10-Q 1 finq1.txt FINANCIALS FOR THE QARTER ENDED JUNE 30, 2002 The WideCom Group Inc. Consolidated Financial Statements (Unaudited) For the quarters ended June 30, 2002 and 2001 Together with Review Engagement Report TABLE OF CONTENTS Accountant's Review Report 3 Consolidated Balance Sheets 4 Consolidated Statements of Operations 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 & 8 Page 2 Z A F A R H U S A I N S I D D I Q U I C H A R T E R E D A C C O U N T A N T 2 Robert Speck Pkwy, Suite 750 Mississauga, Ontario L4Z 1H8 Phone: (905) 677-7777 Fax: (905) 272-5333 INDEPENDENT ACCOUNTANT'S REVIEW REPORT To the Board of Directors of The WideCom Group Inc. I have reviewed the accompanying consolidated Balance Sheet of The WideCom Group Inc. (incorporated in Ontario, Canada) as of June 30, 2002, and the related consolidated statements of operations and cash flows for the three-month period then ended. These consolidated financial statements are the responsibility of the company's management. I conducted my review in accordance with the standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Substantial doubts existed, especially in view of a negative net equity as at June 30,2002, as well as on the date of this report, as to the Company's ability to continue to meet its obligations and commitments and also with regards to its ability to continue to generate sufficient amounts of cash flows from its operations to maintain its solvency for a reasonable period of time without continued, substantial financial support from the personal resources of two of its directors and one key employee who is very closely related to those two directors. Information from management does not provide definitive confirmation of the related willingness and ability of the above mentioned individuals. As more fully explained in Note 7(b), the Company's ability to continue as a going concern may also be jeopardized by a decision by a secured creditor (a financial institution) to enforce its demand for an immediate, full repayment by the company of its indebtedness even though such an action might be considered by management to be unlikely, extreme, unscrupulous, or unwarranted. As mentioned in Note 8(a), the Company is committed to issuing 100,000 common shares to a claimant of alleged infringement of software and trademark ownership rights as part of an out-of-court settlement. As of the date of this report, those shares are yet to be issued. The effects of those to-be-issued shares on the financial statements have not been included. Except for the matters discussed above, based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. Mississauga, Ontario August 19, 2002 Chartered Accountant Page 3 The WideCom Group Inc. Consolidated Balance Sheet (in United States dollars) June 30, 2001 2002 Current Assets Notes Cash and cash equivalents 27749 40451 Accounts receivable 438001 241534 Inventory 3 708399 477751 Prepaid expenses 19817 35182 Advances to related parties 295658 190082 Deferred financing costs 14811 Total Current Assets 1504435 985000 Capital Assets 4 641024 567058 Purchased research and development technology 14811 0 Investment in affiliate 84650 0 Total Assets 2244920 1552058 Liabilities & Stockholders' Equity Current Liabilities Bank indebtedness 168494 144815 Accounts payable & accrued liabilities 732251 436729 Loans from related parties 658481 841468 Convertible debentures 5 180085 181841 Total Current Liabilities 1739311 1604853 Stockholders' Equity Common shares 5,000,000 shares authorized of no par value 2,633,585 shares issued and outstanding on June 30, 2001 2,633,585 shares issued and outstanding on June 30, 2002 14711179 14711179 Contributed surplus 159825 159825 Deficit -14365395 -14923799 505609 -52795 Total Liabilities & Stockholders' Equity 2244920 1552058 The accompanying notes are an integral part of the financial statements. Page 4 The WideCom Group Inc. Consolidated Statements of Operations (in United States dollars) For the three months ended June 30, June 30, 2001 2002 (Unaudited) (Unaudited) Revenue Product sales 85752 139560 Research and development grants 0 Interest income 91 140 Total Revenue 85843 139700 Expenses Cost of product sales 22166 37118 Research and development 11792 69937 Selling, general & administrative 100532 109378 Interest and bank charges 3368 3545 Management fees & salaries 39500 13823 Amortization 23627 16342 Financing fees 0 Foreign exchange loss (gain) -2358 2704 Total Expenses 198627 252847 Operating loss -112784 -113147 Legal settlement costs 0 Equity in loss of affiliate -74543 Net loss for the period -187327 -113147 Loss per common share, basic and diluted -0.07 -0.04 Weighted average number of shares outstanding* 2633585 2633585 The accompanying notes are an integral part of the financial statements. Page 5 The WideCom Group Inc. Consolidated Statements of Cash Flows (in United States dollars) For the three months ended June 30, June 30, 2001 2002 (Unaudited) (Unaudited) Cash provided by (used in) Operating Activities Loss for the year -187327 -113147 (Add (deduct) items not requiring a cash outlay) Amortization 23626 16342 Foreign exchange loss (gain) -2358 2704 Share