Form 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
|X| Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2002.
|_| Transition report pursuant Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _______________
Commission file number: 0-23687
Stockgroup Information Systems Inc.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1379282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 500 - 750 W PENDER STREET
VANCOUVER BRITISH COLUMBIA CANADA V6C 2T7 A2
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (604) 331-0995
(Former name or address, if changed since last report)
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes: |X| No: |_|
Applicable only to issuers involved in bankruptcy
proceedings during the preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes |_| No |_|
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 15,943,846
Transitional Small Business Disclosure Format (check one): Yes: |_| No: |X|
1
Stockgroup Information Systems Inc.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION ............................................ 4
Item 1. Financial Statements (unaudited) ................................. 4
CONSOLIDATED BALANCE SHEETS ............................................ 4
CONSOLIDATED STATEMENTS OF OPERATIONS .................................. 5
CONSOLIDATED STATEMENTS OF CASH FLOWS .................................. 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations ......................................... 12
Item 4. Disclosure Controls and Procedures ................................ 20
Part II. OTHER INFORMATION ................................................ 21
Item 1. Legal Proceedings ................................................. 21
Item 2. Changes in Securities and Use of Proceeds ......................... 21
Item 4. Submission of Matters to a Vote of Security Holders ............... 21
Item 6. Exhibits and Reports on Form 8-K .................................. 22
SIGNATURES ................................................................ 23
CERTIFICATIONS ............................................................ 24
Exhibit (b) - Section 906 Certification of CEO ............................ 26
Exhibit (c) - Section 906 Certification of CFO ............................ 27
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Stockgroup Information Systems Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - Expressed in U.S. Dollars)
[See Note 1 - Nature of Business and Basis of Presentation]
September 30, December 31,
2002 2001
------------- ------------
ASSETS
CURRENT
Cash and cash equivalents $ 71,372 $ 126,618
Marketable securities 2,353 21,814
Accounts receivable [net of allowances for doubtful
accounts of $56,744; December 31, 2001 $92,331] 180,004 173,105
Prepaid expenses 119,941 60,465
------------ ------------
TOTAL CURRENT ASSETS $ 373,670 $ 382,002
Property and equipment, net (note 8) $ 560,003 $ 341,688
------------ ------------
$ 933,673 $ 723,690
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Bank indebtedness $ 913 $ 6,081
Accounts payable 321,833 373,674
Accrued payroll liabilities 77,391 144,920
Deferred revenue 242,094 124,944
Current portion of capital lease obligation 7,646 7,674
Notes payable and accrued interest (note 9) 205,031 108,837
Current portion of convertible notes (note 2) 100,000 2,509,236
Warrants liability (note 4) -- 110,000
------------ ------------
TOTAL CURRENT LIABILITIES $ 954,908 $ 3,385,366
Capital lease obligation 4,750 11,231
Convertible notes (note 2) 1,454,168 --
Convertible debentures (note 3) -- 70,695
------------ ------------
TOTAL LIABILITIES $ 2,413,826 $ 3,467,292
------------ ------------
COMMITMENTS AND CONTINGENCIES (note 7)
SHAREHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCK, No Par Value (note 5)
Authorized shares - 75,000,000
Issued and outstanding shares - 15,943,846;
10,131,260 at December 31, 2001 $ 8,875,534 $ 7,969,090
ADDITIONAL PAID-IN CAPITAL 2,803,141 2,422,014
ACCUMULATED DEFICIT (13,158,828) (13,134,706)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) $ (1,480,153) $ (2,743,602)
------------ ------------
$ 933,673 $ 723,690
============ ============
The Accompanying Notes Are An Integral Part
Of These Unaudited Financial Statements.
