AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON June 24, 2002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
STOCKGROUP INFORMATION SYSTEMS INC.
(Exact Name of Registrant as Specified in Its Charter)
COLORADO 6282 84-1379282
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code) Identification
Number)
SUITE 500 - 750 WEST PENDER STREET
VANCOUVER, BRITISH COLUMBIA, CANADA V6C 2T7 (604) 331-0995
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Executive Offices)
DEVLIN JENSEN
BARRISTERS AND SOLICITORS
2550 - 555 WEST HASTINGS STREET
VANCOUVER, BC, CANADA V6B 4N5
(604) 684-2550
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
----------
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462 to Rule 426(b) under the Securities Act of 1933, check the following
box and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
Registration Statement number of the earlier Registration Statement for the same
offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
Registration Statement number of the earlier Registration Statement for the same
offering. |_|
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
1
CALCULATION OF REGISTRATION FEE
----------------------------------------------------------------------------------------------------
Title Of Each Class Of Number of Shares Proposed Proposed Maximum Amount of
Securities To Be To Be Registered Maximum Aggregate Offering Registration
Registered Offering Price Per Price Fee
Share
----------------------------------------------------------------------------------------------------
Common Stock,
no par share 4,301,000 (1) $ 0.19 (2) $ 817,190.00 $75.18
----------------------------------------------------------------------------------------------------
(1) The amount shown above represents 2,051,000 shares and 2,000,000 shares
underlying warrants issued pursuant to a private placement, and 250,000
shares underlying warrants issued to a management consultant.
(2) Calculated in accordance with Rule 457(c) under the Securities Act of
1933.
2
Subject to completion, dated June 24, 2002
PROSPECTUS
This prospectus is not an offer to sell these securities, and it is not
soliciting an offer to buy these securities, in any state where the offer or
sale is not permitted.
STOCKGROUP INFORMATION SYSTEMS INC.
4,301,000 SHARES
COMMON STOCK
----------
We have prepared this prospectus to allow certain selling shareholders, or their
pledgees, donees, transferees or other successors in interest, to use a "shelf"
registration process to sell up to 4,301,000 shares of our common stock which
they have acquired in a private placement or will acquire upon exercise of
warrants.
With the exception of the shares underlying 2,250,000 warrants, all shares have
been issued and are outstanding. We will receive no proceeds from the sale of
these shares, other than proceeds, if any, from the exercise of the warrants.
Our common stock is listed on the O-T-C Bulletin Board under the symbol "SWEB."
On June 24, 2002, the closing price of our common stock was $0.155 per share.
----------
See "Risk Factors" beginning on page 9 for a discussion of
material issues to consider before purchasing our common stock.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is June 24, 2002.
3
TABLE OF CONTENTS
TABLE OF CONTENTS ....................................................................... 4
PROSPECTUS SUMMARY ...................................................................... 6
SUMMARY FINANCIAL DATA .................................................................. 7
RISK FACTORS ............................................................................ 8
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS .................................... 11
USE OF PROCEEDS ......................................................................... 12
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY ......................................... 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ... 13
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001 ......... 13
RESULTS OF OPERATIONS - FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 .. 15
RESULTS OF OPERATIONS - FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 .. 18
LIQUIDITY AND CAPITAL RESOURCES ...................................................... 21
CORPORATE DEVELOPMENTS ............................................................... 22
BUSINESS ................................................................................ 25
GENERAL .............................................................................. 25
CORPORATE BACKGROUND ................................................................. 25
PRODUCTS AND SERVICES ................................................................ 26
EMPLOYEES ............................................................................ 29
REGULATORY ISSUES .................................................................... 29
SUBSIDIARIES ......................................................................... 30
RESEARCH AND DEVELOPMENT ............................................................. 30
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND DOMAIN NAMES ........................... 30
LEASEHOLD ............................................................................ 31
EQUIPMENT ............................................................................ 31
LEGAL PROCEEDINGS .................................................................... 31
MANAGEMENT .............................................................................. 32
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS ......................... 32
EXECUTIVE COMPENSATION ............................................................... 34
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES ..... 35
SELLING SHAREHOLDERS .................................................................... 37
PRINCIPAL SHAREHOLDERS .................................................................. 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ....................... 40
SECURITY OWNERSHIP OF MANAGEMENT ..................................................... 42
DESCRIPTION OF CAPITAL STOCK ............................................................ 43
COMMON STOCK ......................................................................... 43
PREFERRED STOCK ...................................................................... 44
CONVERTIBLE DEBENTURES, NOTES AND WARRANTS ........................................... 44
ANTITAKEOVER EFFECTS OF COLORADO LAW AND OUR ARTICLES OF INCORPORATION AND BYLAWS .... 48
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS .................................. 48
TRANSFER AGENT AND REGISTRAR ......................................................... 49
SHARES ELIGIBLE FOR FUTURE SALE ...................................................... 49
PLAN OF DISTRIBUTION .................................................................... 50
LEGAL MATTERS ........................................................................... 51
EXPERTS ................................................................................. 51
WHERE YOU CAN FIND ADDITIONAL INFORMATION ............................................... 51
UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001 ........... 53
CONSOLIDATED BALANCE SHEETS .......................................................... 53
CONSOLIDATED STATEMENTS OF OPERATIONS ................................................ 54
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................................ 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................................... 56
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 ..................... 62
CONSOLIDATED BALANCE SHEETS .......................................................... 63
CONSOLIDATED STATEMENTS OF OPERATIONS ................................................ 64
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) ......................... 65
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................................ 66
NOTES TO FINANCIAL STATEMENTS - YEAR ENDED DECEMBER 31, 2001 ......................... 67
PROSPECTUS .............................................................................. 92
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS ................................... 92
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION ................................. 96
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES ..................................... 96
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .................................. 99
EXHIBIT INDEX ........................................................................... 99
ITEM 28. UNDERTAKINGS ................................................................ 100
SIGNATURES .............................................................................. 102
5
PROSPECTUS SUMMARY
This summary provides a brief overview of key aspects of this offering and our
company. Because this is only a summary, it does not contain all of the
information that may be important to you. You should read the entire prospectus,
including "Risk Factors" and our financial statements and the related notes,
before making an investment decision regarding our common stock. References
herein to "we", "us", "our", "Company" or "Stockgroup" refer to Stockgroup
Information Systems Inc. and its subsidiaries.
Stockgroup is a financial media and technology company which provides a wide
range of financial information services including Financial Software and Content
Systems, and Public Company Disclosure and Awareness Products. A full
description of the company may be found elsewhere in this prospectus under the
heading: Business.
In addition to our corporate headquarters at Suite 500 - 750 West Pender Street,
Vancouver, British Columbia, Canada V6C 2T7, we have offices in San Francisco
and Toronto. Our telephone number at our corporate head office is (604)
331-0995.
THE OFFERING
Common stock offered by selling up to 4,301,000 shares
shareholders
Common stock to be outstanding 16,045,768 shares. This number assumes the
issuance of the maximum number of shares
registered under this offering and does not
include shares reserved for issuance upon
exercise of previously outstanding stock
options, warrants or other convertible
securities.
Use of proceeds None of the proceeds from the sale of the
common stock offered by this prospectus
will be received by us, with the exception
of proceeds, if any, from the exercise of
the warrants.
O-T-C Bulletin Board Symbol: SWEB
6
SUMMARY FINANCIAL DATA
Set forth below are summary statements of operations data for the quarters ended
March 31, 2002 and 2001, and the years ended December 31, 2001 and 2000, and
summary balance sheet data as of March 31, 2002 and December 31, 2001. This
information should be read in conjunction with the annual consolidated financial
statements for the quarters ended March 31, 2002 and 2001, and the years ended
December 31, 2001 and 2000 and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations", appearing elsewhere
in this prospectus.
For the Quarters Ended For the Years Ended
March 31 December 31,
2002 2001 2001 2000
---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
REVENUE
Revenues 442,241 1,105,359 2,857,151 4,037,608
Cost of revenues 164,248 426,875 1,045,326 1,800,810
---------- ---------- ---------- ----------
Gross profit 277,993 678,484 1,811,825 2,236,798
---------- ---------- ---------- ----------
EXPENSES
Sales and marketing 92,060 206,823 466,954 2,718,992
Product development 18,498 91,348 241,392 849,335
General and administrative 363,540 642,585 1,776,710 4,220,455
---------- ---------- ---------- ----------
Total expenses 474,098 940,756 2,485,056 7,788,782
---------- ---------- ---------- ----------
Loss from operations (196,105) (262,272) (673,231) (5,551,984)
Interest income 146 1,591 4,020 85,138
Interest (expense) (184,359) (96,703) (596,097) (3,910,517)
Gain (loss) on warrants
liability (55,000) -- 242,000 --
Other income (expense) 3,951 18,703 9,509 (4,453)
---------- ---------- ---------- ----------
Loss before extraordinary
items and cumulative
change in accounting
principle (431,367) (338,681) (1,013,799) (9,381,816)
Extraordinary gain on
convertible note
redemptions -- -- 58,701 1,048,373
Extraordinary gain on
restructuring of
convertible notes 1,088,586 -- -- --
Cumulative effect of
change in accounting
principle -- -- 413,546 --
---------- ---------- ---------- ----------
Net income (loss) 657,219 (338,681) (541,552) (8,333,443)
========== ========== ========== ==========
Basic and diluted loss per share:
Net loss before
extraordinary items
and cumulative change in
accounting principle (0.04) (0.04) (0.11) (1.13)
Net loss 0.06 (0.04) (0.06) (1.01)
BALANCE SHEET DATA as at: Mar 31/02 Dec 31/01
--------- ---------
Total assets 921,508 723,690
Total liabilities 2,173,221 3,467,292
Total shareholders' deficiency (1,251,713) 2,743,602
7
RISK FACTORS
The following factors should be considered carefully in evaluating the Company
and its business.
Our limited operating history makes it difficult for you to judge our prospects.
We have a limited operating history upon which an evaluation of the Company, our
current business and our prospects can be based. You should consider any
purchase of our shares in light of the risks, expenses and problems frequently
encountered by all companies in the early stages of their corporate development.
Liquidity and capital resources are uncertain.
For the quarter ended March 31, 2002 we had an operating loss of $196,105 and
for the year ended December 31, 2001 we had an operating loss of $673,231. At
March 31, 2002, we had a working capital deficiency of $120,254. We experienced
a significant reduction in cash used in operations from $3,524,385 in 2000 to
$778,086 in 2001 as a result of restructuring activities initiated in 2001. Cash
used in operations was $257,884 in the quarter ended March 31, 2002. Although we
have generated positive cash flow in two of our last three quarters, there can
be no assurance that revenue will increase or that costs will be lower going
forward or that positive cash flow will continue. We have cash payments due to
certain of the noteholders on June 30, 2002, July 31, 2002, and at the end of
each of the next 10 quarters. To the extent that we do not maintain our recent
operating profitability and positive cash flow, or the cash payments due to
certain noteholders seriously depletes cash levels, we may need to seek
additional capital. If we do, there can be no assurance that we will be
successful in raising a sufficient amount of additional capital or in internally
generating a sufficient amount of capital to meet long-term requirements. To the
extent that we are unable to maintain or generate the required amount of
capital, our ability to meet obligations and to continue as a going concern is
uncertain.
Computer equipment problems and failures could adversely affect business.
Problems or failures in Internet-related equipment, including file servers,
computers and software, could result in interruptions or slower response times
of our products, which could reduce the attractiveness of the Web site,
financial tools, or software products to advertisers and users. Equipment
problems and failures could result from a number of causes, including an
increase in the number of users of the Web site, computer viruses, outside
programmers penetrating and disrupting software systems, human error, fires,
floods, power and telecommunications failures, and internal breakdowns. In
addition, any disruption in Internet access provided by third parties could have
a material and adverse effect.
We may not be able to compete successfully against current and future
competitors.
We currently compete with several other companies offering similar services.
Many of these have significantly greater financial resources, name recognition,
and technical and marketing resources, and virtually all of them are seeking to
improve their technology, products and services. We can not assure you that we
will have the financial resources or the technological expertise to successfully
meet this competition.
We are significantly influenced by our officers, directors and entities
affiliated with them.
8
In the aggregate, ownership of Stockgroup shares by management represents
approximately 34% of issued and outstanding shares of common stock. These
shareholders, if acting together, will be able to significantly influence all
matters requiring approval by shareholders, including the election of directors
and the approval of mergers or other business combinations transactions.
Our future performance is dependent on the ability to retain key personnel.
Our performance is substantially dependent on the performance of senior
management and key technical personnel. In particular, our success depends on
the continued efforts of our senior management team. The loss of the services of
any of its executive officers or other key employees could have a material
adverse effect on our business, results of operations and financial condition.
Future success also depends on the continuing ability to retain and attract
highly qualified technical, editorial and managerial personnel. We anticipate
that the number of employees will increase in the next 12 months. The inability
to attract and retain the technical and managerial personnel necessary to
support the growth of our business could have a material adverse effect upon our
business, results of operations and financial condition.
We may be unable to protect the intellectual property rights upon which our
business relies.
We regard substantial elements of our Web site and underlying technology as
proprietary and attempts to protect them by relying on intellectual property
laws, including trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. We also
generally enter into confidentiality agreements with employees and consultants
and in connection with license agreements with third parties, and seek to
control access to proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain or use our proprietary
information without authorization or to develop similar technology
independently. Moreover, effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which the Company's
services are distributed or made available through the Internet, and policing
unauthorized use of proprietary information is difficult. There can also be no
assurance that our business activities will not infringe upon the proprietary
rights of others, or that other parties will not assert infringement claims
against us, including claims that by directly or indirectly providing hyperlink
text links to Web sites operated by third parties, we have infringed upon the
proprietary rights of other third parties.
It is unclear how any existing and future laws enacted will be applied to the
internet industry and what effect such laws will have on us.
A number of legislative and regulatory proposals under consideration by federal,
state, provincial, local and foreign governmental organizations may lead to laws
or regulations concerning various aspects of the Internet, including, but not
limited to, online content, user privacy, taxation, access charges, liability
for third-party activities and jurisdiction. Additionally, it is uncertain how
existing laws will be applied by the judiciary to the Internet. The adoption of
new laws or the application of existing laws may decrease the growth in the use
of the Internet, which could in turn decrease the demand for our services,
increase the cost
9
of doing business or otherwise have a material adverse effect on our business,
results of operations and financial condition.
We may be held liable for online information or products provided by us or third
parties.
Because materials may be downloaded by the public on Internet services offered
by us or the Internet access providers with which we have relationships, and
because third party information may be posted by third parties on our Web site
through discussion forums and otherwise there is the potential that claims will
be made against us for defamation, negligence, copyright or trademark
infringement, or other theories. Such claims have been brought against providers
of online services in the past. The imposition of liability based on such claims
could materially and adversely affect us.
Even to the extent such claims do not result in liability, we could incur
significant costs in investigating and defending against such claims. The
imposition on us of potential liability for information or products carried on
or disseminated through our Web site could require implementation of measures to
reduce exposure to such liability, which may require the expenditure of
substantial resources and limit the attractiveness of services to members and
users.
Our general liability insurance may not cover all potential claims to which we
are exposed or may not be adequate to indemnify us for all liability that may be
imposed. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could have a material adverse effect on our
business, results of operations and financial condition.
The value and transferability of our shares may be adversely impacted by the
limited trading market for our shares and the penny stock rules.
There is only a limited trading market for Stockgroup's shares. The Company's
common stock is traded in the over-the-counter market and "bid" and "asked"
quotations regularly appear on the O-T-C Bulletin Board under the symbol "SWEB".
There can be no assurance that our common stock will trade at prices at or about
its present level, and an inactive or illiquid trading market may have an
adverse impact on the market price. In addition, holders of our common stock may
experience substantial difficulty in selling their securities as a result of the
"penny stock rules," which restrict the ability of brokers to sell certain
securities of companies whose assets or revenues fall below the thresholds
established by those rules.
Future sales of shares may adversely impact the value of our stock.
In addition to shares being offered in this prospectus, we have authorized and
reserved, as of June 24, 2002, 3,774,056 shares of common stock for issuance
upon the exercise of non-qualified stock options, 3,648,000 shares of common
stock for issuance upon conversion of convertible notes, and 1,081,818 shares of
common stock for issuance upon conversion of warrants. The 2,250,000 shares
underlying the warrants covered by this prospectus, plus the shares reserved for
such convertible securities, would represent 78% of the number of our
outstanding shares on the date of this filing. If required, we will seek to
raise additional capital through the sale of common stock. Under the terms of
outstanding convertible notes, the number of shares that may be issued under
such instruments may be increased in the event of certain changes in our capital
structure. Future sales of shares by us or our stockholders could cause the
market price of our common stock to decline.
10
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology.
These forward-looking statements include, without limitation, statements about:
o our market opportunity;
o our strategies;
o competition;
o expected activities and expenditures as we pursue our business plan;
and
o the adequacy of our available cash resources.
These statements appear in a number of places in this registration document and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (i)
trends affecting the our financial condition or results of operations, (ii) our
business and growth strategies, (iii) the Internet and Internet commerce, and
(iv) our financing plans. Although we believe that the expectations reflected in
the forward-looking statement are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
The accompanying information contained in this prospectus, including, without
limitation, the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" identify important factors that could adversely
affect actual results and performance. All forward-looking statements
attributable to us are expressly qualified in their entirety by the foregoing
cautionary statement.
11
USE OF PROCEEDS
Other than the proceeds, if any, from the exercise of the warrants, none of the
proceeds from the sale of the common stock offered by this prospectus will be
received by us. The holders of the warrants are not obligated to exercise their
warrants, and there can be no assurance that we will receive any additional
proceeds. If, however, all the warrants were exercised, the gross proceeds to us
from the exercise of the warrants would be $575,000. We intend to use such
proceeds for currently unspecified general corporate purposes that may include
sales and marketing, salaries and wages, investor relations, legal and
accounting, or other operating expenses. Pending these uses, the proceeds
received by us will be invested in short-term, investment grade instruments,
certificates of deposit or direct or guaranteed obligations of the United
States.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been quoted for trading on the O-T-C Bulletin Board since
March 17, 1999. Accordingly, there has been a limited public market for our
common stock. The following table sets forth high and low bid prices for the
common stock for the quarterly periods ending March 31, 2000 through to March
31, 2002, and the two months ended May 31, 2002. These prices represent
quotations between dealers without adjustment for retail markup, markdown or
commission and may not represent actual transactions.
Quarter Ending: High Low Volume
--------------------------------------------------------------------------------
March 31, 2000 $5.031 $1.562 2,623,600
June 30, 2000 $3.500 $0.760 1,732,700
September 30, 2000 $2.813 $0.875 4,983,800
December 31, 2000 $1.938 $0.563 1,120,500
March 31, 2001 $1.000 $0.375 1,005,700
June 30, 2001 $0.650 $0.280 2,840,800
September 30, 2001 $0.390 $0.090 1,105,300
December 31, 2001 $0.200 $0.115 1,977,800
March 31, 2002 $0.400 $0.140 5,509,300
May 31, 2002 (two months) $0.230 $0.150 1,597,800
On June 5, 2002, we had 70 registered shareholders owning 13,795,768 shares.
We have not declared, and do not foresee declaring, any dividends now or into
the foreseeable future.
We have authorized and reserved, as of June 24, 2002, an aggregate of 10,753,874
shares of common stock for issuance upon conversion of convertible notes, upon
the exercise of outstanding warrants, and upon the exercise of non-qualified
stock options.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
Stockgroup should be read in conjunction with the unaudited financial statements
for the quarters ended March 31, 2002 and 2001, and the annual audited
consolidated financial statements for the years ended December 31, 2001 and 2000
and notes thereto included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including but not
limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
The results of the first quarter of 2002 are a product of our continued focus on
improving the balance sheet and obtaining high quality sales customers and
partners for our Financial Software and Content Systems. Overall sales and
operating profitability are down from the first quarter 2001, but there have
been several positive events in the first quarter of 2002 which we feel have
strengthened both our balance sheet and future revenue potential.
The decrease in revenue is primarily due to the reduction in E-Business
Solutions revenue, which we discontinued early in 2001. We spent some time
during the quarter on improvements to our balance sheet, as we felt it necessary
to restructure and reduce our convertible debt, as well as raise capital to
support future growth. We accomplished all of these balance sheet improvements
in the quarter, including restructuring our 8% convertible notes, converting the
balance of our 3% convertible debentures into shares, and raising $0.410 million
in a private placement financing. These three events are further described in
Notes 2 through 5 to the financial statements.
Besides the improvements to the balance sheet, we also established new sales
agreements with two more high quality and high potential financial and media
companies to sell our Financial Software and Content Systems. Despite the
adversity in the financial markets, we feel this quarter has been extremely
promising for the future.
Revenue and Gross Profits
Total revenues in the first quarter of 2002 were $0.442 million compared to
$1.105 million in the first quarter 2001, a decrease of $0.663 million, or 60%.
Our Public Company Disclosure and Awareness Products revenue was $0.285 million
compared to $0.430 million in the first quarter 2001, a decrease of $0.145
million or 34%. Financial Software and Content Systems revenue was $0.157
million compared to $0.110 million in the first quarter 2001, an increase of
$0.047 million or 42%. E-Business Solutions revenue was nil in the first quarter
2002 compared to $0.565 million a year earlier. We have chosen not to actively
pursue E-Business Solutions business since the second quarter of 2001 in favour
of revenue streams which carry more potential profitability in the long term,
namely Financial Software and Content Systems and Public Company Disclosure and
Awareness Products.
Gross profits in the first quarter of 2002 were $0.278 million compared to
$0.678 million in the first quarter 2001, a decrease of $0.400 million, or 60%.
Gross profits as a percentage of sales, however, increased
13
quarter over quarter from 61.4% in the first quarter 2001 to 62.9% in 2002.
We are continuing to provide innovative products in our Public Company
Disclosure and Awareness Products line, and the IntegratIR sales remain strong
and delivering high value to customers. The decrease in total Public Company
Disclosure and Awareness Products sales is due in large part to a general
slowdown in public company investor communication spending on most other
products. Historically, many of our Public Company Disclosure and Awareness
Products customers have come from the technology sector, but the slowdown in
this sector has caused considerable attrition, especially with small cap and
micro cap companies. We have been diversifying our target market for some time
in order to be less dependent on any one sector. As well, sales and marketing
efforts have been increased in this area late in the quarter, mainly through our
attendance at carefully selected trade shows and improving our sales force.
Financial Software and Content Systems continues to be a strong contributor to
our overall revenue and gross profits. Our process has matured over the past
year and we are able to efficiently deliver high quality services in this area
for a fraction of the cost to customers of having it done internally. We have
established relationships with major sales channels, media networks, and
financial companies, and have seen significant results already, and expect more
in the near future. Financial Software and Content Systems revenue was up this
quarter 42% over the same period a year ago. All of this revenue is contractual,
typically in 12-month terms, so we have a solid base of revenue in this area to
grow from.
E-business Solutions revenue for the first quarter of 2001 was mainly derived
from work on a financial leasing exchange for a single client. Since that
contract, which ended in the first quarter of 2001, we have chosen not to pursue
further contracts of this nature. As a result, our revenue from this segment was
nil in the first quarter of 2002. We have instead decided to focus our energies
on more stable, predictable revenue streams, which ultimately will be more
profitable, such as Public Company Disclosure and Awareness Products and
Financial Software and Content Systems.
Operating Expenses
Total operating expenses in the first quarter of 2002 were $0.474 million
compared to $0.941 million in the same quarter last year, a decrease of $0.467
million or 50%. This decrease was a result of the reductions in all areas of
expenditures that we made in 2001 and continue in 2002. We have stabilized our
operating expenses at a level which will enable us to grow our sales
efficiently, thereby generating the greatest return on investment.
Sales and Marketing expenses were $0.092 million in the first quarter of 2002
compared to $0.207 million in the first quarter 2001, a decrease of $0.115
million or 56%. This decrease is due in large part to a decreased emphasis on
broad-scope advertising for our advertising community, Smallcapcenter. We also
reduced the costs associated with our New York and Dallas sales centers by
centralizing sales in our head office, where maximum synergy can be attained.
