113
Additional paid-in capital 7,461,877 5,836,416
Accumulated deficit (9,580,159) (7,572,317)
- -----------------------------------------------------------------------------
Total stockholders' deficit (1,937,799) (1,703,218)
- -----------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 492,285 $ 448,775
=============================================================================
See accompanying notes to condensed consolidated interim financial statements.
2
Knowledgemax, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
=======================================================================================================
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
Revenue $ 296,500 $ 146,935 $ 624,699 $ 146,935
Costs of revenue - related party 110,502 455 212,471 455
Costs of revenue 164,772 124,941 365,265 124,941
- -------------------------------------------------------------------------------------------------------
Gross profit 21,226 21,540 46,964 21,540
Operating expenses:
Research and development 214,748 110,165 474,331 137,173
General and administrative 896,135 206,179 1,449,473 412,034
- -------------------------------------------------------------------------------------------------------
Total operating expenses 1,110,883 316,345 1,923,804 549,208
- -------------------------------------------------------------------------------------------------------
Loss from operations (1,089,657) (294,805) (1,876,841) (527,668)
Interest expense (52,175) (25,556) (131,001) (48,553)
- -------------------------------------------------------------------------------------------------------
Loss before income taxes (1,141,831) (320,361) (2,007,842) (576,222)
Income taxes - - - -
- -------------------------------------------------------------------------------------------------------
Net loss $ (1,141,831) $ (320,361) (2,007,842) (576,222)
=======================================================================================================
Basic and diluted net loss per share $ (0.01) $ (0.01) $ (0.02) $ (0.01)
Weighted average shares
Basic and diluted 127,263,011 63,035,302 105,022,498 60,269,490
See accompanying notes to condensed consolidated interim financial statements.
3
Knowledgemax, Inc.
Condensed Statements of Cash Flows
(Unaudited)
=================================================================================
Six months ended
June 30,
2002 2001
- ---------------------------------------------------------------------------------
Cash flows used in operating
activities:
Net loss $ (2,007,842) $ (617,369)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 33,509 30,228
Isssuance of common stock
for services 209,200 50,000
Warrant expense 72,121 -
Non-cash stock compensation
expense 20,296 5,170
Non-cash conversion of accrued
interest into Series B
convertible preferred stock 21,168 -
Change in assets and liabilities:
(Increase) decrease in accounts
receivable (42,388) (146,935)
(Increase) decrease in prepaid
expenses and other assets 913 (2,604)
Increase (decrease) in accounts
payable and accrued expenses 535,932 260,557
- ---------------------------------------------------------------------------------
Net cash used in operating
activities (1,157,091) (420,953)
Cash flows from investing
activities:
Purchases of property and equipment (16,671) -
- ---------------------------------------------------------------------------------
Net cash used in investing
activities (16,671) -
Cash flows from financing
activities:
(Repayments on) proceeds from
line of credit (10,451) (11,095)
Repayments on capital leases (20,020) -
Repayments on notes payable (4,830) -
Proceeds from issuance of
notes payable related party 50,000 -
Repayment in notes payable related party (71,658) -
Proceeds received from merger 1,170,881 -
Proceeds from issuance of notes payable - 70,000
Proceeds from issuance of Series B
convertible preferred stock - 450,000
Proceeds fomr issuance of Series B
convertible notes - 50,000
- ---------------------------------------------------------------------------------
Net cash provided by financing
activities 1,113,922 558,905
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (59,840) 137,952
Cash and cash equivalents,
beginning of period 80,633 11,188
- ---------------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 20,793 $ 149,140
=================================================================================
Supplemental disclosure of
cash flow information:
Interest paid $ 22,826 $ 4,401
=================================================================================
Supplemental disclosure of
noncash activities:
Assets acquired under capital lease - 51,548
Conversion of accounts payable
to notes payable - 132,818
Exercise of warrant in exchange for
line or credit related party 200,000 -
Conversion of accrued salaries into
common and Series B convertible
preferred stock 177,920 279,717
Conversion of notes payable related
party and accrued interest to Series B
convertible preferred stock 219,670 -
See accompanying notes to condensed consolidated interim financial statements.