3
Stockgroup Information Systems Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - Expressed in U.S. Dollars)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
------------ ------------ ------------ -----------
REVENUE
Revenues $ 563,481 $ 731,635 $ 1,413,425 $ 2,353,013
Cost of revenues 222,129 208,301 555,635 943,753
------------ ----------- ------------ -----------
Gross profit $ 341,352 $ 523,334 $ 857,790 $ 1,409,260
EXPENSES
Sales and marketing $ 135,930 $ 77,356 $ 365,441 $ 423,085
Product development 25,687 25,229 62,864 175,375
General and administrative 432,314 386,033 1,209,362 1,514,607
------------ ----------- ------------ -----------
$ 593,931 $ 488,618 $ 1,637,667 $ 2,113,067
------------ ----------- ------------ -----------
LOSS FROM OPERATIONS $ (252,579) $ 34,716 $ (779,877) $ (703,807)
Interest income 19 936 187 3,642
Interest expense (42,569) (327,051) (264,990) (525,778)
Gain (loss) on warrants
liability (note 4) -- 242,000 (55,000) 242,000
Other income and (expense) (15,307) (4,191) (13,028) 21,414
------------ ----------- ------------ -----------
NET LOSS BEFORE EXTRAORDINARY
ITEMS & CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE $ (310,436) $ (53,590) $ (1,112,708) $ (962,529)
Extraordinary gain on
restructuring of convertible
notes (note 2) -- -- 1,088,586 --
Extraordinary gain on redemption
of convertible notes -- 58,701 -- 58,701
Cumulative effect of change in
accounting principle -- -- -- 413,546
------------ ----------- ------------ -----------
NET INCOME (LOSS) $ (310,436) $ 5,111 $ (24,122) $ (490,282)
============ =========== ============ ===========
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE:
Net loss before extraordinary items
& cumulative effect of change
in accounting principle $ (0.02) $ (0.01) $ (0.08) $ (0.11)
Extraordinary gain on restructuring
of convertible notes $ 0.00 $ 0.00 $ 0.08 $ 0.00
Extraordinary gain on redemption
of convertible notes 0.00 0.01 0.00 0.01
Cumulative effect of change in
accounting principle 0.00 0.00 0.00 0.05
Net income (loss) $ (0.02) $ 0.00 $ 0.00 $ (0.05)
============ =========== ============ ===========
Weighted average shares
outstanding for the period 15,880,948 9,863,980 13,518,419 9,029,116
============ =========== ============ ===========
The Accompanying Notes Are An Integral Part
Of These Unaudited Financial Statements.
4
Stockgroup Information Systems Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - Expressed in U.S. Dollars)
Nine Months Nine Months
Ended Ended
September September
30, 2002 30, 2001
----------- -----------
OPERATING ACTIVITIES
Net (loss) $ (24,122) $(490,282)
Add (deduct) non-cash items
Amortization 148,822 146,373
Loss on disposition of property and equipment -- 7,896
Amortization of deferred financing costs -- 8,818
Extraordinary gain on restructuring of convertible notes (1,088,586) --
Extraordinary gain on redemption of convertible notes -- (58,701)
(Gain)/loss on warrants liability 55,000 (242,000)
Effective interest on convertible notes and debentures 246,505 379,719
Cumulative effect of change in accounting principle -- (413,546)
Bad debt expense (35,587) (51,981)
Common stock and equivalents issued for services 177,712 9,690
Stock based compensation 45,936 99,351
Unrealized foreign exchange (gain) loss (3,718) --
----------- ---------
$ (478,038) $(604,663)
Net changes in non-cash working capital
Marketable securities 19,461 --
Accounts receivable 28,688 44,296
Prepaid expenses 17,722 51,955
Accounts payable (61,926) (362,252)
Accrued payroll liabilities (67,529) (35,099)
Accrued interest on notes payable 2,878 3,140
Accrued interest on convertible notes -- 132,112
Deferred revenue 117,150 (19,259)
----------- ---------
CASH PROVIDED BY (USED IN) OPERATIONS $ (421,594) $(789,770)
----------- ---------
FINANCING ACTIVITIES
Issuance of common stock and warrants (net) 390,920 173,993
Issuance of convertible debenture (net) -- 479,960
Issuance of notes payable 97,034 100,347
Repayment of convertible notes (100,000) (181,000)
Repayment of capital lease obligation (6,509) (3,742)
Repayment of bank indebtedness (5,168) (5,851)
----------- ---------
CASH PROVIDED BY (USED IN) FINANCING $ 376,277 $ 563,707
----------- ---------
INVESTING ACTIVITIES
Property and equipment (11,172) (17,600)
Proceeds on disposition of property and equipment 1,243 34,585
----------- ---------
CASH PROVIDED BY (USED IN) INVESTING $ (9,929) $ 16,985
----------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (55,246) (209,078)
Cash and cash equivalents, beginning of period 126,618 338,448
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 71,372 $ 129,370
=========== =========
The Accompanying Notes Are An Integral Part
Of These Unaudited Financial Statements.
