===========================================================================
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 December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from_________________to_________________
Commission file number 1-13588
THE WIDECOM GROUP INC.
(Exact Name of Registrant as specified in Its Charter)
ONTARIO, CANADA 98-0139939
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
72 DEVON ROAD, UNIT 17-18, L6T 5B4
BRAMPTON, ONTARIO, CANADA
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (905) 712-0505
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 ____
The registrant's shareholders approved a one for four (1:4) reverse
stock split and as a result, the number of shares outstanding of registrant's
common stock as of February 17, 1999 was 1,788,649 shares.
<PAGE> 1 of 11
THE WIDECOM GROUP INC.
FORM 10-QSB
INDEX
Page No.
Part I Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets -
December 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three and Nine months ended December 31, 1998
and December 31, 1997 4
Consolidated Statements of Cash Flows -
Nine months ended December 31, 1998
and December 31, 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 5 Other Information 10
Signatures 11
<PAGE> 2 of 11
PART I FINANCIAL INFORMATION
THE WIDECOM GROUP INC.
CONSOLIDATED BALANCE SHEET
(in United States dollars)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 130,687 $ 946,858
Accounts receivable 723,509 840,954
Research and development grants receivable - 261,737
Prepaid expenses 92,017 75,719
Advance to related parties 160,273 113,374
Inventory (Note 3) 1,734,772 1,619,445
--------------------------
Total current assets 2,841,258 3,858,087
Capital assets (Note 4) 1,418,033 1,518,233
Investment in affiliates 722,180 1,361,736
--------------------------
Total assets $ 4,981,471 $ 6,738,056
==========================
Liabilities and Shareholders' Equity
Current liabilities
Bank indebtedness 270,457 319,821
Accounts payable and accrued liabilities 779,108 1,155,484
Loan from related parties (Note 5) 13,333 -
Convertible debentures (Note 6) 150,000 198,094
--------------------------
Total current liabilities 1,212,898 1,673,399
--------------------------
Shareholders' equity
Common shares (Note 7) $13,452,497 $12,511,730
Contributed surplus 159,825 159,825
Deficit (9,554,752) (7,311,473)
Cumulative translation adjustment (288,997) (295,425)
--------------------------
3,768,573 5,064,657
--------------------------
Total liabilities and shareholders'
equity $ 4,981,471 $ 6,738,056
==========================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 3 of 11
THE WIDECOM GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in United States dollars)
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
Months ended Months ended Months ended Months ended
December 31 December 31, December 31, December 31,
1998 1997 1998 1997
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Product sales $ 646,081 $ 821,436 $1,914,231 $ 2,552,102
Cost of product sales 161,520 205,359 493,559 698,980
-------------------------------------------------------------
Gross profit 484,561 616,077 1,420,672 1,853,122
Research and development grants 78,235 - 480,630 -
Interest income 1,053 16,365 15,269 107,240
-------------------------------------------------------------
Net revenue 563,849 632,442 1,916,571 1,960,362
-------------------------------------------------------------
Expenses
Research and development - 18,671 - 134,898
Selling, general and administrative 520,498 771,733 1,973,682 2,567,294
Interest and bank charges 11,087 6,282 40,095 20,652
Management fees and salaries 53,691 93,091 210,265 302,941
Amortization 86,839 98,107 264,851 281,858
Foreign exchange loss 21,344 - 70,849 -
-------------------------------------------------------------
Total operating expenses 693,459 987,884 2,559,742 3,307,643
-------------------------------------------------------------
Operating income (loss) (129,610) (355,442) (643,171) (1,347,281)
-------------------------------------------------------------
Equity in (loss) of affiliate (67,126) (117,003) (263,597) (277,073)
Legal settlement costs - - - (375,000)
-------------------------------------------------------------
Earnings (loss) before extraordinary item (196,736) (472,445) (906,768) (1,999,354)
Extraordinary item, net of tax - - - -
-------------------------------------------------------------
Net earnings (loss) for the period $ (196,736) $ (472,445) $ (906,768) $(1,999,354)
=============================================================
Loss per common share before
extraordinary item, basic and diluted $ (0.12) $ (0.34) $ (0.56) $ (1.44)
=============================================================
Loss per common share, basic
and diluted $ (0.12) $ (0.34) $ (0.56) $ (1.44)
=============================================================
Weighted average number of shares outstanding 1,623,338 1,391,313 1,623,338 1,391,313
=============================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 4 of 11
THE WIDECOM GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in United States dollars)