4
Knowledgemax, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 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. The Company generates revenue from the sales of 3rd
party materials including books, learning materials, videos and CDs,
to its customers. The Company develops and maintains the customer
tailored eSourcing infrastructure through a co-branded eBusiness
model.
The Company began generating revenues in May 2001, with a contract
to provide the bookstore and knowledge and learning resource center
to a Fortune 100 Corporation.
In May 2002, the company completed the planned merger with Sideware
Systems, Inc. as more fully described in Note 4, and in the Form 8-K
and Form 8-K/A filed with the Securities and Exchange Commission on
May 21, 2002 and September 23, 2002, respectively.
(2) Basis of Presentation
The condensed consolidated 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
(all of which are normal and recurring in nature) that, in the
opinion of management, are necessary for fair presentation of the
interim financial information.
The condensed consolidated 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 make the information presented not misleading. These
unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the audited
financial statements and notes for the year ended December 31, 2001
in Form 8-K/A for Knowledgemax and Form 10-K for Sideware and Form
10-Q for Sideware as filed with the Securities and Exchange
Commission.
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 investors.
While 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, which funding may be in
the form of debt, equity, or some combination thereof. There can be
no assurance of continued funding by 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
5
generating operating losses and negative cash flows from operations
for the foreseeable future. The markets the Company are 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. 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
Sideware Systems Inc., a Yukon Territory, Canada corporation
('Sideware') completed its merger with Knowledgemax, Inc., a
Delaware corporation ('Old 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 Old Knowledgemax,
whereby Old Knowledgemax was the surviving corporation, and Old
Knowledgemax changed its name to 'Knowledgemax Learning, Inc.'
Immediately following this transaction, the Company changed its
corporate name from Sideware to 'Knowledgemax, Inc.'
On December 7, 2001, Sideware entered into an Agreement and Plan of
Merger and Reorganization (the 'Merger Agreement') with Old
Knowledgemax and KM Acquisition Corp. On May 20, 2002, the merger
was consummated by KM Acquisition Corp. merging with and into Old
Knowledgemax, with Old Knowledgemax the surviving corporation,
resulting in Old Knowledgemax becoming a wholly owned subsidiary of
the Company. In the merger, Old Knowledgemax stockholders
received 24.82 shares of the Company common stock for each share of
Old Knowledgemax common stock that they held, and the Company
assumed the obligations of Old Knowledgemax under its outstanding
stock options (with each former Old Knowledgemax option converting
into an option to purchase 24.82 shares of the Company common stock.
An aggregate of 94,427,331 shares of the Company common stock were
issued to former Old Knowledgemax stockholders in the merger and
options to purchase Old Knowledgemax shares converted into options
to purchase 16,660,251 shares of the Company common stock in
connection with the assumption of the Old Knowledgemax options.
The shares issued to the former Old Knowledgemax stockholders in the
merger represent approximately 52.48% of the registrant's issued and
outstanding common stock immediately following the merger.
Immediately following the closing of the merger, including the Old
Knowledgemax options assumed by the Company, former Old Knowledgemax
stockholders and option holders owned or had the right to acquire
55% of the fully diluted common shares of the Company. Accordingly
the merger constitutes a change of control of the Company.
As the merger resulted in the stockholders of old Knowledgemax
owning greater than 50% of the merged entity, the merger is treated
as an acquisition of the net assets of Sideware by Old Knowledgemax.
This means that the assets of Sideware are valued at their fair
market value and that value is assigned to the equity instruments
deemed issued by Old Knowledgemax. In addition, as Old
6
Knowledgemax is considered to have acquired Sideware's net assets,
the historical financial statements of the Company will reflect Old
Knowledge Max's operations to the date of the merger and combined
with Sideware's thereafter.