5
Stockgroup Information Systems Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 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 Stockhouse and Smallcapcenter
financial web sites.
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 and nine-month periods
ended September 30, 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 annual
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 $1,112,708 for the
nine months ended September 30, 2002, has a shareholders' deficiency of
$1,480,153 and had a working capital deficiency of $581,238 as at September 30,
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 achieve profitable
operations and positive cash flows in early 2003. 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 achieving a profitable level of
operations and 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.
6
2. CONVERTIBLE NOTES
----------------------------------------------------------------------------------------
September 30, 2002 December 31, 2001
----------------------------------------------------------------------------------------
Convertible notes, maturing December 31, 2005
Principal $ 1,724,000 $1,924,000
Prepayment premium -- 288,600
Interest -- 296,636
Unamortized debt discount (169,832) --
----------------------------------------------------------------------------------------
Subtotal $ 1,554,168 $2,509,236
Current portion 100,000 2,509,236
Long term portion 1,454,168 --
========================================================================================
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. $23,340 was paid on June 28, 2002, $76,660 was paid on
July 12, 2002, and $20,000 was paid on October 1, 2002. Separate payments of
$20,000 are due at the end of each of the next nine 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 interest-free period ending December 31, 2003.
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.
7
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 3A and 3B
warrants. The exercise price of the Series 3A warrants has been reduced from
$1.00 to $0.25. The exercise price of the Series 3B warrants has been reduced
from $2.00 to $0.50. The expiry date for both the Series 3A and 3B 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 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 September 30, 2002, in addition to the 15,943,846 common shares outstanding,
there were also 2,510,700 stock options and 3,331,818 warrants outstanding.
Issues of common shares and common share equivalents for the nine month period
ended September 30, 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.
8
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.
On June 28, 2002, the Company issued 2,080,000 common shares with a fair value
of $424,320 to Stockhouse Media Corporation pursuant to an asset purchase
agreement. The shares are being held in escrow until certain terms of the
agreement are met.
On September 23, 2002, the Company issued 68,078 common shares with a fair value
of $10,212 to an employee for services rendered.
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.
--------------------------------------------------------------------------------
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 (1,593,578) 1,593,578 0.15 - 0.40
Options forfeited 897,700 (897,700) 0.20 - 2.75
Options exercised -- (601,078) 0.15 - 0.25
--------------------------------------------------------------------------------
Balance at September 30, 2002 1,195,278 2,510,700 $0.01 - 2.50
================================================================================
9
Warrants
As at September 30, 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 September Price Date
1, 2002 30, 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 For the nine months ended
September September September September
30, 2002 30, 2001 30, 2002 30, 2001
--------------------------------------------------------------------------------------------
Public Company
Disclosure and
Awareness Products $360,692 $ 542,466 $ 888,058 $1,329,466
Financial Software and
Content Systems 202,789 173,646 525,367 406,281
E-business Solutions -- 15,523 -- 617,266
--------------------------------------------------------------------------------------------
$563,481 $ 731,635 $1,413,425 $2,353,013
============================================================================================
During the first nine months of 2002, the Company had one customer from whom
revenue received by the Company represented approximately 11% of total revenue.
During the first nine months 2001, the Company had two customers from whom
revenue received by the Company represented approximately 35% of total revenue.
No other customers represented greater than 10% of revenue.
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
10
and any settlement or final award will be reflected in the statement of
operations as the litigation is resolved.
8. ASSET ACQUISITION
On June 24, 2002, the Company acquired certain website and related software
assets of Stockhouse Media Corporation ("Stockhouse"). Under the terms of the
agreement, the Company purchased a 65% interest in the assets by issuing
2,080,000 shares of unregistered common stock with a fair value of $424,320. The
assets acquired are program source codes underlying the website, which are
classified as software, for $347,122, and prepaid operating costs of $77,198.
The prepaid operating costs of $77,198 were expensed fully in the quarter ended
September 30, 2002. The software is being amortized over a three year period.
