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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 1-13588
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THE WIDECOM GROUP INC.
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(Exact Name of Registrant as specified in Its Charter)
ONTARIO, CANADA 98-0139939
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
72 DEVON ROAD, UNIT 17-18, BRAMPTON, ONTARIO, CANADA L6T 5B4
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (905) 712-0505
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Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report.
Indicate by check X 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
periods 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
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The number of shares outstanding of registrant's common stock as of
November 12, 1998 was 7,154,598 shares.
THE WIDECOM GROUP INC.
FORM 10-QSB
INDEX
Page No.
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Part I Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and September 30, 1997 3
Consolidated Statements of Operations -
Three and Six months ended September 30, 1998
and September 30, 1997 4
Consolidated Statements of Cash Flows -
Three and Six months ended September 30, 1998
and September 30, 1997 5
Notes to Consolidated Financial Statements 6-8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II Other Information
Item 2 Changes in Securities 9
Item 2 Reports on Form 8 - K 9
Signatures 10
PART I FINANCIAL INFORMATION
THE WIDECOM GROUP INC.
CONSOLIDATED BALANCE SHEET
(in United States dollars)
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
(unaudited) (unaudited)
============================================================================
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 392,849 $ 1,440,814
Accounts receivable 585,571 891,845
Research and development grants receivable - 271,099
Prepaid expenses 89,140 100,338
Advance to related parties 167,767 117,430
Inventory (Note 3) 1,730,296 1,752,621
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Total current assets 2,965,623 4,574,147
Capital assets (Note 4) 1,506,737 1,655,485
Investment in affiliates 790,778 1,529,802
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Total assets $ 5,263,138 $ 7,759,434
============================================================================
Liabilities and Shareholders' Equity
Current liabilities
Bank indebtedness 305,398 316,380
Accounts payable and accrued liabilities 768,554 1,258,464
Loan from related parties (Note 5) 13,333 -
Convertible debentures (Note 6) 150,000 205,180
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Total current liabilities 1,237,285 1,780,024
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Shareholders' equity
Common shares (Note 7) $13,452,497 $12,622,985
Contributed surplus 159,825 159,825
Deficit (9,377,072) (6,801,738)
Cumulative translation adjustment (209,397) (1,662)
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4,025,853 5,979,410
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Total liabilities and shareholders' equity $ 5,263,138 $ 7,759,434
============================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
THE WIDECOM GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in United States dollars)
<TABLE>
<CAPTION>
For the three For the three For the six For the six
Months ended Months ended Months ended Months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
(unaudited) (unaudited) (unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product sales $ 635,955 $ 854,761 $1,254,050 $ 1,738,656
Cost of product sales 168,470 203,717 332,323 438,369
-----------------------------------------------------------
Gross profit 467,485 651,044 921,727 1,300,287
Research and development grants 301,285 - 405,799 -
Interest income 3,057 27,674 13,281 91,577
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Net revenue 771,827 678,718 1,340,807 1,391,864
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Expenses
Research and development - 28,288 - 116,036
Selling, general and administrative 743,033 847,955 1,458,674 1,813,200
Interest and bank charges 19,418 10,595 29,058 14,800
Management fees and salaries 81,620 92,367 157,254 209,982
Amortization 89,913 97,962 178,072 192,812
Foreign exchange loss 28,163 - 49,505 -
-----------------------------------------------------------
Total operating expenses 962,147 1,077,167 1,872,563 2,346,830
-----------------------------------------------------------
Operating income (loss) (190,320) (398,449) (531,756) (954,966)
-----------------------------------------------------------
Equity in (loss) of affiliate (67,055) (67,422) (197,333) (159,654)
Legal settlement costs - - - (375,000)
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Earnings (loss) before extraordinary item (257,375) (465,871) (729,089) (1,489,620)
Extraordinary item, net of tax - - - -
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Net earnings (loss) for the period $ (257,375) $ (465,871) $ (729,089) $(1,489,620)
==============================================================================================================
Loss per common share before
extraordinary item, basic and diluted $ (0.04) $ (0.08) $ (0.12) $ (0.27)
==============================================================================================================
Loss per common share, basic
and diluted $ (0.04) $ (0.08) $ (0.12) $ (0.27)
==============================================================================================================
Weighted average number of shares outstanding 6,162,731 5,565,251 6,162,731 5,565,251
==============================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
THE WIDECOM GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in United States dollars)
<TABLE>
<CAPTION>
For the six months ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
====================================================================================================
<S> <C> <C>
Cash provided by (used in)
Operating activities
Loss for the period before
extraordinary item $(729,089) $(1,489,620)
Add (deduct) items not requiring a cash outlay
Amortization 178,072 192,812
Foreign exchange loss 49,505 -
Equity in loss of affiliate 197,333 159,654
Net changes in non-cash working capital balances
related to operations
(Increase) in accounts receivable (50,297) (133,522)
Decrease in R & D grants receivable - 425,556
(Increase) in inventory (381,311) (548,621)
Increase (decrease) in accounts payable and accrued liabilities 30,529 (96,536)
(Increase) decrease in prepaid expenses (6,890) 209
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(712,148) (1,490,068)
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Investing activities
Purchase of capital assets (58,835) (115,886)
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(58,835) (115,886)
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Financing activities
Increase (decrease) in bank indebtedness 122,971 (14,173)
Shares issued for cash 200,000 2,150,499
Loan from related parties 13,333 -
Convertible debentures - 250,000
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336,304 2,386,326
Effect of exchange rate changes on cash 134,695 28,956
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Net increase (decrease) in cash during the period (299,984) 809,328
Cash and equivalents, beginning of period 692,833 631,486
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Cash and equivalents, end of period $ 392,849 $ 1,440,814
===================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
THE WIDECOM GROUP INC.
