FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission file number:
December 31, 1996 1-13588
THE WIDECOM GROUP INC.
(Exact name of registrants as specified in its charter)
ONTARIO 98-0139939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
55 CITY CENTER DRIVE, SUITE 500, MISSISSAUGA, ONTARIO, CANADA, L5B 1M3
(Address of principal executive office, zip code)
905-566-0180
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 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
--- ---
As of February 18, 1997 the Company had 4,579,073 shares of its common
stock, $.01 par value outstanding.
PART l: FINANCIAL INFORMATION
Item 1. Financial Statements.
See Attachment A.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The Company's revenues are derived from product sales, which are
recognized when products are shipped. Prior to January, 1996 the company
was eligible for substantial research and development grants. As of January
1, 1996 grants are made as a reduction of taxes payable. As no taxes are
payable in the quarter, no grants have been recognized. This compares to
$94,810 recognized in the same period of the prior fiscal year.
During the quarter the Company earned $12,391 interest on short-term
investments. No interest was earned in the same period of 1995 as no funds
were available for investment.
Results of Operations
Quarter Ended December 31, 1996 Compared to Quarter Ended December 31, 1995
Revenues for the quarter ended December 31, 1996 were $376,861 an
increase of $32,993 or 9.59%, as compared to $343,868 for the quarter ended
December 31, 1995. Sales for the quarter ended December 31, 1996 were
$364,470, an increase of $115,412 as compared to $249,058 for the quarter
ended December 31, 1995. For the quarter ended December 31, 1995, sales of
the 36" WIDEfax Modular Unit and WIDEfax Scan accounted for approximately
46.10% and 32.60%, respectively, of the Company's product sales. For the
quarter ended December 31, 1996, sales of the WIDEfax Color Scan and WIDEfax
Scan accounted for approximately 72.30% and 24.70% respectively, of the
Company's sales. No revenues were recognized from government sponsored
research programs for the quarter ended December 31, 1996 as compared to
$94,810 for the quarter ended December 31, 1995.
Operating expenses for the quarter ended December 31, 1996 were
$1,179,624, an increase of $842,090, or 249.48%, as compared to $337,534
for the quarter ended December 31, 1995. Research and development expenses
decreased from $137,089 for the quarter ended December 31, 1995 to $91,828
for the quarter ended December 31, 1996. Selling, general and administrative
expenses for the quarter ended December 31, 1996 increased by $762,315 and
increased as a percentage of revenues from 43.45% to 241.92%. The increases
in absolute dollars and as a percentage of revenues were due to marketing
expenses associated with continued emphasis on product commercialization,
particularly the introduction of the next generation WIDEfax Scan and WIDEfax
Plotter and the expansion of the Company's administrative and sales staff and
offices in anticipation of expanding the Company's operations.
Nine Months Ended December 31, 1996 Compared to Nine Months Ended December
31, 1995
Revenues for the nine months ended December 31, 1996 were $1,328,648,
a decrease of $102,821 or 7.18%, compared to $1,431,469 for the nine months
ended December 31, 1995.
Operating expenses for the nine months ended December 31, 1996 were
$2,952,437, an increase of $1,667,437, or 129.76%, compared to $1,285,000
for the nine months ended December 31, 1995. Operating expenses also
increased as a percentage of revenues from 89.77% for the nine months ended
December 31, 1995 to 222.21% for the nine months ended December 31, 1996.
The increases in absolute dollars and as a percentage of revenues were due
to marketing expenses associated with continued emphasis on product
commercialization, particularly the introduction of the next generation
WIDEfax Scan and WIDEfax Plotter and the expansion of the Company's
administrative and sales staff and offices in anticipation of expanding the
Company's operations.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund research and
development activities, acquisition of equipment and inventories, and
marketing expenses incurred in connection with the commercialization of its
products. The Company has historically satisfied its working capital
requirements principally through the issuance of debt and equity securities,
government sponsored research and development grants and reimbursement and
cash flow from operations. During the quarter ended December 31, 1996 the
Company raised $340,000 (net) upon the conversion of warrants to common
shares. In light of the Company's current cash position, management expects
that additional equity capital will be required during the first several
months of 1997. The Company expects that such equity will be supplied by its
currently-ongoing warrant redemption program. There can be no assurance,
however, that sufficient equity will be raised by that program. Investors
should refer to the Risk Factors describing the Company's need for liquidity
in the Company's preexisting filings with the Securities and Exchange
Commission.
PART ll: OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27-Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WIDECOM GROUP INC.
Date February 18, 1997 /s/ Raja S. Tuli
------------------------- ----------------------------------------
Raja S. Tuli, President
Date February 18, 1997 /s/ Willem J. Botha
------------------------- ----------------------------------------
Willem J. Botha, Chief Financial Officer
THE WIDECOM GROUP INC.