Product Development expenses in the first quarter of 2002 were $0.018 million
compared to $0.091 million in the first quarter 2001, a decrease of $0.073
million or 80%. As our business has matured, product development has naturally
taken a lesser role. Our staff are more experienced, and our processes for
developing new products are streamlined so that overall development costs are
minimized.
14
General and Administrative expenses in the first quarter of 2002 were $0.364
million compared to $0.643 million in the first quarter 2001, a decrease of
$0.279 million, or 43%. Expenses have steadily declined during 2001 and have
stabilized at a level that can generate the maximum return on investment. The
most notable cuts have been in payroll, which is our largest expense category.
We have also eliminated our premises costs in New York and Dallas.
Other Income (Expense) and Income Taxes
Interest expense in the first quarter of 2002 was $.184 million compared to
$0.097 million in the first quarter 2001, an increase of $0.087 million, or 47%.
Of the amount for the first quarter of 2002, $5,786 is cash interest, either
already paid or payable after the quarter end. The remaining interest is
non-cash interest arising out of the 8% convertible notes and the 3% convertible
debentures. Upon restructuring of the 8% convertible notes, there was a non-cash
interest expense of $18,364. Upon conversion of the remaining balance of the 3%
convertible notes there was a total non-cash interest expense of $160,209.
Loss on warrants liability of $55,000 was a result of the increase in the fair
value of the Company's 300,000 callable warrants and 800,000 other warrants
immediately before the February 6, 2002 restructuring of the 8% convertible
notes as described in Notes 2 and 4 to the financial statements.
Income taxes were nil in both the first quarter 2002 and the same quarter 2001.
Due to our net loss position, we did not incur tax in the first quarter of 2002.
As at the most recent year end, Stockgroup had tax loss carry forwards of
$5,751,000 in Canada which expire in 2006, 2007, and 2008, and tax loss carry
forwards of $2,916,000 in the U.S. which expire in 2019, 2020, and 2021.
Extraordinary Gain was $1,088,586 for the first quarter 2002 and nil in the
first quarter 2001. The extraordinary gain was a result of the February 6, 2002
restructuring of the Company's 8% convertible notes, as described in Note 2 to
the financial statements.
Net Income
The net income for the first quarter of 2002 was $0.657 million compared to a
loss of $0.339 million in the first quarter 2001, an increase of $0.996 million
or 294%.
RESULTS OF OPERATIONS - FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31,
2000
Year 2001 ended with the Company's first two quarters with profitable income
from operations since going public in 1999. This improvement was largely due to
a combination of cost reduction efforts and a greater leverage of the existing
infrastructure which was built up during 1999 and 2000. After Q1 2001, the
Company began focusing on sales of Financial Software and Content Systems over
E-Business Solutions consulting. The Company found that the recurring nature of
Financial Software and Content Systems had greater profit and growth potential
than large non-recurring E-Business projects.
15
Financial Software and Content Systems sales grew, as did margins, and costs
actually decreased over the year as a result of this new focus.
Revenue and Gross Profits
Total revenues for 2001 were $2.857 million compared to $4.037 million in 2000,
a decrease of $1.180 million, or 29%. The company's business of Public Company
Disclosure and Awareness Products decreased compared to last year, from $2.531
million in 2000 to $1.643 million in 2001, a decrease of $0.888 million or 35%.
Much of this decrease is attributed to the decrease in public company corporate
communications spending caused by the slowdown in financial markets and the
effect of the events of September 11, 2001. E-Business Solutions revenue
declined by $0.766 million, or 55%, for the year compared to 2000. This was
because the company refocused its strategy from short term E-Business Solutions
project consulting to one of longer term licensing of Financial Software and
Content Systems, while continuing to emphasize its Public Company Disclosure and
Awareness Products as well. Offsetting the reductions in the E-Business
Solutions and Public Company Disclosure and Awareness Products revenue, was the
company's newest source of revenue Financial Software and Content Systems. 2001
was the first full year for this revenue stream, so Financial Software and
Content Systems increased from $0.087 million in 2000 to $0.580 million in 2001,
an increase of $0.493 million or 567%.
Gross profits in 2001 were $1.8 million compared to $2.2 million in 2000, a
decrease of $0.4 million, or 18%. Gross profit dollars decreased year over year,
but gross margin percentage increased from 55% to 63%. This increase in margin
percentage is due to reductions in direct payroll costs as a result of the
phasing out of E-Business Solutions consulting and substantially reduced
operating costs associated with maintaining Smallcapcenter.com.
Stockgroup has expanded its offering in the Public Company Disclosure and
Awareness Products markets through the development of Sector Supplements and the
IntegratIR. Sector Supplements, which are a spotlight feature on a certain
industry sector, such as Energy, Mining, Biotech, or Technology, are an
effective exposure tool for companies. In a Sector Supplement, investors are
drawn to a site which features up to twelve companies and contains
industry-specific news and information. Investors who visit this web site can
view each of the featured companies' profiles, request information, or link
directly to the client's own web site. The IntegratIR is an automated Internet
disclosure software application initially launched in beta format in April 2001
and with the full version in September 2001. The IntegratIR assists public
companies to comply with continuous disclosure requirements on their Internet
site. For a fixed monthly fee, public companies can ensure their message is
effectively and accurately communicated to investors with minimal effort on
their part. The IntegratIR automates the updating of news releases, SEC filings,
quotes and charts to the customer's web site on a private labeled basis. The
IntegratIR also gives the investor relations officer desktop control over
changing and updating the other content areas of IR. Stockgroup will continue to
complement the growing popularity of its Public Company Disclosure and Awareness
Products products by entering profitable new strategic areas.
The revenue from Financial Software and Content represents 20% of sales in 2001,
an increase over the 2% of sales it represented in 2000. This is a growing
source of revenue that is expected to continue increasing. Stockgroup started
providing financial software tools and applications to other companies' web
sites and intranets on a private labeled basis late in November 2000. Each
customer the Company secures typically
16
signs a twelve-month contract, with automatic renewal option that provides a
monthly recurring revenue stream. The Company's Financial Software and Content
and its Public Company Disclosure and Awareness Products are derived from a
common technology base and both benefit from continuous recurring revenues.
E-Business Disclosure and Awareness Products revenue for the first half of 2001
was mainly derived from work on a financial leasing exchange for the company's
client, OnMark. The OnMark contract was secured late in 2000 and was completed
in April 2001. No significant new E-Business Solutions contracts have been
undertaken in the second, third, or fourth quarters of 2001.
Operating Expenses
Total operating expenses for 2001 were $2.485 million compared to $7.789 million
in 2000, a decrease of $5.304 million or 68%. Stockgroup was able to make
significant reductions in all areas of expenditures without reducing its ability
to earn income. This was possible because the expensive part of the
infrastructure was built in 1999 and 2000, and this infrastructure allows the
Company to handle additional business without adding extra costs.
Sales and Marketing expenses were $0.467 million in 2001 compared to $2.719
million in 2000, a decrease of $2.252 million or 83%. These reductions are a
result of the Company's decision late in the third quarter of 2000 to change the
company's main strategy to licensing software and content, and to place a lesser
emphasis on building a financial community with proprietary small cap news. This
allowed the company to reduce its advertising expenses associated with
Smallcapcenter significantly.
Product Development expenses in 2001 were $0.241 million compared to $0.849
million in 2000, a decrease of $0.608 million or 75%. The decreases in this area
were a result of cost reduction efforts as described in the previous paragraphs.
General and Administrative expenses in 2001 were $1.777 million compared to
$4.220 million in 2000, a decrease of $2.443 million, or 55%. These reductions
are a result of the Company's decision late in the third quarter of 2000 to
change the company's main strategy to licensing software and content, and to
place a lesser emphasis on building a financial community with proprietary small
cap news. This allowed the company to reduce its travel, staffing and other
expenses associated with Smallcapcenter significantly. Stockgroup expects these
ongoing reductions to have a continuing beneficial effect on costs in this area.
Other Income (Expense) and Income Taxes
Interest income in 2001 was $4,020 compared to $85,138 in 2000, a reduction of
$81,118 or 95%. Interest is earned on short term investments of available cash,
so the reduction is in line with lower cash levels in 2001 compared to 2000.
Interest expense in 2001 was $0.596 million compared to $3.910 million in 2000,
a decrease of $3.314 million, or 85%. Reductions in this area were due to large
non-cash interest amounts generated in 2000 relating to the convertible notes
issued in the second quarter of 2000 that were not repeated in 2001. Of the
$0.596 million amount for 2001, only $24,170 was actually paid in cash; a
further $170,834 is the actual
17
amount that has accrued and will either be converted into common stock, or
cancelled in 2002. See the subsequent event disclosure Note 15(a) in the
financial statements and the corporate developments section below for more
information. The remaining $401,093 in interest expense is deemed interest
recorded as a result of accretion of the warrant discount and beneficial
conversion feature described in Notes 8 and 9 in the financial statements.
Due to its net loss position, the Company did not incur tax in 2001. As at the
most recent year end, Stockgroup had tax loss carry forwards of $5,751,000 in
Canada which expire in 2006 to 2008, and tax loss carry forwards of $2,916,000
in the U.S. which expire in 2019 to 2021.
The Gain on Warrants Liability of $242,000 results from the change in fair value
measurement of the 300,000 callable and 800,000 other warrants between the June
30, 2001 change in accounting principle and December 31, 2001. See the
disclosure Note 10 in the financial statements for a more detailed explanation
of this amount.
The Extraordinary Gain on convertible note redemptions of $58,701 is the result
of the $181,000 redemption on September 30, 2001.
Cumulative effect of change in accounting principle of $413,546 is the
difference between the previous carrying value of the 300,000 callable and
800,000 other warrants of $765,546 and their fair value at June 30, 2001 of
$352,000. A more detailed explanation of this amount can be found in Note 10 of
the financial statements.
Other income in 2001 was $9,509, which consists of net gains on market value of
short term marketable securities.
Net Income
The net loss for 2001 was $0.542 million compared to a loss of $8.333 million in
2000, a decrease in losses of $7.791 million or 94%. This reduction in net loss
was a product of various factors described above, including staff expense
reduction, reduction in interest expense on certain convertible notes, and
reduced advertising expenses.
RESULTS OF OPERATIONS - FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31,
1999
In the year 2000 the Company leveraged its expertise in the Business to Business
(B2B) Corporate Services area, and developed a new revenue stream -- Financial
Software and Content Systems -- that was a direct result of the core
competencies developed in B2B and in running its financial portal for investors,
www.smallcapcenter.com. Much of its growth was attributable to the investments
in infrastructure that it made using the equity funds raised in 1999 and 2000,
and the debt financing secured early in 2000. Although the use of these funds
caused the Company to produce deficit operations for the prior two years,
management now believed it had completed the majority of the effort to
consolidate its position and develop desirable
18
revenue streams. Stockgroup believed it was poised to leverage its
infrastructure and expertise in 2001 and complete the transition to profitable
operations.
Revenue and Gross Profits
Total revenues in 2000 were $4.0 million compared to $1.9 million in 1999, an
increase of $2.1 million, or 110.5%. The company's historical business of Public
Company Disclosure and Awareness Products also increased compared to last year,
growing from $1.9 million in 1999 to $2.6 million in 2000, an increase of $0.6
million or 32.8%. The other growth in revenue came from the company's two new
sources of revenue, both an outgrowth of the B2B business. Financial Software
and Content Systems accounted for $87,728 of the increase in 2000, while
E-Business Solutions accounted for the remaining $1.4 million.
Gross profits in 2000 were $2.2 million compared to $0.7 million in 1999, an
increase of $1.5 million, or 214.3%. Gross profits were able to grow faster than
sales because increases in revenue were not dependent on matching increases in
costs, most notably labor costs. This scalability was a result of two main
factors. Stockgroup completed the major effort of building
www.smallcapcenter.com in 1999, allowing it to re-allocate those resources to
new Financial Software and Content Systems and Enterprise revenue sources. Also,
the fact that all three revenue streams had compatible requirements in terms of
programming, design, administration, and management allowed the Company to avoid
excess capacity and derive the maximum benefit from investments in staff and
assets such as computer hardware and software.
Stockgroup believed revenues from the B2B market would continue to grow in 2001.
Not only did the Company continue to add tools and content to improve its
product offering, it was also continuously finding new ways to leverage its
successful website. Stockgroup's business development department was always on
the lookout for strategic opportunities, prime examples being the startup of the
Company's ASP business in November, a special Oil and Gas supplement launched in
March 2001, and the IntegratIR, an automated Internet disclosure tool launched
in March 2001 that helped public companies comply with SEC Internet continuous
disclosure requirements. Stockgroup intended to continue to complement the
growing popularity of its B2B products by entering new strategic areas.
While the revenue from Financial Software and Content Systems represented less
than 2% of sales in 2000, it was a growing source of revenue that was expected
to become a significant line of business in 2001. Stockgroup started providing
tools and content to other companies' websites and intranets late in November
2000, using direct and channel sales through internet syndicators. Each customer
the Company secured typically signed a twelve-month contract in addition to the
start-up fees, providing an on-going revenue stream that was continuously
building. At December 31, 2000, the Company had signed contracts worth over $0.5
million in future revenues. The Company's Financial Software and Content Systems
market and its Public Company Disclosure and Awareness Products market both
benefited from continuous recurring revenues derived from a common technology
base.
E-Business Solutions was also a new area in 2000. Stockgroup started the year
with its Asian product, AsiaXIS.com, and ended the year working on OnMark. These
two major projects, along with several minor ones, helped establish this area as
a significant revenue source for the Company in 2000. Stockgroup was able
19
to capitalize on opportunities in this area because of the expertise it
developed in building and maintaining its own destination website.
Operating Expenses
Total operating expenses in 2000 were $7.8 million compared to $5.1 million in
1999, an increase of $2.7 million or 52.9%. Of this amount, over $0.6 million
was from non-cash expenses as described below, as well as $1.08 million of
unusual expenses. Much of the increase in operating expenses occurred in the
first half of 2000, as Stockgroup continued to build infrastructure and develop
revenue streams. During the third quarter, the Company undertook an effort to
achieve the most cost-efficient structure possible, in order to benefit from the
infrastructure and revenue gains it had realized but to also start moving toward
profitability. Stockgroup was able to make significant reductions in most areas
of expenditures during the last half of the year, without reducing its ability
to earn revenues. Stockgroup intended to continue to keep expenses as low as
possible as it grew its revenues in an effort to achieve profitable operations
in 2001.
Sales and Marketing expenses were $2.7 million in 2000 compared to $2.5 million
in 1999, an increase of $0.2 million or 10.8%. This increase was primarily the
result of the addition of a Vice President of Sales during the first half of the
year and the strategy of significantly increased staffing and geographic
expansion into offices in Alberta, Ontario, New York, California, and Texas.
Late in the third quarter the company re-evaluated this strategy and concluded
that it would be beneficial to change the strategy from the standpoint of
increasing revenue and reducing costs, by using fewer, more competent resources
concentrated in fewer markets, thus achieving increased effectiveness and
economies. Stockgroup expected these reductions to have a continuing beneficial
effect on costs in this area in 2001.
Product Development expenses in 2000 were $0.8 million compared to $0.4 million
in 1999, an increase of $0.4 million or 104.6%. The increases in this area were
a result of over $450,000 in expenses relating to the Company's expansion into
Europe in the spring of 2000, which was discontinued due to adverse financial
market conditions.
General and Administrative expenses in 2000 were $4.2 million compared to $2.2
million in 1999, an increase of $2.0 million, or 90.9%. Major non-cash elements
of this area totaled over $0.6 million and included $243,500 of non-cash
investor relations expenses that were paid in stock, over $140,000 of
stock-based compensation expenses, and $204,000 in amortization expenses. Also
included was bad debts expense of $631,000 relating to collection of large
receivables from two customers, $351,000 of which the Company believed was
likely to be collectible pending the outcome of litigation. Other significant
expenses included rent and office expenses on North American offices, legal and
accounting expenses relating to public company status, and general increases in
administrative staff and associated costs to keep pace with the growth in sales.
Many of these costs had been reduced in the last five months of 2000, and
management expected the effect of these reductions to carry forward into 2001.
20
Other Income (Expense) and Income Taxes
Interest income in 2000 was $85,138 compared to $123,260 in 1999, a reduction of
$38,122 or 30.9%. Interest was earned on short term investments of available
cash, and primarily occurred in the first half of the year.
Interest expense was $3.9 million in 2000 compared to $15,610 in 1999, an
increase of $3.9 million. Of this amount, only $163,000 was actually paid in
cash; a further $132,000 was the actual amount that has accrued and would be
payable in cash or shares upon redemption or conversion of the balance of the
outstanding convertible notes. The remaining $3.6 million in interest expense
was deemed interest recorded as a result of the particular nature of the $3.0
million convertible notes' conversion formula which entitles the holder to an
in-the-money conversion rate. Due to the variable nature of the conversion
feature, the effective interest will continuously be re-measured as the
Company's stock price changes, until conversion, redemption, or maturity of the
notes.
Due to its net loss position, the Company did not incur tax in 2000. At December
31, 2000, Stockgroup had tax loss carry forwards of $6,718,000 in Canada which
expired in 2006 and 2007, and tax loss carry forwards of $2,306,000 in the U.S.
which expired in 2019 and 2020.
Net Income
The net loss for 2000 was $8.3 million compared to a loss of $4.2 million in
1999, an increase in losses of $4.1 million or 96.4%. This increase in losses
can be entirely attributed to unusual or non-cash items totaling $4.2 million as
described above: the $3.6 million deemed interest on the convertible notes, and
the $631,000 bad debt expense on two customers. The extraordinary gain on note
redemption was recorded in accordance with the appropriate accounting
principles. The portion of the operating loss experienced in 2000 that was not
attributable to non-cash items was primarily due to continuation of
infrastructure and revenue building activities commenced in 1999, the majority
of which were completed by the end of the third quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2002 with cash and cash equivalents of $256,631,
an increase of $130,013 from December 31, 2001. This compares with net cash
increases of $19,062 in Q4 2001 and $14,698 in Q3 2001, and a cash decrease of
$84,183 in Q2 2001. Although we expect to maintain positive cash flow from
operations, we may pursue financing to improve our working capital position and
to grow the business to the greatest possible extent.
Our income from operations in Q3 and Q4 2001 contributed to our improved cash
flow during fiscal 2001. Added to that, in the first quarter of 2002, three
events took place which should further solidify our cash position going forward.
They are the restructuring of certain convertible notes, the conversion of
certain convertible debentures, and the raising of $410,200 in a private
placement. The restructuring of $1,924,000 in convertible notes removed a
discount to market conversion factor which, in our opinion, were inhibiting
further investment in Stockgroup. The restructuring, which can be referenced in
our 8-K filing on February 15, 2002, removed a great deal of the uncertainty as
to the timing of cash payments relating to this debt, and eliminated the
interest and prepayment penalties which had been accrued. The second event, the
conversion of $206,904 in convertible debentures and accrued interest on March
15, 2002 into common stock at $0.50
21
per share improved our balance sheet. The third event, the raising of $410,200
in a private placement, added working capital which will be used to grow the
business. This financing also included warrants with an exercise value of
$500,000 if they are exercised, although there can be no assurance that this
will happen within their 12 month life. The warrants issued with the 3%
convertible debentures, if exercised, would provide an exercise value of
$275,000, and the warrants issued with the restructured convertible notes, if
exercised, would provide an exercise value of $845,454. The exercise of warrants
is the decision of the warrant holders, so there can be no assurance that any
warrants will be exercised.
Despite these significant improvements, we will continue to pursue further
financing opportunities during 2002, as we believe more working capital would
give us more leverage to maximize our capacity for growth.
You should be cautioned that there can be no assurance that revenue will
increase or that margins and profitability will remain stable. In addition, we
have cash payments due to certain of the noteholders on June 30, 2002, July 31,
2002, September 30, 2002, December 31, 2002, and at the end of each of the next
8 quarters after that. To the extent that either of these possibilities
seriously depletes cash levels, we may need to seek additional capital. If we
do, there can be no assurance that we will be successful in raising a sufficient
amount of additional capital or in internally generating a sufficient amount of
capital to meet long-term requirements. If we are unable to generate the
required amount of additional capital, our ability to continue as a going
concern is in substantial doubt.
CORPORATE DEVELOPMENTS
A synopsis of our recent corporate highlights is as follows:
2001
1. On January 19, 2001, we closed a $0.5 million financing from a group of
unaffiliated investors pursuant to a Securities Purchase Agreement. The
funding included $0.5 million of 3% Convertible Debentures and 4-year
warrants.
2. During the first quarter of 2001, we integrated a variety of Financial
Software and Content Systems for new customers including the US Navy,
Unisys, Primevest and Conseco's Internet/Intranet sites. We provide these
sites with our proprietary financial tools, including delayed and
real-time quotes, interactive charting and customizable portfolios. These
products are licensed to clients and delivered in a private-labeled format
to the specifications of the customer.
3. On April 30, 2001, we announced the initial Beta launch of our innovative
web-based investor relations software application, the IntegratIR. The
IntegratIR allows companies to more effectively communicate with
shareholders and potential investors so they can better achieve their
disclosure requirements. The IntegratIR is a communications tool that
seamlessly integrates into a public company's existing web site and
reflects the company's branding, look and feel. The IntegratIR automates
the updating of the public company's critical time sensitive disclosure
information on their Internet site. News releases, financial reports, SEC
filings, quotes, interactive charting, and other disclosure information is
updated with our IntegratIR software. The IntegratIR also interacts with a
sophisticated email database response system that automates the delivery
of news and messages for the public company to their shareholder database
and their other mailing lists. In addition, with the IntegratIR enables
Investor Relations Officers to directly
22
change and administer their investor relation's site without having
specialized technical skill or training. Changes can be made to their
investor relation's site with a few mouse clicks. The IntegratIR
communications tool is accessible to the client company 24 hours a day, 7
days a week, and can be administered from any location. The IntegratIR is
available for both US and Canadian companies. The full version of the
IntegratIR was launched in Q3, 2001.
4. On June 5, 2001, we announced that Profit Magazine had recognized our
Canadian subsidiary as one of Canada's fastest growing companies.
Stockgroup ranked 35th on the Profit Magazine Top 100 Fastest Growing
Companies list, which can be found in the June 2001 issue of Profit
Magazine. The 2001 Profit 100 list awards companies based on their 5-year
revenue growth. Our revenues grew 2,426% from Year 1 to Year 5 of its
operations. This is the first year we have been eligible for consideration
on the Profit 100.
5. On June 7, 2001, we announced that vFinance, Inc., a financial services
company that provides investment banking and brokerage services, had
selected our Financial Software and Content Systems for its full service
brokerage division, vFinance Investments, Inc.
6. On June 21, 2001, we announced an agreement with TELUS Mobility to deliver
Web-based Financial Software and Content Systems to their more than 2
million clients across Canada. TELUS Mobility Pocket Web clients can
access Stockgroup brand financial information using their web ready
wireless phones. Tools delivered include proprietary quote look-up and
portfolio manager tools drawn from a database of 21,000 public companies.
TELUS Mobility's Pocket Web wireless Internet service is available on all
of its web ready digital phones.
7. On October 2, 2001, we announced that we have signed an agreement with
Comtex News Network, Inc. to make available our Financial Software and
Content Systems to COMTEX's clients reaching over 1000 distribution
points. Our leading edge financial tools will be integrated into COMTEX's
hosted product line - News Solutions. This agreement allows COMTEX to
provide its customers with additional financial tools in addition to
offering end-users the critical content they need to stay informed about
financial market events. The combined Stockgroup and COMTEX solution
provides a one-stop financial content solution for COMTEX and Stockgroup
clients.
8. On October 8, 2001, we announced an agreement with ClariNet Communications
Corporation, an aggregator and re-distributor of news and publisher of
ClariNews, under which each party will represent the products of the
other. Under the terms of the agreement, ClariNet will offer its
corporate, institutional and ISP news clients our proprietary,
cutting-edge Financial Software and Content Systems along with the
ClariNet news products. The ClariNet additions include a new ClariNet
product that allows users to add company news relating to any of the
public companies contained within the Stockgroup software products.
9. On October 11, 2001, we announced we had changed our name from
Stockgroup.com Holdings, Inc. to Stockgroup Information Systems Inc. to
better reflect our emphasis on providing financial content and software
systems to customers.