<TABLE>
<CAPTION>
For the nine months ended
----------------------------
December 31, December 31,
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash provided by (used in)
Operating activities
Loss for the period before
extraordinary item $(906,768) $(1,999,354)
Add (deduct) items not requiring a cash outlay
Amortization 264,851 281,858
Foreign exchange loss 70,849 -
Equity in loss of Joint Venture 263,597 277,073
Net changes in non-cash working capital
Balances related to operations
(Increase) in accounts receivable (191,317) (112,146)
Decrease in R & D grants receivable - 423,173
(Increase) in inventory (380,913) (470,958)
Increase (decrease) in accounts payable and
accrued liabilities 41,967 (157,106)
(Increase) decrease in prepaid expenses (9,860) 21,927
--------------------------
(847,594) (1,735,533)
--------------------------
Investing activities
Purchase of capital assets (58,749) (187,470)
--------------------------
(58,749) (187,470)
--------------------------
Financing activities
Increase (decrease) in bank indebtedness 86,031 656
Shares issued for cash 200,000 2,150,499
Loan from related parties 13,333 -
Convertible debentures - 250,000
--------------------------
299,364 2,401,155
--------------------------
Effect of exchange rate changes on cash 44,833 (162,780)
--------------------------
Net increase (decrease) in cash during
the period (562,146) 315,372
Cash and equivalents, beginning of period 692,833 631,486
--------------------------
Cash and equivalents, end of period $ 130,687 $ 946,858
==========================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 5 of 11
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 December 31, 1998, and the results of operations for
the three months ended December 31, 1998 and 1997 and cash flows for the
nine months ended December 31, 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>
December December
31, 1998 31, 1997
-------- --------
<S> <C> <C>
Raw materials $1,018,699 $ 728,751
Work in progress 47,697 631,583
Finished goods 668,376 259,111
------------------------
Total inventories $1,734,772 $1,619,445
========================
</TABLE>
<PAGE> 6 of 11
4. Capital Assets
Capital assets consist of:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------- -------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Machinery, plant and
Computer equipment $1,838,294 $1,002,900 $1,522,895 $ 634,001
Furniture and fixtures 106,331 50,358 108,393 39,113
Prototype and jigs 284,737 120,642 230,858 81,510
Land 55,360 - 56,134 -
Building under -
construction 307,211 - 354,577 -
------------------------------------------------------
$2,591,933 $1,173,900 $2,272,857 $ 754,624
======================================================
Net book value $1,418,033 $1,518,233
========== ==========
</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 $22,028. 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.
<PAGE> 7 of 11
7. Share Capital
(a) 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.
(b) On January 27, 1999, the outstanding common shares of the Company
were backsplit 1 for 4. These changes have been treated retroactive
to all prior period share information and earnings per share
calculations.
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.
<PAGE> 8 of 11
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.
While the Company has received government grants in the past, it does not
meet the required pre-qualification for such grants subsequent to
conducting its public offering. In consideration of this, the Company has
shifted its research and development to an affiliated joint venture based
in Montreal, Canada. During the quarter, the Company earned $1,053 interest
on short-term investments compared to $16,365 earned in the same period of
1997.
Results of Operations
Quarter Ended December 31, 1998 Compared to Quarter Ended December 31,1997
Revenues for the quarter ended December 31, 1998 were $725,369, a decrease
of $112,432 or 13.42 % as compared to $ 837,801 for the quarter ended
December 31, 1997. Sales for the quarter ended December 31,1998 were
$646,081, a decrease of $175,355 as compared to $821,436 for the quarter
ended December 31,1997.
Operating expenses for the quarter ended December 31,1998 were $693,459, a
decrease of $294,425, or 29.80%, as compared to $987,884 for the quarter
ended December 31,1997. Research and development expenses decreased from
$18,671 for the quarter ended December 31,1997 to nil for the quarter
ended December 31,1998. Selling, general and administrative expenses for
the quarter ended December 31,1998, decreased by $251,235 and decreased as
a percentage of revenues from 92.11% to 71.76%. 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 December 31, 1998, amounted to $67,126 as compared to
$117,003 for the quarter ended December 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 December 31, 1998, the Company had working capital of
$1,628,360, as compared to $2,184,688 at December 31, 1997. However, the
Company had only approximately $130,687 in unrestricted cash available.