CONSOLIDATED BALANCE SHEET
(in United States dollars)
(Unaudited)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---- ----
- ----------------------------------------------------------------------------
Assets
<S> <C> <C>
Current assets
Cash and short term investments $ 744,136 $ 6,131,223
Accounts receivable 698,394 377,354
Research and development grants receivable 703,358 699,371
Inventory 1,462,211 555,570
---------------------------
Total current assets 3,608,099 7,763,518
Capital assets 1,986,253 627,147
Investment in joint venture 1,786,892 -
Investment in affiliate 468,000 614,129
---------------------------
Total assets $ 7,849,244 $ 9,004,794
- ---------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Bank indebtedness $ 231,051 $ -
Accounts payable and accrued liabilities 409,027 542,938
Loan from non-management shareholders - 304,333
Deferred income taxes 62,659 -
---------------------------
Total current liabilities 702,737 847,271
Shareholders' equity
Common shares 9,872,294 8,266,528
Contributed surplus 159,825 159,825
Retained earnings (deficit) (2,800,464) (191,384)
Cumulative translation adjustment (85,148) (77,446)
---------------------------
7,146,507 8,157,523
---------------------------
Total liabilities and shareholders' equity $ 7,849,244 $ 9,004,794
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THE WIDECOM GROUP INC.
CONSOLIDATED STATEMENTS OPERATIONS For The Three For the Three For the Nine For the Nine
(in United States dollars) Months Ended Months Ended Months Ended Months Ended
(Unaudited) December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------- ------------- ------------ ------------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product sales $ 364,470 $ 249,058 $ 1,210,093 $ 1,179,731
Cost of sales 91,118 47,694 302,524 262,322
Gross profit 273,352 201,364 907,569 917,409
Research and development grants - 94,810 - 251,738
Interest income 12,391 - 118,555 -
Net revenue 285,743 296,174 1,026,124 1,169,147
Expenses
Research and development 91,828 137,089 501,666 494,998
Selling, general and administrative 911,711 149,396 2,001,125 420,060
Interest and bank charges 4,892 (3,666) 12,007 53,292
Compensation benefit on stock transaction - - - 166,974
Amortization 171,193 54,715 437,639 149,676
Total operating expenses 1,179,624 337,534 2,952,437 1,285,000
Operating income (loss) (893,881) (41,360) (1,926,313) (115,853)
Equity in earnings (loss) of joint venture (49,857) - (49,857) -
Debt discount - 255,478 - 255,478
Finance fees - 167,277 - 167,277
(49,857) 422,755 (49,857) 422,755
Earnings (loss) before income
taxes and extraordinary item (943,738) (464,115) (1,976,170) (538,608)
Provision for (recovery of)
income taxes
Current - - - -
Deferred - (63,200) - (63,200)
- (63,200) - (63,200)
Earnings (loss) before
extraordinary item (943,738) (400,915) (1,976,170) (475,408)
Extraordinary item, net of tax - 269,017 - 269,017
Net earnings (loss) for the period $ (943,738) $ (131,898) $(1,976,170) $ (206,391)
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share before
extraordinary item, primary and fully diluted $ (0.21) $ (0.14) $ (0.43) $ (0.19)
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share primary
and fully diluted $ (0.21) $ (0.05) $ (0.43) $ (0.08)
- ---------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 4,579,073 2,770,226 4,579,073 2,569,547
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THE WIDECOM GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine For the Nine
(in United States dollars) Months Ended Months Ended
(Unaudited) December, 31 December 31,
1996 1995
------------ ------------
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in)
Operating activities
Earnings (loss) for the period before
extraordinary item $(1,976,170) $ (475,408)
Add (deduct) items not requiring a cash outlay
Amortization 437,639 149,676
Deferred income taxes - 63,200
Accrued interest on IOC loan payable - (269,017)
Compensation benefit on stock transaction - 166,974
---------------------------
(1,538,531) (364,575)
Net changes in non-cash working capital balances
related to operations
(Increase) in accounts receivable (196,575) (17,986)
(Increase) in R & D grants receivable - (192,691)
(Increase) decrease in inventory (1,016,617) -
Increase in accounts payable 67,107 32,823
Other - (22,503)
Decrease (increase) in prepaid expenses - 37,008
---------------------------
(2,684,616) (527,924)
---------------------------
Investing activities
Purchase of capital assets (1,093,145) (264,930)
Purchase of equity in Joint Venture (1,836,750) -
---------------------------
(2,929,895) (264,930)
---------------------------
Financing activities
Increase (decrease) in bank indebtedness 100,593 (101,708)
Shares issued for cash 571,500 6,105,204
Advances (repayment) of Ontario Development Corporation loan - (214,290)
Loan from shareholders - 45,086
Shares issued in settlement of debt - 252,000
Shares issued for purchase of investment - 720,000
---------------------------
672,093 6,806,292
---------------------------
Effect of exchange rate changes on cash 43,063 18,526
---------------------------
Net increase (decrease) in cash during the period (4,899,355) 6,031,964
Cash and equivalents, beginning of period 5,643,491 99,259
---------------------------
Cash and equivalents, end of period $ 744,136 $ 6,131,223
- ---------------------------------------------------------------------------------------------
</TABLE>
The WideCom Group Inc.