Presently, an unrelated third party investor is also considering an investment
in Stockhouse that would effect certain terms and conditions of the Company's
agreement with Stockhouse. If the third party invests in Stockhouse, then the
Company would maintain its 65% interest in the acquired assets but would then
have the option to acquire the remaining 35% during the period of one year
following June 24, 2004. During the same period, Stockhouse would also have the
option to cause the Company to purchase the remaining 35% interest.
If the third party does not invest in Stockhouse, then the Company will
immediately have the option to acquire the remaining 35% of the website and
related software assets of Stockhouse with the issuance of additional common
shares. As per the terms of the agreement, the number of common shares to be
issued for the remaining 35% shall not be less than 920,000 shares and not more
than 1,120,000 shares.
The third party had a deadline of September 30, 2002 to decide whether or not to
invest in Stockhouse. As of the date of this filing, the deadline had been
informally extended.
The original 2,080,000 common shares were issued into an escrow account on June
28, 2002 and will be released to Stockhouse on the date the third party investor
makes its decision.
9. NOTES PAYABLE
On July 23, 2002 the Company's Canadian subsidiary issued a C$152,400 promissory
note to a lender. Net proceeds after financing costs were C$149,400. The Note
carries an interest yield of 17% and matures June 30, 2003. Interest is
calculated and paid monthly. The note is secured by a floating charge over the
subsidiary's assets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30,
2001
The results of the first nine months 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. In the first
quarter we restructured our convertible notes, converted our convertible
debentures to equity, and raised $0.4M. Near the end of the second quarter we
acquired the Stockhouse website in a non-cash transaction which added to the
already improved balance sheet from the first quarter. In the third quarter we
integrated the Stockhouse websites into our infrastructure, and with the
exception of a certain increase in bandwidth and equipment items, we have
substantially eliminated the incremental costs of the Stockhouse website. We are
now in position to capitalize on the potential revenue of this asset.
We continued to acquire additional twelve and twenty-four month customers for
our Financial Software and Content Systems, which will continue to grow our
recurring revenue stream.
11
Overall sales are down from the first nine months of 2001, primarily due to the
discontinuation of our E-Business in 2001, but there is a marked improvement in
all year to date expense areas. Like most companies who are involved in the
financial markets, parts of our business have been negatively affected by the
downturn in the stock market. We have adapted accordingly, as discussed in more
detail below.
Revenue and Gross Profits
Total revenues in the first nine months of 2002 were $1.413 million compared to
$2.353 million in the first nine months 2001, a decrease of $0.940 million, or
40%. Our Public Company Disclosure and Awareness Products revenue was $0.888
million compared to $1.329 million in the first nine months 2001, a decrease of
$0.441 million or 33%. Financial Software and Content Systems revenue was $0.525
million compared to $0.406 million in the first nine months 2001, an increase of
$0.119 million or 29%. E-Business Solutions revenue was nil in the first nine
months 2002 compared to $0.617 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 nine months of 2002 were $0.858 million compared to
$1.409 million in the first nine months 2001, a decrease of $0.551 million, or
39%. Gross profit as a percentage of sales was 60.7% and 59.9% for the
nine-months periods ended September 30, 2002 and 2001 respectively.
We are continuing to provide innovative products in our Public Company
Disclosure and Awareness Products line, and the IntegratIR sales remain strong,
delivering high value to customers. Historically, many of our Public Company
Disclosure and Awareness Products customers have come from the technology
sector, and the slowdown in this sector has caused considerable attrition. As
well, part of the product line has been affected adversely as public companies
reduced or eliminated spending on their awareness products. However, we continue
to sign new agreements for our disclosure products with major corporations. We
have been diversifying our target market for some time in order to be less
dependent on any one sector. We feel that this area of the business will rebound
fully when the financial markets begin to recover from their current slowdown.
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 to customers
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 already seen significant results. Financial
Software and Content Systems revenue was up this nine month period 29% over the
same period a year ago, and up 23% quarter over quarter from the second quarter
2002. All of this revenue is contractual, typically in 24-month terms, so we
have a solid base of revenue in this area to grow from.
E-business Solutions revenue for the first nine months 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 nine months of 2002. We have instead decided to
focus our energy on more stable, predictable revenue streams, such as Public
Company Disclosure and Awareness Products and Financial Software and Content
Systems, which ultimately will be more profitable.