10. On October 23, 2001, we announced that we have signed an agreement with
NAQ in which NAQ will re-sell our financial software and content system.
11. On November 16, 2001, we appointed David Gillard as our new CFO, replacing
Lindsay Moyle.
2002
1. On February 11, 2002, we announced that we have signed an agreement with
Freedom Communications,
23
a large private media company with publications and websites throughout
the U.S., to provide our Financial Software and Content Systems to its
websites.
2. On February 19, 2002, we announced that we have restructured the
convertible notes with Deephaven Private Placement Trading Ltd. and Amro
International, S.A. Under the restructuring, the interest rate and
prepayment penalties are reduced to zero, accrued interest has been
waived, the conversion price is fixed at $0.50, and a total of up to
$300,000 cash is required to be paid to the noteholders over 10 quarterly
installments starting June 30, 2002. The new notes have a two-year term
with renewal provisions for another two years. We filed a form 8-K on
February 15, 2002 which fully describes the restructured notes.
3. On February 21, 2002, we announced they have signed an agreement with The
Canadian Press (CP) in which CP will re-sell our Financial Software and
Content Systems. This agreement will give CP exclusive re-distribution
rights for Canada.
4. On March 15, 2002, we and the remaining noteholders from the January 19,
2001 convertible debenture reached an agreement whereby they would convert
the $0.2M balance of the debt into common shares at $0.50 per share. The
exercise price of the Series A warrants has been reduced from $1.00 to
$0.25. The exercise price of the Series B warrants has been reduced from
$2.00 to $0.50. The expiry date for both the Series A and B warrants has
been extended to July 31, 2005.
5. On March 19, 2002, we announced that we have signed an agreement with
Credential Group in which Credential Group would license our Financial
Software and Content Systems, and offer our products to its more than 450
credit union partners across Canada.
6. On March 25, 2002, we completed a $0.4M financing with 22 unaffiliated
investors pursuant to a Subscription Agreement. The funding included
2,000,000 units consisting of one common share and one warrant each, at a
price of $0.20 per units, plus 51,000 common shares at a price of $0.20
per share. The warrants have an exercise price of $0.25 and an expiry date
of March 24, 2003. The 2,051,000 common shares were issued to the
investors on April 1, 2002. The investors' resale of the 2,051,000 common
shares and the purchase of the shares underlying the 2,000,000 warrants,
if and when the warrants are exercised, are being registered with this
prospectus. The full details of this financing, including all relevant
documents, were filed in a Form 8-K on March 26, 2002 and can be viewed
therein.
24
BUSINESS
GENERAL
We are a financial media and technology company. Our revenue streams can be
categorized into two areas:
- Financial Software and Content Systems,
- Public Company Disclosure and Awareness Products
The clients for Financial Software and Content Systems are primarily enterprise
companies from many different markets, such as media, banks and credit unions,
stock brokerages, insurance, and others. Public Company Disclosure and Awareness
Products are awareness and disclosure products that are purchased, as the name
implies, by public companies in all industries.
See PRODUCTS AND SERVICES below for a full description of these revenue streams.
CORPORATE BACKGROUND
Stockgroup was incorporated under the laws of Colorado on December 6, 1994 under
the name I-Tech Holdings Group, Inc. ("I-Tech"), a United States non-operating
company registered on the NASD OTC Bulletin Board. The financial statements and
supporting information in this report are issued under the name of Stockgroup
but are a continuation of the financial statements and report of operations of
Stock Research Group, Inc. ("SRG"), a British Columbia corporation which was
incorporated on May 4, 1995. On March 11, 1999, pursuant to a reverse
acquisition, SRG acquired the net assets of I-Tech. For accounting purposes, SRG
became a subsidiary of I-Tech.
Our name was changed from I-Tech to Stockgroup.com Holdings Inc. on May 6, 1999
and to Stockgroup Information Systems Inc. on September 20, 2001.
We are a United States publicly traded company registered on the NASD OTC
Bulletin Board under the symbol SWEB. From our head office in Vancouver, we
operate branch offices in San Francisco and Toronto.
As SRG, we operated from 1995 to 1997 as a profitable financial Internet
technology and media company that offered proprietary financial news and tools
to investors and companies. We used our experience and the funds from a public
offering in spring 1999 to provide the foundation for the development and
initial marketing of our products. In October 1999 we launched
Smallcapcenter.com. At that time it was widely believed that a
subscription/advertising model centering around Smallcapcenter was viable. While
parts of this business model did not prove to be profitable, the building of
Smallcapcenter and its related investment software and content aggregation &
management systems gave us a strong foundation of skills and a suite of products
to sell commercially. Smallcapcenter is still a high-traffic and well-maintained
portal for the investment community, and its drawing power is a key driver to
many of our investor awareness products. It also serves as an excellent
development and testing ground for new financial software applications being
developed by us on a continuing basis.
From late 1999 to early 2001 we were hired to create several large enterprise
web sites for different clients
25
on a contract basis. These were large contracts, and added a significant amount
of revenue to the Company, but they also added instability in our cost
structure. In early 2001 it was decided that this E-Business Solutions division
would be de-emphasized in favour of other areas with more profit potential,
namely Financial Software and Content Systems and Public Company Disclosure and
Awareness Products (as described in the PRODUCTS AND SERVICES section below).
From 2000 to 2001, we expanded our awareness and disclosure product line to
include Sector Supplements, and automated investor relations software
applications such as the IntegratIR. We already had a large public company
customer base, so the transition into this area was a natural extension of our
core competencies.
We entered the Financial Software and Content Systems market late in 2000 by
licensing our proprietary financial software applications and third party
content to customers that need to offer financial information to their customers
or improve their content offering. We had access to a wide array of customers
through our internal sales team as well as our reseller channels. Our software
content model is attractive to customers because it is a comprehensive and cost
effective alternative to in-house development.
Early in 2001, as the market for our products and services evolved, it became
apparent to our management where the most profitable and sustainable areas of
the business were. They were Financial Software and Content Systems and Public
Company Disclosure and Awareness Products (including IntegratIR and other
awareness and disclosure products). Once these were identified, a more
streamlined and stable cost structure was introduced and the profitability and
cash flow began to improve. In the last two quarters of 2001 we have reported
income from operations as a result of this stabilized structure.
PRODUCTS AND SERVICES
Our understanding of internet based financial technology and media has enabled
us to leverage our products and services to enter new markets and secure new
clients. Using a common integrated technology platform, we have developed two
main revenue sources: Financial Software and Content Systems and Public Company
Disclosure and Awareness Products.
Financial software and content systems
We have developed proprietary financial applications and tools it licenses to
clients. The clients for Financial Software and Content Systems are from many
different markets, such as media, banks and credit unions, stock brokerages,
leasing, insurance, and other financial services companies.
We provide Financial Software and Content Systems on a private-labeled basis,
and they are typically sold on long term (twelve month or more) contracts,
generating recurring revenue streams. Many of the software applications are
data-feed driven. We either feed data from our own aggregated databases or from
third parties. The advantage of using the Stockgroup system is that the customer
is able to receive data and information from a variety of different feeds all
from one point of contact, at a fraction of the cost of purchasing all feeds
individually. We add value by customizing, filtering, and sorting data in the
configuration the customer wants, and then adding the different software
applications and hosting the entire solution. We are able to use our economies
of scale and automation to give a product that is efficiently
26
delivered and customized, and at a substantial costs savings to having the
customer build and manage it internally.
Examples of some of the providers of third-party data feeds include Marketguide,
Comtex, Multex, and North American Quotations.
We distribute Financial Software and Content Systems through content and
application syndicates, such as Yellowbrix, through channel resellers such as
The Canadian Press, Comtex News Network, Clarinet Communications, and through
its own sales team. These Financial Software and Content Systems cover the
entire North American market including mutual funds, commodities, and equities.
We bring in market feeds through satellite, File Transfer Protocol (FTP),
Extensible Markup Language (XML), and other delivery formats. We have built and
maintain our proprietary middleware solution that aggregates the multiple feeds,
translates and builds a common database infrastructure. Our system then cleans,
filters, and maintains the data in a common database structure. A sophisticated
server cluster and security system backs this content/data management system.
The data is then streamed to our proprietary software applications.
Here are just a few of the over 25 Financial Software and Content Systems
products:
1. Real-time stock quotes on major U.S. exchanges
2. North American 20-minute delayed stock quotes and indices
3. Portfolio management, live portfolio updates and wireless portfolio
updates
4. Most active stock updates
5. Stock watch lists
6. Company fundamentals, SEC/SEDAR filings
7. Daily stock market winners/losers, most actives
8. Company profiles, stock screening (investment data) and technical stock
analysis
9. Employee stock option calculations
The Financial Software and Content Systems is delivered to customers in four
different formats:
A) On an Application Service Provider (ASP) basis where the content and
software is hosted by us and private labeled to the customers
Internet or Intranet site
B) Through our proprietary software objects residing on the customer's
servers which use a proprietary Application Protocol Interface (API)
to retrieve data from our servers
C) Through secured Extensible Markup Language (XML) channel
D) Through different wireless devices and modes including: handheld
devices, Short Message Service (SMS) paging, and Wireless
Application Protocol (WAP) portals which have been built and
maintained by us.
27
Public company disclosure and awareness products
We have developed and own a large array of Public Company Disclosure and
Awareness Products. These products are used by clients to either a) manage their
investor relations and shareholder communications through their web site, b)
generate awareness for their company and their stock, or c) improve their public
disclosure compliance.
Products and services offered by this revenue stream include the IntegratIR
software system, Investor Marketplace, E-Mail Distribution of Press Releases,
Sector Supplements, Smallcap Express sponsorship, Banner and Button Advertising,
Monthly Investor Marketing, Custom Web Site Development, and other online
investor marketing products.
Public companies are increasingly outsourcing these activities because they lack
the internal skills and resources or because it is more effective and cost
efficient than in-house development and maintenance. We offer a `one-stop
shopping' package for corporate clients and provide everything from news release
tracking and postings to quarterly streaming conference calls. Our understanding
of this market segment and focus has resulted in a highly specialized bundle of
products including: private label quotes, charts and database tools for building
relationships with shareholders and traffic reports to track investor usage of
Web sites and inquiries.
In the third quarter of 2001 we launched version 2.01of the IntegratIR, an
automated financial application that is licensed to public companies. The
IntegratIR updates the clients' regulated investor relations information
automatically by private labeling this software application into the clients
corporate web site. The SEC has mandated fair disclosure policies that make our
IntegratIR especially attractive as it updates news releases, webcasts and SEC
filings direct from the wire services as they happen and automatically sends the
information to the client's shareholders and interested parties. The IntegratIR
helps to prevent mistakes and increase timeliness compared to having internal
staff manually update these activities.
Our IntegratIR system represents a way to manage shareholder communications and
reach new investors. The IntegratIR is an investor relations web page and email
management system that functions as a software application - giving the Investor
Relations Officer (IRO) and Chief Financial Officer (CFO) desktop control over
the investor relations portion of their web site. In addition to standard
features, such as dynamic quotes and charts, the IntegratIR provides powerful
new tools that automate the client's online disclosure activities including
publishing their press releases, publishing of regulatory filings and
distributing information requested by shareholders, all on a real-time,
automated basis.
Other Public Company Disclosure and Awareness Products include the following:
Investor Marketplace (IMP), a web page which is actively marketed through
advertising to draw readers, where companies can be featured online to
prospective investors. Being featured on the IMP enables customers to get their
name, profile, and internet link in front of a large investor audience that they
may not otherwise be able to attain.
Targeted e-mail marketing, which are used to disseminate news releases to an
exclusive list of opt-in investors and interested parties.
28
Sector Supplements, which are a spotlight feature on a certain industry sector,
such as Energy, Mining, Biotech, or Technology, are an effective exposure tool
for companies. In a Sector Supplement, investors are drawn to a web site which
features up to twelve companies and contains industry-specific news and
information. Investors who visit this web site can view each of the featured
companies' profiles, request information, or link directly to the client's own
web site.
Sponsorship of the Smallcap Express daily market recap mailing that goes to a
large audience of e-mail readers who have signed up to receive it through
Smallcapcenter.com. A client who sponsors Smallcap Express gets an advertising
banner at the top of each flight. This can be an effective way for the client to
get their name in front of a large number of investors.
Banner Advertising and Button Advertising, which is shown at the top of
Smallcapcenter.com's front page on a prescribed rotation, is another way for
clients to get the attention of a targeted investor audience. Potential
investors who see the banner or button ad can 'click through' the ad to get to a
jump page which can include the client's own description of their company.
The products developed by us over the past five years enable us to offer Public
Company Disclosure and Awareness Products to a rapidly growing customer base
while maintaining a high sales margin. The revenues derived from this source are
typically contractual over a specified term. The Internet communities developed
by Stockgroup host the critical mass to ensure a high level of exposure to the
Company's communication products for public companies.
EMPLOYEES
As of June 24, 2002 we employed 30 people on a full-time basis and 2 people on a
part-time basis. After seeing wide fluctuations in the number of employees
between 1999 and 2001, the number of employees has remained relatively stable
for the eleven months ended May 2002. This stability has been an important part
of our improved cost structure.
None of our employees are subject to collective bargaining agreements. We
believe relations with employees are good.
REGULATORY ISSUES
We are not subject to governmental regulation in our Internet publishing efforts
other than local state and municipal sales tax licenses.
A number of legislative and regulatory proposals under consideration by federal,
state, provincial, local and foreign governmental organizations may lead to laws
or regulations concerning various aspects of the Internet, including, but not
limited to, online content, user privacy, taxation, access charges, liability
for third-party activities and jurisdiction. Additionally, it is uncertain how
existing laws will be applied by the judiciary to the Internet. The adoption of
new laws or the application of existing laws may decrease the growth in the use
of the Internet, which could in turn decrease the demand for our services,
increase the cost
29
of doing business or otherwise have a material adverse effect on our business,
results of operations and financial condition.
SUBSIDIARIES
Stockgroup owns 100% of the issued and outstanding voting common shares of
579818 B.C. Ltd., which wholly owns Stockgroup Media Inc., a British Columbia
corporation, and owns 50% of Stockscores Analytics Corp., a British Columbia
corporation. In addition, Stockgroup wholly owns Stockgroup Systems Ltd., a
Nevada Corporation.
RESEARCH AND DEVELOPMENT
During 2000 and 2001 we invested approximately $849,335 and $241,392
respectively on research and development related to new products and services.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND DOMAIN NAMES
We protect our intellectual property through a combination of trademark and
copyright law, trade secret protection and confidentiality agreements with our
employees, customers, independent contractors and strategic partners. We pursue
the registration of our domain names, trademarks and service marks in the United
States and internationally. Effective trademark, service mark, copyright and
trade secret protection may not be available in every country in which our
services and products are made available on-line. We create a majority of our
content and obtain rights to use the balance of our content from third parties.
It is possible that we could become subject to infringement actions based upon
the content obtained from these third parties. In addition, others may use this
content and we may be subject to claims from our licensors. We currently have no
patents or patents pending and do not anticipate that patents will become a
significant part of our intellectual property in the future. We enter into
confidentiality agreements with our employees and independent consultants and
have instituted procedures to control access to, and distribution of, our
technology, documentation and other proprietary information and the proprietary
information of others from whom we license content. The steps we take to protect
our proprietary rights may not be adequate and third parties may infringe or
misappropriate our copyrights, trademarks, service marks and similar proprietary
rights. In addition, other parties may assert claims of infringement of
intellectual property or other proprietary rights against us. The legal status
of intellectual property on the Internet is currently subject to various
uncertainties as legal precedents have not been set and are still to be
determined in many areas of internet law.
LEASEHOLD
Our corporate offices are composed of one floor of leased space located in the
center of Vancouver's business community. We also lease sites in New York and
Toronto. Our facilities are fully used for current operations, with the
exception of the New York facility, which is currently being subleased to a
tenant.
30
City Monthly Payment Lease Expiry Date
--------------------------------------------------------------------------------
Vancouver CDN $23,647 7 years June -- 2006
New York $8,449 7 years August -- 2006
New York sublease -$8,449 3 years April -- 2004
Toronto CDN $4,533 3 years July -- 2002
EQUIPMENT
We have made a significant investment in servers and computer equipment required
for our website and have dedicated staff assigned to maintenance and support of
these operations.
LEGAL PROCEEDINGS
We filed a statement of claim in the Supreme Court of British Columbia on
January 3, 2001, against Pacific Capital Markets Inc., James King, Rick Jeffs,
and Heidi Hirst. We are suing Pacific Capital Markets Inc. for $351,800 due to
it under a sales contract we signed with them on September 20, 2000. We are
suing the individuals named above, who are managers of Pacific Capital Markets
Inc., for general damages for misrepresentation. We are seeking payment of the
$351,800 owing, plus interest, damages, costs and such further and other relief
as deemed suitable by the court.
On January 12, 2001, Pacific Capital Markets Inc., James King, Rick Jeffs, and
Heidi Hirst filed a Statement of Defense and Counterclaim. At the time of this
filing, no settlement conferences have been held and no court date has been set.
As of June 24, 2002, no further action had been taken by either side. While we
believe we have a strong case, we have not elected to aggressively pursue this
litigation at this time, pending further information on the collectibility of
the debt.
31
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth, as of December 31, 2001, the name, age and
position of the our directors, executive officers and other significant
employees.
Name Age Position with the Company
---- --- -------------------------
Marcus A. New............ 32 Chairman of the Board, Chief Executive
Officer
Leslie Landes............ 58 Director, President and Chief Operating
Officer
Craig Faulkner........... 31 Director
David Caddey............. 52 Director
Louis de Boer II......... 49 Director
David Gillard............ 33 Chief Financial Officer
The backgrounds of our Directors, Officers and significant employees are as
follows:
Marcus New, B.A., Founder, Chairman of the Board and CEO
Marcus New is the founder, and has been Chairman and Chief Executive Officer
since May 1995, of Stockgroup. Mr. New formed the vision for Stockgroup in 1995
and developed the company from an idea to the goal of becoming a leader in
information solutions for financial services companies and a leading provider of
investor relations products for public companies on the Internet. Over the last
five years he has grown the company by re-investing internally generated capital
and has successfully built a substantial corporate client roster. Similar to
other successful Internet pioneers, Mr. New created Stockgroup based on
identification of the ways in which the Internet could be used to provide
services that were not otherwise available. Prior to that, Mr. New was VP of
AmCan Public Relations Group and is currently a director of Iwave.com Inc., an
online information company. Mr. New earned a Bachelor of Arts degree majoring in
business from Trinity Western University.
Leslie A. Landes, Director, President and Chief Operating Officer
Leslie Landes has served as Stockgroup's President and Chief Operating Officer
since August 1998 and has been an advisor to Stockgroup since shortly after its
inception. Since January 1992, Mr. Landes has served as the President and as a
director of Landes Enterprises Limited, which he founded, and which is an
interim turnaround management consulting company that advised and counseled
clients in several industries, including telecommunications and technology on
issues ranging from mergers and acquisitions to international marketing
campaigns. Prior to forming Landes Enterprises in 1992 Mr. Landes spent 13 years
with the Jim Pattison Group, Canada's third largest privately held company with
sales in excess of CDN$3 Billion, with over 13,000 employees. He served as
President of The Jim Pattison Sign Group, Outdoor Group, and Communications
Group, which included radio and television stations and paid subscription print
publications. Ultimately he was appointed President of Jim Pattison Industries
Ltd. and Senior Vice President of the parent Jim Pattison Group, responsible for
the Group's acquisitions and divestitures, and with involvement in the
management of the Group's 50 diversified companies. He successfully initiated
and completed the acquisitions of other companies in a number of diverse
industries in which the Group was active. Under his
32
direction the Sign Group was built into the largest electric sign company in the
world. Mr. Landes is also a director of TIR Systems Ltd., a lighting technology
company, which is a public company.
Craig Faulkner, Director
Mr. Faulkner is one of the founding partners of Stockgroup. Mr. Faulkner's skill
and knowledge of database-to-web solutions brings a history of innovative and
dynamic solutions. Early in his career, Mr. Faulkner led Stockgroup to
co-develop one of the first portfolio tracking tools, LivequoteSRG, fully based
on the use of Java. Mr. Faulkner managed the programming and information
management team at Stockgroup, initiated solutions with data and hardware
vendors, while maintaining a senior management role and board membership. Under
Mr. Faulkner's direction, Stockgroup implemented a sophisticated blend of both
Sun Solaris and Microsoft solutions. Mr. Faulkner is also part of the advisory
boards for Brand Fidelity an online service addressing the commercial naming and
branding business, and Serveyor, a leading Managed Service Provider (MSP) for
Internet Availability Monitoring, Performance Measurement and Quality testing.
On March 28, 2002, Craig resigned as Chief Technology Officer of Stockgroup but
will remain on the board of directors.
David N. Caddey, B.Sc., M.Sc., Director
David Caddey has been a Director of Stockgroup since May 1995 and has over 26
years experience in the business and program management field. Since July 1998
he has served as an Executive Vice President of MacDonald Dettwiler and
Associates Ltd., a space technology and satellite services company that designs,
manufactures, operates and markets a broad range of space products and services.
During this period he has also served as the General Manager of that company's
Space Missions Group where he is responsible for managing the construction of
the Radarsat-2 spacecraft and associated ground infrastructure program, valued
at over $350 million, as well as the construction of the Space Station Mobile
Servicing System. From July 1994 to June 1998, Mr. Caddey worked as a Vice
President and General Manager of the Space and Defense Systems Business Area of
MacDonald Dettwiler and Associates Ltd.. In this capacity he was responsible for
marketing and sales, project management, technical management and post delivery
support. From 1990 to 1994 he served as Vice President and General Manager of
Geo-information Systems of MacDonald Dettwiler and Associates Ltd., where he
managed the development of Radarsat I Ground Segment Program.
Louis de Boer II, Director
Louis de Boer has served as a director of Stockgroup since October 1999. Since
May of 1998, he has served as President of MediaFutures, Inc., which provides
consulting services to clients in the Internet and cable broadcasting
industries, including such companies as Hearst New Media, Cox Enterprises,
Rainbow Programming as well as several emerging growth companies. From July 2000
through June 2001, he also served as CEO of Automatic Media Incorporated, and
Internet media and software firm based in New York City. From June 1996 to April
1998, he was Chief Executive Officer at New Century Network, an online company
formed by a consortium of the nine leading US newspaper organizations,
including, Advance Communications, Cox Communications, The Chicago Tribune,
Hearst, Gannett, Knight-Ridder, Inc., The New York Times, The Washington Post
and Times-Mirror. From 1977 to December 1994, Mr. de Boer was employed at HBO
culminating in the positions of Executive Vice President of HBO Inc. and
President of its International division, where he played an instrumental role in
helping negotiate and broker deals that
33
significantly increased that company's presence in its international markets.
Mr. de Boer is also a director of Click TV, a television production company in
the UK and Priva Technologies, both of which are private companies.
David Gillard, CGA, Chief Financial Officer
Mr. Gillard has been Chief Financial Officer of Stockgroup since November 2001,
and prior to that he had been with the Company in the capacity of Controller
since March 2000. Prior to joining Stockgroup, he had been in the accounting
field for 10 years, including most recently over 6 years in the accounting
department of Maynards Industries Ltd., one of the largest asset conversion
companies in North America. He is a graduate of the British Columbia Institute
of Technology, and has been a Certified General Accountant since 1996.
EXECUTIVE COMPENSATION
The following summary compensation table reflects all compensation awarded to,
earned by, or paid to the Chief Executive Officer and the President for all
services rendered to us in all capacities during each of the years ended
December 31, 1999, 2000 and 2001. None of the other executive officers received
salary and bonus exceeding $100,000 during those years.
Summary Compensation Table
--------------------------------------------------------------------------------
Securities All Other
Name and Principal Position Year Salary Underlying Compensation
$ Options (#) $
--------------------------------------------------------------------------------
Marcus New 1999 $111,073 325,000 $0
Chief Executive Officer, 2000 $147,460 0 $0
Chairman and Director 2001 $ 97,194 100,000 $0
--------------------------------------------------------------------------------
Leslie Landes 1999 $122,654 745,800 $0
President & 2000 $145,668 0 $0
Chief Operating Officer 2001 $ 97,194 533,200 $0
================================================================================
Option Grants In the Last Fiscal Year To Named Executive Officers
--------------------------------------------------------------------------------
Name Securities % Of Total Exercise Expiration
Underlying Options Price Date
Options Granted to $
Granted Employees
(1)(2) In Year
--------------------------------------------------------------------------------
Marcus New 100,000 4.6% 0.12 18-Sep-07
Leslie Landes 533,200 24.4% 0.22 10-Aug-07
--------------------------------------------------------------------------------
(1) All of the above options are subject to the terms of our Stock Option Plan
and are exercisable only as they vest. The options have a term of 6 years
from date of grant.