issued to settle lawsuits and corporate indebtedness 0 0 Equity in loss of affiliate 74543 0 Net changes in non-cash Working capital balances related to operations: Decrease (increase) in accounts receivable 10908 -9080 Decrease in research and development grants receivable 0 0 Decrease (increase) in inventory 35160 56291 Increase (decrease) in accounts payable and accrued liabilities -1805 -44223 Increase (decrease) in prepaid expenses -245 -13693 -47497 -104806 Investing Activities Disposal (purchase) of capital assets 0 0 Advances (to) related parties 1412 47176 1412 47176 Financing Activities Deferred financing costs incurred 0 0 Increase (decrease) in bank indebtedness -1805 45080 Shares and warrants issued, net of issue costs 0 Loan from related parties 12996 37657 Issuance of convertible debentures 0 11191 82737 Effect of exchange rate change on cash -6933 -12405 Net increase (decrease) in cash during the period -41827 12702 Cash and cash equivalents, beginning of the period 69576 27749 Cash and cash equivalents, end of the period 27749 40451 The accompanying notes are an integral part of the financial statements. Page 6 The WideCom Group Inc. Notes to Consolidated Financial Statements (Unaudited) (in United States dollars) 30-Jun-01 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 June 30, 2002, and the results of operations for the three months ended June 30, 2002 and 2001 and cash flows for the three months ended June 30, 2002. Interim results are not necessarily indicative of 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 Widecom's audited consolidated financial statements and notes for the fiscal year ended March 31, 2002. 2. Financial Statements The consolidated financial statements include the accounts of Widecom and its wholly owned subsidiary. All significant intercompany balances, transactions and stockholdings have been eliminated. 3. Inventory June 30, June 30, Inventories are summarized as follows: 2001 2002 Raw material 577802 297974 Work-in-progress 7659 20600 Finished goods 122938 106629 R & D Inventory 0 52548 708399 477751 4. Capital Assets Capital assets consist of: 30-Jun-01 30-Jun-02 Accumulated Accumulated Cost Amortization Cost Amortization "Machinery, plant & computer equipment 1646001 1463619 1648168 1519097 Furniture and fixtures 91395 77033 91395 79906 Prototypes and jigs 239494 139805 239494 157587 Land 45806 0 45806 0 Building under construction 298785 0 298785 0 2321481 1680457 2323648 1756590 Net book value 641024 567058 5. Convertible Debentures During 1999, the Company conducted a private placement of ten specific investment units, each comprising 10,000 common shares ( see Note 10(b)(x)) and a three-year 12% convertible subordinated note in the amount of $20,000. Interest payments are payable quarterly and conversion is available at an exercise price of $1.00 per share. One-half of the principal amount of the note is exercisable during the 30 day period commencing 180 days from the initial closing on February 19, 1999. The remaining principal amount Page 7 The WideCom Group Inc. Notes to Consolidated Financial Statements (in United States dollars) 30-Jun-01 5. Convertible Debentures (cont'd) is convertible following 360 days after the initial closing. During the fiscal year ended March 31, 2000, the Company issued the remaining one-half unit comprising of 5,000 common shares ( see Note 10(b)(x)) and a three-year 12% convertible subordinated note in the amount of $10,000. The Company is presently in default on the interest payments on the 12% convertible debentures. The consequences of this default has not been determined. 6. Loans from Related Parties The loans from related parties are non-interest bearing, due on demand and were advanced to the Company in order to assist in certain working capital requirements. 7. Bank indebtedness (a) The Company has an operating line of credit available for approximately $100,000 which bears interest at prime rate plus 0.75%, is due on demand, and is secured by a general security agreement over all Company assets except real property. As at June 30, 2002 approximately $99,925 was utilized. (b) In February 2002, the Royal Bank of Canada (RBC) served through its attorneys a notice upon the Company demanding immediate repayment of the outstanding debt. A few weeks later RBC accepted a settlement offer made by the Company's management. In April 2002, however, RBC reneged, and Widecom threatened legal action against RBC for breach of contract. In response, RBC agreed to consider Widecom's revised offer (a) to make an initial payment of $20,000 CDN followed by a monthly payment of #5,000 CDN until the entire amount has been settled, and (b) a personal guarantee of $20,000 CDN by one of the executives of the Company. As of the date of the accountant's review report, the matter has remained unresolved, pending a firm response from RBC. In the event of a non-acceptance by RBC of the Company's revised offer, management may have to resort to legal action against the bank, the outcome whereof, at the present time (I.e. the date of the accountant's review report) is extremely hard to predict. 