Operating Expenses
Total operating expenses in the first nine months of 2002 were $1.638 million
compared to $2.113 million in the same nine months last year, a decrease of
$0.475 million or 22%. This decrease was a result of the reductions in all areas
of expenditures that we made in 2001 and continued in 2002. We have stabilized
our operating expenses at a level which
12
will enable us to grow our sales efficiently, thereby generating the greatest
return on investment.
Sales and Marketing expenses were $0.365 million in the first nine months of
2002 compared to $0.423 million in the first nine months 2001, a decrease of
$0.058 million, or 14%. This area of the expenses decreased slightly and should
remain relatively flat for the near future.
Product Development expenses in the first nine months of 2002 were $0.063
million compared to $0.175 million in the first nine months 2001, a decrease of
$0.112 million, or 64%. As our business has matured, product development has
naturally taken a lesser role. Our staff is more experienced, and our processes
for developing new products are streamlined so that overall development costs
are minimized.
General and Administrative expenses in the first nine months of 2002 were $1.209
million compared to $1.515 million in the first nine months 2001, a decrease of
$0.306 million, or 20%. Expenses steadily declined during 2001 and stabilized in
2002 at a lower level that can still 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 nine months of 2002 was $0.265 million compared to
$0.526 million in the first nine months 2001, a decrease of $0.261 million, or
50%. Of the amount for the first nine months of 2002, $0.019 million 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 $0.018 million, plus amortized debt discount
in Q2 and Q3 totaling $0.068 million. Upon conversion of the remaining balance
of the 3% convertible debentures there was a total non-cash interest expense of
$0.160 million.
Loss on warrants liability of $0.055 million 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 nine months 2002 and the same nine
months 2001. Due to our net loss position, we did not incur tax in the first
nine months of 2002. As at the most recent year end, Stockgroup had tax loss
carry forwards of $5.751 million in Canada which expire in 2006, 2007, and 2008,
and tax loss carry forwards of $2.916 million in the U.S. which expire in 2019,
2020, and 2021.
Extraordinary gain on restructuring of convertible notes was $1.088 million for
the first nine months 2002 and nil in the first nine months 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 loss for the first nine months of 2002 was $0.024 million compared to a
loss of $0.490 million in the first nine months 2001, an increase of $0.466
million or 95%.
LIQUIDITY AND CAPITAL RESOURCES
Stockgroup ended the third quarter of 2002 with cash and cash equivalents of
$71,372, a decrease of $74,935 from June 30, 2002. This compares with a net cash
decrease of $110,324 in Q2 2002, and net cash increases of $130,013 in Q1 2002,
$19,062 in Q4 2001 and $14,698
13
in Q3 2001. Although we expect to generate positive cash flow from operations,
we are pursuing financing to improve our working capital position and to grow
the business to the greatest possible extent.
Our cash flows from operations for the first nine months of 2002 were
$(421,594). We raised $390,920 net in equity financing in Q1, and $97,034 in a
notes payable issuance in Q3. We repaid $100,000 of our convertible notes as per
the restructuring agreement described in Note 2 to the financial statements.
Other uses of cash were repayment of capital lease and bank debt, totaling
$11,677, and property and equipment acquisitions, net of proceeds of disposal,
of $9,929.
You should be cautioned that there can be no assurance that revenue, margins,
and profitability will increase. In addition, we have cash payments due to
certain of the noteholders on October 1, 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 will 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 DURING THE PERIOD
A synopsis of corporate highlights for 2002 is as follows:
1. On February 11, 2002, we announced an agreement with Freedom Communications,
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 6, 2002, we restructured the 8% 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 20, 2002 which fully describes the restructured notes.
3. On February 21, 2002, we announced 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
3% 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 3A warrants has been reduced from $1.00 to $0.25. The
exercise price of the Series 3B warrants has been reduced from $2.00 to $0.50.
The expiry date for both the Series 3A and 3B warrants has been extended to July
31, 2005.
5. On March 19, 2002, we announced 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 $0.410M 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 31, 2003. 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.
14
7. On June 24, 2002, we completed an agreement with Stockhouse Media
Corporation, in which we acquired certain of Stockhouse's assets. On June 28,
2002, we issued 2,080,000 common shares to Stockhouse as part of the agreement.