Additionally, as a prerequisite to the merger, immediately prior to
completing the merger, Sideware changed its corporate jurisdiction
from the Yukon Territory of Canada to the State of Delaware, by
reincorporating under the General Corporation Law of Delaware.
(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,
and the associated expenses are included in cost of revenue. There
were no material discounts or promotions during the three month and
six month periods ended June 30, 2002.
(6) Equity Transactions
Effective with the merger, each Old Knowledgemax share was converted
into 24.8163 shares of the combined Company. The Company issued
94,427,331 shares to the Old Knowledgemax shareholders in connection
with the merger.
Also, effective upon the merger, 328,610 shares of Series A
Convertible Preferred Stock and 1,006,266 shares of Series B
Convertible Preferred Stock were converted into 1,334,876 share of
common stock and subsequently exchanged for 33,126,683 shares in the
combined Company
The following equity transactions, which occurred prior to the
merger date, are stated at the post-merger share quantity.
Prior to the merger for the six months ended June 30, 2002, Old
Knowledgemax granted 2,593,390 options to purchase common stock at
exercise prices between $0.12 and $0.13 per share. After the
merger the Company granted 250,000 options at a price of $0.065 per
share.
For the three months ended March 31, 2002, the Company issued
584,895 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 1,488,978 shares of common stock for
services rendered to the Company for $178,200.
For the three months ended June 30, 2002, the Company issued
1,250,593 shares of common stock to a law firm to settle a related
party note payable and accrued interest totaling $149,670.
The Company also issued 77,104 shares of Series B convertible
preferred stock for interest totaling $9,228.
In connection with the merger, the Company issued 8,331,576 shares
to the related party book distributor pursuant to the exercise of
the warrant for $200,000, which was exchanged for a line of credit
balance due from the Company.
Subsequent to the merger, the Company issued 240,000 shares of
common stock in the combined Company to consultants for services
totaling $31,000.
7
(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. The county has requested repayment of
the note and accrued interest of approximately $80,000 by October
31, 2002.
(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.
Loss per share is computed by dividing the net loss by the weighted
average number of shares outstanding. Potential common shares have
not been included in the earnings per share calculation as their
inclusion would be anti-dilutive.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Condensed Financial Statements and the related notes
that appear elsewhere in this document.
Overview
The Company has developed an eBusiness supply chain and delivery
system for commercially available learning and knowledge products
and customer proprietary information. The Company's main activity
consists of developing the Knowledgemax.com website, third party
content selling, eCommerce, and eLearning database platform for
companies to select, purchase, and deliver knowledge resources and
education to their employees.
The Company began generating revenues in May 2001, with a
contract to provide the bookstore and knowledge and learning
resource center to IBM.
On May 1, 1998, Knowledgemax, Inc. was incorporated in the State
of Maryland. On June 17, 1998, Leadership Library Limited
Partnership was merged into Knowledgemax, Inc. On June 8, 2000,
the 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 formerly known as Sideware Systems Inc., a Yukon
Territory, Canada corporation ('Sideware') completed its merger
with Knowledgemax, Inc., a Delaware corporation ('Old
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 Old Knowledgemax, whereby Old Knowledgemax was the
surviving corporation, and Old Knowledgemax changed its name to
'Knowledgemax Learning, Inc.' Immediately following this
transaction, the Company changed its corporate name from Sideware
to Knowledgemax, Inc.
On December 7, 2001, Sideware entered into an Agreement and Plan
of Merger and Reorganization (the 'Merger Agreement') with Old
Knowledgemax and KM Acquisition Corp. On May 20, 2002, the merger
was consummated by KM Acquisition Corp. merging with and into Old
Knowledgemax, with Old Knowledgemax the surviving corporation,
resulting in Old Knowledgemax becoming a wholly owned subsidiary
of the Company. In the merger, Old Knowledgemax stockholders
received 24.82 shares of the Company common stock for each share
of Old Knowledgemax common stock that they held, and the Company
assumed the obligations of Old Knowledgemax under its
outstanding stock options (with each former Old Knowledgemax
option converting into an option to purchase 24.82 shares of the
Company common stock. An aggregate of 94,427,331 shares of the
Company common stock were issued to former Old Knowledgemax
stockholders in the merger and options to purchase Old
Knowledgemax shares converted into options to purchase 16,660,251
shares of the Company common stock in connection with the
assumption of the Old Knowledgemax options.