8. Contingent Liabilities (a) The Company has been served with a claim, with respect to a breach of contract In the prior years the Company had been served with a claim with respect to an alleged breach of contract regarding the Company's rights under two specific joint venture and development agreements to use and distribute various iterations of software components allegedly the sole property of the claimant. The action claimed damages for breach of contract along with copyright and trademark infringement. The claim sought a total of $15.85 million in damages and was in progress in the Province of Ontario. During the quarter currently being reported on, the claim has been settled for $CDN 5,000 in cash and 100,000 shares in the Company. These shares have not yet been issued and are not reflected in these financial statements or in these accompanying notes elsewhere. Several other claims against the Company are in various stages of litigation. In management's opinion, these claims are not material and accordingly no provision has been made in the consolidated financial statements. Loss, if any, on the above claims will be recorded when settlement is probable and the amount of the settlement is estimable. (b) The Company's wholly owned subsidiary, Indo WideCom International Ltd., in India, has not met export obligations for the fiscal year which may result in additional customs duty levied by the authorities in India. As at the balance sheet date, this amount was not determinable. Page 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Since inception, we have generated limited revenues from operations and have not yet achieved significant profitability. Our revenues are primarily derived from product sales that are recognized when products are shipped. We have limited revenue from operations, significant losses and have a significant deficit. Due to limited cash resources, we have often relied on cash infusions from management to meet ongoing obligations. There is no certainly that such access to funds will be available to us in the future. In order to reduce our losses, we have significantly reduced Selling, General and Administrative costs. We expect this to have a reduction on sales. While we received government grants in the past, we do not meet the required pre-qualification for such grants subsequent to conducting our public offering. In consideration of this fact, we shifted our research and development to an affiliated joint venture based in Montreal, Canada. In February 2000, we established a majority-owned subsidiary, Posternetwork.COM Inc., to engage in the business line of offering an online printing service. Posternetwork is currently engaged in organizational and financing activities. Results of Operations Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001 Sales for the quarter ended June 30, 2002 were $ 139,560 an increase of $53,808 as compared to $85,752 for the quarter ended June 30,2001. Net Revenue for the quarter ended June 30, 2002 were $139,700, an increase of $53,857 as compared to $85,843 for the quarter ended June 30, 2001. The increase in revenue was attributed to increase in selling activities. Operating expenses for the quarter ended June 30, 2002 were $252,847 an increase of $54,220, as compared to $198,627 for the quarter ended June 30, 2001. This is mainly due to the increased in Research and Development Expenses. Selling, general and administrative expenses. Liquidity and Capital Resources Our primary cash requirements have been to fund inventories and to meeting operations expenses incurred in connection with the commercialization of our products. We meet our 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. Our cash requirements in connection with manufacturing and marketing will continue to be significant. We do not have any material commitments for capital expenditures. We believe, based on our current plans and assumptions relating to our operations, projected cash flow from operations may not be sufficient to satisfy our contemplated cash requirements for the foreseeable future. We have relied on investments from management to cover our short falls in the last fiscal year, such investment may not be available to us in the future In the event that our plans 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, delays, problems or otherwise), we could be required to seek additional financing sooner than currently anticipated. There can be no assurance that this additional financing will be available to us when needed, on commercially reasonable terms, or at all. Nasdaq The Company's Common Stock was delisted from the Nasdaq Small Cap Market effective the close of business April 10, 2001 for failure to meet certain minimum net tangible asset requirements. The stock continues to trade on the OTC Bulletin Board. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. See Contingent Liabilities. ITEM 2. CHANGES IN SECURITIES. No material change. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. REPORTS ON FORM 8-K and EXHIBITS None 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. August 19, 2002 /s/Suneet S. Tuli ------------------ ---------------------- Date Suneet S. Tuli, Executive Vice President