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 fourth 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.
<PAGE> 9 of 11
Part II
Item 5. Other Information.
A.
At the Annual Meeting of Shareholders held on January 27, 1999, the
shareholders approved a proposal to amend the Articles of Incorporation to
effect a one-for-four (1:4) reverse stock split ("Reverse Stock Split") of
the Company's Common Stock, $.01 par value per share, whereby four shares
of Common Stock currently outstanding, will be exchanged for one new share
of Common Stock. The Reverse Stock Split was effective on January 29, 1999
("Effective Date").
All fractional shares resulting from the Reverse Stock Split will be
settled in cash. The Reverse Stock Split will not affect the par value of
the Common Stock. There are presently 20,000,000 shares of Common Stock,
$.01 par value per share, authorized by the Company's Articles of
Incorporation. Because the number of authorized shares of Common Stock was
not reduced when the Reverse Stock Split was effected, these shares will be
available for issuance without any further shareholder approval. As of the
Record Date, there were 7,154,598 shares of Common Stock issued and
outstanding and 2,462,460 shares of Common Stock reserved for issuance upon
the conversion or exercise of various securities of the Company.
Currently, the number of shares of Common Stock issued and outstanding is
approximately 1,788,649 and the number of shares reserved for issuance is
615,615.
B.
The Company's shareholders also approved the acquisition of Diprin
from the Company's President and Chief Executive Officer, Mr. Raja Tuli,
for 125,000 shares of the Company's Common Stock. The Company executed an
acquisition agreement with Mr. Tuli on February 9, 1999 and anticipates
that the acquisition will be closed within the next 30 days.
Diprin, although recently incorporated, was actively researching and
developing the portable photo-printer technology, prior to incorporation
and Diprin is continuing its research and development activities.
Operations will commence upon the completion of the development of the
photo-printer. Diprin currently has no operations, previous contracts,
revenues or liabilities and was formed by Mr. Tuli to hold the photo-
printer technology to facilitate this acquisition and the eventual
commencement of operations. Diprin owns all the rights to the photo-printer
technology for which a patent application is currently pending. Diprin has
100 shares of common stock outstanding. After the acquisition, the Company
will be the sole owner of Diprin.
The Company believes that the cost of the portable photo-printer
technology, in comparison to the potential revenues derived from sales of
the portable photo-printer and the potential revenues derived from
consumables that will be marketed with the portable photo-printers, is
extremely low.
C.
On February 1, 1999, the Company has entered into a Stipulation and
Order Amending the Settlement Agreement in the case of Brett Whiton, et
al., v. The Widecom Group, Inc., Raja S. Tuli and Suneet S. Tuli. In
accordance with the Stipulation, the Company will issue and distribute to
class members who held warrants as of February 10, 1997, and sold such
warrants prior to the close of business on March 5, 1997, one share (pre-
split) of the Company's Common Stock for each warrant sold. The Company
anticipates that the total number of shares issued under the Stipulation
will be approximately 109,466 shares.
Exhibits 27 - Financial Data Schedule
<PAGE> 10 of 11
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.
February 19, 1999 /s/Suneet S. Tuli
- ----------------- --------------------
Date Suneet S. Tuli,
Executive Vice President
February 19, 1999 /s/Raja S. Tuli
- ----------------- --------------------
Date Raja S. Tuli
President
<PAGE> 11 of 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 130,687
<SECURITIES> 0
<RECEIVABLES> 723,509
<ALLOWANCES> 54,176
<INVENTORY> 1,734,772
<CURRENT-ASSETS> 2,841,258
<PP&E> 2,591,933
<DEPRECIATION> 1,173,900
<TOTAL-ASSETS> 4,981,471
<CURRENT-LIABILITIES> 1,212,898
<BONDS> 0
0
0
<COMMON> 13,452,497
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,981,471
<SALES> 1,914,231
<TOTAL-REVENUES> 2,410,130
<CGS> 493,559
<TOTAL-COSTS> 2,559,742
<OTHER-EXPENSES> 263,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,095
<INCOME-PRETAX> (906,768)
<INCOME-TAX> 0
<INCOME-CONTINUING> (906,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (906,768)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