The commons stock issued to the Old Knowledgemax stockholders in
the merger represented approximately 52.48% of the Company's
issued and outstanding common stock immediately following the
merger. Immediately following the closing of the merger,
including the Old Knowledgemax options assumed by New
Knowledgemax, former Old Knowledgemax stockholders and option
9
holders owned or had the right to acquire 55% of the fully
diluted common shares of New Knowledgemax. Accordingly the merger
constitutes a change of control of Sideware.
These unaudited consolidated financial statements have been
prepared on the going concern basis under which an entity is
considered to be able to realize its assets and satisfy its
liabilities and commitments in the ordinary course of business.
Through the date of these consolidated financial statements the
Company has incurred operating losses and negative cash flow from
operating activities. Operations to date have been financed
primarily by debt and equity transactions. These factors 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 following
discussion does not reflect any adjustments that might be
necessary should the Company be unable to continue as a going
concern.
Critical Accounting Policy
The Company recognizes revenue from the sales of 3rd party
materials such as 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.
Results of Operations
The following discussion compares the results of operations for
the three- and six-month periods ended June 30, 2002.
As discussed above, the merger of Sideware and Old Knowledgemax
resulted in the stockholders of Old Knowledgemax owning in excess
of 50% of the Company, requiring the merger be accounted for as
if Old Knowledgemax acquired Sideware. Accordingly, the
historical financial statements of the Company will reflect Old
Knowledgemax's operations to the date of the merger and combined
with Sideware's after the merger. Therefore, these results
include Sideware's results of operations from May 21, 2002 (the
merger date) through June 30, 2002, in accordance with the
purchase method of accounting for the merger. Sideware ceased
operations after the merger and had approximately $3,600 of
trailing expenses in the period from May 21, 2002 to June 30,
2002, which are included in general and administrative expenses.
Prior to the merger, the Chalk Group was included in the results
of operations, as Sideware held approximately 80% of the
outstanding shares of the Chalk Group. As Sideware's investment
in the Chalk Group was reduced to approximately 28% prior to the
merger with Knowledgemax, and the investment value has been
determined to be unrecoverable, all results of the Chalk Group
have been accounted for on the equity method of accounting and
have not been consolidated into the results of the Company.
Revenues
Revenues increased 101% in the three-month period ended June 30,
2002 to $296,500 from $146,935 compared to the corresponding
period of the prior year. The Company began generating revenues
in May 2001, and as such the June 30, 2002 quarter reflects a
full quarter of revenue activity compared to the prior year
10
period, and an increase in revenue from the primary customer.
The revenue from the primary customer, IBM, has been generated
from a limited number of users of the customer user population,
as the system has not been fully deployed to the full user
community.
The Company's revenue is primarily generated and due from one
customer. During the three-month period ended June 30, 2002, 98%
of revenue was generated from one customer compared to 100% in
the corresponding prior year period.
The Company signed three new customers during the quarter,
including the National Geographic Society and Dyncorp. Limited
revenue has been generated from these customers as the
development and promotion of the site was completed near the end
of the quarter. In addition, revenues from 'Information On
Demand' products and services are also expected to have higher
margins.
Revenue increased 325% in the six-month period ended June 30,
2002 to $624,699 from $146,935 compared to the corresponding
period of the prior year. As noted above, the company began
generating revenue in May 2001, and as such the six month period
ended June 30, 2002 reflects a full six months of revenue
activity compared to the prior year. In the first quarter of
2001, the Company had no revenue.