Item 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 1998, and the results of
operations for the three months ended September 30, 1998 and 1997 and
cash flows for the three months ended September 30, 1998. Interim
results are not necessarily indicative of results for full year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10QSB and do not contain certain
information included in the Company's audited consolidated financial
statements and notes for the fiscal year March 31, 1998.
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.
3. Inventories
Inventories are summarized as follows:-
<TABLE>
<CAPTION>
September September
30, 1998 30, 1997
-------------------------
<S> <C> <C>
Raw materials $1,055,218 $ 911,363
Work in progress 43,842 613,417
Finished goods 631,236 227,841
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Total inventories $1,730,296 $1,752,621
=========================
</TABLE>
4. Capital Assets
Capital assets consist of:
<TABLE>
<CAPTION>
September 30,, 1998 September 30, 1997
-------------------------- --------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
<S> <C> <C> <C> <C>
Machinery, plant and
Computer equipment $1,840,243 $ 929,033 $1,521,841 $ 571,111
Furniture and fixtures 106,477 47,219 180,862 57,902
Prototype and jigs 285,128 111,798 250,252 78,632
Land 55,436 - 60,850 -
Building under
construction 307,503 - 349,325 -
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$2,594,787 $1,088,050 $2,363,130 $ 707,645
=======================================================
Net book value $1,506,737 $1,655,485
========== ==========
</TABLE>
5. Loan from Related Parties
On September 20, 1998, Lakhbir S. Tuli, an independent consultant for
the Company, made a non-interest bearing loan to the Company in the
amount of $13,333 US dollars.
6. Convertible Debentures
On May 19, 1997, the Company completed a private offering of $250,000
of convertible debentures maturing on May 19, 1998. The convertible
debentures bear interest of 8% per annum. In addition, 50,000 warrants
also issued in conjunction with these convertible debentures. The
holder of the debentures has the right to convert at a conversion
price equal to the lower of $5 or 80% of the average closing bid price
of the Company's shares over the past 20 trading days. On February 11,
1998, $50,000 principal plus accrued interest was converted into
58,967 common shares. The warrants are exercisable over 3 years at an
exercise price of $4 per share. The value attributable to warrants is
not material. Included in accounts payable is accrued interest on the
debenture of $18,933. On April 24, 1998 the debenture holder converted
another $50,000 principal plus interest in to 68,850 of common shares.
The Company is currently in default for the repayment of its remaining
$150,000 debentures that came due on May 19, 1998.
7. Share Capital
On September 9, 1998, Raja S. Tuli, President and Chief Executive
Officer, Suneet S. Tuli, Executive Vice President and Secretary of the
Company, and Lakhbir S. Tuli, an independent consultant to the Company
and the father of Raja and Suneet Tuli, purchased, in the aggregate,
1,176,470 shares of the Company's Common Stock at $.17 cents US$ per
share in a private transaction in order to provide the Company with
funds for working capital.
8. Contingent Liabilities
(a) Statement of claims have been filed against the Company in 1997
alleging breach of contract and demanding specific performance,
claiming 240,000 shares and 160,000 warrants (after the reverse
stock split). The President had transferred 100,000 common
shares issued to individuals who provided marketing and related
services in 1992 and 1993. The individuals had attempted to
transfer 172,860 common shares to third parties. The Company's
President has entered into an indemnification agreement with the
Company whereby he would return up to 160,000 common shares for
cancellation to the extent the Company is required to issue any
such additional shares.
(b) The Company has a dispute with a legal firm for non-payment of
legal services for a total of approximately $77,000. The Company
has accrued approximately $32,000 for these services.