The shares are being held in escrow until certain terms of the agreement are
met. We filed a form 8-K on July 11, 2002 which fully describes the agreement.
8. On October 8, 2002, we announced a licensing agreement with National Bank
Financial to build a customized solution to provide online market data to their
clients. National Bank Financial is one of the leading securities dealers in
Canada.
DESCRIPTION OF BUSINESS MODEL
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 primarily investor awareness and disclosure products for public
companies, and advertising on Stockhouse. These products are purchased by
companies in all industries as a means of generating public interest in their
company or products. A more detailed discussion of our products follows in the
Products and Services section.
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.
15
From late 1999 to early 2001 we were hired to create several large enterprise
web sites for different clients 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 to improve profitability
and cash flow.
On June 24, 2002, we acquired the Stockhouse website and related assets. These
assets added a new dimension to our business, that being a high-traffic, highly
recognized financial community. We immediately went to work marketing products
and services which leverage the Stockhouse assets. While Stockhouse began
contributing to our sales revenue in the third quarter of 2002, the benefits
have not yet been fully realized, and we expect solid growth in this area of the
business in coming quarters.
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 we license 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 delivered and
customized, and at a substantial costs savings to having the customer build and
manage it internally.
16
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:
o Real-time stock quotes on major U.S. exchanges
o North American 20-minute delayed stock quotes and indices
o Portfolio management, live portfolio updates and wireless portfolio
updates
o Most active stock updates
o Stock watch lists
o Company fundamentals, SEC/SEDAR filings
o Daily stock market winners/losers, most actives
o Company profiles, stock screening (investment data) and technical stock
analysis
o Employee stock option calculations
The Financial Software and Content Systems is delivered to customers in four
different formats:
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
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 Through secured Extensible Markup Language (XML) channel
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.
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 investor interest in their company, c) improve their public disclosure
compliance, or d) advertise and promote their products and services.
Products and services offered by this revenue stream include the IntegratIR
software system, Investor Marketplace, E-Mail Distribution of Press Releases,
Sector Supplements, At The Bell/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-
17
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 2.01 of 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 is used to disseminate news releases to an
exclusive list of opt-in investors and interested parties.
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 At The Bell/Smallcap Express daily market recap mailings that
goes to a large audience of e-mail readers who have signed up to receive it
through Stockhouse and Smallcapcenter. A client who sponsors At The
Bell/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, both on Stockhouse and on
Smallcapcenter, is a growing part of our business since the acquisition of
Stockhouse. Stockhouse is a high traffic financial community. Research has shown
that our traffic is composed of a high income demographic of active investors.
This demographic is very attractive to advertisers. The Smallcapcenter
demographic, which shares those characteristics, attracts a group whose interest
is high-growth stocks. The combination of these two websites gives us a
tremendous number of sales options.
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
and acquired by Stockgroup host the
18
critical mass to ensure a high level of exposure to our Public Company
Disclosure and Awareness Products.
SHARE PRICE AND VOLUME DATA
The Company's Common Stock has been quoted for trading on the OTC Bulletin Board
since March 17, 1999. The following table sets forth high and low bid prices for
the Common Stock for the three-month periods ended December 31, 2001, March 31,
June 30, and September 30, 2002. These prices represent quotations between
dealers without adjustment for retail markup, markdown or commission and may not
represent actual transactions.
Quarter Ended: High Low Volume
December 31, 2001 $0.200 $0.115 1,977,800
March 31, 2002 $0.400 $0.140 5,509,300
June 30, 2002 $0.230 $0.150 2,734,400
September 30, 2002 $0.200 $0.125 1,785,900
On September 30, 2002, the Company had 71 registered shareholders owning
15,943,846 shares.
DIVIDENDS
The Company has not declared any dividends since inception, and has no intention
of paying any cash dividends on its Common Stock in the foreseeable future. The
payment by the Company of dividends, if any, in the future, rests with the
discretion of its Board of Directors and will depend, among other things, upon
the Company's earnings, its capital requirements and its financial condition, as
well as other relevant factors.