(2) All options were granted at an exercise price equal to the fair market
value of our common stock on the date of grant.
34
No Bonuses were paid to named executive officers in any of the above years. No
Restricted Stock Awards (RSAs), Stock Appreciation Rights (SARs), or Long Term
Incentive Plans (LTIPs) were awarded to named executive officers in any of the
above years.
On August 10, 2001, for services rendered to us, Leslie Landes was granted
533,200 options at an exercise price of $0.22 per share, which vest over three
years beginning February 10, 2002. On September 18, 2001, for services rendered
to us, Marcus New was granted options to purchase 100,000 shares of common stock
at an exercise price of $0.12 per share. These options fully vest on March 18,
2002.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table summarizes the option holdings of the named executive
officers as at December 31, 2001:
----------------------------------------------------------------------------------------
Number of Shares Value of Unexercised
underlying In-the-Money
Unexercised Options Options at
At December 31, 2001 December 31, 2001
----------------------------------------------------------------------------------------
Name Shares
acquired Value Exer- Unexer- Exer- Unexer-
on Exercise Realized cisable cisable cisable cisable
----------------------------------------------------------------------------------------
Marcus New 0 0 130,000 295,000 $0 $ 0
Leslie Landes 0 0 319,920 851,480 $0 $11,550
========================================================================================
Directors' Compensation
We compensate our outside Directors by issuing each one options to acquire
shares of common stock which fully vest after one year of service on the board
of directors. Mr. David Caddey and Mr. Lee de Boer were each granted 50,000 such
options on August 10, 2001 that have an exercise price of $.22 per share and
will fully vest on August 10, 2002.
Employment and Severance Agreement
We have an employment agreement with the President, Leslie Landes. This
agreement was signed on August 4, 1998 and has a term of 5 years. Under the
agreement Mr. Landes is scheduled to receive compensation of a minimum of
C$150,000 per annum. The agreement may be terminated by us or Mr. Landes on 30
days' notice, and if termination is initiated by us, Mr. Landes is to receive a
severance payment equal to 12 months compensation.
35
1999 Incentive Stock Option Plan
The purposes of our 1999 Incentive Stock Option Plan are to enhance our
profitability and shareholder value by enabling us to offer stock based
incentives to employees, directors and consultants. The 1999 Stock Option Plan
authorizes the grant to our, and our subsidiaries, employees, directors,
consultants and advisors, of:
o stock options;
o restricted shares (which would generally provide for a substantial
risk of forfeiture for a period of time);
o deferred shares, which would generally provide for shares to be
issued upon services being rendered; and
o performance shares, which would generally provide for shares to be
issued upon the attainment of specified performance goals.
Under the 1999 Stock Option Plan, we may grant incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, and
non-qualified stock options. Incentive stock options may only be granted to our
employees.
The number of shares authorized and reserved for grants under the 1999 Stock
Option Plan is 2,000,000. The 1999 Stock Option Plan is administered by the
board of directors, although the board has the right to appoint a committee of
two or more non-employee directors to administer the Plan. Subject to the
provisions of the Plan, the board and the committee have authority to determine
the employees, directors, consultants and advisors who are to receive awards and
the terms of such awards, including:
o the number of shares subject to the award;
o the fair market value of the shares subject to options;
o the exercise price per share;
o the terms of vesting, including whether vesting accelerates upon a
change of control, which may also be granted to participants at any
time after an award has been granted; and
o other terms.
Grants of options may consist of incentive stock options, non-qualified stock
options, or a combination of both. Incentive stock options must have an exercise
price equal to at least 100% of the fair market value of a share on the date of
the award and non-qualified stock options must have an exercise price at least
equal to 75% of the fair market value of a share on the date of the award. If
the grant of an incentive stock option is to a shareholder holding more than 10%
of our voting stock, the exercise price must be at least 110% of the fair market
value on the date of grant. Terms and conditions of awards are set forth in
written agreements between us and the respective option holders. Awards under
the 1999 Stock Option Plan may not be made after March 11, 2009, and stock
options granted before that date may not have a term beyond that date.
If the employment with us of the holder of a stock option is terminated for any
reason other than as a result of a voluntary termination with the consent of the
board or the holder's death or disability, the holder's stock option terminates
on the same date. If the termination is due to such a voluntary termination the
holder may exercise the option, to the extent exercisable on the date of
termination of employment, until 3 months after the date of termination. If an
option holder dies or becomes disabled, stock options may generally be
36
exercised, to the extent exercisable on the date of death or disability, by the
option holder or the option holder's survivors until six months after the date
of death or disability.
As of June 24, 2002, options to purchase up to 1,893,576 shares of common stock
had been granted under the 1999 Stock Option Plan, of which 938,576 have been
exercised, and options to purchase 106,424 shares were available for future
grants. We have registered the shares subject to issuance under our 1999 Stock
Option Plan, pursuant to our registration statement on Form S-8 filed with the
Securities and Exchange Commission on November 16, 1999.
2000 Incentive Stock Option Plan
The purposes and description of our 2000 Incentive Stock Option Plan are
identical to the 1999 Stock Option Plan in all respects, save that the amount of
shares authorized and reserved for issuance under the 2000 Stock Option Plan is
500,000 shares. As of June 24, 2002, 451,666 options have been issued under the
2000 Stock Option Plan, of which 264,166 have been exercised and 48,334 options
are available to be granted. We have registered the shares subject to issuance
under our 2000 Stock Option Plan, pursuant to our registration statement on Form
S-8 filed with the Securities and Exchange Commission on May 15, 2001.
2001 Incentive Stock Option Plan
The purposes and description of our 2001 Incentive Stock Option Plan are
identical to the 1999 and 2000 Stock Option Plans in all respects, save that the
amount of shares authorized and reserved for issuance under the 2001 Stock
Option Plan is 1,000,000 shares. As of June 24, 2002, 956,402 options have been
issued under the 2001 Stock Option Plan, of which 23,202 have been exercised and
43,598 options are available to be granted. We registered the shares subject to
issuance under our 2001 Stock Option Plan, pursuant to our registration
statement on Form S-8 filed with the Securities and Exchange Commission on May
13, 2002.
2002 Incentive Stock Option Plan
The purposes and description of our 2002 Incentive Stock Option Plan are
identical to the 1999, 2000, and 2001 Stock Option Plans in all respects, save
that the amount of shares authorized and reserved for issuance under the 2002
Stock Option Plan is 1,500,000 shares. As of June 24, 2002, 517,500 options have
been issued under the 2002 Stock Option Plan, of which none have been exercised
and 982,500 options are available to be granted. We registered the shares
subject to issuance under our 2002 Stock Option Plan, pursuant to our
registration statement on Form S-8 filed with the Securities and Exchange
Commission on May 13, 2002.
SELLING SHAREHOLDERS
This prospectus relates to the offering by the selling shareholders of shares of
our common stock acquired by them in an equity investment and exercise of
warrants that the selling shareholders received in certain private placements.
All of the shares of common stock offered by this prospectus are being offered
by the selling shareholders for their own accounts.
37
[A] 22 SHAREHOLDERS PARTICIPATING IN THE MARCH 25, 2002 PRIVATE PLACEMENT
We are registering the resale of 4,051,000 common shares for this group of
investors.
Bank Sal. Oppenheim jr. & Cie, A. Richard Bullock, Canadian Gravity Recovery
Inc., Jons Edstrand, Friedrich Gruehl, Inversiones Hispanola, Peter Jensen, Tara
Landes, Kathy Leishman, Les Entreprises de Richard Atkinson Ltee, LOM Nominees
Ltd., Northeastern Resources Corp., Thomas O'Neill, PCG Performance Capital
Group Ltd., Susan P. Richards, Robert J. Charlton Personal Law Corp., Lawrence
Ross, Vincent Smith, Value Relations IR Services, Praveen Varshney, WAT Capital
Corp., and Michael Wells (collectively, the "selling shareholders") purchased an
aggregate 2,000,000 units, each unit consisting of one common share and one
non-transferable warrant, at a price of $0.20 per unit, plus 51,000 common
shares at a price of $0.20 per share, for total gross proceeds of $410,200, from
us in a private placement transaction which completed on March 25, 2002. Each
warrant entitles the holder to acquire one share of the Company at an exercise
price of $0.25 until March 24, 2003.
As of the date of this filing, none of the warrants had been exercised.
The following table sets forth information with respect to the common stock
beneficially owned by the selling shareholders as of the date of this
prospectus. Beneficial ownership is determined in accordance with SEC rules and
includes voting or investment power with respect to the securities.
The percentage interest of each selling shareholder is based on the beneficial
ownership of that selling shareholder divided by the sum of the current
outstanding shares of common stock plus the additional shares, if any, which
would be issued to that selling shareholder (but not any other selling
shareholder) when exercising warrants in the future.
To our knowledge, each of the selling shareholders has sole voting and
investment power over the shares of common stock listed in the table below. No
selling shareholder has had a material relationship with us during the last
three years, other than as an owner of our common stock or other securities. To
our knowledge, none of these investors is affiliated with the others. One of the
selling shareholders, Tara Landes is the daughter of one of our officers.
38
--------------------------------------------------------------------------------
SELLING ORIGINAL GROSS NUMBER OF NUMBER OF PERCENT
SHAREHOLDERS PROCEEDS SHARES SHARES OWNED OF CLASS
$ REGISTERED AFTER THE
OFFERING
--------------------------------------------------------------------------------
Bank Sal 50,000 500,000 0 0%
Oppenheim jr. Cie
--------------------------------------------------------------------------------
A. Richard Bullock 25,000 250,000 0 0%
--------------------------------------------------------------------------------
Canadian Gravity 10,000 100,000 0 0%
Recovery Inc.
--------------------------------------------------------------------------------
Jons Edstrand 10,000 100,000 0 0%
--------------------------------------------------------------------------------
Friedrich Gruehl 20,000 200,000 0 0%
--------------------------------------------------------------------------------
Inversiones 25,000 250,000 0 0%
Hispanola
--------------------------------------------------------------------------------
Peter Jensen 10,000 100,000 0 0%
--------------------------------------------------------------------------------
Tara Landes 4,000 40,000 0 0%
--------------------------------------------------------------------------------
Kathy Leishman 24,000 240,000 0 0%
--------------------------------------------------------------------------------
Les Entreprises de 20,000 200,000 0 0%
Richard Atkinson
Ltee
--------------------------------------------------------------------------------
LOM Nominees Ltd. 10,000 100,000 0 0%
--------------------------------------------------------------------------------
Northeastern 20,000 200,000 0 0%
Resources Corp.
--------------------------------------------------------------------------------
Thomas O'Neill 10,000 100,000 0 0%
--------------------------------------------------------------------------------
PCG Performance 100,000 1,000,000 100,000 0.7%
Capital Group Ltd.
--------------------------------------------------------------------------------
Susan P. Richards 5,000 50,000 0 0%
--------------------------------------------------------------------------------
Robert J. Charlton 16,000 160,000 0 0%
Personal Law Corp.
--------------------------------------------------------------------------------
Lawrence Ross 2,800 14,000 0 0%
--------------------------------------------------------------------------------
Vincent Smith 10,000 100,000 0 0%
--------------------------------------------------------------------------------
Value Relations IR 7,400 37,000 0 0%
Services
--------------------------------------------------------------------------------
Praveen Varshney 11,000 110,000 0 0%
--------------------------------------------------------------------------------
WAT Capital Corp. 10,000 100,000 0 0%
--------------------------------------------------------------------------------
Michael Wells 10,000 100,000 0 0%
--------------------------------------------------------------------------------
We are registering a total of 4,051,000 shares in this prospectus.
The number of shares to be issued upon exercise of the warrants is based upon an
exercise price of $0.25 for the 2,000,000 warrants.
[B] STANLEY HOLLANDER
We are registering 250,000 common shares for this shareholder.
Stanley Hollander holds 250,000 non-transferable warrants, each exercisable for
one share of our common stock, with an exercise price of $0.30 and an expiry
date of September 15, 2003. These warrants were issued to him pursuant to a
consulting agreement dated March 16, 2002.
39
All warrants are immediately exercisable, so as of the date of this filing,
Stanley Hollander's beneficial ownership of our stock is 1.8% of the outstanding
common shares. As of the date of this filing none of the warrants had been
exercised.
PRINCIPAL SHAREHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 24, 2002 the beneficial ownership of
common stock of each person known to us who owns more than 5% of our issued and
outstanding common stock.
Name and address* of Amount and Nature Percent of
Beneficial Owner of Beneficial Ownership Class
---------------- ----------------------- -----
Marcus New 3,361,500 24.37%
Yvonne New 2,364,500 17.14%
518464 B.C. Ltd. 1,945,000 14.10%
Craig Faulkner 834,000 6.05%
* Unless otherwise referenced, the address for each of the above mentioned
parties is c/o Stockgroup Information Systems Inc. Suite 500 - 750 West
Pender Street, Vancouver, B.C. Canada V6C 2T7.
On March 11, 1999, Stockgroup entered into a Share Exchange and Share Purchase
Agreement with 579818 B.C. Limited, a British Columbia subsidiary in which
Stockgroup owns 100% of the issued and outstanding voting common stock; Stock
Research Group, Inc., a British Columbia corporation (now named Stockgroup Media
Inc.); and all of the shareholders of Stock Research Group, Inc. ("SRG"). Under
that Agreement 579818 B.C. Ltd. acquired all of the issued and outstanding
shares of SRG, in consideration of which 579818 B.C. Ltd. issued to the SRG
shareholders 3,900,000 Class A Exchangeable Shares. Stockgroup also issued to
Stock Trans, Inc., its transfer agent, 3,900,000 shares of common stock, to hold
as trustee for the benefit of the SRG shareholders. The exchangeable shares may
be converted, at the option of the holder, into an equal number of shares of
common stock in the capital of Stockgroup held by the trustee. Pending any such
conversion, each holder of the exchangeable shares may direct the trustee to
vote an equivalent number of shares of common stock. The trustee has no
discretion as to voting or disposition of common stock.
As a result of these transactions, each of the former SRG shareholders has the
right to vote, or to direct the trustee to vote on their behalf, a number of
shares of common stock in the capital of Stockgroup equal to the number of
exchangeable shares held of record by them. As of the date of this filing, the
aggregate number of shares of common stock issued to the trustee is 3,058,000,
represent approximately 22% of issued and outstanding shares of common stock.
The trust created by these transactions will continue until the earliest to
occur of the following events:
o no outstanding exchangeable shares are held by any former SRG shareholder;
o each of 579818 B.C. Ltd. and Stockgroup acts in writing to terminate the
trust and such termination is approved by the holders of the exchangeable
shares; and
40
o December 31, 2098.
Of the amount shown for Marcus New, 50% (or 1,142,000 shares) of the
exchangeable shares are owned by Yvonne New, Mr. New's wife.
Marcus New owns directly 169,500 Exchangeable shares and his wife, Yvonne New,
owns directly 169,500 exchangeable shares. They both indirectly, through 518464
B.C. Ltd., a British Columbia company owned by Mr. New as to 50% and his wife
Yvonne New as to 50%, 1,945,000 exchangeable shares. Accordingly, Marcus and
Yvonne New beneficially own 2,284,000 exchangeable shares of common stock, which
represent approximately 17% of issued and outstanding common stock.
Mr. New also owns 2,000 shares of common stock which were purchased in the open
market. On March 11, 1999, Mr. New was granted options to purchase 325,000
shares of common stock at an exercise price of $2.50, of which 195,000 options
had vested by June 24, 2002. On September 18, 2001, Mr. New was also granted
options to purchase 100,000 shares of common stock at an exercise price of $0.12
per share. These options fully vested on March 18, 2002, and expire on September
17, 2007. On March 5, 2002, Mr. New was also granted options to purchase 400,000
shares of common stock at an exercise price of $0.22 per share. These options
fully vested on March 5, 2002. On May 13, 2002, Mr. New was also granted options
to purchase 300,000 shares of common stock at an exercise price of $0.17 per
share. In combination with Mr. New's 2,284,000 exchangeable shares, 995,000
vested options, and 2,000 shares of common stock, and his wife Yvonne New's
80,500 shares of common stock, Mr. New holds a beneficial ownership position in
the company of 3,361,500 shares representing approximately 24.37% of issued and
outstanding common stock as of June 24, 2002.
Of the amount shown for Craig Faulkner, Mr. Faulkner owns directly 169,000
exchangeable shares and indirectly, through 569358 B.C. Ltd., a British Columbia
company owned by Mr. Faulkner, 565,000 exchangeable shares. Mr. Faulkner has
been granted options to acquire 100,000 shares of common stock at an exercise
price of $0.12 per share. Mr. Faulkner was granted these options on September
18, 2001. The options fully vested on March 18, 2002. Mr. Faulkner, through his
direct and indirect holdings, and 100,000 vested options, beneficially owns
834,000 shares representing 6.05% of the issued and outstanding common stock as
of June 24, 2002.
41
SECURITY OWNERSHIP OF MANAGEMENT
The tables below and the paragraphs that follow present certain information
concerning directors, executive officers and significant employees. Mr. David
Caddey is Mr. Marcus New's wife's uncle. Other than this relationship, none of
the our directors, executive officers or significant employees has any family
relationship with any other director, executive officer or significant employee.
---------------------------------------------------------------------------------------------------
Name Age Position with Company Executive Shares Percent
Officer/ Beneficially of
Director Owned Class
Since June 24, 2002
---------------------------------------------------------------------------------------------------
Directors:
Marcus A. New 32 Chairman of the Board,
Chief Executive Officer,
Director 05/04/95 3,361,500 24.37%
Craig D. Faulkner 31 Director 05/04/95 834,000 6.05%
Leslie Landes 58 President,
Chief Operating Officer,
Director 08/04/98 319,920 2.32%
David Caddey 52 Director 05/04/95 60,000 0.43%
Louis de Boer II 49 Director 10/07/99 0 0.00%
David Gillard 33 Chief Financial Officer 11/16/01 100,000 0.72%
---------------------------------------------------------------------------------------------------
All Directors, Executive Officers and
Significant employees as a group 4,675,420 33.89%
---------------------------------------------------------------------------------------------------
Of the amount shown for Mr. Caddey, 50% (or 30,000 shares) are owned by Ms.
Donna Caddey, Mr. Caddey's wife.
Mr. David Caddey and his wife, Donna Caddey, each own directly 20,000
exchangeable shares. In addition, 20,000 shares of common stock are owned
jointly by David and Donna Caddey. Accordingly, Mr. and Ms. Caddey beneficially
owns 60,000 shares of common stock which represents approximately 0.43% of
issued and outstanding common stock. Mr. Caddey has been granted options to
purchase 50,000 shares of common stock at an exercise price of $0.22 per share.
Mr. Caddey was granted these options on August 10, 2001. The options have a
six-year term and full vesting of the 50,000 options will take place on August
10, 2002, and the beneficial ownership in the table above does not include any
shares of common stock underlying these options. In combination with his direct
and indirect holdings of 40,000 exchangeable shares and direct and indirect
holdings of 20,000 shares of common stock, Mr. Caddey beneficially owns 60,000
shares representing approximately 0.43% of issued and outstanding common stock.
On March 11, 1999 Mr. Leslie Landes had been granted options to purchase 745,800
shares of common stock at a price of $0.01 per share as to 105,000 and $0.94 as
to 640,800. These options begin vesting on August 4, 2002 and expire on August
1, 2004. As of December 31, 2001 107,600 of the $0.94 options had been
forfeited. As of June 24, 2002 a further 533,200 options had been cancelled. On
August 10, 2001 Mr. Landes was granted an additional 533,200 options at an
exercise price of $0.22, of which 319,920 had vested
42
by June 24, 2002. As at June 24, 2002, Mr. Landes' options provide him with
beneficial ownership of 319,920 of issued and outstanding common stock
representing approximately 2.32% of the issued and outstanding common stock.
On August 10, 2001, Mr. Louis de Boer was granted options to purchase 50,000
shares of common stock at an exercise price of $0.22 per share, with a six year
term and full vesting on August 10, 2002. As at June 24, 2002, Mr. de Boer had
beneficial ownership of zero shares of common stock.
On April 30, 2001, Mr. David Gillard was granted options to purchase 7,500
shares of common stock at an exercise price of $0.31 per share, with full
vesting on October 31, 2001 and a six year life. On May 13, 2002, Mr. Gillard
was granted options to purchase 92,500 shares of common stock at an exercise
price of $0.15 per share, with full vesting on May 13, 2002 and a six year life.
As at June 24, 2002, Mr. Gillard had beneficial ownership of 100,000 shares of
common stock, representing approximately 0.73% of the issued and outstanding
common stock.
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and various provisions of our
Articles of Incorporation and our bylaws are summaries. Statements contained in
this prospectus relating to such provisions are not necessarily complete, and
reference is made to the Articles of Incorporation and bylaws, copies of which
have been filed with the Securities and Exchange Commission as exhibits to our
registration statement of which this prospectus constitutes a part, and
provisions of applicable law. Our authorized capital stock consists of
75,000,000 shares of common stock, no par value, of which 13,795,768 shares were
issued and outstanding as of June 24, 2002, and 5,000,000 shares of preferred
stock, no par value, of which no shares were issued and outstanding as of June
24, 2002. As of June 5, 2002, there were 70 holders of record of our common
stock.
COMMON STOCK
Each share of common stock is entitled to share pro rata in dividends and
distributions with respect to the common stock when, as and if declared by the
board of directors from funds legally available therefor. No holder of any
shares of common stock has any pre-emptive right to subscribe for any of our
securities. Upon dissolution, liquidation or winding up of Stockgroup, the
assets will be divided pro rata on a share-for-share basis among holders of the
shares of common stock after any required distribution to the holders of
preferred stock, if any. All shares of common stock outstanding are fully paid
and non-assessable.
Each shareholder of common stock is entitled to one vote per share with respect
to all matters that are required by law to be submitted to shareholders. The
shareholders are not entitled to cumulative voting in the election of directors.
Accordingly, the holders of more than 50% of the shares voting in the election
of directors will be able to elect all the directors if they choose to do so.
Currently, our bylaws provide that shareholder action may be taken at a meeting
of shareholders and may be affected by a consent in writing if such consent is
signed by the holders of the majority of outstanding shares, unless Colorado law
requires a greater percentage. Our Articles of Incorporation provide that they
may be
43
amended by the affirmative vote of a majority of the shares entitled to vote on
such an amendment. These are the only provisions of our bylaws or Articles of
Incorporation that specify the vote required by security holders to take action.
PREFERRED STOCK
The board of directors is authorized, without further shareholder approval, to
issue from time to time up to an aggregate of 5,000,000 shares of preferred
stock. The preferred stock may be issued in one or more series and the board of
directors may fix the rights, preferences and designations thereof. No shares of
preferred stock are currently outstanding and we have no present plans to issue
any shares of preferred stock. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of our outstanding voting stock.
CONVERTIBLE DEBENTURES, NOTES AND WARRANTS
[A] MOUSTAFA, ASLAN, PANETTA, STONE, MCCORMACK, BRUENING, ALLIOTTS $500,000
On January 19, 2001, we entered into a Securities Purchase Agreement with seven
unaffiliated investors to issue $500,000 of unsecured 3% convertible debentures
("debentures"), and 4-year warrants ("warrants").
The debentures mature on December 31, 2003 and are convertible into common
shares at any time. The maximum and minimum conversion prices for the debentures
are $1.00 and $0.50 respectively. The actual conversion price of the debentures
will be determined upon receipt of a conversion notice and will be lessor of (a)
the maximum conversion price, or (b) 80% of the 2 lowest closing prices of our
common shares during the 10 trading days prior to the date of conversion, but in
no case less than the minimum conversion price. Interest accrues on the
debentures at the rate of 3% per annum, and is payable on each conversion date,
at the end of each calendar quarter and at maturity. Interest may be paid in the
form of cash or shares at our option.