Notes to Consolidated Financial Statements
(in United States dollars)
(Unaudited)
- -------------------------------------------------------------------------------
1. Presentation of Interim Information
In the opinion of Management the accompanying unaudited financial
statements include all normal adjustments necessary to present fairly
the financial position at December 31, 1996 and the results of
operations for the three months ended December 31, 1995 and 1996 and
cash flows for the nine months ended December 31, 1996. Interim
results are not necessarily indicative of results for full year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's audited consolidated financial
statements and notes for the fiscal year March 31, 1996.
- -------------------------------------------------------------------------------
2. Financial Statements
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany
balances, transactions and stockholdings have been eliminated.
The investment in an affiliate is accounted for on an equity basis and
the $720,000 excess of the purchase price over the underlying value of
the assets has been attributed to goodwill. The goodwill is being
amortized over five years resulting in amortization to date of
$252,000.
In November 1996, Company entered into a joint venture with Societe
Innovatech du Grand Montreal ("Innovatech") and two smaller companies
to establish a research and development consortium (the "Consortium").
The Company acquired a 45% stake in the Consortium in exchange for
approximately $1,836,749. This enables the Company to continue to
receive research and development grants, which should substantially
expand the amount of research and development that can be undertaken.
The Company and Innovatech have also entered into an agreement which
may permit the Company to acquire Innovatech's interest in the
Consortium in exchange for 253,000 shares of Company's common stock.
The investment in the Consortium is accounted for on the equity basis,
and the Company's 45% share of the operating loss in the Consortium
for the period ended December 31, 1996, is $49,857.
- -------------------------------------------------------------------------------
3. Inventories
Inventories are summarized as follows:-
<TABLE>
<CAPTION>
December December
31, 1996 31, 1995
---------- --------
<S> <C> <C>
Raw materials $ 427,464 $263,400
Work in progress 551,362 264,330
Finished goods 483,385 27,840
----------------------
Total inventories $1,462,211 $555,570
----------------------
- -------------------------------------------------------------------------------
</TABLE>
4. Capital Assets
Capital assets consist of:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------- ------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
---------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Machinery, plant and
computer equipment $1,606,318 $ 387,612 $577,570 $ 50,302
Furniture and fixtures 94,106 27,657 119,803 19,924
Motor vehicles 64,069 10,893
Prototype and jigs 440,432 95,923
Land 66,881
Building under
construction 236,532
----------
$2,508,338 $ 522,085 $697,373 $ 70,226
--------------------------------------------------
Net book value $1,986,253 $627,147
------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
5. Share Capital
Changes to issued share capital:
During the period ended December 31, 1996, 145,000 of the 840,000
Bridge warrants were converted to Common shares, for proceeds of
$571,500.
- -------------------------------------------------------------------------------
6. Contingent Liabilities
Statements of claims have been filed against the Company with respect
to the following matters:
Claims for non-payment of invoices in the amount of $185,000. The first
claim in the amount of $75,000 has been made by a printer who provided
printing services for the Company. The Company has accrued $40,000 for
such claim. The second claim in the amount of $110,000 relates to
invoices for accounting services provided by an accounting firm. The
Company has accrued $35,000 for this claim.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 744,136
<SECURITIES> 0
<RECEIVABLES> 698,394
<ALLOWANCES> 5,349
<INVENTORY> 1,462,211
<CURRENT-ASSETS> 3,608,099
<PP&E> 1,986,253
<DEPRECIATION> 522,085
<TOTAL-ASSETS> 7,849,244
<CURRENT-LIABILITIES> 702,737
<BONDS> 0
0
0
<COMMON> 4,579,073
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,849,244
<SALES> 364,470
<TOTAL-REVENUES> 285,743
<CGS> 91,118
<TOTAL-COSTS> 1,270,742
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,892
<INCOME-PRETAX> (943,738)
<INCOME-TAX> 0
<INCOME-CONTINUING> (943,738)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (943,738)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