Item 4. Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Stockgroup's Chief Executive Officer and Chief Financial Officer have evaluated
the company's disclosure controls and procedures as of November 1, 2002, and
they concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There are no significant changes in internal controls or in other factors that
could significantly affect these controls subsequent to November 1, 2002
19
Part II. OTHER INFORMATION
Item 1. 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 October 25, 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.
Item 2. Changes in Securities and Use of Proceeds
On February 6, 2002, we restructured our 8% convertible notes. This transaction
is fully described in Note 2 to the financial statements, included herein.
On March 15, 2002, the holders of our 3% convertible debentures converted the
final $200,000 of principal and $6,904 of accrued interest into 413,808 common
shares. This transaction is fully described in Note 3 to the financial
statements, included herein.
On March 28, 2002, we 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. This transaction is fully described in Note 5 to
the financial statements, included herein.
On June 24, 2002, we acquired certain of Stockhouse's assets. On June 28, 2002,
we issued 2,080,000 common shares to Stockhouse as part of the agreement. The
shares are being held in escrow until certain of the covenants of the agreement
are met. We filed a form 8-K on July 11, 2002 which fully describes the
agreement.
Other equity transactions for the period are fully described in Note 5 to the
financial statements, included herein.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On September 19, 2002, the Company held its annual general meeting
in San Francisco, California.
(b) The existing board of directors was re-elected in its entirety.
(c) Votes were also cast to
(i) Appoint Ernst & Young LLP as the Company's auditors
(ii) Approve the 2002 Stock Option Plan
Votes were cast as set out in the table below.
--------------------------------------------------------------------------------
YES NO ABSTAIN
--------------------------------------------------------------------------------
1. Election of directors
Marcus New 9,955,170 0 20,590
Craig Faulkner 9,953,170 0 22,590
Leslie Landes 9,954,215 0 21,545
Louis deBoer 9,954,020 0 21,740
David Caddey 9,955,020 0 20,740
Jeffrey Berwick 9,955,020 0 20,740
2. Appointment of Ernst & Young LLP 9,669,065 291,195 15,500
3. Approval of 2001 Stock Option Plan 6,008,393 211,826 30,600
4. Other matters 9,848,069 107,296 20,395
20
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
On February 20, 2002, we filed an 8-K regarding the restructuring of
the 8% convertible notes issued on April 3, 2000. This restructuring
is described completely in Note 2 to the financial statements
included herein.
On March 26, 2002, we filed an 8-K regarding our $0.410M private
placement which is described in Note 5 to the financial statements
included herein.
On July 11, 2002, we filed an 8-K regarding our acquisition of
certain assets of Stockhouse Media Corporation.
No other reports on form 8-K have been filed in 2002.
(b) CEO Section 906 Certification (page 24)
(c) CFO Section 906 Certification (page 25)
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STOCKGROUP INFORMATION SYSTEMS INC.
(Registrant)
Date: November 7, 2002 By: /s/ David Gillard, CGA
----------------------------------------
Chief Financial Officer, Secretary &
Treasurer
22
CERTIFICATIONS
CERTIFICATION
I, Marcus New, CEO, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stockgroup
Information Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any correction actions with regard to significant deficiencies and
material weaknesses.
Date: November 7, 2002
/s/ Marcus New
----------------------------------------
Marcus New
Chief Executive Officer
23
CERTIFICATION
I, David Gillard, CFO, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stockgroup
Information Systems Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any correction actions with regard to significant deficiencies and
material weaknesses.
Date: November 7, 2002
/s/ David Gillard
----------------------------------------
David Gillard, CGA
Chief Financial Officer
24
Exhibit (b) - Section 906 Certification of CEO
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
ss.906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Stockgroup Information Systems Inc.
(the "Company") on Form 10-QSB for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Marcus New, Chief Executive Officer of the Company, pursuant to 18 U.S.C. ss.
1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, hereby
certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of ss. 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Marcus New
------------------------------
Marcus New
Chief Executive Officer
November 7, 2002
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
25
Exhibit (c) - Section 906 Certification of CFO
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
ss.906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Stockgroup Information Systems Inc.
(the "Company") on Form 10-QSB for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, David Gillard, Chief Financial Officer of the Company, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
hereby certify that to the best of my knowledge:
(1) The Report fully complies with the requirements of ss. 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ David Gillard
------------------------------
David Gillard
Chief Financial Officer
November 7, 2002
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
26