The warrants were issued on a pro-rata basis, with each debenture holder
receiving one Series A warrant for each dollar of debentures purchased and three
Series B warrants for each five dollars of debentures purchased. The exercise
price of the warrants is $1.00 per share for the Series A warrants and $2.00 per
share for the Series B warrants. The warrants permit the holders to acquire up
to an aggregate of 800,000 common shares at any time up to December 31, 2004.
The maximum and minimum conversion prices of the debentures and the exercise
price of the warrants are subject to adjustment upon the happening of certain
events, such as the payment of a stock dividend, a stock split, a corporate
merger or spin-off, or the issuance of securities at a price below the
conversion price.
The debentures and warrants contain provisions which limit the number of shares
of common stock into which the debentures are convertible and the warrants are
exercisable. Under these provisions, the number of shares of common stock into
which the debentures are convertible and the warrants are exercisable on any
given date, together with any additional shares of common stock held by the
note-holders, will not exceed 9.99% of our then outstanding common stock.
44
On July 17, 2001, one of the debenture holders converted principal of $300,000
plus accrued interest into 608,827 common shares. This conversion resulted in
the immediate recognition of $254,554 in interest expense related to the
previously unamortized debt discount and beneficial conversion feature.
On March 15, 2002, Stockgroup and the 3% convertible debenture holders agreed to
an amendment to the original Securities Purchase Agreement. The debenture
holders agreed to immediately convert the outstanding principal of $200,000 and
accrued interest into common shares of Stockgroup at the minimum conversion
price of $0.50 and we agreed to modify the existing terms of the Series A and B
warrants. The exercise price of the Series A warrants has been reduced from
$1.00 to $0.25. The exercise price of the Series B warrants has been reduced
from $2.00 to $0.50. The expiry date for both the Series A and B warrants has
been extended to July 31, 2005.
The foregoing has been a brief description of some of the terms of the
debentures and warrants. For a more detailed description of the rights of the
holders of the debentures and warrants, prospective investors are directed to
the actual forms of the debentures and warrants, and the Convertible Note
Purchase Agreement under which they were issued, which were all filed as
exhibits to our Form 8-K filed with the SEC on January 29, 2001.
Under a Registration Rights Agreement entered into on January 19, 2001, we
agreed to register the shares of common stock issuable to the selling
shareholders upon conversion of their debentures and exercise of their warrants.
The Registration Rights Agreement was amended on March 15, 2002 to include only
the warrant shares and the 608,827 Moustafa shares. This prospectus is part of
the registration statement intended to satisfy this obligation. The registration
rights agreement requires us to file a registration statement with respect to
the shares within a specified period of time and to have the registration
statement be declared effective within a specific period of time. We must also
keep the registration statement effective until all of the securities offered
have been sold. We are responsible for the payment of all fees and costs
associated with the registration of the securities, except that we are not
responsible for legal fees generated by the selling shareholders' counsel(s),
and we are not responsible for brokerage commissions and discounts. We are
required to indemnify and hold harmless the selling shareholders and their
agents and representatives, against:
o any untrue statement of a material fact in a registration statement;
or
o any violation or alleged violation of the Securities Act of 1933 or
the Securities Exchange Act of 1934.
Specific procedures for carrying out such indemnification are set forth in the
Registration Rights Agreement.
[B] DEEPHAVEN AND AMRO $3,000,000
On April 3, 2000, we entered into a Convertible Note Purchase Agreement with two
unaffiliated investors to issue unsecured 8% Convertible Notes ("notes") and
5-year Callable Warrants ("warrants") for gross proceeds of $3 million. In
February 2002 this agreement was restructured as described below under
Restructured Agreement.
The Original Agreement
Under the original agreement the notes mature on March 31, 2002 and became
convertible into common
45
shares after July 31, 2000. The notes may only be converted if we do not make
payment on a lender's prepayment request, or if we seek to prepay the notes. The
initial conversion price for the notes was $3.72. Prepayments on the notes were
subject to a tiered prepayment schedule such that all prepayments after July 31,
2000 are payable at 115% of the principal. Interest accrues on the notes at the
rate of 8% per annum, and is payable on each conversion date and at maturity.
Interest may be paid in the form of cash or shares at our option. The lenders
had the right to put back to us up to 25% of the unconverted amount of the notes
during any 30-day period after July 31, 2000. By November 30, 2000, the lenders
had the right to put back to us 100% of the unconverted amount of the notes.
Upon the lenders' exercise of such right, we have the option of prepaying the
portion of the notes sought to be converted, such prepayment to be in accordance
with the tiered prepayment schedule set forth above. If we do not make such a
prepayment within 10 days after our receipt of a put notice, the conversion rate
of the notes and any accrued interest changes to the lesser of (a) the initial
conversion price of $3.72, and (b) 88% of the average of the 5 lowest closing
prices of our common shares during the 30 trading days prior to the date of
conversion.
In the event the notes are not prepaid or converted prior to March 21, 2002,
they will automatically convert on maturity to common shares at the lesser of
(a) the initial conversion price of $3.72, and (b) 88% of the average of the 5
lowest closing prices of our common shares during the 30 trading days prior to
the date of maturity.
The warrants permit the holders to acquire up to 181,818 common shares at an
exercise price of $3.30 at any time up to March 31, 2005. The warrants may be
called by us, at a purchase price of $.01 per underlying share, if the stock
price of Stockgroup's common shares exceeds $6.51 for any 20 consecutive trading
days after the effective date of the registration statement, provided that the
holders have the right to exercise the warrants within 30 days after their
receipt of such a call.
The exercise price of the warrants is adjusted upon the occurrence of certain
events, including the issuance of equity or convertible instruments exchangeable
into common shares at a price below the market value of the common shares at the
time of issuance and the exercise price of the warrants. In certain
circumstances, the holders of the warrants could elect on exercise to satisfy
their obligation to pay the cash exercise price to us by accepting a lesser
number of common shares.
The notes and warrants contain provisions which limit the number of shares of
common stock into which the notes are convertible and the warrants are
exercisable. Under these provisions, the number of shares of common stock into
which the notes are convertible and the warrants are exercisable on any given
date, together with any additional shares of common stock held by Deephaven or
Amro, will not exceed 4.99% of our then outstanding common stock. This
restriction may be removed by the holder with 60 days' notice to us.
On August 10 and 17, 2000 respectively, the two note holders exercised their
rights to put 25% of the notes, or $750,000 back to us. We extinguished the
$750,000 principal, the $112,500 put premium and the $22,290 in accrued interest
for cash of $884,790. The cash redemption resulted in a $1,048,373 extraordinary
gain, which included the repurchase of the beneficial conversion feature at the
date of extinguishment in the amount of $1,089,166 net of $40,793 in deferred
financing costs.
On November 14, 2000, one of the note holders converted principal of $50,000
plus prepayment premium
46
and accrued interest into 67,741 common shares.
On January 19, 2001, the exercise price and the number of callable warrants
outstanding were adjusted as a result of the 3% convertible debentures and
warrants being offered at a lower exercise price. The exercise price was
decreased from $3.30 to $3.00 and the number of callable warrants were increased
from 272,727 to 300,000.
On February 6, 2001, one of the note holders converted principal of $25,000 plus
prepayment premium and accrued interest into 67,508 common shares.
On June 28, 2001, one of the note holders converted principal of $70,000 plus
prepayment premium and accrued interest into 284,305 common shares.
On September 30, 2001, we extinguished a total of $181,000 in principal to one
of the note holders. This extinguishment was made pursuant to an agreement
whereby the note holder would refer business to us and the proceeds of such
business would be used to repay the principal amount outstanding. These cash
redemptions resulted in a $58,701 extraordinary gain at the date of
extinguishment consisting of the repurchase of the beneficial conversion feature
of $31,551 and the elimination of the prepayment premium of $27,150.
At December 31, 2001 holders of the convertible notes have the right to
immediately convert $855,000 of the notes, in whole or in part, into common
shares of Stockgroup at any time. The holders also have the right to put the
remaining $1,069,000 to us at any time, in whole or in part, after which they
may convert the amount of the notes subject to each put notice into common
shares 10 days after each put notice.
The Restructured Agreement
On February 6, 2002 we and the two lenders reached an agreement to restructure
the terms and conditions of the 8% convertible notes. The lenders agreed to
waive the 15% prepayment premium of $288,600 and the accrued interest to date of
$296,636 and converted $100,000 of the principal balance due into 666,700 common
shares of Stockgroup at a conversion price of $0.15. The remaining principal
balance due of $1,824,000 matures on December 31, 2003, is non-interest bearing
and is convertible into common shares at any time at a fixed conversion rate of
$0.50.
If the lenders do not convert, $300,000 is to be repaid in cash. The first cash
payment of $100,000 is due June 30, 2002 and the remaining $200,000 will be
repaid in ten quarterly payments of $20,000 beginning September 30, 2002. In the
event that either we fail to make any of its scheduled cash payments or there is
an outstanding principal balance on December 31, 2003, the conversion price will
be immediately reduced to the lesser of $0.50 or 88% of the average of the 5
lowest closing prices of our common shares during the 30 trading days prior to
the date of conversion.
The maturity date of any outstanding balance not converted by December 31, 2003
will be extended for two years and the conversion price will be reduced to the
lesser of $0.50 or 88% of the average of the 5 lowest closing prices of our
common shares during the 30 trading days prior to the date of conversion. After
December 31, 2003 interest at 8% will begin accumulating on the outstanding
balance.
47
ANTITAKEOVER EFFECTS OF COLORADO LAW AND OUR ARTICLES OF INCORPORATION AND
BYLAWS
Colorado law does not contain provisions which are intended to have the effect
of delaying or deterring a change in control or management of Stockgroup.
Our Articles of Incorporation permit the issuance of up to 5,000,000 shares of
preferred stock, having such rights, preferences and privileges as the board of
directors may determine. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of our outstanding voting stock.
Provisions of our bylaws which are summarized below may affect potential changes
in control of Stockgroup. The board of directors believes that these provisions
are in the best interests of shareholders because they will encourage a
potential acquirer to negotiate with the board of directors, which will be able
to consider the interests of all shareholders in a change in control situation.
However, the cumulative effect of these terms may be to make it more difficult
to acquire and exercise control of Stockgroup and to make changes in management
more difficult.
The bylaws provide the number of directors of Stockgroup will be established by
the board of directors, but shall be no less than one. Between shareholder
meetings, the board of directors may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office by the
affirmative vote of 66-2/3% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors.
As discussed above, our bylaws further provide that shareholder action may be
taken at a meeting of shareholders and may be effected by a consent in writing
if such consent is signed by the holders of the majority of outstanding shares,
unless Colorado law requires a greater percentage.
We are not aware of any proposed takeover attempt or any proposed attempt to
acquire a large block of our common stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
We believe that provisions of our Articles of Incorporation and bylaws will be
useful to attract and retain qualified persons as directors and officers. Our
Articles of Incorporation limit the liability of directors and officers to the
fullest extent permitted by Colorado law. This is intended to allow our
directors and officers the benefit of Colorado's corporation law which provides
that directors and officers of Colorado corporations may be relieved of monetary
liabilities for breach of their fiduciary duties as directors, except under
circumstances which involve acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, or the payment of unlawful
distributions.
48
We intend to enter into indemnification agreements with our directors and
officers. These agreements will provide, in general, that we will indemnify and
hold harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses incurred
in connection with, or in any way arising out of, any claim, action or
proceeding against, or affecting, such directors and officers resulting from,
relating to or in any way arising out of, the service of such persons as our
directors and officers. Currently, directors and officers are entitled to the
benefits of the limitation of liability provided under our charter documents and
the laws of the State of Colorado.
Insofar as indemnification for liabilities arising under the Securities Act of
1993 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities (other
than our payment of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
TRANSFER AGENT AND REGISTRAR
StockTrans, Inc. is the transfer agent and registrar for our capital stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, 13,795,768 shares of our common stock were
outstanding, 1,061,424 shares of common stock were issuable subject to options
granted under our 1999 stock option plan, 235,834 shares of common stock were
issuable subject to options granted under our 2000 stock option plan, 976,798
shares of common stock were issuable subject to options granted under our 2001
stock option plan, 1,500,000 shares of common stock were issuable subject to
options granted under our 2002 stock option plan, and 3,331,818 shares of common
stock were issuable pursuant to warrants granted under private placements. Of
the outstanding shares, 9,710,975 shares of common stock are immediately
eligible for sale in the public market without restriction or further
registration under the Securities Act of 1933, unless purchased by or issued to
any "affiliate" of ours, as that term is defined in Rule 144 promulgated under
the Securities Act of 1933, described below. All other outstanding shares of our
common stock are "restricted securities" as such term is defined under Rule 144,
in that such shares were issued in private transactions not involving a public
offering and may not be sold in the absence of registration other than in
accordance with Rule 144, 144(k) or 701 promulgated under the Securities Act of
1933 or another exemption from registration.
The shares of common stock issued to certain selling shareholders are being
registered in the registration statement of which this prospectus is a part.
Upon effectiveness of this registration statement, such shares will also be
immediately eligible for sale in public market subject to restrictions included
in our agreements with the selling shareholders. We also filed registration
statements to register for resale the 2,000,000 shares of common stock reserved
for issuance under our 1999 stock option plan, the 500,000 shares of common
stock
49
reserved for issuance under our 2000 stock option plan, the 1,000,000 shares of
common stock reserved for issuance under our 2001 stock option plan, and the
1,500,000 shares of common stock reserved for issuance under our 2002 stock
option plan. These registration statements became effective immediately upon
filing. Accordingly, shares covered by these registration statements are
eligible for sale in the public market subject to vesting restrictions. As of
June 24, 2002, 2,004,920 of these options were exercisable.
Sales of substantial amounts of our common stock under Rule 144, this prospectus
or otherwise could adversely affect the prevailing market price of our common
stock and could impair our ability to raise capital through the future sale of
our securities.
PLAN OF DISTRIBUTION
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such method of sale; and
o any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling shareholders may also engage in short sales against the box, puts
and calls and other transactions in securities of Stockgroup or derivatives of
our securities and may sell or deliver shares in connection with these trades.
The selling shareholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling shareholder defaults on a
margin loan, the broker may, from time to time, offer and sell pledged shares.
Broker-dealers engaged by the selling shareholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
50
The selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares. We have agreed to indemnify the selling shareholders against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby has been passed
upon for us by Faegre & Benson LLP.
EXPERTS
The consolidated financial statements of Stockgroup Information Systems Inc. at
December 31, 2001 and 2000, and for each of the two years in the period ended
December 31, 2001, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent chartered accountants, as set
forth in their report thereon (which contains an explanatory paragraph
describing conditions that raise substantial doubt about the Company's ability
to continue as a going concern as described in Note 1 to the consolidated
financial statements) appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted and you should refer to the registration
statement and its exhibits. With respect to references made in this prospectus
to any contract, agreement or other document of Stockgroup, such references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document. You may review a copy of the registration statement, including
exhibits, at the Securities and Exchange Commission's public reference room at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the public reference room
by calling the Securities and Exchange Commission at 1-800-SEC-0330.
We will also file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration statement
can also be reviewed by accessing the Securities and Exchange Commission's
Internet site at http://www.sec.gov, which contains
51
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission.
52
UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTERS ENDED MARCH 31, 2002 AND 2001
Stockgroup Information Systems Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - Expressed in U.S. Dollars)
[See Note 1 - Nature of Business and Basis of Presentation]
March 31, December 31,
2002 2001
------------ ------------
ASSETS
CURRENT
Cash and cash equivalents $ 256,631 $ 126,618
Marketable securities 7,147 21,814
Accounts receivable [net of allowances for doubtful
accounts of $73,328; December 31, 2001 $92,331] 172,539 173,105
Prepaid expenses 181,204 60,465
------------ ------------
TOTAL CURRENT ASSETS $ 617,521 $ 382,002
Property and equipment, net $ 303,987 $ 341,688
------------ ------------
$ 921,508 $ 723,690
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Bank indebtedness $ 4,929 $ 6,081
Accounts payable 249,695 373,674
Accrued payroll liabilities 86,417 144,920
Deferred revenue 124,447 124,944
Current portion of capital lease obligation 7,824 7,674
Notes payable and accrued interest 104,463 108,837
Current portion of convertible notes (note 2) 160,000 2,509,236
Warrants liability (note 4) 0 110,000
------------ ------------
TOTAL CURRENT LIABILITIES $ 737,775 $ 3,385,366
Capital lease obligation 9,210 11,231
Convertible notes (note 2) 1,426,236 --
Convertible debentures (note 3) -- 70,695
------------ ------------
TOTAL LIABILITIES $ 2,173,221 $ 3,467,292
------------ ------------
COMMITMENTS AND CONTINGENCIES (note 7)
SHAREHOLDERS' EQUITY (DEFICIENCY) (note 5)
COMMON STOCK, No Par Value
Authorized shares - 75,000,000
Issued and outstanding shares - 13,795,768;
10,131,260 at December 31, 2001 $ 8,441,002 7,969,090
ADDITIONAL PAID-IN CAPITAL 2,784,772 2,422,014
ACCUMULATED DEFICIT (12,477,487) $(13,134,706)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) $ (1,251,713) $ (2,743,602)
------------ ------------
$ 921,508 $ 723,690
============ ============
The Accompanying Notes Are An Integral Part
Of These Unaudited Financial Statements.
53
Stockgroup Information Systems Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - Expressed in U.S. Dollars)
[See Note 1 - Nature of Business and Basis of Presentation]
Three Months Three Months
Ended March Ended March
31, 2002 31, 2001
------------ -----------
REVENUE
Revenues $ 442,241 $ 1,105,359
Cost of revenues 164,248 426,875
------------ -----------
Gross profit $ 277,993 $ 678,484
EXPENSES
Sales and marketing $ 92,060 $ 206,823
Product development 18,498 91,348
General and administrative 363,540 642,585
------------ -----------
$ 474,098 $ 940,756
------------ -----------
LOSS FROM OPERATIONS $ (196,105) $ (262,272)
Interest income 146 1,591
Interest expense (184,359) (96,703)
Loss on warrants liability (55,000) --
Other income 3,951 18,703
------------ -----------
NET LOSS BEFORE EXTRAORDINARY
ITEMS $ (431,367) $ (338,681)
Extraordinary gain on restructuring
of convertible notes (note 2) 1,088,586 --
------------ -----------
NET INCOME (LOSS) $ 657,219 $ (338,681)
============ ===========
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Net loss before extraordinary items $ (0.04) $ (0.04)
Extraordinary gain on redemption
of convertible notes $ 0.10 $ 0.00
Net income (loss) $ 0.06 $ (0.04)
============ ===========
Weighted average shares
outstanding for the period 10,776,737 8,515,431
============ ===========
The Accompanying Notes Are An Integral Part
Of These Unaudited Financial Statements.
54
Stockgroup Information Systems Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - Expressed in U.S. Dollars)
[See Note 1 - Nature of Business and Basis of Presentation]
Three Months Three Months
Ended March Ended March
31, 2002 31, 2001
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 657,219 $(338,681)
Add (deduct) non-cash items
Amortization 37,701 47,637
Amortization of deferred financing costs -- 975
Extraordinary gain on restructuring of convertible notes (1,088,586) --
Loss on warrants liability 55,000 --
Effective interest on convertible notes and debentures 178,573 90,107
Bad debt expense (19,003) 69,060
Common stock and equivalents issued for services 167,500 9,690
Stock based compensation 27,568 26,555
----------- ---------
$ 15,972 $ (94,657)
Net changes in non-cash working capital
Marketable securities 14,667 --
Accounts receivable 19,569 (324,919)
Prepaid expenses (120,739) 6,501
Accounts payable (123,979) (155,892)
Accrued payroll liabilities (58,503) (38,389)
Accrued interest on notes payable (4,374) --
Deferred revenue (497) (18,657)
----------- ---------
CASH PROVIDED BY (USED IN) OPERATIONS $ (257,884) $(626,013)
----------- ---------
FINANCING ACTIVITIES
Issuance of common stock and warrants (net) 390,920 --
Issuance of convertible debenture (net) -- 479,960
Repayment of capital lease obligation (1,871) --
Repayment of bank indebtedness (1,152) (2,941)
----------- ---------
CASH PROVIDED BY (USED IN) FINANCING $ 387,897 $ 477,019
----------- ---------
INVESTING ACTIVITIES
Property and equipment (net) -- 9,400
----------- ---------
CASH PROVIDED BY (USED IN) INVESTING $ -- $ 9,400
----------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 130,013 (139,594)
Cash and cash equivalents, beginning of period 126,618 338,448
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 256,631 $ 198,854
=========== =========
The Accompanying Notes Are An Integral Part
Of These Unaudited Financial Statements.
55
Stockgroup Information Systems Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2002
(UNAUDITED)
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Stockgroup Information Systems Inc. (the "Company") is a financial media and
technology company that provides various financial software solutions, tools,
content and services to media, corporate, and financial services companies. The
Company employs proprietary technologies that enable its clients to provide
financial data streams and news combined with fundamental, technical,
productivity, and disclosure tools to their customers, shareholders, and
employees in a cost effective manner. The Company also provides Internet
communications products for publicly traded companies and an online research
center for the investment community through its www.smallcapcenter.com financial
web site.
The Company was incorporated under the laws of Colorado on December 6, 1994.
The accompanying interim unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
These interim financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 2001.
These financial statements have been prepared by management in accordance with
accounting principles generally accepted in the United States on a going concern
basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future.
The Company incurred a loss before extraordinary items of $431,367 for the three
months ended March 31, 2002, has an accumulated deficit of $12,477,487 and had a
working capital deficiency of $120,254 as at March 31, 2002. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management has been able, thus far, to finance the losses, as well as the growth
of the business, through a series of equity and debt private placements.
Management expects that revenues resulting from current operations will increase
which should allow the Company to continue profitable operations and positive
cash flows in 2002. The Company is continuing to seek other sources of financing
in order to grow the business to the greatest possible extent. There are no
assurances that the Company will be successful in achieving its goals.
In view of these conditions, the ability of the Company to continue as a going
concern is uncertain and dependent upon continuing a profitable level of
operations and, if necessary, on the ability of the Company to obtain necessary
financing to fund ongoing operations. Management believes that its current and
future plans provide an opportunity to continue as a going concern. These
financial statements do not give effect to any adjustments which would be
necessary should the Company be unable to continue as a going concern and
therefore be required to realize its assets and discharge its liabilities in
other than the
56
normal course of business and at amounts different from those reflected in the
accompanying financial statements.
2. CONVERTIBLE NOTES
------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
------------------------------------------------------------------------------------
Convertible notes, maturing December 31, 2005
Principal $ 1,824,000 $1,924,000
Prepayment premium -- 288,600
Interest -- 296,636
Unamortized debt discount (237,764) --
------------------------------------------------------------------------------------
Subtotal $ 1,586,236 $2,509,236
Current portion 160,000 2,509,236
Long term portion 1,426,236 --
====================================================================================
On February 6, 2002 the Company and note holders reached an agreement to
restructure the terms and conditions of the existing convertible notes and
callable warrants.
The note holders agreed to waive the 15% prepayment premium of $288,600 and the
accrued interest to date of $315,000 and immediately converted $100,000 of the
principal balance due into 666,700 common shares of the Company at a conversion
price of $0.15. The remaining principal balance of $1,824,000 matures on
December 31, 2005. The notes are non-interest bearing and are convertible into
common shares at the option of the holder at any time at a fixed conversion
price of $0.50 through to December 31, 2003. From January 1, 2004 to December
31, 2005, or sooner in the event of a default on any mandatory payment described
below, the notes bear interest at 8% and are convertible into common shares at
the option of the holder at any time at a conversion price equal to the lesser
of (i) the initial conversion price of $0.50 and (ii) 88% of the average of the
5 lowest closing prices of the Company's common shares during the 30 trading
days prior to the date of conversion.
The restructured agreement provides for $300,000 of mandatory payments through
to December 31, 2004. A one-time payment of $100,000 is due on June 30, 2002 and
then separate payments of $20,000 are due at the end of each of the following
ten quarters through to December 31, 2004. If applicable, the Company will also
provide mandatory payments of 20% of the gross proceeds raised from any common
stock or common stock equivalent financing in excess of $2,000,000 in 2002 and
20% of the gross proceeds raised from any common stock or common stock
equivalent financing in excess of $500,000 in 2003.