Cost of revenue
Cost of revenue for the three-month period ended June 30, 2002
was $275,274, resulting in a gross margin (defined as revenue
less cost of products) of 7%, compared to a cost of revenue of
$125,396 and a gross margin of 15% in the corresponding period of
the prior year. The decrease in margins is due to a high volume
of bulk orders in the three month period ended June 30, 2001,
which carry higher margins, compared with the high portion of
individual orders in the quarter ended June 30, 2002, which carry
lower margins, from the primary customer. New contracts being
negotiated or signed are expected to contain higher gross margins
for individual orders than the contract with the Company's
primary customer.
Cost of revenue for the six-month period ended June 30, 2002 was
$577,736, resulting in a gross margin (defined as revenue less
cost of products) of 8%, compared to a cost of revenue of
$125,396 and a gross margin of 15% in the corresponding period of
the prior year. As noted above, the margins decreased due a
decrease in the proportion of higher margin bulk orders to lower
margin individual orders for the Company's primary customer.
Operating expenses
Total operating expenses for the three-month period ended June
30, 2002 were $1,110,883 compared to $316,345 for the
corresponding period of the prior year. Research and development
expenses increased from $110,165 to $214,748 due to additional
resources hired or contracted by the Company to develop
enhancements to its supply chain, delivery and billing systems.
General and administrative expenses increased from $206,179 to
$896,135 due to expenses related to the merger with Sideware, the
securing of additional financing, the office space leased in
January 2002 and increased expenses for legal, accounting, and
public company compliance.
11
Total operating expenses for the six-month period ended June 30,
2002 were $1,923,804 compared to $549,208 for the corresponding
period of the prior year. Research and development expenses
increased from $137,173 to $474,331 due to the increased research
and development activities mentioned above. Similarly, general
and administrative expenses increased from $412,034 to $1,449,473
due to the activities noted above.
As of the date of this report, the Company has 19 employees.
Excluding the merger with Sideware, the Company has not increased
its number of employees since March 2002.
Interest expense
Interest expense for the three-month period ended June 30, 2002
was $52,175 compared to $25,556 for the corresponding prior year
period. This increase was due to the increased debt incurred
compared to the prior year.
Similarly, interest expense for the six-month period ended June
30, 2002 was $131,001 compared to $48,553 for the corresponding
prior year period. This increase was due to the increased debt
incurred compared to the prior year.
Net loss
For the three month period ended June 30, 2002, the net loss was
$1,141,831 compared to a net loss of $320,361 for the
corresponding prior period. The combination of decreased gross
margin percentage and increased operating expenses for research
and development and general and administrative purposes resulted
in the increased net losses.
For the six-month period ended June 30, 2002, the net loss was
$2,007,842 compared to a net loss of $576,222 for the
corresponding prior period. The increase in net loss was due to
lower gross margins combined with higher operating expenses such
as research and development and general and administrative
expenses.
Liquidity and capital resources
The Company has experienced continuing 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 Company believes that its recently completed merger will
provide it with additional opportunities to access capital,
including access to the public market for securities, however,
there can be no assurance that the merger will provide sufficient
resources or access to capital to support or sustain the
operations of the Company.
As of June 30, 2002 the Company held $20,793 in cash and cash
equivalents compared to $80,633 at December 31, 2001. Working
capital (defined as current assets less current liabilities) at
June 30, 2002 was a deficit of $2,023,129 compared to deficit of
$1,765,536 at December 31, 2001. The increase in the working
capital deficit is attributable to the substantial debt used to
fund the net losses of the Company.
Net cash used in operating activities for the six months ended
June 30, 2002 was $1,157,091, compared to $420,953 for the six
months ended June 30, 2001. The increase in the net cash used in
both periods was primarily the result of funding the net losses
of the Company.
12
Net cash used in investing activities for the six months ended
June 30, 2002 was $16,672. This was to purchase property and
equipment, primarily for network security. For the six months
ended June 30, 2001 there was no cash used in investing
activities.