(c) A Statement of Claim has been filed against the Company in 1998
for breach of sales and royalty agreement and breach of
trademark and copyright issues in the amount of approximately
$15.85 million. The Company believes it has a good and
meritorious defense to this claim.
Loss, if any, on the claims in paragraph (b) and (c) will be recorded
when settlement is probable and the amount of the settlement is
estimable.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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 which were accrued as the
research and development expenses were incurred. As of January 1, 1996 cash
grants are only made to certain qualifying companies while non-qualifying
companies received grants in the form of reduction against taxes payable.
Because there was no certainty that the Company would be recognized as a
qualifying Company no income was accrued against research and development
expenses incurred for the period from January 1, 1996 to March 31, 1997. The
Company's claim for cash re-imbursement has been submitted, audited and paid
to the Company during the this quarter. The Company has consequently
recognized this revenue in this quarter.
During the quarter, the Company earned $3,057 interest on short-term
investments compared to $27,674 earned in the same period of 1997.
Results of Operations
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Revenues for the quarter ended September 30, 1998 were $940,297, an increase
of $57,862 or 6.55% as compared to $882,435 for the quarter ended September
30, 1997. Sales for the quarter ended September 30, 1998 were $635,955, a
decrease of $218,806 as compared to $854,761 for the quarter ended September
30, 1997.
Operating expenses for the quarter ended September 30, 1998 were $962,147, a
decrease of $115,020, or 10.67%, as compared to $1,077,167 for the quarter
ended September 30, 1997. Research and development expenses decreased from
$28,288 for the quarter ended September 30, 1997 to $nil for the quarter
ended September 30, 1998. Selling, general and administrative expenses for
the quarter ended September 30, 1998, decreased by $104,922 and decreased as
a percentage of revenues from 96.09% to 79.02%. The Company continues to
incur legal, administration, and other related costs associated with its
warrant call.
The Company's share of the loss incurred by the research and development
consortium (3294340 Canada Inc.) that had been formed on October 2nd. 1996,
for the quarter ended September 30, 1998, amounted to $67,055 as compared to
$67,422 for the quarter ended September 30, 1997.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund research and
development activities, acquisition of equipment and inventories and to
meeting operations expenses incurred in connection with the
commercialization of its products. Until the Company's initial public
offering, the Company had 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. At September 30, 1998, the Company had working capital of
$1,728,338, as compared to $2,794,123 at September 30, 1997. However, the
Company had only approximately $392,849 in unrestricted cash available
against current liabilities of $1,200,000. Accordingly, the Company has
experienced short-term capital deficiencies during the last fiscal year and
has entered into an agreement with an investment banking firm to arrange
$1,500,000 in debt and equity financing during the second quarter of fiscal
1999. There can be no assurance, however, that the financing will be
consummated. In addition, the Company is currently in default in payment of
$150,000 of convertible debentures that were due May 18, 1998. The Company
is attempting to arrange for a purchase and extension of these notes or, in
the alternative, will repay the notes out of the proceeds from the financing.
The Company's cash requirements in connection with the manufacture and
marketing of its products has been and will continue to be significant. The
Company does not presently have any material commitments for any additional
capital expenditures. The Company believes, based on its currently proposed
plans and assumptions, that the pending financing should satisfy its
contemplated cash requirements for the foreseeable future. In the event that
Company's plan or assumptions change, or prove to be incorrect, or if the
projected cash flows otherwise prove to be insufficient to fund operations
(due to unanticipated expenses, delay, problems or otherwise), the Company
may be required to seek additional financing . There can be no assurance
that any additional financing will be available to the Company if needed
on commercially reasonable terms, or at all.
Exhibits 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.
November 13, 1998 /s/ Suneet S. Tuli
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Date Suneet S. Tuli, Executive Vice President
/s/ Willem J.Botha
--------------------------
Willem J. Botha, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 392,849
<SECURITIES> 0
<RECEIVABLES> 585,571
<ALLOWANCES> 54,251
<INVENTORY> 1,730,296
<CURRENT-ASSETS> 2,965,623
<PP&E> 2,594,787
<DEPRECIATION> 1,088,050
<TOTAL-ASSETS> 5,263,138
<CURRENT-LIABILITIES> 1,237,285
<BONDS> 0
0
0
<COMMON> 13,452,497
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,263,138
<SALES> 1,254,050
<TOTAL-REVENUES> 1,673,130
<CGS> 332,323
<TOTAL-COSTS> 1,872,563
<OTHER-EXPENSES> 197,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,058
<INCOME-PRETAX> (729,089)
<INCOME-TAX> 0
<INCOME-CONTINUING> (729,089)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (729,089)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