The restructuring resulted in an extraordinary gain of $1,088,586 consisting of
$603,600 for the waived prepayment premium and accrued interest, $247,222 for
the repurchase of the beneficial conversion feature and $237,764 for the debt
discount representing the difference between the fair value of the notes at a
market interest rate of 8% and the face value of the notes which are
non-interest bearing through to December 31, 2003. The debt discount of $237,764
is subject to accretion over the term to maturity of the convertible notes.
The callable warrants permit the holders to acquire up to 181,818 common shares
at an exercise price of $3.00 at any time up to March 31, 2005. The warrants may
be called by the Company, at a purchase price of $.01 per underlying share, if
the stock price of the Company's common shares exceeds $6.00 for any 20
consecutive trading days, provided that the holders have the right to exercise
the warrants within 30 days after their receipt of such a call.
57
3. CONVERTIBLE DEBENTURES
On March 15, 2002, the Company and the 3% convertible debenture holders agreed
to an amendment to the original Securities Purchase Agreement. The debenture
holders agreed to immediately convert the $200,000 outstanding principal and
$6,904 accrued interest into 413,808 common shares of the Company at the minimum
conversion price of $0.50. The conversion resulted in the immediate recognition
of $135,503 in interest expense related to the previously unamortized debt
discount and beneficial conversion feature.
The Company agreed to modify the existing terms of the Series A and B warrants.
The exercise price of the Series A warrants has been reduced from $1.00 to
$0.25. The exercise price of the Series B warrants has been reduced from $2.00
to $0.50. The expiry date for both the Series A and B warrants has been extended
to July 31, 2005 from December 31, 2004. The reduction in the exercise price and
extension of the expiry date of the warrants is accounted for as an inducement
to convert the convertible debentures. The fair value of the warrants after the
conversion was $24,000 greater than the fair value of the warrants prior to
conversion and this excess fair value was recorded as interest expense on the
conversion date.
4. WARRANTS LIABILITY
The Emerging Issues Task Force Abstract No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock ("EITF 00-19") became applicable to the Company's warrants on June 30,
2001. EITF 00-19 requires the Company to evaluate whether a sufficient number of
authorized and unissued shares exists at each reporting date to control
settlement by delivering shares. In that evaluation, the Company must compare
the number of authorized but unissued shares, less the maximum number of shares
that could be required to be delivered under existing convertible debt, stock
option and warrant agreements with the maximum number of shares that could be
required to be delivered on net share settlement of the warrants. If the Company
does not have a sufficient number of authorized but unissued shares at the
reporting date then the share settlement is not within the control of the
Company and the warrants will be presented as a liability.
As at December 31, 2001, the Company could not demonstrate they had a sufficient
number of authorized but unissued shares to share settle all of the outstanding
warrants if exercised and the $110,000 fair value of the warrants was classified
as a current liability. As a result of the February 6, 2002 restructuring of the
convertible notes and callable warrants, the Company could demonstrate they had
a sufficient number of authorized but unissued shares to share settle all of the
outstanding warrants if exercised and the $165,000 fair value of the warrants
was reclassified as equity. The $55,000 difference between the fair value on
December 31, 2001 and February 6, 2002 was recorded as a loss on warrants
liability in the statement of operations.
5. SHARE CAPITAL
The Company is authorized to issue up to 75,000,000 shares of common stock and
5,000,000 shares of preferred stock.
At March 31, 2002, in addition to the 13,795,768 common shares outstanding,
there were also 2,075,700 stock options and 3,331,818 warrants outstanding.
Issues of common shares and common share equivalents for the three month period
ended March 31, 2002 are summarized as follows:
On February 6, 2002, the Company issued 666,700 common shares pursuant to a
conversion of $100,000 of principal under the restructured convertible notes as
discussed in Note 2.
58
On February 25, 2002, the Company issued 33,000 common shares to an employee for
services rendered. The transaction was recorded at a fair value of $7,500 based
on the closing stock price on the date of the agreement.
On March 5, 2002, the Company issued 500,000 common shares to a consultant
pursuant to a service contract. The transaction was recorded at a fair value of
$107,500 based on the closing stock price on the date of the agreement.
On March 16, 2002, the Company issued warrants to purchase 250,000 common shares
to a management consultant pursuant to a services agreement. The warrants have
an exercise price of $0.30 and expire on September 15, 2003. The $60,000 fair
value of the warrants issued was estimated using the Black-Scholes option
pricing model and was recorded as an expense in the first quarter 2002.
On March 25, 2002, the Company issued 413,808 common shares pursuant to a
conversion of the final $206,904 in principal and accrued interest of the
convertible debentures as amended, discussed in Note 3.
On March 28, 2002 the Company completed a placement of 2,000,000 units at $0.20,
each unit consisting of one common share and one warrant, plus 51,000 common
shares, for gross proceeds of $410,200. Financing fees were $19,280, resulting
in net cash proceeds of $390,920. Each warrant entitles the holder to acquire
one common share at $0.25 per share until March 31, 2003. The net proceeds were
allocated to common stock and warrants based on the relative fair value of each
security at the time of issuance.
Stock Options
The Company's 1999, 2000, 2001, and 2002 Stock Option Plans (collectively the
"Plans") authorize a total of 5,000,000 common shares for issuance. Activity
under the Plans is set forth below.
59
--------------------------------------------------------------------------------
Options Outstanding
---------------------------
Shares
available Number of Price per
for grant shares share
--------------------------------------------------------------------------------
Balance at December 31, 2001 391,156 2,415,900 $0.01 - 2.75
Additional shares authorized 1,500,000 -- --
Options granted (1,008,000) 1,008,000 0.20 - 0.40
Options forfeited 815,200 (815,200) 0.31 - 2.75
Options exercised -- (533,000) 0.23 - 0.25
--------------------------------------------------------------------------------
Balance at March 31, 2002 1,698,356 2,075,700 $0.01 - 2.50
================================================================================
Warrants
As at March 31, 2002, common stock issuable pursuant to warrants outstanding is
as follows:
--------------------------------------------------------------------------------------------------------
Warrants Warrants
Outstanding Warrants Warrants Warrants Outstanding Exercise Expiry
At January Issued Exercised Cancelled at March Price Date
1, 2002 31, 2002
# # # # # $
--------------------------------------------------------------------------------------------------------
Series 1 300,000 -- -- 18,182 281,818 3.00 March 31, 2005
Series 3A 500,000 -- -- -- 500,000 0.25 July 31, 2005
Series 3B 300,000 -- -- -- 300,000 0.50 July 31, 2005
Series 4 -- 2,000,000 -- -- 2,000,000 0.25 March 31, 2003
Series 5 -- 250,000 -- -- 250,000 0.30 Sept. 15, 2003
--------------------------------------------------------------------------------------------------------
1,100,000 2,250,000 -- 18,182 3,331,818
========================================================================================================
6. SEGMENTED INFORMATION
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. The Company has
concluded that its business activities fall into one identifiable industry
segment with the following sources of revenue:
For the three months ended
March 31, 2002 March 31, 2001
--------------------------------------------------------------------------------
Public Company Disclosure and Awareness Products $ 285,177 $ 430,425
Financial Software and Content Systems 157,064 110,358
E-business Solutions -- 564,576
--------------------------------------------------------------------------------
$ 442,241 $1,105,359
================================================================================
During the first three months of 2002, the Company had one customer from whom
revenue received by the Company represented approximately 11% of total revenue.
During the first three months 2001, the Company had one customer from whom
revenue received by the Company represented approximately 47% of total revenue.
No other customers represented greater than 10% of revenue.
60
7. COMMITMENTS AND CONTINGENCIES
The Company is currently involved in litigation with a customer to collect
amounts owing pursuant to a contract entered into in September 2000. The
defendant provided a $100,000 deposit and contracted the Company to provide
certain advertising services. The Company delivered the requested services
throughout October and November 2000; however, the defendant defaulted on all
additional payments. The Company is suing the defendant for the $351,800 balance
owing, plus interest and costs. The defendant has filed a statement of defense
and counterclaim to recover the $100,000 deposit. No court date has been set at
this time. Although management currently believes the outcome of the litigation
will be in the Company's favour, they have not elected to aggressively pursue
the litigation at this time. The Company has made no provision for the
counterclaim in the financial statements and any settlement or final award will
be reflected in the statement of operations as the litigation is resolved.
61
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
AUDITORS' REPORT
To the Shareholders of
Stockgroup Information Systems Inc.
(formerly Stockgroup.com Holdings, Inc.)
We have audited the accompanying consolidated balance sheet of Stockgroup
Information Systems Inc. as of December 31, 2001 and 2000 and the related
consolidated statements of operations, shareholders' equity (deficiency), and
cash flows for the years then ended. 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. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Stockgroup
Information Systems Inc. at December 31, 2001 and 2000 and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Stockgroup Information Systems Inc. will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company has incurred
recurring operating losses and has a working capital deficiency. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 10 to the financial statements, in 2001, the Company
changed its method of accounting for callable warrants.
Vancouver, Canada,
February 25, 2002 [except for Notes 15[b] /s/ ERNST & YOUNG LLP
and [c] which are as of March 25, 2002]. Chartered Accountants
62
Stockgroup Information Systems Inc.
CONSOLIDATED BALANCE SHEETS
[See Note 1 - Nature of Business and Basis of Presentation]
As at December 31 (expressed in US dollars)
2001 2000
$ $
--------------------------------------------------------------------------------------
ASSETS [notes 5 and 7]
Current
Cash and cash equivalents 126,618 321,363
Marketable securities 21,814 17,085
Accounts receivable [net of allowances for doubtful
accounts of $92,331; 2000 - $471,430] [note 3] 173,105 218,810
Prepaid expenses 60,465 116,127
--------------------------------------------------------------------------------------
Total current assets 382,002 673,385
--------------------------------------------------------------------------------------
Property and equipment, net [note 4] 341,688 529,855
--------------------------------------------------------------------------------------
723,690 1,203,240
======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current
Bank indebtedness [note 5] 6,081 14,303
Accounts payable 373,674 796,637
Accrued payroll liabilities 144,920 194,241
Deferred revenue 124,944 181,987
Current portion of capital lease obligation [note 6] 7,674 --
Notes payable [note 7] 108,837 --
Convertible notes [note 8] 2,509,236 2,662,000
Warrants liability [note 10] 110,000 --
--------------------------------------------------------------------------------------
Total current liabilities 3,385,366 3,849,168
--------------------------------------------------------------------------------------
Capital lease obligation [note 6] 11,231 --
Convertible debentures [note 9] 70,695 --
--------------------------------------------------------------------------------------
Total liabilities 3,467,292 3,849,168
--------------------------------------------------------------------------------------
Commitments and contingencies [note 14]
Shareholders' equity (deficiency)
Common stock, no par value [note 11]
Authorized shares -75,000,000 [2000 - 50,000,000]
Issued and outstanding shares - 10,131,260 in 2001
and 8,467,676 in 2000 7,969,090 7,344,483
Additional paid-in capital 2,422,014 2,602,743
Accumulated deficit (13,134,706) (12,593,154)
--------------------------------------------------------------------------------------
Total shareholders' equity (deficiency) (2,743,602) (2,645,928)
--------------------------------------------------------------------------------------
723,690 1,203,240
======================================================================================
See accompanying notes
63
Stockgroup Information Systems Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
[See Note 1 - Nature of Business and Basis of Presentation]
Year ended December 31 (expressed in US dollars)
2001 2000
$ $
--------------------------------------------------------------------------------------------
REVENUE
Revenues [note 12] 2,857,151 4,037,608
Cost of revenues 1,045,326 1,800,810
--------------------------------------------------------------------------------------------
Gross profit 1,811,825 2,236,798
============================================================================================
EXPENSES
Sales and marketing 466,954 2,718,992
Product development 241,392 849,335
General and administrative 1,776,710 4,220,455
--------------------------------------------------------------------------------------------
2,485,056 7,788,782
--------------------------------------------------------------------------------------------
Loss from operations (673,231) (5,551,984)
Interest income 4,020 85,138
Interest expense [notes 7, 8 and 9] (596,097) (3,910,517)
Gain on warrants liability [note 10] 242,000 --
Other income (expense) 9,509 (4,453)
--------------------------------------------------------------------------------------------
Loss before extraordinary items and cumulative change
in accounting principle (1,013,799) (9,381,816)
Extraordinary gain on convertible note redemptions [note 8] 58,701 1,048,373
Cumulative effect of change in accounting principle [note 10] 413,546 --
--------------------------------------------------------------------------------------------
Net loss (541,552) (8,333,443)
============================================================================================
Basic and diluted earnings (loss) per share
Loss before extraordinary items and cumulative change
in accounting principle (0.11) (1.13)
Extraordinary gain on convertible note redemptions 0.01 0.12
Cumulative effect of change in accounting principle 0.04 --
--------------------------------------------------------------------------------------------
Net loss (0.06) (1.01)
============================================================================================
Weighted average number of common shares outstanding 9,305,391 8,284,867
============================================================================================
See accompanying notes
64
Stockgroup Information Systems Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
[See Note 1 - Nature of Business and Basis of Presentation]
Year ended December 31 (expressed in US dollars)
Additional
Common stock Common stock paid-in capital
[note 11] # of shares $ $
------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 8,195,000 6,761,483 261,277
Issuance of common stock pursuant to private placement 116,935 435,000 --
Issuance of common stock and warrants pursuant to
a consulting agreement 100,000 162,500 81,000
Fair value of detachable warrants pursuant to convertible
note private placement, net of financing costs -- -- 455,546
Intrinsic value of beneficial conversion feature pursuant to
convertible note private placement -- -- 2,751,061
Repurchase of beneficial conversion feature on partial redemption
of outstanding convertible notes -- -- (1,089,166)
Issuance of common stock on partial conversion of
outstanding convertible notes 67,741 57,500 --
Cancellation of common stock (12,000) (72,000) --
Stock based compensation -- -- 143,025
Net loss -- -- --
------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 8,467,676 7,344,483 2,602,743
Fair value of detachable warrants pursuant to convertible debenture
private placement, net of financing costs -- -- 298,778
Intrinsic value of beneficial conversion feature pursuant to
convertible debenture private placement -- -- 190,000
Issuance of common stock on partial conversion of outstanding
convertible notes and debentures 960,640 413,664 --
Repurchase of beneficial conversion feature on partial redemption of
outstanding convertible notes -- -- (31,551)
Intrinsic value of beneficial conversion feature pursuant to
convertible notes private placement -- -- 32,182
Cumulative effect of change in accounting principle -- -- (765,546)
Issuance of common stock for shares granted under the employee stock
option plan 92,944 27,260 --
Issuance of common stock pursuant to exercise of employee stock
options 600,000 173,993 --
Issuance of common stock pursuant to a consulting agreement 10,000 9,690 --
Stock based compensation -- -- 95,408
Net loss -- -- --
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 10,131,260 7,969,090 2,422,014
========================================================================================================================
Retained earnings Total
(accumulated shareholders'
deficit) equity (deficiency)
[note 11] $ $
-------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 (4,259,711) 2,763,049
Issuance of common stock pursuant to private placement -- 435,000
Issuance of common stock and warrants pursuant to
a consulting agreement -- 243,500
Fair value of detachable warrants pursuant to convertible
note private placement, net of financing costs -- 455,546
Intrinsic value of beneficial conversion feature pursuant to
convertible note private placement -- 2,751,061
Repurchase of beneficial conversion feature on partial redemption
of outstanding convertible notes -- (1,089,166)
Issuance of common stock on partial conversion of
outstanding convertible notes -- 57,500
Cancellation of common stock -- (72,000)
Stock based compensation -- 143,025
Net loss (8,333,443) (8,333,443)
-------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 (12,593,154) (2,645,928)
Fair value of detachable warrants pursuant to convertible debenture
private placement, net of financing costs -- 298,778
Intrinsic value of beneficial conversion feature pursuant to
convertible debenture private placement -- 190,000
Issuance of common stock on partial conversion of outstanding
convertible notes and debentures -- 413,664
Repurchase of beneficial conversion feature on partial redemption of
outstanding convertible notes -- (31,551)
Intrinsic value of beneficial conversion feature pursuant to
convertible notes private placement -- 32,182
Cumulative effect of change in accounting principle -- (765,546)
Issuance of common stock for shares granted under the employee stock
option plan -- 27,260
Issuance of common stock pursuant to exercise of employee stock
options -- 173,993
Issuance of common stock pursuant to a consulting agreement -- 9,690
Stock based compensation -- 95,408
Net loss (541,552) (541,552)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 (13,134,706) (2,743,602)
=============================================================================================================
See accompanying notes
65
Stockgroup Information Systems Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[See Note 1 - Nature of Business and Basis of Presentation]
Year ended December 31 (expressed in US dollars)
2001 2000
$ $
----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss (541,552) (8,333,443)
Add (deduct) non-cash items
Amortization 191,632 203,961
Amortization of deferred financing costs 8,818 244,763
Bad debt expense (27,299) 730,643
Loss on disposition of property and equipment 8,759 --
Effective interest on convertible notes and debentures 401,093 3,633,062
Extraordinary gain on redemption of convertible notes and debentures (58,701) (1,048,373)
Cumulative effect of change in accounting principle (413,546) --
Gain on warrants liability (242,000) --
Common stock issued for services 9,690 243,500
Stock based compensation 122,668 143,025
----------------------------------------------------------------------------------------------------
(540,438) (4,182,862)
Net changes in non-cash working capital
Marketable securities (4,729) (17,085)
Accounts receivable 73,004 (166,284)
Prepaid expenses 55,662 771,096
Accounts payable (437,160) 51,633
Accrued payroll liabilities (46,706) 67,675
Accrued interest on notes payable 8,490 --
Interest on convertible notes and debentures 170,834 --
Deferred revenue (57,043) (48,558)
----------------------------------------------------------------------------------------------------
Cash used in operating activities (778,086) (3,524,385)
----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 173,993 435,000
Net proceeds from issuance of convertible notes and debentures 479,960 2,870,000
Net proceeds from issuance of notes payable 100,347 --
Repayments of convertible notes and debentures (181,000) (862,500)
Repayment of capital lease obligation (5,741) --
Repayments of bank indebtedness, net (8,222) (6,701)
(Repayments to) advances from shareholders -- 31,973
----------------------------------------------------------------------------------------------------
Cash provided by financing activities 559,337 2,467,772
----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (7,103) (280,846)
Proceeds on disposition of property and equipment 31,107 --
----------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities 24,004 (280,846)
----------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (194,745) (1,337,459)
Cash and cash equivalents, beginning of year 321,363 1,658,822
----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 126,618 321,363
====================================================================================================
Supplemental disclosure of cash flow information
Interest paid 24,170 33,000
Income taxes paid -- --
====================================================================================================
See accompanying notes
66
NOTES TO FINANCIAL STATEMENTS - YEAR ENDED DECEMBER 31, 2001
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Stockgroup Information Systems Inc. (the "Company") is a financial media and
technology company that provides various financial software solutions, tools,
content and services to media, corporate, and financial services companies. The
Company employs proprietary technologies that enable its clients to provide
financial data streams and news combined with fundamental, technical,
productivity, and disclosure tools to their customers, shareholders, and
employees in a cost effective manner. The Company also provides Internet
communications products for publicly traded companies and an online research
center for the investment community through its www.smallcapcenter.com financial
web site.
The Company was incorporated under the laws of Colorado on December 6, 1994. The
Company previously operated under the name Stockgroup.com Holdings, Inc. until
its name was changed in accordance with the relevant provisions of the Colorado
Business Corporations Act and pursuant to shareholder approval received at the
Company's annual general meeting held September 20, 2001.
The financial statements have been prepared by management in accordance with
accounting principles generally accepted in the United States on a going concern
basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future.
The Company incurred an operating loss of $673,231 for the year ended December
31, 2001 [2000 - $5,551,984], and had a working capital deficiency of $3,003,364
as at December 31, 2001. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The Company experienced a
significant reduction in cash used in operations from $3,524,385 in 2000 to
$778,086 in 2001 as a result of restructuring activities initiated in 2001.
Management has undertaken a number of key initiatives to strengthen its capital
structure and to achieve profitable operations subsequent to December 31, 2001
(Note 15). The Company has restructured the terms of its 8% convertible notes
due March 31, 2002 such that the prepayment penalty of $288,600 and accrued
interest of $296,636 will be waived and $1,524,000 of the outstanding principal
is not due until February 6, 2004. The Company has negotiated the conversion
into common shares of the remaining $200,000 principal and accrued interest on
its 3% convertible debentures. The Company has also raised an additional
$400,000 in a private placement to finance ongoing operations. Although the
Company has taken steps to achieve profitable operations in 2002, there are no
assurances that the Company will be successful in achieving its goals.
67
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (cont'd.)
In view of these conditions, the ability of the Company to continue as a going
concern is uncertain and dependent upon achieving a profitable level of
operations and, if necessary, on the ability of the Company to obtain necessary
financing to fund ongoing operations. Management believes that its current and
future plans provide an opportunity to continue as a going concern. These
financial statements do not give effect to any adjustments which would be
necessary should the Company be unable to continue as a going concern and
therefore be required to realize its assets and discharge its liabilities in
other than the normal course of business and at amounts different from those
reflected in the accompanying financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Stockgroup Media Inc. (British Columbia, Canada),
Stockgroup Systems Ltd. (Nevada, United States) and 579818 B.C. Ltd. (British
Columbia, Canada). All significant intercompany accounts and transactions have
been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue recognition
The Company generates its revenues from three primary sources: Public Company
Solutions, Financial Software and Content Systems, and E-Business Solutions.
Public Company Solutions consist of small-scale web site development and
maintenance, IntegratIR investor relations tools, monthly investor marketing
programs, and online advertising. Revenue from small-scale web site development
and periodic web site maintenance is recognized upon completion of the services
provided no significant obligations remain and collection of the resulting
receivable is probable. Revenues from IntegratIR, monthly investor marketing
programs, and online advertising are recognized ratably over the contract life
as the service is provided. Most of these services require an advance payment
which is recorded as deferred revenue until the services have been provided.
68
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Financial Software and Content Systems consists of real time, time delayed and
wireless quotes and charts, company profiles, investment data and technical
analysis. Revenue from set up fees, periodic maintenance fees and contractual
monthly licensing fees for ongoing use of financial tools and content is
recognized ratably over the contract term, which is typically twelve months.
E-Business Solutions consists of large scale, longer-term technology
development, data aggregation, system design and development and project
management services. Revenue from fixed price long term contracts is recognized
on the percentage of completion method of contract accounting based on the ratio
of actual costs incurred to total estimated contract costs. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
Foreign exchange
The reporting currency and the functional currency of the Company is the U.S.
dollar. The accounts of the Company's Canadian subsidiary are translated into
U.S. dollars such that monetary assets and liabilities are translated at
exchange rates in effect at the balance sheet date and non-monetary items are
translated at exchange rates prevailing at the transaction date. Operating
revenues and expenses are translated at average exchange rates prevailing during
the year. Any corresponding foreign exchange gains and losses are included in
income.
Foreign currency transactions are translated into U.S. dollars at the rate of
exchange in effect at the date of the transaction. Foreign currency balances of
monetary assets and liabilities are translated using the rate of exchange in
effect at the balance sheet date. Foreign exchange gains and losses on
transactions during the year and on the year end translation of the accounts are
included in income.
Fair value of financial instruments
The Company's financial instruments consist of cash and cash equivalents,
marketable securities, accounts receivable, bank indebtedness, accounts payable,
notes payable, convertible notes, convertible debentures and capital lease
obligation. Unless otherwise stated the fair value of the financial instruments
approximates their carrying value.
69
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Cash and cash equivalents
Cash and cash equivalents consist of cash and short-term deposits with original
maturities of ninety days or less and are recorded at amortized cost.
Marketable securities
Marketable securities consist of equity instruments held for trading and are
recorded at fair value based on quoted market prices. Both realized and
unrealized gains and losses are included in the statement of operations.
Deferred finance costs
Finance costs associated with the issuance of convertible notes and debentures
are deferred and amortized over the term to earliest conversion. All finance
costs have been amortized and included as interest expense in the statement of
operations.