Net cash provided by financing activities for the six months
ended June 30, 2002 was $1,113,922, primarily due to $1,170, 881
obtained as part of the merger with Sideware, offset by
repayments on notes payable and capital leases. For the six
months ended June 30, 2001, net cash provided by financing
activities totaled $558,905, primarily due to $450,000 in
proceeds from the issuance of Series B convertible preferred
stock.
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 investors,
debt instruments, and vendor payables. While 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 said funding may be in
the form of debt, equity, or some combination. There can be no
assurance of continued funding by investors or other sources or
that such funding will be on terms favorable to the Company.
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 was fully
used. 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 common stock at $0.10 per share, for a period of three
months, and an additional 2,050,000 warrants to purchase the
Company's common stock at $0.10 per share, if the line is
extended for an additional three months.
The Company is focusing efforts to raise capital through debt
instruments or equity funding to continue to fund its operations
and satisfy its obligations, however there can be no assurances
that these efforts will be successful.
In the event sufficient additional funding is not received the
Company may cease operations immediately, and/or be forced to
pursue other alternatives, which could include the sale of
assets, bankruptcy, or liquidation.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET
RISK
As at June 30, 2002 we have not entered into or acquired
financial instruments that have a material market risk. We have
no financial instruments for trading or other purposes and no
derivative or other financial instruments with off balance sheet
risk. All financial assets and liabilities that are due within
the next twelve months and are classified as current assets or
liabilities in the consolidated balance sheet provided with this
report. The fair value of all financial instruments at June 30,
2002 is not materially different from their carrying value.
Item 4. Controls and Procedures
In the quarter ended June 30, 2002, we did not make any
significant changes in, nor take any corrective actions
regarding, our internal controls or other factors that could
significantly affect these controls. We periodically review our
internal controls for effectiveness and we plan to conduct an
evaluation of our disclosure controls and procedures each
quarter.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As at the date of this Form 10-Q we are not involved in any
material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent sales of unregistered securities
In June 2002, the Board of Directors of the Company approved the
granting of 240,000 common shares issued in lieu of consulting
services to accredited investors as that term is defined in
Regulation D under The Securities Act of 1933 as amended.
(a) In July 2002, the Company authorized the issuance of up
to 2,050,000 warrants to purchase the Company's common stock
at $0.10 per share, for a period of three months, and an
additional 2,050,000 warrants to purchase the Company's common
stock at $0.10 per share, if the line is extended for an
additional three months.
(b) Not applicable
(c ) Consideration: 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 was fully used.
The line is secured under a junior security agreement by all of the
assets of the Company. The warrants were additional consideration
for the line of credit agreement.
(d) The warrants were issued pursuant to a Regulation D exemption,
as the principal investor was a qualified accredited investor.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On May 21, 2002, the Company filed a current report on Form 8-K
reporting a change in control of the Company, the completion of
the merger and related transactions and its name change from
Sideware to Knowledgemax, Inc.
On May 21, 2002, the Company filed a current report on Form 8-K/A
amending its Form 8-K including the financial statements for the
Company, and pro forma financial statements relating to the change
in control of the Company, the completion of the merger and
related transactions and its name change from Sideware to
Knowledgemax, Inc.
14
INDEX TO EXHIBITS
Number Exhibit
2.1(7) Agreement and Plan of Merger and Reorganization
(included as Appendix A to the joint proxy statement -
prospectus
2.2(8) Special Warrant Exercise Form dated March 27, 2002 to
Chalk.Com Network (Holding) Corp.
2.3(8) Share Purchase Agreement dated March 27, 2002 between
Sideware Systems Inc. and SYD Enterprises Ltd.
2.4(8) Purchase and Sale Agreement dated March 27, 2002
between Sideware Systems Inc., SYD Enterprises Ltd.,
and Chalk Media Corp.
2.5(8) Share Repurchase Agreement dated March 27, 2002
between Sideware Systems Inc., SYD Enterprises Ltd.,
and Chalk Media Corp.
2.6(8) Irrevocable Direction to Pay dated March 27, 2002 to
Chalk Media Corp. from SYD Enterprises Ltd.