Property and equipment
Property and equipment are carried at cost. Amortization is provided using the
straight line method over the assets estimated useful lives as follows:
Computer equipment 5 years
Computer software 2 years
Office furniture and equipment 5 years
Leasehold improvements Term of the lease
The Company changed its amortization policy in 2000 from the declining balance
method to the straight line method. The cumulative effect of this change in
accounting policy was not significant to the financial statements.
70
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Product development costs
Product development costs other than those incurred during the application
development stage are expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. Substantially all of the Company's
product development costs are for ongoing operating and maintenance and have
been expensed in the period incurred.
Advertising costs
Advertising costs are expensed in the period incurred and are included as a
component of sales and marketing expenses. Advertising expense for the year
ended December 31, 2001 was $nil [2000 - $1,112,000].
Income taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates. A valuation allowance is provided against deferred tax assets for which
it is more likely than not that the asset will not be realized.
Stock-based compensation
The Company accounts for fixed stock-based awards to employees in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and has adopted the disclosure-only
alternative of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Accordingly, compensation expense for stock options issued to employees is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
71
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
Earnings per share
Basic earnings (loss) per share is computed based on the weighted average number
of common shares outstanding during each year. Diluted earnings (loss) per share
reflects the dilutive potential of outstanding securities using the treasury
stock method.
For the years ended December 31, 2001 and 2000, all of the Company's common
shares issuable upon the exercise of stock options, warrants and other
convertible securities were excluded from the determination of diluted loss per
share as their effect would be anti-dilutive.
Comprehensive income
Comprehensive income includes all changes in equity except those resulting from
investments by owners and distributions by owners. Comprehensive income
comprises only net income for all years presented.
Recent pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations" for a disposal of a segment of a business. SFAS 144 is effective
for fiscal years beginning after December 15, 2001. The Company does not expect
that the adoption of the Statement will have a significant impact on its
financial position and results of operations.
Comparative figures
Certain amounts in the 2000 consolidated financial statements have been
reclassified to conform to the 2001 presentation.
72
3. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents and trade
receivables.
The Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. Amounts owing from two customers
represented 12% and 12% respectively of the total accounts receivable balance in
2001. Amounts owing from two customers represented 31% and 11% respectively of
the total accounts receivable balance in 2000. No other customers represented
greater than 10% of the total balance in any other year.
4. PROPERTY AND EQUIPMENT
Accumulated Net book
Cost amortization value
$ $ $
--------------------------------------------------------------------------------
2001
Computer equipment 531,682 299,841 231,841
Computer software 110,698 110,698 --
Office furniture and equipment 146,187 76,621 69,566
Leasehold improvements 42,197 20,465 21,732
Assets under capital lease 24,646 6,097 18,549
--------------------------------------------------------------------------------
855,410 513,722 341,688
================================================================================
2000
Computer equipment 524,636 189,970 334,666
Computer software 107,138 65,700 41,438
Office furniture and equipment 182,181 58,680 123,501
Leasehold improvements 42,310 12,060 30,250
--------------------------------------------------------------------------------
856,265 326,410 529,855
================================================================================
73
5. BANK INDEBTEDNESS
Bank indebtedness consists of a demand loan which bears interest at prime plus
1%, is repayable in blended monthly principal and interest payments of $591, and
is due December 31, 2002. Interest expense for the year ended December 31, 2001
was $800 [2000 - $1,300]
The Company also has an approved demand operating line of credit of $100,000
bearing interest at prime plus 1/4%. Interest expense for the year ended
December 31, 2001 was $10,700 [2000 - $8,600].
The demand loan and the operating line of credit are collateralized by a general
security agreement on all assets of the Company. The weighted average effective
prime rate for 2001 was 5.81% [2000 - 7.23%].
6. CAPITAL LEASE OBLIGATION
On May 3, 2001, the Company entered into a three year lease agreement for
computer equipment requiring monthly payments of $790 (Cdn$1,260). The
obligation at December 31 is as follows:
2001 2000
$ $
--------------------------------------------------------------------------------
Total future lease payments 20,787 --
Less interest (effective rate during 2001 - 8%) (1,882) --
--------------------------------------------------------------------------------
18,905 --
Less current portion (7,674) --
--------------------------------------------------------------------------------
11,231 --
================================================================================
The following capital lease payments are required over the next three years:
$
--------------------------------------------------------------------------------
2002 7,674
2003 8,311
2004 2,920
--------------------------------------------------------------------------------
18,905
================================================================================
74
7. NOTES PAYABLE
The following table summarizes the activity under various agreements:
2001 2000
$ $
--------------------------------------------------------------------------------
16% Notes payable, maturing July 31, 2002
Principal 100,347 --
Accrued interest 8,490 --
--------------------------------------------------------------------------------
Total notes payable 108,837 --
================================================================================
On May 8, 2001 the Company entered into a Securities Purchase Agreement with an
individual related to a Director and Officer of the Company to issue $32,375
(Cdn$50,000) of secured unregistered 16% debentures. The debentures mature on
July 31, 2002. Interest accrues on the debentures at the rate of 16% per annum,
and is payable at the end of each calendar quarter and at maturity. Investors
may also choose to receive all accrued interest on the maturity date in lieu of
the quarterly payments of interest. The investor has been granted a second
floating charge over all of the Company's property, assets, and rights as
security for the amount borrowed by the Company.
On May 10, 2001, the Company entered into a Securities Purchase Agreement with a
related party investor to issue a further $35,000 of secured unregistered 16%
debentures under the same terms as those issued May 8.
On July 16, 2001, the Company entered into a Securities Purchase Agreement with
a Director and Officer of the Company to issue a further $32,972 (Cdn$50,000) of
secured unregistered 16% debentures under the same terms as those issued May 8.
75
8. CONVERTIBLE NOTES
2001 2000
$ $
--------------------------------------------------------------------------------
8% Convertible notes, maturing March 31, 2002
Principal 1,924,000 2,200,000
Prepayment premium 288,600 330,000
Accrued interest 296,636 132,000
--------------------------------------------------------------------------------
2,509,236 2,662,000
================================================================================
On April 3, 2000, the Company entered into a Convertible Note Purchase Agreement
with two unaffiliated investors to issue unsecured 8% Convertible Notes
("notes") and 5-year Callable Warrants ("warrants") for gross proceeds of $3
million.
The notes mature on March 31, 2002 and became convertible into common shares
after July 31, 2000. The notes may only be converted if the Company does not
make payment on a lender's prepayment request, or if the Company seeks to prepay
the notes. The initial conversion price for the notes was $3.72. Prepayments on
the notes were subject to a tiered prepayment schedule such that all prepayments
after July 31, 2000 are payable at 115% of the principal. Interest accrues on
the notes at the rate of 8% per annum, and is payable on each conversion date
and at maturity. Interest may be paid in the form of cash or shares at the
Company's option. The lenders had the right to put back to the Company up to 25%
of the unconverted amount of the notes during any 30-day period after July 31,
2000. By November 30, 2000, the lenders had the right to put back to the Company
100% of the unconverted amount of the notes. Upon the lenders' exercise of such
right, the Company has the option of prepaying the portion of the notes sought
to be converted, such prepayment to be in accordance with the tiered prepayment
schedule set forth above. If the Company does not make such a prepayment within
10 days after its receipt of a put notice, the conversion rate of the notes and
any accrued interest changes to the lesser of (a) the initial conversion price
of $3.72, and (b) 88% of the average of the 5 lowest closing prices of the
Company's common shares during the 30 trading days prior to the date of
conversion.
In the event the notes are not prepaid or converted prior to March 21, 2002,
they will automatically convert on maturity to common shares at the lesser of
(a) the initial conversion price of $3.72, and (b) 88% of the average of the 5
lowest closing prices of the Company's common shares during the 30 trading days
prior to the date of maturity.
76
8. CONVERTIBLE NOTES (cont'd.)
The warrants permit the holders to acquire up to 181,818 common shares at an
exercise price of $3.30 at any time up to March 31, 2005. The warrants may be
called by the Company, at a purchase price of $.01 per underlying share, if the
stock price of the Company's common shares exceeds $6.51 for any 20 consecutive
trading days after the effective date of the registration statement, provided
that the holders have the right to exercise the warrants within 30 days after
their receipt of such a call.
The exercise price of the warrants is adjusted upon the occurrence of certain
events, including the issuance of equity or convertible instruments exchangeable
into common shares at a price below the market value of the common shares at the
time of issuance and the exercise price of the warrants. In certain
circumstances, the holders of the warrants could elect on exercise to satisfy
their obligation to pay the cash exercise price to the Company by accepting a
lesser number of common shares.
The gross proceeds of $3 million was allocated to the convertible notes and
warrants based on the relative fair value of each security at the time of
issuance. Accordingly, in 2000, $2.7 million was allocated to the notes and
$300,000 was allocated to the 181,818 lender warrants. The fair value of the
warrants was estimated using the Black-Scholes option pricing model. The
$300,000 discount for the warrants and the 15% prepayment premium of $450,000
was accrued and recorded as interest expense over the original eight month term
to earliest conversion.
The terms of the convertible notes provide the lenders with an `in-the-money'
variable conversion rate. A beneficial conversion feature on the convertible
notes was calculated at issuance based on the difference between the effective
conversion price of the allocated proceeds and the market price of the common
stock. The original amount of the beneficial conversion feature was $281,588 at
inception, however, because of the variability of the conversion ratio, it is
remeasured each reporting period until conversion, extinguishment or maturity.
As at December 31, 2000, the accumulated beneficial conversion feature on the
outstanding principal and accrued interest amounted to $2,751,061. This amount
was recorded as interest expense in 2000. The remeasurement of the beneficial
conversion feature in 2001 has not resulted in any change to the amount
previously calculated in 2000.
The Company paid $130,000 in cash for financing costs and issued additional
warrants to the placement agent to acquire up to 90,909 common shares on the
same terms as the warrants issued to the lenders. The financing costs were
allocated to the notes and lender warrants in the same relative fair value
manner. The fair value of the placement agent warrants amounted to $187,273 and
was estimated using the same Black-Scholes pricing assumptions as the lender
warrants.
77
8. CONVERTIBLE NOTES (cont'd.)
On August 10 and 17, 2000 respectively, the two note holders exercised their
rights to put 25% of the notes, or $750,000 back to the Company. The Company
extinguished the $750,000 principal, the $112,500 put premium and the $22,290 in
accrued interest for cash of $884,790. The cash redemption resulted in a
$1,048,373 extraordinary gain, which included the repurchase of the beneficial
conversion feature at the date of extinguishment in the amount of $1,089,166 net
of $40,793 in deferred financing costs.
On November 14, 2000, one of the note holders converted principal of $50,000
plus prepayment premium and accrued interest into 67,741 common shares.
On January 19, 2001, the exercise price and the number of callable warrants
outstanding were adjusted as a result of the 3% convertible debentures and
warrants described in note 9 being offered at a lower exercise price. The
exercise price was decreased from $3.30 to $3.00 and the number of callable
warrants were increased from 272,727 to 300,000 [Note 11[d]].
On February 6, 2001, one of the note holders converted principal of $25,000 plus
prepayment premium and accrued interest into 67,508 common shares.
On June 28, 2001, one of the note holders converted principal of $70,000 plus
prepayment premium and accrued interest into 284,305 common shares.
On September 30, 2001, the Company extinguished a total of $181,000 in principal
to one of the note holders. This extinguishment was made pursuant to an
agreement whereby the note holder would refer business to the Company and the
proceeds of such business would be used to repay the principal amount
outstanding. These cash redemptions resulted in a $58,701 extraordinary gain at
the date of extinguishment consisting of the repurchase of the beneficial
conversion feature of $31,551 and the elimination of the prepayment premium of
$27,150.
At December 31, 2001 holders of the convertible notes have the right to
immediately convert $855,000 of the notes, in whole or in part, into common
shares of the Company at any time. The holders also have the right to put the
remaining $1,069,000 to the Company at any time, in whole or in part, after
which they may convert the amount of the notes subject to each put notice into
common shares 10 days after each put notice.
On February 6, 2002 the Company and the two lenders reached an agreement to
restructure the terms and conditions of the 8% convertible notes [Note 15[a]].
78
9. CONVERTIBLE DEBENTURES
2001 2000
$ $
--------------------------------------------------------------------------------
3% Convertible debentures, maturing December 31, 2003
Principal 200,000 --
Unamortized warrants discount (84,013) --
Unamortized beneficial conversion feature (51,490) --
Accrued interest 6,198 --
--------------------------------------------------------------------------------
70,695 --
================================================================================
On January 19, 2001, the Company entered into a Securities Purchase Agreement
with unaffiliated investors to issue $500,000 of unsecured 3% convertible
debentures ("debentures"), and 4-year warrants ("warrants").
The debentures mature on December 31, 2003 and are convertible into common
shares at any time. The maximum and minimum conversion prices for the debentures
are $1.00 and $0.50 respectively. The actual conversion price of the debentures
will be determined upon receipt of a conversion notice and will be lessor of (a)
the maximum conversion price, or (b) 80% of the 2 lowest closing prices of the
Company's common shares during the 10 trading days prior to the date of
conversion, but in no case less than the minimum conversion price. Interest
accrues on the debentures at the rate of 3% per annum, and is payable on each
conversion date, at the end of each calendar quarter and at maturity. Interest
may be paid in the form of cash or shares at the Company's option.
The warrants were issued on a pro-rata basis, with each debenture holder
receiving one Series A warrant for each dollar of debentures purchased and three
Series B warrants for each five dollars of debentures purchased. The exercise
price of the warrants is $1.00 per share for the Series A warrants and $2.00 per
share for the Series B warrants. The warrants permit the holders to acquire up
to an aggregate of 800,000 common shares at any time up to December 31, 2004.
The maximum and minimum conversion prices of the debentures and the exercise
price of the warrants are subject to adjustment upon the happening of certain
events, such as the payment of a stock dividend, a stock split, a corporate
merger or spin-off, or the issuance of securities at a price below the
conversion price.
79
9. CONVERTIBLE DEBENTURES (cont'd.)
The gross proceeds of $500,000 have been allocated to the convertible debenture
and the Series A and B warrants based on the relative fair value of each
security at the time of issuance. Accordingly, $190,000 was allocated to the
notes and $310,000 was allocated to the Series A and B warrants in aggregate.
The fair value of the warrants was estimated using the Black-Scholes
option-pricing model.
The terms of the convertible debenture provide the holders with an in-the-money
variable conversion rate. A beneficial conversion feature on the convertible
debenture of $190,000 has been recognized, and will be subject to remeasurement
each reporting period until conversion, extinguishment or maturity. As of
December 31, 2001, the remeasurement of the beneficial conversion feature has
not resulted in any change to the original amount calculated on the date of
issuance.
The beneficial conversion feature and the debt discount are subject to accretion
over the term to maturity of the debenture.
On July 17, 2001, one of the debenture holders converted principal of $300,000
plus accrued interest into 608,827 common shares. This conversion resulted in
the immediate recognition of $254,554 in interest expense related to the
previously unamortized debt discount and beneficial conversion feature.
On March 15, 2002, the Company and the 3% convertible debenture holders agreed
to an amendment to the original Securities Purchase Agreement [Note 15[b]].
80
10. WARRANTS LIABILITY AND CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE
The Emerging Issues Task Force Abstract No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock ("EITF 00-19") became applicable to the Company's warrants on June 30,
2001. Since the number of shares issuable in the event of exercise of the
callable warrants is not currently subject to an explicit limit, the Company's
300,000 callable and 800,000 other warrants were presented as a liability at
their fair value as at June 30, 2001. The fair value of the warrants liability
was estimated using the Black-Scholes option pricing model. The $413,546
difference between the previous carrying value of the warrants in additional
paid in capital of $765,546 and their fair value at June 30, 2001 of $352,000
has been recorded as the cumulative effect of a change in accounting principle
on prior periods. This $413,546 change in accounting principle has decreased the
net loss per share for the year ended December 31, 2001 by $0.04.
The warrants liability will continue to be remeasured at fair value thereafter
until such time as the number of shares issuable in the event of exercise of the
callable warrants is fixed to an explicit limit. All future fair value
remeasurements since the June 30, 2001 change in accounting principle will be
recorded in the statement of operations. At December 31, 2001, the fair value of
the warrants liability has decreased to $110,000 and resulted in a gain of
$242,000.
11. SHARE CAPITAL
[a] Authorized
The Company is authorized to issue up to 75,000,000 shares of common stock and
5,000,000 shares of preferred stock. The authorized capital of the Company was
increased from 50,000,000 shares of common stock to 75,000,000 shares of common
stock pursuant to a vote of the shareholders at the Company's annual general
meeting held September 20, 2001. No preferred stock are issued and outstanding
in the years presented.
81
11. SHARE CAPITAL (cont'd.)
[b] Common stock
2001
The Company issued an aggregate of 960,640 common shares pursuant to conversions
of convertible notes and debentures [notes 8 and 9].
On January 19, 2001, the Company issued warrants to purchase 800,000 common
shares [note 9]. The fair value of the warrants issued, net of financing costs,
amounted to $298,778 and was recorded as an increase to additional paid-in
capital.
The Company issued an aggregate of 92,944 common shares directly to employees in
consideration for past services resulting in a compensation expense and an
increase in share capital of $27,260.
The Company issued an aggregate of 600,000 common shares to employees pursuant
to the exercise of stock options for total proceeds of $173,993.
The Company issued 10,000 common shares in exchange for consulting services. The
transaction was recorded at a fair value of $9,690 for the common shares based
on the closing stock price on the January 18, 2001 date of the agreement.
2000
On August 17, 2000, the Company completed a private placement to an investor for
the issuance of 116,935 common shares at $3.72 per share for net cash proceeds
of $435,000.
On August 24, 2000, the Company issued 100,000 common shares and 100,000
warrants in exchange for consulting services. The exercise price of the warrants
was $4.00. The transaction was recorded at a fair value of $162,500 for the
common shares based on the closing stock price on the date of the agreement and
$81,000 for the warrants which was estimated using the Black-Scholes option
pricing model. On June 30, 2001, the 100,000 warrants were cancelled for no
consideration [Note 11[d]].
82
11. SHARE CAPITAL (cont'd.)
[c] Stock options
1999, 2000 and 2001 Incentive Stock Option Plans
The Company's 1999 Incentive Stock Option Plan became effective March 11, 1999,
and authorizes a total of 2,000,000 common shares for issuance.
The Company's 2000 Incentive Stock Option Plan became effective on November 10,
2000, and authorizes a total of 500,000 common shares for issuance.
The Company's 2001 Incentive Stock Option Plan became effective September 20,
2001, and authorizes a total of 1,000,000 common shares for issuance.
The 1999, 2000 and 2001 Incentive Stock Option Plans (collectively the "Plans")
entitles directors, employees and consultants to purchase common shares of the
Company.
Options issued generally begin vesting one year after the date of grant, at
which time vesting occurs in equal instalments of one-fifth of the grant total
per year for a period of five years. Options immediately become exercisable once
vested. Any options that do not vest as the result of a grantee leaving the
Company are forfeited and the common shares underlying them are returned to the
reserve. The Board has the authority to vary the vesting provisions of grants at
its discretion.
83
11. SHARE CAPITAL (cont'd.)
Activity under the Plans is set forth below:
Options Outstanding
------------------------------------------------
Shares Weighted
available for Number of Price per average
grant shares share exercise price
----------------------------------------------------------------------------------------------------
Balance at December 31, 1999 216,700 1,783,300 $0.01 - 4.44 $1.80
Additional shares authorized 500,000 -- -- --
Options granted (586,500) 586,500 $0.59 - 4.36 $1.79
Options forfeited 383,800 (383,800) $0.94 - 4.34 $2.28
----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 514,000 1,986,000 $0.01 - 4.44 $1.70
Additional shares authorized 1,000,000 -- -- --
Options granted (2,184,644) 2,184,644 $0.12 - 3.58 $0.29
Options forfeited 1,061,800 (1,061,800) $0.20 - 4.44 $1.49
Options exercised -- (692,944) $0.14 - 3.58 $0.34
----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 391,156 2,415,900 $0.01 - 2.75 $0.91
====================================================================================================
The weighted average remaining contractual life and weighted average exercise
price of options outstanding and of options exercisable as of December 31, 2001
are as follows:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
average Weighted Weighted
Number of remaining average average
Range of shares contractual exercise Shares exercise
exercise prices outstanding life (years) price exercisable price
-------------------------------------------------------------------------------------------------
$0.01 - 0.49 1,265,700 5.16 $0.20 227,500 $0.31
$0.50 - 0.99 583,200 2.80 $0.91 319,920 $0.94
$1.00 - 2.75 567,000 3.16 $2.50 255,000 $2.49
-------------------------------------------------------------------------------------------------
2,415,900 4.12 $0.91 802,420 $1.26
=================================================================================================
For the year ended December 31, 2001 the Company recorded $122,668 [2000 -
$143,025] in stock based compensation expense. Of this total, $95,408 [2000 -
$128,925] is a result of options granted to an employee in 1999 with an exercise
price less than the market price of the common stock on the date of grant. The
remaining $27,260 [2000 - $14,100] is a result of common shares granted to
employees and options granted to consultants in exchange for services which have
been measured at fair value on the commitment date.
84
11. SHARE CAPITAL (cont'd.)
As at December 31, 2001, the Company has $82,127 [2000 - $177,535] in deferred
compensation to be expensed in future periods based on the vesting terms of the
underlying fixed plan options.
Pro forma disclosure of stock based compensation
Pro forma information regarding results of operations and earnings (loss) per
share is required by FASB Statement No. 123 ("SFAS 123") for stock-based awards
to employees as if the Company had accounted for such awards using a valuation
method permitted under SFAS 123.
The fair value of the Company's stock-based awards granted to employees in 2001
and 2000 was estimated using the Black-Scholes option pricing model. The option
pricing assumptions include a dividend yield of 0%, a weighted average expected
life of 4.5 years [2000 - 4.2 years], a risk free interest rate of 4.45% [2000 -
5.41%] and an expected volatility of 216% [2000 - 205%]. The weighted average
fair value of options granted during 2001 was $0.12 [2000 - $1.51]. For pro
forma purposes, the estimated value of the Company's stock-based awards to
employees is amortized over the vesting period of the underlying options. The
effect on the Company's net loss and loss per share of applying SFAS 123 to the
Company's stock-based awards to employees would approximate the following:
2001 2000
$ $
--------------------------------------------------------------------------------
Net loss (541,552) (8,333,443)
Compensation expense (380,148) (778,095)
--------------------------------------------------------------------------------
Pro forma net loss (921,700) (9,111,538)
================================================================================
Basic and diluted loss per share
As reported (0.06) (1.01)
Pro forma (0.10) (1.10)
================================================================================
85
11. SHARE CAPITAL (cont'd.)
[d] Warrants
As at December 31, 2001, common stock issuable pursuant to warrants outstanding
is as follows:
Warrants Warrants
Outstanding at Warrants Warrants Warrants Outstanding at Exercise
January 1 Issued Exercised Cancelled December 31 Price Expiry
# # # # # $ Date
-----------------------------------------------------------------------------------------------------------------------------
2000
Series 1 warrants -- 272,727 -- -- 272,727 3.30 March 31, 2005
Series 2 warrants -- 100,000 -- -- 100,000 4.00 August 24, 2002, or
August 24, 2001
if registered
-----------------------------------------------------------------------------------------------------------------------------
-- 372,727 -- -- 372,727
=============================================================================================================================
Warrants Warrants
Outstanding at Warrants Warrants Warrants Outstanding at Exercise
January 1 Issued Exercised Cancelled December 31 Price Expiry
# # # # # $ Date
---------------------------------------------------------------------------------------------------------------------------
2001
Series 1 warrants 272,727 27,273 -- -- 300,000 3.00 March 31, 2005
Series 2 warrants 100,000 -- -- 100,000 -- -- Cancelled
Series 3A warrants -- 500,000 -- -- 500,000 1.00 December 31, 2004
Series 3B warrants -- 300,000 -- -- 300,000 2.00 December 31, 2004
---------------------------------------------------------------------------------------------------------------------------
372,727 827,273 -- 100,000 1,100,000
===========================================================================================================================
86
12. SEGMENTED INFORMATION
The Company operates in one industry segment and derives its revenue from the
following services:
2001 2000
$ $
--------------------------------------------------------------------------------
Public company solutions 1,643,023 2,550,373
Financial software and content systems 580,409 87,728
E-business solutions 633,719 1,399,507
--------------------------------------------------------------------------------
2,857,151 4,037,608
================================================================================
Revenue from external customers, by country of origin, is as follows:
2001 2000
$ $
--------------------------------------------------------------------------------
Canada 2,655,477 3,556,753
United States 201,674 480,855
--------------------------------------------------------------------------------
2,857,151 4,037,608
================================================================================
During 2001, the Company had one customer whose revenue represented 20% of total
revenue. During 2000, the Company had three customers whose revenue represented
17%, 12% and 11% of total revenue, respectively.
Substantially all of the Company's property and equipment are located in Canada.
87
13. INCOME TAXES
The Company is subject to United States federal and state income taxes at an
approximate rate of 35%. The reconciliation of the provision (recovery) for
income taxes before the extraordinary gain, at the United States federal
statutory rate compared to the Company's income tax expense as reported is as
follows:
2001 2000
$ $
--------------------------------------------------------------------------------
Tax expense (recovery) at U.S. statutory rates (190,000) (3,753,000)
Lower (higher) effective income taxes of
Canadian subsidiary (26,000) (467,000)
Change in valuation allowance (852,000) 2,348,000
Change in opening valuation allowance for the
reduction in future enacted tax rates 1,004,000 --
Non-deductible expenses 64,000 1,872,000
--------------------------------------------------------------------------------
Income tax provision (recovery) -- --
================================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has
recognized a valuation allowance for those deferred tax assets for which it is
more likely than not that realization will not occur.
Significant components of the Company's deferred tax assets as of December 31
are as follows:
2001 2000
$ $
--------------------------------------------------------------------------------
Net operating loss carryforwards 3,091,000 3,987,000
Property and equipment 149,000 105,000
--------------------------------------------------------------------------------
Total deferred tax assets 3,240,000 4,092,000
Valuation allowance (3,240,000) (4,092,000)
--------------------------------------------------------------------------------
Net deferred tax assets -- --
================================================================================
88
13. INCOME TAXES (cont'd.)
The net operating loss carryforwards expire as follows:
$
--------------------------------------------------------------------------------
Canada
2006 2,641,000
2007 2,836,000
2008 274,000
--------------------------------------------------------------------------------
5,751,000
U.S.
2019 1,173,000
2020 1,494,000
2021 249,000
--------------------------------------------------------------------------------
2,916,000
--------------------------------------------------------------------------------
Total 8,667,000
================================================================================
14. COMMITMENTS AND CONTINGENCIES
[a] The Company has operating lease commitments with respect to office
premises with minimum annual payments as follows:
$
--------------------------------------------------------------------------
2002 192,000
2003 178,000
2004 246,000
2005 279,000
2006 157,000
--------------------------------------------------------------------------
1,052,000
==========================================================================
Rental expense included in general and administrative expenses for the
year ended December 31, 2001 was $289,000 [2000 - $371,000].
89
14. COMMITMENTS AND CONTINGENCIES (cont'd.)
[b] The Company is currently involved in litigation with a customer to collect
amounts owing pursuant to a contract entered into in September, 2000. The
defendant provided a $100,000 deposit and contracted the Company to
provide certain lead generation services. The Company delivered the
requested services throughout October and November, 2000, however, the
defendant defaulted on all additional payments. The Company is suing the
defendant for the $351,800 balance owing, plus interest and costs. The
defendant has filed a statement of defense and counterclaim to recover the
$100,000 deposit. As of December 31, 2001, no further action had been
taken by either party and no court date has been set. Although management
currently believes the outcome of the litigation will be in the Company's
favour, they have not elected to aggressively pursue the litigation at
this time. The Company has made no provision for the counterclaim in the
financial statements and any settlement or final award will be reflected
in the statement of operations as the litigation is resolved.
15. SUBSEQUENT EVENTS
[a] On February 6, 2002 the Company and the two lenders reached an agreement
to restructure the terms and conditions of the 8% convertible notes. The
lenders agreed to waive the 15% prepayment premium of $288,600 and the
accrued interest to date of $296,636 and converted $100,000 of the
principal balance due into 666,700 common shares of the Company at a
conversion price of $0.15. The remaining principal balance due of
$1,824,000 matures on February 6, 2004, is non-interest bearing and is
convertible into common shares at any time at a fixed conversion rate of
$0.50.
If the lenders do not convert, $300,000 is to be repaid in cash. The first
cash payment of $100,000 is due June 30, 2002 and the remaining $200,000
will be repaid in ten quarterly payments of $20,000 beginning September
30, 2002. In the event that the Company fails to make any of its scheduled
cash payments, the conversion price will be immediately reduced to 88% of
the average of the 5 lowest closing prices of the Company's common shares
during the 30 trading days prior to the date of conversion.
The maturity date of any outstanding balance not converted by February 6,
2004 will be extended for two years and the conversion price will be
reduced to 88% of the average of the 5 lowest closing prices of the
Company's common shares during the 30 trading days prior to the date of
conversion.
90
15. SUBSEQUENT EVENTS (cont'd.)
[b] On March 15, 2002, the Company and the 3% convertible debenture holders
agreed to an amendment to the original Securities Purchase Agreement. The
debenture holders agreed to immediately convert the outstanding principal
of $200,000 and accrued interest into common shares of the Company at the
minimum conversion price of $0.50 and the Company agreed to modify the
existing terms of the Series A and B warrants. The exercise price of the
Series A warrants has been reduced from $1.00 to $0.25. The exercise price
of the Series B warrants has been reduced from $2.00 to $0.50. The expiry
date for both the Series A and B warrants has been extended to July 31,
2005.
[c] On March 25, 2002, the Company completed a private placement for 2,000,000
units at $0.20 per unit for cash proceeds of $400,000. Each unit consists
of one common share and one share purchase warrant. The warrants are
exercisable at any time for one year from the date of issuance at $0.25
per share.
91
STOCKGROUP INFORMATION SYSTEMS INC.
4,301,000 Shares of
Common Stock
----------
PROSPECTUS
----------
June 24, 2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Colorado Law provides that a corporation may indemnify a person made a party to
a proceeding because the person is or was a director against liability incurred
in the proceeding if:
(a) the person conducted himself or herself in good faith; and
(b) the person reasonably believed:
(I) in the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's best
interests; and
(II) in all other cases, that his or her conduct was at least
not opposed to the corporation's best interest.
The law also provides that a corporation may not indemnify a director:
(a) in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the
corporation; or
(b) in connection with any other proceeding charging that the director
derived an improper personal benefit, whether or not involving
action in an official capacity, in which proceeding the director was
adjudged liable on the basis that he or she derived an improper
personal benefit.
Indemnification permitted under Colorado law in connection with a proceeding by
or in the right of the corporation is limited to reasonable expenses incurred in
connection with the proceeding. Unless limited by its articles of incorporation,
Colorado law provides that a corporation shall indemnify a person who was wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the person was party
92
because the person is or was a director, against reasonable expenses incurred by
him or her in connection with the proceeding.
Colorado law further provides that a corporation may pay for or reimburse the
reasonable expenses incurred by a director who is a party to a proceeding in
advance of final disposition of the proceeding if:
(a) the director furnishes to the corporation a written affirmation of
the director's good faith belief that he or she met the standard of
conduct described in the law;
(b) the director furnishes to the corporation a written undertaking,
executed personally or on the director's behalf, to repay the
advance if it is ultimately determined that he or she did not meet
the standard of conduct; and
(c) a determination is made that the facts then known to those making
the determination would not preclude indemnification under Colorado
law.
A corporation may not indemnify a director under Colorado law unless authorized
in the specific case after a determination has been made that indemnification of
the director is permissible in the circumstances because the director has met
the standard of conduct set forth in the law. A corporation may not advance
expenses to a director unless authorized in the specific case after the written
affirmation and undertaking required by the law are received and the
determination required by the law has been made.
The determinations required by Colorado law shall be made:
(a) by the board of directors by a majority vote of those present at a
meeting at which a quorum is present, and only those directors not
parties to the proceeding shall be counted in satisfying the quorum;
or
(b) if a quorum cannot be obtained, by a majority vote of a committee of
the board of directors designated by the board of directors, which
committee shall consist of two or more directors not parties to the
proceeding; except that directors who are parties to the proceeding
may participate in the designation of directors for the committee.
Alternatively, the determination required to be made by the law may be made:
(a) by independent legal counsel selected by a vote of the board of
directors or the committee in the manner specified above or, if a
quorum of the full board cannot be obtained and a committee cannot
be established, by independent legal counsel selected by a majority
vote of the full board of directors; or
(b) by the shareholders.
Authorization of indemnification and advance of expenses shall be made in the
same manner as the determination that indemnification or advance of expenses is
permissible; except that, if the determination that indemnification or advance
of expenses is permissible is made by independent legal counsel, authorization
of indemnification and advance of the expenses shall be made by the body that
selected such counsel.
93
Colorado law also provides that, unless otherwise provided in the articles of
incorporation:
(a) an officer is entitled to mandatory indemnification, and is entitled
to apply for court-ordered indemnification, in each case to the same
extent as a director;
(b) a corporation may indemnify and advance expenses to an officer,
employee, fiduciary, or agent of the corporation to the same extent
as to a director; and
(c) a corporation may also indemnify and advance expenses to an officer,
employee, fiduciary, or agent who is not a director to a greater
extent, if not inconsistent with public policy, and if provided for
by its bylaws, general or specific action of its board of directors
or shareholders, or contract.
Colorado law further provides a corporation may purchase and maintain insurance
on behalf of a person who is or was a director, officer, employee, fiduciary, or
agent of the corporation, or who, while a director, officer, employee,
fiduciary, or agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, fiduciary, or
agent of another domestic or foreign corporation or other person or of an
employee benefit plan, against liability asserted against or incurred by the
person in that capacity or arising from his or her status as a director,
officer, employee, fiduciary, or agent, whether or not the corporation would
have power to indemnify the person against the same liability under Colorado
law.
Our articles of incorporation provide that the board of directors has the power
to:
(a) Indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an
action by or in the right Stockgroup), by reason of the fact that he or
she is or was a director, officer, employee or agent of Stockgroup or is
or was serving at our request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him or
her in connection with such action, suit or proceeding if he or she acted
in good faith and in a manner he reasonably believed to be in our best
interests and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his or her conduct was unlawful.
(b) Indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the
right of Stockgroup.com to procure a judgment in its favor by reason of
the fact that he or she is or was a director, officer, employee or agent
of Stockgroup or is or was serving at our request as a director, officer,
employee or agent of Stockgroup request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorney's
fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good faith and
in a manner he or she reasonably believed to be in our best interests; but
no indemnification shall be made in respect of any claim, issue or matter
as to which such person has been adjudged to be liable for negligence or
misconduct in the performance of his or her duty to Stockgroup unless and
only to the extent that the court in which such action or suit was brought
determines upon application that, despite the adjudication of liability,
but in view of all circumstances of the case, such person is fairly and
reasonably entitled to indemnification for such expenses which such court
deems proper.
94
(c) Indemnify a director, officer, employee or agent of Stockgroup to the
extent that such person has been successful on the merits in defense of
any action, suit or proceeding referred to in subparagraph (a) or (b)
above or in defense of any claim, issue, or matter therein, against
expenses (including attorney's fees) actually and reasonable incurred by
him or her in connection therewith.
(d) Authorize indemnification under subparagraph (a) or (b) above (unless
ordered by a court) in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct
set forth in subparagraph (a) or (b). Such determination shall be made by
the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or, if
such a quorum is not obtainable or even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or by the shareholders.
(e) Authorize payment of expenses (including attorney's fees) incurred in
defending a civil or criminal action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding as authorized in
subparagraph (d) above upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount if it is
ultimately determined that he or she is not entitled to be indemnified by
Stockgroup.
(f) Purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Stockgroup or who is or was
serving at our request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him or her in
any such capacity or arising our of his or her status as such, whether or
not we would have the power to indemnify him or her against such liability
under the provision of our Articles of Incorporation.
The indemnification provided by our Articles of Incorporation is not exclusive
of any other rights to which those indemnified may be entitled under the bylaws,
any agreement, vote of shareholders or disinterested directors or otherwise, and
any procedure provided for by any of the foregoing, both as to action in his or
her official capacity and as to action in another while holding such office, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of heirs, executors and administrators
of such a person.
Our by-laws give effect to the foregoing provisions of our Articles of
Incorporation.
We intend to enter into indemnification agreements with our directors and
officers. These agreements provide, in general, that we will indemnify such
directors and officers for, and hold them harmless from and against, any and all
amounts paid in settlement or incurred by, or assessed against, such directors
and officers arising out of or in connection with the service of such directors
and officers as a director or officer of Stockgroup or its affiliates to the
fullest extent permitted by Colorado law.
The Company intends to obtain liability insurance for its directors and officers
covering, subject to exceptions, any actual or alleged negligent act, error,
omission, misstatement, misleading statement, neglect or breach of duty by such
directors or officers, individually or collectively, in the discharge of their
duties in their capacity as directors or officers of Stockgroup.
95
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of various expenses, all of which
we will pay, in connection with the sale and distribution of the securities
being registered. All of the amounts shown are estimates, except the Securities
and Exchange Commission registration fee.
Securities and Exchange Commission Registration Fee $ 33.53
Accounting Fees and Expenses $ 5,000.00
Legal Fees and Expenses $ 5,000.00
Miscellaneous $ 3,500.00
Total $13,533.53
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order is information regarding shares of common stock
issued and options and warrants and other convertible securities granted by us
during the past three years. Also included is the consideration, if any,
received by us for such shares and options and information relating to the
section of the Securities Act of 1933 (the "1933 Act"), or rule of the
Securities and Exchange Commission under which exemption from registration was
claimed. All securities issued were restricted.
1. Pursuant to a Share Exchange and Share Purchase Agreement dated March 11,
1999, by and among I-Tech Holdings Group, Inc., 579818 B.C. Ltd., a
British Columbia corporation of which I-Tech owns 100% of the issued and
outstanding voting common stock, Stock Research Group, Inc. or SRG, a
British Columbia corporation and all of the shareholders of SRG, being
nine persons, 579818 B.C. Ltd. acquired all of the issued and outstanding
common shares of SRG from the SRG Shareholders in consideration of the
issuance by (i) 579818 B.C. Ltd. to the SRG Shareholders, on a pro-rata
basis, of 3,900,000 Class A exchangeable shares and (ii) by I-Tech issuing
to StockTrans, Inc. as trustee for the SRG Shareholders 3,900,000 shares
of common stock to be held under the terms of an Exchange and Voting
Agreement dated March 11, 1999 by and among I-Tech, the Trustee, 579818
B.C. Ltd. and the SRG Shareholders. These shares were issued to the
trustee to hold for the SRG Shareholders pursuant to Regulation S
promulgated under the 1933 Act.
2. On March 15, 1999, we issued 75,000 shares in exchange for consulting
services. The transaction was recorded at a fair value of $450,000 based
on the closing price of the stock on the day of the agreement. The
issuances were made under Section 4(2) of the 1933 Act and were made
without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary
to evaluate these investments, and who represented to us that the shares
were being acquired for investment.
3. During the spring and summer of 1999, we completed a private placement
under Regulation S to five Non -U.S. institutions and one Non-U.S.
individual for the issuance of 900,000 common shares at $6.00 per share
for net cash proceeds of $5,232,263.
4. On September 17, 1999 we completed a private placement under Regulation S
with Southam, Inc. a media company in Canada for the issuance of 200,000
common shares in exchange for advertising services. The transaction was
recorded at a fair value of $676,000 based on the closing price of the
stock on the day of the agreement.
96
5. On April 3, 2000, we entered into a Convertible Note Purchase Agreement
pursuant to which we obtained $3 million in a financing led by Deephaven
Capital Management LLC, a subsidiary of Knight/Trimark. Amro International
S.A., managed by Rhino Advisors was an additional lender in the funding.
The funding included $3 million of 8% Convertible Notes, and 5 year
Callable Warrants. The Notes are convertible into common stock only after
July 31, 2000. The Notes may only have been converted if we did not make
payment on a noteholder's prepayment request and were in receipt of a
properly completed and executed conversion notice at any time thereafter,
or if Stockgroup would have sought to prepay the notes. Interest would
have been paid in the form of cash or registered stock, at our option. The
warrants permit the holders to acquire up to 181,818 shares of common
stock. The placement agent in the transaction received warrants to
purchase 90,909 common shares on the same terms as the warrants issued to
the lenders. The issuances were made under Section 4(2) of the 1933 Act
and/or Regulation D promulgated under the Securities Act of 1933 and were
made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary
to evaluate these investments, and who represented to us that the shares
were being acquired for investment. This agreement was restructured in
February 2002, as described in item 12 below and in the Selling
Shareholders section of this prospectus.
6. On August 17, 2000, Stockgroup completed a private placement with
Mediastream Limited, a media company in Singapore, for the issuance of
116,935 shares at $3.72 each, for gross cash proceeds of $435,000. The
issuances were made under Regulation S.
7. On August 24, 2000, Stockgroup completed a private placement with
Continental Capital & Equity Corporation, a financial relations and direct
marketing advertising firm in Canada, for the issuance of 100,000 shares
and 100,000 warrants in exchange for publicity services. The transaction
was recorded at a fair value of $162,500 for the shares based on the
closing price of the stock on the day of the agreement and $81,000 for the
warrants based on the fair value of the warrants under the Black-Scholes
option pricing formula. The issuances were made under Regulation S and the
shares deemed "restricted." On June 30, 2001 the warrants under this
private placement were cancelled.
8. On January 18, 2001, we issued 10,000 common shares to Value Relations IR
Services GmbH in exchange for consulting services. The transaction was
recorded at a fair value of $9,690 for the common shares based on the
closing stock price on the date of the agreement. The issuance was made
under Regulation S.
9. On January 19, 2001, we closed a $0.5 million financing from a group of
unaffiliated investors pursuant to a Securities Purchase Agreement, under
Section 4(2). The funding included $0.5 million of 3% Convertible
Debentures and 4-year warrants. The warrants were issued on a pro-rata
basis, with each debenture-holder receiving 1 Series A warrant for each
dollar of debentures purchased and 3 Series B warrants for each five
dollars of debentures purchased. The debentures mature on December 31,
2003 and are convertible into common shares upon the earlier to occur of
March 25, 2001, or the effective date of the registration of the shares
issuable upon conversion of the debentures and exercise of the warrants.
Stockgroup filed a registration statement on Form SB-2 for the investors'
resale of the shares underlying the debentures, the shares issuable, if
any, in payment of interest on the debentures, and the shares underlying
the warrants, which registration statement became effective on April 4,
2001. There was no placement agent in the transaction.
97
10. On October 10, 2001, we issued 23,202 common shares under Regulation S to
an employee resulting in a compensation expense and increase in share
capital of $3,248.
11. On February 6, 2002, Amro International S.A. converted $23,340 of its
convertible note into 155,600 common shares and Deephaven Private
Placement Trading Ltd. converted $76,660 of its convertible note into
511,100 common shares, in transactions that were exempt under Section
3(a)(9).
12. On March 15, 2002, the remaining 3% debenture holders converted $200,000
of convertible debentures plus accrued interest into 413,808 common
shares, in transactions that were exempt under section 3(a)(9).
13. On March 16, 2002, we issued 250,000 warrants to a consultant under
Section 4(2), each warrant having an exercise price of $0.30 and an expiry
date of September 15, 2003.
14. On March 25, 2002, we completed a $0.4M financing with 22 unaffiliated
investors pursuant to a Subscription Agreement under Section 4(2). The
funding included 2,000,000 units consisting of one common share and one
warrant each, at a price of $0.20 per units, plus 51,000 common shares at
a price of $0.20 per share. The warrants have an exercise price of $0.25
and an expiry date of March 24, 2003. The 2,051,000 common shares were
issued to the investors on April 1, 2002.
98
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The following Exhibits are either attached hereto incorporated herein by
reference or will be filed by amendment:
EXHIBIT INDEX
(A) EXHIBIT NUMBER DESCRIPTION OF EXHIBIT AND FILING REFERENCE
2.1 Share Exchange and Share Purchase Agreement dated March
11, 1999, among I-Tech Holdings Group, Inc. (the
"Registrant"), 579818 B.C. Ltd., Stock Research Group,
Inc. ("SRG"), and the former shareholders of SRG
effecting a change in control of Registrant.
(incorporated by reference to the Exhibits filed with
Form 8K filed March 19, 1999, Form 8K/A filed March 24,
1999 and Form 8K/A filed May 10, 1999)
3.1 Articles of Incorporation (incorporated by reference to
the Exhibits filed with Form 10SB12G filed January 29,
1998, and Amendments to Articles of Incorporation filed
herewith)
*3.2 Amended and Restated Bylaws
4.1 1999 Stock Incentive Plan (incorporated by reference to
the Exhibits filed with Form S-8 filed November 16,
1999)
4.2 Convertible Note Purchase Agreement, ("Note Purchase
Agreement") dated March 21, 2000, among the Registrant,
Deephaven Private Placement Trading Ltd. ("Deephaven")
and Amro International, S.A. ("Amro") (incorporated by
reference to Form SB-2 and Form SB-2/A filed May 26,
2000 and August 1, 2000 respectively)
4.3 Form of 8% Convertible Note issued to each of Deephaven
and Amro pursuant to the Note Purchase Agreement
(incorporated by reference to Form SB-2 and Form SB-2/A
filed May 26, 2000 and August 1, 2000 respectively)
4.4 Form of Callable Warrant issued to Deephaven, Amro, and
Jesup and Lamont Securities Corporation pursuant to the
Note Purchase Agreement (incorporated by reference to
Form SB-2 and Form SB-2/A filed May 26, 2000 and August
1, 2000 respectively)
4.5 Registration Rights Agreement, dated March 31, 2000,
among the Registrant, Deephaven and Amro (incorporated
by reference to Form SB-2 and Form SB-2/A filed May 26,
2000 and August 1, 2000 respectively)
4.6 Securities Purchase Agreement, dated January 19, 2001,
among the Registrant and a group of unaffiliated
investors (incorporated by reference to Form SB-2 and
Form SB-2/A filed March 20, 2001 and April 3, 2001
respectively)
99
4.7 Form of 3% Convertible Debenture, dated January 19,
2001, among the Registrant and a group of unaffiliated
investors (incorporated by reference to Form SB-2 and
Form SB-2/A filed March 20, 2001 and April 3, 2001
respectively)
4.8 Form of Warrant, dated January 19, 2001, among the
Registrant and a group of unaffiliated investors
(incorporated by reference to Form SB-2 and Form SB-2/A
filed March 20, 2001 and April 3, 2001 respectively)
4.9 Registration Rights Agreement, dated January 19, 2001,
among the Registrant and a group of unaffiliated
investors (incorporated by reference to Form SB-2 and
Form SB-2/A filed March 20, 2001 and April 3, 2001
respectively)
**5.1 Opinion of Faegre & Benson LLP, regarding the legality
of the securities being registered
9.1 Exchange and Voting Agreement dated March 11, 1999,
among the Registrant, 579818 B.C. Ltd., SRG and the
individual signatories thereto, incorporated by
reference to the Exhibits filed with Form 8K filed on
March 19, 1999
*10.2 Employment Agreement, dated August 1, 1998, between the
Registrant and Leslie Landes.
16.1 Letter regarding change in certifying accountant
(incorporated by reference to Exhibits filed with Form
8K filed July 9, 1999)
21.1 Subsidiaries of the Company (incorporated by reference
to Exhibits filed with Form 10KSB/A filed May 1, 2000)
**23.1 Consent of Faegre & Benson LLP (included in Exhibit 5.1)
**23.5 Consent of Ernst & Young LLP
----------
* Previously filed.
** Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules omitted because the information is included in the
Financial Statements of notes thereto.
ITEM 28. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
100
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually, or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) (230.424(b) of this Chapter)
if, in the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
Offering.
101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Vancouver, Province of British Columbia, on June 24, 2002.
STOCKGROUP INFORMATION SYSTEMS INC.
By: /S/ Marcus New
Marcus New
Chief Executive Officer
102