2.7(8) Waiver Agreement dated May 8, 2002 between Sideware
Systems Inc., KM Acquisition Corp., KnowledgeMax,
Inc., SYD Enterprises Ltd., Chalk Media Corp., Grant
Sutherland and James L. Speros
3.1(8) Articles of Incorporation dated May 20, 2002
3.3(8) By-Laws of Knowledgemax, Inc.
10.1(1) Assignment of Lease and Modification of Lease
Agreement dated August 17, 1998 between HOOPP Realty
Inc., Techwest Management Inc., Sideware Systems Inc.,
and BrainTech, Inc.
10.2(2) Lease effective as of July 1, 1999 between the
Company, Techwest Management Ltd., BrainTech, Inc. and
Pacific Centre Leaseholds Ltd.
10.3(2) Assignment Agreement effective as of July 1, 1999
between the Company, Techwest Management Ltd.,
BrainTech, Inc., and SJM Management Ltd.
10.4(6) Change of Control Severance Agreement with Rahul
Bardhan
10.5(7) Change of Control Severance Agreement with James
Speros
10.6(7) Amendment agreement between James Speros and Sideware
10.7(7) Amendment agreement between Rahul Bardhan and Sideware
10.8(6) Assignment of Lease
10.9(3) 2000 Stock Option Plan
10.10(4) Amended 2000 Stock Option Plan
10.11(6) Stock Option Plan (2001)
10.12(7) Sideware 2002 Equity Incentive Plan (included as
Appendix G to the joint proxy statement - prospectus)
10.13(7) Form of stock option agreement under Sideware 2002
Incentive Equity Plan
11.1 Computation of net loss per share
(1) Incorporated by reference to exhibit to Sideware's
Registration Statement on Form 20-F filed in May 1999 (file no.
000-29974)
(2) Incorporated by reference to exhibit to Sideware's
Registration Statement on Form F-1 filed on November 12, 1999
(file no. 333 90893)
(3) Incorporated by reference to exhibit to Sideware's
Registration Statement on Form F-3 filed on April 18, 2000 (file
no. 333 34984)
(4) Incorporated by reference to exhibit to Amendment No. 1 to
Sideware's Registration Statement on Form F-3/A filed on June 8,
2000 (file no. 333-34984)
(5) Incorporated by reference to exhibit to Sideware's Form 10-
Q for the quarter ended September 30, 2000 filed on November 15,
2000 (file no. 000-29974)
(6) Incorporated by reference to exhibit to Sideware's Form 10-
K for the year ended December 31, 2000 filed on March 23 (file
no. 000-29974)
(7) Incorporated by reference to exhibit to Sideware's
Registration Statement on Form S-4 filed on January 11, 2002
(registration no. 333-76648)
(8) Incorporated by reference to exhibit to Knowledgemax,
Inc.'s Form 8-K filed on may 21, 2002 (File number 0-29974)
15
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of
1934, the registrant has caused this Quarterly Report to be signed
on its behalf by the undersigned thereunto duly authorized.
Dated: September 23, 2002 Knowledgemax, Inc.
/s/ E. Linwood Pearce
-------------------------------
E. Linwood Pearce
Chief Executive Officer,
Chairman of the Board
(Principal Executive Officer)
/s/ Charles P. Abod II, CPA
-------------------------------
Charles P. Abod II, CPA
Acting Chief Financial Officer,
(Principal Finance and Accounting
Officer)
16
CERTIFICATION
I, E. Linwood Pearce, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
KnowledgeMax, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
September 23, 2002 /s/ E. Linwood Pearce
- -------------------------- -------------------------------
Date E. Linwood Pearce
Chief Executive Officer,
Chairman of the Board
17
CERTIFICATION
I, Charles P. Abod II, CPA, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
KnowledgeMax, Inc.,
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
September 23, 2002 /s/ Charles P. Abod II, CPA
- ----------------------------- ---------------------------------
Date Charles P. Abod II, CPA
Acting Chief Financial Officer
18